2020/21 Edition I I

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TAXATION LAW
General Principles
Income Taxation
Transfer Tax
Value Added tax--
Tax Administration and Enforcement
Remedies .
Court of Tax Appeals
Local Taxation · · • I

Real Propet1}! Taxatio~

..sth RGCT
. - BAR OPERATIONS
SAN BEDA UNIVERSITY COLLEGE OF LAW

CENTER
• ~2021
 MEK-0-RY AID-•
TABLE OF CONTENTS
GENERAL PRINCIPLES
CONCEPT AND PURPOSE OF TAXATION ..... ..................... .......................... ........................ ,............... 1
TAXATION DISTINGUISHED FROM OTHER INHERENT POWERS OF THE STATE .................. :........ 5
THEORY AND BASIS OF TAXATION ............................. .......................................................................... 8
JURISDICTION OVER SUBJECTS AND OBJECTS .. .'........ ,..........................._.. :.. .. ........ .......................... . 9
PRINCIPLES OF A SOUND TAX SYSTEM ............... :....... '. ................ :........................... .. .. ...................... 10
LIMITATIONS OF TAXATION ........... ... ................... ................. ..... ,.... ............. ..... .... ................................. 10
STAGES AND ASPECTS OF TAXATION.. ...................................................................... .......................... 25
TAXES ..................... ................. .................. ..... ... '. .................... ................................................................... 25
GENERAL CONCEPTS IN TAXATION .. .. .... ......... .......... ................. ...... :...................................... ............ 27°
CONSTRUCTION AND INTERPRETATION OF TAX LAWS, RULES, AND REGULATIONS.... .. ........... 39

INCOME TAXATION
DEFINITION AND GENERAL PRINCIPLES ......................... ....... ... ....................... ................................... 41
SITUS OF TAXATION ................................ ........ ..... ... ...... ........ .. ... .. .. .......... ......... ..... ..:............................ 45
CLASSIFICATION OF TAXPAYERS.... ................. ...... ........................... ......... .......................................... 48
TAX ON INDIVIDUALS ....... ......... ................... ...................................... .'...... ·............... ............................... 54
TABLE: RULES ON THE TAXABILITY OF THE INCOME OF INDIVIDUAL TAXPAYERS.. ...... .............. 65.
TABLE: SUMMARY OF TAX RATES ON PASSIVE INCOME SUBJECT TO FINAL TAX .... :............... .. 66
TABLE: SUMMARY OF RATES ON CAPITAL GAINS RECEIVED BY INDIVIDUALS ..: .. ...................... 69
TAX ON CORPORATIONS .......................................................... ,.......... ..... .. ...................................... .... 70
TABLE: RULES ON TAXABILITY OF INCOME OF CORPORATE TAXPAYERS ···:···........................... 88
GROSS INCOME ........... ......................................... .......... ..................... .............................. :........ ....... ...... 91
ITEMS OF GROSS INCOME ......... .. ........ .. 1.. .. ...... .. .. ... ....... .. .. .. ... ...... . .. : ••••• • ••• • •••• •••• • ••••• •• • •• •• •• ••• • , .... .. .. .. . ... 92
EXCLUSIONS FROM GROSS INCOME ......... ........... :...................... ..................... ... ........... ..................... 101
FRINGE BENEFITS .. .. .. .. ................................................................. ... .. ...... ................ ....... ............. :......... . . 108
FRINGE BENEFITS TAX. ................. .............. .. ......................................... ................ .. .. ............................ 108
DE MINIMIS BENEFITS ............................................................................................................................ 114
TABLE: SUMMARY RULES ON GROSS INCOME .. .: .. .................................. :... :................... :................ 116
DEDUCTIONS FROM-GROSS INCOME.............. ... ......... ............. .......................... ................................ . 123
NON-DEDUCTIBLE ITEMS .................... ............................................. .. .. ...:.........................:............ ........ 159
RULES ON CAPITAL GAINS AND LOSSES ........... ......... ..... .. .............................. ... .. .............................. · 161
SUMMARY TREATMENT: LOSSES OF INDIVIDUAL VS. CORPORATION ................................... .. ...... 173
TABLE: SUBJECT OF CAPITAL GAINS TAX ON THE SALE OF REAL PROPERTIES BY AN 174
INDIVIDUAL AND A CORPORATE TAXPAYER ....... ...... ........ ....................... .. .. .-.................... ................ .
RULES ON EXCHANGES OF PROPERTY............... ..................................... ............. .. ....................... .... 175
ESTATES AND TRUSTS ............ ...................... .............. ........... ................... .. .. .. ..... .. ....... ......................... 179
ACCOUNTING PERIODS AND METHODS .............. ..... ..,............................. .. .. ..................... .............. .... 183-
TAX RETURN AND PAYMENT .......................................... ..... ......_. ...................... ................ .. ................... 186
WITHHOLDING TAXES.... .... .... ..... ... ............. .............. ................. .......... .... ............... .............. .................. 190

TRANSFER TAX
BASIC PRINCIPLES .......................... ................................................. ................... ................. ................... 199
ESTATE TAX .........:........... ........................... ... ........... ......... ............................................................ ........... 200
GROSS ESTATE........ ................................................................ ......... ........... ................................ .. ......... 202
NET ESTATE ................. ............... ..... .. ,.. ......................... .................. .......... .. .............. .. ....... ................ ..... 207
DEDUCTIONS FROM GROSS ESTATE ......................... ...... .............. .. .. ..... ...................... :............... ....... 208
EXCLUSIONS FROM GROSS ESTATE................................................................................................... 214
EXEMPTIONS FROM GROSS ESTATE...... .. .. ............... ............................... .......... ... ......................... ..... 214
ESTATE TAX CREDIT ............ ................ ......... ................ ... ............... .............. ....... ........._. :................ .. .. .... 215
ESTATE TAX SETTLEMENT ..... ........... ................. .... ........... :............ .......... .-................ ............................. 217
ILLUSTRATIVE EXAMPLES TO PROPERLY PRESENT FAMILY HOME AND STANDARD
DEDUCTIONS AS DEDUCTIONS FROM GROSS ESTATE. .................. ................................................. 221
DONOR'S TAX... ... ... .. .... ...... ....... ......................... .. ...................... ..................... .................................. ....... 223
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MEKQltY AID-•
TABLE OF CONTENTS
GROSS GIFT ...... :...... ..... ........... .... ... .. .. .. ... :.......................... .. .............. ............ .. ............ .. ...... ... ........... ..... . 226
NET GIFTS ... ........ .. .. ....... ... ....... .... ......... ..... ... : ........ ... .... .. ........... ................... .:........ .': .. ... ............... .. .. : ....... 230
EXEMPT DONATIONS ... .. :.. .. ............. .. ..... .. .. ... ..........................: .. ..... ... ............. .. ..... ....... ....... ........ .......... 230
COMPUTATION OF DONOR'S TAX ........ ........ .. ........ .. ... ........ ........... ..................... ... ... .. ........... ........ .. .... . 232
DONOR'S TAX CREDIT ....... .. .... ... .. .... ..... ... ... ........... ........ ................ .......................... ..... :....... .............. .. . 233
DONOR'S TAX SETTLEMENT ... ... ................. .. ..... .. ... .... ..... .... .:.:... .......... ... .. .............. .. ......... .... .... .......... . 234

, VALUE ADDED TAX

VALUE ADDED TAX (VAT) ..,..:., ........ .. .......... .. ........ .... .. ............... .. ......._
......... ... ....................... ....... ..... .... 236
PERSONS LIABLE FOR VAT ... .... ... .......... .. ............ ."!; ••••••• • • • •• • •• • • ••• • ••••• • •• •• • • ••••• •• ••••••••• • : •• •• • • • : • • ••• ••• •• • • •• • ••• • • 239 ·
VAT ON SALE OF GOODS OR PROPERTIES ...... ...... ...... .. ........... .. .......... .. .. ... .... .. .. ....... ..: ........... .. .... :.. 242
. VAT ON SALE OF REAL PROPERTIES .... .... ..... .. ... ... .......... .... ..... ....... ... ...... .... .. .. .. .......... ...... ..... .. ... ...... . 243
VAT ON IMPORTATION OF GOODS .. .. .......... ......... ... .. ......... .. ..... .'......... ...... ... : ...... ..... .. ....... ........... ....... . 245
VAT ON THE SALE OF SERVICE AND USE OR LEASE OF PROPERTIES ... .. ............ : ...................... .. 245
TRANSACTIONS DEEMED SALE .. .......·.. ..... .............................. :... ... .... .... ............ .. ... ....:.... .. ............. ..... . 2-50
CHANGE OR CESSATION OF STATUS AS VAT-REGISTERED PERSON-.,........ ...... :... ..... _.:... ........... 251
ZERO-RATED SALES OF VAT REGISTERED PERSONS .. ............. . :..... ... ........................ ..... ............... . . 252
VAT-EXEMPT TRANSACTIONS .... ... .. ...... ...... ......... ... ........ ...... .... :.. .... ................ ... .................:.. .-............. . ·258
INPUT TAX AND OUTPUT T_AX .......: ... .. ..... ....... ............ ........... .. ....... ..... ... .. :...... .. .. .... ....... :.............. ..... .... 264
INPUT TAX ON DEPRECIABLE GOODS .... .. .......... ... ..... .'....... ..... .... .. ... ... ... ..'.. ...................... .................. . 266
TRANSITIONAL AND PRESUMPTIVE INPUT TAX ... .................. ,..... ... .. .. .. ............. .: .... :... .............; .. :.... . 268
SUBSTANTIATION OF INPUT VAT ............. .. .... ................ .. ... .. .. .. .. ... ............ .. ........... ....................... ... ... . 269
REFUND OF TAX CREDIT OF EXCESS INPUT VAT ......... ........................ ..... .......... .... .............. .. .......... 270
REGISTRATION ..... ......... .. ............... .. ..... ... .... .. ..:.. ......... .... ... .. ... .... ...:...... .............. ..... ..... ....... .. ................ . 274
INVOICING REQUIREMENTS .................... ....... ....... ... ... ... ...... ... ......... .. ... :.... .. ... .. .. .. ......... ......... ............ .. 275
FILING OF R6TURN AND PAYMENT OF VAT .. .. ..... .. ....... ... ., ..., ... ... ..... ....... ....'. ....... ........... :.. ........... .... .. . . 276
CANCEb.LATION OF VAT REGISTRATION .... .......... ... ...... .......... .. ... .... .:....:...... ....: ....... .......... ........... .".... . 276
WITHHOLDING OF FINAL VAT ON SALES TO GOVERNMENT .... .... ..: .. ........ .. ...... ........... .... .. ..... ...... :-.. . ' 277
ADMINISTRATIVE AND PENAL SANCTIONS ... .... .... .. ........ ... .... .. ... .. .... .......... .. ... ......... ... .. ...........: ....... . 21a·
OTHER PERCENTAGE TAX .'..... ............ ... .. ... .............. :... ..... .. .... .. .................... .... ... .................... .. ......... .. 278
CREATE ACT PROVISIONS AFFECTING VAT AND OPT .. ............ .. ...·.... :.... ... .. .............................. ........ 281
EXCISE TAX ·········· ··· ···· ······· ······· ···· ·· ···· ······ ··· ··· ·· ··· ····· ··· ···· ········ ······ ······ ··· ·· ·:·· ···: ····· ······ ···:·. ···· ··· ·········:: ... : 282
DOCUMENTARY STAMP TAX .. ... ..... ........ .... .. .... ......... : .......... ............. ... .... .... ...... .......... ................. ... .... . 283 .,

TAX ADMINISTRATION AND ENFORCEMENT

OVERVIEW .... :..... ....... ............ .... .. ... .. ............. ... ..........:..... .. .......... : ... .. .. .. .. .. ... ............ ... ... ..... .. ....... .......... . 287
BUREAU OF INTERNAL REVENUE .. ..... ....... ......... ...: ............... .. .... :.. .. ... ... ......:... ... .. .... ...... .. .. ............ ... .. 288
.
POWERS OF THE COMMISSIONER OF INTERNAL REVENUE .. .. .... .... .. ... ...... ........: .... ......... : .... .......... .
COMPLIANCE REQUIREMENTS .. .............. ... .. ........... ......... ... ......... ............ .. .... ....... ....... ........ .. ·.............. .
290
297
STATUTORY OFFENSES AND PENALTIES ...... ........... .. .. ....,.:.. .. ... .. .... .. ..... :· ··· .. ···... .. ..... ....... .... .. . .. ..... . 306
SOURCES OF INTERNAL REVENUE ...... .. ... .... .. ........ :............... ................... ... ...... ....... ....... ... .. ... ..... .. ....
• J •
312

REMEDIES
OUTLINE OF REMEDIES .. .. ...: .. .... .... ... ..... .:.. ...... .... .. ... .. ... .... ..... ....... .... .. ............. ... .. ... ..... ... ... ............ .... .. 313
ASSESSMENT .. ... ................ .............. .. .. ...... ... ........ ............. ............ ..... ...... ... .. ....... :.. .. .... ....... ...;... ........... 313
COLLECTION .. ...... ................ ......... ... ···· ·· ······················ ········ ····· ·· ······ ·· ···· ···· ···· ···· ···· ··· ·· ····· ·· ·· .. . .. ... ....... .... 345
TABLE 1: Distraint of Personal Property ················································································i..................... 357
TABLE 2: Levy upon Real Property .. ......... ......... ... :......... ...... ... .. ......... .. ........ :.. ..... .. .... ....................... ... .. .. 358
TABLE 3: Period of Collection and Assessment and Suspension Thereof ..... ... ........ :......... ... ... ... ..... ..... .. _360
TABLE 4: Protest. ........ .: .. ...... ... ....... .. ........ .... .... ...:··················!············· ··········· ····················:······~·············· 362
FLOWCHART: Assessment Process with Government and Taxpayer's Remedies · .. ... : ........ ......'.. .. ·:····.. 364
FLOWCHART: Procedure for Distraint and Levy - NIRC .............. ............ ............. .... .. .. .. ...................... ... 365
TABLE 5: Period of Refund .... ..... .. ... ..:..... ......... .... .. ............ ...... ... .... ....... .. .. .... .. .. ...... ........... ..... ..... ....... .. ... . .366
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TABLE O.F CONTENTS
COURT OF TAX APPEALS
COURT OF TAX APPEALS.. ..... ... .. ....... ......... .... .............. ..................... ... ........ .............. ........................... 368
JURISDICTION OF THE COURT OF TAX APPEALS...... ....... .... ....... ..... ... ......................... ... .. .. .............. ~70
APPEAL IN GENERAL ..... .. ... ..... ..... .. . ....... .. ... .... ... .. .. ............ .. ...... .... ........ .......... .. .. ....... ..... .... .. ... ... .......... 373
-APPEAL IN CIVIL.CASES .................. .... .................... ........... .............., ................ ,..... .. ... ... .. ........ .. ........... 377
APPEAL IN CRIMINAL CASES ... .. .. ..... ........... : ............ ............. ..... ............ .. ............ ........................... ..:... 379
PROCEDURE AFTER DECISION OF THE CTA DIVISION.. ...... .............. ... ...... .......... ..... .. ... .................. 380
TABLE: SUMMARY OF JURISDICTION IN JUDICIAL TAX CASES ........... .. ........................................... · 384
FLOWCHART: PROCEDURE FOR APPEAL IN CIVIL CASES .................... .. .. ...... :. ............... ......... ... .. .. 386
FLOWCHART: PROCEDURE FOR APPEAL IN CRIMINAL CASES.. .. ........ .... ................. .. .. .... .............. 387

LOCAL TAXATION ·
GENERAL PRINCIPLES ················ ········ ·····················--··········································:··············:·· ·· ··· ···· ·· ······ 388
LOCAL TAXATION ........ :................................................................................... ... .. ...... .... :............... .. ....... 389
COMMON LIMITATIONS ON LOCAL TAXING POWERS .. ........ .. ........ .. ........ ............. ............... .. :........ ,.. 392
TAXING POWERS OF LOCAL GOVERNMENT UNITS (LGUS) ... .. ............... ........................ :.......... ....... 395
PRESCRIPTIVE PERIODS FOR THE ASSESSMENT AND COLLECTION OF LOCAL TAXES.. ... ....... 413
OUTLINE OF REMEDIES .. ............. ............. ................ .. ............·................... ............... .. ...... .......... .. ........ .. 414:
TAX REMEDIES OF THE LOCAL GOVERNMENT UNITS .....: .. ,., .. ...........\ ........... ....... ,........................... 414
TAX REMEDIES OF THE TAXPAYER. ................... ........... ........ ............................ :................... ...... .. ....... 416
TABLE OF TAXING POWERS OF LOCAL GOVERNMENT UNITS .. ......... ................... .. .... ..... .. .. ........ :.. 420 -
FLOWCHART: PROCEDURE FOR DISTRAINT OF PERSONAL PROPERTY..... ................................ .. 424
FLOWCHART: PROCEDURE FOR LEVY OF REAL PROPERTY .. .: .............-..................... ........ :........... . 425
FLOWCHART: TAXPAYER'S REMEDIES FROM ASSESSMENT OF LOCAL TAXES OTHER THAN
REAL PROPERTY TAXES .................................... :........ .. ....................... ...... :. ........................................... 427
FLOWCHART: PROCEDURE FOR DISTRAINT AND LEVY FOR TH.E PU,RPOSE .dF SATISFYING
LOCAL TAXES ........... ................... .. ... ................. .......... ....................... ........ •................... .'......................... 428

. REAL PROPERTY TAXATION

GENERAL PRINCIPLES .. ... .............................. ................. , ........................... ...:........... ................ ............ 429
IMPOSITION OF REAL PROPERTY TAX ..................................: .................. :..................... .. ............. ..... . 431_
TYPES OF REAL PROPERTY TAX ... ......... ........... ................. ......::.. .................. .. ..................... .. .. :........ .. 439
TAX EXEMPTIONS, CONDONATIONS, AND REDUCTIONS :.................... ...............................:............ 441 ·
DISTRIBUTION OF PROCEEDS ...................................................................................... ........................ 447
REMEDIES IN REAL PROPERTY TAXATION (LGU) .. .. ...................... :........ ...................................... ..... 448
REMEDIES IN REAL PROPERTY TAXATION (TAXPAYER).. ... ...... ..... .......................... ........................ •451
BOARD OF ASSESSMENT APPEALS .... :............ ..................................................................... .-. ............. · 457
TABLE: LOCAL TAXAT)ON VS. REAL PROPERTY TAXATION .................... .'..... .. ...... ..........:......... ....... 458
FLOWCHART: PROCEDURE OF ASSESSMENT OF LANO VALUE FOR REAL PROPERTY TAX...... 460
FLOWCHART: TAXPAYER'S REMEDIES INV0LVING COLLECTION OF REAL PROPERTY TAX ..... . 461 ·
FLOWCHART: PROCEDURE FOR LEVY FOR PURPOSES OF SATISFYING REAL PR0PERTY
TAXES ....... .. ............... .. ....................... .. ..'.. ... .. .... .. .. ............. ...... .. ................. .......•............ ............... :.. ...... . 463

BIBLIOGRAPHY .... ... ............... ........................................................................................................ .... ..... . 465 · .

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MEM:Q~Y AID .
s., Bede t.w-wiy CCllega d lAw - RGCT Bar Opendions·Cen«

PURPOSES AND OBJECTIVES

CONCEPT AND PURPOSE 1. Primary Purpose
OF TAXATION Revenue-raising - revenues (.lerived from
taxes are intended primarily to · finance the
government and its activities (Id. at 1) . .

TAXATION 2. Secondary Purposes - (Non-Revenue/

It is the power by which an independent State,
through its law-making body, raises and
accumulates revenue from its inhabitants to pay the
necessary expenses of the government. As ·a
means, it is a way of collecting and apportioning the
cost of government among those who are privileged
to enjoy its benefits and must bear its burdens
(VALENCIA & ROXAS, Income Taxation (2016), p.
2-3 {hereinafter VALENCIA & ROXAS]).
Taxation is 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 and
Development Corp. v. Court of Appeals, G.R. No.
119286, October 13, 2004) .
THREE ELEMENTS OF TAXATION: ~
(ESP}
1. It is an .5.nforced proportional contrf6ution from
persons and properties; •.
2. It is imposed by the State by virt~e ; of its
~overeignty; and · •· _ -~ :·
3. It is levied for the support of.the government and
for all f.ublic needs (Republic v. Cojµangco, _
G.R. Nos. 147062-64, December 14, 20()1). •' ·
- TWO CONCEPTS OFTAXATION
1. Power to tax; ·and - , :· ;:. -,::~
2. The act-or process by which the taxing power rs
exercised (V/TUG & ACOSTA, Tax ~aw. and
Jurisprudence (2014), p. 1 [hereinafter VtTUG &
ACOSTA]). , at reducing the inequality in the distribution
Sumptuary purposes (PR 2EP)
a. fromotion of General Welfare
Taxation may be used as an implement of
police power in order to promote the general
welfare of the people (ABAN, Law of Basic
Taxation in the Philippines, Revised Edition,
p. -S [hereinafter ABAN]).
ILLUSTRATION: .Sugar . Adjustment Act
was imposea to strengthen the sugar
industry (Lutz v. Araneta, G.R. No. L-7859,
December 22, 1955).
b. Regulatory Measure
Taxation may be used as an implement of
.. • , the police power of the State with the end
· :{;!;;"':&.' -;,_. view ?of regulating a pa~ic~lar activity
--~"'~'-~JOIMft.;AMPAO, Tax Pnnc,ples and
-. Rema.dies (201_8), p. 26 [hereinafter
DiMAAMf:'AO]).
,
l~t.UST~ TION: Taxes may be imposed to
rehabilitate and stabilize a threatened
industry, which is imbued with public interest
.: that vitallY.· affects the general welfare, like
the oil
industry (Calte){ PHL v. Commission
on Audit, G.R. No.. 92585, May 8, 1992).
. ,.,
. C. Beduction of -Social Inequality/
Compensatory Purpose
The present tax system has adopted the ·
progres•sive system of taxation which aims
of wealth . by-- preventing its undue
concentration in the hands of a few

EXECUTIVE COMMITTEE
DOHN ALFRED E. AQUILIZAN, Over-All Chairperson I NICHOLE VANE B. SANTOS, Chairperson for Academics I RONALYN A.
GACUI.A, Ad Hoc Director for Bar Matters I MARIELLE CIELO B. BELGIRA, Vice Chairperson for Finance I JUAN INIGO s. MIGUEL,
Viet Chairperson for Operations I ALISSA MARIE D.C. DELOS SANTOS, Vice Chairperson for Audit I CORINA R. TAMP.US, Vice
Chairperson for Secretariat I ARVY KEITII N." CHUNG, Vice Chai_rperson for Logistics I ANTONIO JUN-JUN C. MANALIGOD IV, Vice
Chairperson for Membership IJORDAN N. CHAVEZ, Vice Chairperson for Electronic.Data Processing
SUBJECT COMMITTEE
JOSE LORENZO C. DAVE, Subject Chair I LOUISE MARIE C. CO~ACTO, Assistant Subject Chair I KATRYNA ANNE R. TOMENIO;
Subject Electronic Data Processing I SUBJECT HEADS: MARY GRACE A. GRANIL, .General Principles I SHEENA ROSETTE DG.
DOMINGO, ·Administration, Enforcement, Remedies and Court of Tax Appeals IJERRLITO P. CUSTODIO, Local and Real Property Taxation
I ST£vlE R. ARCILLA and PATRICK MARRION Y. MELENDRES, lncomt T_axation I MARY ANN C. TAN, Transfer Tax I MARILYN
H. MAI.ALOAN, Value-Added Tax I - _
SUBJECT MEMBERS
KATRINA MICHAELA D. DELFIN, ARMANT. PAEZ, ANDREI ANNE U. PALOMAR, MARY KATHERINE A. SIMf:ON, JAMES
KARL DANIEL B. ALVARO, ARIESA JANE V. DOMINGO, JOSEPHINE MARIE T. SALAZAR, YNA MAREI AGUILAR, NERY
ROYCE T. LAZARO,JOHN KENNETH Q. CRISOLOGO, LOIS DANIELLE P. DIMAANO, ANDRELA M. AQUINO, ANNA LOREN
DC. MANUEL and GILBERT OWENS. APILADO ·
ADVISERS
Atty. NICASIO C. CABANEIRO, CPA, Atty. DANTE 0 . DELA CRUZ, CPA,JusticeJAPAR B. DIMAAMPAO, Atty. EFREN
VINCENT M-. DIZON, CPA
 GENERAL PRINCIPLES
Taxation Law

individuals (OIMAAMPAO, supra at 25) .

(e.g. Income Tax)

d. Encourage Economic Growth

Tax exemptions and tax reliefs serve as
incentives to encourage investments in our
local industry and thereby promoting
economic growth (Id.).

ILLUSTRATION: The grant of preferential

tax treatment for businesses that are
registered with Philippine Economic Zone
Authority (PEZA), Subic Bay Metropolitan
Authority (SBMA) and the like (RECALDE, A
Treatise on Tax Principles and Remedies, p.
5 {hereinafter RECALDE]) .
Generally, not subject to May be subject to
e. ~rotectionism compensation or set-off. compensation or set-
In the case of foreign importations, taxes (Please refer to off.
sometimes provide protection to local discussions on
industries like protective tariffs and customs compensation or set-off
duties .(ABAN, supra at 6-7) . " for exception on page
35)
ILLUSTRATION: The Anti-Dumping Act,
which protects our local industries against
importations sold at a lower cost
(DIMAA_MPAO, supra at 2-1). Tax does . not draw Debt draws interest if
interest except in~case stipulated or if the
of delinquency. debtor incurs legal
SIMILARITIES OF TAXATION 'JVITH
delay.
OTHER INHERENT POWERS OF THE
STATE: (13EL)
1. It is Inherent in the State and need not co'nferred
by the Constitution; · · ·
2. It is !ndispensable in that the State . cannot
continue or be effective •unless it is able ' to
exercise the same; ">- •.
3. It is method whereby the State !nterferes with · D~termined by,
private rights; , NIRC. Determined by the Civil
Code.
4. It presupposes as gquivalent compensation ,
tangible or otherwise, for the private rights (MAM_ALATEO, Reviewer on Taxation ·(2019) , p.16
interfered with; and · [heremafter MAMALA TEO, Reviewer]) .
5. · Exercised primarlly by the ,begislature.
(NACHURA, Outline Reviewer in Political Law
(2016), p. 60) .

DISTINCTIONS OF TAX FROM OTHER

FORMS OF EXACTIONS
Enforced proportional A consideration which is
contribution from paid for the use of
persons or property.
a
property which is of a
pu_blic nature. (e.g., road
and bridges)

An obligation based on An obligation based on

law. contract or judgment. A demand of A demand of
sovereignty. proprietorship.
 M ''
MEM:Q~Y AID
San Bede UnlvefSltY College of Law - RGCT Bar Openitlons Center

Taxes are levied for the Tolls are compensation

support of the for the cost and
government. maintenance of the
property used.

General application._ Special application .only

The amount of tax is The amount of the toll is as to a particular ti,:ne and
de!ermined by the determined by the cost place .
legislature. of the property or of the
improvement. (ABAN, supra at 15).

May only be imposed Imposed by the

by the State. government or private
individual.
(MAMALATEO, Reviewer, supra at pp. 16-17).

Fees paid by the public to toll way operators for the

use of toll ways are not taxes. These are exactions .
which end up as earnir:,gs of toll way operators, and
not the government: Taxes may be imposed only by
the government under its sovereign authority. Toll
fees may be demanded by either the government or
private individuals or entities, as an attribute of
ownership (Diaz v. Secretary of Finance, G.R. .No.
193007, July 19, 2011). Limited to the_cost of:
1. Issuance of license;
and
Inspection and
surveillance·, except
for non-useful
occupation (Physical ·
Enforced proportional, Therapy Organization
Enforced
contributions from owners of the PHL, Inc. v.
proportional
of lands especially or Municipality Board of
contribution from
peculiarly benefited 'by · the City of Manila, .
persons or property.
public improvements. G.R. No. L-10448,
August 30, 1957) .

Taxes are levied on Levied only on land.

Normally paid after Normally paid before the
persons, property the start of bus[ness commencement of
(which includes operations. business operations.
land), income,
business, etc.

Taxes, being the License fee may be

Personal liability of
the taxpayer.
lifeblood of the State, surrendered with or
Cannot be made a
cannot be without consideration.
personal liability of the
surrendered except
p~rson assessed . .
for lawful
consideration.
 GENERAL PRINCIPLES
T~ation Law

Non-payment does Non-payment makes the May be imposed only May be imposed by the:
not make the business illegal. by the government. 1. Government; or
business illegal but 2. Private individuals or
may be ground for entities.
criminal prosecution .
(ABAN, supra at 14-15)
(MAMALA TEO, Reviewer, supra at p. 17).

Test in Determining Whether the Imposition is a

Tax or a Fee ·(Primary Purpose Test)
If the generation of revenue is the primary purpose All embracing term to A kind of tax impo·sed on
and regulation is merely incidental, the imposition is include various kinds of. articles which are traded
a tax; but if regulation is the primary purpose, the fact enforce.d contributions internationally.
that incidental revenue is also obtained does not from persons for the
make the imposition a tax (Progressive Dev't. Corp. attainment of public
v. Quezon City, G.R. No. L-36081 , April 24, 1989). purposes.
To be considered a license fee, the imposition must (Id. at 23)
relate to an occupation or activity that so engages ·
the public interest in health, morals, safety, and
development as to require tegu)atJon fo ·the _
protection and promotion of such pilblic _in, efest or
the imposition must bear a·reasonable.rel~tion to the - ,.
probable expenses of regulation, ta~ing into account .Basic jmpo~ition on as _a
not only the costs of direct regulat1Qn but also its person~. prqperty, and compromise in cases
incidental consequences as well (Progressive Dev't.. excise& , involving violations of
Corp. v. Quezon City, supra) . · ' . -- · the tax laws, rules or
regulations.
(Id. at 15) ; ·.
-- --~-; : ., '
VIII. As .a ainst Subsicties

Enforced proportional Sanction imposed as a

contribution from
persons and property.
punishment for violation - - -
.
L:evied by the law-
A legislative grant of
of law or acts deemed· _ 1 making bo~ of the State money in aid of a
injurious; violation of tax • for~ th~ ~1Jpport of the private -enterprise
laws may give ris~ to , g~>Vef1)ment' and for deemed to promote the
imposition of penalty. ublic needs. public welfare.
•·'
(Id. at 22)

Tax is a civil liability. A It is a punishment for

person is criminally the commission of a
liable in taxation only crime.
when he fails to satisfy A source pf revenue of· A broad term that
his civil obligation to the government. includes not only taxes
pay taxes (Republic v. but income from other
Patanao, G.R. No. L- sources as well.
22356, July 21 , 1967).
(Id. at 23)
· · ,' -:•. ·. A~ to P~rpos~ · .~- _-.-.: .·
• •• & •

Importance of Distinction
Intended to raise Designed to regulate It is important to differentiate taxes from other
revenue. conduct. exactions, especially when it comes to problems and
issues on double taxation and tax exemptions and
the jurisdiction of the Court _of Tax Appeals:
 \ I

San Seda l)"Mnily ColeQ9 ol 1.8w - RGCT Bar Operatlona Center

. 1. If an exaction is not a tax, then the defense of a
taxpayer of double taxation will necessarily fail;
2. In the same manner, a tax-exempt individual or
corporation is generally only exempt from paying·
taxes; hence, if the exaction is not a tax, then the
individual or corporation must still pay the
exaction (INGLES, Tax Made Less Taxing: A
Reviewer with Codals anq Cases (2018), p. 4
{hereinafter INGLES, Reviewer]).
TAXATION
DISTINGUISHED FROM
OTHER INHERENT
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
(CONST., Art. X, Sec. 5).
NOTE: Under the Constitution, where there is
neither a grant nor a prohibition _by statute, the
tax power must be aeem·ed to exist although
Congress may provide statutory limitations and
guidelines. The basic rationale for: the cur_rent
rule is to safeguard- the viability and self- ·
sufficiency of local gov_
ernment units by directly
granting them general .and _broad tax powers
(Manila Electric Co. v. Province of Laguna, G.R.
No. 131359, May 5, 1991). ,

POWERS OF THE STATE b. By a valid delegation of tax power through a

statute from the _
national legislature granting
local · government units or political
subdivisions to exercise such power, in the
NATURE OF TAXING POWER absence· of a Constitutional · provision
It is the one that reaches every trade or occupation, (VALENCIA & ROXAS, supra at 6) .
to every object of industry, use, or enjoyment, to
every species of possession; and it imposes a lien ILLUSTRATION: The Constitution
which, in epse of failure to discharge, may be - i mandates that the Congress shall enact an-
followed by seizure or confiscation of J),!9Perty · , organic act for · each autonomous region
(VAL_ ENCIA & ROXAS, supra at 3). . · (CONS T., Art. X, Sec. 18). Within its
terr!toric1I jurisdiction and supject to the
1. Inherent Attribute of Sovereignfy~- .· •. r
provisions of this Constitution and national
The power of taxation ii ·an· inctdent of,. raws, the organic act of autonomous regions
sovereignty as it is inherenJ in the State, • shall provide for legislative powers over
belonging as a matter of· right to every . ereati~n of sources of revenues, among
independent government. It does- riot need ot~e~ (CONST., Art. X, Sec. 20(2)) .
constitutional conferment.. ., - ConstitutionaJ
provisions do not give rise to the power.to tax NOTE: The fundamental law did. not intend
but merely impose limitations on what' would the deleg.ation to be absolute and
otherwise be an invincible power.(DIMAAMPAO, ~- unconditional; the constitutional objective
supra at 15). _j . = obviously is to ensure that, while the local ·
_j
~.
~"·,,
-
.:
·. government units are being strengthened
Taxation being an attribute of sovereignty, its and made more autonomous, the legislature
relinquishment · is never presumed (Luzon must still see to i~ that: .
Stevedoring Co. v. Court of Tax Appe_als, GR.
No. L-30232, July 29, 1988). i. The ,taxpayer will r:iot be over-burdened
or saddled with · multiple and
The taxing power of provinces, cities, _unreasonable impositions;
municipalities, and barangays (LGUs) is not ii. Each local governm_ e nt u·nit will have its
clothed with inherent power of taxation unlike a fair share of available resources·· ·
sovereign state_. And the power, when granted is iii. The resources of the ~ational
t~ be construed in strictissimi juris (Pelizloy g?vemment will not be unduly
Realty Corp. v. Province of Benguet, GR. No. disturbed; and · ·
183137, April 10, 2013). iv . . ~ocal taxation will be fair, uniform, and
Just (Manila Electric Co. v: Province of
of
Grant Taxing Power to LGUs Laguna, ·G.R No. 131359, Mai 5
a. By the Constitution; or 1991). '

ILLUSTRATION: The Constitution provides that 2: Legislative in .Character

each local government unit shall have the power BASIS: The power to tax is inherent in the State
· to create its own sources of revenues and to levy and ~he State is·· free to select the object of
taxes, fees and charges subject to such taxation, such power being exclusively vested in

the legislature, except where the Constitution
provides oth~rwise (DIMAAMPAO, supra at 16,
citing CONST., Art. VI, Sec. 28 (2)) .
Scope of Legislative Power to Tax
a. Discretion as to: (PAP~SiM)
i. Person, property, or occupation to be
taxed - the legislature has unlimited
scope as to the persons, property, or
occupation to be taxed, where there are
no constitutional restrictions, provided
the property is within the territorial
jurisdiction of the taxing state
(DIMAAMPAO, supra at 18);
ii. Amount or rate of the tax - the
ieg'islature may levy a tax of any amount
it sees fit. It may be carried on even to
the extent . of exhaustion and
destruction, thus becoming in its
exercise a power to destroy (Id. at 20) ;. ,
iii. f urposes for which taxes shall be levi ed
- they should be for public purposes (Id.
at 17); . .'
iv. Kind of tax to be collected ( d, at 154-
- r
157); · ) /' --
v. Apportionment of the tax - •whether the
tax shall be general or limited to · a
particular locality or partly general and
partly local (Id. at'53-58) ; ,-· -- - -- - -- ·- inherent powers of the government, only that It
vi. Situs of taxation ,- -place of taxation (Id.
at 52) ; and ' "
vii. Manner, means,-J_and agencies of
collection - the discretion ext~rids to the _- -; - .
mode, method or kinds of tax (Id. at 20).
b. Grant tax exemption or condonation (Id.
134).
at
_,.
The inherent power to tax naturally caji?s ~ th--
it the power to grant tax --exemptions.
Exemptions from taxation may be created:
i. directly by the Constitution, e.g., A ·
VI , Sec. · 28(3) of the Constitution
granting tax exemptions to properties
actually, directly, and exclusively used
for _religious, charitable and educational
purposes; or
ii. by an act of the legislature, subject to
the limitations as the constitution may
place, expressly or by implication, upon
the power of the legislature (Id. at 134-
135).
EXTENT OF THE TAXING POWER: The power of
· taxation reaches to every trade or occupation, to
every object of industry, use, enjoyment, or to every
species of possession, and it imposes a burden
which in case of failure to discharge the same may
be followed by seizure, confiscation, or forfeiture of
property (Id. at 29).
GENERAL PRINCIPLES
Taxation Law
CHARACTERISTICS OF TAXATION
Taxation is said to be: (CUPS)
1. Comprehensive . ..
:- it covers persons, businesses, actIvItIes,
professions, rights, and privileges (Id. at 30).
2. Unlimited I'd I
:- a tax does not cease to be va I mere y
because it regulates, discourages, or even
definitely deters the activities_ ta_xed ._The power
to impose taxes is one so unlimited in force an~
so searching in extent that the courts scarcely
venture to declare that · it is subject to any
restriction whatever, except such as rest in the
discretion of the ·authority which exercises it (Tio
v. Videogram Regulatory Board, G.R. No.
_ 75697, June 18, 1987).
3. ~lenary .
- it is complete. Under the NIRC, the BIR ~ay
avail of certain remedies to ensure the collection
1
'·-. of taxes (DIMAAMPAO, supra at30). ·
. /
.§upregi~' ·- _
- although refe'rred to as the strongest of all the
powers ' o( · the ', government, it c~nnot . be
interpreted tp.me~n that it is superior to oth~r
is Sl-O)reme insofar ·as the selection ofth_e ~ubject
of . taxation· is concerned (Tio v. V1deogram
. Ref1ulatory f3oard, :G.R. No. 75697, June 18,
1981): ' ;
..· . . . _- r -.._- ;,
I , I •
THE · CONCEPTs! OF POLICE POWER
I. ;
.l ,..:AND,EMINENT DOMAIN IN TAXATION
Pow.er of. Taxation as an Implement of the Police
Power (Regu_latcfry Measure)
Taxation_ i_s- po longer envisioned as a measure
m~rely ·t9 raise revenue to support the existence of
tlie _government; 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 (Caltex
Philippines Inc. , v. Commission on Audit, G.R. No.
92585, May 8, 1992).
ILLUSTRATION: The tax levied under the Sugar
Adjustment Act is one with a regulatory purpose
which is to provide means for the rehabilitation and
stabilization of the threatened sugar industry. In ·
other words, the act is primarily an exercise of the
police power (Lutz v. Araneta, G.R. No. L-7859,
December 22, 1955) .
Police Power as an Implement of Power of
Taxation ·
Fees may also be regarded as taxes even though
they also serve as an instrument of regulation. If the
 \ I

MEM:Q~Y AI D
San Bede 1.1r-.-witY College of Lllw - RGCT Bar Operallons Center

purpose is primarily revenue, or if revenue is, at TAXATION DISTINGUISHED FROM

least, one of the real and substantial purposes, then OTHER INHERENT POWERS OF THE
the exaction is properly called tax (Philippine Airlines
Inc. v. Edu, G.R. No. L- 41383, August 15, 1988). On STATE
the other hand.a charge of a fixed sum which bears
no relation at all to the cost of inspection and
regulation may be held to be a tax rather than an
exercise of the police power (Progressive
Development Corporation v. Quezon City, G.R. No.
36081, April24, 1989). To raise To promote To facilitate the
revenue; or public welfare taking of private
ILLUSTRATION NO. 1: R.A. No. 4136, requiring the for regulatory through property for public
payment of motor vehicle registration fees levied to measure as regulations. use.
raise funds for the construction and mainten_ance of means for the
highways and to pay for the .operating expenses of rehabilitation
the administering agency (Progressive Development and
Corporation v. Quezon City, G.R. No. 36081, April stabilization
24, 1989). of a
threatened
ILLUSTRATION NO. 2: Where a permit collected industry e.g
from alien job applicants is in excess of the cost of the Sugar
regulation, the exaction is a tax (Villegas v. Hiu Adjustment
Chiong Tsai Pao Ho, G.R. No. L-29646, November Act (Lutz v.
10, 1978). Araneta, G.R.
No. L-7859
Power of Taxation as an Implement of the Power
of Eminent Domain
Tax measures . are but enforced contributions
exacted on pain of penal sanctions and imposed for
a public purpose. The power to tax has indeed-
Limited to the amollnt
become a most_effective tool to rea_lize social justice, as cost ·of imposed; - just
public welfare, and the equitable distribution of ossible, regulation, compensation is
wealth (Commissioner of Internal Revenue v. ust - be issuance of given to the owner
Central Luzon Drug Corp., G.R. No. 159.647, April qual to the the _license or of · the
15, 2005) . .
eeds of the surveillance expropriated
government fee , except property.
NOTE: The 20% senior citizen discount was an in order. to for non-useful
exercise of police power and not of eminent domain: avoid a deficit occupations
The 20% discount is intended to improve the welfare scenario for wherein the
of senior citizens who, at their age, are less likely to the State. exaction may
· be gainfully employed, more prone to illnesses and be very large
other disabilities, and, thus, in need of subsidy in (Physical
purchasing basic commodities. The 20% discount Therapy
may be properly viewed as belonging.to the catem)l'Y Organization
of price regulatory measures , which affect the of the
profitability of establishments subjected thereto. On P_hilippines,
its face , therefore, the subject regulation is a police Inc. v.
power measure (Manila Memorial Park Inc. v.
Municipality
Secretary of DSWD, G.R. No. 175356, December 3,
Board of the
2013).
City of
Manila, G.R.
· No. L-10448,
August 30,
1957).

No direct No direct A direct benefit

benefit is · benefit is results in the form
. 8
GENERAL PRINCIPLES
· Taxation Law

received by received , yet of just

the taxpayer, a healthy compensation to
merely economic the property
gene(al standard of owner.
benefit of society is
Operates on Operates ?n Operates on the ,
protection_ maintained.
a community . a community particular . private
and
or a class of or a class of property of an
promotion of
individual. individual. · individual.
public
welfare.

Inseparable Protection, Common

for · the safety, and necessities and
existence of a welfare of interest of the
nation - it society. community
supports_ transcend .
- poliqe power individual rights in ·
and eminent property.
domain.
Taxes paid No transfer Transfer is
form part of but only effected in favor of
public funds. restraint on the State. .
the exercise Constraints :constraints Constraints , by
of prope'1}' by by \ Constitutional and
rights. Constitutional: ·constltutional Inherent
a·nif Inherent . and Inherent limitations.
limitations. limitations.
f
' (VALENCIA-,& ROXAS, _supra at 4-5).
Covers all Covers all Covers only a ,.I :' I

persons, persons, particular / ';. '\ ·,

property and property, property.
excises. rights and .
privileges. •
THEORY AND ·BASIS OF
I #< • \ '

':-.
T,AXATION
''( I
May be May be May be: - '/ . .i ,. .
exercised exercised 1. _Exercised.,,. by
only by the only by the the .. : ~~LIFEBLOOD THEORY
government government government Taxation is the indispensable and inevitable price for
or its political or its political or its political civilized society; without taxes, the government
subdivisions. subdivisions. subdivisions; would be paralyzed for lack of motive power to
or activate and operate it. Thus, the collection of taxes
2. Granted to must be made without hindrance if the State is to
public service maintain its orderly existence (Commissioner of
companies or Internal Revenue v. Algue, G.R. No. L-28896,
public utilities. February 17, 1988).

However, such collection should be made in

Can accordance with law as any arbitrariness will negate
Generally, be Can be expressly
the power to expressly the very reason for government itself. It is therefore
delegated to the
necessary to reconcile the apparently conflicting
make laws delegated to local government
interests of the authorities and the taxpayers so that
cannot be the local units by the law-
delegated. government the real purpose of taxation, which is the promotion ·
making body.
units by the of the common good, may be achieved
(Commissioner of Internal Revenue v. Algue, G.R.
No. L-28896, February 17, 1988) .
 \ I
MEM-Q~Y AID .
San Beda l.WWnlty College d Law - RGCT Bar 0peraUo,,a Center
FOR THIS REASON:
1. Injunction generally does no~ lie against · the
collection of taxes (Commissioner of Internal
Revenue v. Cebu Portland Cement Company,
G.R. No. L-29059, December 15,· 1987);
2. Taxes are generally not subject to set-off or
compensation (Republic v. Mambulao, G.R. No.
L-17725, February 28, 1962);
3. The State is not estopped from collecting taxes
by the mistakes or errors of its agents (Philippine
Guaranty Co., Inc. v. Commissioner of Internal
Revenue, G.R. No. L-22074, April 36, 1965);
4. Tax exemptions are never presumed and are
strictly con_strued against the tax'payer (Smart
Communication_s, Inc., v. City of Davao, G.R.
No. 155491, September 16, 2008); and · ROXAS, supra at 8).
5. Taxation is plenary and unlimited in its range
(Chamber of Real Estate and Builders
Associations, Inc. v. Romulo, G.R. No. 160756, .
March 9, 2010) .
. NECESSITY THEORY
Government is necessary; h_ owever, it cannot
continue without the means .o f paying for its·
- -existence; hence it has the right to compel all its
citizens and property within its power to contribute .
. for the same purpose (71 Am. Jur. 2d 346). ~Without
taxes, the government cannot fulfill its mandate of ·
promoting general welfare and well-being of th~'t- · :
people (National Power Corp. v. City of Cabanatuan,
GR. No. 149110, April 9, 2003) . ·a" -~ :·. ·
. ..
BENEFITS-PROTECTION:/· .. . t." ... arising from . rime tt)at ·could be wiped out by the
RECIPROCITY THEORY_.(DOCTRINE OF .. _ _ acts charged · (Proton Pilipinas Corporation v:
SYMBIOTIC RELATIONSHIP) ..-f; • . _
Taxes are paid for the enjoyment of the benefits of
organized society. Such enjoyment also ·extends 1o
those members of a State who ·do not pay taxes
because they are ,not able to· do so (ABA'N,: supra at
7). The government for its part, is expected to
respond in the form of tangible and intangible
benefits intended to improve th~ lives of the people
and enhance their material and moral values
(Commissioner of Internal Revenue v. Algue, G.R.
No. L-28896, February 17, 1988).
A person cannot object -to or resist the payment of ·
taxes solely because no personal benefit to him can
be pointed out arising from the tax (Lorenzo v.
Posadas, G,.R. No. L-43082, June 18, 1937).
JURISDICTION OVER
SUBJECTS AND
OBJECTS
JURISDICTION OVER SUBJECTS AND
OBJECTS
The power _to tax can only be exercised within the .
terr)torial ·jurisdiction of a taxing authority, except
when there exists pnvity of relationship between the
taxing State and the object of tax (VALENCIA &
-
LIABILITIES INVOLVED ·
Civil liability to pay taxes arises from the fact that one
has engaged himself in bl!siness, and not because
of any criminal act committed by him. The criminal
liability arises upon failure of the debtor to satisfy his
.. .. civil obligation (Republic of the_ Philippines v.
, Patanao, GR. No. L-22356, July 21, 1967).
lri addition , it should be borne in mind that the :tax
and the obligation to pay the Mme are all created by
statute; so are its collection a nd payment governed .
by statute. The r;?c!yment of taxes is a duty which the
· law requires to be paid. ·said obligation· is not a
co"nsequence cf
the felonious acts. charged in the
criminal 'proceeding nor is it a mere civil liability
judicial ·declaration of non-existence of- the criminal
Republic of the Philippines, G.R. No. 165027
. Qeftober 12, 2006). - · _ '
DOES THE POWER TO TAX INVOLVE
THE POWER·TO DESTROY?
According to Justice Marshall , "the po_wer to -tax
involves !he power to d_estroy." Taxation is a
destructive power which interferes with the personal
and propE;irty rights of the people and takes from
them a portion of their property for the support of the
government" (McCulloch v. Maryland, 4 Wheaton
316, March 5, 1819) . But according · to Justice
Holmes the "power to tax is not the power to destroy
while this court (Supreme Court) sitsn (Sison v.
· fi.ncheta, G.R. No. L-59431 , July 25 1_984).
. .
NOTE: The power to tax includes the power to
destroy if it is used validly as an implement of the
pq_lice power in discouraging and in effect, ultimately
prQhibiting certain things or enterprises inimical to
the public .welfare (CRUZ, Constitutional Law, as
cited in DIMAAMPAO, supra at 21).
 GENERAL PRINCIPLES
Taxation Law

Marshall and Holmes Dictum Reconciled Commission of the Philippines, February 1939, Vol.
While taxation is ·said to be the power to destroy, it 1, pp. 23-31).
is by no means unlimited. When a legislative body '
having the power to tax a certain subject matter Non-observance of the canon however, will not
actually imposes such a burdensome tax as render a tax .imposition invalid, "except to the extent
effectually to destroy the right to perform the act or that specific constitutional or statutory limitations are
to use the property subject to the tax, t.he validity of impaired." Thus, even if the imposition of VAT on _
the enactment depends upon the nature and tollway operations may be burqen~ome__ to ·
character of the right destroyed. If so great an abuse implement, it is not necessarily invalid unless some
is manifested as to destroy natural and fundamental aspect of it is shown to violate any law or the
rights which no free government could consistently Constitution (Diaz v. Secretary of Finance, G.R. No.
violate, it is the duty of the judiciary to hold such an 193007, July 19, 2011).
act unconstiMional. Hence, the modification: "The
power to tax is not the power to destroy while the THEORETICAL JUSTICE (ABILITY-TO-
Supreme Court sits (DIMAAMPAO, supra at 22).
PAY Tl:IEORY)
A sound tax system must be based on the taxpayers'
JUDICIAL REVIEW OF TAXATION ability to pay. Our laws mandate that taxes must be
Taxpayers may seek redress before the courts in reasonable, just, fair, and conscionable. Taxation
case of illegal imposition of taxes and irregularities. must be uniform and equitable (CONST., Art. · VI,
The Constitution as the fundamental law overrides~ - Sec. 28(1)).
any legislative or executiye act that runs counter to .
it. Therefore, where it can be demonstra ed tlia the _, . '. EFFECTS OF VIOLATION OF THE
challenged statutory provision fai~s- j o a_bi(1e.1_~ yitsc-~·- '"'·PRINCIPL.ES ·
command, then the court must /so declare and --.......---h-.,,...--------- - - -
adjudge it null -(Sison Jr. v. Ancheta' et.al.- ..--id.r · .A--t la -.wiil retai,:, its validity even if it is not in
However, •in the exercise of s~cflpower to/ pass or:i censonc;ince wit~ the principles of fiscal adequacy
the validity of the statutory provision, 's ill it should be •and apministrativ~ \ feasibility- because the
exerc~sed with due care and'circu~spectiorl) (2_fy_o(___ _ Constitution does not xpressly require so. These
Baguro v. De Leon, G. R. N o. L -~ ~4756, \' Oct. 31 , '"p rmc1ples are on_fy designed to make our tax system
1968). ~---.. - - sound. lf!owever,' if a' tax law runs contrary to the
. . _principl~ of theoreti~i , justice, such violation will
-_!_~!1~er / !l}e--:; law~ unco11stitutional considering that-·-
•, J . undec~e..Oonst1tuti9n, tie rule of taxation should be

""
OF .A~_/•.. _ unifo~J ~nd e~uitabre (DIMAAMPAO, supra at .32;
C6NS-T.: Art., 'Vt, Sec 28 (1)). .
SOUND TAX SYSTEM ,. _,,_. ~.,,,, :-(-./ / ·
.__ _ _ _ _ _ _ _ _...,._____,_ , -·
P.-~--~~-------------
i - . -· \ '-,)
--....._- J • , \

.EIMITATIONS OF .
FISCAL ADEQUACY ,,_ \, ,,. -TAXATION
Sources of government revenues must be sufficient
to meet government expenditures and other public
needs (Chavez v. Ongpin, G.R. No. 76778, June 6,
1990). This is in consonance with the doctrine that
While the State has an interest in swift collection of
taxes are the life-blood of the government
the tax, its power to tax is by no means absolute. The
(Commissioner of Internal Revenue v. Algue, G.~.
power of taxation, no matter how vigorous it may be,
No. L-28896, February 17, 1988).
has its limitations. Such limitations may either be
inherent i,:i the exercise of _the power itself or
ADMINISTRATIVE FEASIBILITY impos~ by the Constitution (RECALDE, supra at
Tax laws must be capable of being effectively 26).
enforced with the least inconvenience to the
taxpayer (ABAN, supra at p. 12). Inherent Limitations: (PINES)
1. fublic Purpose;
The principle requires that each tax should be clear 2. International Comity;
and plain to the taxpayers, capable of enforcement 3. f:!on-delegability of the taxing power;
by an adequate and well-trained staff of public 4. Exemption of the Government; and
officials, convenient as to time and manner of 5. §itus or Territoriality (ABAN, supra at 53).
payment, and not unduly burdensome upon or
discouraging to business activity (Report of the Tax
 \ I
MEt40~Y AID
Sen Seda UriYffltty College of lMI - RGCT Bar Ope,atione Center
Constitutional Limitations
1. General or Indirect: (DENR FP 2J) .
a. Due process;
b. Equal protection; _ functions, such as· building roads and delivery of
c. Non-impairment of obligations of contract; ·
d. Religious freedom · ·
e. Freedom of speech and expression;
f. Presidential power to grant reprieves,
commutations and pardons, and remit fines
and forfeitures after conviction by final
judgment;
g. Law-making f rocess; and
h. No taking of private property without Just
compensation.
2. Specific or Direct: (~ 2UTO SERV JAIL)
a. frohibition against imprisonment for non-
payment of poll tax;
b. frogressive system of taxation; . -
· c. ,Ynifqrmity and equality of taxation;
d. Delegated authority of the President to
impose Iariff rates, import and export
quotas, tonnage and wharfage . dues
(Flexible Tariff Clause);
e. Origin of_ revenue · ar:id tariff bills and
appropriatio11s;
f. Prohibition oh use of tax levied for §.pecial
purpose; ,.,,_.,
g. Votes required to grant tax .5.xempttons;
h. Tax exemption of Beligious·, cha(itabl~,.and
educational entities; · ',
i. President's ~eto power; _ " - •
j. . Non-impairment of ~ uprE!rne _:, Court's
Jurisdiction; :, , , ..,.. , ·
k. Non-&,propriation or .use· Qf ,P,1,1blic money !
for religious purposes;
I. Non-taxability of non-stock, non-profit
educational Institutions; and . •
m. ,bGU's power to create its own sourcesf of
revenue (Id. at 66). \ ~,..,.,,,
INHERENT LIMITATIONS
Those which proceed from the very nature of the
taxing power-itself. They are ·otherwise known as
elements, tenets, or characteristics of taxation
(DIMAAMPAO, supra at 45).
A violation of these inherent limitations can a.mount
to the taking of property without due process of law
(Pepsi-Cola Bottling Co. v. Municipality of Tanauan,
Leyte, G.R. No. L-31156, February 27, 1976).
Hence, in this sense, it can be said that any tax law
~nt~vening any limitation of taxation ; in effect, will
hkew1se be unconstitutional (VITUG &· ACOSTA,
supra at 5).
1. Public Purpose
.The term "public purpose" is ·not defined. It is an
. elastic concept that can be hammered to fit rhoderri
standards. Jurisprudence states that "public
purpose" should be given · a broad interpretation. It
does not only pertain to those purposes which are
tcaditionally viewed as essentially governmental
b·asic services, but also includes .those purposes
designed to promote social justice (Planters
Pr9ducts, Inc. v. Fertiphil Carp., G.R. No. 166006,
March 14, 2008) .
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 Corp., G.R. No.
159647, April 15, 2005). .
The phrase has now been broadened to cover uses
which redound to the general public indirect
·advantage, or benefit (CRUZ, Constitutional Law
(2015), p. 149-150).
"' It is the essential character of the direct object of the
. expenditure, · which must determine . its validity.
.·:~. Incidental advantage to the public or the State, which
.' "' results from the promotion of private interests, does
1t i~t ·us~ify ,t~eir aid by the use· of public money
,f"' (Pnillppin'e:.11Cg_conut Federation, Inc., v. Republic,
· G.R. No.177JJ5 -58, January 24, 2012).
q .
,. The legisl{tu~e \nay determine within reasonable
. bounds what is necessary for its protection and
· ·-~ . expedieQt for the promotion of -public interest
· (SABABAN , · 'T'axafjon,, Law Revie·w (2008), p. 6
: . · [hereinafter SABABAN]).
' • - • >
· However, this will not prevent the court from
· questioning the prcipriety of such a statute on the ·
_ •. :r · ground 'ibat the law enacted .is not. for a public
purpose; but once it is settled that the law is for a
public purpose, the court.may no longer inquire into
the .wisdom, expediency or necessity' of such tax
measure (DIMA/J,MPAO, supra at 47) . ' ·
Tax can be readily employed against one class of
individuals in favor of another so as to ruin one class
and give unlimited wealth and property to another, if .
there is no implied limitation on the uses for which
such J axing power, may be exercised (1 DIZON,
Taxation Law Compendium (2013), p. -92
1
[hereinafter, DIZON]). ·
The legislature is without power to appropriate public
rev~nues for anything but a public purpose. It is
robbery if it is appropriated for private purpqse (Id.) . .
The levy is for a public'purpose if:
a. It is for the welfare of the· nation or greater
portion of the population (VALENCIA &
ROXAS, supra at _6);

b. It affects the area as a community rather
than as individuals (VITUG & ACOSTA,
supra at 5); or
c. It is designed to support tt,e services of the
government for some of the recognized ·
objects of the country (Id.) .
Tests to Determine Public Purpose:
1. 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 (ABAN, supra at 53);
and
2. Promotion of General Welfare Test
- whether the proceeds of the tax will
directly promote the welfare of the
community in equal measure (Id.).
It is the_purpose which determines the pu~lic 1 T
character of the tax law, not the nu111~er of 1 _J
persons benefited. As long· as t ul,!imate
result favors the welfare of th ublic· in
general, the appropriation is.,- deemed done-~-----
for a public purpose ~- 20% discount
privilege for senior citize s as maridated by
Senior Citizens.. Act) (DIMM MPAO; supra
at 47). -; ~---- -
Public purpose must exist ·at the time of the
enactment of the law evyin!;f the tax or .
appropriating fu nd s ( 1{ l~ON, SUPJJ
at 95). .
Cases of Public Purpose:
PURPOSE) ·,
~BC.IC~ · j' . · .
a. fublic improvement; , '-'.
b Unemployment relief·
C.
• - •
Buildings and roads0nfrastructure;
d. S_ubsidie_s for ,bocal police forces ur{der
RA. 6142 (An Act Amending Ce'rtain
Provisions of R.A. 4860 - An Act
Authorizing the President to Obtain
, Foreign Loans and Credits Necessary
to Finance Approved Economic
Purposes or Projects);
· e. Industries classified as indispensable
under PD 1987 (An Act Creating the
Videogram Regulatory Board), as
amended by RA 9239 (Optical Media
Act of 2003) ;
f. ~onstruction of home sites;
g. fromotion of science and invention;
h. Y.Pliftment of the underprivileged;
i. Rehabilitation of the sugar industry;
j. fensions to deserving retirees;
k. Oil industry's protection;
L §ocialized housing; and
m. sducational subsidy (DIMAAMPAO,
supra at 48).
GENERAL PRINCIPLES
Taxation Law
2. International Comity t
Under international comity, a sta e -must
recognize the generally ac~epted tenets of
international law, some of which are t~ose that
limit the authority of the_ gov~rnment . to
effectively impose taxes on ·a sovereign state
and its instrumentalities (V/TUG & ACOSTA,
· supra at 11) .
ILLUSTRATIONS:
a. If a tax law is passed imposing taxes on t~e
income -of foreign ambassadors or imposing
real property tax upon foreign embassies, it
is not a valid law because the imposition is
in violation of the universal principles of
international law (DIMAAMPAO, supra at
52).
b. Income derived from investments in· the
Philippine in loans, stocks, bonds or other
domestic securities, . or from interest on
eposits in banks in the Philippines by: (i)
to ign governments, _ (ii) financing
, · institutions owned, · controlled or enjoy_ing
re manci g from fqreign -govemments, · and
... (iii) ,n ernational or · regional financial
, \ ins'tiuy0 2' established by foreign
.' ,· - ~overn ents" is exempt from ·income tax
(NIR , Se . 32(B)(7)(a)).
- - - c :-rOiplomllttic · ,ano Consular representatives
,- . are exe pt from paying the community tax
LGC, .;>8C.
C'! '1 5 9,11 . .
, > , .
-
r J
:--:---i,_( l.J~d~r in!ernational laws, foreign embassies
4. ~-;--o/.e consid~red extensions of the terri_toriality
/"':-~ ' ' -Of the foreig n states; to impose taxes upon
__ >.;; )/ !h~md:-v<?uld be tantamount to an exercise of
,r l r: -\ \ ._; JUns iction. over these foreign states
---- I • - -
-- . r~
(D/AA MPAO
, supra at 52).
s1ses ~ f th R I .
. e u e. .
a. D~ctrme of So~e~~•gn Equality
- sta~e~ a!e Juridically equal, enjoy the ·
same_ng~ts, ~nd ~a~e equal capacity in their
exercise. ~his principle finds its roots in the
rule of par m parem non habet imperium (as
between equalS, there is no sovereign) (Id.).
·
b. Doc~rlne of Sovereign Immunity .
- It . is th e rule of international law that a
~oreign government may not be sued without
~ts consent. Thus, it would be useless to
im?ose a tax which could not be collected
(Arr Transportation Office v Sps David
G.R. No. 159402, February 23, 201.1). '
3 Non-De1e·g abllity of The Taxing. Power
·
GENERAL · RULE·• oelegata potestas non
potest delegare (a delegated
further delegated) Si power cannot be
• · . · nee the power of taxation
1s a power that 1s exercised by C ongress as
 \ I ,
MEM:Q~Y AI D
· S... Seda Colege ot Law • AOCT Bar Operationa Center
delegates of the people, then as a general rule
Congress could not re-delegate this delegated
power (VITUG & ACOSTA, supra at 11).
BASIS: Delegated power constitutes not only. a
right but also a duty to be performed by the
delegate through the instrumentality of his own
judgment and not through -the intervening mind
of another.
The following matters cannot be delegated by
Congress: ,
a. Selection of property or transaction to be
taxed;
b. Determination of purposes;
c. Rate of taxation; and
d . Rules of taxation (ABAKADA Guro Party .
Ust v. Ermita, G.R. No. 168056, September
1, 2005). . municipal government concerned (VITUG &
EXCEPTIONS: (PAL)
a. Delegation· to the f resident - deleg_
ation of:
{TE) . -
i. Iariff powers by Congress under the·
flexible tariff. clause (CONST. Art.· VI,'
Sec. 28(2)) ; and , ' b. · Government agencies; and
ii. smergency powers (CONST. Art. VI,
Sec. 23 (2)) , ·
b. Delegation to Adm inistrative_··agencies
also known as the power of su6ordinate
legislation, subject to the following tests:
i. Completeness Test ,,- .,·
- the law must be -completEf n all ifs
essential terms and "conditions When 1t . ·
leaves the legislature so.....
that
.,,.,..
there
-.
will;
I
be nothing left for the delegate to do
when it reaches him except -to enforce it
(CRUZ, Philippine Political Law (2014); .•. ·-~
p. 176). ; .f
~.
"" ., ......"--·
..,;.
ii. Sufficient Standard Test
·- the law must offer a sufficient standard
to specify _the limits of the delegate's
authority, announce legislative policy,
and specify conditions under which it is
to be implemented _(ld.. at 178).
c. Delegation to ,bocal Government - the
Constitution grants each LGU the power to
create its own sources of revenue and levy
taxes, fees and charges, which shall accrue
exclusively to the LGU (CONST. Art. X, Sec.
5). . As a matter of public policy, property of the State
Municipal corporations, unlike sov~reign
states, are clothed with no inherent power of
taxation. Its charter or a statute must clearly
show an intent to confer that power or the
municipal corporation cannot assume and
exercise it, and that any such power granted _
· 13
•,
.
. must be construed strictly, any doubt or
ambiguity.arising from the terms of the grant
to be resolved against the municipality
- (Ferrer, Jr. , v. Bautista, G.R. No. 210551,
June 30, 2015).
Limitations of the EXCEPTIONS: -
a. The ?el~gation ,_shall not contravene any
const1tut1onal provisions or . inherent
limitations;
b. The delegation is effected either by the
Constitution or by validly enacted legislative
measures or statutes; and
c. The delegated levy ·power, except when the
delegation is by an express provision of the
Constitotion itself, should only be in favor of
the local legislative body of the - local or
ACOSTA,·supra at 9):'. .
4. Exemption of the Government
The inherent" limitation of , exemption of
government from tax covers: · -
a. Government entities;
·c. Government instrumentalities,
· Government Entities '(Government of the-
Rep_ ublic of the Philippin~s) _
It refers to the corporate gqvernmental entity
through which the functions of the government
are exercisei!t throughout the Philippifles,
inclgding, save as-the contrary appears from the
_context, !he yarious arms through 'whicn the
political authority is made effective· in the
Philippines, whether pertaining . to the
- autonomous -regions, the provincial, - city,
municipal .or barangay subdivisions or other
.."
forms of local government (REV. ADM. CODE,
· Sec. 2).
REASON: Properties of the national
government · as well as those · of the local
government units are NOT subject to ta~.
otherwise, it will result in the absurd situation of
.the government "taking money from one pocket
~nd putting it In another." Hence, it would not be
serve the purpose of taxation. (COOLEY on
Taxation, Sec. 621, 4th ed: as cited in Social
Security System v. City of Bacolod, G.R. No. L-
35726, July 21 , 1982). .
and of its municipal subdivisions· devoted to
government uses and purposes ' is generally
deemed to be exempt from taxation althou_ gh no
express provision in the law is made therefor (51
Am. Jur. 503).
 · GENERAL PRINCIPLES·
Taxation Law

A close scrutiny of the definition of "government- considered MIAA as a government

owned or controlled corporation" in Section 2 instrumentality under Sec. 133(0) of the
(13) of the Local Government Code (LGC) will LGC which provides that exercise of the
show that Manila International Airport AL!thority taxing powers ... shall not extend to the levy
(MIAA) would not fall undef such definition, of: "taxes, fees or charges of any kind on the
MIAA is a government "instrumentality". Under National government, its agencies and
the LGC, local government units have no power instrumentalities and local government
to tax instrumentalities of the national units" (Manila Int'/. Airport Authority v. Court
government like MIAA. Furthermore, the airport of Appeals, G.R. No. 155650, · July 20,
lands and buildings of MIAA .are properties of 2006); and
public dominion intended for public use, and as c. Mactan Cebu International Airport Authority 1
such are exempt from real property tax under (MCIAA) (MC/AA v. Lapu-Lapu City, G.R.
Section 234 (a) of the Local Government Code. No. 181756, June 15, 2015).
However, under the same provision, if MIAA
leases its real property to a taxable person, the Reasons for the Rule on Exemption: .
specific property leased_ becomes subject to real a. So that the functions of the government shall
property tax. In this case, only those portions of not be · unduly impeded (51 Am. Jur. 550-
the NAIA Pasay properties which are teased to 51); and
taxable persons like private parties are subject . b. To reduce the amount-of money that has to
to real property tax by the City of Pasay (Mactan- be handled by the government in the course
Cebu International Airport Authority (fv!S;IA-:4) v. -, T 1
·•· of its operations (Maceda v. Macaraig, G.R.
City of Lapu-Lapu and Pacald9., G.R. No. ) ;r f.!_o 88291, June 8, 1993).
181756, June 15, 2015). · :~ .... ;, • i f '
/'. J .,.>-,.~•"' Pilisuant to the provisions of the NIRC, the
Government Agencies · ; · - -- "- ·- · Natioha·I ~vernment may levy income tax
It refers to any of the vari9Us JJnit ~t°th~ ·:- , upon ...,.~ corporations, agencies and
government, including a department burea~; . . · _ , ·instrumeritalifies owned or controlled by the
office, instrumentality, o,r, f10verl)ment-pwned or , , . governme,:i( subject to exceptions as
qontrolled corporation (GQG<i:s), or1 a ·local -provided ·t'J_yr~in (NIRC, Sec. 27(C)).
government or a district unit-tberein (REV. ADM. _tiowever, i~qome derived . by the
CODE, Sec. 2) . .. . . ' 1g9vernment frpm any public utility and from
. . -.... 1 J '. .' tn-e J3xer:cise of ;any essential governmental
Taxability of Government Ag ncies:.-. · --: ;f1.JJ)Ctio13 · r-e : exempt from income tax
a . . Agencies performing ; go\ eri)m.ental : . ; •· - · •.I . , '(NIRC,-,Sec.' 32(B)(7)(b).
functions are exempt from t~x-""; uhTess • · · .,_,,,. ' ·
expre~sly taxed. . . '·y'~; - i., ·,,_ :-_,;:· NOTt Reaj •property, even if owned by the
b. Agencies
· b. performing proprietary funct10os .-:. - ·- _ ,
- ,_,, . ,. , ··, \ ...., _, !~ oepubI,·c O, any of I·ts pol·t·1IcaI su bd"IvIsIons,
· · .
:::m;~~~/M~J~ u~~s~s , xp)~ssly .:.. - ' ..:. - _-_,,... , ·~mt\l s_,tilt be subject to real prqperty tax' if the
0 , P a-a , ••$:. • ~~nefic1al use of the real property was

Instrumentality of the Government · nled to a taxable person (Manila Int'/.

It refers to any agency of the National 'A,rporl Authority I(. Court of Appeals, G.R.
Government, not integrated within the No. 155650, July 20, 2006). .
department framework, vested with special Governrraent-Owned . or Controlled
functions or jurisdiction by law, endowed with Corporations (GOCCs)
som~ if not all corporate powers, administering Refers to any agency: -
special funds, and enjoying operational
a. Organized as a stock or non-stock
autonomy, usually through a charter (REV. corporatior:i;
ADM, CODE, Sec.2).
b. Vested with functions relating to public
Examples: -~eeds, '-'."hether governmental or proprietary
in nature; and .
a. Philippine Fish~_rie~ Development Authority
(PFDA~ (Philippine Fisheries .Dev't. c. ~v.:ned by the ~?vernrnent dir~ctly through
Author,ty v. The Municipality of Navotas G its I~st rumentaht1es either wholly, or where
R. No. 150301, October 2, 2007); ' · ·applicable as in the case of stock
b. Manila International Airport Authority ?orpor~tion 5, to t~e extent of at least 51% of
(MIAA). its capital stock (REV. ADM. CODE, Sec. 2).
The SC held that the real prop_erties of MIAA
Taxability of GOCCs
are owned by the National Government and
thus exempt from real · estate fax. It A GOCC is generally subject to tax except that
·the following are not subject to inco'me tax:
 \ I .
MEM:Q~Y AID
San Bedll LW,era1ty ColeQe of Law - RGCT Bar Opef8llone Center
a. Government Service Insurance System
(GSIS);
b. Social Security System (SSS);
c. Philippine Health Insurance Corporation
(PHIC);
d. ·Local Water Districts (LWDs); and,
e. Home Development Mutual Fund (NIRC, as
amended by R.A. No. 11534, otherwise
known as the Corporate Recovery and Tax
Incentives for Enterprises (CREA TE) Act,
Sec. 27).
NOTE: The 2020/2021 Bar Examination
Taxation Law Syllabus does not include
Corporate Recovery and Tax Incentives for
Enterprises (CREATE) Act which took effect on
April 11, 2021 (15 days after its publication on
March 27,2021), but for purposes of discussion,
CREATE Act was included in the·making of the
Memory Aid.
Prior to the CREATE Act, the NIRC ·expressly
mentioned only GSIS, SSS, PHIC, and LWDs as
GOCCs. However, the CREATE Act added
HDMF as a GOCC (CREA TE Act, Se9. 6) .
• .:,;:IY\og · ou~ide its borders or ·lay an excise . or
NOTE: Before the TRAIN Law, PCSO was
included among the ·tax-exempt entities under
Sec. 27, par (c). Pursuant to the amendment, the
income of PCSO is now subject -to tax (NIRC,
Sec. 27, par. (c) ,·as amended by TRAIN Law).
NOTE: In Mactan Cebu International Airport
Authority v. Marcos, - G.R. No. 120082;
September 11, 1996, MCIAA was considered as •
a GOCC and thus not exempt from ·real property
tax.
However, this classification was .°revisited .in
Mactan Cebu -lniemational Airport Authority v.
City of Lapu-lapu, .G.R. No. 18175.6, June 15,
2015 where the Supreme Court held that MCIAA
is not a government-owned or controlled
corporation under Section 2(13) of the
Introductory Provisions of the Administra~ve
Code because it is not organized as a stock or
non-stock corporation. Neither is MCIAA a
goven:,ment-owned or controlled corporation
under Section 16, Article XII of the 1987
Constitution because MIAA is not required to
meet.the test of economic viabil ity. MCIAA is a
government instrumentality vested with
corporate powers and performing essential
public services pursuant to Section 2(10) of the.
Introductory Provisions of the Administrative
Code. As a government instrumentality, MCIAA
is not subject to any kind of tax by local
governments under Section 133(0) of the Local
Government Code.
NOTE: Section 13 of PD 1869 states that
payment of the 5% franchise tax by PAGCOR
and its contractees and licensees exempts them
from payment of any other taxes, including
corporate income tax (Bloomberry Resorts and
Hotels Inc. v. BIR, G.R. No. 212530, August 10,
2016) . .
Unless otherwise provided herein, th~ exercise
of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend
. to the leyy of the following : xx x (o) Taxes, fees
or charges of any kind on the National
Government, its agencies and instrumentalities
and local government unjts (LGC, Sec. 133).
5. Territoriality or Situs of Taxation
Situs of ·Taxation
It is also known as place of taxation (ABAN,
supra at 57) .. It is the place or authority that has
the right to impose · and collect taxes
(Commissioner of lritemal Revenue v. Marubeni ·
Corp., G.R. No. 137377, December 18, 2001) .
GENERAL RULE: A state may not tax property
,. piiviiege'"fax upon the exercise or enjoyment of
a right pr ~privilege derived from the laws of
another/ state and therein exercised or enjoyed
C. ...
(51 AnJ. Jur.'-{J7-88).
I .
' REASONS :
a. Tax.ing ,....power of a country is limited to
person and property within and subject to its
(DIMAAMPAO, supra at 52); and
Benefits-Protection Theory (ABAN, supra
,at 7) .
•.1,, ,;~---·
EXCEPTIONS:
a. Where tax laws operate outside territorial
. jurisdiction (Id.); .
EXAMPLE: Taxation of resident -citizens
and domestic corporations on their income
from sources without the Philippines.
b. Where tax laws do not operate within the
territorial jurisd iction of the state;
c. When exempted 'by treaty obligations; or
d. yvhen exempted by. international . comity
(Id.) .
For further discussion on Situs of Taxation,
please refer to page 28.
CONSTITUTIONAL LIMITATIONS
Constitutional limitations are provisions of the
fundamental law of the land that restrict the
supreme, plenary, unlimited and comprehensive
power to tax by the State. As a rule, the Constitution
 16
'
does not create the power to tax on the State.
Instead , it simply defines and regulates the exercise
of tax power in order to safeguard the interest of
affected taxpayers (VALENCIA & ROXAS, supra at
17) .
GENERAL OR INDIRECT
CONSTITUTIONAL LIMITATIONS
1. Due Process Clause
No person shall be deprived of life, liberty, or
property without due process of law (CONST.,
Art. Ill, Sec. 1).
Two Aspects of Due Process:
a. Substantive due p·rocess - the tax statute
must be within the constitutional authority of
Congress and that it must be fair, just and
reasonable (SABABAN, supra at 8) .
~-
b. Procedural due process - requires _notice • r
and hearing, or at least an opportunity to be ,
I _ _;
heard (Id.) . ,, _,. _- \ :.,. •. _ •
Notice and Hearing W~en t:4e~essary
As a rule , notice ~lid _tlearing -at the
----=--- --~.,. - . . . ·, ,
opportunity to be heard is necessary only .
when expressly required by law. Where
there is no such requiremel'}t, notiqe and the - - --- - ·-
opportunity to be hea ,are dispensable
(SABABAN, supra at 9) . ,
ii .
While the S~nggllnia~ are ._re...q~ired · te
conduct pubhc h ci_n · g prior !O
-i-;-,-
the _ _ , : , .4,~~ ·tfcation. It 'm rely requires that all persons
enactment of tax ~rclmanc~ anti rE;venue
measures, the Natio al Leg~slt;1ture, or;i _ttie,, ,...,/.:·;7'~~ h legislation shall be treated alike, under l!ke
other hand , has the dlscret1on •\yhethe.r or . - . .
not they would conduct public,· hearings f · • : 1 - ... privileges conferred and, in the liabilities,
before the enactment of tax laV:'~, (f GC, . . ... • -
Secs. 186 & 187). ··
Due process in taxation requires: (PTA)
a. Tax must be for a f.ublic purpose;
b. Imposed within Territorial jurisdiction; and
c. No Arbitrariness • or oppression in
assessment or collection (DIMAAMPAO,
supra at 76). ·
Due process In taxation does not require:
a. Determination through judicial inquiry of. the
property subject to tax or the amount of tax
to be imposed; and · ·
b. Notice and hearing as to the amount of the
tax or the manner of apportionment (Id., as
cited in Pepsi-Cola Bottling Co. v. Mun. of
Tanauan Leyte, G.R. No. L-31156, February
27, 1976).
Where the due process clause is invoked ,
considering that it Is not a fixed rule but rather a
broad standard, there is a need for proof of such
GENERAL PRINCIPLES
Taxation Law
persuasive character as would lead to _su~h
co·nclusfon. The taxing power has authonty to
make reasonable classifications for purposes of
taxation. Inequalities resulting from singling out
of one particular class tor, ~ation_or_ ex_em~tion
do not infringe any constitut1oaal limitation. The
real estate industry is, by itself, a class and can
be validly treated differently from other business
enterprises (Chamber of Real Estate and
Builders' Associations, Inc. v. Romulo, G.R: No.
160756, March 9, 2010) .
Illustrations of Violations of the Due Process
Clause: ·
a. If the tax amounts to a confiscation of
property; . . .
b. If the subject of confiscation ,s outside the
jurisdiction of the taxing authority;
c. If the law is imposed for a purpose other
than a public purpose; ..
.,. d If the law which is applied retroactively
/ •• 1 J imposes unjust and oppressive taxes; o_ r
:,~ \ e; Where . the law · is in violation of inherent
. 2. EquarProte.,ti,on Clause
.
.,. limitation~ (ABAN, supra at 67-69) .
. . ".. . nor s6~fi an person be denied the equal
protection of(the Jaw" (CONST. Art. Ill, Sec. 1) .
. .
,Equal prote~tion neither requires equal rates of
taxation on diffe~r;it classes of property, nor
prohibits uneq1,1al •taxation so long as the
-ine,q'uality is-.. riot based upon a~itrary
,.(or,; property, -of e same class) subjected to
circumstancei and conditions, both in the
-~,mpo~ " (Cooley, as cited in Sison, Jr. v.
. ,- Ancheta, G.R. No. L-59431, July 25, 1984).
'... ,/
. .
'Absolute Equality Not Required
Practical equality is constitutional equality.
There is no imperative requirement that taxation
shall be absolutely equal (DIMAAMPAO, supra
at 86).
The equal protection clause may be violated
in two ways :
a. When classification is made where there
should be none (i.e., where classification
does not rest upon substantial distinctions),
(Villegas v. Hiu Chiong Tsai Pao Ho, G.R.
No. L-29646, November 10, 1978); or
b. When classification is called for (i.e., when
substantial distinctions exist) but no
corresponding classification is made on the
basis thereof (Association of Customs
Brokers, Inc., et al. v. The Municipal Board,
G.R. No. L-4376, May 22, 1953).
 \ I
MEM-Q~Y AID
Sen B e d e ~ Colega d Law - RGCT Bar 0per8llafla Center
The legislative power to select subjects of
taxation and apportion the public burden among
them includes the power to make classifications
(Villegas v. Hiu Chiong Tsai Pao Ho, G.R. No. L-
29646, November 10, 1.978).
Requisites for a Valld Classifi~tion: .(SAGE) .
a. It must be based on §ubstantial distinctions~
b. It must Aµply both to · present and future
conditions; ..
c. · It must be G~rmane to the purposes of the
law; and
d. It must apply gqually to all members of the
same class (Ormoc Sugar Co. v. Treasurer
of Ormoc, G.R.· No. L-23794, February 17,
1968).
Substantial Distinction . tax to limit the circulation of information to which
The principle -of equality admits of classification
-- or distinction as long as they are based upon
real and substantial differences between the
persons; property, or privileges (ABAN, supra at
70) . - . , However, if the fee imposed is .not for the
z ''.t'
I exercise ofa privilege but only for the -purpose
Vertical Equity and Horizontal Equity , of defraying part of the cost of re.gistration (e.g.
Vertical ·e quity connotes a .difference in the fU
treatment between those who are finanrJtl\"
well-off and those who have relativE;lly-le'~f. \~ l S
fairly in relation to each taxpayer's ~bili••'l..\o ,GIii
the tax. ,;
. "" .
Horizontal equity' implies that' those _Who ·~re·-
similarty situated in life shooJcf tie te,xeg_ simila_rl_y
(RECALDE, supra at.44-45). : . ..-, .. !:' ..- .
3. Freedom of the Press
No law shall be passed abridging the frE;iedO[ll of
~or
speech, of expression , o~ the press1 the rig~t · ~- ~.
of the people peaceably to assemble • af1d
petition the . government for redress of
grievances (CONST., Art. Ill, $ec. 4) . ··
' press freedom (Chavez v. Gonzales, G.R. No.
Four primary reasons why · freedom of
expression is essential to a free society:
a. It is the foundation of self-fulfillment; ,
b. It is vital to the attainment and advancement
of knowledge;
c. It is necessary to our ·system of self-
government; and · · .charging license fees for the privilege -of selling
d. It .provides. a "check" against possible
government corruption and excess, which
seem to be permanent features of the
~uman condition (1 DIZON, supra at U$2).
·There is curtailment of · press freedom and
freedom _of thought and expres·sion if a tax ls
levied in · order to suppress these. basic rights
and impose a prior restraint thereto: ·A )icense
. fee may not be imposed on the press because it
lays a· prior restraint on the exercise of jts right
. .
17
(Tolentino v. Secretary of Finance, G.R. No.
115455, August 25, 1994).
The U.S. Supreme Court held that to apply an
ordinance requiring a business license to be
obtained before a person could sell newspapers
in the _streets would be to impose a prior restraint
on press freedom because a newspaper is not
in the same category as a pineapple or a _soap
·powder, or a pair of shoes whose sale may be
conditioned on the possession of a business
license (People v. Karins; 385 N. Y.S.- 2D 474,
1976).
· .. Separate s~les tax on newspapers with
circulation of over 20,000 imposed was a
deliberate and calculated device in the guise of
the public is entitled in virtue of the Constitutional
guarantees_(Grossjean v. Ameriqan Press, 297
u.s; 233, 1936).
1
.annual registratior, fee) or when a tax is imposed
~n the sale, barter, lease or exchange of goods
and pro erties ·or services purely for revenue
pu rpos~s . (e.g. VAT), the Const\tution is not
violatep (Tolentino v. Secretary of Finance, G.R.
No. 1 545~'August25, 1994).
; .
Freedom of ,. circulation, the unhampered
distr-ibution • of- newspaper.s and other media
among customers and among the general
public, may I;>.~ interfered wi!h in several ways.
r. pne of which include requiring the p~yment of a ·
fee or tax, imposed either on the publisher or on .
the distributor, with the _intent to limit or restrict
circulation. This mode o( interfe.ring with the
freedom to circulate has been constantly
stricken down as unreasonable limitation on
168338, February 15, 2008) .
Thus, imposing a li~nse tax measured by_gross
receipts for the priv\lege of engaging in t~e
business of advertising in any newspaper, or
religi,ous books are_impermissible restraints on
the freedom of expression (Id., citing Grosjean
. v. American Press Co., 297 U.S. 233 (1936);
· Murdock v. Pe'nnsylvanic;1, 319 U.S. 105 (1943),
and American Bible Society v. City of Manila,
101 Phil. 386 (1957)).
It has been held, . however, even in the
P,hilippines, that publishers. and distributors of
newspapers ar,d allied ·m~di_a cannot complain
when required to pay ordinary tax~s such-as the
'

sales tax. The exaction is valid only when the
obvious and immediate effect is to restrict
oppressively the distribution of printed matter
(Id.).
4. Religious Freedom
The Constitution provides for these two
clauses:
a. "No law shall . be made respecting an
establishment of religion, or prohibiting the
free exercise thereof."-: also called the non-
establishment clause, it covers the
prohibition to establish a national or official
rel.igion since in that case, there would be an
appropriation from taxes paid by the people
(CONST., Art. Ill, Sec. 5) ; and
b. "The free exercise and enjoyment of
religious profession and worship, without
discrimination or preference, shall forever
be allowed.· - Also called the free exercise
clause, which is t_he basis of tax exel'T!P- ·ons
granted to religious institutions{fcr.}. f
,:he constitutional guaran · of he..,...free - · -- ·
exercise and enjoyment- ''ci religious
profession and worship carries with it the
right to disseminate religious information
(INGLES, Reviewer, supra .at 12) . \ - - · .
.,.,_ , .
Thus, a municipal license tax on the sale of ·
bibles and religi_ous articl~s by'ano -stock,
n~n~profit missionar)( orgah!µJif n at7-:--: ~:-N""c~,/t~kin_
m1~1~al profit constit · tes ~urtail~~n of
rehg1ous freedom and wars 1 • guar~ teed
by the Constitutioo (A11Jerican ible' soe'ieJy . I r ,·;,, /
v. City of Manila, G.R. No. L-9631, Apri('-30;, , -: t-: ·:. . ,. Please refer ta previous di'scus ·
1957) ' ...!:._ 1 r ,
· - · / ( , .
. .. - _'"" ) ,
Not every 1mpos1t1on of tax, however, co stftutes 'r • I\ . ~\
curtail_ment of . r~ligio~s freedom. The .,f~e_e .
exercise of rehgIon clause does not prohibit
imposing a generally applicable sales and use
tax ori the sale of religious materials by a
religious organization. VAT, which is not a
license but a revenue tax, is allowed
(Tolentino v. Secretary _of Finance, G.R. No.
115455 October 30 1995).
, ,
Income of Certain Organizations
GENERAL RULE: Income is exempt from
taxation if the following is complied with: (NON)
a. That it is a Hon-stock corporation; _ ·
b. Organized and operated · exclusively for
religious, charitable, scientific, · athletic or
cultural,.and social welfare purposes; and
c. tfo part of the income inures to the benefit
of any member, organizer, officer, or any
specific person (NIRC, Sec. 30(E)) .
GENERAL PRINCIPLES
Taxation Law
. .
EXCEPTION: Income of such organizations is
taxable regardless of the disposition made of
such income if realized from:
a. Productive use of property, real or personal
(i.e. rents, dividends, interests); or
b. Profitable business pursuits (Commissioner
of Internal Revenue v. Court of Appeals,
G.R. No. 124043, October 14, 1998).
Lemon Test
The wall of separation that must be maintained
between the churqh and the state is blurred,
indistinct and variable barrier depending on all
circumstances of , particular relationship. The
following are the three tests to assess whether a·
law violates the establishment clause:
a. Does the law have secular purpose? _
b. Is the primary effect either to advance
religion or to inhibit religion?
.. _ . c. Does the law foster an 'excessive
, " • . governmental entanglement with religion?
J .. • f ' (1 DIJON, citing Lemon v. Kurtzman, 403
. r ' US.,602). · .
ltt order, fo pass constitutional muster under the
No -E~ ablishment-Clause, a statute: ·
a. 'Must e ~ecular legislative purpose;
b. Must l'\ave a) principal or primary effect that
- ·-·--neither aa a ces nor:.inhibits religion;
· . c. Must not fost~r an excessive governmental
· , ntanglJment,with religion (Id.) .
· . · /f,',, J J 1
.
g of ~rivate Property without.
I· . .lust.Compensation (CONST. Art. 111 · sec. •
I .,, , 9)'-:''• '
,.
p ·
, _, , . s1ons on ower
-- - - - of Taxat19n_, as an implement of the Power of
E,vl ent amain on page 7
· ·
v 6:~ r Non-lmpairm · t Cl
N. • . . en a~s~
O1
aw impamng th e· obhgat101"! of contracts shall
be ~ass~d (CON~T. ~rt. Ill, Sec. 10).
To impair th ~ obligation of a contract is to alter
or ch~nge th e terms_or effect of the contract, and
th u~ . m con_ templation of law, to weaken t~e
position or rights of one or all of the parties to it
(ABAN, supra at 77).
Non-lmpail'!'flent Clause as a Limitation to the
Power to Tax ·
The non-i111pairment clause becomes a
liinitati~n to the power to tax when the taxpayer
enters mto an agreement with the government
(SABABAN, supra at 13). . .
It applies only where one party is the
G9vernment and the other party, a private
individual (Id.).
'
 \ I
MEt40~Y AI D
s., B«la UrMt9fty co1ege of 1..- · RGCT Bar 0penltions Cenblr
EXAMPLE: A tax exemption based on a
contract cannot be revoked by a later taxing
statute. There was an impairment of·the contract
existing between the plaintiff-con~es~ionaire
and the Spanish Government considering that
under said decree no taxes outside Of those
authorized therein could be levied· on mining
concessions (Casanovas v. Hord, G.R. No.
3473, March 22, 1907; ABAN, supra at 94-95) .
REASON: When the State grants an exemption
on .the basis of a contract, consideration is
presumed to be paid to the State, and the public
is supposed to receive _the whole equivalent
therefrom (DIMAAMPAO, supra at 98).
EXCEPTION~:
a. When the exemption is unilaterally granted
by law and the same is withdrawn by virtue
of another law;
b. When the exemption is granted under a
franchise;
c. A franchise is subject to amendment;
alteration, or repeal by Congress when the
common good so ~equires (Philippine
. ,·. "''
Amusement and Gaming Corp. v. Bureau of
Internal Revenue, G.R. No. 172087, ¥arch
· >-'-: •, .'Please. refer
15, 2011).
- NOTE: The repeal or amendment ,must· be
expressly provided (Tawang Multi-Purpose
Cooperative · v. La Trinidad W~ter District,· ·
G.R. no. 166471, March .22, 2011), ·
R.A. No. 9334 failed to specific.~lly identify
P.D. No. 1590 (a special law ·governing the
franchise of PAL} as one of the acts
intended to be repealed. Thus, the franchise
of PAL remains the governing Jaw on its
exemption . from taxes (Republic . v.
Philippine Airlines, Inc.; G.R. Nos. 20!1353-
54, July 6, 2015) .
Impairments are permitted, provided that
the legislation:
i. Must serve important and legiti~ate
public interest; and
ii. Is a reasonable and narrowly tailored
means of promoting · that interest
(Goldenway Merchandi~ing Corp., v.
Equitable PC/ Bank, G.R. No. 195540,
March 13, 2013) . · Guro Party List v. Ermita, G.R. No. 168056,
7. Law-Making Proces~
Requisites: .
Bill should embrace only 1 subject expressed in
the title thereof;
a. Must pass 3 readings on 3 separate days;
b. Printed copies · in final form must be
.distributed to members of the House 3 days
before its passage (CONST. Art. VI, Sec.
26); and
c. President shall thereafter sign or veto the
· _same (CONST. Art. VII, Sec. 27) .
8. Presidential Power to Grant Reprieves,
Commutations and Pardons and Remit
Fines and Forfeitures after.Conviction by
Final Judgment
Except in cases of impeachme~t. or as
otherwise provided in the Constitution, the
President ·may grant reprieves, commutations,
and pardons, and remit fines and forfeitures,
after conviction by final judgment. He shall also
have the power to grant ·amnesty' with the
concurrence of the majority of all the Members
of the Congress (CONST. , Art. VII, Sec. 19).
.r ..
·
. to
pages 36·to 37.
discussions on tax amnesty on
·
/,\ .
SPECIFl_¢/l;)IRECT CONSTITUTIONAL
LIMITATION
"~ 1. Taxation sha_ll be Uniform and Equitable
• (CONS_ T., Art. VI, Sec. 28(1)) .
Uniformity
",:· A tax is "uniform in application" if it operates with
ti,'~ .I •
!.; :_, ~- the same force :and effect in every place where
;,i- !:. • the · · uoject may be found (Commissioner of
Internal Revenue v. Lingayen · Gulf Electric
Power Co., G.R. No. L023771, August 4, 1988) .
It means that persons or things belonging to the
same class shall be taxed at the same rate
(CRUZ, supra a{90).
Uniformity, not Equality
REASON: The equal protection clause does not
require the universal application of the laws on -
all persons without distinction. This might in fact
result in unequal protection. What -the clause
requires is equality among equals as determined
accord,ing to -a valid classification (ABAKADA
September 1, 2005) .
Different articles or other subjects may be taxed
at different rates provided that the rate is uniform
on the same class everywhere (City of Baguio v.
De Leon, G.R. No. L-24756, October 31, 1968).

Equitabillty
Taxation is said to be equitable when its burden
falls on those better able to pay (ABAN, supra at
82). The progressive system of taxation woulq
place stress on direct taxes rather than indirect
taxes. A good example is the current individual
income tax system that imposes rates
progressing upwards as the tax base increases
(VITUG & ACOSTA, supra at 17).
Uniformity v. Equitability
Unifonnity in taxation means that persons or
things belonging to th~ same class shall be
taxed at the same rate (DIMAAMPAO, supra at
91). ·where the differentiation complained of
confonns to the practical dictates of justice and
equity, it is not discriminatory within the meaning
of this clause and is therefore uniform (VITUG &
ACOSTA, supra at 17). Equitable means fair,
just, reasonable and proportionate to one's
ability to pay (Id.). Taxation may be unifonn o ut
inequitable where the amount is excessl e or ._ ,.
unreasonable, i.e.,whenthereis doubret atio
(CRUZ, supra at 92) .
· · tj ; __.-
2. Progressive System -, o_f1/ Tpxatio•n
(CONST. Art. VI, Sec. 28(1Jj// /.
Progressive taxation is built on the principle of
the taxpayer's ability topay (DIM...P,MPAQ,-
supra at 104). As the resonrces of the\taxpaier
become higher, his tax ra~ likewi~e_increases· . · , ·
(e.g., income tax system. (,,,. '_l _ _ _ _._. • ___ __ _ /;1.r,/ ·
( \ :,;~,
VAT is admittedly regressive bec'ause. it is.
imposed regardless of income {Jf!GbE;S
Reviewer, supra at 13). However, it is still a.lid'
as the Constitution does not really prol'libif~ - -.-::·:
regressive system · but mereI~ directs he -...:...· 1 -·-
Conwess to evolve a progressive s__y~t~": of
taxation. In _a C9Se, the VAT s~s~em mm11fozes
the regressive effects by providing zero-Jated
transa~ons (ABAKADA Guro Party Ust v.
Ermita, G.R. No. 168056, September 1, 2005).
3. Non-Imprisonment for Non-Payment of
Poll Tax (<;ONST. Art. Ill, Sec. 20)
Poll tax
A poll tax (or personal or capitation tax) is a tax
of fixed amount on individuals residing within a
specified territory, whether citizens o~ not,
without regard to their property or the occupation
in which they may be engaged (51 Am. Jur. 660,
cited in Villanueva v. City of 1/oilo, G.R. No. L-
26521, December 28, 1968).
REASON: One cannot be imprisoned for non-
payment of poll fax because payment thereof is
not mandatory (SABABAN, supra at 14).
GENERAL PRINCIPLES
Taxatio~ Law
While a person may not be imprisoned for non.
payment of poll tax, he may be imprison~d for
non-payment of other kinds of taxes where the
law so expressly provides (NIRC, Sec. 255) .
NOTE: Non-payment of poll tax may be
penalized . by a fine because it is only
imprisorment which is prohibited by the
Constitution (1 DIZON, supra at 203).
4. Origin of Revenue or Tariff Bills
All appropriation, revenue or tariff .bills, bills
authorizing the increase of the public debt, bills
of local application and private bills shall
originate exclusively in the House of-
Representatives but the Senate may propo~ or ·
concur with amendments ( CONST. Art. VI,· Sec.
24) .
~- A bill originating in the House may undergo such
-r • extensive changes .in the Senate-that the result
J '-./ may pe rewriting of the whole (ABAN, supra-at
-·· = -" £1.0-BJf):,,> • ·
t' } .
- - -.NOTE: -·lt •is not the law, but the bill which is
-.. req ire , to originate exclusively from the House
: , _.. : - of ijepresentat~ves. A bill originating in the ·
Hou~e max ~ntlergo such extensive changes in.
~-rne·senate_ .tfii3!Jhe, result may be a rewriting of
__, ' the Whole {.rolentiflD v. Secretary. of Finance,
G. }'!!!: 115455, jAugust 25, 1994).
· • ·
·. I 5. ~re,sidenf has·· the power to Veto any
I· ;pa'l;f)cular item'ls in: (ART)
J /' ,,a: ,;!ppropriatiorrbill;
,.,,,, 0:~ b/ Revenue bill;· or
·
.
Iariff bill (f ONST.Art. VI, Sec.27 (2)) .
. \>.,.. / -
. . -.;t\e _re;.ident shall have the power to veto any
1 fA\ particular item or items in an appropriation.-
·· · revenue, or tariff bill, but the veto shall not affect
the item or items to which he does not object
(Id.) . ·
6. Delegated Authority of President to .
Impose Tariff Rates, Import an(t Export ·
Quotas, Tonnage and Wharf~ge Due~ _·
Flexible Tariff Clause .
The Congress may, by law, authorize .the
· President to fix within specified limits, and
subject to such limitations. ahd 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 (CONST. Art. VI, Sec. 28 (2)).
 \ I
MEK-Q~Y
a.a
San
AI D
l)MIWlly Co11101 Law - ROCT Bar Opamtlarw C.,,.,
7. Tax Exemption of · Properties for
Religious, Charitable, and 'Educational
Purposes
Charitable institutions, churches and
parsonages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly,
and exclusively used for religious, charitable, or
educational purposes shall be exempt from
taxation (CONST. Art. VI, Sec. 28(3)). .
The Court ruled that the above-mehtloned
constitutional provision, which grants .tax
exemption applies only to property and real .
taxes assessed on such properties used
directly, actually and~ exclusively for religious,
charitable and educational purposes (ABAN,
supra at 84).
Test of Exemption: It is the use of the property,
and not ownership (Abra Valley College, Inc. v.
Aquinp, G.R. No_. L-39086, June 15, 1988).
,·
•·
Nature of Use: The properties must be actually, .
directly and exclusively used for the religious,
charitable, or educational purposes.
Actually
- as opposed to seemingly, pretenaedly, _or .
feigned_ly, as actually engaged in, truly !_
n fact.
Directly
- means in a direct way ' ··without ;· anything
intervening; not by secondary, but QY direct
. .... ;,.
means ..
Exclusively
- means apart from all others; without admissi~n·
of others to participation; in a manner to exdode
(Black's Law Dictiona,y,·3m ed., cited in-fj.ational
Power Corporation· v. Central Board of
Assessment Appeals, G.R. No. 171470,
January 30, 2009).
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. What is meant by actual, direct· and
exdusive use of the property for . charitable
institutions is the direct and immediate and
actual application of the property itself to the ·
purposes for which the charitable institution is
organized.- lt is not the use of the income from
the real property that is determinative of whether
the property is used for tax-exempt purposes"
(Lung Center of the PHL v. Quezon City, G.R.
No. 144104, Ju~e 29, 2000) .
NOTE: The rule enunciated · in He"era v.
Quezon City Board of Assessment Appeals
(G.R. No. L-15270, September 30, 1961), that
the exemption extends to facilities which are
incidental to and reasonably necessary for the
accomplishment of said purposes" has now
been ABANDONED. Further, what is ·exempted
is not the institution itself; those exempted from
real estate taxes are lands,. buildings aild
improvements actually, directly, and exclusively
· used for religious, charitable or educational
purposes (DIMAAMPAO, supra at 122-123).
8. Voting Requirement for Tax Exemption
~o law granting any tax exemption shall be
passed without the concurrence of a majority of
all the Members of the Congress (CONSt Art.
VI, Sec. 28(4)) . .
REAS.ON: To prevent ,indiscriminate grant of
tax exemptions.
The above-mentioned prov1s1on requires the
concurrence of a majority, not of the attendees
. constituting a quorum but of all the members of
the Congress (VITUG & ACOSTA, supra_at 20).
The phrase ~a majority of all the members of the -
C9ngress" means at least fifty percent· (50%)
plus one (1) of all the members of two-houses
voting s-e,Sa_rately (Id.) .
Ari eitemption granted by a presidential
proclama~on and not by law is therefore invalid
(John Hay People's Alternative Coalition v. Lim,
G.R. No: 119775, ctober 24, 2003). -
Rules . on · Voting · Requirement for Tax
Exemptions
· ·a. Law granting tax exem'ption - majority of all
members {absolute majority);
b. Law withdrawing tax exemption - majority of
quorum of members present constituting a
quorum (relative majority) (ABAN, supra at
118).
REf'SON: Taxation is the rule a1Jd exemption is
the exception. Thus, the law makes it easier1 by
requiring a smaller number of v.otes, to withdraw
exemption compared to its grant (DIMAAMPAO,
supra at 135).
tax amnesties, condonation and refunds are in
the nature of tax exemptions. Such being the
case, a law granting them requires the vote of an ·
a~solute majority (Id.).
A constitutional grant of exemption may be self-
executing or may require an act of Congress for
its operation. Where a Constitutional provision
granting an exemption is self-executing, the
legislature can neither add nor detract from it. It
may, however, prescribe a procedure to

determine whether a claimant is entitled to the
constitutional exemption (Id.).
9. Non-Use of Public Money or Property for
Religious Purposes (CONST. Art. VI, Sec.
29, (2))
EXCEPTION: If a priest is assigned to armed
forces , penal institutions, government
orphanages or leprosarium (MUNOZ, Philippine
Governance and Constitution, p. 82 [hereinafter
MUNOZ])
10. Prohibition on Use of Tax Levied for
Special Purpose or Special
Assessments
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 cr~ated
has.•been fulfilled or abandoned, the bala ca, if
any, shall be transferred to the general funds of
the Government
. (CONST. Art. VI,, Sec. 29(3)) .
11. Supreme Court's Power" t!) · ; Re~ ew .
Judgments or Orders of,Lower Court~
The Supreme Gourt can review judgrents or
orders of lower courts in all cases involving:
a. The legality of any tax, impost, assessment, -
or toll; and .,. - .., I Non-Profit Educational Institutions
b. The legality of any p~nalty imposed in
relation thereto (CON T. Art. \(I I, Sec.
5(2)). . .,, ,
Principle of Judicial Non-interference · ,' . ' directly, and exclusively for educational
The· courts cannot inquire into the wisdom ,of,a \
taxing act, unless there is a violatio'n of -- - -
constitutional limitations or restrictions (1_,_
DIZON, supra at 207). !, -, i
1 -Non-profit Educational Institution:
The Constitution, as the fundamental law,
overrides any legislative or executive act that
runs counter to it. Where it can be demonstrated
that the challenged statutory provision fails to
abide by its com~and, then the court must so
declare and adjudge it null (ABAKADA GURO v.
Ermita, G.R. ·No. 168056 September 1, 2005).
It is axiomatic that judicial power embraces the
ascertainment of facts and the application of the
law, the Constitution as t~e ~ig~est l~w
superseding any statute o_r ordmanc~ m confh~t
therewith, it cannot be said that a City Court 1s
bereft of competence to proceed on the matter
(City of Baguio v. De Leon, G.R. No. L-24756,
October 31, 1968).
12 Grant of Taxing Authority to LGUs
• Each local government unit shall have the power
to create its own sources of revenues and to levy
GENERAL PRINCIPLES
Taxation Law
taxes, fees and charges subject to such
guidelines and limitations as th~ Conwess may
provide, consistent with the basic policy of loca1
autonomy (CONST. Art. X, Sec. 5).
such taxes, fees and ·charges shall accrue
exclusively to the local governments (CONST.
Art. X, Sec. 5).
By necessary implication, the legislative power
to create political corporations for purposes of
local self-government carries with it the power to
confer on such local governmental agencies the
' power to tax (Pepsi-Cola Bottling Co. of the PHL
v. City of Butuan, G.R. No. L-22814, August 28,
1968).
Congress cannot abolish the local government's
power to tax as it cannot abrogate what js
expressly granted by the fundamental law. The.
• only authority conferred to Congress is to
1
provicle guidelines and limitations on the local
-
government's exercise of the power to tax·
(DIMAAMPAO,
. . supra at 143).
. .
Please refer to.,L:.ocal Taxation chapter for further
discussions.
- 13. Tax, Exempti<>I) . Granted to Non~tock,
a. .Non-stock, ·_Non-profit Educational
, Institution
··- -; , AU,revenues·and assets of non-stock, non-
, - profit educational institutions used actually,
purposes shall be exempt from taxes and
duties (CQNST. Art. XIV, Sec. 4 (3)).
....
.r.
It is a non-stock, non-profit corporation
or association;
ii. The purpose for which it was created is
one of those enumerated under Sec. 30
of the NIRC;
iii. No part -of the corporation or ·
association's net income shall inure to
the benefit of any private individual; and
iv. The trustees of the non-profit
corporation or association do not
receive any compensation or
remuneration (R.M.O. No. 20-2013,
Sec. 5(a)).
Coverage of Exemption:
i. Real property tax (see previous
-discussions); .
ii. Income tax - (DIMAAMPAO, supra at
130);
iii. Donor's Tax - it is tax-exempt if the
. donee is a non-stock, non-profit
 \ I
MEM:Q~Y AID
San Bedl Uwenlly Oillege d LM - ROCT Ber <:lplqllone Cent.
educational institution (NIRC, Sec.
101(A)(2), as amended by TRAIN Law);
and
iv. Customs duties (INGLES, Reviewer,
supra at 15).
Taxability of .Income Derived from the
Operation of Dormitories, Canteefls and
Bookstores
Exempt from taxation provided:
i. They are owned and _operated by the
educational institution as ancillary ·
activities; and · expressly provides · that all revenues and
ii. The same are located within the school
premises (R.M.C. No. 76-2003) .
Taxability of Interest Income on Currency
Bank Deposits and Yields from Deposit
Substitutes
Interest income used actually, directly and
exclusively in pursuance of their purposes
as educational institution are exempt from
the 20% and· 15%; tax under the expanded
foreign currency deposit system imposed
under Sec. 27(D) of the NIRC subject to the . '':'I,
compliance with the condition that the .
incomes are included in the school's a.imual
information return and duly audited financial .
statements, together with:
i. . Certifications from depository ban!<s as
to the amount of interest'iricome earned
from passive investments not ~µbject to - .
the 20% final withholding_ tax; ' . . without force and effect, provided, that
ii. Certification of actual , direct and
exclusive utilization of S9id inco·me for··
educational purposes; an9 ·
iii. Board resolution on proposed projects
to be funded out of ttie money d·eposited
in banks or placed in m·oney market
pla~ments (DOF Order No. 149-95) . .
The RDO shall conduct an audit of the
annual information return filed to determine
compliance with the conditions . set forth .
(DOF Order No. 149-95).
NOTE: Sec. 30(h} in relation to th_ e last
paragraph of the NIRC appears to be
unconstitutional. It disregarded the requisite
of · use (CONST. Art. XIV, Sec. 4(3)), and
instead used the phrase "regardless of the
disposition made."
First View: Sec. 1 of DOF Order No. 149-
95, which amended DOF Order No. 92-88
and DOF Order No. 137-87, provides that
these non-stock, non-profit educational
institutions shall "be subject to internal
revenue taxes on income from trade,
business or other activity the conduct of
which . is . not related to the exercise or
.performance by such educational institution
of its educati9nal purpose or function ."
Second View: Sec. 30 of the NIRC, which
provides that the income from whatever kind
and character from any of the properties,
real or personal, or from any of the activities
conducted for profit of non-stock, -non-profit
educational institutions "regardless of
disposition" appears to be unconstitutional.
Sec. 4(3), Art. VI of the 1987 Constitution
assets actually, dfrectly, and exclusively
used for educational purposes shall be
exempt from taxes and duties. The
Constitution, being the basic and paramount
law, the NIRC must yield to its provisions
{DIMAAMPAO, supr~ at 131)°.
Prevailing View: . In Commissioner of
, Internal Revenue :v. be La Salle University
t Inc.; G.R. No. 196596, November 9, 2016,
' ·< the Supreme Court held -that Sectio(l 30 of-
./:=
the Tax Code (which provides that the
:"~ .... income of whatever kind and. character of
·-..~... .
npn-stock and non-profit · educational
institutions, among others, from any of their
prope . ies, real or personal, or from any of
their cif2tivities conducted for profit
regard les~ of the disposition made of
such income shall be subject to tax} is
the non-stock, non-profit educational
institutions _prove that its assets and
revenues are used actually, directly and
•. exclusively for educational purposes. The
·':. .- _; -'.,,~'1i£Cou rt emphasized that the tax exemption
granted by the Constitution to non-stock,
non-profit educational institutions is
conditioned only on the actual, direct, arid
exclusive. use of their assets, revenues and
income for educational purposes.· As ~uch,
the tax-exemption constitutionally-granted
to. non-stock, rion -pr.ofit educational
institutions, is not subject to limitations
imposed by law.
. ,
Taxability of Donation .
Exempt from donor's tax if actually, directly
and exclusively used for educational
purposes, provided that not more than 30%
of the donation, beque·sts, devises or
legacies shall be ·used by such institution for
administration purposes (CONST. Art. XIV,
Sec. 4(4) in relation to NIRC, as amended
by ,TRAIN, Sec. 101(A)(2)) . ,
. 24
GENERAL PRINCIPLES
Taxation Law

Taxability of Donation
Donations to proprietary educational
institutions are subject to donor's tax
because a donation to an educational
institution is exempt ·only if the school Is
incorporated as a non-stock entity paying no
dividends (NIRC, Sec. 101(A)(2), as
amended by TRAIN Law).

NOTE: Gifts to non-stock, non-profit

1. Income tax; Real property tax. educational institutions shall be ex~mpt
2. Custom duties; and from taxation, provided that not more than
3. Real property tax 30% of said gifts shall be used by such
(DOF Order No. 137- donee for administration purposes (NIRC,
87). Sec. 101(A)(2), as amended by TRAIN
Law).
(DIMAAMPAO, supra at 129)
Fo~ further discussjons on taxability of
b. Proprietary Educational Institution
proprietary educational institutions, please
Proprietary educational institutions, refer to pages 79 to 80. ·,
including those cooperatively owned, may -,-~-~
likewise be entitled to such exemptions
/'' .· c. ,• Gov.,ernment Educational Institution
subject to limitations provided.by' I w ,
including: . J __.;. · ' ./ ~ o,,v.emment educational institutions are
exempt'from:
i. · Restrictions on divisions\ and ""
ii. Provisions for reinvestments' (ABAN,- ·-·- : - - I. . ,_Income tax (NIRC, Sec. 30(i)); '.
supra at 88). l "- ¥ . • / •• •
ii. .. ~eat Pfdperty tax (CONST., Art. VI, Sec.
f ..,, , '~- \ 2~•.par. 3); and
' i}i. Do~or',s .t~ (NIRC, Sec. 101(A)(2), as
:ax, e~emptions o~ rop~epiry educational .. --- ··-. ' amendej by TRAIN Law).
mst1tut1ons require .. prior l~gislative
implementation si be lie use of the
., -
'
SUMMARY·Of,
}l
TAXABILITY OF
permissive term "ma')'." i e provision gives
1
Congress discretion to 'deterrfi_ine whether . __ EDUCATIONAL INSTITUTIONS
or not assets- and reven es ot,p"foprietary
educational institutlo'n-'s s ould . likewise
enjoy exemptions from taxes. In short,, tt,e
tax exemption here rs not self-executirig Exempt,
(ABAN, supra at 89). · property is
actually, directly,
Taxability of Income .,.
Pro.prietary educational institutions shall pay and exclusively
used for
a tax of 10% on their taxable income educational
provided that if the gross income fro~ purposes. See
unrelated trade, business or other activity Art. VI Sec. 28(3)
exceeds 50% of the total gross income of the
derived by such institution, a tax of 30% Constitution.
shall be imposed on its entire taxable
income (Predominance TlieoryJ (NIRC, 10% or 30% Exempt
Sec. 27(8)). . .

Taxabllity of Interest Income on Currency Taxable Exempt

Bank Dep~sits and Yields from Deposit
Substitutes
It shall pay a final tax at the rate of 20% upon Taxable Exempt
the amount of interest on currency bank
deposit or yield, provided, however that
interest i~come from a depository 'bank
under foreign currency deposit system shall
be subject to a final tax at the rate of 15% of
such interest income (NIRC, Sec. 27{0), as
amended by TRAIN Law).
 \ I

MEM:Q~Y AI.D -
S.,Beda l.kwefllty Colegll d law - RGCT Bar 0peratlcne Center

of government (1 Cooley . 64; · Question No. 1(~),

STAGES AND ASPECTS 2004 Bar Examination) . ·
OF TAXATION_. ATTRIBUTES OR ESSENTIAL
CHARACTERISTICS OF TAXES: (S.LEM-
P3-RP) -
STAGES OR PROCESSES OF 1. It is imposed by t_he §.tate which has jurisdiction
TAXATION: (LAPR) over the person, property, or services;
- 1. Levy 2. It is levied by the ,baw-making body of the state;
Levy is the imposition of taxes which involves 3. It is an Enforced contribution - not dependent on ·
the passage of tax laws or ordinances· through the willof the person taxed, not a ·contract but a
the legislature. The tax laws to be passed shall positive act of the government;
determine the nature of taxes, those to be taxed , 4. It is generally payable·· in Money - it is a
pecuniary burden payable in money, but
how much is to be collected, and how taxes are
to be implemented (1 DOMONDON, Bar Q&A backpay certificates may be \JSed in payment of
tax (De Borja v. Gel/a, G.R. No. L-18330, July
'Taxation: General Principles of Taxation (2018),
31, 1963) ;
p. 189 [hereinafter 1 DOMONDON]).
REASO_N: The taxpayer is· not allowed to settle
2. Assessment his·tax liability by conveying property in view of
The process of determining the correct amount .-: · the problem of assigning valye to-such property
of tax due in accordance with the prevailing tax "' (MAMALATEO, Reviewer, supra at p. 11).
laws. Taxes are generally self-assessing (Id.__at
190). 5. It is Proportionate in character - taxes must be
.based 011 ability to ·pay in accordance with the· .
3. Payment .. ~... constitut io al mandate to Congress to evolve a.
The act of compliance by the taxpayer -in , progressi system of taxation _(DIMAAMPAO,
contributing his share to defray thete~penses of.. l~ _ · supra a ( 1-'2); · . .
the government' (Id. at 190). ,
• -<,.-'
> . ,_ ·
f ,.·
6. It is levied o fersons , property, and excise (Id.) ;
,tiX,"1" ·!- t '\ "'" 7. It is levied for Public purpose/s (Id.) ;
4. Refund ..· · -.:t 8. It is aid. at ~ egular ·p~riods · or intervals~ and
The recovery of an~ tax alleged to) aye b~en · ;-

erroneously or illegally assessed or c~ll~ ted , or. Examples:

of any penalty claimed to hav~. ~-ee~- collected a. Income axes are paid :quarterly and
without autho'rity, or ·of any sum alleged tp have annually. · ·
been excessively, or in any manner wrongfully · b. Value-Added· Taxes are 1 paid monthly ·and
collected (Id. at 190).. ,,.
er,."" / ,. quarterly.
·~ . ... . .
The first 2 stages of taxation are referred ,to as 9. It is Personal to the taxpayer (ABAN, supra at 2J
the impact of taxation, ·whereas the third. phase 3). - . .
is referred to as ~he incidence of taxation (Id.) .
Examples: . .
a: · Non.:enforcea~jlity of estate taxes against

I I
.tieirs accruing .upon . transmission of
TAXES · dec_edent's e,state (Id, at 4).. .

EXCEPTION:
If prior to the payment of estate tax on the
TAXES transfer of decedent'l> estate,· the properties
of the deceased are distributed to any -
Taxes are enforced proportional contributions from
beneficiary, the latter shall be s1,1bsidiarily
persons and property levied by the law-making body
liable for the- paym.ent of such portion of the
of the State by virtue of its sovereignty for the
estate tax as his distributive ~hare be_ars to
support of the government and for public needs
(ABAN, supra at 2) . · the total value of the net estate (/cf.).

They are not arbitrary exactions but contributions b. Exemption from liability of ' stockholders in
levied by authority of law, and by som~ rule of case of the corporation's tax delinquency.
proportion which is intended to insure uniformity of
contribution and a just apportionment of the burdens .
 . '
26
EXCEPTIONS:
. i. Stockholders may be held liable for the
unpaid taxes of a dissolved corporation
if it appears that the corporate assets
have passed into their hands (Tan Tiong
Bio · v. Commissioner of Internal
Revenue, G.R. No. L-15778, April 23,
1962)-
ii. When stockholders have unpaid
subscriptions to· the capital of the
corporation, they can be made liable to
the extent of their unpaid subscriptions
(ABAN, supra at 4).
REQUISITES OF A VALID TAX: (JAPUL)
1. That either the person or property taxed be
within· the Jurisdiction of the taxing authority
(Reagan v. Commissioner of Internal Revenue,
G.R. No. L-26379, December 27, 1969);
2. That the .Assessment and collection of cep ain
kinds of taxe~ guarantee against (!!justice to .
individuals, especially by providipg _notice· and .
opportunity for hearing (VITUG & ACOSTA,
supra at 12); .
3. That it should be for a fublic purpose (Pascual
v. Secretary of Public· Works and
Communications, G.R. No. L-10j 05, December
29, 1960) ; ' _ ,. _ __
4. The rule of taxation shall Qe Y,niform (CONST.,
Art. VI, Sec. 28(1)) ; anq · - ...,
5. The tax must not impi ge n the !D.h~rent arid . -
constitutional Limitations' on the power o( ______; ;._:.
taxati_on {Basco v. Phili{lpine (l,musEt_me@s and . J' . .
Gammg Corp., G.R. No. 91649, May '1 4, ~99J).
1 1
· • • , • ./,,~
CLASSIFICATIONS OR KINDS I OF. _: ,; -~ \
I /
TAXES: ·, __ J : . _. _.,-..
1. As to subject matter ' ).,_-} 1
a. Personal, poll, or capitatio / \_
- taxes of a fixed amount upon all persons
of a certain class within th e jurisdiction of U,e
taxing power without rega rd to th e amount
of their property, or the occupations or
businesses they may be engaged (e.g.,
· community tax) (ABAN, supra at 23) ,
b. Property
- taxes assessed on all property or all
property of a certain class within the
jurisdiction of the taxing power (e.g., real
property tax) (Id.).
c. Excise or privilege
- those taxes that are laid upon the
manufacture, sale, or consumpti9n of
commodities within the country and upon
the licenses to pursue certain occupations
and upon corporate .privileges (e.g., donor's
tax, estate tax, VAT, income tax) (Id. at 26).
GENERAL PRINCIPLES
Taxation Law
)
2. As to who bears the burden and
incidence
a. Direct
- taxes wherein both t_he incidence of
liability for the payment of the tax as well as
the impact or burden of the tax falls on the
same person (e.g., income tax, estate tax,
donor's tax) (Id. at 23). ·
b. Indirect ·
- tax wherein the incidence or liability for
the payment falls on one person but the
burden may be shifted or passed on to
another not as a tax but as part of the
purchase price (e.g., VAT, excise tax,
percentage tax) (Id. at 24) .
NOTE: The impact oftaxat,on is the point on
which. tax is originally imposed. It falls on
one on whom the tax is formally asse~sed.
,,_ Meanwhile, the incidence of taxation is the
'\
.._ ' . point on which the tax burde·n finally rests or
-•--~ ., settles down (ABAN, supra at 23) .
" \. ti
3.- As to-purpose
a. 'General, fiscal, or revenue
- taxJmpo~ed for the general or ordinary
_ __ purposesJ of \he Government, to raise
revenue. ,fo r~- governmental needs (e.g.,
. lncome tax dorlor's tax, estate tax, or value-
!added tax) {ki at 26) .
~- :
tf. 1..-Speci~l,·'fegJlatory, or sumptuary
. :·•(:;L tax levied for special purposes (e.g.
---.:../'additional 1% real estate tax levied under
, , ..- \ \. _,
the1 LGC forr
the benefit of the . public school
syf.tem) (Id. at 27) .
- .-:·••. ~-< ~O,TE: : 11 mon·ey 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 (CONST., Art. VI, Sec. 29(3)) .
4. As to how amount is determined
a. Specific
- tax of a fixed amount imposed by the
head or number or by some standard of
weight or measurement; it requires no
valuation other than a listing or classification
of the objects to be taxed (e.g., tax on
fermented liquors, cigars, distilled spirits)
(ABAN, supra at 27).
 \ I
MEM:Q~Y AID
Sari Becia u,.-tfty College of Law - RGCT Bar Operations Cent•
b. Ad valorem (Value)
- tax based upon the value of the articles
subject to tax (VITUG & ACOSTA, supra ·at
28). 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 (e.g., real
property tax) (ABAN, supra at 27) .
c. Mixed
- tax having both the characteristics of
specific tax and ad valorem tax (Id.).
5. As to taxing authority
a. National
.- levied by the National Government,
through Congress, and administered by the
BIR or the BOC (e.g., NIRC taxes, customs
duties) (VITUG & ACOSTA, supra at 29).
b. Local or municipal
- levied by the LGUs, through their
respective Sanggunians, and administered
by the local executive government through
the local treasurer (e.g., real property tax,
business taxes imposed under the LGC) (Id.
at 29).
.,,.
6. As to rate
a. Progressive or graduated
- the rate or amount increases a·s the
amount of income or earning to be taxed
increases (e.g., income tax oh individuals,
estate tax, and donor's tax) (Id.). · ·
b. Regressive
- the tax rate decreases as the 'amount of •
income or earning to be taxed incre,i:lses
(Id.). " omits material ·facts from his return or any
. . '·
c. Proportionate
- tax rates are fixed· (in amounts or in
percentage) on a flat tax base, (e.g., real
property tax, VAT and 3% percentage tax)
(Id. at 30).
GENERAL CONCEPTS IN
.
TAXATION
/
PROSPECTIVITY OF TAX LAWS
GENERAL RULE: Tax laws · are prospective in
application (CIVIL CODE, Art. 4; Commissioner of
Internal Revenue v. PNB, G.R. No. 195147, July 11,
201~. . limitations (Commissioner of Internal Revenue v.
EXCEPTION: When the language of the statute
clearly demands or expresses that it shall have a
retroactive effect (Lorenzo v. Posadas, G.R. No. L-
43082, June 18, 1937) .
Retroactive application of revenue laws may also be
allowed if it will not deny due process. There is
violation of due process when the tax law imposes
harsh .and oppressive tax (DIM~AMPAO; supra at
170-171).
NON-RETROACTIVITY OF RULINGS
GENERAL RULE: Any revocation, modification, or
reversal of any of the rules and regulations, rulings,
and circulars promulgated · -by the Commissioner
shall not be given retroactive application if it will be
prejudicial to the taxpayers (NIRC, Sec. 246).
ILLUSTRATION: During the period from December
10, 2003 (when BIR Ruling No. DA-489-03 was
issued) to October 6, 2010 (when the CIR v. -Aichi
Forging Company of Asia, Inc. case was
promulgated wherein the BIR Ruling No. DA-489-03
was invalidq,ted), taxpayers-claimants need not
ob_ setve#the ' 120-day period before it could file a
judicial claim' tor refund of excess input VAT before
the CT A. Beffire and after the aforementioned period
(i.e. , Dece b~ 10, 2003 to October 6, 2010), the
observance of the 120-day (N.ow: 90-day pursuant
to TRAIN law) perjod is mandatory and jurisdictional
to the filing of such claim (Commissioner of Internal
'-: Reve:iue v. CE Luzon Geothermal Power Company,
·· Inc:; G.R. No. 19b198; September 17, 2014) . Thus,
the Aichi ruling was not applied retroactively.
;·EXCEPTIQNS: (MD 2B)
- 1. WHere he taxpayer delioerately Misstates or
document;
2. Where the facts subsequently gathered by the
BIR_are materially Qifferent from the facts on
which .the ruling is based; .
' 3. Where it is the court and not the Commissioner
which Qeclared ' null and void a BIR issuance
(Philippine Bank of Communications v.
Commissioner of Internal Revenue, G.R. No.
112024, January 28, 1999); or ·
4. Where the taxpayer acted in Bad faith (NIRC,
Sec. 246); ' ·
IMPRESCRIPTIBILITY OF TAXES
GENERAL RULE: The right to assess and to collect
are imprescriptible ( Commissioner of Internal
Revenue v. Ayala Securities Corp., G.R. No. L-
29485, November 21, 1980).
EXCEPTION: When the laws provide for statute of
 GENE~L PRINCIPLE'S
Taxation Law

Standard Chartered Bank, G. R. No. 192173, July 29, in the furt~erance of the · business of the
2015). foreign corporation; and '
e. Share/s rights in a partnership business or
Examples: industry established in the Philippines
1. Assessment of internal revenue taxes within (DIMAAMPAO, supra at p4-55).
three (3) years after the last day prescribed by
law for filing of the return (NIRC, Sec. 203) ; in 3. Income .
cases of fraud, at any time within ten (1 O) years Factors that determine the situs of income tax:
after the discovery of the fraud (NIRC, Sec. 222). (CR-WWP)
2. For LGUs, five (5) year prescriptive period for a. Nationality or ~itizenship of the taxpayer;_
assessment and collection . (LOCAL b. Residence or domicile of the taxpayer; and
GOVERNMENT CODE [hereinafter LGCJ, Secs. c. Source of the income:
1~a~27~. · i. From sources Within the Philippines -
all kinds of taxpayers are subject to
SITUS OF TAXATION income tax on· income derived Jrom
Factors that Determine Situs: (K-PRICE) sources within the Philippines.
1. Kind or classification of the tax being levied; ii. From sources Without the Philippines -
2. · Situs of the thing or froperty taxed; only resident citizens and domestiJ~
3. Residence of the taxpayer; corporations are liable to income tax.
4. Source of the !ncom·e; iii. fartly within and partly without the
5. ~itizenship of the taxpayer; and . Philippines taxable .income
6. Situs of ·the _g_xcise, privilege, ,6sin~ or . attributable to sources within tne
occupation being taxed (ABAN,.ti.ipra at 61). !
_>Phi ippines may be determined by
· /" • \.-_, P,re esses or formulas of general
SITUS OF SUBJECTS OF TAX, .--- · -(a'ppo~1onment prescribed by the
1. Persons , __ . -:-.'.~ ~~c~[ta " of Finance (NIRC, Sec. 23) .'.
1
Poll, _capitation, or community taxes are based 4 Excise · · 0 r( \ · ·1 · th
upon the residence of the t P.Byer, regardless- --·- --· · :.:,; •. nvi ege upon . . e
of the source of incom _ or locatio ol the . ~ orma" ~~ of an _act or the engaging m
property of the taxpaye . •' ' -., . _. . an occupaj 1on .
-<( ! ( -.,\ . . ; . De~~Qq_~ u~on~ \ e _pla~e where the act is
2. Property . :-'I \::;' - - r·_ -: ~ -Po/f9r~ ed r 1?~~pat1on 1s engaged i_n . It is not .
a. Real property - /exCcei A<Sitae O e , itu~ !
.V . _Pf>. vie d mle le of the p~rson sub~ect to the
{where the property is located)- ,•\ 1 ·' no ' upon the physical · location of the
· ' \ ?.Pr9pe~ and in · co~nection. with !he act or·
b. Tangible personal property - wvher~ _ ~ccupation taxed (Allted Thread v. City Mayor of
property is physically located althougli~t~e~ ~ -Manifa, G.R. No. L-40296, November 21 , 1984).
owner resides in another jurisd icti6 -,~rAm. ( t, -
R'~I \> ,.,, .
\u eon s tus of business.tax:
Jur. 457). · __,.. ;-
___
i-; t , .... _\
• 1.....· -·
a
.
.
Sale of real property - where the property is
located (LGC, Sec. 233) . .
c. Intangible personal property - b. Sale of personal property - where the sale
GENERAL RU.LE: Mobilia sequuntur is perfected and consummated. · ·
personam {movables follow the person). c. VAT - the place where the transaction was
The situs is the domicile of the owner
made (Commissioner of Internal Revenue v.
(ABAN, supra at 59).
American Express International, Inc. , G.R.
No. 152609, June 29, 2005).
EXCEPTIONS: .
a. Franchise exercised in the Philippines; ·
(Please see further ~iscussion on VAT).
b. Shares of stock, obligations, bonds issued
by domestic corporations organized and
constituted in accordance with 'Philippine
5. Gratuitous Transfer: .
laws; a. The transmission of property from a donor to
c. Shares, obligations, bonds issued by a a donee;
foreign corporation where 85% of its b. From·a decedent to his heirs may be subject
business is located in the Philippines. It is to taxation in the state where..the transferor
subject to donor's tax and estate tax· is a citizen or resident; or
d. Shares, obligations, bonds issued by c. Where the property is located in case of a
foreign corporations which has acquired non-resident (DJMAAMPAO, supra at 57).
business situs, when such have been used
 \ I
MEM-Q~Y Al D ·
San S e d a ~ Colege law - RGCT Ber Ope'8tjona Center
DOUBLE TAXATION
An act of the sovereign by taxing twice for the same
purpose in the same year upon the same property or
activity of the same person, when it should be taxed
' once, for the same purpose and with the same kind
of character of tax (VALENCIA & ROXAS, supra at
31).
In the broad sense, double taxation means indirect
duplicate taxation. It extends to all cases in which .
there are two or more pecuniary impositions. The
- Constitution does · not prohibit the imposition of
double taxation in the broad sense (Villanueva v.
Cffy of lloilo, G.R. No. L-26521, December 28, -
1968). It is something not favored but is nevertheless
permissible (VALENCIA & ROXAS, supra at 31).
. Kinds of Double Taxation: (Dl 2L)
1. Direct Duplicate Taxation / Obnoxious I
Objectionable I Prohibited (Strict sense}
- it is the objectionable kind of double taxation
in its prohibited sense, since it violates the equal
protection clause of the Constitution (City ·of
Baguio v. De Leon, G.R. No. L-24756, October
31, 1968).
Elements: (P2TA-JF>K} -··
a. Th~ same f roperty or subject. matter is •
taxed twice when it .should be .. taxed only·'
once; ·. , _, ··
b. Both taxes are levied for !}le same~furpose;
and ·• - . or·owhs capital in the other contracting State
c. Imposed by the same Iaxihg Autht>rity;
i: Within the same Jurisdiction; - ·
ii. During the same taxing ferlod; ·and
iii. Covering the same Kind or _chara~er of
tax (Villaf]ueva v. City of 1/oilo, .G.R. No.
L-26521, December 28, 1968).
. ; .
ILLUSTRATION: The City of Manila- imposed
local business tax· on manufacturers ofliquors,
-- distilled spirits, and wines and local business tax
on businesses subject to excise, VAT, or .
percentage tax under the NIRC.
The Court held that there is direct duplicate
taxation if respondent is subjected to the two
local business taxes, since these are being
imposed: (1) on the same subject matter - the
privilege of doing business in the City of Manila;
(2) for the same purpose - to make persons
conducting business within the City of Manila
contribute to _city revenues; (3)· by the same
taxing authority - petitioner City of Manila; (4)
within the same taxing jurisdiction - within the
1erritorial jurisdiction of the City of Manila; (5) for
the same taxing periods ·- per calendar year;
and (6) of the same kind or character - a local
business tax imposed on gross sales or receipts
of the business (Nursery Care Corp. v: Acevedo
and the City of Manila, · G.R. No . .180651, July
30, 2014).
2. Indirect Duplicate Taxation / Broad Sense
,- It extends to all cases in which there is a
burden of two -or more pecuniary impositions. It
is usually allowed as long as there is no violation
of the equal protection.and uniformity clauses of
- the Constitution (VALENCIA & ROXAS, supra at
31) . :
Examples:
a. A tax upon a corporation for its property and
upon.its sh·areholders for their shares;
b. A tax upon the same property imposed by
two different states; and
c. A tax .on a mortgage as personal property
and upon the mortgaged property as real
estate (Id.).
a. International Juridical Double Taxation
- the imposition of comparable taxes in two
or more states on the · ~ame taxpayer in
respect of the same subject rnatter and for
identical periods (Commissioner of Internal ·
Revenue v. S.C..Jehnson & Son, Inc. , G.R.
NoJ 271_05, June 25, 1999}."
This ouble taxation us~~lly takes place
when a person is a resident of the first
contracting State and derives income from
.and , both States impose taxes on - such
income OJ capitaC In order to eliminate
double taxati<:>n, the two contracting States
enter into a tax treaty (Commissioner of
v.
Internal Re.venue. S.C. Johnson & Son,
Inc., G.R. No. 127105,.. June. 25, 1999t
International juridical double taxation only
.occurs when the State of residence of the
taxpayer imposes tax on the income of said
taxpayer from sources within and ·without
their State (Commissioner of Internal
Revenue v. S.C. Johnson .& Son, lnc., :G.R.
No. 1211.os,· June 25, 1999) .
Reason. for Avoiding lnternational
Juridical Double Taxation: 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 oynamic
economies (Commissioner of Internal .
Revenue v. S.C. Johnson & Son, Inc., .G.R.
No. 127105, June,25, 1999) .

b. Local Double Taxation
: happens when an LGU will impose a tax
that is already imposed by the National
Government or by another LGU that has
territorial jurisdiction over such LGU
(RECALDE, supra at 66).
To avoid "local double taxation ," Congress
prevents LGUs from imposing taxes which
are already impose.d by the National
Government "unless otherwise provided in
the Local Government Code." This
limitation, known as the pre-emption rule,
is common to all LGUs (Id. at 66) .
The Philippine tax system provides for
certain schemes in order to avoid or
minimize the harsh or burdensome effects of.
double taxation. The means, however,
depend on whether there is international
double taxation or local double taxation (Id.
at 65). ..:'
Modes of Relief from Double Taxation: (CREDT)
1. Tax Credits · :-- the incom~ or capital, which is taxable in the
- anamount is subtracted from an Individual or
entity's tax liability to arrive at the total tax liability
(Commissioner of Internal Revenue v. Central
Luzon Drug Corp. , G.R. No. 159647, April 15,
2005). . i capi al. (This m ay be done by using the fax
.,j
2. ,Beductlon of the Philippine lncome 1Tax Rate
- an example is the Taxppafing Rµle wherein -
the dividend earned by a -non-resident foreign
corporation (NRFC) within the Philippii:,es is
reduced by imposing a lower rate of 15% (in lieu
of the 30% ), on the condition that the country to .
which the NRFC is domi.clled shall allo credit
1
against the tax due from the NRFC, Wtii taxes
are deemed to have been paid in the Philippines
(NIRC, Sec. 28(8)(5)(b)); Commissioner of
Internal Revenue v. Procter & Gamble, G.R. No.
L-66838, December 2, 1991) .
3. Tax gxemptions
- freedom, immunity, · or privilege from the
burden of taxation to which others are subjected
(ABAN, supra at 118-120).
4. Tax Qeductlons
- the amount of tax is written off or treated as
deduction from an individual or entity's gross
Income on which the resulting amount the tax
liability is calculated (Commissioner of Internal
Revenue v. Central Luzon Drug Corp., G.R. No.
159647, April 15, 2005) .
5. Tax Ireatles
- an agreement between two countries
specifying what items of Income will be taxed by
-
GENERAL 'PRINCIPLES
. Taxation Law
the authorities of the country where the income
is earned (Air Canada v. Commissioner of
Internal Revenue, G.R. No. 169507, January 11,
2016) .
Methods Resorted to by a Tax Treaty.In Order to
Eliminate Double Taxation:
First Method
An exclusive right to tax is conferred in one of the
contracting states; however, for other it~ms of
income or capital , both states afe given the right to ·
tax although the amount of tax that may be imposed
by the state of source is limited (RECALDE, supra at
65).
Second Method
The state of source is given a full or limited right to
tax together with the state of residence. In this case,
· the treaty makes it incumbent upon the state of
residence to allow relief in order to avoid double
tax:ation (Id. at 65-66).
•
I I • ' . . .
Two Waysy nder the· Secor,d Method:
1. ·· Exemption._Method .__
state of source or sj tus, is exempt in the st~te of
residel'1ce, although in some instances it may be .
take into account in determining the rate of tax
applicable t9.the t xpayer's remaining income or
dedJ ction method, which allows foreign income
taxes to be deducted from gross income, in
- e ect, exempting the payment from being
furth~r taxed). The focus here is on the income
-
or capital itself {Id. at 160) .
/ ,
r : . J
Tne predit Method
\
- altho49h the income or capital, which is taxed
ir the sJafe of source, is still taxable in the state
of residence, the tax paid in tne former is
· cred ed against the tax levied in the latter
(Commissioner · of Internal Revenue v. S. C.
Johnson & Son Inc., G.R. No. 127105 June 25,
1999) . ' .
BIR Cannot Impose Additional Requirements
In Deutsche Bank AG Manila Branch v. •
Commissioner of Internal Revenue, the Supreme
Court categorically held that the BIR should not
impo~e additional requirements that would negate
!he availment of the reliefs provided for under
international agreements, especially since said tax
treaties do not provide for any prerequisite at all for
the availm_ent of the benefits under said agreements.
It bears reiterating that the application for a tax treaty
relief from the BIR should merely operate to confirm
the entitlement of the taxpayer to the relief (CBK.
Po_wer Company Limited v. Commissioner of
Internal Revenue, G.R. Nos. 193383-84; January
14, 2015).
 \ I
MEM-QllY AID
sw, Seda ~ ~ di.- - RGCT Ber Ope,wtlona Center
Most Favored Nation Clause in Tax Treaties
The purpose of the most favored nation clause is to
grant to the contracting party treatment not less
favorable than that which has been or may be
granted to the ·most favored" among other countries.
It is' intended to establish the principle of equality of
international treatment by providing that the citizens
or subjects of the contracting nations may enjoy the
privileges accorded by ~ither party to those of the
most favored nation (Commissioner of Internal
Revenue v. S.C. Johnson & Son Inc., G.R.
No.127105, June 25, 1999).
ESCAPE FROM TAXATION
The "doctrine of escape from taxation" permits the
taxpayer to minimize (if not to escape) payment of
tax by lawful means, the sam~ is effected through
the following (AvE - SCTEx):
1. Tax Avoidance
- also called tax minimization. It is reducing or
totally escaping payment of taxes through legally
·permissible means (Id. at 33) . ·
Tax avoidance is the tax saving device within the
means sanctioned by law. This method should be
used by the taxpayer in good faith and at arm's
length (Commissioner of Internal Revenue · v.
Estate of Benigno Toda Jr. , G.R. No. 147188,
September 14, 2004). ·
A taxpayer has legal right to decrease the. amount
of what- .would otherwise be his taxes or
altogether avoid them by means which the law
permits (Delpher Trades Co. v. Intermediate
Appellate Court, G.R. ,Vo. L-69259, Janu~ry 26, ,
1988).
Examples:
a. Selling shares of stock through a .stock
exchange in order to avail of the lower tax
rates; estate planning within the means
sanctioned by the Tax Code (VALENCIA &
ROXAS, supra at 33) .
b. Availing of all deductions allowed by law or
refraining from engaging in activities subject
to tax (VALENCIA & ROXAS, supra at 33).
2. Tax Evasion
- fill illegal means of escaping taxatio,n. It
connotes fraud through the use of pretenses and
forbidden devices to lessen or defeat taxes
(Yutivo Sons Hardware v. Court of Tax Appeals,
G.R. No. L-13203, January 28, 1961) . Hence, it
subjects the taxpayer to further or additional civil
or criminal liabilities. Tax evasion is sometimes
referred to as tax dodging (VALENCIA &
ROXAS, supra at 33).
_ A scheme used outside of those lawful means
and when availed of, usually subjects the
taxpayer to (further or additional) civil or criminal
liabilities (Commissioner of Internal Revenue v.
Estate of Benigno Toda Jr., G.R. No. 147188,
September 14, 2004).
Elements of Tax Evasi_on: (ESC)
a. - The End to be ·achieved , i.e., payment of
less than that known by the taxpayer to be
legally due, or paying no tax when it is
shown that the tax is due;
b. An accompanying §tate of mind which is
describ~d as being evil, in bad faith , willful,
or deliberate and not coincidental; and
c. A Course of action or failure of action which
is - unlawful (Commissioner of Internal
Revenue v. Estate-of Benigno Toda Jr. , G.R.
No. 147188, September 14, 2004).
lndicia of Fraud in Tax Evasion:
a. Failure to declare for taxation purposes true
and actual income derived from business for
two (2) consecutive years (Republic v.
.•
l Gonzales, G.R. No. L-17962, April 30,
, 1965); or
b. $ijps~ntial underdeclaration of income in
the tax returns of the taxpayer for four (4)
consecutive years coupled with intentional
overstat~ment of deductions
_(Commissioner of Internal Revenue v.
Reyes, G.R. Nos. L-115~4 and L-11558,
Nov~m_ber 25, 1958).
·-
NOTE: Failure to report sales, receipts· or
income ·in an amount exceeding 30% of that
declared per. return, and a claim . of
'deauctions in an amount exceeding 30% of
actual deductions, shall render th_
e taxpayer
liable for substantial underdeclaration of
sales, receipts or income or for
overstatement of deductions (NIRC, Sec.
248 (8)). -
TAX AVOIDANCE VS. TAX EVASION
Legal and not subject to Illegal and subject to
criminal penalty. criminal or civil penalty.
':',.~ • ' • . .:~• •.-:;.".,, ;,_:-..,.,. ,..\,~"""'-11!'.!'l.1"'~,..•.;,,,-~. ••..-..· .l .._-~;H
~· - · ·-· As to Man·ner·: of:Commission ~·,. :, /'~
( - -......_ . ... ·..... ,. -· . . .-.:·· , .· ..
Accomplished by legal -Accomplished by
procedures or means breaking the letter of the
which may be contrary law.
to the intent of the law
yet do not violate the
letter of the law.
 · GENERAL PRINCIPLES
Taxation Law

J'),, . , ~~•,_,_'("i...-,.-~•;71.-"':"~t;:'1'~:•
r , •
Direct Taxes ,
Tax Avoidance Tax Evasion ····· _;~t
Those that cannot be shifted and are exacted
As to Effects from the very person who, it is i~tended or
. . desired should pay them (e.g. · income tax)
Minimization of taxes. Almost always results in (DIMAAMPAO, supra at 142). Those wherein
the absence of tax both the incidence of the tax as well as the
payments. impact thereof falls on the same person (ABAN,
supra at 23) .
(Commi$sioner of Internal Revenue v. Estate of
Benigno Toda Jr., G.R. No. 147188, September 14, Impact of Taxation · .
2004) Point on which tax is originally imposed; falls on
one on whom the tax is formally,assess_ed (Id..).
WIiifui Blindness Doctrine
Where there is a natural presumption that the Incidence of Taxation •
taxpayer knows his tax obligations under t~e Point on which the · tax burden finally rests or
law, mere reliance on another person . in settles·down (Id.) .
preparing, filing and paying income taxes is _not
a justification for failure to file the right . ILLUSTRATION: In VAT wherein the seller is
information on income taxes (People v. required by law to pay tax, but _the burden is
Kintanar, C. T.A. E.B. CRIM. No. 006, December actually shifted or passed on to the buyer (Id. at
3, 2010). . ... --
,..
.,.-...-
r
~24) .
I ·,
3. Shifting . /.h . : . . . / .r IMPACT VS. INCIDENCE -~ ...
The transfer of the burden of ta by t e- angina 1
payer or the one on whom the f~,rasj ssess~.9 ----~ •
or imposed (impact of taxat10n) , to ,.another
(incidence of taxation), " '(DE) . LEON,. T~e , •
Fundamentals of Taxatio , at p. ;52 [h ~remafter
. t .R~fers : to ~e.) initial Refers to the ultimate
DE LEONJJ. , , .;:,, r - ·-
bur9en { ' r- .,. •• (?f burden of the tax.
NOTE: Only indirect ta; e•; , as
t pposed. to.direct . taxatior/liability.
taxes, may be shifted (qommi~sioner fl~ Internal ,
Revenue v. PLOT, G.R. No. 140230, De~ember - -,--·
15, 2005) . . ,) ·, \. :; :.. 1·' . .oc;:sy~ ,atth~ point h f Occurs at the point . of
Indirect Taxes .,
' <'i · ; -. JmeosJtion. : settlement.
1
The liability for the paymen of the {?x reyrn:lins .::.,i,.:. __
with the taxpayer, but the ~urden thereof fis / t ) \ _ • ..,
shifted or passed on to the purchase fp.p; VAT,_ · ,Rests up<tn 1 person Rests on the · person e
excise tax, other percentage ta , d'ooumo/1, ary frpl!'\ whom the tax is who pays it eventually.
stamp tax) (ING Bank N. V. v. Commis ioner of 1
collected.'
Internal Revenue, G.R. No. 167679, April 20,
2016) .

· The imposition of indirect taxes is not a violation May be shifted.

of the principle that taxes are personal liabilities, (DE LEON, supra at 52)
the payment of which cannot be transferred to
another person. When the seller passes o_n the It Is essential to know where .the Impact of
tax to his buyer, he is only shifting the tax bµrden taxation lies because it generally
(not the liability to pay it) to the purchaser as part determines: ·
of the costs of the goods sold or services a. The proper party to cl~im a · refund pf
rendered (ABAN, supra at 24). erroneously imposed indirect taxes; and
-
The Con~titution does not prohibit the imposition
b. Whether the indirect taxes can be passed on
to an exempt buyer (INGLES, Reviewer,
of indirect taxes like the VAT. The Constitution supra at 7).
has been Interpreted to mean simply that direct
taxes are to be preferred and as much as Kinds of Shifting:
possible, indirect taxes should be minimized a. Forward shifting
(Tolentino v. Secretary .o f Finance, G.R. No.
When the burden of tax is transferred from a
(15455, October 30, 1995).
factor of production through the fa~tors of
I..
 \ I
MEM:Q~Y AID
s., Seda l.Wlletlity Cqlege d Lew - ROCT Bar Operatione Center
distribution until it finally settles on the
ultimate purchaser or consumer.
b. Backward shifting
When the burden is transferred from the
consumer through the factors of distribution
to the factors of production . · v. Court of Tax Appeals, G.R. No. L-30232, July
c. Onward shifting
When the tax is shifted two or more times
either forward or backward (VALENCIA &
ROXAS, supra at 34-35).
d. ~apitalization
The reduction in the price of the taxed object
is equal to the capitalized value of future
taxes, which the purchaser expects to be
called upon to pay (Id. at 35).
4. Capitalization
Tax capitalization is made when the price of the
property is lowered to accommodate the
exclusion of the tax which is expected to be paid
by the seller as a result of sale transaction ·(ld.J.
Example: Capital expenses incurred by private
educational institutions for the· expansion of
school facilities (NIRC, Sec. 34(A)(2)) .
5. Transformation
The manufacturer or producer upon whom the
tax has been imposed, . fearing the loss of, his
market if he should add the tax to the price, pays
the tax and endeavors to res oup himself by
improving his process of production, thereby ' ·
producing his units at a lower cost (VALENCIA
& ROXAS, supra at 35).
TAX EXEMPTION
The grant of immunity, express or implied (or
contractual), to particular persons or corporations or
to persons or corporations of a particular class from
a tax which persons or corporations generally within
the same state or taxing district are obliged to pay
(Philippine Long Distance Telephone Co., v. City of
Bacolod, G.R. No. 149179, July 15, 2005) .
REASON: The inherent power ofthe·state to impose
taxes naturally carries with it the power to grant tax
exemptions. The power to exempt from taxation , as
well as the power to tax, is an essential attribute of
sovereignty, and may be exercised by virtue of the
Constitution, expressly or by implication
(DIMAAMPAO, supra at 134-135),
Principles Governing Tax Exemptions
Tax exemptions, including its equivalent provisions
such as deductions, tax amnesty and . tax
condonations shall be governed by the following
principles:
1. They are not presumed (Floro Cement Corp. v.
Gorospe, G.R. No. L-46787, August 12, 1991).
2. When granted, they are strictly construed
against the taxpayer (Luzon Stevedoring Corp.
29, 1988).
3. They are highly disfavored and may almost be
said to be directly contrary to the intention of the
tax laws (Manila Electric Co. v. Vera, G.R. No.
1,.-29987, October 22, 1975).
4. He who claims tax exemptions must be able to
justify his ciaim or right (Commissioner of
Internal Revenue v. P.J. Kiener Co., LTD., G.R.
No.i.-24754, July 18, 1975) .
Principle of Strictlssiml Juris in Tax Exemption
Laws granting tax exemption are construed in
strictissimi juris against the taxpayer and liberally in
favor of the taxing power. Taxation is the rule and
exemption is the exception. The law does not look
with favor on tax exemption.s and that he who would
' seek to be privileged must justify it by words too plain
to be mistaken and too categorical to be
misinterpreted (Philippine Amusement and Gaming
Corp. v. Bureau of Internal Revenue, G.R. No.
172087, March 15, 2011).
Reasons for the,App'licatlon of Strictissimi Juris:
1. Life-Qlood theory (DJMAAfyfPAO, supra at 2);
2. To minimize differential treatment and foster
impartiality, fairness and equality of ··treatment
among taxpayers (Maceda v. Macaraig Jr. , G.R.
No. 88291 , June 8, 1993); and ·
3. Taxation is a high prerogative of sovereignty
·wbose relinquishment is never presumed
... (Luzan-Stevedoring Co. v. Court Tax of Appeals,
G.R. No. L-30232,· July 29, 1988).
Exceptions to the Application of Strictissimi
Juris: ·
1. When the statute granting exemption provides
for liberal construction thereof;
2. · In case of special taxes relating to special cases
and affecting only special classes of persons;
3. If exemptions refer to the public property;
4. In cases of exemptions granted .to religious,
charitable and education·a1 institutions or their
property;
5. In cases of exemptions in favor of the
government, its political subdivisions or
instrumentalities (DIMAAMPAO, supra at 137);
and
6. If there is an express mention or if the taxpayer
falls within the purview of the exemption by clear
legislative intent (Commissioner of Internal
Revenue .v. Amoldus Carpentry Shop, Inc. , G.R.
No. 71122, March 25, 1988) . .

Kinds of Tax Exemption:
1. Express
- exemptions are expressly granted by the
Constitution, statutes, treaties, franchises or
similar legislative acts (DIMAAMPAO, supra at
135);
The ·following are examples of statutory tax
exemptions:
a. Inter-corporate dividends by a domestic
corporation from another domestic
corporation (NIRC, Sec. 27(0));
b. Conditionally tax and/or duty-exempt
importations (CUSTOMS
MODERNIZATION AND TARIFF ACT
[hereinafter CMTAJ, Sec. 800);
c. Exemptions from Real Property Tax (LGC,
Sec. 234); and . ·
d. Other special laws such as Omnibus
Investment Code of 1987 (Executive Order
226); Philippine Overseas Shippin · ct
(R.A. No.1407) (VITUG & ACOSTA, upra
at'34).
~- Implied
- whe·never particular persons, p operties, or
excises are deemed exempt as they fall outside
the scope of the taxing provision •itself
(DIMAAMPAO, supra at 5,2=-53); and
,<._,
3. Contractual d.
- tax exemption in consideration of a .
contractual agreement with the govermen (Id. - ; I -:· speti~JI and ,., cal statute applicable to the
. j ..
1
at 106-107). _ · ,/\
' ) '
The legislature of a State may, in the absence pf
special restrictions in its constitution, mak~ 1a, - .i- ,· \
valid contract with a corporation in respect ·to 11 _ '- 1 ;,;/ specia law unless there is manifest intent to
taxation, and that such contract can • ere forced ___,.,,... . ~e~eal or alter the special law (Province of
against the State at the instanc.e ,of 'the
corporation (Casanovas v. Hord, G.R. No. 3473,
March 22, 1907).
Contractual tax exemptions must not be
confused with the tax exemptions granted und.er
franchises, which are not contracts within the
purview of the non-impairment clause of the
Constitution . Contractual · tax exemptions are
those lawfully entered into by the government in
contracts under existing laws (Cagayan Electric
Power & Light' Co., · Inc. v. Commissioner of
Internal Revenue, G.R. No. L-60126, September
25, 1985; V/TUG & ACOSTA, supra at 35).
A franchise is a special privilege conferred by .
governmental authority, acting as such on an .
undertaking that Is within the scope of
governmental fu~ctlons. Contractual tax
exemptions covering ma~ers that are not
essentially governmental in nature, such as
GENERAL PRINCIPLES
· Taxation Law
those contained in government bonds or
debentures, unlike in franchises, may not be
revoked without impairing the obligations of
contracts (V/TUG & ACOSTA, supra at 35).
Rev~catlon of Tax Exemptions
Since taxa.tion is the rule and exemption is the
exception, the exemption may thus be withdrawn at
the pleasure of the taxing authority (MC/AA v.
Marcos, G.R. No. 120082, September 11, 1996).
However, if the tax exemption constitutes a binding
contract and for valuable consideration, · the
government cannot unilaterally revoke the tax
exemption (DIMAAMPAO, supra at 108).
NOTE: Police power prevails over non-impairment
clause (Oposa v. Factoran, GR. No. 101083, July
30, 1993) .
Restrictions on Revocation:
1. _Non-Impairment Clause - where the exemption .
; . / was grapted to private parties based on material
•· cbnslderation of a mutual nature, it then
becdme~cq tractual and is covered by the non-
- - iQ1pairm.ent ' lause of the . Constitution
•p (DIMAAMf AO 'supra at 107). : .
2.. Adheren to fol: - if the tax exemption is
granted b the1 Q stitution, its revocation may
- :-be- effectecf t rough constitutional amendment
onlyl · ; · -,
.3. Where the tax-ex~mption grant is in the form of
a stP,e.clal law ant:l not by a general law, the
~l_c,i{lar case ·1~, not repealed by the later
/ stahite which is general in its terms, provisions,
V ~;: 1
w,l1 applic~·t\on even if the terms of the general
j ct are broad ough to include the cases in the
\ M,isamis Oriental v. Cagayan Electric Power &
i • Ligfit Co. Inc., G.R. No. L-45355, January 12,
1990).
Tax Refunds
Tax refunds are In the nature of tax exemptions.
They are regarded as a derogation of sover~ig~
authority and to be construed strictissimi J~ns
against the person or entity claiming the exemption.
The burden of proof is upon him who clai~s t~e
exemption in his favor and he must be able to,1ustrfy
his claim by the clearest grant of organic ~r statute,
law (Davao Gulf Lumber Corp. v. Commissioner 1~
Internal Revenue, G.R. No. 117359, July 23, 19981·
Tax Excluslons
Both in their nature and in their effect, there is no
difference between tax exemption and tax exclusion.
Exemption is an Immunity or privilege; it is freed 0111
from a charge or burden to which others ·are
subjected . E>fClusion, on the other hand, is th8
 \ I
MEK-Q~Y Al"D
s., Beda College of Law - RGCT Bar 0peratlona Cent•
removal of otherwise taxable items from the reach of
taxation (e.g., exclusions from gross income and
allowable deductions). Exclusion is thus also an ,
immunity or privilege which frees a taxpayer from a
charge to which others are subjected. Consequently,
the rule that tax exemption should be applied
in strictissimi juris against the taxpayer and liberally
in favor of the government applies equally to tax
exclusions (Philippine Long Distance Telephone
Co., Inc. v. City of Bacolod, G.R. No. 149179, July
15, 2005) .
Rule that Tax Statutes Construed Strictly
Against Government Prevails ov·er Rule on
Exemption Construed Strictly Against Taxpayer
The CIR erred in applying the principles of tax
exemption without first applying the well-settled
doctdne of strict interpretation in the imposition of
· taxes. It is both illogical and impractical to determine
who are exempted without first determining who are
covered by the aforesaid provisions. As such, it must
be determined first if the person is covered by the
tax law, applying the rule of strict interpretation of
laws impo~ing taxes and other .burdens on the
populace, before asking the same person to prove
his exemption therefor (Commissioner of Internal
Revenue v. 9ou_rt of Appeals, G.R. No. 115349; April
18, 1997). ·
DOCTRINE OF EQUITABLE
RECOUPMENT
This doctrine of law states that a tax claim for refund,
which is prevented by prescription : may be allowed
to be used as payment for unsettled tax liabilities if
both taxes arise from the same transaction in which,
overpayment is made and underpayment i~ due
(VALENCIA & ROXAS, supra at 38). ·. ·
:~
NOTE: This doctrine is not applicable in · our
jurisdiction. The_reason is that "if allowed; both the
collecting agency and the taxpayer might,be tempted
to delay and neglect-the pursuit of their respective
claims within the period prescribed by law" (V/TUG
& ACOSTA, supra .at 46; citing Collector of Internal
Revenue v. University of Sto. Tomas, G.R. No. L-
10936, April 25, 1958).
COMPENSATION AND SET-OFF
Compensation shall take place when two persons, in
their own right, are creditors and debtors of each
other (CIVIL CODE, Art. 1278).
This presupposes mutual obligations between the
parties, and that they are mutual creditors and
debtors of each other (CIVIL CODE, Art. 1270(1)).
GENERAL RULE: ,There can be no off-setting of
taxes against the claim~ that the taxpayer may have
against the government (INGLES, Reviewer, supra
at 28).
NOTE: A person cannot refuse to pay a tax on the
ground that the government owes him an amount
equal to or greater than the tax being collected. The-
collection of a tax cannot await the results of a
lawsuit against the government . (Francia v.
Intermediate Appellate Court, G.R. No. L-67649,.
June 28, 19.88) .
REASON: Taxes are not in the nature of contracts
between the part,ies but grow out of duty to and are
the positive acts of the government to the making
and enforcing of which, the personal · consent of
individual taxpayers is not required (Republic v.
Mambulao, G.R. No. L-17725, February 28, 1962) .
EXCEPTION: If the obligation to pay taxes and the
taxpayer's claim against the government are both
overdue, demandable and fully liquidated,
compensation ta~es place by operation ·of law and
both obligations are extinguished to their concurrent
amount (Commissioner of Internal Revenue v.
·- Toledo Power Inc., G.R. No. 183880, January 20,
• . 2014).
There can be legal compensation for tax purposes
as long as all the requisites under Article 1279 of the
-:-. · Civil Code .i re present (RECALDE, supra at 17). In
' order that · mpensation may be proper, it is
necessa,JiY: ;
< .
1. That :each· one of the -Obligors be bound
principally, and that he be at the same time a
principal creditor of the other; .
that both debts consist in a sum of money, or if
· th~ .things due are consumable, they be of the
. same kind, and also of the same quality if the
latter has been stated;
3.- That the two debts be due;
4. That they be liquidated and demandable; and
5. That over neither of them there be any retention,
or controversy, commenced by third persons
·and communicated in due time to the debtor
(CIVIL CODE, Art. 1279).
The . Government may be allowed to set-off a
taxpayer's claim for refund that has been finally -
adjudged· by \he courts· in favor of the taxpayer as
against a tax assessment that the Government
issued to such taxpayer even if such assessment is
not yet final and executory (Commissioner of Internal
Revenue v. Cebu Portland Cement, G.R. No. L-
29059, December 15, 1987).
On the other hand, th~ taxpayer cannot. claim the
defense of compensation since the claim for refund
was not yet liquidated and demandable. Such claim
 GENERAL PRINCIPLES.
Taxation Law

Please refer to Tax Administration and NIRC

cannot be raised as a defense against a deficiency
assessment (RECALDE, supra at 19).
Remedies for further discussion.

Offsetting of a Tax Refund with a Tax Deficiency TAX AMNESTY

The grant of a refund is founded on the assumption
that the tax return is valid, that is, the facts stated
therein are true and correct. The deficiency
assessment, although not yet final , created a doubt
as to, and constitut~s a challenge against, the truth
and accuracy of the facts stated in said return which , ·
by itself and without unquestionable evidence,
cannot be the basis for the grant of the refund (South
African Airways v. Commissioner of Internal
Revenue, G.R. No. 180356, Februa_ry 16, 2010,
citing Commissioner of Internal Revenue v. Court of
Appeals, G.R. No. 106611, July 21, 1994).
In other words, the issue of the claim for tax refund
is intertwined wi~ the issue of the proper ta~es that
are due. A claim for tax refund carnes t!),_~ .....
assumption that the tax returns . fil1;.d . ere
correct If the tax return filed w~s not,Prop~ the ~ 1 J.2.j TJle government is not estopped from
correctness of the amount paid _.rcr.th~~fore -= -~-........"· questioning the tax liability even if amnesty tax -
the claim for refund beco~e ~u~ t,onable.J~ t_ at
case, the court must deter~rune ~{,a t~xp~~~r c~ 1mmg--:
r~fund of erroneously paid ta1~ m?re /properly
ha~I~ !or taxes other than' tn p aid_ 1(SMI-ED :··. :\
A tax amnesty is a general pardon or the .intentionai
overlooking by the State of its authority ,to impose
penalties on persons otherwise guilty o!
violating a
tax law. It partakes an absolute waiver by tbe
government of its rig~t to collect what is due it and to
give tax evaders who wish to relent a chan~ to st~rt
with a clean slate (Asia International Auctioneers,
Inc. v. Commissioner of Internal Revenue, G.R. Nq.
179115, September 26, _ 2012)·. · .,.·
Rules on Tax-Amnesty: .
1. Like tax exemption, it is never favored nor
presumed and construed strictly against t~e ·
. taxpayer (the taxpayer must show complete .
compliance with the law) (Luzon Stevedoring
.. co. v. Court·of Tax Appeals, G.R. No: L-302) 2,
1i 1~ ,iaty 29, 1988);
. ·
1
_ pay. en_pf wece alr.eady received (PH Nationaf
il. Compan v,_ Court of Appeals, G.R. 'No.
· , .. 109976 April.26~2005)' and . "_
\ · '. ~. r ' J :•

Ph1ltppmes Technology, In ·, V. ~~mm,s ,oner of RE 'SON: 1_..E ' ri-dneous application and
,,,c__ . •-- .•, ,,, . .
Internal Revenue, G.R. No. 17541 , Noye_mber 12, -~ . enfo cement 0 , th'e law b
2014) , ), bl' ffi'. d not
Y pu 1c o 1cers . o _
· \ ' .. ' . ,-'blot subs, quen \correct application of the
- ' . , statUti:> Th~ g·ovetnm t .15 . ·1 db ·
The Issue of the Deficiency Tax Assessment ·~/ . , ~--~ 3 , ~n never es opp~, Y ·
must be resolved jointly with the Claim for Tax-'-,-· __..JIUSiji~e, or;err~~ pt
its agents _{Commiss,oner
Refund , u ; \ '{'.,,:, . ; : · 9~ f'!__!fJrnal ,Re~ (IIJe v. Court of Appeals and
To grant the refund without determination of the 1· ·, ,,,..(c,«1ftg~ Bflnkmg/ Jorp., G.R. No. 1066.11, July
proper assessment and the tax due would inevitabl
result in multiplicity of proceedings or suits:. If the:----;- .>:
( --~ "-

deficiency assessment should subsequently be ! LJJ_;.,.:.,., her~ could -be NO

~-
· ?mnesty granted by the ,
~~7s1dent. of the Ph1hppm~s t:>ecause the same

1Vl p\s:.•i
upheld, the Government will be forced to institute~ ,
anew a proceeding for the recovery of erroneously . m t~e a ure of tax exemption, which could _ be_
refunded taxes. Thus, to avoid multiplicity of suits
1 a~ ed only by a concl!_l'rence of Congress
and unnecessary difficulties or expenses, it is both-- · (People v. Castaneda, G.R. No. L-46~81,
logically necessary and legally appropriate that the September 15, 1988).
issue of the deficiency tax assessment be resolved
jointly with the claim for tax refund, to determine a
3. Defense of tax amnesty is personal defense
once and for all in a single proceeding the true and (People v. Castaneda, G.R. No. L-46881,·
correct amount of tax due or refundable (Id.). September 15, 1988). ·
•

COMPROMISE · REASON: Relates to the circumstances of a

A contract whereby the parties, by making reciprocal
concessions, avoid litigation or put an end to one
already commenced (CIVIL CODE, Art. 2028).
1. Compromises are allowed and enforceable
when the subjeG! matter thereof is not prohibited
from being compromised; and .
2. The person entering such compromise is duly
authorized to do so (VALENCIA & ROXAS,
supra at 39).
particular accused and not the character of the
_acts .charged in the information (People v.
· Castaneda, G.R. No-46881, September .15,
· · 1988). · .
To avail of a tax . amnesty granted · _by the
Government, and to be immune from suit on Its
delinquencies, the taxpayer must have
. yoluntarily disclosed his previously untaxed
. income. and mus~ have paid the corresponding
tax on such previously untaxed income (Banas,

' -
 \ I

MEM::Q~YAfD
San Beda lkMr1llty College of I.aw - RQCT a. Cerllllr

Jr. v. Court of Appeals, G.R. No. 102967,
February 10, 2000) .
.
4. The completion of the requirements provided
under the tax amnesty law shall be deemed full
compliance with the tax amnesty program: the
taxpayer shall thereafter be immune from the
payment of taxes, and additions thereto, as well
as the appurtenant penalties under the NIRC,
arising from failure to pay any and all internal
revenue taxes (Commissioner of Internal
Revenue v. Philippine Aluminum Wheels, Inc.,
G.R. No. 216161; August 9, 2017) . ,
ILLUSTRATION: While the Reference and ·
Basis for Valuation in the SALN were left blank,
CEPHI attached schedules to its SALN, which
provide the required information under RA No.
9480. Thus, considering that CEPHI completed
the requirements and paid the corresponding
amnesty tax, it is considered to have totally
complied with the tax amnesty program
pursuant . to R.A. No. 9480. As a matter of.
cours·e, CEPHI is entitled to the immediate ·. ·,, BASIS: The ,right is based on the · fact thai
enjoyment of the immunities 'and privileges of _·
the tax amnesty program· · (Commissioner of
Internal Revenue vs. Covanta Energy Philippine
Holdings, Inc., G.R. No. 203160; January 24,
2018). - 16, 1989).
law (Constantino, Jr. V. Cuisia, G.R. No.
· 106064, _
October 13, 2005) .
It is hornbook principle that a taxpayer is .allowed to
sue where there is a .claim that public funds are
illegally disbursed, or that public money is being
deflected to any improper purpose, or that .the~e is
wastage of public funds through the enforcement of
an invalid or unconstitutional law. A person suing as
a taxpayer, however, must show. that the act
complained of directly involves the illegal
disbursement of public funds derived from taxation
(Land Bank of the Philippines v. Cacayuran, G.R.
No.191667; April 17, 2013) . Thus, a taxpayer's suit
would fail if what are alleged to be illegally disposed
of are objects which were acquired from private
sources (Joya et al., v. PCGG, et al., G.R. No.
96541, August 24, 1993).
Only · one who will sustain a direct injury in
consequence of its enforcement. may contest the
• validity of a statute (RECALDE, supra at 28).
, : expenditure of public, funds by an officer for the
• · purpose of ,;1~i:ninistering or !mplementing an invalid
.... on..lncoostitirttonal law is a misapplication ·of such
funds (Gascon v. Arroyo; G.R. No.- 78389, October
.

Tax Amnesty vs. Tax Exemptio~. Requisit~, ~f a l:pxpayer's ·suit: (OVA)

Tax amnesty is the government's absolute ·
forgiveness, waiver, exercise of.a general pardon,.or
intentional condonation of its·right to collect p~st d_ue ,
and uflpaid tax collectibles, including imposable
penalties on persons guilty of evasion' o'r violation .of
a revenue or tax law, giving tax evaders who wish to
relent and are~willing to reform a chance ·to do ,.so · • , ..
(ABAN, supra at 118-120). It is imrr:iunity fr~!'Tl, all
criminal and civil obligations arising n:9'P ,
non-
payment of taxes. It is a general pardon given to all
. taxpayers and it applies to past tax 'periods, h:nce
of retroactive · application (People v. Castaneda,
G.R. No. L-46881, September 15, 1988).
Meanwhile, tax exemption is freedom, immunity, or
_ privilege from the burden of taxation to which othe~s
are subjected (ABAN, supra at -118-120). It 1s
generally prospective _in application (DIMAAMPAO
supra at 11).
TAXPAYER'S SUIT.
A taxpayer is allowed to sue where: (CDW} . ·
1. There is a ~laim that public funds are 1ll_egally
disbursed; or · cases, has relaxed the stringer,t "direct injury
2. That the public money is being Qeflected to any
improper purpose; or . procedural technicality. In cases where serio~s
3. That there is Wastage of public funds through
. .
the enforcement of an invalid _or unconstitutional
1. Public funds derived from · taxation are
Disbursed by - a political subdivision or
instrumentality; , . ' .
2. In doing so, a law is ~iolated or some irregularity
is committed; and
. -~ : -:;Peljtioner is directly-Affected by th~ alleged a~t
· \ (BagatSing v. San Juan, G.R. No. 97787, August
1, 1996; Mamba . v. Lara, ..G.R: No. 165109,
December 14, 2009).
. .
ILLUSTRATION: The Court held that although
the ·construction of the town center would be
pri~arily sourced from the proceeds of the
bonds, which · respondents insist are . not
· taxpayer's money, a governrr:ient support in the
, amount of t-187 million would still be spent for
paying the interest of the ~onds. Records also
show that ,the . governor requested the
Sanggunian to appropriat~ an · amount of t-25
·million for the interest of the bond . .Clearly, the
first requisite has been met (Mamba v. Lar_a,
G.R. No. 165109, December 14, 2009).
As to-the second requisite, the Court, _in recent
test" bearing in mind that locus standi is a
legal issues were raised · or where public
expenditures of millions of pesos were involved,
 GENERAL PRINCI_PLES
_ Taxation Law

the Court did not hesitate to give standing to TAXPAYER'S $UIT DISTINGUISHED
taxpayers. The Court finds no reason to deviate FROM CITIZEN'S SUIT ·
from the jurisprudential trend . The amount
involved in this case is substantial. Under the
various agreements ratified by the Sangguni~n, Plaintiff is affected by Plaintiff is a mere
the province would incur costs totaling the expenditure of instrument of public
~31 ,908,232.39 (Mamba v. Lara, G.R. No. public funds. concern.
165109, December 14, 2009) .
one is allowed to sue
NOTE: The decision to entertain a taxpayer's where there is an
suit is discretionary upon the Court (Mamba v. assertion that public
Lara, G.R. No. 165109, December 14, 2009). funds are illegally
disbursed or deflected
Concept of Locus Standi as applied to Taxation to an illegal purpose or
It may refer to ripeness for judicial determination. In that there is wastage of
cases involving expenditure of public funds , a public funds through the
taxpayer can have a standing to sue, if it can be enforcement of an
shown that: invalid or
unconstitutional law
1. He has sufficient interest in preventing the _ (Public Interest Center
illegal expenditure of money raised in taxation; Inc., v. Roxas, G.R. No. ·
and _I 125509;· -~ January 31 ,
2. He will sustain direct injury as a result of·the~ -
Person complaining
must allege that he has
been or is about to be
denied some right or
privilege to which he
has been - lawfully
entitled or that he is
about to be subjected to
some burdens or
penalties by reason of
the statute or act
complained of (Agan,
Jr. v. PH International
Air Terminals Co. Inc.,

- ·-
2007). , G.R. No. 155001; May
enforcement of the questioned statute. (Bugnay 5, 2003).
Construction and Dev't. Corp. v. Judge - -
Laron, G.R. No. 79983, August 10, 1989). . . Act of Petitioner. standing as
( - J'
· 'i nvolve ~al citizen, is able to craft
Direct Injury Test · I' disbursem Liblic ·an issue of
The person who impugns th~ewafidity of a statu~e- - funds~ derived fro'm transcendental
must have a personal and-substantial lnteres~ m taxation. . importance or when
the case such that h has sustainetl or will paramount public
sustain direct injury a . a, resulf _'(elanters interest is involv8da
--s.
Products, Inc. v. Fertiphil Cqrporatiof! G~ o.
166006, March 14, 2008) . J './,. ,(Prqvince of N,o rth Cotabato v. Government o[ the ,
P,HL, G-F Nor 183591, October 14, 2008; Lozano v. .
However, being a mere procedural techhicaH~,-- ~ grales, G.R. No. 187883, June 16, 2009) ·
the requirement of locus standi may-be w_aiv~ ;- - - 1
- by the Court in the exercis of its A~retion • · .! · DOCTRINE .,QF TRANSCENDENTAL
(David v. Macapagal-Anuyo, G. . No;_1_7 ~96,
1
I~ P0RTANCE
May 3, 2006) . ( 1 1 · , .,. j ,:-l..:i,-i.,..a_p_r:i-:--.n-c-:--ip:-le
~ th_a_t_t:-
he~ C,....o_u_rt_,,-
in- th_e_e_x_e-rc-:i-se-o7f-:-:--its
.1..,. sou_n discretion, brushes aside the procedural
CITIZEN'S SUIT barrier and takes cognizance of a petition (Chamber
It is a suit whereby any Filipino citizen in of Real Estate and Builders' Associations, Inc., v.
representation of others, including minors or Energy Regulatory Commission and Manila Electric
generations yet unborn, may file an action to enforce Company, G.R. No. 174697, July 8, 2010).
rights or obligations under environmental laws.
Citizen's suits are filed under R.A. No. 8749 (An Act In cases of paramount importance where serious
Providing for a Comprehensive Air Pollution Contr,ol constitutional questions are involved, the standing .
Policy and for Other Purposes) and R.A. No. 9003 requirements may be relaxed and a suit may be
(An Act Providing for an Ecological Solid Waste allowed to prosper even where there is no direct
Management Program, Creating the Necessary injury to the party claiming the right of judicial review
Institutional Mechanisms and Incentives, Declaring (Coconut Oil Refiners Association, Inc. v. Torres,
Certain Acts Prohibited and providing Penalties, G.R. No. 132527, July 29, 2005).
Appropriating Funds therefor, and for Other
Purposes) (A.M. No. 09-6-8-SC, Sec. 5) .
What determines the Principle of Transcendental
Importance: (CPL)
1. The £haracter of the funds or other assets
involved in the case;
2. The fresence of a clear case of disregard of a
constitutional or statutory prohibition by the
 MEM:0-RY,AID·
San S e d a ~ Colege of Law - RGCT 8w 0penatlona Centw
- 39

public respondent agency or instrumentality of

the government; or .
3. The Lack of any other party with more directa
CONSTRUCTION AND
and specific interest in raising the questior;is INTERPRETATION OF
being raised (Francisco, Jr. v. House_ of
Representatives, G.R. No. 160261, November
TAX LAWS, ~ULES AND
10, 2003) . REGULATIONS
While the court has taken an increasingly liberal
approach to the rule of locus standi, evolving from
the stringent requirements of "personal injury" to the NATURE OF TAX LAWS
broader Mtranscendental importance" doctrine, such 1. Not political in character; effective even under
liberality should not be abused. It is not an open belligerent occupation (Hilado v. Collector of
invitatjon for the ignorant and the ignoble to file Internal Revenue, G.R. No. L-9408, October 31,
petitions that prove nothing but their cerebral deficit 1956); ·
· (Lozano v. Nograles, G.R. No. 187883, June 16, 2. Civil in nature; and .
2009). 3. Not penal in character, hence, not subject to ex
post facto prohibitions (RECALDE, supra at 5) .
PRINCIPLE OF JUDICIAL NON-
INTERFERENCE IN TAXATION CONSTRUCTION OF TAX LAWS
GENERAL RULE: The Supreme Court can review 1. Tax laws are prospective in operation, unless .
judgments or orders of lower courts in all cases the language of the statute clearly provides -
involving the legality of any tax, impost, assessment, otherwise (Commissioner of Internal Revenue v.
or toll, or any penalty imposed in relation thereto Acosta, G.R. No. 154068, August 3, 200.7).
(C9NST. Art. VIII, Sec. 5(2)) . /J• • ... • I •
l 2. - :Legi_slf!tiv~ intention _must be considered (Ratio
EXCEPTION: The courts cannot inquire into the • ., et
Legis' Anima) ·- tax statutes are to receive a
wisdom of a taxing act, unless there is a violation of · reasonaple coristruction with a view tq carrying
constitutional limitations or restrictions (ABAKADA . out their pur pose and intent (CIR ' v. Solidbank
Guro Partylist v. Ermita, G.R No. 168056, Corporation, µ .R. No. 148191, Nove_mber 25,
September 1, 2005). . ,,. 2003) . ' .

INAPPLICABILITY OF , ESTOPPEL
. - 3. Where there , is doubt · - Taxes, being
AGAINST THE GOVERNMENT'' burdensome, are not to be imposed or
presumed to be imposed beyond what the
GENERAL RULE: The Government is not bound by
, statute expressly and clearly declares (Medicard
the errors committed by its agents. rn the
. . Philippines_, Inc., v. CIR, G.R. No. 222743, April
performance of its governmental functions, the ~tate
5, 2017).
cannot be estopped by the neglect of its _agents and
- officers (Commissioner of Internal Revenue v. ~9ourt
4 . . Where language is plain (Verba Legis or Strict
of Appeals, G.R. No. 106611, July 21, 1994)."
Construction) - rule of strict construction against
the government does not apply where the ·
REASON: Lifeblood theory (First Lepanto Taisho
. languag~ of the tax law is P.lain an_d there is no
Insurance Corp. v. CIR, G.R. No.197117, April 10,
doubt as to .the legislative intent. The words
2013) .
employed are to be given their ordinary meaning
(PLOT v. City of Davao, G.R. No. 143867
EXCEPTION: The CIR is precluded from adopting a
March 25, 2003).
position inconsistent with the one previously taken
where injustice would result therefrom or where .
5. Public purpose is always' presumed. This is in
there has been a misrepresentation to the taxpayer
consonance with the doctrine that like any other
(Commissioner of Internal Revenue v. Benguet
statute, tax legislation carries a presumption of
Corp., G.R. No. 145559, July 14, 2006).
constitutionality (Chamber of Real Estate and
Builders' Association, Inc . .v. Romulo, G.R. No.
160756; March 9, 2010).

6. Pro~isions of the taxing act are not to be

extended by implication. It is a hornbook
doctrine in the interpretation of tax laws that "[a]
statute will not be construed as imposing a tax _
 GENERAL PRINCIPLES
· · Taxation Law

unless it does so clearly, expressly, and
unambiguously.· A tax cannot be - imposed
without clear and express words for that
purpose. Accordingly, the general rule of
requiring adherence to the letter in construing
statutes applies with peculiar strictness to tax
laws and the provisions of a taxing act are not to
be extended by implication.• Parenthetically, in
answering the question of who is subject to tax
statutes, it is basic that "in case of doubt, such
statutes are to be construed inost strongly
against ~he government and in favor of the
subjects or citizen~ because burdens are not to
be imposed nor presumed to · be imposed
beyond what statutes expressly and clearly
import· (Commissioner of Internal Revenue v.
Court of Appeals, G.R. No. 115349; April
18, 1997).
equality of taxation or certainty as to the nature ·
and amount of each person's tax; and _
2. DJrectory
those provisions designed merely for the
information or direction of officers or to secure
methodical and · -systematic modes of
proceedings (ABAN, supra at 145) .
·importance of Distinction
The omission to follow mandatory provIsIons
renders invalid the act or proceeding - to which it
relates while the omission to follow directory
provisions does not involve such consequence (Id.).
SOURCES OF TAX LAWS: (CLeCAJI)
· 1. ~onstitution;

7. Tax laws are special laws and prevail ove[ 2. Legislation or statutes, including pr~sidE:nti~I
- decrees and executive orders on taxation and
general · laws (Republic v. Ga~cayco, G.R. No. r - · •
L-18307, June 30, 1964). t 1· ,-tax ordinances, tax treaties, and conventions
.. , ,- -- -~ with Joreign countries; · ·
.I,.~-· Ii •
Construction of statute by pr,eaecesso!P ·s not .... ._ v,., ,;- . . . '·
binding on the successors. _Thus/ the se.9r.etary---:--3.:...J ~o'n _e ~ p~r~ neous constru~t1on ~y executive or
of .Finance is vested wit !'~~hQ ,..ty' to"r evok~. . . ,,· admm~ !rat_1.}e ) officers, mcludmg. Revenue
repeal, or abrogate the acts or ,P[0Vious rulings •., .'.'., Reg~l~tions b~ the Department of Fmance and
of his predecessor in office· bed use the adm!ni str tIvre 18 p nces by the BIR.or the BOC;
construction of a statute by those administe rirfg · --!. . ~. \ , -.
it is not binding on their successors, ereafter , . . - 4: . ~ dm,r.u~t~atI¥~•-~ a~d ~egu~ations, rulings,
the latter .becomes satisfied that a different . ·.:. 0 ~ndlo~mions ~f ta• officials particularly the CIR,
construction should be gi eA..(Hilado·0 1Gollector : _ ·. ' mcl~?-1~g opjlnion~ of t)1e Secretary of Justice (2
of Internal Revenue, G.R., No L-9~ /,f:Yctober·-r.·- - D,E ,p=_?N, Nat1gnal Internal Revenue Code
'{_f · !_ · . . An[lotated .(2016), -.supra .at 8 [hereinafter 2 DE
. ' ,· >
31, 1956). · \ \
\·( i , )-'E...~t<J. NI CJ). · .
The NIRC being a special law, prevails'Qve"rt_a I -:;7--;,:/. . ., ,
general law like the Civil Code, in case of c6!lfllcl T"""-· ~- . ! ud1c1a_l ~ec1s1ons
in their provisions (Republic ti'. Gancay90 G.R.!J-.:_ ~-,..,,-:- dee s~ons o! t~e Supreme Court applying o~
No. L-18307, June 30, 1964; Co1:1rrii~s,ipn,e,: of . ~nte pre 1ng ex1stmg tax laws are binding on all
Internal Revenue v. Ilagan Electrip and I Ice ·• f ,. , s~qorq na1e courts and have the force and effect
Plant, Inc., G.R. No. L.-31364 March 30: 1,9.79) . · L/ ! !' \. i.. of)aw; T~ey form part of the legal sysfem of the
· ' ' ~-,.,....~Philippines (CIVIL CODE, Art. . Bf . They
NOTE: The Tax Code may be considered a constitute evidence of what the law , means
general law with respect to other laws. It is (People v. Licera, G.R. No. L-39990, July 2i,
a
settled that general law cannot repeal a special . 1975).
law by implication for the legislature is presumed
to know all the laws on the subject (BIR Ruling 6. !nterpretation of American Courts
No. 409-05, October 4, 2005) . - since Philippine income tax laws are of
American origin, interpretations by Am~ri~n
8. Principle of legislative Approval by courts on parallel Philippine tax laws· have
Reenactment - it means that the reenactment of p~rsuasive effect on the. interpretation of the
a statute substantially unchanged is persuasive latter (Bal1as v. Coqrt of Appeals, G.R. No.
indication of.the adoption by Congress of a prior 102967, February 10, 2000).
executive construction (RECALDE, supra at 24) . .

KINDS OF PROVISIONS OF TAX LAWS

1. Mandatory
- those provisions intended for the security of
the citizens or which are designed to insure
 \ I . .

MEM:0-:RY AID
San B e d e ~ Colege cl Law - RGCT Bar Clperationa Center
. 41 .

INCOME TAX
DEFINITION AND It is a tax on all yearly profits arising from property,
GENERAL PRINCIPLES professions, trades or offices, or as a tax on a
person's income, emoluments, profits and the like .
(LG Electronics Philippines, Inc v. CIR, G.R. No.
165451, December 3, 2014).
INCOME
'It is a tax on income; whether net or gross realized in
Income means all wealth that flows into the taxpayer
one taxable year. It is due on or before the 15th day
other than as a mere return of capital. It includes the
of the 4th month following the close, of the taxpayer's
forms of' income specifically described as gains and taxable year and is generally regarded as an excise
profits, including gains derived from the sale or other tax, levied upon the .right of .a person or entity to
disposition of capital assets· (R.R. No. 2-40, Sec. 36). receive income or. profits (Mobil Philippines, Inc., v.
The City Treasurer of Makati, G.R. No. 154092, July
Income means cash received or its equivalent. It is 14, 2005).
the amount of money coming to a person within a
specific time. It means something distinct from It is a kind of tax levied upon the privilege of receiving
principal or capital; for while capital is a fund , income income or profit. It is an excise tax and not a tax on
is a flow. As used in our income tax law, income property (DIMAAMPAO, Basic Approach to Income
refers to the flow of wealth (CIR v. Japan Air Lines, Taxation (2018), p. · 3 [hereinafter DIMAAMPAO,
Inc., G.R. No: 60714, October4, 1991) . lnc"me Taxation]) .
It is an amount of money coming _to a person or
corporation within a 'specified time, whether as ; :i
BASIS OF THE RIGHT . OF THE
payment for services, interest, or profit from G-0V~RNMENT TO TAX INCOME:
investment. Unless otherwise specified, income P~R:rNERSHIP THEORY
. means cash or its equivalent (Hernando Conwi v °fl'e ·right of.the government to tax income emanates
- Court of_Tax Appeals, G.R. No. 48532, August -) 1 from its part1J,~,rship in the production of income by
1992). . providing th~ rotection , resources, incentive • and
/,.. proper clitn_ite fo such· production (CIR v. L!3dnicky,
INCOME V:CAPITAL . ..· G.R. No .. t 18169, uly 31, 1964).
:J J .
. FEATURES · OF· PHILIPPINE
• • .. ... ;.#Of' .. '
INCOME
Denotes a flow of wealth Fund or property, ~; TAX: (DP-CSA)
during a definite period of existing at
one distinct ::-: 1. Direct Tax .
time. All · wealt~ other point of time, which can .~- ··; The tax burden is borne by the income recipient
than as a mere return of be used in · producing
- :;,- ). UPQ w!'Jpm the tax is imposed;
capital. goods or services.
Service of wealth Wealth 2. Progressive Tax
The tax rate increases as the tax base increases.
"Fruit" "Tree" It is founded on the ability-to-pay-principle.and is
(Madrigal v. Rafferty,· G.R. No. L-12287, August 7, consistent with Sec. 28(1 ), Art. Vi, 1987
1918). Constitution;

EXECUTIVE COMMITTEE
DOHN ALFRED E. AQUILIZAN, Over-All Chairperson I NICHOLE VANE B. SANTOS, Chairperson for Academics I RONALYN A.
G~CULA, Ad Hoc Director for Bar Matters I MARIELLE CIELO B. BELG IRA, Vice Chairperson for Fin£!nce I JUAN INIGO S. MIGUEL,
Vice Chairperson for Operations .I ALISSA MARIE D.C. DELOS SANTOS, Vice Chairperson for Audit I CORINA R. TAMPUS, Vice

/I Chairperson for Secretariat I ARVY KEITH N. CHUNG, Vice Chairperson for Logistics I ANTONIO JUN-JUN C. MANALIGOD IV, Vice
Chairperson for Membership IJORDAN N. CHAVEZ, Vice Chairperson for Electronic Data Processing
SUBJECT COMMITTEE .
JOSE LORENZO C. DAVE, Subject Chair I LOUISE MARIE C. CONTACTO, Assistant Subject Chair I KATRYNA ANNE R. TOMENIO,
Subject Electronic Data Processing I SUBJECT HEADS: MARY GRACE A. GRANIL, General Principles I SHEENA ROSETTE DG.
DOMINGO, Administration, Enforcement, Remedies and Co,!,lrt of Tax Appeals fJERRLITO P. CUSTODIO, Local and Real Property Taxation
I STEVIE R. ARCILLA and PATRICK MARRION Y. MELENDRES, In come Taxation I MARY ANN C. TAN, Transfer Tax I MARILYN
H. MALALUAN, Value-Added Tax I
· SUBJECT MEMBERS
KATRINA MICHAELA D. DELFIN, ARMANT. PAEZ, ANDREI ANNE U. PALOMAR, MARY KATHERINE A. SIMEON,JAMES
KARL DANIEL B. ALVARO, ARIESA JANE V. DOMINGO, JOSEPHINE MARIE T. SALAZAR, YNA MAREI AGUILAR, NERY
- ROYCE T. LAZARO,JOHN KENNETH Q. CRISOLOGO, LOIS D~LLE P. DIMAANO, ANDRELA M. AQUINO, ANl'{A LOREN
DC. MANUEL and GILBERT OWENS. APILADO - -
ADVISERS
Atty. NICASIO C. CABANEIRO, CPA, Atty. DANTE 0 . DELA CRUZ, CPA,JusticeJAPAR B. DIMAAMPAO,A,tty. EFREN
VINCENT M. DIZON, CPA
 006
INC OM E TAXATION
Taxation Law

3. Comprehensive System taxpa yer prior to the . realization of such

The Philippine Income Tax system adopts the
citizenship principle, the residence principle; and
the source principle;
4. Semi-Schedular or Semi-Global; and
5. American in origin.
Note: Thus, the authoritative decisions of the
U.S. courts and officials charged with enforcing
the U.S. Internal Revenue Code have peculiar
force and persuasive effect for the Philippines
(CIR v. Baier-Nickel, G.R. No. 153793 Augus t 29,
2006).
REQUISITES FOR TAXABILITY
INCOME: (PR-NR)
1, There must be a gain or f rofit, whether in cash
or its equivalent;
2. The gain must be Realized or received - when
income is actually or physically transferred 'to .
person, or con~tructively rec~ived b~ _him. Tnis
implies that not all economi gains consJitute
tax1=3ble income; and
• f. •
, !
Test of Realization . , 1
Actual vis-a-vis Constructhte ,Receipt
· . :': l 3:· .'The gain musfN ot be exclu~e_d by law or treaty.
Actual receipt
- when income is actually reduced to ·
possession. The realization of,gain may, take the-· · -
form of actual receipt of· cash (R.R. No. 2-40,
Sec. 52) . '. '
; "'
Constructive receipt ·., , ·; i ;-.' R~vepue from jervices rendered is re_cogniz~
- when income is credited to the ac?ount of or .=:..:.. -_
sef apart for a taxpayer and which ll\8Y. be c;!rawn
upon by him at any time is subject tq tatc f~r the
year during which so credited or set apart, : 1 i f-\
although not then actually reduced to
possession. To constitute receipt in such a case,
the income must be credited to the taxpayer
~ithou t any substantial limitation or restrictio~ _as
to the time or mann er of payment or cond1t1on
upon which payment is to be made (R.R. No. 2-
40, Sec. 52).
Income is received not only when it is actually
handed to a person but also when it is merely
constructively received by him (Limpan
Investment Corp. v. CIR, G.R. No. L-21570, July
26, 1966).
Increase in the Value of the Property is NOT
Considered as Income .
It is merely an unrealized increase in capital.
Increase or · appreciation in the value of the
property is not even an accrual of income to the
. .
appreciation through sale or conversion of the
property (VALE NCIA & ROXA S, Income
Taxation (2016), p. 151 [hereinafter, VALENCIA
& ROXAS, Income Tax]). No income is· derived
nor a loss incurred by the owner until after the
actual sale or other disposition of the property in
excess of its cost (MAMALA TEO, Philippine
Income Tax (2014), p. 11 [hereinafter
MAMALA TEO, Income Tax]) .
Examples of Income Constructively
Received: ·
a. Matured interest coupons, due and payable,
not yet collected by the taxpa yer (R.R. No. 2-
OF 40, Sec. 53);
b. Interest credited on savings bank ·deposit
(R.R. No. 2-40, Sec. 53);
c. Dividends applied by the corporation against
·the indebtegness of a stockholder (R.R. No.
.2-40, Sec. 50); .
, d. , Intended payment deposited in court (e.g.,
- • rental payments refused by the lessor, when
" -- . the,..lessee tendered paym ent and the latter
- -.. _ ma_.de a judicial deposit of the rental due); and
e. Distrjbuti'(e;sbare of the profits of a partner in
a general' co-partnership (R.R. No. 2-40, Sec.
53} . • ,,. r " . .
--·-·I . \. ,. r.
, (DI ;,".\AMPAp, n 1 e Taxation, ·supra at 8 to
11) . .P:: /
i
-- . I}._~_; --~,
4. J he.Jncome must be Recognized.
)r<co,m~ is recogniz~dwhen the income has been
. ' / ' ~ re'9eiveQ;".,. either/ actually or constructivel
y.
d
when se ices have been performed and are
, billable. t i_i; recorded at the amount received or
-f ,
. ~pectf id.,. to be received . (Ericsson
Telecommunications, Inc. v. City of Pasig, G.R.
No. 176667, Novem ber 22, 2007) .
CASH METHOD VIS-A-VIS ACCRUAL
METHOD
· . Cash meth~ d . ::· ;, Ac~ru a'1 ~ethod ,
-. . . "' •,._\ ,:;_· .·
· As to Definition · '- '_'· ·. -~ ,""
A method of A method of accounting .
accou nting whereby for income in the period it
all items of gross is earned regardless · of
income received whether it has been
during the year shall received or not
be accounted for
such taxable year.
 \ I .

MEt40~Y AID
s., Beda UrMr8fty College of Law - RGCT B a r ~ Center

.
As to Recognition of Income (and Expens-~f' : in Taxation (2006), p. 1108 [hereinafter DIZON,
Outline]). ·
Income . is realized Income is earned
upon receipt of cash regardless of whether it 2. Deferred Payment
or its equivalent has been received or not Income to be reported during the year of sale is
including those Note: · Expenses are . the difference between the selling or contract
constructively · accounted for in the price and the cost· of the property, even tho.ugh
received but not period they are incurred the entire purchase price has not been actually
including gifts and and not in the period they received in the year of sale.
donations are paid
Note: Only expenses 3; Percentage of completion ·
actually paid for shall fncome from long-term contracts is reported for
be claimed as tax purposes on the basis of percentage of
deductions during the completion. "Long-term contracts" means
year building, installation or construction contracts
covering a period in excess of 1 year (NIRC, Sec.
As to the Kind of Taxpaye~ . · · 48).

Generally used by Generally · used
taxpayers who do not taxpayers whose nature
keep regular books of of business . uses
accounts, such as inventories since this
individuals engaged method of accounting will
in business and correctly reflect income by
practice of profession matching purchases arid
expenses against sales,
such as medium anq large
corporations ..
(Revenue Audit Memorandum Order No. · 1-2000,
Chapter ll(A)(B) {hereinafter R.A.M.O.})..: •
NOTE: The taxabl~ incom~ shall be -computed
upon the basis of the ~xpayer•s· __anriual
accounting period (fiscal year or calenda,:.
year, as the case may be) in accordance with
the method of accounting regularly employed
in keeping the books of such taxpayer; .but if no
such method of accounting has been so
employed, or if. the method employed does
not clearly r~flect the income, the computation
shall be made in accordance. with such
method as in · the opinion of the
Commissioner clearly reflects the income
(NIRC, Sec. 43) .
NOTE: R.A.M.O. No. 1-2000 provides that under
the accrual method, expenses not being claimed
as deductions by a taxpayer in the current year
when ·they are incurred cannot be claimed as
deduction from income for the succeeding year
. (CIR v. lsabela Cultural Corp., G.R. No. 172231, ·
February 12, 2007).
SPECIAL METHODS OF ACCOUNTING:
1. Installment Basis
Appropriate when collections of the proceeds of
sales and income extend over relatively long
periods of time and there is strong possibility that
full collection will.not be made (2 DIZON, Outline
by · For further discussions on Accounting Periods .and
Methods, please refer to pages 183 to 186.
·' TESTS IN DETERMINING · WHETHER
..., INCOME IS EARNED FOR TAX
/;PURPOSES: (FC-CARE)
, · -1.....vflow of~Wealth Test ·
;"~ ·· ~~,:.
.i ...;:_. the 0-test of taxability is the "source", i.e.,the
ci property, 1: ctivity or ·service that produced _the
income <Jptf!_rmines whether any gain was
1
derived • fi f7\ the . transaction (CIR v. British
Overse_ as 1:,4,rw.ays Corp., G.R. No. L-65773-7,
April 30, 1p87) . ..
Control Tesf
- the power to dispose of income is· the
t{, .... ; ~quivalent of owne:rship of it. The exercise of that
:-,~_ . . power to procure the payment of income to
_-.·,. ,,anothe · is . the enjoyment, and hence . the
· realization, of the income by him who exercises it
(Helvering v. Horst, 311 U.S. 112, November 25
1940). . . '
3. Claim. of Right Doctrine
...,..... a taxable gain is conpiti_oned upon the
presence of a claim of right to the alleged gain
and . the absence of a definite unconditional
. obligation to return or repay that which would
otherwise ·constitute -a gain. This is also called the
Doctrine of Ownership, Command or Control
(CIR v. Wilcox, 327 U.S. 404, February 25, 1946).
\
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 contingentfy, 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
tha~ the property may later be recovered from the
 -
INCOME TAXATION
Taxation Law

taxpayer. If the taxpayer who has - included applied thereto (Tan v. Del Rosario, Jr., G.R. No.
amounts in income pursuant to the claim of right 109289, October 3, 1994).
doctrine subsequently repays tho~e amounts,
the taxpayer may be entitled to a deduction in the 3. Semi-Scheduiar or Semi-Global Tax
year·of repayment (CIR v. Manila Electric Co., System
Inc., CTA En Banc No. 7-73, May 08, 2012; CIR -itis:
v. Javier, G.R. No. 78953, July 31, 1991). a. Global, in the sense that all compensation-
income, business or professional income not
4. All-Events Test . subject to final withholding income tax, ar:id ·
- for income or expense to accrue, this test other income not subject to final tax are
requires: added together to arrive at the gross income;
a. The fixing of a right to income or liabilily to and the taxable income (i.e., gross income .
pay;and less allowable deductions and exemptions) is'
. b. The availability of the reasonable accurate subjected to o_ne set of graduated tax·rates (if
determination of s_uch income or liability (CIR individual) or normal corporate income tax
v. lsabela Cultural Corp., G.R. No. 172231, rate or· minimum corporate income tax rate,
February 12, 2007). as the case may be (if corporation)
(MAMALATEO, Reviewer, supra ·at 95);
5. Realization/Severance Test
- also known as the Macomber test. There is,no. b. Schedular, in the sense · that, passive
taxable income until there is a separation from· --investment income subject to final tax and
capital of something of exchangeable f Yalue, ·. -~· ~: -\ I . cap ital gains from the sale or transfer of
thereby supplying · the alization ~; or.. - ~, " s , a_r.es··-of stocks of a domestic corporation
transmutation which would re ylt i(l the-receipt of and real ,prpperties remain subject to different
income. The essence of the test s,th t in.order -- ·- sets-"'of 'tax• rates covered by different tax
. for income to be taxed, it i~·:tb·be evered from -~ - · r~tums (M,IIMALA TEO, Reviewer, supra at
the property from which i~was denved.1 .. 97); \, 1
I ; f ~• - ~;-f;.•
The Court analogized "Jpftal' as bein separafe____ CRITE IA IN~j MPOSING PHILIPPINE
· from "income" in the wff'that a _ tree i separ3=1te INCOM TAX-: •
from its fruit. It requires t esenc~, _of a "tax - ---.-,ii,----.-·--.--.--.-.----
event" which is an even\_v h trigg~rs'.a.tran~!_e! _- _ 1. .~J.JS~•P. or N_ation_~hty ~rmc1l_)le .
of ownership of properly ,{Els(lfr v::Macomber, . - ,the, 9_as1s of e 1mpos1tion of income ta~ 1s the
252 U.S. 189, March 8, 1920/ \<, ," · · · · , t..ax_p~~,er's citizenship. Thus, citizens . of the
· ·; 1 ,, . '>- l hilippi~e , whet~er residents or non-residents,
6. octrlne~ol -~-: _:.:,-~~b~~t to ou; income t_ax law (2 CA.$ASOLA,
Proprietary Interest ' \ ( "0°~ ·, : , ' , Ml-( 013), P. 77 [herema_fter 2 CASASOLA};
- Any economic benefit to the ernpJo ee, thiit ' ·::._ - ..:.- ~-- ~f,l ._ "A~ Ti/EO·
_ lnc~me Tax, supra at 89-90);
increases his net worth, whateve may) 9aye
been the mode by which it is-effected, ·sta~able 2r\ ,
.•
- R'ii . . .1\, • ; • • •
,-~!$•~p.r1'~e Prm~•ple ':>~ Don:-1c1le Prm~1ple
• '

(MAMALA TEO, Revi(}wer on Taxation (2'01'9), P.•
169 {hereinafter MAMALA TEO Reviewer}).
' persons residing in the Philippines shall be
INCOME · TAX SYSTEMS IN . THE
PHILIPPINES:
1. Global Tax System
· - the tax system views indifferently the tax base ·
and generally treats ih common all categories of
taxab)e income of the individual. It taxes all
categories of income except certain passive
incomes and capital gains (Tan v. Del Rosario,
Jr., G.R. No. 109289,- October 3, 1994).
2. Schedular Tax System . Sec. 24 (A));
- system employed where the income tax
treatment varies and is made to depend on the
kind or category of taxable income of the· .
taxpayer. It itemizes th,e different incomes and
provides for varied percentages of taxes to be
' :~ :•~he basis.of t~e 1mpos1t1on ~f income ta~ 1s the
. residence of the taxpayer. All income derived by
subject to income tax on the income derived from ·
sources wit_ hin the Philippines (Id.); and
3. Source Principle
- the basis of-the imposition of income.tax is the
source of the income. All income derived -from
sources within the Philippines shall be subject tQ
income tax (Id.). .
TYPES OF PHILIPPINE INCOME TAX:
1. Graduated Income Tax on Individuals - (NJRC,
2. Regular/Normal Corporate Income Tax on
Corporations (RCIT) (NIRC, Sec. 27(A));
3. Minimum Corporate Income Tax on Corporations
(MCIT) (NIRC, Sec._27(E));

J
 \ I
006
MEM:Q~Y AID
San Seda lJrWwaity College of lllw - RGCT Bar ()peraUona Center
4. Special Income Tax on Certain Corporations
(i.e. , private educational institutions, foreign
currency deposit ' units, and international
carriers); .
5. Capital Gains Tax (CGT) on sale or exchange of
unlisted shares of stock of a Domestic
Corporation classified as a capital asset (NIRC, .
Sec. 24(C));
6. CGT on sale or exchange of real property located
in the Philippines classified as capital · asset
· (NIRC, Sec. 24(0)) ;
7. Final Withholding Tax (FWT) on certain passive
investment income (NIRC; Sec. 28(8)(5)(b));
8. Final Withholding ' Tax (FWT) ori income
payments made to non-residents (individual. or
corporation); - . ·
9. Fringe Benefit Tax (FBT) (NIRC, Sec. 33) ;
· 10. Branch Profit Remittance Tax (BPRT) (NIRC,
. Sec. 28(A)(5)); ·
11. Improperly Accumulated Earnings Tax {IAET} .
(NIRC, Sec. 29); and
12. Gross Income Tax (GIT) (NIRC, Sec. 27(A)) .
TYPES OF TAXABLE INCOME:
1. Cc;,mpensation Income
- income derived from the rendering of services
under an employer-employee relationship; ·
. . '
2. Professional Income
- fees derived ·from engaging in ah endeavor
requir-ing special training as professional as a
means of livelihood , which include;· but are not ·.
limited to the ·fees of lawyers·, engineers,
architects, CPAs, doctors, lawyers ,_. ~ngineers,
and the like; ·- ' - · ,·
3. Business Income
- gains or profits . derived from rend~[.iii g
services, selling merchandise·, ma11..ufacturing
products, farming and long-term constru·ction
contracts;
4. Passive Income
- income in which the taxpayer merely waits for
the amount to come in, which includes, but is not
limited to, interest \ncome, royalty income,
dividend incom.e, winnings and prizes; and
5. Capital Gain
- gain from dealings in capital assets (R.R. No.
8-2018, Sec. 2).
SIGNIFICANCE OF KNOWING .THE TYPE
OF INCOME
It is important to know the type of income realized by
the taxpayer since the .Philippines has adopted the .
semi-schedular/semi-global tax system. Thus, some
· types of income are subjected to graduated tax rates
while others are not (2-A DOMON DON, Taxation
(2018), pp. 56 and · 58 [hereinafter 2-A
DOMONDONJ).
I SITU S OF TAX ATIO N · I
It is the place or authority that has tl)e right to impose
and collect taxes (Commissioner of Internal Revenue
v. Marubeni Corp. , G.R. No. 137377, December 18,
2001) . It is also called "place of taxation" (ABAN, Law
of Basic Taxation , supra at 57) .
INCOME FROM SOURCES WITHIN THE
PHILIPPINES:
1. Interest derived from sources within the
Philippines and interest on bonds, notes, or other
interest-bearing ._obligations of residents,
corporate or otherwise (NIRC, Sec. 42 (A)(1)) ;
2. Dividends received from a:
a. Domestic corporation; and
.• b. Foreign corporation; provided t~at at least
.
1
- 50%.,of its gross income for the three (3)-
,, .,L~ ::·,. y_ear ·~ riod ending with the close of its
taxabl~ year preceding the declaration of
such: cil idends . or for such part of such
period; as the corporation has been in
existehc was derived from . sources within
t~ Ptiilippl nes ·(NIRC, Sec. 42 (A)(2)(b}) ;
I .· .\ . .
.NOTE~ It is limited only in an amount which
· bears the same Faticf to such dividends as the
gross income of the corporation for such
period derived from sources within the
. Philippines bears to its gross income from all
sources [Income Partly Within and .Partly
Without] (NIRC; Sec. 42 (A)(2)(b)) .
3. · Compensation · for labor or personal services
performed in• the Philippines· (NIRC, Sec:
42(A)(3));
4. Rentals and royalties from property located in the
Philippines or from any interest in such· property
(NIRC, Sec. 42(A)(4)) ; .
5. Gains, profits and income from the sale of real
property located in the Philippines (NIRC; . Sec.
42(A)(5)) ; and .
6. Gains, profits and income from the sale of
personal property, subject to the following rules:
a. Income i_s treated as partly from sources
within and partly from sources without the
Philippines if: . _
i. · Produced, in whole or in part within and
sold without the Philippines; or ·
ii. Produced, in whole or in part without and _
sold within the Philippines (NIRC, Sec.
42 (E) par. 1). ·
 INCOME TAXATION
46 · · Taxation Law

. b. Income is treated as derived entirely from

sources within the country where the
property is sold if:
i. Purchased within and sold without the
Philippines; or
ii. Purchased without and sold ·within the
Philippines (NIRC, Sec. 42 (E) par. 2).
The exception is gain from the sale (?f shares
of stock in a domestic corporation, wherein
the income is treated as derived entirely from
sources within the Philippines, regardless of
the place where ttie shares were sold (NIRC,
Sec. 42(E)) .
INCOME FROM SOURCES WITHOUT
THE PHILIPPINES
1. Interests other than those derived from sources
within the Philippines (e.g.,.interest earned from
deposits on banks located outside . the
Philippines, and interest on loans where the
debtor is not a resident of the Philippines) (N(RC,
Sec. 42(C)(1)) ; · . , •
2. Dividends other than those derived from sources
within the Philippines (NIRC _Sec. 42 ·(C)(2)) ; -
l. --.(.~~.. ) I #
Examples: · 2. ' Gross ·income _derived from the purchase of
a. Dividends received f!om a' _ foreign . __ .
corporation less than 50% of its gross
income for the three. (3)-year perio_d
ending with the close of its taxable year · ·~ . · · · Philip1;>io..es ..;_ t1ehyed entirely from sources
preceding the declaration -of - such
dividends or for such par\_ of sljch period !
as the corporation has been in· existence , \
INCOME FROM SOURCES PARTLY
WITHIN AND PARTLY WITHOUT THE
PHILIPPINES
Items of gross income not allocated t<;> sources from
within or without the Philippines shall, unless
unmistakably from a source within or source without
· the Philippines, be treated as derived from sources
partly within and partly without the. Philippines (R.R.
No. 02-40, Sec. 162).
PERSONAL PROPERTY PRODUCED/
PURCHASED AND SOLD
1. Gross income derived from the sale ofyersonal
property produced (in whole or in part) by the
taxpayer within the Philippines and sold within a
foreign country, or produced (in whole or in part)
by the taxpayer within a foreign country and sold
within the Philippines - partly within and _partly
without the Philippines (R.R. No. 02-40, Sec.
--,1 62).
The word "produced" includes . created,
fabricated,' manufactured, extracted, processed,
cure? , or aged,dR.R. No. 02-40; Sec. 162). ·
y .J
. personal pr(?p~rty· within and its sale without the·
f:>hiliP,pines, 9r Jrom the purchase of personal
. · prop rty without . and its sale within the
_ ._wit_ hil) th~ co, ntry in}which it is sold (NIRC, · Sec.
4_2(/~J.; R.R. No. 02-40, Sec. 162).
. ,, · - / :1 ,

is from sources within the Philippines (NfRC,__ \ SUM~ARY OF FACTORS CONSIDERED

S~~- 42 (A)(2)(b!); and - · , ~'.: . , · IN DETERMINING THE SOURCE OF
b. D1v1dends received from a non-resident. , ' , ·, ;) INCOME ·
foreign corporation (BANGGAWAN ·- - _:. . ; . . - .-• ' . . ~..- ·.
Income .Taxation (2017), p. 78) [flereinafter ' :__: . Type of income Factor considered
BANGGAWAN, Income Taxation]). _ / _
Salaries, wages, and
3. Compensation for labor or personal services other compensation
Where services are
performed without the Philippines (NIRC, Sec.
42(C)(3)); Income from service performed
4. Rentals or royalties from property located without business
the Philippines or royalties for the use of or for
Sale of personal Where it is sold
the privilege of using without the Philippines,
property - purchased
patents, copyrights, secret processes and
formulas, goodwill, trademarks, trade brands, Sale of personal Where it is produced •
francbises and other like properties (NIRC, Sec.
42(C)(4)) ; and
property - produced
within , sold within
5. Gains, profits and income from the sale of real
pr'?perty located without the Philippines (NIRC, Sale of personal Where it is produced
Sec. 42(C)(5)) ._ property - produced
without, sold without

Interest Income .
Residence · of the
debtor
MEM:Q~YAI o·
\ I
s., Bedll Urwwlity College d law - RGCT Bar Clpe,atione Cente<
Type of income Factor considered
Dividends:
From Domestic Corporation - Income within the
Philippines
From Foreign Corporations - Income is partly
within and partly without if 50% or more of its
gross income for the three (3)-year period ending
with the close of its taxable yea_ r preceding the
declaration of such dividends or for such part of
such period as the corporation has been in
existence is from sources within the Philippines;
Income without the Philippines if less than 50%
of its gross income for the three (3)-year period
ending with the close.of its taxable year preceding
the declaration of such dividends or for such part
of such period as the ·corporation ·has been in
existence is from sources within the.Philippines
Rents Location of property
Royalties (eg. Patents, Where property is used
copyrights, etc.)
Sale of real property Location of property
Sale of Shares of Stock:
Of Domestic Corporations - Income -within the
Philippines, regardless of where the share i~ sold
Of Foreign Corporations - : irrespective-of ·.the place ·of sale or issue and
If sa1e is m·ade within the Philippines: ·Income .
.within the Philippines · documents were sold (Air Canada v. CIR, G.R.
If sale is made without the Philippines: lnc;ome
without the Philippines
SPECIAL CONS_IDERATIONS
SOURCES OF OTHER INCOME
1. Labor Performed Abroad
The important factor which determines the
source of income of per~ona• seryices is not the
residence of the payor, or the place where the
contract for service is entered into, or the place
of payment, but the place where the services
were actually rendered (CIR v. Baier-Nickel,
G.R. No . 153793, August 29, 2006).
2. Income of Se~man
In case of income of Filipino seamen working -on
board foreign vessels that touch Philippine ports
to load and unload cargoes, their services are
considered rendered partly within and partly
without the Philippines (BIR Ruling No. 03-76
dated May 27, 1976).
Thus, the situs of the income of seamen is not
determined based on the citizenship of the vessel
47
in which they are on board. Income Is
considered earned In the place where the
service was actually rendered and as such
may be considered as rendered where the
vessel is docked for the purpose of rendering
services (BIR Ruling 01-61 dqted January 6,
1961). .
3. Foreign Airline Company Selling Ticke~s
An offline carrier (any foreiijn air carrier not
certificated by the Civil Aeronautics Board, but
who maintains office or who has designated or
appointed agents or .employees in the
Philippines, who sells or offers for sale any air
transportation in behalf of said foreign air carrier
and/or others, or negotiate for, or holds itself out
by solicitation, advertisement; or otherwise sells,
provides, furnishes, contracts, or. arranges for
such transportation) is considered a resident
foreign corporation "doing" or "engaging in" or
"transacting" busines.s in the .Philippines and Is
,_
taxable under Sec. 28 (A)(1) of the NIRC on its
income derived frorn sources within the
. Philippines (Afr Canada v. CIR, G.R. No.
169507, January_ 11, 2016). .
·· · under seJ. 28 (A)(3)(a) of the NIRC, the tax of
two and hne-half percent (2 1/2%) of Gross
Philippine Billings attaches only when the
carriage of ~rsons, excess baggage, cargo,
and mail originated from the Philippines in a
cont!f,uo4s and uninterrupted flight,
the "plac.e'.o(payment of the ticket or passage
~o. 169507, January 11, 2016) .
., SUMMARY OF TAXABLE INCOME
ON (BASED ON SOURCE) FOR EACH
TAXPAYER
!¥i1~l~~~~1~0~\·) 2ftf}r~;mi~~~W"~,_/': .}f:'.
~-~!_ -~:,~;i:.~~19~~7~· -·:~ ~,- ·.:
..,Citi~e.n1i,ot > the , All. income derived from
': P~ilippine_s, sources within and without
;:'residing _therein the Philippines
:7..:.. .:. ;.~- - ._;·r· .
Only on income derived from
'
• Non-resident
citizen
.
- ..
within the
, , .
•,lhdividu_a.1 ~jtiz~n Only on income from sources
; ofthe Philippines , within the Philippines,
'who· . is . workirig : provided, that a seaman
. and .· · . . deriving : who is a citizen · of the
income .. ' .. from : Philippines and receives
abroad as an'· compensation abroad as a
Overseas·· member of the complement
Contract Worker · of a vessel engaged
exclusively in international
 INCOME TAXATION
Taxation Law

·Taxp_
ayer in a country is · considered
(BANGGAWAN, Income Taxation, supra at 71).
trade shall be treated as an
overseas contract worker KINDS OF INDIVIDUAL TAXPAYERS
1. Resident Citizen (RC)
- a citizen of the Philippines residing therein,
Only on income derived from unless he qualifies as a non-resident citizen
within the under Sec. 22 (E) of the NIRC.

The following are the . Citizens ·of the

Philippines: (CFBN)
income _derived from a. Those who are citizens of the Philippines at
sources within and without
the time of the adoption of the 1987
the Philippines ·
Constitution (i.e., February 2, 1987);
Only on income derived from b. fhose whose fathers or mothers are citizens
within the of the Philippines;
c.- Those born Before January · 17, · 1973
(effectivity of 1973 Constitution), of Filipino
mothers, who elect . Philippine citizenship
upon reaching the age of majority; and
·, d. Th9se who· are Naturalized in accordance
(NIRC, Sec. 23) with' law (CONST., Art. IV, Sec. 1).

.------------·-·.r______
, _._ . 1
#.
~-

.
\

,,,.- ·
. ,. \ •

NOTE: Citiz~ns of the Philippines who marry

aliens ·shall retain their citizenship, unless by their
CLASSIFICAT,I ON OF act qr omiss1on, they are deemed, under the law
TAXPAYERS , ' to haye ren~~n9e~ .i,t (CONST. , Art. IV, Sec. 4) .
.__ _ _ _ _ _ _ _ _-_ _ _ _ _
1 -_
- --....,.
- ·- Residence
' -_ ,_, ·. *··
- itris
j
the permanent
,.
home, the place to which, 1,._ ,.. • • '
when.ever absent (or business or pleasure, one
TAXPAYER _ _ intends to 'return :(Saluda, Jr. v. American

-
I ., -, {
<J.· '· : · ,_,
Any person subject to tax in,pose d by Titje.)I of the • , , ·-. Expiess International, Inc., G.R. No. 159507,
NIRC (NIRC, Sec. 22 (N)). 5!_!11)9, 2006) .
r •
.,i _
The term "perso~" means a individual , aJtrus~. ->·,: _2fa ;'Np°n,;.~esident Citizen (NRC) .
estate, or corporation (NIRC, Sec. 22 (A)) . · <
1 ,- • -Y <.k citizen of the,--Philippines who: (PIMP)

..__ 1 -. :_:;:-~ ::-Esta lis~es to the satisfaction ·of the

SlGNIFICANCE OF KNOWING..t, 1THE ;; . , \ Comm ssioner the fact of his fhysical
CLASSIFICATION OF TAXPAYERS 1 1\' ·»-- presence abroad with a definite intention to
...;It;_.-is-im-po_rt_a_n_t_t_o~k-no_w_t-:-h-e---:-d:-::iff:-e-re-n-:-t-g-ro__u....,p~s~of .~ -;! .,. -·
reside therein; .
taxpayers in order to determine what gross incomes b. Leaves the . Philippines during the taxable -
are to be recognized for tax purpose~. the exclusions year to reside abroad, either as an Immigrant
from their gross income, the exemptions, the or for employment on a permanent basis (i.e.1 ,
allowable deductions and the applicable tax rates (2- Overseas Contract W~rkers (OCW) or
A DOMONDON, supra at 134). Overseas Filipino Workers (OFW)) (R.R.
No. 1-2011, Secs: 2 and .3));
INDIVIDUAL TAXPAYERS NOTES:
General Classification .Rule for Individual i. NRC under. subsection (b) shall b~
Taxpayers: · . . considered as RC for the taxable year i!'I
1. INTENTION: The intention of the taxpayer which he departed from the Philippines
regarding the nature of his stay within or outside with respect to his income derived from·
the Philippine shall determine his appropriate the beginning of the said taxable year
residency classification. The taxpayer shall until the date of his departure from the
·submit to the CIR the BIR documentary proofs Philippines. ·
. 'indicating such intention; and ii. Taxpayer should only be treated as NRC
2 LENGTH OF STAY: In default of such for the taxable year in which he
· documentary proof, length of stay of an Individual departed from the Philippines after his
. departure.
 \ I .
MEM-Q~Y:Ai D .
Sen Seda I.Jrw.9lly College rA Law - RGCT Bar Operatlona c«,tar
iii. An individual taxpayer may be both a
resident and a non-resident in one
· ·taxable year and the determination if one
is resident or non-resident is done in a
year-to-year basis.
c. Works and derives income from abroad and
whose employment thereat requires him to
b~ physically present abroad Mo~t of the
time during the taxable year; and
NOTES: . abroad and who do not have the :intention to
i. To be considered physically present .
abroad · most· of the time during the
taxable year, a contract worker must
have been outsi~e the Philippines for
not less than 183 days during such
_taxable year (R.R. No. 1-79, Sec. 2) .
ii. Citizens who work outside the
Philippines for at least_183 days in a
taxable year due to a contract ot . :~;
employment with · a Philippi~e~: -~1. ·
employer are not . considered n.on:.' :[~
resident citizens because they are :noL · ~£1!
considered employed abroad (ING~SJ .': <¾;; ",? P.v'!rseas Contract Worker (as NRC)
Tax Made Less 'Taxing: A Revie_w el witH ·· · ·
Coda~s and Cases (~.~f 8f;' p.45, ,;~
[hereinafter, INGLES,· Rev,ewer}). '-t'_ • · •
· · - ._·:· 17· ,-•. ·'
iii. In case of a leap ·year (Wliic~ ~ i~_
ts of
366 days in one y~r), a t~p. yer who~--
has been outsid ·"· l')Qp·~n,s!c;le \!b.e
Philippines for ex~tly 18J ., ~ ays.:.;·i_s1
considered as a RC f()Jl_•~~.~me he waf
within the Philippines and.an NRqforthe
days he was without for ~r~ltle tax
purposes. -;'· · . --~ ~5:.'i!'- ·.,.. ,.,,. '., Ali1lippine
· ~! · •-' ·11
Generally, a- citizen tfas· ohti;oni tax
status during the calendar year,'eith"er as
a resident or a non-resident citizen.
However, it _is possible -for a citizen to
have dual status (resideAt and non-
reside11t) during -a calendar year for
income tax purposes: He may be treated
as a resident citizen and at the same
time a non-resident· citizen· during the
same taxable year; if at the beginning of
the year, he derives compensation
and/or business or professional income,
and sometime later daring the same
year, he departs from the Philippines as
an immigrant, permanent worker, or a
qualified non-resident citizen o~ vice
versa (MA MALA TEO, ·. Reviewer, supra
at 107). '·
d. Has been freviously considered _as a non-
resident citizen and who arrives in the
"' 49
0
.
· Philippines at any tirne during the taxable
year to reside permanently in the Philippines
shall likewise be treated as a non-resident ·
for the taxable year in which he arrives in the
Philippines with respect to his income
derived from sources abroad until the date
of his arrival in the Philippines (NIRC, Sec.
42 (E)). : . .
NOTE: The listed personnel of-a d_omestic
corporatior:t, who are temporarily assigned
reside· at the places where they are
delegated to, either as immigrants or on a
permanent basis, cannot be cQnsideced as
non-resident citizens. Hence, . the'ir
compensation during their period of
assignment cannot be ~nsidered as income
derived abroad since they are not rendering
service for _another . corporation; . but ·
compensation derived from services
rendered under the ER:- EE relationship. with
the DC (BIR Ruling No. 517-2011,' December
22, 2011) .
,
_
· ·~ -a FJ1ipin0 citizen employed in a foreign country,
commonly ':eferred to as OFW, who is physically
present in a · oreign country as a consequence of
his empfoyment thereat ·(R.R.,·No. 1-2011, Sec.
2). • 1t · ·
1
T be cqn~i<lereci s an OCW: (FREa)
a. I-le ,m1,1sf: bif physically present in .a foreign
country as a consequence · of his
employment;
"~t?6 . ·
. ~-e must be duly Registered as such with the
. Overseas · Employment
Administration (POEA) and , issued · with a
valid ., Overseas Employment Certificate
(OEC); and . . ,
c. His salaries and wages must be ,paid by an
smpldye~1broad and .not borne by any entity
or person in the Hhilippines (R.R. No. 1-2011,
,, Sec. 2 -(1)). . , , •
NOTE: An OCW or OFW.'s income arising
out of• hi~ -~ver_seas ·employment is · exempt
from income tax. However; Jf an 9cw or ·
OFW ha~ income . earnings from. business
activities.or properties within the Philippines,
such income earnings are subject to income
tax (R.R. No. 1-2011; Sec. 3). .
A seafarer or seaman is considered as:an OCW
, provided_ the following requirements are rriet
(CAIRO): .
a. A ~iti~en of the Philippines;
 006
INCOME TAXATION·
. Taxation Law

b. Receives compensation for services The aggregate period of more than 180 days
rendered ~broad as a member of the provided under Sec. 25 (A) (1) of the NIRC must
complemen t of a vessel; be within the same taxable year for an alien to be
c. Such vessel is engaged exclusively in considered engaged in trade or busin~ss.
!ntemationa l trade (NIRC, Sec. 23 (CJ) ;
d. He must be duly B,egistered as such with the The term "trade or business" includes the
POEA; and performance of the functions of a public office
e. He has a .valid Overseas Employment (NIRC, Sec. 22 (S)) but excludes performance of
Certificate (OEC) and a valid Seafarers services by the taxpayer as an employee (NIRC,
Identification Record Book or Seaman's Sec. 22 (CC)) .
book issued by the Maritime Industry
Authority (MARINA) (R.R. No. 01-2011, Sec. 5. Non-Resident Alien Not Engaged in Trade
2) .
or Business (NRA-NETB)
- a non-resident· alien who shall come to the ·
3. Resident Allen (RA) Philippines and stay for an aggregate period of
- an individual whose residence is within the one hundred eighty (180) days or less during
Philippines and who is not a citizen thereof any calendar year (R.R. No. 8-2018, Sec. 2 (I)
(NIRC, Sec. 22 (F)). issued on February 20, 2018).
An alien is considered a resident of the
Philippines for income tax purposes if: - • •··
-CO~PORATIONS
a. He is not a mere transient or s()journer (R.R. . 1~ Domestic Corporation (DC)
N 2-40 S 5
:1 ,.. - , ' •-· L \;- / a ;corporation ..created or organized in the
b. H~- has n~ d:~ni{~ intention.,as ~o hi s sta~ in P.}li~iP.Pi .e{ )r under its laws (NIRC, Sec. 22 (CJ) .
the· Philippines; or · ,. ,, , i • ~-~- /\,. '
l ,,..,...., 1- 2. . Res,iae' t' Foreign Corporation (RFC) ·
NOTE: An alien who . taye1· in the ,· - a corpor;:tti' n . which is not domestic but is
Ph·1· · for more t h an o,re yea as f th
11ppmes 9 e ,, - engag ed in:\tra
, 0 \. or business in the Philippines
end of the taxable yea -ts a reslcfenn il en -,---- --(NIRy, s_ec. 22S(f-!)) .
(BANGGAWAN, Income Taxation, supra at I . ·
71.). . , • : The term "doi gJ:ll}siness nincludes:
- 1 • a. Soli_citing;-ordel s, service contracts, opening
c. His purpose is of su , n8\4r, .J ~atan--,. ..--- -l9J!ices, ~he .er called "liaison" offices or
extended stay may tbe cessart for its 1 · / _:branch~s. ,
accomplishment and to tha end, '" h.,e ~ien • . / b~,-j PP~i~ting_ represe~!ati~es or distri_ butors
ma_~es. his home . temporarily 'iry ~ \tle> J/ (/J\, / c!Om Lc1led m the P~1hppmes or who, m ~ny
Ph1hppmes (BIR DA-/TAD Rulin?tNQ. rt_§SIJ6,;:-;_-r ~\ _ \ calendar yesir, stay m the country for a penod
dated December 12, 2006; 2 CASASOfA, ' ~· '', _·~ -: or p_eriods totaling one hundred eighty (180)
supra at 86). / {. ,- __ ,. -days or more; · ·
_,,. )J ·\ : , c:\ Pa~ipating in the management, supervision
Mere Intention to Change his Residence is I
Not Enough to Change Residency of an Alien
11: r control of any domestic business, firm,
entity or corporation in the Philippines; and
An alien who has acquired residence in the d. Any other act or acts that imply a continuity
Philippines retains his status as a resident alien of commercial dealings or arrangements, and
until he abandons the same and actually departs contemplate to that extent the performance
from the Philippines (R.R. No. 2-40, Sec. 6) . of acts or works, or the exercise of some of
· the functions normally incide11t to, and in
4. Non-Resident Allen Engaged In Trade or progressive prosecution of, commercial gain
Business (NRA-ETB) or of the purpose and object of the business
- an individual whose residence is not within the organization (R.A. No. 7042 otherwise
Philippines and who is not a citizen thereof but known as Foreign Investments Act of 1991,
doing business in the Philippines (NIRC, Sec. 22 · _Sec. 39(d)) .
(G)).
- In order that a foreign corporation may be
A NRA who shall come to the Philippines and regarded as doing business within a State, there
stay for an aggregate period of more than one must be a continuity ot conduct and . intention to
hundred eighty (180) days during any calendar establish a continuous business, such as the
year shall be deemed a NRA-ETB (NIRC, Sec. appointment of a local agent, and not one of a
25 (A)(1)) . t~mporary character (CIR v. British Overseas •
 \ I
MEM-0-RY AID
s., Beda \kMrWlly CQlege d Law - RGCT Bar ()peratione Cent8r
Airways Corp., G.R. Nos. L-65773-74, April 30,
1987).
An Offline International . Air Carrier Selling
Passage Tickets In the Philippines, through a
General Sales Agent, is considered as a ·
Resident Foreign Corporation
An offline carrier has appointed an agent in ttie
Philippines, through whom, it sells or offers for
sale any air tra_
nsportation is undoubtedly "doing
business" or "engaged in trade or business in the
Philippines", therefore considered resident
foreign corporation (Air Canada v. CIR, G.R.
No. 169507, January 11, 2016).
3. Non-Resident Foreign Corp~ration
(NRFC)
- a corporation which is not domestic and not
engaged in trade or business in the Philippines
(NIRC, Sec. 22 (i)).
Corporation Includes (PJ-JAI):
a. fartnerships, no matter how created J)r-
organiz"ed even if the partnership was
created pursuant to law or not. Whether
stock and profit or non-stock, nonprofit, .it is
still deemed a corporation because Of the • • ,
possibility of earning profits ·trom ~sources .t .
within the Philippines; · ··
b. Joint-stock companies; . _.., . ,.. ·
c. Joint accounts (cuentas en•-piJrticipacion);·
d. Associations; and
e. !nsurance companies (N_l~C. Sec, _2,_2 (BJ) .
...
Corporation excludes: .
a. General Professional Partnerships (GPPs)
(Please see discussions on the, Kinds of
Partnerships below); and .~
b. Joint Venture (JV) or consortium formed for
the purpose of: · · - :_:
i. Undertaking construction projects; or
ii. Engag.ing in petroleum, coal, geothermal
and other energy operations pursuant to
an operating consortium agreement
under a service contract with the
Government (NIRC, Sec. 22 (BJ).
Joint Venture and Consortium
It is . generally understood to mean an
organization formed for the execution of a single
transaction and is thus of a temporary nature.
While a corporation cannot generally enter into a
contract of partnership unless ·authorized by law
or its charter, it has been hellj that it may enter
into a joint venture which is akin to a particular
partnership (Phi/ex Mining Corp. v. CIR, G.R. No.
148187, April 16, 2008 citing Aurbach v. Sanitary
Wares Manufacturing Corp., G.R. No. 75875,
December 15, 1989).
Factors to Constitute a Jo.int Venture
The follow_ing are the essential factors to
constitute a joint venture:
a. Each party making a - contribution, not
:necessarily of capital but by way of services,
skill, knowledge, material or·money;
b. Profits must be shared among the parties;
c. Profits must be a joint proprietary interest;
d. Right of mutual control over -the subject
matter of the enterprise; and
e. Usually, there is a single business
transaction (MAMALA TEO, Income Tax,
supra at 41-42).
NOTE: To be a tax-exempt JV, the following
requirements must be satisfied: (URL-L)
i. For the Yndertaking of a construction ·
project;
ii. · Should involve . joining or pooling qf
Resources by licensed local contractors
that is, licensed as a general contractor
by the Philippine Contractors
Accreditation Board (PCAB) of the
Department of Trade and Industry (DTI);
iii. The J:ocal contractors are engaged in
90nstruction business; and ·
iv . . The JV itself must likewise be cfuly
J:icensed as such by the PCAB of the DTI
(BIR Ruling No. 475-2014, November
· 26 2014; R.R. No. 10-2012; Sec. 3)
Each of the co.:Venturers to the JV 'agreement is
sep~rately lic\ble for ·the payment of the
corporate income _tax on the profits distributed to
them by the joint venture. Other joint ventures,
although not formally incorporated, •are taxable
as ordinary corporations (1 DE LEON, The
ationa/ Internal Revenue Code Annotated
(2015), p. 111 {hereinafter 1 DE LEON]).
ESTATES AND TRUSTS
Estate·
- the mass of properties. left by a deceased person
(DIMAAMPAO, Income Taxation, supra at 152).
NOTE: The status of the estate is determined by the
status of the decedent at the time of his death. So, an
estate, as an income taxpayer, can be a citizen or an
alien (Id.) .
Classification of Estates:
1. Estate under judicial administration
- settlement of which is the object of judicial ·
testamentary or intestate proceedings; and
NOTE: Income of the estate under judicial
administration is taxable under Sec. 60 (A)(3) of
the NIRC to the fiduciary or trustee.
 . '

52
INCOME TAXATION
"J:axation Law

2. Estate not under judicial administratiol') distributed to the beneficiaries or

- settlement of which is not the object of judicial
testamenta_ry or intestate proceedings (R.R. No.
2-40,, Secs. 209 and 210). ·
NOTE: Income of the estate not under judicial
administration , since no • executor or
administration , is taxable to the heirs and
beneficiaries. Each heir and beneficiary shall
include_said income (as distributive share of the
net income of the estate) on his or. her income tax·
return .
Taxes Payable upon Death of a Person .
When a person who owns property dies, the
following taxes are payable under the provisions
of the income tax law:
a. Income tax for individuals (to cover the
period beginning January to the time of
death) (NIRC, Secs. 24 and 25, as amended •
by TRAIN Law); and
b. Estate income tax if the estj!te is ;under ,
administration or judicia· -settlement
(NIRC, Sec. 60 (A)(3)) . .-' °/ ' .. .' -.
. .: ; . , --
NOTE: Estate income tax; under sic. 60 ·of the
NIRC is different from the imposition 1of estate '
tax. While the first is in tpe nature of income tax,
the latter is a transfer ' t~x imposed · on- the -
privilege to transfer the-. properties of t he
deceased to his heirs . · ·
-· \' . _
Trust - a right of property, reahor pe~ onal, held j· ·.--PARTti ERSHIPS
by one party for the ben_etit of another{ tfiat here .
is a fi_duciary relation . between · trus)e~ a nd a .
cestw que trust as regards-,certain opeH~:,r eal,
accumulated (NIRC, _Sec. 60 (A)(1), (A)(2)
and (4)) .
2. Revocable Trust .
- a trust in . which the power ·to revest in the
grantor title to any part of the corpus of the trust
is vested in the grantor himself or any person not
baving any substantial adverse interest in the
trust corpus or in its income; and ·
NOTE: The income of r~vocable trust revested to
the , grantor shall be included in computing
taxable income of the granter (NIRC, Sec. 63).
3. · Employee's Trust
- trust which forms .part of a pensio.n, stock
bonus or profit - sharing plan of an employer for
the benefit of some or all of his employees.
-:- ·· !',IOTE: Income tax shall not apply to
i :imployee's trust (NIRC, Sec. 60 (f3)).
lncom ·of
; /' ' 9
tate a·nd Trust is tax like an
lndiv.J,duat °Falfpayer
T.~e tax ble iii m of the estate or trust shall be
computed in the ame (Tlanner and on the same basis
as in the case of an 1r\.dividual (NIRC, Sec. 60 (A)).
-·-- - - ..i . , ..
Please refer to t e sekarate discussions on Estates
and Trusts on pages.-1 9 to 183.
' 11;--..-,
I, . •
1. ·_ G~neral Professional Partnerships (GPP)
/ ,P ->·
•

Jo~~ed by . pe ons for the s_ole purpose of

personal , money or choses .in action (Phifjpp(ne,, -:-·-:.,.::' :.-_eYerc~~irig their .90~mo~ pro~~ss10~ an~ no ~art
National Bank v. Court .of Appepls and BR .'Mata...!-·~_• ?f the income~of w~1ch·_1s derived from engaging
and Co., G.R. No. 97995, Januaty__2,f, J ~9y)~ . . _-"'.' 1~ ~ny t~ad;.,or business (NIRC, Sec. 22 (8)) .
. ..._. ' ,( ,..
Classification of Trusts: . , Tax Implications of the Income of GPP·:
1. Ordinary Trust a:· ~A GPP is not considered a taxable entity ·
- the income and corpus of the trust do not .. for income tax purposes since it is only acting
revert to the grantor. It is any of the following as a "pass-through" entity (R.R. No. 8-2018,
trust: - Sec. 8) .
a. A trust where the income accumulated · in b. It is the individual partners who shall be
trust for the benefit of unborn or subject to i'ncome tax in their separate and
unasc~rtained person or persons with individual capacities (R.R. No, 8-2018, Sec.
contingent interests; · 8). :
b. A trust where the income accumulated or c. For purposes of computing the distributive
held for future distribution under the terms of share of the partners, the net income of the •
the will or trust; ·· ~PP shall be computed in the same manner
c. A trust where the income which is to be as a corporation (R.R. No. 8-2018, Sec. 8;
distributed currently by the fiduciary to the NIRC, Sec. 26) .
beneficiaries; d. The GPP is still obligated to file a return for
d. A trust where the income collected by a ~dministrative purposes, but the partners are
guardian of an infant which is to be held or hable for the payment of income tax in their
distributed as the court may direct; and · individual capacity (Tan v. Del Rosario, G.R.
e . . A trust where the income which, in the No. 109289, October 3, 1994).
discretion of the fiduciary , may be either
 \ I
.
MEM:Q~Y AID
Sin Beda College of law • RGCT Bat ()peraUona CentM
· 53

2. Taxable Business Partnership

- All other partnerships, no matter how created
or organized, which include unregistered joint
ventures (except tax-exempt JV or consortiums)
and business partnerships, are subject to the
corporate income tax (2 CASASOLA, supra at
116). .
No. 2-98 as amended by R.R. to a final tax as
No. 11-2018). follows:
Tax Liability of a Taxable Business
RC, NRC, RA-
Partnership
NOTE: 10% _ (NIRC,
They are taxable as an entity subject to normal
Under Sec. 2 of R.R. No. 11- Sec. 24(8)(2);
corporate income tax (Id.) .
2018 issued on January 31, as amended by
2018, income payments to TRAIN Law);
The partnership itself is subject to corporate partn·ers of general NRA-ETB - 20%
taxation while individual partners are considered professional partnership is (NIRC, Sec. 25
stockholders, and therefore, profits distributed to subject to 15% creditable (A)(2)); or
them by the partnership are taxable as dividends withholding tax; if the gross NRA-NETB
(Id. at 117): income for the current taxable 25% (NIRC,
year exceeds ~720, 000; and Sec. 25 (B)) .
The taxable income for a taxable year, after 10%, if otherwise.
deducting the corporate income tax imposed
therein, shall be deemed to have been actually or However, under R.M.C. No. 1-
constructively received by the partners in the 2018 issued on January 4,
same taxable y1:3ar and shall be taxed to them in 2018, due to the 8% Income
their indiv.idual capacity, whether actually Tax Rate Option given to Self-
distributed or not (NIRC, Sec. 73 (0)). Employed/ , · Professional
lndividua 'iri 'the TRAIN law,
NOTE: When the NIRC includes "partnerships" income payrnents to partners
among the entities subject to the tax on of gen~ral professional
"corporations", it must allude to organizations partnershj is said to be
which are not necessarily "partnerships" in the , subjecte? t~ 8°.('o creditable
technical sense of the term. As defined in the
NIRC "the term corporation includes partnership,
.l withholding tax.
": . -: .. -
no matter how created or organized." This The 'pr~ceding - • paragraph,
qualifying expression clearly indic~tes that a joint however~ is qualified by Sec. 3
venture need not be undertaken in any of the (C) ,of R.R. No. 8-2018 issued
standards, form, or conformity with the usual on .January 25, 2018 which
requirements of the law on partnerships, in order 'provides;that partners of a GPP
that one could be deemed constituted for the by virtue of their distributive
purposes of the tax on corporations (Evangelista share · from GPP which is
v. Collector of Internal Revenue, G.R. No. L- already net of cost and
9996, October 15, 1957). expenses cannot avail of the
8% income tax rate option (See
TAX LIABILITY OF A PARTN.ER IN GPP related discussion under
AND TAXABLE PARTNERSHIP ON THE Optional Standard Deduction
(OSD) of GPP).
SHARE IN NET INCOME/LOSS

If net loss, it may be taken by the individual partner

in his return ol income.

3. Co-Ownership
- There is co-ownership whenever the
ownership of an undivided thing or right belongs
If net income, it shall form part If net income, it to different persons (CIVIL CODE, Art. 484).
of the gross income of each shall be treated
partner -based on his agreed as dividend and GENERAL RULE: Co-ownership is~ tax-exempt
ratio subject to 10%/15% shall be subject entity.
creditable withholding tax (R.R.
 54. INCOME TAXATION
Taxation Law

NOTE: It is not -taxable when the activities .are
limited to the preservation of the co-owned
property and the collection of the income
therefrom. Each co-owner is taxed individually
on his distributive share (Ona v. CIR, G.R.. L~
19342, May 25, 1972).
regardless of the amount of gross
sales/receipts, and to a,taxpayer who is subject
to Other Percentage Taxes under Title V of the
Tax Code, as amended, except those subject
under Section 116 of the same Title (R.R. No. 8-
2018, Sec. 3(C).

EXCEPTION: Co-ownership is considered as a 4. Final Withhol~in·g Tax (FWT} on passive income

separate taxable entity if co-ownership is subject to final tax; or;
converted into an unregistered partnership (Ona 5. Capital Gains Tax (CGT} on capital assets
v. CIR, G.R. L-19342, May 25, 1972) like when subject to capital gains. tax.
like when the income of co-ownership is invested
by the owners in business or other income- GRADUATED RATES OF 20% to 35%
producing properties ot when a co-ownership is Taxable income subject to graduated rates of 20% to
formed or established voluntarily, or upon 35% refers to those items of income, other than
agreement of the parties. passive income and capital gains which are subject
to final tax (and capital gains tax}.
NOTE: In the exception, Co-ownership should be
subject to income tax as a corporation (Ona INCOME SUBJECT TO GRADUATED
v. CIR, G.R. L-19342, May 25, 1972).
RATES:
,. • l
The Division of Property upon Dj,ssolution of , i 1- pon:,~ens_ a tion incom~; .
Co-Ownership by Agreement isrblO'l ~ubject '-.. - 2 . .1Bus1_np s ,. ~nd profes~1onal income;
to Capital Gains Tax . .,, .,.. _,/--" . Cap1~l,ga1ns not subject to final tax;
_The transfer of title to co-a -ne ' [s no·t .sale;- --- ~-4- Pa sive t subject to final tax; and
9
barter, exchange or other/.:1 djs..positi~fl ~--. her 1
contemplated by law subject to he imlfosition:=of , • '
the tax (BIR Ruling No. 145-98; Oct. r 9, 1998). _ · a. NRA-NETB .·~ J1ot subject to the ~radua~ed
The act of partitionin_g ~- common)y owned- -·-·-··--. __r,te_s. All. income . (except · capital gaI~s
property to e~ch co-own~r:st.iould_not ~e treate_ d _ _ '. ,, ~JJbject 9 eapltal ~a.ms tax} re~1v~d by h1_ m
as a taxable even! as : It Is nothing ~ ore than , . . ._ .i ff om. sourcE:s ~ ithi~ the Phth~pmes a~e
· terminating the co-ownership_ by making each co- · P~fl~ I,d~red a~ 9 oss income subject to 251/o
owner owner of specific ip~n ific:1ble p6,rt!Q'1 oru ni( ; - · _- .... j ~~} withholdi g tax (NIRC, Sec. 25 (BJ) .
1
of the property (BIR R ling No. 15~-99 dated i _. :. ,,/_ ·..:: · 1 . . ~ I , H. . f
October 6, 1999). \ ·• ·-.:- 5
. ,,,- ': \~:1pec1a 1 ·. c asses o emp1oyees (~.g.,
1
' '· · ·.' ".-, ...· managerial employees of Regional
• <:_:::,
· .:.,-....___ •·· ~- _ - . Headquarte (RHQs)/Regional Area
,
.. - - - - - - - - - - - - - - - •'- -.. . '/: :__\ i.---.}_.,.HefJdqua~rs (RAHs} are subjected to a
TAX ON INDIVIDUALS"" ,·-··· _ _ l?refete al tax rate of 15% imposed on their
. . _
1 1
\ "\ gro ncome (NIRC, Sec. 25 (CJ, (D) and
1
1: • _ • ,.(E), as amended by TRAIN La~)-

NOTE: The 2020/2021 Bar Examination Taxation NOTE: The preferential tax treatment shall not ·
apply for employees of RHQslRegional
Law Syllabus does not include the Corporate
Operating Headquarters (ROHQs), Offshore
Recovery and Tax Incentives for Enterprises
Banking Units (OBUs}, and petroleum service
(CREATE) Act which took effect on April 11, 2021 (.15
contract9rs and subcontractors. They shall now
days after its publication on March 27, 2021), but for
be subject t9 the regular income tax rates, (R.R.
purposes of discussion, CREA TE Act was included in
No. 8-2018, Sec. 4 (CJ; NIRC, Sec. 25 (F), as
the making of the Memory Aid.
~mencfed by TRAIN Law).
APPLICABLE TAXES:
GRADUATED TAX TABLE
1. Effective 2018 to 2022, graduated rates of 20%- Effective 1 Janua 2018 unf/ D mber 31 2022
35% on their taxable income;
Income But Less Of Excess
2. 0% or exempt on income less than ~250,000; Tax Due Plus over
Over Than
3. Option to be taxed at 8% on Gross
Sales/Receipts for those. who fall below the VAT ~?50,000 0% - - -
threshold;
~250,000 ~400,000 20% 19250,000
NOTE: The option to be taxed at 8% is not ~400,000
available to a VAT-registered taxpayer,
~400,000 ~800,000 ~30,000 25%
-
 \ I 0. .
MEM:Q~Y AID
s.,, 8edll Colage of law · RGCT Bar 0peretlone Centar
55

t-2,000,000 '
t-800,000 t-130,000 30% t-800,000 DIVIDENDS
t-2,000,000 t-8,000,000 t-490,000 32% i-2,000,000
Any distribution made by a ·corporation to its
shareholders out of its earnings or profits and payable
t-8,000,000 t-2,410,000 35% t-8,000,000 to its shareholders, whether in money or in other
(NIRC, Sec. 24(A)(2), as amended by TRAIN Law) property (N,IRC, Sec. 73(A)).

Effective 1 Jan Kinds of Dividend Income:

2023
1. Cash Dividend
Income But Less Tax Due _Plus • ,Of Excess - it is dlvid!:md payable in cash;
Over Than Over :::

i-250,000 0% . 2. Stock Dividend

'
- it is dividend payable in unissued or increased
i-250,000 t-400,000 15% t-250,000 or additional shares of the corporation instead of
in cash or property out of the unrestricted
t-400,000 t-800,000 i-22,500 20% t-400,000
retained earnings of the corporation;
t-800,000 i-2,000,000 t-102,500 25% t-800,000
3. Property Dividend
i-2,000,000 t-8,000,000 t-402,500 30% i-2,000,000 - it is dividend distributed to the stockholders in
the form of property, real or personal;
t-8,000,000 i-2,202,500 35% t-8,000,000
(Id.) . Liquidating Dividend
- tt)ese are dividends which ·are actually
FINAL TAX distributions of the assets of the corporation upon
"Income subject to final tax" refers to. an income dissolution or winding up of the same; and
which tax . due is fully collected through . the
withholding tax system in the form of final withholding ·.. . 5. Scrip Dividend
tax. Under this procedure, the payor of th.e income . - it is dividend in the form of a writing or
withholds the tax and remits it to the gov~mment thru certificate' lssued _
to. a stockholder entitling him to
the BIR as final settlement of the income tax due on the pay en f money, stock, or other benefit at
said income. The recipient is no longer required to
'
some futu e ' time (DE LEON, The Corporation
include the item of income subje,qted to "final tax" as Code of the Philippines (2013), p. 411-415}.
part of his gross income in his income tax returns (2 I
Cash Anti Pro·perty Dividends
CASASOLA, supra. at 88-89) . >-'
Final Tax Rates:
Passive incomes are truced finally at.source (CIR v.
1. On:
Philippine Airlines, Inc., G.R. No. 160528, October 9, Cash · and/or property dividends from a
2006). ·, ,, -: domest_ lc corporation or from a joint sloe~
com any, .insurance or m·utual fund
companies and regional operating
PASSIVE INCOME headquarters of multinational companies;
Income derived from any activity in which' the b. Share in the distributable net income after tax
taxpayer does not materially participate (2-A of a taxable or business partnership; and
DOMONDON, supra at 409) . c. Share in the net income after tax of an
association, a joint account, or ·a joint
Passive Income Subject to Final Tax: (DRIPP) venture or consortium taxable as a ,
1. Cash and/ or Property Qividends (N/RC, Sec. corporation of which he is a member or co-
24(8)(2), as amended by TRAIN Law) ; venturer:
2. fioyalties (NIRC, Sec. 24(8)(1), as amended by
TRAIN Law); Final Tax Rates:
3. Interest Income (NIRC, Sec. 24{8)(1), as • Re: NRC, RA - 10% (NIRC, Sec. 24 (8)(2) ,
amended by TRAIN Law) ; . as amended by TRAIN Law). ·
4. frizes and Winnings (NIRC, Sec. 24(8){1), as · • NRA-ETB- 20% (NIRC, Sec. 25 (A)(2)) .
amended by TRAIN Law); and • NRA-NETB - 25% (NIRC, Sec. 25 (BJ).
5. Partner's share from the net income after tax of
business partnership, association, joint account,
joint venture or consortium (NIRC, Sec. 24(8)(2),
as amended by TRAIN Law).
 INCOME TAXATION
Taxation Law

2. On cash and/or property dividends from a FORMULA:

foreign corporation:

Applicable Tax Rates: Gross Income

• RC - graduated rates of 20% to 35% (NIRC, from PH Amount of
Sec. 24 (A)(2), as amended by TRAIN Law). sources . Dividend
• NRC, RA, NRA-ETB (If considered from -------x declare_d by a
sources within) - graduated rates of 20% to Gross Income foreign
35% (NIRC, Sec. 24 (A)(2), as amended by from A(L corporation
TRAIN Law). sources
• NRA-NETB (if considered from sources
within) - 25% based on Gross Income Portion of
(NIRC, Sec. 25 (BJ) . . = Reportable
Dividends
GENERAL RULE: Dividends paid by a foreign
corporation are considered from foreign source (RECALDE, A Treatise on Philippine Internal
and not subject to Philippine tax on the part of Revenue Taxes, (2014), p. 168)
non-~esident citizen and alien recipients (DIZON,
Outline supra at 210). ILLUSTRATIONS:
a. USACO, a corporation organized in
EXCEPTION: Where the foreign corporation California, USA earned 67% of its total gross
meets the 50% threshold {Pre-dom·nance Test]. , r in_come from its Philippine business during
a portion of its dividends will be realed as .• .' • years 2010-2012. In 20·13, USACO paid a
coming from Philippine sourve (NfRC, 'Sec. Pf:10b;000 ·dividend to Mr. NRA, a non-
42(A)(2)(b)) . · • •----- resident alien. Mr. NRA has ~67,000 of
v Philippine ource income as a result of this
The 50.o/o threshold is met,where'jlt least 50% of dividenti fr m USACO (DIZON, Outline supra
its gross income for th three (3)-year period at 210-21(1). l
en~ing with the clo e of -~ tax ble year ---- b. USACO, a foreign corporation was organized
preceding the declaration of such dividends -' in 2008. ffi 009, USACO- distributed a .
or for such part of such1 period as the t-100,000 , divitiend to Ms. NRC, a non-

lJ .
corporation has been ln·e'xistence wa~ derived re~!P~nt citizen. In 2008, 95% of USACO's
from sources within the Pl)ilippipes (Id~). ·. - - - - .--:-· ·- ' gf.oss ·Income was from its foreign business
1
• · • • . <6utside .' Philippines. Therefore, Ms. NRC's
NOTES: '-~ · · • · , '· ..qividend income is all from foreign source
a. If the ·corporation has ly been in _.,.,.-~\- {Income without} and not taxable (Id.).
existence for 2 years , at least 50%{ of ,its , ..t(' • '
gross income for the 2-year perio · ending' L Stock_Dlvuilends .
with the close of its taxable year .rS3~ ding ., GEN~~AL ~OLE:: A stock dividend representing the
the declaration of dividends · sn 6.!,.lld' be .~ transfer , of·.,,surplus to capital account shall not be
derived from sources within the Phfnppines in J /1 b)ect to tax- (NIRC, Sec. 73 (BJ).
order to treat the dividends as coming from
Philippine s~urces (Id.). REASON: Stock dividends, strictly .·speaking,
represent capital and do not constitute income to its
b. It is limited only in an amount which bears the recipient. . Mere issuance thereof is not subject to
same ratio to such dividends as the gross income _ tax as •they are nothing but enrichment
income of the corporation for such period through increase in value (1 DE LEON, supra at 710).
derived _ from sources within the Philippines
bears to its gross income from all sources EXCEPTION: If a corporation · cancels or redeems
(Income Partly Within and Partly Without] stock issued as a dividend at such time and in such
(Id.). manner as to make the distribution and cancellation
or redemption, in whole or in part, essentially
equivalent to the distrib_ ution 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 (NIRC, Sec. 73 (BJ) . · ·
--- \ I

MEM:Q~Y AID
s.,, Bede lJrMIWit)' Colege d '-- - RGCT Bs Operalla\a Center
-
NOTE: For the ex~mptlng· clause tci apply, it is and not to the CGT on the sale of shares ·{BIR Ruling
indispensable that: No. 363-2014, September 22, 2014). ·
1. There is redemption or can~ellation;
,2. The transaction involves stock dividends; ,and . Applicable Tax Rates:
3. The time and manner of the transaction makes it • RC, NRC, RA, NRA-ETB - graduated rates
essehtially equivalent to a distribution of taxable (NIRC, Sec. 24(A)(2), as amended by TRAIN
dividends. Of these, the most important is the L:,aw);
third (CIR v. The Court of Appeals, G.R, No. . '
108576, January 20, 1999). NRA-NETB-- 25% Final tax (NIRC, Sec. 25(8),
. as a1J1ended by TRAI~ Law).
Stock Dividend is Taxable to Usufructuary ·
Under the Massachusetts rule, a stock dividend is NOTES:
considered part of the capital and belongs to the 1. The reckoning poiht is the time of declaration and
remainderman (usufruct); while under the ·not the time of payment of dividends as dividends
Pennsylvania rule, all earnings . of a corporation, are taxable whether actually or constructively
when declared as dividends in whatever form, made received (2 CASASOLA, supra at 90). ·
during the lifetime of the usufructuary, belong to the 2. Tax on income is . different from tax on the
latter (Bachrach v. Seifert, G.R. No. L-2659, October · dividends; therefore, .· there is no double taxation
12, 1950). - (Afisco Insurance Corp. v. Court of Appeals~G,R.
No. 112675; January 25, 19"99) :
The Pennsylvania rule is more in accord with our 3. During liquidation, the transfer of property by"the
statutory laws than the Massachusetts rule. Under- dissoJving corporation to its stockholders by way _
Sec. 16 (now Sec. 42 of the Revised C_ orporation~ .. of liquidating dividend is not a sale subject to
Code) of our Corporation Law, no COrPoration .may· 1Ti
income tax, documentary stamp tax, and
makepr declare any dividend except from the surplus ~~:-:£1
creditable withholding tax (BIR Ruling DA~316-
profits arising from _its business. Any dividend,_~--::' · .• .- 2007, Ma}, 29, 2007; BIR Ruling ·No, 363-2014,
. therefore, whether cash or. stock, represents surplus ·,· · September, 22, 2014).
·profits. Article 471 of the Civil Code provides that the
:;..
. usufructuary shall be ~ntitled to receive all the;·:.'r
natural, industrial, and civil fruits of the property in · • It · is the P,ay ent for the use and exhaustion of
usufruct {Id.). ,,;;· · ,~-• •;,,, · . property s ch s· e.a_mings from · copyrights, ·patents,
--~.
Dividend In Stock ."'z..5 ~- ·>,~-
It is a dividend paid in stock of another corporation. It r ,
-~·.
trademarks, formulas and • natural resources· und.er
lease. ICcovers oolh payments
,; . ...
,. .. ,'
made:
)

is not a stock dividend (R.R. No. 2-40, Sec. 251;' . ·- 1. Under a license; and
DIMAAMAPO, supra at p. 47). Rather, it is a property .2. ,,. Compensation which a person would be obliged
1
dividend. · _-'i · . rto ·pa for fraudulently copying or infringing the
.......
. . ..-,.
,
1
right (Model Tax Convention on Income and on
Liquidating Dividends . tf /:=-<; Capital (2017), Art. 12, par. 2) ·
This represents distribution of all the properfy'
of a
. .
corporation-in complete liquidation or dis~olufion. Royalties is defined as payments of any kind
' . received as consideration for the use of, or the
RULE: Upon surrender by the stockholder/investor of righlto use, of any:
its shares in exchange for cash a~d/or property · a. Patent; ·
distributed by the corporation upon its dissolution and b. Trade mark;
liquidation of all assets and liabilities, the stockholder c. Design or model; ,
shall recognize either capital g·aln or loss. d. , Plan; .
· e. Secret formula or process;
FORMULA: - f. Copyright of literary, artistic or scientific work;
Liquidating Dividends (sum of the ·. g. Industrial, , commercial, · or scientific
cash and the fair market value of , equipment, or for information· concerning
prpperty received) ~xxxx industrial, commercial ; · or scientific
Less: Stockholders cost of experience; or 0· _

investment in the shares h. . Cinematograph films, or tapes for radio or

surrendered · xxxx television broadcasting (CIR v. Smart
Capital Gain (Loss) ~xxxx Communication, Inc., G.R. Nos. 179045-46,
Augu~t 25, 2010). ·
(R.R. No. 06-2008, Sec. 8)

The capital gain or loss derived th~refrom is subject

to regular Income tax rates under the -Tax Code,
 INCOME TAXATION
. 58 Taxation Law

lenders is not valid because it completely

FINAL TAX RATES: disregards the "20 or more lender rule" found
From Sources Within the Philippines under Sec. 22 (Y) of the NIRC (Banco De Oro v.
Republic of the Philippines, G.R. No. 198756,
Royalties from books, RC, NRC, RA, NRA-ETB January 13, 2015) .
literary works and - 10% (NIRC, Secs. 24
musical compositions. (8)(1) and 25 (A)(2), as Public Borrowing - borrowing from twenty (20)
amended by TRAfN or more individual or corporate lenders at any one
Law). time (R.R. No. 14-2012, Sec. 2).
NRA-NETB 25%
(NIRC, Sec. 25 (B)) . TAX IMPLICATION: If the bonds are considered
deposit substitutes (20 or more lenders), the ·
Royalties other than RC, NRC, RA, NRA-ETB
interest income is generally subject to the 20%
above. - 20% (NIRC, Secs. 24
(8)(1) and 25 (A)(2) , as
Final Withholding Tax. If the bonds are not
considered deposit substitutes ( 19 or less
amended by TRAIN
Law). lenders), the interest income forms part of gross
NRA-NETB 25% income and is subject to the regular income tax
(NIRC, Sec. 25 (B)) . rates (Banco De Oro v. Republic of the
Philippines, G.R. No. 198756, January 13, 2015) .
From Sources Without the Philippines
, Meaning of "at any one time", for purposes of
RC - Graduated rates (OIZON, pra at ) , , ,deter'!"i ing the "20 or more lenders"
181) r - ..: " ' Everyj trarl$action executed in the· primary or
,' ... seco~dary _market in connection with the
NRC, RA, NRA-ETB, xcl ~ded :---•--purchase' or 'sale of securities (Banco De Oro v.
(DIZON; Outline supra at 181) :._, 1 • ._.. "' ·, Rep bile'-ot .,(tJ,"e Philippin~s. G.R. No. 198756,
,___ _ __ __ __ _..::....:......:::...__~ ___,,=---....;...J ·, ·. .. \ JanJary 13! 2015).

INTEREST INCOME ,-. _,__ _ · ' ·, :

- - - - - - - - - - - - - ---'- -- ·- -•-- - -Th"En ~ckoning of "20 or more tenders/investors"
1. From any currency bank deposit, yielC, or. , ; Is made at art transaction in connection with the
any o~her monetary ·be efit from deposit , purcp<'.lse or ale,of the government bonds, such
s~b~t1tutes and. frolll' rust <:tgrjds and _-.-- :__ ~::../ ';I :-~1
1
·
1~ :·: /
·
s1m1lar arrangemer~n der1ve9- from i . a/ J~syance by tlrte Bureau of Treasury of the
sources within the Phlllppines \: f-,,,: · :,'!9rids to Govt i:nment _Securities Eligible
\ . ,~, ( . , _.,,~,,'°,("._ -!,Jealer; (GSEDs) m the primary market;
Final Tax Rates: · c ,/'-.;} ..,., · - ~ / J
a. RC, NRC, RA, NRA-ET~ - 20% (NI.RC, ~icff7 · -. \
l~;.) NOTE: . GSED refers to a SEC-licensed
24 (8)(1), as amended by i"RAIN Lay.,)" . . -....:..·__ -- de'\~ r '~,"government securities accredit~d
b. NRA-NETB - 25% (NIRC; Sec. 2~:(~)).; , - '.'""""' • · -, ·,b.Y }P~ Bureau ~f _Tr~asury to participate 1n
. ", , ; ·, ' .~ \ ' )tile primary or ong1nat1on sale of Government
I
Deposit Substitute L ; ecurities (Department of Finance, D. 0. No.
"7'

An alternative form of obtaining _funds from the " ....-
public other than deposits, through the issuance,
endorsement, or acceptance of debt instruments
for the borrower's own account, for the· purpose
of relending or purchasing of receivables and/
other obligations , or financing their own needs or
the needs of their agent or dealer (NIRC, Sec. 22
(Y)) .
NOTE: The term "public" means borrowing from
twenty (20) or more individual or corporate
lenders at any one tim~ (NIRC, ~ec. 22 (Y)) .
Hence, the number of lenders is determinative of
whether a debt instrument should be considered
a deposit substitute and consequently subject to
the 20% final withholding tax. Thus, a BIR ruling
which states that all government bonds are
deposit suostitutes regardless of the number of
20-2010, Part 1, Sec. 1 (15)) .
b. Sale and distribution by GSEOs to various
lenders/investors In the secondary market;
c. Subsequent sale or irading by a bondholder
to another lender/investor in the secondary
market usually through a broker or dealer; or
d. Sa.le by a financial intermediary-bondholder
of its participation interests in the bonds to
individual or corporate lenders in the
secondary market (Banco De Oro v.
Republic, ·G.R. No. 198756. January · 13,
2015) .
When, through any of the foregoing
transactions, funds are simultaneous!)'
obtained from 20 or more lenders/investors,
there is deemed to be a public borrowing and
the bonds at that point in time are deemed
 \ I
MEM:Q~Y AID
a.~
Sin lltdllMMnlly Cclag9oti.- - ROCT c.,i.,
deposit substitutes (Banco De Oro v.
Republic, G.R. No. 198756, January 13,
2015).
NOTES: ·
•
i. Interest income must be derived from
sources within the Philippines to be
~nsidered as passive income subject to
final tax.
ii. If the depositor is an employee trust fund
or retirement plan, such interest income,
yield or other monetary benefit is
exempt from the final withholding tax
(CIR v. Court of Appeals, G.R. No.
95022, March 23, 1992).
iii. · Interest income from savings and time
deposits of members with their credit
cooperative is also exempt from final
withholding tax.
2. From a depositary bank under · the
expanded foreign currency deposit
system
Foreign Currency Deposit System - the
conduct of banking transactions whereby any
person whether hatural or juridical may deposit
foreign currencies forming part of the Philippine
international reserves (R.R. No. 10-98).
Final Tax Rate: .,,
a. RC, RA - 15% (N/RC, Sec. 24 (8)(1 )). .
b. NRC, NRA-ETB, NRA:NETB .,. Exempt
(NIRC, Secs. 24 (8)(1)) , 25 (A)(2) and 25
(8)).
. •
NOTE: If the bank is jointly in the name pf a NRC
such as an QCW, or a Filipino seaman , .and
his/her spouse or depenpent who is a resident of
the Philippines, 50% of the interest income from
such bank deposit shall be exempt while the
other 50% shall be subject to 15% final
withholding tax (R.R. No. 14-2012, Sec. 5) .
3. From long-term deposit (LTD) or
investment in the fonn of:
a. Savings;
b. Common or individual trust funds;
c. · Deposit substitutes;
d. Investment management accounts;
e. Other investments evidenced by certificates
in such form prescribed by the BSP (NI RC,
Sec. 24 (8)(1)).
Common Trust Fund
- A fund maintained by a trust corporation, bank
or investment house authorized to perform trust
functions under a written and formally
established plan, exclusively for the collective
investment and reirwestment of certain moneys
representing participation in the plan received by
it in its capacity as a trustee (/RR, R.A. No. 9160,
as amended, Rufe 3.a.3 (f)) .
Investment Management Account
- the investible funds or any investment portfolio
handled by a bank or an investment house in a
representative capacity as financial or managing
agent, adviser, consultant or administrator of
financial or investment -management, advisory,
consultancy or any similar arrangement which
does not create or result in trusteeship (2008
Manual of Regulations for Banks, Sec. X403 (C)).
Final Tax Rate:
RC, NRC, RA, NRA-ETB (held for 5 years or
more)-. exempt (NIRC, Secs. 24 (8)(1) and 25 ·
,(A)(2)) . .
IN CASE OF PRE-TERMINATION
BEFORE THE· FlfTH YEAR:
. Holding Period Final Tax Rate
4 to less. than 5 years 5%
3 to less tpan 4 .years 12%
.' .
Less than 3 ye~rs 20%
(NIRC, Secs. 24 (8)(1) and 25 (A)(2))
NOT : The above rule applies only to individuals.
Interest income from LTD of corporations is
always taxable.
NRA-NETB (regardless of holding period) - 25%
''(NIRC, Sec. 25 (8)).
PRIZES AND WINNINGS
Prizes
- result of an effort made (2CASASOLA, supra at
90).
Winnings
- result of transaction where the outcome depends
upon luck or chance (Id.).
Final Tax Rates: '
1. RC, NRC, RA:
a. · Prizes ~10,000 and below - Graduated
Income tax of 20% to 35% (NIRC, Sec. 24
(8)(1) ,·as amended by TRAIN Law).
b. Prizes abo\fe ~10,000 - 20% (NIRC, Sec. 24
(8)(1 ), as amended by TRAIN Law).
c. Winnings from PCSO and lotto ~10,000 and
below - exempt (NIRC, Sec. 24 (8)(1) as
amended by TRAlr,J Law).

d. Winnings from PCSO and lotto above
~10,000 .- ·20% (NIRC, Sec. 24 . (8)(1 ), as
amended by TRAIN Law).
e. Other winnings - 20% (NIRC, as amended
by TRAIN Law, Sec. 24 (8)(1)).
2. NRA-ETB
a. Prizes ~10,000 and below - Graduated
Income tax of 20% to 35% (NIRC, Sec.
25(A)(2), as amended by the CREATE Act).
b. Prizes above ~10,000- 20% (NIRC, Sec. 25
(A)(2), as amended by the CREA TE Act).
c. Winnings from PCSO and lotto regardless
of amount - exempt (NIRC, Sec. 25 (A)(2) ,
as amended by the CREATE Act). ·
NOTES:
i. Sec. 25(A)(2) of the NIRC was ne>t
amended by TRAIN Law. Hence, NRA-
ETB's PCSO and Lotto winninQ!, _. _ ,
regardless of the amount are ·still
EXEMPT from in·come tax. _ - • , •
. · :~·\ . -~.,-~,
ii. However, Sec. 25(A){2.) was amen..ded .
by the CREATE Act.' Upon>its--effectivity- -
on April 11, 2021, w!"nings-from· PCSO
. games amounting to more than P10,000
of NRA-ETBs s.hall be subject to 20%
. income tax, while winnings from ·Pcso-
games amounting-. to P10;000" a·nd
below are exempt (NIRC, Sec: 25 (A)(2)
as amended b>; 6R~TE Act;_R.R. No.
2-2021, Sec. 1: R,.R NoJ 5-20Z1, ·s-ec. -4;:-
. J )_ _, ,'
d. Other winnings - 20% {NIRC,. Sect 25~(A)(2)
as amended by CREATE Act). . ". ,
3.
. ... . ·., .,
...
.
-.,_
NRA-NETB (prizes and wmmngs regan:iless- ot ~· .:.
. -:. <-~
... v
amount)- 25% (NIRC, Sec. ~5YBJj•' __;,1~.
-.. _,j J \
NOTES: ·
a. Prizes amounting to ~10,000 or less,
although exempt from final tax, are to be
included in gross income and subject to the
graduated rates (NIRC, Secs. 24 (8)(1) and
25 (A)(2)).
b. Prizes and winnings from sources without
the Philippines are included in the gross
income of a RC, but not NRC, RA, NRA-ETB,
NRA-NETB.
. Partner's share from the net income after tax of
business partnership, joint account, joint venture
or consortium
For discussion, please refer to Partnership on pages
52 to 54.
CAPITAL GAINS TAX
For discussion, please refer to Rules on Capital
Gains and Losses on pages 165 to 170.
INCOME TAXATION
Taxation .Law
T AXABILITY OF SPECIAL CLASSES OF
INDIVIDUAL EMPLOYEES
1. Minimum Wage Earner (MWE)
Refers to a worker in the private sector who is
paid the statutory minimum wage (SMW), or to an
·employe.e in the public sector with compensation
income of not more than the statutory minimum
wage in the non-ag~icultural sector where he is
assigned (NIRC, Sec. 22 (HH)). . I
Tax Treatment: Minimum wage earners shall be
exempt from the payment of income tax and
withholding tax based on their statutory minimum
wage rates. The holiday pay; overtime pay, night
shift differential pay and hazard pay received by
such earner are likewise exempt (R.R: No. 11-
2018, Sec. 6) .
NOTE: Hazard pay shall mean the amount paid
by the employer to MWEs who were actually
1 assign~d to danger or.strife-torn areas, disease-
{ in! ested .__places, or in distressed __ or isolated
-s~tiqnS'"and camps, which expose them to great
, - ~ nger W con~gion or peril to -life. Any hazard
- .. • p~i<\ ~o ¥~E~-~ ich do_es not satisfy the above
. . cntena I a'eeriie'o subJect to income tax and
consequent! • ~ith°h_olding tax Of! the·said hazard
pay-(~ .R. NQ. 11 -'2018 dated January 31, 2018).
- · - ....,.Mlt
A se~ior ci~i~ett.~ ~ose salary i~ equivalent to the
stat1,.1to.iy.m1mmum~wpge shall also be considered
-- as.ta M~E eatitle tq exemptions (2 CASASOLA,
. supra.at 881 '-;
7.
.. '-~
, · .,,,- Th~ follo~ ing incpme payments ·_ to MWEs are
..,.,, T: ' bl
,P6c,
~- ' a .....
,xa e_:.
1t1onal compensation
.
such as
_ ,~- .. ~_--(_-~mmiss_ions, honoraria; fringe bene~ts,
·"\ · ' t'~rle.fi s m excess of the allowable statutory
1_· J: ~mount of ~0, 000, taxable allowances, and
other taxable income.given to an MWE by the
same employer other than those which are
expressly exempt; and · .
b. Other income received by MWEs from other
sources in addition to compensation income,
such as income from other · concurrent
employers, from the conduct of trade,
~usiness, or practic~ of profession, except
m~ome subject to final tax, only to the extent
of income OTHER THAN SMW, holiday pay,
overtime pay1 night shift differential pay, and
hazard pay earned during the taxable year
(R.R. No. 11-2018, Sec. 6 dated January 31,
2018). .
2. Individuals whether Filipino or Alien
~mployed by: . •
a. Regional or area headquarters and regional
operating headquarters of multinational
 companies in the Philippines (NIRC, Sec.25
(CJ, as amended by TRAIN t..aw);
b. Offshore banking unltEi established In the
Philippines (NIRC, Sec,, 25 (0), as amended
by TRAIN Law); or
c. Foreign Service contr13ctors or sub-
contractors engaged in petroleum operations
in the Philippines (NIRC, Sec .25 (E), as
amenqed by TRAIN Law).
Multlnatlonal Company
- a foreign firm or entity engaged in international
trade with affiliates or subsidiaries or branch
offices in the Asia-P_ aclfic Region and other
foreign markets (R.R. No. 11-2010, Sec. 1).
Tax Rate: Preferential 15% tax rate based on
their gross income. Provided, that, the same tax
treatment shall apply to Filipinos employed and
occupying the same positions as those of aliens
employed in RHQ, ROHQ, OBU, and PSCS
(NIRC, Sec. 25 (C), (D) and (E), as amended by
TRAIN Law) .
Tax Base: Gross income received as salaries,
wages, annuities·, compensation , remuneration
and other emoluments, · such as honoraria and .
allowances (NIRC, Sec. 25 (CJ , (Q) Efnd (E), as ..
amended by TRAIN Law).
REASON: Only · alien indiviq1.1als dccupying
managerial and technical -positions in said ·
establishments and Filipino~- employijd In the
same positions as those of aliens are s4bject to
the 15% final income tax (R.R. No, 02-98).
I
To be a managerial employee, the tgllowing
elements must concur: (MAD-20%)
a. His primary duty consists of performance of
work directly related to .Ma~~9~rnent
policies;
b. He regularly and directly Assists in the
management of the establishment;
c. He custornarily ~nd regularly exercises
Qiscretions and independel')t judgment in the
performance of his functions; and
d. He does not devote 20%of his time ·to work
other than those above prescribed.
On the other hand, the term utechnical position"
is limited only to position~ which are:
a. Highly technical in nature; and ·
b. Where there are no Filipinos who are
competent, able, and willing to perform the
services for which aliens are desired (R.M:C.
f-;Jo. 41-2009).
Flllplnos employed in said establishrnents
have the option to pay by way of fifteen
percent (15%) flnal Income tax:
Requirements: .
a. Multinational companies - Filipino must be
holding a m1:Jnagerial or technical position
.- though.there are no aliens holding the same
position. .·
b. Offshore banking units and petroleum
service contractors and subcontractors:
I. Filipino must be holding a managerial or
technical position; and
ii. . There are aliens hplding the same
position (R.R. No. 12-2001) .
Tests to be met by a FIiipino to be allowed
the option to be taxed at 15%:
i. Position and Function Test - must
occupy managerial or technical position
and must actually e)(ercise managerial or
technical functions pertaining thereto
(R.R. No. 11-2010, Sec, 3(a));
ii. Compensation Threshold Test - must
have received, or is due to receive under
a contract of employment, a gross
anr:iual taxable compensation of at least
· J-9!15,000 (whether or not actually
i re9eived) (R.R. No. 11-2010, Sec. 3(b));
I
0 : Provided that, a change in
. comp!:3nsation as .a consequence of
which, such employee subsequently
:·. •recaivjng less than the compensation
'•"··J~ threshold stated in this section shall, for
·tne. calendar year when . the change
becomes effective, result in the
employee being subject to the regular
i:,come tax rate (R.R. No. 11-201 O,· Sec.
3(b)); and
iii. Exclusivity Test- the Filipino managerial
or technical employee must be
exclusively working for the RHQ or
ROHQ as a regular. employee and not
just as ·a consultant or _contractual
·personnel (R.R. No. 11-2010, Sec. 3(c)).
NOTE: Beginning January' 1, 2018, the
Graduated Tax Rates of 20% to 35% shall
be applicable (R.R. No. 8-2018, Sec. 4 (CJ) .
The preferential income tax rate under
subsection (C), (D) and (E) of Section 25 of
the Tei><' Code, as, amended, shall no longer
be applicable without prejudice to the
application .of preferential tax rates under
existing international tax treaties, if
warranted. Thus, all concerned employees of
the RHQ, ROHQ, OBU, and PSCS shall be
subject to the Regular Income Tax rate under
 INCOME TAXATION
Taxation Law

Sec. •24(A)(2)(a) of the Tax COde, as Gross Sales - Convenience Store 19800,00Q
Gross Receipts - Bookkeeping 300,0oo
amended (R.R. No. 8-2018, Sec. '4(C)).
Total Sales/Receipts 191, 100,00Q
Less: Amount allowed as deduction
3. Purely Self-Employed Professionals under Sec. 24(A)(2)(b) · 250,00Q
Individuals earning income purely from self- Taxable Income

-
19850,00Q
employment and/or practice of profession whose Tax Due (8% x P860,000) 196a 1ocio
gross sales/receipts and other non-operating (R.R. No. 8-2018, Sec. 3(C))
income does not exceed the ~3.000,000 VAT
threshold, such taxpayer may opt to be taxed at: NOTE: Ms. Ns· total gross sales and gross
a. The graduated rates under Sec. 24 (A)(2) as receipts is below the VAT threshold. Her
amended by TRAIN Law and pay percentage source of income is purely from self-
tax (R.R. No. 8-2018, Sec. 3 (C)); or employment Thus, she may opt to be taxed
b. An 8% tax on gross sales or receipts and at 8% and she is entitled to the amount
other non-operating income in excess of allowed as deduction of P250,00 under Sec.
~250,000 in lieu of the graduated income tax 24(A)(2)(b} of the Tax Code.
rates and percentage tax (R.R. No. 8-2018,
Sec. 3 (C)). b. If Ms. A above failed to signify her intention
to be taxed at 8% income tax r~te on gross
If during the taxable year the taxpayer exceeded sales in . her initial Quarterly Income Tax
the VAT threshold within the year: . Return and she incurred cost of sales and
a. The taxpayer shall automatically be s1Jb1ect operating expenses amounting to ~600,000
to he graduated rates under sec:24 ( )(2) .:-arnd P 200,000 respectively, the income tax
·as amended by TRAIN Lstw t R.R. Wo. 8- shall' be computed as follows:
2018, Sec. 3 (C)); and · . - / ,
b. The taxpayer shall be allbweq a·tax credit -for - · Gross ales/Receipts ~1.100,000
the previous quarter/s Income ) ax P.ayme~!fs . ,, . r
ess: Cost, of Sales 600,000
under the 8% income ta :ate option (R.R. ,,,,
Gross lnc_o m~ 19500,000
No. 8-2018, Sec. 3 (C)) . · _ . L.less: Ope~atmg Expenses 200,000

• : .intention
__
· .. . t·?
. ·--. - - - - -=rn:ixable incol'n6
·
:
• Tex ,ooo)
Due: On Excess (300,000-
. ~00,000

Unless the taxpayer srgmfies

the . ,. ,,, , 250 x 200;0 'l 1910,000
elect the 8% Income Tax rate in the _: st Quart~r,,: . . : ,_. Id,}., • l' - --------
Percentage and/or ITRi. r 'On het_rn,.l!_lal. g uarter · - . . .. J )!_-~
-~~ls
<

return of the · taxable , ·year ·' ..~fter . ffie_. I

J , ·) •. _c is ·a -prominent independent contractor
commencement of a newA >llsiness/p~?ctrce of • · :: , ~/--:-- Ko offers architectural and engineering
pro~ession, ~he taxpayer -shall be consrderea as ! ,., / -.;_~., ervice's. Since her career flourished, her
hav,~g availed of. the graduated. rate ur-i_~~ _. __• '. ::--~(\ toti=3I gross r~ceipts amounted to '94,250,000
~ect,on 24 (A)(2)(a). Such electro~ ~ha~S-~e/ !-_ ~: \~ ,>, for ~ xable year 2018. Her recorded cost of
irrevocable and _no amendmen of opt~_!\shallt>e:I.:..L.. · _,-· ~erv~ and· operating expenses was
made for the said taxable year (R.R/ N'g ' &-2018: i ~. · ~ tse,ooo and ~1.000,000 respectively.
Sec. 3 (C)). t 1't J_. \.
1
·
The election -to be taxed at 8% should be • ' • • Her income tax liability will be computed as
follows: ·
signified by filing an Application fQ'r Registration
Update (Form 1905) on ·or befor~ the due date
Gross Receipts from Architectural
· forfilir:ig of the Percentage Tax Return and signify and Engineering Services ~4.250,000
the same in the 1st Quarter ITR (R.R. No. 8-2018, Less: Cost of Service . 2,150,000
Sec. 3(C)). Gross Income 192,100,000
Less: Operating Expenses 1,000.ooQ...
ILLU~TRATIONS: Taxable Income ~1.100.000
a. Ms. A operates a convenience store while Tax Due:
· she offers bookkeeping services to her On PS00,000 ~130,000
On Excess (P1, 100,000
clients. In 2018, her gross sales amounted to 90,0_QQ_
800,000) X 30%
~00,000, in addition to her receipts from Income Tax Due 19220.00,Q_.
bookkeeping services of ~300,000. She (Id.) .
already signified her intention to be taxed at
8% income tax rate in her 181 quarter return. NOTE; Ms. B's total gross receipts is
Her income tax liability for the year will be exceeded the VAT threshold of ~3,000,000.
computed as follows:
Thus, she is subject to graduated income tax
rates. ·
 \ I

MEM:Q~Y AID
Sin 8eda College of Law - RGCT Ber C)peratione Cenc.r

GENERAL RULE: The option to be taxed at 8% deductible against the taxable income from
income tax rate is not available to: (VOP) business/practice of profession under the 8%
a. A YAT-registered taxpayer, regardless of the income tax rate option (R.R. No. 8-2018,
amount of-gross sales/receipts; Sec. 3(0)) .
b. To a taxpayer who is subject to Other
Percentage Taxes under Title Vof the Tax ILLUSTRATIONS: Ms. C is a Financial
Code, as amended by TRAIN Law; and Comptroller of ABC Company. She earned
c. Partners of a GPP by virtue of their an annual compensation income of
distributive share from GPP which already P'1,500,000, inclusive of 13th month pay and .
net cost and expenses (R.R. No.' 8-2018, other benefits in the amount of P'120,000 but
Sec. 3 (C)) . net of mandatory contributions to SSS and
Philhealth. Aside from employment income,
EXCEPTION: The option to be taxed at 8% he owns a convenience .store with gross
·income tax rate is available to ~ooperatives, self- sales of ~2,400,000. His cost of sales and
employed individuals and professionals with total operating expenses are ~1,000,000 and
annual gross sales and/or gross receipts not P'600,000, respectively with non-operating
exceeding ~500, 000 (R.R: No. 8-2018, Sec. income of P,.100,000.
3(C); NIRC, Sec. 116, as amended by TRAIN
Law). If she opted to be taxed at 8% income tax
rate, his tax due shall be as follows:
4. Mixed Income Earners
For mixed income earners (earning both Total compensation income 191 ,150,000
compensation income and income from business Less: Cost of Service 90,000
Taxable compensation 191 ,410,000
or practice of profession), their income taxes
income
shall be: ·
a. For income from compensation Tax Due
- Graduated income tax rates for individuals; a. On Compensation:
AND
On ?1'800,000 19130,000
On Excess (P1 ,410,000 -
b. For income from business or pra_ ctice of 800,000) X 30% 183,000
profession: Tax Due on-c ompensation
i. Gross sal~s/receipts which do not - Income 19313,000
exceed the VAT threshold of. P 3, 000,
000 • b. On Business Income
8% income tax, .. on gross Gross Sales 192,400,000
sales/receipts and other non-operating Add: Non-Operating Income 100,000
income OR graduated income tax rates Taxable Business Income 192,500,000
on taxable income, at the·-taxpayer's : Multiplied by: Tax Rate 8%
Tax Due on Business
option;
Income 19200,000
(R.R. No. 8-2018, Sec. 3(0))
ii. Gross sales/receipts and other non-
operating income which exceeds the
NOTES:
VATthreshold.of~3. 000, 000
a. The ·option of 8% income tax rate is
- graduated income tax rates for
appiicable only to taxpayer's income from
individuals (NJRC, Sec. 24(A), as
business and the same is in lieu of the
amended by TRAIN Law). income tax under the graduated income tax
rates (Id.) .
NOTE: The provision under Section (24)
(A)(2)(b), which allows an option. of 8% b. The amount of P'250,000 allowed as
income tax rate on gross sales/receipts and deduction under the law for taxpayer's
other non-operating income in excess of earning solely from self-employment/practice
~50 000 is available only to purely self- of profession is not applicable for mixed
empl~yed individuals and/or profe~sionals. income earner under the 8% income tax rate
. The P'250,000 mentioned is not applicable to option. The P'250,000 Is already incorporated
mixed income earners since it is already in the first tier of the graduated income tax
incorporated in the first tier of the gradua~ed rates applicable · to compensation income.
income tax rates applicable to compensation (Id.).
income. Under the said graduated rates, the
excess of the ~250,000 over the actual
taxable compensation income is not
 INCOME :t"AXATION
Taxation Law

c. If she did not opt to be taxed ~t 8%, _the

taxable inoome from both compensation and
busine~s ·shall be combined for purposes of
computing the income tax du_e (Id.).

5. Senior Citizen
A senior citizen refers to any resident citizen of
the Philippines at least 60 years old. (R.A. No.
9994, Sec. 3) .

Senior citizens are subject to regular income tax,

whether the · inoome i~ . derived from
compensation or otherwise; except:
a If the senior citizen is a Minimum Wage
Earner under R.A. No. 9504 (2.CASASOLA,
supra at 88) . ·

NOTE: The exemption of Senior Citizens from

inoome taxes will not · extend to all ·types of
income earned during the taxable year. Hence, · · - - - -
he can still be liable for other taxes· i.e., fi nal
!,!Jo.
J
2010). . -
/'
-n ,
withholding tax or capital gain tax (R.R. 7- ,._

.,.)
... I ~}V
,___ .- __L_ - -
.: '. J , :.-
- -.- _;: '.

--~---
\.:.-r::! '•' •
,

1<' ' .
~··

1 /

.
-( ,

, .
 \ I

MEK-Q~Y AI D
San Beda u.--ai!}' Caiiage of Law - RGCT Ber Ope,aliorw Cent.,

RULES ON THE TAXABILITY OF THE INCOME OF INDIVIDUAL TAXPAYERS

Income derived during a taxable year 1. Taxable net iocome subject to

from all sources, within and without
the Philippines "(NIRC, Sec. 23(A)).
Income derived dur.ing a taxable year
from sources within the Philippines
(,YIRC, Sec. 23(8)) . . Purely Self- Employed
-+-------- - - - - - ~
Income derived during a taxable year
from sources within the Philippines
(NIRC, Sec. 23(0), as amended by
TRAIN Law).
graduated rate of 20%_to 35%
(NIRC, Sec. 24(A)(2)(a), as
amended by TRAIN Law); or
2. Option to be taxed at 8% of
Individual/Professionals and Mixed
Income Earners on Gross _
Sales/Receipts for those who fall
below the VAT threshold (NIRC,
Sec. 24(A)(2)(b) and Sec.
24(A)(2)(c), as amended by TRAIN
Law).

!!Jlilll~.lf'1l Income derived from sources within Taxable net income subject tq
the Philippines (NIRC, Sec. 23(0)). graduated rate of 20% to 35%
(NIRC, Sec. 25(A)(1) , as amended
by TRAIN Law)

Income derived from-sources within 25% Final Income tax on the gross
the Philippines only (NIRC, ·Sec. income (NIRC, Sec. 25(8), as
23(0)). . . amended by TRAIN Law)

Exempt from the payment of income·taX1on their taxable income: Provided,

further, That the holiday pay received by ~such minimum wage earner shall
likewise be exempt from income tax. (NIRC, Section 24(A), as amended by
TRAIN Law) ·.: . '
The holiday pay, overtlme pay, nig_ ~_t shift ~iftej eritial pay and hazard pay
received by such earner ~, -
are likewise:e)5em.pt'(R.R.
.. . '. ..,. No. 11-2018, Sec. 6) .

Income derived from salarie~/ ~ a·ges,
annuities, and compensation'
received from employer (NIRC,
Section 25(C) and Section 25(0) , as
amended by TRAIN Law) .
15% tax on gross income (NIRC,
as amended by TRAIN, Section
25(C) and Section 25(0)).
RHQs, ROHQs, OBUs or
petroleum service contractors
registering with the SEC after
January 1, 2018; the Graduated
Tax Rates of 20% to 35% shall be
applicable (NIRC, Section 25(F), as
amended by TRAIN Law).

Income derived during a taxable year Taxable net income subject to

from all sources, within and without graduated rate of 20% to 35%
the Philippines (NIRC, Sec. 61 in . (NIRC, Sec. 61 in relation to Sec.
relation to Sec. 24(A), as amended 24(C), as amended by TRAIN Law)
by TRAIN Law)
 ,

66
INCOME TAXATION
Taxation Law

SUMMARY OF TAX RATES ON PASSIVE INCOME SUBJECT TO FINAL TAX

20% 20% to 35% 20% (NIRC, 25% (NIRC,

Sec. 24(8)(1 ), graduated Secs.24(8)(1) and Sec, 25(8),
as amended by rates (NIRC, 25(A)(2), as amended as amended
TRAIN Law). Sec. · by TRAIN Law). by TRAIN
24(A)(1 )(a) in Law).
relation to Sec.
24(A)(2), as
amended by
TRAIN Law).

(NIRC, RA - 15% (NIRC, Exempt

Sec. 24(8)(1), Sec. 24(8)(1), as (N/RC, Sec:
as amended by amended by TRAIN 25(8), 88
TRAIN Law) , La_w). amended by
TRAIN Law).
I NRC, NRA-ETB -
Exempt (NIRC, Sec.
'25(A)(2), as amended
/Jy·T~AtN Law).
Exempt; 25% (NIRC,
Exempt;
5% ; Sec. 25(8),
5%;
12%; as amended
12%;
20%; . · by TRAIN
20%;
(NIRC, Secs. 24(8)(1) Law).
(NIRC, Sec.
;8nd 25(A)(2), as
-24(8)(1 ), as
amended by TRAIN
amended by
Law).
ffl"-f!lmt~~~ltl TRAIN Law).

{NIRC, 10% (NIRC, Secs. 25% (NIRC,

Sec. 24(8)(1), ~· 24(8)(1), as amended Sec. 25(8),
as amended by by TRAIN Law, and as amended
TRAIN Law). 25(A)(2)) . by TRAIN
Law).

20% (NIRC, 20% (N/RC, 25% (N/RC,

Sec. 24(8)(1), Secs.24(8)(1), as Sec. 25(8),
as amended by amended by 'TRAIN as amended
TRAIN Law). Law, and 25(A)(2)) . by TRAIN
Law).

20% to 35% RA, NRC, NRA-ETB - 25% (NIRC,

graduated rates 20% to 35% Sec. 25(8),
(NIRC, Sec. graduated rates as amended
24(8)(1), as (NIRC, Secs.24(8)(1), by TRAIN
amended by as amended by Law).
TRAIN Law). TRAIN Law, and
25(A)(2)).
 \ I

MEM:Q~Y AID
Sen a.de lJr"Mlalty Cclege d law · RGCT S. Oparatlona Centar

20% (NIRC, 20% (NIRC, 25% (NIRC,·

Sec. 24(8)(1 ), Secs.24(8)(1), as Sec. 25(8),
as amended by amended by TRAIN as amended
TRAIN Law). Law, and 25(A)(2)). by TRAIN
Law) .

20% (NIRC, 20% to 35% 20% · ~5% (NIRC,

Sec. 24(8)(1); graduated (NIRC, Sec. 24(8)(1 ), Sec. 25(8),
as amended by rates . (NIRC, as amended by as amended
TRAIN Law) . Sec. ' TRAfN Law) . by TRAIN
I
24(A)(1 )(a) in Law).
relation to Sec. Exempt - NRA-ETB
24(A)(9), as (NIRC, Sec. 25(A)(1 ),
amended by as · amended by
TRAIN Law). TRAIN Law) .

NOTE: Upon the ·

~ffectivity of the
CREATE Act,
winnings from PCSO
games amounting to
more than P10,000 of
Non - Resident Alien
Individuals shall be
subject to income tax
; at the rate of 20%
(R.R No. 5-2021, Sec .
. R.R. No. 2-2021,
i ~e.c. 1).
~
.i

Exempt (NIRC, :::.'. :Exe;\.pt 25% (NIRC,

, Sec. 24(8)(1), ·,t..; (NIRC; · Secs. Sec. 25(8),
as amended by t ., 24(8)(1 ), as amended as amended
TRAIN Law) . t:- by TRAIN Law, and by TRAIN
25(A)(2)). Law).

20% (NIRC, 20% 25% (NIRC,

Sec. 24(8)(1), (NIRC, Sec. 24(8)(1) Sec. 25(8),
as amended by as amended by as amended
TRAIN Law). T_RAIN Law; · Sec. by TRAIN
25(A)(2)) . Law).
 . INCOME .TAXATIO
Taxation Law

- - -...
1
10% (NIRC, NRC, RA - 10% 25% (NIRC
lm~~~rl-:=~~~-:;.;~~-:- sec. 24(8)(2), (NIRC, Sec. 24(8)(2), Sec. 2S(B)'.
as amended by as amended by as amended
TRAIN Law) TRAIN t.aw) by TRAIN
Law)
NRA-ETB - 20%
(NIRC, Sec. 25(A)(2),
as amended by
TRAIN Law)

,,..
20% to 35% 20°/c to35% 25% (NIRC,
'graduated grad uated rates- Sec. 25(8),
rates (NIRC, (NfRC,, Sec. 24(A)(2), as amended
Sec. - 24'{A){2), as amended by by TRAIN
as amended by TRAIN Law) . Law).
I
TRAIN Law). -
... ":...,.
\
NOTE:
-This is- NOTE: This is subject NOTE: This
., _, \ to Rre-dominance is subject to
subJect to pre- . -test. pre-
dominance dominance
test . test.
 \ I

MEM:Q~Y AI D . 69
San Bed& UrWlnlty Colege of Law - RGCT Bar Operations Cenll!f
/
SUMMARY OF RATES ON-CAPITAL GAINS RECEIVED BY INDIVIDUALS

Percentage Tax 6/10 of 1% of Gross Se_lling Price (NIRC, Sec. 127(A),

as amended by TRAIN l,aw).

Final Tax 15% of Net Selling Price (NIRC, Sec. 24(C), as amended by
TRAIN Law).

GENERAL RULE: Final Tax of 6% based on NRC, RA - same with RC

gross selling price or current fair market (NIRC, Sec. 24(D)(1), as
value (higher between the FMV as · amenf}ed by TRAIN Law)
determined by the Commissioner or the
FMV as shown iri the schedule of values of NRA-ETB - same w/ RC
the Provincial and City Assessors), (NIRC, Sec. 25(A)(3), as
whichever is higher (NIRC, Sec. 24(0)(1), as amended by TRAIN Law).
amended by TRAIN Law). .
NRA-NETB -:- same w/ RC
NOTE: Final Tax .9(6% or Graduated Rates (NIRC, Sec. 25(8), as
of 20% to 35% at,t~e,19pljpn of tl11 ~axpayer amended by TRAIN Law).
if gains from s·ates 'or
othefJ~ pbsitions of
real property to tl)e ·government q,riany of
its political s~ubdivisions or ag,i~cjes or
to GQCCs. •:, ;i " \
. : i, .
EXCEPTION: Sal~'bt Principiil Residdnce
is Exempt qnly it ~the follo~i,:i . J}'
concur: . ·.:; 1 .-;~-~ . .,
1. The· proce-~ds i~) ully utilized·i~\3cquiring
or constructing a':fn~w principal residence
within eighteen (18~ 1~nd~r months from
the date of $ale ot <fispe>silltf ~-..,; ~
2.Commissioner shall have . been duly
notified . by the taxpayer within thirty (30)
days from the date of sale or disposition
3. Only be availed of once every ten (10)
years
4. 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 capital
gains tax (NIRC, Sec. 24(0)(2), as amended
by TRAIN Law) .
 '
INCOME TAXATION
70 Taxation Law

\
TAXON
CORPORATIONS

NOTE: The 2020/2021 Bar Examination Taxation

I (NIRC,
28(A)(5)) .
Sec.

NORMAL CORPORATE INCOME TAX

(NCIT)
Law Syllabus does not include the Corporate (NIRC, as amended by TRAIN, Sec. 27(A))
Recovery and Tax Incentives for Enterprises
(CREA TE) Act which took effect on April 11, 2021 Tax Rate: 30% (DC and RFC)
(15 days after its publication on March 27, 2021) , Tax Base: Taxable income
but fo r purposes of discussion, CREA TE Act was
included in the making of the Memory Aid. NOTE: With the passage of the R.A. No. 11534 or
the CREATE Act, starting July 1, 2020, the NCIT
APPLICABILITY OF DIFFERENT TAXES rate of DC ·is either 25% or 20% if the net taxable
ON CORPORATIONS income is not more than t-5 million AND the total
assets of DC ·are not more than t-100 million. On
the other ' hand , RFC shall be subjected to 25%
Normal Corporate X NCIT rate starting July 01, 2020 (CREA TE Act, Sec.
Income Tax (NCIT) 6; R.R No. S-2021 , Sec. 3).
.
(NIRC, as amended
"\ '
!
by TRAIN, Sec. _, ;Total ·assets •.shall be net of depreciation and
27(A)). ·allowance for,.tl. d debts, if any. Further, the land
where 'tile usiness . entity's office, plant and
Minimum Corporate X f"'
.
equipment are ituated is excluded in computing for
I
)
Income Tax (MCIT)
I \h~ total assets (R.M. C. No. 62-2021 , A1).

'
(NIRC, as amended '( •
.' t
by TRAIN, Sec. ,-.
---· - F0RMULA IN 'COMPUTING TAXABLE
27(E)).
INCOME:
Gross Income Tax X ---•
xx
(GIT) (NIRC, as i' Gross,~?)Ts ;
Less: Sales returns (xx)
amended by TRAIN, ,.....,'\ '\ .. _S.ah{al(owa~ce • . (xx)
Sec. 27(A)). - 6 ,
i---------+---1----+----1 ~ale~1oisC?unts (xx)
Capital Gains Tax ,/ N~t;,Sales.., xx
(CGT) (NIRC, as NOTE: NO_TE: NOTEz'i' . Less: Cost of goods sold (xx)
amended by TRAIN, Capital Capital Capital 1
f [1 _.:.Gross i come from sales xx
Secs. 27(0)(2) and Gains Gains 'e ins·
(5)) . from from ffofp l
----
T .
I come "'
\. -
.Add: Inc dental income/ Other
xx
Safe of Safe of Safe of Gr ' ss. income xx
Shares Share Shares less: Allowable deductions (xx)
of of sof Stock Taxable income xx
-Stock Stock Multiply by: 30%
and NCIT due !!
Real
Proper MINIMUM CORPORATE INCOME TAX
ty (MCIT) .
Final Tax on Passive (NIRC, as amended by TRAIN, Sec. 27(E)(1))
Income (N/RC, as
amended by TRAIN, Tax Rate: 2% (DC and RFC)
Sec. 27(0)). Tax Base: Gross income except inconie exempt
from · income tax and income subject to final
lmproper1y X x withholding tax.
Accumulated
· Earnings Tax (IAET) NOTE: Pursuant to the CREATE Act starting July
(NIRC, Sec. 29). 1, 2020 until June 30, 2023, the MCIT rate of both
X DC and RFC will only be 1%. Starting July 1, 2023,
Branch Profit X
the MCIT rate will again be 2% (CREA TE Act, sec.
Remittance · Tax 6; R.R. No. 5-2021, Sec. 3) .
 \ I

MEM:Q~Y AID
San Beda llnMlnllly College <'A I.aw - RGCT Ber Operations Center

Rationale for the Imposition ·of MCIT sale of service, gross income means gross receipts
As a tax on gross income, MCIT prevents tax less gross refurns, allowances, discounts and cost
evasion and minimizes tax avoidance schemes of services (NIRC, Sec. 27(E), ·as amended by
achieved · through sophisticated and artful !RAIN Law).
manipulations of deductions and other stratagems.
Since the tax base was broader, the tax rate was NOTE: If apa,rt from deriving income from these
lowered (Chamber of Real Estate and· Builders' core business activities, there are "other items" of
Associations, Inc. v. Executive Secretary, G.R. No, gross income realized or ' earned by the taxpayer
160756, March 9, 2010). during the taxable period which are subject to the
NCIT, the same items must be inclu~ed as· part of
MCIT not a tax on capital the taxpayer's gross income for computing MCIT.
The MCIT is imposed on gross income· which is This means that gross income will . also include all
arrived at by deducting ·the capital spent by a items of gross income enum~rated 1:1nder Sec.
corporation in the Sale of its goods, i.e., the cost of 32(A) of the NIRC, except income exempt from
goods and other direct expenses from gross salEfs. income tax and income subject to final withholding
Clearly, the capital.is not being taxed (Chamber of tax ((R.R No. 9-98, Sec. 2.27(E)(4), as amended by
Real Estate and Builder's Associations, Inc. v. R.R No. 12-2007, Sec. 2)) . ·
Romulo, 614 SCRA 605, 628, G.R. No.- 160756,
March 9, 2010). FORMULA:
SALE OF GOODS/SALES OF
When MCIT Commences
SERVICES
MCIT is imposed beginning on the fourth (4th )
taxable year immediately following- the year in which xx '
such corporation commenced its busin~s Gross sales/receipts
operations (NIRC, as amended by TRAIN, Sec. Less: Sales returns xx
27(E)(1)) .
, Sales allowances xx
NOTE: MCIT shall likewise apply to the quarterly Sales discounts · xx (xx)
corporate income tax but the final ·comparison · i
between the NCIT due and the MCIT shall be made
at the. end of the taxable year-' taking . ,into
Net Sales t-' xx

consideration quarterly tax payment l']'lade (R.R. - Less: Costof goods (xx)
No. 12-2007). ' ' • sold/services
Gross income from sales xx
When MCIT applicable ·· - .
1. If taxable income is zero (R.R No. 9-98; Sec. Add : Other income xx
2.27(E)(1), as amended by R.R No. _1~-:2007,
~~m; . . Gross income xx
2. If taxable income is negative (R.R~No. 9-98, Multiply by: 2%
Sec. 2.27(E)(1), as amended by R:R 1 No._ 12-
2007, Sec. 2)); or . MCIT due !!
3. If MCIT is greater than NCIT due (NIRC, Sec.
27(E)(1), as amended by TRAIN Law). Rules on Carry-Forward of Excess MCIT:
· 1. The excess of MCIT over the NCIT can be
When MCIT Not Applicable , carried forward ;
1 . If the DC or RFC is not subject to NCIT; 2. It c;an be credited against the NCIT due in the
2. For DC whos&operations are partly covered by ~ext three (3) immediately succeeding taxable
the NCIT and pattly covered under a special years; ·
income tax system, the MCIT shall apply only 3. Any excess not credited in the next three· (3)
on operations covered by the NCIT (R.R. No.9- yeijrs shall be forfeited .
98, Sec. 2.27(E)) ; and · 4. Carry forward is possible only if NCIT is greater
3. For RFC, only the gross income from sources than MCIT;
within ·the Philippines shall be considered for 5. The maximum ·amount that can be credited is
determining applicability of MCIT (R.R. No.9- up to the amount of the NCIT;
. 98, Sec. 2.28(A)(2)). 6. The excess MCIT cannot be claimed as a credit
against the MCIT itself or · against any other
Gross Income for MCIT Purposes losses; and
Gross income shall mean gross sales less . sales 7. The tax payable shall be the MCIT whenever it
returns discounts and allowances and cost of is greater than the NCIT (NIRC, Sec. 27(E)(2),
goods ~old. In ca~e the taxpayer is engaged in the
 .INCOME TAXAT:10~
Taxation Law
7
as amended by TRAIN Law; 2 CASASOLA, greater than the MCIT in such year, as it is still
supra at 136 to 138) withio the 3-year period. However, in the given
illustration, the MCIT in Year 7 is greater than
ILLU~TRATIONS: the .NCIT. Hence, excess MCIT is not
A domestic corporation had the following data creditable.
on computation of the NCIT and the MCIT for
five years. Requisites for the Suspension of the Imposition
of MCIT: (ALL-FR)
Y4 Y5 Y6 - Y7 YB 1. Suspension was upon the Authority of the
MCIT 80k 50k 30k 40k 35k Secretary · of ~Finance, upon the
NCIT 20k 30k 40k 20k 70k recommendation of the Commissioner;
2. Substantial Losses were sustained; and
The excess MCIT over NC!T carry-forward is shown 3. The losses must be dt,Je to any of the following:
below: ·
• a. Prolonged !:abor dispute
Y4 YS · Y6 Y7 YB · - losses ·arising from a strike staged by the
employees for more than six (6) months
MCIT - 80k 50k 30k 40k 35k within a taxable period causing temporary
NCIT 20k 30k 40k 20k 70k shutdown of business operations; ·
Excess MCIT ----6-,0k-......,..,...--.;..;;..;.;----=~-.;....;;.;.;.._
20k 20k
NCIT due n/a n/a 40k n/a 70k+
Less: Carry forward Eorce majeure
From Year 4 - - - - • (40k)*I /_.. - cause due to an irresistible force as by
From Year 5 i (20k) "ac of god" like lightning, earthquake,
From Year 7 (20R) stor m, flood and the like; also includes
Tax Due · 80k 50k 0 3Qk · a m . . a·corfl icts like war and insurgency;

NOTES: ·;, ' ...,·•" .-> c. 'Legiti"!i e business R~verses ·

1. Arrow pointing downward. means that the NCIT - inclu<le JUbstantial losses sustained due
is higher so that there can be an excess MCIT- - - · - to fire , r otfuery, theft, or embezzlement, or
carry-forward against it. - · · · · • , · ·.··. :/ for other economic" reasons as determined
. ;, · . ~, by the SecrJ ta ry ·o t Finance (N/RC, as
2. The figure with asterisl< *l -
Cannot carry- ·_ . ; - • am-eflded by 1RAIN, Sec. 27(E)(3) ; BIR
forward an amount highpr than ~GIT, hence7-:---:-- - 1 •M~morand~m 6-2002) . · ·
only the 40k of the excess of 60k troll> Year 4 · ·, / . ,
may be carried forward aga!n~t the ., ~ T in · · ' J=n@i,$ to which MCIT is Not Applicabl~:
Year 6. The un~sed 20k ren:1ammg from :Yeacl 4 1. /,l'~omestic · proprietary · educational -
cannot be carried forward ,n Year 8 be~ u~e:7--:. ,.., , ",.,Jhstitutions
Year 8 was beyond th ree years from : ear .i.- :._/-::. - ) '......- /s bj~ct)o ten percent (10%) of their taxable
. • / ), ) . u;icome (NIRC, as amended by TRAIN Law,
3. In Year 4, the taxpayer will pay the MCll of 80k \. .r I
because the MCIT is higher than the NCIT. The 1VJ rt.. - .
Sec 2 7(B)) ·
'
_excess MCIT qt 60k (80k-20k) can be ca rried
2 . . Domestic non-profit hospital
forward in the next three years .
·- subject to ten percent (10%) on their taxable
, income (NIRC, as amended by TRAIN Law,
4 . In Year 5, the taxpayer will pay the 50k MCIT
Sec. 27(8)); •
since it is still higher than the NCIT. The excess
MCIT of 60k in •Y ear 4 cannot be used in this
instance. The ·excess MCIT of 20k can be
a. Domestic depository banks under the
expanded foreign currency · deposit
carried forward in the next three years.
system
5. In Year 6, where the NCIT of 40k is higher than - subject to final income tax of ten percent
the MCIT of 30k, the taxpayer is allowed to (10%) of their taxable income;
claim as credit the excess MCIT of Year 4 but
only to the extent of the amount of the NCIT for b. . Resident foreign· International carrier
the current-ye~r (e.g., up to 40k only). Hence, -subject to . two-and-one half pe~cent
the taxpayer will not be liable to pay any tax. (2.5%) of their Gross Philippine Billings
The remaining MCIT in Ye~r 4 of 20k (60k-40k) (NIRC, S~c. 28(A)(3)) ;_
may still be carried . forward in Year 7 and the
excess MCIT in Year 5 of 20k may still be
carried forward up to Year 8, if the NCIT is

J
 \ I

MEM:0-RY AI D
San Beda College of Law - RGCT Bar 9Pcntiona Cent11r

c. -_Resident foreign offshore banking units 4. Ratio of Consolidated Public Sector

- subject to final income tax at ten percent
Financial Position (CPSFP) to GNP
(10%) of such income (NIRC, Sec.
28(A)(4)); · - 0.9% (NIRC, as amended by TRAIN, Sec.
27(A)).
'
d. Resident foreign ·regional operating
headquarters NOTE: The election of the GIT option shall be
irrevocable for three .(3) consecutive years
- subject to tax at ten percent ( 10%) of their
during which the corporation is qualified under
taxable income (N/RC, Sec. 28(A)(6));
the scheme (NIRC, as amended by TRAIN,
Sec. 27 (A)).
e. Finns enjoying special income tax rate
under the PEZA law, Bases Conversion
and Development Act of 1992 and those CAPITAL GAINS TAX (CGT)
enjoying income tax holiday incentives; (NIRC, as amended by TRAIN, Sec. 27(D)(2) and
(5))
f. Nonresident foreign corporations
- subject to 35% tax of the gross income Foe further discussions, please refer to Rules on
received from all sources within the Capital Gains and Losses on pages 165 to 170.
Philippines (NIRC, Sec. 28(8)); and
Final Tax on Passive Income (NIRC, as amended
g. Real Estate Investment Trust (R.A. No. by TRAIN, Sec. 27(D))
9856, Sec. 10).
.RULES ON PASSIVE INCOME OF
REASON: The ·entities enumerated above a-re. CORPORATIONS
exempt from MCIT because they are not
subject to NCIT (R.R. No. ·9-98).

GROSS INCOME TAX (GIT) -~ , . 20% (NIRC,

(N/RC, as amended by TRAIN, Sec. 27(A)) . as ·amended
by TRAIN,
Tax Rate: 15% optional rate -· ,Secs. NOTE: Under
Tax Base: Gross income ·i ~7(D)(1) and the CREATE

When GIT is applicable:

.
-:
.:,,,_ .;
,.
' .28 (A)(7)) . Act, in general,
a foreign
• Available only to firms whose r'f!tio of ~st of (NIRC, corporation not
sales to gross sales or receipts from all sources as amended engaged in
does not exceed fifty-five percent (5~%); and by TRAIN, trade · or
• Its application in lieu of the NCIT musk ,be Secs. business in the
authorized by the Preside~t, yi>on 27(D)(1) and Pliilippines,
recommendation by the Secretary of Finance 28 (A)(7)) . shall pay a tax
(NIRC, as ·a mended by TRAIN, Sec. 27(A)). equal to 25%
effective
NOTE: To date, no authority has been given by January 1,
the President. · 2021
- - -%- -(N- IR
_C_,--1 (CREA TE Act.-
20
Conditions to be satisfied before the grant Sec. 7; R.R.
as a,:nended N
of President's authority: ' by TRAIN, o. 2-2021,
1.. Tax effort ratio Secs, Sec. 1(F)).
- 20% of Gross National Product (GNP); 27(D)(1) and
28 (A)(7)).
2. Ratio .of income tax collection to total
tax revenues 15% - DC Exempt (NIRC,
-40%; (NIRC, ·as as amended by
f!mended by TRAIN, Sec.
3. VAT tax effort TRAIN; Sec. 27(0)(1)).
. - 4% of GNP; and 27(0)(1)) .
 INCOME TAXATION
Taxation Law,
.

7.5%-
(N/RC, Sec.
28 (A)(7)).

However, the
·same shall be
income exempt if all of,
derived from a the conditions
Depository laid under Sec.
Bank under 5, R.R. No. 5-
the Expanded 2021 are
Currency present.
Deposit
System of a Exempt (NIRC, 30% NCIT
RFC is subject Sec. 2B(A)(7) (if income
to a final s;.Z-:&~,~.:!I (d)). within)
income tax at
the rate of NOTE:
15% Beginning July
(CREA TE Act, 1, 2020, the
Sec. 7; RR.- NCIT rate of
No. 2-202 (, RFC shall be
Sec. 1(E)).
25% (Sec.. 6,
. . CREATE Act
RULES ON INTER-CORPORATE
.,. - and Sec. 3, R.R.
DIVIDENDS: No. 5-2021) .

15% Final Tax if 30% Final Tax

tax sparing rule (if income
applies. within)

amended Otherwise, 30% NOTE: Under

RAIN, S Final Tax the CREATE
7(0)(4)) . (NIRC, Sec. Act, in general, a
2 (~) . :'.;.,"'( I 2B(B)(5)(b)). foreign
-.. ._ - I corporation not
NOTE: With the engaged in
passage the trade or
CREATE Act, business in the
starting July 1, Philippines:
2020, the NCIT effective
rate of DC is January 01,
either 25% or 2021, shall pay
20% (CREATE a final tax equal
Act, Sec. 6; R.R. to 25%
No. 5-2021, (CREA TE Act,
Sec. 3). Sec. 7; R.R. No.
2-2021, Sec.
In general, 1(F)).
foreign sourced
dividends NOTES:
received by
1. Where the dividends received by a foreign
domestic
corp?ration meets the 50% threshold [in the Pre-
corporations are
dominance Test), a portion of it's the dividends
w~II ~e treated as coming from Philippine sources
within the Philippines in an amount which bears
 \ I
MEM:Q~Y AID
Sin Seda t.w-wty Colage d law - ROCT Bar ()peratjons Center
the same ratio to such dividends as the gross
income of the corporation for such 'period
derived from sources within the Philippines
bears to its gross income on all sources (NIRC,
Sec. 42(A)(2)(~)).
2. Where the dividends received by a foreign
corporation is less than the 50% threshold, it
shall be treated as income from sources without
the Philippines ((NIRC, Sec. 42(C)(2)).
Conditions for Exemption from Income Tax of
Foreign Sourced Dividends received by a
Domestic Corporation: (RFH)
1. The dividends actually received or remitted into
· the Philippines are Reinvested in the business
operations of the domestic corporation within
the next taxable year from the time the foreign-
source dividends were received and remitted;
2. dividends received shall only be used to fund
the working capital requirements, capital
expenditures, dividend payments, investment
in domestic subsidiaries, and infrastructure
project; and
3. The domestic corporation .!:folds directly ,c;1t least
twenty percent (20%) in value · of the
outstanding shares of the foregoing ~orporation
and has held the· shareholdings uninterruptedly
for a minimum of two (2) years i:lt the time of the
dividend distribution. In _case the foreign
corporation has been in existenc~ for less than
two (2) years at the time of dividend:S
distribution, then the domestic corA!:>ratjon mut,
have continuously held directly a~ least 1wenty
percent (20%) in value of the .foreign
corp9ration's outstanding shares during ~the.
entire existence of the corporation (R.R. No . .6-
2021, Sec. 5).
Conditions for the 15% final tax imposed on
dividends received by a NRFC from a domestic
corporation (Tax Sparing Rule)
1. The -country in which the non-resident foreign
corporation is domiciled allows a tax credit
against the tax due from the NRFC taxes
deemed to have been paid in the Philippines
equivalent to fifteen percent (15%); or
2. Such country does not impose tax on dividends
(NIRC, Sec. 28(8)(5)(b)) .
Tax Sparing Rule
The fifteen perce'nt (15%) represents the
difference between the NC_IT of thirty percent
(30%) on corporations and the fifteen percent
(15%) tax on dividends. It is the amount of tax
spared, waived , forgiven· or otherwise as if paid
by the Philippine government in favor of the
non-resident corporation (CIR v. Procter and
I
Gamble PMC, G.R. No. L-66838, December 2,
1991).
To expound, the ordinary 30% tax rate
applicable to dividend remittances to non-
resident corporate stockholders of a f>hiliP.pine
corporation goes down to 15% if the country of
domicile of the foreign stockholder corporation
"shall allow" such foreign corporation a tax
credit for "taxes deemed paid in the
Philippines," applicable against the tax payable
to the domiciliary · country by the foreign
stockholder corporation (CIR v. Procter and
Gamble PMC, G.R. No. L-66838, December
2, 1991).
Effect if tax credit. is not allowed: Such
condition must be strictly complied with
because the 15% tax rate is a-concession in the
nature of a tax exemption vis-a-vis the 30%
NCIT (2 CASASOLA, supra . at . 172, citing
Marubeni Corp., v. CIR and CTA, G.R. No.
76573, September 14, 1989).
NOTE: The Tax Code does not require that the
· p. fo~eign tax law deem the parent-corporation ·to
·- · 'have p•aid, the fifteen percentage points ( 15%)
of dividend tax waived by the Philippines; it only
requires-· that the foreign country "shall allow"
the taiwaye" a "deemed paid" tax credit in an
amount equiv.alent to the fifteen percentage
;_ poin!5 (1 5%) (QIR v. Procter and Gamble PMC,
~-
• I
~i..;':~.
G:R. No. L~66838, December 2, 1991).
NOTE: 'Effective July 1, 2020, the credit-against
~!i' the tax due shall be equivalent to the difference
...::>; 1
t;>ety.,een the NCIT rate. and the 15% tax on
·. :,ft.. 1- di'ildEinds. (Sec. 7, CREA TE Act)
IMPROPERLY ACCUMULATED
EARNINGS TAX (IAET)
(NIRC, Sec. 29)
NOTE: The provision on IAET was already
repealed by the Corporate Recovery and Tax
· Incentives for Enterprises (CREATE) Act (CREATE
Act, Sec. 8).
Corporation liable: DC and closely-held
corporations
Tax Rate: 10%
Tax Base: Improperly accumulated taxable income
Coverage: Improperly accumulated earnings tax is
imposed for each taxable year on the improperly
accumulated taxable income by closely:-held
domestic corporations (2 CASASOLA, supra at
175).
 INCOME TAXATION
_ , . Taxation Law

Closely-held corporations · Add: Retained · XXX

- are those corporations at least 50% in value of Earnings from prior
the outstanding capital stock or at least 50% of the years
total combined voting power of all classes of stock Accumulated Earnings XXX
entitled to vote is owned directly or indirectly by or as df end of current .
for not more than 20 individuals (R.R. No. 2"-2001, year
Sec. 4). , Less: Amount that may PXXX
be Retained (100% of
NOTE: A branch of a foreign corporation is not -Paid-Up Capital as of
covered by the imposiJion of IAET, the same being end of current year)
.e..xxx
J

a resident foreign corporation (R.R. No. 2-2001, IATI

Sec. 4). ·
TOUCHSTONE OF THE LIABILITY: It is the
Improperly Accumulated Taxable Income {IATI) purpose behind the accumulation of the incom·e and
- refers to profits of a corporation that are permitted not the consequences of th~ accumulation. Thus, if .
to accumulate instead of being distributed to its the failure to pay dividends is due· to some other :
shareholders for the pµrpose of avoiding the ca·uses, such al? the use of undistributed-earnings
incorne tax with respect to its _sha·reholders or the and profits for the .reasonable needs of the
shareholders of another corporation (R.R. No. 2- business, suGh purpose would not generally make
2001, Sec. 2). · _. . the accumulated or undistributed earnings subject
·• ·, r io tpe tax.· However, if there i~ a determination that
_Computation of Improperly A~cumulated , ) f f Or(ior,tion has accumulated income beyond the
Taxable Income ~"' -:.~ , . ·-reasonaijle. needs of the business, ten perc~nt
The term 'improperly accu!11'Ulate'd, ~ xable ( 10%· I.A:Et ·sl\?11 be imposed (R. R. No . . 2_-2001,
income' means taxable income: .... ·,t1 ,-,- .,,,. - --~- -Sec..JJ..' .,_ )- · _-~
..,,,_-'t-
~ () 1•
1
1. ·. Adjus~ed by: · · ( ;,. . • [ " -:,_, .-~. ~-;-· "'\ ·

a. Income e?(empt fron,t ax~•' / ! /.. Ration~ ~ o~tA_ET '·, . . .

b. Income excluded from gross mco~ e; If ear11mgs '\ ah.. ; profits were distributed,
c. Income subject to final taxf and , - - - - --- snareholders wbuld b. liable to income tax thereon,
d. amount ·of · net operating loss carry--0yer ·· · wfie'feas1if ther -.Ji no.distribution , lhey would incur
(NOLCO) deducted / i - . \ ,_ _ . ·no taxi ; respe'i to--th'e undistributed earnings and
--2. Reduced by the sum of: ...., ,; . nr --..·-_·-~·- .f p_
a. Dividends actually or ..c<?nstrupy t e'Y paid . . ! ,: 1rnpo~ ,- : ·
rofi~ i tjf,:~ / e rporati,on. Thus, a tax- is being
.~ •
issued from the applicable yea( ~;~~x_able.. 1. · : _,1 '/ ~ef~R.e~altyi or th~ Jmproper accumulation of its
income; · . '~- ~', 1
· ~_,.,/4~~~ings,i; penalty tax); 1md ·,
b. Income tax pa1d/pay~ble for ,the ta~abJe·~ ;_...-,,,,.~. " s a form of deterrent to the avoi<1ance of tax
year; and · . · ( _,1>·, -:t, ,~ l)pon shareholders who are supposed 'to pay
c. amount rese,:ved for the rea_son~le- Q e~ds!.!:' :_ -·'--·'' _div!det:.19s tax·on the.earning distributed to them
of the business emanating · from-. the ,,..,.-: by, the Ea p·oration (R.R No. 02-200t Sec. 2).
covered year'.s taxable 1ncome (R.R._fil .. 2- ,f \:~r .,;.
~\"...,\ ·.
2001, Section 5; NIRC, Sec. 29, par (DJ) . _ 1 ,;; ;- • The ·ax on improper accumulation of surplus i~
- to discourage tax avoidance through-corporate
FORMULA (RMC NO. 35- 2011 ): -surplus accumulation. When· corporation's do
not declare dividends·, income taxes are not
Taxable Income for the PXXX paid on the undeclared dividends received by
year the shareholders. The tax on improper
Add: accumulation of surplus ·is essentially a pen~lty
Income subjects to PXXX tax designed , to compel corporations • to
Final Tax distribute earnings so that the said earnings
NOLCO XXX could , in turn, be taxed (Cyanamid Philippines,
Income exempt from XXX Inc. v. Court of Appeals; G.R. No. 108067,
. tax January 20, 2000) .
Income excluded from XXX XXX
gross income Period for P~yment of Dividend or Payment of
PXXX IAET• · , ·
Less: Dividends must be dec!ared and paid or issued not
Income Tax Paid P.XXX . later than one ( 1) year following the close of th e
Dividends XXX XXX taxable year. Otherwise, IAET (if any) should be
declared/paid paid within fifteen (15) .days thereafter (R.R. No. 02•
PXXX 2001 , Sec. 6).
Total

\ I
MEK-Q~y AID
San Seda lJrMnfty Ccllege of Llw - RGCT Bar Center
NOTE: If a taxable partnership does not declare
dividends, it is not subject to IAET because 'under
Sec. 73(0) of the NIRC, the net share of a partner
is deemed constructively received (Constructive
Distribution).
LIMITATION ON IAET: The profit that has been
subjected to IAET shall no ·longer be subjected to
IAET in later years even if not declared as dividend.
However, profits · which have been subjected to
IAET, when declared as dividends, shall be subject
to tax on dividends except in those instances where
the recipient is not subject thereto (R.R. No. 2-2001,
Sec. 5).
Reasonable Accumulation of Income
The accumulation of earnings or profits is
reasonable if it is .necessary for the purpose of the
business, considering all the circumstances of the
case. The term "reasonable needs of the business"
is construed to mean the immediate needs of the
business, including reasonably anticipated needs
(NIRC, Sec. 29(E); R.R. No. 2-2001, Sec. 3). To
determine the reasonable 11eeds of the business in
order to justify an accumulation of earnings, the
Immediacy Test is used (Cyanamid Philippines, Irie.
v. Court of Appeals, G.R. No. 108067, January 20,
2000).
Immediacy Test , ..
It construed the reasonable. needs· oL the
business as the immediate and reasonably
anticipated needs supported . by cl direct
correlation of anticipated · needs to suet},:
accumulation of profits. If the. corporation did·
not prove an immediate need for the
accumulation of the earnings and . profits, the
accumulation was not for the reasonabfe needs
of the business, and the IAET would apply
(Cyanamid Philippines, Inc. v. Court of Appeals,
G.R. No. 108067, January 20, 2000).
The following instances constitute proper
accumulation of earnings for the reasonable
needs of the business: (PLACES)
1. Allowance for the increase in accumulation
of earnings up to one hundred percent
(100%) of the faid-up capital;
NOTE: . The basis of the one hundred
percent ( 100%) threshold of 'retention shall
be the paid-up capital or the amount
contributed to t~e corporation representing
the par value of the shares of stock. Any
excess capital over and above the par
(additional paid-in capital/premium) shall
be excluded (R.M.C. No. 35-2011).
2. Earnings required by baw or applicable
regulations to be retained;
.
.
77
3. Earnings reserved for building, plants or
equipment Acquisition as approved by the
Board of Directors or equivalent body; .
4. Earnings reserved for ~ompliance with any
loan covenant or pre-existing obligation;
5. Earnings reserved for definite corporate
gxpansion projects or programs ~pproved
by the Bpard of Directors or equivalent
body;and · ·
6. In case of .§ubsidiaries of foreign
corporations in the. Philippines, all
undistributed earnings intended or
reserved for investments within the
Philippines ·(R.R. No. 2-2001, Sec. _3).
Prima Facie Instances of Accumulation
of Profits beyond Reasonable Needs of
the Buslne.ss
a. Investment of substantial earnings and
profits of the corporation in unrelated
business or in ~tock or securities of
unrelated business; _
b. Investment in bonds and other long-
term secl!rities;
• l c. Accumulation of earnings in excess of
100% of paid-up capital, not otherwise
iniended for the reasonable· needs of
t.he business' (R.R. No. 2-2001, Sec. 7);
d. ccumulation of liquid net assets
J ppproxin:iately equal to the annual
r aper ting needs for the year to cover
/ cost of goods sold and operating .
expenses because it excludes proper
consig.eration of funds generated by
the collection of notes receivable· or
trade·accounts during the course of the
year (8asilan Estates, Inc. v. CIR, G.R.
· :.No. L-22492, September 5, 1967); and
e. Indirect loans to stockholders (2-A
DOMONDON; supra at 137).
Holding or Investment'Company .
- a corporation which has practically no activities
except holding property, and collecting the income
therefrom or investing the same (R.R. No. 2-2001,
Sec. 7).
Corporations Exempted from the IAET: (BPI-
TENG-F) . '
1. Banks and other non-bank financial
iiitermediarie$ (R.R. No. 2-2001, Sec. 4);
2. fublicly-held corporations (NIRC, Sec.
29(8)(2)) - domestic corporations not falling
under the definition of closely-held corporations
(R.R. No. 02-2001, Sec. 4);
3. Insurance companies (NIRC, Sec. 29(8)(2));
4. Iaxable partnerships (~.R. No. 2-2001, Sec. 4);
5. gnterprises duly registered with the Philippine
Economic Zone Authority (PEZA) under R.A.
No. 7916(Philippine Special Economic Zone

Act of 1995), and enterprises registered
pursuant to R.A. No. 7227(Bases Conversion
and Development Act of 1992), as well as other
enterprises duly registered under special
economic zones declared by law which enjoy
payment of special tax rate on their registered
operations or activities in lieu of other laxes,
national or local (R.R. No. 2-2001, Sec. 4);
6. Non-taxable joint ventures (R.R. No. 2-2001,
Sec. 4);
7. Qeneral professional partnerships (exempt;
taxable against the partners .(NIRC, Sec. 26);
and
8. Branches of E.oreign corporations (R.R. No. 2-
2001, Sec. 4).
NOTES:
For nos. 1-3: exempted without qualification;
For nos. 4-7: qualification that IAE must be for
the reasonable needs of the business should be
satisfied; and · \ (NIRC, Sec. ~8(A)(5)).
For no. 8: not covered.
BRANCH PROFIT ·REM1riAtfce •TAX_..
(BPRT) >>-
(NIRC, Sec. 28(A)(5)) I.
Tax Rate: 15% (RFC) / e
Tax Base: Total profit appJiecf or earmarked for
remittance without any deductfon for the tax
component thereof (NIRC sec 28(.A)(S')
' • 1 ~ -· , •
NOTE: The 15% branch prpJJI 1 mltianc: tax Is
Imposed on any profit remitted by a branc~ 1 to its
head office based on the total profits appll~~ ~r.. 1
earmarke~ for remittance without any deductloncfor J,.. -'business I the Philippines. While . Philippine
the tax component thereof exc pt those acilvltles 1I
which are registered with the Phillppln~
Zone Authority (NIRC, Sec. 28(A)(5)). < 1/1/ nomlc
l/
If It Is a foreign corporation, the following are not 1 VI 1 otherwise appear to be an unequal tax treatment on
included - interests, dividends, rents, royalties,
Including remuneration for technical services,
salaries, wages premiums, annuities, emoluments
or other fixed or determinable annual, periodic or
casual gains, profits, Income and capital gains
received by such foreign corporation during each
taxable year from all sources within the Philippines
unless the same are effectively connected with the
conduct of Its trade or business In the Philippines
(NIRC, Sec. 28(A)(5)).
BPRT under the RP-Germany Tax Treaty
Under Section 28(A)(5) of the NIRC, any profit
remitted to Its head office shall be subject to a tax
of 15% based on the total profits applied for or
earmarked for remittance without any deduction of
the tax component. However, by virtue of
Paragraph 6, Article 10 of RP-Germany Tax Treaty,
the Supreme Court extended to a branch In the
INCOME TAXATION
Taxation Law
Philippines, remitting to its head office in Germany
the benefit of a preferential rate equivalent to 1oo;;
BPRT (Deutsche Bank AG v: Commissione--;-;;
Internal Revenue, G.R. No. 188550, August 19
201~. '
NOTE: The filing of a tax treaty relief application is
not a condition precedent to the availment of a
preferential tax rate. The denial of the availment of
tax relief for the failure of a taxpayer to apply within
the prescribed period of 15-days before the date of
the transaction as provided by R.M.o.· No. 1-2000
would Impair the value of the tax treaty. At most, the
application for a tax treaty relief from the BIR should
merely operate to confirm the entitlement of the
taxpayer to the relief (Id.} .
EXCEPTIONS:
1. Those actl.vltles which are registered with the
Philippine Economic Zone Authority (PEZA)
/ 2./ EnterprJses registered with .the Sublc Bay
•• ~etropolltan Authority (SBMA) and Clark
Development Authority (CDA) covered by R.A.
- No. V227. ,
.... ) '
• • I
. Ration e for lr:,,posltlon of BPRT
The ratl nale f9f t Imposition of the BPRT Is In
~- - order t equaJlze t e tax burden on foreign
corporal ons malntainlnp, on the one hand, local
branch offices and oroanizing, on the other hand,
subsidiary dorl]estic r oorporations. Prior to the
, lmposl~lon of the, BRRT, local branches of foreign
corporations were made to pay only the NCIT
appllca~le to.1resident foreign corporations doing
\ s1,1bsldlar es of for~ign corporations were subject to
- -the (a) NSIT on their net income and dividend
P8 Y':\'en s;; ~nd (b) were additionally subjected to a
A wltpqpldfng tax. In order to avert what would
such subsidiaries vis-a-vis local branch offices, a
BPRT was Imposed (Bank of America NT & SA v.
Court of Appeals, G.R. Nos. 103092 & 103106, July
21, 1994).
BPRT of a foreign corporation deriving Income
from the Phlllpplnes
GENERAL RULE: The following shall not be
treated as branch profits for purposes of remittance
tax: (IDR3-SAP) .
1. Interests;
2. Qlvldends;
3. ,Bents;
4. ,Boyaltles;
5. .Bemuneratlon for technical services;
6, §.alaries, and wage premiums;
7. Annuities, emoluments or other fixed or
determinable annual, periodic or casual gains;
and
 \ I
EM:Q~Y AID
Sin 8ecM Colage at I.aw - RGCT Bat 0pendjcn Center
8. ftofits, income and capital gains (NIRC, Sec.
28(A)(5)).
EXCEPTION: If effectively connected with the
conduct of its trade or business in the Philippines
(NIRC, Sec. 28(A)(5)) .
NOTE: If income is not effectively connected with
the conduct of the corporation's business within the
Philippines, then the corporation is liable tor the
NCIT.
P-ayment of Income Tax on Branch Profit
Remittance
The income tax on BPR shall be collected through
withholding by the payer-corporation and/or
persons, covered by a return and paid to an
authorized agent bank, to the Revenue District
Officer, Collection Agent, or duly authorized
treasurer of the city or municipality (NIRC, Sec.
28(A)(5) in relation to Secs. 57 and 58).
NOTE: The 15% BPRT is in addition to the regular
tax imposed on resident foreign corporations (R.R.
No. 2, Sec. 15(b), as amended -by R.R. No._8-75).
TAX ON NON-RESIDENT FOREIGN ,
CORPORATION
(NIRC, Sec. 28(8))
Tax Rate, 30%
Tax. Base: Gross income receive,d from al~sources
within the Philippines such as interests, divJdends,
rents, royalties, salaries, preIT)iums -,. (except
reinsurance premiums), annuities, en,oluments or
other fixed or determinable annual, periodic or
casual gains, profits and income, and capital~gains
except capitai gains resulting from the sale, of
shares of stock of a domestic corporation not listed
and traded through a local stock exchange, held as
a capital asset (NIRC, Sec. 28(8)(1)).
NOTE: In general, a foreign corporation not
engaged in trade or business in the Philippines shall
pay a tax equal to 25% of gross income received
during each taxable year, effective January 1, 2021.
(Sec. 7, CREA TE Act and Sec. 1 (F), R.R. No. 2-
2021 ).
·REASON: A NRFC is not subject to NCIT on its
taxable income but instead subject to final tax on
· gross income without the benefit of any deductio~
(NIRC; Sec. 28(8)).
Special Domestic Corporations
These are the domestic corporations that are
subject to concessionary tax rates that are lower
than those imposed upon ordinary domestic
corporations. They are not usually conducted for
profit, or even if they are, they are usually engaged
in activities that would generally benefit the public
(2-DOMONDON, supra at 141). .
The following are Special Domestic
Corporations:
1. Proprietary Non-Profit Educational Institutions
and Hospitals (NIRC, as amended by TRAIN,
Sec. 27(8));
2. Depositary Banks (Foreign Currency Deposit
Units) (NIRC, as amended by R.A. No. 9294,
Sec. 27(0)(3)); and ·
3. Government owned . and · controlled
corporations, instrumentalities or agencies
(NIRC, as amended by TRAIN Law, Sec.
27(C)).
PROPRIETARY NON-PROFIT
EDUCATIONAL INSTITUTIONS AND
HOSPITALS
(NIRC, as amended by TRAIN, Sec. 27(8))
Proprietary educational institution
: - Any private school maintained and administered
·-·· by private individuals or groups with an issued
· -~ pe,rm·t to OP.erate from the Department of Education
/ (Dep~},·or· e Commission on Higher Education
(CHED), or the Technical Education and Skills
Developmer,t Authority (TESDA) (NIRC, as
.qy
amended f FZ~ IN, Sec. 27(8).
Non-profit
~--~ - means no_net income or asset accrues to or
:.~. benefits any member or specific person, with all the
}_ net income 'or asset devoted to the institution's
purposes and all its activities conducted not for
p~frt. Non-profit_ does not necessarily mean
"pha_rltable\ (C/R v. St. Luke.,s Medical Center, Inc.
G.R. No. 195909, September 26, 2012).
NOTE: Hospitals and educational institutions that
fail to meet the above d~finition of "proprietary" and
"non-pro~t" shall be taxed as a regular corporation
(R.M.C. No. 67-2012).
The tax · exemption granted to proprietary
educational institutions under Sec. 4(3), ~- XIV of
the 1987 Constitution requires prior legislative
implementation since the use of the permissive
term . "may" in the provision gives Congress
discretion to determine whether or not assets and
revenues of proprietary educational institutions
should likewise enjoy exemption from taxes (ABAN,
Law of Basic Taxation (2016), supra at 89).
Requisites for Applicability of 10% Rate: (SPUP)
1. §tock and non-profit institutions;
2. frivate educational institution or hospital; ,
 80 · INCOME TAXATION
Taxation Law

3. Gross income from Unrelated trade, business, . 2. Its as~ets, property and revenues are used
or activity does not exceed fifty percent {50%) actually. directly, and exclusively for the
of gross income from all sources; ano primary purpose (N/RC, $ec. 30).
4. Eor educational institutions, Issued a fermit to
operate from DepEd, CHED, or TESDA (NIRC, DEPOSITARY BANKS (FOREIGN
as amended by TRAIN, Sec. 27(8)). CURRENCY DEPOSIT UNITS)
(NIRC, as amended by R.A. No. 9294, Sec.
Unrelated Trade, Business or Other Activity
27(0)(3))
- Any trade, business or activity, the conduct of
which is not substantially related to the exercise or GENERAL RULE: Exempt from all taxes on income
performance by such educational institution or derived under the Expanded Foreign Currency
hospital of its primary purpose or function (NIRC, as Deposit System (EFCOS) from foreign ·currency
amended by TRAIN, Sec. 27(8)).
transactions with:,(NOLO)
1. Non-residents;
TAXABILITY OF PROPRIETARY
2. Offshore Banking Wriits; and
EDUCATIONAL INSTITUTIONS 3. Local commercial banks, including branches of
foreign banks _that ·may be authorized by the
BSP to transact business with foreign currency
Proprietary · 10% on their taxable deposit system units (NIRC, as amended by
educational · income (except inco e [RAIN Law, Sec. 27(0)(3)). ·
institutions which are subject to capi_tal· gains ·-. r
nonprofit tax and .pas iv!!. inco.me) Je 'CEPTIO S: . . · ·
(NIRC, as amel1ped _ "y 1. Net ihcom. ~rom such transactions as may be
1-----------+-- Ti_
R_A_IN _,_.·s_~__cc_
,. _2_7_ ( ~_)_)._""_ .-'-l _ _ specJfied \: the Secretary _of Finance, upon
f 300 - recommendatio by the Monetary Board to be
If gross income O
Proprietary
1,
taxable JI
Qn i t e f entire0_
I income · · ·
., ··\: subJ'ect to: the normal corporate income tax
':., • · ·
. 1· (. cl d' . ; ·income · · · · - payable by b,anks; and . · .
educationa m u mg __: __:_2._ Eina tax of e~ percent (10%) on interest
institutions from sllbject to t ix nc:I
unrelated trade, income • which 'are . ) ticor e from foreign currency loans granted by
business or other exempt)~ or 2% · MCIT ·· . . .:, suet'\ dep?sit9ry banks under said expanded
activity exceeds fifty (NIR~. as aniiyl ed by • : . :· sy~tt~-\o. 1· . . .
percent (50%) of the IN, Sec.' 2Z(B)). - ·- -7 - ..- _ --a.:1 re~~de_ t (other th~n offshore units m the
total ·gross income
derived from
,.r_,, ,.
all
·. ( 1
;:,"'>·
I·· _: ..
'-
\\ J i ·;
/,<~t;)ihppmes , r
• ·.' , -;%'i(~ y>ther
.
depository banks_ under . the
sources •,. _. ,· ~,...., I ..-·1: _ ~ ~ / exp_? ded ,syst~m [Foreign Currency
.____________._____----....,_ ,:., . - "'~- -.! :::--::< "{ . lnter_bank Deposits] (NIRC, as amended by
. ' ,· · .. Jr:· . . 1, ~::-., TRAIN Law, Sec. 27(0)(3)).
NOTE: Beginning July 1, 2020 until June":30, 2023, ----- • ,-( \ • . .
the t~x rate ir~posed shall_ be one p€r~rtt ~1f /o): · _~ ;, "~\ __N0TE: Income of non-r:esidents (individual
Provided, ~hat 1f the gross from iUnrelated· [\/ r,_ \. "~ _..or corporation) from transactions with
1
trade, business or other activity exceeds 0%,.o .. ,,..,_,.,,_:.- depositary banks under FCDS is exempt
the total gross income derived from all sources, the . from final tax.
tax shall be an income tax rate of 25% (CREA TE
Act, Sec. 6; R.R. No. 5-2021, Sec. 3). GOVERN-M ENT OWNED AND
ILLUSTRATIONS:
CONTROLLED CORPORATIONS
If a proprietary educational institution earned a net (GOCC) .
income of ~100,000,000, ~50,000.,000 of which GENERAL RULE: The rules governing domestic
came from unrelated trade, ·business or activity, the corporations engaged in a similar business,
net income would be subject to 10% tax (now 1% industry, or activity shall 1;1pply. In short; they are
under the CREATE Act). On the other hand' if taxable (NIRC, as amended by TRAIN, Sec. 27(C)).
~51,000,000 came from unrelated trade, busin~ss
or activity, the ~100,000,000 would be subject to EXCEPTIONS:
30% (now 25% under the CREATE Act) (Id.). 1. Government Service Insurance System
(GSIS);
With regard to a hospital, it is exempted provided 2: Social Security.System (SSS);
that: 3: Philippine Health Insurance Corporation
1. It is non-stock and non-profit; and, -(PHIC); and
4. Local Water Districts (LWD); ·
- \ I
MEM:Q~y AID
San Beda CoOege of Law • RGCT Bar OperatJona Center
5. Home . Development Mutual Fund (NIRC, as
amended by the (CREA TE) Act, Sec, 27) .
NOTES:
a. R.A. No. 9337 deleted PAGCOR from the
list of exempt GOCCs. PAGCOR's income
derived from its gaming operations is
subject. to 5% franchise tax, 1n lieµ of all
national and local taxes, while its income
from olher related services or operations is
subject to the regular corporate jntome tax.
Under PD. 1869, as amended, PAGCOR is
subject to income tax only with respect to
its operation of related services.
Accordingly, the · income tax exemption
ordained under Section 27(c) of R.A. No.
8424 clearly pertains only to PAGCOR's
income from operation of related services
(Philippine Amusement _ a nd Gaming Corp.
v. Bureau of Internal Revenue, ·G.R. No.
215427, December 10, 2014);
b. RA No. ·10953 [TRAIN LAW] removed the
corporate iricome tax e:xemption of PCSO;
c. Prior to t_
he CREATE Act, the NIR·c
expressly mentioned only GSIS , SSS , ·
PHJC, and LWDs as GOCCs. However, the
CREATE Act added HDMF as a GOCC- ·
(CREATE Act, Sec. 6).
GOCCs not enumerated under Sec. 27(C) of
TRAIN Law may still be exempt from in.c ome tax
under Sec. 32(8)(7)(b) of NIRC
Even if the GOCC is not one of those enumerated
under Sec. 27(C) of the NIRC, it may still be exempt
if it is performing governmental functions_. Under
Sec. 32(B)(7)(b) of the NIRC, income derived from .
any public utility or from the exercise of essential
government function accruing to the government of
the Philippines or to ~my political subdivision is
exempt from income tax (NIRC, as amended by
TRAIN, Sec. 32(8)(7)(b)) .
D.ifference betwe~n Sec. 27(C).and Sec. 32(8) (7)
of the NIRC
Sec. 27(C) of the NIRC exempts from ~ncom~ t~x
those enumerated without any qualification while in
Sec. 32(6)(7) of the NIRC, the requisite qualification
(i.e., income is derived from any public utility or f~om
exercise of any essential governmental function)
must concur before it may be exempted .
SPECIAL RESIDENT FOREIGN
CORPORATIONS ·
1. International Carriers doing business in
the Philipplnes (Air Carrier and Sea
Carrier) (N/RC, Sec. 28(A)(3)); R.R.
No.15-2013)
Tax Rate: 2.5%
· Tai Base.: Gross Philippine Billings (GPB)
NOTE: The tax attaches only when the carriage
of persons, excess baggage, cargo, and mail
originated from the Philippines in a continuous
and uninterrupted flight, regardless of where
the passage documents were.sold (Air Canada
v. CIR, G.R. No. 169507, January 11, 2016)
If the international air carrier . does not have
flights to and from the Philippines but
nonetheless earn income from ·other activities
in the country, then it shall be subject to the
thirty percent (30%) NCIT or the thirty percent
(30%) final tax on gross income, respectively
(South African Airways vs CIR, G.R. No.
180356, February 16. 2010).
An offline carrier which l}as a branch/agent in
the Philippines and sells passage documents to
cove_r offline flight of its principal or other
airlines is taxed for the sale of the tickets even
if the service to be rendered is outside of the
Philippines based on the situs of taxation
principle (Air Canada v. CIR, G.R. No. 169507,
··January. 11 , 2016) ..
• ;__...V ,_ ~: ' •
Tax Op\ion of International Carriers Doing
Business' in the Philippines
a: Preferential tax rate of 2.5% based on
GPB · or ;
b. Tax ~xemption:
· i:· . Based_·,on tax treaty or internationai
•-..~, 'agreement to which the Philippines is a
signatory; or .
ii. On the basis of reciprocity (i.e. home-
." •t .. ,J country grants income tax exemption to
\ · : ::.•;y,· Philippine carriers) (R.A. No. 10378).
International Air • Carrier - . a foreign airline
· corporation doing business ·in the Philippines
having been granted ·1anding rights · in . any.
Philippine port ·to perform international air
transportation services/activities or flight
operations anywhere in the world (R.R. No.15-
2002, Sec.2(a)).
On-line flights. or voyages - refer to flight or
voyage operations carried out or maintained by
an international carrier between ports or points
in the territorial jurisdiction -of the Philippines
and any port or point outside the Philippines
(RR. No.15-2002, Sec.2(e)).
Off-line flights or voyages - refer to flight or
voyage operations carried out or maintained by
an international carrier between ports or points
outside the territorial jurisdiction . of the
Philippines (R.R. No.15-2002, Sec.2(d)).

Gross Philippine Billings
a. International Air Carrier
- Gross revenue from carriage of persons,
excess baggage, cargo and mail originating
from the Philippines in a continuous and
uninterrupted flight, irrespective of the
place of issue and the place of payment of
the ticket or passage document (NIRC,
Sec. 28(A)(3).(a)).
b. International Shipping
- Gross revenue whether ,for passenger,
cargo or mail originating from the
Philippines up to filial destination,
regardless of the place of sale or payments
of the passage or freight documents (NIRC,
Sec. 28(A)(3)(b)) .
Continuous and Uninterrupted Flight or
Voyage •·
This refers to a flight or voyage in ,the carrj~r of ·,
the same ~ompany from the _niop,ent ·. a ·
passenger, excess baggage, cargo, and/or mail
is lifted from the Philippine.s up ·fq,!he e,oint of - -
final destination of the. passenger,.. excess
baggage , cargo and/or maif (R:R. No!15-2002,
Sec.2(h)) . , Canada .v. CJR, G.R. No. 169507, January
• • . '. -
NOTE: The flight or v(>yage is not considered .
continuous and uninte·rrupted: if transshipmen(
of passenger, excess , oaggage, fa"rgo., and/or . . -' _
mail takes place at anx ~p9rt out~jde ""fhe... -:-:~- - • / tr..ade or qusiness in the country. The
Philippines qn. another ' airc~aft 9rJ':vessel , .. . - ·' , ~.§IJ>sence of't' flight operations within the
belonging to a different company (2~QIZOf'{,__ · , _._
supra at 343); "i. /'_,:"__ • ..,: •• _17 _.,-· th:..( ~~com~ _received. ~a~. derived from
_ " ; . ·:·.:-:, ~-; \ ~"- ' aci1v1t1es w1thm the Ph1hppmes. The test of
Effect of flight interruption (i.e. change - or-~~-- . ;~
transshipment at any port . outsipe . ) he ..-..
Philippines from an airline to anbthen afrtine)
Only the ali~uot portion of the cost of the:Jj~ket
corresponding to the leg flown from llil!
Philippines to the point of transshipment shall
form part of the Gross Philippine Billings
(known as flown revenue) {Id.). _ 28(A)(4), as amended by R.A. No. 9294)
Originating from the Philippines shall include
the following : (PFAS)
a. Where the fligh_t or voyage originally
commenced from any fhilippine Port to any
other port or point outside the Philippines;
- b. Where the flight or voyage originally
commenced from any .Eoreign port and
whose stay in the Philippines Is more than
48 hours prior to embarkatipn except if the
failure to depart within 48 hours is by
reason of force majeure;
..........
INCOME TAXATION
·Taxation Law
I
c, Where the flight or voyage originally
commenced from any foreign port and the
passenger, his excess baggage, cargo,
and/or mail Alights in any Philippine port
and thereafter boards another airplane or
vessel owned by the same airline or sanie
international carrier . and the time
intervening between the. arrival and
departure exceeds 48 hours, except for
reasons beyond his COl'"!trol (such as when
the only next available flight or voyage
leaves beyond 48 hours or by force
majeure); and ,
d. In connection with #3, where the §econd
aircraft or vessel belongs to a different
airline company or internati.onal sea carrier,
regardless of the intervening period
between the arrival and departure from the
Philippines by the passenger, his excess
..., ., baggage, cargo and/or mail (R.R. No. 15-
J 1
.-.. ~ O-t.3, _ S ec. 3) .
~. . ,..
NOTES: · .
a. Al:, offllne international carrier with no
landing ·g,hts in the Philippines, is not liable
to tax ,on Gross Philippine Billings (Air
---- ·- - ~1, 201_6 . .
· b. A foreign· a1rli~e company selling tickets in
· -• he Philippine~ through their local· agents
-' ib.all bei considered as RFC engaged in
1/ ./:. >.ehili~dine terrjtory_ cannot alter the fact that
• ility is the source, and th~ source is
~,.,.. \. hat activity which produced the income (Air
. \ . ea,nada v. , CIR, CTA Case No. 6572,
,:,....,,.,. '-· .• Decemper 22, 2004).
- · ·
2. Offshore Banking Units (OBUs)
authorized by the BSP (NIRC, Sec.
Offshore Banking Unit
A branch, subsidiary or affiliate of a foreign
b~nking corporation which is duly authorized by
the BSP, as a separate accounting unit, to
transa~ offshore banking business in the
Philippines (P.O. No. 1034, Sec. 1(8)).
_ GENERAL RULE: Exempt from all taxes on
income derived by banks from its OBUs and
Expand1d Foreign Currency Deposit Units
(EFCUDs) from foreign currency transactions
'
a. Non-residents;
b. Offshore Banking Units; and
-- \ I
MEM:Q~Y AI D
San Seda University Colege of Law - RGCT Ber Operations Center
c. Local commercial banks, including
branches of foreign banks that may be
authorized by the BSP to transact business
with foreign currency deposit system units
(NIRC, Sec. 28(A)(4), as amended by R.A.
No. 9294)
EXCEPTION: Interest income derived from
foreign currency loaris granted to RESIDENTS
(other than OBUs or local commercial banks,
including local branches of foreign banks ·
authorized by the BSP to transact business with
OBUs} shall be subject only to the final
withholding tax of ten percent (10%} (NIRC,
Sec. 28(A)(4), as amended by R.A. No. 9294).
NOTE: Income of non-residents, whether
individual or corporation , from transactions with
OBUs is exempt from final tax. · for its subsidiaries, branches or affiliates in
NOTE: Upon the effectivity of the CREATE Act,
on April 11, 2021 , OBUs shall be taxed as
Resident Foreign . Corporations, subject to
whichever is higher between the NCIT of 25%
or MCIT of 1% until June 30, 2023, or MCIT of
2% starting July 1, 2023. (R.R. No. 5-2021,
Sec. 3)
3. Resident Foreign Depository Bank .
(FCDU) (NIRC, Sec. 28(A)(7)Tb), - as
amended by R.A. No. 929.4)
Foreign Currency Deposit Unit (FCDU) . N0TE: Effective January 1, 2022 and up to ·
. An accounting unit or. depa mer:it. in local
bank or in an existing local IJra_r;ich of foreigf)
banks, which is authorized by the to
operate under the expanded foreign curren~y
tem (P.O. No. 1034, Sec. 1(8)); ,,:·
deposit sys_
GENERAL RULE: Exempt from all ~ axes on .
income derived by banks from its FCDUs or
EFCUDs from foreign currency transactions
with:
a. Non-residents;
b. Offshore Banking Units; and . Pacific Region and in other foreign markets and
c. Local commercial. · banks, including
branches of foreign banks that may be
authorized by the BSP to tra~sact busine~s
with foreign currency deposit system units
(NIRC, Sec. 28(A)(7){b), as amended by
R.A. No. 9294).
EXCEPTION: Interest income derived by bank
from its FCDU/EFCDU from foreign currency
loan granted to residents other than
FCDU/EFCDU is subject to final tax rate of
10% (NIRC, Sec. 2B(A)(7){b), as amended by
R.A. No. 9294).
4. Regional or Area Headquarters of
Multinational Companies (N/RC, Sec.
28(A)(6)(a))
Tax Rate: Exempt from inc<?me tax.
NOTE: It' is also exempt from all kinds of local
taxes, fees, or charges imposed by a local
government unit except real property tax on
land "improvements and equipment (E.O: 226,
Chapter Ill, Art. 65).
Regional or Area Headquarters (RHQ) - An
office whose purpose is to act as an
administrative branch of a multinational
company which :
a. Prjncipally serves as a supe~ision ,
communications and coordination center
the ·Asia-Pacific Region (2 CASASOLA,
· supra at 164); and
b. Does not derive income in the Philippines -
(Id.).
· · 5. . Region~I · Operating_ Headquarters of
·-!t"Multinational Companies (NIRC, Sec.
. 28(A)(6)(b))
Tax Rate: 10%
' Tax Base: ' Taxable income within the
Philippines
I
June 30, ·· 2023, ROHQs shall be subject to
whichever is higher between the NCIJ of 25%
V _or MCIT of 1%, or MCIT of 2% starting July 1, -
2023 (R. R. .No. 5-2021, Se'c. 3: CREATE Act,
Sec. 7). '- '
-
Regional Operating Headquarters (ROHQ) -
foreign business entity which is allowed to
derive income in the Philippines by performing
qualifying services to its affiliates, subsidiaries
or branches in the Philippines, iri the ~ia-
may.engage in the followif1g activities:
a. General administration and planning;
b. Business planning and coordination;
c. Sourcing and procurement of raw materials
d. and components;
e. Corporate finan~ advisory services;
f. Marketing control and sales promotion;
g. Training and personnel managemen_t;
h. Logistic services;
i. Research and development services and
product development; .
j. Technical support and maintenance;
k. Data processing and communications; and
I. - Business development (/RR, R.A. 8756,
Sec. 4(b)).

SPECIAL NON-RESIDENT FOREIGN
CORPORATIONS · . .
1 Non-Resident Cinematographic Film
· Owners Lessors or Distributors (NIRC,
as ame~ded by TRAIN, Sec. 28(B)(2))
Tax Rate: 25% , b. Are educational or instructive in character,
Tax Base: Gross income from all sources
within the Philippines
2. Non-Resident Owner or Lessor of
Vessels Chartered by Philippine
Nationals (NIRC, Sec. 2B(B)(3))
Tax Rate: 4.5%
Tax Base: Gross rentals, lease or charter fees
from leases or charters to Filipino citizens or
corporations, as approved by the MARINA
3. Non-Resident Owner or Lessor of
Aircraft and Machineries · and Other
,,
Equipment (NIRC, Sec. 2~(B)(4)). .
.,
Tax Rate: 7.5% _
Tax Base: Gross rentals or' fee :
TAX-EXEMPT CORPORATIONS
The following organizations shall not be subje~t-to
tax provided they are n t organized for profit:
- (BLOG-COM-F2 EN) . l - i.
1. Business league, chambe of comme ee; or-:- i
board of trade, not organized _for pr~fi~, ~nd no · I
part of the net income f which inur~s ~e
benefit of any private st~kholder,_or 1nd1_vidual-
(NIRC, Sec. 30(F)); ' ~- ~hartered by a_parent organization and largely
Business league .,
- An association of persons having ome
common business · interest, which limit~ its
activities to work for such common interes and
does not engage in a regular business of a kind
ordinarily carried on for profit .(R.R. No. 02-40,
Sec. 31).
It ceases to be tax exempt if it engages in a
regular business for . profit even if it conducts
business on a cooperative basis or produces
. only sufficient income to be self-assessing.
An association engaged in furnishing
information to prospective investors, to enable
them to make sound investment, is not exempt,
since its members have no common business
interest, even though all its income is devoted
to the purpose stated (R.R. No. 02-40, Sec. 31).
INCOME TAXATION
Taxation Law
2. Labor, agricultural or -horticultural organization
not organized principally for profit (NIRC, Sec.
30(A));
Agricultural or horticultural orgar:ii_zati?Rs: .
a. Must have no net income munng to the
benefit of any member;
ano
c. Must have as their objects the betterment ·
of the conditions of those engaged in such
pursuits (R.R. No. 2-40, Sec. 25) .
3. Civic leag~e or Organization not organized _for
profit but operated exclusively for the promotion
of social welfare (N/RC, Sec. 30(G));
4. Government educational institution (NIRC, Sec.
30(/)); .
5. Cemetery company owned and operated
exclusively for the benefit of its members
(NIRC. Sec. 30(0)) ;
6. , A . beneficiary society, Order or association,
operating for the exclusive benefit of the
members such as a fraternal organization
.operating under the lodge system, or a mutual
. aid associatiop or a non- stock corporation
- , organized by° en:iployees - providing for the
payrrient for life , sickness . accident, or other
benefits exclusively to the members of such
_ ,- society, order or ·association , or non-stock
· corporation or ,th~ir dependents (N/RC, Sec.
30(9)); .'
,- - ·- : / : • . ,.. ,. _
. Operating Under ihe Lodge System
: .. .::_ means carrying on its activities under a form
"" · of orgaoization that comprises local branches,
s,elf-governirm , called lodges, chapters, or the
like (1 D~-LEON, supra at 330) .
. .
NOTES: A grand lodge established for the care
of the members, their dependents, and
members, of an affiliated lodge unable to earn a
livelihood by reason of the infirmities _o f age was
held tax exempt.
Mutual protective societies not operating under
the lodge system and traveler's association
providing for fixed death benefits to the
beneficiaries,or members are not tax exempt.
7. Mutual savings bank not having a capital stock
represented by shares and cooperative bank
without capital stock organized .and op~rated
for mutual purposes and without profit (N/RC,
Sec. 30(8));
In order that a corporation may be entitled to
exemption, it niust appear that it is an
organization:
 \ I
M EM:Q~Y Al D
SM S - Unlwnity College of Law • RGCT Bar Clpenations Cenh!r
a. Which has no capital stock represented by
shares; and
b. Whose earnings less only the expenses of
operation are distributable wholly among
the depositors (R.R. 'No. 02-40, Sec. 26).
NOTES: Exemption applies to both foreign and
domestic t;>anks. · b. Revenues derived from assets used in the
Not.qualified as mutual savings bank if deposits
are made compulsory under contract between
the bank and the depositors and is operated for
sp"Bculation rather for savings.
8. farmers , fruit _growers or like association
organized and operated as a sales agent to·r the
purpose of marketin.9 the products of its
members and turning back to them the
proceeds of sales, less the necessary selling
expenses on the basis of the quantity of
.produce finished by them (NIRC, Sec. 30(K)) ;
9. .E.armers or other mutual typhoon or fire
insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone
company, or like organization of a purely local
character, the income of which consists solely
of assessments, dues or fees collected from
members for the sole purpose of meeting its
expenses (NIRC, Sec. 30(J)) ; and .
10. A non:-stock and non-profit
institutions (NIRC, Sec. 30(H)) .
GENERAL RULE: Non-stock, Nq_n-profit
Educational Institutions are · exempt from
taxation· (NIRC, Sec. 30(H)) . _
EXCEPTION: Private educationa.1 institution
which deviates from its ·purely educational
purposes and activities shall be treated like any
private domestic corporation engaged in
business for profit (MAMALA TEO, lnaome Tax,
supra at 171).
NOTE: All revenues and assets of ·non-stock,
non-profit - educational institutions, used
actually, directly and exclusively for educational
purposes·are exempt ((CONST. Art. X[V, Sec.
4(3)). The phrase "a// revenues " is unqualified
by any reference to the source of revenues.
Thus, so long as the revenues and income are
used actually, directly .and exclusively for
educational purposes, then said revenues and
income shall be exempt ·from taxes and duties
(CIR v. De La Salle . University, G.R. No.
196596, November 9, 2016) .
The exemption of non-stock, non-profit
educational institutions from income tax
extends to incidental income from ancillary
activities such as:
a. Income from cafeterias, canteens and
bookstores are also .exempt if they are
owned and operated by the educational
institution and are lo-cated within the school
premises (R.M.C. 76-2003) . .
operation of cafeterias/canteens and
bookstores are exempt from taxation ,
provided that they are owned and
operated by the educational Institution
as ancillary activities and the same are
located within the school pTemises
(MAMALATEO, Income Tax, supra at 174).
c. The il"!terest Income from currency bank
deposits and the yield from deposit
substitute instruments used actually,
directly and exclusively in pursuance of
they purpose as an educational institution
are EXEMPT from :
i. 20% final tax; and
ii. 7%-12% [Now: 7.5% - 15%] tax on
interest income under the expanded
foreign currency · deposit system
(NIRC, as amended by TRAIN, Sec.
.27(0)(1)).
Documentary Requirements:
1
a. Annual Information Return; and
b. Quly audited -financial statement to
§ducational gather with the following:
i. Certification .from their depository
banks as to the ·amount of interest
income earned from passive
investment not subject to the 20%
final withholding tax and 7%-12%
[Now: 7.5% - 15%] tax on interest
income under the expanded
foreign currency deposit system
imposed ·by Sec. 27(0)(1) of the
NIRC;
ii. Certification of actual· utilization of
said income; and
iii. ·soard Resolution by the school
administration on proposed
projects (i.e. construction and/or
- improvement of school buildings ·
and facilities, -acquisition of
equipment, books and the like) to
be funded out of the money
deposited in banks or placed in
money markets, on or before the
14th day of the fourth month
following the end of its taxable year
(Finance Department Order No.
137-87, Sec. 3).
NOTE: The exemption does not cover
withholding taxes. As educational

institution , they are constituted as
withholding agents for the government
requ ired to withhold the tax on
compensation income of their employees,
or the withholding tax-income payments to
persons subject to tax pursuant to Sec. 57
of the Tax Code of 1997 (MAMALA TEO,
Income Tax, supra at 175).
11 . Non-stock corporations or association
organized and operated exclusively for
religious, charitable, scientific, · athletic or
cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset shall
belong to or inure to the benefit of any member,
organizer, officer or any specific person.
In case of religious activities, income from the
conduct of strictly religious activities, such as
fees received for administering baptismal , ,_
solemnizing marriages, attending _burials, , oses. To be exempt from income taxes,
holding masses and the like,' are exempt.
"' · "". ._ - . .
Charitable Corporation includes association
for the relief of the families of ~ rgymen,_ev.en- - - ._b . Organized exclusively for charitable
though the latter make contributions•'to the fund
established for this purpose, or for fy mishing
the series of trained nurses to persons unable
to pay for.them or for.ai,iiin the' general body of"• - - - -
litigants (2 CASASOLA uptaj at 190}. ·
i ' · '·
a: -
Scientific Corporatlon..J includ~s an _-: _~-
association for the scientific-study' (,law with
view to improving its ~d · istration. (), '-
·
·. I:·'. ·:
\ 5~-~ ' . : ,.::- ~At,~jvitie~ ·conducted for profit .
Requisites for Tax Exemption: ' J ,;,.:.,
a. It mu~t _be a non_-stock corporatiQ_iJ. <.; 0 ,, _:-i~,-\; ;_,0r profit acti\eities: However, such profit is
association organized and 7 ~perated~,.:..--- 1 subje o tax (INGLES, supra at 101).
exclusively for religious, l ctJ.arita!Jle.-
scientific, athletic, or cultural putp'cf~ , or
for the rehabilitation of the vete ns
1
1.\ '
_J._""\..'>. associations which claim to be charitable or
(R.M:o . No. 20-2013, Sec. 6);
b. It should meet the following tests:
i. Organizational Test - Its purpose is
exclusively limited to one or more of
those described in Section 30(E) of
NIRC.
ii. Operational Test - Its regular activitie$
must be exclusively devoted to the
accomplishment of the specified
purpose.
N~TE: A corporation/association fails to
meet this test if a substantial part of its
operations is considered "activities
. conducted for profit" (R.M.O. No. 20-2013,
Sec. 6).
INCOME TAXATION
Taxation Law
c. All the net income/as~ets must be devoted
for its purpose and no part accrues to any
person (R.M.O. No. 20-:2013, Sec. 6); and
d. It must not be a branch of a foreign non.
stock, non-profit corporation (R.M.O. No.
20-2013, Sec. 6).
NOTE: A Tax Exemption Ruling for non-
stock, non-profit corporations/associations
shall be valid for a period of three (3) years
unless sooner revoked or cancelled
(R.M.,O. No. 20-2013, Sec: 9) .
A non-stock and non-profit charitable
. institution is not automatically exempt from
paying taxes
. To be exempt for real property taxes, Section
28(3), Article VI of the Constitution requires that
a charitable institution use the proper "actually,
directly, and exclusively" for charitable
.-Secti6' 30{E) of the NIRC requires that a
qtari_ta~le"institution must be:
a A no1r-5tock corporation or association;
.purpp~,:;
c. 'pperate<:1 exclusively for charitable
' \ ..,,_
purpo¥ s; and . _
tJo party'"'o f its net income or asset shall
f>elong to or ioure to the benefit of any
, ember, ~nizer, officer or any specific
P,~ n (Q qASASOLA, supra at 192).
Z'-./: ' .
,E.ff!_ct if a charitable institution engages in
-1 ·does n6t lose its tax-exempt status for its not-
...., ,
t!Olt:. Non-stock; non-profit corporations or
social welfare but are not organized and
operated "exclusively.. for charitable or social
welfare purposes are not entitled to the income
tax exemption under Section 30(E) and (G) of
the NIRC, as amended-, and their taxable
income shall be subject to ordinary · 30%
corporate rate under Section 27(A) of the NIRC,
as amended (R.M.C. No. 67-2012).
-
An institution under Section 30(E) and (G) does
not lose its tax exemption if it earns ircome
from its for-profit activities. Such income tram
for-profit activities is merely subject to income
tax at the preferential 10% rate (R.M.C. No. 67-
2012).
 . \ I ., .

MEM:Q~y AID
s., Seda l.w-.ty Collega of Law - RGCT Bar O!)eratlona CantBr d,~, 87
'•

Tax-Exempt Co.rporations under Special Laws:

1. Cooperatives, subject to certain conditions
(R.A. No. 6938); .
2. Fo1,mdation created for scientific advancement
(R.A. No. 2067, Sec. 24) ;
3. Barangay Micro Business Enterprises (R.A. No.
9178) ;

Barangay Micro Business Enterprises

- refers to any business entry or enterprise
engaged in the · production , processing or
mal")ufacturing of products or commodities,
including agro-processing, trading and series,
whose total assets including those arising from
loans but exclusive of the land on which the
particular business entity's office · plant and
equipment are situated , shall not be more than
~ . 000,000 (R.A. No. 9178, Sec. 3 (a)) .

Exempt only for income arising from the

operations of the enterprise, but not from final
taxes on deposits, interest income, capital
gains tax, royalties, etc (R.A. No. 9178, Sec. 7).

4. Foster Child Agencies (R.A. No. 10165) ;

5. Tourism Enterprise Zone (TEZ) Operators (R.A. No.
9593, Sec. 86(a))

- TEZ Operators are given an income t?1X holiday

for six years. -......

6. Association Dues. The association dues and

.I
income derived from rentals of the homeowners
association's properties are exempt from income
~~~ed: .
. a. . The homeowner's association must be a _
duly constituted "association" ;under
Section 3 (8), R.A. No. 9904;
b. The LGU having jurisdiction I over .. the
homeowners association must issue a
certification identifying the basic services
provided by the association, and stating i!s
lack of resources to provide such basic
services; and
c. The homeowner's association must
present proof that the income and d~es are
usecj for cleanliness, safety, security and
other basic services needed by the
members (R.M.C. No. 9-2013).
- - - ~-

88 . INCOM~ TAXATION
Taxatioh law

RULES ON THE TAXABILITY OF INCOME OF CORPORATE.TAXPAYERS

Income from all sources Either: I

within and without the 1. NCIT - 30% of Taxable Income
Philippines (NIRC, as (NIRC, as amended by TRAIN Law
amended by TRAIN Law Sec. 27(A)); or
Sec. 27(A)) . 2. MCIT - 2% of Gross Income (NIRC
as amended by TRAIN Law, Sec. 27(E))·
Whichever is higher ·

NOTE: The NCIT rate of DC is either

25% or 20% starting July 1, 2020 (~ec, ·
.6, CRf=A TE Act and Sec. 3, R.R. fyo. 5.
~021).

Starting July 1, 2020 until June 30,

2023, the MCIT rate of both DC and
RFC will only b~ 1%. Starting July ,.
·.• 2023, the MCIT rate will again be 2%
j '(S c. 6, CREA TE Act and Sec. 3, R.R.

' .
.No .. 5,-2021).

Income derived from ~II ~ptional f ate of 15% of Gro_ss l[lcbril~.

1
.

sources within and without (f!/IRy, a~ amended by TRAIN ifr',

the Philippines (NIRC, as Sec. ·27(AJ,par. 4)).
amended by TRAIN !-av,(,
Sec. 27(A)) . ·.

Income derived from 10% of Taxable Income- if gross income.

from unrelated activities does pot
sources within and without
exceed · 50°/o of total gross income_'
the Philippines (NIRC, as
(NIRC, as amended by TRAIN Law,
amended by TRAIN Law,
Sec. 27(8)) . Sec. 27(8)).

NCIT/ MCIT - if ex~eeding 50% (N/RC),

as amended by TRAIN Law, Sec. 27(B)

. . I 1 2020 until
NOTE: Beginning Ju Y , . d
June 30 2023, the tax rate ,mpose1
1

shall be one percent (1%): By J~l~o '

1
2023 the tax rate shall agam be ·f
If ex~eeding 50% - Income ta~ rate
2020
fo
25% or MCIT of 1% (July 1, ~~23
1
June 30, 2023) or 2% (July •
onwards) (GREAT~ Act, Sec. 6)-
 \ I

MEM:Q~Y AI D
$ail s.c,a l.kv. College ol law • RGCT Bar ap..liona C....

J. TAX BASE TAX RATES

Income derived from Either:
sources within the 1.NCIT - 30% of Taxable Income
Philippines (NIRC, Sec. (NIRC, Sec. 28(A)(1)); or
2B(A)(1)). 2.MCIT - 2% of Gross Income (NIRC,
Sec. 28(A)(2)),
whichever is higher

NOTE: A foreign corporation engaged in

trade or business in the Philippines,
effective July 1, 2020, shall pay a tax
equal to 25% (CR~A TE Act, Sec. 7;
R.R. No. 2-2021 , Sec. 1(F))

Starting July 1, 2020 until June 30,

2023, the MCIT rate .of both DC and
RFC will only be 1%. Starting July 1,
2023, the MCIT rate will again be 2%
(CREATE Act, Sec. 6; R.R. No. 5-2021,
S~c. 3)

Optional Rate of
15% of Gross Income (NIRC, Sec.
28(A)(1) par. 4)).

Gross· Philippine Billings Either:

(NIRC, Sec. 28(A)(3)(a))
1. Preferential Tax Rate of 2.5% or Tax
Exemption (on the t;>asis of reciprocity or
Tax Treaty) (NIRC, as amended by
TRAIN Law, Sec. 28(A)(3))
2. Offline carriers/ no landing rights -
30%, however, the existence of a tax
.treaty must be considered (Air Canada
vs f;/R, G.R. No. 1695607, January 11,
2016)

Income from foreign Exempt, except net income from

currency transactions with transactions as may be -specified by the
nonresidents, other OBUs, Secretary of Finance (NIRC, Sec.
local commercial banks, 28(A)(4))
- including branches of
foreign banks (NIRC , Se.c.
28(A)(4));
 INCOME TAXATION
· Taxation Law

Interest Income
from foreign currency loans
, granted lo residents, other
~~-.,.r...~~~Jthan those included In the
above list (NIRC, Sec.
28(A)(4))

Income derived within the Exer'l1pt (NIRC, Seo. 28(A)(6)(a))

Philippines only (NIRC,
Sec. 28(A)(1))

Income derived .within the 10% of Taxable Income (NIRC; Sec.

Philippines only (NIRC, 28(A)(6)(b))
Sec, 28(A)(1))
NOTE: Effective January 1, 2022,
ROHQs shall be subject to whichever Is
hfgh{ir between the NCIT of 25% or
MCIT•·of ,1% from January 1, 202.2 to
Jt.lne ·3b, 2023 or MCIT ·of 2% starting
July 11, ~023 (CREA TE Act, Sec. 7; R.R.
No. o-2021 ,'pec. 3)

Income deri'I/Sd within th~ 30% Ftnal T x on Gross Income (NIRC,

Philippines, except capital.
gains from sale of shares of
stock not tra9ed in the stock
~xchange (NIRC, Sec.
28(8)(1 ))
Sec. 28(8)(1)}
NOTE: _ A 'i foreign corporation not
'engaged i trade or business in the
Philippines, effective January 1, 2021 ,
s all pay.}~tax equal to 25% (CREATf
.
Act, Seoi 1i R.R. No. 2-2021 . Sec. 1{P))

(ncorne derived within the 25% of Gross Income (NIRC, Sec.

Pnilippines only (NIRC, 28(B)(2))
Se( t8(B)(2))/ ,·· ,. ,, ..

Gross rentals, lease or 4.5%1 of gross rentals, lease or chart~r

charter fees from leases or fees -from leases or charters to t=illpino
charters to Filipino citizens ~ltizens or corporations, as approved by.
or corporations (NIRC, Sec. the Mantlme Industry Authority (NIRO,
28(8)(3)) Sec. 28(8)(2))

Rentals, charters, and other 7 .5% of gross rentals or' fees (NIRC,
fees derived within the Sec. 28(B)(4)).
Philippines (NIRC, Sec.
28(B)(4))
 - ·' I •
.MEM:Q~Y''it\lD
Sen Bede UrWMwty Cohge of I.aw • RGCT Bar Ope,atlona Center

- . . - . .- ~-

I
I..,, ,

(.' .
I
.

GROSS INCOME .
" • I I
GROSS · ·," TAXABLE
INCOME . . . INCOME
NET INCOME
. ..
J
As to Definition .
. -. ,, .
INCOME · '.' ' I •
•(A) -· 1 of , he less '- ,., ,_ 'lh':l' :' ~!;

NIRC. deductions, if ! -~ . :fl d,..- ••:f

It rel ers, to all wealth w~icti flows into the taxpayer
any, f1 - "':r ,t..lr,>: - -
other than a mere return of capital. It includes forms • I

of income specifically described as gains and profits, authorized NOTES:

incll\ding " gai~s ~e.rived from the sale or . other NOTE: Gross ·for such 1. Statutory
1income does types : of .1 deductions
0

d_ispo~iti,on ,of capital a~~e~s (R.R. No. 02-40,· Sec.

36). ., not include income by ·are-:'r. in
monies or NIRC or gene al, ,
GROSS INCOME . receipts other s·pecial ' expenditure
entrusted-to the laws; r'(N/RC, ·s oth'er than
All income.deriv~d from whatever source, including taxpayer which Sec. ·' 31;ci--as · •- ~pital
(but ,,not limited to) the following items: (CARD- -do not belong amended·· by · -expenditure
GRIP3) to them ·and-do TRAIN Law) . S ; .._
1. ~ompensation for services in whatever form not redound to connected
paid, including , but not limited to: (SWag-C.oFS) the taxpayer's NOTE: The with income
a. §.alaries, benefit (CIR • v. · ·phrase· I i ,;. : · • production
o. Wages , BPI, G.R. No. "and/or (R.R. · No.
c. Commjssions, 147375, June pers6nal -an'd · 1 1r- 02-010, Sec.
d. fees, and 26, 2006, citing -,additional ·, · 1 s:. 36). I
§.imilar items; CIR v. Tours ,exemption" iS'= :, · · : :,c:
_nnuities; - , I : . _Specialist 1 _ removea .. ihi' 2.-0rdiharily
3. Bents;
4. Dividends; .~. :-664~{>\
"Ii 6..(} fiJ the definitionl '),-:'t he I
_o. pursuant to '· ':'income is
net

_5,._ Gal[l~_si_eJ ived fr:Q.!TI dealing_s in prop__rfy;___'. · March 2t TRAIN Law. computed
6,., Royalties; ,. 1~ - m , ,. ,1990) [--J,\.f I '} i • ) t::iasedt 0 9 on
7. !nterests; 1 ,-; J ',,\'.•- , , · : , · r ,,1i2 .. i ~ r- Ethe'i'li'lethod
s~ •·,Gross income derived from ttie-conduct- of trade 1
'!
¥
. . of
or business or the·exercisE:!.:bf a-,frofession; , . ' •:;>".' ~;,_,c. ...t. • ·:. '- .l,~ ,i:.-;-
• r... ::,
\: ; , ,11i;~cd:itfntlhg .;:
9. frizes and winnings; b cre, . ·. t 11':'' ::·t l~ ·1 1sr11regularlY'
... ; .
10. Pensions; and 1 - , ... ,~ .... , ) J . · ., · :- , ,,,. r .if"\ ,i_ /\a ernpFdyed
11 . Partner's distributive share .from 1he net iR~om~ by the
of the general professional partne~hip ,(NIRO, c;,.;: . . , , :~"'·, . :Zta"xpa e
Sec.,32 (A) as amt3nded by TRAIN Law). · ,1,_ .vr I 1,_ • liu' 1 1f I (RRimr, w o.
' . •. JU r • Ii- 02...«),7CSec.
Meaaio_g ~ft_be Phrase "All Income Derived F.rom n,', 36 J ' ·1s
Whatever -Source" , ·· '
All income not•expressly excluded or exempted from
the class • of taxable income under our laws . The Gross,-, Income ,fPaxable/Ner:l noomf!iJ? s rn
definition of gross income is broad enough to include · = All income-• ,1::; Gross inW meNeSS'iallowa"'ble
all passive.ir:icomes subject to specific tax rates or less exclusions · deductions (DIMAAMPAO,
v.
final taxes (Banco de Oro et al. Republic, G.R. No. (DIMAAMPAO, Income Taxation, supra .at 13).
Income · ,1 ,, . 1 __ , ;- ,rj_,~ ,Gd l"Alr 2';:j,sT -
198756, January 13, 2015).
• Taxation, . ,:1,. .-, 1 ,J•,,,u1i 1a11 ~-1 >.:-, ::ir·,.- ::-n1 ·,·, '
su rtJ'a/"1'3 ;', •;:, . r,,,c,1:::,••-,t-1_ :-i: "r1,~,.:- ... : J jfll
GROSS INCOME VS. TAXABLE INCOME
VS. NET INCOME The enumeration ·\ un'derW, S~c. · 1 "32 · (A)' ...is ; not
exclusive. The following are likewise included in the
taxpayeris grOSS1nCOme .. ' · 'l~, f: 1~1 ', '. 'U,j::: .\
··1:·eonseqilenflaf1 damag~s reptesentir'ig- -lo~ of
· victim's earning capacity (BIR Ruling 'tf.26: 2018,
· January 18, 2018);
All · income, Pertinent Gross income d1 1_;iF l• it..i _. t :, - . ·iv"'::' ..,. . : - : 1 ; .. • J
1 1
~ \~
.gain , or profit items of less statutory
-2. · Amol.ml received by mistake '(C/R ii. javier, G.R.
subject to gross income deductions
· · No.J ,78953, Jul}i3•1,- 1991); .-· -v · ~. 1
income tax specified in (R.R. No. 02- ' . - \:
under Sec. 32 the NIRC, 40, Sec. 36

3. Canceilation of the taxpayer's indebtedness on
account of service rendered (R.R. 02-40, Sec.
50); .
NOTE: The cancellation and forgiveness of
indebtedness may have three possible
treatments:
a . Taxable Income
If an individual performs services to a
creditor who, in consideration thereof,
cancels the debt to the extent of that
amount;
b. Gift
If a creditor merely desires to benefit a -
debtor and without any consideration
therefor cancels the debt; the same need
not be included in the latter's gross income
·because it is an exclusion under Sec. 32 (B);
INCOME TAXATION
Taxatl<;>n Law
9. Cash deposits or advances received b
taxpayers other than General Profession1i
Partnerships cov~red by R.M.c.· No. 89-20 12
(R.M.C. No. 16-2013); and
10. Pr~eds of stolen ~r embezzled property
JUmted States · v. Loz,a, 104 F. Supp. 34 6
DCJDNY, 1952; MAMALA TEO, Income Tax'
supra at 75). '
NOTE: It is opined that unlawful, as well, as
lawful g~in is comprehended within the term
·gross income" ·(James v. United States, 366
U.S. 213, May 15, 1961; MAMALATEO, Income
Tax, supra at 75). This is because the money or
other proceeds of the sale or disposition of
stolen property are received under a claim of
right (United States v. Lozia, 104 F. Supp. 346,

u
. or DCJDNY, _1952). .

NOTE: It is subject to donor's tax. _,.--

c. Capital Transaction . . · SOFGROSS

If the corporation forgives he d~ ,t or its
stockholders which has th effect of an ----- COME
indirect dividend, w f is taxat>le aq9 . · :_,
included in the gros _ income (R. ,j. 02-4.d;
5
Sec. 0). - , -.----~----,---M_-P__l=_N_S_A. . f_~O
.. _N......._,..
\ _ _ _ _ __ _
4. Payment of ~surious i rapt (DIMAAM~p,;· ,: , ~,_ ~ ,~~remuneration. toe, Services performed by an
Income Taxatton, suprcf at 6): ~"":, '-. 7employee for his e~ployer under an employer-
<, ,---:~ · '\.:::::·.
,_., employe~ ·(ER-EE) relationship, unless exempted
5. Illegal gains (e.g., gcJins from. ; e ortion-;/l""'": ~- un er1NIRO' (R . No. 8-2018, Sec. 2(a)).
embezzlement, jueteng, 1and "\':.{~}:r,bling) ]\, / . ; -- //-{::-/ · ·
(DIMAAMPAO, Income Taxation, sup -a ,6. . · -Tes(~ /to Determine . Whether Income Is
' ........ /
- ~pensatlon or Not
REASONS: When the axpayer acquJ~es; ::-· 1 . 1 Whether ·such income is received by virtue of an
.earnings, lawfully or unlawfully, wjt out tH e-1 Li J.....--,.,...-ER-E~_s.elationship (1 DE LEON, supra at 353).
,t• , ·
consensual recognition, express ·or: implied, of
an obligation to repay and without esfr1c tion as
to their disposition, he has receive i me
M- - . ..,
13._ · e)ler;:illy, an ER-EE relationship exists when
C "\.. .t ile person for whom services are performed has
which he is required to return, even though t the right to control and direct the individual who
may still be adjudged liable to -restore· its performs the service, not only as to the result to
equivalent (MAMALA TEO, Income Tax, supra at be , accompiished by the work but also as ~o
75). details and means by· which that result Is
acco"niplished (R.R. No. 8-2018, ~ec. 2 (e)) .
6. Taxes and bad debts recovered to the extent of
the income tax benefit derived from deduction of 2. The name by ·. which the relJluneration for
the taxes and bad debts (please s~e the concept services is designated is immaterial (R.R. No. 8-
of Tax Benefit Rule under Deductions on pages 2018, Sec. 2 (t;1)). ·
135 for tax refunds and 144 for bad debts);
a. Compensation for services rendered ~Yan
7. Subsidy for advertising expenses (CIR v. Sony independent contractor, where there 1s n2
Philippines, Inc., G.R. No. 178697, November EE-ER ·relationship, does not fall unde_r
17, 2010); "gross compensation income". However, 11
shall be recorded as Income from trade or
8. Unutilized or excess of the campaign funds, business (DIMAAMPAO, Income Taxation,
which is the excess of campaign contributions at
supra 31).
over the candidate's campaign expenditures (2
CASASOLA, supra at 235) ;
 . \ I .
ME~Q~Y AID .
San Bed&~ Oolage ot Law • ROCT Bar 0perat1cna Cwar
b. Amounts paid either as advances or
reimburse~ent for transportation,
representation and other bona fide ordinary
and .necessary expenses incurred in the
p~rformance of. an employee's duties are
not taxable compensation income. Only the
excess, if any, over the actual expenses is -
taxable (Id. at 30) .
Remuneration for services, unless excepted
by the statute, constitutes compensation
even though at the time paid the relationship .
of employer and employee no longer exists,
between the person in whose employ the
services were performed and the individual
who performed them (Id. at 354).
Valuation of Amount of Compensation:
If payment is made in:
1. Ca_ sh - full amount received ;
2. 0.ther than cash - fair market value (FMV) of
the thing at the time of payment or rendition of.. c
service; {- ,._ ·-:
NOTE: If the services were rendered at '~ ':
stipulated price, in the absence of evidence;l d ' ·-
the contrary, such price wili be presumed to be
the fair value of the compensation receive~
(RR No: 02-40, Sec. 41). v.~ .. ,
.....,.;;..,
3. Promissory note or oth~ · Eivi~nce· of
indebtedness - ,.
i. Not discounted: face value· •• - • ·_;;
ii. Discounted: the fair discounted value of ttia:l
note as of _the time of r~_jp("and th~
employee shall also rec&d adcl~ onal
income upon the recovery of the ~discount • ·, official or employee when' the cause of the
(DIMAAMPAO.- Income Taxation; supra · a · ·
32).
4. Stocks - FMV of the stock. It is to be treated as
if the corporation sold the stock for the market
value and paid the employee in ·cash; and
NOTE: In case of a stock option, the difference
between the FMV of the shares at the time the
option is exercised and the option price
constitutes additional compensation income to
the employee (Commissioner v. Smith, 324. U.S.
1n; DIMAAMPAO, Income Taxation, supra at
41).
5. Uvi_ng quarters furnished in addition to cash
salary - the rental value of such quarters (R.R.
No. 02-40, Secs. 41-42).
Compensation Income includes: (WSRM-DFL)
1. _ Wages . Retirement Benefits of Employees of
- ·means all remuneration (other than fees
paid to a public official) for services performed
by an employee for his employer, including the
cash value of all remuneration paid in any
medium other than cash (NIRC, Sec. 78..(A));
a. INCLUSIONS: ·sackwages, Allowances,
and Benefits awarded in Labor Disputes -
these constitute remuneration for services
that would have been performed by \he
employee · had he not b~en illegally or
unjustly dismissed (MAMALA TEO,
Reviewer, supra at 175) . .
NOTE: The employee should report as
income and pay the corresponding . truces
thereon ."by allocating or spreading hi~
-backwages, allowanc~s. and · benefits
through the years from his separation up to
the final decision of t~ court awarding _
backwages." (RMC 39-2012). '
b. EXCLUSIONS: Wages do not include
remuneration paid for the following: .(AD-
.... .CaS) . ·
,l. Agricultural · labor paid entirely in
products of the farm where the labor is
performed;
ii. Qorriestic.service in a private home;
/ iii. Casual labor not .in the course of the
/ m))loyer's trade or business; and
',· •.!~ § erv·ces by a citizen,or resident of the
P ilippines for a foreign government or ·
a international organization (NIRC,
.sec. T,&-(A)).
'
§eparation pay
- taxable compensation of the separated
' separ.alion is within the control of such official or
employee (e.g., the employee is separated
.. under a voluntary separation program · of the
employer);
NOTE: Separation pay received because of
death, sickness or other physical disability or for
any cause beyond the control of the separated
official or employee are excluded from gross
income anq, as such, are not taxable (NIRC.
Sec. 32(B)(6)(b), as a__mended by TRAIN LAW).
3. Retirement benefits
=- taxable compensation to the retiring official or
employee if such benefits were received by an
.employee who fails to meet the minimum
requirements of a reasonable private benefit
plan under: .
a. ' R.A. · No. 4917 (An Act Providing that
Private Firms shall not be _Subject ·to
(
 .I
INCOME.=rAXATION
- Taxation Law

Attachment, Levy, Execution, or any Tax ANNUITIES

whatsoever); or It tefers· to the periodiq installment pa~ments at
b. R.A. No. 7641 (An Act Amending Article income or pension by irysurance companies during
287 of P.O. No. 442, as amended, the life of 'a person or for a gua~anteed ~xed period
. otherwise known as the Labor Code of the df time whichever is longer, In cons1derat1on of
Philippines, by Providing for , Retirement capital paid · by him. It is paid . annually, monthly or
Pay to Qualified - Private Sector perioaically, computed upon the amount paid yearly,
Employees in the Absence of any but not necessarily for life (Peralta v. Auditor
Retirement Plan in the Establishment) General, G.R. No. L-8480, March 29, 1957).

NOTE: Retirement benefits granted by private The annuity payments represent two parts that are
firms or individuals may be exempted from - either taxable or not taxable. ·
income taxation, subject to certain conditions
(Please refer to discussion on Exclusions from 1. Not Taxable - Return of premium·; and
Gross Income on pages 104 to 106).
NOTE: Life insurance ·annuities are excluded
4. Monetary ·benefits (e.g., bonuses, 13th month from gross income (NIRC, Sec. 32 (B~(1J) :
pay) in excess of the ~o. 000 threshold for
exclusion (Please refer to discussion on 2. Taxable - Return which is excess over premium
Exclusions from Gross Income on page 106)~ and interest (R.R. No. 02-40, Sec. 62).

5. Director's fees ,; 1 ,., J

. '\ ".
ILLUSTRATION: Mr. A purchased a life annuity
(
- if the director is, at the same- 1im~. an .-> - for fltS00,000 which will pay him f9120, 000 per
. employee of the employer-corporation •(e.g., year. - Assume that the life expectancy .9f ~r. A
President of a corporation sating_ as a· member -. - ··ts fi'le .. years,~ reckoned from the date of
of the board of directors) (R.R ,No. •02-98, Sec. -v • purchase.,Mr. A will receive a tot~I of flt600,000
2.78.1; R.M.C. No. 34-2008); an ..:.. / . o, (P120, 000 per year x 5). Out of the t-600;000 to
( . t
. be received by A ,'-f!-500 ,000 shall be excluded
NOTE:. Director's fees paia'to~n individual who - from gross income s it represents th·e 'return of ·
t:. · is not an employee of• the-. corporation paying
o such fees (i.e., wfiose duties.are confin\Jd to the
·~ attendance of and participation in. the meetings
of the board of direct~rs) ~e not treated as
0
premiums paid while the excess of flt100,000
shalr be taxab1ij'. -:- ; •r >,
,..,,...
. .
J . .J 1.J l

. ,.,
compensation because of the absence 'of ER- RENTS
EE relationship, but rather, the:.same ~sflould Tpe
..J ,
~rri9unt
••
paid for V,e use
•
or lease or enjoyment
I
squarely fall as gross income derived from the oJ,j:\ P.fpperty , wheth~r real or personal property, to
conduct of trade or business· or exercise of . a 1 - ~wner:, of the pJoperty (2 CASASOL/4 supra at
½ 01 - . .
profession (R.M.C. No. 34-2008). . , '" · I ;1." f' ~ , .r..
.i' l ' • .,
6. fringe benefits grante_ d . to rank--and-file S~OPE:' All rentals derived from leas·e of property,
employee - However, fringe benefits ' given to w.lle1!1.~.r Used in busir,ess .or not, from real or
1
rank-and-file employees may be excluded or - persona) pr9perty, earnings _ ftom c·q pyright,
absorbed by the fD90, 000 tax exemption on the trademarks, patents and natural ·r esources under
13-month pay and other benefits (NIRC. Sec. lease. It includes:
32(B)(7)(e), as amended by TRAIN LAW). . ,.. .
1._ Agreed amount per month 'or per year; '
7. '
"!:_ave gifts" received by pastors •from pastoral 2. Obligations of lessor to third parties which the
ministry (BIR Ruling No. DA-211#-06, April 5, lessee undertakes to pay as further
2006). con_sid~ration of the l~ase, such 9 s~(RIDI) ,
j .- 1 l .a . Real _estate taxes on leased p(e·mises;
NOTE: It is subject to income tax and b. !nsurance ptemiums pa.id - by lessee on
withholding tax. Every form of -compensation for policy covering leased property;

oi
, personal services is taxable,) regardless of how ~. ~- Qividends paid by lessee to stockholders of
it is earned, by whom it is paid, the label by r-' les':~or-'corporation, in fieu rent (.US v.
which it is designated , the basis upon which it is Boston M:R. Co., 279 US 732,- Ju'ne '1929,
determined, or the form by which it is received citing West End Railway Co. V. ·Malley, 246
(BIR Ruling No. DA-214-06, April 5, 2006). F. _625); and . .
d~ !ntefest paid by iessee to holder. of bonds
issued by lessor-corporation, instead of rent
 (DIMAAMPAO; Income Taxation, supra at
45) .
NOTES: ' · .J
1. Prepaid or advance rental 'is 'taxable' inc'ome to
the lessor in, th~ year received, if so r~ceived
u~der a claim of right and without restricti6n as
to its use, regardless of method of accounting
employed (DIMAAMPAO, Income Taxation
.
· supra at 46) .
. ..,
· '
1
2. Security deposit is'·not taxable as 1an advanc~
rental. However, it is taxable 'if the lessee
violates any provision of the contract. When it is
applied to the rental of the terminal month or
period of contract, it must be recognized as
income at the time it is appliet1 (Id.). . .'
3. If the security deposit is to ensurJ c~ntract
compliance (security _deposit with acceleration
clause), it is not income to the lessor until the
lessee violates any provision of the contract (2 ..
CASASOLA, supra at 222) . . ~-
4. lfthe advance payment is a security d~posit and
the condition which mat<es the security deposit
the property of the lessor occurs: then the lessor
realizes a taxable income to the e)S!ent of the
security deposit (BIR Ruling No. 14'4~88,' 'April
18, 19'88, 'citing BIR Ruling'Nd. 011-69, OctQber
3, 1969). The security deposit i's taxable if the
lessee, violates any provision of the contract ·
(DIMAAMPAO, Income · Taxation,_. ·supra at p.
48). An example of which would be if tfie security
deposit is made to compensate· the ·lessor for .
any possible damage that may be done to the
leased property, and.is thereafter app lied by the
lessor to compensate the damages to · the .
property leased caused by t he lesseE!·, then the
lessor realizes-a taxable income to t , e••ext~nt of
. If
the security deposit given :· · b. The lessor purchases the "property at the
5. Wheth'er an agreement whictr in f~rm is a lease ,
is in· substance · a conditional sales contract,
depends upon the intent. of .the pa_rties as
evidenced by the provisions _of the agreement,
read in the light of the facts and circumstances
existi'ng at the tim~ the agre~m~_ nt w~s ~xecuted
(DIZON, Outline supra at 521) . .
• I
NOTE: The different treatment for ·leases and
conditional sales:
1. Lease: the amount paid for the lease shall be
· considered p'a'rt of tHe gross income.
2. Conditional sales ''(rent to own 1s·cti'emes; etc.):
this will be treated as sales hence,' tti e rules on
gains from thf3'sale of assets will apply and these
gains will be 1reated as Income' (RECALDE,
1 leased property from the owner-lessor
supra at 302-303) . ' '
I , ;1 •
Whether an agreement, which in form is" a lease,
is in substance -a conditional •sales contract
depends ,upon the intent of •the parties, as
evidenced by the provisions,•of the agreement,
read in -the light of the face and circumstances.
No general rule, applicable to all cases can be
laid down (RECALDE, supra at 302-:J03).
Operating Lease: An operating lease is a
contract under which: ,·
• a. The asset is not wholly amortized during th~
- primary period of the lease, and
b. Where the lessor does not rely solely on the
, rentals' ·during the prima·ry period for his
profits, but looks for the recovery of the
,balance of his costs and for the rest of flis
profits from the sale or re-lease of the
• returned asset of the primary ·1ea e period
(RECALDE, supra at 297-298) .·
· NOTE: In an operating lease: : ;f)1:
i. The amount paid for the use of property
·· '· is considered as rental income· which
· form part of the Gross lncome-rof.::.the
.,,, lessor; ,· ·~r·
.:h . ii. tf'he lessor may deduct a11 ·ordinary1and
" "' 1qq I necessary expenses paid or ·ncurred
1
during the taxable year which-r are
attributable to the earnings of the
' inco' e- and .- ,·
ii/ Lesso_r ' may claim an allowance for
. 1·depre~ ation of t he. leased property,
,, ·. ·wt)tch--isi;.to be deducted from the gross
. i~?ime'"(Jd.).
Finance Lease: A finance lease or a full payout
~- l lease · is a contract characterized by the
·. following : ·.; , 1 '- , , '1
a. The contract must be a non-cancellable
. ·' ' , . lease; ' '.C • L • r' •
instance of the lessee;
c. ' The consideration for th said 'p·urchase is
..the periodic- payment by, the lessee of a fixed
amount of money; .. <- r a •
d: The iperiodic ' Jease '1 payment t must be .
,, , sufficient ito amortize at least 70% of, the
·, • purchase ·price .or acquisition cost over an •
, 1 obligatory, period 1 _of,,nbt less than .two (2)
I· '
.e. During Jhe period of lease, ,the lessee has
the right.to: hold and' use:.the property with
the right to expense the lease rentals paid to
,.. 1, the· lessor, as 1well1 1'as bear ·rthe cost of
repairs ; maintenance,' insurance, and
preservation of the property leases; and
f. At the end of the lease contract, the lessee
has no obligation or option to purchase the
(RECALDE, supra at 301-302,304).
 INCOME TAXATION
Taxation Law
NOTE: In a finance lease: '
-=----
--
'
Total lease income 191,550,00o
i. If the agreement is considered a finance
_ lease, the · periodic payments are
considered rentals. N~TE: It shall _Mr. · X who shall .record and
ii. For VAT purposes, a finance lease is claim the deprec1at1on of ~e building at the start
taxed like an operating lease (Id.) . of the_ second yea~ ~f the lease. Take note that
there Is no deprec1at1on of the building as of th
Income From Leasehold Improvements first year ·because it w_a s completed at the end 0~
When the lessee erected or built permanent . the first year. ·
improvements in the leased property which will
become the property of the lessor upon the Under the Spread-Out Method, Mr: X shall
expiration of the lease, the value of the report an additional income of P450,000 at the
improvements should be reported as income of the end of the second and third _year of the lease
lessor (R.R. No_ 02-40, Sec. 49). which is derived as follows: .

NOTE: No income accrues to the lessor if th~ Value of building t-1 , 500,000 ·
improvements are subject to removal by the lessee Less: Accumulated
(DIZON, Q&A in Taxation, p. 136 (2006) [hereinafter depreciation at the end of the
DIZON, Q&A]). lease (~1 .500,000/Syrs.) x 2
yrs. (600, 000)
Methods Of Report ·
,ng f Value of improvement at the 900,000
Income rom Leasehold d f
Improvements: - /'. en o the lease
• • , ••
1
Divide: Remaining term of the
When bu1ld1~gs are erected or improve(Tlents' made ,. / • l~ase, 2 (yrs.)
by a lessee m the lea_sed premises Jn pursuance of ·Ann\Jal'mc~ eon leasehold
an ~greement with the lessor, and the' sarne a~e not - · - - . impr~ e nt · 450,000
subject to removal by the lessee, the essor may at Adq: A nual ran al 50,000
his option report_the income t herefrom upbn eithE!r Total le~sa income per year 500,000
of the following bases: /. · ',, ,· .
I ;-- -- - - - -NOl:ES: V J
1. Outright Method -i I a . .T b h~ ~os1 bonie by the lessee in .erecting the
- recognized -as income to lessor at the time ,___p
. u1ldings making permanent
when such buildings or improvements are ,. J I~P-~ov~r1ents p n ground of which he is

completed, at fair market va ue; or ,,.. 1, •:- - - - _ _ , Jessee Is held t6 be a capital investment and
r ) J ; II 1 • _ _/.,_:((i<;>t a deduG,tible_ business expense· (R.R.
'\ •

2. Spread-out M~thod ·( \ '- . , , ~/,_•"-~ o. }-40; Sec, 74) ; .

- the lessor spread over the life (or remainil')g
period) of the lease the estimated depreciatea
value of such buildings or improvements af1he {~- ..:: _. '/
temnination of the lease and report as in.come for
each year of the lease, an aliquot part th~reof
(R.R. No. 02-40, Sec. 49).
ILLUSTRATION: Mr. X leased his land to Ms. Y
for three (3) years. It was stipulated that Ms. Y
shall construct a building thereon. The building
was completed at the end of the 1st year of the
lease. It has a fair market value of ~1. 500, 000
and an expected life of five (5) years. In addition
to the annual rent of ~50, 000 paid by Ms. Y, Mr.
X shall report the value of the improvement as
additional income. In reporting, Mr. X may
choose between the two methods:
Under the Outright Method, Mr. X shall report
st
the entire ~1 .500,000 at the end of the 1 year
of the lease.
Value of building ~1 . 500,000
Add: Annual rental 50 ,000
, _....~, ,, / _/,.,r, / .
-- .....--- ,.._ ~- _In order o ret!Jrn to such taxpayer his
iny.estment of capital , an annual deduction
ma be made from gross income of c)n
\ J. \,.:_ mount equal to the cost of such
improvements divided by the number of
years remaining of the term of lease, and
such deduction shall be in lieu of a
deduction for depreciation (Id:);
c. However, where lhe leasehold is acquired
for business purposes for a·specified sum,
the purch~ser (lessee) may take as a
deduction in his return an aliquot part of
such sum each yea·r based on the number
of years the lease has to ~n (Id.) ;
d. If for any other reason than a bona fide
purchase from the lessee by the lessor the
lease is terminated , so that the lessor comes
into possession or control of the proper!Y
. prior to the time .originally fixed for the
termination of the lease the lessor shall
recognize income in ac~ordance with the
following rules:
-WHIAi \ 1 . -:.· .__ , .. _:¥:.:: ·. '• ;. . . ... • .:
MEtf,Q~y AID .
San Beda Colege of law - RGCT Bar ()pe,ations Center
-~',,.
~..,.... ..,.,~_.,.,
..,. .
. 97
,,, -:- '

i. The amount of income shall be the

difference between: RC and DC (NIRC,
1.) The value of the building at the time Sec. 24 (A)(1)(a); Normal
of the pre-termination of the Sec.. 27 (A); Sec. income tax
contract; and 32 (A)(5) ; Sec. 42 rates
2 .) :lie amount already reported as (C)(4))
income on account of the
·introduction of such property. NRC, RA, NRA-
ETB, NRA-NETS,
ii. No appreciation in value due to causes 'RFC, NRFC
other than premature terrt1ination of the Not subject
(NIRC, Sec. 24
lease shall be included (R.R. No. 2-40, to income
(A)(1)(b); Sec. 28
Sec. 49) . tax
.(A)° (1 ); Sec. 32
(A)(5); Sec. 42
TAX TREATMENT OF INCOM.E (C)(4))
RECEIVED FROM LEASE OF
PROPERTY DIVIDENDS
Any _ distribution made by a corporation to its
shareholders out of the unrestricted retained
earnings payable to .its shareholders, whether in
money, property or stock (NIRC, Sec. · 73 _(A) as
RC, NRC, RA, amended by TRAIN Law).
NRA-ETB (NIRC, Normal _ Tax on dividend income·refers only to: (CP)
Sec. ·24(A)(1); 1.s-. Cash; and ·
graduated
25(A)( 1) as income tax 2.' fr'operty ·dividend (R.R. No. 6-2008).
amended by
rates
TRAIN Law; Sec. What is excluded: liquidating dividends. However,·
32 (A)(5)) the capital .-gain or loss derived therefrom shall be
.. subject to 'the· reQular income tax rates (R.R. No. 6-
DC and RFC Regular 2008) . :; •• ·
(NIRC, . Sec. 32 corporate
(A)(5); Sec. 42 income tax NOTE: Und~r Art.-1·-f (5) of the RP-US Tax Treaty,
(A)(4)) rate the tertn · "dividends" should be understood
according to the taxation law of the State in which
NRA-NETS (NIRC; FWT of the corporation making the distribution is a resident
Sec. 25 (B)) 25% (CIR v. Goodyear Philippines, Inc.,· G.R. No. 216130;
August 3, 2016) .
NRFC (NIRC, Sec. FWT of
28 (8)(1)) . 30% Taxability of Stock Dividends
GENERAL RULE: Stock dividends are not taxable.
NRFC -gross
rentals, lease, and NOTE: Applying the Severance Test, there is no •
charter fees · of FWT of taxable income until there is a separation from
vessels 4.5% capital of something ·of exchangeable value, thereby
foreign
supplying the realization or transmutation which
(NIRC, Sec. 28 would result in the receipt of income :
(8)(3))
REASONS: Stock dividend -is ·not an income. It
NRFC -gross merely evidences the interest of the stockholder in
rentals, lease, and the increased capital of the corporation. An income
charter fees of FWT of may be defined. as the amount of money coming to
aircraft, 7 .S% a person or corporation within a specified time,
machineries, and whether as payment for services, interest, or profit
equipment (NIRC, for investment. A mere advance in the value of
Sec. 28 (8)(4)) property of a person or corpora_tion in no sense.
constitutes the "income" specified in the revenue
law. Such advance constitutes and can be treated
merely as an increase of capital. An income means
 ' INCOME TAXATION
98
cash received or its equivalent. It does not mean
choses in action or unrealized increments in the
value of the property (Fisl)er v. Trinidad, G.R. No. L-
17518, October 30, 1922) .
Reclassification/Exchange of Shares Does Not
Give Rise to a Taxable Event
Neither the reclassification nor exchange per se,
yields realized income for tax purposes . The
exchange of shares, without more, produces no
realized income to the subscriber. There is only a
modification of the subscribers' rights and privileges
- which is not a flow of wealth for tax purposes (CIR
v. The Court of Appeals, G.R. No. 108576, January
20, 1999).
See previous sections or, Tax on Individuals and
Corporations for discussion on how dividends from
domesoc and foreign corporations are taxed.
EXCEPTIONS:
The following stock dividends are taxable: l:iOG- \....) 1
TED) · ... '\_) 1 ~-
\,,.
1. Cancellation or Redemption of s ' ares of stock .
issued as divi~ends, the amou11t distributed ,tn
redemption or cancellation shall be considered
taxable income (NIRC, Sec. 73 (8)) .
/ - , . .
NOTE: For the exempting- clause to apply, 1t·1s
indispensable that: (RCSE) . __
i. There is Redemption o~ancell~ti9n_ ; corporation's prir11a.fy purposes, the same 1s not
ii. The transaction involves) §.to~l{ -~IV~dends; -
and • ,_,,_,..,
iii. The "time and ma~ner" of- t~e transaction - . /
makes it wgssent1ally equivalent to . a
distribution of taxab~e divide~ds." Of th~'se!·J
the most important 1s the third (9IR v. The------:-
Court of Appeals, G.R. No. 108576, Jan'-!ary
20, 1999).
2. Recipient is Other than shareholder, in which
case, stock dividend is taxable to usufructuary
(Bachrach v. Siefert, G.R. No, L-2659, Oct. 12,
1950)
3. Dividends declared in the Guise of treasury
stock dividend to avoid the effects of income
taxation (Commissioner v. Manning, G.R. No. L-
28398, Aug. 6, 1975)
4 . Distribution of Ireasury stocks;
5. Change in the stockholder's gquity, right/interest
in the net assets of the corporation;
6. Different classes of stock were issued
(DIMAAMPAO, Income Taxation, supra at 48).
GAINS FROM DEALINGS IN PROPERTY
For discussions, please refer to Rules on Capital
Gains and Losses on pages 161 to 174.
Taxation Law
ROYALTIES
These are payments for the use and exhaustion of
proP.erty such as earnings from copyrights, patents,
trademarks, formulas and natural resources under
lease (R.M.C. No. 44-2005, Sec. .3).
The definition covers both· payments made under a
license and· compensation which a person would be
·obliged to pay for fraudulently copying or infringing
the right (R.M.C. No. 44-:- 2005, Sec. 3) .
NOTE: Royalties must be derived from sources
within the Philippines to be considered as passive
income (NIRC, Sec. 42 (A)(2) as amended by
TRAIN Law).
Kinds of Royalties
1: Non-Passive (Active) Income
· - where the royalties are derived from the
active pursuit of the primary purpose of the
l ·1 )\ ~business (e.g., distribution of licensed
\J mate. ials, licensing and sub-licensi~g of musical
com ositions), the royalty f~es are in the nature
of a<:tive ·nGOt:(le (BIR Ruling DA-368-06, June
½a, 2006;.BIRRuling DA-684-07,·December 27, ·
\ 200.7) ."'j-.
, < ,-. ·~
_ _ _ _ 2 J~as~ive lhcdme: .
-:-. the BIR definesi passive income by stating
· what it is not. If the; income is generated in the .
active_-,pursuit~ a~d performance of. the
rI passiVe income (dhamber of Real Estate and
Builders' Assoc., I Inc. v. Romulo, G.R. No.
_,,. 1-40756, March 9, 2010) .
9' -.
r. -:- ,\ 0
:::,.1~ other . words, . passive income is
mcom· enerated by the taxpayer's assets.
' T.hese,'>assets can be in the form of real
l ...\ p op~rties that return rental income, shares of
stock in a corporation that earn dividends or
interest income received from savings. (Id.).
Accordingly, the royalties included in ~he
computation of gross income are those which
are not subject to final tax, such as:
a. Those royalties derived from sources
outside of the Philippines; and
b. Those which are not passive income
(DIZON, Outline supra at 528).
. b. ct
Tax Rates Imposed on Roy_alty Income Su Je
to Final Tax as
1. In general - 20% (NIRC, Sec. 24 (8)(1)
amended by TRAIN Law); · or
2. Derived from books, other literary works as
musical compositions - 10% (NIRC,
amended by TRAIN LAW, Secs. 24 to 25).
------- \ I
AID·
s., 8eda l.Wver9ity College of law - ROCT Bar Opntions Center
3. In all Instances above, for non-resident alien
not engaged in business, rate is 25%; while for
domestic and resident foreign corporation, 20%;
and for nonresident foreign corporations, 30%
(NIRC, as amended by TRAIN LAW, Secs. 27 to
28). . accounts, arid other investments evidenced by
INTEREST
Conditions for Interest Income to Be Treated as
Passive Income: (WEC)
1. Derived from sources Within the Philippines;
2. gamed by an individual citizen, resident alien
individual, or non-resident alien individual
engaged in trade or business in the Philippines
or earned by a domestic corporation or resident
foreign corporation; and
3. Derived from any · ~urrency bank deposit and
yield or any other monetary benefit from deposit
substitutes and from trust funds and similar
arrangements (NIRC, as amended by TRAIN
~w. Sec. 42 (8)(1)).
Examples of Interest which are included in the
computation of Gross Income: · alien or non-resident alien engaged in !ra'de •
a. Interest income from long-term deposits by
_corporations (not issued by banks nor within
the coverage of deposit substitutes);·
b. Compound interest;
c. Usurious interests earned by a loan shark;
d. · Unconscionable .interest income (eyen -if
knowingly and voluntarily assumed); and
e. Theoretical interest income (DIZON, Outline
supra. at 517-518) . ·•
Interest income which are already subject to
final tax need not be included iri the
computation for gross income ,,.(INGLES,
Reviewer, supra at 130).
Tax Treatment of Interest Income Depending on
Source of Income
Interest inco_me derived_ from sourc~s within the
Philippines may be subject to final tax or exempt.
Interest income ·derived from sources without the
Philippines are subject to the graduated rates (for
resident citizens) or normal corporate income tax
rate (for domestic corporations).
NOTE: To determine if interest income is income
within or income without, determine first the
residence of the debtor. Source is within if debtor is
a resident of the Philipp.ines (MAMALA TEO, Income
Tax, supra at 63).
Tax Rate on Interest Income Subject to Final Tax
1. . From any currency bank deposit, yield, · or any
other monetary benefit from deposit subs!itutes
and from trust funds and similar arrangements
derived from sources within the Philippines -
99
20% (NIRC, Sec. 24(8)(1), as amended by
TRAIN Law) ;
2. From long term deposit (LTD) or investment in
the form of savings, common or individual trust
funds, substitutes, investment management
certificates in such form prescribed by BSP -
exempt (NIRC, Sec. 24(8)(1), as amended by
TRAIN Law);
NOTE: In case of pre-termination before the 5th
year, a final tax shall be imposed on th~ entire
income, whose holding period was: .
a. 4 years to less than 5 years - 5%;
. b. 3 to less than 4 years - 12%;
c. Less than 3 years - 20% (NIRC, as
amended by TRAIN, Sec. 24(8)(1)) ;
Requisites for Tax Exemption of Interest
Income Derived from . Long- Term Deposit
(LTD) or Investment (DISB-5-DIET)
a. The Qepositor or investor i~ an individual
citizen (resident or non-resident) or (esident
o~ bu~iness in the Philippines and not a
,-: ~c.orporation ; . ,
b: -;'The· l::TD or investments certificates should
be un,,d~r the name of the !ndividual and not
un~er;i t e name of the corporation or the
bahk or' the trust departmenUunit of the
1
bank;"' ·
c.'I \. The L:TD or.investments
..r--~,. must be in the
• form
_pf. ~aviti_gsJ common or individual trust
..} ,.
Tl f ,
fCmds1 -· deposit substitutes, investment
management a~counts and other
investment;:; eviden~ed by certificates in ·
&iJSli form prescribed by the BSP;
· The LTp or investments must-be issued by
§.anks only and not by other financial
institutions; .
e The LTD or investments rn.ust have a
maturity period of riot less than five (fil
years; .
f. The LTD or investments must be in
Qenominations of P10,000 and other
denominations as may be prescribed by the ·
BSP;
g. Only the Interest income from LTD or ·
investments certificates are covered by the
income tax exemption ; . 1
h. · income tax gxemption does not cover any
other income such as gains from trading or
foreign exchange gain; and
. .
The LTD or investments should not be
Ierminated by the investor before the 5th
year, otherwise it shall be subjected to the
graduated rates of 5%, 12%, or 20% on
, interest income earnings

3. From foreign curre·ncy d~posit units, except
nonresidents - 15% (R.R. No. 14-2012).
NOTE: Under the TRAIN Law, the rate of fi_n al
tax on interest income received by resident
individual taxpayer under the expan~ed
foreign currency deposit system increased from
7 .5% to 15% final tax (NIRC, Sec. 24(8)(1 ), as
amended by TRAIN Law) .
The 20% withholding tax on passive interest
income on deposits does not apply to
cooperatives
Under the NIRC, interest from any currency bank
deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar
arrangements is subject to a 20% Final Withholding
Tax (NIRC, Sec. 24(8)(1), as amended by TRAIN
Law) . This provision applies only to_interest paid by
banks and does -not cover ·interest paid by
cooperatives. Moreover, members' deposits with the
coopera_tives are not currency b~nr, deposits nor •
deposit substitutes. Thus, Interest o! members'
savings and time deposits with duly registered
cooperatives are no! subject to income and
withholding tax. The legislative intent under RA. No.
6938 or the Cooperative Code of the Phillppinesi s · --- Taxation, supra at.219).
to give coop~ratives preferential ta~ trea1nent and · ·
tax exemption . This tax exemption _:>~ould. be
construed to extend to members OT'C(!,0~'!!!1ves
(Castillo, Dumaguete Cathedral Credit Co)>perative
v. CIR, G.R. No. 182722, January 22, 2010),. '
TI'
\ ·
GROSS INCOME FROM PROFESSIQN,':::t_, __ ___ - .,_f-.: For individuals - graduated rates (0% to 35%)
Professional Income r -, \
· - _ ··
- it refers to fees received by a professlc5 al from -
the practice of his profession, provided that there is
oo ER-EE relationship between him and his~lients
(MAMALA TEO, Reviewer, supra at 194). It includes
the fees derived from engaging in an endeavor
requiring special training as professional as a means
of livelihood, which includes, but is not limited to, the
fees of CPAs, doctors, lawyers, engineers, and th e
like (R.R. No. 02-98).'
Professional Income Taxpayer
- it refers to a person certified by a professional
body belonging to a specific p~ofession by having
completed a required course of studies and or
practice (DASCIL, NIRC of the Philippines (2018) , p.
57) . It also refers to a person .who engages in some
art or sport for money, as a means of livelihood,
rather than as a hobby (TABAG, Income Taxation,
supra at 69).
INCOME TAXATION
· · Taxation Law
Professional income vs. Compensation in~ome-
The existence of employer-employee relationship
determines whether the income ~hall be ~reat_ed as
pensation income or professional fee. This fact
~so;aterial for purposes of taxation beca~se _there is
no deduction allowed against compensation mcome,
whereas allowable deductions may be made from
professional income (MAMALA TEO, Income Tax,.
supra at 87) .
GROSS INCOME FROM TRADE, OR
BUSINESS
Self-Employment Income . . . .
_ it consists of earnings derived by an Ind1v1duaI
from the practice of profession, or conduct of trade
or business carried on by him as a sole proprietor,
or by a partnership of which he is a member (NIRC,
Sec. 74(A), as amended by TRAIN Law).
Business Income
- it refers to income derived from merchandising,
mining, manufacturing, farming, and other similar
operatiods ..... lt arises from habitual engagement in
any commercial activity involving regular sales of
goods-or services.by an individual or a corporation.
The income from busir,1ess, legal or illegal, registered
or unregistered : j s taxable (BANG GA WAN, Income
jlt is not ma.terial whether they have a
: :business lic~nse or whether they are registered, or
- self-d~ li red (BANGGAWAN, Income Taxation,
supra ~t 219). A ·' •• • ,
__ . / 1--..::; , '
\ T,.a~,tes for Trade or Business Income:
-.;_·,'(NlRC Sec. (A)(2)(a), as amended by TRAIN
- [gw) : cl d
• 2,-. Fpr corporations - normal cqrporate income t_ax ·
/ ·, _ (30%) fNIRC, Sec. 27(A)).
· •· -
PRIZES AND WINNINGS
- amount of money in cash or in kind received ~y
chance or by luck. Prizes refer to those obtained as
a result of effort; while winnings are products of
chance or luck (1 DE LEON, supra at 146)
Prizes and Winnings Subject to Final Tax Of 20%
1. Prizes derived from sources within the
Philippines by an individual amounting to more
than P10,000. Such prizes are taxed on a per
transaction basis;
2. Other winnings (except winnings amounting to
P10,000 or less from Philippine Charity
Sweepstakes and Lotto which shall be exempt),
derived from sources within the Philippines; and
3. Philippine Charity Sweepstakes and Lotto
winnings •in excess of '910,000 (NIRC, Sec. 24
(B)(1), as amended by TRAIN Law).
 \ I
MEM:Q~y AID .
s., Seda lk'Ml1lity College Of Law - RGCT a. Openitlona Center
NOTE: Under Sec.-25(A)(2) of the NIRC, NRA-
ETB's PCSO ~nd Lotto_winnings, regardless
of the amount Is EXEMPT from income tax.
NOTE: NRA-NETB (prizes an·d winnings ·
regardless of amount) - 25% Final Tax '(NIRC,
Sec. 25 (8))
Prizes And Winning Included in Gross lnc~me to
be Taxed at Regular Rates .
1. Prizes derived· from . sources within . the
Philippines by.an individual (except NRC-NETB)
amounting , to P10,000 or less (NIRC, Sec.
24(A)(1 )(b), as amended by TRAIN Law) ; '
2. Prizes_and winnings from sources without the
Philippines by a RC individual are inclu·oed in the
gross income. In other winnings, there is no
· .threshold amount. (NIRC, Sec. 24 (A)(1)(a), as
amended by TRAIN Law); and
3. Prizes and winnings of · corporations from
whatever source are not subject final tax but
included as part of th~ir gross income. (NIRC, 1
Sec. 24 (8)(1), as amended by TRAIN La·w). ·
Prizes -Excluded from Gross Income . GROSS INCOME
1. Prizes and awards made primarily in recogn!tib~ .
of religious , charitable, scientific, edu~ tional, ·
artistic, literary, or civic achievement but only if: ,
a. The recipient was - selected with,dut ~ny.
action on his part to enter the contest or
proceeding; and ~.
b. The recipient is not . required to render
substantial future services as ·a·conditioi,' tg,_
receiving the prize or award; aod_ ·.· ~-· "t
1 .
2. All prizes and awards granted to athletes 1n local
and international sports . competitions ' and .,
tournaments whether held in the PhJlippin~s--~r • . "
abroad and sanctioned by their national sports
associations. (NIRC, Sec. 32(8)(7)(d}'to ·e)}.
PENSIONS
- it refers to the amount of money received in lump
sum or on staggered basis in consideration of
services rendered given ·after an individual reaches
the age of retirement (Peralta v. Auditor General,
-G.R. No. L-8480, March 29, 1957).
Sec. 32(8)(6)(a) of NIRC provides that retirement
benefits and pensions received , other than those
received under R.A. No. 4917, R.A. No. 7641, R.A.
No. 8282 (The Social Security Law, as amended) ,
and R.A. No. 8291 (The Government Serv!ce
Insurance System) and . other laws on p~ns1on
benefits excluded from gross income are considered
taxable is already repealed by TRAIN Law.
Tax Treatment of Separation Pay
Separation pay may or may not be taxable,
depending on the voluntariness or involuntariness of
the cause of separation. It is taxable when voluntarily
availed of. It shall not be taxable if ·involuntary
(VALENCIA & ROXAS, Income Taxation, supra at
210) . -
PARTNER'S DISTRIBUTIVE SHARE ON
THE G~NERAL PROFESSION .
PARTNE_RSHIP (GPP)
GPP shall _ not be subject to income tax ·since it is th~
individual partners who shall be subject _to income
tax in their separate and individual capacitif;!s. Each
partner shall report as gross income· his dfstributive
share, actually or constructixely received; in the net
income of the partnership (R.M.C. No. 3-2012; R.R.
Nor B-2018).
EXC.L USIONS FROM
··i?·.,•~----------------_.
· .
EXCLUSIONS
_ _ _ _.....___,_ _ __ _ _....:....._ __ _ _
• - income received or earned but is not included in
J , the determ ination of gross income and thus not
taxable eithen·because (NIRC, Sec. 32 (8)) :
.' ! Example: Life insurance proceeds paid to the ·
·· · heirs or beneficiaries upon the death of the
. • · insu and· damages received on account of
personal injuries or sickness
2. They represent return of capital;
Example: Amount received as return of
premiums
3. They are subject to another kind of internal
revenue tax; or
Example: Gifts, bequests and devises which are
subject to donor's tax and estate tax
respectively. · · · · '
NOTE: The definition of gross income is broad
enough to include au passive income subject to
specific rates or final taxes. However, since
these passive incomes are already subject to
different rates ~nd taxed .finally at source, they
are no longer included in th"e computation of
gross income which determines taxable income
subject to the regular' income tax rates (CIR v.
 102
INCOME TAXATION
Taxation Law

Philippine Airlines, Inc., G.R. No. 160528; TAX CREDIT V. DEDUCTION

October 9, 2006).

. 4 . They are income, gain, m . profits which are Reduces the Philippinl;l Reduces taxable
expressly exempt from -income tax under the income from which tax
income tax liability (CIR
Constitution, tax treaty, NIRC, or general or liability is calculated
v. Bicolandia Drug
special law. (CIR v. Bicolandia Drug
Corporation, G.R. No.
148083, July 21, 2006). Corporation, G.R. No.
Example: Retirement benefits received under 148083, July 21, 2006).
RA. No. 7641, income derived by foreign
governments, and GSIS, SSS, or other Subtracted from the tax Subtracted from gross
contributions (net) amount to be paid income (M.E. Holding
(Black's Law Dictionary, Corp. v. CIR, CTA Case
EXCLUSION V. EXEMPTION · Centennial Edition, No. 5314, August 17,
· . Exclusion _.,·. ·.,· 1 • .; ; . ;_·:;:Exe~-ptiori -'..":. :.; ·i 1991) . 1998)
. ' . .,._
Used by priva!e -Used before the tax is
Refers to the Refers to an immunity or
removal of privilege, freedom from establishment only after computed (CIR v.
otherwise taxable charge or burden to which the tax has been Central Drug
items from the reach other persons are subject computed (CIR v. Corporation, G.R. No.
of taxation to tax / Central Drug 159647, April 15, 2005)
I cbrporafion, G.R. No.
(Philfppine Long Distance Telephone Co. , Jnc. v. 159647;" April 15, 2005)
Province of Laguna, G.R. No.151 899, August 16,
2005) . >- .,, ,,_ - - Sources:·· . Foreign Sources: Deductible
,. "... ·" f · 'i ncome war-=profits·..and . taxes such as business
Taxpayers Who May Avail: I excess prqfif'. tax tax, excise tax,_
All kinds of taxpayers, individuals (citizens 9r aliens), (DIMA4.MPAO,,, l,fc_ome percentage tax and
estates and trusts, and corporate (residents ·or-non= ·
residents) may avail of the exclusions . . -~
~- Taxation supra at 12,1}. other
connected
business-
taxes
.
(DIMAAMPAO, Income
Taxation, supra at 121).

Refer$ to flow of wealth
•not treate~ as part of
gross income because
it is exempted by the
Constitution , statute, or
is not income.
Pertain to the Pertain
computation of gross computation
income.
income.
NOTES: ·'
rs o t e a 1_: 'Taxes withheld from the employee's salaries will.
which the law allo ;-,, not affect the for'mer's taxable income be·c ause
be subtracted from g they are not allowed as tax deductions but as tax
income to arrive at credits., Tax reduction reduces the taxable
income. ·~ · income·_wllile tax credits reduce the tax liability
· (Cl v. Central Drug Corporation, <3.R. No.
...., "1 59647, April 15, 2005) .
to the
of net
2. Under Sec. 4 of RA. No." 9994 (Expanded
Senior Citizen's Act of 2010), and Art. 10, Rule
· IV of its IRR, the senior citizen's discount is
treated as a tax deduction, not as a tax credit.

Something received or Something spent or paid EXCLUSIONS

earned by the taxpayer in earning gross income.
UNDER THE
wh ich do not form part
CONSTITUTION
of gross income. Income of non-stock, nor:i-profit educational
institutions ':'sed actually, dire'ctly, and exclusively
for educational purposes are exempt from taxes
(MAMALA TEO, Reviewer, supra at 245-246; _(Sec. 4(3), Art. XIV, 1987 Constitution). · ·
DIMAAMPAO, Income Taxation, supra at 99).
NOTE: lr.icome derived from the real or personal
properties, as well as any activity conducted for profit
by a . non-stock, non-profit educational institution
shall be taxable, unless said income are used
~ctually_, directly, and ,exclusiyely for educational
 \ I
MEM-0-RY AID
San Bed& lJMw9ity College of law • ROCT Bar Operatiooe Center
purposes (CIR v. De La Salle University, Inc., G.R.
Nos. 196596, 198841, 198941, November 9, 2016).
ITEMS OF EXCLUSIONS: (LAG-CRIME)
1. Life Insurance:
2. Amount received by insured as return of
premium;
3. Gifts, bequests, and devises; ·
4. g
ompensation for injuries ·or sickness;
s. Betirement benefits, pensions, gratuities;
6. !ncome exempt under treaty; and
7. Miscellaneous items
a. Income derived by foreign government;
b. Income derived by the government or its
political subdivisions;
c. Prizes and awards;
d. Prizes and awards in sports competition;
e. 13th month pay not-exceeding P90,000 and
other benefits
8. g_xclusions under Special Laws
PROCEEDS OF LIFE INSURANCE
REASONS: They partake more of indemnity or
compensation rather than gain to the recipient (2-A
DOMONDON, supra at 417) .
CONDITIONS FOR EXCLUSION: The life
insurance proceeds must be paid to the heirs or
beneficiaries upon death of the insured, whether in
a single sum or installment (NIRC, Sec. 32(8)(1)) .
NOTES: _ .
1. This exclusion is applicable to gr~up life
insurance proceeds, death benefit payments
under the workmen 's compensation insurance
contract, and health or accident insi:Jrance
contract having the characteristics • of life
insurance proceeds payable by reason of death
(NIRC, Sec. 34(8)(4)) .
2. If the amount of life insurance proceeds is held
by the insurer under an agreement to pay
interest thereon , the interest payments shall be
included in the gross income .(NIRC, Sec. 32,
par. (8)(1)). · 6.
3. Interest do not form part of the indemnity but are
earnings or income from the use of capital (i.e.,
the insurance proceeds whi~h were not taken)
which are taxable (2 DOMONDON, Taxation,
_.supra at 193).
4. The design;ion of the benefici~ry is ~ot
essential for purposes of exclusion of hfe
insurance proceeds from the gross inc~~e of
the recipient. The concept of revoca~1l_1ty ~r
irrevocability of designation of the benef1c1ary 1s
material only in determining whether the
insurance proceeds are,,to form part of the gross
103
estate of the decedent or not (2 DOMONDON,
Taxation, supra at 191).
When Life Insurance Proceeds are included in
the Gross Income: (EPAgO-MOV-PC)
1. Payments for reasons other than death are
subject to tax to the extent of the g_xc~ss of the
Premiums paid. If there are any policy loans
(borrowings·made on the policy), these are to ~e
considered as advances deductible from the hfe
insurance proceeds received upon death; ·
2. If such amounts are held by the insurer L!nder an
Agreement to pay interest thereon, the in~erest
payments shall be included in gross income;
3. When the insured Outlives the policy, the
proceeds from life insurance (le_ss the tot~I
amount of premiums paid) should be included _in
the gross income since death is an essential
e(ement for.the exclusion;
4. Where the life insurance policy is used to secure
a Money Obligation;
.. 5. Where the life insurance policy was transferred
f~r a-Valuable consideration; · ,
·- . -
ILLUSTRATION: A insured his life for P1 M. He
assigned tbe insurance to B for valuable
consideratio of P800,000. A then died and B
was.able to c llect the proceeds of P1 M. In t~e
present scenario, B shall recognize an income
of P200,000 (proceeds of P1 M · less the
consideration ·of P800,000). However, the
income recognized shall be reduced further by
. ~the premiums paid by B reckoned from the time
'J :::,,; ': of •th assignment of the said policy. Hence,
should B pay premium of P100,000 after the
transfer of the policy to him, B shall recognize
an income of P100,000 only (Proceeds of P1 M
less consideration of P800,000, further
lessened by the premium payment of
P100,000).
The recipient of the insurance proceeds is a
fartnership in which the insured is the partner
and the insurance was taken to compensate the
partnership for any loss in income · that may
result from the dissolution of the partnership
caused by the death of the insured partner; and
7. The recipient of the life insurance proceeds is a
forporation' in which the insured was an
· employee or officer (R.R. No. 02-40).
 104 •
IN CO M E TAXATION
Taxation Law

RETURN OF INSURANCE PR 2. Workmen's compensation; and

EMIUM
RE AS ON S: The amounts retu 3. Damages received whe the
rned are not income r by suit or
but return of capital. They repres agreement on acc oun t of
ent earnings which such injuries or
were previously taxed (2-A DO sickness (NIRC, Sec. 32( 8)(4
MO ND ON , supra at ); R.R . No. 02-40,
426) . Sec. 63).

CO ND ITIO NS FO R EXCLUS
ION: The amounts KIND OF DAMAGES AR
must be received as a return ISING 'FROM
of premiums paid by PERSONAL INJURIES AN
him under life insurance, end D SICKNESS
owment or annuity WHICH ARE EXCLUDED FR
contracts (NIRC, Sec. 32(B)(2
)). OM GROSS
INCOME
NO TES :
006
1. Actual or compensatory
1. Where the total premium damages
returns exceed the this is the adequate com
aggregate premiums paid, the pensation for
excess shall be pecuniary loss suffered as ma
included in the gross income y be dul y proved.
(R.R . No. 02- 40,
Sec. 62) . 2. Moral, nominal, temperate
-or moderate;
2. In case of a transfer for a valuable and liquidated damages
consideration - should be on account of phy
of a life insurance, endowm sical injuries or
ent or · annuity sickness.
contract, or any interest the.rein ·
, only the actµal
value of such consideration and
the amo unt of . NOTE: Punitive or exemplary
the premiums and other sum dam age s are
s subsequently taxable within the broad con
paid by the transferee are exemp cept of gross
t from tax ation ' incoml} ~(G len sha w Gla ss v.
(R.R . No. 02- 40, Sec. 62).
/ ,, •.... (1955)) . Th~ personal injury
CIR, 75 US 473
,. - - - .__ _ app y oe_cause exclusion does not
GIFT, BEQUEST, DEVISE OR . the amounts are awarded
DECENT _- account ot-tt\e defendant's con
on
REASONS: They are neither pro duct rather than
ducts of capital nor
industry, thus, there is no income the plainti(rs pers~nal injury (US
..T>'e consideration- IRS Rev. Ru/.
is based on pure liberality and ·i~ _ -- --~ : !08 , 198'f:..? C.B. 32) . •
donor's tax (gift) or estate tax (b~ already ~ubject to " 1
•
quest or drv ise ) as \
Compensation [o~ Los,t Pro
-·"-
the case may be. Moreover, the fits
re is no· income (2 · Compe~~atory ciamage.s, actu _
DOMONDON , Taxation, supra al damages, mor~I
at.206). _..... ' - -- - __ _gam
ages,.exemplary
NO TE: Only donated _proper
1 • 1 : the c9~t of ,the suit;- recdam ages, attorney's fees, and
eived on account of death are
ty is exc lud ~ from I· e~cl~~e~, ·· .fro m ~_ross income
gross income. However, the
income from such. , . Howe~er,
,l.,_:
property, as well as gift, beques -C?ns~guenttal damages repres
t. devise, or descent ._ enting loss of the
of income from any property, in v,~tin;l's _earning capacity are
cases of trans(ers bf : , • \ gr~ not excluded from
divided interest, shall be incl ss, income. Such damage
ud in .rtt,~ gross. · · - rep,l~cemeQ s are merely
income (NIRC, Sec. 32(B)(3)) . t .o,f income · which would hav
· _ subJected to, tax if earned e bee11
(BIR Rul ing 026 -20 18,
Gif t Tax Tes t "' .:Ja
-
nuary 18, 2018). ·
. .
1. If there is no legally dem
andable obligation to
give the gift - not taxable; and RETIREMENT BENEFITS,
PENSIONS
2 . If there is a legally dem
andable obligation to AN D GRATUITIES .
give , there is income - RE AS O~ S: Reti~ees are
taxable (2-A mo st deserving of
DOMONDON, supra at 436) .
. ?ompass,~n an.d · should not
be given ·a strict
mte~pretat,on under the law . Ret
COMPENSATION FOR INJ irement laws aim to
URIES OR ass~st retirees in his old age,
not to punish him for
SICKNESS ~avmg survived: It includes:
RE AS ON S: This is in the nat
ure of indemnity for the · T~ose r~ce,ved by officials
and employees of
injury or damage suffered. The pnvate employers ln acc
y are intended to put o·rdance with a
the injured party in the position ~~~\~n~ble private benefit plan
in which he was under R.A. No.
before he was injured . The term
death produced by the
"injury" "includes 2 · iiho se derived under RA . No.
injury or sickness" 7641 from private
(Oc ean eer ing Contractors (Ph trn:'s without a BIR-appro
ils), Inc. v. Barretto, reti rement plan; ved reasonable
G.R. No. 184215, February 9, .
2011) . 3 · S~p .
a~~tion pay due to death, sick
It includes amounts received: nes s or other
dtsabthty or any other cause bey
ond the control
1. Through accident or health of the employee or the
insurance; retrenchment); 0 ffi . I (e.g . .
,c,a
 \ I
MEM~Q~Y AID
San Beda I.JrMrafty Colege rd Law • RGCT Bar Openidons Center
4. Social security benefits, retirement gratuities,
pensions and other similar benefits received by
citizens or aliens who come to reside
permanently in the Philippines from foreign
government agencies, private or public;
5. Benefits due to residents under laws of the
United States administered by the United States
Veterans Administration;
6. SSS benefits received in accordance with R.A.
No. 8282; and . 2.
7. GSIS benefits received under R.A. No: 8291
(N/RC, Sec. 32(B)(6)).
Retirement Benefits under R.A. No. ·4917
In order to avail of the exemption with respect to
retirement benefits under a reasonable private plan,
the following requirements must be met
(RAN-10-50)
1. The plan must be Reasonable;
2. The benefit plan l!IUSt be Approved by the BIR;
3. The retiring official or employee should !fot have
previously availed of -the privilege under the
retirement benefit plan of the same or another
employer; and .
4. The retiring official or employee must have b~n .
in the service of the same employer for at l~as\ ·
ten W!) years and must at _least be fifty•,(50) .
years old at th~ time of retirement (JYIRC, Sec. ., ·
32(B)(6)(a); R.R. No.02-98, Sec. 2.78.1(8)(1)) ; , .
NOTE: It does not matter whether th~ reti~tD~nt
is voluntary. As long as the requirements are•
met, .the retirement proceeds are excluded from
gross income. However, if the retirement is ·.
compulsory, there is no need to ~fflply ;with the
above requirements before the · retirement-
benefits would be excluded becaus_ e th~ same
would be excluded as separation pay beyond
the control of the employee (2-A DOMONp0N,
supra ~t 236). ,.
"Can be availed of only once"
;_ applies only to retirement benefit from a
subsequent private employer. It does not apply
to subsequent public employer as the benefits
are still exempt under R.A. No. 8291 (1 DE
LEON, supra at 363).
"Reasonable Private Benefit Plan"
- it means a pension, gratuity, stock bonu~. or
•profit-sharing plan maintained by an employer
for the benefit of some or all his officials or
employees, wherein contributions are made by
such employer "for the officials or employee~,· or
both, for the purpose of distributing the earnings
and principal of the fund thus accumulai~d. any
part of which shall not be used or diverted to any
purpose other than for the exclusive benefit of
the said officials and employees (NIRC, Sec. 32
(B)(6)(a)).
-
Retirement Benefits under R.A. No. 7641
The following are the rules on retirement pay of
. qualified employees:
1. Where the retirement plan is established in the
CBA or other applicable employment contract -
Any employee may be retired upon reaching the
retirement age established in the CBA or other
applicable employment contract;
In the absence of a retirement plan or agreement
providing for retirement benefits_of emp!oyees in
the establishment - Any employee may be
retired under the following:
a. Optional Retirement - the conditions
are: (60~5-6)
i. An employee upon reaching the age
of sixty (60) years or more;
ii. Who has served at least five lfil
years in the said establishment; and
iii. May retire and shall be entitled to
retirement pay equh@lent to ½
month salary for every year of
service, a fraction of at least six ifil ·
months being considered as one
whole year.
.b~ · ~ andatory Retirement - the conditions
a e: (65-5-6) .
,1. .An employee· upon reaching the age
'· of beyond- sixty-five (65) years
hich is the compulsory retirement
age;
L·_ ..W, ,9 ,has served at least five lfil
.. .• ··years in the said establishment; and
iii. May retire and shall be entitled tq
retiremE;lnt pay equivalent to ½
month salary for every year of
service, a fraction of at least six ifil
months being considered as one (1)
whole year- (LABOR CODE, as
amended by R.A. 7641, Art. 287).
Terminal Leave Benefit .
- it is the commutation or monetization of an
employee's accumulated and unused vacation leave
(VL) and sick leave (SL) received by a retiring,
retired, or separated employee (SABABAN,
Reviewer, supra at 93-94).
REASONS: Terminal leave pay is applied for by an
employee who is no longer working. It is no longer
compensation for s_ervices rende~ed.
This includes monetized value of retiree's
accumulated vacation leave (VL) and sick leave (SL)
subject to the following rules: "'
1. For compulsory retirement - sixty (60) years
for private entities; sixty-five (65) years for
government employees; seventy (70) years for
the judiciary - exempt (Labor Code, Sec. 287;
 INCOME TAXATION
Taxation Law

The retirement benefits or monthly GSIS pension

R.A. No. 8291, Sec. 13; R.A. No. 9946, Sec. 1);
and, ·
2. For optional retirement - SL is taxable; VL up
to ten (10) days is exempt; and the excess is
taxable (For discussions, please refer t9 De
Minimis Benefits on page 114 to 115).
Separation Pay Excluded from Gross Income
If due to death, sickness, or other physical disability
or for any cause beyond the control of the employee
(NIRC, Sec. 32(B)(6)(b)).
"Cause Beyond the Control"
This connotes involuntariness on the part of ttie
official or employee. The separation from the service
of the official or employee must not be asked or -
initiated by him (R.R. No. 12-86, Sec. 2(b)).
Illustrations:
1. Retrenchment of employees as a consequence - - double taxation is to encourage the free flow of
of either the sale of the entire business to :
shall be exempt from income tax (R.A. No. 8291,
Sec. 39).
INCOME EXEMPT UNDER TREATY
REASONS: Public•policy recognizes the. principles
· of r~ciprocity and comity among nations (2-A
DOMONDON, supra at 230) . .
NOTE: Tax treaties are entered into "to re~ncile ~he
national fiscal legislations of the contracting parties
and in turn, help the taxpayer avoid simultaneous_
tax~tions in two different jurisdictions." CIR v. S.C . .
Johnson and Son , Inc. further clarifies that "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 identi~I
perjods. The apparent rationale for doing away with
goods a?d services and the -movement of cap!tal,
j

another corporation or the cessation of the · --. 1ec~nology, and persons between countries,
employer's business (LABOR CODE, Art. 283); conditions deemed vital in creating robust and
2. Separation of employee due tcfdlssoluti~ of a- · - dynamic eco(lomies. Foreign investments will only
law firm; and , thrive ln a ~fairly predictable and reasonable
3. Separation due to installation o labdr saving · international i nv~stment climate and the protection
devices or bankruptcy · LABOR cdDE, Art. ag~~ ouble ta,satiof!_ is crucial in creating such a
283). I
-- ---- climate" (Deutsche.Bank AG· Manila Branch v. CIR,
G.R.No. 18855~August19, 2013) .
Conditions For Exclusion of Separation Pay from· , 1

Gross Income: (Ehes) ----
1. Amount is r~ceived by an official, f mployee, or
by his !jeirs; ,,, ·
2. It was received from the 5.mployer; and r
3. It was received as a·consequence of §epa~ation
of such official or employee from the service_of I I - . o~: double taxation and prevention of fiscal evasion
the employer: / r
a. Because . of . ~eath, sickness ..:1r1 ~ other
physical d1sab1lity; or _, '
b. For any cause beyond the control of such .l. V Income of any kind to the extent required by any
official or employee (NIRC, Sec. 32, par.
(B)(6)(b)).
NOTES:
i. The exemption holds regardless of the
employee's age and length of service.
ii. The law does not requir~ that the
exclusion be enjoyed once.
GSIS Benefits under R.A. No. 8291
The retirement of most government offi~rs or
loyees under the GSIS is made automatic and
:ipulsory at the age of sixty-five (65) years, a~er
having served a certain number of years of service
(R.A. No. 8291, Sec. 3).
·l
·~-_lnterna~O!ljll Convention or.Tax Treaty .
Shall .oQ.ly refer to"ffle Double Taxation Convention
(DTCs)cjor Double Taxation Agreement (DTAs)
· egotJ~(ed between the Philippines and the other
COnlfclcting States or jurisdictions for the avoidance
- - - w1P1 respect to taxes on income (R.R. No.10-2010,
£Sec:•. f{F)). ,
f ·
treaty obligation binding upon the Government of the
Philippin~s may be excluded from gross income
(NIRC, Sec. 32(8)(5)). The provisions of a tax treaty
must take precedence over and aboye t~e
provisions of the local taxing statute consonant with
the principle of international comity. Tax treaties are
accepted limitations to the power of taxation
(USAFFE Veterans Ass'n., Inc. v. Treasurer, G.R-
No. 1,.-10500, June 30, 1959).
MISCELLANEOUS ITEMS (13.pl1G 3) __
1. 13th month pay and other benefits up to
t-90,000 (NIRC, Sec. 32(B)(7)(e), as amended
by TRAIN Law); .
These are excluded from gross income to the
extent of ~o.ooo. Any excess will be included
as part of the gross compensation income.
 \ I
MEM:Q~Y AID
s., Beda ':oleQe of Law - RGCT Bar Operations Center
"Other ben~fits" include Christmas bonus
productivity_ inc~ntive bonus, loyalty award, gi~
in cash or m kmd and other benefits of similar
nature (R.R. No._02-98, Sec. ~.78.1(8)(1)(b)).
2. fassive income by:
a. Foreign governments;
b. Financing institutions owned, controlled, or
enjoying refinancing from foreign
government; and
c. International or regional financial institutions
established by -foreign governments (NIRC,
Sec. 32(8)(7)(a)).
REASONS: To lessen the burden of foreign
loans inasmuch as the interest of these
loans are, by contractual agreement, borne
by the domestic borrowers.
When a financing institution owned,
controlled, and financed by a foreign
government extends a loan to a foreign
corporation, subject to the condition that
the proceeds thereof will be !JSed as a
loan to a domestic corporati~n, t~e
interest Income earned by- the foreign
corporation is NOT conside~ed an
income derived by a foreign government
which is excluded from gross .income
. under Sec. 32 (8)(7) of the NIRC · ·
While the loans secured by Mitsubishi Metal
Corporation (Mitsubishi, a Japanese
corporation) from Export-Import Bank of
Japan (EXIMBANK of Japan, a.=firiancing
institution owned , controlled, -and financed,
by the Japanese Government) ~as subject
to a condition that Mitsubishi would use the
amount as a loan to Atlas Consolidated
Mining and Development Corporation
(Atlas, a domestic corporation); tl]e_ fact
remains that the interest income paid by
Atlas to Mitsubishi, which is alleged to be
exempted (now excluded) from gross
income by Mitsubishi, was derived from a
loan granted by Mitsubishi to Atlas, and not
by EXIMBank of Japan to Atlas . When
Mitsubishi obtained the loan of $20,000,000
from EXIMBank, the said amount ceased to
be the property of the bank and became the
property of Mitsubishi. Therefore,
Mitsubishi and NOT EXIMBank, is th e sole
creditor of Atlas. The loan ·granted to Atlas
by Mitsubishi is entirely separate and
distinct transaction from the loan agreen:,e~t
-between EXIMBank and Mitsubis 1.
. . ents are not
Accordingly, the interest paym . holding
exempted (now excluded) from with
t ma/ Revenue v.
taxes (Commissioner of In e 54 908,
Mitsubishi Metal Corp., G.R. No.
80041, January 22, 1990).
3. Prizes and Awards
Requisites: {RAS) ·
a. Prize must be received in Recognition of
Charitable, Artistic, Religious, Civic,
g°ducational, - bit_
e rary,- or §cientific
/ achievement {CARCELS);
b. Recipient di_
d not take an Active part to join
although he participated; and
c. Recipient is not required to render
Substantial future services (unconditional
receipt of such prize) (N/RC, Sec.
32(B)(7)(c)).
NOTE: Scholarship of stu~nt granted by
educational institution may be considered
as gift or compensation in payment of past
or future services (the value of the sa~e is
considered _ as compensation income of the
recipient) (2-A DOMONDON, supra at 271-
2_74) .
If there is a penalty clause that requires the
recipient to 'reimburse certain amounts if he
does not render any service or where he is
not able to render full service, then the
~-reirli · rsement does not form part of the
'gros income of the grantor because it is
considered as merely a payment ot a loan '
(2-A IJ)OMONDON, supia at 271-274).
§ .
Prizes ahd itwards g~anted to athletes in
sports competitions locally o·r abroad .I
and sanctioned by their national sports
association (NIRC, Sec. 32(B)(7)(d)) .
. National Sports Associations
-..,......_..·-\Tbe
r fer to those duly accredited .by the
.I
. Philippine Olympic Committee (POC) (R.A. No.
7549, An Act Exempting All Prizes and Awards
Gained from ~ocal and International Sports
Tournaments and Competitions from the
Payment of Income Tc!x and Other Forms of
Taxes and for Other Purposes, Sec. 2(2)).
5. !ncome derived by the Philippine
government and its political
subdivisions from:
. a. Any public utility; or
b. · the exercise of any essential governmental
function (Nl~C, Sec. 32(8)(7)(b)) .
NOTE: The Constitution does not contain
any provision granting tax exemption to the
government. Obviously, the reason for this
is that the government's exemption from
taxes is an intierent limitation on the State's
taxing power. Notwithstqnding the immunity
of the government from taxes, it is also a
well-recognized principle that the
 108
INCOME TAXATION
Taxation Law

government may tax itself (ABAN, Law of 4. !fousehold personnel, such as maid, ~river and
Basic Taxation, supra at 65). others; .
5. Interest on loan at less than. market rate to the
extent of the difference betwe·en the market
EXCLUSIONS UNDER SPECIAL LAWS rate and actual rate granted; ·
1. R.A. No. 7916 (Philippine · Export Zone 6. Membership fees, dues anq other expenses
Authority Law) borne by the employer for the employee in
PEZA-registered enterprises are given income social and athletic clubs or other similar
tax holidays for 6 or 4 years from the date of start organizations;
of commercial operation, depending on whether 7. Holiday and vacation expenses;
their activities are considered as pioneer.or non- 8. g°xpenses for to.reign travel ; . .
pioneer; after enjoying income tax holidays, they 9. Educational assistance to the employee or his
are subject to the 5% final tax on their gross dependents; and . .
income earned, in lieu of all national and local 10. Life or health insurance and other .non-hfe
taxes; insurance Premiums or similar amoun~s in
excess of what the law allows.
2. R.A. No. 6657 (Comprehensive Agrarian
Reform Program) VALUATION OF FRINGE BENEFITS
Gain arising from the transfer of agricultural 1. Money, if directly paid by the employer - the
property covered under the law shall be exemµ,_t ,, . ·~value is the amount granted or paid;
from capital gains tax for 10 years; • .,.,,"."""' 1 2. : Property other than money and ownership is
1
- ,,. f - .; • 1 tr.insferred to the employee - the value of the
3. R.A. No. 7653 (New Centra~Ba nl< A(tj° ~-· · .,. .... I fring e be~efit shall be equal to the fair market
The BSP is exempt from all n~tional, p r'ovincial, value ~ of the property as determined in
municipal and city taxes_for_s' yea(~· -~ .. .-. ·--· ~ - - - -. acccird{nce ~ It~ the authority of the Bl~ to
, 1 / / _:
1 , prescribe real..property values (zonal valuation);
4: R.A. No. 7279 (Ur:ban ..,0eve opment . :: . . or \ , f \
Housing Act of 1992) i'--- · / _ _ _ _/ _. .::_] ; __ Pr9Ji:rty ot r than money.~ut own~rship i~ not
The NHA is exempt from al te·es and charg_~s. qf /• ; !~an~ferred o,tbe employee - _the value of fringe
any kind, whether local or ·national, such · ,as ,-" I · benefit is equal to, the depreciation value of the
income and realty taxe ; -:[ (I(\ . · , _-:- ·., · ~ propr;~Y.. (R.f?_"No,~3-98, Sec. 2.33(A)).
__..,._ '-·-· -- - r - - - - f , - ·, .
s. R.~. No. 8502 (Je~ elry , ·Jn~\lstry ! .: ·•·, - ~
/ /~ ··- - -
·t.:•..··-1_ _ _ _ _ _ _...,.
Development Act of 1998) '/, ·'<· . 1 •. : , / ..:.. ., •
Certain incentives are available to Q~al'fied
Jewelry Enterprises; and i · (. . · .J :--- _
·, / FRINGE BENEFITS TAX
- ~ ---/ _ _ _ _ _, _ _ _ _ _ _ _ __ _
• ( / .• -,·'l, ':,..,-
- . . 1- . '' \ __ # ,

6. R.A. No. 9504 (An Act Amending Sec. 22;- - ·- :-· · \- ;

24, 34, 35,_51 ~nd 79 of ~he ~l~C) '0: •
1 . -FRl~(;E- BENEFITS TAX (FBT)
C9mpensat1?~ income f~lhng within_ the term 1 v1-
f Final tal( of 35% impqsed· on the grossed-up
·statutory minimum wage (S~W) paid to SMW monetary value (GMV) of fringe benefit furnished or
earners shall be exempt from income tax. granted . to the employee, • except ranl<-and-file
employees, by the employer, whether an individual
or a corporation (NIRG_, Sec. 33(A), as amended by

I FRINGE BENEFITS
I TRAIN LAW).

(FBT) is: (FIW):

1. A final tax;
2. Imposed on the GMV of fringe benefit furnished
FRINGE BENEFITS or granted to a managerial/supervisory
Any good, service, _or ?ther benefit furnished or employee;
granted in cash or in kind by an employer to an 3. Withheld by the employer who files the return
individual employee (except rank-and-file and remits the tax not later than the last day of
employees as defined herein, such as but not limited the. month following the close of the quarter
to the following : (HEV-HIM-HEEP) during which withholding was made (Guidelines
1. Housing; for BIR Form No. 16Q3Q).
2. Expense account;
3. ~ehicle of any kind;
 ME&& ' '
tLE~O,RY AID COlege I.aw - RGCT Bar r.-..c-- .
-,.,.,•"""""Center
EMPLOYER PAYS THE FBT
~r~:
The FBT is a tax on the income of
b 'd b h an emp 1oyee to
e pa1 y t e employer on behalf of th I
The FBT is_collected from the employe~ ::~
~mployer 1~ a tax-exempt corporation or an
instrumentality of the Philippi·ne pem~~
(DIM~A:fP_AO, Income Taxation, supra at 39). In
effect, 1t 1s imposed on the employer and not on the
employee who received the fringe benefit (R.R. No.
03-98, Sec. 2.33(A), Appendix O). · .
~EASONS: Em~loyer is the one required to pay
income tax on fringe benefit because the valuation •
of benefits is easier a_
nd does not depend upon the
self-de~laration of an employee (occupying
supervisory or managerial position) {OIMAAMPAO,
Income Taxation, supra at 39) .
FBT IS A DEDUCTIBLE EXPENSE
FBT on fringe benefits is paid by the employer but
he is allowed by iaw. to deduct the grossed up
monetary value of the fringe benefit furn ished or .
granted to the employee as a business expense in
determining his taxable income provided that the
final tax imposed under Section 33 has been paid
(NIRC, Sec. 34(A)(1(a)(i)).
The FBT is not an additional tax on the employer. He
can · claim the fringe benefit and the FBT as a
deductible expense from his gross income
(DIMAAMPAO, Income Taxation, supra at 40).
TAX TREATMENT OF ·FRINGE
BENEFITS
1. If given to managerial or supervisory
employees
- subject to Fringe Benefits Tax (NIRC, Sec.
33(a), as amended by TRAIN Law).
The FBT covers only the taxable fringe benefits
of managerial and supervisory employees. For
purposes of FBT, R.R. No. 3-98 clarifies that
taxable fringe benefits exclude those items
considered as compensation income
(BANGGAWAN, Income Taxation, supra at
362).
Managerial Employees
They refer to those who are vested }Vith powers
or prerogatives to lay down and execute
management policies and/or to hire, transfer,
suspend, lay-off, recall, discharge, assign, or
discipline employees (R. R. No. 03-98, Sec.
2.33(A)).
Supervisory Employees
They are those who effectively recommend such
managerial actions if the exercise of_ su~h
. exemption from other income taxes unles
authority is not m·erely routinary or clerical rn
109
nature but requires the use of independent
judgment (R.R. No. 03-98, Sec. 2.33(A)).
2. If given to rank-and-file employees
- Similar fringe benefits granted to managerial
or supervisory employees may likewise be given
to rank-and-file employees. The value of such
fringe benefit is not subject to FBT but shall be
considered as part of the compensation income
of such employee-subject to applicable income
tax rates (R,R. No. 3-98, Sec. 2.33(C)).
Rank-and-File Employees
They are the employees who are holding neither
managerial nor supervisory position .
(DIMAAMPAO, Income Taxation, supra at p. 40;
R.R.' No. 03-98, Sec. 2.33(A)) .
3. Exempt from FBT, regardless if the
benefits were given to managerial or
supervisory or rank-and-f_ ile employees,
if:
a. Fringe benefits are authorized and
exempted from income tax under the NIRC
or under any special law;
b. They ~are contributions of the employer for
the benefit of the employee to retirement,
insurance and hospitalization benefit plans;
NOTE: These refer to voluntary benefit
plans established by the employer for its
employees, such as the employee's
Personal Equity and Retirement Account
(PERA).' " .
The employer's contribution to the
. employee's PERA shall not form part of the
• employee's taxable gross income, hence,
exempted from withholding tax on
compensation and fringe benefits tax (R.R.
No. 17-2011, Sec. 7(8)).
c. Benefits given to rank and file employees,
whether granted und~r a collective
bargaining agreement or not;
d. They are de minimis benefits (Please refer
to separate discussion of De Minimis
. Benefits on pages 114 to ·11 S);
e. The grant of fringe benefits is required by
the nature of or necessary to the trade,
business or profession of the empl9yer; and
f. If the grant is for the convenience or
advantage of the employer (R.R. No. 03-98
Sec. 2.33(C)) . '
NOTE: Exemption from FBT is not an
such benefit is also stated expressly to b:
 INCOME TAXATION
110 Taxation Law

exempt from. other income taxes (2 GROSSED-UP MONETARY VALUE OF

CASASOLA, NIRC, supra at 273) .
NOTE: While the benefits above may be
exempt from FBT, it may still for part of the
employee's gross compensation income
which is subject to income tax (R.R. No. 03-
98).
CONVENIENCE OF THE EMPLOYER
RULE
Benefits given for the exclusive benefit or
convenience of the employer are not subject to FBT
(DIMAAMPAO, Income Taxation, supra at 32) .
FRINGE BENEFIT TAX RATE/TAX BASE
Grossed-up monetary value (GMV) of the fringe
benefit (NIRC, Sec. 33(a), as amended by TRAIN
Law) .
The FBT is imposed on the GMV of fringe benefit i
furnished, granted, or paid by the employer to the · ,
employee, except rank- a'nd-file e111ployees, whether ·
such employer is an individual, · professional
partnership, or corporation, regardless ~f wheth~r
the corporation is taxable or not: or t~e goyernment
and its instrumentalities (R.R. No. 03-98, Sec. 2.33
(A)) . . •
DETERMINATION OF FRINGE
BENEFITS TAX
FRINGE BENEFITS REPRESENTS:
1. The whole · amount of income realized by the
employee which include·s the net amount of
money or net monetary value of property which
has been received; plus
2. The amount of FBT thereo11 otherwise-due from
the employee but paid by the employer for ·and
in behalf of the employee (R.R. No. 03-98, Sec.
2.33(A)).
DETERMINATION OF GROSSED-UP
MONETARY VALUE
GMV of the fringe benefit shall be determine~ by
dividing the actual monetary value of the fn_ nge
benefit by: '
1. 65% - for citizens, resident aliens, and non-
resident aliens engaged in trade or business-in
•. the Philippines; , .
2. 75% - for non-resident alien individual not
engageo in trade or business in the Philippines;
. ahd . ·
3. ~85% - for alien individual employed by regional
or are( headguarters or regional operating
headquarters· 'bf multinational companies,_
offshore banking units of a foreign bank
established the· Philippines, foreign service
contractors· 6r s bcontractors engaged in
petroleum operations, or any Filipino individual
employees who are employed and occupying
the sam.e position as those occupied or held by
tl)e alie_n employees (R.R. No. 03-98, Sec.
2.33(A)) .·

Formula:

STJ P1: D\~termine the GMV

Monetary Value
(MV) =Grossed up
Monetary
Monetary value .-xx ,. xx ,. xx Grossed-up
Value (GMV)
divisor
Divide by gross
monetary value 65% 75% 85% STEP 2: Compute for the FBT
factor

Grossed-up ,. xx ,. xx ,. xx Grossed-up
monetary X FBT rate
monetary
value
value

x FBT rate 35% 25% 15% The rates of fringe benefit tax vary depending on
Fringe benefit .-xx ,. xx ,. xx how the employees are taxed. The reason is that the
FBT tends to recover income tax of the employee 5~
tax
the rate follows the income taxation of sue
employees as shown in the.table below:
 \ I

MEM:Q~y AID
Sa'\ Seda lJMw8ity College ot Law - RGCT Bet Clpeiationa Caoter

APPLICABLE FBT RATES

RC, NRC, RA, NRA- 35% (NIRC, Sec.

ETB 33(a), as amended by determined by
TRAIN Law) the CIR.

Employer Annual value .is 50% of the

NRA-NETS 25% (NIRC, Sec. a 5% of the value of the
purchases
25(8)) acquisition cost, benefit
residential
property on exclusive of
Individuals employed 15% (NIRC, Sec. installment interest
by RHO or ROHQ, 25(C); Sec. 25(0) and basis and
OBU, foreign service Sec. 25(E, as amended allows use by
contractor or foreign by TRAIN Law) the employee
service subcontractor
engaged in petroleum Employer Acquisition cost Entire value
operations in the purchases a or zonal value of the
Philippines residential as determined benefit
property and by the CIR,
(NIRC, as amended by TRAIN, Sec. 33(A); R.R. No.
transfers the whichever is
03-98, Sec. 2.33(A)).
ownership to higher
employee
NOTE: Upon effectivity of the TRAIN Law, Special
Alien Employees and Special Filipino Employees Employer Difference Entire value
are now subject to graduated tax rate on their purchases a between: of the benefit
compensation income. Consequently, the. FBT rate residential • 1. The higher of
applicable to them shall be 35% beginning. January property and the FMV in
1, 2018. Therefore, the 15% tax rate illustrated in the transfers 'the the Real
table shall only apply if the taxable fringe benefit was ownership to, Property Tax
given prior to 2018 taxable year (NIRC, Sec. ·33 (a) , employee at a Declaration
as amended by TRAIN Law). price less than . and the zonal
the acquisition~ value as
FRINGE BENEFITS SUBJECT TO FBT: cost , .. ,.,;' ,;: determined
(HEV-HIM-HEEP) . ... , by . the CIR;
(NIRC, as amended by TRAIN, Sec. 33 (BJ) . and
2. The cost to
the .
emi,loyee.

(R.R. No.03-98, Sec. 2.33(8)(1))

Employer Amount of rental 50% of the Non-Taxable Housing Fringe Benefit: (MTB)
leases paid value of the a. Housing privileges ·of Military officials of the
residential benefit AFP consisti11g of officials of the Philippine
property for use Army, Philippine Navy and Philippine Air
of the employee Force;

REASONS: The State shall provide its

Employer owns Annual value is 50% of the soldiers with necessary quarters which are
the residential 5% of the high'er value of the within or accessible from the military camp
property and amount benefit so that they can readily be on call to meet
assigns the between : the exigencies of their military service.
same for use by 1.The FMV in
the employee the Real b. Iemporary housing for an employee who
Property Tax stays in a housing unit for three (3) months
Declaration or less; and
and c. Housing unit which is situated inside or
2 _The zonal adj~cent (i.e., fifty (50) meters from the
value as penmeter of the business premises) to the
 '
INCOME TAXATION
Taxation Law

premises of a ~usiness or factory (R.R. No.

03-98, Sec. 2.33(8)(1)) . ·

2. gxpense account
GENERAL RULE: Expenses incurred by the benefit of his
employee but which are paid by his employer employer
and expenses paid for by· the employee but
reimbursed by the employer are taxable fringe
benefits (R.R. No. 03-98, Sec. 2.33(8)(2)(a) and Employer Amount Entire value of
(b)) . shoulders a shouldered the benefit •
Exception: If such expenses are duly receipted portion of the by the regardless of
for and in the name of the employer and the amount of the employer whether the
expenditures do not partake the nature of a purchase price vehicle · is used
personal expense attributable to the employee, of the vehicle by the employee
the said expenses are not taxable (R.R. No.03- and ownership partly for his
98, Sec, 2.33(8)(2)(a) and (b)) . is placed in the ' personal
name of the purpose and
NOTE: Personal expenses of the employees employee partly_ for the
. whether paid by the employer or reimbursed -to ben~flt of his
the employee shall be treated as taxable fringe ~ e_mployer ..
benefit (R.R. No ..03-98, Sec. 2.33(8)(2)(c ): 1---___..::._
~ - - - t -- -----::--t------:---7
-
.. Employer •.. Acquisition Entire value of
NOTE: Representation and " trarisporta~oo ::..Ao •purchases- -~th~ cost, the benefit
allowances which are fixed in,-amounts fmd are y ehicle~ . -('· in ?xclusive of regardless of
regularly received by the_ep,ployE;~s .as.... part of • ·-··-- installmenf-\~and ltmterest, whether the
their monthly compensation are, not treated a~ · 6wnership ... fs- divided by vehicle is used
taxable fringe benefits but are considered · placed , in • the five (5) by the employee
taxable compensation income subject to regular name _ of he years partly for his
tax rates (R.R. No. 03-98, ec. 2.33 (B)72f(d)r ·-· employee . -- , , per,sonal
1 -. · ., 1 '" ..., • purpose and
3. Vehicle of an kind .. · . ' i partly for the
I • ' benefit of his
. I employer

,Employer QWns Acquisition 50% of the value

Employer Entire value of ,., a•' fleet of cost of all of the benefit
purchases the the . benefit ; , vehicles· for use, 'the vehicles
vehicle in regardle·ss of ·. • · ~of the_ bu,,siness not normally
employee's wti'eth~ r ; 1 the - · and employfte~ used for
name vehicl'e used , ; : , \ ,. sales,
by the employee _ freight;
partly for his delivery
personal service and
purpose and - other non-
• I.
partly for the personal
benefit of his use divided
employer by five ·(5)
years
Employer Cash Entire ·value of -
furnishes received the benefit Employer leases Rental 50% of the value
employee with regardless of a fleet of payments of the benefit .
cash . for the whether the vehicles for use for motor
purchase of vehicle is used of the business vehicles not
vehicle and by the employee and employees normally
ownership is partly for his used for
placed in the personal sales,
name of the purpose and freight,
employee partly for the delivery
service and
other non-
-
 . \ I
MEM:Q~Y ·AID
Sen B e d e ~ 'Colege t:A Law - RGCT Bar""---"-- .
..,.,...auonaCenter
persona·I
use
(R.R. No.03-98, Sec. 2.33(8)(3))
NOTES:
a. The use of aircraft (including helicopters)
owned and maintained by th~ employer
sha~I be treated · as business use . and not
subJect to FBT (R.R. No: 03 _98 S
2.33(B)(3)(g)),. · ' ec.
b. The use of , yacht whether owned and
maintained or Jeased by the employer shall
be treated as taxable fri_nge benefit. The
value of the benefit shall be based on the
depreciation -of a yacht at an estimated ..
useful life of 20 years· (R.R. No.03-98, Sec. ··:;'~
2.33(B)(3)(h)).
N_OTE: The · high. cost of ownership ~of
aircrafts makes it inherently prohibitive· or
impractical to be for personal use. ·'.thus,
aircrafts are deemed by regulations as
solely for business use; hen~. tpey are
exempt from fringe ben~fit -tax. ~Yaf hts,
though pricey on the other hand, generally
lack any sensible business _purpose aside
from being for personal pfeasure;·, he.nce,· its
depreciation value is subject Jo_FB:T in full
(BANGGA WAN, Income Taxation, s'!pra at
372) . '·. , :-
'l...
4. Household expenses -
Expenses for employees which are bo~n~SY the
employer for · household ·personnel, such as
salaries of household help, personal driver of the
· employee, or other similar personal expenses
(e.g. , payment for homeowner's association
dues, garbage dues, etc,) shall be taxable as
fringe benefits (R.R. No. 03-98, Sec. 2.33(8)(4)) . .
5. Interest on loan ,at less than market rate
to the extent of the differen·ce between
the market rate and actual rate granted
If the employer lends money to his employee
free of interest or a rate lower than the market
rate (currently 1?%), such interest fore~one by
the employer or the difference of the interest
assumed by the employee and the market rate
(12%) shall be treated as taxable fringe benefit
(R.R. No. 03-98, Sec. 2.33(B)(5)(a)).
6- Membership fees, dues, and other
expenses borne by the employer for th e
employee in' social and · athletic clubs
and similar organizatrons
These expenditures shall be treated as taxable
fringe benefits of the employee in full (R.R. No.
03-98, Sec. 2.33 (8)(6)) . The monetary value is
the amount paid (BANGGAWAflf,, Income
Taxation, supra at 373) . .
7. Holiday and vacation expenses
Holiday and vacation expens~s of the employee
borne by his employer shall be treated as
taxable fringe be,:,efits (R.R. No. 03-98, Sec.
2.33(8)(8)) . - .
. '
8. gxpenses for foreign travel -
GENERAL RULE: Expenses for foreign travel
are taxable fringe benefits. The travelling
expenses of the family members of the
employee which are paid for by the employer are
subject to - FBT (R.R. No. - 03-98, Sec.
2.33(B)(7)(c)).
Exception: Business e~penses paid for by the
employer shall not be treated as taxable fringe
benefits if the following conditions are met:
a:-- ;The e);(penses were reasonable·
b. Expenses were paid for the for~ign travel ·of
emP,_lqyee for the purpos~ of attending
business meetings or.conventions; and
c. The employee's travel abroad · was
suppqrted by documentary evidence
proving the actual occurrences of the
• ·me~~m:is "or conventions (R.R. No. 03-98,
Sec: '2.33(B)(7)(a); 1 DE LEON, supra at
39). . . .
-~ ,'. ~~>K/, •
-~ r ·"' . · ·· The exemption covers inland travel
,,_, •
expenses, such as expenses for · food,
·~, ;i bev~rages and _local transportation, except
lodging cost at a . hotel 0( similar
_establishments amounting to an· average of
more than US$300 per day (R.R. No. 03-98,
Sec. 2.33(8)(7)(a)) .
The ·cost of economy and business class
airplane ticket shall not be subject to FBT.
However, 30% of the cost of the first class
airplane ticket shall be subject to FBT (R.R.
No. 03-98, Sec. 2.33(8)(7)(a)) .
Summary of · Expenses · For Foreign
Travel subject to FBT (30%-LTE)
i. 30% of the cost of first class airplane
tickets;
ii. J:odging· cost in a hotel or similar
estab!ishment in excess of US $300 per
day; and · ·
iii. . !ravelling , g,xpen~es paid . by the
employ~r for ·the travel of the family

members of the employee;
(8ANGGAWAN, supra at 374).
NOTE: When there is no documentary
evidence showing that the employee's travel
abroad was in connection with business
meetings or conventions, the entire cost of
the ticket, including the cost of hotel
accommodations and other expenses
incident thereto shouldered by the
employer,·shall be treated as taxable fringe
benefits (R.R. No. 03-98, Sec. 2.33 (8)(7)).
9. gducational assistance to the employee
or his dependents
GENERAL RULE: The educational assistance
is a taxable fringe benefit (R.R. No. 03-98, Sec.
2.33(8)(9)(a)) .
EXCEPTIONS:
a. Education or study is directly connecteawith. ·
employer's trade or business and there is a .
written .contract that employee shall remain. ,
employed with the employer for a ~eriod of
time mutually agreed upon.A( .R..,No. 03-98,-
Sec. 2.33(B)(9)(a)); and ,, ·.~ ;.-
b. In case of dependents, tn'e assist nee was
provided through a comRetitive scheme
under -the scholarship program of - the
company employe( (R.R. No. 03; 98, Sec:
2.33(B)(9)(b)).
.,.--7:r,,
10. lnsuran_ce fremium r .-·;,. \ - ~·- --y-
GENERAL RULE: The premiums pa)dfor.life or
health insurance and other non'-life insurance
borne by the employer for his employee are
taxable fringe benefits •(R.R. No. 03-98/ Sec.--.--~ . .
2.33(8)(10)). ' <~ , . · 1. • ·,: combined, does not exceed P10,000 per
/ ,
EXCEPTIONS: , , · ·
a. Cost of premiums borne by the employer
for the group insurance of employees; and
b. Contributions of the employer for the
benefits of the employee to the SSS, GSIS
and similar contributio~s arising fro~
provisions of any existing law (R.R. No. 03-
98, Sec. 2.33(8)(10)) .
I DE MINIMIS BENEFITS
DE MIN/MIS BENEFITS EXEMPT FROM
INCOME TAX:
These are the facilities or privileges furnished or
offered by an employer to his employees that are of
relatively small value and are offered or furni_shed by
INCO.M E TAXATION
Taxation Law
the employer merely as a means of promoting the
health, goodwill, contentment and efficiency of his
employees (R.R. No. 03-98, Sec. 2.33(C)) . They are
2
the following : (RU 2 M 3 -C OLA)
1. fiice subsidy of '92,000 or one (1) sack of 50kg
rice ·per month amounting to not more than
'92,000 (R.R. No. 11-2018, Sec. 2. 78.1(3)(d));
2. Y.niform and clothing allowance not exceeding
,.6,000 per annum (R.R. No. 11-2018, Sec.
2. 78. 1(3)(e));
· 3. Monetized y_nused vacation leave (VL) credits of
private employees not exceeding ten (10) days
during the year;
NOTE: Monetization of unused VL credits in
excess of ten (10) day~ and monetization of sick
lea_
ves ·even if not exceeding ten (10) days are
not exempt.
· 4., Monetized value of vacation and sick leave
- cr~dits paid to government officials and
1 ' \ employees (no limit as to the number of credits);
5. . Medi<;:al cash allowance to -dependents of
.. employ~e.s not exceeding '91,500 per employee
· per semester .or P250 per month (R.R. No. 11-
2018, Sec. 2. 78.1(3)(c)); .
6. Actual ye~rly M~dical benefits not exceeding
_ -1'J 0,000 per'annurn;
7 ., ~ift : given ,. during Christmas · and major
anniversary 'cel~bralions not exceeding '95,000
per, eryiployee per ap num; ·
8--.-.Benefits received ,by an employee .by virtue ·of a
I ·- • ~?llectiy~ ...~argai~ing agreement (CBA) and
wog,uctiv,ty incentive schemes provided that the
1 , ·, total an~ual monetary value received from both
CBA . and productivity incentive schemes
, - e!Jl_ployee per taxable year (R.R. No. · 1-2015);
9 - Da!IY meal allowance for Overtime work and
["". \ ni~ht/graveyard shift .not exceeding twenty-five
percent (25%) of the basic minimum wage on a
per region basis;
10 - ~au nd ry Allowance not exceeding t-300 per
month; and ·
11 · Employees' ~chievement Awards, e.g., for
leng th of service or safety achievement which
must be in the form of a tangible p~rsonal
property other than cash or gift certificate, with
I an a~nual monetary value of .not exceeding
'910,0?0 received by the employee under an
e~ta~h~hed written plan which does not
discriminate in favor of highly paid employees
(R.R. _No. 03-98, Sec. 2.33(C), as amended by
R.R. No. 05-2011, R.R. No. 08-2012 and R.R.
No. 1-2(!15).
 .\ I

M'EM:0-:RY Al D ·
Sen Bede. College of Law - RGCT Bar Operations Center
. 115

SUMMARY OF DE MIN/MIS B'ENEFIT NOTE: De minimis benefits granted by an

· THRESHOLDS employer shall form part of compen~ation income
1...... ::.:.-· :": <-: Iii
f l J:tf1'·1/,l/J,',J,-..,. : l::ll,'l::l::IIIL~ l't •; ·· .. · · ,. ·• subject to the graduated rates but only the amount .
.i .. . 'lll:1 ~,1:a,.."1:reflli\ <·,:.;;.
1
1
..
••
'
in excess of the ceiling prescribed and the same
were given to rank-and-file employees. If the same
P2,000 or one (1) sack
1. Rice Subsidy were ' given to managerial and supervisory
of 50kg per month not
employees, the· excess shall be subject to FBT
exceeding P2,000
(R.M.C. No. 5-201 ~).- .
2. Uniform and Clothing
Allowance P6,000' per annum. The amount of de minimis benefits conforming ·to:
the ceiiing of de minimis benefits shall not be ·
3. Leave Credits · considered in determining the P90,000 ceiling of
(Private) 10 days per annum "other benefits" excluded from the gross income ·
under Section 32(8)(7)(e) of the Code as
4. Leave Credits amended by the TRAIN Law: On the other hand·,
(Government) No limit
the excess of the de minimis benefits over their
respective ceilings prescribed under this
5. Medical Cash regulation shall be considered as part of other
Allowance · P1,500' per sem or P25C
per month benefits subject to tax only on the excess over the
(D~pendents) P90,000 ceiling (R.M.C. No. 5-201.1).

6. Medical Benefits P10,000 per annum ,;:,. ILLUSTRATION:

Mr. A receives a-nee subsidy of.P2,500 per month .
7. Christmas or Major , He also receives a 13th month pay of P88,000. ·
PS,000 per annum
Anniversary Gifts :-·?t In the present scenario, the rice subsidy received
,
· \~~.~xceede ·, the threshold by PSOO. Before
8. Under CBA and '..o. :·• i f'eterm1o(ogf' whether such excess is taxable, it
Productivity Incentive P10,000 . must be added to his 13th month pay and other
Schemes :, benefits. Jh~ amount in excess of P90,000 shall be
'
included In &,e computation of income tax:
9. Meal Allowance· for
25% of basic _min .. wage , t . . .
OT work •'
Hence/in the present problem, the excess of PS00
P300 per month multipfied by 12 (representing 12 _months for one
10. Laundry Allowance.
year) pius the J3Jhi month pay amounts to P94,000
P10,000 in the form of (P6,000 + ~ 88,000). The P4,000 excess over the
11 .Achievement Awards tangible.property- P90,000 threshold is taxable. ·
. .~IJ:~r..: -~
. - .' .. - DEDUCTIONS FOR THE EMPLOYER
Reason for exemption: The. fair ma'r~et value ·
GENERAL RULE: Any benefits given by the
of the property or serviC:e is s~ :~ _ m_all ·that . . I
employer whether considered as de minimis or
accounting for the property or ser':'1ce ~o~ld be fringe benefits subject ·to income tax shall be
unreasonable or administratively I'!1practical ( 1
considered as deductible expense of the employer.
DE LEON, supra at 403). . The fringe benefits tax is also deductible (R.R.. No.
03-98, Sec. 2.33(0)) .
NOTES: t d is
a. The list of benefits enumera e Exception: lf the ba~is for computation of the
exclusive. All other benefits giv~n by · fringe benefits tax is the depr~ciation value,_t~e
employers which are not inc · Iu d e d ,n the ·
'zonal value or the fair market value as determm~d
enumeration shall not be considered _as de . in the current real property-tax declaration, only the
minimis benefits, hence, shall be subJect to actual fringe benefits tax paid shall constitute a
income tax (R.R. No. 05-2011, Sec. 1). deductible expense. The value of the fringe benefit--
b. · The de minimis benefits enumerated are shall not be deductible (R.R. No. 03-98, Sec.
. t only up to the
exempt from income ax t
extent of the ceiling prescribed_. Any am u;
1
f 2.33(0)).

in excess of the ceiling prov~def, sshu~h i: Exception to the exception: If the aforesaid zonal ,
taxable to the employee for exempt value or fair market value of the property is greater
beyond the thres O ~o.ooo
R No . than its co·st, the excess an:iount shall be allowed
13th month pay and other benefits (R. . . as a deduction ·from the employer's gross income
02-98, Sec. 2.33(C)). · as fringe benefit expense (R. R. No. 03-98, Sec.
2.33(0). ·
 INCOME TAXATION
Taxation Law

1. Separation pay given

1. From sources within the 1. From sources within
the Philippines to employe·e s due to
Philippines derived by NRA-
NETS- who is not subject to derived by RC, NRC, causes beyond their
preferential rate - 25% FWT RA, and NRA-ETB control;
(NIRC, Sec. 25(8)); and who are not subject 2. Retirement pay a·nd
2. From sources within the to the · preferential other benefits exempt
Philippines derived by individual rate ; and pursuant to R.A. No.
employees subject to 2 . From sources 4917, R.A. No. 7641,
preferential income tax rate - without the R.A. No. 8282 and
15% FWT (NIRC, Sec. 25(C), Philippines derived R.A. No. 8291;
Sec. 25(0) and Sec. 25 (E), as by RC. 3. 13th . month pay and
Compensation -amended by TRAl!:J l!:.aw). 1 other benefits
and Pensions, /'. I amounting to ~o.ooo
except Fringe NOT.E: RHO .~OH<ls 0BlJs or- • - '- (NIRC, Sec. 32(7)(e),
Benefits petroleum ervice r ·contractors as amended by TRAIN
registering wit the $Ee a er Law);
January 1(201 s, the/G raduated. ' 4. GSIS; SSS, Medicare
Tax Rates of'20% fo 35%.'lshall , ·· contributions and
be a,RPlicable t!:!J_RC_, _ !!~ ·--~j union dues;
amended : by TRAIN, Section J Those ·exempt under
25(F)). - \ '.,._ >. . ·~ j special laws · or
. <C (''' ·.· ;- .- treaties; and

:)\ ,-- - ~- ·71-· / - -·

tr:- ' All other compensation
rf) from sources without
~--~'->. ,··..-~'.:~ / the Philippines derived
;{ ' '
by NRC, RA, NRA-
.. ,,;,~'-...l"
'..~ ~;r\ .
/ I~;~~-- __. ETB and NRA-NETB.
' \ ,,..,.
1. From sources 'with1fl \ •--1Ji' _1. - From _so~!- es within 1. Return of premiums;
Philippines deriv dr.iy. th . ..., Pti_iJipplnes 2. Those exempt under
a. NRA-NETB whd. i not ! d"-~1 ed .y•RC, NRC, special laws or
. subject to preferential rate .!.. 1, ,_.., and NRA-ETB treaties; and
25% FWT (NIRC, Sec. •·· -·who are not subject 3. · Annuities from sources
25(8)) ; and to the preferential without the Philippines
b. NRFC - 30°/~ FWT (NIRC, rate, DC and RFC; derived by NRC, RA,
Sec. 28(8)(1)). · and NRA-ETB, . NRA-
2. From sources within the 2. From sources NETB, RFC, and
Annuities
Philippines derived by individual without the NRFC.
employ~es subject to Philippines derived
preferential income tax rate - by RC and DC.
15% FWT (NIRC, Sec. 25(C),
as amended by TRAIN Law).
 \. I

MEM:Q~y Al D-
SM S e d a ~ Colege law - RGCT Bar Operations Center

From sources within the Philippines 1. From sources within

derived by: 1. Those exempt under
the Philippines special laws or
1. NRA-NETS - 25% FWT (NIRC, derived by RC, NRC, treaties; and
Sec. 25(8)); and RA, an<;I NRA-ETS, 2. From sources wi!hout
2. NRFC: .
DC, and RFC; and the Philippines derived
a. In general, except as 2. From sources. by · NRC, RA, NRA-
provided below - 30'% FWT without · the ETS, NRA-NETS,
(NIRC, Sec. 28(8)(1 )); Philippines deriv.ed RFC, and NRFC. -
b. Cinematograpl)ic film .lessor by RC and DC.
- 25% Fwi" (NIRC, Sec.
Rent 28(8)(2));
c. Lessor of vessels chartered
by Philippine nationals -
4.5% FWT (NIRC, S~G:"
. 28(8)(3)); and
d. Lessor of aircraft,
machineries and other
equipment - 7.5o/~,_, FWT
(NIRC, Sec. 28(8)(4)). .

1. Cash or prqperty divjd§n9~paid .:1 . Cash or · property 1. Stock dividends, in

... by DC to:. . ... ·dividengs -pald b/ FC general;
a. RC . ~ --10% FWT (Nf RC, to the --.· following,. 2. Liquidating dividends,
Sec: 24(8)(2)1: : • provided that the · however, it. is taxable
b. NRC ....: ·.10% FWT (NIRC, income was derived income with respect to
Sec. 24(8){2)); ;, from sources with,n the excess of amount
c. RA- 10% FWT,(N/RC, Sec. , the Philippines: · · received over cost of
24(8)(2}) ;- . . :, -·- a .. RC;:.. - · the. share surrendered;
d. NRA-ETS_ .:.. 20% FWT b. NR_C; 3. Cash or prpperty
(f::1/RC, Sec. 25(A)(2)); c. RA; dividends · paid by DC
... e. NRA-NETS - 25% FWT
(NIRC,.Sec. 25(8)); and
d. NRA-ETS;
e. NRA-NETS
to another DC and
' Dividends RFC;
f. ·/ NRFC - 15%/30% FWT, f. DC; and 4 . Cash or property
. subject to tax sparing rule . g. RFC. dividends paid by FC,
· (NIRC, Sec. 28(8)(5)(b)). . ( Cash or property provided that -income
Cash or property dividends paid ' dividends paid by FC was derived . from
by FC to the following, provi~ed to RC' ancl DC from sources without the
that income was derived from sources · without the Philippines, to- NRC,
sources within the Philippi,:ies: Philippines. RA, NRA-ETS, NRA-
a. NRA-NETS ,.. _25% FWT NETS, RFC and
(N/RC, Sec. 25(8)); and NRFC; and .
b. NRFC - 30% FWT (NIRC, 5. Those exempt under
Sec. 28(8)(1)) . special laws or
treaties.
118
INCOME TAXATION
Taxation. Law

1. Ordinary gaihs derived from 1.
sources within the Philippines
by:
a. NRA-NETB - 25% FWT
(NIRC; Sec. 25(8)); and
b. NRFC - 30% FWT (NIRC,
Sec. 28(8)(1)).
2. Capital gains or presumed
gains, as the case may be, on:
a. Sale of shares of stock of
DC.not list.ed and not traded
through stock exchange -
i. RC- 15% CGT "'( NIR9,
. Sec. 21.fCl, as ~ mendes!_
by TRAIi')/ Law); ·• ;_
ii. D9<. 15%~.q'G1 (NIRC,
Gains From §ec. ~,27(D1(2), .,--a~
Dealings in
~men~ed by TRAIN
Property
Law).-a d;
iii. RFC/NRFC1 - 5% and
1'0 %: (NIRC; . Sec.
""'--zB(.4)(7)(c)). . ·
b. . §I!~of real p~op,erty located
in the Philippines - 6% CGT
((IJIRC, Sec. ·24(0 )(1);
27(D)(5)). , ''
3. Net capital Qijins de'rived from '
sourees within the P~ilipP._ines :
other than those subj~cl t'b ,C~jr
Ordinary · gains 1. Capital gains from sale
derived from sources of principal residence,
within the Philippines as the case may · be
by . RC, NRC, RA, (N/RC, Sec. 24(D)(2J);
NRA-ETB, DC, and 2. Tax-free exchanges; ·
RFC; 3. Gains derived from
2. Ordinary gains sale or exchange of
derived from sources bonds, debentures, or
without the other certificate of
Philippines by RC indebtedness with a
an.d DC; . maturity of more than
.,3 . Net capital gains five (5) years; .
- -... derived from sources 4. Gains from redemption
· _! ~ithip ot~er than of shares in mutual
= those subject to CGT fund;
by R_c ; " NJ~c: RA, 5. Those exempt under
··NRe.t TB , DC, a_nd special laws or
.., _RFC; ~nd , . , . , treaties; and
4 . Net capital- gains 6. Ordinary gains and net
derived from sourc~s• capital gains derived
- -·without' - the from sources 'without
Ph.ilippihes by RC the Philippines by
· ' and DG . NRC , RA, NRA-ETB,
·sec. ,, ,·.
.
i NRA-NETB, RFC, and
NRFC.
.t ' I
f

by·. • ,,. . --:.'~.

L
a . NRA-NETB • -::..:;.r25% FWT
(NIRC, Sec. 25(8)); and
b. NRFC -: 30% FWT (NIRC,
Sec. 28(8)(1)) . .
 MEW ' 1
MEM:Q~y AID
San Seda College of Law - RGCT Bar Operations Center
119

../

1. Passive royalty income derived 1. Passive royalty 1. Those · exempt under

from sources within the
Philippines by:
a. RC, NRC, RA, NRA-ETB -
20% FWT ex~ept royalties
on books, literary and 2.
musical compositions which
is 10%.. FWT (NIRC, Sec.
24(8)(1), as amended by
TRAIN Law, · . and Sec.
25(A)(2));
b. NRA-NETB - 25% FWT 3.
(NIRC, Sec. 25(8)) ;
. Royalties c. DC and RFC - 20% FWT
(NIRC, Sec. 27(0)(1), as
amended by TRAIN Law) ;
and
NRFC - 30% FWT (NIRC,
Sec. 28(8)(1)) .
2. Active royalty income derived
from sources within the
Philippines by:
a. NRA-~ETB - 25% FWT
(NIRC, Sec. 25(8)) ; and
b. NRFC - 30% FWT (NIRC,
Sec. 28(8)(1)). _ .,.
income derived from special laws or
sources without the treaties; and
Philippines by RC 2. Passive and active-
and DC; royalty income derived
Active royalty from sources without
income derived from the Philippines by
sources within by NRC, RA, NRA-ETB,
RC, NRG, RA, NRA- NRA-NETB, RFC, and ,
ETB, DC, and RFC; NRFC.
and
Active royalty
income deriyed from
sources without the
Philippines by RC
and DC.
 INCOME TAXATION ·
Taxation Law
•

1. Interest from any currency .bank 1. Other interest 1. Interest from long-term
deposit, yield or any other income not subject to deposit or investment
monetary benefit from deposit final tax derived from (held for at least five
substitutes derived from sources within by (5) years, unless pre-
sources within by RC, NRC, RA, RC , NRC, RA, NRA- terminated) by RC,
NRA-ETB, DC, and RFC - 20% ETB, DC, and RFC; NRC, RA and NRA-
FWT (NIRC, Sec. 24(8)(1), as and ETB;
amended by TRAIN Law; Sec. 2. Other interest 2. Any interest income
25(A)(1); Sec. 27(0)(1), as income not subject to from transactions with
amended by TRAIN Law); final tax derived fr0m depositary banks ...
2. Interest income from FCDU sources without the under FCDUs by NRC,
deposits by: . .: . .._ Phrnppines by RC NRA-ETB, NRA-
a. RC, RA, and DC, 1'5% FWT .- , a d DQ. NETB, and NRFC;
(NIRC, Sec. • 24({3)(1). as _I 1 , . ,,. 3. Those exempt under:
amended · y TR ) A.IN·µ1w'); . ':.. ' I ii _;. special laws or'
and /> . ,,,~ - •, - · / . ._ treaties; and
b. RF~ 7.5%' ,{Nl8 C,- Sl:fc. ". \ ) 4. Other interest incorre
28 <A)t7,)(b( 1 ·" · . , .,_
not ~ubject to final tax
Interest I .'' ,
" · 1 '
3. Interest from. foreign currency
loans, grante'd by ,FCDUs and
.\ . •
\
derived from sources
without the Philippines
OBUs f ":RC, RA, ll C,a naRFC' --·-----·i by NRC, RA, NRA.,
- fo% fiWT (NfRC, Secs. · ! ETB, NRA-NETB,
24(8)(1)1 as <!mended by i.. RFC, and NRFC.
TRAIN ~aw· Sec. 27(Q)(3)); . •' ··
4. Interest ir ~ e 'cfn,foreign loans 1 - - - , ;-
by NRFe .!. 20% FWI"(N/RC, as
amended by. TRAIN, Sec.' ..
11
28(8)(5)(a)); , ,' !
5. Interest income erived, rom ·
sources within t~e,, f>hilippin~s. - -' · · ;..,. ' -?"-- /
by NRA-NETB <'-=>45 0 FWT 1j ~·.. '. \_ ,_ ,,/'
NIRC, Sec. 25(8)); ahd
6. Interest income derived' from
1i\' . . ;/ ·/ ·
sources within the Philippines
by NRFC - 30% FWf (NIRC,
Sec. 28(8)) .

From sources within the Philippines 1. From sources within 1. Those . exempt under
derived by: the Philippines special . laws or
Gross Income 1. NRA-NETB - 25% FWT (NIRC, derived by RC, NRC, treaties; and
from • Sec. 25(8)); and · RA, and NRA-ETB, 2. Income. derived from
profession, 2. NRFC - 30% FWT (NIRC, Sec. DC and RFC; and sources without the
Trade or 28(8)(1)). 2. From sources Philippines by NRC,
Business without the RA, NRA-ETB, NRA·
Philippines derived NETB, RFC, . and
by RC and DC. NRFC.
 \ I

t1BedaEK-Q~y Al D
Ur-.-1lity College of law - RGCT Bar 0peratjor,a Cooter

From sources within the Philippines 1. Prizes amounting to 1. Exempt prizes · and
d erived by: . . ·p10,000 or less awards in recognition
1. RC, NRG, RA, NRA-ETB - 20% derived from sources of specific valuable
FWT, provided that the amount within the Philippines achievements;
of prize exceeds ~10,000 by RC, NRC, RA, 2. Exempt prizes and
(NIRC, Sec. 24(8)(1), as NRA-ETB. awards in sports
amended by TRAIN" Law; Sec. 2. Prizes and winnings,. competition;
25(A)(2), as amended by the regardless of 3. Those exempt under
CREA TE Act); and · amount, . derived special . laws or
from sources witnout treaties; and
Prizes and NOTE: Lotto winnings in excess the Philippines by 4. Prizes and winnings
Winnings of ~10,000 shall be subjed to RC; and derived from sources
20% FWT (NIRC, Sec. 24(8)(1 ), .3. Prizes and winnings without the Philippines
NIRC, Sec. 24(8)(1), .as of corporations, by NRC, RA, NRA-
amended by TRAIN Law; Sec.. whether domestic or ETB, and NRA-NETB.
25(A)(2), as amended by · the· :,'
.(7
foreign.
CREATE Act). ' ,.·
' . . , . '•·<W<!"~
2. NRA-NETS 25% . FWT·, · _.,.;~,__;!l-t.,lt,_
regardless of the . amount of ::
prizes and win.nings (NIRc,··-as: ·
amended by . . TRAIN,-. Sec. •
25(8)) . "= /

From sources within the Philippine's Froin._s~urces..-v.l ttiin 1. Those exempt under
derived by NRA-NETS - 25% F'NT .; · the '.~·Pf.id.ippines special laws or
(NIRC, Sec. 25(8)).~ . i c· derived RC; NRC, by treaties; and
Partner's !' RA, and NRA-ETB; 2. Income derived from
Distributive {'
and sources witho\Jt the
Share in the Net .2. ·p om sources Philippines by NRC,
Income of GPP without the RA, NRA-ETB, and
. Philippines derived NRA-NETB.
by RC.

1. If the benefits were earned from 1. If the benefits were 1. Those exempt tinder
sources within the Philippines earned fro·m sources the · NIRC or other
ano granted to managerial or within the Philippines special laws;
supervisory employee who is: and granted to rank- . 2. Contributions of
a. RC, NRC, RA or NRA-ETB_ and-file employee employer. for the
who · is not subject to who is RC, NRC, RA retirement, insurance
preferential rate -35% FBT or NRA-ETB who is . and hospitalization
(NIRC, Sec. 33(a), as -not subject· to plan of employees;
amended by. TRAIN Law;); preferential rate; ·and 3. De minim,is benefits;
Fringe Benefits b. NRA-NETS who is not 2. If the benefits were .4. Benefits necessary to
subject to preferential rate - earned from sources the conduct of trade or
25% FBT (NIRC, Sec. without the business;
Philippines and 5. Those granted for
25(8)); or
granted to rank-and- convenience of
C. Alien Individual employees employer;
subject to preferential rate - file employee who is
35% FBT (NIRC, Sec. 25 RC. 6. Non-taxable housing
(F), as amended by TRAIN privileges;
7. Use of aircraft;
Law);
122 INCOME TAXATION
Taxation Law

8. Exempt educational
NOTE: Alien Individual assistance; and
employees subject to 9. All other ·benefits
preferential rate are subject derived from 1 sources
to the graduate income tax without the Philippines
rates as per the veto of the by NRC , RA, NRA-
President of a portion of ETB, and NRA-NETS,
Sec. 25(F) of the TRAIN whether given to
Law. Accordingly, the fringe managerial or
benefit tax applicable to supervisory or rank-
them is 35%. and-file employee.

2. If the benefi_ts were earned T

from sources without the •
Philippines al1! grante,;:I to
managerial _,. or ., supervisory
employee wt)o is RC~- 35%
FBT (NIRC, Ys ec: ~3(A?,· a~;
amended by TRAIN, ) , .. .··
3. If the benefits were granted ,to. ,. ,,
ra nk-and-file individual
employees subject · - - to ~.
preferentia l rate - 35% FWT·
(N!Re, as amende,d by TRAIN,
Sec. ?S(F)), anc(;;:, · - _
4. If th benefits were earned •
from sources w ithin the
Philippines and gra nted to
rank-and-file e mployee who is
1
NRA-NETS who ·s not subjec
to preferential ra 25% FWT
(NIRC, Sec. 25(8)) .
 \ I
MEM:Q~y AID
Sal Beda UniYelwity Colege of Law - RGCT Bar 0peratlona Center
DEDUCTIONS-FROM
GRoss·INCOME
DEDUCTIONS
Items or amounts which the· law allows to be
deducted from gross income in order to arriv~ at the
taxable income (MAMALA TEO, Reviewer, supra at
3~0) .
It is a governing principle in taxation that tax
exemptions must be construed in strictissimi juris
against the taxpayer and liberally in favor of the
taxing authority; and one who claims an exemption
must be able to justify the same by the clearest grant
of organic or statute law. An exemption from the
common burden cannot be permitted to exist upon
vague implications. And since a deduction for
income tax purposes partakes of the nature of a tax
exemption, then it must also be strictly construed
(CIR v. lsabela Cultural Corp. , G.R. No. 172231, -
February 12, 2007).
No deductions shall be allowed tq the following
taxpayers:
1. Individual taxpayers earning compensation .
income arising from personal services _rendered
under an employer-employee relationship; and
2. Those who opted to be taxed at 8% income tax
rate on ·their income from business/practice of
profession (R.R. No. 8-2018, Sec. 8).
GENERAL RULES:
1. Matching Concept for Deductibilit~
- deductions must · match the 1nc(?me;
deductions must be paid or · incu~red · in
connection with the taxpayer's trade, business or
profe$sion (2 DOMONDON, Taxation, supra at _
522) ; . profession (NIRC, Secs. 34(A) to (K)); R.R. No.
NOTE: A taxpayer who is authorized to de?uct
,. certain expenses and other allowable deductions
for the current year but failed to do so cannot
deduct the same for the next year (CIR v. lsabela
Cultural Corp., G.R. .No. 172231, February 12,
2007).
2. Substantiation Rule . TRAIN Law.
_ the taxpayer must substantially prov~ by
evidence or records the deductions cl~imed
under the law oth·erwise, the same_ will be
disallowed (Pilmico-Mauri Foods Corp. v. CIR,
GR No 175651 September 14, 2016) .
· · · ' d b adequate
Deductions must be supporte Y
. . A t yer has the burden
receipts or invoices. axpa . d d ductlon or
of proving entitlement to a claime _e
123
0
refund (Paper Industries Corp. of the PHL v.
Court of Appeals, G.R. Nos. - 106949-50,
December 1, 1995).
NOTE: Substantiation . requirements are not
applicable to a taxpayer claiming deductions
under the Optional Standard Deduction (OSD)
which is based on a
fixed percentage of
deductions .without regard to any actual
expenditure . .
3. Subject to limitation
The taxpayer is mandated to deduct amounts
only within the limits allowed by law. A taxpayer
is free to deduct from its gross income a lesser
amount, or not to claim any_ deduction at all (CIR
v. Phoenix Assurance Co., L(d., G.R. No. L-
19727, May 20, 1965).'
4. Additional requirement relating to
with.holding
Any amount paid or payable which is otherwise
deductible from, or taken into account in
computing gross income or for which
depreciatipn or amortization may be allowed,
· sh~ll.be-aJJpwed _as a deduction only if it is ~hown
that1hEh ax required to be deducted and withheld
therefrorullas been paid to the BIR (N/RC, Sec.
- Retu, n of·Capita
.,· '
34(K); ft)/4.C. No. 63-2013).
.
Income tax i5:•levied by law only on income, which
may 'De gros~ income or net income; hence, the
· : amount representing return of capital should be
· •· deducted from the proceeds from sales of assets
and should not be subject to income tax (R.R. No.
,02.Jia, .Sec. 65) .
·v•,.,..::. . . "
KINDS OF DEDUCTIONS: (150)
1. Itemized Deductions, which are . ordinary and
necessary, incurred or paid for the practice of
8-2018)
2. ~pecial Deductions; and
3. Qptional · Standard Deduction (OSD) (NIRC,
Sec. 34(L), as amended by TRAIN; R.R. No. 8-
2018)
NOTE: Premium payments on health and/or
hospitalization insurance (PPHHI) and Personal
Exemptions as deductions are removed by the
. . '
Those allowed by the It is a fixed percentage
NIRC to be . deducted deduction of 40% without
 124
INCOME TAXATION
Taxation law

from the gross-income regard t<;> any actual

before the income is expenditure, in lieu of
subjected to· tax the itemized deductions. DC DC
(NIRC, S~c. 34, -as It is merely a privilege
RFC RFC
amended by TRAIN that may, be enjoyed by
Law). certain taxpayers (NIRC, • N PCI - Not purely compensation income ·
Sec. 34(L),· as amended earners
by TRAIN,). ** A general professional partnership and the
partners comprising such partnership may
·avail of the optional standard deduction ·only
OPTIONAL STA.NDARD DEDUCTION once, either by the general professional
Pursua·nt to TRAIN Law, in lieu of the deductions partnership or the partners· comprising the
allowed under ·Secs. 34(A) ·to (K), an individual partnership (NIRC, Sec. 34(L), as amended
subject to tax under Section 24, other than a by TRAIN Law).
nonresident alien, may elect a standard deduction
in an amount n<;>t exceeding forty percent (40%) of NOTE: Partners of a GPP by virtue of their
his gross sales or gross receipts, as the case may distributive share from GPP which is ·already
be (NIRC, Sec. 34(L), as amended by TRAIN Law). net of cost and expenses cannot avail of the
8% income tax rate option (R.R. No. 8-2018,
In the case of a corporation · subject to 30% tax - · ':- .· Sftc. 3(C)).
(NIRC, as amended by TRAIN, Sections V(A) and ;
I _,• -\ > .,.
28(A)(1)), it may elect a standard deduction;.in an ·
amount not exceeding . forty percent (40%) : ou ts ,..··
· SUMMARY_. RULES ON ALLOWABLE
gross income (NIRC, Sec. 34 (L), as amended by . DEDUCTIQN~
TRAIN-Law) . ,: •i._/ ., .: .~ -· - ' For.li:ldividoals: '
j ,' .•..., """.. .. . -.1s No '· dedu-ction•s 'shall· be allowed to individual
In the absence of an express,"selection, · a ., taxp~yers.earning·compehsation income arising
taxpayer is considered ·tQ_ have avalle«:9 _ o_! from persbria( ,services rendered under an
itemized deductions · ,.,,. .,;- ' -~employer-e'rppJoye~ relationship, and those who .
Unless the taxpayer signifies- in his return his . opted to be taxed,at 8% income tax rate on their
intention to elect the OSD, he shall .be considered a~ inco)::D.e fro \ business/practice of profession.
• r
having availed himself of the dedu~tions .a1r~we9 jD
Secs. 34(A) to (K). Such ele.ction when niade _in th~ 2. -Tti~'.p~rtners •co~rfptising the GPP can no longer
return shall be irrevocable forthe
.,.
taxab1e
l
year for . ,;
,. , ' '
claiov further dedl1ction from ,their distributive
which the return is made:~ Provil':l~d. T_Haf , aq · ) , , J~h~re in ;he net ir:icome of the GPP and are not
individual who is entitled to and claimedJor th'e.,,oSQ_ , , ·allowed to avail of the 8% income tax rate option
shall not be required to submit with his..tax rettirn i . . sin~~ t heir di~tributive share from- the GPP is
such financial statements otherwise requirect-under alread~ net5)f cost and expenses. .
the NIRC (as amended by TRAIN Law.; Rf{ No. 8- · ... . . \ .,.
2018, Sec. 8) . ~--· If, the. partner also derives other income· from
· trade, business or practice of profession apart
TABLE OF ALLOWABLE DEDUCTIONS. from the share in the net income of the GPP, the
· deduction that can be claimed from the other ·
income would either be the itemized deductions
or OSD (R.R. No. 8-2018; NIRC, Sec. 34(L); as
amended by TRAIN Law). '
RC (NPCI)* RC (NPCI)
For GPP _
NRC (NPCI) NRC (NPCI) 1. If the GPP availed ' of itemized deductions, the
partners are not allowed to claim the OSD from
RA (NPCI) RA (NPCI) their share in .the net income because the OSD
is a proxy for all the items of deductions allowed
NRA-ETB in arriving at taxable income ..

· 2. Jf the GPP avails of OSD in computing its net

inco~e, the partners comprising it can no long~r
claim further deduction from their share in the
E&T E&T said net income.
GPP GPP** ,
 \ I
MEM:Q(Ry Al D
SM Bed& lkMl8ily Colege ot Law • RGCT Bar Oparatlona Cel'1tef
REASONS:
a. The partners' distributive share in the GPP
is treated as his gross income not his gross
sales/receipts. The 40% OSD allowed to
, individuals is specifically ·mandated to be
deducted not from his gross income but from
his·gross sales/receipts; and,
b. The OSD, being in lieu of the itemized
deductions allowed in computing taxable
income as defined under Section 31 of the
Tax Code, will answer for both· the items of
deduction allowed to ·the GPP and its
partners. ·
. No. 172231, February 12, 2007) .
3. If the ·partner also derives other gross income
from trade, business or practiGe of profession
apart and distinct from his share in the net
income of the GPP, the deduction· that he can
claim from his other gross income would follow
the same deduction availed of from his
partnership _income as explained in the
foregoing rules. Provided, however, ttlat if the
GPP opts for the OSD, the individual partner
may still claim 40% of its gross income fro~
trade, business or practice of profession but not ·
to include his share from the net income of th~
GPP (R.R. No.2-2010, Sec. 2).
ITEMIZED DEDUCTIONS: (Exln~TaloBa-
DepDE!p-ChaRD-PeT)
1. Business ~enses;
.
...
..••.
2. Interest;
3. Taxes;
4. Losses;
5. Bad Debts;
6. Depreciation;
7. Depletion; · · •·. • activities are, however, allowed ~s deduction
8. Charitable and Other Contributions;
9. Research and·Developme11t; ;;ind
10. Pension Trust Contribution (NIRC, Sec. 34, as
amended-by TRAIN Law).
NOTE: Non-resident aliens not en_gaged in trade
or business in the Philippines (NRA-NETB) and
non-resident foreign corporations (NRFC) are
not alfowed the above deductions because they
are taxed on their gross income derived from
sources within the Philippines. NRA-N~T~ and
NRFC's gross income from sources w1thm -the
Philippines is subject to a final tax of 25% and
30%, respectively (NIRC, Sec. 25 (BJ a nd Sec.
28 (8)(1)) .
ORDINARY AND NECESSARY TRADE,
BUSINESS, AND PROFESSIONAL
EXPENSES
Requisites for Deductibility: (D-ST_ROWN) ble .
1. It must be paid or incurre~ Qunng th e taxa
year; ·
. 125
The term "paid or incurred" shall be construed_
according to the method of accounting upon the
basis of which tlie net income is computed
(NIRC, as amended by TRAIN, Sec. 22(R))
For further discussions on Accounting Periods
and Methods, please refer to pages .183 to 196.
Hence under an accrual method of accounting,
· profes~•ional fees incurred in prior years but
which were claimed as deductions only in the
year .the billings were received shall be
disallowed (CIR v. lsabela Cultural Corp., G.R.
2. · It must be Substantiated by proof; ·
3. It must be incurred in Irade or business carried
on· by the taxpayer;
4. It must be Reasonable (not lavish, extravagant
.or excessive under the circumstances); .
5. It must be Qrdinary and necessary; _
6. If subject to withholding ·taxes, have been
-.... properly-Withheld and remitted on time to the
BIR; and
· 7. Not contrary to law, public policy or morals_
'. : ~NIRC! · ~c.·34(A) and (K); R.R. No. 02-40, Sec.
-65);" ·;;Y- .
Ii
NOTE: .11 Ue
4-
illegal income- will
• • •
form part of
gross incqme of the taxpc!'yer (w1thm the concept
_of "incorn_e f~m whatever source"), expenses
---whit~ ~onstitute bribe, kickback and other
similar-payment, being against law and public
· policy are nof deductible from gross incoi:ne
(NIRC, as _amended ·by TRAIN, Sec. 34, Par.
:.,.-. . (A)(1)(c)). Other expenses necessary and
/ ~·' C?J:di[l_aD' expenses in connection of such illegal
within the purview of expenses under the NIRC,
as amended by TRAIN Law (R.R. No. 02-40).
amended by TRAIN Law (R.R. No. 02-40).
· Ordinary Expense ··
It is that which is normal or usual in relation to the
taxpayer's business . and the surrounding .
circumstances.
Conditions · For Ordinary Expense to be
Deductible As Business Expense [Business
Test]: (OWT)
1 .· The expense must be Ordinary and necessary;
2. It must be paid or incurred Within the taxable
year; and .
3. It must be paid or incurred in carrying in a 12%
Irade or business.
NOTE: Additionally, the taxpayer must
substantially prove by evidence or records the
deductions claimed under the law. In addition
not only must the taxpayer meet the busines~
 . .

126
INCOME TAXATION
Taxation Law

test, he must substantially prove by evidence or making good the exhaustion thereof (Armco-
records the deductions claimed under the law, Marsteel Alloy Corp. v. CIR, CTA Case No. 4592,
otherwise, the same will be disallowed (Atlas July 1, 1993).
Consolidated Mining & Devt. Corp. v. CIR, G.R.
No. L-26911, January 27, 1981) . GENERAL RULE:
CAPEX are not deductible as ordinary and
necessary expenses in the year paid or incurred
Necessary Expense
It is one which is appropriate and helpful in the because they do not help earn income when it is
development of the taxpayer's business and are incurred (2-B DOMONDON, Taxation (2013), p.
intended to minimize losses or to increase profits 814). However, they are capitalized and depreciated
(General Electric (P.J.), Inc. v. CIR, CTA Case No. or amortized over the life of the asset. The periodic
1117, July 14, 1963). depreciation or amortization is the one deductible for
income tax purposes (Please see discussion on.
If the expenses are extraordi,:,ary, the expenditure~ Depreciation on pages 145 to 147) (NIRC, Sec. 34
shall be capitalized for which depreciation allowance (F)).
niay be claimed (VJTUG & ACOSTA, Tax Law, supra
at115). Examples of CAPEX:
1. Amounts spent on acquiring fixed assets;
ORDINARY EXPENSE VS. NECE_SSARY 2. Organization costs;
3. Architect's fees as they form part of the building
EXPENSE cost (CIR v. Soriano & CTA, G.R. No. L-24893,
Mii rch 26, 1971);
4 . Legal costs of establishing or maintaining one's
right of ownership in a piece of property; •
It connotes a payment, Where the. expenditure 5 . . _Amounts spent on restoring or adapting it to a
which is normal in is new or different use;
relation to the business 1. appropriate · or 6. Administrat ion costs of an estate; and
of the taxpayer and the helpful in the .7. Commission paid in selling securities as they
surrounding development of the form part of the cost of the securities purchased
circumstances taxpayer's (MAMALA TEO, ncome Tax, supra at 273-275) .
(General Electric Inc., business
v. Collector, CTA Case 2. or that the same is EXCEPTION:
No. 1117, July 14, proper for the In case of proprietary educational institutions , it has
1963). purpose of the option to either:
realizing a profit or 1. Deduct expenditures otherwise considered as
minimizing a loss capital outlays of depreciable assets incurred
(General Electric during the taxable year for the expansion of
Inc. , v. Collector, 1 school facilities; or
CTA Case No. 2. Deduct allowance for depreciation (NIRC, 8$
1117, July 14, amended by TR~IN Law, Sec. 34(A)(2)).
1963).
· NOTES:
Two tests of Ordinary and Necessary expenses: 1. Cohan Rule
1. Reasonableness of the amount - based on - if there is showing that expenses have been
various factors such as, but not limited to: incurred but the exact amount thereof cannot be
a. Type and size of the business; ascertained due to the absence of documentary
b. Volume and amount of earnings: evidence, it is the duty of the BIR to make an
c. • Nature of the expenditure itself; estimat~ of deduction that may be allowed in
d. Intention of the taxpayer; and computing the taxpayer's taxable income
e. General economic conditions . ?earing heavily against the taxpayer whose
2. Amount incurred must not be a capital outlay to inexactitude is of his own making (Cohan v. CIR,
create "goodwill" for the product and/or business 39 F. 2d 540, March 3, 1930, cited in Pilmicu-
(CIR v. General Foods (PHL), Inc., G.R. No. Mauri Foods Corp., v. CIR, C. T.A. EB No. 97,
143672, April 24, 2003) . August 29, 2006).

Capital Expenditures (CAPEX) 2. Expens!3s paid or incurred on mere passive

- payment which creates or enhances what is investments are not deductible from any interest
essentially a separate and distinct asset or made to or dividend earned thereby because they do not
increase the value of the taxpayer's property or for come within the purvjew of carrying on any
any amount expended in restoring property or in "trade or business" (Hospital de San Juan de
---- \ I .
MEM:Q~y AID
San Seda Univwslty COlege of Law - RGCT Bar Operation& Center
Dios, Inc. v. CIR, G.R. No. L-31305, May · 10,
1990).
Expenses incurred partly for the taxpayer's trade
or business and in part for other purposes shall
be apportioned c•xrespondingly (CIR v. Jamir,
G.R. No. L-16552, March 30, 1962).
3. Withholding on Expenses
Any amount paid or payable which is otherwise
deductible from, or taken into account ir:i
computing gross income or for which
depreciation or · amortization may be· allowed
..shall be allowed as deduction only if it is shown
that the tax required to be deducted- and
withheld t_ herefrom has been paid to the BIR
. (NIRC, _Sec. 34(K)).
Previously, no more deduction will be · allowed
notwithstanding payments of withholding tax at
the time of the audit investigation or
reinvestigation/ reconsideration in cases where
no withholding of tax was made in accordan90
with Secs. 57 and 58 of the NIRC (R.R. 12-
r 2013). However, R.R. No. 12-2013 has been ~
revoked ; thereby allowing expenses not
subjected to withholding as deductions for as
long as the said withholding taxes are paid at the
time of audit (R.R. No. 6-2018) •· ·
NOTE: A d~duction will also be- allo"'wed · in the
following cases where no withholding of tax was -
made: (Re-F-Er) ·. , __ " ' · classified· as de minimis benefits or fringe
a. Payee ~orted the income and P¥1YS tbe
tax due and the withholding agent pays the
tax, including interest and surcha~ge,,!f any,
at the time of the audiUinvest1gat1on or
reinvestigation/reconsidera!ion; ·• ·
b. Payee Failed to report the incbme hond~he
due date, but the wi~~ o1 ~ng
agenUtaxp?1yer pays the tax, inc!udmg
- interest and surcharge, if any, at the time of
the audiUinv~stigation or •
reinvestigation/reconsideration; and
c. Withholding agent . Erroneously,
underwithheld the tax but _pays th e
difference between the correc~ amo~nt ·and
the amount of tax withheld, mclud1~g the
interest and surcharge, if any, at th e time of
the audiUinvestigation or
reinvestigation/reconsideration (R.R. No. 6-
2018).
d. No deduction for gross incodmed_shcatllly
allowed for any payment· ma e, ire .
indirectly to an official or employee of th e
national government, LGU, GO~C . or
employee . or repres~ntative of a or~1gn
or to a private corporat1on,
govern men t . 'milar
general professional partnership or a s1
127
a
entity, if the payment constitutes brib_
e or
kickback (NIRC, Sec. 34(A)(1)(c)). .
e. Payments made in exchange for t~e
revelation of a competitor's trade secrets 1s
considered ah expense which is against law,
morals, . good customs or public policy,
which is-not deductible (3M Philippines, Inc.
v. CIR, G.R. No. 82833, September 26,
1988). ·
Kl~DS OF BUSINESS EXPENSJ:S:
1. Compensation for Personal Se!'Yices
- it includes:
a. Salaries, wages, commissions, professional
fees, vacation-leave pay, retirement pay
and other compensation;
b. 'Bonuses, in good faith;
c. Management Expenses;
d. Contribution to pension trust created for the
benefit of the employees, including
contribution under SSS Act;
e. Premiums and compensation for injuries, if
not · compensated for by insurance or
othe ise; and
·t; ·. -Gr ssed-up monetary, value (GMV) of
trirfg benefit provided. tor, as long as the
final ax imposed has been paid .
,
I r
: Any amount
.
.
NOT . given by the employer
as benefits to its employees, whether
benefits . shail constitute as deductible
expens~ upon such ·employer (2-B
DOMONDON, Taxation (2013), supra at
860) . .
Requisites for Deductibility of Compensation
for Personal Services Actually Rendered
(OPT-SPR)
a. The expense '!lust be both Ordinary and .
necessary;
b. The salaries must be faid or incurred within
lhe taxable year;
c. The salaries must be incurred in carrying on
a Trade or business;
d. · The expense must in fact be §.alaries or
other compensation;
e. The salaries must be for fersonal services .
actually re11dered; and
f. The salaries must be Reasonable in amount
(MAMALATEO, Income Tax, supra at 187).
Payment for compensation ·is deemed
reasonable only as to such amount as would
ordinarily be paid for services in like
enterpris~s in similar circumstances (R.R.
No. 02-40, Sec. 70) .
 <
128 .
2. Travelling/Transportation Expenses
Travelling expenses as ordinarily understood,
include transportation expenses and meals and
lodging (R.R. No. 02-40, Sec. 66).
·NOTE: If the trip is undertaken for other than
business purposes, the transportation expenses
are personal expenses, and -the meals and
lodging are living expenses, and therefore, not
deductible (R.R. No. 02-40, Sec. 66).
Requisites for Deductlbflity of
Travelling/Transportation Expenses: (PAR)
a. In the Pursuit of trade or business;
. b. Incurred or paid while Away from home; and
c. Reasonable and necessary (R.R. No. 02-
40, Secs. 65-66).
The term "away from home" means away
from the location of the employee's princiRal ..
place of employment regardless 9f..~ere ,
the ·family residence is maint~ine~_, like •
business trips . It include s fr nsP_prtat1on.
meals and lodging. Thus: 7 .•.
i. Transportation expe i e;lfOl)1 main ·
office to branch-~or from
1
bfanch to
main office are dedu Gtible. 1
ii. Transportation ex enses from
office to home---ori from ho'me:--to - -~· - - a. --Made a~ a Con~lition to the continued use or
office are not dee ctible.
iii. If company car is utilized both for
business 'or pe sonal i use, in
proportion to the"llse (R.R. Wo. 02---
40, Secs. 6 66) . , /.
-
. .( '
3. Lease Agreement e·xpenses
- it includes:
a. Aliquot part of the amount used,t9 acq_uir&- ' . .: ' -_ Sale and Leaseback Transaction
leasehold over the number of years .the
lease will run; and l .'
b. Taxes and other obligations of the lessor
paid by the lessee; and
c. Annual depreciation of the cost of leasehold
improvements introduced by the lessee over
the remaining term of the lease, OR over the
life of- the improvements, whichever period
is shorter (R.R. No. 02-40, Sec. 74) .
Requisites for Deductibility of Rental
Expenses (CUTTT)
a. It must be made as a condition to the
~ontinued .!J.se or possession of property;
b. Taxpayer has not taken _or is not taking !itle
to the property or has no equity other than
that of a lessee, user or possessor;
c. Property must be used in Irade or business;
and
d. Subjected to withholding Iax of 5% (R.R.
No. 02-98, Secs. 2.57.2(8) and (CJ).
INCOME ·TAXATION
Taxation Law
Allowable deductions by lessor:
All ordinary and necessary expenses paid or
incurred during the taxable year which are
attributable to the earning of the income. It
includes cost of repairs and · maintenance,
salaries and wages of em~loyees attendant
to · such lease, interest paym~nt, property
taxes, etc. (R.R. No. 19-8_6, Sec. 2.01).
Allowable deductions by lessee: ·
Amount of rent paid or accrued including all
expenses which under the terms of the
agreement, the lessee is required to pay to,
or for the account of the lessor. If the
payments are so arranged as to constitute
advance rentals, such payment will be duly
apportioned over the lease term (R.R. No.
19-86, Sec. 3.01) . ·
NOTE: The cost borne by the lessee · in
., erecting buildings or making improven:ients
1 ·, ! on the ground of which he is a lessee is held
to be a capital investment and not deductible
·as a ,.business expense (R.R. No. 02-40,
..... "Sec::''74).
I . -
. ·\ Ad<\itional , Re~uisites for Deductibility in
case of Real Pcroperty: (CUT-R) ·
posse~si n O property;
b. Property mus~ be Used in trade or business;
C. raxpayer has·not Iaken or is not taking t!tle .
: }C?.: the property or has no equity othe_r than
· ·"'- that of.a lessee, user or possessor; and
~- ·Must,be_Be~,Property (R.R. No. 02-98, Sec .
~, 2.57'.2(C)). ·
. ,.... • A sale and leaseback transaction is one ,where
• an entity (the seller-lessee) transfers an asset to
1
, another entity (the buyer-lessor) for
consideration, and leases·that asset back from
the buyer-lessor (International Financial and
ReportinQ Standards 16.98-103).
Consequences of a Sale . and Lease Back
Transaction ·
a. On the buyer - lessor
The buyer-lessor may claim depreciation
expense purs_uant to Sec. 29 (F) of the Tax
Code of 1977 (now Sec. 32(F) of the NIRC)
(BIR Ruling No. 237-88, June 3, 1988) .
If the property is financed, the buyer-lessor
may claim interest expense on the loan's
interest (NIRC, Sec. 34(8)(1)).
b. On the seller - lessee
The seller-lessee may claim a reasonable
allowance for rentals and/or other payments
Ill
 \ I
MEM:Q~y-AID
S., Seda lJrMqfty Colege d law - RGCT Bar Clperatlona Center
which are · required as a condition for the
continued use or possession, for pu.rposes
of the trade, business or profession, of
property to which the taxpayer has not taken
or is not taking title or in which he has no
equity other than that of a lessee, user or
possessor (I.e., rent expense} (NIRC, Sec.
34(A)( 1)(iii)). . ·
ILLUSTRATION (2016 Bar):
Henry, a U.S. naturalized citizen, went home
to the Philippines to reacquire Philippine
citizenship under RA 9225: His mother left
him a lot and building in Makati City and he
wants to make _ use of it in his trading
business. Considering that he needs rnoney
for the business, he wants to sell his lot and
building and make use of the consideration.
However, the lot has sentimental value and
-he wants to reacquire it in the future . A friend
of Henry told him of the "sale-leaseback
transaction"• commonly used in ·the U.S.,
which is also used for tax reduction . Under ·
said transaction, the lot -owner sells his
property to a buyer on the condition that he
leases it back from the buyer. At .the same
time, the property owner is granted an .
option to repurchase the lot on or before an
agreed date._Henry approaches you as a tax
lawyer for advice. Explain what tax benefits,
if any, can be obtained by -Henry and the
buyer from the sale-leaseback transaction?
ANS: Henry will be entitled to cl_aini rental .
expense as a deduction from hfs gross
income in .the trading business. His lease
payments plus interest expense would be_
substantially higher than the depreciation
. expense he may claim jn computing his
taxable inconie; hence, the lease would
result in the additional benefit'of increasing
his additional tax deductions. The buyer will
be deriving rental income from .the prop_erty
and be able to claim business deductions
such as real property taxes, repairs and
maintenance, depreciation and other
expenses necessary for the renting out of
the property (Answers to the 2016 Taxation
Law Bar Examinations, UP Law Center) .
4. Entertainment, Amusement
Recreation (Ear) Expenses · ·
- it includes:
a. Representation expenses; and .
b. Depreciation or rental expenses relatin g to
entertainment facilities (R.R. No. 10-2002'
Sec. 2).
Representation Expenses
- · expenses incurred by a taxpayer. in
connection with the conduct of his trade,
business or exercise of profession, in ·
entertaining, providing amusement and
recreation to or meeting with guest/s at a dining
place, place of amusement, · country · club,
theater, concert, play, sporting event and similar
events or places (R.R. No.10-02, Sec. 2).
Entertainment facilities refer to: ·
a. A yacht, vacation home, or condominium;
and .
b. Any similar item of real or personal property
used by the taxpayer primarily for the
entertainment, amusement or recreation of
guests or employees (R.R: No. 10-02, Sec.
2).
Guests
· - persons or entities with which the taxpayer
has direct business relations, sucti as but not
limited to clients/customers or prospective.
clients/customers. It shall not include
employees, officers, partners, directors,
. ':stockholders, or trustees of the taxpayer (R.R.
'-No..10.:02, Sec. 2) . ,
Requisites for Deductibility of EAR
Expenses (DR-LB-SPWE)
a. Q.lrectly' · onnected to the development,
management, and operation of the trade,
;·.- business or profession of the taxpayer; or
directly related to or in furtherance of the
conduct of trade, ·business, or profession
(R.R. No ..10-02, Sec. 4(8)); ·
b. Is B.easonable; ·
c. Not contrary to _baws, morals, policy or
public order (R.R. No. 10-02, Sec. 4(C)) ;
d. Does not constitute as a §.ribe, kickba~k or
other- similar payments (R.R. No. 10-02,
Sec.4(0)) ;
e. §ubstantiated with adequate proof. The
official receipt, or invoices, or bills or
statements of accounts should be in the
name of the taxpayer claiming the deduction
(R.R. No. 10-02, Sec: 4(E)); .
· f. Must _be f aid or incurred during the taxable
year (R.R. No. 1.0-02, Sec. 4(A));
g. The appropriate amount .of Withholding tax,
and if applicable, should have been withheld
therefrom and paid _to the BIR (R.R. No. 10-.
02, Sec. 4(F)); and
h. Does not .§.xceed: ,
i. For taxpayers engaged in sale of
goods/properties - one half of one
percent (.50%) of net sales;
ii. For taxpayers engaged in sale of
services - one percent ( 1%) of net
revenues; and
 INCOME TAXATION
Taxation Law -

iii. For taxpayers engaged •in both sale of

goods/properties and services
determined using an apportionment
formula, taking into consideration the
percentage ceiling prescribed above
(i.e., Net Sales (or Revenues) I Total
Sales and Revenues x EAR) (R.R. No.
10-02, Sec. 5).
EAR expenses exclude:
a. Expenses treated as compensation or fringe
benefits;
b. Expenses for charitable or fund-raising
activities;
c. Expenses for bona fide business meeting of
stockholders, partners or directors;
d. Expenses for -attending or sponsoring an
employee to a business league or
· professional organization meeting;
. e. Expenses for events organized for .,.
promotion, marketing and adv,ertising
including concerts, conferences, seminars,
· EAR, as apportioned:
EAR based on net sales:
P200,000 x P3,000 = P2,000
P300,000
EAR based on net revenues:
P100,000 x P3,000 = ~1.000
P300,000
.
EAR, taking into accou,nt the percentage ceiling:
t-200,000 x 0.5% = P1 ,000 EAR for Net Sales
t-100,000 x 1% = P1 ,000 EAR for Net Revenues
Hence, the total allowable EAR is t-2,000
(P1 ,000 for net sales and P1 ,000 for net
revenues). The excess P1 ,000 arising from EAR
of net sales is not deductible.
NOTE:" Any findings of improper classification of
_ EAR to avoid being subjected to ceiling shall be
, · disallowed in its totality.

s:
workshops, conventions and ot e~ ~•niilc!_!r
events; and i
, '~ · p • Cost of Materials and Supplies
f. Othe_r expenses of similar nafure (R.fJ.. No. Oeductiole only to the amount that they are
10-02, Sec. 3). f act4ally consumed and used in operation during
·, I the year for which the return is made, provided
Notwithstanding the foregoing, such items that the CO$t·of suqh materials and supplies has
of exclusions may, no-netheless, qoality·as- - - n ot- been dedu9ted in determining the net
other items of deductions under Sec. 34 of . income for any previous year (R.R. No. 02-40,
the NIRC, subject to conditipns for _ Sec. 67) .
deductibility therein (R.B_ No. - 10!02, Sec.· · 1 ./- •
3). r r- \ ·;; -~-- \~----Me.tho~s u~d to determine materials used:
_ • • • •• 1 •· a, -~ Actual consumption method ·
L1m1tat1on on the Deduct1b1hty of EAR:, I . , ... 1 -~: Direct Purchase Method (DIMAAMPAO,
It must not exceed: . • ,...... :·- ·, Income Taxation, supra at 112).
a. For taxpayers engaged in sale ,\ of , - -- ,,.
goods/properties - .1/2 of 1% (.50%) of net '_'-~- 6 . . Expen_ses .of Professionals:
sales; a. ~ost Of §.upplies used ·in the practice of a
b. For taxpayers engaged in sale on?ervices - profession;
1% of net revenue; and b. • Expenses paid in the operation and repair of
c. For taxpayers engaged in both sales of ·Iransportation gquipment used in making
goods/properties and services - determined professional calls; ·
using an apportionment formula, taking into c. Dues to-Professional Societies·
consideration the percentage ceiling d. Subscription to professional Jo'umals;
prescribed above (R.R. No. 10-02, Sec. 5). e. Rent paid for Offices; -
f. Expenses for Utilities used in such office;
APPORTIONMENT FORMULA: g. Hire of office Assistants;
Net Sales (or h. . Salaries of employees; and
Revenues) i. Cost of Books, furniture and professional
Total Sales and xEAR equipment, the useful life of which is short
Revenues ·(R.R. No. 02-40, Sec. 69) .

Amounts expended for books, furniture, and

ILLUSTRATION: professional instruments and equipment of a
Net Sales t-200,000 permanent character are not allowable as
Add: Net Revenues 100,000 deductions (R.R. No. 02-40, Sec. 69).
Total P300,000

EAR Expens~ P 3,000

 \ I

MEM:Q~y AID
s.,i 8edl College Of law · ROCT Ber oi,.,1111one c.ntar

Pro-Bono Legal Services ,

TAXABILITY OF ADVERTISING
A lawyer or professional partnership rendering
actual free legal services is entitled to an
EXPENSE
allowable deduction from- the gross income, the KINDS OF DEDUCTIBLE OR
amount that could have been collected for the ADVERTISING NOT DEDUCTIBLE
actual free legal services rendered or up to ten EXPENSE
percent (10%) of the gross income derived from
the actual performance 9f the legal profession, Advertising to stimulate Deductible
whichever is lower: Provided, that the actual free the current sale of
legal services herein contemplated shall be merchandise or use of
exclusive of the minimum sixty (60) hour services
mandatory legal aid services rendered to
Indigent litigants (R.A. No. 9999, "Free Legal Advertising to stimulate Not deductible outright,
Assistance Act of 2010", Sec. 5). future sale of spread out over a
merchandise or use of reasonable period of
7. Repair Expenses services time
Minor or ordinary repairs
Deductible from gross income because it keeps Advertising to promote Not deductible
the assets in its ordinarily efficient operating the sales of shares of
cond ition (R.R. No. 2-40, Sec. 68) . stocks or to create a
favorable image
The following conditions must be present:
a. The repairs place the property in an (General Foods, Inc. v. CIR, CTA Case No. 4386,
ordinarily efficient operating condition ; February 8, 1994; Welch v. Helvering, 290 U.S. 111,
b. It must not materially add to the value of the 78 L Ed. 21 ~, 545 Ct. 8, 1993).
property or appreciably prolong Its life; and
c. The plant or property account must not be NOTE: The latter type involves expenditures
increased by the amount of such incurred , in whole or in part, to create or maintain
expenditure (R.R. No. 2-40, Sec. 68) . some form of good will for the taxpayer's trade
or business. If the expenditures are for
Major or extraordinary repairs advertising of the first kind , then , except for the
Not deductible as an expense since major reasonableness of amount, there is no doubt
repairs tend to prolong the life of t~e asset. that such expenditures are deductible as
These are capitalized or added to the cost of the business expense (General Foods (Philippines),
asset subjected to repair. Inc. vs CIR, CTA-Case No. 4386, February 9,
1994) .
NOTE: The cost of incidental repairs which
neither 'materially add ·to the value of. tHe There are two conditions set by American
property nor appreciably prolong Its life, ~ut jurisprudence before an expense may be treated·
keep it in an ordinarily efficient operating as ordinary, hence deductible:
cond ition may be deducted as expense, a. ·"Reasonableness" of the amount incurred;
provided 'the plant or property account is not . and
increased by the amount of such expenditure. b. Whether the questioned advertising
Repairs in the nature of replace,men_t, to the expenses are actual_ly capital outlays to
extent that they arrest detenorat1on and create a "goodwill" to the product and/or
appreciably prolong the life of th e pr~p~rty business, and hence,- considered as capital
should be charged against the deprec1at1on expenditures to be spread over the life of the
reserves if such account Is kept (R.R. No. 02 -4 o, asset (General Foods (Philippines), Inc. vs
Sec. 68) . CIR, CTA Case No. 4386, February 9,
1994).
8. Advertising Expenses .
- It includes the use of spoken or wntte~ wo rd 9. Expenses Allowed to Private
In printed matter, movies, radio, and television ~o Educational Institutions
acquaint the . public with the tax~ayer s In addition to the expenses allowable as
merchandise or services (General Foods, Inc. v. deductions under the NIRC, a private
CIR, CTA Case No. 4386, February 8• 1994)- educational institution may at its option elect
either: ·
a. To deduct expenditures otherwise
considered as capital outlays of depreciable
 132
a~sets ·incurred during the taxable year for
the expansion of school facilities; or
b. To deduct" allowance for > depreciation
(NIRC, Sec. 34(A)(2)) .
lti;ITEREST
CONCEPT: Compensation for the use or
forb_earance or detention of money, regardless of the
name it is called or denominated . It includes the
amount paid for the borrower's use of money during
the term of the loan as well as for his detention of
money after the due date for it~ repayment (R.R. No.
13-2000, Sec. 2(a)).
Requisites For Deductibility: (TIO-CROWD-TA)
1. The in~ebtedness must be that of the Iaxpayer;
NOTE: The term "indebtedness" has been
defined as an unconditional and legally
enforceable obligation for the payment of money·
(CIR v. Prieto, G.R. No. L-13912, Septetn er 30,
1960). . .
) > ~---
2. Interest expense must have _..been_: paid or . _
!ncurred during the taxable.year; • • ,.. _,.,.
3. It must be based on a bona fide"Debtor creditor
relationship; · - ,- f d.
,:,_ ~-- -- -
- NOTE: A bona fide debtor::c~editor re\ationship
is one based on a valid nd enforceable
obligation wherein the aebtor , -is under
unconditional obligation to l'epay\ the 'creditor
(Phi/ex Mining Corp. v. , Commissicfper, . CTA
Case No. 5200, August 21, 1998) . ·--;,_ r
4. The indebtedness must be £onnected with t~e.· ! . ,, _.., . , petrole~m exploration (NIRC, Sec. 34(8)).
taxpayer's trade, business , or exe ise j ,f: ;- : _\ \_ ..
profession;, /, • .
5. The interest · must NOT be between .., Related
. taxpayers; . - ' (
6. The interest must NOT be incurred to finance
petroleum Qperations;
7. The interest must be stipulated in Writing;
8. The interest must be legally Que;
9. In case of interest incurred to acquire property
used in Irade, business or exercise of
profession, the same was NOT treated as
capital expenditure (NIRC, Sec.34(8)); and
10. Interest expense is subject to interest Arbitrage
rule (CIR v. Ludo & Luym Corporation; CTA En
Banc Case No. 1559, June 8, 2018) .
GENERAL RULE: The entire amount of interest
expense shall be allowed as deduction from the
taxpayer's gross income (NIRC, Sec. 34(8)(1)).
Exception: No deduction shall be allowed in respect ·
of interest: . (R.R. No. 13-2000).
1. If within the taxable y~ar an individual taxpayer
reporting income on the cash basis incurs an
INCOME TAXATION
Taxation Law
indebtedness on which an interest is paid in
advance · though discount or otherwise.
Provided, That such interest shall be allowed as
deduction in the year the indebtedness is paid.
Provided, further, That if the indebtedness is
payable in periodic amortizations, fhe amount of
interest which corresponds to the amount of the
principal amortized or paid during the year shall
be allowed as d~duction in such_taxable year;
2. If both the taxpayer and the person to whom the
payment has been made or is to· be made are:
(F50-HoG-F2 )
a. Between f.amily members of a family;
b. Except in -the case of distributors in
liquidation, between two corporations more
than 50°/~ in value of the outstanding stock
of which is owned, directly or indirectly, by
· or for the same individual;
c. Except in the case of distributors in I
liquidation, between two corporations more
t_han 50% in value of the outstanding stock .I
of which is owned, directly or indirectly, by
..... or for he same individual, if either one of
sue~ L~OfPOration, a personal Holding
company or a foreign personal holding
company! _.•.
!3etwee,n Grantor and a fiduciary and
----- - ~ene 1ci~ry'qf ~uch trust;
--e-. Betwee.n _f.idu ·ary _o f and the fiduciary of a
rust an~ the 1_ uciary of another trust if the
,~~me p~rson j •~ a grantor with respect to
each tr st; and
r B~~ee giduciary of a trust and beneficiary
j · _ of, s~ct) trust (NIRC, Sec. 36(8)); and
! 3. If , the indebtedness is incurred to finance
' .
- - : 11~JJJatlo'\-Q{I ~ductibility of Interest:
--
lnt~r~st ,rbitrage Rule
•Ta.x Arbitrage refers to a situation where a taxpayer
' profits from the differences on how income or gains
are taxed. The tax arbitrage contemplated under the
Tax Code is scheme wherein the proceeds of a
taxpayer's loan obtained in the connection with the
operations of his trade, business or exercise of
profession is deposited or invested (DIZON, Outline
supra c!t 713). ·
The taxpayer's otherwise allowable deduction for
interest expense shall be reduced by 33% of the
interest income which. have been subjected to final
withholding tax. Thus, the amount of interest
_expense equivalent to 33% of interest income
subjected to final tax will be non-deductible, and only
the_ remaining portion of the interest expense can be
claimed as expense in the income tax computation
·
 MEM-O~v AID
6-l Seda ~ Colege of Law ·. RGCT Bar OperatJona Center
NOTE: The reduction is now 20% of the interest
income subject to final tax which shall take effect:
1. On July 1, 2020, for domestic corporations,
other than those with net taxable income not
exceeding P5,000,000 and total assets not
exceeding P100,000,000; or
NOTE: For domestic corporations with net
taxable income not exceeding P5,000,000 and
total assets not exceeding P100,000,000, the
deduction is 0% since there is no difference in
the income tax rate on the taxable income (20%)
with the tax rate applied on tne interest income
subjected to final tax (20%).
2. Upon the effectivity of the CREATE Act on
April 11, 2021 in case of individuals engaged in
the business or practice of profession (R.R. No.
5-2021 , Sec. 7(8)) .
NOTE: The limitation on the allowable interest
expense shall apply. regardless of whether or
not a tax arbitrage scheme was entered into by
the taxpayer, or regardless of the date when the
interest-bearing loan and the date when the
investment was made for as long as, during the
taxable year, there is an interest expense
incurred on one side and an interest income
earned on the other side, which interest-income
had been subjected to final withholding tax (R.R. ,,
No. 13-2000).
PURPOSE OF LIMITATION: To discourage ~ax
arbitrage wherein back-to-back loan is used to take.
advantage of the lower tax rate on lnt~rest.JQ~m~.
. and a higher tax rate on interest expense dedupt1on .
Basis of 33%: ·
30% NIT -: 20% FT
= 33%
30% NIT
NOTE: The limitation on the allowable interest ·
expense shall apply, regardless of whe~her or not a
tax arbitrage scheme was entered into ._by the
taxpayer or regardless of the date when the interest
bearing l~an .and the .date when the investment was
m;:3de for as long as, during the taxable ~ear, there
is an interest expense incurred on one s1_de and _an
interest income earned on the other side, which
interest income had been subjected to · final
withholding tax (R.M.C. No. 31-2009; R.R. No. 13-
2000; R.A. 9337) .
ILLUSTRATION (Based on the old reduction_rate
of 33%): . t in such taxable year (NIRC, Se_c. 34(8)(2)(a)).
Corporation X borrowed from ABC Bank an a~ou_n
of P500 000 at a 10% annual interest (resulting to
interest •. expense). Immediately !hereafter, the
proceeds of the loan were placed in a focal bank
deposit account which earns a 10% annual interest
rate (resulting to interest income).
Assuming that the rule on interest expense limitation
is not yet in place, the interest expense of P50,000
(10% of P500,000) will result to a tax benefit of 30% ·
or P15,000; while the interest income of P50,000
(10% of P500,000), being a passive income will only
be subjected to final withholding tax .of 20% or
P10,000 . The taxpayer would derive a net benefit of
P5,000 from the combined effect of a lower rate of
final tax liability and a higher rate of tax deductibility.
Realizing the negative impact ·of tax arbitrage, the
interest expense limitation was legislated to make
the tax benefit of claiming deduction equal _to the
amount of final tax paid on the interest income.
Thus, if we were to reduce the .interest expense of
P50,000 by 33% of the interest income subjected to
final tax (P50,000), the interest expense allowed as
deduction would only be P33,333. The tax benefit
thereon of t-10,000 (30% of t-33,333) is now equal
to the final tax paid (t-10,000) .
_;_ EXCEPTIO , TO . THE LIMITATION: Interest
incurr~ o( paid on unpaid b\,Jsiness-related taxes
shall be full , ded_uctible (R.R. No. 13-2000, S~c.
4(c)) .
Interest On Delin~uent Taxes ·
Interest aid f or incurred by the taxpayer on all
.! unpai9 -business-felated taxes shall be fully
/. deductible , from gross income and shall not be
; .• subject lo tfie; limitation on deduction. Thus, suc_ h
• interest expense paid or incurred shall not be
:;. airhinished by the percentage of interest income
-,, . ,eained:""JNbich had been · subjected ·to final
. withholding tax (R.R. No. 13-2000, Sec. 4, Par. (C)) .
Interest paid on delinquent tax should be based on
the tax ·proper only without the including the interest,
surcharges, and.penalty incidental thereto (R.R. No.
13-2000, Sec. 4, Par. (C)).
Advance Payment of Interest of Individuals
Under Cash Basis
If an individual reporting income on cash basis incurs
indebtedness on which an interest is paid in advance
through discount or otherwise, the interest may only
be deductible:
·1. In the year the indebtedness is paid; a~d
2. If the indebtedness is · payable in periodic
amortization , the amount of interest which
corresponds to the amount of · principal
amortized or paid shall be allowed as deduction

Interest Incurred to Finance Petroleum
Explorations
· The interest is non-deductible and capitalized as
·deferred exploration cost" (NIRC, Sec. 34(B)(2)(c)
in relation to Sec. 34 (G)).
The non-deductible interest herein referred to
pertains to interest or other consideration paid or
incurred by a service contractor engaged in the
discovery and production of indigenous petroleum in
the Philippines in· respect of the financing of its
petroleum operations, pursuant to Sec. 23 of P.O.
No. 8, as amended by P.O. No. 87 (Oif Exploration
and Development Act of 1972) (R.R. No.13-2000,
Sec. 4, Par. 3).
Interest Incurred Between Related Taxpayers
It is not deductible (NIRC, as amended by TRAIN,
Sec. 34(B)(2)(b)).
Related Taxpayers
(NIRC, as amended by TRAIN Law, Sec. 36(8))
1. Between members of the family; I' .r r •
·Family" includes only the tf~thers: sister ,.
whole or half blood, spouse ancestors,
1
and
lineal descendants. ,
2. Between an individual and corporation- more
than fifty percent (50%) in value_ of the
outst~nding stock of which j_s owned, directly or
indirectly, by or for such 'ndividual (except in
case of distributions in liquidation); · .
/,
- - -
. \--'.
NOTE: The fact that ttie Presidenr qf one
corporation is the Chairman of the Board of
another does not mean that he has controlling , ·
ownership of such corporation (Oranbo Realty
Corp. v. CIR, CTA Case No~ 5222: April 7,
1997).
3.Between two (2) corporations more than -fifty
percent (50%) in value of the outstanding stock
of which is owned, directly or indirectly, by or for
the same individual if either one of such
corporations, with respect to the taxable year of
the corporation preceding the date of the sale of
exchange was under the law applicable tQ such
tax;:1ble year, a personal holding company or a
foreign personal holding company · (except in
case of distributions in liquidation);
4. Between the grantor and a fiduciary of any trust;
5. Between the fiduciary of a trust and the fiduciary
of another trust if the same person is a grantor
with respect to each trust; and
6. Between a fiduciary of a trust and beneficiary of
such trust.
INCOME TAXATION
Taxation Law
Optional Treatment of Interest Expense
At the option of the taxpayer, in~erest incurred to
acquire property used in the trade, business or
exercise of a profession may be a_llo;.ved as:
1. Interest expense; or
2. Capital expenditure wherein the amount of
interest is _added to the cost ~f the property (i.e.,
capitalize the interest as part of the acquisition
cost of the property and subsequently avail of
the deduction from business income in the form
of depreciation) {NIRC, Sec'. 34(Bf(3)).
The two options are mutually exclusive. The
taxpayer is not entitled to bo_th the deduction
from gross income and the adjusted (increased)
I
basis for determining gain or loss and the
allowable depreciation charge (Paper Industries
Corp. of the PHL v. Court of Appeals, G.R. Nos.
106949-50, December 1, 1995) .
-. - Examptes of Deductible Interest Expense:
;1, , lnter~stpaid by a corporation on scrip dividends;
2.· lnterest:on 9eposits paid by authorized banks of
.
. _.he BSP t depositors, if it is shown that the tax
I
)
- • on such interest was withheld;
3. lnte est paicf t:>y a corporate taxpayer who is
• liable on a mo!'1gage upon real property where-
th~ said corp~rati9n is the legal or equitable
owner. even though it is not directly liable for the
- -indebtedness; and ·
4. lntere~t paid or i!'lcurred abroad for debt actually
r [!curred to provid~ Junds for use in business in
the fhilippines (R:R. No. 02-40, Sec. 78) .
Exam'ple of,, Non-Deductible Interest Expense
_(APo:.csS;-SR) J .
1. Interest pai~ in ~dvance by an individual
taxpayer through discount or otherwise who is
reporting - income on cash basis. The interest
may only be deductible:
· a. In the year the indebtedness is paid; and
b. If the indebtedness is payable in periodic
amortization, the amortized amount of
interest paid during the year shall be allowed
as deduction in such taxable year (NIRC,
Sec. 34, par. (B)(2)(a));
2. If the indebtedness is incurred to finance
f.etroleum exploration, the interest incurred is
capitalized as "deferred exploration cost" (NIRC,
Sec. 34, par. (B)(2)(c) in relation to Sec. 34 (G));
3. Interest in the form · of Dividends paid to
preferred shareholders (R.R. No. 02-40, Sec.
78; R.M.C. No. 17-71);
· 4. Interest for ~ost ke~ping on account of capital or
surplus invested in business which does not
represent charges arising under interest bearing
obligations (R.R: No. 02-40, Sec. 79);
5. Interest paid when there is no .§_tipulation for the
payment thereof or where there is no
indebtedness as when the · obligation is -
 ff \ I
MEM:Q~y AID
Sa-, Bedll lJmwa/ty CoNege Of Law - RGcr Bar Operations Center
unenforceable (CIR v. Prieto, G.R. No. L-13912,
September 30, 1960);
6. Interest paid on earned and unclaimed §alary
(Kuenzle· & Streiff, Inc. v. Collector of Internal
Revenue, G.R. Nos. L-12010 & L-12113
October 20, 1959) ; '
7. Interest paid on indebtedness used to purchase
Securities by one who is not a dealer . in
securities, because such interest is part of the
acquisition of a capital asset (NIRC, Sec. 34,
par. (B)(2)(b)); and
8. Interest paid on indebtedness between Related
taxpayers (NIRC, Sec. 36(8)). - stock listed and traded through the local stock
TAXES
Requisites for Deductibility: (TILE-C)
1. Payments must be for !axes and not for
amounts representing surcharge or penalties
incident to delinquency;
2. _ Paid or !ncurred during the taxable year in
connection with taxpayer's trade, business or
profession;
3. Tax must be imposed by _baw on and payable by
the taxpayer; ·
4. Taxes must .not be specifically sxcluded by law
from being deduct~d from the taxpayer's_gross
income; and · Philippines (NIRC,, Sec. 34, Par.·(C)(2)) .
5. In the case of a NRA-ETB and a RFC, tt)e taxes
for which deduction is claimed must be
Connected with income from sources y.ijthin-the
Philippines (NIRC, Sec. 34(C); R.R. No. 02-40,
Sec. 80).
GENERAL RULE: All taxes , whether national or
local, shall be allowed as deduction . Examples are:
1. Import duties; · · ·1u.:u sfRATION: Assuming Company A claimed as
2. Business license, privilege, excise and stamp
taxes; ._ . obtained a tax benefit of P30,000 (P100,000 x 30% );
3. Local government taxes (e.g., ~ea~ protperty
taxes license taxes, profess1ona1 axes,
amu;ement taxes, franchise taxes);
4. Documentary stamp taxes;
5. Excise taxes;
6. Percentage taxes;
7. BIR registration fees (alt~ough th ey are
technically not taxes); and . .
8. Registration fees of vehicles used in business
(DIZON, Outline supra at 72 7) ·
EXCEPTIONS:
1. Philippine income tax; vails
2. Foreign income tax , provided th~ taxpayer a ma
of the foreign tax credit; otherwise, th e t?x
be claimed as deduction from gross income
(NIRC, Sec. 34, Par. (C)(1) a nd (3)) ;
3. Estate and donor's tax; t s assessed
4. Special a~sessments. and ki~~e that tend to
against local benefits of a d·
increase the value of the property assesse '
' 135
NOTE: A tax is considered assessed against
local benefits when the property subject to the
tax is limited tq the property benefited. Special
assessments are not deductible, even though an
incidental benefit may inure . to the public
welfare. The taxes deductible are those levied
for the general public welfare, ·by the proper
taxing authorities at .a like rate against all
property · .
in the te.rritory over which such authorities have
jurisdiction (R.R. No. 02-40, Sec. 83).·
5. Taxes on sale,. barter or exchange of shares of
exchange or through initial public offering
(NIRC, Sec. 34(C)(1) and Sec. 127(0); R.M.C.
No. 57-2013) ;
6. Final taxes, being in the nature of income tax ;
and
7. Taxes paid on capital assets that are subject to
a final tax, such as real p~operty, the disposition
of which is subject to the presumed capital gains
. tax (2-B DOMONDON, Taxation, supra at 827).
NOTE: In the case of ·NRA-ETB and RFC,
deduction is allowed only if and to the extent that
· the taxes for which deduction is claimed are
connected with income from sources within the
Tax Benefit ~ul~
Taxes attowed as ·deduction from gross income,
when refunded or credited , shall be included as part
; : of gross income in the year of receipt to the extent of
• · the income tax benefit of saip deduction (N/RC, Sec.
?,
· , 34, Par. (C)( ffeidpar.) .
,.;.'t -
tax· deductlon P100,000 in 2012, thus Company A
meaning its income tax liability · is reduced by
P30 ,000 because ·ot the tax .deduction (1 CAPUNO,
Taxation Law . (2020), p. 219 [hereinafter 1
CAPUNO]) .
• When the. t-100,000 is .subsequently refunded, only
P30,000 shall be included in the gross income in.the
year of receipt of the refund because this is _the only
extent that Compar:iy A benefited on the P100,000
tax deduction previously claimed (Id.) .
Tax liability based on a contingency
lri the case of contingent tax liability, the obligation
to deduct arises only_ when the tax is finally
Y_ determined (DIMAAMPAO, Income Taxation, supra
at 119).
Who can claim taxes as deduction
Taxes are deductible as such only by the persons
upon whom they are imposed by law (Id. at 117) .
 iNCOME TAXATION
Taxation Law

Options for claiming as deductions income taxes ·Limitation B: over-all Limitation

paid to any foreign cc:>untry . Taxable income
1. Tax Credit Approach: Claim as foreign tax (outside country) x Philippine
credit against Philippine income tax due_;or Income Tax
2. Deduction Approach: Claim as deduction from Taxable income
gross income (NIRC, Sec. 34(C)(1) _a nd (3)) . (all sources}

Tax Credit Application:

Peso-for-peso reduction from a taxpayers tax
liability. It is a direct subtraction from the tax payable One foreign country .
to the government (CIR v. Central Luzon Dr:ug Cor, _ the allowed credit is the one lower between the
G.R. No. 159610, June 12, 2008). result of Limit A and the foreign_income tax paid
or accrued .
Who can claim tax.credit:
a. Resident citizens; Two or more foreign countries . •.
b. Resident aliens, under the principle of _ determine first the amount lower between ~1m1t
reciprocity; . . B and the total foreign income taxes paid or
c. Domestic corporations including accrued · then compare the result with Limit A,
partnerships except GP.Ps; c!rid the low~r ·amount is the allowed credit.
d. Beneficiaries of e·states and trusts; and
e. Members of GPPs (NIRC, as amf:!,nded by -
When credit for taxes be taken ·
TRAIN, Sec. 34(C)(3)).
The 'credits may at the option of the t~xpayer and
. l irrespective of_th~ method of aC<?ounting :erriployed,
Who are not entitled to tax,cret:Jit:
be tal<en' in the year the taxes of the foreign country
i. Non-resident citizens; / '
were incurred. In such case, the credits for all
ii. Resident aliens if without reciprocity;
subsequent years shall be taken upon the same
iii. Non-resident aliens; and· ·. !
iv. Foreign corporations, w ether residents basis and no ., portion of any such taxes shall _be
or non-residents · (MAMALA TEO;- allowed as deduction-in the same or any succeeding
year (NIRC, Sec. 34(C)(6)) .
lncome Tax, supra at ? 15) . t I

\ ' '
- Proof of.1Credits · · . .
REASONS: These taxpayers are :subject to ·
Philippine income tax.,- only cfn income· The foreign tax.es may be credited only when the
taxpayer establislies the following :
derived from sources within the ~hilippines
(Id.). .,
1. . Total' · amount of income
. derived from foreign
) .. .
7
sotJrces; .
Limitations on Availing Tax Credit: <' -·
~., 2.· The amount of income derived from each
r. The amount of the credit in respect ,to the 'tax. - ,.country, the foreign tax paid or incurred, which
--:. •' - is claimed as a credit; and
paid or incurred to any country shall ~o. &xc~ed
the same proportion of the tax against which _3~ All . other information necessary for the
such credit is taken, which the taxpayer's \ verification and computation of such credit
taxable ·income from sourc~s within such '(NIRC, Sec. 34(C)(7)) .
country bears to his entire taxable income for the
same taxable year; and · Deductibility of Surcharges, Interest and Fines
2. The total amount of the credit shall not exceed for Delinquency .
the same proportion of the tax against which- Surcharges, interest, and fines are not deductible
such credit is taken, which the taxpayer's (R.R. No. 02-40, Sec. 80) . To allow them to be
income from sources· without the Philippines deducted defeats the prescribed punishment
taxable under Title II of the . NIRC (Tax on (Gutie"ez v. Collector of Internal Revenue, G.~ . No.
Income) bears to his entire taxable _income for L-19537, May 20, 1965).
the same taxable year (NIRC, Sec. 34, par.. .
(C)(4)). NOTE: Interest on deficiency taxes may be allowed
as deduction (R.R. No. 13-2000).
Limitation A: Per country limitation
Taxable income LOSSES
(foreign country) ·x Philippine Losses actually sustained during the taxable year
Income Tax and not compensated for by insurance or other
Taxable income forms of indemnity are the losses contemplated to
(all sources) be ded_uctible (NIRC, Sec. 34, Par. (D}(1)).
 \ I
MEM-Q~y AID·.
San Bede lkMrwity College of - ROCT Bar Operations Center
Requisites for Deductibility: (TEN-ACIDA)
l v. Collector of Internal Revenue, G:R. No. L-
1. The loss must be that of the Iaxpayer;
Where a-taxpayer operates 2 phases of industry,
one exempt from income tax pursuant to R.A.
No. 901 and the other taxable, losse's sustained
in the tax exempt operation cannot be deducted
.from income of the taxable industry (Marcelo
Steel Corp . . v. Collector, G.R. No. L-12401,
October 31, 1960). • .
The loss · of the parent company may not be
deducted by its subsidiary. But the loss of the
branch within or outside the Philippines is ·
deductible from the gross income of the head
office located in the Philippines, since the
branch is only an extension of its head office and
there is only a single entity. If the taxpayer is
engaged in several businesses, loss sustained
. in one line of business cannot be deducted from
the other lines of business (BIR Ruling No. 123-
87, May 4, 1987).
2. gvidenced by ·a closed and complet~d _
transaction ·- there should be an identifiable
event that fixes the loss iike the delivery of the
thing purchased; The taxpayer's failure to·record
in his books the alleged loss proves that the loss : · - -'
had not been suffere~ . hence, not dedu~tible·
(City Lumber v. Dommgo, G.R. No. _.~-18611,
.• Classification of. Losses
·January30, 1964).- _. ... : · 1. Ordinary Losses
l-• .C
3. Not" claimed as a · deducti~~ for .. e~t:ate · tax
purpo~es (for individuals) - _the taxpayer ~annor
claim double benefits arising from the - ~ame
casualty loss for income tax and:, ~s~ te tax
purposes; ~! .·
Losses within six (6) months after the; de,~t~ of
the decedent can be claimed as itemized
deduction of losses under Sectio~ 86 Par.
(A)(1)(e) of the NIRC. However, it l'T!ay be
claimed as deduction in the estate t~x return
provided that the same are not cla1m_ed as
itemized deduction of losses under Section 34,
Par. (D).
4. Actually sustained and charged off during th e
taxable year; · f
5. Not Compensatedior by insurance or other orm
of indemnity; ·
NOTE· If the loss is compensated .by insurance
or otherwise the loss , is postponed tto a
'
subsequent year _.m w h'ich 1
·t appears tha • no
compensation at all can be had , o~ there isf all
remaining net Ioss (or there · 1s no cu
compensation) (Plaridel Surety & Insurance o.
21520, December 11, 1967);
6. For Individuals, t!le loss must be connected_with
his trade business or profession or incurred in
any tran;action entered.in.to for profit t~ough not
connected with his trade, b!-Jsmess or
professi_on; _
7. For casualty losses, Qeclaration of loss must be
filed with the BIR via a sworn declaration of loss
(i.e., wjthin 45 days) from the date of occurrence
or-discovery of the casualty or robbery, theft or
embezzlement; and
8. In case of casualty, capital and special losses,
the Additional/special rules and conditions for
their-deductibility must be satisfied and the
amount to be deducted must be limited to the
amount prescribed (NIRC, ·sec$. ,34(O), 38 and
39; RR. No. -12-77, ~ec 4(b)).
Substantiation Requirements · · ·
1. A declaration of loss which rnust be fileq with the
CIR or his deputies within a c'ertain period
prescribed in these regulations after the
occurrence of casualty, roQbery, theft or
embezzlement; and
- 2. Proof of elements of the loss claimed, such as
the actual nature and occurrence of the event
l and amount of loss (R..R. No. 12-77, Sec. 2) .
.
- incurred in trade or business, or practice of
profession (DIM~AMPAO, Income Taxation,
supra at 122). ·
2. Casualty Losses .
. ·. - incurred by property connected with trade,
" business, or profession, if the loss arises -from
4ire, storm, shipwreck or other casualties, or
- from robbery, theft, or emb~zzlement (Id.).
a. Total Destruction
- the basis of the loss is the net book value
immediately preceding the casualty to be
reduced by the am~unt of insurance -or
_compensation received.
b. Partial D~struction •
- the replacement cost to restore the
property to its normal operatir:ig cond~tion,
but in no case shall the deductible loss be
more than the net book. value of the property
as a whole, immediately before casualty.
The excess over the net book value
immediately before the casualty should be
capitalized, subject to depreciatio_
n over the
remaining useful life of the property.

Characteristics of Casualty Losses:
The loss may result from an event that is:
a. Identifiable
- the event must be clearly identified as the
direct cause of the loss of or physical
damage to the property used · in ·trade,
business or ~xercise of the profession;
b. Sudden
- one that is swift and not gradual or
progressive;
c. Unexpected
- one that is not ordinarily. anticipated or
foreseen and occurs without the intent of the
one· who suffers the loss; and
d. Unusual in character
- one that is extraordinary and non-
recurring, that does not commonly occur in
the course of the taxpayer's trade, business
or - exercise of the profession ~ 2-B
DOMONDON, supra at 633-634). [ f on Capital Gains and Losses on page 160).
A
Requisites for Deductibilii9 o Casualty.,;_.. _ _ _ d_ Wagering'Losses
Losses: , , , ,.,
a. The taxpayer must submit .a declar~tion of . ·-. /
casualty loss not later tha ri forty-five (45)
days from the date of{jlscovery of the event
giving rise to the loss (RECALD!= supra·at. .
405) . "· . ; -
,"J~ ___ --.-··..:_ ___
b. Proof of Loss: ./
i.- A declaration of loss whic~ ust be
filed with th~ CIR or his cjeputies
within a certain period presc ·bed
after the occurrence of the cas_~~!~Y,•/ .- .:;·•.. )
robbery, theft or embezzlement·
and
ii. Proof of the elements 6 t oss
claimed, such as the actual nature
and occurrence ofthe event and the
amount of loss . (R.R. No. 12-77,
Sec. 2).
Robbery, theft or embezzlement
losses-
1.) Sworn declaration of loss, to be
filed within 45 days after the
date of the event; and
2.) Proof of elements of the
loss(es) claimed (R.M.O. No.
31-2009).
Only losses actually sustained and
written-off during the year, not
compensated for by insurance and
evidenced by closed and
completed transactiohs . are
generally allowed as deduction
INCOME TAXATION
Taxation Law
from gross income (R.R. No. 02-
40, Secs. 94 and 96).
NOTE: Although both ordinary and
casualty losses are qualified · as
allowable deductions from gross
income, their distinction lies mainly in
the additional requirement for
deductibility in the case ' of casualty
losses, that ~s • . the submission of a
declaration of loss to the BIR as
provided in the last paragraph of Sec.
34(0) of the Tax Code (DIZON, Outline
supra at 747-748).
c. Capital Losses
- losses arising from the sale or exchange
of capital assets. and losses resulting from
securities becoming worthless which are
capital assets. These losses must be
r · .deductible only to the extent of the capital
J J t. 1f J Q!3ins (For discussions, please refer-to Rules
,. I ~,,,,
, Deductibl~ only to the extent of gain or
winnings- (NIRC, Sec. 34(0)(6)). It applies
· nly to.indlvjduals.
1
~---·---:-- .. · -~ _
· t_ ,» OTE: The excess of the gain over the loss
/ is, howeveJ;A.lxable. A wager is made when .
Jfi~i outcome depends upon chance
. i , , .' (Q£MAAMP~O, · Income Taxation, supra at
1 • · . , ·, .- /0 J 4). · ·
/ / · :1 · .
J,,,.. <-?.?,,' Cost of unsold tickets of a sweepstakes
agent constitutes his investment in a
!...:...0.--,.,... wctgering transaction (Id.).
) .
,..R A.~No. 1169 (An Act Providing for Charity
Sweepstakes, Horse Races, and Lotteries)
exempts sweepstakes winnings · from
taxation. It follows that no losses incurred
therefrom can be allowed as deductions
from gross income (BIR Ruling No. 62-006,
January ~6. 1962).
e. Losses on · Securities becoming
worthless
In order to be deductitite, the securitie~ must
be: (WoCAT}
i. Ascertained to be Worthless and
charged off within the taxable year;
ii. Held as -~apital Asset; (NIRC; Sec. 34,
Par.(D)(4)(b)); and
iii. Loss was incurred by a Iaxpayer,
OTHER THAN a bank or tn-1st company
incorporated under Philippine laws,
substantial part of business is the
receipt of deposit (NIRC, Sec. 39(C);
 \ I
MEM:0-RY Al D
s., 8ecia Urwenlty Colege of Law - ROCT Ber ()pefallon1 Cente,
Par (C); China Banking Corporation v.
CA, G.R. No. 125508, July -19, 2000) .
NOTE: Securities becoming
worthless are considered as a loss
from the sale of capital assets on the
last day of such taxable year (Sec. 34,
Par. (D)(4)(b); Par. (E)(2)) .•
The Supreme Court upheld the CIR denial
of the deduction from gross income of
"securities becoming worthless" claimed by
CBC. Shares of stocks would be ordinary
assets only to · a dealer in securities or a
person engaged in the purchase and sale of,
or an active trader (for his own account) in,
securities. In the hands, however, of another
who holds the shares of stock by way of an
investment, the shares to him would be
capital assets. When the shares held by
such investor become worthless, the loss is
deemed to be a loss from the sale or
, exchange of capital assets . The loss
sustained by the said holder of the
securities, which are capital assets (to him),
is to be treated as a capital loss as if incurred
from a sale or exchange transaction. Capital
losses are allowed to be deducted only to
the extent of capital gains, i.e., gains derived
from the sale or exchange of capital assets,
and not from any other income . of the
taxpayer (China Banking Corp. v. CA, G.R.
No. 125508, July 19, 2009).
f. Losses on Wash Sales of Sto~ks (NIRC,
Sec. 38). · the sale or thirty (30) days after the sale;
Rationale: To prevent taxpayers from
claiming pretended losses. The law is
designed to prevent a situation where the
alleged seller may try to give the impression
of a loss in such wash sale when the "loss"
is actually negated by the effects of his
having bought or acquired "substantially
identical stocks or securities" within a period
very close to the occurrence of the sale of
his shares of stocks (ABELLA, Taxation Law
(2017)) .
Wash Sales
- a sale of stock or securities where
substantially identical securities are
acquired or purchased within sixty-one (61 )-
day period, beginning thirty (30) days before
the sale and ending thirty (30) days after the
sale (NIRC, Sec.38) .
139
Substantially Identical Stock or
Securities -
- Stock or securities of the same class or
which are similar on their important features.
For example, bonds or preferred stock of the
same corporation are ordinarily . not
considered substantially identical to the
common stock of the same corporation.
However, a preferred stock Is substantially
identical to a common stock if the preferred
stock:
I. Is convertible into common stock;
ii. Has the same voting rights as the
common stock;
iii. Is subject . to the same dividend
restrictions; or, .
iv. Is unrestricted as to convertibility (U.S.
Department · of Treasury, IRS,
Publication 550, January 17, 2012).
NOTE: The term "substantially · identical"
means that the stock must be of the same
class, or in the case of bonds, the ·terms
thereof must be the same. It Is necessary
· that there must be similarities on all
important · particulars (ABELLA, Taxation
Law (2017)):
Elements of Wash Sales: (L-30-P-61-
NAD)
a. The sale or other disposition of stock
• resulte_p to a Loss; , .
b. There ~ as an acquisition or contract or
option or acquisition of stock or
securities within thirty (30) days before
c. The acquisition must be by furnhase,
taxable exch~nge or through an option
- contract upon which the entire amount
of gain or loss was recognized by law;
d. The stock or securities sold were
substantially the. same as those
acquired within the sixty-one Cfil.}-day
period; and
e. The seller is Not Dealer in securities
(N/RC, Sec. 38(A); R.R. No. 6-2008,
Sec. 7(c)) .
GENERAL RULE: Losses from sales or
exchanges of stock or securities are
deductible (NIRC, Sec. 34(4)(a)).
Exception: Loss from wash sales is not
deductible (NIRC, Sec. 38) .
140
INCOME TAXATION
T~ation Law

Exception to the exception: (OSG) deductible losses but added instead to the
a. If the taxpayer is a dealer in securities, co~t of the iand (R.R. No. 02-40, _S ec. 97).
and the transaction from which the loss
resulted was · made in the Qrdinary Involuntary _demolitron such • as that
course of business of such dealer, the ordered by ttie City Engineer's Offic;:e, which
lqss from wash sales is deductible in full; considered the· building . as a fire hazard,
b. Short sales transactions; and may result to deductibility of the building's
c. Gains in wasti sales as such gains are value if the loss is not compensa!ed for by·
taxab_le (NIRC, Sec. 38). insurance (CIR v. Priscila Estate, Inc., G.R.
l-18282, May 29, 1964). . .
REASONS: ·Loss was incurred in the
ordinary course of business or trade j. . Loss of useful value of capital assets due
(ordinary loss). Moreover, losses from wash .to changes ·in business cc>nditions and a
sales of stock or securities incurred ~Y capital asset is terminated
taxpayers· other than dealers in stock or - occurs when the taxpayer discontinues in ·
securities are treated in the same manner as · business or discards · such assets
other capital losses. · These losses, if permanently from use in such business. He
considered as capital losses, are deductible may claim deduction only to the extent of
only froro capital gains not from ordinary actual loss sustained after adjustments for
gains (2-B OOMONOON, Taxation, supra at .,._ improvement, · depreciation, and saivage
·.,. value (R._ R. No. 02-40, Sec. 98).
829). · ,
,,,,,
. ,.
'--' • 1} .
r
..
I
1
•., ~•
'--
'.
.
•~ "~

g. Abandonment . Losses ·,; / Pe~roleum,,...;:.;~_: If l:osses of farmers ,

Operation .· . ._ · y - · . ;,:· io_ _§s~
incurred· in the operation of farm
- all accumulated • exP,loratici"~ and - · --·~ .... . busihess , re deductible from gross income
1h:~~«:~i~~ be ~:Fi: eitar~f .l / d:~~~h~ J\ -~-:~ . ~R:~:,r;iro,.:o, Sec. 100). .
provided th~t not1, ?f a~andon~ ~n~~hall_·:...:.i__ --~ ~ et OperatiJtg Loss Carry-over (NOLCO)
be filed with th CR, / Prov14ed, that · -· NIRC, Sec. 34(0)(3); R.R. No.14-2001)
accumulated E!xpe ditur.es1 incurre_d iri ,that -:..Y •• ..,_*.,; , ·
f
area prior to Janaa_ry!"'.•1 1939 ~ hall ibe :.. it
i s th~ ·! xce$$ ~f allowable deductions over
~!lowed as _a deguctio 0 nly(ro_ r:n_ ~~Y ----~- -....:...-:. _ l,~_r.o~m ome b ,thebusinessforanytaxable
mcome denved fro"} hf 11 sam~ ;fqnlract I . ._· ,, \.Y-.~~r. w}licq. hc\d not been previously offset ,
area. In all ca~es, notl ot
a~)i~9(1ment. , I . ,: • , //~ ,s deduction from gross income (NIRC,
shall be filed with the Comm! SIO~ f (}ll~q, j ~.-~.:Sec./ 4, par._,0)(3))..
Sec. 34(O)(7)(a)). · ., · -~:, • .J./"'_..:. .,:;, / _.,t . ., .
h.
· r • ~. .... ' °'il .:\ .
> i GENE~l,/ ~Ul,.E: NOLCO shall be carried
Abandonment Losses m Produ 1ng We I...:.:... ..::_ .- .,. over as a deduction f · ·· f
- th~ unamortized cost thereof,ra~ j ll as ,. \. thEk'n"' three (3) c rom ~ross .mcome or
the undepreciated cost of equipment~ irectly 'I\ f • . ' ' i mediate! follo _onsecut1ve taxable years.
~sed therein , shall be allowed as dedu tion / iv\f'
(NIRC,
34
th
se{ (0~(~i)
e year of such loss
m the year the well, equipment or facility is __.,.. ·
abandoned by the contractor; Provided, that
Exception: In the case of mines othe·r than
if such abandoned well is reentered and the
oil and gas .wells, lo~ses incurr~d in any of
prodiJ~!ion_is resumE:d, or if such equipment.
the ~rst ten (10) years of operatiol") may be
or fac1hty 1s restored into service, the said
?arned over as a deduction from the gross
~sts shall b~ included as part of the income
mcome for the next five (5) years following
m th e year or resumption or restoration and
shall be amortized or depreciated (NIRC as such loss (NIRC, ·Sec. 34(0)(3)).
amended by TRAIN, Sec. 34 (0)(l)(b)). '
Requisites for Deductibility of Net
i. Lo~ses - due to. voluntary · removal of ~p~rat~ng Loss Carry Over (NOCES)
building Incident .to renewal • or 1. It is fro·m the f:!et operating loss of the
replac~ments - deductible expense from business for any taxable year
gross mcome imm~diate/y preceding the current
However, if an entity buys a land with a taxable. year; . .
building with a view · of erecting another ii. It .has.. not been previously Offset as
building, the value and the cost of deduction from gross income· ·
demolishing _ the old building are ·not iii. It shall be ~ar:ried ov.er as a' deduction
~rom gross income, for the next three (3)
 \ I
MEM:Q~y AID
San Becla lrMrllly College Of law - AGCT ea, Cenlllr
consecutive taxable years immediately
following the year of such loss only·
iv. !he taxpayer was not ~xempt ~om
income tax in the year the loss was
incurred; and
v. !here has been no §ubstantial change
in the ownership of the business or
enterprise (NIRC, Sec. 34(0)(3)).
NOTE: In the case of mines other than
oil and gas wells, losses incurred
without the benefit of incentives under ·
the Omnibus Investment Code of 1987
in any of the first ten (;10) years of
operation may be carried over as
deduction from the gross income for the
next five (5) years following such loss
(NIRC, Sec., 34, par. (0)(3)) .
Substantial Change In the Ownership of
the Business·or Enterprise
Refers to a chijl)Qe in the ownership of the
business or enterprise as a result of or ·
arising from its merger or consolidation or
combination with another person in the
manner as provided in Subsection 2.4 of
these Regulations (R.R. No. 14-01, ··Sec.
3.8) . . 28, 201 2) . .
N0LC0 shall be allowed if there has been
no substantial change in th,e ownership of
the business or enterprise in that:
i. Not less than seventy-five percent
(75%) in nominal value of outstanding
issued shares; or · ii. • DC and RFC subject to the normal
ii. Not less than seventy-five percent
(?So/o) of the paid up . capit~I . ~f the
corporation, if the business 1s m the
name of the corporation, is held by or on
behalf ·of the same persons (R.R. No.
14-01, Sec. 2.4).
The term "by or on behalf of the same
persons~ shall refer to the m~inte~ance of
ownership despite change as when. ' .
i No actual change in owne~sh1p is
. . I ed in case the transfer involves
invo v h.• t · d·rect
change from dir_e ct owne~ ip o in I
ownership, or vice versa, and . .
. No actual change in ownership is
ii. inv~lved in the case of merger of the
subsidiary into the parent company.
(R.R. No. 14-01, Se~. 3.12) .
01c) quity ' ownership
. The seventy-five (7 5 o e I t
t r le shall only app Y O a
or lnteres n~ent of the taxpayer·~ ~et
transfer or assig result of or arising
operating loss~ds afa:payer's merger or .
from the 5 ~ 1
/
consolidation or business combination with
another person (R.R. No. 14-01, Sec. 2.4).
.
'
In such case, the transferee or assign~e
shall not be entitled to claim the same as a
deduction from gross income except when
as a result of the said merger, consolidation
or combination, the shareholders of the
transferor/assignor, or the transferor gains
control of:
i. At least seventy-five (75%) or more in
nominal value of the outstanding issued
shares or paid-up capital of the
transferee/assignee, of a corporation, or
ii. At least ·seventy-five (75%) or more
interest in the business of the
transferee/assigl)ee, if nqt a corporation
(R.R: No. 14-01, Sec. 2.4) .
NOTE: However, in a· recent ruling by the
· BIR, in case of tax~free merger, it held that
. N0LC0· is not one of the assets of the
absorbed corporation that can be
transferred and absorbed by the surviving
corporation as this. privilege or deduction
ca n be availed of only by the absorbed
corporation (BIR Ruling No. 214-12, March
Taipayers Entitled to Deduct NOLCO:
(~IPE;iT) . .
i. Individuals engaged in trade or
business or in the exercise of his
Profession:
Income tax;·
Special corporations · subject to
Preferential tax ·rates (e.g., private
educational institutions, hospitals, and
regional operating headquarters); and
iv. _sstates and !rusts (R.R. No.14-01, Sec.
4) .
Taxpayer~ Not Entitled to NOLCO: (OFIP-
. BFE) .
i Offshore banking units (0BU) of a
· foreign banking corporation, and
Foreign Currency Depo_sit Unit (FCDU)
of domestic or foreign banking
corporation duly authorized by the_BSP;
ii. An enterprise registered with the Board
of Investment (B0I) with. respect to its
BO1-registered activity ,enjoying Income
Tax Holiday (1TH) Incentive:
iii. An enterprise registered with the f. EZA
with respect to its PEZA-registered
activity;
iv. Enterprises registered with the ~ases
Conservation and Development Act
(BCDA) (e.g., ' SBMA-registered
 INCOME TAXATION
142 . Tax~tion Law

enterprises with respect to its registered Losses incurred or

business activity); Involves net connected . .with
v. .Eoreign Corporations engaged · in capital loss. trade or· business
international shipping or air carriage (from operatio~}.
business in the Philippines; and .
vi. Any person, natural or juridical, enjoying Business losses not
gxemption from income tax (R.R. Carry-over as previously offset as ..
No.14-01, Sec. 4). loss from sale a deduction from.
of capital asset the gross income
Summary Rules on NOLCO: in the next carried over as
i. NOLCO shall be allowed as a deduction succeeding such for the next _
from the gross income of the taxpayer year. three (3)
who sustained or accumulated the net consecutive years.
operating losses regardless of the
change in its ownership. This rule shall (N/RC, Secs. 39(0) and 34(0)(3))
also apply in case of a merger where the·
taxpayer is.the survivin·g entity (R.R. No. Losses are personal and not transferable to
14-01, Sec. 2.2). • another .
ii. The three (3)-year reglementary period The loss of predecessor partnership is no~
for ciaiming NOLCO will continue to run deductible by a successor corporation (R.R. No. 16-
despite the fact that the taxpa er paid .;_ ~- / 6). ,, '
income tax under the MCIT ravalled of ' : -~..' . . .
the OSD (R.R. ·No: 1°4-01, SecS> 2:5 and ..,___. ol The Joss of the parent company may not be .
:1
2.6/• / .
I .• M. •
deducte~ by its subsidiary. However, a branch may
iii. NOLCO is deducted on~afirstin, firstout - · . cl,aJm t~foJloyving..home office expenses:
(FIFO) basis (R.R. ', o.•~ 1f-Q1, Sec. 2. 7). 1. Losses, • expenses and other deductions
iv. The net operating lossl incurred by a - properly alloca.ted_to the Philippine branch; and
taxpayer in the year in .which a 2. A ra! able porti_ on of the losses, expenses and
substantial ·change in-ownershlp-1rrsuch-- ·• - - -other deductions effectively connected with the
taxpayer occurs shall not be affected by . busir,ess or trade conducted exclusively within
such change in owr:tership (R.R. No. 14- the -Philippines. which cannot be definitely be
01, Sec. 2.8) . · · · 1-
all~ted to some it~ms or class of gross income
v. NOLCO shall be allowed as deduction - (8.R. Np. 16-..86).. .
,• >,.. ... ,
in computing the taxpaye/s income
taxes per quarter · and annual final i CJosed a'nd Completed Transaction
adjust~ent income tax refum (R.R. No. ; G~Nl;RAL RULE: Losses must be evidencedi>y a
14-01, Sec. 6.4). , . · - . clqsed a11d completed _transaction to be ·deductible
vi. A taxpayer who claims the forJy percent. (R.R. No. 02-40, Sec. 96) .
(40%) optional standar :deduction shall 1 •·
not simultaneously claim deducti6n of _1 , Cl~~,~q a_n;<:1,Completed Transaction
the NOLCO (R.A. 9504, Sec. 3 in , \ · ; - ...one )Vh_rch the facts indicate that the transaction is
relation to R.R. No. 14-01, Sec. 2.5). · sufficiently final to ascertain that loss has occurred
(MERTENS, Law of Federal Income Taxation).
NET CAPITAL LOSS CARRY-OVER VS . .
NET OPERATING LOSS CARRY-OVER Thus, if the loss is due to shrinkage in value of stock
through fluctuation of market price or otherwise the
amount of loss is not deductible until the same' has
been disposed. The loss allowable is that actually
suffered when the stock has already been disposed
of (R.R. No. 02-40, Sec. 99). . .

T~e. same principle applies to · losses of farmers

Taxpayer may be arising from the shrinkage in weight or physical value
an individual of farm . products. Such losses are not deductible
Taxpayer must (engaged in trade
~xcept as_ sucl'I shrinkage -may be reflected in an
be an or business or in the
inventory rf used to determine profits (R.R. No. 02-
individual. exercise of 40, Sec. 100). ·
profession) or a
Corporation
 \ I .

MEM:Q~y Al D. ·
Sin lleda UrMlwl\y Cohge law- RGCT Bar Operat1or,t Center

In case of loss from a sales transaction the

consumption of the sale is the identifiable -~vent
which fixes the loss (DIMAAMPAO, supra at 129).

Other examples of non-deductible losses

because they were not evidenced by closed and
completed transaction: .
1. Losses arising from revaluation of property,
plant and equipment; and
2. Unrealized·foreign exchange losses arising from
foreign loans (BIR Ruling No: 144-85).

Exception: In cr3se of loss of useful value of capital

assets due to chang~s in business conditions (as
previously disqussed under Special Losses), the
loss may be deducted even though there was no
sale or disposition of the property (R.R. No. 02-40,
Sec. 98).

Losses can be claimed as itemized deduction

within six (6) months after the death of the
decedent provided tl:lat the sanie are not clajmed
as deduction for estate tax purposes (NIRC, Sec.
34(D)(1)(c}},

GENERAL RULE: Loss is deductible in the year \he

loss was sustained (P/aridel Surety & Insurance Co.
v. CIR, G.R. No. L-21520, December 11, 1967).

Exception: If the loss is compensated by i~_sura,nce

or otherwise, the los~ is postponed to a su~s~!Jent
year in which it appears that no compe~sation at all
can be had, or there is a remai ning net.Joss (or ther~
is no full compensation) (Plaridel Surety & losurance
Co. v. CIR, G.R. No. L-21520, Decemb~r 11,. 1967).,

BAD DEBTS
Bad· debts refer to those debts resulting from the
worthlessness or uncollectibility, in_whole or in part,
of amounts due the taxpayers by others, arising from
money lent or from uncollectible amounts of income
from goods sold or' services rendered (R.R. No. 05-
99, Sec. 2 (a)). · to be satisfied by banks, its non-fulfillme,:it shall
Unpaid advances (cash and property) which are
investments by a partner in a partnership cannot-be _
claimed as bad debts deduction from -gross· income.
(Phi/ex Mining Corp. v. CIR, .G.R. No. 148187, April
16, 2008; 1 DE LEON, supra at 470),
Requisites for Deductibility: '(IR-WASC-1B) .
1. Existing, valid, and legally · demandable
· !ndebtedness due to the taxpayer;
2. Must have been Reported as receivables in the
income tax return of the current or prior years;
3. Actually ascertained · to be Worthless nd-~.
uncollectible as of the end of the taxab.le"'Y,ear;
L,
NOTES: • , .. · ,_ ~--- - ' c. Statute of limitations;
a. Before a debt can be con~jdered Y{Ortnless,
the taxpayer must also show fhatit is indeed -
uncollectible even in the fu\ure (~hifippine
Refining Company v. ·court of Appeals, G.R.
No. 118794, May8,11996). . : ____ _
b. There are steps outlined to be u dertaken
by the taxpayer to prove that ha exerted
diligent efforts to collect the debts: viz.: (1)
sending of stateroen t --of c!C9ounts; (2) __
sending of collection ,lettE;rs; (3) -~giv_ing the
account to a lawyer fqr col ectiof'); ,anp (4)
filing a collection case in court (Philip,Pihe
Refining Company v. Court of Appeals, G.R .
No. 118794, May 8, 1996). . ._:_( :: - The recovery of bad debts previously allowed. as
c. Good faith on the part of fhe taxpayer is not -
enough. He must show that _. ~e·: had -
reasonably investigated the relevant facts
and had drawn a reasonable inference from
the information thus obtained by him~
(Collector of Internal Revenue ii. Goodrich
International Rubber, G.R. No. L-22265,
December 22, 1967).
4 . Actually charged off.in the books of accounts of
the taxpayer as of the end of the taxable year of
worthlessness; . · 05-99, Sec. 4).
5. Must not be .§.ustained in a ·transaction entered
into between related parties ' (For further
discussion, ple~e refer to Interest Incurred
between Related Taxpayers on page 134) ;
6. ~onnected with the taxpayer's trade, business
or practice of profession;
7. For Insurance or surety companies, bad debts
must have been declared closed . due to
insolvency or for any such similar reason by the
Insurance Commlssioner; and
INCOME TAXATION
Taxation Law
8. For Banks, · the taxpayer shall submit to the
BSP/Monetary Board the written approval of the
writing off of the indebtedness from bank's
books of accounts at the end of the taxable year
(NIRC, Sec. 31 (E); R.R. No. 25-2002).
NOTE: Oespite ·additional requisite· provided for
not prejudice the Commissioner's determinatibn
of worthlessness and uncollectibility of debts
(R.R. No. 25-02, Sec. 2).
Mere RecordinQ of Estimated Uncollectible is
Not Write-off
A mere recording in the books of. account of
estimated uncollectible accounts · does not ·
constitute a write-off of receivable (R.R. No. 05-
99, Sec. 2) .
Factors affecting Worthlessness:
1 / , a . . .Bankruptcy or insolvency of the debtor; .
. t __) -_ . .' b,, IQsufficiency of the collateral ;
d. . Death•of the debtor leaving no assets; .
-,-.., e. lnju(Y of the debtor making it impos_sible for
.. , him to, earn a living; ·
f. Meager amoupts involved;
g. Improbability. , of success of judicial ·
·-collection; and ,
h. pestruction fire of origjnal invoices
,- .e,videncif19•-.....! Jndebtedness (Goodwill
_ 1 lriJernat{onal 'Rubber Co. v. Collector of
j Internal Revenue, CTA Case No. 468, June
•.'' 8 1963). .., .
. ;'
· 'Tax Benefit Rule .
· dedyction in the preceding year/s shall be included
as·part of the taxpayer's gross income in the year of
:such recovery to the extent of the income tax benefit
of said deduction (NIRC, Sec, 34 (E)(1)).
NOTES:
1. The recovery of bad debts previously allowed as
deduction in the preceding year or years shall be
~ncluded as part of the taxpayer's gross income
In the year of such_recovery to the extent of the
income tax benefit of said deduction (R.R. No.
. ·
2. If in the year the taxpayer claimed deduction of
bad debts written-off, he realized a reduction of
the income tax due from him on account of the
said deduction, his subsequent rec·overy thereof
from his debtor shall be treated as a receipt of
realized taxable income (Id.).
3. If the taxpayer did not benefit from the deduction
of the bad debt written-off because it did not
result to any reduction of his income tax in the
 \ I
MEM:Q~y AID
Slw1 S e d a ~ Colege Law - ROCT Bar Ope,atiana C«1ter
year of such deduction (i.e., where the result of
his business operation was a net loss ·even
without deduction of the bad debts written-off)
then his subsequent reco~ery thereof shall b~
treated _as a mere recovery or a return of capital,
hence, not treated as receipt of realized taxable
income {Id.). · Difference Between Purchase Price and
Illustrations:
·4. II"! 2018, A Corp. reported net income amounting
to N80,000. Juan, a debtor of A Corp. in the
amount of t-500,000 was declared to be
insolvent. Hence, A Corp. charged off the entire
amount owed by Juan, resulting to net loss of
t-20,000 at the end of the year. In 2020, Juan
was able to recover from insolvency and paid A
Corp. the entire amount of t-500,000. How muoh
shou_ ld A Corp. report as income from bad debt
recovery in 2020?
ANS: Only t-480,000 should be reported · as
income. A Corp. obtained an income tax benefit
from the deduction made iii 2018. Because of.
the t-500,000 deduction, A . ·corp did not pay
truces on its taxable income of ,.480,000.
Accordingly, the income that should be reported
upon recovery of the bad debt is t-480,009.
5. Supposing there is only a partial recovery of
t-300,000, how much should A Corp. report as
income for bad debt recovery il)-2020? · .,
ANS: Only t-300,000 sho'Uld : be reported -as
income. A Corp. obtained an incom,e tax·_b~nefit_
due to the deduction made in 2018. Accordingly;
any recovery · from it should be reported as
income in the year of reco~ery.
1
'.
6. A. Corp reported a net .loss of ,-20,000 w!thout
the bad debt of Juan being dedu~t~d.
Consequently, A Corp. wrote off the entire
t-500 000 as bad debts which- resulted to a total
net lo~s of t-520,000. How much should~- Corp
report as income for bad debt recovery if Juan
paid the entire ,-500,000 to A. Corp?
ANS: None. A. Corp. will not report any income
because there is no income tax bene~t. Take
note that there was already a net loss prior to th e
deduction made due to the bad debt from Juan.
A d' I there was no income tax benefit
th~~~:~Jd from the further deduction made.
Securities Written Off that are Capital Assets are
Not Bad Debts, But Capital Loss . . · property must be .,bocated within the Philippines
In a case where securities are ascertained to be
worthless and charged off within the ~axable year,
and are capital assets, the loss resulting therefro_
m other conditions under R.R. No. 12-2012 and
t th than a bank or trust company
_o the taxpayer, o er f the Philippines a
incorporated under the laws 0
substantial part ~f whose business· is the receipt of
deposits, will not be treated as bad debts, b~t as
capital loss on the last day ·of the taxable year
{NIRC, Sec. 34 (E)(2)).
When Mortgagee Buys Mortg'aged Property,
Indebtedness Is Not Bad Debt .
Where under the foreciosure of a mortgage, the
mortgagee buys the mortgaged property and credits
the indebtedness witti the · purchase price, the
difference between the purchase price and the
indebtedness is not allowable as a deduction for a
bad debt because in such case the property which
was security for the debt stands in place of the debt.
The determination of loss in such case is deferred
until the disposal of the property (R.R. No. 02-40,
Sec. 103).
DEPRECIATION
Depreciation is the gradual diminution in the useful
CJ value of tangible property resulting from wear and
tear and normal obsolescence (Basilan Estates, Inc.
' v, Commissioner oflntemal Revenue, G.R. No. L-
·. _2.24f2, September 5, 1_967).
.,.;.~ "1- -
:.'- It is also applied to the amortization of the value of
the intangible ,assets, the use of which in trade or
business is ohimited duration (Basil~n Estates, Inc.
v. Commis~io'h er. of Internal Revenue, G.R. No. L-
22492, Septe · ber 5, 1967).
j
REASON:"Pfpp!:!rty· gradually approaches · a point
where its u sefu[ness is exhausted. By using the
prop_ erty, a ·gradual sale is made of it, and the
· depreciation charged is the· measure of the cost
v.
.. ·.;~.wfilctl,:hJ\~ been sold (U.S. Lud~y, _274 U.S. 295,
. ,:·May 16; 1927). As income is earned, then the assets
that contribute in earning the income likewise suffer
djminution (2-B DOMQNDON, supra at p. 44).
Requisites fo~ Deductibility: (PORAL-V) .
r. The allowance for depreciation .must be for the
exhaustion, wear and tear, including
obsolescence, of froperty used in the trade or
business (NIRC,·Sec. 34 (F)(1));
2. It must be charged Off wittlin the taxable year
(R.R. No. 02-40, Sec. 113);
3. Allowance must be Reasonable (NIRC, Sec. 34
(F)(1));
4. Statement on the allowance must be Attached
to the return (R.R. No. 02-40, Sec. 115);
5.. For non-resident alien engaged in trade or
business and resident foreign corporation,
(N/RC, Sec. 34.(F)(6)); an~
6. For deductibility of depreciation of ~ehicles,
R.M.C. No. 2-2013 must have been complied
with:
 INCOME TAXATION
Taxation Law

9. Incidental. Repairs which neither materially add

Properties Subject to Depreciation: (UETI) to the value of the property nor a_ ppreciably
1. Property that is Used for trade, business or prolong the life, but keep . it in an ordinary
exercise of a profession or held for the efficient operating condition (R.R. No. 2-40, Sec.
production of income (Italian Thai Development 68) .
Public Co. Ltd. v. Commissioner of Internal
Revenue, CTA Case No. 6172, November 12, NOTE: Repairs in the nature of replacement, to
2002); the extent they appreciably prolong the life of the
2. Properties subject to .5.xhaustion within a property should be charged against ·depreciation
determinable period of time, that is, it has a · (R.R. No. 2-40, Sec. 68) . .
limited useful life (Italian Thai Development
Public Co. Ltd. v. Commissioner of Internal Commencement of Depreciation
Revenue, CTA Case No. (3172; November 12, Depreciation commences at the time of the
2002); ' acquisition of the property (Basilan Estates, Inc. v.
3. All kinds of Iangible property used in the trade Commissioner of Internal Revenue, G.R. No. L-
or business which is subject to wear and tear, to 22492, September 5, 1967).
decay or decline from natural· causes, to
exhaustion and to obsolescence due to the NOTE: If the property is being used partly for
normal progress of the art (R.R No. 02-40, Sec. personal and partly for business, depreciation
106); and _ __ expe·nse must be pro-rated and only the portion
.,. Rttributable to business use is deductible.
NOTE: It does not apply to inve tones,' or to ,i 1 • • :·-p
stock in trade, nor to land a arf' frptfi th~ .-:: '. Determination of the Useful Life on which
improvements or physical dev~lopme.nt adcfed o"epr~ciation Rate is Based
to it. It does not apply to octiE(sJ of mlrier-als- -. The f?IR·a~~ ~e taxpayer may ~wee in wri~ing as to
which through the proces , of removal suffe( - t!ie use(ul life c;:1nd r~at~ of depr~c1atIon of the property
depletion. (R.R No. 0240 Se~. 106).
3
f .·. \ to be depreciat~. w_hi~h agreement shall be binding
; • ,. upon both ·the , ta~payer and the National
4. All kinds of !ntangibl • p operty (oqrer1han -:-- - Government and ___y-1hich shall be subject to
shares of stock), the us -of1 J hich in, tradE( or ·· · mpdificai ion if ju~tified l>y facts or circumstances not
business is definitely in imited duratio~ such -as' . taken into consideratiqrf during the adoption of such
patents, copyrights and,frarfc_h ses (R:"/~ No. 02~ · agreement.~Any_change shall not be effective prior
40, Sec. 107J. . , ', \ - ---- -;· --to- th$ .ta~able _year nwhich notice in writing by
.( .·.:.,.,~\ . I c~rtin~<t!'Tlail oc registered mail is served by the party
Examples of Properties Subject . · to ; initiating (NIRC, Sec. 34 (F)(3)).
Depreciation: (FAB-L1 2M-PR) ' ·, · · l ·· ' ,"
1. furniture or furnishings used in the bu1°19iR?r1--=---·:__ r tfo-rE:
If there is no agreement and the BIR does
used solely by the taxpayer as his , esi encel •:..: : not object if) writin'g to the rate and useful life being
(R.R. No. 02-40, Sec. 106); • ''7' , ·-- __ . . useo by tti~ taxpayer, the same shall be binding
2. Automobiles and other transportation equ_jpment
used solely by the taxpayer for pleasure .(R. R.
No, 02-40, Sec. 106);
3. ~uildings used solely by the taxpayer as his
,
~-
t: 1(N(R{;, Se-c. 34 (F)(3)) .
[
Methods of Computing Depreciation:
1. -Straight-line method;
residence (R.R. No. 02-40, Sec. 106); 2. Declining balance _method using a rate not
4. _band apart from the improvements of physical exceedin·g twice the rate which would have been
development added to it (Limpan Investment used had the annual allowance been computed
Corp. v. Commissioner of Internal_ Revenue, under straight-line· method;
G.R. No. L-21570, July 26, 1966; R.R. No. 02- 3. Sum-of-the-years digit method; and
40, Sec. 106); 4. Any other method which may be prescribed by
5. !nventories or stock in trade (R.R. No. 02-40, the Secretary of Finance upon recommendation
Sec. 106); . of the Commissioner (NIRC, Sec. 34 (F)(2)) .
6. !ntangibles, the use in trade, t;>usiness or
exercise of a profession is not of limited duration Special Cases of Depreciation
(R.R. No. ·2-40, Sec. 107); 1. Properties used in Petroleum Operations
7. Bodies of Minerals which through the process of a. Properties directly used in or related t2
removal were already subject to depletion production of petroleum - depreciation shall
allowance (R.R. No. 02-40, Sec. 106); · ~e allowed under straight-line method or
8. Personal effects or clothing, except costumes declining balance method at the option Qf
used in theatrical business (R.R. No. 02-40, the service contractor. The useful life shall
Sec. 106); and be ten ( 10) .years or such shorter life as maY
 \ I
MEM:0-:RY AID
Sin Beda UnlWf9ity Colege of Law - RGCT Ser Operatione Centar
be permitted by tti e Commissioner (NIRC,
Sec. 34 (F)(4)).
NOTE: If service contractor initially elects the
declining-balance method, it may
subsequently shift to straight-line (NIRC, Sec.
34 (F)(4)) .
b. Property not used directly in production -
depreciation shall be under straight-line
method on the basis of an estimated useful life
of five (5) years (NIRC, Sec. 34 (F)(4)).
2. Properties used in Mining Operations
a. Depreciation shall be computed at normal
rate if expected life is ten (10) years or less
(NIRC,.Sec. 34 (F)(S)).
b. If expected life is more than ten (10) years,
property shall be depreciated over any
number of years between five (5) years and
the expected life, provided that the
contractor notifies the Commissioner at the
beginning of the depreciation period which
depreciation rate wlli be used (NIRC, Sec.
34 (F)(S)).
-t
Basis of Depreciation
It shall be based on acquisition cost less 'salvage
value (without adjustment for revaluation, losses· or .
increments) (R.M.C. No. 70-10). · ·
Who can claim Depreciation Expe,nse as
deduction on Taxable Income ·· · ,s:helieopters Ad/or aircrafts and land vehicles
The person who sustains an economic.loss from the ·
decrease in property value due to depreciation, ·
which is usually the owner.
Special Rules on Claiming Depreciation Exp~nse
1. In case the property is held by one person f ~r
life (beneficial owner) with remainder to
another person (naked title) ·
- deduction shall be compute~ as if the tenant
was the absolute owner of the property and,
as such, the expense shall accrue to him
(NIRC, Sec. 34 (F)(1)) .
2. For property held in trust
- deduction shall be apportioned between t~e
income beneficiaries and the trustees in
accordance with the pertinent provisions of the
instrument created or in the absence of such
provisions, on the basis of the trust .income
allowable to each (NIRC, Sec. 34 (F)(1)) .
3. Capital Expenditure of Private Educational
Institutions
- Private educational institutions are granted
the option to treat capital expenditure as
a. an outright expense; or,
b. as·a deduction through allowance for
depreciation (NIRC, Sec. 34(A)(2)) .
4. Rules on Deductibility of Depreciation of
Vehicles ·
a. The taxpayer must substantiate the ·
purchase with sufficient evidence, which ·
contains the following, among others:·
i. Specific motor vehicle identification
number, chassis number or othe.r
registrable identification numbers of the
vehicle;
ii. Total price of the specific vehicle subject
to depreciation; and
iii. Direct connection or relation of the ·
vehicle to the .. development,
management, operation and/or conduct
of the trade or busi.ness or profession of
the taxpayer (R.R. No. 12-12, Sec. 3) ;
b. Only one vehicle for land transport is
allowed for the use of an official or
employee, the value of which should n(?t
exceed t-2, 400, 000 (R.R. No. 12-12, Sec.
3) ; and
~.
,i,.. ,,_;_ . · NO'TE: The threshold limit applies
prospectively from October 17, 2012. It does
noti ippl~ to vehicles purchased prior to such
daJe (R.,l{ C. No. 02-13) .
c. No dep reciation shall be allowed for yachts,
. ' which ;exceed '92,400,000, unless the
ta~payer's main line of business is transport
operations · or lease of· transportation
-1equipment ·and the vehicles purchased are
usad in said operations (R.R. No. 12-12,
Sec. 3) .
NOTE: Depreciation for yachts, helicopters
and/or aircrafts and land vehicles shall be
disallowed in case of failure to meet all the
requirements. The maintenance ~xpenses
and loss on /Sale of the non-depreciable
vehicles shall likewise be disallowed (R.R.
No. 12-2012, Sec. 3; RMC No. 2-2013).
DEPLETION OF OIL AND GAS WELLS
AND MINES
Depletion is the exhaustion of natural resources
owing to production or severance (2 CASASOLA,
supra at 363) .
THEORY AND PURPOSE OF DEPLETION
ALLOWANCE: The allowance for depletion is
based on the theory that the extraction of minerals
gradually exhausts the capital · investment in the
min~ral deposit. The purpose of the depletion
deduction is to permit the owner of a capital interest

in mineral in place to make a tax-free recovery of that
depleting capital asset (Consolidated Mines, Inc. v.
Court of Tax Appeals, G.R. Nos. L-18843-4, August
29, 1974).
Formula for Rate of Depletion (Consolidated
Mines, Inc., v. Court of Tax Appeals, G.R. Nos. L-
18843-4, August 29, 1974):
Rate of Cost of Mine·Property
Depletion = · Estimated Ore·Deposit
Depletion Method: The total of the accumulated
exploration and development expenses is divided by
the number of recoverable units to arrive at a per unit
depletion cost(similar to units-of-production-method
of depreciation) (R.R. No. 05-76, Secs. 4 and 6) . .
Tax Treatment of Intangible. Exploration and
Development Drilling Costs: (NIRC,· Sec. 34 (G))
Intangible Costs in Petroleum Operatl9ns
Any cost incurred in petroleum operations wnicn in·
itself has no salvage value and.wh th ·s.inciderital to
and necessary for the drilling of ) wells
preparatiqn of wells for the proti0ction,af p~troleurri
(2 CASASOLA, supra at 370),! I ·
/ f
Tax Treatment: ·--:,;,.~ I - - - - - - -such as·but not limited \to, operating agreement and
1. If incurred for non-produci g well and/or
mines: Outright expense deductible in the year ·
incurred (NIRC, Sec. 34 (G){1)). , -,-:-\' . _ ---·· ~~et~r.n pqt~ ca~ital. A person who has no capital
2. If Incurred for producing wells and/9r_'mlnes· ] .. mves ~ent l_n •l~e-m\neral deposit does not possess
in _the s~me contract arpa! . . ' -:·. .
a. Outnght expense deductible m_the y~ar paid
or in_cu~ed; or , .~ •
rirr~~J'.zed
b. . and amortized (NIR~ ~~c.
(_ , -~ . .
N~!E: In c~mputing taxable income / from , ; all9~nce,( or depletion of oil and gas wells or mines ·.
m1n!ng operations, the ~axpayer may at l!is '
option,_ deduct exploration and dev.elopment
exp~nd1tures accumulated as cost or adjusted
basis for cost depletion as of date of
prospecting, as well · as exploration and
· development expenditures paid or incurred
d_uring the taxable year: Provided, That the
amount deductible for exploration and
development expenditures shall not exceed
25% of the net income from mining operations
computed without the benefit of any tax •
incentives under existing laws. The actual
exploration and develo'pment expenditures
minus twenty-five percent (25%) of the net
income from mining shall be carried forward to
th~ succeeding years until fully deducted (NIRC,
Sec. 34 (G)(2)).
The election to deduct the exploration and
development expenditures is irrevocable and
INCOME TAXATION
Taxation Law
shall be binding in succeeding taxable years
(NIRC, Sec. 34 (G)(2)).
Exploration E~penditures
It means expenditures paid or incurred for the
purpose of ascertaining the existence, location,
extent or quality of any deposit of ore or other
mineral, and paid or incurred before the beginning of
the development stage .of the mine or deposit (NIRC,
Sec. 34 (G)(2)) .
Development Expenditures ,.
It means expenditures paid or incurred during the
development stage of the mine or other natural
deposits. The development stage of a mine or other
natural deposit shall begin at the time when deposits
of ore or other minerals are shown to exist in
sufficient commercial quantity and quality and shall
end upon commencement of actual commercial
extraction (N/RC, Sec. 34 (G)(2)).
JW~o J',re: Entltled To Depletion Allowance
nn4al depJetion deductions are allowed only to
mining entitip~ hich own an economic Interest
nd ·n n:iineral deposits. An economic interest is
. posses~ed in ev~iy case in ·which the taxpayer has
. : acquired by invesfment in any interest in mineral, in
place an'd secures,tby any form of legal r~lationship,
service j contract';.--'a~freement, income from the
. extraction of miperal, to which it must look for a
, 1 • an e~!!9m1c 1~terest .. merely because through a
I - 90nti:_actual relation he possesses a mere economic
: . A·,ot;·p~cuniary advanlflge derived from production (2
L: ~. -, \ ~AS_~,S?~ : sup~~,at 364).
NOT~: In •~tlij3 ·"case of a NRA-ETB or a RFC,
: shall be authorized on.ly in respect to oil and gas
we Is or mines located within the Philippines
(NIRC, Sec. 34 (G)(3)). .
DEPLETION V. DEPRECIATION
Assets subject to Assets subject to
depletion could not be depreciation may be
replaced. replaced.
Natural resources Depreciable assets
CHARITABLE AND OTHER
CONTRIBUTIONS
Requisites for Deductibility:, (SAMA) ·
_1. It mu~t be given to organizations Specified bY
law; -
· 2. The contribution or gift must be Act~ally paid;
3. It _must be Made within the taxable year; and
 \ I

MEM:Q~Y At·o .
San S e d a ~ Colege al law - RGCT Bar ()perattona Center
. .
4. It must be evidenced by Adequate receipts or provide for, or to be used in undertaking ·
records (Substantiation Rule) (NIRC, Sec. 34 priority activities in: {HEY-HECS)
(HJ; R.R. No.13-98J. i. Health; -
ii. ' Education;
NOTE: Irrespective of the ·accounting method iii. Youth & Sports Development;
used by the donor, donation is recognized as a iv. Human Settlements;
deduction only when it. was actually paid or v. gconomiG Develop~ent;
made, not in the year the. deed of donation was vi. Culture; or
perfected. The deductibility of donation is not vii. Science (NIRC, ,sec. 34 (H); R.R.
governed by the ordinary r\,Jles on deductibility of No.13-98).
the expense. Donation must be ·BOTH perfected·
and consummated before it can be allowed as.a The above . activities must conform to
deduction , (Philippine Stock Exchange v. CIR, the National Priority Plan according to
CTA ~ase No. 5995, October 15, 2002J . NEDA in consultation with - the ·
appropriate government agencies
Kinds of Contributions (NIRC, Sec .. 34 (H); R.R. No.13-98) .
1. Ordinary / -Partially Deductible Contributions
those which are subject to limitation as to the Any donation not in accordance with
amount deductible from gross income (NIRC, said priority plan shall be subject to the
Sec. 34 (HJ; R.R. No.13-98). 5% or -10% limitation (NIRC, Sec. 34
(H); R.R. No. 13-98)'.
Recipient Is: (GAN)
a. The Government of the Philippines or any of b. foreign institutions - or international
its agencies or ·political subdivisions organizations pursuant to agreements,
exclusively for public purposes; ' treaties or commitments by the Philippine
government and such institutions or in
b. Accredited domestic corporations or . pursuance of. special laws; or
associations organized and operated
exclusively for: (ReCS-YER-CS) · · ·1 •·. c. Accfedited NGOs (NIRC, Sec. 34 (H); R.R.
i. Religious; No. 13-98) . .
ii. ~haritable;.
iii. Scientific; - . R~quisites (NIRC, Sec. 34(H)(2))
iv. -Youth & sports developme11t; ,_ , · lN!PU-AD)
v. E:ct°ucational; .- 1· · i. · NGO ,s a M_on-profit ·domestic
vi. Rehabilitation of veterans; · corporation;
vii. Cultural; or ii. No part _ of its net income !nures to the
viii. :iocial welfare. benefit of any private ·stockholder or
individual;
Non-government organizatio~s ._(NGOs) iii. It is organized and operated exclusively
C.
(NIRC, Sec. 34 (H); R.R. No.13-98) for the following f4rposes: (SEC-CHR-
SC)
Limitatio~s of Amount Deductible: 1.) · ~cientific;
2.) ~ducational;
i. Corporate taxpayer
_ S% of taxable 'income before .3.) ~ultural;
4.) ~haritable;
contributions.
5.) .!::!ealth;
6.)- B,esearch;
ii. lndividualJaxpayer 7.) §ocial welfare; or
_ 10% of the taxable income before
8.) fharacter building and youth and
contributions (NIRC, Sec. 34 (H); R.R.
sports development; ·
No.13-98).
iv. Contributions , are . Y,tilizecf (to
2. Specialffully Deductible Contributi 0 ~ 5 th accomplish -one of its purposes. to
.....:. donations which are deductible in !u 11 rom e
acquire asset, or to set aside for specific
gross income. project) directly not later than the 15th
day of th_e 3rd month (unless extended)
Recipient is: (GFA) .. . · 0f after the close of the taxable year in
a. The Government of the Philippines 0 ~
which contributions are received;
. its agencies or political subd1v1s1ons
including fully-owned - g_overnn:ient
-corporations exclusively to finance, to

v.• Annual Administrative expense does
not exceed thirty percent (30%) of its
total expenses; and
vi. Upon Qissolution, its assets woul~ be
distributed to another· NGO organized
for similar purpose or purposes, or to the
State for public purpose, or would be
distributed by a court to another
organization to be used in such man~er
as in the judgment of said court shall
best accomplish the general purpose for
which the dissolved organization was
organized (NIRC, Sec. 34 (H); R.R.
No.13-98).
Any donation not in compliance with the
foregoing requirements shall be subject
to the 5% or 10% limitation (NIRC, Sec.
34 (H); R.R. No.13-98).
NOTE: Whether deductible in full or T
subject to limitation, the recipient NGO
must be accredited by/the -Philippine -
Council for NGO Accre6itation (E.O. No. ·
720, April 11, 2008). . ,,. 1 r_,,,.
I'· ",
More importantly E.O. Np. 720,provides
that NGOs previously granted· qualified
donee-institution status shall remain- to
be so until the expiration stated in their
Certificates of Registration (B }R Ruling
No. DA-526, September 10, 2009; 1 DE
LEON, NIRC, supra a{~86). , , . of don~tion is not govei;ned by the ordinary rules on
'' , deductibility of the expense. Donation must be
3. Contributions Deductible in• Full .under
Special Laws · be allowed as a ·deduction (Philippine Stock
a. Integrated Bar of the Philippines (P.O. No.
181, Sec. 3) ; • CTA Case tjo. ~995, October 15, 2002) .
b. Development Ac,ademy of the Philippines
(P.O. No. 205, Sec. 12);
c. Aquaculture Department of the Southeast
Asian Fisheries and Development Center
(SEAFDEC) (P.O. No. 292, Sec. 2)
d. National Museul')'l (R.A No. 8492, Sec. 25); .
e. University pf the Philippines (R.A No. 9500,
Sec. 25(b)) and other State Colleges and
Universities;
f. Cultural Center of the Philippines (P.D No.
· 15, Sec. 13);
g. International Rice Research Institute (P.D
No. 1620, Art. 5) ;
h. National Science Development Board (now
the DOST) and its agencies and to public or
recognized non-profit, non-stock
educational Institutions (R.A. No. 3589, Sec.
5); and
i. Donations of prizes and awards to athletes
(R.A. No. 7549, Sec. 1).
INCOME TAXATION
Taxation Law
Requisites: (AS) . .
i Granted to Athletes in iocal and international
· tournaments and ·competitions held in the,
Philippines or abroad; and ·
..II . Tournaments and competitions must. be
.
Sanctioned by their respective national
sports associations (R.A. No. 7549, Sec. 1).
NOTE: "National Sports Association" shall
mean those duly . accredited by the
Philippine Olympics Committee (R.A. No.
7549, Sec. 2 (2)) .
Example: The National Chess Federation of
-
the Philippines, the Philippine Canoe-Kayak
Federation, and the Philippine Volley~all
Federation are some of the accred1te9
members of the National Sports
-
Association. Note that the Philippine
Basketball Association (PBA) is not
jncluded .
I I
1
1va·1uation ,
Tne an10unt pf any charitable contribution of
property other· than money shall be based on the
. acquisiqon co~t- of the property (NIRC, Sec. 34
(H)(3)) . , •
' I '
- irrespective of t h~ accounting method used by the
donor, donation .is recognized as a deduction only
when it;was actually paid or made, not in the year
the deed of donation was perfected. The deductibility
both perfected and consummated before it can
Exchange· v. Com issioner of Internal Revenue,
Substantiation Requirement
Donqrs claiming donations and contributions to .
accredited non-stock, non-profit corporationiNGO as
deductions must submit Certificate of Donation/s
issued by such entities indicating therein the
following :
1. Actual receipt by the said entities of the donation .
or contribution and the date of receipt; and
2. Amount of the charitable donation or
contribution, if in cash; if- property, real or
personal , the acquisition cost of the said
property (R.R. No. 13-98, Sec. 8 (a)) .
NOTE: If the donation is more than ~1. 000, 000,
a notice of donation must be submitted to the
Revenue District Officer where his place of
bu·siness is located within 30 days after receipt
of the Certificate of Donation (R.R. No. 13-98,
Sec. 6) . ·
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MEt4Q~y AID
San Bede Colege of Law - RGCT Bar Center
RESEARCH AND DEVELOPMENT -(R&D
CONCEPT: All costs incident to the d ) apply to:
an experimental or pilot model a pl e~elopment of
product, a formula or invention' or si:I process, a
1
and the improvement of already existiii ar property,
the type mentioned (2-A DOMONDON g property of
. , supra at 9?)-
. ,.
GENE~L RULE: Expenses for ~&D ca~ be treated
as ord_m~ry and nec~ssary expe_ n ses provided that·
1. It 1s mcu'"!"ed during _the taxable year; ·and' · ·
2. Incurred in connection with his trade b · . .
· i · , usmess,
or pro ess1on (NIRC, Sec. 34(/)(1)).
Research
It is the original and planned investigation
un?~rtaken by _the . ta~payer with the prospect of
gaming ne~ sc1ent1fic or technical knowledge arid
understanding (2 CASASOLA, supra at 388).
Development
It is the application of res~arch findings or other
knowledge to a plan or design for the production of. ·..
new or substantially improved materials, devices, .:
products, processes, systems or·services before the·
start of commercial production or use (2. - _:..,
CASASOLA; 388) .
NOTES: ·,. ,,. .-
1. R&D expenses may be for: ·•
a. Acquisition or improvements -~of property
subject.fo depreciation or depietion used in.
research and developn:ieot; or ,· . .
b. Other research ana development ~sts.
..... ,
2. Treatment of .R&D Expense :-; . · · {':
The taxpayer has the option to: ., ~,
a. - Claim the _e xpense as deduction: in.th~ year
· d
1ncurre ; or '-~·.
b. Treat it as deferred expenses.;;.v,:pich · are
charged as capital account and arnqrtize the
same over sixty (60) months beginning with
the month in which the taxpayer first realizes
benefits from such expenditures (NIRC,
Sec. 34(/)).
NOTE: The method so elected_and period
selected by the taxpayer shall be c;1dhered to
in computing taxable income for the taxable
year: for which the elections is made and for
all subsequent taxable years, unless a
different method is authorized and approved
by "the CIR (NIRC,_ Sec. 34(/)(2) . _The
election shall not apply to a~y expe nd itu!.e
paid or incurred during any taxab!e year
prior to the taxable year for which the
taxpayer makes the election (NIRC, Sec. 34
(/)).
151
3. Deductibility of R&D expenditures shall not
· '
a. Any expenditure for the acquisition or
improvement of land or _for the improvement
of property to be used, in •connection with
research and development subject · to
depreciation and depletion; and ' .
b. .Any expenditure paid or incurred for the
purpose of ascertair:iing the existence,
location, extent or quality of any deposit of
ore or other miner.al including oil ·or gas
(NIRC, Sec. 34 (/)(3)) .
4. Pre-operating Expenses
- expenses paid or incurred in connection with
creating · or investigating the creatiqn or
acquisition of an active trade or business
entered into by the taxpayer. These are
expenses paid or incurred before,. and in
anticipation of the business in an a'ctivity for
profit or the production of income:
a. May be treated as deferred expenses and
deducted from gross income for not more
than sixty (60) months.
b. Amortization period commences with the
1
.:~ .·:uti'.• montt\ in which the business begins .
.., c!·· C<Sh,oration is considered to begin
business when it commences the activities
W~i
for h it was organized and reckoned
from tj,e ;time the certificate of registration or
li'f9ns'e t do business is issued.
..... ;" t
• ~nvestigatoi:x ' expen~es and start-up costs,
..,,. , mtere.s t on•loan obtained to purchase land and
, olher incidental costs, and project development
fl,... :. ; 0st~ of real estate developers, cannot be
,
t;,· 1
f"~9H~~dered as part of the pre-operating·
.•,~---t:.. ,.expanses. •
"''
PENSION TRUST CONTRIBUTION
Requisites for Deductibility: (PRECA-10)
· 1 . Employer must have established a Pension or
retirement plan for the payment of reasonable
pension to its employees;
2. Pension plan is Reasonable and actuarially
sound (R.R. NQ. 2-40, Sec. 1_18);
3: It is funded by the ~mployer (employer
contributes cash);
4. Amount contributed must no longer be subject to
the ~antral of the employer;
5. Payment has not been Allowed before as
deduction; and . - ·
6. The amount _is apportioned in equal parts over a
period of 10 cons~cutive years beginning with
the year in which the transfer or payment is
made (1 DE LEON, NIRC, ~upra at 49-1).
NATURE: Applicable only to the employer on
account · of its contribution to- a BIR-qualified .
reasonable private pension plan for the benefit of its
 INCOME TAXATION
· Tax~tion Law

It is purely business in character

employees.
(DIMMMPAO, Income Taxation, supra at 149).
Requlstt•s of a Reasonable Retirement Benefit
Plan: (WriP-C 2IN2FoT)
1. Written program '
- it must be a definite written program setting .
forth all provisions essential for qualification;
2. fennanency _ 2014, p~r. 3).
- it must be permanent a·nd continuing program;
3. £overage -
a. Percentage Basis
- - it must cover at least seventy percent
(70%) of all officials and employees. If the
pla_
n provides eligibility requirements and at
least .seventy percent (70%) of all officials.and
employees meet them, at least eighty percent
(80%) of those eligible must be covered.
b. Classification basis ,-·
- If the employer .does no wish o t cov~r-----·-
greater portion of his empl yees , he ays et
up a plan under a classJfication' se -up and
NOTE: Before the employer can deduct its
~ontributions to the trust, .it must secure first a
- certification from the BIR to the effect that the
plan is. qualified rR.R. No. 01-68, Sec.-6).
Contributions to non-qualified retirement plan
are deductible only in the year · paid to
employees and not at the tilT)e the contributions
were made (NIRC, $ec. 60 (B); R.M.C. No. 39-
Deductible Payments to Pension Trust
1. Empl·o yer's · current · uabllity - or present
service cost
- amount of contribution to the trust during the
. taxable year; and
2. Employer's liability for past services (past
service cost requires lump sum to the
pension fund) .
- sane tenth (1/10) of the reasonable amount
f pa"id ~Y the employer to cover pension liability
applicab ec o prior ten (10) years (DIMAAMPAO,
In omii Taxatiof:1, supra at 150).
1
--- -
,I\ .
- -.

limit the coverage of enfploy~es ,1n- a certain . "(reatmen · o Income from Pension Plan
classification provided a I it / is not _,_ · ~. Not \ taxable - to the employee (BIR Ruling,
discriminatory; November20, '!f956);
--· ---· ·- - 2.- In ~se any'-portion~ofthe funds-is reverted back
4. Contribution _ . .fo the emploree:i said fund forms part of the
=- the employer, or official~ .and employees,· or .
both, shall contribute to the fund; ,...-· _
' incdtne of the emAloyee during the taxable year
of reversion,(BIR R~ling, April 3, H/59) .
. . - ----r-- - --. . . "• .
1
. ' '- : . l ,, ··- I ' ' .. ,.
5. Impossibility of diversion - ' 1 • OP.TIO....NAL
1
.- STANDARD DEDUCTION
- the corpus or income of the trust fund.must at I- · " '
I .
· ' '

no time be used for, or div~rted to, any ~urpose-., f . (OSD). ·

other than the exclusive 13enefit of the' sa,a - L ' . C9NCEPJ: ·A .fixed percentage deduction without
officials and employees; , ' :.. - · ~. r_egard. to . a_oy actua expenditure, in lieu · of the
. :...::_ · 1temi~q deductions. It is merely a pdvilege that may
6. ffon-discriminatory . · ·· I .l " _pe, enJ_oyed by·certain taxpayers (NIRC, Sec. 34 (L),
- there must be no discrimination in favor of i\ · [8 § amended by TRAIN Law).
offici~ls and employees who are officers, 0
- - - • .,-

shareholders, supervisors or highly . Who Can Avail OSD

compensated; As a rule, all taxpayers who are subject to tax on
taxable net income can claim deductions.except the
7. tfon-forfeiture rights following:
- it must provide that upon the termination of the 1. Individuals who opted to be ta~ed at 8% income
plan, the rights of each official or employee are tax rate on their income from business/practice
non-forfeitable; of-profession (RR. No. 8-2018, Sec. 8);
2. Non-resident alien engaged in trade or
8. Forfeiture . business;
- the plan must expressly provide that forfeiture · 3. Taxpayers mandated to use itemized
for any reason must not be applied to increase deductions
the benefits of any employee; and a. · Exempt GOCCs and non-stock, non-profit
corporation with no taxable income;
9. Irust b. Corporations and individuals with income
- the fund must be administered by a trust (R. R. subject to special/preferential tax rates;
No. _01-68, Sec. 2). c. Corporations and individuals with income
subject to regular corporate income tax and
special/preferential tax;
 \ l
MEM:Q~y
°'
Sen Seda
.Al D . Colege lAw - RGCT Bar
. . .
d. Exempt individuals under the NIRC 8nd ·
speGial laws with n·o other taxabl .
e. Non-resident alien not engaged~ intcodme;
• in ra e or
busm~ss (R.R. No. 02-2014, Sec. 5) . .
Hence,. t~e follo~ing ~ay avail of the OSD: {ICG) ·
1. !nd1v1duals (including estate and trust)
individuals earning pure compensar ' .except
· and non-resident aliens· ion income
2. ~orpora~ions,· except , non-resident foreign
corporations (R.R. No. 16-2008, Sec. 2); arid
3. Gen~ral Professional Partnerships (GPP)
provided that:
a. GPP . a~d partners comprising such
p~rtnersh1p may avail oso only once
b. Either . :by the GPP or the partners-
compnsing the partnership (NIRC, Sec. 34
(L), a_
s amended by TRAIN Law).
NOT~: Unless the taxpayer signifies in his
return his intentioA to elect OSD he is
considered as having availed of the itemized
deductions. Such election, when made by
the qualified taxpayer, is irrevocable for the
year in w~ich made; · however, he caii ·
change to itemized deductions 'in·
succeeding years (R.R. No. 16-2008, Seci'
7; R.R 08-2018, Sec. 8); ·•
Rate of OSD: - .
. 1.Individuals, except non-resident alien::: .,
a. Under accrual basis .:... Not ·exceeding forty
percent (40%) based on ·gross sales~or ,
b. Under cash basis - .·Not exceeding forty
percent (40%) based on gross :r~ceipts.
(R.R. No. 16-08, Sec. 3):
NOTE: The cost of sales (individ_ual seller .of:.-~~
goods), or the cost of service (individupl sellEk of
services)", is not allowed to be deductecl for
purposes of determining the basis of the·oso
(-R.R." No. 16-08, Sec. 3).
2. Corporation: - ·Not exceeding forty percent
-. (40%) based on gross incom~ of DC and RFC
(R.R. No. 16-08, Sec. 4;NJRC, Sec. 34 (L) as .
amended by TRAIN [aw) .
NOTES: . . .
1. Unless the taxpayer signifies in his income
tax return his intention to elect OSD, he is
considered as having availed of ~he itemized
deductions. The taxpayer is not allowed to
use a hybrid method of claiming its/his
deduction for one taxable year (R.R. No. 16-
08, Sec. 7, as amended by R. R No. 2-2010,
Sec. 3).
2. Such election to avail of the OSD, whe_n
made by , the qualified taxpayer, is
irrevocable for the year in which the return is
made. However, he can change to itemized ·
deductions in the succeeding years (R.R.
No. 18-08, .Sec. 7 as amended by R. R No, ·
2-2010, Sec. 3).
3. Proof of actual expenses is not required, but.
the taxpayer should k~ep.records pertaining
to his-gross sales/receipts or income (NIRC, ·
Sec. ·34 (L), as amended by TRAIN L.aw).
, .
4. That except when the Commissioner
otherwise permits, corporations who avail of
the OSD should still submit financial ·
statements when jt files its annual income
tax return a!ld keep such records pertaining
to its gross income (NIRC, Sec. 34, (L), as
amended by TRAIN Law; R.R. No. 02-10,
Sec. 3 amending Sec 7 of R.R. No. 16-
2008). .
5. Passive incomes which have been
subjected to a final tax at source shall not
form part of the 9ross income for purpose·s
of computing the forty .percent (40%) OSD
·(R:R. No. 16-2008): ·
OSD of GPP. and Individual Partners
The .GPP is t.not a taxable entity- for income tax
purposes since-it is only' acting as a "pass-through"
e_ntity where :ts . income is ultimately taxed to the
partners com.prising it.
Section 26. pf the Tax Code-, as amended, likewise
. provides that- "For purposes of computing the
distributive ~hare of the partners, the net income of
the GPP shall be computed in the same manner as
a corporation." As such, a GPP.may claim either:
a. the itemized deductions allowed under
Section 34 of the Code or in lieu thereof it
can opt to avail of . .. . . .'
_b . the OSD allow~d to corporations in claiming _
the dedu_ctions in al) amount nof exceeding
-forty percent (40 %) of its .gross income.
NOTE: Every -GPP shall file, in duplicate, a
return of its income, except income exempt
under Sec. 32 (B) of NIRC the item~ of gross
income and of deductions allowed by this.
Title, and the · names, _ Taxpayer
Identification Numbers (TIN}, addresses ,
and shares of each of the partners (NIRC,
Sec. 55).
The share .in the net income of the partnership,
actually or constructively received, ·shall be
reported as taxable income·of each partner.
 INCOME TAXATION
154
. , · Taxation Law

The partners comprising the GPP can no longer

claim further deduction from their distributive
share in ttie _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 Corporation
already net of cost a_nd expenses.
DC Allowed
If the partner also derives other income from
trade, busine_ss, or practice of profession apart RFC -Allowed
and distinct from the share in the net income of
the GPP, the deduction that can be claimed from NRFC Not Allowed
the other income would either be the itemized (NIRC, Sec. 34 (L), as amended by TRAIN Law).
deductions or OSD (R.R. No. 08-2018, Sec. 8) .
NOTE: NRA and NRFC cannot avail . of any
Frequency of Availment of the OSD by GPP and deductions from gross income since their gross
partners comprising such · income from sources within the Philippines is subject
The GPP and the partners comprising such already_to a ·final tax of 25% (NIRC, as amended by
partnership may avail -of the OSD ONLY ONCE, TRAIN, Sec. 25) and 30% (NIRC, Sec. 28(8)(1)) ,
either by the GPP or the partners comprising the respectively. ,
partnership : Provided, finally, That except when the
Commissioner otherwise permits, the said individual ... • ·s AECIAL DEDUCTIONS
shall keep such records pertaining to hi ~ ross sales i , 1
or gross receipts, or the said corporation·sh,al.(ke_ep_ . _, Sp'ecial Ded~ tions are other items of deductions
such records pertaining to his ross income ·as whic~"- n{ay ·o; . ay not partake the nature of an
defined in Sec. 32 of the NIRC.,.aUting , the t xabl , - ex ense. but ~re_al!owed by_the NIRC ?r by ~pecial
year, as may be required/ bYJ he ruj, s and
regulations promulgated by tlie.- Secretary .of .
Finan~. upon, recor:rur~endation i~f ,. the
" .._!~ws . . e~u9t1op ~- Special d~duct1~n~ mclu~e
~~duct1_1n m~ ~i'ves t~ taxpayers m ~ss1stmg and 1_n
· ?omply111g with ( c~~!," legal req_ u1r~_ments. This
>
Commissioner (NIRC, Sec. ,3-r-(L),: as amended -by-·- -----include -but not hmIted to the f?llowmg . · ·
22
· TRAIN La~; R.R. No: - <J~O,
3
- •

s;ci
J. _;_-·:_·.~~-- · . . _.· ~PEC~ L E~P,EN.Sf:S UNDER THE NIRC
' -- ~ ' ' •

The rules indicated above is summarized as follows: .

-r ):I
· AND SPECIJ(L LAWS ·
91?,~ci~I· De9u'ctio~ ,Against the Gross Income of
:· A~e Estate and Trl!st (NIRC; Sec. 61(A)) ;
i .2(,,-Sp~t ial , Deductj6ns Allowed to Insurance
, 1.-, '~-: Companies (NIRC, Sec. 37); ·
· -;:. 3. ·, Dividend Distribution of · a Real Estate
1
'-- .-~ lnv.estme[lt :rrust (REIT) (R.A. N~. 9856,. Sec.
Itemized deductfon~ ,· _' . - -10); ',,;'' ,/ ·
ONLY - ' ' (.r •1 11)i. ' "transfer to · Reserve Fund of Taxable
1
• / Gooperatives (/RR of R.A. No. 9520 Sec.
Optional standard Neither itemized nor ·----~ 8(8)(2)) ;
deduction optional standard 5. Deductions under the Expanded Senior Citizens
deductions Act of 201 O (R.A.- No. 9994, Sec. 10);
6. Discount to Persons With Disability (R.A. 10754,
(R.R. No. 02-2010, Sec. 2):
Sec. 1).

..
SUMMARY OF ALLOWANCE OF OSD
- ..... ·:~ .. ,
: . Taxpayer;?:.·· ·
: tr.· l#'.-;~;;

,
Y/jjf: 05[f
. .>,"'; -fi~\.
',i<'"
.. - ~- ,~
.,. ;-._"!-,t,.
•~v.._-
. _,.', ,1 • ,.. •
DEDUCTIBLE
SPECIAL LAW
INCENTIVES
'
UNDER

Individual 1. Additional Claimable Compensation Expense ·

for Senior Citizens(R.A. No. 9994, Sec. 10); .
RC ·Allowed 2. Additional Claimable Compensation Expense
for Persons with Disability (PWD)(R.A. No.
NRC Allowed 8525, Sec. 5) ; .
3. Cost of Facilities Improvements for Persons with
RA Allowed Disability (PWD) (R.A. 7277, Sec. 8(b));
4. Deductions for Training Expenses for Qualified
NRA-ETB Not Allowed Jewelry Enterprises (R.A. No. 8502, Sec. 3(0));
 \ I .
MEM:Q~y AID
s., Bede UrMntty College of Law - ROCT Ber Cents
5. Deductions under the Adopt-a-School Act of
1990 (R.A. No. 8525, Sec. 5); . 4. Assessment Insurance Companies
6. Addition Deductions for Compliance to
Rooming-in and Breast-feeding Practices (R.A.
10028, Sec. 14);
7. Additional Free Legal Assistance Expense (R.A.
9999, Sec. S); . guarantee or reserve funds (,YIRC, Sec. 37 (D)).
a. Additional Productivity Incentive
Expense(R.A. N<?- 6971 , Sec. 7).
SPECIAL DEDUCTION AGAINST THE
GROSS INCOME OF -THE ESTATE AND
TRUST
(For discussion_s, please refer to Deductions Against
the Gross Estate on pages 208 to 214.)
SPECIAL DEDUCTIONS ALLOWED TO
INSURANCE COMPANIES
1. Insurance Companies
- whether domestic or foreign, doing business ¥
in the Philippines, are allowed to deduct, ,irL,
addition to the itemized deductions, the' ( . ,
following: .::, ;
a. Net additions, if any, required by law tp bfi
made within the year to reserve funds; 'ar,-d
b. Sums other than dividends paid •wi~hin tM.
year on poiicy and annuity contracts (NIRC,
Sec. 37 (A)) . . ·. -
2. Mutual Insurance Companies (MICs)
- in case of mutual fire and mutual employe~§
liability and mutual workmen's cdmpehsat(on :
and mutual casualty insurance . comp~nies _
requiring members to make premium _deposits ~o
provide for . losses and exp~~es, s~id ':
companies _ shall not return_ as income al)y
portion of the premium deposits retume~ _tQ_their
policyholders, but shall return as taxabfe income
all income received by them from all ot_her
sources plus such portion of th e pr~mi~;
deposits as are retained by the companies d
purposes other than the payment of losses an
expenses and reinsurance reserves (NIRC, Sec.
37 (8)).
3. Mutual Marine -Insurance ·Companies
(MMIC) · . t of gross
- MMICs shall include in their re urn
income the gross premiums collected a nd
received by them less: . n account
a. Amounts repaid t~ policy h~lde~~em;' and
of premiums previously paid by b tween
b. Interest paid upon those amou~~t ~hereof
the ascertainment a nd paym
(NIRC, Sec. 37 (C)).
155
-e- whether domestic or foreign, may deduct
from their gross income the actual deposit of
sums with the officers of the Government of the
Philippines pursuant to law, as additio·ns to
Bonus
. Real Estate Investment Trust (REIT)
- stock corporation established in accordance with
the Corporation Code of the Philippines and the
rules and regulations promulgated by the
Commission principally for the purpo_se of owning
income-generating real estate assets.
Dividend Distribu_ tion· of A Real Estate
Investment Trust (REIT)
An REIT must distribute annually at least- ninety
percent (90%) of its distributable income as .
dividends to its shareholders not later than the last
day of tt- ' fifth (5th) month following the close of the
fiscal -~ ta,,fthe REIT.
/"
Dirtri bota~ income excludes . proceeds froni the
l(llt i ~e REIT's assets that are re-invested by the
~IT ,.vithin _one (1) year from t~e dat~ of the sale
(ll·~ - o. 985~, Sec. 7) .
Taxable Net.Income of REIT
"Taxable Net Income of REIT" means the pertinent
items of,grp ss in ome specified in Section 32 of the
:· .··
NIRC, a~ amended, less all allowable deduc,tions
enumerated in Section 34 of the NIRC, as amended,
.., less the dividends· distributed by a REIT out of
,. ; its distributable income as . of the end of the
• taxable year as: (a) dividends to owners· of the
' common shares; and (b) dividends to owners of
· ' '. the preferred shares pursuant to their rights and
· : limitations specified in the articles of
incorporation of the REIT (R.A. 9856, Sec. 3(M~)) .
NOTE: For. purposes of computing the ·taxable net
income of a REIT, dividends distributed by a REIT
from . its distributable income after ·the close of a
. taxable year and on or before the last day of the fifth
(5th) month following the close ' of the taxable year
shall be considered as paid on th~ last day of such
taxable year (R.A. 9856, Sec. _10).
TRANSFER TO RESERVE FUND · OF
COOPERA-TIVES
Business transactions with non-members
Cooperatives with · · accumulated reserv~s arid
undivided net savings of more than Php10,000,000
which transact with non-members shall pay income
tax at the full rate on the amount allocated for
interest on capitals: Provided, Thaf the same t,ax is
not consequently imposed on interest individually
received by the members.
 INCOME TAXATION .·
Taxation Law

The tax base for all·cooperatives liable to income tax
shall be the net. surplus arising from the business
transactions with non-members after deducting the
amounts for the statutory reserve funds as
provided for in the Cooperative Code and other
laws (/RR of RA 9856, Sec. 8 (B.2.1.1)).
Reserve Fund
- refers to the accumulated amount of money
annually deducted from the net surplus, which shall
be less than fifty (50%) for the firs.t five years ·of
operation after registration and at least ten per
centum (10%) of the net surplus thereafter, intended .
not for the allocation or distribution to the members
but for the protection and stability of the cooperative
(/RR of RA 9856, Sec. 3(A)).
DEDUCTIONS UNDER EXPANDED
SENIOR CITIZENS ACT OF 2010
a. The seller must not claim the .OSD during the
taxable year (R.R. No. 07-2010 imp/err,enting
R.A. No. 9994)
NOTE: With the effectivity of R.A. No. ·92p7 on
21 March 2004, there is now a new tax treatment
for senior citizens' disceunt . granted by all
covered establishments.- This discount should
be considered as ·a deductible expense.from
gross income and no longer as tax credit as-
provided in R.A. No. 7432. _Tax credit is defined ·
as a peso-for-peso reduction ·from a taxRayer's
tax liability. It is a direct subtraction from the tax
payable to the government.· On ·the other hand,
a tax deduction is only a subtraction from gross
income resulting ·10 · a lower taxable income
(Commissioner of Internal Revenue v: Central
Luzon Drug Corporation G.R. No. 159610T~une
12, 2008) .

A senior citizen refers to any resident citizen of the J)ISCOUNT TO . PERSONS WITH
Philippines at least 60 years old (R.A: No. 9994, Sec. •
3) . . ., ... - -:- ·_O_
~S__;~~B_IL_IT
.,...Y___,_(P.,. .W_D.. .:. )_ _ _ _ _-----:-_
.:1 ' ,,, ... - Persons wilh D.is.ability (PWD)'
All e·stablishments providing ,. -th~ prescrib~g,. . :-- are" those-who•.j,ave long-t~rm physical, mental,
discounts to Senior Citizens may claim ·u<e same as intelleetual. or se~sory impairments which, in
a tax deduction based on the cosf of goods sold or . . jnteraction i ith Various barriers, may hinder their full
services rendered to Senior Citizens; subject to the · · ' and eff~tive • particip tion in society on an. equal
, . " . ' th , .. -l I .
following conditions: · ;.. -...,., ; • _ __ ·- __ _ __:..._basis..wi othe'r~. 1 f, .
I
1. Only portio'n of gross ;3les exclusively used, • ·: ...., 1
consumed or enjoyed ~y the) enior cit/?en sh-all . ·. Esf.;bliJhment~ granting Sales Discounts may
be eligible for the deductible sales discounts; . . . avail them .as Deduc'tion from Gross Income
2. Gross selling price and sales ~iscoun( i\Just-be , -- - Establishments grantj,ng sales discounts to PWD on
separately indicated in , the ,officiaheceipt oc their salenf goods and/or services shall be entitled
sales invoice issued by th~~ stablishm~nt fq the · .to deduct the said sales discount from · their
sale of goods or services to the se9ior citizen; · . : .~ gross Jncom~ subject to the following condit_ions:
3. Only the (i) actual amount of the discour)t · ,,. ..
granted or a (ii) sales discount not less than ' :--. . 1, · --All ,, ·eetablishments which granted sales
twenty_ percent (20% ), whichever, f~ \ hl ghei - •. discounts ·on their sale of goods and/or services
based on the gross selling pri~e. · can , be , "" ·t. to', ~WO · may claim the said discount as
deducted from the gross income; - · ; ·, '. 'aed.JJctio n from the gross income for the same
4. The seller must record its sales inclusive of.the -taxable year that the discount is granted:
· discount granted; . Provided that, the -name of PWD and the PWD
s. The discount c;m only be allowed as a d_eduction Identification Card (PWD ID) No. are reflected in
from gross income for the same year that the the required record of sales for PWD.
discount was granted;
6. The business establishment giving sales · As expressly provided by-law, the t~tal amou~t
discounts to qualified senior citizens is required of the claimed tax deduction net of VAT, if
to keep a separate and accurate record of sales, applicable, shall be included in their gross sales
which shall include the name of the Senior receipt for tax .purposes and shall be subject to
Citizen, OSCA JD, gross sales/ receipts, sales proper· documentation and to the provislons of
discount granted, dates of transactions and Nation'al Internal Revenue Code (NIRC), as
· invoice numbers for every. _sale transaction to aniended, thus if there are no name of PWD and
Senior Citizen; , .PWD Identification Card (PWD ID) No. in the
7. Only selected establishments mentioned in R.R. records of sales, the sales discount claimed as
No. 07-2010 (i.e., those supplying medic[ne, deduction by business establishments shall be
giving professiona!, dental or medical services, disallowed.
etc.) may claim the said discount as deduction;
and For percentage taxpayer, 'the amount of sales
discounts shall be excluded for purposes of
computing the three percent (3%) percentage
 \ I .
MEK-Q~y AID
san Beda l.)-.--alty Colege of Law- RGCT BarOi>erationa Center
tax but shall ·be included as part of the gro
. t & • ss
sale s/r~ce1p s ,or income tax purposes. The
sales d1sc~unt granted shall then be accounted
as deduction from the gross income of th
establishment for the same taxable year that th:
discount was granted. ·
2. Only that portion ot the gross sales exclusively
use_d, consumed or enjoyed by the PWD shall be
eligible for the deductible sales discount·
3. The seller must record its sales inclusiv~ of the
discount granted, not as a reduction of sales to
arrive at net sales, but as a. dedu~tion from its
gross inco~e (sales less cost of sales);
4. ThE: sales discount shall be treated •as a
necessary and ordinary expense duly deductible •
from the gross income of the seller falli_ng under
the category of itemized deductions;
5. The sales discounts shall not be accounted as
deductible expense for taxpayers availing the
·. Optional Standard Deduction (OSD);
6. .The amount of sales · discount s~all only be
allowed as itemized deduction from gross
income for t~e same taxable year that the
discount is granted ;
7. The gross selling price and the sales discount . . .. -AP.DITIO,:,J~ L CLAIMABLE
must be separately . indicated in the official . _:. COMPEN~~ TION EXPENSE roR
receipt or sales invoice issue9 ' by the
establishment for the sale of goods or services
to the PWD ;
8. Only the actual amount of the sales discount .
. granted or a sales discount nof exce~ding 20% ·
· , ·-. senior d fizen?- subject to the general -requisites for
. of the gross selling price or .gross receipts can
be deducted from the gross income, net of val_ue
added tax, if applicable. and shall .be subject to
proper documentation under · pertinent
provisions of the Tax . Code of ) _99.7~ as
amended ; and :· _ .:.:., . · ··-aetef mined by· the NEDA ttiru the National
9. The business establishment. giving sales
discount to qualified PWD is required to J ~ep
separate and accurate records. of sales; wh1~h
shall include the name · of the person . with
disability, PWD ID . Number, gross
sales/receipts, sa!es discount granted, date of
transactions and invoice number for every sales
transaction to PWD (R.R. No. 05- 17, Sec. 5).
Prohibition on Availment of Double Discounts.
The foregoing privileges granted to PWD s~all not
be claimed if the said PWD claims a higher ~iscount
as may be granted by the commercia~ estabh~hm~nt
and/or under other existing la~s or m combmatio_n
with other discount program/s. Thus , a PWD _who is
at the same time a senior citizen can only c_lai_
m on;
20% discount on a particular sales transaction (R. ·
No. 05-17, Sec. 6) . '
ADDITIONAL CLAIMABLE __
COMPENSATION EXPENSE FOR
PERSONS WITH DISABILITY
Private .entities that employ disabl~d persons who
meet th~ required skills or qualifications, either- as
reg·ular employee, apprentice or learner, shall be
entitled to an additional deduction, from their gross
income, equivalent to twenty-five percent (25%) of ·
the total amount paid.._ as salaries and wages to
disabled persons (R.A. No. 7277, Sec B (BJ) :
Cost of Facilities Improvement for Pers~ns with
Disability · . · .
Private entities that improve or modify their physical
facilities in order to provide reasonable
accommodation for disabled persons shall also be
entitled · to an additional deduction from their net
taxable income, equivalent to fifty percent (50%) of
the direct costs of the improvements · or
modifications. This Section, however, does not apply
., to improvements or modifications of facilities
required under Batas Pambansa Bilang _344 .(R.A. .
No. 7277, Sec 8 (C)) .
·..
_
·,. SENIOR Gl~IZEN·EMPLOYl:ES
" Private est~blrsh.fnellts employing senior'citizens are
entitled to1 additional deduction of fifteen percent
. J .(15%) of he amoy_nt paid as salaries and wages to
"/ expen~s aod-thf foii wing additional conditions: ·
• 1. Employment'shall ·have to continue for a period
-~ of at least six ·(6) months; and
_, .., , 2. , .Annual taxable income of the senior citizen does
. · 11ot\,. exceed the poverty · level as may be
Statistical Coordination Board (NSCB). The
senior citizen must submit a sworn certification
that his annual taxable income does not exceed ·
the poverty l~vel (R.R. No. 07-10, Sec. 12).
DE'DUCTI_ONS FOR TRAINING
EXPENSES OF QUALIFIED. JEWELRY ·
. ENTERPRISES
A qualified jewelry enterprise in l he jewelry industry ·
· is granted an addit\onal deduction . from taxable
income of fifty percent (50%) of expens~s incu~~ed
in training sct:iemes approved . by the appropriate
agency and which shall be deducti~le during the
financial year the expenses were incurred (R.A
No.8502, Sec. 3(d)): '
Conditions for Deductibility .
1. A Qualified Jewelry Enterprise must_submit a
certified true . copy of- its Certificate· of
Accreditation issued by the BOI Managing Head .
 INCOME TAXATION
Taxation Law

2. That all health and non-hhea It~ · fa cility,

or his duly authorized representativ·e to the BIR;
and , establishments .and institutions s a11 comp 1y with
the provisions of this IRR within six (6) months-
2. The training scheme must be approved by the
Technical Education and Skills Development after its approval; and . .
3. That such facilities, establishments · or
Authority (TESDA).
institutions shall secure a"Working Mother-
Baby-Friendly Certificate" from the Department
DEDUCTIONS UNDER tHE ADOPT-A- of Health to be filed with the Bureau of Internal
SCHOOL ACT OF 1990 Revenue, before they can avail of the incentive
The expenses incurred by the adopting entity for (/RR of R.A. 1002~, Sec. 15): ,.
the "Adopt-A-School Program" shall be allowed an
additional deduction from the gross income TAX INCENTIVES GIVEN TO LAWYERS
equivalen_t to fifty percent (50%) of such expenses
(R.A No. 8525, Sec. 5). ·
OR PROFESSIONAL PARTNERSHIPS
GIVING t=REE LEGAL ASSISTANCE
Conditions for Deductibility Tax Deduction Incentive
1. That the deduction shall be availed of in the A lawyer or professional partnership~ renderi~g
taxable year in which the expenses have been actual free legal services, as defined by t~e
paid or incurred; · Supreme Court, shall be entitled to an allowable
2. That the taxpayer can substantiate the deduction from the gross income, · the , a,:nount that
deduction with sufficient evidence, su~....,a~· - could, have been collected for the actual free legal
official receipts or delivery receipt and r,other i services~rendered or up to ten percent (10%) of the
adequate records which shall set forth~ the ~- ; gross· income .perived from the actual perform~nce
following : / ... : -:. · ' -~ of the legal profession, whichever is lower: Provided,
a. The amount of expenses"being claimed a~- .Tt,at the , actual . free . legal services _herein
w

deduction; • ,,.,_ ~./' ., contemplated· shall' be exclusive of the minimum

b. The direct connection ,or relation of the ·sixty (60)-hourj · fnandatory legal aid s~rvices
expenses to the adopting ,privat entity's . re.ndere~ to indige[lt, litigants as required under the
participation in f _the .. _;Adopt;a_::-School - ·. .. Rule -on Mandatory Legal Aid Service for Practicing
Pro·gram. The adopt!ng pnvate ent1ty, shall ·Lawyers., under Bar Matter No. 2012, issued by the
also provide a list of projects and/or Supreme Court (~.A. 9999, Sec. 5). ·
activities undertaken and the cost of each · ;,
undertaking, .. indicating in particular:_where. - . ·· Requireme~ts for Avaitment .
and how the assistance has._ been utilized as , A l<:1wyer.~or professio~~I pa,:tnership shall securea
supported by the Agreement1 and, certification fr@m.the·P.ublic Attorney's Office (PAO),
c. Proof or acknowledgment of receipt o_ f .. the : , the·.,.Departinent of / Justice (DOJ) ·or accredited
contributed/donated '"property by ~he. _·: - association·'of the ~~preme Court indicating that the
recipient public school. ~. _ saii:rlegal. servic~s to be provided are within the
3. That the application, together With the'approved - · services d~fihed'by the Supreme Court, and that the
Agreement endorsed by the tjaJional a~n tes -cannot provide the legal services to be
Secretariat, shall be filed with the -Reve'nue ,. , 6y
provii:led the private counsel.
District Office (RDO) having jurisdiction over the. ·
place of business of the donor/adopting private NOTES:
entity, copy furnished the RDO having 1. For purposes of determining the number of
jurisdiction over the property, if , . th~ hours actually provided by the lawyer and/or
contribution/donation is in the form of real professional firm in the provision of legal
property (R.R. No. 10-03)., services, the association and/or organization
duly accredited by the Supreme Court shall
ADDITIONAL DEDUCTIONS FOR issue the necessary certification that ·said legal
COMPLIANCE TO ROOMING-IN AND services were actually undertaken.·
BREAST-FEEDING PRACTICES
The expenses incurred by a private health and non- 2. The certification issued by, among others, the
health facility, establishment or institution, in PAO, the DOJ and other accredited association
complying with the provisions of the RA 10028 and by the Supreme Court shall be submitted to the
its IRR, shall be deductible expenses for income tax Bure~u of Internal Revenue (BIR) for purpos~s
purposes up to twice the actual amount incurred. of availing the tax deductions as provided for 1~
this Act and to the DOJ for purposes 0 I.
Conditions for Deductibility monitoring (R.A. 9999, Sec. 4) . I
1. The deduction shall apply for the taxable period
when the expenses were incu_rred ;
I
 \ I
·MEM:Q~Y AID
Sin Bede~ Colege of~ - ROCT Bar Clpen,tione Center .
3. Within ninety (90) days from the date effectivity
of RA 9999, the BIR shah formulate the
necessary r~venue regulations for the . proper
implementation of the · tax component as
envisioned in this Act. Currently, there is no IRR
of RA 9999 that has been implemented as of
date.
SPECIAL DEDUCTIONS FOR
PRODUCTIVITY BONUS AND
MANPOWER TRAINING UNDER THE
PRODUCTIVITY INCENTIVES.ACT OF
1990
A special deduction from gross income equivalent to
fifty percent (50%) of the total amount of
bonuses/gr.ants over and above ·the allowable
ordinary and necessary business deductions. under
NIRC, as amended , shall be granted to:
1. a business enterprise which adopts . a
productivity incentives program given to
employees, duly and mutually agreed upon by
parties to the labor-management committee; ·
and . (N/RC, Sec. 38); and
2. . a business enterprise which ·grants · for
manpower training and special studies given to
rank-and-file employees pursuant to a prog·ram
prepared by the labor-management· committee " , .. EXPENSE;~ .
for the development of skills ide~.~ified -as - ··
necessary by the appropriate government ':.i ·conduct oftra e or business (/11/RC, Sec. 36 (A)(1)).
agencies (R.A No. 6971 , Sec. 7). ··
. .
NOTE: Any strike or lockout arising fr~m any
violation of the productivity incentives..program
shall . suspend the effectivity of -~.A: 6971
pending settlement of such strike or lockout:
Provided, That the business enterprise shall not
be deemed to have forfeited any tax, incentives
accrued prior to the date of occurrence of such
strike or lockout, and the workers shall no_t be
required to reimburse the productivity bonuses
already granted to them under the producti~ity
incentives program. Likewise, bonuses which
have already accrued before th~ ~trik~ or
lockout 'shall be paid the workers within six (6)
months from their accrual. (R.A. 6971, Sec.
7(C)).
NON-DEDUCTIBLE .-
ITEMS
NON-DEDUCTIBLE ITEMS IN
COMPUTING NET INCOME (PIRPIL·
N3WP)
1- fersonal, living, or family expenses;
2. Amount paid out for new buildings or for
permanent Improvements, or betterments made
to increase the value of any property or estate
(capital :expenditures); .
3. Amount expended in Restoring property _or in
making good the exhaustion thereof for which an
allowance has been made (major repairs);
4. f_remiums paid on . any life insurance policy ·
covering the life of any officer or employee, or of
any person financially interested in any trade or
business carried on py the taxpayer, individual
or corporate, when the taxpayer is directly or
indirectly a beneficiary under such policy (NIRC,
Sec. 36 (A)) .
5. Interest expense, bad debts and losses from
sales or exchanges of property between related
parties; .
6. .Losses from sales or exchange of property
(N/RC, Sec. 36 (B));
7. Non-deductible interest expense;
8. Hon-deductible taxes;
9. Non-deductible losses;
. 10. Losses from Wash sales of stock ·or securities
: 11 .. f_olitical Campaign Expenses
,:: .·.! • . , : •
~· PERSONA,L, LIVING OR FAMILY
-- - th_e_s_e_a_re"'-'-p"""'er_s_o_na_l_e_x_p_,
e_n
,...s_e_s_a_n_d_n_o_t_r_el-a-te-d:-t-o
\.
. !
1 · ·. _
. REASON: T ese ~terns are not deductible from
.;, gross inc?in:1e ijecause they did ·not help earn the
income. They . are non-business expense
,. (DIMAAMPAO, Income Taxation, supra at 152).
, CAPITAL EXPENDITURES
Amount paid out for new buildings or for permanent
improvements, or betterment made to increase the
value of any property or estate. It is expenditures for
replacements, · alterations~ improvements, or
additions. which prolong the life of th~ property
(Alhambra 'Cigar and Cigarette Mfg. Co. v.
Commissioner of Internal Revenue, G.R.. No. L-
23226, November 28, 1967). These are added to the
, cost of the property and the periodic depreciation is·
the amount that is considered as deductible expense
(NIRC, Sec. 36 (A)(2)) . .
Capital expenditures are not deductible because
they do not help earn income when it is incurred:
However, the proportion of capital expenditures
which would help earn income for future periods are
allowed as deductions for depreciation or as
amortization (2-B DOMONDON, supra at 529-530).
 . INCOME TAXATION
Taxation Law

Example of Non-Deductible _Capital a personal holding company or .a foreign

Expenditures: personafholding company;
1. Amount . paid out for new buildings or for 4. Grantor and fiduciary in a trust;
permanent improvements, or betterment made 5. Fiduciary of-a trust and fiduciary in ar:iother trust, ·
to increase the value of any property or estate if the same person is a grantor with respect to
(NIRC, Sec. 36 (A)(2)) ; and each trust; and
2. Amount expended in restoring property or in . 6. Fiduciary of a trust arid beneficiary of such trust
making good the exhaustion thereof for which an (NIRC, Sec. 36 (8)) . . .
· allowal]ce has been _made (NIRC, Sec. 36
(A)(3)). NOTE: Relatives by affinity and collateral relatives,
other than brothers and ·sisters are not related
Example of Deductible Capital Expenditures: . parties. Thus, interest payments made l9 parents-in-
1. · Intangible drilling and development costs in law, brothers or sisters-in-law, as well as to all kinds
petroleum operations (NIRC, Sec. 36 (A)(2) ·in of cousins uncles and aunts may be deductible from
relation to Sec. 34 (G)(1)); and · gross inco~e (2-8 DOMOND.ON, supra at 824) . .
2. Expenditures considered . as capital outlays of
LOSSES FROM SALES OR EXCHANGE
depreciable assets incurred duri~g the taxable
year for the expansion of school facilities, when
OF CAPITAL ASSETS · SHALL BE
this option is elected by the private educational
ALLOWED AS DEDUCTIONS ONLY
institution (NIRC, Sec. 34 (A)(2)) .
·FRQM CAPITAL GAINS
•
7
~ -, • •• •• • "

AMOUNT EXPENDED IN RESTORING , , '1, : c _apita~. losses could be deducted only · from
PROPERTY . ' .. r. • ; ' , _ . ·_. ·'. • 93piljll ,., g<!ins not from ordinary . gains.
' f:u,rthe'rmp re,.if the taxpayer is· an individual, a
This refers to expenses in ,making good the.. net" c.epftal · loss carry over is allowed to be
•A.,. •
exhaustion thereof for which an 'allowance has lfeen .
' I' . . cieducfe·d qn1~/ r~m capital g_~ins'. Oh the. other
made (NJRC, Sec. 36 (A)(3)) .. ·, · ,,
. hancl, wliere'tnere is a net capital gain from sale
. i
{ ·' t . '
. • of capital '@~sets othe_r _than real property or
PREMIUMS PAID . . ON. .:-ANY\-: -LIFE - · · - -··share~ of s.to k.'t,,f{lid gain is adde9 to all the
INSURANCE POLICY .: f \ .· oth~ income %fem~nts to form part of the gross
· It covers the life of any officer or employee, 'or of any. ~-. : · inc(?ine from hiF the allowable deductions
person financially intere_sted ifi".any \radf ~f,Busi~~~ - -----..: __ coyld, ;by niade (f a
DOMONDON,. supra · at
carried on by the taxp~yer, il)diviq al or~-~?fP.Orate, _ I . : ··'. 827}; -/ ,! ""-<4 :·
when the taxpayer Is d r.ectly' or mcp,y.cpr, a . ; . · •· · .· I'. v. , _. >.· . _
beneficiary under such policy (("IRC, Sec. 36JA)(4)).- ; · _2.. J osses v om ~ecuntIes .considered as capital
_ , · ' . . ,';;'· essets pecomrng worthless are not allowed as
A person is said to be "financially interest~d" 'in.ihe._ _.,, ... ·; direct deduction against .gross income but are
taxpayer's business, if he is a sto~ holde~tfi ea'! o:r-: ' _ ·, ·. ~J gn~ide,r.ed qS losses from sale or exe::hange of
he is to receive as his compensation shaJ? qt he-- . ,_,_. capItal,~ ssets on the last day of such taxable ·
profits of the business. " • . . . .-_ .'_ ;~ : y~ar (NIRC, Sec. 34 (E)(2)) .
1
.. f - A- •

LOSSES FROM SALES OR EXCHANGES
of PROPERTY BETWEEN RELATED
TAXPAYERS (NIRC, SEC. 36 (B));
The following are related taxpayers:
1. Members of the same family (brothers and
sisters, whether by the whole or half blood,
spouse, ancestors and lineal descendants);
2. Stockholders and a corporation, when the
stockholder holds more than 50% in value of the
·corporation 's outstanding capital stock, except
in case of oistribution in liquidation; · NOTE: The provision between related taxpayers
3. Two corporations more than 50% in value of
outstanding capital stack of each of which is
owned, directly or indirectly, by or for the same
individual if either one of such corporations, with
respect to the taxable year of the corporation
preceding the date of the sale or exchange was
· ·~--~" - REASON: To prevent avoidance on income tax
by means of a simulated sale or exchange (1 DE
LEON, NIRC, supra at 508) . The law presumes
that the transactions are devoid of free bargain
between the seller and buyer. 'It is immaterial
whether the sale or exchange Is bona fide or not
(Lakeside lffigation Co., Inc. v. Commissioner of
· Internal Revenue, 128 F.2d 418 (51h Cir. 1942),
_
as cited in DIMAAMPAO, Income Taxation,
supra at 154).
also applies to the following items of deductions:
a. Interests (NIRC, Sec. 34(8)(2)(b) in relation .
to Sec. 36(8));
b. Losses (NIRC, 36(8)); and ·
c. Bad· Debt~ (NIRC, Sec. 34(E) in r,elation to
Sec. 36(8)).
 # \ I .
MEM:0-llY Al D
San Bede Un111eiwtY Colege al Law - RGCT Bar 0perat1c,na Cenler
·NON-DED~CTIBLE INTEREST
(For discussion, please refer to Itemized Deductions
- lnfe~st on pages 134 to 135); . .·
NON-DEDUCTIBLE TAXES
(For discussion, please refer to Itemized Deductions
• Taxes on page 135); · Resolution No. 9991, Rule 5, Sec.-1).
NON-DEDUCTIBLE LOSSES
(For discussion, please refer to Itemized Deductions
- Losses on page 136 to 143); and
LOSSES FROM WASH SALES OF
STOCK OR SECURITIES (NIRC; SEC..38)
(For discussion, please refer to Itemized Deductions
- Losses on Wash Sales of Stocks on page 139.)
· POLITICAL CAMPAiGN EXPENSES
GENERAL RULE: These are not deductible either
as busine~s expense . or as contribution (Felix -~i 6.
Montenegro, · Inc. v. Commissioner of lntemat ·
Revenue, CTA Case No. 695, April 30, 1969). -;-~.--
,: •
EXCEPTION: Contributio.ns to political ·parties' i. · /-~1 . _frp m income payments made to election
political candidates are deductible provided they · _r" ·· ·· cofllractors, suppliers, and other ·service -
were previously subjected - to 5% creditable ---~
· withholding tax (R.M:C. No. 31-2019). • . ; . ;·.·. ····
NOTES:
1. Only contributions spent a~d.~{ilizeg <;!~ring the ··.
campaign period are exempt fr-0m ' ~- A[lx_
_political contribution or donation sp~n4>~fore.or:
after the campaign period . .-,~et bX th~.
Commission on Elections are subject to both
donor's tax and income tax. AQ.Y 1:'Jlspent
political contributions form part of taxable • .Jhe
· ·income and are subject to income~- ln~me
payments made by political patti,~ J_.,and
candidates of local and national .elections are
subject to 5% creditable withholding tax (RMC
30-2016, March 14, 2016, emphasizing R.R. No.
07-2011; R.M.C. No. 31,.2019):
2. Corporations, whether dome·stic or fore!gn,_ are
prohibited from making political contributions
under the . Corporation Code. Should a
corporation violate this, their contributions - .no ·
matter if they are spent within the campaign
period or not - will be ~ubject -to donor's· _ tax
(CORPORATION CODE, Sec. 36 (9)).
NOTE: Under the Revised J:orporatio~ Code,
Sec. 35 (i), · only · foreign co~or~t,on are
prohibited to give donations to in aid of any
political party or candidate of for purpose~ of .
Part·1san po 1·1·
I ica
I activity. The Revised .•
. d ·n the
Corporation Code is not include 1
coverage of 2019 Bar Examinations.
' .
7
. 161
3. Every person giving contribution, ~~ether in
cash or in kind, to any candidate, political p~rty,
or party-list group . or their duly authonzed
representatives, shall file _with th~ nearest
COMELEC Field Office a . Report on
Contributions, in duplicate, within thirty (30) days
.following the day of the electio{l (COMELEC
4. Any contribution in cash or · in kinq . to any
candidate or party for campaign pµrposes, duly
reported to the Commission, shall not be ~ubject
to the payment of donor's tax . (COMELEC
Resolution No. 9991, Rule 5, Sec. 4).
5. Any unexpended balance from any contribution
to candidate or party, also known .as excess
· .contributions, shall be subject to income tax
(COMELECResolution No. 9991, Rule 5, Sec.
5).
Campaign expenditures, whether paid for by
candidates, parties, their autho~ized
representatives or contributors, are subject to
creditable income tax to be withheld by the payor
_provider~ (¢OMELEC · Resolµtion No. 9991,
Rule _6, ~Sec. 8) .
. .-f)N CAPITAL -
. NS AND LOSSES
..._
~ OTE: The 20201202{ Bar Examination Tax~tion
Law Syllabus does not include the Corporate
Recovery and Tax lncentiv_es_ for_ · Ent~irprises
(CREATE) Act which took effecfon April 11, 2~21
(15 days after its publication on March 27, 2021 ), but
for purpose~ of discussion, CREA TE Act was
iriclu·ded'in the making of• the Memory Aid., !"""'.
.
Gains and loss from d~alings in preperty . shall
· include all gains or .losses · derived from t~e ,
disposition of property (real,~pe_CS\'.>nal, or mixed) for
money in cas_e of sale, -or for' property in .case · of
exchange, or from a combination of both sale and
exchange (DIMAAMPAO, Income Taxation, supra at .
178}. .
- , _r
The rules on capital gains and .losses. shall apply
only if the transac!ion on capital asset is either a sale
or exchange. There is·a sale or exchange of property
when there is an effective and actual transfer of
ownership of the prop-arty to another as would divest
the transferor of the benefrts accruing from the
0
· ownersh ip of the property, for ·a valuable
 162 . INCOME TAXATION
Taxation Law

consideration (MAMALA TEO, Income Tax, supra at classified as ordinary asset (DIMAAMPAO, Income
302). Taxation, supra at 162):

ORDINARY ASSETS: (SOUR) Examples: .

1. Accounts receivable;
1. Stock in trade of the taxpayer or other properties
2. Investment in stocks;
of a kind which would properly be included in the
3. Goodwill;
inventory of the taxpayer if on hand at the close
4. Real Property not used !n trade or business;
of the taxable year (e.g., supplies on hand,
5. Personal Property not used in trade or busines~.
merchandise inventory);
2. Property held by the taxpayer primarily for sale
to customers in the Qrdinar.y course of business YARDSTICK IN DETERMINING
(e.g., subdivision lots by a real estate ,developer, WHETHER REAL PROPERTY IS
groceries by a retail store); CAPITAL OR ORDINARY ASSET
3. Personal property Y,sed in trade or business The yardstick for determining whether a property is
subject to depreciation (e.g., delivery truck, store capital asset or ordinary asset is its "actual use". In
and office equipment); and the determination of whether a piece of property is a
4. .Beal property used in trade or business (e.g., capital asset or ordinary asset, a careful exa~ination
warehouse, factory, office building) (NIRC, Sec. and weighing of all circumstances revealed m each
39 (A)(1)) . case must be made (BIR Ruling No. DA 212-07,
,April 3, 2007) .
NOTE: The ~bove-mentioned list is excfu;ive
. (BIR Ruling No. DA 212-07, April .3~fo07) . - -' rh~LEVANCE OF DETERMINING
WHETHER..-AN ASSET IS CAPITAL OR
WHEN SHARE'S OF STOC~S BE ORDINARY
TREATED AS AN ORglN~R~ ASSETS -Tlie relevance of . the distinction lies . in the
OR AS CAPITAL ASSETS / applicability of th_e following provisions/limitations of
An equity investment is a capitaj, not ordinary ~ s!:lt_ _ _ _ the. NIRC!;: '
1. Holding period·under Sec. 39(B );
a
of the investor the sale or exch ge of which results
in either a capital gain or capital loss. ~hares of · .2. - loss Limitation Rul~ under Sec. 39(C)_; and
stock like the other securitie~ df fined irJ...S~. 22 (T) . , 3. Net' ~apita1 '· Loss Carry-Over (NOLCO) Rule
of the NIRC, would be ordinary asse~s, <:>nly to_a __ __ u~der -sec. 39 (D). ; . _
dealer in securities or a· person engaged in the [ -<
. ; .'/ ___,. , . -
purchase and sale of, or an a~tive traper (for ~is_own · ·- , ' N~TE: Those three provisions apply-only if the_
account) in, securities. In th hands, howeve,r_,: ?( . , ,:,; asset involved is, capital asset (NIRC, S~c. 39).
another who holds the shares f stock by way of:an . :'· . -r . • · . . .
investment, the shares to him would .be capital ,:._-~- M.EMBEBSHIP'SEAT IN THE PHILIPPINE
assets. When the shares ~eld by SU9'r 1r ve.s~ r- - - STOCK .·eYCHANGE CONSIDERED A
become worthless , the loss 1s deemed to~ a loss · ?
from the sale or exchange of capital assets C ina , •. ' :CAP-IT AL ASSET · .
1
Banking Corporation v. C.A., G.R. No. 125508, July - • The existence of seat connotes that the taxpayer 1s

19, 2000). · · - - engaged in business. A person who deals in

securities or invests in stock market to monitor the
TREATMENT OF ORDINARY GAINS AND day-to-day transactions will · have to maintain such
LOSSES: seat~n PSE where stocks are being traded . With the
said seat are some rights and privileges enjoyed by
1. Ordinary gains are included in the·gross income
the member which are intangible assets, the -
(NIRC, Sec.·32(A)) ; and
taxpayer may never have carried in his books (1 DE
2. Ordinary losses are deductible from gross
LEO,Y, NIRC, supra at 534).
income (NIRC, Sec. 34(0)).
NOTE: The gain realized by the subsequent sale of
Gains or losses from sale or other disposition of
the seat should be included in the taxpayer's gross
ordinary asset are subject to graduated rates in
income (BIR Rulirig No: 151-98).
case of an individual or normal corporate income
tax in the case of a corporation (NIRC, Secs. 22,
32, and 34, as amended by TRAIN Law).

CAPITAL ASSETS
All other properties held by the taxpayer whethe_
r or
not connected with his trade or business not
 \ I
MEK-Q~y Al D ·
s., Seda Urwenitty coa.ge of Law - RGCT Ber Operations Center
- GUIDELINES IN DETERMINING
WHETHER A PARTICULAR REAL
PROPERTY · IS A CAPITAL OR
ORDINARY ASSET (R.R. NO. 07-2003)
1. Treated as Ordinary Asset under the following
instances:
a: Faill!re to operate a real estate business;
b. Changing business from real estate to non-
real estate; ._ · .
c. Abandoned and idle properties in a real estate
business;
d. Property purchased for future use in · the
business (although thwarted by
circumstances beyond the taxpayer's control)';
e. Transfer of real properties classified as capital
or ordinary asset in the hands of the
seller/transferor: · ·
i. Tax free ·exchange by taxpayer not
engaged in real estate business to, a
·taxpayer who is engaged in real estate
business; or. . . , ~- initially classified as a capital asset may thereafter ·
ii. Although not engaged in real estaJ~ ·
business will use in business the property " -: ~:;. the factors indubitably tend to show that the activity
received in the exchange (R.R. No. 07-. ·
2003) .
2: Treated as Capital Asset under th!3 fo}!owing ·
instances: · _
a. Real property used by ari exempt corporation
• in its exempt operations; · • _ t; 1 very activply sold.- or both it may be treated as held
b. Transfer of real properties classified as capital
or ordinary asset in the hands ,,~f the:
seller/transferor: ; r·~ Internal Revenue: · G.R. No. L-26284, October 8,
i. · If transferred through succession or
donation to the heir or don·ee who is not
engaged in the real estate .busin~ss and
who doe·s not subsequently use such · ~:. ., AS S·Al!E OR. _
property in trade or business;
ii. If received as dividend by the stockholders
who are not engaged in the real estate
business and who do not . subsequently
use such real property in trade or business
(even if the corporation which declared the
real property dividend is engaged in real
estate business) R.R. No. 07-2003).
NOTE:- Involuntary transfer has no effect
on the classification of real property in the
hands of the involuntary seller (R.R. No.
07-2003, Sec. 3(g)). · No. 06-2008, Sec. 8); ·
GENERAL RULE: Once an ordinary asset, always
an ordinary asset. A property purchased for futu~e
use in the business, even though this purpose 1s
later thwarted by circumstances beyond the
taxpayef s control, does not lose its char~cter as an
ordinary asset. Nor does a mer~ discontinuance of
the active use of the property change its character
previously established as a business-property (R.R.
No. 07-2003, Sec. 3(e)).
EXCEPTION-: Properties classified as ordinary
assets for being used in business by taxpayer
·engaged i.,n business other than real estate business
are automatically converted into capital assets upon
showing · that the same have ri6t been used in
business for more than ·two (2) yec1rs prior to the
consummation of the taxable transactions involving
said properties · (R.R. No. 07-2003, Sec. 3(e));
Calasanz v. Commissioner of lntema/ · Revenue,
GR. No. L-26284, October 8, 1986; BIR Ruling No.
142-2011, May 4, 2011). .
A PROPERTY INITIALLY CLASSIFIED
AS -A CAPITAL ASSET THEREAFTER
MAY BE TREATED AS AN ORDINARY
ASSET
Jurisprudence has consistently held that a property
, be treated as an ordinary asset if a C!Jmbination of
was in furtherance of or in the .cou·rse of the
, ~- ·.-:1a){payer'. s trade or business. Thus, a sale of
,;,. ..,.. irttieritadi{eal property usually gives capital gain or
loss even th<;:HJg~ the property has to be subdivided
or •improve<f or oth to make it salable. However, if
the inherit~a pr perty is substantially improved or
'.'."} prima_rilyl or sale to 'Customers In the ordinary course
; -~ of the heir's,business (Calasanz v. Commissioner of
~' 1986). . '
!.-
,i •
. THE. FOLLOWING ARE CONSIDERED
EX~HANGI: OF CAPITAL
ASSETS:
1. Retirement of bonds (NIRC, .Sec. ,39 .(E));
2. Short sales _of property (N/RC, Sec..;39 (F)(1 )) -
·any sale of security which·the seller does not
own or any sale which is consummat:d by the
delivery ·o f a security t;>orr_
owed., by, '~r for the
account of the seller; . · •.
3. Failure to exercise privilege or option to buy or
sell pr~perty (NIRC, Sec. 39 (F)(2));
4. Securities becoming worthless (NIRC, Sec. 34
(D)(4)(b)); .
5. Distribution in liquidation of corporations (R.R.
·
6. Readjustment of interest in a _GPP (1 DE LE~N
J>IIRC, supra at_519); · .
7. Dacion en pago (Fi/invest Credff Corp. v. ·
Philippine 'Acetylene, Co., Inc., G.R. No. L-
50449, January 30, 1982);
a. Conveyance of property in consideration of the
transferee's assumption of accrued ta>ces for
 INCOME T~TIOM .
· Taxation.Law

which the transferor was personally liable, as a Court of Tax Appeals, G.R. Nos. L-9738 & L-·9.771
compromise of tax liability on other realty; and, May 31 , 1957) . . '
9. Forced sale and foreclosure sales (R. R. No. 7-
2003, Sec. 3(g)). Real properties transferred pursuant t~ expropri.ation
proceedings are subject to capit~I gains tax. The
EXCEPTIONS: . transfer · of ' property · through expropriation
a. Real properties held by a real estate deafer, · proceedings is a sale or -exchange within ·the
which are foreclosed, shall . be treated meaning of Sections 24(0) and 56(A) (3) of.the Tax
ordinary assets for purposes of determining Code, and profit fr9m the transaction constitutes
the applicable tax on such foreclosure sale . capital gain. Such capital gains is subje·ct to capital
(R.R No. 7-2003, ·Sec." 3(g)). · gains tax (Republic of the Philippines, .represented
b. Real properties acquired by banks through by the Department of Public Works and Highways
foreclosure sales are conside_red as their (DPWH) v. Spouses Senando F. Salvador and
ordinary assets (R.R No. 7-2003, Sec. Josefina R. Sa~vador, G.R. No. 205428, June 7,
2(b)(4)). 2017). ·

t.lQTE: In condemnation proceedings, the sale The expropriation of property classified as capital
occurs at the time of the taking of the property asset is subject to CGT and DST based on the
rather than receipt of proceeds of the judgment. amount of.just compensation (R.M.C. No. 41-91). It
is not subject to Creditable Withholding Tax and
10. Surrender of shares by the invest9r upon'" Value-.A2ded Tax (BIR. Ruling No. DA:.212-07, April
dissolution of the corporation and l"qtJidafign of 1........ 1b~:· 2qo1l . · · ·
assets and liabilities of said corp.oratio (~}~;-6- .,.....,!!/ ! ; ... ..
2008, Sec. 8); · / _,,, -,_,.. : Smc-e ~apltal gains tax is a tax on passiye_income, it
11 . Redemption of shares for ··cancellation r ·s-..tb,e sel/er; 'o( respondents in this case, who are
retirement (R.R. 6-2008, Sec. ); ': " ,-- - liable · to shoulddr, 'the tax. Thus, as far as the
12. Voluntary buy-back of share~...(R. ~. 6-2008, Sec. ·., iiovernment ·is concer,ned, the capital gains tax in
9). /_ .! ,___ .: expropri~tion piocee,,.dipgs remains a liability of the
. • - - ·- ~ se1ler;· a'!j it is a·tax on the seller's gain from the sale
SALE OF GOODWILL No:t SUBJ ECT--,:O~. ' bf real [Property ~(Republic oi the Philippines v.
ORDINARY INCOME TAYt · _. - Spouse~~ Salvador, -'?•!R• No. 205428, June 07,
The sale of goodwill is not subject to ordinary jncome _:._ -~ 2_D__!!)- Jft::::.,
l
tax since goodwill is not an ordi 'a}y:asset".ar;id ·snot · 1 . . / / .: . ',...._: _; .
among the exceptions under the definitio~'-c>fcapital qo/:, . -·~~Y ~?t be-v _award.e~ as consequ~nt1al .
!
assets in Section 39(A)(1) of the 1~97 Nation l l qa~ ag95 } 'm ~xpropnat,on proceedings.
Internal Revenue Code. It is subject to ca . ital g~ns ..~.,.,..,,,~ ns_equenttal dam., g~s are only aw~rded if _as_ a
!
tax (WM. H. Anderson v. Juan eosadas, r.,' G,_R.' [ [--~ \ ~~s~lt 0 the exprop,nat1on,. the ~emaining j)roperty_?f
No. 44100, SeptembfJr 22, 1938) . /
- . _~ y
- ·--: .- __.. the qwn~r t1,1,ffe1J-from an impairment or decrease m
1 ,
) ~-v~1u~; G V.7P tpat the p~ym~nt of capital gains tax on
The Transfer of ,Title to Real Property f~ortl/the l: . ;'tJi~llS f the subJect property has no effe~t.on__
Trustee to the Beneficiary Without Monetary l 11 -"the 1 .creas~ or decrease m value of the remam!ng
Consideration Under and by Virtue of the Deed property, it can hardly be considered as
of Acknowledgment of Implied Trust and Waiver consequential damages that may be awarded fo
of Rights and Interest to Real Estate Properties owner~ (Republic of the · Philippines v. Spouses
Not Subject To CGT . Salvador, G.R. Nb. 205428, June 07, 2017) . · .
There is in fact and in law no transfer of beneficial
ownership since the naked ownership of the trustee CAPITAL GAIN V. ORDINARY GAIN
-·~• • j • ..... ·- •v - .. • •••• • •.,. f ~•.•,:

and the beneficial ownership of the beneficiary are · · capita_! gain_ · · , Ordinary _gain,>1:-~: ·
consolidated in the latter (BIR Ru(ing No. ·108-98, • , ~- - .: .. _,_. - ~ .., "s....- ..

June 29, 1998).

0

. : .
• ,
. As to
• -
,"

• '
0

': > "' •

source. ·. . ,·· · - ':'-:,
•

. • •
...t'; \,
• • ·: -,; .,.. • -:...-- -:;:, ,, A

Derived from sale or Includes all gains other

CGT TREATM_E NT ON EXPROPh.lATION exchange of · capital than capital gains
PROCEEDINGS assets
The acquisition by the Government of private
properties through the exercise of the power of
eminent domain, · said properties being justly Can · be adjusted by the
compensated, is embraced within the meaning of the . holding period,
term "sale" or "disposition of property" (Gutierrez v.
 \ I
MEM:Q~y AID
Sin Seda LW,,erafty Colege of Law. - RGCT Bar Operatjona Center
Capital losses shall be Ordinary losses are
deducted only to the deductible -. from capital
extent of the capital gains but net capital loss
gains cannot be deducted from
ordinary gain or income
(1 0~ LEON, NIRC, supra at 516 to 518)
NET -CAPITAL GAIN V. NET CAPITAL
LOSS
Net capital gain means the excess of the gains from
sales or exchang~s of capital assets over the losses
from such sales or exchanges (NIRC, Sec. 39
(AJ.(2)).
Net capital loss means the excess of the losses from
sales or exchanges of capital assets over the gains
from such sales or exchanges (NIRC, ·Sec. 39
(A)(3)) .
NOTE: The net capital gain ; except capital gains
_
subject to final tax and perc'ilntage tax, shall .be
reported in the taxpayer's income tax return and
shall be subject to the graduated income tax rates in_ ·
addition to the net income from other sources. The
net capital loss cannot be deducted ·from the
ordinary income because the loss can ~e deducted
ORiy_ to · the extent of capital g~ins (INGLES,
Reviewer supra at 171 and 176) . . · ame(lded ·by TRAIN Law).
TREATMENT OF CAPi°TAL .GAINS ·AND ..
LOSSES
Under the NIRC, ·capital losses are i:1eductible only
up to the extent of capital gains from . dealings in . .
capital assets other than domestic stocks an~ !e.al
properties. Hence, capital gain· and capiial losses
are offset. A .net ~pital gain js _an item of gross
income subject to reg ular income tax, except for
certain cases. A. net capital loss is not an item of
deduction against ·gross incom~. The law views_net
capital losses as unnecessary expenses since
capital assets are not used in the business or trade
of the taxpayer (BANGGAWAN, Income Taxation,
supra at 393f
Capital gains and losses on transactions involving
capital assets are subject either to: ·
1. Capital Gains Tax (CGT): · ..
_ a. Sale of shares of ~tocks of a dome stI c
corporation not fisted and not traded th rough
stock exchange (NIRC, as amended by
TRAIN, Sec: 24 (CJ); -a nd .. .
b. Sale of real property in the Ph1hppmes h~ld as
capital asset (NIRC, Sec. 24 (D)) .
' .
Capital gains and losses subject to CGT will no
longer be considered in computing the gross
income·subject to regular income tax rates.
2. Regular Income Tax Rates · ·
The capital gains and losses other than those .
· subject - to CGT will be considered -in the
determination of -gross income, subject to the•
following rules:
a. Holding period (N/RC, Sec. 39 (B));
· b. Loss Limitation Rule (N/RC, Sec: 39· (C)) ; .
and
c. Net Capital Loss Carry-Over (NCLCO) Rule
(NIRc, ·sec. _
39 (O)) .
DETERMINATION OF THE AMOUNT OF .
TAX .
1. Sale of Domestic Shares of Stock NOT
Traded in the Stock Exchange is Subject
to CGT .
CGT Rate:
If Sale is by a Domestic Corporation: Final tax
_ at the rate of 15% (NIRC, Sec. 24(0) and Sec.
•!\",•: ,-... · ·27 (0 )(2), as amended
.
by• TRAIN Law)..
If Sale is ~y a Foreign Corporation: Final tax
at the rate o 5% for'net gain not over t-100 ,000,
and 10% for amount in excess of ,.100,000
(NIRO, Sec. • 24(C)' and Sec. 27 (0)(2) , as
-
NOTE: Under the CREATE Act, capital gains
from sale of shares of stocks not •traded in the ·
.. stock exchange if sale· is made by a Resident
· Foreign ·corporation and Non-Resident Foreign ·
Corporation is subject to final tax of 15% (R.R.
No. 2-2021, Sec. 1(E)(6) and Sec. 1(F)(6)).
· Tax Base: Net capital·-gains •(gross selling price
or ·consideration less cost or adjusted basis) on
a per transaction basis (NIRC, Sec. 27(0)(2), as
amended by TRAIN Law). .
Persons Liable:
a. Individuals
- citizen or alien , except non-resident alien ·
(RC, .NRC, RA, NRA-ETB, ,NRA-NETB)
(NIRC, Sec. 24 (C), as amended by TRAIN
Law); • ·
b. Corporation
- domestic or foreign (DC, RFC, NRFC)
(NIRC, Sec. 27 (0)(2), as amended by
TRAIN'Law); and
c. Other taxpayers such as estate, trust, trust
funds and pension, among others (NIRC,
Sec. 60).
 ,,.
..
• x-.
.
166
Coverage:
Sale of shares of stock of a domestic corporation
not listed and not traded in the stock exchange
by a non-dealer in securities (NIRC, Sec. 27 ·
(0)(2) , as amended by TRAIN Law).
NOTE: What is controlling is whether or not the
shares of stock are traded in the local st6ck
exchange and not where the . actual sale
happened (Del Rosario v. Commissioner of
Internal Revenue, CTA Case No. 4796,
December 1, 1994).
Excluded from the Coverage:
a. Sale of shares of stock of a foreign
corporation is not subject to CGT - the gain
on which will be subject to regular income
tax rates; .
b. Sale made by a dealer in securities - the
resulting gain or loss is considered as
ordinary gain subject to graduated,..rates .
(20% to 35%) for individual and nqrmal •
corporate income tax (30%) for.corporations :
(NIRC, Secs. 24 and 27,· as amended by
TRAIN Law). • · -· · -- •-- · clos_ing pric~ on the day nearest to the date
NOTE: The term 'dealer in securities'
means a mercharlt _,of stocks or s'ecurities,
·whether an individual, partnership or
corporation, with an 'established iplace . of
business, regularly engaged in the purchase-
of securities and tfle ... resale thereof to
customers; that is, one who, )
as a'. me·
., rchant '
buys securities . and- re-~ells (.the to . 1
customers with a view to the galn.s , and
profits that may be derived therefrom '(Jy/RC:
Sec. 22 (U)) . • •• , •. -:- '
• >
c. Stock traded in the stock ·exchange other • .,.._ • \ • , ·, market value.
than the sale by a dealer in securities -
which will be subject to stock transaction tax
of 6/10 of 1% on its gross selling price ·· -
(NIRC, Sec. 127, as amended by TRAIN
Law).
Determination of Selling Price:
a. In the case of cash sale
- the selling price shall be the total
consideration per deed of sale·
'
b. If the total consideration is partly in
money and in kind
- .the selling price shall be the sum of
money and the fair market value of the
property received;
c. In the case of exchange
- the selling price shall be the fair market
value of the property received; and
INCOME TAXATION
Taxation Law
d. _In case the fair market ' value qt the
shares of stock sold, bartered or
exchanged is greater thall ·the amount of
money and/or fair market value of the
property received .
- the excess of the fair market value of the
shares of stock sold, bartered or exchanged
over the amount' of money and the fair
market value of the property, if any, received
• as consideration shall be deemed a gift
subject to the donor's tax under the NIRC
(R.R. No. 06-08, Sec. 7 (c)).
Definition Of Fair Market Value of Shares of
Stock
a. In the case of listed shares which were
sold, transferred, or exchanged outside
of the trading system and/or facilities of
the Local Stock Exchange: ·
The closing price on the day when the
·· .. shares are sold, transferred, or ex~hanged.
When no sale is made in the Local Stock
·: Exc_b'ange on the day when the listed shares
·-· · ,. are soid1 transferred, or exchanged, ihe
,of'sale,,.Jrgn~fer or exchange of the shares
~hall ·oe the fair market value (R.R. No. 6-
2008).,,', , \ .--~- .
. '
' . ...,,
b. In the case of shares of stocks not listed
' "and traded in the local stock exchanges:
· fi For common shares of stock the book
-- • - - -~ ·value,., based on the latest.' available
·:· . ·financial silitements duly c~rtified by an
·· independent public accountant prior to
~-< ,,.. /' ,fhe date of sale, but not earlier than the
.. \ , . . _,.., immecpately preceding taxable year
- ,·· ,..... ; ·:, §~al~be considered as the prima facie
1
~, '. .
.
,
. ii. For preferred shares of stocks, the
liquidation value, which is equal to the
redemption price of the preferred shares
as of the balance sheet date nearest to
the transaction date, · including any
premium and cumulative preferred
dividends in arrears, shall be
considered as fair market value.
iii. In cqse there are both common and
preferred shares, t~e book value per
common share is computed by
deducting the liquidation value of the
preferred shares from the total equitY of
the corporation and dividing the re·sult
by the number of outstanding common
shares as of balance sheet date nearest
to the transaction date. (R.R. No. 20·
2020).
 w \ /
MEM:Q~v·Alo·
s-, Bede Unlvrity Colege of Law - RGCT Bar Centl!l<
c. In the case of a unit of participation _in
any association, recreation or ·
. amusement club (such as golf, polo, or
similar clubs): , EXCEPTION: This rule does not cover
The fair market value thereof shafl be its
selling price or the bid price nearest to the
date of sale as published in any newspaper
or publication of general circulation
whicheYer is higher (R.R. No. 6-2008) . ' shares are listed and executed through the
Taxation of Surrender of Shares by the
Investor Upon Dissolution of the
Corporation an~ Liquidation of Assets
and Liabilities of Said Corporation
Upon surrender by the investor of the shares
in exchange for cash and property
distributed by the issuing corporation upon
its dissolution and liquidation of all assets
and liabilities, the investor shall ·recognize
either capit~I gain or capital loss·upon such
surrender of shares computed by comparing
the cash and fair market value of property
received against the cost of the investment
in shares. The difference between the sum
of the cash and the fair market value of
property received and the cost of the
investment in sha~es shall represent the
capital gain or capital loss from the
investment, whichever is applicable. If the
investor is an individual , the rule on -holding
period shall apply and the percentag~ of
taxable capital gain or cfeductible capital
loss shall depend on the number·of months
or years the shares are held by the investor.
Section 39 of the NIRC, as amended, shall
hefein apply in all possible situations.
The capital gain or loss derive~ therefrom
shall be subject to the regular income. tax
rates imposed under the Tax C~de, as
amended on individual taxpayers or to the
corporate' income tax rate, in case of
corporations (R.R. 6-2008, Sec. 8).
Taxation of Stiares ~edee·med . for
Cancellation or Retirement
When preferred shares are red_een:ied ~t _a
time when the issuing corporation is ~till ~n
its "going-concern" and_not ~ontemplatmg m
dissolving or liquidatmQ its_ assets and
liabilities, capital gain or capital loss upo_n
redemption shall be recogni~ed on th e basis
of the difference between th e a~ount/value
received at the time of redemption and the
cost of preferred shares.
The capital gain 0 ~ loss derived shall be
sub·ect to the regular income tax rates
imp~sed under the NIRC, as amended , on
, redemption, (i.e., extrajudicial foreclosure
individual taxpayers . or to tre corporate
income tax rate, in case of corporation.
situations where a corporation voluntarily
buys back its own shares, in which it
becomes treasury shares. In such cases,
the stock transaction tax shall · apply if the
trading system and/or facilities of the Local
Stock Exchange. Otherwise, if the shares
are not listed and traded through the Local
Stock Exchange, it is subject to _the 15% "or
5%/10% net capital gains tax (R.R. 6-2008,
Sec. 9) .
2. Sale or Other Di.sposition of Real
Property Subject to CGT by a Non-Dealer
(N/RC, Sec. 24(0)(1) , Sec. 25(A)(3) and (B));
Sec. 27(0)(5))
CGT Rate and Tax Base:
GENERAL RULE: 6% on -the Gross Selling Price
or Zonal Value or the FMV as shown in the
schedule of values of the provincial and city
assessofs f whichever is higher (N/RC, Sec.
· 24(0)). . 'i
1'
NATURE: ~Capital gains is a tax on passive
incom~. ' i , is ; the seller, not the buyer, who
generally would shoulder the tax -(Repub/ic of the
Philippine~ represented by the Department of
PublicWofks <U!d Highways v. Arlene R. Soriano,
G.R:·~No'. '2 i 1666, February 25, 2015) .
Persons Liable:
a. Individuals
- citizen or alien, except non-resident alien
· (RC, NRC, RA, NRA-ETB, NRA-NETB)
· (N/RC, Sec. 24 (D) ;
b. Corporation
- domestic corporation (DC) (NIRC, Sec.
27 (0)(5)); and ··
c. Other taxpayers such as estate and trust
(N/RC, Sec. 60) .
Coverage:
a. Sale, exchange or · other disposition
(including pacto de retro sales and other
forms of conditional sales) of:
b. Located in the Philippines;
i. Real property with respect to individual
taxpayers, estate and trust; and -· ·
ii. Land · and buildings with respect to
domestic corporations;
c. By a non-dealer in real estate; and
d. In case of sale subject to right of
 . INCOME TAXATION
168 · . Taxation Law

sale of capital assets initiated ?Y banks, \

finance and insurance companies) , such
right must not have been exercised upon the sold from the amount
. expiration of the period to redeem (R. R. No. · realized.
'04-99, Sec. 3) .

EXCEPTIONS: (RPG) .
In case of sale subject to right of
a. Redemption, the CGT, shall be based on the
bid price of the highest bidder (R.R. No. 04- Difference between the Gain which assumes as
99; Sec. 3) . · selling price and the having been realized by
b. In case of sale of f rincipal residencbe - cost the seiler from sale,
capital gains presumed to have een exchange or other
realized therein shall be exempt from CGT, disposition of r~al
subject to certain conditions (Pleas~ ~ee property.
separate discussion . Sale of Pnnc,pal
Residence); and E~cluded from the _Coverage: · .
c. If the buyer of real property is the 1. Sale made by a dealer in real estate or if the.
Government or -any of its political real property is an ordinary ~sset - the ·
subdivisions or agencies or GOCCs and th~ •- r~sulting gain of which shall be subJect to regular
seller is an individual, the taxpayer.has th e ·incom~ tax rates.
option to subject the capital •gai_ns t?, the · ', .•
regular income tax rates. · .• · · ·...-:_ ~. -. ~ eal .Estat e Dealer - any ,person engaged in
. -:-- }.
. . •~ r .'. ·" ___ • __ • the b~sin~ss of"buying and selling or exch~n~ing
NOTE: Gain o~ loss 1s 1m~atenal,. there . ·r eal propert!es,on hi~ own account as a pnnc~pal
being a conclusive pr¥urnptio_o of ?am. . ,• •: and; holdjngf himself o~t as a full or part-time
· · • dealer in r eal .e~tate (1.e ., real estate dealers,
ACTUAL GAIN V. P.RESUMED;GAIN _ developers; ai;d/or, lessors) (R.R. _No: 07-2003,
As a general rule, the i ~ me ~ax la~ im~oses Sec.; 2(e)) . •. · ·
tax only when there is, acl ll~ m~me1_ga1~, or l •. -l · . _ · ·
profit by deducting the co~t or dJu~tep,bas~s of NOTE:- Registration·with the Housing and Land
the property sold from the amount,_ ~aJ1~ed_ , -- Use Re~ula o,..ry Board (HLURB) or Housing an?
(NIRC, Sec .. 40, par. (A));Jiis is:\kh~wn . as · I Uroah · Development Coordinating , Council
"actual gain". However/ as ~n ex'cep_tion , : • ·,,.• ,( H8 J>CC) as a re_al estate de_aler or developer
where an individual or a corporation sold ,a ·rea) 'l ,. ':shall be· sufficient for a taxpayer to be
property (land or building)· ~lassifiecl as cap ital ·_~- _ ; · ·c~msigered as ~abitually engaged in the sale ~f
asset, the law presumes that there was a capl~I '! · · real'estat~. If.the .taxpayer is riot registered, he/it
. gain realized , and the capital gai~s 1J
is ~% ?f :..! - - ~·· may n~veW,eless be deemed to be engaged in
the actual consideration or the fa, ma_tket value the real estate business through the
at the time of sale of the real property, hicheyer · ·'.- .'.: 'I. : ei:lablishment of substantial relevant evidence
is higher. This is known as the "presume~.... _ • .. (such as consummation during the preceding
gain". But, as an exception to the exception, the year of at least six (6) taxable real estate
rule on presumed gain DOES NOT APPLY ~o transactions, regardless of amount; registration
sale of shares of stock of a domestic as habitually engaged in · real estate business
corporation, not listed and sold through a stock with the LGU or BIR, etc.) (R.R. No. 07-2003,
exchange, because there is actual gain Sec, 3). ·
whenever an individual or corporate taxpaye·r
sold shares of stock treated as capital assets (2-
8 OOMONOON, supra at 152) . 2. Sale of Prin~ipal Residence · (NIRC, Sec.
24(0)(2); R.R. No. 13-99 as amended by R.R.
ACTUAL GAIN V. PRESUMED GAIN No. 14-2000)

l!!f~A
§J~.~.G~-~:-~r~~~{G~in.· ;.: •~/ ---::-r,•·- •.
Rule: Exempt from 6% CGT (NIRC, Sec.
>·· . . ·As to Cost o(P;op~rty;S~ld )\... ·
;'lll~•-·r~~ :.~--•··. ·.~ .-,~,./-t-:.• ,,._'.~-s-•-_.,.;.--., 1
?4(0)(2)).
4
4 ·~-._-- " •

. ,:',
•,,.,

Principal Residence
Computed by deducting Does not consider the
It refers to the dwelling house., jncluding the land
the cost or adjusted cost of property sold
on ythich it is situated, where the individual and
basis of the property
members of his family reside, and whenever
absent, the said individual intends to return .
Actual occupancy is not considered interrupted
 M ' .,
MEM:Q~y AID
San Bede lJnMnity College of law - RGCT Bar c«rte,
. .
or abandoned by reason of temporary absence ·
due to travel or studies or work abroad or such
other similar circumstances (R.R. No. 14-2000,
Sec. 2.-1). . . .' .
If the land is lease9., only the dwelling house can
be treated as principal residence. However,
where both the owner of the land and owner of
the dwelling house actually reside in the said
dwelling house, then both said land and the
dwelling house shall be treated as their principal
residence (MAMALA TEO, Income Tax, supra at
326).
If the principal residence is co-owned, the
exemption applies only to the extent of his
proportionate share {DIZON, Outline supra at
252) . ·
GENERAL RULE: The address shown in the
income tax return is conclusively presumed as ·
the principal residence (MAMALA TEO, Income . ,
Tax, supra.at 327). ' P20,000,000 with a fair market value (FMV) of
EXCEPTION: If the individual is not required to ·
file a return, certification . from Barangay
. Chairman ·or Building Administrator -(for
condominium units) ~hall suffice (Id.). ··
Requisites for Exemption: (TUCTE) .•
(NIRC, Sec. 24(0); R.R. No. 14-2000) · . '
1. The CIR is duly notified by the ta?(payer Within
!hirty (30) days from the ~_ date ·9f _safe ~r
disposition through a swor'~ declaration of his
intention to avail of the tax .exemption.. Such
sworn declaration shall be inclusive, -~mong·
others', of the following:
a. CGT return ; and ·· ; ·
b. Sworn . statement from the · Barangay
Chairman that: . subject . .to capital gains · tax (NIRC, Sec.
i. The taxpayer's principal residence Is
located within the jurisdiction-. of the
Barangay, and
ii. The same has_been his resi~t~nce as of
· the date of its sale or disposI I0n.
·1fthe taxpayer's principal re_si~ence ~o~d
or disposed of is a condomIm~m umt, in
lieu of the said Barangay Chairman, the
certification shall be . issued by the
Building Administrator of th e
condominium building.
2. The proceeds of the sale o~ dihspositiou~s~1t~1oenreoorf
has in fact been Utilized in t e acq 1
' t ct· , of the seller transferor's new
cons ru ion . . . ei hteen (18) ·
principal residence wi th in g .
calendar months from the date of the said sa 1e
or disposition.
. 169
NOTES:
a. The sale or disposition of a property refers
to the date of notarization of the document
evidencing the transfer of said property.
/
b. If the taxpayer constructed a new residence
and then sold his old house, the transaction
does not fall under ·ttie exemption because
the law is clear that the,proceeds should be
used in acquiring and constructing ·a new
principal residence. Ther.efore, the . old
residence should first be ·sold before
acquiring ~r constructing the .new residence
and not vice-versa (DIZON, Q&A, supra at
82). '·
c. If there is no full utilization, the portion of the
gains presumed to ha_ve been realized shall
be subject to CGT.
ILLUSTRATION: On March 18, 2016, Mr. A sold
his old principal · residence in Quezon City for
P25,000,000. Wanting to transfer to Makati City
so he can be nearer to his place of work, he used
P12,000,000 of the proceeds to acquire a new
principal residence on March 18, 2021. The
acquisition cost of the new principal residence
was f>18,000,000 and •it has a fair ma·rket value .
(FMV) 0f ~ 30,000,000 at tfie time of acquisition.
· Is Mr., A li~ble to pay capital gains tax (CGT)? If
so, how much? · ·
,, .
ANSWER: .Yes, 'Mr. A is liable to pay capital .
gaimFtax in the amount of P600,000. The Tax
Code provides that if there is no full utilization of ·
...: . • the proceeds ·of- the sale or disposition, the
, ·.<••.,.,_ , .• portio of the gain presumed to have been
- -,---i rea 1zea from the sale or disposition shall be
24(0)(2)). Th.e amount subject to capital gains
tax is the portion which the unutilized amount
bears to the gross ~elling price multiplied by the
higher betweeri the FMV. at the time of the sale
or the Gross Selling Price (GSP). The formula
can be stated as follows :
Gross Selling Price ?-xx .
Less: Utilized portion·of the GSP xx
Unutilized-portion of the GSP Pxx
Divided by: GSP xx
Percentage of Non-Utilization xx%
· Multiplied by: Higher between the
FMV at the time of sale or GSP xx
Taxable 'portion
_Multiplied by: Capital Gains-Tax
· Rate 6%
Capital Gains Tax Due XX
I
(R.R. No. 13-99)
 170
In this case, the ratio would be PB,000,000 (the
unutilized amount} over '920,000,000 (the gross
selling price} [i.e., 40%] which will be multiplied
by '925,000,000 (the higher between the FMV at
the time of sale or GSP}. The resulting amount
of '910,000,000 will be multiplied by the CGT
rate of 6%. Accordingly, the CGT would be
t-600 ,000.
3. The historical ~ost or adjusted basis of his old
principal residence sold, exchanged or disposed
of shall be carried over to the cost basis of his
new pri_ncipal residence.
4. The tax exemption granted may be availed of
only once every Ien (1 O} years.
5. _sscrow agreement - the six percent (6%) CGT
·shall be deposited in cash or manager's check
in · interest bearing account with an Authorized
Agent Bank (AAB) under an Escrow Agreement.
.,,. ls
Such deposit shall - only be released t upon
exemption. · ' -
showing that the taxpayer 7 i s ~~nt tied ~to
. .-.. ·,, ;;-
/' .I _ /
Who may avail of the exemption ·, _ 1 property subject to 6% capital gain tax and ·
Only a RC, NRC, and RA are entitled to exemption
_ from payment of capital gaiQS·tax, in case of sale-of
principal residence (NIRC, Sec._~4(A), as f;Jmended
by TRALN Law). · income ·since 'tqese are subject to final tax
.j , 1'
OTHER CAPITAL ASSETS';,
, ,.. } ., /
NOT--
SUBJECT TO CGT
Coverage: It involves sale <;> r exchange or ' oli_ e
considered as equivalent to a sale or exchange.;of -
property classified as capital asset except: \ ·,
1. Unlisted shares of stock of a , aomestic ~•-::. .
corporation (NIRC, Sec. 27(0), as an/e de°q b'y'
TRAIN Law); and · · ~/
2. Real property in the Philippines held as capital
asset. · ------•·,vo. 4796, December 1, 1994).
Tax Treatment and Rate: Included in the gross
income subject to the regular income tax rates
Tax Base: Net capital gains
Formula:
For sale of property
Selling price (in terms of money)
Less: Cost
Net capital gain or loss
For exchange of property
FMV of the property received in exchange
Less: Cost
Net capital gain or loss
INCOME TAXATION
Taxation Law
SPECIAL RULES ON CAPITAL GAINS
OR LOSSES SUBJECT TO REGULAR
INCOME TAX RATES
1. HoJding period
Rules on holding period are as follows :
a. In the case of an individual taxpayer, only
the following percentages of the gain or_loss
recognized upon the sale or exchange of a
capital asset shall be taken into account in
computing net capital gain, net capital loss,
and net income:
i. 100% - if the capital asset has been
held for not more than twelve (12)
months (Short term capital gain);
ii. 50% - if the capital asset has been held
for more than twelve (12) months (Long
term capital gain) (NIRC, Sec. 39 (BJ). ·
b. In case of a corporation, regardless of the
holding period , 100% if the capital gain or
) I loss is recognized, the rule on l_lolding period
does not apply (NIRC, as amended by
TRAIN t aw, Sec. 39 (B)) .
.
c. ~. Tile ·~ above . rules do not apply to real
shares of stock of a domestic corporation
not traded·in ~the stock exchange with a 15%
rate. These"are. not included in the taxable
· ~l~eady.•For co porations, capital gains and
lpss'es • ar -always 100% (INGLES,
"Reviewer, su pra at 175) .
.•. NOTE· In f h f k d d ·
sa Ie s ares O stoc not tra e
t-;-
.. , , - ·
th rougti th e local stock exchange, what is
controlling is. whether the shares of stock are
traded ~in the local stock exchange and not
. where-the actual sale happened (De/ Rosario v.
'.. S,o mmissioner of Internal Revenue, CTA Gas~
2. Deductibility -of Net Capital Loss (Loss
Limitation Rule) ·
Capital losses are allowed only to the ·extent of
capital gains. Hence, the net capital loss is.not
deductible (NIRC, Sec. 39(C)).
REASON: To ensure the matching of costs
xx against revenues consistent with the rule that
(xx) only business expenses are deductible from
gross income. Capital loss is not a business
expense (DIMAAMPAO, Income. Taxation,
supra at 170-171).
xx
NOTE: If the taxpayer is a bank or trust
(xx)
company incorporated under the laws of the
!! Philippines, a substantial part of whose business
is the receipt of deposits, sale of any bond,
 \ I •

f=iJM:Q~y Al D
College of Law • RGCT Ber Ope,wt1on9 Center

debenture, note or certificate Or Oth .

of indebtedness issued b er ev1de~ce NCLCO v. NOLCO
(including one issued by Y any corporation
rr I bd' • . a government or
po, ,ca su _ ,v1sIon), capital gains and losses
are _recognize~ to the extent of 1000/c ('
subJect to holding period)· any I ho ,.e., ~at
· 1d d · ' ass s a1I not be Excess of capital gains Excess of allowable
me u e m determining the a r bT 1 over capital losses deductions over gross
limitation (NIRC, Sec. 39 (C)). PP ica 1ty of the
income

3. Net-C~pit_al_ Loss Carry-Over (NCLCO)

If an md1v1dual taxpayer sustains in an Amount not to exceed No such limitation
taxable year a net capital loss such los~ the. ne\ taxable income
(amount not exceeding the net ta~able ·income for the year the loss was
for such year) shall be treated in the succeeding incurred
taxable ~ear as a loss from the sale or exchange \:;:---: ... ::- 1;;.. .. • ~'""" · ., .. -·~-i -~"¥r:.:~;; l( ~-:.-3/~•· • ,,,, , • : .., ,

of a capital a~set held for not more than twelve : ,:··-: "''As to Allowable Years to ·carry-Over
'•~''.
~- -- ,, . - . ~" / , ,(

(12} months (1.e., 100% deduction) (NIRC Sec

39(0)). ' . Can be carried-over in Can be--carried over for
the succeeding taxable the next three (3)
Limitations: year consecutive taxable
years immediately
lndividu~I taxpayers are allowed to carry-over
following tne · year of
net . c~pIt~I loss as a deduction against net suchloss -
capital gam of the following year subject to the
following limits: ·
, ILLUSTRATION:
Limit 1: The amount of net income iri the ., ' ..Mr. Rhad Estoque, a Filipino Resident, ·had the ·
year the net capital loss was sustained, and · ; !.following incomes and losses for the years 2020 and
Limit 2: The available net capital gain in the - 2021.
following year. · ·

NOTES: Ordinary,, Tax.able_Income P7 ,000 P90,000

a. No ~rry-over is allowe9 for corporations as . · short Term Capital
1.
Gain 10,000
it only applies to individual taxpayers .. This .is
an exception to the rule that losses-shall be '
Short Term Capital Loss 18,000
deducted from the gross income in the same
.taxable year in which the losses· were Long Term Capital Gain 52,000
.F
incurred (CIR v. PAL, G.R. No. 179259, ·'·

September 25, 2013). L6ng·Term Capital Loss 20,000

b. For sale, barter, exchange or other,forms of

disposition of shares of stock subject to the The taxable income of Mr. Estoque before personal
15% or 5%/10% capital gains tax on the net exemptions for each year is ~omputed as follo'-'.-'s:-
capital gain during the taxable year, the 2020
capital losses realized from this type of
transaction during the taxable year are Capital Assets Transactions:
deductible only to the extent of capital gains Short Term Capital
. from the same type of transaction during the Loss P18,000 100% P18,000
same period. If the transferor of the shares
is an individual, the rule on holding period Short Term Capital
and capital loss carry-over will not apply, Gain 10,000 100% 10,000
notwithstanding the provisions of Section 39
Net Capital Loss 8,000
of the Tax Code as amended (R.R. No, 6-
2008, Sec. 7(C.4)) . Ordinary Taxable Income 7,000
Taxable Income Before Exemption* P7,000

NOTE: Observe that the net capital loss is not

deductible from the ordinary gain (business•income),
 INCOME TAXATION
.Taxation Law

hence, the Taxable Income Before Exemption · ·

remains the same.
2021

Capital Assets Transactions:

Long Term
Capital loss 1?20,000 50% 1?10,000

Long Term
Capital Gain 52,000 50% 26,000

Net Long Term Capital Gain _16,000

NCLCO 2020 7,000

Net Long Term Capital Gain P9,000

NOTE: The Net Capital Loss to be carried over from

2020 to .2021 should only be P7 ,000 since 1he
amount of capital los.s should _ not exceed the
_amount of the income before exemptions at the year
when the loss was sustained (VALENCIA & R0 S,
u· · .i_
Income Taxation (2016),. p: 309) .
/. ½ ') l-
-
z -----
. :;-4 ...·
<C ' -1 it::~ ~:j ', :j r,
: . - ~ - - - - _-•z_:r,J . .
rJ) /
_;
. ! -;'.
. i.-
/. '/

!.
:~

).-
)--
 \ I
.
.,,,i --~
MEM:Q~y AID
San Beda l.Wvel'8lty Colege of Law - RGCT Bar °""'8tiona Cerner
· 173

SUMMARY TREATMENT

LOSSES o_~ INDIVIDUAL vs,_c

.:::..O
.=;,.:.,,:
R:...PO
=-=--=
RA :....:T
..:..:1:0..:..:
.:: N~ - - - - - - - - ,

ORDlr,jARY Can be deducted from capital gains if

LOSS ordinary income is not enough to absorb
it.

Apply three-year rule; can be deducted

NOLCO from ordinary income or (net) capi,al
INDIVIDUAL gain.
TAXPAYER

CAPITAL Apply holding period. Deductible from

' f-+ capital gain only (NIRC, as amended by
LOSS
TRAIN, Sec. 39(C)).

Apply one-year rule; subject to. limit.

NCLCO Deductible from net capital gain only
(NIRC, · as amended by TRAIN, Sec.
39(0))

ORDINARY LOSS
The same as individual taxpayer.
OR NOLCO

CORPORATE CAPITAL No holding period. Deductible from

TAXPAYER LOSS capital gain only.

Net capital loss carry-over is not

NCLCO applicable (NIRC, as amended by
TRAIN, Sec. 39(0))
174
INCOME-TAXATION
·raxation Law

SUBJECT OF CAPITAL GAINS T AX•ON ·THE SALE OF REAL PROP.ERTIES BY AN

INDIVIDUAL AND A CORPORATE TAXPAYER

Citizen (Resident or Non-. The capital gains presumed to have been realized fro in the sale, exchange or other"
resident) .disposition ·of real·property located in the Philippines, classified as ca~ital assets.
(NIRC, Sec. 24 (D)(1)).

Resident Alien The capital gains presumed to have been realized from the sale, exchange or other
(NIRC, Sec: 24 (D)(1)) . disposition of real property located in the Philippines , classifie~ as capital assets.

NRA-ETB or not within the Capital gains realized from the sale, exchange or other ·disposition of real
Philippines · property.
(NIRC, Sec. 25 (A)(3)) .

NRA-NETB within the Capital gains realized from the sale, exchange or other disposition of real
Philippines property.
(NIRC, Sec. 25 (BJ).

Domestic Corporation Gain presumed to have·been realized on the sale, excha.nge or other disposition
(NIRC, Sec. 27 (D)(5), as of lands and/or buildings l:'hich are~not actually used in lhe business of a
amended by TRAIN Law) . corporatioh and are treated as capital assets.
# • ..~,,,,,,

The NI~ does not impose the 6°/~ capital ~ain~ tax on the .realized from the sale
of machineries and ~5luip11;(ient (SMI-Ed' Phiiippmes Techn_ology, Inc.v. etR, G.R.
No. 1754 10, November 12_, -201_4) . ·
 -
MEM-Q~y AID
' ~,
San Bede U.-.ity College or law - RGCT Bar Operatlona Center
0
175

RULES ON EXCHANGES Mode of

Acquisition
Basis
OF PROPERTY deterry,ining loss, the basis
shall be such fair market
value.
NOTE: 2021 Bar Examination Taxation Law Syilabus
does not include Corporate Recovery and Tax 4. ·Acquired for The amount paid by the
Incentives fo~ Ente_rprises Act (CREA TE), but for less than an transferee for the property
purposes of d1scuss1on, CREA TE Act was included in adequate
the making of the Memory Aid ' consideration

5. Acquired in a Substituted Basis

Determination of the Amount of Gains and Loss
1. Gain _ previous tax-
free exchange
- excess of the amount realized over the basis
or adjusted basis (NIRC, as amended by TRAIN, Sec. 40 (B);
INGLES, Reviewer, supra at 181-182) ·
2. Loss
- excess of the basis or adjusted basis over the NOTE: Nos. 1-4 above are ·considered the original
amount realized. basis of property to 'be transferred . If the acquisition
cost of the property is increased by the amount of
3. Amount Realized improvements that materially add to the value of the
- sum of money received plus the fair market property or appreciably prolong its life less
value of the property (other than money) received accumulated ,,,depreciation, the adjusted basis of the
(NIRC, S~c. 40) -co~t_ih ,Nos.1.:..4: shall be used as original basis (Id.).

Formula: SUBSTITUTED BASIS

Money received in the sc1le or disposition · xx • _ Basis for d"tterniining gain or loss on a subsequent
sale or dispositioA. of property subject of the tax-free
Add : FMV of the property received xx exchangel (NIRC, · Sec. .40(C)(5)(a)) (Please see
, · discus~ ior, below pr{ TE!x-Free Exchanges).
Amount realized xx : ... ·. ~ .... ,,., ~• . ... .> ' "~.•;._.;,,, '

Less: Basis of the property sold or (xx)

1. Substituted'Basis of stocks _or securities
.~ _i

disposed
: received by the transferor on a tax-free
··.;ii·, : J!X~ftange
• • t....., •
GAIN or LOSS from the sale or r-"v-
disposition xx Formula (R.R. No. 18-2001, Sec. 2):
i
Original basis of the stock or securities
exchanged xx
BASIS OF SALE OR EXCHANGE OF
PROPERTY Less: Money received (including the
.. - .. liability assured by the
Mode of Basis transferee of property or the (xx)
Acquisition amount of liability on the
property)
1. Purchase Cost
FMV of other property
2. Inheritance Fair market price or value as received (xx)
of the date of acquisition
Add: Amount treated as d_ividend xx
3. Gift The same as if it would be in Amount if any gain recognized
lhe hands of the donor or the on tt)e exchange ·
xx
last preceding owner by wh~m
it ·was not acquired by gift. .Substituted-Basis of the Stocks or
xx
Securities
Except if such basis is greater
than the fair market value of The property received as "boot" shall have as
the property at the time of the basis its fair market value.
gift then, for ·the purpose of
 INCOME TAXATION
176 .· · Taxation Law

Boot 2-. A shareholder exchanges stock in a corporation

- money and/or other property received in
excess of the stock or securities received by the
transferor on a tax-free exchange
If the transferor receives several kinds of stocks
or securities, the CIR is authorized to allocate the
basis among the several classes of stocks or
securities (R.R. No. 18-2001, Sec. 2).
2. Su.bstituted Basis of the Property
- Transferred in the Hands of the Transferee·
a. Original basis in the hands of the transferor
b. Plus: the amount of the gain recognized to
the transferor on the transfer
~equisites for recognition of gain or loss .in
an exchange of property:
a. _The property received is essentially different
from the property disposed of and
b. The property received has market '(allle - 1
(R.R, No: 2, Sec. 140) 1 '>_
which is a party to t~e merger or consolidation:
solely for the stock of anottier corporation also a
· party to th~ merger or consolidation (stock for I
stock); II
I
3.· A security holder of a corporation, which_ is a I
party to the merge~ or con_sol~dation, exchanges
his securities in such corporation, solely for stock
I
or securities in another corporation, a party to the I
merger or consolidation (security_for stock); or
4. If property is transferred to a corporation by a \
person in exchan.ge for stock or unit of
participation in such a corporation of whic~ as a
result of such exchange said person, alone or
together with 9thers, not exceeding four persons, •
gains c;:ontrol of said corporation: Provided, That
stocks issued for services shall not be considered
as issued in ret_urn for property ( estate planning)
' (NIRC, ·sec. 40 (C)(2)).
!
"--
+
• t'
1'
'I

_ , > ;.... -:;;;_, NOT~: ,control means _ownership of stocks in a

GENERAL RULE: Upon the.sate or e~ch,an-ge of corporatio possessing at least fifty-one percent
property, ttie_entire amount of the 'gaip·or _loss-;as- - (51 % ) ,of the' total voting power of all classes of
the case may be, shal1 be r,ecpgnized (NIRC, . . stocks entitlecfto .vote (NIRC, Sec. 40 (C)(6)(c)).
Sec. 4,0(C)(1)). . I - . . \ · ' ,.. ' . .
/ -- ' ' I NOTE: Under th~ CREATE Act. control means
EXCEPTIONS : .,,_,,. - - --- ownership of stoc.ks in a corporation after· the
a. Gain recognized but"'loss not recQgnized in - _"tran~fer of prop erty possessing at least fifty-one
transactions be~e~~ elated pa_rties (NIRC, . ' . . percfont (51 %) of 1t~e total voting power of all
Sec. 36(8)). . \ , \ · classes qt stocks entitled to vote: -Provided, that
,• . , \ 1r, : - • - t the collective· and-not the individual ownership of
b. Exchanges
Exchanges
Solely -. in ·. Kind/fax-Free · ·
. · '- ;- ( · ' · -I- all -elasses 1 of stocks entitled to vote of the
/ tran'sferor -'or traAsferors shall be used in
- It is an excha~g~ of'property with p~o'f)e~ y . ,,,.-_r d,!:3termining the (}resence ·of control (R.R. No. 5-
and no money 1s involved (e.g. , shares 1 o'i-;·)- -i:, ~,2021, ec. 2). /' · . .
stock exchanged for shares of stock) (2-A ::-: _ J,:/ .. , . . / • . · .
DOMONDON, supra at 306) . . _l'!~; , ·. !N ~~NS:ES WHEN ,THE GAIN OR LOSS
. .. • , ON THE'' SALE · OR EXCHANGE . OF
c. Gam recognized but loss not recognized. _._ . ,.. -
where the exchange is not solely in kind·- , _. • .PROPERTY IS . NOT RECOGNIZED
(NIRC, Sec.40(C)(3)) . . UNDER THE CREATE ACT·
1. No gain 9r loss . shall be recognized o~ a
NOTE: Exchange solely in kind is an corporation or on its stock or securities if such
exchange of property with another property corporation is a party to a reorganization and
and no money is involved (e.g., shares of exchanges property in pursuance of a plan of
stock exchanged for shares of stock) (2-A reorganization solely for stock or securities in
DOMOND_ON, supra at 306). another corporation that is a party · to the
reorganization.
INSTANCES WHEN THE GAIN OR LOSS
ON THE SALE OR EXCHANGE OF 2. No gain or loss shall be recognized if property is
PROPERTY IS ~OT RECOGNIZED t~ansferred to a corpo'ration by a perso.n, alone or
together with others, not exceeding four (4)
1. A corporation which is a parfy to a merger or
persons, in exchange for stock or unit of
consolidation, exchanges property solely for
participation ·in .such a ·corporation of which is a
stock in a corporation, which is a party to the
result of such exchange, the transferor or
merger or consolidation (property for stock);
transferors, collectively, gains or maintains
control of said corporation: Provided, that stocks
 \ I
MEM:0-Rv·Al D
e. ,___,,___
San B e d e ~ Colega of'Law - RGCT
...,,.,,__,.Cooter
issued for services shall not be con 1
'd d
issued in return of property. ~ ere as
3. · Sale or
h
exchange of property used fo •b .
. . r usmess
for s ~res of stocks covered under this
subsection shall not be subject to value-added
tax (VAT). In all of the foregoing instances of
exchange of property, prior Bureau of Internal
Revenu~ (BIR) confirmation or tax ruling shall.not
be req~rred for pu_rposes of availing the ·tax
exemption. The concerned part·ie
.. I t th s can
imp emen e transaction covered b th '
S t' . I d" · y IS
etchroncmc_fiu mg, but not limited to, the issuance
of e ert1Icate ~ut~orizing Registration (CAR)
by the R~venue District Office (RDO) where the
property 1s located, in case of real properties or
·to the RDO where the business is registered', in
case of shares of stocks, subject to post-
transaction audit by the _ Bureau (R.R. No. 5-2021
Sec. 8).
REORGANIZATION SHALL MEAN ANY
OF THE FOLLOWING INSTANCES:·
1. A corporation which is a party to a merger or
consolidation, exchanges property solely for
stock in a corporation, which is a party to ttie·
merger or consolidation; • be con·sidered as issued in retum for property
2. The · acquisition by · one (1) corporation, in
exchange solely for all or a part of its voting stock, ·
or in exchange solely for all or part of the voting
stock of a corporation which is in control ·of the
acquiring corporation, of stock of another
corporation if, immediately &fter the acquisition,
the acquiring corporation has control of such
other corporation, whether or not such acquiring
corporation had control immediately before the
acquisition;
· 3. A recapitalization which shall .. _mean . an
arrangement whereby the stock and bonds cif a·-
.corporation are readjusted as to amount,' income,
or priority or ~n agreement of all stockholders and
credits to change and increase or decrease the
capitalization or debts of the corporation o~ both;
or .
4. A reincorporation, which shall mean the
formation of the same corporate business with
the same assets and the same stockholders
surviving under a new charter (R.R. No. 5-2021,
Sec. 2(/)).
TAX-FREE EXCHANGES
Tax-free exchc;1nges refer to thqse instances
enumerated in Section 40(C)(2) of the NIRC that are
not subject to Income Tax, Capital Gains Tax,
Documentary Stamp Tax and/or Value-added Tax, as
the case may be.
. 177
TAX-FREE EXCHANGES OF PROPERTY·
1. No gain or loss is recognized where in pursuan_ce
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 porporation, which is a party to the
merger or consolidation (Property For Stock);
b. A shareholder exchanges. stock in a
corporation, which is a party to the merger or
consolidation, solely for the stock of another
corporation also a party- to the merger or
consolidation (Stock For, Stock); or
c. A security holder of a corporation, which is a
. party to · tbe merger or consolidation,
. exchanges his securities in.such corporation,
solely for stock or securities in such
• corporation,' a party to the merger or
consolidation (Security for Stock); ·and
'
2. 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:
,j- Provided, that stocks issued for services shall not
(Estate ~lar:ining) {NIRC, Sec. 40(C)(2)(c)) .
ti
ILLUSTRATION: .
A and B assig ed or conveyed to X Corporation
real i;,roperties in payment of the stocks of X.
After the exchai:ige, and as a- result of such
exchange, A and B galned control of X.
,.'.J Accordingly, no gain or loss shall be. recognized
\ ;• ~A9 both transferors (A and 8) and the transferee
· · ·· •'(X)i· · ·
. -~-- " ti . . .
._ However, if the transferors later sell or exchange
the shares of stock acquired by them in
exchange, they shall be subject to income f~x o·n
the 1gains derived from such sale or exchange (1
DE LEON, NIRC, supra at 542). . :
NOTE: Technically, there, is no tax exemption
even if the exchange· is sqlely ir( kind. - The
exemption refers only . to the initii:11 exchange.
There is merely a deferral of th,e income ·tax.
Thus, upon the subsequent sale or dispositio_n of
the - . property _ covered by the merger,
consolidation or tax-free exchange by the
transferor to the transferee, the historical co$t or .
basis shall be used for purposes of determining
the gain or loss from the _subsequent sale or .
transfer (MAMALA TEO, lncom_ e Tax, supra _a t
320).

178
DEFINITIONS
1. Securities t "notes" of
_ bonds and debentures but no
whatever class or duration (NIRC, Sec. 40
(C)(6)(a)).
2. Merger or Consolidation so1·1dat·1on
means the ordinary merger or con '
or the acquisition by one corporation of all or
substantially all ·the properties of another
corporation solely for stock undertaken for a bona
fide business purpose and not solely for ~he
purpose of escaping the burden of taxation
(NIRC, Sec. 40 (C)(6)(b)).·
In determining whether a bona fide business
purpose exists, each and every step of the
transaction shall be. considered and the whole
transaction or series of transactions shall be
treated as a single unit: Provided, _ tbat in .
determining whether the property transferred
oJ
constitutes a substantial portion the properfy of
the transferor, the term "prop~rty" shall include
the ·cash assets of the transferor .(N/f?.C, 'Se;. 4Q,,
(C)(6)(b)). . , ..., t' ,·"'
· •' i·
3. Control · t·,.
- ownership of stocks in a corpora lvn -· - 1.- . If the individtlal, a shareholder, a security holder
possessing at least fifty-one percent (5:1 %)-9,~ -!he ,
total voting power of all classes of stoc s entitled:,
to .vote (NIRC, Sec. 40(C)(6)(c)) . · \ ·~ •
..r- • .--;,_\
REASON·FOR THE EXCt:PTION$";\ . .
More often than not, exchanges involved in cofl)orate 1
combinations do not result in substantial alteration i~ I/ ' .>b:. Loss · is not recognized (NIRC, Sec.
the interest of those who _own the business atfe_!5\ed; : . -: · _ ,, 40(C)(3)(a )'.
by the transaction before 1t was reformed. \/Yhen: the !..=, __ --
government imposes a tax on the suppo~ grin or
when it allows a deduction on the .suppo .~ loss,
what the government actually does is to tax paper
-M P\. "
profits" and to allow deduction of "paper loss!S"
(Explanatory Not~ to_H.B. No. 7235, ~nacted mto
R.A. No. 1921 which inserted the exceptions) .
RULE ON UPSTREAM MERGER
An upstream merger between a parent company and
its subsidiaries where the parent company will not be
issuing any shares to the subsidiaries in exch~nge for
the assets to be transferred as a result of the merger
takes the nature of a donation made by the
subsidiaries to their parent company and not a tax-
free exchange transaction contemplated in Section
40(C)(2) of the NIRC (BIR Ruling No. 614-12,
November 9, 2012).
ILLUSTRATION: A Corp., a domestic corporation,
entered into a merger with its wholly-owned domestic
subsidiaries, B Corp. and C Corp. A Corp. is the
surviving corporation. Pursuant to the merger, B
INCOME TAXATION
· Taxation Law
C Corp. will transfer all their assets and
Corp. an d ·· B C dC
liabilities to A Corp. However, since ~rp. an
Corp. a re wholly-owned
.
by A Corp. prior to th~
. h - f
r A Corp. will no longer issue any s ares o
merge ' d 1· b·1·t·
stock in consideration of the assets an 1a 111es
transferred. Is the merger between A Corp., B Corp.
and C Corp. considered a tax-free merger under
Section 40(C)(2) of the NIRC?
ANS: NO. The intended re-organization is ~n
upstream merger between a parent ~ompa~y and its
su bs1.d.1aries
. where the parent company
. . will not fbe
issuing any shares to the subsidiaries in exchange or
the assets to be transferred as a result of the mer~er.
In effect, the transfer takes the n~ture of donation
made by the subsidiaries to their pare~t company,
contrary to what is contemplated in Section _40(C)(2)
of the NIRC. ·1n the .same manner, the !ntended
merger also has the effect _of dissolving and
liguidating the subsidiaries . without payment of
'i
corresponding taxes (BIR Ru/mg 614-12, November
.9, 2017Y: . "
--EX'cHANGES NOT SOLELY IN KIND
· It involves an exchange of property not solely for
stocks (f or sh~re Af stock or securities plus _money
.. ~ndlor other property including assumption. of
liability}: i '_: : .
·:· or . ~orporp~on~l ~ceives not _only st~ck or
. · secuqti~ but also · oney andJor property. •
· _._ __a,,-1 Ga(n, if any, is recognized in an amount n~t
- I. · .l(l ·excess"of~he sum of the money and fair
I . · . · :rriarket,.value ofrsuch other property received.
,', • ,, .
1
.,..., . .
.. · NOTE: In case of a shareholder, if the money
a' d or other property received has the effect
of a distribution of a taxable dividend, there
shall be taxed as dividend to the shareholder
an amount of the gain recogn,ized not in
excess of his proportionate share of the
undistributed earnings and profits of the
corporation. The remainder, if any, _of the
gain recognized shall be treated as. a capital
gain (NIRC, Sec. 40(C)(3)(a)) .
2. If the transferor corporation receives· not only
shares of stock but also money and/or other
property: ·
a. · If the corporation receiving such mon~Y
and/or other property distributes it in
pursuance of the plan of merger or
consolidation, no gain to the corporation shall
be recognized from the exchange.
b. Otherwise,· th~ gain, if ~ny,_ shall b~
recognized but in an amount not m excess 0
 \ I
MEM-0.:RY Al D
s.-, Beda lk-MfSfty Colege of Law • RGCT Ber 0pec'8tlona Cents
the sum of such money and the fair market
value of such other property so received,
which is not distributed. The loss to the
corporation is not recognized (NIRC, Sec.
40(C)(3)(b)) .
If tbe taxpayer receives stock or securities
plus assumption of liabilities:
GENERAL _RULE: Such assumption or
acquisition shall not be treated as money
and/or other property, and shall not prevent
the exchange from being within the exception _
(NIRC, Sec. 40(C)(4(a)).
EXCEPTION: If the amount of the liabilities
assumed plus the amount of the liabilities to
which the property is subject exceed the total
of the adjusted basis of the property
transferred, then such excess shall be
considered as a gain from · the sale or
exchange of a capital asset or of property
which is not a capital assed , as the case may : deductible from the nature of the transaction as
be (NIRC, Sec. 40(C)(4)(b)) .
• · · intention of the .parties, as being inferred from the
OTHER INSTANCES WHEN · GAIN IS : · transaction by operation of law basicany by reason of
RECOGNIZED auT LOSS I~ NOT
RECOGNIZED: (I- WAR)
1. !llegal transactions (R.R. No. 02-40, Sec. 96) ; -
2. Wash sales by non-dealers of securities and
when not subject to the stock transaction tax
(NIRC, Sec. 38(A)); ·
3. Sales and exchanges that are ·not Arm's len~th:
and , .
4. Transactions between Related taxpayers (NIRC,
Sec. 36(8)).
- la.._E_s_T_~_T_E_s_AN
_ o_T_
R_u_s_
T_s_l
ESTATE
It refers to the mass of properties and assets left
behind by the deceased (2-A DOMONDON, Sf!pra at
74).
It includes not only the property and transmissible
rights and obligations existing at the time.of hi~ death,
but also those which have accrued thereto since the
opening of the successio_n (CIVIL· CODE, Art. 781 ).
TRUSTS
An arrangement created by will or by an agreement
under which the property is passed to another for
conservation or investment wit!'\. 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 (1
DE LEON, NIRC, supra at 694).
A trust is the legal relationship between one person
having an equitable ownership of property and
another person owning the legal title to such property,
· the equitable ownership of the former entitling ~im to
the performance of certain duties and the exercise of
certain powers by the-latter (Estate of Cabacungan v.
Laigo et. al, G.R. No. 1750'7:3, August 15, 2011) .
Trusts are either express or implied. Express or direct
trusts are created by the direct and positive acts of
the parties, by some writing or deed, or will, or by oral
declaration in words evincing ~n intention to create a
trust. Implied trusts - also called "trusts by operation
of law," "indirect trusts" and "involuntary trusts" -
arise by legal implication based on the presumed
intention of the parties or on equitable principles
. independent of the particular intention of the parties.
They are those which, without being expressed, ar~
matters of intent or, independently of the particular
equity (~state ofCabacungan v. Laigo et. al, G.R. No.
175073, August 15, 2011). ·
TAXABILITY OF ESTATES AND TRUSTS
· Estates and trusts are considered · as individuals
:- taxable as separate taxpayer, except revocable
..• trusts, he..income of which -shall be included in
computing the taxable income of the grantor (1 DE
. ·' LEON, NIRC, supra at 695).
The income of estates or any kind of property held in·
... trust are'taxable, including:
1. Income accumulated in · trust for the benefit of
unborn or unascertained person or persons with
contingent interests, and income accumulated or
held for future distribution under the terms of the
will or trust;
. 2. Income which is to be distributed currently by the
fiduciary to the beneficiaries, and · income
collected by a guardian of an infant which is to be
held or distributed as the court may direct;
3. Income received by estates of deceased persons
during the period of administration or settlement
of the estate; and .
4. Income which, in the discretion of the fiduciary,
may be either distributed to the beneficiaries ·or
accumulated (NIRC, Sec. 60). - -
TAXABLE INCOME OF ESTATES
For income tax purposes, estates are classified into:
.. t t·
1-. Estate under judicial admm1s .ra_1~n .
2 _ Estate not under judicial admm1strqt1on (NIRC,
Sec. 60(A)(c)).

ESTATE UNDER JUDICIAL
ADMINISTRATION
Income received by _estates of deceased persons
during the period of administration or settlement of
the estate is taxable (NIRC, Sec. 60(A)(c)) .
Gross Income of Estate
The items of gross income taxable to individuals
under Sec. 32(A) of the NIRC are also the same items
of gross income which are taxable to esta!es (NIRC,
Sec. 61(A)) .
Included in the gross income .of an estate are the
following : . .
1. Income received by the estate of the deceased
person during the period of . administration o_r
settlement of the estate.
2. WherE~, prior to the settlement of the estate, the
executor or administrator sells the prope'D' of
decedent's estate for more than the appraised ·.
value placed upon it at the death 9f the decedent,
the excess is income taxable to the estat~. · ·
Excluded in the gross income of ·an estate is the gain
derived from the passage of property ~o the exec,Litor
or administrator on the deat of the decedent, even
though the property may have appreciatec:Lin value
since the decedent acquired it. r
. , --· ;;
Deductions in the Gross Estate · . operating income in excess of P250 ,000 in lieu .of
1. An estate can take up tlie same itemS-- Of
deduction-allowed on individual taxpayers under·
Section 34 (N/RC, Sec. 61). - '
2. Special deductions: . · ·. ·- ·-
a. There shall be allowe~ s a ded ction _i_n _1 • -
computing tl:)e taxable mco e of the esJ te .
the amount of the income of the: ~sThte or
trust for the taxable year which i~( to be ; ... 1
distributed currently by the fiduciary to the •
beneficiaries, and the amount of the income
collected by a guardian of an infant which is -
to be held or distributed as the court may
direct (N/RC, Sec. 61(A)).
NOTES:
i. The amount so allowed as a ded_uction
shall be included in computing the
taxable income of the beneficiaries,
whether distributed to them ·or not (NIRC,
Sec. 61 (A)) .
ii. There is a creditable withho1ding tax on
payment to the heir of 15%, except such
income subject to final withholding tax
and tax-exempt income (R.R. No. 11-18,
Sec. 2(0)). ·
b. There shall be allowed as an additional
deduction in computing the taxable income of
INCOME TAXATION
Taxation Law
the estate the amount of the income of the
estate or trust for its taxable year, which is
properly paid or credited during such year_to
any legatee, heir o_r beneficiary (NIRC, Sec.
61(8)).
NOTE: , The amount so allowe~ · as . a_
deduction shall be incl_uded in computing the
taxable income of the legatee, heir or
beneficiary (NIRC, Sec. 61(8)).
Rates of Tax: .
Since the taxable income of estates shall be
computed in the same manner and on the same basis
as in the case of an individual (NIRC, Sec. 60}, the
income of the estate shall be taxable as follows:
If the estate's gross sales/receipts plus other _
non-operating income exceeds the VAT threshold
of Pl 000 000: It shall be taxed on its net taxable
, incorn~ . u~ing the graduated rates under Sec:
24(A)(2-)(a) of the NIRC ..
If the estate's gross sales/receipts plus other
non-operating income DOES NOT EXCEED the
VAT threshold of ' PJ,000,000: The executor or
administrator of the estate has the option for the
· estate to b e taxed at
- 1. - The graduated rates under Sec. 24(A)(2)(a) .of
the NIRC; o -.
2. 8% gross sales or-gross receipts , plus other non-
- the graduated income tax rates . un_der Sec.
, 24(A)(2)(a) of the . NIRC and the 3% Other
Per~entage Tax under"Sec. 116 of the NIRC
ESTATJ:'NOT UNDER JUDICIAL
ADMINISTRATION
.~ ---:::----:-----:----:-:----------- -
• Pending the extrajudicial settlement, the income tax
lia bilify depends on whether or. not an unregistered
'partnership or co-ownership is created (N/RC, Sec:
60(A)(3)) .
If the heirs contribut_e· to the estate money, property,
or industry with intention to divide the profits
between/among them , an unregistered partnership
is created and the ,estate beco•nies liable for the
payment of corporate . income tax (Eflangelista v.
Collector of Internal Revenue, G.R. No. L-9996,
October 15, 1957).
"NOTE: T·he co-ownership of inherited properties is
automatically converted into an unregistered
partnership the moment the said common properties
and/or the incomes derived therefrom 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
.,...---
\ I
MEM:O~Y AID
SW, 8eda U-MrlAy Colege or Lllw • RGCT Bar Operations Center
intestate . proceeding (Ona v. .Commissioner of
Internal Revenue, G.R. No. L-19342, May 25, 1972).
If the heirs, without contributing money prop rt
t . th . . e Y or
industry 0_1mprove e estate, simply divide the fruits
!hereoft b~tweita;~dng th~mselves ; a co-ownership
IS c~ea e ,' an ~n IVI ual mcome tax is imposed on
the income received by each of the heirs -payabl ·
their s~p~rate and individual capacity (Pascua~
Comm1ss1onerof Internal Revenue, G.R. No. 78133
October 18, 1988). · · ·
TAXABLE INCOME OF TRUSTS
Trusts are classified into:
1. Ordinary Trust
2. .Revocable Tn,ist
3. Employee's Trust
NOTE: Income of employees' trusts is exempt
fr?m irwome tax (NIRC, Sec. 60(8)) . (Please see
dtspussion on Employees ' Trusts) . ·
ORDINARY TRUST
-::T::-he---:-in_c_o_m_e_a_n.,..d:-c-o_r_p-us-o"'.""f.,..th_e_t-ru_s_t_d_o_n_o_t-re_v_e..:.
the granter. It is any of the following trust: · 1r,tr,1e or all oj.~is employees.
1. A trust where the income accumulated in trust f
· the benefit of unborn or unascertained persc-
· persons with contingent interests; -. -·
2. A trust where the income accumulated Mid
future distribution under the terms bf ftit, -1f or .
trust;
3. A trust where the income which f/ t O, · be
distributed currently. by tiie fiduci~ry\_tt> · the
beneficiari~s; _ r. .,. ,.
4. A trust where the income collected by a g·uardian
of an infant which is to be held or distributed as
the court may direct; and · .·. · .Y
5. A trust where the income which , in the discretion
of the fiduciary, may be either distributed ·to the
beneficiaries or accumulated (NIRC, Sec. 60
(A)(1), (A)(2) and (4)).
REVOCABLE TRUST
Revocable trusts exist when the power to revest in
the grantor title to any part of the corpus of the trust
is vested:
1. In the grantor, either alone or in conjunction with .
any person not having a substantial adverse
interest in the disposition of such part of the
corpus or the income therefrom; or
2. In any person not having a substantial adverse
interest in the disposition of such part of the
corpus or ·the income therefrom (NIRC, Sec. 63).
NOTE: For tax purposes, _the trustor or the
• grantor, not the trust itself, is subject to the
payment of income tax of a revocable trust.
Income Included in Comp~ting the Taxable
Income of the Grantor .
Income of the trust shall be included in computing the ·
taxable income of the grantor'where any part of the
,,
income of a trust:
1. Is, or in ttie discretion of the grantor or of any
person ·not h_aving a substantial adverse interest
in the disposition of such part of the income may
be held or accumulated for future distribution to
the grantor, or
2. May, or in the discretion of the grantor or of any
person not having a su_bstantial adverse interest
in the disposition ~f_ such part of the income, be
distributed to the grantor, or
3 . . is, or in the -discretion of the grantor o~ o( any
person not having a substantial adverse interest
in the disposition of such part of the income may
be applied to the payment of premiums upon
policies of insurance on the life of',the grantor
(NIRC, Sec. 64(AJ) . . .-
, .iH~"'LOYEES' TRUST . . .
, Tnu.f wnich forll)s part of a pension, stock bonus or
rt.._t_o ptohf ..:. .sharing plan of ari employer for the benefit of
/.".' · • •· ,,.JI
.-i:';;;ploye'es' t;t sts .are not subject to income tax
-4 provided the following requisites are m_et: (PCDE) ,
or rot l~ 1. Employ~e~ trust mu~t be fart of a pension, stock
bonus ,or ~ro t-sharmg plan ofthe employer for
the benefi of some or all of his employees;
/ · , -
f ootrlbutions are made to the trust py such
employer, or such employee~. or both; ·
3-,,·-Such contributions are made for the p~rpose of
Qistributing to such employees both the earnings
and principal · of the fund accumulated by the
t nd
truS ; a · ·
4. · Th·e trust instrument makes it impossible for any
part of the trust corpus or income to be used for -
or diverted to, purposes other than the Exclusive
·_benefit of such ~r:nployees (NIRC, Sec.60(8)).
Tax exemption is -likewise to be enjoyed t:iy the
income of the pension trus t: otherwise,· taxation of
those earnings would . result in a diminution of
accumulated income and reduce whatever the trust
beneficiaries would receive out Qf the trust fund -
(Commissioner of Internal Revenue v. Court of
Appeals, GCL Retirement Plan, G.R.. No. 95022;
March 23, 1992).
Since the final tax and the withholding thereof are
embraced within the title on "Income Tax", it follows
that e_mployees' trusts ·are deemed exempt
therefrom; otherwise, the exemption · becomes
meaningless (BIR Ruling No. 042-00, September 15,
2000). .
 ("· ~,: :·
182
Any amount actually distributed to any employee or _
distributee shall be taxable to him in the year in which
so distributed to the extent that it exceeds the amount
contributed by such employee or distributee (NIRC,
Sec. 60(8)) .
INCOME OF TRUST TAXED TO THE
TRUSTEE
1. The income of a trust which is to be accumulated
or held for future distribution, whether consisting
of ordinary income·or gain from the sale of assets
included in the corpus of the trust, must be
returned by and will be taxed by trustee.
2. The income of a trust, whether created by will or
deed, for accumulation of income, whether for an
unascertained person or persons with contingent
interests or otherwise, shall be taxed to the
trustee.
3. The income of a trust, where under the fe;,;,s of
the will or deed, the trustee may, in his discretion ,
distribute the income or accumulate •i.t, tHe
income is taxed to the trustee, irrespective of th_e
exercise of his discretion. 4 ·; •' _ 4
.-
INCOME OF TRUST TAXED
BENEFICIARIES
The income of a trust for the taxable year -.yhich ·is to
be distributed to the benefici<!rieS ,!llUSt be, returned
by and will be taxed to the r~spective beneficiaries.
, .,,, ., · - · -·
There is a creditable withholding tax on' paynfer t to
th e bene fiIcIa
· ry of 15°/4o, ex cept sue h mcome
· · su b'1ect
to final withholding tax and tax-1exempt--i,.ncome; 1R:R. · _i ,, ~·
No. 11-18, Sec. 2(0)). ' 1 - • •
; <:t._
I /
INCOME OF TRUST TAXED <T,O
. , THE ·
GRANTOR
1. In case of revocable trust, income from such"part .
of the trust estate title to which may be revoked
by the grantor or reveste9 in the grantor.
2. In the case of a trust the iAcome of which , in
whole or in part, may be held or distributed for the
benefit of the grantor. That part of _the income
which rriay be held ·or distributed for the benefit of
the grantor should be included in the return of the
grantor (NIRC, Sec. 63). . Sec. 62 of NIRC is hereby repealed .
3. Such part of the income of the trust which may be
applied to the payment of premiums upon
policies of insurance .on the life of the grantor. ·
Such part of the income shall be included in
computing the taxable income of the grantor
(NIRC, Sec. 64(A)).
INCOME TAXATION
· Taxation Law
ITEMS COMPRISING THE TAXABLE
INCOME OF TRUSTS
1. Gross Income
- same as individuals (NIRC, Sec. 60(8)).
2. Allowable Deductions .
- same as individuals (N/RC, Sec. 60(8)) .
NOTE: The amount so allowed as deduction
shall be included in computing _the net income of
the · heir, _legatee, or beneficiary (NIRC, Sec.
61(8)) .
3. Special Deductions
a. The amount of the income of the estate or
trust which is to be distributed currently by ·
the fiduciary to the beneficiaries;
b. The amount of the income· collected by a
guardian of an infant which is to be held or
distributed as the court may direct. The
·amount so allowed as deduction shall be
included in computing the net income of the
heir, legatee , or beneficiary; and
c. Tl,e amount of the income of the estate or
trust which is properly paid or credited to any
legatee, heir or beneficiary (NIRC, Sec~61) .
TO
- NOTE: i ··tne' case of a trust administered in
a foreign· t ouhlry, the deductions mentioned
in a., b. , and, c. bove shall not be allowed:-
Provided, That 't he amount of any income
i_
ri~l9ded, in the.ret1,1rn of said trust shall not be
· '· · ' included in 'computing the income of the
•• .r:-~:--...
~p-eneficiaries (NIRC, Sec. 61) .
Where no s ch distribution to the heirs is
--:,~ I i- " - .• - made during the taxabl~ year when the
'
incohi'e · is earned, and such income is
su~[ecled · to · income tax payment by the
estate, the subsequent distribution thereof is
no longer taxable on the part of the recipient
(BIR Ruling 233~86, November 7, 1986).
EXEMPTIONS
Pursuant to Sec. 19 of R.A. No. 10963 (TRAIN,Law),
the tax exemption allowed to estates . and trusts
amounting to P20,000 previously provided under
.
Rates of Tax: Since the taxable inco~e of trusts shall
be computed in the same manner and on the same
basi~ as in the case of an individual (NIRC, Sec. 60)),
the inc om_e of the estate shall be taxable as follows :
If the trust's gross sales/receipts plus other non·
operating income·exceeds the VAT threshold of
P3,000,000: It shall be taxed on its net taxable
income using the . graduated rates under Sec.
24(A)(2)(a) of the NIRC.
 MEM,Q~y Al D
Sen OedR UnMlrlity College of Lew • ROCT Bar Opera11on8 CIIOter
If the trusts's gross sales/receipts plus other non-
operating lnco'!'e DOES NOT EXCEED the VAT
threshold of ~3,000,000: The trustee has the option
for the estate to be taxed at
1. The graduated rates under Sec. 24(A)(2)(a) of
the NIRC; or
2. 8% gross sales or gross receipts, plus other non-
operating income in excess of ~250,000 in lieu of
the graduated income tax rates under Sec.
24(A)(2)(a) of the NIRC and the 3% Other
Percentage Tax under Sec: 116 of the NIRC
FILING OF INCOME TAX RETURN
1. If income is distributed to beneficiaries , the
beneficiaries shall file the return and pay the tax·
2. If income is to be accumulated or held for futur~
distribution, the trustee or beneficiary shall file the
return and pay the tax .·
EXCEPTION: Whete at any time the power to revest
in the grantor title to any part of the corpus of the trust
is vested in the :
1. Grantor, either alone or in conjunction with any
person not having a substantial adverse interest
in the disposition of such part of the corpus or
income, or
2. In any person not having a substantial adverse
interest in the disposition of such part of the
corpus or income, the income of the trust shall be
included in computing the taxable income of the
grantor (NIRC, Sec. 63) .
T AXABILITY OF INCOME 'QF ESTATES
AND TRUSTS
~ - ..... ~---~-~-•"'•J••~~
ncoine,1{ '\f.:---:-~~.i ~b~:; ,:~pcp~ye.rt 1. .
, '. _,. ·< • - :_-..~~f..:-" :.4;)i:~:::t:.:~;;r.... ..._. ""·-
For the benefit of the granter Grantor
Sec. 64)
Retained by the trust Fiduciary
Distributed to beneficiary Beneficiary
CONSOLIDATION OF INCOME OF TWO
OR MORE TRUSTS
Where two or more trusts are created by the ~ame
grantor, and the beneficiary In each Instance 1s the
same person the fiduciaries shall file a separate
return for and pay the Income tax of, each trust, but
the CIR ~hall cause the income tax to be computed
on the consolldated taxable Income of th e several
trusts (NIRC, Sec. 60(C)) .
The income tax computed on th e consolidated
taxable income shall be -allocated between ~e
several trusts In proportion to their respective taxa e
income (NIRC, Sec. 60(C)) .
ACCOUNTING PERIODS .
AND METHODS
ACCOUNTING PERIOD
GENERAL RULE: The accounting period of a
taxpayer is a period of 12 months (2 CASASOLA ,
supra at 471) . ·
EXCEPTION: A taxpayer may have a taxable period
of less than twelve ( 12) months (short period) where:
1. Taxpayer, other than an individual, changes his
accounting period from fiscal year to calendar
year, or from calendar year to fiscal year, or from
one fiscal year to another (NIRC, Sec. 47);
2. Taxpayer dies (BANGGAWAN, Income Taxation,
supra at 101) ;
3. Corporation is newly organized ;
4. Corporation 'is dissolved (BANGGAWAN;
Income Taxation, supra at 101) ; or
5. Tax period is terminated by the Commissioner
by authority of law under the following
circu~stances (NIRC, Sec. 6(0)): (RIP)
I
a. T·axpayer is B,etiring from business subject to
tax; · .
b. Taxpayer is fntending to le~ve the
Ph(iippines, remove his property therefrom,
or hid~ or conceal his property; ·and
T.a.xpayer. is ferforming any act tending to
obstruct the proceedings for the collection of
the tax for the past or current quarter or year
i
or render the same totally or partially
ineffective unless such proceedings are
begun immediately
(NIRC,
It may be:
\
1. Calendar period
- an accounting period which starts from
January 1 to December 31 . Taxable income shall
be computed on the basis of the calendar year if
' the: (OPBI)
a. Taxpayer's accounting period is Other than
fiscal year;
b. Taxpayer has no annual accounting feriod;
c. Taxpayer does not keep ~ooks; or
d. Taxpayer is·an Individual (NIRC, Sec. 43);
2. Flscal period
- an accounting period of 12 months ending on
the last day of any month other than December
(NIRC, Sec. 22, par. (Q)) , which is allowed only
for corporations (BANG GA WAN, Income
Taxation, supra at 101) ; and
 .'-
3. Short period . .
- an accounting period where income 1s
computed on the basis of a period less than
1
twelve (12) months when the: · . ·
a. Taxpayer, other than an individual., with th_e
approval of the Commissioner, changes his
accounting period from fiscal year to
calendar year, or from calendar year to fiscal
year, or from one fiscal year to another
(NIRC, Sec. 47) ;
b. Taxpayer dies (applicable to the "de~edent's
final personal income tax covering the
beginning of the taxable ye·ar until his death,
the income of his estate, and estate tax
return) (NIRC, Sec. 90, ·par. (A), as amended
by TRAIN Law);
c. Corporation is newly organized;
d. Corporation is dissolved (BANGGAWAN,
Income Taxation, supra at 101);
e. Tax period is terminated by t~e .
Commissioner by authority of law. ·(NIRC,
-Sec. 6, par. (0)) . ·
CHANGE OF ACCOUNTING PERIOD ~
A corporation may change its . accounting period
wherein the net income shall, with the approval of the
CIR, .be computed on the basis of such new
accounting period . A separate adjustment _or final
return shall be made for the period between the c!ose
of the original accounting • periqd and the date
designated as the close of t9.e n~w _accounting period
(NIRC, Secs. 46 and 47). - . .... -- - orj li~ E;Xpens~.. _is.Jncurred (2 CASASOLA, supra
NOTES:
I
"
,,. '
·.
.•
1. The request for cha~ge of a~1:mting_1period
should be filed at any time. t less than sixty (60) • •
days prior to the beginning o( the propo~ed new/ • ,
accounting period ·(R.R. No. 03-.2011; Sec. 4) .
· ,., , .
2. The certification approving the adoption of a·new '
accounting period must be released within thirty
(30) working days from the date of receipt of the
complete documentary r,equirements (R.R. No.
03-2011, Sec. 6).
METHODS OF ACCOUNTING
There is no uniform method of accounting prescribed
for all taxpayers. The law contemplates that each
taxpayer shall adopt such forms and · systems of
accounting as are in his judgment best suited to his
purpose (DIZON, Outline, supra at 1105).
Accounting methods comprise a set of rules for
determining when and how to -report income and
deductions. The accounting method for tax purposes
must be one generally employed in keeping the
taxpayer's books, provided that the method clearly
reflects the income (2 CASASOLA, supra at 472) .
INCOME TAXATION
)"axation Law
The method regular . regularly employed by the
taxpayer must clearly reflect his i~come, for the year
· (MAMALA TEO, Reviewer, supra at 389).
GENERAL RULE: The taxable - income shall
computed upon the basis of the taxpayer's annual.
accounting period (fiscal or cale~dar year, as . the
case may be), in accordance . with t~e method of
ac·counting regularly e·mployed in keeping the boo~s
of such taxpayer (N/RC, Sec. 43) .
EXCEPTION: Computation shall be made in such
method as in the opinion of CIR clearly reflects the
income:
1. If no such method has been so employed by the
taxpayer; or ·
2. If the method of accounting employed does not
clearly reflect the income (N/RC, Sec. 43).
METHODS RECOGNIZED BY LAW AND
REGULATIONS: -
1. ,Cash Basis Method
· • ..:!.. income is ' reported in the year payments are
received while expenses are deducted in the year
. -paid, (DIZON, quwne, supra at 1006). . .
,
Cash Basis Method ·
_ income is realizeid upon actual or constructive
. receipt or· its equivalent while e~penses are
deductible onlY, u on acfual payment, regardless
.· of the .taxable year.when ttie service is performed
C i ~fl!4P
./., - ·
. . .
, .
.A - •
I _,, : ( lJnder the ca~h method of account(ng (ca~h
receipts ' and disbursements method), income 1s
. __ re·~lized upon receip.t of cash or its equivalent
including those constructively received (such as
deposits for the taxpayer's account · by
- customers) but not including gifts or donations
(Revenue Audit Memorandum Order No. 1-2000,
Chap. II-A).
2. Accrual Method
- income is reported in ·the year.it is earned
while expense is deduct~d in the year , it is
incurred regardless of receipt or disbursement of
cash (DIZON, Outline supra at 1006) .
AccruaJ Method
- income, g~ins, and profits are included in the
gross income when earned · regardless of
whether or· not actually received, and the
expenses are allowed as deductions from the
gross income when actually incurred, although
not ye\ paid (2 CASASOLA, supra at 474).
 \ I
.
MEM:Q~y AID
San Seda l.Wwrwlty Colege ot Law - RGCT B a r ~ Center
185

All-events Test
- un~er the accrual method, an expense is
deductible for the taxable year in which all the·
~ve~_ts had occurred which determined the fact of
hab1hty and the amount thereof can be
determined with rea~onable accuracy
(MAMALATEO, Reviewer, supra at 391) '.
~nder ~he accrual _basis method of accounting, it
1s t.he right to receive income, and northe actual
receipt, that determines when to include the
amount in gross income. Gleanable from this
notion are the following requisites of accrual
method of accounting: · installment where the initial payments do not
a. That the right to receive the amount must be
valid, unconditional, and enforceable, i.e.,
not continge!"t upon future time;
b. The amount must be reasonably susceptible
of accurate estimate; and
c. There must be a reasonable expectation that
the amount will be paid in due course
(Filipinas Synthetic Fiber Corp. v. Court of,,
_Appeals, G.R. . Nos. 118498 & 124377, -,
October 12, 1999).
NOTE: The amount of all .items of gross- '
income shall be included in the gross income ..
· for the taxable year in which received by the .
taxpayer, unless, under rTrethods of ::
accounting permitted u_nder Sept~n 43 of
NIRC, any such amounts ?re to be,;i:)roper1y
accounted for as of a different period. (NIRC, .
•
Sec. 44).
.,
The deductions shall be taken.for the1 taxable
year in which 'paid or accrued' or 'paid or
incurred', dependent upon the~m_e\hod of
accounting upo_ n the basis of '.\!~)ch the net ·
income is computed, unless In or~er ·to
clearly reflect the income, the · dequcti~ns
should be taken as of a different period
(NIRC, Sec. 45).
3. Installment Method
- appropriate when collections of the proceeds
of sales and incomes extend over relatively long
periods of time and there is strong possibility t_hat
full collection will not be made (DIZON, Out/me,
supra at 1108).
This method is considered appropriate when
collections extends over relatively long periods of
time and there is a strong . possibility that full
collection will not be made (2 CASASOLA, su~ra
at 475).
Income from deferred payment sales mc!Y _be
· reported under this method in the following
cases:
a. Installment sale by a · dealer of personal
property regularly selling on installment
(N/RC, Sec. 49(A)); .
b. Casual sale or -casual disposition on
installment of pers~nal property other than
inventory where:
i. The Initial payments do not exceed
twenty-five percent (25%) of the
selling price; and
ii. . The selling price exceeds ~1 ,000
(NIRC, Sec. 49(8)); or
c. Sale or other disposition of real property on
exceed twenty-five percent (25%) of the
selling price (NIRC, _Sec. 49(8)) .
NOTES: .,
a. As customers make installment
payme11ts, the seller recognizes .the
gross_profit on sale in proportion to the
cash collected (Chapter II. E, Accouoting
• Methods, Handbook on Audit
Procedures and Techniques, Volume 1
(Revision 2000), p. 3-4).
b. The income from installment received-is
determined in accordance with the
following formula stated Jn Collector_of
Internal Revenue v. Binalbagan Estate,·
Inc. , G.R. No. L-12752, January 30,
1965:
Total
Gross Income for
Profit Installment the year
x received fo-r = subject to
T otal the year income tax
Selling
Price
4. Perc_entage of Completion Method
_: in the case of a building, installation or
con!:otruction contract covering a period in excess
of one (1) year, the gross income derived from
such contract may be reported upon the basis of
percentage of completion (NIRC, Sec. 48).
The return must be accompanied by a return
certificate of architects or engineers showing the
percentage of completion during the taxable year
of the entire work performed under the contract
(NIRC, Sec. 48).°
5. Crop Year Method
- applicable only for farmers engaged in the
production of crops which take more than a year
from · the time of planting to the process of
gathering and disposal of the harvest; Expenses
paid or incurred during the year are deductible

from the gross income realized from the sale of
the crops (R.A.M. No. 2-95).
NOTE: This method recognizes that . t~e
harvesting and selling of crops do not fall w1thm
the same year that they are planted or gro:-vn. It
is applicable to farmers or those engaged m the
production of crops which take more than a year
from the time of planting to the process of
gathering and disposal of harvest. Expense~ of
crop production, paid or incurred, are deductible
in the year the gross income from the sale of
crops is realized or costs of crop production is
recognized when the crops are sold (CIR v.
Lancaster Philippines, Inc., G.R. 183408, July
12, 2017) .
I
TAX RETURN AND
PAYMENT
/ return (R.~ . No. 8-201-'3, Sec. 9).
TAX RETURN
A report made by the taxpayer to the BIR of all gross ·
income received during the taxable year, the
allowable deductions including exemptions, the net
taxable income, the income tax--rate, the income tax
due,. the income tax withheld, if.any, and the income •
tax still to be paid or refundable.
WHO ARE REQUIRED TO' FILE ' INCOME
TAX RETURN (ITR)
1. Individual
•• I
a. Resident Citizens; and . by the BIR for the purpose of verification for
b. Non-resident Citizen , Resident Alien and -
Non-resident Alien engaged _in Tf~de or
Business with respect to income from
sources within the Philippines.
EXCEPTIONS: Individuals Not Required to
File ITR
a. An individual ·earning purely compensation
income whose taxable income does not
exceed two hundred fifty thousand pesos
(P250,000);
NOTE: The Certificate of Withholding filed by
the respective employers, duly stamped
"Received" by the Bureau , shall be
tantamount to the substituted filing of income
tax returns by said employees.
b. An individual whose income tax has been
correctly withheld by his employer, provided
that such individual has only one employer
for the taxable year - the Certificate of
INCOME TAXATION
Taxation t..aw
Withholding filed by · the respective
employers, duly stamped "Received" by the
Bureau shall be tantamount .to the
substituted filing of income tax returns by
said employees;
c. A n individual whose sole income has
d
been
subjected to final withholding tax; an
d. A minimu·m wage earner as defifmWe~hinh thd~se
regulations - the Certificate o 1t o 1 mg
filed by the respective employers, duly
stamped "Received" by the Bureau shall be \r
tantamount to the substituted filing of income
tax returns by said employees (R.R. No. 8- I
2018, Sec. 9) .
NOTE: In all cases , all individuals deriving I
compensation income, regardl~ss of th_e
amount, from two (2) or more concurrent or
successi\le employers at any time during the
taxable year are not qualified for substituted
filing. Thus, they are still required to file a
'
Special' Rules on Return of Husband and
Wife: . : .
a. File one •·retu'rn for the taxable year if the
-- following r_equisites are complied with:
i. They are married; and
ii. They d6 not · derive income purely from
1
compensation (NIRC, Sec. 51(0)).
I ..-, '
b. If it is impracticable to file one return, each ·
·' · ; ·pause shall file a separate return of income
but tfi e return so filed shall be consolidated
the year (NIRC, Sec. 51(0)).
2. iUnmarried Minor
Income of unmarried minors derived from
property received from the living parent shall be
included in the return of the parent, except: .
a. When donor's tax has been paid on such
property; or
b. When transfer of such property is exempt
from donor's tax (NIRC, Sec. 51(E)). ·
3. Persons under Disability (DOG-R) ·
If a taxpayer is unable to make his own return, it
may be made by his:
a. Quly au~horized agents;
b. Other person charged with the care of his
person or property who will assume the
responsibility of making the return and
incurring penalties provided for erroneous,
false or fraudulent return (NIRC, Sec. 51(F)) .
c. Guardian; or
d. Representative;
 w ' / .
MEM:Q~Y AID
San Bede College of Law · ROCT Ber Center
. 187

4. Taxable e·state and Trust
The fiduciary shall file a return if gro~s income is
at least ~20,000 (NIRC, Sec. 65).
s. General Professional Partnership
Every GPP shall file, in duplicate, a return of its
income, except income exempt under Section
32(8) of the Tax Code, setting forth the items of
gross income and of deductions allowed, and the
names, TIN, addresses and shares of each of the
partners (NIRC, Sec. 55).
6. Corporation
Every corporation subject to tax shall render a
return which shall be filed by the president, vice-
president or other principal officer, and shall be
sworn to by such officer and by the treasurer or
assistant treasurer (NIRC, Sec. 52, as amended
by TRAIN Law,).
WHAT RETURNS TO FILE
1. Quarterly and Annual Income Tax Return (ITR);
and
2. Capital Gains Tax Return .
WHEN RETURNS ARE FILED
.,.
(MAMAL.A TEO, Reviewer, supra at 402-403; NIRC,
Sec. 75)
IMPLICATIONS OF THE OPTIONAL
STANDARD DEDUCTION IN INCOME TAX
RETURNS
The election to claim either the OSD or the itemized
deduction for the taxable year must be signified by
checking the appropriate box in the income tax return
filed for the first quarter of the taxable year adppted
by the taxpayer. Once the el~ction is made, the same
type of deduction must be consistently applied for all
the succeeding quarterly returns and in the final
income tax return for the taxable year. Any taxpayer .
who is required but fails to file the quarterly income
tax return for the first quarter shall be considered as
having availed of the itemized deductions option for
the taxable year (R.R. No. 02-10, Sec. 3).
1. CGT Returns from sale or exchange of shares
of stock not traded thru local stock exchange:
Within thirty (30) days after each transaction and
a final consolidated return on or before April 15
of each year covering all stock transactions of the
~precediQQ ~axable ·year (NIRC, Sec. 51(C)) .
1
. . .{
2. CGT Returns from sale or disposition of real
property under Section 24(0)): Within thirty
(30) days following each sale or other disposition
(NIRC, Sec. 51(C)) .

Q1 return May 15 of
- · EXTENSION OF-TIME TO FILE RETURN
Individual
deriving purely same year ' The CIR may, on meritorious cases, grant a
trade, business 1-------+------~ reasonable extension of time for filing income tax
or professional Q2 return
income , or
August 15 of
same year
mixed income 1-------+--------1
..
.. r~turn (NIRC, Sec. 53) .

-' OEADl.:INE FOR

.__
FILING OF
Q3 return November 15 DECLARATION ESTIMATED INCOME
of sam~ year
FOR THE CURRENT TAXABLE YEAR
Annual return April 15 of the The deadline for filing of declaration estimated
following year income for the current taxable year is on or before
(NIRC, Sec. May 15 of the same taxable year. The payment of the
74, as four installments shall be:
amended by • First - May 15
TRAIN Law) • Second - August 15
• Third - November 15
Domestic Q1 return 60 days after • Fourth - on or before May 15 of the following
corporation 1--------1 the close of calendar year wh~n the final adjusted income
and resident Q2 return each of the first tax return is due to be filed (N/RC, Sec. 74, as
foreign 1....-------1 3 quarters of amended by TRAIN Law) .
corporation 03 return the taxable
year

Annual return On or before

the 15th day of
the 4 th month
following the
taxable year
 INCOME TAXATION
· Taxation Law

CONDITIONS FOR SUBSTITUTED FILING

WHERE RETURNS MUST BE FILED
TO APPLY
The ITR shall be filed with an authorized agent bank,
Based ·on Revenue Regulation No. 3-2002,
Revenue District Officer (RDO), collecting agent or
substituted tax filing only applies to employe~s who
duly authorized treasurer of the municipality or city in
meet all the following conditions: (POES-FF) ·
which the taxpayer has his legal residence or
1. · The employee receives furely compensation
·principal place of - business. If there Is no legal
income (regardless of a~ount)_during the taxable
residence or principal place of business, it shall be
filed with the Office of the Commissioner (NIRC, Sec. year
2. The employee receives the income only from
51(B)). One employer in the Philippines during the
taxable year·
HOW RETURNS ARE TO BE FILED 3. The amount of tax due from the employee at the
Generally, ITR shall be filed personally by the person end of the year gquals the amount of tax withheld
required to file returns or his representative as the by the employer
~semaybe. 4. The -employee's §pouse also complies with all
three (3) conditions stated above.
Nevertheless, a person (i.e., employer) may be 5. The employer files the annual information return
required to file income tax return on behalf of another (BIR Form No. 1604- CF); and
(i. e. , employee) when covered by the rules on 6. Employe·e has BIR form 2316 or Certificate of
substituted filing . -Final Tax Withheld at Source (BIR Form 2306)
SUBSTITUTED FILING , !ss~ed .by its employer (R.R. 11-2013, Sec. 2) .
1
~ode ?f filing when _ the employer's ann~al ..... .-> : • •
1nformatIon return · of withholding . taxes on · N_9TE; In c~ses covered by substituted filing, the
compensation (BIR Form No..- 1604-CF) may -:be" ·. -- employer ~hall .submit to the BIR the duplicate
~nsidered as the "substitute" 'IT~ of employee copy of B1 f3 - fqrm No. 2316 not later than
inasmuch as the information provided in his ITR · Februarf ,28 following the ·close of the calendar
would exactly be the same information co tained in · year,,othe'rwi~e -~will be subjected to prescribed
the employer's annual info • ation, return l7R.-~ No. . -·-· penalties (R,R 'Nb.'J1-2013, Sec-. 2).
.· l\lo;
03-2002, Sec. 4; R.M.C. No. 0'1-2-003) .
. ,.,;, · I '. ·-
,. ;:'_ .IND-_,IVIJDUAL~i :...,;~ , QUALIFIED FOR
SUBSTITUTED FILING vs. NON-F Lj~ .,_ l=JLING (BUT STU.L
Under "subst!tuted filing", ar ir;idividllaj.; ~xpayer
1
• REQUJ~ED liO FILI= ITR):
although _required under the law to file his in'C(?me tax · I· t . )~dividuals deriving ·compensation f O tw · (2 )
· / more em lo ers 00 r m ?
J. /,;-·a~y time·~uXng the
return , will no longer have to ·personally file •t'lis' own or
~ncome ~x return but instead the employer's ·a~nual .• or_successively a~
information return filed will be considered ~s the·
·substitute· income tax return the7 em lo' ee,_1-,' :2,__.;;_.,.Em ees d~ . .
O
r r 5 0 _nvu~g
e year,
compensation i~come,
O
!nasmuch as the information in the emQl~yer·/ furn
Is exactly the same information contained , the M o(
r,; ~- th'e
f
e;.dl ~ ' he amount,_ whether from a single
a ~mployers. during the calendar year,
1
employee's return. "Non-filing" is applicable·to certain _t corre~ e tax . of which has not been withheld
types of individual taxpayers who are not required __, ret Y resulting to collectible or refundable
under the law to file an income tax return (R ·M·c No ·
1-2003). 3· lnd~r~d •.
ivi u_a1s deoving other non-business, non-
profess1on-~ela~ed income . in addition to
compensation incotne not otherwise subject to
!ndividual taxpayers receiving purely compensation final tax;
income, ~egardless of amount, from onl 4. . ~ndividuals receiving purely compensation
~mployer m the Philippines for the calendar y:ar ~ncome from a single ·employer although the
incom~ tax of wh'ich has been withheld correct!' b income tax of which has been correctly withheid,
the said em~loyer (tax due equals tax withheld) !hail but whose spouse falls under 1 to 3 above· ar;id
not be required to file an annual income 5. NRA-ETB-der·1v·mg pure Iy compensation income,
'
The certificate of withholding filed by th tax retu_rn.
e I d I , e respective or .compensation income and other -non-
mp oyers, u y stamped received' by the BIR 5 h II business, _non-profession-related income (R.R.
be tantamount to the substituteo filing of inco ' ta
returns by said employees (NIRC, Sec. 51
amended by TRA_ IN Law). .
r::
ax
• as
No. 11-2018, Sec. 13).

MANNER OF PAYMENT
Pay-As-You-FIie System - income tax
returnni~~ !~e(~~Rtucm should be paid at the time the
I , Sec. -S6(A)(1)).
 \ I
MEK-\/~Y AI D
San Beca C0i9ge d I.aw - AOCT B e r ~ Canter
EXCEPTION: Individuals may pay in tw
O
al
installments if the income tax due on the a~~~al
return exceeds ~.ooo,
as follows: . 1. Large Taxpayer
1. First Installment - at the time the return is flied
2. Second Installment - on or before Octobe: 1 s·
following the dose of the calendar year (NIRc'
Sec. 56(A), as amended by TRAIN Law· R.R No'.
08-2018, Sec. 11) . ' . . Administration and Enforcement)
NOTE: Before amended of NIRC by TRAIN Law the
deadline was on or before July 15. ' - generally, are not required to file returns thru
ADDITIONAL RULES IN MANNER OF
PAYMENT IN CAPITAL GAINS TAX:.
1. If the seller submits proof of his intention to avail
hi~self of the b_e ~efit of exemption of capital
gains under existing special laws no such
payments shall be required . ' b. The top 20,000 private . corporations
2. In case of failure to qualify for exemption ~nder
such special laws and IRRs, the tax du~ on the
gains realized from the original transaction shall ·
immediately become due and payable, subject to
the penalties prescribed under NIRC, as
amended by TRAIN Law.
.-
3. If the seller, having paid the tax, submits such .
proof of intent within 6 months from the -
registration of the document transferring the real
property, he shall be entitled to a refund ·of such
tax upon verification of his compliance with the
requirements for such exemptio!" (NIRC, Sec.
56(A)(3)).
NOTES: . • 4. Other Taxpayers
a. In case the taxpayer elects and is qualified to
report the gain by installments unt:ter Secyon
49 of this Code, the tax due from each
installment payment shall be paid wi~in 30
days from the receipt of such payments
(NIRC, Sec. 56(A)(3)).
b. No registration of any .document transferr~~g
real property shall be effected _by_
Register of Deeds unless the Comm!ss1oner
or his duly authorized representative has
certified that such transfer has . been
reported, and the tax herein imposed, if any,
has been paid (NIRC, Sec. 56 (A)(3 }).
ELECTRONIC FILING AND PAYMENT
SYSTEM(EFPS) . . db
- refers to the system dev~loped a nd main~~~~din~
the BIR for electronically fihng tax returns,
• taxes due thereon,
attachments, if any, and_ paying N _2001
specifically through the internet (R.R. o. 09 '.
Sec. 2).
COVERAGE:
- shall e-file their final adjustment income tax
returns for the calendar/fiscal year and shall e-
pay their taxes (R. R. No. 09-2001 , Sec. 2)
(Please see who are Large Taxpayets under Tax
2. Non-Large Taxpayer
EFPS, except for the following:
a. The volunteering 200 or more Non-Large
Taxpayers previously identified by the BIR to
have availed of the option to file their returns
under- EFPS and received notification letter
duly signed by CIR to file their returns ,,md
pay their taxes thru EFPS; and
(taxpayers duly identified and notified by the
CIR as included in such group under R.R.
No. 17-2003, a& amended) (R.R. No. 05-
2004, Sec. 3).
:: 3. Joint Venture or Consortium Formed for
the .Purpose of Undertaking Constru_ction
Projects
All licensed local contractors are hereby required
_ · to enroll themselves to the Bureau of Internal
Revenue's Electronic Filing and Payment
System (EFPS). The enrollment should be done
at the Revenue Districf Office (RD_O) where the
local contractors are registered as taxpayers
(R.R. No. 10-2012, Sec. 4) .
_ jj. Corporations with paid-up capital stock · of
t, ·: !!.1D,O00,O00 and above;
•
b. <;::orporations with complete computerized
system; .
c. Taxpayers joining public bidding pursuant to
. E.O. No. 398 as implemented by R.R. No.
03-2005;
d. Top 20,000 private corporations duly notified
by the BIR;
· e. Top 5,000 individual taxpayers dyly notified
by the BIR;
f. PEZA-registered entities and those located
within Special Economic Zones;
g. Government offices, in so far as remittances
of withheld · VAT and business tax is
concerned;
h. Taxpayer Account Management Program
(TAMP) taxpayers; and·
i. Accredited importer and prospective importer
required to secure the lmJjorter Clearance
Certificates (ICCs) and Customs Broker
Clearance Certificates (BC Cs) (R. R. No. 10-
2007, Sec. 2; R.R. No. 1-2013; R.R. No. 10-
2014, Sec. 3) .

190
REPORTORIAL REQUIREMENTS
Submission of Financial Statements (FS) is
mandatory even if there is no income (R.R. No. 21-
2002, Sec. 2, as amended by 7-2007, Sec. 2)) .
EXCEPTION: An individual taxpayer who i~ entitled
to an'd claimed the OSD shall not be required to
submit with his tax return such financial statements
otherwise required under the NlRC. Provided, that,
except when the Commissioner otherwise permits,
the said individual shall keep such records pertaining
to his gross sales or gross receipts (R.R. No. 02-10,
Sec. 3) .
NOTES:
1. FS shall be composed of the balance sheet,
income statemenUprofit and loss statement,
statement of changes in equity, statement of
cash flows, notes comprising a summary of
significant accounting policies and explanatory
notes and schedule attached to such statements.
2. FS filed with accompanying auditor's certificate
shall show the comparative figures of the current
year and the previous year.
3. Taxpayers are mandated to' reflect in its books of
accounts (i.e., general , subsidiary ledgers, and
journals) the adopted/accepted year-end
adjusting entries made corollary to the
preparation and filing of its audited financial
statements and annual income tax returns (R.R.
No.21-2002, Sec. 2, as ame aed by 7-2007, Sec.
2) . • ... • .
4. In the case of a corporation who is entitled to and
claimed the OSD, said corporation is still required
to submit its financial statements when it files its
annual income tax return and to keep ·such
records pertaining to its gross income (R.R, 'No.
02-10, Sec. 3) .
STATEMENT OF MANAG MENT
RESPONSIBILITY
1. All taxpayers required to file annual ITR under the
NIRC shall be required to submit a Statement of
Management's Responsibility.
2. Aside from individual taxpayer, President and
Managing Partner, the CEO and the CFO or any
officer performing similar functions regardless of
their designation are also required t6 affix their
signatures in the said Statement.
3. In the case of a forei9.n corporation with branch
office in the Philippines , the Statement shall be
signed by its local manager who is in charge of
its operations (R.R. No. 03-2010) .
~ -
INCOME TAXATION
Taxation Law
RETURNS OF CORPORATIONS
CONTEMPLATING DISSOLUTION OR
. REORGANIZATION
Every corporation shall, within thirty (30) days after
the adoption by the corporation of a resolution or plan
for its dissolution, or for the liquidation.of the whole or
any part of its capital stock, including a corporation
which has been notified of possible involuntary
dissolution by the Securities and Exchange
Commission , or for its reorganization, render a
correct return to the Commissioner, verified under
oath , setting forth the terms of such resolution or plan
and such other information as the Secretary of
Finance , upon recommendation of the commissioner,
shall , by rules and regulations, prescribe (NIRC, Sec.
52(C)) .
I WITHHOLDING TAXES I
WITHHOLDING TAX SYSTEM
Taxes imposed or prescribed are to be deducted and
withheld by the payor-corporations and/or persons
from payments made to payees-corporation and/or
1 persons·fpr the former -~q pay the same directly to the
BIR (2-B DOMONDON, supra at 1058).
. '
It is a method of collecting income tax in advance
from the taxable income of the recipient of income
Thus, the taxes are collected practically at the time
the transaction is made or when the taxable act
occur~ (taxation at source). · ·
The payee Is the taxpayer, the person on whom the
·tax is i posed, while the payor, a separate entity,
act b ore than an agent of the government for the
collection of the tax in order to ensure its. payment
(D~ LEON, supra at 656) .
EARMARKING NOT THE SAME AS
WITHHOLDING
Amo_ unts earmarked do not· form part of gross
receipts ~ecause they are by law or regulation
reserved for some person other than the taxpayer,
although delivered or received. On the contrary,
amounts withheld form part of gross receipts because
they are in constructive possession and not subject
to any reservation, the withholding agent- being
· merely a conduit in the collection process (2-B
DOMONDON, supra at 1058) .
 ,\ I
MEM:Q~y AID
San Bede llnMnity Colege of Law - RGcT e a . , ~ Center
Deficiency VAT and Excise Tax C t
Be uD d" anno
eeme as Withholding Taxes
Merely Because_They Constitute Ind· . t
Taxes ,rec
lndirect_tthahxesd,_ like VAT and excise tax, are different
from w1 o1 mg taxes. To distinguish . . d"
· ·d , in in irect
taxes, th e mc1 ence of taxation falls on one person
but the burden thereof can be shifted or passed on to
another person , such as when the tax is imposed
up?n goods befor~ reaching the consumer who
ultimately pays for 1t. On the other hand 1 ·n
·thh Id" , case o
w1 _o mg taxes, the incidence and burden of
taxation fall on the same entity, the statutory
ta_xpaye~. The burden of taxation is not shifted to the
w~thhold~ng agent who merely collects, by
w1t~~oldm~ •. the tax due from income payments to
entities arising from certain transactions and remits
the ~ame to the government. (Asia International
Auctioneers, Inc. v. Commissioner of Internal
_Revenue, G.R. No. 179115 (Resolµtion) , September
26, 2012). -
WHEN TO WITHHOLD
At the time an income payment is·paid or payable or ·
accrued or recorded as an expense · or asset
whichever 'is applicable in_ the payor's .. books'.
whichever comes first (R.R. No. 02-98, -Sec. 2.57.4
as amended by R.R. No. 12-2001).
The term "payable" refers to the date the obligation
becomes due, demandable or legally enforceable
(R.R. No. 02-98, Sec. 2. 57.4 as amended by R.R.
No. 12-2001). ' ,
HOW WITHHELD AND REMITTED
It is withheld by withholding agents ana it shall be
covered by a return and paid to (except in cases
where the Commissioner otherwise permits) -an
authorized agent bank, RDO, collection agent. or duly
authorized treasurer of the city or municipality where
the withholding agent has his legal residence or
principal place of business, or where the withhol~in_g
agent ·is a corporation, where the principal office 1s
located (NIRC, Sec. 58(A), as amended by TRAIN
Law).
The taxes deducted and withheld by the withholding
agent shall be held as a special fund in trust for the
government until paid to the collecting officers (NIRC,
Sec. 58(A), as amended b,: TRAIN Law).
REASONS:
1. To provide the taxpayer a con~en_i~nt manner to
meet his probable income tax h~b1hty; · .
2. To ensure the collection of the income tax which
could otherwise be lost or substantially redu~ed
through the failure to file the correspo nd ing
returns; . fl d
3. To improve the government's cash ow; an
4. To minimize tax evasion, thus resulting in a more
efficient tax collection system (2-B DOMONDON,
.supra at 1059).
WITl-f HOLDING AGENTS
The withholding taxes shall be withheld by the person
having control over the payment and who at the same
time claims the expenses. The following persons are
constituted as withholding agents: · ·
1. Juridical person, whether or not engaged in trade
f or business;
2. Individuals, with respect to payments niade in
connection with his trade or business;
3. _ Individual buyers, whether or not engaged in
trade or business_ insofar as taxable sale,
exchange or transfer of real property is
concerned; and ·
4. All government offices including GOCCs as well
as provincial,· city and municipal governments
and barangay (R.R. N_o. 02-98, Sec. 2.57.3).
NOTE: If . the withholding agent is -the
Government or any of Its agencies, political
subdivisions or instrumentalities, or a
.- ·:,. governm~nt-owned or controlled corporation, -the
_ . 11 employe~ thereof responsible for' the withholding
~, an'd remittance of the t~x shall be personally
liable· fof the deficiency taxes (NIRC, Sec.
247(b)) .f ..
:i ' .i '
:,,, WITHHOLDIN~ OF INCOME TAX ON
. BACl(WA,GE~ ALLOWANCES, . AND
, BENEF-itS?REOEIVED BY EMPLOYEES
·t ~-THROUGH GARNISHMENTS OF DEBTS
. ~'?: 9~ CREDITS PURSUANT TO A LABOR
. :_ DISPUTE AWARD
When the judgment awarded in a labor dispute is.
enforced through garnishment of debts due to the
employer or other credits to which the employer is
entitled, the person owing such debts or having in
possession or control of such credits (e.g. banks or
other financial institutions) would normally release
and pay · the entire garnished · amount to ' the
employee.As a result. employers who are mandated
to withhold taxes on wages pursuant to Section 79 of
the NIRC, as amended, as implemented by R.R. No.
2-98, as amended, · cannot withhold appropriate tax
due thereon.
In th_is regard, persons having control of the payment
of. wages, or salaries are authorized to deduct and
withhold_upon such wages or salaries the withholding
tax due thereon. In this case, the garnishees are the
persons owing debts due to the employer or in
possession or control of the credits to whiqh the
employer are entitled. Accordingly, they are in control
of the payment of backwages, allowances, and
benefits and they are authorized to deduct and
 /
192
withhold the income tax due from the backwages,
allowances, and benefits to be paid to employees,
and are respectively liable for such deductions.
In order to ensure .the collection of appropriate
withholding taxes on wages, garnishees of _a
judgment award in a labor dispute are constituted as
withholding agents with the duty of deducting the ·
corresponding withholding tax on wages due thereon
in an amount equivalent to (5%) of the portion of the
judgment award representing the taxable
backwages, allowances, and benefits (R.M.C. No.
·39-2012). . accrued or recorded as an expense in the
CHARACTER OF WITHHOLDING AGENT
In the operation of the withholding tax system, the .
withholding agent is not the payor but a separate
entity acting no more than an agent of the
government for the collection of the tax in order to
ensure its payment.. The payor of the tax Js. the
taxpayer as he is the person subject to the tax ·
imposed by law, and the payee is the taxing autl:}ority •
(2-B DOMONDON, supra at 1059) . •" . ,. ·
In regard to the filing of the necessary dncome tax
return and-the payment to thetQovemment} he is the
agent of the taxpayer. With respect to th~ (collection
and/or withholding of the tax. h_e is the government's
agent. Thu.s the withholding ageht 'is the con st ituted
agent both of the government ahd the taxpayer (2-B
DOMONDON, supra at 10~1..... · ----r
. , ., \ _ --~ . ~- f_oll~~ing l,tbe· close of tHe quarter during which the
· DUTIES OF THE WITHHOLDING ·Aµ ENT . ' withholc!lhg was · made. -The provision that the
The Tax Code imposes certain ob\ig~tions upotl.the
withholding agent to monitor its compliance w ilh .the
duty to withhold. They include: ' ·, .-1... - . I TRAIN law .(NIRC, Sec. 58, as·amended by TRAIN
1. The filing of the quarterly witl1holding tax retuths;·
2. The submission to the pay~e. in respect of his.or
its receipts during the calendar quai:ter-or. year, of
a written statement showing the income or other
payments made by the withholding agent uring
such quarter or year and the amount of tax
deducted and withheld therefrom; and
3. The filing with the BIR of a reconciliation
statement of quarterly payments and a list of
payees and income payments.
The codal provisions on withholding tax are
mandatory and must be. complied with by the ·
withholding agent (Far East Bank and Trust
Company· v. Court of Appeals, G.R. No.· 129130,
December 9, .2006) . .
NOTE: A taxpayer cannot be compelled to answer for
the non-performance by the withholding agent of its
legal duty tq withhold unless there is collusion or bad
faith . Further, the taxpayer could not be deemed to
have evaded taxes had the withholding agent
performed its duty (Far East Bank and ,Trust
INCOME TAXATION
Taication Law \
company v. Court of Appeals, G.R. No. 129130, \
December 9, 2006). I
OBLIGATION OF THE EMPLOYER TO
WITHHOLD ACCRUED BONUSES -
If the taxpayer claims bonuses as a deduction in its
income tax return , the withholding tax on the said
bonuses should be withheld and remitted to the BIR
in ·the year of accrual and not during the _year of
payment. The obligation of the payor employer to
deduct and withhold !he related withholding tax on
bonuses arises at the time . the income was ·paid or
payor's/employe c's books, whichever comes first
(ING Bank N. V. v. Comfl'J.issioner of Internal
Revenue, G.R. No, 167679, July 22, 2015).
The obligation of the payor employer to deduct and
withhold the related withholding tax on· bonuses
arises at the time the income was paid or accrued or
recorded as an expense in the payor's/employe~s
-books, whichever comes first (ING Bank N.V. v.
• Commissioner · of Internal Revenue, G.R. No .
. _ 167679, j u/y 22, 2Q15).
. FILINGWTOF- tV:TURN AND .PAYMENT OF
THE F AN.D CWT , _ _
T lie - filing of fi~a~ r:id creditable withholding tax
· · reiurns a · d payment of the taxes withheld at source
· shall be P,)ade nol later,t an the last day of the month
• Com(Jlissi,oner ,may require the payment of the taxes
I . hh
wit!' -~1d at more frequent intervals is removed under
- f ~~; .R-!J.·:~o. 11 -~018, Sec:5) . ·
- :'
: >-C~ns~~in~ ) h'at th e · taxes ....;ithheld by ·the
~ itl\ hQ.l 1,ng agent are held in trust for the government
·anctit:- a'ltailabili~ _is an imperious necessity to ensure
sufficient cash inflow t the National Treasury,
wi th holding agent~ shall file BIR Monthly Remittance
Form (BIR Form No. 0619F and/or 0619E ) every
10th
ten th ( ) day of the following month when the
th 0
w~ h lding is made, regardless of the amount
withheld (R.R. No. 11-2018, Sec. 5 par. 3).
NOTE: Before the passage of TRAIN Law: the return
for FWT and the return for creditable withholding
taxes (EWT returns) shall b~ filed within ten (10) days
the er:id of each month (Sec. 2.58 of R.R. No. 2-
LIABILITIES OF THE WITHHOLDING
AGENT
1. For failure to collect and remit taxes
Any person required to withhold account for, and
remit any tax imposed by this Code or who
 - \ I
MEM:Q~YAID
Son Bede Uri-..ty Colege of law - RGCT Bar Clperatiqns Center
willfully fails to withhold such t
and remit such t • . ax, or account for
ax, or aids or abets .
manner to evade an su · in any
thereof be liable: Y ch tax or th e payment
a. :o _the criminal penalties of fine and
imprisonment provided under Sec. 255 of the
NIRC; and
b. T? a penalty equal to the amount of tax not
withheld, or not accounted for and remitted
(NIRC, ~ec. 251) .
2. For failure to refund excess
withholding tax
Any employer/withholding agent who fails o~
r_efuses to refund excess withholding tax shall b
hable: e and other energy operations pursuantto an
a. !
0 _the criminal · penalties of fine and
imprisonment provided under Sec. 255 of the
NIRC; and
b. To the total amount of refunds which was not
refunded to the employee resulting from any
.excess of the amount withheld over the tax
actually due on their return (NIRC, Sec. 252) .
_NOTE: The withholding agent is explicitly
made personally liable under the NIRC · -
The law sets no condition for the peffionai
liability of the withholding agendo attach. , _ : ,
This is in order to compel the 'withholding · •
agent to withhold the tax under any ·and all
circumstances (2-8 DOMONDON, supra at
1063-1064).
WITHHOLDING OF TAX SHALL -.NOT
APPLY TO INCOME PAYME~T -Of. THE
FOLLOWING:
1. National government and its instrumentalities,
including . provincial, city, or municipal .
governments, as well as GOCCs; and :- •
2. Persons enjoying income tax exemptions; and
3. Exempt organizations under Sec. 30 of the NIRC,
except income derived from real or personal
property, or from any activity conducted for profit.
4. Persons enjoying exemption from payment" of
income taxes pursua·nt to the provision~ ~f any
law, general or special, such as but not hm1ted to
the following: · ·
a. Sales of real property by a corporation which
is registered with and ce~ified by the HLURB
or the HUDCC as engaged in socialized
housing project where the selling price of the
house and lot or only lot does not exceed the
socialized housing price applicable to t~e
area as prescribed and certified by th e said
board/council as provided und e~ RA No.
7279 and its implementing regulations.
b. Corporations which are Exempt from · the •
income tax under Sec. 30 of the Tax Code,
as amended, and government-owned
controlled corporations exempt from income
tax under Section 2_7(A)(C) of the same
Code, to wit: GSIS, SSS, PHIC, and LWD;
however, the income payments arising from
any activity which is conducted for profit or
income derived from real or personal
1
property shall be subject to withholding tax
as prescribed in these regulations.
c. Joint ventures or consortium formed for the
purpose of undertaking construction projects
or engaging in petroleum, coal, geothermal,
operating or consortium agreement under a
service contract with the government.
NOTE: Joint ventures or consortium formed
for the purpose of_undertaking construction
t·
projects shall comply with the following
-conditions to be considered as joint venture
not taxable as a corporation:
i. Should involve joining or pooling of
,. resources by licensed local contracts;
that is, licensed as general contractor by
. the Philippine Contractors Accreditation
B ah:t (PCAB) of the Department of
; Trad~ and Industry (DTI);
ii. i These local contcactors are engaged in
; construction business;·and
-i!i. --.The Joint Venture itself must likewise be
' duly licensed as such by the PCAB of the
. DTI. .
, Joint ventures involving foreign
,,._..,_,~-...cc-,..;... contra.ctors may also be treated as a
non-taxable corporation only · if the
member foreign contractor is covered by
a special license as contractor by the
PCAB of the DTI; and the construction
project is 9ertifie~ by the appropriate
Tendering Agency (government office)
that . the project is a foreign
financed/internationally-funded project
a~d that international bidding is allowed
under the Bilateral Agreement entered
into by and between the Philippine
Government and the
foreign/international financing institution
pursuant to the implementing rules· and
regulations of Republic Act No'. 4566
otherwise known .as Contractor's
License Law
d. Individuals who earn P250,000 a11d below
from a lone income payor upon compliance
with the following requirements: .
 INCOMI; TAXATION
194 Taxation Law

i. The individual has executed a payee's sector (R.R. No. 02-98, Sec. 2.57.5, as amended
sworn declaration· of gross receipts in by R.R. No. 11-2018, Sec. 4).
accordance with the format per attached
Annex "B-2"; RATIONALE: Withholding tax is a method of
ii. The sworn declaration has been collecting income tax in advance from the taxable
submitted to the lone income income of the recipient of income. Thus, if the
payor/withholding agent on or before income of the recipient i•s exempt from income
January 15 of each year or before initial tax, no withholding of tax is required to be made
income payment, whichever is by the payer of such income, which is constituted
applicable (R.R. No. ()2-98, Sec. 2.57.5, as withholding agent (MAMALA TEO, Reviewer,
as amended by R.R. No. 11-2018, Sec. supra at 407) .
4).
CONSEQUENCES OF FAILURE - TO
BENEFITS NOT SUBJECT TO WITHHOLD:
WITHHOLDING TAX ON 1. Liable for surcharges and penalties;
COMPENSATION 2. Liable upon ·conviction to a penalty equal to the
1. Remunerations 1 received as . incidents of • total amount of the · tax not withheld, or not
employment; accounted for and remitted (NIRC; Sec. 251);
and
a. R_etirement benefits received unEler R~publ 1c 3. /M)y income payment which is - otherwise
Act under 7641 · and those eceived by · , ,dequctible from the payor's gross income will not
officials and employees of private' rms, be' allo.wed as a deduction if it is shown that the
whether individual or corporate, ;\ mder a , ·
incon1e,tax r~quired to be withheld is not paid to
reasonable private benefit .glan m aintained.---· ..... - the· BIR (RR. ·No. 18-2013, Sec. 2). . ·
by the employer. .r / • • ,- - ~~ , -,. · .,i \ .
j WHEN ,INCOME "FAX WITHHELD -BY THE
b. Any amount received by an official or IN,COME PAYOR/WITHHOLDING. AGENT
employee or by his eirs from the' employer IS I C)'
due to death, sicl<nes~ r othel physi~al - - - · frEXCESS ~WHAT IS PRESCRIBED
disability or for al")y cause beyond the control . Any i~90me . tax with~eld by the income
of the said o~ciaf or employee; • such as · payor/~~tr,~0J1dmg ag~nt _ in excess of · what is
retrenchment, redu dancy, or . ~ssation of--:--i- _ prescn~ed ~n th~se re~ula_t,_ ons shall be refunded to
business. r ,, ' ._ ', 1 the paye~ ~y !he ~:31d income payor/withholding
age~t.- T~e in9ome p_ayor/withholding agent shall
2. Remunerations paid for _agricultural laQor and re~ct- the a!llount r~funded as adjustment to ·the
paid entirely in products of the farm where ' the- ., r~mittabl_e wlthholdirg tax due for the first quarter
. labor is performed; ' /i Y'!thhol91ng tax re urn. The adjusted amouht of tax
3. Remuneration for domestic services/ ,~ "' __ -_ -~1thhela sh~ll .also be reflected in the Alphabetical
4. Remuneration for casual labor not in the course ~1st of•Payees to be attached in 'the said first (1st)
of an employer's trade or business; q~arter,:-return. The said list of payees, who are
5. Compensation for services by a citizen or . s~bJect t? refund either due to the change of rates of
resident of the Philippines for a foreign w1thhol~1ng or due to the qualification to avail of
government or an international organization exempt10~ from withholding · tax shall likewise .be
(R.M.C. No. 31-2013); attached in the said return, which shall be filed on or
6. Damages paid by the employer to employees · bef~re April 30, 2018_(R.R. No. 14-2018 issued on
7. Proceeds of life insurance; Apr,/ 5, 2018).
8. Amounts received by an insured employee as a
return of premium; CONSEQUENCES OF THE FAILURE OF
9. Compensation for injuries or sickness·
10. Income exempt under treaty· '
THE WITHHOLDING AGENT TO REFUND
1 I EXCESS WITHHOLDING TAX
1 . 13 month pay and other benefits not exceeding
. a total of ~90,000; Any employer/withholding agent who fails or refuses
12. GSIS, SSS, PhilHealth and other contributions· 1
to refund ~xcess withholding tax shall, in addition to
13. Co~pensation ~ncome including overtime pa y, ~he penalt1~s pro~ided in this Title (i.e. civil penalties,
holrday pay, night shift differential pay, and ~nterests including deficiency and delinquency
hazard pay of Minimum Wage Earners; interests, and imprisonment), be liable to a penalty to
14. 9ompensation income of employees in the public the total amount of refunds which was not refunded
sector if the same does not exceed those of to the employee resulting from any excess of the
minimum wage earners in the· non-agricultural ar_nount Withheld over the tax actually due on their
return (NIRC, Sec. 252). ,
 - \ I_

MEM-Q~y Al D· .
San Seda U ~ College of Law - RGCT Ber Operet1ons Center
195

CONSEQUENCES OF NON- time - of audit/investigation or-

REMITTANCE OF TAX WITHHELD BY
THE WITHHOLDING AGENCY WITH
RESPECT TO THE PAYEE OF INCOME
Should the duly constituted withholding agent of the
government fail to remit the amount of tax withheld to
the BIR, the payee of the income from whom the
withholding tax was deducted may still credit the
amount withheld from his income tax liabjlity for the
year. The act of the agent (withholding agent) is the
·act of the principal (government) (MAMALA TEO,
Reviewer, supra at 416). -
NOTE: Proof of actual remittance by the respondent
is not needed in order to prove w_ithholding and
remittance of taxes to petitioner. Section 2.58.3 (B) of
Revenue Regulation 'No. 2-98 clearly provides that
proof of remittance is the responsibility of the
withholding agent and not of the taxpayer-refund
claimant. -tt should be born_e in mind by the petitioner
-that payers of-withholding taxes are by themselves. . ) · BASIS OF TAX: Gross amount of income payment
constituted as withholding agents of the BIR. Tl)e - . 11
reinvestigation/reconsideration; and ·
3. The payee B,eported the income and pays the tax
due thereon and the withholding agent pays the
tax, including the interest incident to the (ailure to
withhold the tax, and surcharges, if applicable, at
the time of audit/investigation or
reinvestigation/r~~onsideration (R.R. No. 6-2018
issued on·January 19, 2018 revoking RR No. 12-
2013 relative to the requirements for deductibility
of certain expenSfJS) . ·
NOTE: Items of deduction representing return of
capital, such as those pertaining to purchases of
raw materials forming part of finished product
purchases of goods for resale, shall be allowed
as deduction upon withholding agent's payment
of the basic withholding tax and penalties incident
to non-withholding or under withholding (R. R. No.
6-2018).
,

taxes they withhold are held in .trust for the ,t,,,:iKINDS OF WITHHOLDING TAX:
government. In the event that the withholding ag_e~t~ · ·~~~i1. . Final withb,olding tax (FWT) (NIRC, Sec. 57(A));
commit fraud against the government by not·rem1,ttmg_ · ' 2. , Creditable ' withholding tax (CWT)· at source
the taxes so withheld , such act should not prejOaice · • ,~ (NIRC; Sec. 57(8), as amended by TRAIN Law);
herein respondent who has been duly withheld taxes "' a. Withholding tax on compensation;
by the withholding agents acting under goyernment · _ i\. a. Withnqlding VAT; and
authority. Moreover, pursuant to Section_57 and 58 of ~f b. Expanded Withholding tax (2-8
the NIRC of 1997, as amended, the withholding of
income tax and the remittance thereof to t~e BIR is · r' ::·:
/ . D©M(J)NDON, supra at 1065).
_
the responsibility of the payer and. not ·t.he, pa~~e FINAL WITHHOL DING TAX (FWT)
(Commissioner of Internal f:?evenue. · v. . Asia[! _ · Examples of rnco·me Payments subject to FWT
Transmission Corporation, G.R. No. 1 2:P617, J.~nuary . 1, Interest income on .· currency bank deposits
19, 2011). ___ :• (NIRC, Sec. 24(8)(1) 27(0)(1), as amended by
, TRAIN Law; NIRC, Sec. 28(A)(7));
WHEN DEDUCTION STILL AtL.OW~D -· 2~ ..,Passiv e royalty income . (NIRC, Sec. 24(8)(1)
DESPITE NON-WITHHOLDING OF TAXES Sec: 25(A)(?)); and ·
Any income payment w h.Ich ·Is o therw·1se "deAi.lctible µ . 3. Prizes and winnings which exceeds
under the Tax Code shall be allowed as a deduction P10,000(NIRC, Sec. 24(8)(1) Sec. 25(A)(2)).
' "f
from the payer's gross income only 1 1 Is s o "t · h wn that
.
the income tax required to·be withheld has been paid Effects of FWT: _ • -
to the BIR in accordance with Sections 57 c! nd 58 of 1. Final tax is constituted as a full arid final payment
the Code. Nevertheless, deductio~ will b~ al:~:~ of the income tax due from the payee;
in the following cases wher_ e no wi th holding 2. The income subjected to final tax is no longer
I
subject to income tax; , _ · , _
was m-ade: (FUR) . rt the income
1. The recipient/payee .E.ailed to repo . Id' 3. _The final tax is limited only to ttie payees income
on the due date thereof, but e wit~ho th -tax liability and does not extend to other taxes
agent/taxpayer pays the tax, including ·e that may be impo~ed on said income;
interest incid~nt to the failure to wi th hold t~e taxf, 4. Liability for the payment'of the tax rests primarily
. 1 - ble at the time o on the payor as withholding agept; and
and surcharges, 1f app ica • or
audit/investigation - 5. Withholding agent (not the payee) files the return
reinvestigation/reconsideration; - (2 CASASOLA, supra at 526) .
1
2. The withholding ·· agent h erdr~ffne~~~1
Underwithheld the tax but pays t e I e t'f"'of
- nt and the amoun
between the correct_amou . est incident to
tax withh~ld, including th e !ter licable at the
such error and surcharges, 1 app '
 · INCOME T~TI.ON
Taxation .Law ·

Commencement of Prescriptive Period for WHEN TO FILE ANNUAL INFO~MATION

Refund of FWTs · - . RETURN FOR INCOME TAX WITHHELD -
Final withholding taxes are considered as full and
FINAL AND CREDITABLE
final payment of the income tax due, and thus, are not
subject to any adjustments. Thus, the two (2)-~ear The return shall be filed and the payment made not
prescriptive period commences to run from the time later than the last day of the month following the
the refund is ascertained, i.e., the date such tax was close of the quarter during which the withholding
paid, and not upon ttae discovery by the taxpayer of was made (NIRC, Sec. 58(C) .
the erroneous or excessive payment of taxes. l.n the
case at bar, it is undisputed that Metrobank'.s final
withholding tax liability in March 2001 was remitted t~
SUMMARY OF EXPANDED
WITHHOLDING TAX RATES
I
the BIR on April 25, 2001 . As such, it. only had until
April 25, 2003 to file its administrative and judicial
claims for refund. H.owever, while Metrobank's
\
administrative claim was filed on December 27, 2002,
Professional fees, talent fees, etc., for services
its corresponding judicial claim was only filed on
rendered by individual·payee
September' 10, 2003. Therefore, Metrobank's claim
for refund had clearly prescribed (Metropolitan Bank If gross income for the current year did 5%
& ·Trust Co. v. Commissioner of Internal Revenue
not exceed ~3.000,000
G.R. No. 182582, April 17, 2017, First .Divisf3!J, ....
Perlas-Bernabe, J.).
. , ·-If the g(oss income is more than
P3M 10%

CREDITABLE (EXPANDED} <... . or · VAT registered · regardless of

amount . .
WITHHOLDING TAX _I~ '- , ,.,.

Withholding taxes on ordinary business..,income - , - NOT~·: Befo;e the :passage of TRAIN

which is still subjected to incom tax
and therefore, it .Law, the professional fees for services
·rendered byl nd1viduals are subject to
is deductible·as tax credit. 1
!______ _ -15%/10% rates. ·depending on the
Income of Recipient I -··- -amount • of their Q!OSS income if it
Income which any credit le requ to be ~xceeds P720,00O or.not (R.R. No. 2-
withheld at source shall b in in_th urn of . " 98, sec'. 2.57.2)1
"' .. '
its recipient (NIRC, Sec. 58 D)) . -·. \_. . - ,·
. ( ) '-[ :
The excess of the amount of tax with eld ··
due on his return shall be refunded tottiim, su J~ -
Sec. 204 of the NIRC (abatement, refun~/c·
taxes) (NIRC, Sec. 58(0)).
.

Return on Creditable (Expanded) Wi

. ,
. ...
I
Tax . I.
The income payor who withheld a credita e mco
tax should file a return and pay the tax withheld.
Rear pro'perties 5%
Requisites: (E-FLAR)
1. An gxpense is pa1d or payable by the taxpayer, Personal properties 5%
which is income to the recipient thereof subject to
income tax; . Poles, satellites and fransmission 5%
2. The income is fixed or determinable at the time facilities
of payment; · ·
3. The income is one of the income payments Billboards
,bisted in the regulations (R.R. No. 02-98) that is
subject to withholding tax; Cinematographic film rentals and 5%
4. The payor-withholding Agent is a resident of the other payments (R.R. No. 11-18)
Philippines; and _
5. The income fiecipient is a resident of the 15%
Philippines liable to income tax (MAMALA TEO,
Reviewer, supra at 411).
10%
 M \ I

MEM:Q~y AID
. San Beda lWvenlily College of Law • RGCT Bar Center
197

FINAL WITHHOLDING TAX SYSTEM V.

C~EDITABLE WITHHOLDING TAX
If gross income for current year 15% · SYSTEM
exceeds
P720,000

If gross income for current year does 10%

not exceed P720,000
Constituted as a full and Intended to equal or at
final payment of the least approximate the tax
income due from the due from the payee on the
payee on the said said income.
If gross income for current year 15% income (R.R. No. 02-98,
exceeds Sec. 2.57(a)).
P720,000

If gross income for current year does 10%

not exceed P720,000

Payee is not required to

file an income tax return required to file an income
for the particular tax return and/or pay the
inc~me. difference between the fax
withheld and the tax due

. \
1. All income>subject to Those income
final [ taxes , (e.g. , payments covered by
,,. ..... passive,-gr.oss incpme the expanded
1% of NR/!/.JETE3J;>;.it -withholding tax (R. R.
,--: 2. Fringe benefif (NIRC No.02-98).
Sec. 33,. as amended
1% · ,. bX. i ~tN Law); and
, lnfoJjj!,~rJ:s,-rpward to
persons instrumental in
the discovery of
violations of the NIRC
1% and the discovery and
seizure of smuggled
goods (NIRC, Sec.
282(8)).

(MAMALATEO, Reviewer, supra at 419-421 ; R.R. .WITHHOLDING TAX ON

No. 02-98, Sec. 2.57.2; R.R. No. 14- 2018, Sec. 2)
COMPENSATION
It applies to all empl~yed individuals, whether citizens .
or ·aliens, deriving income from compensation for
servi_ces rendere(i in .the .Philippines wherein the
employer is constituted the withholding agent (R.R.
No. 02-98, Sec. 2. 78) .

EXCEPTION: Minimum Wage Earners as defined

under Sec. 22(HH) of the NIRC (2~8, DOMONDON,
supra at 1100).
 INCOME TAXATION 1·
198
. Taxation Law

The income recipient (i.e., employee) i~ th e person

liable to pay the income tax, yet to improve the
collection of compensation income of employees, the
State requires the employer to withhold the tax upon
payment of the compensation income. .

Requisites: (EP) . .
1. Employer-employee relat1onsh1p; and .
2. f ayment of compensation or wages for services
rendered. ·

Compensation Subject to Withholding Tax: (SBC-

FAT)
1. §.alaries and wages;
2. ~onuses;
3. Commissions;
4. fringe benefits of rank and file employees;
5. Allowances; and
6. ]ps (R.R. No.· 02-98, Sec. 2.78.1(A)).

WITHHOLDING VAT
For discussion, please refer to With holding VAT on
· pages 277 to 278.

WITHHOLDING TAX ON FRINGE

BENEFITS
The FBT is collected from the employer even if the
employer is a tax-exempt corporation or an
instrumentality of the Philippine government.
(DIMAAMPAO, Income Taxation, supra at 39). In
effect, it is imposed -on the employer and not on the '~.
employee who received the fringe benefit•

FBT is imposed on the grossed-up monetary value of

fringe benefit furnished ·or granted to a
managerial/supervisory employee. It sh all ber- - . - .
withheld by the employer who files the retu rn and! _L
remits the tax not later than the last day of the month
following the close of the quarter during wh ich
withholding was made (Guidelines for BIR Form No. '
16030).
 w \ /
MEM:Q~y AID
San Seda l!rMnlty Colege of Law - RGCT Bar ()perationa Center

. ,s:JIB}1}~t~J;r)}}!\?"
., [ BASIC PRINCIPLES
I ~~/"; } / \: As· to
::..~

Imposed on donations
Donor's Tax
Typiot Donation ·
imposed on donations
TRANSFER TAX mortis causa inter vivas
It is a t~x imposed upon the privilege of passing
ownership of property without . any v I bl
.d t' ( a ua e
consI era ion 2-8 ~OMONDON, National Taxation
Fixed r~te of 6% Fixed rate of 6%
(2018), p. 396 [hereinafter 2-B DOMONDON}).
Old: Tax rates range Old: Tax rates range
NATURE OF TRANSFER TAXES within 5%-20% from 2% to 15%
Transfer taxes are: (Family); 3~% (Stranger)
1. E~c!se or privilege taxes imposed on the
privilege of passing property ownership;'
No exemption. Cumulative donations for
N~TE: An excise tax is one levied on a specific
the calendar year to the
art1cl~, rather th_an one upon the performance,
NOTE: TRAIN Law extent of t-250, 000_.
on, or the exercise of an activity (CIR v.
abolished the
P1/tpmas Shell Petroleum Corporation, G.R. No.
exemption of t-200, 000
188497, February 19, 2014) .
below.

2. Not taxes on the property transferred (2-B

DOMONDON, supra at 396) .
· Yes (NIRC, Sec. 86) Yes (NIRC, Sec. 101, as
.,;' ...
KINDS OF TRANSFER TAX: ~-' . -
_ amended by TRAIN
Law)
1. . Estate tax; and
. 2. Donor's tax.
NOTE: However, TRAIN
Law abolished the
DISTINCTIONS BETWEEN ESTATE ·AND deduction of the amount
DONOR'S TAX of gift on account of
marriage under Sec. 101
of the NIRG_ of 1997'.

Tax on privilege to
transfer property upon
one's death ·
Individuals only
,
Tax on priv~ege to
1. Tra'nsfers subject to All transfers by gift
transfer property during
1 estate tax; \ except those which,
one's lifetime· ·
2. Estate consists of under Sec. 101 of the
registered or NIRC, are exempt from
registrable property tax (NIRC, Sec. 1D3)
(NIRC, Sec. 90, as
Individuals and amended by TRAIN
corporations Law)

DOHN ALFRED E. AQUILIZAN, Over-All Chairperson I NICHOLE VANE B. SANTOS, Chairperson for Academics I RONALYN A.
GACULA, Ad Hoc Director for Bar Matters I MARIELLE CIELO B. BELGIRA, Vice Chairperson for Finance I JUAN INIGO S. MIGUEL,
Vice Chairperson for Operations I ALISSA MARIE D.C. DELOS SANTOS, Vice Chairperson for Audit I CORINA R. TAMPUS, Vice .
Chairperson for Secretariat I ARVY KEITH N. CHUNG, Vice Chairperson for Logistit:s I ANTONIO JUN-JUN c. MANALIGOD IV, Vice
Chairperson for Membership IJORDAN N. CHAVEZ, Vice Chairperson for Electronic Data Processing
31J:JIGIB•lfih~li1i3
JOSE LORENZO c. DAVE, Subject Chair I LOUISE MARIE C. CONTACTO, Assistant Subject Chair I KATRYNA ANNE R. TOMENIO,
Subject Electronic Data Processing I SUBJECT HEADS: MARY GRACE A. GRANIL, General Principles I SHEENA ROSETTE DG.
DOMINGO, Administration, Enforcement, Remedies and Court of Tax Appeals IJERRLITO P. CUSTODIO, Local and Real Property Taxation
I STEVIE R. ARCILLA and PATRICK MARRION Y. MELENDRES, Income Taxation I MARY ANN C. TAN, Transfer Taxi MARILYN
H. MALALUAN, Value-Added Tax I .
3 :\•!:IIMHIAAM=i~·l:
KATRINA MICHAELA D. DELFIN, ARMANT. PAEZ, ANDREI ANNEtl~ PALOMAR, MARY KATHERINE A. SIMEON,JAMES
KARL DANIEL B. ALYARO, ARIESA JANE V. poMINGO, JOSEPHINE MARIE T. SALAZAR, YNA MAREI AGUILAR, NERY
ROYCE T. LAZARO,JOHN KENNETH Q. CRISOLOGO, LOIS DANIELLE P. DIMAANO, ANDRELA M. AQUINO, ANNA LOREN
DC. MANUEL and GILBERT OWEN S. APILADO
7 J•VM4i€
Atty. NICASIO C CABANEIRO, CPA, Atty, DANTE 0. DELA CRUZ, CPA,JusticeJAPAR B. DIMAAMPAO Atty EFREN
. VIN~ENT M. DIZON, CPA ' .
 TRANSFER TAX
200 Taxation Law

because the recipient (heir or donee) has not

actually worked for it. Thus, the imposition of
transfer taxes helps the equitable.distribution of
wealth to attain social progress and stability
Within 30 days after the (Id.) . .
Within 1 year from
death (NIRC, Sec. 90 date the gift is made
5. State-Partnership Theory
(B), as amended by
TRAIN Law)
(~/RC, Sec. 103 (8))
=- the tax is in the share of the State as a
passive and silent partner in the accumulatio_fl of
property as it protects every individual within its
territory (Id.). ·
Not exceeding 30 days, No extension is allowed '
in meritorious cases
(N/RC, Sec. 90 (C)) . KINDS OF GRATUITOUS TRANSFER
SUBJECT TO TRANSFER TAX .
1. Succession-
At the time the return is At the time the return is - otherwise known as donation mortis causa
filed (Pay-as-you-file) filed (Pay-as-you-file) because the effectivity of gratuitously
(N/RC, Sec. 91 (A)) (N/RC, Sec. 103 (B)) transferring properties to the heirs is caused by
the death of the property owner either through
- , the operation of law (Intestate Trari_sfer) or by a
Allowed if payment on Not allowed written will (Testamentary Transfer)
the due date would (VALENCIA & ROXAS, supra at 39-40).
impose undue hardship
upon the estate or 2. Qonation
heirs, except in cases - also called cfo_nation inter-vivas donation is a
of negligence, undue grat\Jitous transfer of property to the donee
disregard of rules and during the lifetime of the donor. Since the
regulations, and fraud prop~rty is · given for free, the donee has no
(NIRC, Sec. 91 (BJ) obligation to give any consideration. This kind of
. __ 1 - · . •- grato itous transfer · of property is ·subject to
1
THEORIES REGARDING ·THE ·P.URPO.SE - ·· ___ gons,r -~ tax (Id.) . . :
OF TRANSFER TAXES., (BEARS)'-· . /. . : ' . / .,,- ·
1. §.enefit-Received Theory . ·3_ : ~~~ lally gratuitous transfer
- the tax is in return for the protection .·and i.. , ~ - he c_onveyan~e of prop-erty"is made possible .
services render~d by the State in' . the _ :, for an_.-madequcJte consideration. It is · usually
accumulation of properties transferred ' · called "disguised sale" because the intent of
gratuitously, resulting to benefits received b,Y~he -, ., ,p(:;f~~.t_r~nsfer is partly sale and partly gift
estate and the recipient (heirs · o ( rdonee) . 'rl
(VALENCIA & ROXAS, Transfer and Business ' '

]
Taxation (2016), p. 42-43 {hereinafter
VALENCIA & ROXAS}).
ESTATETAX
2. ~quitable Recoupment Theory
- the State imposes transfer taxes to counter-
act tax evasion, or to reasonably recover the
current and future anticipated reduction of ESTATE TAX
government's income tax collection (Id.) . It is an excise tax imposed on the privilege of
transferring a property upon the death of the owner
3. Ability-to-Pay Theory (CAB~NEIRO, From Living to Leaving (2018), p. 127
- every inheritance received by an heir is in the [hereinafter G_ABANEIROJ). ·
nature of unearned ~ealth, the tax is based on
the act that the receipt of inheritance and gift It is a tax -on the right to transmit property at death
creates an ability to pay and thus contribute ts0
governmental income (Id.). .
fnd. on ce~ain transfers by the decedent during his
ifetime which ~re made by the law equivalent of
te st~mentary disposition {INGLES Tax Made Less
4. ,Bedistrlbution-of-Wealth Theory Taxing·· A R~viewer
· ·with
. Codals and
• Cases (2018),
- properties given for free contributes to p. 256 -fhereinafter INGLES, Rev,ewer
· -11 .
11
unequal distribution of wealth and earnings
 MEM-O~YAID .
S1f1 Bede UrweBity Colege of Law - RGcT Bar Operations Center

NATURE OF ESTATE TAX the personal .property transferred by the decedept

1. It is a privilege or excise tax; (2-8 DOMONDON, supra at 401 ).. ,
2. It is not a property tax because their imposition
does not rest upon general ownership but rather, THE . STATE AS AN EXTRAORDINARY
they are imposed on the act of passing owner- COMPULSORY HEIR OF DECEDENT
ship of property (2-8 _DOMONDON, supra at
399); and . Upon the death of the decedent, succession takes
place and the right of the State to tax the privilege to
3. It is different from inheritance tax (Lorenzo v.
transmit the estate vests instantly upon death (R.R.
Posadas, G.R. No. V-43082, June 18, 1937) .
No. 1_2-2018, Sec. 3).
Inheritance Tax
Despite the transfer of properties and rights at the
- a tax imposed on the legal right or privilege to
time of death, the executor or judicial administrator
succeed to, receive or take property by or under
shall not deliver a distributive share to any party
a will, · intestacy law, or deed, grant or gift
interested in the estate.unless there is a certification
becoming operative at or after death (Lorenzo v.
from the Commissioner th~t estate tax has been paid
Posadas, G.R. No. L-43082, June 18, t937) .
is shown (NIRC, Sec. 94). The State is then
considered as an "extraordinary heir of a de~dent,"
NOTE: Presently, there is no inheritance tax taking precedence over all legitim~te .heirs in the
imposed by law. p.o. No. 69 passed on II .
distribution of the decedent's assets (CABANEIRO,
November 24, 1972, effective January 1, 1973, supra at 36). I
abolished the inheritance tax.
RATE OF ESTATE TAX
PURPOSE OR OBJECT OF ESTATE
Whether resident or nonresident of the Philippines,
TAX a tax at the rate of six percent (6%) based on the
1. To generate additional revenue for the value of net estate is imposed (NIRC, Sec. 84 as .
government; .aniend~d by ::rRAIN Law).
2. To reduce concentration of wealth;
3. To provide for equal distribution of wealth;
4. It is the most appropriate and effectiv~ method
for taxing the privilege whic~ the decedent Graduated rates of 5% Fixed rate of 6% on net
enjoys in controll_ing the disposition at death of to 20% cin net est~te estate
property accumulated during the .1Ltet1me of the
decedent; and · ·-~ . · · .·.i~ ;~·.: -,-~~~::. •~:· -~ .
~-" CLASSIFICATION OF DECEDENT FOR
5. It is the only method of collecting ·the share_.
which is properly due to the State as·a partner in _ '~ ESTATE TAXPURPOSES
the accumulation of property which was made '.,; 1 ::. :Residents; and
possible on account of the protection _gi~en by . ;.". ... >a ,·Resident Citizen (RC); and
the State (2 Report of the Tax CoTT1mI_ssIon on . lb·. Resident Alien (RA).
N;:1tional Internal Revenue Laws, p._5~-5_7): · 2. Non-residents .
a. Non-resident Citizen (NRC)
b. Non-resident Alien (NRA) (NIRC, Sec. 84) ..
ACCRUAL OF ESTATE TAX
The estate tax accrues as of the death _of !he NOTE: A corporation, domestic or foreign,
decedent. The accrual is distinct from the obligation is not liable for estate tax because, it is not
to pay the tax, which is 1 year after the death of the capable of a natural death.
deceden~ (R.R. No. 12-2018, Sec. 3). ·

·LAW THAT GOVERNS THE IMPOSITION Decedents and estates are classified _in
accordance with the benefits protection
OF ESTATE TAX - theory. In turn, the classification determines
Estate taxation is governed by the statute in force at what is the composition of gross e·state for
the time of the death of the decedent (~ .R..No. 12- purpos·es of estate taxation. The· protection
2018, Sec. 3). · given by the Philippines to the persons of ·
citizens and resident alien extends to their
properties wherever situated _ (2-8
TIME AND TRANSFER OF PROPER!IES DOMONDON, supra at 401). .
The transfer of ownership· ta kes PIa.ce at the ftime
title of
to
death not at the time when the certificates O d t t
real property are transferred from th e dece e~ 0
· the transferee The transfer does not also take. P acef ·
·
When the transferee · 1 Possess1on o
takes physica
 TRANSFER TAX
Taxation Law

I
character in respect of intangible personal

GROSS ESTATE property owned by citi4e~s of the Philippines

not residing in that foreign country (NIRC,
Sec. 104). ·

GROSS ESTATE NOTE: If any of the two states o~ countries

The value of all the property, real or personal , collects or imposes and does not exe~pt
tangible or intangible; of the d~cedent (N/RC, Sec. any transte"r, death , legacy or succession
85) . tax of any character, reciprocity does not
apply (CIR v. Fisher, G.R. No. L-11622,
COMPOSITION OF · THE January 28, 1961).
GROSS
ESTATE:
1. If the decedent is a resident or citizen
2: Without reciprocity C s-
Shall be included in the gross estate (NIR , ec.
- All properties, real _or personal, tangible or 104).
intangible, wherever situated. '

2. If the decedent is a non-resident alien VALUATION OF GROSS ESTATE

- Only properties situated in the Philippines 1. Property
provided that, with respect to intangible personal ~· .. - The properties comprising the gross estate
property, its inclusion is subject to rule of , shall be valued based on their fair market value
reciprocity provided for under S: ~ ~04 of t_he ·- ·..J 1 : (F[,AV- s of the time of decedent's death (R.R. .I
NIRC (R.R. No. 12-2018, Sec. 1). - ;. · . . No. ! 2-2018, Sec. 5) .
/' \,,.·.,... ·-·:. . l /
' ,. ,_'
INTANGIBLE PR,OPE~T~ES - . Real Pr,ope·rty , .
CONSIDERED Wh[ctiever ls higher between the FMV:
SITUATE°"' IN ' THE
PHILIPPINES: / I , a. 1As determined by the Commissioner (zonal
value)· or -._ '
' ? ' '
1. Franchise which must b in - the· b. - {',s shown-fn the schedule of values fixedRbCy
Philippines; ·
2. Shares, obligations or ppnds issued
-

corporations organized ·o constitul e in the

, .
.PY
.

.
,t ee. 88).
/ :z;;)
'---i ,
'
the Provincial and City Assessors (NI ,

.
Philippines; \--:'~ -- - --. , SH~re~ of ~\pc .
3. Shares, obligations or bonds issued tiy'.51 f oreign 1 •• , • • Th~ _f:MV ,hall. de,Pe_nd on whether the shares
corporation 85% of the business o w ich is . · · _ reJ1sted r unlisted m the stock exchange:
• located in the Philippines; ' ., ..,,. "(1"") : ~f uP, isted , ·
4. ~hares, obligations or bonds issued by a fefr~ign._- - - \ ) •· . Common shares should be valued at
corporation if such shares, obligation ra foncJ~} I:~--~ :.,., - . • book value at the date of death;
have acquired a business sitvsc ·
1
the "I ii. \ Pr,ferred shares are valued at par
Philippines; and / A ,\-, . valu~ (R.R. Nd._12-2018, Sec. 5) .
5. Shares, rights in any partnership, b usioess or l .., 10\
industry established in the Philippines (NIRC, NOTE: In determining the book vaiue of
· Sec. 104). common shares, appraisal surplus and
RULE OF RECIPROCITY the value assigned to preferred shares,
. if there are any, stiall not be considered .
The intangible personal property of decedent NRA
. The valuation of unlisted shares shall
oe exempt from the provisions of R.R.
1. With r eciprocity
No.'06-2013, as amended.
Shall not be included in the gross estate if:
a. The decedent at the time of his death was a
b. If listed - the FMV is the arithmetic mean
citi~en and ~esident_of a foreign country
between the highest and lowest quotation at
which at the time of his death did not impose
a date nearest the date of death, if none is
tran~fer tax of any character, in respect of
available on the date of death itself (R.R.
intangible personal property of citizens of No. 12-2018, Sec. 5).
the Philippines not residing in that foreign
country; or
· 2. Participation in any association,
b. The laws of the foreign country which the
decedent was a citizen and resident at the recreation, or amusement club (such as
time of his death allow a similar exe·mption golf, _polo, or similar clubs)
from transfer or death taxes of every - fair market value of the unit participation sh~ll
be the arithmetic mean between the highest and
 \ I

MEM:Q~y AID
San Bede Ul"Ml!'Slty Colege of Law - RGcT Bar

lo~:~~
. Center

quota_tlon at a date nearest the date

? lef a(R ,RI nNone is available on the date of death '
transfer during his lifetime, under whJch he has
retained for his life or.for any period which does not
1tse. . . o. 12-2018, Sec. 5) .
in fact end before his death:
1. Possession·or enjoyment'of the property;
3. Right to Usufruct, Use or Habitation and
2. Right to the income of the property; or
Annuity · '
3. Right, either alone or in conjunction with any
- The proba_b le life of the beneficiary in person; to designate person Who 'shall possess
acco~ance w:1th the latest basic standard or enjoy the saic;j property or income therefrom .
mortality table 1s to be taken into_account, to be
, approved by the Sectetary of Finance upon NOTE: Except in case of a bona fide sale for an
recon:imendation of the lns~rance adequate and full consideration in money or
Commissioner (R.R. No. 12-2018, Sec. 5) . money's worth (NIRC, Sec. 85 (8)) .

4. Improvement ·
- The cons.t ruction cost_ per building permit or
the FMV per latest tax declaration.
N9TE: Any income from, or increase in the
value of the properties left by the decedent after
his death, will not fon:n part of his gross estate
(BIR Ruling DA-~20-06, April 7, 2006) .
INCLUSIONS ON THE GROSS ESTATE:
1
,,
(ITR-GP-PIC) .
1. Decedent's !nterest at the time of his death;
2. Iransfer in contemplation ot'death;
3. Revocable Transfer; · LEON, NJRCJ).
4. Property passing under General' Power of
Appointment; ,.
5. froceeds of life insuranc~;
6. Prior interest;
7. Transfers for Insufficient consideration; and
8. ~apital of the· surviving .spouse (NIRC, ~ec. 8~
as amended by TRAIN Law) .
. .. . -
DECEDENT'S INTEREST
To the extent of the interest therein of the decedent
at the time of his death (NIRC, Sec. · _85 (~)). It
includes any interest having value or capa.ol~ of
being valued, transferred by the decedent at the t1r:ne
of his death (MAMALATEO, Reviewer on Taxation
(2019), p. 433 [hereinafter · MAMALATEO,
Reviewer]):
"
Ciro.umstances taken into account:
1. Age and state of health of the decedent.at' the
time of the gift, especially where he was aware
of a serious illness;
2. Length of time between the gift and the date of
death. A short interval suggests the conclusion
that the thought of death was- in the decedent's ·
-
~I .
mind, and a long interval suggests the opposite;
and ·
Concurrent making of a will within a short time
after the . transfer (1 DE LEON, The NIRC
Anaotated · (2015), p. 760 [hereinafter 1 DE
.
f
NOTES: .
a. T,~e concept of transfer in contemplation of
death has a technical meaning.-It does' not
. mean tha! 1:1 person transfers his properties
. because he knows he is going to die. It is not
the mere transfer that constitutes a transfer
....
in contemplation of death but the .retention
{i:. ::::-\ ,, of some type. of contrc>i' over the property
:_' ".b. --i raosferred . (2-B DOMONDON, supra at
425) ;
b. The law does not specify the number of
years prior to the decedent's death within
which the transfer can be considered in
contemplation of death (BIR Ruling No. 261,
S~ptember2, .19~7); and

Examples: c. When it comes to transfers done d.uring the

1'. Dividends declared by a corporation before lifetfme of a decedent,_there is a disputable
death of stockholders although paid after death • . presumption that the transfers are in
if the decedent Wi:IS living on the re<;:o rd date; contemplation of death if the recipients are
.
2. Partnership. profits even ·f I pa1
'd after death of compulsory heirs (IN~LES, Reviewer,
partner; and th heirs supra at 266.
3. Right of usufruct if transferable _l<? · e xes ·
.I
(AMPONGAN, Transfer & Busmess Ta ILLUSTRATION: X died on April 21, 2020.
(2015), p. 24 [hereinafter AMPONGANJ) . X, before his death, made a gift inter vivos
in .favor of Y of all ~is property according to
TRANSFER~ IN CONTEMPLATION OF a deed of gift which includes all the property
of X. The deed of gift was .executed by X on
DEATH · .·- · f April 9, 2020, in favor of his son Y. This deed
- 'd d in contemplation o
The transfer shall be consi ere time . niade a of gift transferred 22 tracts of land to the
death if the decedent has at any
 TRANSFER TAX
· Taxation Law

donee Y reserving to the donor X for his life ANS: The PS00,000 is subject to estate tax. The
revocability of the donation at will of the ,donor
the usufruct of 3 tracts.
made the donation ambulatory. Furthermore, no
ANS: The facts warrant the inference that right was vested in the donee while the donor is
the transfer was an advancement upon the alive. Therefore, the donation is subject to estate
tax. · ·
inheritance which the donee, as th,e sole and
forced heir of the donor, would be entitled to
receive upon the death of the donor. Th~ law Q2. Suppose the deed of donation contains a
presumes that such gifts have been made in condition that Atong e9uld reacquire only the
anticipation of inheritance, devise , bequest, land upoo giving of a 30-day notice to Bardagol.
or gift mortis causa, when the donee, after Is the donation subject to donor's tax or to estate
the death of the donor proves to be his heir, tax? '
devisee or donee mortis causa, for the
purpose of evading the tax, and it is to ANS: The donation is still mortis causa subject
prevent this that it provides that they shall be to estate tax because the requireme11t of notice
added to the resulting amount (Dizon v. has not changed the ambulatory nature of the
' Posadas, G.R. No. L-36770, November 4, d<;mation (A_MPONGAN, supra at 27). ·
1932).
The power to alter, amend, · or revoke is
REVOCABLE TRANSFERS .{TE) considered to exist on the date of decedent's
A transfer is a revocable transfer where: I , de~th . . ·
1. There is a transfer (except in case of ona fide ...__ ! ,~ven tho9gh the exercise of the power is subject to
sale for an adequate and full consideration in .,:::a precec;ient ·of giving notice or even though the
money or money's worth) by .Trust or ot}:lerwise; alterati9n; a ll)en dment, or ·revocation takes_effect
and _ / ) ,,,.,,,...--~_--:--• only ~n th~ expiration of a sta,ted period after the
2. The snjoyment thereof wa suBje at the date .exercise of tne p~ er, whether or not, on or before
of his· death to any change thro gh th fexercise · the dec~dent's death\ notice has been given, or the
of power (in whatever cag,acity .exerci¥!bl~)J?y~ _ ... _po~er _ has been ~xer~ised. In such ·cases, proper
(ACR) r ,,;-,,. 1 adJostment shall be made representing the interests
a. The decedent Alont -~ \ ' - -· which w_puld have 6ee~ excluded from the power if
b. The decedent in ~onjunctfon with any other ; the decedent had,live~ 2-8 DOMONDON, supra at
person (without regarcfto-when' qrirom Vv:hat . · .,. 430) . jF: :· ·
source the decedent ~q'j~r d sush ;P~wer),7 . .' <-:- / ;..,._<. " . ·
to alter, amend, revok or t inate; or !, , I~_n9 1'1e ·t;ras n -t bee given, or the power has not
c. Where any_such power is B~linquish'e,,_d i n I· ,..\>eerf e ~rcised on o~ be!ore the date of his death,
contemplation of the · dececlent's "de.~tlJ.__' J .,.__soch, not1ce shall be ~ons1dered to have been given,
(NIRC, Sec. 85(C)(1)) . __. :-·;,., or-tl)e power execc1sed , on the date of his death
. /, •--. __, ._..,. (NIR<;, Sec~?5 (C)(2)) .
NOTE: It is sufficient that the decedent had , - · ~· ·. -:' ' ·
the p_ower' to revoke, though ~e did ' not 1 /; Irrevocable T ransfers Not Included · .
exercise the power to revoke (INGLES -- y - • Only.,.revocable transfers shall ·be included in the
supra at 262). - ·gross estat~ because of the tremendous power and
control which the transferor can exercise. The
Examples: . transferor can anytime revoke the transfer, hence
1. Transfer with retention of interest to income or there ~as no transfer made (SABABAN & BUNDAC,
~ ith right to designate persons who will enjoy· Taxation Law Reviewer (2008) p. 136). . ,
incom~ or proPE:rty (NIRC, Sec. 85 (BJ); and
2. Donations mort,s causa even without retention Ex~mples of Irrevocable Transfers:
of interest while the decedent still lives (Puig v 1. If _the decedent's power could be exercised only
Penaflorida, G.R. No. L- 15939 January 31 . . ~1th the . consent of all the parties having an
1966). · ' ' interest m the transferred property, and if the
power does not affect the rights of all t he ·parties,
ILLUSTRATION: Atong donated real property the property transferred would not be included as
wo,:th ~~00 , 000 to Bardagol during his lifetime. a revocable transfer·
An item m the deed, however, grants the donor 2. _Where the decedent was completely stripped of
to revoke the donation at will. the power (to alter, amend, or revoke) at the time
of his death; and . .
Q1. Is the ~500, 000 subject to donor's tax or to 3 - Where the exercise of the power (to ;;titer, amend,
estate tax? or revoke) by the decedent was subjected to a
 - \ I
MEM:Q~y AID
San Seda UrMlf1lty Colege of Lew - RGcT Bar ~W-- .
..,._"""'18
cd?dntingt ency bbeyfo.nd t~e decedent'~ control which
1 no occur ore his death (3 4 Am. Jur. 2d.).
PROPERTY PASSING UNDER GENERAL
POWER OF APPOINTMENT (GPA)
Power of Appointment
- in its ~eneral sense, is a power to designate who
shall enJ0Y the use of property (2-B DOMONDON
supra at 432). ' •father, the painting has to be transferred to W,
Prop~rty over. which !he decedent held a power of
appointment 1s not included i!'l his gross estate
unless such p9wer is general (1 DE LEON NIRC
supra at 760). ' '
Kinds of Power of Appointment:~
1. General _ · . Requisites: (DAm-ER)
-" W_hen it a~thorizes the donee (decedent) to
appoint any per~n he pleases, including
himself, thus having full dominion ove.r the
property as though he owned it.
2. Special . retained the power of re·vocation; or
-When the donee _(decedent) can appoint only
among a. restricted · or designated class of
persons other than himself (Id.).
Requisites for Taxability: (EEP)
1. Existence of a GPA; ·
2. gxercise .of such -power by the decedent •by will
or j)y deed in certain cases; ·and ·
3.~ The fassing of the property by virtue of such
exercise (Id.).
The GPA may be exercised by th·e decedent:
1. By will;
2. By deed executed in contemplation · of, Of-=-
intended to take effect in possession or
enjoyment at, or after his death; or _ : .
3. By deed under which he has retain~d for ~1s hfe
or any period not ascertainable. w1th~ut .
reference to his death or for any period which
does not in fact end before his death: .
a. The possession or enjoyment the prope~;
b. The right to the income from th~ pro~erty, .or
c. The right, either alone or in coniunct1on w~h
any person, to designate the persons w 0
shall possess or enjoy the property or th e
income (N/RC, Se_c. 85 (D)).
ILLUSTRATION: -ln 1999, X purchased from y
th
a painting for ~500, 000. The FMV th ereof_~; ;
time of purchase was ~1, 000, 000. In 28 ·X
died. In his last will and teS tament,
0 2
bequeathed the painting to hi.s o~ly ~ \ ; · as
was granted the power t.o ap.point hi~ wif~, of 'z·s
successor to the painting in th e ev~n d to the
death. z died in 2007, and W su~cee e in the
property. Should the painting be included
Center
(
gross -estate of Z in 2007 and be subject to_
estate tax? ·
ANS: ·No, the painting should not be included_in
the gross estate of .Z because only property ·
passing under a general power of appointment
is included in the gross estate of. the decedent.
In the case. in accordance with the will of Z's
Z's ,wif.e, and since the power of appointment
granted by X to Z.is specific (i.e. only to his wife) ,
the property should not be included in Z's gross
estate in 2007 (MAMALA TEO, Reviewer, supra
at 442). ·
PROCEEDS OF LIFE INSURANCE
1. The Qecedent takes an insurance policy on his
own life; and
2. The Amounts are receivable by:
a. The Estate, his executor, or administrator
irrespective of whether or not the ·insured
b. Any beneficiary designated ·as fievocable
(NIRC, Sec: 85 (E)).
" ~- ....
. . - . -.. . \-,,.Nofe: The proceeds of life insurance are not
incluaekl in a decedent's gross estate when
the. beneficiary is other'than the estate, his
executor{. or adtninistrator and the
d. sigr ati n is irrevocable (NIRC, Sec. 85
(1=)). • .
,,...,.;, '-'"' .,.,... .
. ,•._ ~:· :t_;tc. -r'·~--
Proceecfs' ofl .ife Insurance are Not Taxable in the
following cases: (AGAI-BL)
. t Accident insurance proceeds;
-, -, .;, '4. Procee~s of a Qroup insurance policy taken out
a
.. _~by company for its employees; · . ·
3. Amount receivable by any beneficiary irrevocably
designated in the 'policy of insurance by the
insured;
4. . Proceeds of !nsurance policies issued by GSIS to
go'{ernment officials and employees;
5. Benefits accruing under the SSS law· and
6. Proceeds· of bife insurance payabl~ to heirs of
deceased members" of -military personnel
(MAMALA TEO, Reviewer, supra at 443).
Determination of the Character of ttie Proceeds
1. Po!icy taken before marriage
the source of funds determines ownership of
the proceeds · of life insurance (2-B
DOMONDON, supra at 440).
2. Policy taken during marriage
a. Beneficiary is the estate of the insured - ·
proceeds are presumed conjugal; hence,
one-half share of surviving spouse is not -
· taxable.
·
 - ' i¾.' .
TRANSFER TAX
•,> : ~

206 . ·.:
Taxation Law

b. Beneficiary is third person - proceeds TRANSFERS FOR INSUFFICIENT

are payable to the beneficiary even if CONSIDERATION .
premiums were paid out of the conjugal Any transfer in contemplation of death, revocable
partnership (Del Val v. Del Val, G.R. No. L- transfer or property passing under GPA made,
9374, February 16, 1915). created exercised or relinquished for a
0

conside ration in money or money's worth but is n·ot

NOTE: Property relations between husband
and wife shall be governed (1) by marriage
settlements executed before the marriage;
(2) by the provisions of the Family Code;
and (3) by the local custom (FAMILY CODE,
Art. 74).
ILLUSTRATION: Antonia Santos, 30 years
old, gainfully employed, is . the sister of
Edgardo ·Santos. She died in an airplane
crash. Edgardo is a lawyer and he
negotiated with the airline company and
insurance company. Edgardo, the airline
company, and the insurance company ·'°'
agree to a total settlement of P10, 000, ·060.
This is what .Antonia would have'earned as
somebody who was gainfully emp[oyed.
Edgardo was her only heir.' ls th~e P16, Oba,
.
000 subject to estate tax? Refison briefly.
ANS: No, the fD10, 000, 000.is 'not subject to
estate tax because the proceeds are not
part of Antonia's gross ~stafe. It is .clear that
the payment came from the airline and its
insurer. There is _no showing that the P10,
000 , 000 ·came from.....an insurance policy -
"taken by the decedef)t Anfonia ori her owh
life. Furthermore, the P10, o·oo,"ooo is not
part of Antonia's property at .the tim~ of her
death (2-8 DOMOND N, supra at 448) .
/ .
PRIOR INTEREST
a bona fide sale for an adequate and full
consideration in money or money's worth (NIRC,
Sec. 85 (G)).
The value to be included in the gross estate is the
excess of the fair market value of the property at the
time of the decedent's death over the consideration
received (NIRC, Sec. 85 (G)).
If there was no consideration received on the
transfer, the value to be included in the gross estate
will be the fair market value of the . property·at the
time of the decedent's death (INGLES, Reviewer,
supra !Jf 265) .
-Formula;
FMV of property at.decedent's date of death
.. Les·s: Actual consideration received by
decedent ~
, Amount included in decedent's gross estate
...
:- ILLUSTRATION: J ' ·• .. .
Mr. ,A sold to Mr. B his wooden cabinet worth t-500
· to be delivered only u·p on Mr. A's death. The current
market :value of the cabinet at the time of death of
Mr: -A is P750. What amount should be included in
. Mr. A's estate if the 1,>rice agreed upon is (a) PSOO?
. If (ti) P300? " ." .
, f -:
! .·

Except as otherwise provided in: 1. FM\1 at l he .ti~e of transfer P500 19500

I -
1. Transfer in contemplation of death
2. Revocable transfer 2. Consideration received by the P500 P300
3. Proceeds of life insur~nce transferor-decedent at the time of
transfer
Sec. 85 of the NIRC as amended by TRAIN Law
s_hall apply to the transfers, trust, estates, interest, 3.FMV at the time of the death of · P750 19750
nghts, powers, and relinquishment of powers, as transferor
severally enumerated and described therein
whet~er ":'ade, creat1ed, arising, existing, exercised Value to be included in the gross PO
or rehnqu1shed before or after the effectivity of the estate
NIRC (NIRC, Sec. 85 (F)) .

1 - FMV at the time of transfer

2. Consideration received by the

transferor-decedent at the time of
transfer
----- \ I

MEM:Q~y AID .
SM Bede l.!rMlrslty College or Law - RGCT B '"'-- .
ar .....rations Center

I
- .

3.FMV at the time of the death of ~750 ta750

transferor
. 6% on net estate 5% to 20% on· net
Value to be included in the gross f90 . •. estate graduated scale ·
P450
estate

NOTE: To determine the adequacy of .d · .

compare Items 1 and 2 If there . cons1 erat1on)
·d · · is not enough
c?ns1 erat,on, or no consideration at all . th
difference between Items 2 and 3 t0 d t ' ~et e
·1 · f · e ermine the
va uat1on or inclusion in the gross est at e. -

CAPITAL OF THE SURVIVING SPOUSE

The capital of. the surviving spouse of a deceaent
·I'
shall not, for the purpose of Chapter I of Titl Ill
NIR~ as amended by TRAIN Law, be deemed aepart
of _
his or her gross estate (NIRC, Sec: 85 (HJ).

I
I •

NET ESTATE

NET ESTATE
Refers to the value of the gross estate less.allowable ·
deductions ·(N/RC, Sec. 86) : - ,,..

DETERMINATION OF THE N~T ESTATE

For the purpose of .the imposition of the estate -tax,
the value of th·e net estate shall be ,d~teimifled,.by
deducting from the value of the gross estate_(2; 8
DOMONDON, supra at 454) : ' . ·_ \"
1. The deduction allowed to the estafe.of a'-citizen
or a resident (R.R. No. 12-2018, Sec. 6J< }
2. The deduction allowed to · nonresidenl estates__
(R.R. No. 12-2018, Sec. 7) . "'
-~
The basic equation to determine the net ~taxable
estate is ·(Gross Estate - Deductions) (INGLES,
Review(!,r, supra at 267).
' . -
ESTATE TAX RATE AS AMENDED BY
TRAIN LAW
The net estate of every decedent, whether re~ident
or non-resident of the Philippines, shall be subJect to
an estate tax at the rate of six per~ent (6%) (NIRC,
Sec. 84 as amended by _TRAIN Law). .I
· NOTE: Upon the effectivity of TRAIN Law the estate
tax rate is now fixed at 6% and the · graduated
schedule with a rate of 5-20% under the Tax Reform
Act of 1997 is now repealed.
 TRANSFER TAX
· Taxation Law

CLAIMS·AGAINST THE ESTATE

DEDU~TIONS FROM This refers 'to debts or demands of a pe~uniary
GROSS ESTATE nature which could have been enforced against the
deceased in his lifetime and could have_ been
reduced to simple money judgments. It may anse out
of'contract: tort or under operation of law (R.R. No.
DEDUCTIONS ALLOWED 12-2018, $ec. 6 (2)) .
SUBSEQUENT AND PRIOR TQ TRAIN
LAW Requisites for Deductibility: (PGVC)
1. The· liability represents a fersonal o~ligation of
the deceased existing at the time of his death;
2. The claims must be contracted in 9,ood faith and
for adequate and full consideration in money ~r
Standard Deduction Standard Deduction money's worth; _ . .,: .
fi-s, ooo, ooo) (i-1, 000, 000) 3. The claims must be a debt or claim which Is
Valid in law and enforceable in court; and
XXX REMOVED XXX Expenses, Losses, 4. The indebtedness must not have been
Indebtedness, Taxes, Condoned by the creditor or the action to co!lect _
Funeral Expenses: and from the decedent must not have prescribed
Judicial Expenses ~- - •• (R.R. No. 12-2018, Sec. 6 (2.1)).
Claims against the estate
NOTE: An obligation that t,as prescribed during
Claims againsUnsolvent persons · .. an . individual's lifetime, or that · was
' - ---=----=------,r--.-:--::,--=
.,,.~. -:-., unenforceable, will not be a claim against his
Unpaid mortgages, taxes, Unpaid · ~ortgages, estate bn his death (INGLES, Reviewer, supra
and casualty losses tafes, a~d loss7s . at 272). • __,. ·

"'· ;· ' .
Property previously taxed (V~nishing Deductions) · Claims again_st the estate are restricted to
.
Transfers for.public use · · --- --- private claims . enforceable against the
decedent's estate. (BANGGAWAN, supra .at p.
family Home - Family Ho~e . 542). :
(i-10,000,000) (t-1,000,000.)
Subst'~~~i~·tio'}~~e- ui~ ments:
1
xxx-REMOVED
------ - - f - -Medical
xxx :.,/ ------i
7"--:-.Exoenses All .tcfaims against the estate are allowed as
, - t
• ,...dequcti6ns from gross estate, provided t~a
Amount received by heirs under ~ .A. No. 4~1 1:._ 1_,... • following J equiremfnts/documents are complied

th ' _ ...-, ~: l,y~h/su.,bmitted: / _

tfet share of e surviving spou~~ , - - 1. 1n· case ·ot Simple · Loans . (including
(NIRC, Sec. 86, as amended by TRAI~ L~w). _, < • • · advances)

STANDARD DEDUCTION
'r' " ,: (.:.... > a...,,.,.,,.Debt
•
instrument
•
must be notarized
•
at the·
time the indebtedness was incurred;
A deduction in the amount of t-5, 000, 000 shall be
allowed as an additional deduction without need of EXCEPT: For loans granted by financial
substantiation. The full amount of t-5, 000, 000 shall institutions where notarization is not part of
be allowed as deduction for the benefit of the _ the business practice.
decedent (NIRC, Sec. 86 (A)(5), cts amended by
TRAIN Law).
b. Duly notarized certification from the creditor
as to the unpaid balance of the debt,
It is a deduction without need of substantiation in the including interest as of the time of death;
amount of:
c. Proof of financial capacity of the creditor to
1. Citizens and residents - five million pesos lend the amount at the time the loan was
(195,000,000); or
granted; and
2. Nonresident aliens - five hundred thousand d. Statement under oath by the administrator
pesos (19500,000). ·
· or executor of the estate reflecting th_~
3. The full amount of either '95,000,000 or disposition of the proceeds of the loan if sai
19500,000 shall be allowed as deduction for the
loan was contracted within three (3) years
benefit of the decedent (R.R. No. 12-2018, Sec.
prior to the death of the decedent (R.R, No.
6 (1) and Sec: 7 (1)).
12-2018, Sec. 6 (2)(2.2)(2.2.1)).
 \ I
MEM:Q~y AI D
Sen Bede Colega of I.aw - RGCT Bar Center
2. If the unpaid obligation arose from h 2.
of goods or services · pure ase
a. Docum~nts evidencing purchase of goods
or service or contracts of service·
b. Duly notarized _certification from the creditor
~s to_ th~ unpaid balance of . the debt
mcludmg interest as of the time of death'.
and · '
c. Certified true copy of the latest audited
balance sheet of the er.editor with a det ·1 d
sche~ule of its receivable . showing a't~e
unpaid balance (R.R. No. 12_2018 Sec 6
, .
. NO_TE: Wh~n settlement is made through
th e _Court (m testate/intestate proceeding.};
pe_ rtmen_t d(?cuments filed with the Court
evidencing claims and the Court Order
approving the _claims, if already issued
should be given in addition to the abov~
er:,umeration (R.R. No. 12-2018, Sec. 6
(2)(2. 2)(2. 2. 3)). . · .
NOTE: The date-of-death valuation rule
should be applied· - the net value of the
property transferred should be ascertained
as nearly as possible, as of the instance of
death. This means that post-death
developments should not be considered in
determining the net value of the estate
(Dizon v. Court of Tax Appeals, (3.R_. No.
140944, April 30, 2008). -,
CLAIMS AGAINST INSOLVENT
PERSONS
Claims of the deceased against insolvent persons as
defined under R.A. No. 10142 and other existing ·
laws, where the value of the decedel)t'S interest
therein is included in the value of the gross estate
(RR. No. 12-2018, Sec. 6 (3)). ·
NOTE: Claims against insolvent persons are subject
to the condition that the full amounts of the
receivables are first included in the gross estate
(INGLES, Reviewer, supra at 272).
The deduction from the gross estate will be the
uncollectible portion. It will be wrong to include in the
_
computation for the ·taxable estate only the
realizable portion of the claims (REYES, A Study on
Business Taxes and Transfer Taxes Under the
TRAIN Law (2018), p. 142 [hereinafter REYES,
TRAIN Law Business and Transfer Tax]).
Requisites ·for Deductibility: . Requisites for Deductibility of Unpaid Taxes·
1· The amount thereof has been initially mclµded
th
as part of his gross estate (for otherwise ey
Would constitute double deductions if they were
to be deducted); and
The · incapacity of .the debtors to pay their
obligation is proven (Monserrat v. Collector of
Internal Revenue, CTA Case No. 11, December
28, 1955).
NOTE: In case, the claim is the exclusive
property of the deceased, the same is not to be
considered in determining the share of. the
surviving spouse (1 DE LEON, NIRC, supra at
773): .
UNPAID MORTGAGES, TAXES, AND .
CASUALTY LOSSES
Unpaid Mortgages
Requisites for Deductibility of Unpaid
Mortgages: (VB)
1. The ~alue of the decedent's interest therein,
undiminished by such mortgage or
indebtedness, is included in the value of the ·
gross estate; and
., 2. The mortgages were contracted Bona fide and
' for an adequate and full consideration in .money
or money's worth (R.R. No. 12-2018, Sec. q (4)).
-:. ~:- . '--'' N_(~TE: I~ case_ unp~id mortgage p~yable is
; "' ., being cJ?1med by the estate, verification must be
made..as to who was the beneficiary of the loan
proceeqs~ .
a. If .the, 1oan is foun_ d to be merely an
accommb dation loan where the loan
t •
P,roceeds went to another person, the value
,of th~~U,!:lpaid loan must be included as a
~e·ceivable-of the estate.
b. If there'..is' a legal impediment to recognize
the same as receivable of the estate said
·, .· ,:;_ .•: _ . unpaid .obligation/mortgage payable' shall
•' ·,,i: _. ·R9 be altowed as a deduction from the
gross estate,
In all instances, the mortgaged property, to tt,e
extent of the decedent's interest therein, should
always form part of the gross taxable estate
{R.R. No. 12-2018, Sec. 6 (4)). .
Wh~n .Mortgage Indebtedness may · not. be
Deducted .
Indebtedness secured by mortgage of real property
situated outside the Philippines may not be deducted
where such property is not includible in -the gross
estate because the decedent was a non-resident
alien at the time 'of his death "(lntestado de Don
Valentin Descals · v. Administrator de Rentals
lntemasr G.R. No. L-7253, March 26, 1956). ,
Unpaid Taxes
(AU) . . .
1. Taxes which have Accrued as of or before the
death of.the decedent; and - · , ·

2. Y,npaid as of the time of his death (R.R. No. 12-
2018, Sec. 6 (4)). · =- the donor's tax on the gift or estate tax on the
This deduction for unpaid taxes will not include:
1. Income tax upon income received after death;
2. Property tax.es not accrued before his death ; or
3. The estate tax due from the transmission of his
estate (NIRC, Sec. 86 (A)(1)).
NOTE: To be deductible, taxes should qualify as
claims against the estate. They must be
enforceable obligations of the decedent at the
time of his death (VALENCIA & ROXAS, supra
at 198).
Casualty Losses
Requisites for Deductibility of Casualty Losses:
(CNot-LNot-5)
1. Arising from Fire, storms, shipwreck, or other
g_asualties, or from robbery, theft, or
embezzlement; . determined and paid for in behalf of such donor
2. Not compensated for by Insurance or otherwise;
3. Incurred not later than the bast day , for the -
payment of the estate tax as prescribed by law;
4. At the filing of the estate tax return , such losses - ·
have Not been claimed as a Deduction for
income tax purposes iri income tax return ; and.
I
NOTE: Consequently, casualty loss can be
allowed as deduction in one-instance only, either
..__ \
,,
for income tax purposes or estate tax purposes.
5. Incurred during the § ettleme t of-',t~~ estate --,·
(R.R. No. 12-2018, Sec. 6 (4)).
<. I ,
PROPERTY PREVIOUSLY TAXED
(VANISHING DEDUCTIONS)
The deduction allowed from the gross es\ate for
properties which were previously subject to donor's
or estate tax. The deduction is called a vanishing
deduction because the deduction allowed
diminishes over a period of 5 years (2-B
DOMONDON, supra at 470) .
It operates to ease the harshness of successive
taxation of the same property within ·a· relatively short
period of time occasioned by untimely death of
transferee after the receipt of property from the prior
decedenVdonor (1 DE LEON, NIRC, supra at 775) .
Requisites.for Deductiblllty: (DIPIN)
1. ,Qeath
- the present decedent died within five years
from the receipt of the property from a ·prior
decedent or donor;
2. !dentlty
- the property sought to be deducted is the one
received from a prior decedent or donor;
TRANSFER TAX
Taxation Law
3. Previously determined and paid
prior succession was finally determined and
paid;
4. Inclusion
::_ the property must have formed part of the
gross estate situated in the Philippines of the
prior decedent, or the total amount of the gifts of
the donor; and
5. No previous deduction
=- no van ishing deduction on the property was
allowed to the estate of the prior decedent
(REYES, TRAIN Law Business and Transfer
Tax, supra at 15-16). ·
NOTES:
1. The deduction shall be allowed only where a
donor's tax or estate tax imposed was finally
or the estate of sue~ prior decedent;
2. The ' 'deduction allowed is only in the amount
finally determined as the value of such property
in determiniAg th.e value of the gift or the gr.oss
estate of sd'ch prior decedent and only to the
extent that lie value of such property is included
.. " iiic
in the <;lecedent's estate;
I
3. · Where a deduction . was allowed of any
· mortgage or lien in determining the donor's tax,
or the ·estate tax of the prior decedent, which
• was. paid in whole or . in part prior to the
I decedent's death, then the deduction allowable
1. · for property previously taxed shall be reduced by
the amount so.paid;
. .,
4. Sue _deduction allowable shall be reduced tiy ·
an a!J1ount which bears the same ratio to the
amounts allowable as deductions for Claims
against the estate, Claims against insolvent
persons, Unpaid mortgages, taxes, and casualty
losses, Transfers for public use, as the amount
otherwise deductible for property previously
taxed bears to the value of the decedent's
estate; and
5. Where the property referred to consists of two or
more items, the aggregate value of such items
shall be used for the purpose of computing the
deduction (NIRC, Sec. 86 (A)(5),).
Classiflcatlon of Vanishing Deductions (VD): .
1. Under Conjugal Partnership of Gains - VD is
always c;hargeable against exclusive (separate)
property of the decedent.
2. Under Absolute Community PropertY
· st
Regime - VD may either be chargeable again
 . \ I

M Al D -
s., Beda lkwer9/ty College of Law - RGCT Ber ()pe,atioos Center

the , co~munity property or exclusive property

dependmg on the classification of the subject
property (AMPONGAN, supra at 110) .

Formula for Computing Vanishing Deduction

(VD): -

Step 1: Computation of initial basis: More than 2 years but not 60% .
more than 3 years
Value of the property subject to VD_
*. XXX More than 3 years but ·not 40%
Less: Any Mortgage paid on that XXX more than 4 years
property
Initial basis XXX More than 4 years but not 20%
more than 5 years
*Value at the time of donation or death of the prior ·
decedent, OR value at the time of death of the _
More than 5 years 0%
present decedent, whichever is lower. The (NIRC, Sec. 86,_as amended by TRAIN Law)
_deduction is based on the individual valuation of I •
each property (1 DE LEON, NIRC, supra at 775) . ILLUSTRATION: (AMPONGAN, supra at 109-110)
D died on October 21, 2008 leaving a parcel of land
Step 2: Computation of 2"d deduction: which she inherited from her mother, M ·w ho·died oo
May 20, 2005. The value of the property at the.time
Initial basis pars. (2), (3), of death of her mother, M, was ·i-350,000, but it
Value of the GE (4) and (6) of : 2nd - appreciated to f-475,000 in -2008.
X Sec. 86 (A) deduction . .
of the NIRC* Jti~ gross e$t~te and the deductions consisted of the
·toJlowir')g:__; .. >·} j .
.
' -
*The sum .of the following ·is the multiplier: (C 2 UTra)
1. £!aims against the ·e state; ·
Community
.
Property . ft 950,000

2. £!aims against insolvent persons; ,. of D

Exclusive Prop~'f!y 650,000
3. .Y_npaid mortgages, taxes, and casualty ·. '
losses; and Claims against
'y . .,, .. ;;..
Insolvent
'\ ~-
Person 65,000
1

4. Transfers for public use. ,. ,

Transfer for Public Use -10,000
Step 3: Computation of final basis: -:.Claims against the Estate . 15,000

Initial basis XXX - "-':...

Less: 2nd de9uction .,, XXX At the time of death ·of M, the parcel bf land had an
Final basis
--· xxx . unpaid mortgage of PS0,000 of which f'20 ,000 was .
paid by D. Compute the vanishing deduction.
Step 4: Computation of vanishing deduction:
Percentage ANS:
Final X provided under · _ Vanishing
Basis Sec. 86 (A)(2) = deduction - Step 1: Computation of initial basis:
· of NIRC
Value subject to VD~ f'350,000
Less: Any Mortgage paid . 20,000
Initial basis P330,000

*Value at the time of donation or death of the prior

decedent (f'350,000), OR yalue at the time of
death of the · presert decedent (P475,000),
whichever is lower.
.
Within one year prior to the Step 2: Computation of 2nd deduction:
death of decedent
f'330,000
80%
More than 1 year but not (950,000 + . X 120,000* = P24,750
more than 2 years 650,000)

*The sum of·
Claims against Insolvent Person P 65,000
-
Transfer for Public Use 10,000
Claims against the Estate 1 15,000
Unpaid Mortgage (1850,000 - 30,000
20,000)
Step 3: Computation of final basis:
Initial basis 19330,000
Less: 2nd deduction 24,750
Final basis
Step 4: Computation of vanishing deduction:
19305,250 X 40%* = ft122,100
*The holding period of the property is 3 years, 5 -
months and 1 day (i.e. from May 20, 2005 w9ich is
the ·death of the prior decedent to Octob~r 21, 2008 --
which is the death of decedent), h; nce 4~,~ i ,used~ • ·
0
NOTE: Illustration given was O'Jlt
patt,em~d ·in a n
example given in the book of Ampongan . Some of
the given items were changed to show computation
based on the amendments ir> the TRAIN Law. · - occupied a·s a family residence and is
TRANSFERS FOR PUBLIC USE ·
The amount deductible shall be ! he entire amount of
all bequests, legacies, devises or transfers to or for ,
the use of the Government. of.,the Repl.i~lic of the
Philippines or any political subdiv_ ision_• thereof, · j· ·
exclusively for public purpose (NIRC, Se_~· . 86 , /
(A)(6)) . I . - -- , home-due to travel or studies or work abroad,
The requisites are: (LAGPI) ·
1. The disposition is in a ,bast will and t~stamept;
2. To take effect After death; · .
3. In favor of the Government of the Philippines-or
any political subdivision thereof;
4. For exclusive fubli~ purpose; and
5. The value of the property given.is !ncluped in the
gross estate (REYES, TRAIN Law Business anq
Transfer Tax, supra at 14-5).
NOTE: Transfers for public purpose by non-
resident alien decedents are deductible only if
the properties transferred to the Philippine
government is part of the gross estate
(BANGGAWAN, supra at 562).
FAMILY HOME
- the dwelling house, including the land on which it
is situated, where the husband or the wife, or head
of the family, and members of their,family reside, as
certified by the Barangay Captain of the locality
(R.R. No. 12-2018, Sec. 6 (7)) .
I
TRANSFER TAX
Taxation Law
Requisites for Deductibility: (ATL) .
1 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;
2. The Total value of the family hom_e must be
included as _part of the gross estate of the
. decedent (owned by one or both of the
spouses); and . .
3. Allowable deduction must be in an amount
equivalent to the ,bOWEST of: (Cl10)
a. The ~urrent fair market value of the
decedent's family home;
b. The extent of the decedent's Interest
(whether conjugal/community o_r exclusive
property); or .
· c. ft10, 000, 000 (NIRC, Sec. 86 (A)(4)) .
If the family home is a conjugal or community
pro(?erty, the amount to be deducted is
· equivalent to ½ of the fair market value, but shall .
- not exceed '91 o, 000, 000 (INGLES, Reviewer,
supra at. 278)\
--- - -«
NOTES· .., -
· 1. · The'. fami ly hci-~e js deemed constituted on the
house and • lof Jrom the time it is actually
. considered ·a·s su_ch for as long as any of its
beneficiaries actually resides therein (FAMILY
CQD,E, Artsr 152 and 153); . ·
2. ·ActuaJ occupancy 9f the house or house a~d lot
i •. as th"' family residence shall not be considered
·.in~rfupted or abandoned in such cases as the
. temporary absence from the const_ituted f~mily
•/ etc.; .
.- , . 3: \ e fa ' ii home is generally characterized .by
~. per,manency, which is the place to which
' • '· whenever absent for business or pleasure, one
.~' still intends to return;
4. The family home may be constituted by an
unmarried head of a ·family on his or her_own
property;
5. For purposes of availing of a family home
deduction to the extent allowable, a person may
constitute only one family home (Art. 161, Ibid);
and
6. Husband and wife shall refer -to those legally
married man and . woman (R.R. No. 12-2018,
Sec. 6 (7)). ·
AMOUNT RECEIVED BY HEIRS (~.A. NO.
· 4917) .
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
No: 4917 is allowed as deduction' from gross estat~,
provided the amount of separation benefit 15
-- \ I

MEM:Q~y AID
San 8eda I.Jniwnll\y Colaoe ot Law - RGcr Bar Center

included as part of the gro~s estate of the decedent

(NIRC, Sec. 86 (A)(7); R.R. No. 12-2018, Sec. 6 (8)) .
Appropriate Treatment
Amount received by the heir~ under R.A. No: 4917
is trea!ed as one of the items under exemption and
exclus10~ from the gross estate under special laws·.
The bas1~ of such. treatment is j\Jstified by RA. No.
4917 which provides that retirement benefits of
employees, of private firmS' shall not be subject ·to
attachment, levy, execution , or any tax, whatsoever.
If the amount is treated as exemption or exclusion-
. the amount received under R.A. No. '4917 is n~
longer allowed to be· deducted from the decedent's
gross e~tate (VALENCIA & ROXAS, supra at 212-
213).
. _NOTE: The amount received by the heirs under RA
No. 4917 is required to be included in the gross .
estate only if the same is claimed as a deduction in
computing the amount of the net estate (R.R. No. 12-
2018, _Sec. 6 (8)).
DEDUCTIONS FROM THE . GRO_SS,
ESTATE OF A NONRESIDENT ALIEN
A decedent who was not a citizen or resident of the
Philippines at the time of death, with properties
within and outside the Philippines, is subject to tax
only on his estate within the Philippines. Due to this,
the estate in the Philippines is allowed limited
deductions (REYES, . TRAIN Law Business and
transfer Tax, supra at 14-8).
I
.
The executor, administrator, or any of the heirs must
include in the return of the decedent the value of the
part of his gross estate not situated in the Philippines
at the time of his death in order for the deduction to
be allowed (BANGGAWAN, supra at 563).
SUMMARY OF DEDUCTIONS
ALLOWED TO THE ESTATE OF
CITIZEN, RESIDENT, AND
NONRESIDENT ALIEN UNDER TRAIN
LAW

Requisites for Deductibility: (ReSHI)

1. There is a Reasonable private benefit plan
maintained by the employer;
2. Retiring employee has been in the .§ervice of the
Same employer .for at least 10 years and is not
less than 50 years of age at the . _tim~ of. his YES Prorated
retirement; ,
3. The amount must have been receiv~d by the
Heirs of decedent-employee as a consequence
· YES Prorated
of the latter's death ; and
4. The amount is Included in the gross estate of the
decedent (1 DE LEON, NIRC, sup~a at 777) .

SHARE IN CONJUGAL PROPERTY

The net share of the surviving spouse in ttie conjugal YES Prorated
partnership ·property as dimin!shed ·. ·by the
obligations properly chargeable to such property
shalr, for the purpose of Sec. 86 of the ~IRC, be
deducted from the net estate of the decedent (NIRC,
Sec. 86 (C)).
YES YES
NOTE: The share of the ;urviving spouse is one-half
of the net conjugal or commu·nity properties of the
spouses (BANGGAWAN, supra at 555).

After deducting the allowable . deducti~ns YES YES

~ppertaining t9 the conj_ugal or community properties
included in the gross estate, the shar~ of the
survi'-'.ing spouse must be removed to ens_ ure that NO
only the decedent's interest in the estate is taxed
(R.R. No. 12-2018, Sec. 6 (9)) . YES NO

YES
(NIRC, Sec. 86, as amended by TRAIN Law)
EXCLUSIONS FROM
GROSS ESTATE
EXCLUSIONS FROM GROSS ESTATE
The capital (exclusive property) of the surviving
spouse (NIRC, Sec. 85 (H)j .
NOTE: The wife's paraphernal properties
(exclusive properties of the wife) shall - not be
included in the gross estate of the husband upon -
his death since these will not form part o( his ··
donation mortis causa The properties of the-spouses
are presumed common properties: unless pr9ven to
be exclusive properties of either of the spouses - -
(BANGGAWAN, supra at p. 466 and 542). -
NOTE: The share of the surviving spouse in the
absolute community/conjuga partnetship - is
considered as a deduction (NfRC, Sec. 86 (C)).
TRANSFER BY WAY OF BON~ FIDE
SALES
Transfers by way of bona fide sales are onerous
rather than gratuitous transactions. Hence,
properties transferred by way of bona fide sales or
for an adequate consideration are excluded in the
at --·
gross estate because the decedent.no longer owns -
them at the time of death (BANGGAWAN,Jsupra
467) .
BANK DEPOSITS WITHDRAWN FROM
THE DECEDENT'S ACCOUNT DURING
ESTATE SETTLEMENT
The TRAIN Law allows unlimited withdrawal from the
decedent's bank account. However, the bank must
withhold 6% final withholding tax upon the
withdrawal if made within one year from the
decedent's d~ath (R.R. 8-2019, Sec. 2). The
· amounts subJect to the 6% final tax must be
excluded in the gross estate (BANGGAWAN, supra .
at 469).
IRREVOCABLE LIFE INSURANCE TO
SOMEONE OTHER THAN THE ESTATE,
ADMINISTRATOR, OR EXECUTOR
The proceeds of life insurance policies which are
irrevocably designated by the decedent to the
TRANSFER TAX
Taxation Law
beneficiary are no longer owned by the decedent at
the time of his point of death (BANGGAWAN, supra
al 464; NIRC, Sec. 85(E)) .
'EXEMPTIONS FROM
GROSS ESTATE
EXEMPTIONS FROM GROSS ESTATE:
(MIFA)
1. The Merger of usufruct in the owner of the naked
title (NIRC, Sec. 87 (A));
ILLUSTRATION: Mr. A died .on June 2011. In
his will, he devised an agricultural land to B who
shall use the property over 10 years and
thereafter to C. Subsequently, B died resulting
in the transmission of the property to C.
Predecessor Current
--~ ' Decedent
A "' .,
(l/_sufructuary) (Owner of
Naked Title)
I
. ,. The, transfei fro~ll) usufructuary B to the real
owner C upo,n B's death does not constitute a
donation mortis caasa as it is a mere return of
the 'property to. the real owner. Hence, it is ·
exc.!!Jded from · gross estate (BANGGAWAN,
· ,supra at 391).
'. ,
2. The transmission or delivery of the !nheritance
or legagy by the fiduciary heir or legatee to the
fi eicorn issary (NJRC, Sec. 87 (B)) ;
,,. .
ILLU'STRATION: Mr. A died leaving an
inheritance consisting of real estates to his
grandson C. Because C was a minor,· Mr. A
appointed B as fiduciary of the inheritance.
Before transferring the property to C, B died.
Predecessor Current
Decedent
A - - -... B - - - - . C
(Fiduciary Heir) (Fideicommissa,Y)
The delivery of the inheritance upon the death of
B (fiduciary heir), to C (fideicommissary) shall
not be included in th'e gross estate of B because
the transfer does not involve a transfer of
·ownership from B to C. B is merely a trustee.
The delivery is a mere return of property to the
real owner, C (BANGGAWAN, supra at 392) .
 .
215
SM Beda Ur'Mnlty Colege of Law - RG~T Bar Operatlona Center

3. The transmission from the -First heir, leg a tee or

I I
. f
donee 1n avor of another beneficiary ·
accordance with the desire of th·e predece~s~~ ESTATE TAX CREDIT·
(NIRC, Sec. 87, (C)); and

l~LUSTRATION: In his _will, Mr. A devised a

piece of land to B as the first heir and thereafter
to C a~ ~he second heir. B subsequently died
transmitting the property to C in accordance with
Mr. .A's
. will.
Predecessor Current
Decedent
A -----. B C 1. Per Country Basis - The amount of the credit
(1 st Heir) (2"d Heir)
The transfer from B to C is referred to as transfer
under a · special power of appointment. The
same is not B's donat_ion mortis causa. The
· transfer from B to C is merely an implementation
of the tr<!_nsfer which was origin~lly mandated by
ESTATE TAX CREDIT
The estate tax imposed under the NIRC shall be
credited with the amounts of any estate tax imposed
by the authority of a foreign country (N/RC, Sec. 86
(E)(1)). .
Limitations:
with respect to the tax paid to any country shall
not exceed the same proportion of the tax
against which such credit is taken, ·which the
decedent's net estate situated within s4ch
country taxable under the NIRC bears to his
.•:
,.
entire net estate (NIRC, Sec. 86 (E)(2)(a)); and .j
I
2. Overall Basis - The total amount of the credit I

predecessor A (BANGGAWAN, supra at 392). shall not exceed the same proportion· of the tax
against which such credit is taken, -which the
4. All bequests, devises, legacies or transfers to. decedent's net estate situated outside the
Philippines taxable under the NIRC bears to his
social welfare, cultural and charitable
· , entire ne~ estate (NIRC, Sec. 86 (E)(2)(b)) .
institutions, r:,o part of the net income of which ~~~.,_-i',t..,.'"'.. ( ;."'• .
inure to the benefit of any individual: Provided,
ILLUSTRATION:
however, that not more than 30% qt the said
• Mr. B, a citlz fl•:Pf the Philippines, died on May 2019
bequests, devises, legacies or transfers shall be
residing in ,th!:! P.hilippines, leaving a net estate of
used by such institutions for ' administration
,, P1 ,050,000 irj the Philippines, P300,000 in foreign
purposes (NIRC, Sec: 87 (D)) _. ·~- country Y, and P150,000 in foreign country ·z. The
.<,.,,, net estate in c'c:iuntry Y paid an estate tax of ~25,000
NOTE: The · 30% conditional exclusion is to that coun~ry. The ner estate in country Z -paid
deemed satisfied if the donee is an accredited ·:,. ~8.000. The estate tax due, after credit would have
non-profit donee institu·tion. If the dohee is a r; been ~68,000, computed as follows:
qualified non-profit donee institution, the same is -~
excluded in the gross estate. (BANG GA WAN, ' : ! Net Estate Philippines (PH) ~1 .050,000
~upra at 468) . · ·. . l~ 1~Net E§tate I Y . · 300,000
Net Estate, Z ·150,000
Other Legal E~emptions: (G 2S-Usva-WAt_ Net Estate, World ~1.500,000
1. Proceeds of Group insurance taken out by a
company for its employees; PH estate tax on P1, 500, 000 fD 90,000*.
2. Proceeds or benefits of GSIS policy; Less: ~state tax Credit ·
3. Accruals from SSS; · :(See Figure A) 26,000
4. United States Veterans Administration (Usva} Estate tax still due 64,000
benefits;
5. War damage payments; and * P1 ,500,000 x Estate Tax Rate of 6%.
6. Acquisitions or transfers expressly declared as
non-taxable by law (BANGGAWAN, supra at
467). STEP 1:
Limitation A (Per Country Basis)
NOTE: Property acquired using GSIS benefits,
SSS. accruals USVA benefits, proceeds of Net Estate per 1 Philippine Limitation
' · ments are
group insu·rance and war damage pay. . Foreign Country X Estate = A
exempted as long as the heirs or adm1rnstra~ors Net Estate world Tax
can prove that the properties. were acquired
using these exempt benefits (Ibid). STEP 2: Compare Limitation A with actual tax
payment in the foreign country. Whichever .is lower
between the tw.o shall be the amount allowed as tax
credit.
 TRANSFER TAX
Taxation Law

ESTATE TAX FORMULA

Allowed for Y is P18,000 determined as follows:

300,000 X 90,000 = 18,000 Gross xx xx xx

1,500, 000 Estate
Less: (xx) (xx)
Compare 1-18,000 with '92?,000 paid. t-18,000 is Ordinary
lower. deductions
Net xx xx
Allowed for Z is 198,000 determined as follows: Community
Estate
150,000 X 90,000 = 9,000 Less: (xx)
1;500,000 Special
Deductions
Compare 199,000 with 198,000 paid. t-8,000 is lower. Net Estate . xx
Less: ½ (~)
STEP 3: share of
Add all amounts allowed per country. surviving
souse
Country Y P 18,000 ._. Net .XX
--e.
C-=-
ou=n-'-try:
'- . .,._Z
;:;;:...__ _ _ _ _ _ _ _ __:8c.,_,0~0:...:0_ f : T~xable
Total for Limitation A P 26,0b0 l. Estate
Multiply by: 6%
Tax rate > .
· STEP4: Es tate Tax ·, ' xx
Limitation B (Overall Basis) .Due 'J'
Less:Tax (xx)
Net Estate of all ~h!lippine liimttaJ:ion_
Foreign Country X Estate = B an
·- -
Credits: if
.,.
Nef Estate World Tax
Estate Tax ._./ xx
still due, if l
Compare with total actual taxes paid .,.in !QC.eign any ( ·.'
1
country. Whichever is lower shall be lim'itation· .,. B. I Estate Tax '-:
, Pa a·ble
_ _4_5_0.,_,0_00_ _ X 90,000· = 27,000 .
1,500,000 I :i . *~e ) exclusive properties included in the gross ,
: .( - - "' esJate are only thp se exclusive properties of ·the
decedent.
.
Total amount actually paid is P33,000 ("25 000 +
~8.000), which is higher than the compute<lfic>Verall
basis of P27,000. Thus, 1927,000 shall be limitation J\, NO"{_ES: -·
B. 1 . Orily ordinary deductions -are deducted from the
conjugaf .or community property from which as
STEP 5: dimil")ished shall be taken the ½ net share of the
Compare Limitations A and B. Amount creditable surviving spouse (1 DE LEON, NIRC, supra at
shall be lower between the two. 778) .
2. R.R. No. 12-2018 classified deductions on the
Limitation A 19 26,000 gross . estate as ordinary . and special
Limitation B 27,000 deductions. · However, Sec. 86 of the NIRC, as
amended by TRAIN Law, only classify the
Figure A: Amount allowed as credit ~26, ooo. deduction as deductions allowed·to the Estate
of Citizen or a Resident and deductions
allowed to Nonresident Estates.
3. The estate tax due of decedents who ar~ taxable
on global estate such as resident •citizens,
resident aliens, and non-resident citizens shall
be further reduced by foreign tax credit for estate
taxes paid in foreign countries (BANGGAWAN,
supra at 580) .
 . w \ / .
MEK-O~Y AID
San Bede UnlveraityCollege of Law - RGCT Barn.-..... ....._ Center
..,,...........,,,
ESTATE TAX
SETTLEMENT
FILING OF NOTICE Oi= DEATH
The TRAIN_Law has expressly repealed · NIRC
Sec. 89 Notice
. of Death to be filed • Thus , th e not·ice'
of deat h 1s no longer required (2-B DOMONDON ·
supra at 494). . '
.FILING OF ESTATE TAX RETURN (ETR)
1...When ETR shall be Filed: .
a. In all cases of transfers subject to estate tax·
b. W~ere, regardless of the gross value th~
estate consists of 'registe~ed or regist;able
. pro~erty such as . real , property, motor
vehicle, shares of stocks or other similar
property for which a clearance from BIR is
required as a prerequisite for the transfer of '
ownership in the name of the transferee ·
(NIRC, Sec. 90 (/:,), as ·amended by TRAIN ·
Law). · --- ~-
NOTE: When the gross estate exceeds.~s;·ooo,·
000 (previo~sly · ,.2, 000, 000 prior to the , ,·
effectivity of TRAIN Law), the E1:'R _shall _, be,·
supported by a statement duly certified b'y a CPA.
containing the following : · .. 2018/ Sec. 9 (8)). ·
a. Itemized assets of the decedent with their
corresponding gross vaiue at the.time ofhis.
death, or in the case of NRA, ofth'at part·"df
his gross estate •situated in 'tr1e Pliilippines; .
b. Itemized deductions from gross -estate
allowed in Sec. 86; and ., . _,,_,,,__...:....--,returns Officer (R.R. No. 12-2018 Sec. g
c. The amount of tax,due, whether.paid or ~ill
due and outstanding (NIRC, Sec.~_90 (A), ·as
amended by TRAIN Law)_. . •(.- ',
There is also an additional requir~ment of
registering the estate and getting a·separate TIN
{NIRC, Sec. 236 (I)) .
2. Period of Filing: ·.
GENERAL RULE: ETR ·must be filed within 1
year (previously 6 months prior to the effectivity
of TRAIN Law) from the decedent's· death
(NIRC, Sec. 90 (B)).
EXCEPTION: I~ meritorious cases, ~he
Commissioner may grant reasonable extension
not exceeding 30 days (f:1/RC, Sec. 90 (C)) .
Where to File the ETR and Pay the Estate
Tax Due · . ·
a. Resident Decedent
- the executor or administrator shall
. register the estate of the decedent and
secure a new TIN from the RDO where the
decedent was domiciled ~t the time .of his
death and 'shall file ttie ETR an·d pay the
corresponding estate tax with:
i. · Authorized Agent Bank (AAB);
· ii. Revenue District Officer (RDO); or . ·
iii. Revenue Collection Office·r (R..R. No.
12-2018, Sec. 9 (8)) .
' .
b. Non-resident Decedent with Executor or
Administrator In the Philippines .:..- the
ETR 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
registe.red, the ETR shall be· filed with and
the TIN qf the estate .shall be secured from
the RDO having jurisdiction over the
..r . executor or administrator's legal residi:mce
__ . Officer (R.R. No. 12-2018, Sec. 9 (8)).
..'i ~ft: ..:,·.,.,:;
:. .~ . . . .
• . c. · Non•r~sident De_cedent with No Executor
or Af ministrator in the Philippines - the
,f!
r ETR ~hall be filed with and the TIN for the
e~Jat~ sh,all be secur~d from the Office of.
t~ <lomlpissioner Officer (R.R. No. 12-
t . ,t· , . -
NOTE:. Notwithstand.ing the foregoing, ·the.
Co~missioner ?f_ Internal Revenue · may
continue to exercise his power to ·allow a
. di,fferent venue/place in the filing · ·of tax .
(8)). '
.PAYMENJ ,OF ESTATE TAX
GENERAL RULE: "P~y-as-you-fi_ le" · system .-
the est~_te ·tax shall be paia at the time ·tt\e- return is
filed by the executor, administrator or the heirs
, {NIRC, see::_91 (A)). ·
EXCE~TION: When the Commissioner finds thaf
the payment on the ?ue date of the estate tax or any
part thereof would .impose undue hardship upon
the estate or any of the heirs, he may extend the time
for payment thereof not to exceed 5 years or 2 years
as the case may be (NIRC, Sec. 91 (B)J:
NOTE: 5 years_in case of j!,Jdicial settlement; and, 2
years mrcase of extrajudicial settlement (INGLES
Reviewer, -supra at 292). '
Exception to the EXCEPTION: Extension for
payment is NOT allowed where the taxes are
assessed bX reason of:

1. Negligence; . d. In case of lapse of 2 years without the
2. Intentional disregard of rules and regulations; or
3. Fraud, on the part of the taxpayer (NIRC, Sec.
91 (B)).
Requisites for Extension of Time: (ABU-5) . •
a. The Commissioner or hjs duly authonzea
representative shall &>prove the application ;
b. The request must be filed §.efore the expiration
of the original period to pay which is within 1 year
from death;
c. There must be a finding by the Commissioner
that the payment of the estate tax or any part
thereof would impose .!:!.ndue hardship upon the
estate or any of the h_eirs; and
d. The extension must be for ·a period not
exceeding~ years if the estate is settled through
the courts (judicially), or 2 years if settled
extrajudicially (R.R. No. 2-2003, Sec. 9 (E)) .
Effects when the Extension is Granted: . · ~
a. The amount in respect of which the.jexte nsion is
.granted shall be paid on or before,thea 8;te of the,.
expiration of the period of extension;
b. Any amount paid after the statutory,due d31te but....·
within the extension period shali' be subject .to
interest but not to surcha.[9e; . . . f.
c. The running of the st~tute o! hm1t~t1ons for
deficiency assessment shat be suspended for -·-- - - C:- the writter\reqt est for the partial disposition
the period of any such extensiqn; and
d. The Commissioner or · his duly authorized
representative may requlfe the executor, or
administrator, or benefici~ry7 as the,.-casEf may
be, to furnish a bond in sLch am,o.unt. not
exceeding double the amount of the tax.~a_9d with
sureties as the Co missioner · 'd, e(T)s-
ne~ssa~. conditioned up~n the payment'~f~e, }~
said ~x m accordance with the te s or'tlie-= =- --
extension (R. R. No, 12-2018, Sec. 9 rSI I 7
PAYMENT OF ESTATE TAX BY
INSTALLMENT . AND PARTIAL
DISPOSITION OF ESTATE
In case the available cash of the estate is not
sufficient to pay its total estate tax due, the estate
may be allowed to pay the estate tax due through the
following options (R.R. No. 12-2018, Sec. g (6)) .
1. Cash Installment
a.The cash installments shall be made within
2 years from the date of filing of.the estate
tax return ;
b, The ETR shall be filed within 1 year from the
date of decedent's death;
c. The frequency, deadline and amount of
each installment shall be indicated in the
ETR. subject to the prior approval by the
BIR; . the remaining balance of the ETD, including
TRANSFER TAX
Taxation Law
payment of the entire tax due, the remaining
balance shall be due . and demandable
subject to the applicable penalties and
interest reckoned from the prescrjbed
deadline for filing the return and payment of
the estate tax; and
e. No civil penalties or interest may be
imposed on estates permitte.9 to_ pa_y th_e
estate tax due by installment. Nothing in this
subsection, however, prevents the
Commissioner from executing enforcement
action against the estate after the due date
of the estate tax provided that all the
applicable laws and required procedures
are followed/observed (R.R. . No. 12-2018,
- Sec 9 (6)).
2. Parti~I Disposition of Estate and
Application of its Proceeds to the Estate
- • Tax Due ·
. ' a. · ,:'iie .disposition, for purpos~s of this option,
,. . _ shall refer to the conveyance of property,
Whether. real, personal or intangible
-... pro6,erty, ,_ with - the equivalent . cash
,consJder,atioq;
b. Jhe E..TR sp~ll be filed within 1 ye~r from the
date of.~ cedent's death;
' oe
of estate shall approved by the BiR. The
·said requestshall be files, together. with the
. notarized undertaking that the proceeds
-·· th~reof ' sha\r be exclusively used for the
.• . payment of tne total ETD;
, • ,,..d~' ,;the computed ETD- shall be allocated in
l-
,/:f', ~/ proportion to the value ofeach property;
1 -=\ ~,): ,T' e estate shall pay to the BIR the
..., propprtionate estate tax due of the property
,
. \
1- \ ntended to be disposed of·
' ' ·
. An electronic Certificate Authorizing
Registration (eCARf shall be issued upon
pr~sentation of the proof of payment pf the
proportionate ETD of the property intended
to be disposed . Accordingly, eCARs shall be
issued as many as there as properties
intended to be disposed to cover the total
ETD, net of proportionate estate tax(es)
previously paid under this option; and
g. In case of failure to pay ·the total ETD out
from the proceeds of the said disposition,
the ETD shall be immediately due and
demandable subject to the applicable
penalties and interest reckoned from th ~
prescribed deadline for fling the retu~ a_ne
payment of the estate tax, without preJudic
of wit~~olding the i~suance of eCARs on th ~
remaining properties until the payment_ 0
the penalties and interest (R.R. No. 12•
2018, Sec 9 (6.2)).
 \ I .
MEM:Q~y AID
San Seda l.JniveRlty Colh,ge of Law - RGCT Bar""--'---
-,..,.auuna Center
PERSONS LIABLE TO PAY
1. The .e~tate tax s~all ~e paid by the executor or
administrator (pnmanly liable) before delive t
any beneficiary of his distributive share of~h~
estate (CIR v. Gonzales, G.R. · No. L-19495
November 24, 1996); and ' tax a·mnesty for two years, or until June 14, 2023.
2. When there are two or more executors or
administrators, all of them shall be severally
liable for the payment of the tax (R.R. No: 12-·
2018, Sec. 9 (9)) .
NO~E: The inheritance tax, although charged
ag~inst the account of each beneficiary, should :be
paid by the executor or administrator (INGLES
supra at 292) . ' Form do not imply any admission of criminal, civil , or
The heir or beneficiary shall be subsidiarily liable 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
_(R. R. No. 12-2018, Sec. 9 (9)) .
. .
The government, in collecting unpaid taxes · ,.
accruing before the death of the decedent, has~
two ways of collecting the said taxes: •' ·
1. By going after all the heirs and collectir19·,r~orf'
each one of · them the amount of the ta)(
proportionate to the inheritance receiyed; or .
2. By subjecting said property of the ,estat~ wh1cQ
is in the hands of an heir or transferee,'· to the~.
payment of the tax due .the estate . (CIR v.
Pineda , G. R. No. L.-22734, •;.,
September.
. ,
15, 1967).
ESTATE TAX AMNESTY
Undeclared Properties of-the Deceden.t ,,..,.-- .. v, , -(
Net Undeclared Estate refers to th~ · difference
between the total net estate valued at the. till)e of
death and the net estate previously declared with
BIR; if any (R.A. No. 11213, Sec. 3(c)).
Entitlement under Estate Tax Amnesty Law
The estate is entitled to a tax amnesty with the rate
of 6% based on the net undeclared estate (R.A.
11213, Sec. 5).
Th~ executor or administrator of the estate, or if
there is no executor or administrator appointe~. the
legal heirs, transferees or beneficiaries, _wish to .
avail of. the Estate Tax Amnesty shall, within June
15, 2021, until June 14, 2023 file with the Revenue
District Office of the . Bureau of Internal Revenue,
Which has jurisdiction over the last residence of th e
decedent a sworn Estate Tax Amnesty Return.
Provided,' for non-resident decedents, the
st
:~:
Tax Amnesty Return shall be filed an
t 'paid at RDO No. 39, or
corresponding amnesty ax . d' ated in the
any other RDO which shall be in ic
219
Implementing Rules and Regulations (R.A. · No.
11213, as amended by R.A. No. 11569, Sec. 6!
NOTE: RA No. 11569 amended R.A. No. 11213 by
,extending the deadliri~ for the avaiiment period of
Prio( to the amendment, the deadline for the
availment of the estate tax amnesty was until June
14,2021. .
Availment of Estate Tax Amnesty does not imply
· any admission of liability ·
The availment of the estate tax amnesty and the
issuance of the corresponding Acceptance Payment
administrative liability on the part of the availing
estate (R.A. No. 11213, as amended by R.A. No. -
11569, Sec. 6).
RESTITUTION OF TA)( PAID
In oriltr tt'ot a taxpayer may claim the benefits of
5cc..qG jt, :is necessary for him to show the-following:
1. 'nit obligations of the deceased not known at or
bf,fore the time of the payment of the tax;
')., i"hese obligations have been judicially •
/"recognize;i as pro'per claim against the estate of
, the deceased;
1 . 3. The court ordered them paid; and
,4: 4. They have been . actually paid (1 DE LEON,
. NIRC, _supra at 797) .
DUTIES OF CERTAIN . OFFICERS OR
DEBTORS:. ·
Executor or administrator must ensure that
I payment shall be made of the amouot ofwhich
.he is notified before he shall be discharged from .
.personal iiability (N/RC, Sec. 92),.
' 2. Judge shall not.authorize to deliver a distributive
share unless _ a certification from the
Commissioner that the estate tax has been paid
is shown (NIRC, Sec. 94r
.3 . Register of Deeds shall not register in th~ _
Registry of Property any document transferring
real property or real rights therein without
ce.rtification from the Commissioner that the tax
actually·due thereon had been pai~ (NIRC, Sec.
95).
4. Lawyer, notary public, . or any government
officer, intervening in the preparation or
acknowledgment of documents r~garding
partition or disposal of donation inter vivos or
mortis causa, legacy or inheritance, shall have
j the duty of fu!11ishing the Commissioner,
Regional Director, Revenue District Officer or
Revenue Collection Officer of such documents
(NIRC, Sec. 95) .
 TRANSFER TAX
Taxation Law

5. A debtor of the deceased shall not pay his debts
to the heirs, legatee, executor or administrator of
his creditor, unless the certification of the
Commissioner that the estate tax imposed by
NIRC has been paid is shown, but he may pay
the executor or judicial administrator without
said certification if the credit is included in the
inventory of the estate of the deceased (NIRC,
Sec. 95) . ·
6. 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 any
withdrawal from the said deposit account,
subject to a .final withholding tax of 6% (NIRC,
Sec. 97, as amended by TRAIN Law) .
into the deposits of a decedent depositor for the
purpose of determining the gross estate.
BANK WITHDRAWAL LIMIT
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_t~e withdrawa1'1
from the said deposit account, subJect to the final
withholding tax of six percent (6%) of the amount to
be withdrawn, provided that the withdrawal shall only
be made within one year from the date of death of
decedent (NIRC, Sec. 97, NIRC, as amended by
TRAIN Law; R.R. No. 12-2018, Sec. 10).

NOTE: In a survivorship agreement, the bank

deposit does not form part of the gross estate of
the deceased. The contract imposed a mere.
obligation with a term, the term beil1Jl death.
•Such agreement is permitted by the Civil' Code
under Art. 2010 which provides "/jY. ·an aieatory.
contract, one of the parties or both reciprocally
bind themselves to give or to do something in
consideration of what the other shall give or do ·' .•
·upon the f)appening of an ,event which fs . . /-
uncertain, or which is to occur at· an .,
. indeterminate time" (Vitug v. Court of, ppgafs,- - -- - -.
G.R. No. 82027, March 29, 1990). " ;/ j
THE COMMISSIONER IS AliJ,THOR!ZED 10· ., , ;~,-_:.,
INQUIRE INTO THE BANK f)~PO&r1;s· pr~ I . l
- ( ) . . _?
DECEDENT TO DETERMINE HIS ~G'Ross· i . _:J'i _/ I
ESTATE I-
I , ,-1/,
,, · / / ,,,.
Notwithstanding any co,:,trary provision of R. A. No.____:.. -:
1405 or S~crecy of Banks Deposit Law and ' otner'// · ··, .,;
general or special laws, the Commissioner is -=-•- - -- . . . .,
authoriz~d to inquire into the bank depo~its of: t\ 1 "\ · . , )
1. A decedent to deten:nine his gross estate;/ ahd
2. Any taxpayer. who has filed an application for
1
i\.1
"\.. >.- ,•

compromise of his tax liability under Sec. 204

(A)(2) of this Code by reason of financial
incapacity to pay his tax liability (NIRC, Sec. 6
(F)).

ILLUSTRATION: D dies in 2020 leaving a bank

deposit of~. 000, 000 under joint account with
his associates in a law office·. Leaming of D's
death from the newspapers, the Commissioner
of Internal Revenue wrote to every bank in the
country .asking them to disclose to him the
amount of deposits that might be outstanding in
his name or jointly owned with others at the date
of his death. May the bank holding the depQsit
refuse to comply on the ground of the Secrecy
of Bank Deposit Law? Explain.
ANS: No, because the NIRC of 1997 has
empowered the Commissioner, as an exception
to the Secrecy of Bank Deposit Law, to inquire
 - .\ I

MEM:Q~y A,ID -
Slwl Bedll lkw8r8ily Coleoe or law - RGcr Bar Operations Center
221

ILLUSTRATIVE EXAMPLES TO PROPERLY PRESENT FAMILY HOME AND STANDARD

-
DEDUCTION AS DEDUCTIONS FROM THE GROSS.ESTATE
(R.R. No. 12-20_
18, Sec. 8) ·
(1) DECEDENT IS AN UNMARRIED HEAD OF A FAMILY:

(a) With Family Home of More Than P10,000,000:

'-
Real and personal properties .
Family Home .p 14,000,000
Gross Estate 30,000,000
p -44,000,00~
Less: Deductions ·
Ordinary Deductions
Unpaid Real Estate Tax
(2,000,000)
Special Ded~ctions
Family Home*
(10,000,000)
Standard Deduction
(5,000,000)
Total Deductions
.(17,000,000)
NET TAXABLE ESTATE
, P 27,000,000
_* Although the family home is valued at f.>30, 000, 000, the maximum allowable_deduction for the
family home is ~10, 000, 000 only. · · ·

(b) With Family Home of Less Than P10, 000, 000:

Real and personal properties , P 14,000,000 _

Family Home 9,000,000
Gross Estate P 23,000,000

Less: Deductions
. -
Ordinary Deductions. .. . (2,000,000)
Special Deductions
Family Home (9,000,000)
Standard Deduction · . (5, 000,000)
Total Deductioris (16,000,000)
NET TAXABLE ESTATE . . P 7,000,000

, (2) DECEDENT IS A MARRIED MAN WITH SURVIVING_SPOUSE:

(a) The family home is his exclusive property:

Exclusive Conjugal
Conjugal Properties: ·. ,
Real and personal properties p 14,000,000 P 14,000,000
Exclusive Properties:
Family Home 9,000,000 '9,ooo;ooo
9,000,000 14,000,000 P 23,000,000
Gross Estate
 TRANSFER TAX
---
Taxation Law

Less:
Ordinary Deductions
Conjugal Ordinary Deductions (2,000,000) (2,000,000)
Net Conjugal Estate 12,000,000
Special Deductions I

Family Home** · (9,000,000)

Standard Deduction (5,000,000)
Total Deductions (16,000,000)
Net Estate P 7,000,000

Less: ½ Share of Surviving Spouse

Conjugal Property P14,000,000
Conjugal Deduction · ( 2,000,000)
Net Conjugal Estate t-12-,000,000
(t-12, 000, 000 /2) (6,000,000)
NETTAXABLE EST ATE P 1,000,000

** If family home is valued at more than P10, 000, 000, the maximum allowable deduction for the
family home is t-10, 000, 000 only.

(b) Family home is a conjugal or community property:

,>
Exclusive Conjugal ,,. Total
Conjugal Properties:
Real and personal propertjes . t9 14,000,000 P 14, 000,000
Family Home ' .. , 9,000,000 9,000,000

z
Exclusive Properties: ·s ,000,000 5,000,000
Gross Estate 5,000,000 23,000,000 P 28,000,000

Less: - .,. - I

Ordinary Deductions . 1 \l ,,.

Conjugal Ordinary Deductions ·: ;,· -c2,ooo,oooi - (2,000,000)
Net Conjugal Estate •, .,. 21',000,000
Special Deductions {
Family Home*** (4,500, 000)
Standard Deduction ·1';1 -:--; .· (5,000,000)
Total Deductions _1 IJ (11,500,000)
Net Estate . _Q( P 16,500,000

Less: ½ Share of Surviving Spouse / ·

Conjugal Property t-23,000,000
Conjugal Deduction ( 2,000,000)
Net Conjugal Estate '921 ,000,000
(t-21, 000, 000 /2)
NETTAXABLE ESTATE
c1 o,soo,ooo)
P 6,000,000

***Family home deduction is (t-9,000,000/2) or t-4,500,000, since family home is a conjugal p_roperty . .
 p \ /
MEM-Q~Y AID-
S., B e d e ~ Colege of law - RGCT Bar Clperatione Center
[
DONOR'S TAX
DONOR'S TAX
An excise tax imposed on the privilege to transfer
property by way of gift inter vivos by any person,
resident or nonresident, based on a pure act of
liberality without any or less than adequate
consideration and without any legal compulsion to
give (2-B DOMONDON, supra at 531) . ·
NOTE: Donation has a broader meaning as it
extends to all exchanges and sale of property, other
than real property classified as capital assets located
in the Philippines ,' for less than adequate and full
consideration in money or money's worth (NIRC Sec.
100, as amended by TRAIN Law) .
NATURE OF DONOR'S TAX
1. It is not a tax on the property donated but on the
privilege to transfer property (Lladoc v. CIR, G.R. ,
No. L-19201, June 16, 1965).
2. It is levied, assessed, collected and paid upon
transfer by any person, resident or non-resident,
of property by gift inter vivos (J-B DOMONDON,_
supra at 531).
-
3. It is a tax imposed on the privilege to gratuitously
transmit property while living and is meas_ured by
the value of the property (2-8 DOMONDON,
-supra at 531).
4. The transfer of property by gift is perfecte,d from
the moment the donor knows of the acceptance
by the do nee; it is completed by the del~ery, ·
either actually or constructively, of the dq~ated
property to the donee (R.R. No. 2-_2003, -Sec. 11,
paragraph 11 ).
5. The law in force at the time of th~
perfection/completion of the d~nation s~a
govern the imposition of the donors tax (Section
11, paragraph 11, R.R. No. 2-2003).
RATE OF DO~OR'S TAX
1. Tax payable by the donor . .
The tax for each calendar year shall be six
percent (6%) computed on the basis of the total
net gifts in excess of P25~,ooo (f?rmerly
P100,000) exempt gift made during the"calen~a~
year. For purposes of the donor's tax, Net Gift
shall mean the net economic benefit from th e
transfer that accrues to the done (Sec. 12• Rev.
Regs. No. 12-2018).
223
NOTE: The application of the rate as pr~vi~ed
I above is imposed on donations mad~ _beginning
January 1, 2018, which is the effect1v1ty date of
R.A. 10963 (TRAIN Law).
2. Contribution for election campaign
Any contribution in cash or .i~ kind t~ _any
candidate, political party, or coaht1on of p~rt1es for
campaign purposes,· shall be governed by the
Election Code, as amended (MAMALA TEO,
Reviewer, ·supra at 468) .
PURPOSES OR OBJECTS OF DONOR'S
TAX
1. Donor's tax supplements . the estate tax by
preventing the avoidance of the latter thro~gh_the
device of donating the property during the hfetIme
of the deceased; and
2. It aiso prevents the avoidance of income taxes,
since a gratuitous transfer is an exclusion _from
gross income under Sec._32 of the NIRC (1 DE
LEON, NIRC, supra at 800) .
REQUISITES OF .A VALID DONATION:
' -(CD 2Ai=) -~-
•. 1. CapaC'ity,of donor _
All perso who may contract and dispose of
their property may make a donation (CIVIL
CODE. Art. 735) . The donor's capacity shall be
' - . determined as of the time of the making. of the
donation (CIVIL CODE, Art. 737) .
Donative intent
· Donative intent must be present in a direct gift of
property in order that the donor's tax can be
assessed and collected (MA MALA TEO,
Reviewer, supra at 473) . Donative intent is' not.
however, required in transfers of property for less
than adequate and full consideration (Perez v.
CIR, CTA Tax Case 107, February 10, 1909).
NOTE: "Consideration" means money or equal
valu_
e or so"me goods or service capable of being
·evaluated in money. "Gratitude" is not a
consideration the value of which can be deducted
from that of the property transferred as a gift. Like
"love and affection," it has no economic value
and is not "consideration" in the sense that the
word is used in Section 108 of the NIRC. Thus,
donation given out of gratitude for services
rendered constitutes taxable donation. it is not
deductible from· gross income of the donor for the
value of said services does not constitute
recoverable debt (Pirovano v. G.R. No. t-19865,
July 31, 1965).
However, unless the wife expressly joins in
making the donation of conjugal property, it shall
be deemed to have been made by the husband

224
alone (Tang Ho v. Board of Tax Appeals, L-5949,
November 19, 1955).
Even if the sale, exchange, or other transfer of
property is ·for an insufficient consideration, the
same will be considered as made for an
- adequate and full consideration in money or
money's worth if made in the ordinary course of
business (NIRC, Sec. 100, as amended by
TRAIN Law). . and
3. Qelivery, whether actual or constructive
There is delivery if the subject matter is within the
dominion and control of the donee (R.R. No. 12-
2018, Sec. 12).
4. Acceptance by the done .
Acceptance must be made during th~ lifetime of
the donor and of the-donee (CIVIL CODE, Art.
746) . If the donor dies before he learns of the
acceptance, the donation does not take effect
(CIVIL CODE, Art. 1323). ~- :~ i
--' '
5. form prescribed by law _> • • .,. _ _ •
a. Donation of personal property ., • . .-- -- . .
If the value exceeds t-5, 000 the donation
and the acceptance shall be made 1n writing; ' • • , (NIRC, Sec. ,100, as amended by TRAIN Law).
otherwise, the donation shall be void (CIVIL
CODE, Art. 748) . . ,.---;* \-.
• -, • · ·
b. Donation of immov~ble ~rope_rfy\ .
It must be made in a public ,doct.irT}el}_t .
specifying therein the property doriated. The
acceptance may be m'aciei he sar:n.e,Deed
of Donation or in a . separate public
document, but it shall not take effect unless • -- S- ·value of.the property transferred shall be subject
it is done during the lifetime of the donot)i;,_ .- .;
the acceptance is made in · cl' separate--· ·--
instrument, the donor shall -6~ n tified
thereof in an authentic form , an this step
shall be noted in both instruments (GIVIL
CODE, Art. 749; R.R. No. 12-2018, Sec.
12).
NOTE: The -transfer of properties from one
corporation to another corporation which is
connected with, subordinate to, and a district
or local organization or branch of the
transferor corporation .is not subject to ·
donor's tax because it is wanting in donative
intent. Such transfer, being in name only, a
transfer from the right hand .to the left hand
and merely to enable the transfere~
corporation to better perform its obligation to
administer, apply and use the said properties
for the same purposes (religious, charitable,
and educational) for which the transferor was
created and still exists (The Christian &
Missionary Alliance Churches of the Phil. v.
~ -
tRA~SFER TAX
. Taxation Law
Collector, CTA Case No. 668, .August 21·
. '
1964).
BADGES .OF DONATION INTER VIVOS:
1. Made out of love and·affection;
2. Reservation of usufruct in favor of th~ donor (i.e.,
the naked ownership has been transferred to the
donee);
3. Donor reserved certain properties for himself;
4. The donee accepted the donation (no n~ed for
acceptance if donation mortis causa) (INGLES,
Reviewer supra at 299).
TRANSFERS WHICH MAY BE .I
CONSIDERED AS DONATIONS: (LC)
1. Transfer for ,bess·than Adequate and Full
Consideration
GENERAL RULE: If the property. transferred is
, . for less than 13dequate an~ full consideration in
• ' money pr ·money's worth, the amount by which
the. FMV ,.exceeds ·the · consideration shall be
deemed'a gift and be included in computing the
amo!)nt of gifts m,ade during the calendar year
• •. . '
- .~ --. 'Reason: The ~IR¢.considers the transfer a~ a
donation sinee what motivated the transferor in
tran~f!3rring !he--pto.perty is his generosity. In
. ~s,serice;, the doho/ intended a donation .but
opted to tr~n·sfer I t_ he property for inadequate .
I consideration so to avoid Pc!Ying donor's. tax.
\Ypere the consideration is fictitious , the eptire
'"JO donor's tax (f t5E LEON, NIRC, supra at 814) .
... / . ,·
.·NOTE~1 / , .
• a. i~e fule does not apply to real property held
1
t i ; / as a ~pital asset, under Sec. 24 (D) of the
_.__ NIRC, since regardless of the -amount paid
for, the basis for determining the capital
gains tax therein would be the FMV or gross
se_lling price, whichever is higher (NIRC, Sec.
24 (D) in relation to R.R. No. 12:2018, sec. ·
12).
b. Absence of donative , Intent does not
exempt the ~ales of stock transaction fro~
donor's tax since· Sec. 100 , of the NI~
categorically states that the amount by which
the FMV of the property exceed_ed the val~e
of the consideration shall be deemed a 91~·
Even. if nq actual donation, the differe~ce 1~
price is .consiqered a donation by. fi_ct1on °d
law (The Philippine American Life an f
General Insurance Co. v. The Secre(a,Y
Finance, G.R. No. 210987, . November 2 '
2014).
 \ I

ME~Q~y AI D -
San Beda Colege of Law - RGCT Bar ~Ilona Center
0 225

EXCEPTION:
d. Transfers
. made
• bona fid . th e
1 e in · Real Property:
or in~ry ~urse of business and free from
?onative in~ent, even if the consideration is
inad~uate in account, is excluded. They ·are n·ot FMV whichever is higtier of the zonal
considered as donations (e.g., a Bad Bargain). value or assessor's value ·

This is also provided in Sec. 100 of the NIRC as Less: Actual value of consideration received
amended by TRAIN Law, which state that a s~le
. exchan~e. or other transfer of property made i~ Amount constituted as donation
the ordinary course of business (a transaction
-which is a bon~ fid~. - at arm's length·, and free
from any donative intent),. will be considered as 2. Condonation/ Remission of Debt
made for an adequate and full consideration in it the creditor condones the indebtedness of the
money or money's_worth . · debtor the following rules will apply:
a. On account of debtor's services to the
NOTE: Transaction was done at arm's length if: creditor, the same is taxable income to the
a. The partie~ are unrelated (whether in the debtor;
familial or-business sense); b. If no services were rendered but the creditor
·. b. They have equal bargaining power; and simply condones the debt, it is taxable gift
c. They are · acting in their own self-interest .and not the taxable income; arid .
(DASCIL, NIRC Annotated (2020): p. 267) . c. If a corporation forgives a stockholder's debt,
the transaction has the effect' of the payment
Requisites in order that Excess of FMV over
of dividend _(1 DE LEON, supra at 804) . .
the Value of Consideration be Considered as
ILLUSTRATION: Creditors A, Band C condoned .
Donation:
_
the debt of Company X pursuant to a court
In order that the amount by which the FMV of the
. approved restructuring. Are the cr~ditors liable
property exceeded the value of consideration be
for donor' J ax? .
constituted as donation the following requisites
must be observed: (PLI) · ·
ANS: NO· { he trartsaction is not subject to·
a. Property transferred is real or personal donor'Si tax ince the condonation was not
property, except real property referred to in impiemen{ed with a donative intent but only for
Sec. 24(0) of NIRC; . business consideration : The restruct~ring was
- b. Transfer is Less than an· adequate and full not a. res·u!t of the. mutual agreement of the
consideration in money- or money·~ wo_rth; debtors and creditors. It was through court action
and· . that the debt rehab.ilitation plan was approved
c. Transfer ·is Inter vivos (NIRC, ps .a meoded by ,,. and implem!:)nted (BIR Ruling No. DA 028~2005,
TRAIN Law,. Sec. 1()0). : J cfnuary 24, 2005) .
... t ... - • •

NOTE: Based on the foregoing , the formula. to be .CANCELLATION OF INDEBTEDNESS

used is: If a creditor desires to • benefit a debtor, and
without a[ly consideration therefore, cancels the
Personal Property: debt {and the debtor "accepts"), the amount of
the.debt is a donation by the creditor to the debtor
FMV of the property -at the time of the gift (Section 50, R.R. 2-1940).

Less: Actual value of consideration PAYMENT OF LOAN BY GUARANTOR

received A guarantee as a . rule is gratuitous unless
otherwise stated. However, if the obligation is
Amount constituted as donation jointly entere9· into by the ·guarantor· and the
.. borrower with a creditor-bank, the security given
by the guarantor is not gratuitous because the
guarantor must be indemnified py the · principal
debtor in case the guarantor pays for the debt. In
such case, payment by the guarantor .is NOT
subject to ,donor's tax (BIR Ruling No. DA 006-
2005, January 11, 2005) .
 TRANSFER TAX-
226 Taxation Law

LAW THAT GOVERNS THE

NOT subject to
IMPOSITION OF DONOR'S TAX Donor's Tax
The law in force at the time of the perfection/
completion of the donation (R.R. No. 12-2018,
Sec. 12) .

The transfer of property by gift is perfected from Subject to

Donor's Tax
the moment the donor knows of the acceptance
of the donee; it is completed by .delivery, either
actually or constructively, of the donated property
to the donee (R.R. No. 12-2018, Sec. 12) .

LAWS GOVERNING DONATIONS

COVERAGE OF DONOR'S TAX
1. Gifts of real property and personal · property
wherever situated belonging to the donor who is
either a resident or citizen at the time of the
donation; and 1
2. Gifts of real and tangible personal property
Graduated rate of 2- situated in tbe Philippines, and intangible
15% and 30% for
strangers
personal property with a situs in the Philippines
unless exempted on the basis of reciprocity,
belonging to the ,donor who is a non-resident
Graduated rate of alien at the time of the donation (1 DE LEON,
1.5-20% and 10% for
strangers
NiRC, sup ra at 801) . .

CLASSIFICATION OF DONORS:
WHEN DONOR'S TAX APPLIES 1. Resident and •citizens;
2 . .. Non-resident alien ;
The donor's tax shall not apply unless and until there 3. Domestic corporation; and
is a completed gift (R.R. No.-12-2018, Sec. 12) . 4. Foreign corporation (2-B DOMONDON, supra at
A gift that is incomplete because of reserved powers
, ' 548) . ·
becomes complete when either:
1. The donor renounces the power_; or
N"c>TE: A corporation , whether domestic or
foreign , is included since it is capable of entering
2. His right to exercise the reserved power ceases into ,a contract' of donation, through a Board
because of the happening of some event or Resolution .(REVISED CORPORATION (}ODE,
contingency or the fulfillment of sp me •C(?ndition,
S~c._~5) . . ·· ·
other than because of the donor's death, (R.R.
No. 12-2018, Sec. 12) .
IMPORTANCE OF KNOWING THE-
NOTE: The term Mtransfer of property in trust or CLASSIFICATION OF DONORS
otherwise, direct or indirect" is used in the most The classification of donors determines the manner
comprehensive sense. It includes not only the in which they are subject to donor's taxes. Donors are
transfer or any right or interest in property, but classified in accordance with the situs of donor's
less than title. A transfer becomes complete and taxation ·(2-B DOMONDON, supra at 548). ·
taxable only when the donor has divested himself
of all beneficial interest in himself or his estate.
The law contemplates the passage of control

---------------
over the economic benefits of the property rather
than mere technical changes in the title (Estate
·1 GROSS GIFr ]
of Sanford v. Commissioner of Internal Revenue,
308 U.S. 39) .

IMPLICATIONS ON RENUNCIATION OF SHARES

GROSS GIFT
~- ·'.' ,....~:..--~~<i,.,..~~--- . ·,.·> ;:./ ,.. ·r..~·
1. Resident or Citizen Donor
~Renunciation;by_tlie surviving . • }~
;spouse ~f"J!i_s/h!:!f ~hare ·in .the CPG:..- Subject to Gross gift includes real properties, tangible and

i~~tr.~~}~tfJ:;r~if.~~~il:,~~'_} :-;·. Donor's Tax intangible personal properties wherever located

(INGLES, supra at 298) .
_ _,. .,,,. .. _. .., ... •>·-ll, .... ~-•"·-" --Y-~--· . . - . ~.. r._,~
 \ I

MEM:Q~y Al o·
San 8eda lkliwnltr College of Law - RGCT Bar Center

2. Non-resident Alien Donor .6. _ Shares or rights in any partnership, business or

Gross g!ft includes real properties, tangible and
intangible properties located in the Philippines
(ING_LES, Reviewer, supra at 298) .
NOTE: If the donor is a non-resident alien
intangible properties belonging to him situated i~
the Philippines shall be subject to rules on
reciprocity (NIRC, Sec. 104).
COMPOSJTION OF GROSS GIFT IF RC,
RA OR NRA .
industry established in the Philippines (N/RC,
Sec. 104). ·
RECIPROCITY RULE IN DONOR'S TAX
No donor's tax ·shall be collected in respect of
intangible personal property: .
1. If the donor at the time of the donation was a
citizen and resident of a foreign country·which at
the time of his donation did not impose· a transfer
tax of any character, in respect of intangible
personal property of citizens _of the Philippines
not residing in that foreign country; or

2. If the laws of the foreign country of ·which the

donor was a citizen and resident at the time of his
donation allows a similar exemption from transfer
or death taxes of every 9haracter or description
in respect of in_tangible personal property owned
by citizens of the Philippines not residing in that
Excluded foreign country (NIRC, Sec. 104).

. SITUS .OF DONOR'S TAXATION

·. ·-.The situs of donor's .taxation is where the transfer
. 'took place. Thus, on.ly transfers that take place within .
Included.
• •the Pfilli9-pin' are subject to _donor's· ta>ces u_nless
(subject to
reciptocity) ·
. the donors are Filipino citizens who are residents
..:.; of a foreigrl t o_ untry. This is so because donor's
Excluded taxes are i t e nature of taxes imposed upon the ·
•• privilege to1 do something, which in this case is to
-~- transfer P,rbperty (2-B DOMONDON, supra at 548) .
,;;
,,,.. --~J - ' ~. ..
t VALUATioN·6F. GIFTS
=

PROPERTIES CONSIDERED .·SIT~{'TE£? · . 1. Real property

1·N THE PHILIPPINES ·' It shall be valued at the FMV of the property at
1. Real, intangible and tangible personal prqperti~s, . •< the time of the gift. The appraised FMV of the
or mixed, located in the Philippines_a_nd o_uts,,de ;,~· pr~perty shall be whichever is higher between the
of the Philippines, depending on · kt a of ~t FMV . .
donor; a. As determioed by_the Commissioner (zonal
value); or
2. Franchise which must be exercised · in the b. As shown in the schedule of values fixed by
Philippines; Provincial and City Assessors (NIRC, Sec.
1'02 and Sec. -88 (BJ). ·
3. Shares, obligations or bonds issued ~Y dany
corporation · or sociedad ano~ima organize _or 2. All other property
constituted in the Philippines in acco rd ance wi th It shall be valued at the FMV of the property at
its laws; . · the time of the gift (NIRC, Sec. 102).

4 Shares obligations or bonds issued · by a~y NOTE: Valuation of qross Gifts (under Donor's
. foreign 'corporations, 85% of w·hic
• h ·is IOcated ,in Tax), shall also follow the rules under
computation of gross estate, provided, that the
the Phillppin.es;
reckoning point. for valuation shall be the date
when the donation is made (R.R. No. 12-2018,
5. Shares obligations or bonds ·issubel~ bt· Y anyr Sec. 13).
foreign •corporation
. 'fI sueh shares
. · , ' o .1ga ions
• tho
bonds have acquired a business situ~ in e
Philippines; and

SPECIFIC CASES OF TRANSFERS INTER
VIVOS:
1. Donations Between Spouses
GENERAL RULE: Such donation •during their
marriage is void (FAMILY CODE, Art. 87). .
EXCEPTIONS: . . make reasonable donations, in9ludin,g ~hose for
a. Donations mortis causa; and
b. Moderate gifts which the spouses may gi~e
each other on the occasion of any family
rejoicing (FAMILY CODE, Art. 87).
NOTE: Void donations are not subjeQt to donor's
tax (2-8 DOMONDON, supra at 534) . However,
if it was already paid, the taxpayer only has 2
years from the date of payme·nt to file for a claim
for refund , regardless of any supervening event
(NIRC, Sec. 229, par. 2) .
2. Donati(?ns by One of the Spouses
Husband and wife are considered .separate and ,
distinct taxpayers for purposes of donor:s tax
(R.R. No. 12-2018, Sec. 14).
, Did Sec·. · 95 of the Omnibus Election Code
If what was donated is a conjugal or ·comm.unity -, -
property and only the husband _signed the ,deed
of donation, there is onl~ 'one donor f9r donor's
tax purposes, without prejudice to the right of the
wife to question the validity ,-0f the - donation-· · - - ·cCP".was not s~ecifically repealed nor amended
without her consent pursuant' to the· pertinent
provisions of the Civil t Cod~ and Farc,iily Code
(R:R. No. 12-2018, Sec. 14) . . ,·
NOTE: The spouses ar~ co-owners 1>!.C(?njugal I •
property (Art. 174, Civil Code) . Thus, a gift made
by the spouses of conjugal property s~all be .
deemed separate donations by the hu~band and · •.· :·. tti e same prohibition on all natural or juridical
the wife in proportion to their respective interests_: '
In other words, there will be. two don,a io,ns.,mad~ _
and two separate co_mputat,ons of d~nor'~ taxes
(MAMALA TEO, Reviewer, supra at 473) .._
3. Donations to Conceived and Unborn
Child ·
Such donations may be accepted by those
persons who would legally represent them if they
were already born (CIVIL CODE, Art. 742).
4. Contribution for Election Campaign
Any contribution in cash or in kind to any
candidate, political party or coaJition of parties for
campaign purposes shall be governed by the
Election Code, as amended (NIRC, Sec. 99 (BJ) .•
R.A. No. 7166 (An Act Providing for
Synchronized National and. Local
Elections) provides that "any provision of 1a·w to
the contrary notwithstanding, any contrlbution in
cash or kind to any candidate, or political party or
coalition of parties for campaign purposes, duly
TRANSFER TAX
Taxation Law
reported to the Commission, shall not-be subject
to the payment of any gift tax" (R.A. No. 7166,
Sec. 13). ·
Every corporation incorporated under . the
Corporation Code has the power and capacity to
public welfare or for ~o~pital, charita~le, cult_
ural,
scientific, Givic, or. s1m1lar purposes. Provided,
that no corporation , domestic or foreign, shall
give ·donations in aid of any political party or
candidate or for purposes of p~rtisan political
activity (CORPORA T/ON CODE; Sec. 36 (9)) .
NOTE: With the effectivity of the Revised
Corporation Code on February 23, 2019, Sec. _36
. (9) is now Sec. 35 (i) which now states:
" ... Provided, that no foreign cotporation shall
give donations in aid of any political part_y_or
, candidate or for purposes of partisan pohtlcal
'activi_ty".
r ' .,
· (OEC), whi<.h.~numerates the juridical e.ntities
-.th~t ·ar~ .pro,hibite<:f from making political
con~ril;> tiPJ1! ~'\lend or repeal Sec. 36 (9) of
the Corporation .Code? · ·
. NO. The S·Ee cfa rified that the provision of the
by Sec. 95 of' tf:ie'.O!=C, N.either has there been
· an implied amendment or repeal of the CCP
provisfon_. Th:ere is 110 conflict between the two
provfsions arid both; can be· harmonized and be
given effect ins"ofar as the CCP . provides a
• blanket prohibition on all corporations making·
_. political contributions, wh~e the OEC imposes
1. 'persons~falling under specific categories. The
• SEC e1plair<ed that ·sec. 95 of the OEC shouid
, .be aepreci.ated ·as an amplification of th_e
. :absolute prohibition contairied in the CCP and 1s
,.,. ,,.. actually illustrative of some specific
circumstances of the evil sought to_be avoided in
both laws (SEC Opinion No. 15-08).
5. Renunciatioh :of Share ot' Surviving
S~u~ ,
Renunciation ~by the surviving spouse of his/her
share in the conjugal partnership or absolute
community after the dissolution of the marriage !n
favor o( the heirs of the deceased spouse or any
other person is subject to donor's tax (R.R. No.
12-2018, Sec. 12).
ILLUSTRATION: In the settlement of the estate
of M·r. Barbera who died intestate, his wife
renounced her inheritance and her shar~ of the
conjugal property in favor of their children. The
BIR determined that there was a taxable gift and
 \ I
tt~K-:Q~y AID COlege ~law . RGCT Bar Clperatlana Center
thus assessed Mrs Barbera d
BIR correct? · as a onor. Was the
ANS: YES. The BIR is correct th t th
taxa ble 91·ft b ut only insQfar as th a ere. was .
a paym~nt_ of donor's tax ·considering that gifts to
the share of the wife in the con~ renunc1at1on ?f
concerned Th· · Jugal property 1s
· 1s 1s a transfer of prop rty . h
consideration which t k e wit out
•t . ' a es effect during the
11 et1me of the transferor/wife and ·t th - .
as _a taxable ·gift (R.R. No. 12_201 ~. S~~-q~;J'.fies
~ut t~e· ~nunciation of the wife's ~hare in the
mhentan~ from her deceased husband is . t
taxable .gift, considering that the pro e;o i!
automatically transferred to the other hp . Y b
- f f I . eirs Y
?Pe~ ion o aw due to her repudiation of her
mh~ntance (BIR Ruling No. DA-;333 _07)_
6. Renunciation of Inheritance to a C~-Heir
A gene~I _renunciation of inheritance in favor of
a co~heir is not a donation for the purposes of
taxat1~n, unless_ spe_cifically and_ categorically
don~ m favor of 1dent1fied heir/s to the exclusion .
or· d1~advantage of the other co-heirs· in the
h~red1tary estate. The same becomes the
p~o~~rty · of the co-heir and treated as · an ·
ai::fd1t1onal inheritance (R.R. No. 12-2018 · Sec.
12). . '
7. Renunciation of Inheritance .to Another
Person ·Not a Co-Heir
There is donation subject to donor's tax since·
there is a change in the distribution of th·e estate
unless specifically and categ'orjcally done in favo~
of identified heir/s . ·to . the excluSiQn or
. disadv.antage of the other co-heirs in the
hereditary estate (R.R. No. 12-2018;· Sec. 12).
8. Remuneratory Donations
A remuneratory donation is one where the donee
gives something to reward past or future services
or because of future charges or burdens, when
the value of said services, burdens or charges is
less than the value of the donation (De Luna v.
Abrigo, G.R. No. L-57455, January 18, 1990).
Remuneratory donations· shall be governed by
the provisions on donation as regards that portion
which exceeds the value of the burden imposed
(CIVIL CODE, Art. 733).
Requisites: (TMD) · Association is collecting association dues and
a. A person gives another a !hing or right;
b. On account of the latter's Merits or of
services rendered by him to the donor; and
c. The giving does not constitute a Qemandable
debt, or when the gift imposes upon the
donee a burden which is less than the value
of the thing given (CIVIL CODE, Art. 726).
229
9.· Gratuitous Donations to Associations
.Gifts; donations, and other contributions received
by Homeowners' Associations are _subject to the
Associations are not · qualified for exemption
under Sec: 101 (A)(2) of the NIRC (R M C No
53-2013). . . . .
10. Gratuitous Donations made by
Corporations _
Where the heirs wanted to consider the .donation
· as remuneratory to escape the burden of being
taxed for the gift, the SC ·ruled that -a donation
made by a corporation to the heirs of a deceased
~tock~older out of gratitude for his past services
1s subJect to donor's tax (Pirovano v. CIR, G. R.
No. L-19865, J_uly 31, 1965).
Onerous Donations ·
It is one w~ich is subject to burdens, charges or
future services equal (or more)·in value than that
of the thing donated (De Luna v. Abrigo, G.R. No.
L-57455, January 18, 1990). ·
--~ onation.,~ with - an onerous · cause shall be
· 9~VE\H~Q~. ,i- by the . rules on ca°ntracts and
remuneraf9ry donations as regards that portion
which ex eeds the value of the burden imposed
(CIVIL CODE, Art. 733). . -
; I \
Dona~bn tvith . onerous cause is not strictly a
. •.. donaJion ince it is governed .by the rules on
c?n~ ~~}te!'i~ ically; the contributions. are not -
given m the nature of an endowment or donation.
Rather, the amounts are ·in the .concept.of a fee
or pric~ in exchange for the performance of a
service; use of properties or delivery of an object
(R.M.C, No. 53-2013). ·
Onerous Donation, or Donation in Exchange
for Goods or Services, or Use or Lease of
Pr:operties, 1is nofsubject to Donor's Tax
Contr.ibutions to associations in exchange for
goods, services and use of properties constitute
as other as_sess~ents(charges .from activity in
exchange for the performance ·.o f a sef'iice: use
of properties or delivery of an object. As such,
·these fees are income on the part of the
associations that are subje.ct to income tax as
well as to.VAT (R.M.C. No. 53-2013}.'
·1LLUSTRATION: ABC Homeowner's
other charges from its members." Likewise, ifis
accepting donations from non-members in
exchange for stickers for the right of way in their
subdivision road or _toll fees for the maintenance
of the road.

In this case, association dues, membership fees
and other assessments/charges collected from
the members and the donations from non-
members are subject to income tax , and VAT or
percentage tax, as the ·case may be (R.M.C. No.
53-2013) . .
11. Donations made by a Foreign
Corporation
Foreign corporations effecting a donation are
subject to donor's ,tax only if the property is
located in the Philippines. Accordingly, the
donation of a foreign corporation of its own
shares of stocks is not subject to donor's tax .
However, if 85% of the business of the foreign
corporation is located in the Philippines or the
shares donated have acquired business situs in
the Philippines, the donation may be taxed in the
Philippines subject to the rule of reciprocity
(TABAG & GARCIA, Transfer and Business
Taxation (2018) , p. 194 [hereinafter TABAG &
GARCIA]). ,.
On the other hand , donation of a foreign
corporation of its own shares' of s oi:;ks _in) avor of
a resident employee is not subject to donor's tax
because they were given in consideration of the
resident's employee's services t~
corporation , hence, subject to income tax (BIR
Ruling No. 018-87, January 26, 1987).
I
.__-------~~..,--!
~
NET GIFTS
The net economic benefit from the transfer I that
accrues to the donee (R.R. No. 12-2018, c. 12).
Accordingly, if a mortgaged property is transferred as
a gift, but imposing upon the donee the obligation to
pay the mortgage liability, then the net gift is
measured by deducting from the FMV of the property
the amount of mortgage assumed (R.R. No. 12-2018,
Sec. 12).
DONOR'S TAX RATE
The donor's tax for each calendar year shall be six
percent (6%) (Old: 2% - 15% or 30%) computed on
the basis of the total gifts in excess of t-250, 000
exempt gifts made during the year, regardless of
whether the donation is made to a relative or to a
stranger (NIRC, Sec. 99, as amended by TRAIN
Law).
NOTE: The application of the rate is imposed on
donations made on or after the etfectivity date of the
TRANSFER TAX
Taxation Law
TRAIN Law which is January 1, 2018 (R.R. No. 12-
2018, Sec. 11).
6% whether relative or
PROCEDURE FOR COMP(-!TING NET
GIFTS
The donor's tax for each calendar year shall be
·computed on the basis of the total net gifts made
during the calendar year in accordance with the tax
rate prescriged in the law (i.e., The first P250,000 net
gift is exempt and any amount in excess thereof shall
be subject to 6%) (NIRC, Sec. 99(A), as amended by
TRAIN.Law).
The tax is imposed on the cumulative basis during.the
calendar 'year, i.e. , the 6% rate is applied on the
__ aggregate r:iet' gifts during the calendar year, but
donor's tax.es paid during the calendar year are
credited aga1ns • the donor's tax due on the latest
donation ' during the- same calendar year. Thus, all
the _ donations made in.one c alendar year by a donor are
taxed at he same t1:1x·rate as if they had been made
'at one time. A new computation of donor's tax is
made for gifts made by t~e donor in another calendar .
year(s) (MAMALATEO, Reviewer, pp. 484-485).
I.T -1:,-· ---------------.
EXEMPT DONATIONS ]
-
. \ .
Exemptions'are not to be treated as exclusions from
the gross gifts of tRe donor. They partak~ the nature
of deductions and are, therefore, deductible from the
gross gifts in order to arrive at taxable net gift~-
Hence, same amount shall likewise be presented in
the "gross gifts of the donor" (TABAG & GARCIA.
supra at 195).
GIFTS MADE BY A RESIDENT: (NIRC,
SEC. 101 (A)) .
1. Dowries or Gifts on Account of Marriage
TRAIN law removed the exemption of dowri~5
or gifts made on account of marriage. With ~ 15 •
dowries or gifts made on account of marriage
regardless of the amount are now subject to
donor's tax regardless of amount.
2. Gifts Made to or for the Use of the
National Government or any Entity
 \ I

MEM:Q~y AI.D
SS1 Beda IJMw'llty Colege of Law - RGCT Bar Operat1ona Cente<

Created by any of its Agencies which is 5. Encumbrances on the Property Donated

Not Conducted for Profit or to any if Assumed by the Do nee
Political Subdivision of the said These include claims or liabilities attached to the
Government property such as mortgage, s·ecurity interests;
cost of rights and unpaid taxes wh_ich are allowed
3. Gift in Favor of an E·ducational and/or as a deduction once assumed by the donee.
Charitable, Religious, Cultural or Social
Welfare . Corporation, Institution, If a mortgag~d property is transferre·d as a gift,
Accredited Non-Government but imposing upon the donee the obligati~n ~o
pay the, mortgage liability, then th~ net gift 1s
Organization or Philanthropic
measured by deducting from the FMV of the
Organization or Research Institution property the amount of mortgage assumed (R. R.
No. 12-2018, Sec. 12).
Requisites: (ANT-D-PAN)
a: Not more than 30% of the said gift should be ILLUSTRATION: . X donated a mortgaged
used for Administrative purposes; property to Y with the condition that Y will assume
b. The donee must be a Non-stock, non-profit the mortgage. · The value of the mortgage
organization or institution; assumed by Y is exempted from donor's tax as it
c. .The donee or-ganization or institution should is deducted from ·the FMV of the property to arrive
be governed by Irustees who do not receive 'at the net gift subject to donor's tax.
any compensation ;
d. . The said donee should not be authorized to 6. Donations made to the following entities
receive Dividends;
exempted under special laws:
e. Said donee devotes all of its income to the
a. Aquaculture Department of the Southeast
accomplishment and promotion of ,its Asiaa Fisheries Development Center (P.D.
furposes enumerated in its Articles of • • j#
· . __ ;· .No~292); · .
Incorporation; · b. Aurora, Pacific Economic Zone and Freep.ort
f. The NGO must be Accredited by Philippine
AuthoQtr (R.A. No. 10083);
Council for NGO Certification; and c. De~el9p ent Academy of the Philippines
g. The donor engaged in business shall . give (P.O. No. 205) ;
·,
.
L

Notice of donation on every donation worth ',

d. Gi, I Scou'ts of the Philippines (R.A. No.
at least ft50, 000 to the RDO . which has 1'0073); ", . ..
jurisdiction over his place of business w!t~in e: ;:fntegrated Bar of the Philippines (P.O. No.
thirty (30) days after receipt of .th~ _qualtfie.~. 1'81); . .
donee institution's duly issued_Cert1pcate of f. International Rice Research Institute (P.O.
Donation (R.R. No. 12-2018, Sec. 17): No. 1620);
Natipnal Commission for Culture and the Arts
NOTE: Donation of ordinary assets to·charit~ble - (R.A. No. 10066);
institutions is exempt from donor's .x prov,1ed h. National Sodal Action Council (P.D. No.
the above-mentioned requisites are -~mphed 294); -
wlth (BIR Ruling No. 97-2013, March 20, 2013)- i. National Water Quality Management Fund
(R.A. No. 9275);
lf the donor is a VAT-registered person an? th_e j. People's Survival Fund (R.A. No. 10174);
donation involves ordinary assets, th e donatio~ IS k. People's Television Network, Incorporated
subject to VAT, ~he same being a transaction (R.A. No. 10390);
deemed sale (BIR Ruling No. 97-2013, M~rch 20• I. - Philippine Investors Commission (R.A. No.
2013). 3850);
m. Philippine Normal University (R.A. No. 9647);
4. Athlete's Prizes and Awa rd n. Philippine Red Cross (R.A. No. 10072);
Requisites: . o. Philippine-American Cultural Foundation
a. Awarded in local and international sports (P.O. No. 3062);
tournaments and competitions; p. Ramon Magsaysay Award Foundation (R.A.
b Held in the Philippines or abroa?; and . No. 3676); ·
· S t· d by their respective national q. Rural Farm School (R.A. No. 10618);
c. anc 1one Sec 1)
sports associations (R.A. No. 7549' · · r. Task Force on Human Settlements (E.O. No.
,419);
· f " shall mean
NOTE: "National Sports Associ~ _10 ~ • s. Tubbataha Reefs Natural Park (R.A. No.
those duly accredited by the Philippine Olympics 10067);
Committee (R.A. No. 7549, Sec. 2 ( 2)). t. University of the Philippines (R.A. No. 9500).
u. National Book Trust Fund (R.A. No. 9521);
 . - .

232
TRANSFE"AX
Taxation Law

v. Qualified Foster Care Agencies (R.A. No.

9521); and _ .
w . Contributions to. candidates or political
parties duly reported to the BIR (R.A. Na.
7166).

GIFTS MADE BY NON-RESIDENTS January 30, 2018 P2,000,000

ALIENS
Less: Exempt gift (250,000)
1. Gifts made to or for the use of the National
Government or any entity created by any of its Total P1 ,750,000 t-105,900*
agencies which is not conducted for profit or to
any political subdivision of the said Government; *.. 1, 750,000 X 6%
and _. ·
2. Gift in favor of an educational and/or charitable, .
religious, cultural _or social welfare corporation ,
institution, foundation, trust or philanthropic
organization or research institution or
organization, provided, however, that not more
than 30% of said gifts shall be used by such March 30, 2018
donee for administration purposes (NIRC. Sec: P1 ,000,000
101 (B)) . ·r
2,000,000

,.
COMPUfATION 0F ~ (250,000) .

DONOR'S TAX -Total 2,750,000"

1
.. 165,000**

COMPUTATION OF DONOR'S TAX ,Less: T X due/ paid . I ; .. 105,000

on January donation ., !
Donations shall be subject o donor's tax- applicabl -,- --- ,

at the time the donations are mi de. Only ~donations ' , ' .
on or after January 1, 2018 s all be ·subject to donor's Tcyt Que/Payable on March . t- 60,000
tax rate under the TRAIN Law (R.R. No. 12: 2018, Don~tlo'n
Sec. 14}. ; .:'.. -. / **~2.759,000 x 6°/o'
1
I

PROCEDURE FOR .COMPUTING

GIFTS ·( '

1. Cumulative Method
The computation of the donor's tax is on a
cumulative basis over a period of one c.;ilendar
year (R.R. No. 12-2018, Sec.14).
August15,2018
. 500,000

ILLUSTRATION: Add:
Donations made on:
January 30, 2018 ..2,000,000 January 2018 2,000,000 )
March 30, 2018 1,000,000
August 15, 2018 500,000 March 2018 1,000,000
Less: Exempt gift (250,000f

Total ..3,250,000
Tax Due Thereon .. 195,000***
 \ ,I
AI-D
San Beda lkwer9ity Colege d Law - RGCT Bar Operations Center
. Less: Tax
due/paid on
January and
March donation
Tax Due/Payable· on August
Donation
**?3,250,000 x 6% (R.R. No. 12-2018, Sec. 14)
Will It ·not amount to double taxation, since
t~e previous donations were already
subjected to donor's tax?
NO. There is no doul:>le taxation. Under the
cumulative method, the tax paid for the previous
donations will be considered as tax credit for the
succeeding donations.
2. Splitting Method
Since the computation of the donor's tax is_on a
cumulative basis over a. period of one calendar
year (R.R. No. 12-2018, Sec.14), spreading the
donation or gift over numerous calendar years
allows an availment of the exemption from
donor's taxes or lower donor's taxes (2-8
DOMONDON, supra at 562) . ' .non-resident and a non-citiz~n are not taxed for
ILLUSTRATION: Donor A wants to donate PS00,
000 to his son Bon December 2018. Instead of
donating the whole P'S00, 000 _.on December
2018, A can opt to donate P250, 000 on
December 2018 and another P'250, 000 on
January 2019 to avoid payin9 donor's tax which
would be in the amount of P30, 000. This _ is so
because donor's tax is computed on the b~sis of
the total net gifts made during the calendar year.-
I DONOR'S TAX CREDIT ·
DONOR'S TAX CREDIT
The donor's tax imposed upon a citizen ?r resi~ent at
the time of the donation shall be c_redited wi th th ed
- , t f any character an
amount of any donors ax, 0 f .
description, imposed PY the au th0 rity of a oreign
country (NIRC, Sec. 101(C)(1)). .
PURPOSE OF DONOR'S TAX CREDIT
. the harsh effect of
In order to minimize or lessen . !lowed to
taxing the same gift twice, the donor is a , t
claim the gift tax paid in the foreign_ ~o~nt~ a;A~:~
credit against the gift tax paid the Philippine (
& GARCIA, supra at 204).
165,000 LIMITATIONS TO THE TAX CREDI"(:
1. Per Country Basis
The amount ·of credit shall not exceed the same
proportion of the tax against which $UCh credit is
taken , which the net gifts situated within such
P 30,000 country taxable under donor's tax bears to entire
net gifts (x Philippine Donor's Tax x [Net Gift per
Foreign Country/ Total Net Gifts]); and
2. ·Overall Basis
The amount of the tax credit shall not exceed the
same proportion qt the tax against which such
credit is taken, which the· donor's net gifts
situated outside the Philippines taxable under
donor's tax bears to his entire net gifts (Philippine
Do'nor's Tax x [Net Gifts in All Foreign Countries
/ Total Net Gifts]) (NIRC, Sec. 101 (C)(2)) .
NOTE: This tax credit is allowed only for
residents or citizens of the Philippines for the
donor's taxes they paid in a foreign country
(NIRC, Sec. 101).
Rationale: Residents and citizens of the
Philippines are the only ones taxed worldwide. A
- his ' donations in foreign iurisdictions (INGLES,
Reviewer:,' supra at 310;'.
r'
ILLUSJRATION: The following were ~onations
made by Mr. <;,. Alante, a Filipjno, to another
person for1,taxable ear 2018:
~-"'
Do~]tio~'s-of ; roperty which are located in:
Foreign Country A P 300,000
Foreign Country B 200,000
I Philippines
Less: Exemption gift
in Sec. 99
"
500,000
(250,000)
Total donations made P 750,000
Actual Forei n donor's tax aid:
To Foreign Country A fD 10,600
To Foreign Country B 10,000
Total fD 20,600
 TRANSFER TAX
Taxation Law

the
s. such further information as the fommissioner
Computation of Donor's Tax in may require (NIRC, Sec. 103{A)).
Philiooines:
Tax on Donations (P750,000 x NOTE: The donee, not being taxable, is not
19 45,000 required to file any the return unless he acts as
6%)
an agent of tbe donor (VALENCIA & ROXAS,
*20,600 supra at 245).
Less: Tax credits - allowed

Donor's tax still due

19 24,400· TIME OF FILING
The return shall be filed within thirty (30) days after
the date the gift is made or completed (NIRC, Sec.
- *Computation of Allowable Tax Credit: 103 (B)).

Limit 1: Per Country Basis PLACE OF FILING

Country A: Unless the Commissioner otherwise permits, the
[1945,000 X 1918,000 return shall be filed and the tax paid to:
(19300,000/19750,000)] · 1. Authorized Agent Bank;
Actual P10,600 2. Revenue District Officer;
Choose lower amount P10,600 3. Revenue Collection Officer;

Country B:
.. 4. Duly authorized treasurer of · the _c~ty · or
municipality where the donor was dom1c1led at
[(1945,000 X P 12,000 the time of the transfer; or .
(19200 ,000/19750,000)] 5. If there··be no legal residence in the Philippines,
Actual P 10,000 with the Office of the Commissioner (NIRC, Sec.
Choose lower amount _ 103 (B)), ._ · '.
10,000
NOTE: In case of gifts made t:>y non-resident, the
Tax Credit Allowed (P10,600 + f' 20,600 - return may be-filed with the Philippine Embassy
P10,000) - or Consulate in the country where he is domiciled
' · at the time of the transfer, or directly with the
Limit 2: Overall Basis · ,,,; Office of the Commissioner (NIRC, Sec. 103 (B)).
Countries A & B r , '·
[(1945,000 x (19500,000/P750,000)] , 1930-:-000
Actual Total Foreign Tax P20,600 PAYMENT OF DONOR'S TAX
Choose lower amount '1120,6~0 The do_nor's tax is ppid upon filing of return. No
extension is allowed as compared to estate tax
NOTE: The allowable tax credit is the lower o tax '(NIRC, Sec. 103). .
limit and actual tax paid. Thus, the tax ; credits on.
donor's tax would be P20,600 (VALENCIA & ROXAS,· NOTE: On .,_ ~1 - donations of one date, only · one
supra at 244). • donor's tax return is required (INGLES, Reviewer,
supra at 309). This. means that only one return shall
be filed for several gifts (donations) made by a donor
to the different donees on the same date (Guidelines
DONOR'S TAX and Instructions for BIR Form No. 1800);
SETTLEMENT NOTICE OF DONATION
Inasmuch as the gift tax is now payable within 30
days after the date the gift is made and the return filed
FILING OF DONOR'S TAX RETURN within the same period, the filing of a notice of
dona tion is no longer required (1 DE LEON, NIRC,
Any individual who makes any transfer by gift and are 1
supra 823).
required to pay tax due shall make a return under
oath in duplicate and include the following: (EDP-NC)
1. gach gift made during the calendar year which is N~TE: In order to be exempt from donor's tax, and
to be included in computing net gifts; claim ~II d~cf~ction of the donation given to quali~ed
2. Qeductions claimed and allowable; donee . institutions duly accredited by the Philippine
3. Any frevious n_ et gifts made during the same Council f~r NG<? Certification, Inc. (PCNC) the donor
engaged m business shall give notice of donation on
calendar year;
every donation worth at least ~50 000 to the
4. The Name of the donee; and
Reven~e District Office (RDO) which has jurisdiction
over his place of business within 30 days from the
 \ I

MEM:0-RY Al D
San Seda l.W,nt)' College of law - RGCT B e r ~ eent.

qualified donee institutioa's duly issued Certificate of

Donation, stating that no more than 30% of the said
donation for the taxable year shall be used by such
accredited non-stock, non-profit corporation/NGO
institution for ad,ninistration purposes (R.R. No. 12-
2018, Sec. 15 (C)).
 VALUE ADDED "TAX
Taxation Law

I I
or lessee of the goods or properties or services
VALUE ADDED TAX (INGLES, Reviewer, supra at 312).

EXCEPTION: Technical importations

VALUE-ADDED TAX (VAT) In the case of tax-free importation of goods into

It is a tax on consumption levied on the sale, barter,
exchange or lease of . goods or p~opertie~ and
services in the Philippines and on 1mportat1on of
goods into the Philippines (R.R. No. 16-2005, Sec.
4.105-2).
CHARACTERISTICS OF PHILIPPINE
VAT:
1. It is an indirect tax
The amount of tax maybe shifted or passed on
by the seller to the buyer, transferee or [essee of
goods, properties or services (NIRC, Sec. 105).
It is one paid by a person who is indirectly liable
therefor; and who may thereafter shift_or pass on
the tax to another person • or entity, which
ultimately assumes the tax burden (Maceda v.
~acaraig, Jr., G.R. No. 8829_1, May_31, 1991). --·
Impact of Taxation
the Philippines by persons, entities or a~encies
exempt from tax , where such goods a~e
subsequently sold, transferred or exchanged in
the Philippines to non-exempt · perso~~ .or
entities, the purchasers, transferees or rec1p1ents
shall be considered the importers thereof, who
shall be liable for any internal r~venue tax on
sucn importation (NIRC, Sec. 107(8)).
Effect When VAT Shifted to the Customer
Once the VAT is shifted to the buyer/cuStomer as
an addition to the cost of goods or services s~ld,
it is no longer a tax but an additional coSt whi~h
the buyer/customer has to pay in order to obtain ·
the goods or services. The buyer cannot be h~ld
directly li~ble to pay tax or invoke an exemption
privilege .to avoid paying the o~tput tax pass~d on
. to them· by the vendor, in the form of higher
selling price ·(BIR Ruling No. 639-12, December
4, 2012) . •. · • .
' ,, f

- point where the tax is originally imposed or the 2. It is\ a ta, im-pdsed on value added to
one on whom the tax ls· formally '. assessea -goocis, prop~rties or~ services of a
>' • • •
(INGLES, Tax Made Less Ta,fing: A Re~iewer , ~axpayer '
with Codals and Cases (2018), p. 7 Jh~remafter -
INGLES, Reviewer]). .1 .' The tax is so-called ·VAT because it is imposed
011 th~ value ~ot previously subjected to the VAT,
a1
i.e. , on the varue dded to the goods or services
Incidence of Taxation (; -~ at eac h stage of the distribution chain · (2 DE
_ refers to the person r entity to whom · the · LEON, The National Internal Revenue Code
burden of the indirect tax is shifted, the one who . ; ··Annotatea. (2016 , p. 2 (hereinafter 2 DE LEON,
ultimately bears the burdep of the tax (~-C:·· i _ NIRCJ) .
DOMONDON, National Taxation (20 ~8), p. 10- -· - · . • · •
[hereinafter 2-C DO MONDON]). ,... , . • V~lue,.ad~ed
1

The seller is · the one statutorily liable for the

1j 1 '.. ._ _ , the difference between total sales of the
payment of the tax, but the amount of the tax may , taxpayer for the taxable quarter subject to value-
be shifted or passed on to the buyer, transferee added tax and his total purchases for the same
period subject also to value-added tax

DOHN ALFRED E. AQUILIZAN, Over-Al/ Chairperson I NICHOLE VA.NE B. SANTOS, Cha irperson for Academics I RONALYN A.
GACULA. Ad Hoc Director for Bar Ma tters I MARIELLE CIELO B. BELGIRA, Vice Chairperson f or Finance i JUAN INIGO S. MIGUEL,
Vice Chairperson for Operations I ALISSA MARIE D.C. DELOS SANTOS, Vice Chairperson for Audit I CORINA R. TAMPUS, Vice
Chairperson for Secretariat I ARVY KEITH N. CHUNG, Vice Chairperson for Logistics I ANTONIO JUN-JUN C. MANALIGOD IV, Vice
Chairperson for Membership IJ?RDAN N. CHAVEZ, Vice Chairperson for Electronic Data Processing

•
JOSE WRENZO C. DAVE, Subject Chair / LOUISE MARIE C. CONTACTO, Assistant Subject Chair ) KATRYNA ANNE R. TOMENIO,
Subject Electronic D~ta Processing I SUB[ECT HEADS: MARY GRACE A. GRANTL, Ge11.eral Principles I SHEENA ROSETfE D_G.
DOMINGO, Admlmstrat/011, Enfo rceme111, Remedies and Court of Tax Appeals IJERRLITO P. CUSTODIO, Local and Real Property Taxation
/ SlEVIE
H. R. A.RCIU.A
MALALUAN, and PATRICK
Value-Added Ta xi MARRION Y. MELENDRES, fll come Taxation I MARY ANN C. TAN, Transfer Tax )MARILYN

KATRINA MICHAELA D. DELFIN, AJlMAN T. PAEZ, AN DRE I AN~ U. PALOMAR, MARY KATHERINE A. SIMEON, JAM£5
KARL DANIEL B. ALVARO, ARIESA JANE V.. DOMINGO, JOSEPHJNE MARJE T. SALAZAR, YNA MAREI AGUILAR, NERY
ROYCE T. LAZARO, JOHN KENNETH Q. CRISOLOGO, LOIS DANIELLE P. DIMAANO, ANDRELA M. AQUINO, ANNA LOREN
DC. MANUEL and GILBERT OWENS. APILADO

Atl
y.
NICASJO C. CABANEIRO, CPA, Atty. DANTE 0 . DELA CRUZ, C PA, Jus1lccJAPAR n. DIMAAMPAO, Ally. EFREN
VINCE NT M. DIZON, CPA •
 (MAMALA_ TEO'. Reviewer onTaxation (2019), p.
488 [hereinafter MAMALATEO, Reviewer]). ··
ILLUSTRATION:
Andres sold a piece Boris crafts the wood
of wood to Boris: into a rocking chair
and sold it to Cletus:
Price: . ~100 Price: · ~150
VAT 12% ___J2 VAT 12% 18
Total P112 Total P168
Boris'. Net VAT Payable may be computed as
follows: -
Output tax (VAT on Boris' sale) P18 ·
Less: Input tax (VAT on Boris' purchase) · 11£)
*Net VAT Payable ~6
*The tax on the value added by Boris can be seen
in the level of the price ·(Value added of P50 x
12% VAT = t-6 which is also the Net Vat Payable . •
of Boris) (INGLES, Reviewer, supra at 313).
NOTE: As it is a tax on the transaction, there is · .
no need whatsoever for there to be a taxable gain
(unlike in income tax) (Id.).
3. It is a transparent form of sales tax
VAT is a tax on the taxable sale, barter or
exchange of goods, ·properti~s- or. services. A _
barter or · exchange has .the .same . tax
consequence as a sale. A sale may be c!~ actual,
sale.or a deemed sale, or an export ,sal~ or a locaJ
sale (MAMALATEO, Reviewer, ·s_ upra at .491) .
I
Transparent •. · -
- t~e law requires that the tax be sho':'n as a
separate item in the VAT invoice or rece1pt_(RR.
No. 18-201.1, Sec.•1) . .· , ·•. •
4. It is a broad-based tax oh consumption
imposed on all stages of taxable sale but
the burden rests with the final consumer
who consumes the goods, properties or
services in the Philippines (MAMALATEO,
Reviewer; supra at 492).
Broad-based .
- every sale of goods, properties, or services at
nd
the levels of manufacturers or producers a
distributors is subject to VAT (Id.).
5. It is collected through the tax cretdhit
method (sometimes referred to as e export to a country other than the Philippines) or
"invoice method'J (Id. at 49 o) .
Tax Credit Method (or Invoice Method)
- the input taxes shifted by' the sellers to the
buyer are credited against the buyer's output
ta,xes when he in turn sells the .taxable goods,
properties_or services (NIRC, Secs. 105 and 110
(A)) . . .
ILLUSTRATION:
In the transaction above, when Andres sold' the
wood to Boris, the ~12· Output Tax of Andres
becomes the Input Tax of Boris. When the chair .
is sold to Cletus, Boris may claim the ~12 as. his
·input tax which is deductible from his output tax
of ~18 (INGLES, Reviewer, supra at 313).
6. It adopts the "tax-inclusive method"
Unless otherwise stated, any-price charged by a
VAT registered person. shall be deemed to
includE1 the VAT charged (MAMALATEO,
Reviewer, supra at 494).
NOTE: the VAT component shall be separately
indicated in the VAT invoice or receipt (R.R. No.
18-2011, Sec. 1) .
f:.~} ~},lt fo!l9~ s,.the-Destination Principle/Cross
, Bon:ler D9ctrine (Id. at 492). ·
11:,. kJ
Destinatldn Principle or Cross Border .
Doctrine ' ·
Good ~·an~ services are taxed only in the country ·
where these ar.e consumed . The Cross Border .
Doctrine in8:n~ates that no VAT shali be imposed
to form part of the cost of the goods destined for
consumpt\on outside the territorial border of the
. taxing authority (Atlas Consolidated Mining ancJ
Dey~lop ent Corp. v. Commissioner of Internal
Revenue, G.R. No. 141104, June 8, 2007) .
Exports are zero-rated because these ·shall be
consumed outside the Philippines, while imports
. are generally subject to 12% VAT because they
are for consumption within the Philippines
(MAMALA TEO, Reviewer, supra at 492) .
NOTE: In the case of services, the consumption
takes place where the service is performed
following the "situs_of service principle" (Id:) .
Freeport and Economic Zones
Freeport Zones and Economic Zones . are
·considered a~ separate customs territories.
Sales by entities registered with these zones are
· either treated as sales outside the country (if the
purchaser is also a locator, or if the goods are for
domestic sales. If considered as domestic sales
these sales 'are importations in the hands of th~
purchaser and are thus subject to the
", .. ' - - - - - -- - --
corresponding customs duties and other taxes on
imported praoucts (R.R. No. 02-2012, Sec. 2).
Philippine Economic Zone -Authority (PEZA)-
registered enterprises are VAT-exempt _and no
VAT can be passed on to them. Consistently,
under the Cross Border Doctrine, actual export
of goods and services from the Philippin~s to a
foreign country must be free of VAT albeit zero
rated ; while, those destined for use or
consumption within the Philippines shall be
imposed witn 12% VAT . (Toshiba Information
Equipment (PHL) Inc. v. Commissioner of ·
Internal Revenue, G.R. No. 157594, March 9,
2010).
(Please refer to page 252 . to 254 for the full
discussion of VAT on PEZA-registered entity on
the ·~inds of Zero_-rated Sales'.)
8. It does not cascade (tax on tax), .hen ce, .
there is no tax pyramiding (M~MAL.Jt, TEO,
Reviewer, supra at 494) . l ·
:' /
Tax Pyramiding ,'
- Tax passed on by the Pi vious seller, wh fch-is
now a component of gross selling priqe/receipts
of the seller, is again sut:ijected to tax (Id.) . It is a · .
tax imposed upon apoiher tax (People
San_diganbayan, G.R. No. 5?532, A'ugust. 16,
2005). ( . -}.
-....i_
REASON:· Because VAT f!llp'1's a selli~ fo cred it
his input tax (which is equivalenKto the output tax
of the previous seller) from his output tax: Heiice'. I
there is no tax on tax (2-C DOMONDON, ,supra
1
at oJ. z._ '.{
. •
-TRANSACTION• IS SUBJECT TO VAT:
9. Under "catching-up · princ pie'' 0~ -- - -:(-=O.. :S=:-~~N.. :o~t:!..
"recoupment principle", the VAT foregonl in a ,. , 1 '.I . Must be~done in the Ordinary course of trade or
prior exempt transaction may be recovered rom I "' .,_
the succeeding customer liable to VAT under the
(MAMALA TEO, Reviewer, supra at 495).
10. It is a regressive tax
The VAT is an antithesis of progressive taxation.
By its very nature, it is regressive. The principle
of progressive taxation has no relation with the
VAT system inasmuch as the VAT paid by the
pon~umer or_business for every goods bought or
~ervices enJoyed is the same regardless of
income (ABAKADA Guro Party List v. Executive
Secretary, G.R. No. 168056 September 1 ,
2005). ' •
· ADVANTAGES OF VAT:
1. VAT has a built-in self:policing featu
This feature will ensure p~oper collection i~the
tax at all stages of distribution, · since tax
VALUE ADDED TAX
Taxation Law
payments are based on the outp_ ut tax (VAT) and
the input tax (tax credits) as supported by
receipts, thereby providing a m~re ~ccurate_audit
trail or evidence for BIR monitonng purposes.
Furthermore, it will encourage purcnasers to
demand accurate receipts to accu_mulate· more
tax credits. It will thus minimize tax evasion (2 DE
LEON, supra at 14).
2. VAT covers more transactions in a wider
tax base.
VAT is generally more · broad-based (it is
extended to cover both goods and services).
Every sale of goods, properties or services at the
levels of ·manufacturers or producers and
distributors is subject to VAT (MAMA LA TEO,
Reviewer, supra at 492) .
3. VAT makes ·sales tax a more equitable
. _sx stem and encourages savings. .
Tne· VAT system encourages savings because
1
• •• :the tax is imposed only upon consumption.
' l · - ,. ~fore~ve'r, investments in capital goods such as
· ... • machinery and equipment are effectively not
r I ·subject to VA .. 1due 'to the provision in the Tax
~•; Code al OY/in_g ,taxpayers to recove-r input taxes
· paid ' on . acquisition of capital - goods through
'7 - ·---- --1 . .. ,
. refun ·o r ta cr}dlt '(Id.) .
4. It is ,simple and consister:at.
· ,. It has only 2 tax ra e~ (0% and 12%). Hence, it is
easy;, t6 1 admini~ er and to comply . with, and
expected to ger:ierate1 large revenues (2 DE
{..E._QN; NIRC, supra at 14).
I . , '.
ELEMENTS ON WHETHER THE
J-· •
)..:..
\;-:---/--:---:-----::~-----;-:::-::;:-:-;;;
• business; -
"In the course of trade or business" means the
regular conduct or pursuit of economic acitivity
(Sec. 105, NIRC) . .
NOTE: Importations are subject to VAT, whether
or not in the course of trade or business.
2. There must be a Sale barter, exchange, lease-of
1
goods or properties, 0 r rendering of service in th e
_Philippines; and
3. It is Not VAT-exempt or VAT zero-rated.
(INGLES, Reviewer, supra at 313) .
 \ I
MEM:Q~y AID
e.
Sa'I lleda lW.w9lty College of Law - ROCT Ce,11er
PERSONS LIABLE FOR .
VAT
1. . Any person who in the course of trade or
business:
a. Sells, barters, or exchanges goods or
properties (seller or transferor), leases goods
or properties (lessor); or
b. Renders services (service provider) (NIRC,
Sec. 105).
EXCEPTION: A person, whether or not VAT-
registered, whose annuai gross sales or receipts
does not exceed ~3,000,000 shall not be liable to
VAT, but instead he shall be liable for the 3%
percentage tax, unless he opted to be registered
as a VAT person (NIRC, Sec. 116, as·amended
by TRAIN Law) .
2. Any person who imports goods (Importer)
- the person who brings goods into the
Philippines, whether or not made in the course of
trade or business (R.R. No. 16-20051 Sec. 4.105- ·
1 an~ 4.107.1).
IN THE COURSE OF TRADe OR
BUSINESS (RULE OF REGULARITY)
Regular conduct or pursuit of a ~on:imer~ial_ o~ an
economic activity, including tran.sactIons incidental
thereto, by any person regardless of wheth er or not
0
the person engaged therein is a non-stoc~. no~~profit
private organization (irrespective of the dIspos1tI~n of
its net in•come and whether or not it sells.el;(~lus1v~ly
to members or their guests), or gover~Tent entity
(NIRC, Sec. .105; R.R. No. 16-200 5, Sec.~4·105-3).
A transaction will be characterized as having been
entered into by a person in, the course of trade or
business if it is:
1. Regularly conducted; and . .
2. Undertaken in pursuit of, a ~ommercial 0 ~
economic activity (INGLES, Reviewer, supra a
314).
Regular . t d transaction. It
- involves more than one iso1a e .
requires repetition and continuity of action (Id.).
Incidental
. NOTE: VAT shall be levied, assessed and
- means depending upon or appertaining
. to
. . something necessary,
something else primary: ther which is ·
appertaining to, or depend in~ u~o~ an~al to' the main
termed the principal; something incide . .
purpose (Black's Law Dictionary_, 6th Edition).
Isolated transaction
- is generally not in the ordinary course of trade· or
business, hence, not subject to business t~x (TABAG
& GARCIA, Transfer and Business Taxation (2018),
p. 228 [hereinafter TABAG & GARCIA]).
NOTES:
1. Transactions incidental to the pursuit of a
commercial or economic activity are considered
as entered into in the course of trade or business
and are also subject to VAT (Kepco llijan Corp. v.
Commissioner of Internal Revenue, CTA Case
No. 8091, October 23, 2012). .
2. It does not follow that an isolated transaction
cannot be an incidental ·transaction _for VAT
purposes. (Mindanao II Geothermal Partnership
v. Commissionef of Internal Revenue, G.R. ~os.
193301 and 194637, March 11, 2013) .
· a. A bakeshop which through the years
accumulated empty sacks of flours and then
sold them is subject-to VAT. The sale' is a
transaction incidental to traqe or business of
bakeshop (2 CAPUNO, Taxation Law (2020),
p. 69 {i ereinafter CAPUNO]).
..., -. - .
3. T~e ,~ai~ ~r hich was involuntary and made
pursuant'to ttte declared policy of Government for
privatization -eould no longer be _repeated ~r
carried on wit regularity. Hence, 1f the sale Is
made not in pursuant to its regular activity, it is
considered as an isolated transaction not subject
. to VAT (Commissioner of Internal Reyenue v.
Magsaysay Lines, G.R. No. 146984, July 28,
2006).
•"4. Tlie sale of the power plants is not "in the course
of trade or business" as contemplated under Sec.
105 of the NIRC, and thus, not subject to VAT.
The sale of the power plants is not in pursuit of a
commercial or economic activity but a
governmental function mandated by law to
privatize NPC generation assets (Power Sector
Assets and Liabilities Management Corp. v.
Commissioner of Internal Revenue, G.R. No. ·
198146,AugustB, 2017).
Exceptions to the Rule of Regularity (INS):
1. Importation is subject to VAT regardless of
whether or not it is in the course of trade or
business (R.R. No. 16-2005, Sec. 4.107-1).
collected on every importation of goods (NIRC,
Sec. 107 (A), as amended by TRAIN Law).
2. Services rendered in the Philippines by lion-
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
(NIRC, Sec. 105).
3. Any business where the gr~ss sales or receipt dtoh
not exceed 19100,000 . during any 12-mon
period shall be considered ~rincipally for
Subsistence or livelihood and not m the course of
trade or business (R.M.C. No. 4-98) .
VAT-REGISTERED PERSON
These are taxpayers that are either: . Not liable for the imposition of Output VAT on its
1. R·egistered in accordance with the law (NIRC,
Sec. 236 (G)) ; or · 1. His transactions are those falling under the hst of
2. Opted to be registered as a VAT person (NIRC,
Sec. 236 (H)) .
Such status shall continue until registration is
cancelled or until the 3• consecutive years
moratorium has lapsed for a person who opted to
register as a VAT person and thereafter decides
to revert to exempt status (NIRC, Sec: 236 (H)(2F
as amended by TRAIN Law).
EXCEPTION: Franchise grantees of radio and ,
TV broadcasting whose annual gross receipts for
the preceding year do not exceed ,-10,000,000
where the option becomes ~rpetually
irrevocable (R.R. No. 13!20!_§, rSec. 2/ - -
VAT-REGISTRABLE PERSON
A taxable person must register for VAT purposes.
However his failure to register as a VAT person does
not excuipate him from paying ,VAT (MAMA?,ATEO,
R~viewer, supra at 497). _ . 1 - j . , .Sec. 109 {1)(Bf3)) ; and
: .,,,-, : b_:., Non-stock/no,n-profit organizatio~s.
Any person, who in the course of trade r bus1ne~s, . ;-
sells, barters or exchanges goods or pro_pe ies, 9£ . ____ . . NOTE: A non-stock, non-profit association or
engages in the sale or exchange of services,ishall be
liable to register for VAT if: - ;./
l • -
1. His gross sales or receipts for the past 1-2
months, other than those that are exempt under
Sec. 109 (A) to (BB) have exceeded ,-3,000,000;
or ·
2. There are reasona6Ie grounds to believe that his
gross sales or receipts for the next 12 months,
other than those that are exempt under Sec. 109
(A) to (BB), will exceed ,-3,000,000 (NIRC, Sec.
236 (G)(1) as amended by TRAIN Law) .
VALUE ADDED TAX
Taxation Law
EFFECT OF FAILURE TO REGISTER
WHEN REQUIRED ·'
A ers~n who is required to register but failed to do
si~~all be liable to pay VAT as if he were_~ VAT-
registered person , but witho_
ut the benefit of rnput tax
credits for the period in which he was not properly
registered (NIRC, Sec. 236 (G)(2) as amended by .
TRAIN Law) .
VAT-EXEMPT PERSON
· sales, either because: .
transactions that are exempt from VAT under
Sec. 109 A to AA as amended (/1-C
DOMONDON, supra at 58); or .
2. He is specifically exempt from VAT by specific
provision of the Code, by special laws or by
international agreements (Id. at 56) .
•
) . NOTE: :rhe seller has no output tax liability on his
• ..... sales; but the input taxes passed on to him by his
suppliers _,of. goods, properties or services form
part · of his assets or operating expenses
(MAMAL.AT_5O, Reviewer, supra at 529).
THE FOLLOWING PERSONS ARE VAT•
"-EXEMP-T (ES2TC): ·
1. ·Persons not §rigaged in undertaking .
VAT-taxable transactio•ns:
a. ;Those whose annual gross sales and/or
• foceipts do ·not exceed ,-3,000,000 (NIRC,
· , / / .
_,._... -~rg~nization whose receipts come purely
{ \ 1 ' t ram association .dues or special
. assessments from members is not subject to
the value-added tax. These are organized
primarily for the purpose of engaging in non-
taxable transactions.
Reasons for the exemption
i. It is not engaged in business or in taxable
sale of goods, properties, or services: or
ii. The amount received· by it from the
members. is not income but represents
additional capital contribution ; or
iii. It is a liability of the association which
must be spent by the association for the
special purposes for which the fund was
created (MAMALA TEO, Reviewer, supra
at 499).
A person, who is engaged in the business of
undertaking exempt transactions, is not liable to
value added tax. However, if at the same time, he
 \ I .

'MEM:Q~y AID
a.
Sen Bede ~ Colege of law - RGCT 0pe,mj6ne Center

also undertakes taxable transactions, the value 5. Cinemaltheater Operators

of which does not . exceed · the prescribed
threshold, he is not liable to pay value added tax, ·
unless he opts to register as a VAT person
(MAMALA TEO, Reviewer, supra at 528) .
2. §ubsistence Livelihood lncorrie
Any business or businesses pursued by an
individual where the aggregate gross sales or
receipts do not exceed 19100,000 during the 12-
month period shall be considered principally for
subsistence or livelihood and not in the course of
. business (R.M.C. No. 7-2014).
Hence, not subject to business taxes (TABAG &
GARCIA, supra .at 228) . - threshold. However, the aggregation rule for ·
' .
3. Persons exempt from VAT under §peciaJ
Laws:
a. Cooperative Development Authority
registered cooperatives (R.A. No. 6938; R.A.
No. 8424); .
• •'
,/.
A qualified cooperative also enjoys · :."
exemption from the requirement of adva~c~ ; .··
payment of VAT upon withdrawal fro~ th.~.:-
Gross receipts of cinema/theater owners or
operators from sales of-tickets to moviegoers are
exempt from VAT. Cinema/theater movie houses
are not included in· the enumeration of_taxable
services in the' VAT law (Commissioner of
Internal Revenue v. SM Prime Holdings, G.R. No.
183505, February 26, 2010) .
TRANSACTIONS OF SPECIAL VAT
.PERSONS
1. Husband and Wife
Husband and wife shall be considered separate
.taxpayers for .. pu'rppses · of · the 193,000,000
ea.ch taxpayer shall apply .(R.R. No. 16-2005, -,
Sec. 4.109-1).
Aggregation -Rule . .
Revenue derived by a spouse not only from the
practice 6f his/her profession' but also from other
lines of trades or businesses which are ott)erwise
subject to VAT, shall .be combined for purposes
of determinin'Q whether.the threshold amount has ·
been exc~ed,ed (R.R. No. 16-2011, Sec. 3).
• t, -,., ' ' -

refinery/mill. The agricultural coo~~ra~1ve s •• 2. Joint V ure

exemption from the requiremeqt _of -~dvance::.:/
payment is a logical c~nseq~en.ce of t~~:
. exemption from VAT of it~ s.~les J~ reflhed
sugar (CIR v. United cagJPSugar.,.,:armers__
Association Mu/ti-Purpo~_9°0 Pf!,1p,_!!ve, ~.R.
No. 209776, December], 2016). i'J -~
. .-
,,;,, .. "" ., ~,
b. Enterprise registered with S~ _.'~Ei nomic
Zone~ ~r Free Ports in the Phi11~pme :li
While an ecozone is geograp11& 11y ":'it~in
the Philippines, it is deemed a sepr rat!3
· customs territory and is rega rd ecil:. n !gw as
• · er
foreign soil (CornrnIssIon . . . of Internal
Revenue v. Sekisu; Jushi Philippines, Inc.,
G.R. No. 149671, July 21, 2006)-
An uni "orated joint venture un~ertaking
·constru r · energy-related contractual
activitie government, although exempt
from in shall be liable to VAT
( -~MA iewer, supra at 498).
EXCEPTION: .If the unincorporated joint venture
is treated merely as a "flow-through entity~. the
, · members of the joint venture are responsible for
• Jhei respective _obliga~ons under the joint
venture agreement and can claim input taxes on -
their taxable · purchases .(BIR Ruling No. 2-97,
January 14, -1997).
3. Government
a. Performance of essential governmental

c. Regional or Area Headquarters e~!fn~~f

in the Philippine~ by ;_~ )' and
:::i functions exempt from
(MAMALA TEO, Reviewer, supra at 499):
b. Performance of their proprietary functions
VAT

corporations (BIR Ru/mg No. 17 8 ' liable to pay VAT (BIR Ruling No. 060-2000
d. Inventors (R.A. No. 7459)- dated 8, 2000).

4. VAT-Exempt under Ireatr n Diplomatic NOTE: 'There is no automatic exemption

Under the Vienna Conve~tione~ts are exempt from value-added tax registration
· Relations of ·1961 , diplomatic ~g r real· national , requirements of local government units. For
from all dues, taxes, persona O 1 . as long as a government entity sells, barters,
regional or municipal. exchanges, leases goods, properties or
renders services in the course of trad~ or
b'ect to the indirect business, it is required to register as a VAT
They are, neverth~less, su imally incorporated
taxes of a kind which are n~res (BIR Ruling No. taxpayer. A~cordingly, if the local
in the price of goods or servic . government falls within the provision of Sec.
065-96, June 18, 1996). 105 of the Tax Code _(i.e·., in the performance
 . . .I
242
of its proprietary functions) , it is required to
register as a VAT taxpayer; otherwise, it is
not (BIR Ruling No. 060-2000 dated
November 8, 2000) .
4. Non-Stock, Non-Profit Association
a. Not undertaking any taxable transaction -
exempt from VAT (MAMALA TEO, Reviewer,
supra at 499).
b. Engages in any taxable sale of goods or
services - liable to pay VAT (NIRC, Sec.
105).
It is exempt only from direct taxes such as
income tax, and this exemption cannot be
extended to indirect taxes like VAT. Thus, its
purchases of goods and services (as well as
importations of goods) from VAT registered
(or VAT registrable) suppliers are subject to
VAT (VAT Ruling No. 005-009 and 007-09,
April 22, 2009). '~
5. Importer ··' ·· · ,
Generally, it is the seller who si(all pay t e output
tax on his taxable sales. Howev t,. in case of -
importation, it shall be the importer who shall pay
VAT prior to the releas~ of th& good from the
custom_s territory. This is an exception to the
general rule requiring a salel:iefore V h' sfialloe--···-
incurred. ,<._, " · ·,
,-' _., . : - REQUI ITES FiE>R AXABILITY OF SALE
-NOTE: Altho~gh the a~tu t seller of g~~!~ the ·_
head off!ce in a foreign c untry, ~-:c~,nnot be
made hable for VAT - as the sate was 1 -
consummated outside the Philippines. N~ther is ,
a Philippine branch of a foreign corppration liable-,· •
for VAT as it is not the actual seller. 't,ence, vATf · .,_
is properly a~d legally du_e on the 1~ -buy ers:.··._
who are considered the importers. Since VAT on
~mportation was already paid by the local b~yers,
it should no longer be imposed on the hilippine .,
branch (Kanematsu Corporation, Manila Branch
v. CIR, CTA Case No. 4875, February 12, 1997) .
· exercise of profession in the Philippines
6. Subdivisions or VIiiage Homeowners
Associations, and Condominium
Corporation
Association dues, membership fees and other
assessments and charges by homeowners'
associations and condominiums established are
exempt from VAT (R.R. No. 13-2018, Sec. 2).
' - th e total amount of money or its equivalent which
YALU~ ADDED TAX
Taxation Law
VAT ON SALE OF
GOODS OR PROPERTIES
GOODS OR PROPERTIES
All tangible and intangible objects which are capable
of pecuniary estimation and shall include, among
others: (RP-EMT)
1. Beal properties held primarily for sale to
customers or held for lease in the ordinary course
of trade or business;
2. The right or privilege to use fatent, copyright,
design·or model, plan, secret formula or process,
goodwill, trademark, trade brand, or other like
property or right;
3. The right or privilege to use in the Philippines of
any industrial, commercial, or . scientific
gquiP.ment; ·
~- The right.or privilege to use Motion pictures films,
tapes, and discs; and _
5. Radio, ,, teJ~v ion, satellite -Iransmission and
cable televisiorn time (NIRC, Sec. 106 (A)(1) as
...., am nded b T~ AIN Law).
(
NOT~: The list s)not an exclusive list (/NGLES,
evl wer; s1:Jpra a{ ~19).
• · ....---
......,Of _ , lt;OODS 1 AND PERSONAL
, PROPERTIES' : nri 11:NT)
, - • \ •,"' -
1. / r~~~~goods or properties are for the use or
.,consum_etion Within the Philippines;
2,: ..T~ere . is an Actual or deem~d sale, barter or
.L~ exchange of ~oods_or personal properties for a
va uable cons1derat1on; .
., • \ at~ is ttot exemp_t from VAT und~r Sec. 109
... of the NIRC, special law, or international
agreement; and
4. The s~le is in the course of Irade or business or
(MAMALA TEO, Reviewer, supra at 507).
Tax Base an_d Ta~ Rate: Twelve percent (12%) of
the gross selling price or gross value in money of the
goods or properties sold, bartered or exchanged.
Such ta~ 1s to be paid by 'the seller or transferor
(NIRC, Sec. 106 (A) as amended by TRAIN Law).
NOTE: Transactions include barters, exchanges and
leases of goods or properties (NIRC, Sec. 105).
Gross Selling Price for Goods or Properties Other
than Real Property
!he pur?haser pays or is obligated to pay to the seller
in consideration of the sale, barter or exchange of th e
 . \ I
MEM:Q~y AID
San lleda lkwnt)' ColeQe of Law - RGCT a. Ope,atjons Cant.
goods or properties, excluding VAT. The excise tax,
if any, on such goods or properties shall form part of
the gross selling price (NIRC, Sec. 106 (A)(1) as
amended by TRAIN Law) .
If the VAT is not .billed separately, the selling price
stated in the sales document shall be deemed to be
inclusive of VAT (R.R. No. 16-2005, Sec. 4.106-4).
ALLOWABLE DEDUCTIONS
GROSS SELLING PRICE:
1. Sales discounts determined and granted at ttie
time of the sale as expressly indicated in the
invoice. . Discounts conditioned upon the
subsequent happening of an event or fulfillment
of certain conditions shall not be allowed as
deductions (R.R. No. 16-2005, Sec. 4. 106-9);
and
2. Sales returns and allowances granted where
proper credit or refund was made during the
month or quarter to the buyer for sales previously,
recorded as taxable sales (R.R. No. 1672005,
Sec. 4. 106-9).
Sales returns arise when customers return afl or
a portion of the goods that they purchased due to
wrong specifications, poor quality o_f . the
merchandise, or if erroneous merchandise was··
delivered (BET/CON, . HINA YON, IRENEO,
Fundamentals of Accounting (2015), p. 284) .
Sales allowances arise when the customet •i s,
willing to accept the goods despite • certain
defects in exchange for a price adjustme~,t or an
"allowance" granted by the seller (Id.) . , _.
-rl
VATONSALEOF~
PROPERTIES
REQUISITES FOR TAXABILITY OF SALE
OR EXCHANGE OR REAL PROPERTY:
2 selling price is based on the zonal value or ·
(SEP0 N) . d"
1. The seller executes a deed of ~le, i_nc1
dacion en pago barter or exchange, assign
transfer, or con~eyance, or merely contract to se 11
involvlng real property; . d in real estate
2. The seller or_transferor is fng~geestate dealer,
business either as a rea
developer, or lessor; . t d within
3. The real property is loca
Philippines· • f I or for
- ' . h Id primarily or sa e
4. The real property is e of his trade · or
lease in the Ordinary course
243
business,. or at least an Ordinary asset used in
the trade or business of the VAT taxpayer as an
incident to his VAT taxable activity; and
5. The sale is Not exempt from VAT under Sec. 109
of the NIRC, special law, or international
agreement binding upon the government of t~e
Philippines (MAMALA TEO, Reviewer, supra at
507).
FROM NOTE: T~ansmission of property to a trustee
shall not be subject to VAT if the property is to be
merely held in trust for _the trusfor and/or
beneficiary. However, if the property transferred
is one 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 1s a
· completed gift if the transferor divests him~elf
absolutely of control over the property, -,.e.,
irrevocable transfer of corpus and/or irrevocable
designation of beneficiary (R.R. No. 4-2007, Sec.
3).
Tax Base and Tax Rate: Twelve p~rcent (12o/~) of
the gross selling price or gross value in money of the
. goods or properties sold, bartered or exchanged.
Si.Jctl'tax is to be paid by the seller or transferor
(NIRC, Sec. 106 (A)) .
GROSS SELl!.ING PRICE IN CASE OF
REAL PROPERTY
It is whichever is higher between:
1. Ttie consideration stated in the sales document;
m .
Fair market value which shall mean the higher of
the fair market value as:
a. Determined by the Commissioner (zonal
/7 value); or _
b. Shown in schedule of values of the Provincial
and City Assessors/Real Property Tax
·oeclaration (real property tax declaration)
(R.R. No. 16-2005, Sec. 4.106-4).
If the VAT is not billed separately in the
document of sale, the selling price or the
consideration stated therein shall be deemed
to be inclusive of VAT. However, if the gross
market _value of the property, the zonal or
market value shall be deemed exclusiv·e 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 (R.R. No. 4-2007, Sec. .
4) .
the
Real Estate Dealer
- any person engaged in the business of buying;
developing, selling, exchanging real properties as
principal and holding himself out as a full or part-time
 VALUE ADDED TAX
244 Taxation Law

dealer in real estate (R.R. No. 16-2005, Sec. 4.106- 2. on a Deferred Payment Basis . th
3). _ A sale which has initial payments m e year
of sale exceeding 25% of the gross selling price.
SALE OF REAL PROPERTY COVERED
The transaction shall be treat~d as cash_ sale
BYVAT . which makes the entire selling pnce taxable mthe
1. Real properties held primarily for sale to month of the sale (R.R. No. 16-2005, Sec. 4.106-
customers or held for lease in the ordinary course
3).
of trade or business of the seller sh~II be subject
to VAT (CAPUNO, supra at !32); and NOTE: Output tax shall be recognized by_the
2. Sale of residential lot, residential house and lot, seller and input tax shall accrue t~ the buyer at
or other dwellings with gross selling price the time of the execution "Of the instrument of
exceeding the VAT-exempt sale under Sec. 109 sale. Payments subsequent to "initial payments"
(1 )(P} of NIRC . shall no longer be subje~t tQ output NAT
_ (MAMALA TEO, Reviewer, supra at 543).
The sale of parking lots in a condominium is a
separate and distinct transaction and is not
covered by the rules on threshold amount not . SALE ON INSTALLMENT PLAN V. SALE
being a residential lot, house & lot or a residential ON A DEFERRED PAYMENT
. . . BASIS
'
?1i~~tallril~nt Plan · Def;rred Plan
,'

.dwelling, thus, shoul_d be s_ubject . to VAT . ·

regardless of amount of selling price (R.;~• No. .... -,
13-2012, Sec. 2). .~ i j ,. : ::: ·.. ; '.="~~:· As 'to. Initial Payme~t~

MODES OF SALE OF ~E~~ _PRO~_ ERTY ,~.,,.._ .. "'lniti~l p~ym; .!lts, do not Initial payments
BY A "REAL ESTATE DEAL:ER\' .
~·-=-
.=.:....:...:_::..::=::...:.:=--=-=---:----::-
-=-~--···-·
-. --'i,, .,,-,,--.,....-'~
- -----
~t:eed ~.5 ~ "- of
gross selhng-pn~.
th e
·
exceed 25% of the
gross selling price .
1. On Installment Plan / : ......., ," -~ ·' - "' ·
- A sale which has initial payrn'J' ts i the year ·, ·
of sale not exceeding 25,~ of tfie gr~ss _se~i_ng _
price. I ., , ..,.9eJler , hall bS :i.Ubje t Transaction shall be
\, ,.., . to ' output VAJ1 on the treated· as cash sale
The real estate dealer l'l 411 pay 1\YAT :-cm, .. .-. lristallmeo~ pay e~tf whic·h makes the
installment payments, 1 iC udlng 0~~"IB---:-an .-- receivecf;-"1/lclutling · entire selling price
penalties, actually and/or fT1 uctivel race1veci,. I '. ,
") ntere J nd pe a~t1es taxable in the month of
by the seller (R.R. No. 16-20ut>, ec.'"4} ~ ?·· ·' •.~for 8 !~te payme t, . sale.
, J _:. .. • , ac_!u.ally and/or
Initial payments • •· ',/ ''-i. • ,.J, · ,. J x>nsfructjYely received .
- Payment or payments which the ' seller,;---:: . . · •
;:\, :~{~:-~:~~ ~Ai to Tax · ·
. . ..... ' ; . ·~ .. f -- .,- ,,. -., -· •

receives . before or upon 8 ecuti91), . f - the' I J

lnput/0.utput
instrument of sale and pay.me_ nti -~ 1gh. h -- . . • v· ,
expects or is scheduled to receIv m cash or ·\ ·.lr ~e ).~wer of the Output tax shall be. ·
property (other than the purchaser's ev1denc~ of l V . P. _opeffy can claim the . recognized by the
indebtedness), during the year when the sale or· - input tax in the same
seller and input tax
disposition of the real property was made. It period as the . seller. shall accrue to the
covers any down payment made and includes all · recognized the output ·buyer at the time of the
payments actually or - constructively received tax.
during the year of sale, the aggregate of which execution of the
determines the limit set by law (i.e., ~1. 500, 000 instrument of sale.
or n , 500, 000) (R.R. No. 16-2005, Sec. 4.106-
3). · As to Subsequent Payments

Payments that are Payments that ~.re

NOTE: lnitlal payments do not include the subsequent to "initial subsequent to "initial
amount of mortgage on the real property sold payments" shall be payments" • shall no
except when such mortgage exceeds the cost or subject to output VAT. longer be subject to
other basis of t~e property to the seller. Also
output VAT.
excluded from initial payments are notes or other
evidence of indebtedness Issued by the (R.R. No. 16-2005, SecA .106-3) .
purchaser to the seller at the time of the sale
(R.R. No. 16-2005, Sec. 4.106-3).
 \ I
MEM:Q~y AID
Sen Bede lkMnily Colege of law - RGCT 13w Center
NOTE: While the sale of low-cost housing units that
exceed the price ceiling of ~750, 000 per unit is not
eligible for VAT exemption for low-cost housing under
Sec. 109 (P_) of the Nl~C, the sale may still be exempt
from VAT 1f the selling price of. the property held
primarily for sale to customers does not exceed the
thresholds of ~1. 500, 000 on sale of residential lots,
and 192, 500, 000 for sale of house and lot and other·
residential dwellings pursuant to the same provisions
of Sec. 109 (P) of the NIRC. · PERSONS (TECHNICAL IMPORTATION)
The BIR held that while the selling price of
191,250,000 of the low-cost housing units sold by a
real estate company does not qualify under the
classification of a low-cost housing, the selling price
still meets the VAT-Exempt threshold of 193,199,200
(now 192,500,000] for sale of house and lot and other
residential dwellings under Sec. 109 (P). of the _NIRC.
Hence, the sale of the housing units with selling·price
of ~1,250,000 is exempt from VAT (BIR Ruling No.
285-2014, July 9, 2014). • VAT registered person. E has to pay for the VAT. E
VAT ON IMPORTATION
OF GOODS ,•
1
'
VAT ON IMPORTATION OF GOODS
The importation of goods herein contemplated refers
to importatio_n by any person, who may or may not be
engaged in trade or business in the Philippirles -(R.R:
No. 16-2005, Sec. 4.107-1 .(a)). - ·- · ... 2005, Sec. -1. 0,: 1 (b)).
Importation begins when the carrying vessel or
aircraft enters the jurisdiction of the Philippines_...Y!'!th · .. - IMP. OR"fA"TION
the intention to unlade therein. It is terminated upon
payment of duties, taxes, and other chprg~~ due
upon the articles, or secured be paid, at a port of
entry and the legal permit for withdrawal shall have
been granted (Sec. 1202, Tariff and Customs Code) ..
. .
Tax Base and Tax Rate: Twelve percent (12%)
based on:
1. Total value used by the BOC in determi~ing
tariff and customs duties, plus customs duties,
excise taxes, if any, and other charges, such tax
to be paid by the importer prior to the release _of
goods from the customs; or
2. Landed cost in case the valuation used by the
BOC is based on volume and quantity. La nd ed
cost consists of the invoice amount. cuStoms
duties freight insurance and other charges and
also ~xcise tax, if any (NIRC, Sec. 107 ·as
amended by TRAIN Law; R.R. No. - 16 2005 , Sec.
4.107-1 (a)) .
'
245
-
· The same rule applies to technical importation
of goods sold by a person located in a Special
Economic Zone to a customer located in a
customs territory (R.R. No. 16-2005, Sec. 4.107-
1 (a)).
I
SALE, TRANSFER OR EXCHANGE OF
IMPORTED GOODS BY TAX EXEMPT
In the case of goods imported into the Philippines by
VAT-exempt persons, entities ·or agencies which are
subsequently sold, transferred or exchanged in the
Philippines to non-exempt persons or entities, the
latter shall be considered the importers thereof, who
shall be· liable for the VAT due on such importation
(R.R. No. 16-2005, Sec. 4.107-1 (c)).
ILLUSTRATION: MD is a tax-exempt entity that
impo'rted goods, and then sµbsequently sold it to E, a
can claim the VAT paid as creditable input tax.
· · When and by whom paid:· The VAT on importation
' ·shall be paid by the importer prior to the -release of
~_,.,.•.s1,1ch- goods ram customs cus.tody (R.R. No. 16-
:· 2005, S.llc. 4.1Q7-1 (b)).
Importer .
- refers to, a ~y (~erson who brings goods into the
Philippines;; wt:i'etHer or not made in the course of his
. trade or b.JJsin~ss. it1includes pan-exempt persons or.
. ) entities ~\"'h9. acqui_re _tax-free imported goods from
• t exempf-:p~rson~. entities or agencies (R.R. No. 16- ·
- .-PERSONS . LIABLE TO VAT ON
The seller is the statutory taxpayer of VAT. The seller
is the one liable to ~eclare and pay the VAT to the
BIR. As an exception, the importer who is actually the
buyer of goods is the one liable to pay VAT
(CAPUNO, supra at 85).
VAT ON THE SALE OF
SERVICE AND USE OR
LEASE OF PROPERTIES
SALE OR EXCHANGE OF SERVICES
The performance of all kinds of services in the
Philippines for others for a fee, remuneration or
consideration whether in kind or in cash (NIRC Sec
108 (A) -as amended by TRAIN Law; R.R. N~. 16~
2005, Sec. 4.108-2).
 '
246
. VALUE ADDED -TAX
· Taxation Law

LEASE OF PROPERTIES · Except:

1. Those amounts earmarked for payment to
All forms of property for lease, whether real or
unrelated third party; or
personal, are liable to VAT except when the gross_
2. Amounts received as reimbursement for
annual sales do not exceed the threshold . It shall be
advanced payment on behalf of another which do
. subject to VAT irrespective of the place where the
not redound to the benefit of the payor
contract or lease or licensing agreement was
(MAMALA TEO, Reviewer, supra at 545).
executed if the property is leased or used in the
Philippines (INGLES, Reviewer, supra at 322) .
Payment to Unrelated Third Party
- payment made to settle an obligation ·of another
REQUISITES FOR TAXABILITY: (SPCVN) person, which obligation is evidenced by the sales
1. There is a §.ale or exchange of service or lease invoice/official receipt issued by said third party to the
or use of property enumerated in the law or other obligor/debtor (e.g. , customer or client of the payor of
similar services; the obligation) (Id.) .
2. The service is ferformed or to be performed in
the Philippines, and in case of lease, property Advance Payment
leased or used must be located in the Philippines - made on behalf of another if the same is paid to a •·
(place where the contract of le~se or the third party for a present or future obligation of said
licensing agreement was executed is irrelevant); another party, which obligation is eviden_ced by a
3. The service is in the ~ourse of the taxpayer's sales - invoice/official receipt issued by the
trade or business or profession (excepJ ·n h'e obligee/credifor to the obligor/debtor (i.e., the
case of services done in the Philippines dpne by 1 ; aforementioned "another party") for the sale of goods
a non-resident person); • · .... qr se . ices by t e former to the latter (MAMALA TE~.
4. The service is for a Valuabl~ CQnsideration""' Revrewe , UP.ta t 545-546).
actually or constructivelyreceived, an ~. . - • -
5. The service is Not exemp uncl~r the NIRC, 4,nrelated Pa"rty "
special law or internation agreement ::1 :-?--shall not incl_ ~ e ta ayer's employees, partners,
(MAMALA TEO, Reviewer, supra at 546). .• '. affiliates (parent Jslil •
idiary a~d other relat~d
. .. -,--• . companies), re allv~ y consanguinity or affinity
If any of the above essentiaLrequ1s1tes js not met, . . within the 4th civil·c:legree, and trust fund where the
the t_ransaction is e_xempt from value added ta~ . :. .
'taxp~yer ~ the truster, ~ stee or beneficiary, ever, if
but 1t may be subJect to .other p~rce tage tax :-- :covered1by,an agreeme1 t to the contrary (Id. at 546).
(MAMALATEO, Reviewer, s wa at\546) . - , - --_-· , / / ,.._.,...-
( ) . y;_, ':' I .'CONSfRUCTIVE'RECEIPT
NOTE: The place where the service 1s perforn;ied i . . .
determines the jurisdiction to impose the valpe I 0 9~ rs ·1 w~e n the money ·cons1derat1on or its
added tax also known as the situ !'Of-service J!Q_uiva(ent is placed at the control of the person who
principle.' The place of payq,ent is immater[ili L ·,, Y~~tterect,,the s~rvice without restric~ions by the payor
(Id at 522) ,- · - ---~e.g., tr~po fJ banks made available to seller of
• _ ~ , ) -: • r se ioe~ r et-off of seller of services' debt with the
Tax Base and Tax Rate: Twelve percent (1 2%) of ;. , -~ , n~enf of -the latter as payment for services
the gross receipts derived from the·sale or exchange _ rendered to the former) (R.R. No. 16-2005, Sec.
of services, including the use or lease of properties 4.108-4) ..
(NIRC, Sec. 108 as amended by TRAIN La_w) .
Amounts are constructively received when:
GROSS RECEIPTS 1. Credited to the taxpayer's account;
Total amount of money or its equivalent actually or 2. Set apart for the taxpayer; or
constructively received during the taxable period_ for 3. Otherwise made available so that the taxpaye_r
the services performed or to be performed for another may draw upon it at any time, or draw upon 11
person, excluding VAT representing: when notice of intention to withdraw has been
1. Payments on the contract price, compensation, given (R.R. No. 16-2005, Sec. 4.108-4).
service fee, rental or royalty;
2. The amount charged for materials supplied with Actual or constructive receipt of the contract price,
the services; and compensation, remuneration or fee -makes the seller
3. Deposits applied as payments for services of service liable to VAT, even if the service is yet to
rendered and advance payments (R.R. No. 16- be performed by him (MA MALA TEO, Rev/ewer,
supra at 523).
2005, Sec. 4.108-4).
 \ I
MEM:Q~Y AID
s., B e d e ~ ';o11eoe of Law - RGCT Bar Ope,ationa Center
SALE OR EXCHANGE OF SERVICES
INCLUDES SERVICES PERFORMED OR
RENDERED BY:
1. Construction and service contractors;
2. Stock, real estate, commercial, customs and
immigrati_on brokers; and
3. Lessors-of property, whether personal or real
(NIRC, _Sec. 108 as amended by TRAIN Law).
Lease of property shall be subject to VAT
regardless of the place where the contract of
lease or licensing agreement was executed if the
property leased or used is located in the
Philippines (Destination Principle) (R.R. No.
16-2005, Sec. 4.108-3 (a)).
A non-resident person who derives ·rental income
from lease of tangible property physically
situated in the Philippines or receives royalty for
granting the right to use in the Philippines of an
intangible person · is a taxabte person
(MAMALA tEO, Reviewer, supra at 523).
. '
The · licensee shall be responsible for Jti~ ·
paym~nt of VAT on such rentals and/or royal~e~ ·
in behalf of the non-resident foreign corpC?.tat1on ,;;
or owner (R.R. No. 16-2005, Sec. 4.10§1-3 (a)). : . _
.[1 ,f .
In a lease contract, the ·advance pay[Tl~"! ~y,the'
lessee may be: - , 1·' - :. ·
a. A loan to the lessor from the -les~e_ e;
b. An option money for the •~fOP.eqy:tJ., . ,
c. A security deposit . to insure _tt,e. faithful
perfonnance of certain o~ligat!<rms_ of the
· lessee to the lessor; or - corporation in exchange for share~ of the_latter is
d.- Prepaid rental · (R.R. No. 1~ 2 5, · Sec. oo
4.108-3 (a)). 1T ; ._.·;
.. . ,
If the advance payme.nt is either of (a) ·_(b) o~ (c)
above such advance payment is not sub~ ct to
VAT b~cause (a), {b) ~r (c) is ~ott r8~fi~~~d~:~
as actual or constructive receip ,a
(R.R. No. 16-2005, Sec. 4.108-3 (a)).
·t in lease contracts are
However, security depost.~ tat at the time
subject to VAT when apphed todren ce payment
of its application. If th e a van ch ayment
constitutes a prepaid rental_, th: s~onih when
1
is taxable to the. lessor m counting method
th
received, irrespective of e a~o _2005, Sec.
employed by the lessor (R.R. · 16
4.108-3 (a)).
. requirement of the
T~e receipt of a deposi~ as a form of security or
seller from his tenants m •~e e a sale and the
collateral does not con st,tut art of the lessor's
amount thereof does n?t form p on forfeiture of
gross selling price. It ts only failure to fulfill
such deposit due to the cu stom
· ' 247
certain conditions creating a taxable event that
will justify inclusion of the d~posit and tax base
(VAT Ruling No. 276-88) .
4. Warehousing services;
5. Lessors or distributors of cinematographic films ;-
6. Persons engaged in · milling, processing,
manufacturing or repacking goods for others;
7. Proprietors, operators, or keepers ·of hotels,
motels, rest houses, pension houses, inns,
resorts;
8. Proprietors· or operators of restaurants,
refreshment parlors, . cafes and other eating
places,_including clubs and caterers;
The gross receipts of recreational clubs including
but not limited to membership fees, assessment
dues, rental income, and se,vice fees are subject
to VAT.
9. Dealers iri securities;
Dealer in Securities .
.. ,.. - means · merchant of stock or securities,
..,
whether an individual, partnership or corporation ,
with an established place of business, regularly
engaged l n the purchase of securities and their
resale • o customers (R.R. No. 16-2005, Sec.
4.108-3 (g)) .
'·
For Dealer in Securities, the term ,•gross receipts"
means gross selling price less cost of the
· securifies sold (R.R: No. 16-2005, Sec. 4.108-3
(g)).
The transfer of assets of a corporation to another -
subject to VAT. The transfer of assets is not
among the transactions enu'}'lerated under-Sec. ·
109 of the NIRC which is exempt from VAT .
Tax exemptions are construed strictly against the •
taxpayer and liberally in favor of the taxing
authority; he who claims an exemption must be
able to justify its claim by the clearest grant of
statute. No,where in Sec: 109 of the NIRC does it
state that the transfer 9f .assets in exchange for ·
shares is exempt from VAT. Hence, in the
absence of legal basis to exempt from VAT the
transfer of assets by a cprporation to another
corporation in exchange for shares, the same
should be subject to VAT (BIR Ruling No. 424-
2014, Octobe( 24, 2014) .
10. Lending investors;
A "lending investor" is a person other than a
bank, non-bank financial intennediary, finance
company . and other financial intermediary not
performing quasi-banking functions who makes a
practice of lending money for himself or others at
 VALUE ADDED.TAX
Taxation Law

interest (MAMALATEO, Reviewer, supra at 526) . be subject to 12% VAT on their gross re'ceipts
(R.R. No. 13-2018, Sec. 2); ·
REAS.ON: Services of banks, non-bank financial
intermediaries performing quasi-banking 14. Franchise grantees of-electric utilities, telepho'ne
functions, and other non-bank financial and telegraph, radio and/or television
intermediaries are VAT-exempt transactions broadcasting and all other franchise grantees
(NIRC, Sec. 109 (V)) . except those under Sec. 119 of the NIRC; .

The act of extending cash advances with interest
to related parties is. a form of service for a.fee
which is cover~d by the.provisions of Sec. 108 of
'the NIRC that sh_ould be subject t0 VAT. Whether.
a profit is realized or not is immaterial. As I0!19 as
there is financial assistance or service for a fee,
remuneration or consideration, such service
rendered is subject to . VAT (Waterfront
Philippines, Inc. v. Commissioner of Internal
Revenue, CTA EB Case No. 1070, December 4,
2014).
11 . Transportation contractors -on their transpd of -
NOTE: Franchise grantees of radio and/or
television broadcasting whose annual gross
receipts of the preceding year do not ·exceed
1910, 000, 000, and franchise grantees of gas and
water utilities are riot subject to VAT (R.R. No.
16-2005, Sec. 4.108-3 (h)) .
15. Non-life insurance companies (except their crop
insurances) including surety, fidelity, indemnity
and bonding companies; and
The gross receipts _from non-life insurance
? ¢ompanies shall mean total premiums-collected,
• {

goods or cargoes, including R8 ons who ' j\ w~eth..er paid in money, notes, . credits or any
transport goods or cargoes for hire- and other . °VSJ:1bstffu~ for mQney (R.R. No. 16-2005, Se~.
domestic common carriers by~lan elatiV'e to '4.10IJ.J (il>--.. . _ .
their transport of goods or cargoe§;.l .,...,---- --. ...,, ',.- · ·
- f J "' · ·", ., _,_. Non~life.~ 're.Jtnsurance premiums are not
12: Common carriers by air nd ' elati e to their ., •,. subj~ct.to\V~T(R~R No. 4-2007, Sec. 10).
transport o~ passen~~rs! goods ..or cargoes fro~ . , . l . "I,, ( ·'"'1 · .
one pl~?8 _m the Ph1hpJ;?me~ to another p1ace·m ------ Insurance and <\reinsurance commissions,
the Ph1hppmes; i L.., f l · . · . . ·, , _whet~er life o~. on~llfe, -are subject to VAT (R.R.
. \_ '- • -~·:•.: No. 4-2007, Sec .1pf .
, .. ,_. , 'Jfr) ,
COMMON .
CARRIER TRANSPORTATION TAX ....:7 --- 1p~Sifni!af;ervices regpi rd less of whether or not the
; • , :/, .. P~(fQ_r~anc~ thereof calls for the exercise or use
By air or sea Domestic (Phil to Phil) " 12%., I ·_, _}'>f'th_e physical or p,ental faculties (R.R. No. 16-
(NIRC, Secs. .Passengers, goods or VA'P 1 ~,,.,.29os, Sec. 4.108-'2).
108 (A) and cargoes. ( .,'r ,-F -::- '>.. > / I
(8)(6) and -~ , i.·~..:T OLLWAY OJ:>ERATORS
118). International (Phil ' @,0% --- When, a tollway operator takes a toll fee from a
for~ign country) • .... '-V'iT i 'l mot?rist, th~. f~e is in effect for the latter's.use of the
Passengers, goods or .1.. t~llway fac1ht1es over which the operator enjoys
cargoes. · - - . private proprietary rights that its contract arid the law
recognize (Diaz v. Secretary' of Finance, G.R. No.
International 3% 193007, July 19, 2011) . . . .
(doing business in the OPT
Philippiaes) Tollway Operators are Franchise Grantees
Cargoes. Not only do tollway operators conie under the broad
term _"all kinds of services," they also come under the
By land Domestic (Phil to Phil 12% specific class described in Section 108 as "all other
(NIRC, Secs. .Goods or cargoes. VAT
108 and 117). · franchise grantees" who are subject to VAT, "except _
those under Section 119 of this Code." (Diaz v.
Domestic (Phil to Phil 3% Secretary of Finance, supra). ·
Passengers. OPT
Tollway operator~ are franchise grantees and they ~o
not belong. _t_o exceptions (the low-income radio
13. Sale of electricity by generation, transmission by and/or ~elev1s1on broadcasting companies with ~ross
any entity including the National Grid Corporation annual incomes of less than P10 million and gas and
water utilities) that Section 119 ·spares trom 1h0
of the Philippines (NGCP), and distribution
payment of VAT. The word "franchise" broadly covers
companies including electric cooperatives shall
government grants of a special right to do an act or
 \ I
MEM:Q~Y -AID
SIi\ Beda UrwenRy_co1ege flf - RGCT Bar 0peialiona Center
series of acts of public con~rn (Diaz v. Secretaiy of
Finance, G.R. No. 193007, July 19, 2011) .
TOLL FEES ARE NOT TAXES
On the a~gumeht that a toll fee is a "user's tax" and to
impose VAT pn toll fees is tantamount to taxing a tax,
the Court has held that tollway fees are not taxes.
They are not assessed and collected.by the BIR and
do not go to the general coffers of the government.
Toll fees are collected by private tollway operators as
reimbursement for the costs and expenses incurred
in the construction, maintenance and operation of the
tollways_, as wen · as to assure them a reasonable
margin of income. (Diaz v. Secretary of Finance,
supra). - -.
VAT ON TOLLWAY OPERATORS IS A
TAX ON THE TOLLWAY OPERATOR
The .seller r~mains directly and legally liable for
payment of the VAT, but the buyer bears its burden
since the amount of VAT paid by the former is added ._ · 1'
to the selling price. Orice shifted, the VAT ceases to . \
be a tax and simply becomes part of the cost that the · ··~
buyer must pay in order to purchase the good, : • :·~
property or service. Consequently, VAT on tollway \t: ~· is only )jmited to the gross receipts derived by
operations is not really a tax on the tollway user, but
on the tollway operator. The seller of services; who in,.
this case is the tollway operator, is the p_erson liabl~
for VAT. The latter merely shifts the burden ibf\/AT to
the tollway user as part of the toll fees' (Diaz v.
· Secretary of Finance, supra). · com~onen\ to cinema/theater operaiors or
The phrase "sale or exchange of -~entice~" sti~II_
likewise include: · "'· · . .. ~:
• 1. ·The lease or the use of or the right or privjlege to
use any copyright, patent, _design or m~d.el_, plan,
secret formula or process, goodwill, -tradell]ark,
trade brand or other like property or \right; ', •
Royalty payments to non-residents are subject to
12% withholding value-added tax (WVAT). The
resident payor is required to withhold 12% _VAT
. before paying the .royalties to the non-resident
payee (BIR Ruling No. /TAD 02-2012, January
10, 2012) .
Royalties paid for the use of trademarks are
generally subject to VAT. Ho~ever, whe~ th e
incom,e payor is a PEZA-reg1stered entity . to
whom VAT may not be passed on, the royalties
shall be exempt from VAT (BIR Ruling No. /TAD
365-2012, October 24, 2012).
2. The lease or the use of, or the right t~ use any
industrial, commercial, or scient~fic_e~uipm~nt;
3. The supply of scientific, ~echnica~ 1~du~tna\ or
commercial knowledge or mforma!ion , .
4. The'supply of any assistance that 1s 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 (2) or any such knowledge or
information as is mentioned·in subparagraph (3); ·
5. The supply of services by a non~resident person
or his employee in connection with the use of
property or rights belonging to, or the installation
or operation of any brand, machinery or other
apparatus purchased from such nonresident
person; .
6. The . supply of technical advice, assistance or
services rendered in connection with technical
management or administration of any scientific,
industrial or commercial undertakii:ig, .venture,
. project or scheme; •.
7. The lease of motion picture films, films, tapes,
·and ·discs; and
NOTE: Cinema/theater operators may not refuse
to shoulder the VAT component from their lease
· of cinematograp~ic films. The exemption from
VAT of cinema/theater operators or proprietors,
which was upheld by the Supreme_ Court
(Commissioner of Internal Revenue v. SM Prime
Holdings, G.R. No. 183505, February 26, 2010) ,
_51.,. , , cinerna7tbeater operators or proprietors from
admissio ickets and does not extend to the
purchase or lease of cinematographic films.
Hence, , owners , producers, and lessors of
cinematograpl\c films may pass on the VAT
proprietors on the sale or _ lease of
cinernatograpbicfilms (BIR Ruling No. 047-2013,
January 24, 2013) . ·
•8. The lease or the use of, or the right to use, radio ,
..:;:,r television , satellite _ transmission and cable
television time (R.R. No. 16-2005, Sec. 4. t'oB-2).
>,
VAT ON PROFESSION~LS
Professional, classified as self-employed, refers to an
individual or a group, practicing his or their profession
or calling, with or w_ithout license under a regulatory
board or body. _Apart from applicable income taxes
and withholding taxes, he or they are also subject to
VAT (R.M.C. No. 64-2012, October 31, 2012) .
NOTE: The gross annual receipts must exceed the
~3. 000, 000 threshold to be held liable to VAT-
otherwise it is subject to 3% other percentage ta;
under Sec. 109(1 )(BB). ·
'
NOTE: Services rendered by doctors and lawyers
were previously VAT-:.exernpt under RA. No. 9238 . .
These exemptions have been deleted under RA No.
9337 and made VATable effective November 1
2005. Professionals now covered by VAT pursuant t~
R.A. No. 9337 are required to update their
registration (R.M.C. No. 62-2005, October 18, 2005).
 . ..'

250 VALUE ADDED TAX

.Taxation Law

A professional practicing his profession is
subject to VAT if:
1. There is no employer-employee relationship
between him and the person to whom he renders
professional service; and
2. His gross receipts for the next twelve (12) months
- exceed t-3,000,000 (R.R. No. 13-2018).
NOTE: If a professional, aside from the practice
of his profession, also derives revenue from other
lines of business which are otherwise subject to
VAT, _the same shall be combined for purposes
of determining whether the threshold has been
exceeded (R.R. No. 16-2005, Sec. 4.108-3 (v)) .
or properties originally intended for sale or for use
. in the course of business (i.e., when a VAT-
registered person withdraws goods from his
business for his personal use);
The donation by a VAT-registered person of ifs
ord_inary assets is subject to _VAT pursuant to
Sec. 4.106-7 of R.R. No. 16-05, as amended, the
same being considered a transaction deemed .
sale. · ·
ILLUSTRATION:
A Co., a domestic real estate dealer, donated 23
residential lots with the improvements th~reon to

NOTE: · Self-employed
. individuals and ·
B Co,, a non-stock non-profit organization
established for charitable purposes and -
professionals availing of the 8% tax on gross · registered with the Philippine Council for NGO
~ales and/or receipts and other non-operating Certification (PCNC).
income, under Sec. 24 of NIRC shall be exempt
from the payment of. 12% VAT (R.R. No. 13- 2. Qistribution or transfer to :
2018, Sec. 2). ,," . "' a:- Shareholders or fnvestors as share in the
1
"• , , : ', I ;- pr_ofit.5 of a VAT-registered person (Properfy
VAT ON HEALTH MAINTENANCE\ ( ~. ·--..:, _>i I Divi9ehds); or
ORGANIZATIONS : ,, b-;.. Creditors in payment of a debt or obligation;
-;-;-:~;-::;-:--;---~--:--.;.~~::......!•:.....;...._:_
· _.,,__ . )
Health Maintenance Organizations / · ..-- ---.. •· ,.. · ·· · ·
- entities, organized in acfur aapce {vith the ·• ;• ILL:l:ISTRAT~O_N!
· . ,
1
provisions of the Corporation Code bf the Philippines , ·t Somk o~ tbe ,,mP.,?,rts of JGU Corporation are 100
and licensed by the appropriate gov.ernmer t.agency.,.._ - - -~ars_ hrch -~re .r11ten~ed to b~ sold locally. The
which arranges for coverage puf§sfgnate~ ma(laged . " carssbare curren,!!y"_~~rng sold rn ~he local market
care services needed by plan holclers/mem bers for . _ at~ t 0, OOO fPer unrt. Twenty unrts of these cars
fixed prepaid membership fees"'aQd f9i:.,a \ pecified - . · ' '-".er~ ... decla~ . ,s property dividends and
-period o!time (R.R. No. 16-20,0;.,sec.\t ,108-3..(k)). _.::_ .. ~ n?,9tE:d t~ 1ts stoc holders.
C..Jt ! (' f -'-"..,...,--""

HM O's gross receipts shall be the ~total" ain'ount of ', : Th~ 9\Slrib~tion of
20 units is deemed,a sale and
money or its equivalent representing he se'rvice fee ! . ~ub!ett to A~ 2% VAT on the taxable base of ~500,
actually or constructively received during the taxa ble · · ·. ·, OOO pe~_unit. · /
period for the services performed or to be ~ rformed , , ., -· • ,.'.; ./ . . · . .
for another person, excluding the value.!ad.ded ta5c ·_ 3 - ~~n~1gi;i~nts of good~ 1f..actual sale Is not made
(R.R. No. 16-2005, Sec. 4.108-3 (k)) . . " _· , " - ' · • - W!thm 9,0
,;d ys following the date such goods
· ,.: ·wer~ consigned; and
The amounts earmarked and eventually paid by • · .,,..,.. •
MEDICARD to the medical service providers do not - -""NOTE: Consigned goods physically returned by
form . part of gross receipts for VAT purposes the .consignee within the 60-day period are not
(Med,card PHL, Inc. v. Commissioner of Internal deemed sold .
Revenue, G.R.No. 222743,Aprll5, 2017) .
4. Retirement from or cessation of business with
respect to all goods on hand whether capital
. goods, stock-in-trade, supplies ~r materials as of
TRANSACTIONS . . th e date of such retirement or cessation.
· a. _ Change of ownership of a business when:
DEEMED SALE 1. Singl~ proprietorship incorporates; or
ii. Proprietor of single proprietorship sells
his business.
b. Dissolution of a partnership and creation of a
THE FOLLOWING ARE TRANSACTIONS new partnership which takes over the
DEEMED SALES: (TDCR) (NIRC, SEC. business (NIRC, Sec. 106(8); R.R. No. 16·
106 (B)).' 2005, Sec. 4.106-7).
1. Iransfer, use, consumption of goods or
properties not in the course of business of goods
 \ I .
MEM:Q~Y -AID
s., Seda lkMl1ity Colege of Law - RGCT Ber Clperatic,ns Center
ILLUSTRATION:
A_ Co., a . domestic_ realty corporation, was
dissolved via shortening of its corporate term. It
executed a Deed o_f Assignment to transfer a
parcel of land to ,ts stockholder M X
liquidating dividend. Is the. transfe~ a ~d- ' ads
. ,, eeme
sale transac t,on ,or VAT purposes?
YES. U_nder Sec. 106 (8)(4 ) of the NIRC, ·
t~nsactions de~med sale include the retirement
~om or .cessation of business, with respect to
mv_entones of taxable goods existing as of such
retirement and cessation. Thus, the conveyance
?f th e real property as liquidating dividend is a
deemed sale transaction" subject to the 120/4
VAT (BIR Ruling No. 363-2014 dated Septembe;
22, 2014).
Tax Base and Tax Rate: Twelve percent (12%) of
t~e market value of the goods deemed sold as of the
time of the occurrence of the transactions
enumerated in (1), (2), and (3) above. However in
(4) retirement or cessation of business, tax b~se
· shall be the acquisition cost or the current market
price of the goods or properties, whichever is
lower (R.R. No. 16-2005, Sec. 4.106-_7) .
In the case of a sale where the gross selling price is
unreasonably lower than the fair market value, the
actual market value shall be the tax base (R.R. N d.
16-2005, Sec. 4.106-7). ,,
REASON: The inventory left at the retirement of
business is deemed sold for VAT• purposes because1
it gave rise to Input VAT when acqijired which may
have been claimed by the VAT registered person·as
input VAT credit. To recapture the inputtax tt,at was
claimed by the buyer in the month of the purchase, · . '
the inventory left . shall be considered •. sold
(VALENCIA & ROXAS, Transfer and Bus~ness
Taxation (2016), p. 332 {hereinafter VALENCIA &
ROXAS]).
NOTE: Sec. 106 (B) of NIRC -enumerates
transactio_ns deem~d sale of goods and properties
and not of services.
While the subject sales transaction inv?lvin~ the fi~e
vessels may not be considered a "sale env1sag~d ~n
Sec. 99 (now Sec. 106 (B)) of the Tax C~de, w~1ch 1s
a general provision, it is, and it should be, considered
a "sale" within the purview of Sec. 100(b) (now
Sec.106 (B)) of the Tax- Code as implemented by
Sec. 4 of R.R. No. 5-87, ..yhich enumerates the
transactions "deemed sale" (CIR v. CTA and
Magsaysay Lines, et.al., C.A.-G.R. SP No. 29994,
March 11, 1997) .
CHANGE OR CESSATION
OFSTATUSASVAT-
REGISTERED PERSON
SUBJECT TO 12% OUTPUT VAT,: .
The 12% VAT shall ~pply to goods or properties
existing as of the occurrence of the following :
1. Change of business activity from VAT taxable
status to VAT-exempt status; or
An example is a VAT-registered person engaged
in a taxable activity like a whoi'esaler or a retailer
who decides to discontinue such activity and
engages instead in life insurance business or in
any other business not subject to VAT. ·
- 2. Approval of a request for cancellation of VAT
registration due to:
a. Reversion to e~empt status;
b. Desire to revert to exempt status after lapse
·of. 3 :consecutive years from the time of
regis(_r,tion by a ·person who voluntarily
regi~t red despite being exempt under Sec.
109(2) o the NIRC; or
c. Faifure to meet the specific threshold
(1'3,000,000) by one who commencecl
busini ss with the expectation of reaching the
r~quired gross sales or receipts during the
first 12 months of operation (R.R. No. 16-
2005, Sec. 4.106-8).
'NQT·SUBJECT TO 12% OUTPUT VAT
The 12% VAT shall not apply to goods or properties
which are originally intended for sale or for use in the
co~rse of business existing as of the occurrence of
the following : (CTM)
1. Cha~g~- of ~ontrol of a corporation by the
acqu1sIt1on of the controlling interest of such
corporation by another.stockhol~er (individual or
corporate) or group of stockholders.
The goods or properties used in the business
(including those held for lease) or those
comprising the stock in trade of the corporation
having a change in corporate control will not be
considered ~old, bartered, or exchanged despite
the change m the ownership interest in the said
corporation since the.same corporation still owns
them .
~XCE_PTIONS: Exchange of goods or properties
mcludmg the real· estate properties used in
business or held for sale or for lease by the

transferor, for shares of stocks, whether resulting
in corporate control or not, is subject to VAT.
ILLUSTRATION:
ABC Corp. (transferee) is a merchandising
concern and has an inventory of goods for sale
amounting to 1'1,000,000. DEF Corp (transferor),
a real estate developer, exchanged its real
properties for the shares of stock of ABC Corp.
resulting in the acquisition of corporate control.
The inventory of ABC Corp. is not subject to
output tax despite c~ange in corporate control
because the same corporation s~ill owns them.
This is in recognition of the separate and distinct
personality of the corporation from its
stockholders. However, the exchange of real
properties held for sale or lease by DEF Corp.,
for the _shares of stock of ABC Corp., whether it
would result in corporate control or not, is subject
to VAT. •.
2. Change in Irade or corporate·• name O the . . . mtern~I revepue taxes, subject to the provisions of
business; and _,_
3. Merger or consolidation of cd'rpo(atio~s~·
• '"' V /
The unused input t bf th·e ~issolved
corporation, as of th date of rrerger or
consolidation, shall be sorbed by the surviving
corporation (R.R. No. 116-2005, Sec. 4.106-8;
-R.R. No. 10-2011, Sec. 2) .• ,,-i __ ..\
-~~;"-· - - - ,
r---~ - _ _ _ __;,_,,~j .;.
_ ---. · INPUt :·TAX 1ATTRIBUTABLE TO ZERO-
ZERO-RATED SALESOF . ...RATED' SALES OF VAT-REGISTERED
VAT REGISTERED - ·.- - .. PERSON MAY, AT HIS OPTION, BE:
PERSONS ' ,~ ,~ ,.:. ,1.; Refu~ded; or .1
A zero-rated sale by a VAT-registered person is a
taxabl~ transaction for VAT purposes, but shall not
result in any output tax. However the input tax on
purchases of goods, properties or ~ervices related to
such zero-rated sale shall be available as tax credit
or refund (R.R. No. 16-2005 Secs 4 106 5 d
4.108-5). ' · · • an
The pu~po~e of applying 0% rate on a taxable
transaction 1s to exempt the transaction completely
fr~m VAT previously collected on purchases. This
arises because the sales of the VAT-registered seller
are subject to 0% rate, while the input taxes on his
purchases passed on to him by the VAT-registered
suppliers may be recovered back from the BIR in the
form of tax refunds or credits (MAMALA TEO ,
Rf]viewer, supra at 573) . ' ownership of the goods so exported, P~ 1d
'I
VALUE ADDED TAX
Taxation Law
ILLUSTRATION:
X is a VAT-registered business, engaged in.export of
locally made products. During the taxable year, its
total export sales all denominated in foreign currency
is equivalent to the value of 1'500,000. Its total input
tax payments for purchases and 'Utilized services all
in connection with the conduct of business amounted
to 1'36,000.
If X has no other transactions which will give rise to
business tax liability, its tax crediUrefund would be as
follows:
Export Sale-Output tax (1'500,000 x 0%) I' 0
Less: Creditable Input Tax · 36,000
Net VAT Refundable I' 36,000
NOTE: The seller must be a VAT-registered person
to make his export sales zero-rated. Any Input VAT
attributable to the purchase of capital goods or to
zero rated sales by a VAT-registered person may at
1
t - his 1option be refunded or credited against other
h"e· NI C,. S~c,, 112 (VALENCIA & RO,XAS, supra at
- 284). •
..,,,,~ ,
Export s~le by )i ,r10n-VAT registered entity is a VAT-
exempttransaction. Untler Sec. 109 of the Tax Code,
--a VA:r-exempt saie ·ls'n t subject to VAT (output tax)
and ,the shller/sur:1pttel'is ot allowed any tax credit of
_ YAT (inp t tax) o I R..l.l.l,!¥1BSes related to such exempt
'. transactions:-(TA AG & ARCIA supra at 276).
- __ _j 5' ~ I I .
I
-
1
1
2. Credited against other internal revenue taxes,
subiect,t the provisions of Sec. -112 (R.M.C. No.
~~013, August 23, 2013; NIRC, Sec. 110(8)).
KINDS OF ZERO-RATED SALES:
AS ,TO OBJECT OF THE SALE
1. Zero-Rated Sales of Goods or Properties:
(SRROII) (NIRC, Sec. 106 (A)(2)). .
The following sales by VAT-registered person§
shall be subject -to zero percent (0%) VAT r~
{Sec. 4.106-5, RR No. 16-2005, as amended.])'.
RR No. 13-2018) ·
a. Export Sales
i. Sale an?. actual ~hipment of goods from
!he Ph1hppines to a foreign country
irrespective of any shipping arrangement
that. may be agreed upon which maY
influence or determine the transfer ?'
for l_
n acceptable foreign currency or ,ts
equivalent in goods or services, and
 \ I
MEM:Q~y AID
Sin Seda lkMflity Colega otlaw. ROCT Bar 0paadgna 0...
accounted· for in accordance with the
fl.lies and regulations of the BSP· . Bureau of Internal Revenue (BIR)
ii. Sale . _of Raw materials or packaging
ma~nals to a nonresident buyer for
dehve~ to resident local export-oriented
enterpn~e to be_~sect in manufacturing,
p~s~mg, packing, or repacking in the
Ph~hppmes of the ~aid buyer's goods,
wh1~h must be paid for in acceptable
foreign currency and accounted for in
accord~nce . with . the rules and
regulations of BSP;
iii. Sale of ,Baw materials or packaging
materials to an export-oriented
enterprise;
iv· Export~riented Enterprise · _ Any
enterpnse whose export sales exceed
70% of the total.annual production (R.R.
No. 13-2018, Sec. 2) ;
v. ~ransactions "considered export sales
under E.O. No. 226" (Qmnibus
Investment . Code of 1987) and other
special laws; and
Considered Export Sales (under E.O.
No. 226) shall mean the Ph!lippine Port
Free On Board (FOB) value determined
from invoices, bills of lading, and other .
commercial documents of export
products exported . directly, ' by a
registered export proaucer. or the net
selling price of export products sold by a
registered export producer to another
export producer, or to an export trader :
that subsequently exports the same.
' .
GENERAL RULE: Sales of' export
products to another producer or to ·an
export trader shall only be deemed
export sales when actually exported by
the latter, as evidenced by landing
certificates or similar commercial
documents.
EXCEPTION: Without actual
exportation, the following shall be
considered constructively exported:
1.) sales to bonded manufact~ring
warehouses -of export-oriented
manufacturers;
2.) sales to export processing zones;
3.) sales to registered export traders
operating boflded trad_ing
warehouses supplying raw materials
in the manufacture of export
products under guidelines to be set
by the Board in consultation with the
and the Bureau ·o f Customs (BOC);
and
4 .) sales to foreign 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. -
NOTE~:
1.} Export sales of registered export
traders shall include commission
income.
2.} Exportation of, goods on
consignment shall not be deemed
export sales until the export
products consigned are in fact
sold by the consignee.·
3.) Sales of goods, properties or
services made by a VAT-registered
supplier to a BO1-registered
manufacturer/producer . whose
products are 100% exported are
considered export.sales.
A certification to this effect must be ·
issued by the Board of Investment
(BO1) which shall be good for one
year unless subsequently reissued
by the BO1.
· vi. Sale of goods, supplies, equipment and
fuel to persons engaged in !ntemational
s!lipping or international air transport
operations.
The goods, supplies, equipment, and
fuel shall be used exclusively for
international shipping or air transport
operations which includes the sale of
goods, supplies, equipment and fuel to
persons engaged in international
shipping or international air transport
operations is limited to goods, supplies,
equipment and fuerthat shall 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.
NOTE: If any portion of such fuel, goods,
supplies or equipment is used for
purposes other than that mentioned
su·ch portion of fuel, goods, supplies, and
equipment shall be subject to 12% VAT.
 . .
254
"Without docking or stopping at any
other port in the Philippines" .:.. an
international airline that makes - a
stopover in a Philippine port to unload
passengers and/or cargoes from · a
foreign destination or to pick up
passenger and/or cargoes for foreign
destination is deemed not to have
docked or stopped at any other port in
the Philippine-s (R.R. No. 4-2007, Sec.
5) .
b. Sales to persons or entities deemed tax-
exempt under Special Law or International
Agreement
~he following sales to enterprises duly
· registered and accredited with the following
shall be effectively subject to zero-rate:
i. Subic Bay Metropolitan Authority
(SBMA);
ii. PEZA; •"
iii. Asian Developmel')t Ba k tAOB ), ~nd
· iv. International Rice ~ ~search 1 Jnstitute
(IRR!) (R.R. No. 4-2{)07, Sec ,.5) . ,.-- - - - - - -
. .. ,(''j / / .
NOTE. The Pres1der:it vetoed See;s. 31 aod
33 of TRA_ IN La w ~m sale and delivery of
goods/s~rv,ces rendered to. . . _ -- • - - -
i. Registered en_t~rprts~ w1th1~ separ~te
C:~\_ _. ______
cust~ms territory as provided unde_
spe~1al laws; a d · .
ii. Reg,~tered e tr I'f eS ~ ~~'.n
Tounsm Enterpnse onEi,. \ ./ •..
. .. • · \• \ . · l ' <·
However, the prov1s10Q_of Sec_ 106 (A)(2){b) , .. (..:"" / of Internal Revenue v. Burmeister and Wain
and Sec. 108 (B)(3)
·t· sli I considers• salesrto
h •'
pers~ns or en t11es_w ose_exemp~~>n unde ~--· _:-;. .;.,,--
special law or international " agreemen
remains effective. . _.,,,
, · 1
PEZA Memorandum Circular No. 2018-33
dated March 12, 2018 provides that the
· Department of Finance informed that the
TRAIN Law does not affect the zero-rating
of sales of goods and services to PEZA
locators. Accordingly, Sec. 8 of R.A. No.
-7916, known as the "Special Economic
Zon~ Act of 1995", which provides that
special economic zones are to be operated
an~ managed as . separate customs
territory, has not been amended or repealed
by the TRAIN Law.
2. Zero-Rated Sales of Services: (PO-
SISTR) (NIRC, Sec. 108 (8))
The following services performed in the
Philippines by a VAT-reqistered person shall be
subject to zero percent (0%) VAT rate: (Sec.
VALUE ADDED TAx
Taxation Law
4.108-5, RR No. 16-2005, as amended by RR
No. 13-20181
a. frocessing, .manufacturing or repacking of
goods for other persons doing business
outside the Philippines, which goods are
subsequently_exported, where .the services
are paid for in acceptable foreign curren_cy
and accounted for in accordance with the
rules and regulations of the BSP;
, b. Services other than processing,
manufacturing or' repacking rendered to a
person engaged in business conducted
Qutside the Philippines or to a non-resident
person not ·engaged in business who is
ou_tside 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
a ~d regulations of the BSP;
• , ' T he > VAT system generally follows the .
"de"§tination principle" (exports are zero-
• raled' w ereas imports are taxed). However,
, -,--:~ ~n excepfign to this principle is the 0% VAT
on seryices enumerated in Sec. · 108
(previously s,c. 102) and performed in the
_--P,h,hppme . To be exempt from the
· <~:' estinationprinciple under Sec: 108 (b)(1)
r ,. :i and (2), the services mYst be (a) performed
1nf ~ e Philippines; (b) for a person doing
! . ,
he_ ' l)us,ness outside the Philippines; and (c) paid
! ,;... . • ,acceptable ,f o eign currency accounted for
1
in accordance with BSP rules (Commissioner
J- - •· , -• 'i.. ,, 1 Scandinavian Contr.actor Mm ' danao, Inc., .
G.R No. 153205 Janua 22 2007)
.... ' ry ' ·
's
\
1
' •.
, c , erv,ces rendered to persons or entities
· · whose exemption under .§pecial laws or
international agreements to which the
Philippines is a signatory effectively subjects .
the supply of such services to 0% rate;
-
d. Services rendered to persons engaged in
!nternational sl)ipping or air transport
operations, including leases of property for
use thereof;
NO~E: These services shall ·be exclusively
for rnt~rnational shipping or air transport
oper~t,ons. Thus, the services referred to
herein shall not pertain to those made to
co~mon carriers by air and sea relative to
their transport of passengers, ,goods or
· cargoes from one place in the Philippines to
an?ther place in the Philippines, the same
berng subject to 12% VAT under Sec. 1OB of
the Tax Code.
 .I
\ I
'
MEM:Q~y AID .
Ssl Beda IJrMnlty Colege ol Law - RGCT Bar 0peratkns Center
255

NO:E: Crewing services rendered by a VAT-
registered c?mp~ny to a foreign ocean-going
- ve5:>el that is paid for in foreign currency is
su~Ject to VAT at 0%. , However, the
ent1t~ement to 0% VAT does not extend to
s~rv1ces rendered to common carriers by sea
with respect to . transport of passengers
go~s •. or cargoes from one place in th~
Ph~l~pp~nes to another place in the
Ph1hpp1nes, the same being subject to ~2%
VAT in accordance with Sec. 4_ 108_5 (b)( 4)
of ~.R. No. 16-2005, as · amended (BIR
Ru/mg No. 295-2012 dated May 3, 201 2).
\
unde·r special laws or international agreements.
Since the buyer is exempt from indirect tax, the
· seller cannot pass on the VAT and therefore, 'the
exemption enjoyed by the buyer shall extend to
the seller, making the sale effectively zero-rated
(R.M.C. No. 50-2007, Sec.·3).
DISTINCTIONS BETWEEN
AUTOMATICALLY ZERO-RATED SALES
AND EFFECTIVELY ZERO-RATED
SALES

e. Services performed by ~ubcontractors

and/or contrac~ors in processing, converting,
or manufacturing goods for an enterprise
whose export sales exceed 70% of the total Refers to the export Refers to the local sale
annual production; sale of goods, of goods, properties
properties and supply and supply of services
f. Iranspo_rt ot
passengers and cargo by
of services by a VAT-
registered person
by a VAT-registered
person to a person or
domestic air or sea carriers from the
entity who was granted
Philippines to a foreign country; and
indirect tax exemption
under special laws or
NOTE: Gross receipts of international air and international
shipping carriers doing business in J he · , ;.,1,,\ ...,
agreements
Philippines shall be exempt from VAT. ...... .......~•").."
.,.,,;.,.. ,

However, they are still subject · to 3% -~

percentage tax (NIRC, Sec. 118; RR No. 13-·... l.ll
2018, Sec. 2) . · -
Primarilwintended to be . Intended to benefit the
g. Sale of power . or fuel <generated through enjoyed# by the seller purchaser who, not
,Benewable sources of energy ·such as, but .who i~ directly and being directly and
not limited to, biomass, sofar, wind, legally liable for · the legally, liable for the
hydropower, geothermal and steam, ocean' VAT, making such payment of _the VAT,
energy, and other emerging sources. using seller internationally will ultimately bear the
technologies such as fuel cells ahd hy~rogen COITJP.etitive by allowing burden of the tax shifted
the refu d or credit of by the suppliers
fuels. · .-·
input taxes that are
The zero-rating shall not exte; <i to sale of attributable to export
services related to the · maintenance or sales
operation of the plants generating said power (Commissioner of Internal Revenue v. Seagate
(R.R. No. 13-2018, Sec. 2). · Technology (PHL), G.R. No. 153866, February 11
2005) '
AS TO HOW THE TRANSACTION SHALL
BE SUBJECT TO ZERO-RATING: APPLICATION FOR EFFECTIVE ZERO
1. Automatically Zero-Rated Sales . RATING
- · refers to a sale of goods, properties and Sec. 6 of R.R. No. 4-07, which amended Sec. 4.106-
services by a VAT-registered ~eller/supplier t~at 6 of R.R. No. 16-05 dispensed with the requirement
is regarded as either an export sale or a foreign for prior BIR approval for effectively zero-r·ated sales
currency denorriinated sale under Sec. 106 of the of g_oods and properties. However, the VAT zero-
NIRC. Examples are sales to registered rated sellers have to submit the supporting
ecozones and freeport zones (R.M.C. No. 50- documents as required by the existing· rules and
2007, Sec. 3) . regulations to qualify for VAT zero-rating to the
concerned BIR Offices for post-audit and for
2. Effectively Zero-Rated Sales . validation of the zero-rated transactions (BIR Ruling
- refers to the local sale of goods, properties · DA No. (VAT-003) 010-2009, January 14, 2009).
and services by a VAT-registered person to _an
entity that was granted indirect tax exemption
 VALUE ADDED TAX
256 . Taxation Law

Customs Territory
DOCTRINE ON EFFECTIVELY ZERO- The national territory of the Philippines outside of the
RATED SALES proclaimed boundaries of the Ecozones except those
The SC held that P.O. No. 1869, the charter creating areas specifically declared by o~her laws and/or
PAGCOR, gave the latter blanket exemption t~ taxes, presidential proclamations to have the status of
with no distinction on whether the taxes are direct or special economic zones and/or free po~ : (PEZA
indirect. The legislature clearly granted PAGC?R Rules and Regulations, Sec. 1 (g); Comm1ss1oner of
exemption from indirect taxes by extending Internal Re.venue v. Seagate Technology Philippines,
exemption to entities or individuals dealing with the Inc., G.R. No. 153866, . February 1.1, 2005;
latter. It follows therefore, that services, such as lease Commissioner of Internal Revenue v. Toshiba
services rendered to PAGCOR will be zero-rated Information Systems PHL, G.R: No. 150154, August
(Commi~sioner of Internal Revenue v. Acesite 9, 2005) .
(Philippines) Hotel Corp., G.R. No. 147295, February
16, 2007). While an ecozone is geographically within the
· Philippines, it is deemed a separate customs territory
Even with the passage of RA No. 9337 which -and is regarded in laws as foreign, soil. Sales by
removed PAGCOR's exemption from corporate suppliers outside the borders of the ecozone to this
income tax, PAGCOR remains to be exempt from separate custom~ territory are deemed exports and
VAT because R.A. No. 9337 retained Sec. 108 (B)(3) treated as export sales. These sales are zero-rated
(transactions subject to 0% rate) of the NIRC or subject to a tax rate of ze~o ·. p~rcent._
(Philippine Amusement and Gaming Corp: v. Bureau {yo(!lmissioner of Internal Rev(!nue v. Sek,sw Jush,
of Internal Revenue, G.R. No. 172087,,.March 15, i Philjppjnes,--l(IC:, G.R. No. 149671, July 21, ,2006)._
2011). ..
... ~" - .
/ /.. , ·
Goods t:?r6ught'i - and traded within an ecozone are
SALES MADE TO FOREIGN EMBASSIES...,... gene.r,€1IIY' yend , he reach of national internal
For taxation purposes, embassies are cqrisidered revenue ta>tes d q,istoms duties enforced in the
extensions of their respective co n\nes' tel ritory. A's _·-' P.hilippine cu oms tdrritory. Therefore, the act of
such, any sale within I foreign .enibassy is - bringing the goqds Jiito an ecozone is not a taxable
considered foreign sale or ransaction optside he- - - importatlqn. As lphg as t he goods remain (e.g., sale
Philippine territory (2 DE LEON, supra at 93) . ·, and/or consumptldn oQtte article within the ecozon~)
, . _ in -the epozone r re!exported to another foreign
Transactions of a VAT-registered perso~ with the · • .jurisdiction-,;.1he~ shall, continue to be tax-free
embassy of a foreign state a~d ·t~ perso~ llr b~ -1 .- Wiiiis1ma v. .Lazatin; f'- 1·No. 210588, November 29,
zero-rated, provided that the . can subrijit l(? the j 2016)./~_ ·.
Commissioner a copy of the special legislatloh. or I - ;-' ,' i •
, · ·, /
.,
international agreement showing that said -~9~ gn .. / P__R00F OF VAT ZERO-RATED SALES '-
government allows similar tax exemptionoQrivilt!ge to, ' - " ,,. · • . · .
the Philippine embassy and its personnel, °'lt- .is! f'. 2 ro..,,. prove th at th \,re is a direct_ export sale, _th e
however limited to sales made to the em~assie9 ·n... .... _ taxpP~r present !he foll~wmg docum'ents.
their official capacities and does not pl
individual purchases made by the members~ f'their
9 the _
'1
• V (1Y01ces or official receipts;
j f ·, \ " . . .
diplomatic staff (VA r Ruling No. 382-88 dated August _ . , A VAT invoice 1s necessary for ·every sale, barter
24, 1988). or exchange of g(?ods or properties while a VAT
official receipt properly pertains to every lease of ·
SALE, BARTER OR EXCHANGE OF goods or properties, and for every sale, barter or
exchange of services. Thus, we held that a VAT
GOODS, PROPERTIES OR SERVICES IN
invoice and a VAT receipt should not beconfused
ECOZONES
as referring to one and the same thing; the law
Ecozone or Speclal Economic Zone did not intend the two to be used alternatively
Selected areas with highly developed or which have .(Nippon Express (Philippines) : Corp. v.
the potential to be developed into agro-industrial, Commissioner of Internal Revenue, G.R. No.
industrial, tourist, recreational, commercial , banking,. 191495, July 23, 2018) .
investment and financial centers whose metes a·nd
bounds are fixed or delimited by Presidential 2. · Export declaration and bill of lading or ajrway bill
Proclamations. Ecozones, by . fiction of law, are as ~ro?f of actual shipment of goods from the
considered foreign territories (R.A. No. 7916, Sec. 4 Phihppmes to a foreign country (Philippine Gold
(a)) . Processing and Refining Corp. v. Commissioner
of lnterncfil Rev_enue, G.R. No. 222904 (Notice),
July 15, 2020); and
3. The bank credit advice certificate of bank
remittance - or any oth~r document proving
 \ I

MEM:Q~YAID
s., Bedl LW,,eqity Colege d law - RGCT 9- Cerar ,

payment fo~ the ~oods ~n acceptable _tor~ign 2. · Zero-Rated Sale of Service:

currency or its equivalent in goods and services
(Philippine Gold Processing & Refining Corp. v.
Commissioner of Internal Revenue, CTA Case
No. 8270, June 11, 2013).
NOTE: Documentary proofs to substantiate zero-
rated sales of services consisted of sales
invoices and other secondary evidence like
tran~fer slips, credit memos, cargo manifests,
and credit notes are inadequate to support sales
of services (Nippon Express (Philippines)
Corporation v. Commissioner . of Internal
Revenue, supra).
ENHANCED VAT REFUND SYSTEM
- a VAT refund system that grants and pays refunds
of creditable input tax within ninety (90) days from the
filing of the VAT ·refund application with the Bureau
(R.R. No. 13-18, Sec. 2) .
Processing period: The 90-clay period shall start •
from the filing of the application/claim for_refund UI?. fo
the release of the payment of the VAT refund.
The claim/application is considered to have bee
filed only upon submission of the official receipts r,
invoices and other documents in support of the
application as prescribed under pertine t revenu
issuances (R.R. No. 26-2018 is~ue on Depember
27, '2018).
EFFECT OF ·., SUCCESS~
ESTABLISHMENT OF ENH~~fED V /
REFUND SYSTEM: · · by the 2020/2021 Bar-Examination_s.
The following shall be subject to 12% VA_,T a nd no ·
longer be subject to 0% VAT: • •
a. Processing, -manufc!cturing or repacki~g of
goods for ot/ler persons doing business
outside the Philippines, which goods are
subsequently exported, where ·services are
paid for in acceptable foreign currency and
accounted for in accordance with the rules
· and regulations of the BSP; and
b. Services performed by subcontractors
and/or contractors in processing, converting,
or manufacturing goods ·for anc enterprise
whos~ export sales exceed ·70% of the _total
annual production (R.R. No. 13-18, Sec. 2).
NOTE: All pending VAT refun'd claims as of
December 31 2017 shall be fully paid in cash
by Decembe; 31, 2019 (R.R. No. 26--2018,
Sec. 2) . ·
The Department of Finance shall establish a
VAT refund center in the BIR and in the
Bureau of Customs (BOC) that will handle
¼-tie processing and granting of cash refuncfs
of creditable • input tax (R.R. No. • 13-2018, ·
I
Sec. 2) ..
. fi_OTE; The above-enumerated Zero-Rated
Sales- of Goods or Properties and- Zero-
Rated Sales of Services above are
-were
subjected to 12% VAT pursuantto-R.R. No.
9-2021. However, the implementation R.R.
No. 9-2021 was deferred in view of the
continuing GOVID-19 pandemic and its
impact in the export industry pursuant to
R.R. No. 15-2021. These are not yet covered

1. Zero-Rated Sale of Goods or Prop~rfiesk~ ··ng·

a. The sale of Raw materials or pac ~91
materials to a non-resident buyer for dehv~ry
to a resident local export-oriented enterp~se
s
to be Used in manufacturing, proces ing,
hT · es of the
packing or repacking in the p ,_,ppm table
said buyer's goods, paid for m tc:8for in .
foreign currency, and accodun :1ations of
accordance with the rules an reg
the BSP; . ackaging
b The sale of raw materials or P ·
· rt •ented enterprise
materials · to an expo -on nt
whose export sales exceed ~ev~nty/erce
(70%) of total ann~al prc ductio~,s:~es under
c. Transactions considered expo as the
E.O . No . 226 , otherwised known 7
of 198 , an
d
Omnibus Investments, Co 8
other speci_al laws.
 VALUE:-ADDeD TAX
Taxation Law

VAT. Such party is also not subject to th·e VAT, but

J
VAT-EXEMPT may be allowed a tax re~und ~f or _credit for input

\
taxes paid, depending on its re_gI~trat1on as a VAT or
TRANSACTIONS non-VAT' taxpayer · (Commissioner of . Internal
Revenue v. Seagate Technology, G.R. No. 15.3.f.J6($,
February 11, 2005) .

•vAT -exempt transactions" ref~r to the sale of DISTINCTIONS BETWEEN ZERO-RATED

goods or prop~rties and/or service~ arid the use or
- lease of properties that are-nqt subject to VAT( output
SALES AND VAT-EXEMPT SALES. .
tax) and~he sell~r is not allowed any tax credit of VAT
(input tax) on p~rchases (R.R. No. 16-2005, Sec.
4.109-1) .
Still a taxable Not subject to·output tax
The person making the exempt sale of goods, transaction but does not
properties or services .shall not bill any outpµt tax to result in an output tax
his customers because the said transaction is not
subject to VAT (R.R. No. 16-2005, Sec. 4. 109-1).
' Input tax on purchas~s Seller is not entitled to
The seller does not charge VAT and he can.not claim . ._ . ll}_ay be allowed as tax any input tax on t)is
exemption from what has been passed o him ~ . creoits-or refund . purchases despite .the
(INGLES, Reviewer, supra at 338). .
1
!',,;· ·
i'.- _ •''. / / :: '-. issuance o_f VAT invo_ice
• 1' ,.. "' .t ' _,;. ""-,. or receipt
;f...P,................. ·, , ,,,. '-

FEATURES OF AlAT'!:',~~MPi
TRANSACTIONS / '· t; __. - _,
1. VAT--exempt transactions sh~II n9t _·•e inc l~deQ:!J:_l. ,.::. ftequirep td ~ gi't~r~ ., Registration is optional
determlning the general efiresh old pre cnbed by .-;.: '(2-C DOMONflOl)l,~u/Jra at 40)
law [~3,000,000) (R.R. If, . 16-~011, Sep. 3 . , ·., : . __ :__ • ·~ "-.....- •' '

VAT or the 3% percentage a~ nder Sec.

the NIRC exceptthose aJe.pr l~as~ ~f. oods and ;:_ , --
n?
2. VAT-ex~mpt transactions $rnllt not be liable f<;>r . • TRANSA.CTIG>NS EXEMPT FROM VAT:
<?f - c' _· -(N/RC ! SEC : 109 :, AS AMENDED 'BY
1 '·=-=- _ 1 ·t ,. :
properties under Sec. , o'9J.(BB) W fJ.~ ~.t:@!Lpe _.. _._ ___ T_~~ ltfµ,WJ t . . .
subjectto3%perqentag~ta . otex~~citngthe 1. SALE OR IMPORTATION: (AFAB)
VAT threshold [Inferable ·from ~ec. '1 j.6 of the ; · • ·1 _,,,~ ricl:fltui"al and ryarine fQod product~· in -tlieir
NIRC and Sec. 4 :109-1 of. RR. No. 16-2,00~ J'°·' .... , 1 ·"'<-) ;>riginal ~tate, livestock and poultry of a kirJd
3. The pe_rson mak1~g the e er:npt_s le of go~q~ · _i~-:_· ,_:;-~ gf nerally used as, or yielding or produci_ ng fo~ds ·
properties, or services shall not b~II any p utp~~t~:Ct' 1 \. \.~ or human consumption; and breeding stock and
to his customers because the ~id tr~'J,sactio~, s --- - - ge etic\ matel'ials therefor: ,
not subject to VAT (R.R. No. 16-~151pee: _; . .~:. Npn:food products are not included under
4.109-1). •
""'
1- /1 . \
,
.1. - •.
'this category. (R.M.C. No. 53-2007, August
7, 2007). · . .
EXEMPT TRANSACTIONS V. b. Livestock and Poultry
PARTY Livestock
An exempt transaction involves goods or services Include cows; bulls and calves, pigs, sheep, -
which, by their nature, are specifically listed in and goats and rabbits.
expressly exempted from VAT under the NIRC Poultry
without regard to the tax status - VAT exempt or not Include fowls, _
ducks, gee_se and turkey.
· - of the party to the transaction. Indeed, such
transaction is not subject to the VAT, but the seller is Livestock or poultry does not include fighting
not allowed any tax refund of or credit for any input cocks, race 'horses, zoo animals, €Ind other
taxes paid (Commissioner of Internal Revenue v. animals generally considered as pets (R.R-
Seagate Technology, G.R. No. 153866,'February 11, No. 16-2005, Sec. 4. 109-1).
2005).
c. Marine ·Food products t
An exempt party. on the other hand, is a person or Include fish and crustaceans, such as, bU
entity granted VAT exemption under the NIRC, a not limited to, eels, trout, lobster, shrimP;:
special law or an international agreement to which prawns, oysters, mussels and clams (R.
the Philippines is a signatory, and by virtue of which No. 16-2005, Sec. 4. 109-1).
its taxable transactions become exempt from the
 \ I
MEK-Q~y AID
San 8eda UrMnty College of I.aw • RGCT Ber ()peratJona Center
d. Original State
Products classified as such shall remain
such even if they have undergone the simple
process of preparation or preservation for the
ma~et such ~s freezing , drying, salting,
bro1hng, roasting , smoking or stripping
(NIRC, Sec. 109 (1) (A)). Advanced
technological means of packaging such as
shrink wrapping in plastics, vacuum packing,
tetra-pack, in itself does not make the same
liable to VAT (R.R. No. 16-2005, Sec. 4.109-
_1).
Examples of products in 'their original
state: frozen boneless briskets, frozen
boneless buffalo meat, deboned fish .
Polished and/or ·husked rice, corn grits, raw
cane sugar and molasses, ordinary salt and
copra shall be considered in their original
state (R.R. No. 16-2005, Sec. 4.109-1).
Raw Cane Sugar
Natural sugar extracted from sugarcane
through simple mechanical process by
pressing for the juice; boiled to crystallize;
•filtered and dried, resulting to crystallized
brown sugar due to natural molasses ~ntent
present in sugarcane. It shall be produced ·
from conducting only one stage of filtering
and centrifugal without any other further
process. Its color is greater than 800 ICU and
that its content of sucrose· by weight in dry
state corresponds to a _poiarimeter reading of
· less than 99° (R.R. No. 8-201~. S~. _2) . ·
NOTE: For internal revenue purposes, the
sale of raw cane sugar is exempt from VAT
because it is considered to be in its o~~inal
state. On the other hand, refined sugar 1s an
agricultural product_ that_ '?8n no longer be
considered to be in ,ts ongmal state b~cause
it has undergone the refining proc~ss: its sale
is thus subject to VAT (Comm,s~ioner of
Internal Revenue v. United Cad!z Sugar
Farmers Association · Multi-Purpose
Cooperative, G.R. No. 209776, December 7•
2016).
~ot a ,;simple process" if it is a _physical or
chemical process whiGh would alter te
exterior or form or inner sub stance fa
product in sucti a manner as to prepare ,t or
. h •t Id not have been
special use to wh1c ' cou . . (R R No.
put in its original form or co nd ition · ·
16-2005, Sec. 4.111-1).
. . I d d in the VAT
Bagasse is not me_ u e T (R R. No.
exemption. Hence, sub1ect to VA ·
16-2005, Sec. 4.109-1).
259 .
NOTES:
i. Sale of Andok's roasted chicken is
exempt from VAT. However, should
Andok's maintain a facility by which the
roasted chicken will be offered as a
menu to customers w.ho would dine-in,
then it will be subject.to the VAT on sale
of service which is similarly imposed on
restaurants , and other eateries (VAT
Ruling No. 09-2007, June 21, 2007) .
ii. R.M.C. No. 53-2007 reiterates the
amendment under R.~. No. 9337
imposing VAT on the sale of non-food
agricultural products, marine and forest
products, and on the sale of cotton and
co~on seeds in their original state.
- 2. Fertilizers; seeds, seedlings; and fingerlings; fish,
prawn, livestock and poultry fee~s. including
ingredients, whether locally produced or
imported, used in the manufacture of finished
feeds (NIRC, Sec. 109 (B));
EXCEPTION: (RFAZO)
Specialty feeds for ,Race horses, fighting cocks,
Aquadum fish, ~oo animals and Qther animals
generally considered as pets (NIRC, Sec. 109
(8)). _,.
.J
. 3. Sale, importation or lease of passenger or· cargo
vessels arid Aircraft, including engine, equipment
·and spare parts thereof for domestic or
international transport operations;
NOTE: The exemption from VAT on the
importation and local purchase of passenger
and/or cargo vessels shall be subject to the
requirements on restriction on vessel importation
and mandatory vessel retirement program of
Maritime Industry Authority (MARINA) (R.R. No.
13-2018, Sec. 2).
4. Sale, importation, printing or publication of ~ooks
and any newspaper, magazine, review, or
bulletin; ·
Requisites _to be VAT-Exempt:
The book, newspaper, magazine, review or
bulletin must: (If PH)
a. Be printed or published at regular !ntervals;
? b. Be available for subscription and sold at
fixed prices; and _
c. Not principally be devoted to the Publication
of paid advertisements; and - .
d. Be printed in Hard copies (BIR Ruling No.
372-13). _
GENERAL RULE: All imported books, whether
for commercial or personal use; are exempt from

VAT and customs duties (DOF Order No. 57-
2011).
EXCEPTION: Books published by or for a private
commercial enterprise essentially for advertising
purposes as stated in Annex A of the Florence
Agreement (Agreement on the Importation of
l;ducational, Scientific and Cultural Materials)
must first seek an exemption -from the Revenue _
Office of the Department of Finance (DOF Order
No. 57-2011).
SALE: (REC 2-SGD) .
1. Sale of Beal . properties uhder Sec. 109
(1 )(P);
The Sale of the following Real Properties are
VAT-Exempt: (SLSV2)
a. Not ·primarily held for Sale to customers or
held for lease in the ordinary course of trade .,.._.. ~-
,or business; ~l 1 · 1.-
., •:: , _> \. 1 /"
NOTE: Even .if the real,..J?roperty I is not
primarily held for sale t fcustop,(rs or heJd- .
·for lease in the ordinary course of tijl e or
business, but the same ·s· used in /the trade
or business of the seller,l he s e thereof
shall be subject to YAT.b~ing a trari~action ______
incidental to the taxpayer's main1 business ·
(R.R. No. 13-2018, Sec. 2). 1
<:.:.i r- ,
, ··
- .,
- - ::- ,- ,
1
EXAMPLE: When a VAT-registereo.person~--
engaged in manufacturing ' -'s~lfs his• . ·
warehouse which was'" used in h~ ·6Gsiness, l ·.: ·· ,- :~GJ:NEWAL Rlp-E: Threshold is on a per
~he_ sate shall be subject to VAT' i:iei g a11_ ! /
incidental to his business. . ~'1...._..-.l.-~- y' 1/ supp1 at 582.
"---· ' ( I . ;- ,
b. Utilized for ,bow-cbst housing; /c ~__;__,_
L ()j
ow~ost h~usi~g . - \ /j /: \'\
~ousmg pro!ects intended for homeless low-. 1 "
income family beneficiaries, undertaken by
the ~overnme_ nt or pri~ate. developers
wh~rem ~e unit s~lling price 1s within the·
selling pri~ per unit as set by the Housing
and Urban Development Coordinating
g~uncil (HUDCC) (R.R. No. 13-2018, Sec.
c. U~ilized ~?r ~ocialized housing wherein the
price ceiling _per unit is 19450,000.00 or as.
may from time to time determined by the
HUDCC and the NEDA and other related
laws ;
Socialized housing
Housing programs and projects covering
house and lots or home lots only undertaken
by the Government or the private sector for
the underprivileged and homeless citizens
VALUE ADDED TAX
Taxation Law
wherein the housing package selling price is
within the lowest interest rates under the
Unified Home Lending· Program (UHL~) or
any equivalent housing program of the
Government, the private sector or non-
government organizations (R.R. No. 13-
2018, Sec. 2).
d. Residential lot ~alued at 191,500,000 and
.below; and
e. House and lot and other residential dwellings'
~alued at ~2.500,000 and below (NIRC,
Sec.109 (1)(P), as amended by TRAIN Law).
NOTES:
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;
or
1 ii.' .Sale of real property utilized for
-· - ' ,,socialized hqusing; and
""· ·lii:' · Sate) f)f house and lot, and other
..._ ·· te_sider:itlal dwellings with selling price
_, _ \ ·q_~\,ex eding ~2,000,000 (R.R. No. 13-
,,·;\ 1 20.18, Se 2).
fl
\ _\ · ·
_. ._ Evei:y- t f.~ (3) years thereafter, the
.. _.
,._ amo9 ts s1tated shall be adjusted to its
present va) e using ttie Customer Price.
___
1 , 1::,-r def (R.R. No. 13.:.2018, Sec. 2).
.:,._ '. f ..,. · ·
_
,.</-~ tfans~ction b sis (MAMALA TEO, Reviewer, _
- ·'
N: If two or more - adjace~I
, res1d~n 1al lots are sold or disposed of in
favor of one buyer, for the purpose of utilizing
i · , the lots as one residential lot, the sale shall
be exempt from VAT only if the aggregate
value of the lots do not exceed ~1,500,000
(R.R. No. 13-2018, Sec. 2)
· -
Adjacent residential lots, although covered -
by sep~rate titles and/or separate tax
declarations, when sold or disposed to one
and the same buyer, whether covered by one
or separate Deed of Conveyance, shall be
presumed as a sale of one residential lot
(R.R. No. 13-2018, ~ec. 2).
In BIR Ruling No. 185-2013, the ~IR ruled
that . the . transfer of properties by th e
Pres1dent1al Commission on Go~d
Government (PCGG) to private individuals in
a sale at public auction is exempt frorn
income tax, WT, VAT, DST and CGT since
these properties are presumptively owned bY
 \ I
MEM:Q~y 'Al D
s-, \.k"MBlly Colege of Law - ROCT Bar c.:witer
the Republic of the Philippines, and the
PCGG is mandated by law to dispose of
these ~roperties, (BIR Ruling No. 360-2014).
The sale of power plants pursuant to Electric
Power Industry Reform Act (EPIRA) law is
not in pursuant of a commercial or economic
activity nor an incidental transaction made in
the course business, but a governmental
function mandated by law to privatize
National Power Corporation (NPC)
generation assets. Therefore, the sale of the
power plants should .not be subject to VAT
(Power Sector Asse'ts and Liabilities
Management Corp. v. Commissioner of
Internal Revenue, G.R. No. 198146, August
8, 2017).
2. 5.xport sales by persons who are not VAT-
registered;
If he is VAT-registered, his export sales are zero-
rated under Sec. 106 (A)(2) and S~c. 108 (B) of·
the NIRC and claim tax credit or refund.
(Please refer to pages 270 to 274 for the , fu/1 .
discussion of VAT Refund)
3. Sales by agricultural ~ooperatives of too~ .
and non-food products (whether in original or
processed form) duly regi$tered and in good
standing with 't he Cooperative Development
Authority (CDA) to: .
I
a. Their members - VAT-exenipt'whether or
not the coo·perative is the produce~}f th e
goods; or ' . h •
b. Non-members - VAT-exempRt· ~lyN,if ~:
cooperative is the producer ( ·1 ' · 0 · •
.2007, Sec. 14).
Importation of direct farm inputs, ,machineries
and equipment including spare parts thereof,. to
be used directly and exclusively in the product1obn
. of th eir
and/or processing · Produce shall also e
exempt (R.R. No. 04-2007, Sec. 14).
(Compare with No. 4 below).
Sale of Marine or Agncu 1tur~
• I Food Products
In Processed Form
· or agricultural
GENERAL RULE: Sale of dm;n~e are subject to
food products in processe or
VAT. · b agricultural
EXCEPTION: Thos~ sold dir CDA (NIRC,
cooperatives duly registered ~n ( ){L)) .
109 1
Sec. 109 (1)(A) correlated to ec.
261
0
NOTE: Sales by agricultural cooperatives are
exempt from VAT provided the following
conditions concur:
a. Seller must be an agricultural cooperative
duly registered with the CDA; and
An agricultural cooperative is "duly
registered" when it has been issued .a
certificate of registration by the CDA. This
certificate is conclusive evidence . of its
registration. . ·
b. The cooperative must sell either:
i. Exclusively to its members; or
ii. ,To both members and non-members, its
produce, whether' in its original state or
processed form (Commissioner of
Internal Revenue v. United Cadiz Sugar
Fa,,.;,ers Association Multi-Purpose
Cooperative, G.R. No. · 209776,
December 7, 2016) .
4. Sales by non-agricultural, non-electric and
non-credit Cooperatives duly registered and
in good standing with the GOA. Provided
that: .
a. Share capital contribution of each member
does not exceed t-15,000; and
b. Regarpless of the aggregate capital and net
surplus ratably distributed among the
members (R.R. No. 16-2005, Sec. 4.109-1).
lmporfation by these cooperativ~s of
machineries and equipment, including spare
parts thereof, to be used by them are subject
to VAT (R.R. No. 16-20D_5, Sec. _4.109-1)
(Compare with No. 3 above).
5. 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 (Ari Act Expanding the Benefits and
Privileges of Persons with Disability),
respectively;
6. Sale of Gold to the Bangko Sentral ng
Pilipinas; and
7. Sale of Qrugs and medicines prescribed for
diabetes, high cholesterol, and hypertension
to beginning January 1, 2019 as determined
by t~e Department of Health (DOH) (R.R.
No. 13-2018, Sec. 2).
NOTE: The above provision has been amended
by R.R. No. 18-20 dated June 26, 2020. The new'
provision provides for VAT exemption to sale or

importation of prescription drugs and medicines
for:
a. Diabetes, high cholesterol, and hypertension
beginning January 1, 2020; and
b. Cancer, mental illness, tuberculosis, and
kidney diseases beginning January 1, 2023.
The exemption from VAT shall only apply to
the sale or importation by t~e manufacturers,
distributors, wholesalers and retailers of
drugs and medicines included in the "list of
approved drugs and- medicines" issued by
the DOH for this purpose.
IMPORTATION: (PPF)
~. fersonal and household effects belonging
to:
a. Residents of the Philippines returning from
abroad; and
b. Non-resident citizens coming to reseWe in '
the Philippines (NIRC, Sec. 109 (1)(C)) . l
,· -
NOTE: Provided that sticli. goods are
exempt from customs d~ ,...unde(the Tariff
and Customs Code of the.Ph .lip lnes·(l'v/RC,
Sec. 109 (1)(C)). t • · / --
• J
' 2. frofessional instrument and implements,
tools of trade, occupatkfn r employment,
wearing apparel, dom~s_tic -animals, and .
personal and househ Id e.tfects'1 · · ·. - ·,.~ - onguw1e~ fr rh ~a · road or to load pcfssengers
. I-:), -
Requls,te~ to be VAT-Elem . (SO~OA)
a. Belonging to persons coming to §ettle io-the 1
Philippines or Qverse s Filipinos; ' .._· .,
, ~-------:.: u~ed for purposes other than that mentioned,
Overseas Filipinos · 0 <:__ '['~ -:1. \_. sue~ •Portion of fuel, goods and supplies shall be
Filipinos or their fan:iilies a d d'$~ndants- ~ -
who are now residents or c1tizens"if>tJother
countries (NIRC, Sec. 109 (1)(0); as
amended by TRAIN Law).
b. In quantities and of the class Suitable to the
profes~ion, rank or position of the persons
importing said items·
c. For their Qwn use a~d not for barter or sale·
and
d. A~mpanying such persons, or arriving
within a reasonable time (NIRC, Sec. 109
(1)(0), as amended by TRAIN Law).
The V~T exemption does not apply to the
following Importations:
Vehicle.s, ~essels, aircrafts, machineries, and
0th.er s1m1lar goods for use in manufacture
which shall be subject to duties, taxes, and
other charges (NIRC, Sec. 109 (1)(0), as
amended by TRAIN Law).
VALUE ADDED.TAX
Taxation Law
NOTE: The Bureau of Customs may exempt
such goods from payment of duties and
taxes on the following conditions:
i. Upon production of satisfactory evidence
that such persons are actually coming to
settle in the Philippines; and ·
ii. The goods are brought from their former
place of abode (NIRC, Sec. 109 (1)(D),
as amended by TRAIN Law).
3. fuel , goods and supplies by persons
engaged in international shipping or air
transport operations;
NOTE: Provided_ that the fuel, goods and
supplies shall be used for international shipping
or air transport operations (NIRC, Sec. 109
(1)(U); as amended by TR(J,IN Law).
GENERAL RULE: Such fuel, goods and/or
I .. pupplies shall be used exclusively or shall pertain
__, J.. Ito the ti'a sport of goods· and/or passengers from
a po ~ the Philippines directly to a foreign port,_
or vi.ce vers~. without docking or stopping at any
ether poq m !he Philippines (R.R. No. 4-2007,
,:-,- Sec. 14} J.
j
'\· .
· ..EX.fEPTION~ The docking or stopping at any
~ther1 :hilippine port is for the purpose of
:, u~l~ading P.asse gers and/9r cargoes that
_ T-· ........s.~d/r ~- cargqes bound for abroad (R.R. No. 4-
, ·: , _ :0:, 1
ec. 14).
.- ·, .--; •
I / ; , 1 any P0!,ll0 n of ~uch fuel , goods or supplies is
subJec 2% VAT (R.R. No. 13-2018, Sec. 2).
" •
M SERVICES: (PAMEERB)
1. Subject to the fercentage taxes under Secs.
116-128 of the NIRC;
2. By Agricultural contract growers and milling for
0th
e~ of palay into rice, corn into grits, and sugar
' cane mto raw sugar;
Agrlcultur~I contract growers
Persons pr d · -..
or ucmg for others, poultry, _livestock,
th
~ e_r ~gncultural and marine food products in
h
t eir onginal state (R.R. No 16-2005 Sec 4 109-
1 (B)(1)(f)) . · • · ·
3
· Medical, dental, hospital and veterinary services
~xcept th0 se rendered by professionals (N/RC,
_ec. 109 ( 1)(G), as a"!ended by TRAIN Law):
labor~tory services are exempted because it is
a hospital service (R.R. No 16-2005 Sec 4.109-
1 (8)(1 }(g)) . . . ' .
 \ I
MEK-Q~y AID
5-1 Bedll lkMl1ity Calege of Law - RGCT Bar Center
Sales of medicines by the hospital pharmacy to
in-patients is exempt from VAT, but sale to-out-
patients is subject to 12% VAT (MAMALA TEO
Reviewer, supra at 580). '
To claim Vt:,.T e~emption for sale of drugs or
pharmaceutical items classified as hospital
services, the following must be established :
(HDI)
a. The taxpayer operates a Hospital;
b. The said hospital has a pharmacy or
Qrugstore; and - subject to 3% percentage tax (R.R.' No. 13-
c. The sale of drugs claimed to be exempt from
VAT was made by the said hospital drugstore
or pharmacy to !i:,-patients of the hospital
being operated by the taxpayer (Hermano
(San) Miguel Febres Cordero Medical
Education Foundation (De La Salle - Health
Sciences Institute), Inc. v. Commissioner of
lntemal Revenve, CTA Case No. 8194, May
15, 2012).
4. Educational services rendered by private
educational institutions duly accredited by the
Department of Education (DepEd), Commissio~
on Higher Education (CHED) and Technical
Education and Skills Development Authority
(TESDA) and those rendered by government_
educational institutions;
Educational Services
Academic, technical or vocational .education
provided by private educational institutions duly
accredited by the DepEd, the CHED and_TESDA
and those rendered by goverrimeot educational
institutions. . It does not inclu e - seminars, in-
service training, review classes and o!~er similar
services rendered by persons who are, riot
accredited by the aforementioned institutipns
(R.R. No. 16-2005, Sec. 4.109-1 (B)(1)(h)).
5. Rendered by individuals pursuant to an
~mployer-employee relationship;
6. Rendered by Regional o~ area · head~uat_rters
established in the Philippines by mu1tin a.iona1
corporations which act as supervisory'
communications and coordinating cent~ for
their affiliates subsidiaries or branches ; t_he
Asia-Pacific Region and do not earn or enve
income from the Philippines; and
7 Bank non-bank financial intermediaries
· - ' . f rans
1 and other
performing quasi-banking _un_c ' from said units exceed 193 000 000 -
non-bank financial intermediaries.
·dered as non-bank
NOTE: Pawnshops are consi xempted from
·. I . .in termed"ar·1es
fiinancia 1 • thus te (Tambunting
VAT, but liable to percentage ax _
,
263
Pawnshop, Inc. v. Commissioner of lntemal
Revenue, G.R. No. 179085, January 21, 2010) .
OTHERS: (L2IT-MASO)
1. ,bease of residential units, if the monthly rent per
unit:
a. Does not exceed 1915,000; or ;
b. Exceeds 1915,000· but the aggregate annual
rentals received by the lessor do not exceed
P3,000,000. However, the same shall be
2018, Sec. 2) .
Summary of Rules:
a. Monthly rental 1915,000 or less regardless of
annual gross sales· - VAT-exempt and no
percentage tax.
0
b. Monthly rental above 1915,000 and
i. annual gross sales do not exceed
193,000,000 - VAT-exempt but shall pay
. 3% percentage tax under Sec. 116 of the ,
NIRC.
ii. _annual gross sales exceed 193,000,000 -
ifl leforVAT.
Specific threshold (1915,000 monthly rental)
and ·general threshold (193,000,000 annual
gross sa es) should be both met for this
transactio to be liable to VAT. -
, N"OTE: The specific threshold is on a per
· -residential - unit per month basis.
(MAMALA TEO, Revie~er, supra at 583) .
In case the lessor has several residential
units for lease, some are leased out for a
monthly rental not _ exceeding 1915,000 while ·
others are leased out for more than P15,000
per unit, the tax liability will be as follows:
i. The gross receipts - from rentals not ·
exceeding 1915,000 per month per unit
shall be exempt from VAT regardless of
the aggregate annual gross receipts. It is
also exempt from the 3% percentage tax.
ii. The -gross receipts from rentals
exceeding P15,000 per month per unit:
1.) Aggregate annual gross receipts
from said units does not exceed
193,000,000 - VAT-exempt but
subject to the 3% percentage tax;
2.) Aggregate annual gross receipts
subject to VAT (R.R. No'. 13~2018,
Sec. 2) .
Residential Unit
Ap~rtm~nts and houses & lots used for
res1dent1al purposes, and buildings or parts
 ' VALUE ADDED TAX
264 . Taxation Law

The following shall be VAT-exempt even if gross

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 (R.R. No. 13-2018, Sec. 2) .
Unit .
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 (R.R. No. 13-2018,
Sec. 2).
2. Gross receipts from ,bending activities by credit
or multi-purpose cooperatives duly registered
and in good standing with the CDA (R.R. No. 16-
2005, Sec. 4.109-1);
3. Transactions which are exempt under
International agreements to which the Philippin~ _
is a signatory or under special laws, except those , 1
sales or receipts exceed ~3,000,000:
a. Sale of goods ·pertaining to agricultural or
marine food products in their original state;
b. Sale of books; or
c. Sale of service relating to rental of residential
unit not exceeding ~15,000. (MAMALA TEO,.
• Reviewer, supra at 584)
NOTE: Any person whose sales or receipts
do not exceed threshold amount and who js
not a VAT-registered person are exempt_
from VAT but shall pay 3% percentage tax of
his quarterly sales or receipts (NIRC, Sec.
116, as amended by TRAIN Law).
NOTE: A VAT registered person may elect
that the above exempt transactions shall not
apply to his sales of goods or-properties or
services. Once the election is made, it shall
, • be irrevocable for a period of 3 years counted

under P.O. No. 529 (Petroleum,,, Exploration , ) r ; ; from the quarter when the election was made
Concessionaires under the Petroleum 'Act of-'----·'...... _
1
1
f
except for franchise grantees of radio and
1949); ~, , ' _,,,_.. TV' broadcasting whose annual gross
4. Iransport of passengers by1jnter ti ·onai carriers recei~ts for the preceding year do not exceed
doing business in the Philippioes (R.R. No. 15- - , ... ft10,000,000 where the . option becomes
2013, Sec. 6); and / ' >• / · _:~--
perpetw;illy irrevocable (R.R. No. 4-2_ 007,
, Sec. 15) .r n
~OTE: The transport qt 'cargo by internatlon--a1-· • V .,
carriers doing business ,n., the Philippines 'is · · VATexempt personsunderSec. 109whodid
like'-:,'ise VAT-~XEM~T as it is ·_!Ubject' to . . .._- p~
opt to,b&} egistered as VAT jaxpayers
Common earner's Tax (P~rcen\'3g~~ Tax orf · · .- Hj@~ register , as non-VAT taxpayers
lntemation~I Carrier) (R.R. o. 15-2(1J3, Sec. 6):- . --./ Oti.GLES ;Reviewer supra at 365 1
I ) <.\.. - I • • • , ' \ • ' '/ ·

5. Transfer of property pur~ant to a ~ ~rgef o; I·· '

:;,.:~~·;,

consolidation according to Sec. 40 (C)(2) of-the 1 . P-v~'!,./""~ -~-------------

NIRC; i . -:-
6. Association dues, membership fees, and ottier.. L~ ~../
>: '.. ·
tlNPUT·T~
.
ANDOUTPUT
.
assessments and charges _ callee '3d by TAX ·
homeowners' associations and co'rf8¢rrlinium -~
corporations established under R.A. No. 9904. Lv' ,
l' !.~'""!!!'"-~--------------_.
I'
(Magna Carta for Homeowners and
Homeowners' Association) and R.A. No. 4726 INPUT TAX
Act), respectively (R.R. No. -:;!:;:-h-:-e-;--;V:-::-AT;-;d-ue--f-;-ro-m-or_p...:a_id_b_y_a_V_A_T_r_e-gi-st-e-re_d_p_er_s_on
in the course of his trade or business on importation

N?TE: The collection must be on a purely

of goods or local purchase of goods or services,
reimbursement basis (R.R. No. 13-2018, Sec. 2). incl_ uding lease or use of property, from a· VAT-
registered person (NIRC, Sec. 110 (A){3) as
7. ~elf-employed individuals and professionals amended by TRAIN Law).
avail_ing of the 8% tax on gross sales and/or
receipts and other non-operating income, under Input tax is _ what is passed on to the
Secs. 24 (A)(2)(b) and 24 (A)(2)(c)(2)(a) of the purchase~/~axpayer by the seller. If the purchaser is a
NIRC (R.R. No. 13-2018, ·Sec. 2): and VAT-Re~rstered person, then he can use the input
8. Qther than the transactions mentioned in the tax credit to the output taxes he is liable to remit 10
th e BIR (INGLES, Reviewer, supra at 348) .
preceding paragraphs (VAT-Exempt
Transactions), the gross annual sales and/or
receipts do not exceed the · amount of
193,000,000.
 \ I

MEM:Q~y AID
Sen Bede IJnMnily Colege d Law - ROCT Bs ()peiatjons Center ·
265

SOURCES OF INPUT TAX The input tax that ·can be claimed by the buyer
1. Purchase or importation of goods: shall be the corrected amount of VAT (R.R. No.
a. For sale; or 16-2005, Sec. 4.110-6).
b. For conversion into or intended to form part
of a finished product for sale, including VAT PAYABLE/EXCESS INPUT TAX:
packaging materials; or · · Output tax less input tax is VAT Payable or Excess
c. For use as supplies in the course of Input Credits, whichever is the ca~e. on a m?nthly
business; or · VAT declaration and quarterly VAT returns, subJect to
d. For use as raw materials supplied in the sale limitations prescribed by the regulations· (R.R. No. 16-

.
of services; or 20Q5, Sec. 4. 110-6).
e. For use in trade or business for which ·
deduction for depreci~tion or amortization is -
allowed unde'r the Tax Code;
' Output tax
· o ·utput tax exceeds '
Less: Input
2. Purchase of real properties for which a VAT tias -input tax at the erid :~
actually been paid; : . ·.: of any taxabl~ ·· ..
tax
3. Purchase of services in which a VAT has actually VAT
quarter ;.-
been paid; Payable .
4. Transactions deemed saJe under. Sec. 106(8) of Output tax
: · lriput tax inclusive '.:
the Tax Code;
" of input tax ·carried .·; Less: Input -
5. Transitional Input Tax; ,. ';-. ·ovedrom the<,(· tax
6. Presumptive Input Tax; }-;::previous quarter :;:: Excess .
7. Transitional Input Tax Credits allowed under the /,:•t-,exceeds output t~)( · Input Tax
transitory and other provisions (R.R. No. t~- . _. -~ :. .-.. , r ,~·;_,t:. ·.:;•:: .,., .. :,;; -•' ,...;,_.

. 2005, Sec. 4.110-1). 1 , .,,

,- , , · NOTES:
· 1. If t tbe end of any taxable quarter, VAT is a
OUTPUT TAX ,. ii··· ;, f positive ~mount (the output tax exceeds the input
The VAT due on the sale or lease of taxable goods or : tax; such amount is called excess output tax),
properties or services by any person register~d or
required to register under VAT (~ /RC;
(A)(3) as amended by TRAIN L~~) : .• r
110 ~e~:. then it is ttie AT payable by the VAT-registered
persor:i. Vi T payable in case of importation is
already th1 am~unt d_ue on such impo_rtatio·n; and

NOTE: The output tax of the seller is.'inP,t1,{tax to -~~e
purchaser {INGLES, supra at 346). __ _~-; . ,
· ··
DETERMINATION OF OUTPUT ,TA?f-AND
VAT PAYABLE AND THE COMPUTATION
OF VAT PAYABLE OR EXCESStpJC:
• • -- I
1. For sale of goods or properties: · ·
Gross selling price x VAT rate (12% or 0%) =
_Output tax
. 2. If the input tax, inclusive of input ~ax. carried over ·
' from the previous quarter,· exceeds the output
- tax, the excess input tax shal) be carried over to
·,. ~lfttie.succeeding quarter or quarters as tax credit
· -:..:.:(R.R-. 'No: 16-2005, Sec. 4. 110-7).
SUMMARY OF DIFFERENT
TREATMENTS ON VAT*

2. For sale of services: • 12% 12 10 2 0

Gross receipts x VAT r~te (12.% or 0%) = Output Payable

tax 10 12 0 2 Tax Credit

3. Where the basis for computing output tax 0% 0 12 0 12 Refundable/

is either the gross selling price or gro~s Creditable
receipts, but the· amo~nt _of . VAT IS Exempi 0 12 0 12 Wnrecoverable
erroneously billed in the •~voice
The total invoice amount · is presumed . to *All amounts are assumed for illustration purposes. .
comprise · the gross selling price/gross receipts
plus the correct VAT. Using 12% as th ~ VAT rate'
the formula to compute the output tax is: .

Total invoice amount x (12%/11 2%) = Output tax

 .VALUE ADDED TAX
Taxation Law

DETERMINATION OF CREDITABLE Corp. v. Commissioner of Internal Revenue, G.R.

No. 179356, December 14, 2009).
INPUT TAX
The amount of input taxes creditable d_uring a month
PROPERTY IS . CONSIDERED
or quarter shall be determined by: ·.
1. Adding all creditable input taxes during the DEPRECIABLE IF:
month or quarter and any amount of input tax 1. It is used in trade or business or held for the
carried-over from the preceding month or production of income; and
quarter; and 2. It is subject to exhaustion within a determinable
period of time (it has a limited useful life)
2. Reduced by the amount of claim for VAT refund (MAMALATEO, Reviewer, supra at601).
or tax credit certificate (whether filed with BIR,
with Department of Finance, Board of AGGREGATE ACQUISITION COST.
Investments or the BOC) ·and other adjustments,
Refers to the total price, excluding VAT, agreed upon
such as purchase returns or allowances, input tax
attributable to exempt sales and input tax for one or more assets acquired and not on the
attributable to sales · subject to final VAT payments actually made during the calendar month
withholding (R.R. No. 1~-2005, Sec. 4.110-5). (R.R. No. 13-2018, Sec. 2).

INPUT TAX ON MIXED TRANSACTIONS: INPUT TAX ON DEPRECIABLE GOODS

1. All the input taxes that can be directly attributed-,· ~,, Whe~e a VAT registered person purchases or imports
to transactions subject to . VA.,T ,_may be .: capital gqods, which are depreciable assets for
recognized for input tax credit· ,,, : ,. " 1 . incdm~e t~x"·purposes, the aggregate acquisition
' : . J).,.., _,.
,1
cos.t..,o fw!}ich (exclusive of VAT) in a calendar month
2. If_any input tax cannot be dirtctfy,atttibuted- to-- ~,?C~eeds P1 ,OJ~• 000 regardless of the ·acquisition
either a VAT taxable or VAf,.e~~mj?t transactior::i, c~st of ~~aeh cap!~I 9,oo_d: .
the input tax shall be proriited tQry;e v h- taxa~I~ .,,. . ;; Estimated useful life 1s 5 years or more
and VAT-exempt trans~tions and ·oply to the .:. ': , lnpu ta_x .~b b) spread evenly over the month
ratable portion pertaining tojransactioj,s subjec ac~ uisition1,~nd tile 59 succeeding months.
. to VAT may be recognized-(or input tax credit. . .: . , 'r--' •
The allocation of input taxes shall \be do.ne ·2, ·. Est11pated useful ife is less than 5 years
proportionately to each ~ategory ot tra~ action; · lnp~t.,tax s~~ll!5e, spread evenly. on a monthly
..--.-, ,_ - as1~ by d1v1dmg .t~e input tax by the actual
3. The input tax attributabll to tAT-e\ru]i~ ales ._ '. . numb,~ .of ;J on Ji~i comprising the estimated
shall not be -allowed as credit agains~~tpu ta·x · _us~ful life .. Such .i claim_ for inP,ut tax shall

and . ( , •1 -- ; -
7
but should be treated as pqrt of cost or exRen_:se: : ., · -~mm nce in th; calendar month the capital
---:-.-!· g~od is/acquir~__(NIRC, Sec. 110 (A)(2), as
,, _. }_ \ . ~amen ed by TRAIN Law; R.R. No. 16-2005, Sec.
4- For persons engaged in both zerQ-rated sales - 4· 1.0-3. · · ·
and non zero-rated sales, the aggregaje' 'nput / I • \ \ . \ , - :..
taxes shall be allocated ratably between the ,' , ; i'- NO I ES:
zero-rated sale and non 'zero-rated sale (R.R. a. The amortization of the input VAT shall only
No. 16-2005, Sec. 4.110-4). · be allowed until December 31, 2021 after
which taxpayers with unutilized iii put VAT on
capital goods purchased or imported shall be
allowed to apply the same as scheduled until
INPUTTAXON fully utilized (R.R. No. 13-2018, Sec. 2).
DEPRECIABLE GOODS b. Fo·r P~rc~ases made in Jal')uary 2022, no
amortization shall be made and the input
VAT shall be claimed on the 'month of
.purchase or January 2022 (R.R. No. 13•
CAPITAL GOODS OR PROPERTIES 2018, Sec. 2). -
Refer to goods or properties:
1. With an estimated useful life greater than one (1) Formula:
year; Input Tax
2. Which are treated as depreciable assets under Useful Life in Months*
Sec. 34(F) of the NIRC; and *Actual useful life or maximum of 60 month5
3. Used directly or indirectly in the production or if estimated useful life is 5 years or more
sale of taxable goods or services (KEPCO Phil.
 \ I

MEM:\/~Y AID
s., Bed& lJrMnlty College af Law - RGCT Bar ()pqtloos C4otar

EFFECT IF THE AGGREGATE ACQUISITION
COST (EXCLUSIVE OF VAT) DOES NOT EXCEED
P1 ;oo0,000: The total amount of input taxes will be
allowable as credit against output tax in the month of
acquisition (R.R. No. 16-2005, Sec. 4.110-3).
EFFECT OF SALE OR TRANSFER OF
DEPRECIABLE GOOD WITHIN A PERIOD OF 5
YEARS OR PRIOR TO THE EXHAUSTION OF THE
AMORTIZABLE INPUT TAX: The entire
unamortized input tax on the capital goods sold or
transferred can be claimed as input tax credit during
the month or quarter when sale or transfer was made
(R.R. No. 16-2005, Sec. 4: 110-3) .
ILLUST~TION N0.1:
In December 2016, a VAT-registered person reported
the following acquisitions of equipment for its
business use:
E1: t-1,500,000 (estimated useful life 6 years)
E2: t-625,000 (estimated useful life 2 years)
E3: t-750,000 (estimated useful life 3 years)
The Creditable Input VAT1' per month shall be:
E1: t-3,000 (t-180,000/60 months max.
amortization period) ·
E2: t-3, 125 (t-75,000/24 months)
E3: t-2,500 (t-90,000/36 months)
*Acquisition Cost (excluding VAT) x 12%
The t-1,000,000 threshold is based on the aggregate
acquisition cost regardless of the acqui:>ition cost of
each capital good (R.R No. 16-2005, Sec. 4.•110-3).-
ILLUSTRATION NO. 2: . .
ABC Corp., a VAT-registered_ person purc~ased
capital goods on different occasions a~ follows.
- ., -,--"'"'-'
,·- ...•. ·,t ..,,,,~<-:;--·-~
,.•• ·. ·-, .• "''
l"°~-,.-r ·'"
· . _.. ·· ·. -
Month of Amount . ' l}seful
purchase
·(000,000) _ Life -~ amo~!~~t-~
2. 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.
3. For purchase made in December 2021, the
amortization shall be for the period of 5 years or
up to November 2026.
4. For purchases made in January 2022, no
amortization shall be made and the input VAT
shall be claimed on the month of purchase or
January 2022 (R.R. No. 13-2018, Sec. 2).
ASSET ACQUIRED IN .INSTALLMENT
An asset acquired in installment for an acquisition.
cost of more than 191,000, 000, excluding VAT, wi!I
be subject to amortization·of input tax despite the fact
that the monthly payments or i_nstalments may not
exceed 191, 000, 000 (R.R. No. 16-2005, Sec. 4. 110-
3) .
ILLUSTRATION:
. NJ Corp. acquired an asset for P1, 500, 000 payable
:in 3 monthly installments. The input tax of 19180, 000
-wJil be s·ubject to amortization despite the fact that the
monthly paymJnt/installment is 19500, 000 (less than
.
•, fD1 I 000, 000): ••
.
(
., ;
AMORTIZATIQN OF ·INPUT VAT ON.
,,
.· IMPORTEDi
.. .. CAPITAL GOODS
'. APPLICABLE TO - BOTH ZERO-RATED
r. AND 12%NAT TRANSACTIONS
' Sec. 11 O (A)(2) of the NIRC which requires
amortization of input tax ori capital goods purchased
· or imported with-acquisition cost of 191, 000, 000 and
·treated as depreciable asset appli~s to all input taxes
,..• ,.. th on capital goods available as tax credits against the
Las mon
of .·, ~it.'$ taxpayer's VATable transactions, be it VAT zero-
rated or subject to 12% VAT.

DECEMBER Both t~xable sales and zero-rated sales are

JANUARY 8.5 6YRS
. 2022 considered transactions subject to output VAT. The
2018 difference lies only on the VAT rate used.
4YRS JANUARY Considering that the output tax due is 0% in the case
FEBRUARY 8.5
2022 of zero-rated sales transactions , the creditable input
2018 tax attributable thereto in a taxable quarter becomes
5YRS NOVEMBER unutilized or excess input tax -which may be the
DECEMBER 10
2026 subject of a claim for refund or tax credit certificate
2021
under ·Secs, 110 (B) and 112 (A) of the NIRC, as
5YRS OUTRIGHT amended by TRAIN Law.
JANUARY 10
CLAIM
2022 JANUARY
, On the argument that the amortization of input VAT
2022 on capital goods runs counter to the provisions of
Sec. 112 (A) of the NIRC as the claim for refund can
de in January 2018, the be filed effectively beyond the two years from the
1. For purchases ma th horter period of 5 close of the taxable quarter when the sales were
amortization shall be for bet2022 although the made, the CT A maintained that the amortization of
years only or up to oecem e input VAT merely delays the crediting of the input
useful life is 6 years.
 ~ --

VALUE ADDED~TAX
· · Taxation Law

tax and not the filing of the claim . Hence, it held 1

that VAT-registered taxpayers are not deprived of TRANSITiONAL AND

their privilege to credit their input tax as long as they
file their claim within 2 years from the close of the
PRESUMPTIVE INPUT
taxable quarter when the sales were ma~~-. TAX
(Commissioner of Internal Revenue v. Northwmd
Power Development Corp., CTA EB Nos. 1037 and
1042 re CTA Case No. 8119, December 16, 2014;
Taganito Mining Corp. v. Commissioner of Internal TRANSITIONAL INPUT.TAX (NIRC, SE~.
Revenue, CTA EB No. 935 and 936 re .CTA Case No. 111 (A)) .
8090, December 16, 2014). ·
Transitional input tax on the inventory on hand as of
the effectivity of the VAT registration of taxpayers
INPUT TAX ON CONSTRUCTION IN
who:
PROGRESS . 1: Became VAT-registered persons upon
Construction In- ~rogress . (CIP): It is the cost of . exceeding the minimum turnover of ~3,000,000
mnstruction work, which is not yet complet_ ed (R.R. in any 12-month period (NIRC, Sec. 126-(G)); .
No. 4-2007, Sec. 16). 2. Voluntarily registers as a VAT paye( even .1f
turnover does not exceed- ~3,000,000 (except
NOTES: franchise grantees of radio and/ or television
1. CIP .is considered, for purposes of claiming i11pot :;- - oadcasting whose .threshold is ~10,000,000)
tax, as a purchase of service, the vaJue~ . which ; 1 : ,ZNtRQ, Sec. 126 (H)); -and · .
shall be determined based on the Pt091JlSS s.
1If lie is already a v_AT-registered person an~ al~o
billings; J . 1
deals.in g9ods or properties, the sale of wh1c~ Is
/ / · - ~xempt, -but it ecomes a -taxable transaction
2. , Input tax credit can be re~og_nize in t~ o~t~ : . ._. ,, under a ne~ o~ a_mendatory law (MAMALA TEO,
the payment was made. Provided , thatf n offimal , : /. Reviewer, su(fra at 598). - .
receipt of payment has been issuEld baf ed on the . ., • • . ( J .
progress billings; and ,-:;,- · .--:---. - ~ -Pl:IRPO~E: It is appasent that the transitio{l~I input
•,· · - -tax credit operates· to benefit newly VAT-registered
3. Once the input' tax . has. alr~ad~ bee cta1T_~d · .. _ P.~isons, hether 9[..Clqt they previously paid taxes in
whU~. the ~nstruct1on 1s till m 1P~~ress, M · ·the acq~~~I ·r:fl o their beginning. inventory of goods,
add1tion~I mput tax _ can e cl.~~~ -Upo~7 - T)'lateripl~. : ~nd supplies. During that period of
comple~1on of the ass~t nen . it /i'a
beer , ! 1 • trarnJit\Of1 ...1from non-VAT to . VAT status, . the
reclassified as a deprecta le capital , sse 1.and ._ transitional in ut tax credit serves to alleviate the
deprecia,ted (R.R. No: 4-2007, Sec. 16)':</'-. • ! ,.,.im~a~ -Of the- VAT OJI the taxpayer (Fort Bonifacio
"\.. , ,:--- --;. ~:/- qeve{opm~ht Corq: · v. Commissioner of Internal
CONTRACT FOR THE SAlE _OF ~E~Vml;_1;_ _'Revenue, G.R. No. 170680, October 2, 2009) .
WHERE ONLY LABOR Wll.;1-·, BE ",~ ('..- .
SUPPLIED BY THE CONTRACTOR/ AND r . g"Fransltional Input Tax Credit:
1
THE MATE RIALS WILL BE PURCHASED ... .. h1chever is higherletween: ,
BY THE CONTRACTEE FROM OTHER · 1. :wo ; .
percent (21/o) of the value of the beginning
inventory.on hand; or
SUPPLIERS 2. Actual VAT paid on such goods, materials· and
1. Input tax credit on the labor contracted shall still supplies. ·
be recognized on the month the payment was
made based on progress bjllings; ·
The amount is creditable aga.inst the output tax of a
2. Input tax on the purchase of materials shall be
VAT-registered person- (R.R. No. 16-2005, Sec.
recognized at the time the materials were 4.111-1).
purchased (R.R. No. 4-2007, Sec. 16).
Prior Payment of Taxes NOT · Necessary for
A~ailment .of Transitional Input Tax •
Pnor payment of taxes is not necessary before 8
taxpayer could avail of the 8% transitional input tax
credit. All that is required under Sec. 111 of the Nl~_G
is for the taxpayer to file a beginning Inventory w, th
the BIR (Fort Bonifacio Development Corp. v.
Corr,missioner of Internal Revenue, G.R. Nos.
175707, 180035 & 181092, November 19, 2014) . ·
 \ I

MEM:QllY AID .
. San Bed& l.kW9nllty COlege Of Lew • RGCT Bar Ope,at1ona Center
269

NOTE: For transaction~ on real properties, the value

of th~ latter, t~gether with the improvements thereon
REQUIRED SUPPORTING DOCUMENTS:
are included · .-:-T~an~aclion · .- ·. · Required Documents :· ·
. dm the beginning
. inventory of goods, . .~ ' . , ' . . ' ... - .
,

mat 1s a~ supplies based on which the Input taxes on VAT invoice

trans1t1onal input tax credit is to be comput d domestic purchases of
(MAMALA TEO, Reviewer, supra at 598-599) . e goods or properties
. . . ~- .. -.\"-.-p ·::,..--fl,. __ . . . . . •rs-·•'), -- - • ... " .... -

PRESUMPTIVE INPUT TAX 111N/RC SEC '

·:/. Input Tax
I , • • • .. !!.
on ·Purchases of Real Property:'·
•• \-. ~H , _ _' >- • •• - ~• •
·~· ,
111 (B)) ' • Cash/Deferred basis Public lnstrument·(i.e.1 deed
Persons or ~rms engaged in the: (PM) of absolute sale, deed of
1. frocessmg of mackerel, milk and sugar (MMS)· conditional sale, contract/
and ' agreement to sell, etc.)
together with the VAT invoice
2. Manufacturing fooking oil, Qacked noodle-based
for the entire selling price and
instant meals and refined sugar (CPR).
non-VAT ORs for the initial
and succeeding payments
Processing pasteurization , canning , and
activities which through physical or chemical Installment basis Public instrument and VAT
process alter the exterior texture or form or inner OR for every payment
substance of a product in such a manner as to Input tax on domestic VAT OR
prepare it for special use to which it could not have purchases of services
been put in its original form or condition (R.R. No. ,
16-2005, Sec. 4.111-1) . Input tax on Import entry or other
importation of goods equivalent document
. ' showing actual payment of
Detennination of Input Tax: The presumptive input
VAT on the imported goods
tax shall be 4% of the gross value in money of their
purchases of primary agricultural products whicti'are . , Transitional input tax Inventory of goods as shown
used as inputs to their production (R.R. No. 16-2005, ' in a detailed list to be
Sec. 4.111-1). submitted to the BIR.
Input tax Ofl "deemed Required invoices
The amount is creditable against th~.9utput-w x of a sale" transactions '
VAT-registered person (R.R. No. 16-2005, Sec.
4.111-1)." : Input tax input lax from Monthly Remittance Return
payments made to- of Value Added Tax Withheld
non-residents (.such (BIR Farin 1600) filed by the
as for services, resident payor in behalf of the
" rentals, or royalties) non-residen~ evidencing
SUBSTANTIATI remittance of VAT due which
INPUTVAT was withheld by the payor
Advance VAT on Payment order showing
sugar payment of the advance VAT
. (R.R. No. 16-2005, Sec. 4.110-8)
WHO CAN CLAIM INPUT VAT
The input tax credit on domes!ic purchase or All purchases covered by invoices other ·than ·a VAT
importation of goods . or properties by a VAT- invoice shall not !:>e entitled to a refund of input VAT
registered person shall be creditable: (Atlas Consolidated Mining and Development
1. To the purchaser upon consummati~n ?f sale Corporation . v. Commissioner of Internal Revenue,
and on importation of goods or properties, G.R. No. 145526, March 16, 2007). ·
2. To the importer upon payment of the valufe-ad~~d
tax prior to the release of the goods rom e The company's failure to substantiate its zero-rated
custody of the Bureau of Cu st0ms; · . of sales wi~h duly r~gi_stered VAT official receipts
3. To the purchaser, lessee or licensee, m cas~ resulted m the denial of the application for refund.
purchase of services, lease or use 0~ properties, VAT invoice and official receipts must · be duly
upon payment of the compensation, rental, registered with the BIR; the proper authority to print
royalty or fee. (ATP) was secured by the taxpayer for the VAT
4 .. To the purchaser of real property un?er: invoice and official receipts (Eme,:son Electric (Asia)
a. Cash/Deferred Payment Basis - upon Ltd. ROHQ v. Commissioner of Internal Revenue
consummation of sale. CTA Case N9. 8470, Octoper 1, 2014) . '
Installment Basis - every installment
b. payment (NIRC, Sec. 110 (A)(2) ; as
amended by TRAIN Law).
 VALUE .ADDED TAX
Taxation Law

Strict compliance with substantiation ·and invoicing
requirements is necessary considering VAT's nature
and VAT system's tax credit method, where tax
payments are based on output and input taxes and
where the seller's output tax becomes the buyer's
input tax that is available as tax credit or refund in the
same transaction . It ensures the proper collection of
taxes at all stages of distribution, facilitates
computation of tax credits, and provides accurate
audit trail or evidence for BIR monitoring purposes
(Team Energy Corporation v. Commissioner of
Internal Reve,.nue, G.R. No. 197663, March 14,
201~. .
REFUND OR TAX CREDIT ·
OF EXCESS INPUT VAT
_ ·- ~t"'
1.
' ,
9. The claim is filed within two years after the
close of the taxable·quarter when such sales
were made (in contrast with the period of filing
an action to recover taxes ·already paid which is
reckoned from the date of payment); and
10. Duly supported by VAT invoices or receipts in
accordance with Sec. 4.104-5 of R.R. No. 7-95 in
relation to Secs. 113 and 237 of the NIRC (R.R.
No.16-2005, Sec. 4.112-1).
RULES ON PRESCRIPTION. OF VAT
REFUND/ TAX CREDIT
1. Administrative Claim (with the BIR)
The administrative claim is filed within two (2)
· years after the close of the taxable quarter when
the zero-rated or effectively zero-rated sales
were made. The CIR has 90 days from the date
of submission of the official re~ipts or invoices
. and other documents in support of the application
• i
;·=7· .•
, l aw
(NIRC, Sec. 112 (C), as amended by TRAIN

INSTANCES WHERE CLAIP-,s FQFf" \lAT . .-,,1 .· ..-:. ./ i ; . 1

REFUND/TAX CREDIT ~VAILED ·_ Nb1t;,·s~o ld ttie Commissioner find that the

•

OF 7 i. / . .-,,,._......-- -,J1rai'1 of ref.u'h :s not proper, the Commissioner

1. Zero-R~ted and Effectively ~ ·0 Rat~dr·SaleS;(;~-' · ,,: ._\,. s~e i in~ the legal and factual basis
2. Cessation of business; and Y/ , .. . ·. for ~t\e 9et11aJ. . _
3. Cessation of VAT status
:Z
/ - - - __ ·--·-
. • , n\ . . .
- - -The • o-ye~_r--prescnptive penod referred to in
.
NOTE: Transitional input tax cann t be clatme~{as'~ - . , <_Sec._' .112 . {A) ~eptle~ only to the- filing - of
refund or credit (INGLES, Re ·t1we , SU,Puf at 357j.' ,.:. _ -.: '_. a~m!, 1strat 1~, ~l~g, with the CIR and not to~the
\ , • · · · . : · filing 1!?0f JUd1c1al claims with · the CTA
ZERO-RATED AND E Ftgt;rtVEt.Y'ZERO- ~-: ~-(eprfi.r5;/ sion~ t Internal Revenue · v. San
RATED SALES OF GOODS, ; . ·· fi~;,.,~r~
r Corp:,, G.R. No. 187485, February
PRO~ERTIES OR SERVICESt . ·. ~-:.; ''·~: ,,,-(;-.~ ·,/ ,I I '
T? claim refu~d or ~x .credit, claimant mu~t complyr T ,--:_ - · .R_:M. S,:No. 54-?014 requires the taxpayer to file
~•th i~: :nowmg ?ntena: . · ·- - ..!. 1 - ' _i _· :..-- h1s_.cla1,ru. wit~ 'complete supporting documents
2: The ~ayer is YAT reg1stere~; I !.,l '-, ·- . .,.. •' to ~tt~st that he will no longer submit any
effecti tayer is engaged m zero-rated or /• otp!f .ctbcament to prove his claim FCJrther 'the
3·
The invp~r~exro-ratedd sales; • 'l r ,ta~payer is barred from submitti~g additional
es are ue or paid· "documents ft h h · · · ·
4. The input taxes are not tr 't' ' . . a er e as filed his admm1strat1ve
5. The • t ta ansi 1onal input taxes· claim.
i~pu xes h~ve not been applied agai~st
ou tpu taxes during and in the succe d' T~e reckoning of the 120-day period · has been
quarters; e mg
wi th dra'."'n f~om the taxpayer by R.M.C. No. 54-
6. The input taxes claimed are attributable t ,
rated or effectively zero-rated sales· o zero- . 20 ~4 , since it requires him, at the time he files his
claim, to complete his supporting documents and
7. For zero-rated sales under Secs. 106 (A) 2
and (2); 106 (~); and 108 (8)(1) and (2t )t~l
' ~ttest that he will no longer submit ·any other
ocument_ to prove his claim. Further, the
acceptable foreign currency exchange proceeds
~axpayer is barred from · submitting additional
have been duly accounted for In accordance with
BSP rules and regulations; ~~uments after he has filed his administrative
c aim. The foregoing Issuance cannot be
8. Where there are both zero-rated or effectively :~rille~ retroactively since It Imposes new
zero-rat~ sales and taxable or exempt sales
th gations _upon taxpayers In order to perfect_
an~ the rnput taxes cannot be directly and entirely
eir administrative claim (Pilipinas Total Gas,
of Internal Revenue, G.R·
attnbutable to any of these sales, the input taxes /
Nnc· v· Com missioner
· ·
shall be pr~portionately allocated on the basis of . o. 207112, DecemberB, 2015) .
sales volume; _
 \ I
MEM:Q~y AID
Slf1 Bede IJnMnlty Colege of law - RGCT Bar Operations Center
EFFECT OF BIR'S FAILURE TO ACT UPON
TH_E CLAIM WITHIN 90-DAYS: Any official,
agent, or employee of the BIR to act on the
application within the ninety (90)-day period shall
be punishable under Sec. 269 of the NIRC, as
amended (NIRC, Sec. 112 (C), as amended by
TRAIN Law). . .
2. Judicial Claim
GENERAL RULE: In case of full or partial denial
of the claim for tax refund, the taxpayer affected
may, within 30 days from the receipt of the
decision denying the claim, appeal the decision
with the Court of Tax Appeals (NIRC, Sec. 112
- (CJ, as amended by TRAIN Law).
NOTE: The observance of the 120+30-day
period is mandatory and jurisdictional
(Commissioner of Internal Revenue v. Toledo
Power Co., G.R. No. 195175, August 10, 2015).
The 30-day period to file a judicial claim with the
CTA need not necessarily fall within the 2-year
prescriptive period, as long as the administrative .
claim is filed within the 2-year period
(MAMALATEO, Reviewer, supra at 613) .
The taxpayer can file its administrative•claim for
refund or credit of VAT at any time within the two-
year prescriptive period . If it files it~ claim on the
last day of said period, it is still filed on time. The
CIR will have 120 days (Now; 90 days) from such
filing to decide the claim . If the CIR -decides tbe
claim on the 120th (Now: 90th ) day 1 or does not
decide it on . that day, the taxpayer stil( has 30
days to file its judicial claim ytit~ the CTA;
otherwise, the judicial claim would be~; prop~rly
speaking, dismissed for being file~ out of. !•me
and not, as the CTA En Banc puts 1t, prescnbed
(Commissioner of lntem~I _Revenue v.
Bunneister and Wain Scandmav,an Con(ractor
Mindanao, Inc., G.R. No:- 19002 1; October 22:
2014).
NOTE: Prior to the effectivity of TRAI~ L~~· th e
Supreme Court, in the case of Commissioner of
Internal Revenue v. Mindanao Geo~~ermal 11
Partnership ruled that in case of denial -of th e
claim for ' VAT · refund or failure _of th e
Commissioner to act on the said claim, t~e
taxpayer affected may a~peal th e unact!3d claim
with the Court of Tax Appeals.
However pursuant to TRAIN Law, the inaction odf
the Com~issioner on the application for refun
within ·the prescribed pe_riod was re~~v:fRa~a:
ground to appeal the claim. F~rther, rt of
clarified in its issuance that failure_0 ~ th e P~
the BIR to act on the application w1thm the ninety
(90)-day period shall be punishable under Sec.
269 of the Tax Code. In the event that the 90-day
period has lapsed without BIR's decision, the
VAT refund claim may still continue to be
-processed administratively (R.R. 13-18, Sec.
4.112-1, as amended by R.R. 26~18, Sec. 2).
There seems to be two schools of thought on the
jurisdiction of the CT A in the refund of excess
creditable input taxes. First, the inaction of the
Commissioner to act on the claim for refund
witt,in the 90-day period will be deemed a denial
and hence, the taxpayer may file a judicial claim
(i.e. appeal to the CTA within 30 days therefrom).
Second, the inaction by the Commissioner to act
on the claim for refund within the 90-day period
will not be considered a denial of the claim for
. refund . The taxpayer has to wait for the decision
of the Commissioner·before he can file an appeal
with the CTA within 30 days from the receipt of
the decision denying the claim.
The Supreme Court has not yet rendered a
decision which ·addressed-the apparent conflict
brought about by the ameodmenl by the TRAIN
· Law to Sec. 112 of the NIRC. It is believed that
the former rul'e still applies (i.e., inaction of the
Commissioner to act on the claim for refund
within the· 90-day period will be deemed a denial
and hence~the taxpayer may file a judicial claim).
This position is supported by Sec. 7(a)(2) of RA.
No . 1125,as amended, by R.A. Nos. 3457, 9282
and 9503 ...
. '
Prior to the expiration of the 90-day (now 120- .
day) period, the CTA has no competence, with all
due respect, to entertain the appeal (Mindanao II
Geothermal Partnership v. Commissioner of
Internal Revenue, CTA EB No. 956 re: CTA Case
No. ·8247, September 16, 2013) .
The failure of a taxpayer to wait for the decision
of the Commissioner of lnterna~ Revenue or the
lapse of the 120-day period will render .the filing
of the judicial claim with the Court of Tax Appeals
premature (Nippon Express PHL Corp. v.
Commissioner of Internal Revenue, . G.R. No.
196907, March 13, 2013). ·
EXCEPTION: If the taxpayer relied on BIR Ruling
No. DA-489-03 which expressly declared that the
"taxpayer-claimant need not wait for the lapse of
· the 120-day period before it could seek judicial
relief with the CT A by way of Petition for Review.
0

VALUE ADDED TAX

272 Taxation Law

Hence, from December 10, 2003 to October 6, i. The BIR Permit to Prin.t;
ii. The TIN-V of the purchaser; ~nd
2010 which refers to the interregnum when BIR
Ruling No. DA-489-03 was issued, taxpayer- iii. The word "zero-rated" imprint_
ed thereon.
claimants need not observe the stringent 120-
day period; but before· and after said window In this relation , failure to comply.with t~e said
period, the mandatory and jurisdictional nature of invoicing requirements provides sufficient
the 120-day period remained (CE Luzon ground to deny a claim for tax refund or tax
Geothermal Power Co., Inc. v. Commissioner of credit. ·
lntemal Revenue, G.R. Nos. 200841-42, August .... .

26, 2015) . Secs. 204 and 229 of the NIRC pertain to the
refund of erroneously or illegally collected
In Taganito Mining Corporation v. CIR, the Court taxes, while Sec. 112 is the appropriate
held that reconciling the pro(louncements in the provision of ·1aw for claims for exc:;es·s input
Aichi and San Roque cases, the rule must .Vf:,.T (Commissioner of Internal Revenue v.
therefore be that during the period December.10, Dash Eng'ineering PHL, lnc. 1 G.R. No.
2003 (when BIR Ruling No. DA-489-03 was 184145, December 11, 2013).
issued) to October 6, 2010 (when the Aichi case
was promulgated), taxpayers-claimants need not . ·1nput VAT attributable to zero-rated sales
observe the 120-day period before it could -file a incurred by _a taxpayer prior. to its VAT
judicial claim for refund _of excess input VA ,..................... registration may not be the );ubject of refund.
before the CTA. Before and after th : .,.., Under Sec. 112 of ·the NIRC, one of the
aforementioned period (i.e., December 10, 003 u j'C6hQitions for entitlement to refund or tax .
to October 6, 2010), the observan·~ ;t~e 2,Qz........... ,_ c(edits of-excess unutilized input tax from .
day period is mandatory and juJisdictjpn,.al othe zefo-rate sal~s is that the taxpayer-should
filing of such a claim (CBK P cf'1er. 'Company A'r
be a V ;registered taxpayer: Thus, !o be
Limited v. Commissioner ot Inter al Revenue, ·". .\ .,. entitle ~j3f nd of input VAT, the taxpayer
·G.R. No. 198928, December , :2014). i · ~:.:, !l< .!l!!,, refuncJ.:cla1mal'l.t must prove that it was a·
. , ·f . ·.,. V, T-registerecf taxpayer during the period it
NOTES: . . ·1 · r---~ ,,. Incurred, its un tilized input VAT (JP Morgan ·
a. Failure to print the ord "zero-rat d" O':\ the~, :· . -:,., i·· Chase 'n , ,V,.A. - PH Custome; care ,
invoices _or receipts is atal to a claim: for: . :·_ .. 11 Center v. Gomlnissioner oflnternal Revenue,
.credit or refund of in · V>AT ~n,.}, _ro-rated: _,_ -~: ____ /lT l)) EB Cas Nos. 7650, 7681 and 7722, ·
sales (J.R.A. PHL, Inc . .v. ComrrJJ~'£ner o .,. I . .., : ~~1 h ·18,i...2().,12). ·
Internal Revenue, G.R. Nd. 177t 27~ ctober · \ >,: _; / /.r:_ 1
11, 2010J . . . • <r 1
: I
- '-~~(6il~ T10N ~F VAT
b
•
If · · i ,1/REGISTRA
engaged m transport of pas~nge_r 'ana- - · ;: . · .
TION· . . · ·
cargo b~ air or sea vessels from Philip ·:>ln~J.t. :... ~ _YAl;.reg~stere~. person may ap_ply f~r the 1ssu~n~
to a foreign country, inpu~ ta es are-,located~- - .,~ laX"tred1t,cert1f1cate for _a_ny unus_ed m_put tax w1th1n
ratably between. zero-rated and--no _ 1ero- 1 1 f ~ the cancell~t1on of re~1stratton. Such tax

withholding VAT and VAT-exempt sales)

1
ra_ted s~le (subJect to regular rate , final 1v pr~gJ c~~I 1cates may be used m the p_ayment of
othe internal revenue taxes:·The taxpaye_r shall be
(R.R. No. 16-2005, Sec. 4.112-1). entitled to a refund if he has no internal revenue tax
· liabilities against which the tax ~redit certificate may
c. In a claim for tax refund or tax credit the be utilized (NIRC, Sec. 112 (B) as amenaed by
applica~t must prove not only entitlem~nt to TRAIN Law; R.R. No. 16-2005, Sec. 4.112-1) .
the claim but also compliance with all the
documentary and evidentiary requirements Cancellation of Registration ~ay be
due to:
therefore (J.R.A. Philippines Inc. v . 1.· Retirement from or cessation of J:>usiness; or
Commissioner oflntemal Reven~e, G.R. No: 2 · Change in' or cessation of status (R.R. No. 16-
171307, August 28, 2013). 2005, Sec. 4.112-1 (b)). .

NOTES:
d. Sec. 110 (A)(1) of the NIRC provides that
1- In the case ~f clai.ms for refund of unutilized VAi
creditable input taxes must be evidenced by .
a VAT invoice or official receipt, which must, on account of cessation of business the two-ye~r
in tum, comply with Sec. 113 of the same period shall commence from · the d~te of
law, as well as Sec. 4.108.1 of R.R. No. 7- cancellation of registration of the taxpayer, and
1995. The foregoing provisions require, inter not from the close of the taxable quarter when thB
alia, that an invoice must reflect, as required sales were made (Associated Swedish 5teel5
PHL., Inc. v. Commissioner of Internal Revenue,
bylaw:
CTA Case No .. 7850, August 23, 2012). .
 \ I

MEM:Q~y AID
S.. Seda l.Wwnlty Colege d - RGCT Bar ()peratjona Center
- 273

2. Sec._ 236 (2)(b) of the NIRg, as amended, The person legally liable to pay the input VAT can
provides _that the cancellation of registration will claim -a refund or credit" for such "excessively"
be effective from the first day of the follo . collected tax, and thus there will · no longer be any
month. wing
"excess" · input VAT (Commissioner of Internal
Revenue v. San Roque Power Corporation, G.R. No.
WHERE ·TO FILE THE CLAIM FOR 187485, February 12, 2013).
REFUND/TAX CREDIT CERTIFICATE
C~aims for refund~tax credit certificate shall be filed EXCESS INPUT VAT VS: EXCESSIVELY
with . the appropnate BIR ~ffice-Large Taxpayers COLLECTED TAX
S~rvI_ce (LTS) or RDO h~vmg jurisdiction over the
pnnc1pal place of business of the taxpayer (R R N0
16-2005, Sec. 4.112-1 (c)) . _· · ·

MANNER OF GIVING REFUND

Refun~s ~hall be made upon warrants drawn by the NIRC, Sec. 110(6) NIRC, Sec. 229
Comm1ssIoner or by his duly authoriz d
represen~ative without the necessity of bei~g
countersigned by the Chairman of the Commission of
Audit (NIRC, Sec. 112 (D)) .
Input VAT available as credit Input VAT is
QUANTUM OF EVIDENCE TO PROVE CLAIM FOR exce_eds the output VAT collected more
REFUND OR CREDIT: Preponderance of Evidence than what is legally
(AT&T Communications Services PHL.: Inc. v. due
Commissioner of Internal Revenue, G.R. No.
172129, September 12, 2008) . · .
" ."~
""... ...... -·~ .,. '
Not "excessj¥ely" collected Involves·
EXCESS IN~UT VAT VS. EXCESSIVELY because e time of erroneously,
COLLECTED TAX . payment oft put VAT the illegally; .
amount pai the correct excessively or in
Excess input VAT means that the VAT payments
and propJr amoun t any manner
made by the taxpayer is greater than the VAT he . ' f
r S wrongfully -
added to the price of products (9uu,ut VAT) he later .,, collected tax .
on sold. It is not an excessive, ·megal or- wrongfully
collected tax. Whereas, an excessively collected·
tax is illegal or wrongfully collected tax because it is
mar~ than the tax due from the person legally, liable
to pay the tax (including input VAT): (BOADO,. . :~ ·, 'Cann9t claim for refund or Can claim for
Compact Reviewer in Taxation (2018), p. 254 credit of input VAT as refund or credit.
[hereinafter BOADOJ) . • ·. ,_-. "excessively" collected.

Under the VAT system, .a taxpayer can apply his input

VAT only against his output VAT. The only exception
Administrative Claim:'2 years 2 years from tlie
is when the taxpayer is expressly "zero-rated or
from the close of the taxable date of payment of
effectively zero-rated (Sec 110 (B))." If such "excess"
quarter when the sale was the -tax
input VAT is an "excessively" collected tax, the
made by the person iegally erroneously.
taxpayer should be able to seek a refund or credit for
liable to pay the output VAT. illegally,
such "excess" input VAT whether or not he has output
I VAT (Commissioner of Infernal Revenu~ v. San excessively or in
I Judicial Claim: within ·30 any manner
Roque Power Corpora_tion, G.R. No. 113~485, days from the receipt of the wrongfully
February 12, _2013). Such is considered an ordinary
decision of the collected.
refund or credit outside of the VAT System.
1
1
Commissioner denying fully
or partially the claim for tax Reckc;med from the
Under the VAT System, there is no claim or issue that refund.
1 the "excess" input VAT is •~xcessively • or in any d~te the person
~anner wrongfully collected." In fact, if the "excess" liable for the tax
NOTE: In case of inaction by pays the tax
input VAT is an "excessively" collected tax under
the Commissioner of Internal
Section 229 then the taxpayer claiming to apply such
Revenue in cases involving NOTE: , Both the
"excessively" collected input VAT to offset his ou~put
VAT may have no legal basis to make such offsetting. disputed assessments claim for refund
I
,274
VALUE ADDED TAX
Taxation Law

refunds of internal revenue and the appeal ·to

I REGISTRATION ]
taxes ; fees or other charges , the CTA must be
·penalties in relations thereto, done· within the REGISTRATION AS A VAT PERSON
or other matters arising two-year period (N/RC, SECS. 236 (G) AND 236 (H)) ·
under the National Internal (INGLES, 1. Mandatory
Revenue Code or other laws Reviewer, supra Any person, who in the course of trade or
administered by the Bureau at 4.69). business, sells, barters, or exchanges goods or
of Internal Revenue, where properties, or engages in the sale or exchange of
the National Internal services, is required to register if:
Revenue Code provides a a. His gross sales or receipts for the past 12 .
specific period of action, the months, other than those exempt under Sec.
inaction shall be deemed a 109 (A) to (AA), have exc~eded ~3,000,000;
denial (Sec.' 7(a)(2), R.A. No.
or
1125, as ame(lded by R.A. b. There are reasonable grounds to believe that
Nos. 3457, 9282 and 9503) . his gross sales or receipts for the next 12
months, other than those exempt under Sec.
NOTE: The judicial claim
109 (A) to (AA), will exceed ~3,000,000.
need not fall within the two-
year prescriptive period (CIR
r
v. Mindanao Geothermal II 2. Option~
Any YAT-exerppt person m·ay elect·to register as
Partnership, G.R. . No.
191498, January 15, 2014). . a VAT°p,ersdn by paying the annual registration
fee. \ ·}' ·
.. . . : .,. . . . . -.., . ' ,,:\. ~:= '"'-\f..J:!.
Person Claiming Refun~ ·. ·... :·'".'°•:'tl,1
·= . : Hes·~ - all no/ ~e en ·tied to cancel his regist~ation·
I \ > •
The person claiming the Ihe taxpayer whcr · · --· - as· a · AT person for the next 3 years from the
refund or cr~dit of the input• is. legally liable and ·. quarter when the election was made.
VAT is not the person w o ~ ho is deemed t9 •. · : ' ·
legally paid the input VAT. • have l,egal~ paid , ·. _· ·' EX<;E~TJO~: Fra ise grantees of radio and
fo~the 1np_ut VAT. : ---1 - --ry
~r~ dca~l iog wh~se annual gross receipts for
· 1 .• the precedi,ng year do not exceed ~10,000,000
I ·whose option is pefPetually irrevocable (R.R. No.
. ' , •t:2007,,Sec. 15),,
Refund or credit in the VAT ·Prdinary refurtd o r • -~ i,I" --~# '
.'
system
R~gistration is' an indispensable requirement
credit outsid.,e of . 1
• . '. •
the VAT s·ysiem
. ·_up der ou VAT law (Commissioner of Internal
Remedy of the Taxpayer · ··::~-~~
.. ,
•Revenue v. Seagate Technology PHL, G.R. No.
1~53866, February 11, 2005). In other words, non-
1. Input Tax 1. Claim for - ,-...,,.,...,.....~~•,.registration as a VAT person does not exempt the
Carried over to the Refund seller from value a·dded tax (output tax) liability.
succeeding quarter(s) 2. Claim for Based on existing law and regulations, the seller
2. Any input tax attributable Credit who did not register as a VAT person cannot
to zero-rated sales by a (NIRC, Sec. 229) claim any input tax passed on to him as a penalty
VAT-registered person, for non-regist_ration (MAMALA TEO, Reviewer,
may at his option: supra at 627). ·
a. Refunded; or . .

b. Credited against The registration of income tax as a tax type does

other internal not automatically carry with it the registration of
revenue taxes VAT and/or percentage tax as a
(NIRC, Sec. 110(8)) covered/registered tax type (R.R. No. 7-2012,
Sec. 9).
(BOADO, supra at 251-255)
Any person who maintains a head or main office·
and branches in different places shall regiSter
with the RDO which has jurisdiction over th e
place wherein the main or head office or branc~
is located. A separate and distinc
 w \ /
MEt4Q~y AID
Sen Bed& I.JrMfllty College of Law - RGCT Ber Ope,auone Centar
establishment shall n_,ean any branch or facility
wh~re sale transactions occur. E~ch VAT-
registered person shall be assigned onl
Taxpayer Identification Number (TIN) (R ~e 0
16-2005, Sec. 9.236-1). - · · · certificate is based on the existen_ce of zero-
Ev~ry person who becomes liable to be
reg1ster~d shall register with the appropriate
~e~en_u~ offi~ (LTS or RDO) which has
JunsdIct1on over the head office qr_branch of that
perso~ a nd shall pay the annual registration fee
prescnbed (MAMALA TEO Reviewer. supra at
629) . ' '
I
.___RE
INVOICING .
_ Q_UI
_ RE
_ M_E_NT
...;...S_....J .
A VAT-REGISTERED PERSON SHALt '
ISSUE:
1. VAT Invoice-for every sale, barter or exchange
of goods or properties. · ·
2. VAT Official Receipt (VAT OR) - for every i~ase
of goods or properties and for every ~ale, barter
or exchange of ~ervices (NIRC, Sec.'_113 (A)). _ •
Only VAT registered persons _are required to.print
their Tax Identification Num~er (TIN) followed by
the word "VAT" in their invoice•or offig alreceipt,
which shall be considered the "V'1T invoice" or,
"VAT OR". All purchases covered by
invoices/receipts other than the VAT invoiceNAT
official receipt shall not give rise to any.input tax
(R.R. No.-16-2005, Sec. 4.113-1 (A)) .
INFORMATION CONTAINED
INVOICE OR VAT OR: ·
1. Statement that the seller is a VAT-registered
person followed by his TIN;
2. The total amount which the purchaser pays or is
obligated to pay to the seller with the indication
that such amount includes VAT;
a. Amount of tax must be shown separately on
the invoice or receipt;'
b. If the sale is exempt from VAT, the term
"VAT-Exempt Sale" shall be w~itten . 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;
The appearance of the word "zero-rated" on·
the face of invoices covering zero-rated sales
prevents buyers from falsely claiming input
VAT from their purchases when no VAT was
actually paid. If, absent such word, a
successful claim for input VAT- is made, the
government would be refunding money it did
not collect. If the claim .for refund/tax credit
rated sales by the taxpayer but it fails to
comply -.yith the invoicing requirements in the
issuance of sales invoices (e.g., failure to
indicate the TIN), · its claim for . tax
credit/refund of VAT on its purchases shall
be denied considering that the invoice it is
issuing to its customers does not depict its
being a VAT-registered taxpayer whose
sales are classified as zero~rated . sales.
I Nonetheless, this treatment is without
prejudice to the right of the taxpayer to
charge the input taxes- to the appropriate
expense account or asset account subject to
depreciation, whichever is applicable
(Panasonic Comm. Imaging Corp.' of the Phil.
v. Commissioner of Internal Revenue, G.R.
No. 178090, February 8,.2010}.
,
d. If the sale involves goods, properties or
services _some which are subject to VAT and
some re. VAT zero-rated or VAT- exempt,
the breakdown of the sale price between
taxable, exempt, and zero-rated
components, and the calcuiation of the VAT
on ach portion of the sale shall be ·shown on
. \..
the invoice or receipt. A VAT-registered
person may issue a sii:,gle invoice or receipt
for . YAT-taxable and VAT-exempt
transactio s provided that the invoice· shall
clearly indicate the breakdown of the sales.
" 3. ·Date of the transaction·, quantity, unit cost and
description of goods or p_roperties or nature of the
service; and ..
4. In case of sales in the amount of ~1.000 or more
IN. VAT and the sale or ~ransfer is made to a VAT-
registered person, the · name, business style,
address and TIN of the purchaser, customer or
client (NIRC, Sec. 113 (B); R.R. No. 16-2005
Sec. 4.113-1 (B)) . '
CONSEQUENCES . OF ISSUING
ERRONEOUS VAT INVOICE OR RECEIPT
!f a . person w~o is no~ VAT -registered issues an
m~o1~ or ~eceIpt showing his TIN, followed .by the
word VAT, the erroneous issuance shall result to
the following:
1. The issuer shall be liable to:
a. The pe:centage taxes applicable to his
transactions; .
b. The twelve percent (12%) VAT without the
benefit of any input tax credit; and
c. A fifty percent (50%) surcharge.
 - .

VALUE ADDED TAX

Taxation Law

2. The VAT shall be recognized as an input tax

credit to the purchaser, if the other requisite FILING OF RETURNS AND
information is shown on the receipt or invoice as PAYMENT OF VAT
provided in Sec. 113 (B) of the NIRC. .. .·
3. If a VAT-registered person issues a VAT invoice
or VAT official receipt for a VAT-exempt
transaction, but fails to display prominently on the WHO ARE REQUIRED TO FILE A VAT
invoice or receipt the term "VAT-exempt sale" the
issuer shall be liable to account for-the twelve RETURN
percent (12%) VAT as if the transaction is not an Every person liable to pay VAT_ shall file a q~arterly
exempt transaction. The purchaser shaU be return of his gross sales or receipts (N/RC, Sec. -114
entitled to claim an input · tax credit on his (A)) .
purchase (NIRC, Sec. 113 (D); R.R. No. 16-2005,
Sec. 4_113-4). · TIME FOR FILING A RETURN
Every person liable_to pay VAT shall file a-: . ·
INVOICING AND RECORDING DEEMED 1. Monthly return for VAT-registered persons, who
SALE TRANSACTIONS: . shall pay the VAT on a monthly basis;
1. Transfer, use or consumption not in the 2. Quarterly return of the amount of his quarterly
. course of business of goods or
properties gross sales or receipts within 25 day~ following
originally_ intended for ~ale or use ,in · the~ . · the close of the taxable quarter (N/RC, Sec. 114
course of business - a memorandum•·entry in i l ,, ,(A)). · _
the subsidiary sales joum~I to refOrd wit 'dl'i,lwa~. -· :,,.... f.. • / 1 -:.. • . • •
of goods for personal use Is re~uirea. : ·. --~ NOTE:..-Begln_r.ing January 1, 2023, the fihng and
/ (, ; / _ _. _ "-•- paymj:!n A'~quired shall be done within 25 days
2. Distribution or transfer to shareholders or ·:.
1
allowing, the.; c ose of each taxable quarter
investors share in. the/ pfQ.f]~ / bf (he VAT- '-' ~-.: · (NIR(J, S~p. ""t-44 (A)) . . · .. ·
registered persons, or to credl tors in' payment . · -· · . \ •. · . , . ,
of debt or obligation an consighmenL .oL.:·:...-::-Taxable lquarter-- shalt. mean the quarter that is
1
goods if actual. sale Is ot made y.,ithLn._ 60 synchron zed to; ,the i~come tax quarter of the
· days folli:>wing the date -:---1 uch go~ds w~r~ : t_axpayeri (i.e., c~lendar-pr fiscal quarter) (R.R. No.
con~i~ned - ~n invoi'r: wti~ch inplu9~ .,s ~ll"t~e · ~- · ,,.16-2005 riSJ~- 4.JJ 4-1 . . _
lnvo1~mg. requirements.i T_ hE;. data -~Pe.ea~mg- m ---- ------ ;::_·_.; , .
the _m~o1ce shal~ be <fyly; recor~~ <'" !
th~: : 1 • A_
1
m.o_y9~ reflec~ed I~ the _monthly VAT declara!10ns
~ubs1d1ary sa~es Jouma!. 'The t?,tal a~?u~! of I .!o~-!~~-fi~~t tw~ "(~) months bf the quarter shall still be
deemed sale shall be I luded m the cet~-'!1i to 1 ) rfc~u~~~ tn t!Je quarte~y .VAT return that reflects the
be filed_for the month or qt.tarter. , .- . "'. _quqiulat1ve figures for the taxable quarter. Payments
. · : ·~-:.~_Jj_:_ · i~Jh~:pi~h~hly WfF declarations shall, however, be
3. R~tirem~nt from _or ces~atl n oJ ibJlsmess~ .. ., •.<:fed1te,d-_tnUie quarterly VAT return to arrive at the
~•th respect to inventories , OJl,.. h~_nlt ; an 1 b
~et,V 1: pai able or excess inputtax/over-payment as
inventory shal,I b~ ~re~a~ed and -subm_ 1tte to th~ I·/ i pfthe endiOf a quarter (R.R. No. 16-2005, Sec. 4.114-
R~o. who has Juns~1ct1on over the taxpayer's ,:. ~ 1)."'"'-· ·
pnncIpa~ place of business not later than 30 days
after retiremeni or cessation form business.

NOTE: An invoice shall also be prepared for the ·

entire inventory, which shall be the basis of the
entry into the subsidiary sales journal: T.he
invoice need not enumerate the specific items
appearing in the inventory, but it must show the
total amount. It is sufficient to just make . a
reference to the inventory, regarding the
description of the goods (R.R. No. 16-2005, Sec.
4.113-2/
.CANCELLATION·OF VAT
REGISTRATION
.
'.he registration of any person who ceas~s lo ~e
hable to a tax type shall be cancelled upon filing wit~
the _RD<? w~ere he is registered, an applicatio~ for
reg1strat1on information ·update in a form prescnbed
therefor (NIRC, Sec. 23? (F)(1)). ·
 \ I

MEM:Q~Y-AI D -
Sen lledll lkMIWity Colege Law - RGCT B a r ~ Center

A VAT-REGISTERED PERSON MAY STANDARD INPUT TAX .

CANCEL HIS _REGISTRATION FOR VAT
·IF:
1. He mak~s written application and can
demonstrate to the CIR's satisfaction ·thaf his
gross sales or receipts for the following twelve
- (12) months, other than those that are exempt
transactions, _will not exceed ~1.500,000 (now
193,000,000); o_r _ . -.
2. He has cease·~ to carry on his trade or business,
and does not expect to recommence any trade or
business within the next twelve ( 12) months
(NIRC, Sec. 236 (F)(2); R.R. No. 16-2005, Sec.
9.236-6; R.M.C. No. 03-201~) -
Input taxes that can be directly attributable•to VAT
taxable ' sales of goods and services to the
Government or any of its political subdivisions,
instrumentalities or ag~ricies including GOCCs shall
not be credited against output taxes arising from
sales to non-Government entities (R.R: .No. 04-2007,
Sec. 4.110-4).
The Govemmeht or any of its political subdivisions,
instrumentalities or agencies including GOCCs shall
deduct and withhold a final VAT due at the rate of 5% .
of the gross payment (NIRC, Sec. .114 . (C), as
amended by TRAIN Law).

The qancellation of registration will be· effective fr~m The remaining 7% effectively ac90unts for the
the first day of the ~ollqwing month (NIRC, Sec. 236 standard input vat for sales of goods or services to
. (F)(2)). government · or any of its _political -subdivisions,
instrumentalities or agencies including GOCCs in lieu
of the actual input vat directly attributable or ratably
apportioned to such sales (R.R. No. 4-2007, Sec. 22).
WITHHO_L DING OF ' •' ,-,
Cutout VAT 12%
FINAL VAT ON SALES TO> , "? I Less: Standard Input VAT 7%
I GOVERNMENT A} . ' .: . , ,
>\
Final Withholding VAT
... 5%

. .;:, ... If actual inp_ut -VAT attributable to sale to · the

:
"1, _,;; government exceeds 7% of gross payments, the
excess ma~f./form part of the sellers' expense or cost
TYPES OF WITHHOLDING VATr _~-- (R.R. No. f-20 7, Sec. 22) .
1. On payments by Governmeri_t (final w~thholding . I .\.
VAT); and Ir ,.- : · " . •
, If · ~ctual input VfrvT attributable to sale to the
2. On payments to Nonreside,:its (finar withholdi~g · government is less than 7% 1of gross payments, the
VAT) (R.R. No. 16-2005, Sec. 4.11# 2)~{_ '"/ ' difference must· be closed (deducted) to expense or
. . -"':. ., -,r~ :1:... :
,_ cost (R.R. No. 4-2007, Sec. 22) .
FINAL WITHHOLDING Vfi,..T -~-~ ON .
PAYMENTS BY GOVERNMEN°(, .- ;;.· ,_ -, : .".° ILLUSTRATION: _
Selling Price (inclusive of VAT): ~112.00
Sale of goods and services to the government,·~s
VAT withheld by the government: · 5.00
subject to 12% VAT. However, the Gov~rr:ifllent is Standard Input V~T (SIV): _ 7.00
required to deduct and withhold a final VAT o( 5% !or
its purchases (R.R. No. 16-2005, Sec. 4.114-2). _ · SITUATION A: ·· ·
Actual cost of goods of seller is ~89.60 (~_80 + ~9.60
_
N OTE: Beginning . January 1, 202_1, the , VA_T IV): .
withholding system under this subsection shall shift
from final to a creditable system (NIRC, Sec. 114 . Standard Input VAT t-7.00
(C) as amended by TRAIN _Law). Less: Actual Input VAT 9.60 .
Exc~ss Actual Input VAT* P2.60
CREDITABLE WITHHOLDING OF VAT ON
PAYMENTS TO NON-RESIDENTS ~Since the taxpayer cannot credit as input tax the
The Government or any of its political subdivisions, amount of~2.60, 1t is considered as· part of additional
instrumentalities or agencies, including GOCCs, as · . exp~nse of the seller.
well as private corporations individuals, eSt ates and
trusts, whether large or n~n-large taxpayers, shall , SITUATION B: _
Actual cost of.goods of Seller is ~50.40 (~45 + t-5.40
withhold 12% VAT, with respect to: rty r"ghts
1. Lease or use of properties or prope 1
.
LV): ,
Standard Input VAT t-7.00
owned by non-residents; a~d Phili ines by
2.. Other services rendered in th e S
2
, . Pj Less: Actual Input VAT
Excess Standard Input VAT*
5.40
P 1.40
non-r~sidents (R.R. No. 04- 2007• ec. . I ·
 278 .
VALUE ADDED TAX
Taxation Law

. .
*Since he can credit as input tax '97.00 instead of the OTHER PERCENTAGE
actual IV of '95.40, he gained from the transaction
hence, '91 .40 is recognized as deduction to the
TAX
seller's expenses or costs. .

It refers specifically to.the business taxes covered by

ADMINISTRATIVE AND Title Vofthe NIRC of 1997, as amended, payable by
any person or entity whose sale of goods or services
PENAL SANCTIONS is not covered by the VAT system (2 CASASOLA,
National Internal Revenue Code, (2013), p. 935
hereinafter 2 CASASOLA]) .
SUSPENSION OF BUSINESS
OPERATIONS. . TRANSACTIONS COVERED BY OPT
The Commissioner or his authorized representative (NE3M-DoGlnFO-BOLA2WS)
is hereby empowered to suspend the business 1. Sale of goods or services of persons who are
operations and· temporarily close the business exempt from VAT under Sec. 109 (1 )(BB) of the
establishment of any person (NIRC, Sec. 115). Tax Code and who is not a VAT-registered
_, ....... eerson and whose gross annual sales or receipts
Grounds .,,.,.. · · ~- 1 :po Mot gxceed ft3 1000 1000 1 except cooperatives
In addition to other administrative'. and :--penal t. _ ! l· v which shall be exem~t from percentage tax
sanctions provided for in the rra/ Code and .... (NIR<S,,,,Seo. 116, as amended by TRAIN Law); ,
implementing regulations , the Commissi ner of ahd . 1>" , . • .

Internal Revenue or . hi d'u1' y-~ aythorized~ -- 2. 0 er kiqsJs ot business subject to the other
represenlative may order suspension or cl ·sure of'..a ,., '"' ,, percenta tii~e under Title V of tlie NIRC, as
business establishment for any of the following L;.,. ame ded, egar~ess of whether or not the gross
violations {IF-UR): . . _ a~~ual rec ip_,!,s .exceed '93,000,000, such as:
1. Failure to Issue receipts a . invoices. •. ····-~ _ , · . ,, (r;>oGlnFO-BOLA2WS)
2. Failure to file VAT return ~s quired imder..the . · · ,. _a._ Do~ esti _ca!,riers by land and keepers of
provisions of Sec. 114 of.thJ-"Trx Cp d~- 1
_· :..:-~ -''' ..:: § ~~ges Nltfff, Sec. 117);
3. ,Ynderstatement of taxable sa~ s o_r receipts by -· - · b. 1n~e_r,nati nal ca rriers {NIRC, Sec. 118);
1
30%_or more of his coi:rec ~ xabl~) _ales oi · ~ -1/..'f r~richi es ( fR_C, Sec. 119);
re~1pts for the taxable quarter. _ ,(~'. , .!.:..,d.:
1.t ~-~erseas _ dispatch, messc1_ge · or ,
4. Failure of any person to fieg1ster as '{ eqR•~o ,..-'/ ., _· conve. at1on originating from the Philippines
under the provisions of Se 236 of~ Ta~ C,Qde__ ~---:,:.' / (N~pc , Secj 20);
(NIRC, Sec. 115; R.R. No. 6-2005, Sep. 4:1.!_ 5 ~- . \ , ~e: §anks and non-bank financial intermediaries
P~rtPr.ming quasi-banking functions (NIRC,
1).
1r,) ·· , ··- ;:_•_ - - •· Se
. __,,()·;..,. 121);
Duration Ofh · · · ·
Th t " , - er non-bank financial intermediaries
e empo~ry closure of the establishment shall be .(NIRC Sec. 122)·
°~ f
1
5 81 dbeura,iftedtion of NOT less than five (5) days and - • g. ,bife in~urance bu~iness {NIRC Sec 123 1•
only upon co r ·h h A · · ' · ':
requirements pres -b mp iance wit whatever · _gents of foreign insurance companies
th
closure order (NIR~ ;d by e Commissioner in the (NIRC, Sec. 124); ·
115
' ec. , par.2). · i. Proprietor, lessee or operator of Amusement
places (NIRC, Sec. 125); . -
SURCHARGE, INTEREST. AND OTHER
PENALTIES j. Winnings (NIRC, Sec. 126); and
k. Sale, barter or exchange of Shares of stock
The interest
. . on unpaid . •amounts of tax , civil Pena it·1es listed and traded through the local stock
and cnmma 1penalties imposed in Title XI of the T exchange or through initial public offerings
Code shall also apply to violations of the provisi ax (NIRC, Sec. 127) (2 CASASOLA, supra at
of Title IV of the Tax Code (R.R. No. 16-2005 sons 936) . .
4.115-1) . , ec.
NATURE OF OPT
The na~ure of OPT is essentially a tax onthe
:ansaction an? not on the articles sold, bartered or
xchanged. It is an indirect tax which can be passed
~n to_~he_ buyer (Philippine Acetylene Co., Inc. v.
omm,s5 ,oner of Internal Re venue G.R- No. L·
19707, August 17, 1967). '
 \ I

ME~Q~Y AID
Sir! Beda College of Law - RGCT B e r ~ Center

TAX RA TE FOR TRANSACTIONS

b. More than 5 years
SUBJECT TO OPT 1%; .
Any person whose sales or receipts are exe!'Tlpt from
the payment of value-added t~x ,and who is not a 2. Dividends and Equity
VAT-registered person shall pay a tax equivalent to _ shares and net income of
three percent (3%) of his gross quarterly sales or subsidiaries - 0%;
receipts: Provided, That ·cooper atives shall be 3. Royalties·, rentat of property
exempt from the three percent (3%) gross receipts tax (real/personal); profits· from
herein imposed (NIRC, Sec. 116, as amended by exchange ~nd all other
TRAIN Law) . - items under Sec. 32 of the
NIRC-7%; _
OTHER KINDS OF BUSINESS SUBJECT 4. Net Trading Gains within
TO THE OPT taxable year on foreign
cu rreincy, debt securities·,
derivatives and . ott.,er
similar instruments - 7%.

Domestic carriers 3% of quarterly gross receipts NOTE: Provided, however,

by - land • and in· case of pre-termination,
keepers of the maturity period shall be
garages (NIRC, reckoned to end as of the
Sec. 117) ., (.~· pre-termination ·date.
1----------- - -- - - - -.-~
-.,, _c1
International 3% of quarterly gross receipts · , .Other non- 5% _on , the gross • receipts
carriers (NIRC, • ·j >. : " bankingfinancial derived - · - from interest,
Sec. 118) .J· --- intermediaries commissions, discounts and all

Franchises - 3% of the gross .,.. rt:rceipts ,

1/
.~
YNiRt; ~ec. 122) other items t~eated as gmss -
income
Radio
television
broadcasting
and/or derived from the~- business
covered · by the laW:. 9tanti_
franchise • ·
,:ig. F
.,i::.:.
1

1 NOTE: Interest, commissions

and discounts from lending
companies whose . - ~- . ,~..., activities and in'com~ frol'!l
annual gross NOTE: They.have ttie_option.to .financial leasing shall be taxed
receipts of the register as · VAT""'r a_~payer: at (based on maturity period):
preceding _year do o'nce option is ,exercised, said• 1. 5 years or less - 5%
not exceed option shall be irrevocable: 2. · More than 5_years -1%.
~10,000,000 .I {' - '
7
C•

(NIRC, Sec.' 119) :: Provided, however, in case of

pre termination, the maturity
Franchises - Gas 2% of the gros~ rec~lpts period shall be reckoned to end
and Water derived from the t:iu.sinp ss as of the pre-termination 'date.
Utilities (NIRC, covered by the law granting
Sec. 119) . franchise Life · . insurance 2% on the total premium
business (NIRC, collected, . whether paid in
Overseas 1Oo/o on the amount paid .for Sec. 123) money, notes, credits_ · or any
dispatch, such service substitute for money
message or
conversation NOTE: The following are NOTE: The following _are not
originating from exempt from the 10% OPT: included in · the - taxable
the Philippines 1. Government; receipts:·
(NIRC, Sec. 120) 2. Diplomatic Services; . 1. F?remiums refunded within 6
3 _ Public . International months after payment on
Organization; and -account of rejection of risk
4. News Services. ·or other reason;
2. Reinsuraoce (where in tax
Banks and non- 1. Interest, commissionl_s d~~dg has already been paid);
bank financial discounts from en 1
3. Premiums collected by any
· intermediaries activities and income from
branch of domestic
Performing quasi- financial leasing (based on
corporation, firm or
banking functions maturity period): •
0 association doing business
JNIRC, Sec. 121) a. 5 years or less - 51/o,
 .VALUE ADDED TAX
---
. . Taxation Law

outside the Philippines on · they charged admi,ssion or

account of any life , not)- 30%
insurance of a non-resident NOTE: % based on gros~
Insured (if tax has already receipts
been imposed by foreign
Winnings (N!RG_, 10% on the actual amount paid
country); and Sec. ·126) · to him for every winning ticket
4. Pqrtion · of premiums after deducting the cost of the
collected on · variable ticket ·
contracts in excess of
amounts necessary to NOTE: In case winnings came
insure the lives of the
from double,
variable contract workers.
forecast/quinella and trlfecta
Agents of foreign Twice the tax imposed in Sec. bets, tax shall be 4%; and in
insurance 123 of the NIRC case of owners of winning
companies racehorses, it is 10% of the
. (NIRC, Sec. 124) NOTE: In all cases where prizes.
owners of property obtain
insurance directly with foreign Sale, barter or 'i. Traded.through Local Stock
exchange of Exchange - 6/10 of 1% of , ,.
companies, it shall be the duty
of said owners to report- to the shares of stock gross selling price/ gross
Insurance Commissione and ;list~d aAq traded value in money of shares of
to the Commission r o n e al thr,bugh the ,local stock; .
Revenue each, case whe're· stock · eicflange 2. Exchanged through Initial
1
insurance has ,. ,been so or throJgh ) ' itlal Public Offering (of stocks in
effected, and tt: ay 5% tax on public offerings closely -- 11eld
.
premiums pa d)
,i.

1
• ' ·,
'fJYIRC, Sec. 127) corporations) (based on
gross selling price/ gross ·
Proprietors, 1. Cockpits-18% · '. •' _ _ _ value in money of shares of ·
lessee or operator 2. Cabarets, ight or day lubs - t· ~ock)
of · amusement -18% - ·-·. :· ·
places . (NIRC, 3. Boxing exhibitions,..,. 10% ·. . • · · ,
' ' a. Up to 25% - 4%;
Over 25% but not over
Sec. 125) /'' - - 331/3% - 2%·
NOTE· , . :r ~id~d, · ~- : , , Over 33 1/3%, - 1%
however, that bqxu:ig , •/ / /.::?-·-·
exhib(tions whereifo World · /'.'-~ NOTE: % based on
or Or i$il ~'s-~ total outstanding
C_h~f!1Pi~nships in --aAf IF>-. shares after listing
d1v1s1on Is at stake sp an be -.:...-
y
exempt from amusement
· tax, if at le~st of the
contenders Is a Filipioo 1\,
lt1 ' ,
\ · NOTE: Tax shall be
paid by . issuing
corporation in primary
citizen and said
offering or by the seller
exhibitions are promoted
in secondary offering.
by citizen/s or by a
corporation or association Closely held corporation
at least 60% of the capital means any corporation at le1:1st
of which is Filipino-ownea. 50% in value of outstanding
capital stock or at least 50% of
4 . Professional Basketball
total combined voting power of .
_Games (under P.O. No. all classes .of stock entitled to
871)- 15%
vote is owned directly or
indirectly by or for not more
~01:E: Tax herein shall be
in heu of all OPT of than 20 individuals.
whatever nature.
NOTE: Sec. 6 of RA. No.
11494, otherwise known as the
5. Jai Alal and racetracks
"Bayanihan to Recover As one
(irrespective of whether
Act" effective on September
15, 2020 repealed Sec. 127 (B)
 \ I
MEM,Q~YAIO
s., Bede lkw9lity Colege r:A iaN RGCT Bar ()peratjona Center
of the NIRC referring to the Tax
on Shares of Stock Sold or
Exchanged through Initial ,
Public . Offering (NOTE: R.A.
No. 11494 is not yet covered in
the 2021 Bar Exam).
RETURNS AND PAYMENT OF OPT
Person Liable
Every person subject to the percentage taxes shall
file a quarterly return and pay the tax due thereon
within twenty-five (25) days after,the end of each
taxable quarter. In the case of a person whose VAT
registration is cancelled and who becomes liable to
the tax imposed in Sec. '116 of the· NIRC, the tax shall
accrue from the date of cancellation (NIRC, Sec. 128
(A)(1)) .
PERSON RETIRING FROM Bl:ISINESS
Any person retiring from · a business subject to
percentage tax shall notify the nearest internal
revenue officer, file his return and pay the tax due
thereon within twenty (20) days after closing his
business (NIRC, Sec. 128 (A)(2)).
.--------------,-'!,". -----.
CREATE ACT PROVISIONS
AFFECTING VAT AND'OPT
NOTE: The 2020/2021 Bar Examination Taxatiory
Law Syllabus does not include Corpq~aie Recovery
and Tax Incentives for Enterprises (CREATE) Act
which took effect on April 11, 2021 (15 <!_,ays afte~ i!s-.
publication on March 27,2021), but for purpose~ of
discussion CREA TE Act was included in the mr:Jking
' .J.-
.of the Memory Aid.
VALUE-ADDED TAX
Amended and added transactions exempt from
VAT to wit:
. 1. Item (P) of the. amended Sec. 109 of the NIRC
has been vetoed by the President. However,
pursuant to latest revenue regulations, VAT-
exempt sales of house and lot and other
residential dwellings were adjusted from
~.000,000 to t-3, 199,200 beginning January 1,
2021 (R.R. No. 8-21, Sec. 2 (1)) . · . .
2. (R) Sale, importation, printing or p~bh~t1on of
books, and any newspaper, mag~ine, 1our~al,
review bulletin, or any such educational reading
material covered by the UNESCO Awee~ent on
the Importation of Educational, Sc1en_t1~c and
Cultural Materials, including the d1g1tal or
electronic format thereat Provided, That the
materials enumerated herein are not devoted
principally to the publication of . paid
advertisements (R.R. No. 4-21, Sec. 2); .
3. (AA) Sale of or importation of prescription drugs
· and medicines for:
. a. Diabetes, high .cholesterol, and hypertension
beginning January 1, 2020; and
b. Cancer, mental illness, tuberculosis, and
kidney diseases beginning January 1, 2021
(Id.) ;
4: . (BB) Sale or importation of the · following
beginning January 1, 2021 to December 31,
2023, subject to post-audit by the BIR and BOC:
a. Capital equipment, its spare parts and raw
materials, necessary ·for the production of
personal protective equipment components
for COVID-19 protection (i.e., coveralls,
gown, surgical cap, surgical mask, N- 95
. mask, scrub suits, goggles and face shield,
double or surgical gloves, dedicated shoes,
and shoe covers);
b. All drugs, vaccines and medical devices
specifically prescribed and directly used for
·,,~ .,
{J'.)'"...
the treatment of COVID-19; . ·
.
. ·;--". ·_;, ·•"'K~ The Department· of Health (DOH)
shall ,,.-update the list within sixty (60) days
fro"}•tfl~ effectivity of the CREATE Act, and
every three (3) months thereafter.
. 11
r -
c. Drugs for th~ treatment of COVID-19
apP,roved . by the ·Food and . Drug
J Administration (FDA) for use in clinical trials
including raw materials directly necessary fo~
the production of such drugs Provided, That
the Department of Trade and Industry (DTI)
shall certify that such equipment, spare parts
or r~w materi_als for i_mpo~ation are not locally
available or insufficient in quantity, or not in •
·accordance with the quality or specification
. required ·(Id.).
5. (CC) Sale or lease of goods or properties·or the
performance of services oth~r than · the •
transactions mentioned " in the · preceding
. .
paragraphs, the gross annual sales and/or
receipts do not exceed the amount of Three
million -pesos (P3,000,000.00) (R.A. No. 11534
otherwise k~own as the Corporate Tax Recovery
and Incentives for Enterprises (CREA TE) Act,
Se~ 1~. .
.NOTE: Sec. ·109 (BB) of the ·NIRC was only
ame~ded as Sec. 199 (CC). The VAT threshold .
remains at 193,000,000.
OTHER PERCENTAGE TAX (OPT)
Any person whose sales or receipts are exempt d
Section 1Q9(CC) of this Code from the paym~~t ~;
 l
282
VALUE ADDED TAX
Taxation Law

· value-added tax and who is .n9t a VAT-registered . KINDS OF EXCISE TAX

person shall pay a tax equivalent to three per~nt 1. Specific tax - . : ·
(3%) of his gross quarterly sales ~r receipts: It refers to the excis-e tax imposed w~ich is based
Provided, That cooperatives, shall be exempt from on weight or volume capacity or any other physical
the three percent (3%) gross receipts tax . herein unit of measurement: and
imposed: Provided, further, That effective July 1,
. 2020 until June 30, 2023, the rate shall be one
2. Ad valorem tax
percent(1%) (CREATE Act, Sec. 13).
It refers to the excise tax which is based on selling
price or other specified valt1e of the goods or
Excess percentage tax payments as a result of the
services performed (NIRC, Sec. 129 as amended
decrease of tax rate from 3% to 1% from July 1, 2020
until the effectivity of RR No.: 4-21 may be carried by TRAIN Law).
over to succeeding taxable quarters. This carry-over
portion is intended for Percentage Taxpayers who are EXCISE TAXES IMPOSED ON CERTAIN
regularly filing the returns and are expected to have ARTICLES (ATPMi 2) (NIRC, SECS. 141 TO
overpaid taxes as a result of the retroactive 151, AS AMENDED BY TRAIN LAW)
application of the CREATE (R.R. No. 8-21, Sec. 2(3)).

NATURE OF EXCISE TAX

Excise taxe~ may be considered taxes on production
as they are collected only from manufacturers and
·producers. Basically an indirect tax, it is directly levied
upon manufacturer or importer upon removal of the 4. Miscellaneous Products ·
taxable goods from its place of production or from the a. Automobiles ·
customs custody. These taxes, however, may be b. Non-essential goods .
actually passed on to the end consl!mer a,s part of the i. Jewelry, peart.s, precious and sem~
transfer value or selling price of goods sold, bartered precious stones and imitations thereod
or exchanged (Silkair Pte. Ltd. v. Commissioner of goods ·made, ornamented, frtted, fitte
/ntemal Revenue, G.R. No. 184398, February 25, with the same .
2010). Perfumes_an~ toilet waters . for
111 • Yachts and other ves·sels intended
pleasure or sports
c. Non-essential services - refer to invasiv~
 \ I

ME-M:Q~y Al D \
. 6-1 Bede lkwnity College of Law - RQCT Bar Oper.uon. Center

cosmetic procedures, surgeries, and body

enhancements directed solely towards
MODE OF COMPUTING CONTENTS OF ,.
improving, · altering, or enhancing the CASK OR PACKAGE
patient's appearance and do not Every fractional part of a proof liter equal to or greater
meaningfully promote the proper function of than a half-liter in a cask or package containing more
the body or prevent or treat illness or disease than one liter shall be taxed as a liter, and any smaller
d. Sweetened beverages fractional part shall be exempt; but any package of
spirits, the total contents of which are less than a
5. Mineral Products proof liter, shall be taxed . as one liter (NIRC, Sec.
a. Coal and coke 132).
b. Non-metallic minerals and quarry resources
c. Metallic minerals
d. Indigenous petroleum

PERSONS LIABLE TO PAY EXCISE

·1 DOCUME~~y STAMP I
TAXES ON IMPORTED ARTICLES (Ol~P)
1. Owner or !mporter; or
2. Person who is found in Possession of articles
which are exempt from excise taxes other than It · is a tax on · documents, instruments, loan
those legally entitled to exem"t>tion (NIRC, Sec. agreements, and papers evidencing the acceptance,
131). ,,, assignment, sale or transfer of an obligation, right or
property incident thereto (2 CASASOLA, supra at
TIME OF PAYMENT: Before the release of such ·, 1077) .
articles from the customs house (NIRC, Sec. 131). .w
.
1.," ·-'I
I

. NATURE OF _ DOCUMENTARY STAMP

NOTE: In the case of tax-free articles br01;1ght or . : _T_A)(--=i(B_S_T:-)'..;____--=-------:--:----:----~
imported into the Philippines by persons_,.entities, or 1 , A DST is in the nature of an excise tax ·-because it is
agencies exempt from tax which· are s1,1bsequently,_. ··· imposed upoh. the privilege, opportunity or facility
sold, transferred or exchanged in the Philigpines to · offered at ;-exchanges for the transaction of the ·
non-exempt persons or entities, t~~.purctfasers or · business. DSll is a tax on documents, instruments,
recipients shall be corisidered th~, 1mport_ers thereof,, · loan agreem nts, and papers evidencing the
and shaU be liable. for the duty:~i:id· in~e.rn~l.rev~r ue . accepta_nc~{ .a.~signment, or transfer of an obligation,
tax due on such importation (NIRC, Sec._pt). -~.:- right or property ·ncident thereto. DST is thus
. , ' imposed on'lhe exercise of these privileges t~rough
PERSONS LIABLE TO PAY· · EKCISE the execution of specific instruments, independently
TAXES ON DOMESTIC PRODUCTS"' . · bf the -legal status of the transactions giving rise
· thereto · (Commissioner of Internal Revenue v.
Every person liable to pay excise tai' shall Qle•, a .,.. Pilipinas Shell Petroleum Corp., G.R. No. 192398,
separate return for each place of praduct(op- S~buld September 29, 2014).
domestic products be ·removed from the ·1;>!a~ of
production without the payment of the tax, the o~ner
or person having possession thereof shall be liable Hence, in imposing DST, the Court considers not only
for the tax due thereon (NIRC, Sec. 130 (A)(1)). the document but also the nature and character of the
transaction (Philippine Banking Corp. v."
Commissioner of Internal Revenue,. G.R. No.
NOTE: In the case of indigeno.us petr~leum,
170574, January 30, 2009). '
natural gas or liquefied natural gas, the excise tax
shall be paid by the first buyer, purchas_er or
transferee for local sale, barter or transfer, wh1I~ the Under See: 196 of the NIRC, a documentary stamp
excise tax on exported products shall be paid by tax shall be collected on conveyances, deeds,
· instruments, or writings whereby any land, tenement,
the owner, lessee, concessionaire or operator of th e
or other realty sold shall be conveyed to the
mining claim (NIRC, Sec. 130 (A)(1)). .
purchaser or purchasers. . Hence, transfer of
Time of Payment: Before removal of domestic • properties by means of merger is not subject to
products from place of production (NIRC, Sec. 130 documentary stamp tax (Commissioner of Internal
(A}(2)). . Revenue v. La Tondena Distillers, Inc. (L-TDi), · G.R.
No. 175188, Ju~y 15, 2015).
 VALUE.ADDED TAX
Taxation Law

2. Involving Qebts Instruments: (BaD-BiF) .

BASIC FEATURES OF DST a. Bank Checks, Drafts, Certificates of Deposit
1. It is generally a tax on document; _ · not ·searing Interest, and Other Instruments
2. It is due indepe'ndently of the legal status of the . (NIRC, Sec. 178); . , .
tr~nsaction giving rise to the document ·or b. All Debt Instruments (NIRC, Sec. 179);
instrument; c. All Bills' of Exchange or Drafts and Upon its .
3. It is due where,the obligation or right arises from Acceptance (N/RC, Secs. 180 and,181);
the Philippines or the property is located within d. Foreign Bills of Exchange and Letters of
the Philippines; an·d .- Credit (NIRC, Sec. 182). ·
4. It is only payable by persons and on transactions
specifically mentioned in the law (RECALDE, A 3. Involving !nsurance, Pre-need, and Bonds:-(LiP-
Treatise on Tax Principles and Remedies (2014), FIPre-ln) - - ·
pp. 705-706 {hereinafter RECALDE]). a. Life Insurance Po!icies (NIRC, S~q. 183);
b. Policies of Insurance Upon froperty (NIRC,
DOCUMENTS SUBJECT TO DST sec. 184); . ,
Upon documents, instruments, loan agreements and c. Fidelity Bonds and Other lns~rance__Policies
papers, and upon- ·acceptances, assignments, sales (NIRC, Sec. 185); ·
and transfers of the obligation, right or property d. Policies I of Annuities and Pre-need Plans
incident thereto, there shall be levied, collected and (NlRC, Sec. 186);
paid for, and in respect of the transaction so had 2!.-~ ,_ e. Indemnity Bonds (NIRC, Sec. 187).
accomplished, the ' corresponding docup:ientary. • ,._ ·. ·
stamp taxes ·prescr\bed in the followfng.Sections on j 4'., Tlnvolvtng_~hipping: (WaBiC)
this Title, by the person making, sigh ing,. i~s if!g, _~;_ ' a/ Wareheuse Receipts (NIRC, Sec. 189); -
accepting, or transferrinQ_ the s~me ~ e(;yer,.·tne ---.. .b;. Sills of~~~ing or Receipts (NIRC, Sec. 191);
·• document is made, sigred: i su~~ ,.ac~ep~.,i:1 o_r-~·~:-:- --.c Q~rfer' Pa,:ties and Similar Instruments
transferred when the obhgatio.rf .o ng r arJs'eS frp,JTl · 0
r _ · (NIRC, .Sec. 197) .
Philippine sources or the prqperty .· ; situaf ed in tHe . Y<: ~-~- · .' / . :-
Philippi~es, and the ~ame tvne sue act \s done or . . . 5. Involving Per~o6°~1or Real froperty: (leMD)
transaction had: Provided, Thatw eneverpne-party· .- ·-· --a. --:Lleases nd' Other Hiring Agreements-(N/RC;
to the taxable document njo.Y,.S exemption.from -.-,, S~c. 194j~-
the tax herein imposed, ttie other party who is not b. Mortgages . dges and Deeds ·· of Trust
exempt shall be·the one direq ly' ia~1e-~O( the tax · . · (~IR9, Se~. '195);
(NIRC, Sec. 1-73). (J, \;;,:: - · -,_. ·( -·:- ·.c.7·.Q~ecls of Sale, Conveyances and Donation
· - bl II d J - 1 \ ( ) - . _b. .- . ., ,::pf;~eat·Property ·(NIRC, Sec: 196); - =
It 1s app11ca e OIJ . a ocuments not \ p_ 1 e~e -, 1 . •. •• ~ . , ,':,/ - t · . .
l /c,>:"')Not;e'\ 8 · f th -, · t t· , .'f bSTiin a
expressly exempted,. notwithstanding the 'f c, ' tfia
they are in electronic form (2 GASASOh!\, .supr. · t- -...v""_... . . . ? . · asi~ or e co~pu a ion °
1077). Under the, Electronic Commer~e~ ct [~-iDf,;.-) s~~~.transaf3t1on of pre~1ous!y mortgaged re~I _
electronic documents are . considerect/~sl :written ' J:> rty Sliould_be the. .
Jo/ ·""c1' ·\G - 8 1l" . · . . - .
documents. Their issuance is tanta ount'
issuance of written documents that are ·subject to
DST (RECALDE supra at p 705)
the ,.
IV1 , \ •~\ oss -~ mg Pn~ pr the ~onside~aijo0
co~tract~d to be p~1d f~r,such re_alty; and,
' · · e. Fair Market Value determined in accordance
The following are.co~ered by DST: (C-DISPO) with Sec. 6 (E) of the.NIRC;(R.M.C. No. 19-
1. Involving Associations, Companies, or 2018 dated March 19, 2018) : .
£orporations: (ShaSbo-CP)
a. Original ·Issue of Shares of Stock ·(NIRC, 6. Qthers: (CJaPA) · ..
Sec. 174); · . a. £ertificates. (e.g., certificate J of damage)
. . (NIRC, Sec. 188); . _..
b. ~ales, Agreements to Sell, Memoranda of
Sales, Deliveries or Transfer of Shares or b. Jai-.alai, H9rse Rae~ Tickets, Lotto' or Other
Ce_rtificates of Stock (NIRC, Sec. 175)~ · · Authorized Numbers Garnes (NIRC, sec.
c. Bonds, Debentures, Certificates of Stock or 190); ,
Indebtedness Issued in Foreign Countries c. fowers of Attorney (NIRC, Sec. 193); .
(N/RC, Sec. 176); d. !ssignment and Renewals of Certain
d. Qertificates of Profits or Interest in Property Instruments (N/RC, Sec.' 198).
or Accumulations (NIRC, Sec. 177);
e. froxies (N/RC, Sec. 192).
 \ I
MEM:Q~y AID
sw, B e d e ~ Col8ge Of Law • RGCT Ber ()peratjons Center
INSTRUCTIONAL LETTERS, JOURNAL
ENTRIES, OR CASH VOUCHERS
INVOLVING ADVANCES ARE
CONSIDERED DOCUMENTS WHICH ARE
SUBJECT TO DST
In cases where no formal agreements or promissory
notes have been ~xecuted to cover credit facilities,
the documentary stamp tax shall be based ·on the 1
amount of drawings or availment of the facilities
which may be evidenced by credit/debit memo:
advice or drawings by any form or withdrawal slip
(Commissioner of Internal Revenue v. .Fi/invest
DeveJopment Corporation, G.R. No. 163653, July 19,
2011).
DOCUMENTS NOT SUBJECT TO DST
Those items enumerated (a-n) in Sec. 199 of the
NIRC, as a_mended are documents not subject to
DST.
REMITTANCES OF OVERSEAS FILIPINO
WORKERS NOT SUBJECT TO DST
-The remittances of all overseas Filipino workers,
upon showing of the same proof of entitlement by th~
OFW's beneficiary or recipient, shall be ex~mpt from
the payment of documentary stamp tax- (R.A. No.
8042, Sec. 35 as amended by R.A. No. 10022) .
ELECTRONIC
. BANK . TRANSFER NOT
SUBJECT TO DST .
Subject to the physical impossibility on the pa~ of_J~e
payor to be present and prepa~ an~ ~'.gn an
instrument purporting to pay a certain obhga~on_, an
automatic bank transfer of local funds from a savings
account to a checking account maintaine~ by_ a
depositor in one bank shall not be subJ~ct to
documentary stamp tax. likewi~~• :the receipt ~f
funds from another bank in the Philippines for deposit
to the payee's account and th erea~er upon
instruction of the non-resident deposi_tor-pa~~~
through an electronic message, th e depo~it?ry b
to debit his account and pay a named recipient shall
not be subject to documentary stamp tax (HSBC v.
Commissioner of Internal Revenue, G.R. No.
166018, June 4, 2014) .
ACCRUAL OF DST LIABILITY
Documentary stamp taxes are levied ind e~~ nd e~tly
of the legal status of the transactions giving nse
thereto. They must be paid upon the issu~n';e~f
said instruments, without regard to w e . "ble
contracts which give rise to them are resci;si t'
void, voidable or unenforceable (Jaka lnve; ;e; s
0
Corp. v. Commissioner of Internal Revenue, · · · document (Azarraga v. Rodriguez, G.R. No. L-3833,
147629, July 28, 2010) .
285
DST Payment and DST _Declaration
Return Filing upon Loading/Reloading of
DS Metering Machine Not Considered as
-"Date of Payment" when the Prescriptive
Period to File a Claim for a Refund/Credit
Must Commence
For OS metering machine users, the payment of the
DST upon loading/reloading is merely an advance
payment for future application. The liability for the
payment of the DST fa[ls du_e only upon the
occurrence of a taxable transaction. It is only then
that payment may be considered for the purpose of
filing a claim for a refund or tax credit. Since actual
payment was already made upon lo..~ding/reloading
of the DS metering machine and the filing of the DST
Declaration Return, the date of Imprinting the
documentary stamp on the taxable document
must be considered as the date of payment
contemplated · under Sec. 229 of the NIRC
{Philippine Bank of Communications v.
I
Commissioner of Internal Revenue, G.R. . No.
'!• 194065, June 20, 2016) .
'•)°IME OF f lLING AND PAYMENT OF DST
· ·-0srretum shall be filed within ten (10) days after
the clo'se of the month when the taxable
". document was mad~, signed, issued; accepted,
. or transfer~d. ' nd the tax thereon shall be paid at
the same time tlie aforesaid return is filed (NIRC,
" .l
Sec. 200 (8))
. .. PERSON LIABLE
-·; The DST is a tax on certain transactions. It is imposed
_-:" against "the person making, signing, issuing ,
:'..a'cd!pting, or transferring" the document or facility
· evideneing the transaction. Thus, in general, it may
be imposed on the transaction itself or upon the
document underlying such act (R.R. No. 9-2000, Sec.
2) .
However, whenever one party to the taxable
document enjoys exemption from the imposition of
DST, the other party thereto who is not exempt shall
be the one dir~ctly liable for.the tax.(NIRC, Sec. 173).
CONSEQUEN.CES OF NON-PAYMENT OF
DST
Document is inadmissible before the courts'; and
notary public or other officer authorized to administer
oaths shall not add his jurat or acknowledgm·ent to
any document subject to DST (NIRC, Sec: 201).
NOTE: The lack of the documentary stamp on a
document of indebtedness does not invalidate such a
January 18, 1908). These contract remains binding to
all parties in the contract even without documentary
 VALUE ADDED TAX
Taxation Law

stamp affixed to it (VALENCIA & ROXAS, supra at

504-505).

·I

. . . lJ I

,
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;

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.
 \ I

MEM:Q~y AID
Sin Bedl I.Wvar9lly College of Law - RGCT Bar Centar

4. Refund
[ OVERVIEW =. the recovery of any tax alleged to have_ been
erroneously or illegally assessed or collected, or
of any penalty claimed to have been collected
without authority, or of any sum alleged to have
TAX ADMINISTRATION been excessively, or in any manner wrongfully
It refe~ to the man~er or procedure of assessing and collected (Id. at 190). · ·
collecting or enforcing tax liabilities. It also includes
the execution_ of judgment and capacity to act in all NOTE: The first 2 stages of taxation (levy and
tax cases decided by the court in favor of the BIR (DE assessment) are referred to as the impact of
LEON; - The Fundamentals of Taxation (2004) p.
417). ' taxation, whereas the thkd phase (payment) is
referred to as the incidence of taxation (Id.).

TWO (2) FUNCTIONS INVOLVED IN TAX· ADMINISTRATIVE AGENCIES OR

ADMINISTRATION
ENTITIES IN CHARGE OF THE
1. Assessment; and
FUNCTIONS RELATIVE TO THE
-2. Collection (NIRC, Sec. 2).
COLLECTION OF TAXES:
STAGES ·o R 1. Bureau of Internal Revenue (BIR) (NIRC, Sec. 2);_
PROCESSES OF 2. Bureau of Customs (BOC) (1 DE LEON, The
TAXATION: (LAPR) National Internal Revenue Code Annptated
1. ~evy . (2015), p. 87 [hereinafter 1 DE LEON, NIRC]);
- imposition of taxes, involves the passage ·of' · 3. Duly and lawfully authorized collectors or
tax laws or ordinances through the legislature. collecting agencies (Id.);
Provincial, . City, Municipal, or barangay
The tax laws to be passed shall determine the . : ·;4 ·
nature of taxes, those to be taxed, how Jl)UCh is ·-
to be collected, and how taxes , are to be · . 9- 5_
r .treas.urers, or their duly authorized deputies
(LGC, Sec. 170); and .
The Department of Finance, which is the primary
implemented (1 DOMONDON, : ,B ar Q~ ., · agency 6n the collection of taxes, it being the
1
Taxation: General Principles of Taxation (2018), supervisory authority over the BIR (NIRC, Sec.
p. 189 {hereinafter 1 DOMONDONJ)_. · 2). ; 1 .
4

2. Assessment , .. OTHER PERTINENT LAWS

=-of tax
the process of determining th~ _corr~ct -~mou~t
due in accordance with the preva1hng tax
laws. Taxes are generally self-assessi~~- (Id. at
190).
:..
3. Payment
=. the act of compliance by the taxpayer ·in
contributing his share to defray the expenses of
the government (Id. at 190).
Attrition-Ac{ of 2005
· - an act instituting a system of rewards,
rncentives, and sanctions for the purpose of
encouraging the officials and employees of the
BIR and the BOC to optimize their revenue
generation capacity and collection of taxes.
. .
2. Philippine Tax Academy Act of 2010
- an Act designed to further strengthen. the tax
administration of the country, through training,

er-All Chai erson I NICHOLE VANE B. SANTOS, Chairperson for Academi:5 \ RONALYN A.
DOHN ALFRED E. AQUILIZAN, 0v ~LLE CIELO B. BELGIRA, Vice Chairperson for Finance I JUAN INIGO S. MIGUEL,
GACULA, Ad Hoc Director for Bar Matters !MARIE D.C. DELOS SANTOS, Vice Chairperson for Audit I CQRINA R. TAMPUS, Viet
Vice Chairperson for Operations I ALISSA N CHUNG Vice Chairperson for Logis_tics I ANTONIO JUN-JUN C. MANALIGOD IV, Vice

.
: .
Chairperson for Secretaria~ I ARVY KEITHCHAVEZ, Vi~e Chairperson for Electronic Data Processing
Chairperson for Membership IJORDAN N.
MARIE c. CONTACTO, Assistant Subject Chair I KATRYNA ANNE R. TOMENI<;),
JOSE WRENZO C. DAVE, Su~ject Chair I L~u:ADS: MARY GRACE A. GRANIL, General Principles I SHEENA ROSETTE DG.
Subject Electronic Data Processing I SUBTEC d' d Court of Tax Appeals IJERRLITO P. CUSTODIO, Local and Real Property Taxation
DOMINGO, Administration, Enforcemen~~;~. MELENDRES, Income Taxation I MARY ANN C. TAN, Transfer Taxi MARILYN
I SlEVIE R. ARCILLA and PATJUCK _
H. MALALUAN Value-Added Tax I
' · 3tJ:Jl#ditl:i~1:t~;t
v:
T pAEZ ANDREI ANNE U. PALOMAR, MARY KATHERINE A. SIMEON, JAMES
KATRINA MICHAELA D. DELFIN, ARMAN DOMINGO, JOSEPHINE MARIE T. SALAZAR, ~A MAREI AGUil.AR, NERY
KARL DANIEL B. ALVARO, ~ A J~RJSOLOGO, LOIS DANIELLE P. D~O, ANDRELA M. AQUINO, ANNA LOREN
ROYCE T. LAZARO, JOHN KENNETH Q. o ·
DC. MANUEL and GILBERT OWENS. APILAD .
? J@M4i€
Atty DANTE O. DELA CRUZ, CPA,JusticeJAPAR B. D!MAA¥PAO, Atty. EFREN
Atty. NICASIO C. CABANEIRO, CPA, . VINCENT M. DIZON, CPA .
 288
. TAX ADMINISTRATION AND ENFQRCEMENT
T~ation Law

molding, enhancing and development of 4. Give gffect to and administer the supervisory and
capabilities of tax collectors and administrators police powers conferred upon it by ·the NIRC and
and to help improve their tax collection efficiency other laws (NIRC, Sec. 2J. ·
and make them ·competent and effective public
servants. The BIR may claim police power only when
necessary in the enforcement of its princip~I powers
and duties consisting of the "collection of all national
3. Anti-Red Tape Act of 2007
- an Act to promote integrity, _accountability, internal revenue taxes, fees, and charges, and the
proper management of public affairs and public enforcement of all forfeitures, penalties, and fines
property as well as to establish effective practices connected therewith" (Vera v. Cuevas, G.R. No. L-
aimed at the prevention 9f graft and corruption in 33693-94, May-31, 1979) .
government. ·
AGENTS IN TAX COLLECTION
4. Tax Reform Acceleration and Inclusion The following officials are constituted as agents of the
Act (TRAIN) Commissioner of Internal R~venue (CIR) in •!he
- an act to enhance the progressivity of the tax ' collection of national internal revenue taxes:
system; to provide an ectuitable relief to a greater 1. Commissioner of Customs and · his
. rumber of taxpayers and their families to improve subordinates with respect to the collection of
levels of disposable income and increase national internal revenue taxes on imported
economic _activity; and to . ensure tha,1. .ttie ---· ---. . goods (N/RC, Sec. 12(a)); . . .
government is able to provide for th.e needs of · ~' Bank$.duly accredited by the CIR with respect to
those under its jurisdiction and car :,:_ · . ._ I j ,. ; repeiRt 'of. payments of internal revenue ·taxes
. ,/ • 1 .L .,. ,,, ........, •--.,...,.at?ithd'r!zed ,i Q be made through banks (NIRC,
·
.
I~ , . .,~-
.
--·~ Seo '12(c}t·an~ ,
. 3-:---With) o i:ting ti\ agents with respect to in<:9me
BUREAU OF IN'fE,~ 4 AL : ~- ·~"'; with
pay~ en s . uf>j~ t to final and creditable
• '· •' olding , xes(NIRC, Secs. 57 and 58). ·
REVENU;E _ ·_ ___ _ r '!, ;
..-. -· -t leaqs of the a'ppropriate government office and
•• • . / . , -- his ~ ~ordin~tes, p~eviously in charge ·with the
,-- , 1\ :•. _, 1:7; • . coll~ t\O-~ of nergyi tax (NIRC, Sec: 12(b)),_no
·ION: -~ \ _ _ _
1
, :_:_;:_. _o.nget-~ ndl the collection of said tax because
:. - ~:, t?~-~-~le1of elec Ii 1i .- by generation, transmission,
. ·, , t;11_d~is'tribution co panies is now subjecfto VAT
,r-· , J ;--,,, !iJ-l8t,
s,f. 108(p)) , a national internal revenue
t--- - -- - - , - -- --...:.~ f---=--1-.!.- 1 '...:.:~:..1 · _ / <~ t~~• to e colleS~d -by the BIR and not by any
Deputy Commissioners ...4 . _·~ l I:·> 0
"_b ~-
: ~r~g~~-ern/ ent office . .

rAs-s-is-ta-nt_C_o_m_m_iss- io-n-e rs----+- ~ .14:,,_

,'.L;,-,,:.:.,-.--l , BIR O~µ ANIZATIONAL STRUCTURE
1
. Regional Directors 19 ~ !\ ,' 111':\_)'N'J Uonal
· Office · ·
t-R_e_v-en_u_e_D-is-tr-ict_O_ffi_ce_r s - - -+-----.::.-1 - _ _.Its. function is · confined to the general direction,
126 ~u1dance, and control of the entire operations of
Large Taxpayers.Division 8 internal revenue • service national policy
formulati_ on, and program planning for efficient
Large Taxpayers District Officers 2 and effective implementation of internal revenue
Revenue Officers 3000 or more law and regulations (1 DE LEON NIRC supra at
83). ' '
( 1 DE LEON, NIRC, supra at 85).
.. The Office of the Senior Deputy
POWERS AND DUTIES OF THE BIR: Commissioner . is created to assist' th e
(ACE 3) , .
Commissioner in administering BIR operations
1. ,Assess and follect all national infernal revenue and directing all officers and employees of th e
taxes, fees, and charges; Bureau to improve tax collection an_d
2. 5nforce all forfeitures, penalties, and fines administration efforts and enhancing the public
connected with the assessment and collection of perception or image of the·agency (E.O. 827, s.
taxes, fees, and charges; 2009, August 14, 2009/ · _
3. gxecute judgment in all cases decided in its favor
by the CTA and the ordinary courts; and
 \ I
MEM:Q~Y AI D
Seri Bede lk'MditY Colege d - ROCT 8w 0peratlone Center
. The BIR Is headed by the CIR and 4 Deputy
Commissioners (NIRC, Sec. 3), each of whom
heads the following:
a. Operations Group;
b. Legal and Inspection Group;
c. Resource Management Group;
d. Information Systems Group;
1
e. Tax Reform and Administration Group; and
f. Special Concerns Group
' .
The existing BIR Organizational Structure does
not include the newly created positions of
additional 2 Deputy Commissioners (Tax Reform
and Administration Group, and Special Concerns
Group) and the Senior Deputy Commissioner.
BIR continues to be headed by the CIR and 4
Deputy Commissioners (Id.).
2. Field Service
The BIR operates under a decentralized system
primarily charged with the op~rational activities of
the Bureau (1 DE LEON, NIRC, supra at 84) .
a. Regional Offices (RO) · - for effective
administration and control, the Philippif\e's
has been divided into ROs which directly
execute and implement the national policies ·
and programs prescribed by the National
Office for the enforcement of internal
revenue laws. Each office is headed by a
Revenue Regional Dir~ctor (2 . DIZON,
Taxation Law Compendium, (2015), p. 55 '
{hereinafter DIZON, Taxation])].- ·•• · .
Powers and Duties of Revenue Regional
Directors: (IAI-PC 2·EP) of.,.. ·•
i. Implement laws, polices, ·• plans,
programs, rules and regulajlons of the
department or agencies in 'the reg1onal
area·' • ;
ii. Administer and enforce internal
revenue laws, and rules and regulations,
including the· assessment and collection
of all internal revenue taxes, charges and
fees;
iii. Issue Letters of Authority for the
examination of taxpayers within the
region ;
iv. Provide I economical, efficient c;1nd
effective service to the people in the
area;
v. Coordinate with ROs or other
departments, bu_reaus and agencies in
the area
vi. Coordinate with LGUs in the area;
vii. Exercise control and supervision over
the· officers and employees . within the
region; and
289
viii. Perform such other functions as may
be provided by law and as may be
delegated by the CIR (NIRC, Sec. 10).
b. Revenue District Offices (RDO) -
under each RO and headed by Revenue
District Officers, who are under the control
and supervision of the Regional Director.
Duties of Revenue District Officers and
Other Internal Revenue Officers and
Employees:
i. Ensure that all laws, rules and
regulations affecting national int~mal
revenue are faithfully executed and
complied with; and ··
ii. Aid in the prevention, detection and
punishment of frauds or delinquencies in
connection therewith (NIRC, Sec. 11,
par. 1).
Additional Duties of Rev_ enue District
Officers:
1) Examine the efficiency of all officers
and employees of the BIR under his
supervision; and
Report in writing to the CIR, through
the Regional Director, any neglect of
uty, incompetency, delinquency, or
,alfeasance in office of any internal
/ · I revenue officer of which he may
I obtain knowledge, with a statement.
of all the facts and any evidence
susfalning each case (NIRC, Sec.
11, par. 2).
.
PROHIBITION AGAINST THE
ASSIGNMENT OF RDS OR ROOS · IN
THEIR HOME PROVINCE
Pursuant to t~e provisions of Section 79 (B) of the
Revised Administrative Code, in order to further
improve the efficiency and effectiveness of internal
revenue and customs personnel, to avoid
frat~mization and collusion between tax collecting
offic~als and taxp~yers, and _the interest of the public
service so requInng, no regional director or revenue
district officer of the BIR and collector of customs of
the_BOC may, as ·a matt~r of policy, pe assigned in
t~9.ir h~me province. This policy will be followed
rigidly in all matter~ involving the assignment of
personnel, as well as in the reorganization of the BOC
a~d the BIR. This policy, shall not, however, include
minor personnel of the customs or internal re
. . (DOF O venue
services . rder No. 83-70) .
DURATION OF THE ASSIGNMENT
No provincial revenue agent shall be stationed longer
tt,an three years in any one province, and no agent,
examiner, or other field men of the Bureau of Internal
 TAX ADMINISTRATION AND ENFORC~~ENT
. /Taxat1on Law

Court of Tax Appeals, G.R. No. L-23676, April 27,

Revenue shall be assigned to any province for more
than two years. In Manila and other cities and places 1967).
where large number of busin~s~ est~blis~m~nts are
EXCEPTION: For the purpose of safeguarding
located, the territory shall be d1v1ded into district~ and
taxpayers from any unreasp nabl~ exami~ation,
the necessary·number of field men shall b~ assigned
investigation, or assessment, our Jax law_provides a
to each district. No field man shall be assigned to a
statute of limitations in the collection of taxes. Thus,
district for more than six months. (E.O. 94 s. 1947,
the law on prescription , bein~ a remedial measure,
Sec. 59).
should be. liberafly ·construed rn order to afford such ·
protection. As a corollary, the excepti?ns to the law
AUTHORITY OF REVENUE OFFICERS on prescription should perforce be stnctly construed
A Revenue Officer is one who is assigned to perform (CIR v. Goodrich Philippines Inc. , G.R No. 104171,
assessment functions. He may, pursuant to a Letter
February 24, 1999).
of Authority issued by the Revenue Regional
Director: (E.xRe) ·
1. Examine taxpayers within the jurisdiction of the
district in order to collect the correct amount of
tax; or POWERS OF THE
2. Recommend the assessment of any deficiency
tax due in the same manner that the said acts
COM·M ISSIONER OF
could have been performed by the Revenue ·I NTERNAL REVENUE
Regional Director himself (NIRC, Sec. 13). ·
I· . I ' ._. ' f' . *.
/. , .
NO ESTOPPEL AGf ,!~s1 ' ' ,tHE . . E
. x·P.R
. e·s
·s' '·l POWERS OF THE
GOVERNMENT RULE -
~-~-"'.'""""""""'.~---:----::' ~ ---=-~
It is a settled rule that in t~e pPrfotmance of its ··co!VIM1ss16Ne)~= (Ace2 -G10-MAMA-1sc)
governmental functions , the tate ca'nnot be 1:
Ass~ssm·ent a'hd ~ollection of all national internal
estopped by the negligent acts o its officers or revenue ta'5<es, fees , and charges;
agents. Nowhere is this truer) han in ttie field ·of- ----2. gnforpement of -~ll forfeitures, penalties, and
taxation (Commissioner ofr" lnte'flal Re.venue v. .. _Dnes~ " · i .
Procter and Gamble · No. L-66l}38, .. ~-~' gxe9ution ofju_dgfllep ts in all cases decided in its
December 2, 1991). · ·· fav9r;p_y)the 9 TA aha ordinary courts;
, , - · "-· ·i ·· ·4:- --§iyiri'g ·: 1effact,..,,,.to · and administering the
/ .~ - • .. J .,.

Rule On "No Estoppel Against·t Government" . . ~up~rvisory.and pqlice powers conferred by the
Not Absolute , ·• ' :. ' . 1 , ~,Nl,~ C;or ot her laws; ·
Admittedly, the Government ls not e'$topped:'fr:9.__m·<~ 5. !nter~re_~.tax laws.eand decide tax cases; . .
collecting taxes legally due because of rrusta'kes'(6r.-_. <6, ;'
~bta~ rnfor~ation and to _summon, examine,
errors of its agents. But like other. principl~s :o 'law) __ ~:. --- aQd ta~e .~est1 ony of persons;
th~s admits of exceptions in the inter t of jusice .and ·.,.._ , l .~ f4
k~ , .s~~sments and prescribe additional
fair play, as where injustice will result t the ax/ayer 1. ~4I~ ,1:i1ents for _tax administration and
(Commissioner of Internal ·Revenue v. Court of l '' ' l 1enJorcement;

Appeals, G.R. No. ·117982, February 6, 1997) . ~·•·a. Order the examination of books and records
of the taxpayer and assess the correct
EFFECT OF ERRORS COMMITTED BY amount of tax·
TAX OFFICIALS b. Make a return' or amend a false return on the
The Government is Mt estopped by the mistakes or basis of the best evidence obtainable to
errors of its agents; erroneous application and assess the proper tax;
enforcement of law by public officers do not block the c. Order the conduct of surveillance inventory
subsequent correct application of statutes (Philippine taking , and prescribe presumpiive gross
Basketball Association v. Court of Appeals, G.R. No. sales and receipts ; ·
119122, August 8, 2000). d. Terminate taxable period;
e. Pres_crip~ real property value; .
It is important to consider that a favorable finding or f. Inquire into bank deposits under certain
position taken by the BIR in an investigation involving conditions as ail exception to RA 1405;
a particular taxpayer should not be a ground for g. Accre~it and register tax agents; and
according the same treatment to a different taxpayer h. Prescribe additional . procedural ~nd
in another investigation if in that previous documentary requirements in connection
investigation, an error was committed (Tan Guan v. with the submission or preparation of
financial statements accompanying tax
returns.
 •
\ I .

MEM:Q~y AID
s., Beda College ot Law - RGCT Bar Operations Center

8. authority to delegate power;

For further discussion on jurisdiction of the CTA,
9. Make arrests and seizures;
please see chapter on Court of Tax Appeals.
10. assign internal revenue officers·
11 . !mpose duties on certain office~ -
Other Rules under R.M.C. No. 44-01
12. §uspend ~usiness operations of~ taxpayer;
A ruling by the BIR Commissioner shall be presumed
13. fomprom,se, abate and refund or credit taxes VALID unless modified, reversed , or-superseded by
the Secretary of Finance (R.M.C. No. 44-01, Sec.1).
ASSESSMENT AND COLLECTION- OF
ALL NATIONAL INTERNAL REVENUE A taxpayer who receives an adverse ruling from the
TAXES, FEES, AND CHARGES (NIRC Commissioner may, within 30 days from the date
SEC.2) ' of receipt of such ruling , seek its review.- either by
himself or his duly authorized representative (R.M.C.
For full discussion, please see Chapter on Tax
No. 44-01, Sec. 2) .
Remedies.
A reversal or modification of the BIR ruling shall
ENFORCEMENT OF ALL FORFEITURES, terminate its effectivity upon the receipt by the
PENALTIES, AND FINES (N/RC, $EC: 2) taxpayer or the BIR of the written notice of reversal or
For full discussion, please see Chapter on Tax modification, whichever came earlier (R.M.C. No. 44-
Remedies. · 01, Sec. 4, par. 3).

The Secretary of Finance may review the rulings

EXECUTION OF JUDGMENTS IN ALL motu proprio (OOF Order No. 7-02).
CASES DECIDED IN ITS FAVOR BY THE
CTA AND ORDINARY COURTS (N/RC, ,POWER TO .OBTAIN INFORMATION AND
SEC. 2) TO SUMMON, EXAMINE., AND TAKE
For full discussion, please see Chapter on- ,Tax TESTIMONY OF . PERSONS (ALSO
Remedies. KNOWN AS THIRD PARTY
INFORMA!TION RULE} (N/RC, SEC. 5)
GIVING EFFECT TO AND Purposes of the Power: (AMDeCoE)
ADMINISTERING THE SUPERVISORY 1. To Ascertain the correctness of any return;
AND POLICE POWERS CONFERRED BY 2. To Make a return when none has been made;
3. To Determine th liability of any person for any
THE NIRC OR OTHER LAWS (N/RC, SEC. internal revenue tax;
2) To Collect from any person liable for any internal
For full discussion, please see Chapter on Tax revenue tax; and
Remedies. . · 5. To Evaluate tax compliance (/NGLES, Tax Made
Less Taxing: A reviewer with Codals and Cases
POWER TO INTERPRET TAX LAWS AND (2018), p.377 [hereinafter INGLES, Reviewer]) .

DECIDE TAX CASES Extent of the Power: (EIS-TC)

The power to interpret the provisions of the Ta_x Code 1. To gxamine any book, paper, record, or other
and other tax laws shall be under the exclus,~e and data which may be relevant or material to such
original jurisdiction of the Commissioner, subJect to inquiry; and
review by the Secre~ary of .Finance. (N!RC, Sec. 4,
par. 1). The power to require production of books,
papers, records, or other data is subject to the
The CIR has the power to decide: (DRePO) rule prescribing a period to preserve books and
1. Disputed assessments; other records. Beyond such period, the
2. Refunds of internal revenue taxe s, feeS, or 0th er documents may no longer. be covered by a
subpoena duces tfJCUm (NIRC, Sec. 235; DIZON,
charges;
Taxation, supra at 18).
3. Penalties impo'sed in relation th ereto; or
0th
4. ·other matters arising under th e NIRC 0~ :r 2. To obtain, on a regular basis, Information from:
iaws administered by the BIR. (NIRC, ec. '
a. Any person other than the person whose
par. 2) internal revenue tax liability is subject to audit
or investigation; or ·
NOTE: These are subject to the exclusive appellate
b. Any office or officer of the national and local
jurisdiction of the Court of Tax Appeals (NIRC, Sec.
governments, government agencies, and
4) . instrumentalities including BSP and GOCCs
 .
TAX ADMINISTRATION AND ENFORCEMENT
292 T~tion Law

(N/RC, Sec. 5 (B) , as amended by !RAIN Shell Petroleum Corporation v.

Commissioner of ln~emal Revenue, G. R. No.
Law) .
172598, December 21, 2007).
Such information includes (but not limited to) the
following: · 4. To take the Iestimony of the person concerned
a. Costs and volume production; under oath , as may be relevant or material to the
b. Receipts or sales and gross incomes of inquiry {NIRC, Sec. 5 (D)); and
taxpayers; and · :
c. Names, addresses, and financial statements 5. To cause revenue officers ~nd employees to
of corporations, mutual fund companies, make a fanvass from time to time of ~ny revenue
insurance companies, Regional Operating . district or region and inquire after and
Headquarters (ROHQ) of multinational concerning: · _'
companies, joint accounts, associations, joint a. All persons who may be liable to pay internal
ventures or consortia, and registered revenue taxes; and .
partnerships and their members. b. All persons owning or having the care,
management, or possessipn of ·any ,object
Provided, That Cooperative Development with respect to .which a tax is imposed (NIRC,
Authority shall submit to the Bureau a tax Sec. 5 (E)) . ·
incentive report. Such report shall also be
submitted to the Department of Finance and J>.QWER TO MAKE ASSESSMENTS AND
shall be included in _the databa~e...createci ; - RRJ:SGRIBE AODITIOt,IAL
under the Tax Incentives Management and . ,· ' , · r. ·
Transparency Act (TIMTA). (NIRG, $ec. 5 - , ___..Rt;qJ;JIRE~NTS FOR TAX
(BJ, as amended by TRA(N Law). ,/ ,"'__. . ABftt\lNIST~ ION AND ENFORCEMENT
, ... ,- · - ..,...-~~ (NIRC; EO:, ·6, AS AMENDED BY-TRAIN
~~d:~~he Third-Party Info . • vor:i (lPl~progrcm], -~, · LAW) '-.,,,,,,e\ ' '
e can access the r~ord&.<;f the taxpayers' .J , Ext t
customers or supp_liers to confrrT accu ·' acy of the . . t_ en °f e re1 .
h P0 · .
declared sales or purcliase-s in the tax, etums:·----1,_ __ E>1aqunation,..• of Returns and
.
This is an increasingly po erful and · .cost- ·:- Oetermina\ion-o Tax Due: Please refer to
effective way to discover many instances of •, , ·
underreporting (R.M. q 30~03; R':M;Q 34-04; ·_ · · ,. .
RMO 28-07; R.M.O 07- o· R-:M O 13-f2 .- - --- - 2-.- A4th'ontyto Make Assessments based on
_J . J.,.;,., ·,. _ ·., .. the Be'st EVidencte Obtainable:
:he l~ck_ of consent by the taxpa{e[ \· under • ·. o f
investigation does not imply that the BIR ob
ained . · ,.· '
the information from third parties illegally 'th t.:::_ :'.'.'..3: A\ith ·
information received is fal~e or mar .. \ .:i8 : . · . • ··".
· · ·
oraty to . Conduct lnventory-tak111g
·
.does t~e lack of consent precl de u/~ 0 1

6~~- fro: -=-- .2. - -,) tn<! ,urvemance and . to . Pr!~cribe

a_ssessing deficiency taxes on the__;r~x .., yer
based . on the d~utnents. ( Commlssionfr of I
Internal Revenue v. Gonzales, G.R. No. 177279
October 13, 2010).
3. To .§ummon the: (TROPA)
a. Person liable for Tax·
b. Person required to fil~ a Return· -
c. ~cer or empl~yee of such pe~on; .
d. y person having fossession, custod or
care o! books of accounts .and i·her
accounting records . containin . c. The taxp~yer is intending · to rem~ve hi5
relating to the business of the pegrso:~trb,els
for tax; or 1a e
e. Any other person (NIRC, Sec.5 (C)).
NOTE: While the Supreme Court recognized
the power of taxation of government it
,. P:M_S~Jllyt ve Gross Salt!S atid Receipts:
ft,- . ~ lease/refer to Tax Remedies, for full discussi~n
on page 315 to 316 (NIRC Sec. 6 (C)).
' '
4. Authority to Terminate Taxable Period
Tax pe~od may be terminated when: (Re-Le·
Pro2) ·
a. The taxpayer is Jatiring from business
subject to tax;
b. The · taxpayer is intending to J:!aye the
Philippines;
Property in the Philippines or to hide or
conceal his property; or .
d. The taxpayer is performing an act tending to
obstruct the Proceedings for collection of th ~
tax .for past or current quarter or year or.
1
render the same totally or partly ineffed " 1 8

howe~er cautioned the government ' to (NIRC, Sec. 6(0)).

exercise such power to minimize the injury to
the proprietary rights of a taxpayer (Pilipinas
 \ I
MEM:Q~y AID
Sall Bede I.A-Mrllity Colege of Law - RGCT Bar
Effect of Termination of Tax Period
!he t?xes shall be .due and payable
,mm~tately a nd shall be subject to all the
~nalt1es .P_rescribed, unless paid within the
. time fix~ m the demand made by the CIR
(NIRC, Sec. 6(0)).
5. Authority to Prescribe Real Property
Values
!he C_IR is authorized to divide the Philippines
into different zones or areas and shall, upon
mand?tory consultation with . competent
appraisers from the private and public sectors
and with prior notice to affected taxpayers'
determ(ne the fair market value (fMV) of reai
properties located in each zone or area·, subject
to automatic adjustment .once every 3 years.
Provided, That no adjustment in zonal valuation
shall be valid unless:
~- Published in · a -newspaper of general
circulation; or in the absence thereof
b. Posted in 2 conspicuous public places: , . · . ·
NOTE: The basis of any valuation shall be
public records open to the inquiry ot any,.
taxpayer. · >· ' ·~
For purposes of computing -aoy, intern~i
revenue tax, the value of the pro~rty shall
be (whichever is higher): '. - ,;; :,. .·
a. FMV as determined by_ :th~ CIR .(referred to ·
as the.zonal value); or , . "r".,. •. ·- •.:
b. FMV as shown in schedule of values of the.
Provincial and City Assessors (FMV per tax
declaration) (NIRC, Sec. 6(£)., as a'!1..,ended
by TRAIN Law). ·
6. Authority to Inquire into Bank D_e p~sl~t
GENERAL RULE: The CIR cannot mgyire m o
the bank deposits of the taxpayer (NIRC, Sec.
6{F)). ·
EXCEPTIONS:
The CIR can inquire into the bank deposits of the
following taxpayers: (GFS)
a. A decedent to determin~ his Gross estate
(NIRC, Sec. 6(F));
b Any taxpayer who has filed an apphcat1on or
• compromise of his. . tax 11·abTty
11 by reason
.
of
his Financial incapacity to pay hts taxes
(NIRC, Sec. 6(F)); and
Condition·: The taxpayer must ex~~ute a
I In writing which shall constitute as
wathve~ty of the CIR to inquire into the bank
au on . (R R No 30-02
deposits of the taxpayer · ·
Sec. 3(1), par 2) .
...
Center
c. A specific taxpayer/s subject of a request for ·
the .§.upply of tax information from a foreign
tax authority pursuant to a treaty obligation,
· upon the order of the President of the
Pl1ilippines under rules and' regulations as
may be prescribed by the SOF, upon the _
recommendation of the CIR (NIRC, Sec. 3).
Commissioner shall provide the tax
information obtained from banks and
financial ifjstitutioris pursuant to a convention
or agreement upon·request of the foreign tax
authority when such requesting foreign tax
authority · has provided the following
information to demonstrate the foreseeable
relevance of the information to the request:
i. The identity of the person under
examination or investigation; .
ii. A statement of the inf9rmation being
sought including its nature a~d the form
in which the said foreign tax authority
prefers to receive the information from
the Commissioner;
iii. . The tax purpose for which the
information is being sought;
iv. Grounds . for believing · that the
information requested is held in the
Philjppines or is- iri. the possession or
contr:ol of a person within the jurisdiction
'of the Philippines;
v. ; T ,the extent known , the name and
_· address of any person believed to be in
possession of the requested information;
vi. .Statement · that the request is in
conformity . with the law and
administrative practices of the said
foreign tax authority; and
,"' vu.· Statement that the requesting foreign tax
authority has exhausted all means
available in its own territory to obtain the
information, except those that would give ·
rise to disproportionate difficulties
(N/Rc'.· Sec. 6(F)).
. NOTE: A taxpayer shall be duly notified
in writing by the Commissioner that a
foreign tax authority is requesting for
exchange of information held by financial
. · t institutions pursuant to .an . international
convention 'or agreement on tax matters,
within sixty (~O) days from receipt of said
request. ,(R.R. No. 10-1Q, Sec. 10).
7. Authority to Accredit and Register Tax
Agents
Criteria for Accreditation of Tax Agents:
· ' a. Professional competence; ·
b. Integrity; and
c. Moral fitness (NIRC, Sec. 6(G), par. 1).
 / "rA V A'DMINISTRATION AND ENFOR~E~ENT
1 l'U\.
Pe~ons Qualified to be Tax Agents:
a. Individuals; and
b. General Professional Partnerships (GPPsd)
and their representatives who prepare an
file tax returns, statements, reports, protests,
and other papers with or who appear before
the BIR for taxpayers (N/RC, Sec. 6(G), par.
1) .
Minimum Qualifications of Applicants:
a. Individual tax agents (other than a member
of the Philippine Bar): · - · .
i. Must be a CPA with current professional
license from the PRC;
ii. lf·not a CPA, he m·ust have obtained at
least a degree in Law, Juris Doctor (JD)
or its equivalent, or a Bachelor's degree
in , Arts, Commerce, or Business
Administration with at least 18 units in
accountii;ig and/or taxation in a coilege o
university recognized by the.,..... DepEd,;
CHED or in a foreign sch90I' of .~ nown · 1 ' ,'
repute or one duly recognize,d ~by ) ts ::;_:__
government. In addition -he must be-able ·
to demonstrate or. res~~~ conv·ncing- · :·~ •.,.
proof of speciaf/oompetenc in tax - .-,;
matters or tax pract,cew' • I !~ ,. -..
iii. Must be of good moral character as , ·
certified to unge'f:OO\tl by at ·1easr 2 - - - -
disinterested Jiersons who ~re . eit~er ·
members of the Philit,1>ine B~ or CPAs_ -
in good standin ;~ 1 t ( .. _ _ __ · __ . ·
iv. Must not have be Gharg~ ~w tli ang_ . .
convicted by final-Judgment of;)_ rime 1' , ,; : /
involving moral t~fPi!ude, or f?u~~ ui ty-1'
of any act or om, s,on penahz~n~:r,
the ~IRC, or fo~n guilty o . a1d1_n_g (o ; . : -;-\ .•..,. _,,; ··
abetting or causing he co lss1on~ot L __ ,, ., .. ~2. A· regular
- - -• -
any such offense by an e , .
V. Must be a citizen of the Pfillipp,n'es; 1 and
vi. Must have completed at least 6 ha'urs per
year_or_a total of 18 hours for 3 years of
continuing professional education (CPE)
in taxation from trainings/seminars
~n~ucted by the · BIR or from rivate
institutions with the number of t~ . .
hours earned printed on the certifia~tg
and obtained not more than a year pri~~
to t_he. application/renewal for
accred1tat1on (R.R. No. 11-2006 Sec 4
as amended by R.R. No. 14-10.'sec. ·4 /
b. GPP~ (other than those engaged in th
practice of law): e
i. The partners and duly authorized office
or r~pre~entatives must meet all t~=
quahficat,ons of an individual tax agent·
and · '
. Taxation Law
Partnership must be registered with the
ii. SEC (R.R. No.-. 11-06, Sec. 4, as
amended by R.R: No. 14:._10, Sec. 4).
Incorporated ·entities other than GPPs: .
c. i. The applicant-officers or duly authonzed
representatives m~st . .meet all the
qualifications of an ind1v1dual tax agent;
and .
ii. Firm must be registered with the SEC
(R.R. No. ·11-06, Sec. 4) . ·
· GENERAL RULE: Only those who have
been issued with a Certificate · of
Accreditation shall be allowed to represent a
taxpayer or transact business with the BIR in
representation of a taxpayer (R.R. no-. 1f-06,
Sec. 9).
._. EXCEPTION: The following individuals are
·>. .:. allowed to appear and practice- bef~re the
BIR without undergoing accreditation
: p(o9eed)ngs: (IMO)
i. ' !ndivid1:1al taxpayers acting on their own
provided, they present
"\ satist.a·ct fY identification;
?. . iii lllle"rvoers of the P~ili-ppine Bar not
: · suffering rom suspension or disbarment.
1
Howe er, they may at their option, apply
, ,.. , :. / for accreditation; and
_- iii. Othe jndWiduals presenting satisfactory
- · J,-:;_proo of ide tificatiori or authority in any
.', ,one of the following circumstances of
(!;,/limited 'v ; practice or special
(:'y agpearan~ s:(MEET-0)
.,,# -~ -,, _) ·.) An i~.dividual representing a Member
of ~rs or her immediate family;
full-time EmP.loyee
I . ,a{ r · ' · ·
:resenting an md1v1dual emplo~er;
- - ·
e
• .,./ . Emop~a fide _officer or r~gul~r full-ft,~e
oye~ In repr~sentat10~ IS
mpl~yer <:orporat,on, association or
organized group; .
4 .) A ~,:ustee, receiver, , guardian.
administrator, executor or regular
full-time employee in representati~n
·of a trust, receivership, gu~rdiansh1p
or estate; and _
S.) An Officer: or a regular employee of
government unit, agency, ~r
m~trumentality representing said
unit, agency, or' instrumentality in-the
course of his or her official duties
(R.R. No. 11-2006, Sec. 3(8}(1)).
I
Individuals and GPPs and their
representatives who are denied
, a~reditation by the CIR and/or !he
national and regional accreditation
boards may appeal Sl,JCh denial to
 \ I
-MEM:Q~Y-AI D
San Bede IJmwllty Colege of Law • RGCT Bar 0peratlona Center
th e Secretary of Finance who sh~II
rule on th e appeal within 60 days
from receipt of the.appeal. Failure to
rule ?n the appeal within the
prescribed period shall be deemed
as approval of the application for
~J.cretlitation (NIRC, Sec ..6(G), par.
8. Authority to Prescribe Additional
Procedural
or Documentary
Requirements
The CIR may prescribe the manner of
com~liance wi_th any documel"!tary or procedural
requirements in connection with the submission
or . preparation of financial statements
accompanying the tc;1x return (NIRC, Sec. 6(H)) .
AUTHORITY TO ,DELEGATE POWERS
(N/RC, SEC. 7) .
GENERAL RULE: The CIR may delegate the powers
vested in him to any subordinate official with the rank
equivalent to a division chief or higher (NIRC, Sec. 7). ,
EXAMPLE: Delegation of the authority to sign rulin~ s ·
granting and/or confirming tax exemptions;a tax
incenti.ves, and tax treaty relief through the ruling
process to the Deputy Commissioner of the Legal
and Inspection Group, Assistant Commissioner of the·
Legal Service Group and Regional Directors .(R)A.C.
No. 37-07, Sec. 2(A)) . 1 •
EXCEPTIONS:
The following powers cannot be delE!gated'. (R~CA)
1. Power to Recommend the promulgation ·qf rules ·"· REVENUE OFFICERS
or regulations by the SOF; · ·
2. Power to Issue rulings of first ir:npressions or t_o....
reverse , revoke, and modify any existing ruling of
the Bureau; ' The CIR shall employ, assign, or reassign
3. Power to ~ompromise or abate any tax_~iability,
except matters which may be ·compromise~ by
the Regional Evaluation Board and National
Evaluation Board; and
4. Power to Assign or re-assign inter_nal reve~ue
officers to establishments where articles subJect
to excise tax are produced or kept (NIRC, Sec.
7).
None of the exceptions relates · . to th e
· Commissioner's power to· approve th e ~h~g of tax
collection cases (Republic v. CommtsSioner of
Internal Revenue, G..R. No. 13o43 o, De~ember
13, 1999) .
Under Section 7 of the NIRC, the Com_missioner
th
is authorized to delegate to his subo rd inates e
th th
powers vested in him except, among ~ e~ e
power to issue rulings of first impression: ere,
• tt r does not involve
the subject matter of the 1e e
the exercise of the power to rule on novel issues.
It merely implemented the revenue regulations
then in force. (Secretary of Finance v. La Suerte
Cigar, G.R. No. 166498; June 11, 2009).
AUTHORITY TO MAKE ARRESTS AND
SEIZURES
The CIR, the Deputy Commissioners, the Revenue
Regional Directors, the Revenue District Officers,
and· other internal revenue officers shall have the
authority to make arrests and · seizures for the
violation of penal law and rules or regulation
administered by the BIR. Any person arrested shall
be brought before a court, there to be dealt with
according to law (NIRC, Sec. 15).
This section sanctions raids, which gives internal
revenue officers the authority to make arrests and
seizures (1 DE LEON, NIRC, supra at 97).
This does not require any previous warrant, but it
must cover only violations committed within the view
· of the internal revenue officers and employees (Id.).
'· '1_NC;>TE: This_' d?~s no! violate the Constitution since
: .. w~at 1s proh1p1ted 1s unreasonable search and
seizures of whatever nature.and for any purpose. It is
n~t unreasonable_ to ·ett~ct ~rrest,s . and se!zures
-~ without wa~rants 1f the v1olat1ons are done !n the
t,-, pre~ence of revenue officers (NOLLEDO, The
National lnte al R venue Code of 1977 Annotated
,, (1978), p, 10).
·,:•
'j AUTHORITY-- TO ASSIGN - INTERNAL
· ::; · 1. Assignment to Establishments or Places
·' where article·s subject to Excise Tax are
Produced or Kept
internal revenue officers involved in excise tax
functions to establishments or places where
articles subject to excise tax are produced or kept
(N/RC, Seq. 16).
Limitation of Assignment: An internal revenue
officer assigned to such establishment shall in no
case stay in his assignment for more than 2 years
(N/RC, Sec. 16).
2. Assignment to Other or Special Duties
The CIR may, subject to the provisions of Section
16 and the laws on civil service, as well as the
rules and regulations to be prescribed by_the
Secretary of Finance, upon the recommendation
of the Commissioner, assign or re-assign internal
revenue officers and employees of the BIR
without change in their official rank and salary, t~
~ther or special duties , connected with the
enforcement and administration of revenue laws
 296
TAX ADMINISTRATION AND ENFORCEMENT
· . . - Taxation Law

as the exigencies of tile· service may require Other Duties: ,

(NIRC, Sec. 17). 1. Any lawyer, notary public, or any government
officer.with duty to intervene in the preparation or
Special Duties acknowledg~e~t ?f d?cuments ~egarding
The term refers not t o a special or extraordinary partition, donation -mter v,vos or mo,t,s ·causa
or different undertaking but to functions or .work legacy, or inheritance shall have the duty t~ . ·
other than or not related to those • regularly furnish copies to .the BIR of such documents to
discharged by the · officer or employee facilitate collection of taxes. (NIRC, Sec. 95); arid
concerned. The designation is not permanent 2. · Individuals who sign important documents ·with
but merely temporary (Castro v. Hechanov~. -significant tax consequences:
G.R.' No. L-23635, August 31, 1966). a . . Notaries public with . respect to. conveyances
of real property and lease contra~; .
Limitations of the Assignment: b. Bank branch managers with respect to loan
a. Internal revenue officers assigned to perform documents; and ·
assessment or collection function sha·11 not c. Stock and transfer agents . with respect to
remain in the sarrie assignment for more than Sfile or disposition of shares of stocks of
3 years; and domestic corporations.
b. Assignment o.f ·internal revenue officers or
employees to· special duties shall not exceed . , POWER TO SUSPEND THE BUSINESS
. 1 year(N/RC, Sec. 17). . ,.__., .. O~RATIONS OF A TAXPAYER-·
nme limitations on pSSignments are ;rn";ased to -: 1 r er.SJ~ or" tiis authoriz~~ · representa~ive is_
prev~nt familiarity and fratemizatio" ·b ty.,eeh t!lf;l ./ e mpo er d to suspend business operatio,ns and
taxpayer and the revenue .o'fficers .{r;iA>SC/L, temporari ,...clos the business estabiishment of any
NIRC of the Philippines (20 8),p / 35 'hereinafte ,,;,-. E[SOn for the- oil wing violations:
DASCILJ). · ;· ,~ V~ ,,,.. 1. ,l n] se of~a V. ll registered person: .
~. ;~~. ..6.\ >i. a. a~lure,to, issue· receipts ,or invoices;
No Ve~ted Right to a BIR Post ,_... , b. fi!r
1lure ~q. r3;VAT return; or . · .
There 1s no vested right to a Bl post. T~errefore-;-a··- · .· nd_erstatemen of taxable sales or receipts
!"ansfer does not const_ itute a, emotion jus,\ becau~ . , . ,. ~. ·.- ••1,• 30~ ci , mo'te~of his correct t~able sales
in effect, the span of control in -terms of j~risdictiqri . { __ .:. > 9r receipt foq he taxable quarter..
and personnel ·has been consjderably -airpinishea : • ::2. Fail~r~-: qf any pe} ~n to register as required
(Dl~C!N, Taxation, supra ai 68, citinfi:5f ato- v;--,. ··--:---un9~t -S~c. _.-4 , · .
Natividad, G.R. No. 113(!43, JuneJ2, 19gq_. ·"' ,- :. !:'.,. ·( /,.,;__~....,-; . · •-r } . ,· ·
i :i ··,. :(_ I ' · · /J,H,.~mpop ry clo lJre of the establishment shall
AUTHORITY TO IMPd SE DUTIES/"ON ~--~-"<_~P~} or th : durati of not less than 5 days and
CERTAIN OFFICERS (~•,,~ ·1-~:~ ·"'i0,, s~all_ .e lifted__9 ly upon compliance witn the
Unless there is a certification fro the °'F
.ffiat the ~:::..: ".. l :..-• ~~iuire ~ nts in the clo~ure. order (NIRC, Sec.
tax due thereon had been paid: · __.,I,· ·1 · ·•/ r/ , · ·
l ~f ~ . KA~
~og
1 - The .Register of Deeds· shall riot registsr' 'i~ the '7 . . · ·,
. Registry of Property any document transferr.iog ! ~amencfed b R ~nde_r ~.M.O.. No/ ~3;-09, as
It refers Y, · .· ·· · ~; 36.:-~~ ·. ·..:. .
1
real property or real rights therein or any chattel · -

mortgage, by way of gifts inter •vivas or mortis
causa, legacy pr inheritance (NIRC, Sec. 95)'
2. A debtor_of th~ deceased shall not pay his d~bts
t~ the h~1~. lagat~. executor, or administrator of
his cred1tor ·(N/RC, Sec. 95); and
3. If a ban~ ha~ knowledge of the death of a person'
mai_ntained a bank deposit account alone or
Jointly with ~nother, ~t shall allow any withdra~al
fr?m the_said deposit account, subject to a final
withholding tax of six percent (6%). (NIRC Sec
97, as amended by TRAIN Law). ' .
strengthe .to . th~.. B~R s 1~1t1attve . involving the
. rung O . . t e . Bureal!'.S imposition of
presc.~1bed ~dm1rnstr~t1ve sa,nctions for non-
compliance with ess~nt1al requirements.
. . ·~ . . .
starts with th_e. issuance of a Mission :Order
_he BIR, au th0 nzing revenue officers to conduct
:~~e1l!an~ on taxpayer's . operatioos. The
honze~ offic~r will analyze the surveillance results
(e.g., gettm~ .the average daily and :quarterly sales
_a nci co,:n~anng it with the respective tax returns for
any variations, determining violations of tax iaws).

~fter the conclusion of the s~rveillance the BIR

sbr _basis , for .the. closure of the b~siness II

. is~ment, the taxpayer is sent a 48-Hour Notice

· giving him the · •· h
with·1 opportunity to ~xplain under oat
48
with :d ~~urs ~hy th~ business should no\ be dealt
mirn stratively (1.e., suspension or te'mporary
 \ I

MEM-Q~y AI D
San 8eda Colege of law - ROcT Bar Operllllbns Center
297

closure) or criminally. If the taxpayer fails t0

I I
within 48 hours or the BIR deems the ex 1resp_ond
insufficient or unjustified, a 5-day VAT C~ anftions COMPLIANCE
Notice (VCN) shall be issued . mp iance
REQUIREMENTS
If a taxpayer refuses , neglects or fails to sub ·t . .
th e ~rescn"bed penod ·
, a response to a VCN·
m1 within
submitted a response that was later f d •
· uffi · t oun to be KEEPING OF BOOKS OF ACCOUNTS
m~ c,en ; or refuses , neglects or fails to com
with the tem,s of the 5-Day VCN the BIR - ply AND .RECORDS
shall issue a Closure Order. ' concerned All corporations, companies , partnerships or persons
required by law to pay internal revenue taxes shall
The execution of the Closure Order shall c . t . . k~ep and use relevant and appropriate set . of
th h · I I · ons1s in bookkeeping records. (NIRC, Sec. 2~2 (A) , as
. e P ys1ca c osing of the doors or other means of
m~ress of the es~ablishment, and the sealing thereof, amended by TRAIN Law).
with the appropriate security devices (e.g., padlocks)
and the BIR's official seal. - Also, even tax-exempt organizations are required to
keep books of accounts for purposes of ascertaining
The implementation of the Closure Order arid compliance with the conditions under which they
have been granted tax exemptions or tax ·incentives,
Tem_P?rary Suspension for a taxpayer must be widely
and their tax liabilfty, if-any (NIRC, Sec. 235).
pubhc1zed through press - releas~s. press
conferences, and , when possible, the televised
cov~rage of t_h e actual closure/suspension :'of -~· P'<-""'SE IN REQUIRING BOOKS OF
A(CC,1UNTS
business operations of a non-compliant taxpayer.: :-~_
- ---:-----::-:---:----------
1),( reason for requiring the books of accounts to be
The closure of a business establishment shall las~fo~
,n
pr~served i\:, to ensure that all taxes due to the
a period of not less than five.(5) days and shall bP_ 'J vernm~nt {Tlay be readily · and accurately
force until the violation is rectified. · asce~ained an!;! determined any time of the year
. ' (R.R. No. 17. 8, Sec. 1, par. 9). .
AUTHORITY TO COMPROMl~E. ABATE, i i .
AND REFUND OR CREDIT T.AXES · · ' 10-17
-~. R.M.C. NO.
Please refer to Tax Remedies on page 333.:to 338. .... National Governme t Agencies (NG~s), Government
.. -:tt •:. ...
,, :.: Agencies..,-.". a11?. Instrumentalities (GAis) and
REPORTORIAL DUTIES-. (?F .. ' THE,, •·t: G~vernment-Qwned and Controlled Corporations
:., (GOCCs) vested with functions relating to public
COMMISSfONER \ mr~ds, whether governmental or proprietary in
The CIR shall:(FS) ' : _:
1. f umish the Congress upon request 1and in aid of
- < 1·! )ptil~ ar~ Jequired to re~i"ster and keep their books
• ,.,.o r 'aooounts. •
legislation pertinent _infom,ation inch,iding but not
I
limited to: (ICS) REQUIRED FORM OF BOOKS OF I
a. !ndustry audits; ACCOUNTS I
b. Collection perfom,ance data; and
1'. ~elevant and appropriate set - of
c. ~tatus reports in criminal actions initiated
against persons _and taxpayer's return . - bookkeeping records duly authorized by i
I

{NIRC, Sec. 20); the Secretary of Finarice

All persons required by law · to pay internal
2. Submit to the Chairmen of the Committee on revenue taxes.
Ways and Means of both the Senate and House
of Representatives a report on the exercise of 2. Books of accounts, examined and
his powers to compromise, abate and refund or audited yearly by an independent CPA
credit taxes every 6 months (NJRC, Sec. 204) . Taxpayers with gross annual ·sales, earnings,
The report is mandatory (1 DE LEON, NIRy, receipts, or output exceeding ~3.000,000.00.
Their income tax returns shall be accompanied
supra at 101).
by an Account Information Fom, which shall
contain, among others:
NO POWER TO PRESCRIBE PENALTIES a. lnfom,ation lifted from -the certified balance
The CIR has . no power to pres_c ribe pe~alties sheets;
because it is the Secretary of Finance who issues b. Profit an,d loss statements; and _
rules and regulations for the effective enforcement ~f c. Schedules listing income-producing
the provisions of the Tax Code (NIRC, Sec. 24 4 ,n properties and the corresponding · income
relation to Sec. 7(a)).
 TAX ADMINISTRATION AND ENFORCEMENT
298 . : . . · · Taxation_Law

therefrom and other relevant statements system of the taxpayer and shall be subject to the
(NIRC, Sec. 232).
same rules and regulations as to their keeping
translation, production, and inspection as ar~
applicable to" the journal and the ledger (NIRC, Sec.
DEFINITION OF TERMS 233).
Books of Accounts
- include the journal and the ledger and their LANGUAGE IN WHICH BOOKS ARE TO
subsidiaries or-other equivalents (R.R. V-1 , Sec. 2) .
BE KEPT .
Journal It may be any of the following: (NES)
- book of original entry in which the happenings or 1. Native language;
transactions affecting the business of a taxpayer are 2. ~nglish; or
recorded consecutively day by day as they occur · 3. .§panish (NIRC, Sec. 234) .
(R.R. V-1, Sec. 2). .
If in addition to said books or r~cords, the taxpayer
Ledger keeps other books or records in a language other
- book of final entry to which are posted the than the above-mentioned, he shall make a true and
classified accounts or items of all transactions complete translation of all the entries. The keeping of
entered in the journal or its equivalents (R.R. V-1, such books or records in any language other than the
Sec. 2) . above-mentioned is prohibited (NIRC, Sec. 234).
,.,.,..,._,..,. '
General Ledger ~E,GIST~ TION OF BOOKS · OF
- is a record of a business entity's accounts hich ' '.ACCOUNTS
make up its financial statements. lnforrQatio"i'l · ----·~- _ _ ; __...,_~- , - - - - - -- - -- - - -
contained in.a general ledger is gathered from so~<;:~.--- ~ .Before .the r~9u1~ed_books of accounts are used, the
documents such as accou~t vouchers, purcfiase / fax~aye~ rn.u
f, f,r~f present them _for appr?val and
orders and sales invoices. 1 Its equival~nts, may ;~- r~g,stra~1~n to tpE{~DO of the province or city where
consist of several ledgers such as customers' ledger, .. ·. ,the business 1s...1dcate (R.R. V-1, Sec. 18).
creditors' ledger, stock ledgeri-a d s1,1ch otbeL.books. _:_ _ .; 1 J
as the taxpayer may.find convenient for hi · business l)i~r~ n:' i st als~ o~ a per~it for any computerized
(R.R. V- 1, Sec. 4) . ' -- - ?ccocmt11g system (CA$) to be used (R.M.O. No. 29-
. . ,_ 02) . : · · - I
I
In case of variance between t sou~ ;!:~ cument~ --- ·. _'_:__:_/ f:.---,, i J · . ·
and the general ledger, th~ fqrmer \i0 referred ' T,he r99u,remenJ of-l:egii;tration and approval prior to
because the VAT invoices and receip_ts:' aken . 1 );IS~ 9f the :journal and ledger is applicable to
collectively, are necess_ary to substantiate tti'tf ~ ual · s,u s19.lary bo9ls (2 Of= LEON, The National Internal
1·

amount or quan!ity of goods sold and ~their':se11h g____ -:-:._ ..~~ ve~ue Co8e Anno ated (2016), p. 578 [hereinafter
price (proof of transaction) and the bes m!=!ans0 6f l: :--r~.
f?f,.l~p , NIRCJ} and official appo,ntment books
prove the input VAT payments (proof of:rpaymentr · - - :JJ!?fess,dr)als,,(R.R. No. 04-14, Sec. 2).
(Kepco PHL Corp. v. Commissioner:. of In emal -.- • J.
Revenue, G.R. No. 181858, November 24, ?_010). i. ./4 _Ma u~I books of accounts previously registered but
____ ,_ .. .-.whos~ pages are not yet fully exhausted can still be
ADDITIONAL REQUIREMENT FOR SELF- used in th e succeedi~g years without the need of re-
EMPLOYED PROFESSIONALS regiS teri_ng or re-S tamping the same, provided, that
the portions pertaining to a particular year should be
In addition to the maintenance of books of accounts properly labeled or marked by taxpayer. The
they shall also: ' registration of a new set of manual books of accounts
1. Maintain official appointment books containing shall_ only be _at the time f hen the pages of the
the names of their client and the date/time of the previously registered books have all been already
meeting; and exhausted (R.M.O. No. 82-08).
2.' Submit an affidavit indicating the rates, manner
of billings, and the factors to be aonsidered in
. ~RESERVATION OF BOOKS AND .
determining their service fees (R.R. No. 04-14,
Sec. 2). OTHER ACCOUNTING RECORDS (NIRC,
SEC. 235, AS CLARIFIED BY R.R~NO. 17-
SUBSIDIARY BOOKS 13)_ .
All corporations, companies, partnerships, or persons All taxpayers are required to preserve their books of
keeping .the books of accounts may, at their option, account~, including subsidiary books and other
keep subsidiary books as the needs of their business accounting records,_ for a perio9 of 1o years reckoned
may require, provided that where such subsidiaries fro~ the day following the deadline in filin·g a return,
are kept, they shall form part of the accounting · or 1f filed after the deadline, from the date of the filing
 \ I

MEM:Q~y AID
Sin Bedaa.~ College of Law . RGcT Center

of the return, for the taxable year when th

· d · th book e 1ast entry TAX COMPLIANCE VERIFICATION
was ma e in e s of accounts (R.R. No _
sec. 2, par 1). · · 1 7 13, DRIVE (TAX MAPPING)
Tax mapping is · a method whereby BIR
If theedta~Vpayfuerdhasf any pending protest or claim for representatives will pay a surprise visit to business
· tax er I re n o ta~es. and the books and records establishments to check if they are in compliance with
concerned are material to the case the taxp • the tax laws, as implemented through Oplan
· d t h" 1. • ayer 1s
require o preserve. 1s its books
. of accou n s an d.
t Kandado and Tax Compliance Verification Drive
oth er accoun t mg records until the case is finally (TCVD).
resolved (R.R. No. 17-13, Sec. 2, par. 4).
TCVD . is a · program _to apprehend business
Unless a longer period of retention is required under establishments violating internal revenue laws, ·rules
the NIRC or other relevant laws, the independent and regulations particularly non-issuance of duly
CPA ~o audited the records and certified the authorized receipts/invoi.ces or use of unregistered
financial statements of _the taxpayer, equally as a Cash Register/Point-Of-Sale (CRM/POS) machines
taxpayer, has the responsibility to maintain and or similar devices (R.M.O. No. 13-03).
preserve copies of the audited and certified financial
statements for a period of 10 years from the due date The TCVD tax mapping team shall:
of filing the annual · income tax return or the actual 1. Issue a "Reminder to All Business
date of filing thereof, whichever comes later (R.R. No. Establishments";
17-13, Sec. 2, par. 5) . 2. Verify if the estaplishment is registered or not;
3. Observe and verify if the establishment maintains
GENERAL RULE: The books of accounts shall be duly authorized Receipts or Sales/Commercial
subject to examination and inspection only once Invoices;
every taxable year (NIRC, Sec. 235) . 4 . Verify if the use of CRM/POS or such as
Computerized Accounting System (CAS) is duly
EXCEPTIONS: (FRe-\/2O) r authorized and determine if there are violations
1. fraud, irregularity, or mistakes, as determined by in such use;
the CIR;
5. Verify if the establishment is maintaining duly
authorized ooks of accounts and recorded
2. The taxpayer requests Re1nvestigati<:m;
transactior:is are updated;
3. - ~erification of compliance with Withholding tax
6. If warranted, issue an Apprehension Slip to the
laws and regulations; ~•-·
4. ~erification of capital gains tax
liabilities; pr
taxp ayer .f<;> r offenses . penalized relative to
unauthorizeq use and issuance of receipt, sales
5. In the exercise of the Cl R's power ..to Obtain
and commercial invoices and unauthorized use
information from other persons . (NIRC,
of CRM/POS/CAS;
Sec. 235) . 7. List down all violations in Violations Checklist;
arid
In the above-mentioned cases, a taxpayer may be ·:... 8. Before leaving the tax mapped establishment,
subject to multiple audits (2 DE LEON, NJRC, .supra the Tax Mapping T earn shall post a ,sticker as
at 588) . ., proof that the establishment has been tax
mapped pursuant to coh;>r coding scheme
EXAMINATION AND PLACES OF (R.M.O. No. 9-06, (V) (2. 1.3).
INSPECTION
It may be done in any of t~e following : ADMINISTRATIVE PROVISIONS
1. Taxpayer's office or place of business; or · REGISTRATION REQUIREMENTS .
2. In the office of the BIR (NIRC, Sec. 235; R.R. No. Wh·o may register: (SEAM)
17-2013, Sec. 3). 1. Every person §ubject to any internal revenue tax;

All corporations, partnerships or persons that retire He shall register once: .

from business shall submit their books of accounts to a. Within 10 days from date of employment;
the CIR or any of his deputies. for exaf!lina~io~ within b. On or before th~ ~mmencement of
1O days from the date of retirement or w1th1~ such business;·
period as may be allowed by the CIR, after which the c. Before payment of any tax due; or
· books of accounts shall be retu(ned (NIRC, Sec. 235 d. Upon filing of ·a return , statement, or
(e)). declaration as required in the NIRC (N/RC,
Sec. 236(A)).

This includes a person constituted as withholding

agent (R.R. No. 07-12, Sec. 4(2)(ii) & Sec. 9(vii)) .
 TAX ADMINISTRATION AND ENFORCE~E~T
2. Those covered by gxecutive Order (E.O.) No. 98,
series of 1998 which are persons, natural or
juridical, dealing with all government a~encies
and instrumentalities who are required to
incorporate their TIN in all forms, permits,
licenses. clearances, official papers, and
documents which they secure from government
agencies, instrumentalities, including GOCCs
and LGUs (R.R. No. 07-12, Sec. 4(iv));
3. The Administrator or executor who shall register
the estate of the decedent taxpayer (~. R. No. 07-
12, Sec. 12); and ·
4. Marginal income earners although they are ,
exempt from the payment of the an.nual
registration fee, VAT and percentage _taxes
(R.M.C. No. 07-14) .
Provide~: That th~ Comm,issio!"'er shall simplify
the business registration and tax compliance
requirements of self-employed individuals and/or
professionals (NIRC, Sec. 236(A) par. 2, as
amended by TRAIN Law).
INTERNAL REVENUE TAXES WHICH ·
MAY BE REGISTERED: (IVWC-FDEA)
1. !ncome tax;
2. VAT and/or percentage taxes
3. Withholding taxes on compensation .
4. ~reditable withholding tax at source _on certain
income payments;
5. final withholding taxes. on, certain income
payments;
• TaxatJon. Law
6. Documentary stamp taxes (DST);
· 7,.· Excise taxes; and
8. Annual regist~ation fee (R.R. No. 07-12, Sec. 9) .
MANDATORY REGISTRATION FOR VAT
Th~ following persons are required to register for
VAT: . ·
1. Any person whose gross sales or ~eceipt for the
past twelve (12) months, other than those _that
are exempt under Section 109 (A) to (BB) have
exceeded the amount. of ~3,000,000 or
~3,500,000 . _
2. Any person has reasonable grounds to· believe
that his gross sales or receipts for the ne~ twelve
(12) months, other than those that are exempt
under Section 109 (A) to (BB) will exceed Thr~e
million pesos (~3.000,000) (N/RC, Sec. 236 (G),
as am~nded by TRAIN Law).
TAXPAYER'S IDENTIFICATION NUMBER
(TIN)
-
Every person required to make .-render o'r file a
return, statement or other d~cu·ment' · shall be
supplied wi~h TIN (NIRC, Sec. 236(/)).
SOME GENERAL RULES IN THE
ISSUANCE OF TIN _
1. !he TIN, once assigned to a particular taxpayer,
1s non-transferable and -there shall be.no instance.
. where 2 _or several taxpayers are holders of the
Same TIN '(NIRC, Sec. '236 (/)).
2. Only 1 TIN shall be assigned to the taxpaye.r
except for banks with both Regular Banking Un~t
(RBU) and with Foreign Currency Deposit unit
 \ I .

MEM--Q~Y Al D
Safi Bed&~ Colege of Law - RGCT Bar Opanmona
. 301

(FCDU) where each unit is assigned with 11 . Tax Exempt c~rporations under Sec. 30 of the
different TINs (R.R. No. 11-08, Sec. 3). NIRCin pursuance of tax-exempt activities.

3. The estate ·of a deceased person or a trust under The exemption by GAis, LGUs, NSNP and other ta~-
an irrevocable trust agreement shall be issued a exempt entities is predicated on the fa9t that their
TIN separate and distinct from the TIN of the undertakings/endeavors are not directed nor
deceased person and/or trustee (NIRC, Sec. intended to generate income/profit (R.R. - No. 07-12,
236) . Sec. 8)-.

4. · Minors who are earning .and/or who are under the Persons interested in · the estate who continue the
circumstances prescribed under E.O. No. 9a·; business of the deceased are also not liable to pay
series of 1998, shall be supplied wi~h.TIN (R.R. ARF when the _same had previously been paid by the
No. 11-08, Sec. 3). · deceased (NIRC, Sec. 242) .

5. NRFC and NRA-NETB shall be issued TINs for REGISTRATION OF EACH TYPE OF TAX ·
purposes of withholding taxes on their income Every person who is required to register with.the BIR
from sources within the · Philippines . The shall register ·each type of interrial revenue tax for
withholding agent shall apply the TIN on their which he is obligated, shall file a retµrn and shall pay
behalf (R.R. No. 07-12, Sec. 4(1)(v)) . such taxes, and shall update such,registration for any
changes (NIRC, Sec. 236(C)).
6. Only 1 Taxpayer Identification Number (TIN)
shall be assigned to a taxpayer. Any person who- ;;, TRANSFER OF REGISTRATION
shall secure more than 1 TIN shall be criminally ~\ .1n case a registered person decides to transfer his
liable under the provision of Section 275~ oh · . .-2place of business or his head office or branches, it
'Violation of Other Provisi9ns of this Code..1 or :,:-"shall be his; duty to update his registration. status
Regulations in General' (NIRC, Sec. 236(/)).., · ~-
)· (NIRC, Sec.-: 236(0)) . · · . _ ·
. ~- -
ANNUAL REGISTRATION FEE {ARF) · ,, · -
Before a taxp~yer transfers his place of busin~ss, he
Amount: 19500 for _ every separate__/ o r__~i§.t inct must secure thet necessary _ t ax clearance from the
establishment or place of business, ,includj~ .fa.,cility .Revenue isL ct 'Officer (RDO) where _his office is ·
types where sales transactions r-')CCur shall be paid . ·. presently j registere~ . Any tax return currently due
upon registration and every yea ,; tt"!er9after on · or · : -. must stiJ~b.e,fil~<:t,~ftl..~be Roo·where the taxpayer is
before January 31 (N/RC, Sec. 236(B)). _ . r ,. •. : register~ t ~Dl/ ,~i Jt§pc'. 236_(0)) .
...;--- ,.f'~ -~Y.t N• • ..J , .

GENERAL RULE: The payment ~F is -of · . OTHER UPDATES

mandatory. Nonpayment .of registratio·n fee _!llakes a
business illegal (R.R. No. 7-12, Sec. 8; S~ 15) .• _ ;<_:""•";.,,., update''his registration information with the RDO
'' ~· ·.q:,/
EXCEPTIONS: (GOLF-COM-PINE)_ . ,\ ,,._. ~\ ..
The following are not liable to pay ARF: "~·'-'-·
1. Government agencies or instrumentalities (~Als)
in the discharge of their governmental funct1o~s;
2. Persons subject to tax under One-time
transactions (ONETT) such as capital gains tax,
donor's and estate taxes; · the RDO where he is registered, an application for
3. bGUs in the discharge of .their ·governmental
functions;
4. facilities where no sales transactions occur
(NIRC, Sec. 236; R.R. No. 07-12, Sec. ~);
5. £ooperatives duly registered with the CDA;
6. Qverseas workers (OCWs/OFWs);
7. Marginal Income Earners; · .
8- f.ersons registered under E.0. No. 98, series 0
1998· · .
9- !ndivlduals earning purely compensation income,
Whether l ocally or abroad; .
10 · N
_on-stock/non-profit organizat ions (N SNP __ ) not
engaged in business; and
. ,,:--A_,.n-
·y__p_e_rp_o_n- re-g-:-is_t_e-re-d~ s-=-
h-:-al:1,-
:- w---=-
h-e-n e
_v_e_r_ a-pp-=:l:-
ica-:-b-:-le-,
where he_ is registered, specifying therein any change
in type and · -other taxpaye·r details (NIRC, Sec.
236(E)).
CAfiCELLATION OF REGISTRATION
The registration of any person who ceases· to be
liable to tax type shall be cancelled upon filing with
registration information update (Nl~C. Sec: 2;36(F)).
Application for TIN or- cancellation ~or registr:tion
may take place upon any of the following:_(DFD )
1. oe·ath of individ4al not ·subject to estate tax;
2. Full settlement of th_e tax liabilities of the estate;
f 3. ,Discover:y of a ta-xpayer having multiple TINs;
and
· 4 . Dissolutio,n, merger or consolidation of juridical
persons. (R.R. No. 07-12, Sec. 12).
 ~ .
· TAX ADMINISTRATION AND ENFORCEMENT
Taxation Law

ISSUANCE OF RECEIPTS OR SALES OR not having a fixed place of business, shall be kept in
the possession of the holder thereof, subject to
COMMERCIAL INVOICES production upon demand of any internal revenue
All persons, subject to an internal revenue tax shall, officer (NIRC, Sec. 241).
at the point for each sale and transfer of merchandise
or for services rendered valued at t-100.00 or more,
SUBMISSION OF INVENTORIES OF
issue duly registered receipts or sales or 'commercial
invoices showing: (DQ-UD) GOODS OF THE DECEASED
1. Qate of transaction; Persons interested in the estate should within thirty
2. Quantity; (30) days from the death of ~he decedent submit to
3. Unit cost; and the BIR or the Regional or RDO inventories of goods
4. Qescription of the merchandise or the nature of or stocks had at the time of such death (NIRC, Sec.
service (NIRC, Sec. 237, as ·amended by TRAIN 242) .
Law).
RULES AND REGULATIONS
The original receipt shall be issued to the purchaser, The Secretary of Finance, upon recommendation of
customer or client at the time of ·the transaction the CIR, shall promulgate · all ·needful rules and
(NIRC, Sec. 237, as amended by TRAIN Law). regulations for the effectiye enforcement of the NIRC
(NIRC, Sec. 244).
NOTE: For VAT receipts and Invoices; there are
additional information required to be indicated on the .
receipts or invoices J 1 These (~gulat,ons are the consequences of a
(For what type of· information are require tq be L. I del/gc\ted power to issu~ l~gal provisions that have
indicated, please refer to page 2751 · )
;:( .,/.,.-
r _..--- t e, effe~t f aw (Comm1ss1oner of Internal Revenue
v. ol1dbank Corp., G.R. No. 148191, November 25,
20031
PRINTING OF RECEIPTSAR.SALES-OR · . ,
COMMERCIAL INVOICES / j: \ . • SPECIF.IC t'.~, ROVISIONS TO BE
All persons who are enga"Qed i business shall , CONT INED t tN · THE RULES AND
secu_re from the BIR an aut~ori!}' to p mflATP}--.,-8EG U UATION - . · · - ;
receipts or sales or comnierc,al invoices before a- · . · _ , · ·
printer can print the same. The receipts m t: ·-_ • r -."1- · Ti_m~ and ma,;men in which Revenue Regional
1. Be serially numbered; < rl ' · · . · Dir~ ~?!~ hall canva s ttieir respective Revenue
2. Include ttie name, busin~ss style of ~ e~tiixpayer; 7 - -- - R~-~~~: for t~ _,.B.1,1 rpose of discovering persons
3. Include the TIN ; \ . I ·.~ ,• ..q'J,c! pr9·perty halJI~ to internal revenue taxes;.
4. Include the business adqr,ess of the 3 · JS
, O: or i .2. F9(!f)s of labe_ls, brands or marks to be required
entity to use the same; an . . ' / ~QryAoods s~bJect_to an excise tax, and including
5. Such other information tha may be re~u re(f _ , . . t. the m_~nner it st)all be effected; • •
rules and regulations (NIRC, Sec. 23 ). 'I l:.__ \3 l -e'ond1t1 ns un9er which and the manner in which
j
, _9i
~II persons who print receipt or sales or corn
invoices shall maintain a logbook/register of
rcial M "'b.~
g-(ooos te]lded for export shall be labeled,
~e or marked;
· . \CC)1_ditlons to be observed by Revenue Officers
·

taxpayers who availed of their printing services. The
~ogbook or register shall • contain the following
information: . .
1. Name and TIN of persons or entities for whom
the receipts or sales or commercial invoices were
printed; and
2. Num~er of booklets, number of sets per booklet,
number of copies per set and the serial numbers
of the receipts or invoices in each booklet ·(NIRC
Sec. 238) .
EXHIBITION OF CERTIFICATE OF
PAYMENT AT PLACE OF BUSINESS
The certificate or receipts showing payment of·taxes
issued to a person engaged in a business subject to
ARF shall be kept conspicuously exhibited in plain
view in or at the place where the business is
conducted; and in case of a peddler or other persons
es~ecting institutions and conduct of legal
act,o~~ and proceedings;
5. Cond1t1ons under which ·goods intended for
storage in bonded warehouses shall be
conveyed, including the manner of storage and
method of keeping entries and records; 1
6. Conditions under which denatured alcohol may
be removed and dealt in, the character and
quantity of the denaturing material _used, the
' manner in which the denaturing processshall be
effected· · · ·
7. Manner 'in which the revenue shall be collected
a_nd paid, and instrumenUdocument to which
revenue stamps shall be affixed;·
8. Conditions to be . observed respecting
enforcement of the provisions imposing tax on
the estate of a decedent and other transfers
mortis causa, as well as·on gifts;
 \ I

MEM:Q~YAI D
5s' Beda Colege of Law - RGCT B e r ~ Center

. . (MNEs) with an
9. Manner in which tax returns , information and . 6. Multinational enterprises . . ·tal of at
reports shall _be prepared_ an? reported including authorized capitalization or assigned cap,
the preparation and publication of tax ··statistics; least P300,000,000;
and 7. Publicly-listed corporations; . . . .
10. Manner in which internal revenue taxes shall be 8. Universal, commercial -and fore1gn,tbrnkf ~n of at
. . paid through the collection officers of BIR or 9. Taxpayers with an authorized cap, a iza b' k'i ng
authorized agent banks including the manner py least P100,000,000 belonging to a~ .. ,
which the returns and payment of taxes of Large insurance telecommunication , . utilities,
Taxpayers may be filed and paid (NIRC, Sec. petroleum', tobacco and alcohol industries; an?
245) . 1o. Corporate taxpayers engaged in _the production
of metallic minerals (R.R. No. 17-10, Sec. 4
LARGE TAXPAYER (4.5)).
A Large Taxpayer is a taxpayer which has been
classified and notified in writing by the CIR as one ADMINISTRATIVE 1S,SUANCES·
that has satisfied any of the following criteria: 1. Revenue Regulations . .
1. As to payment: - formal interpretations of the NIRC provIsIons
a. VATat least P200,000/quarter for the by the SOF , upon the recommendation of the CIR
preceding year; · (DIZON, Taxation, supra at 11).
b. Excise tax - at least P1,000,000 for the
preceding year; Requisites for · Validity of Revenue
c. Income tax - at least P1,000,000 for the . Regulations: (NCO)'
preceding year; . r a. ttecessary to the proper enforcement of the
law· -
d. Withholding tax - at least P1 ,000,000 for
the preceding year; - b. . Not ~ontrary to law and the' Constitutio"';· and
c. Published in the Official . Gaz~tte (2 .DE
e. Percentage taxes . at leas~
LEQN, NIRC, supra at 673).
P200,000/quarter for the preceding year; and
f. Documentary Stamp Tax - ··at least The issu nde of a revenue regulation authorized
P1 ,000,000 (R.R. No. 17-10, Sec'. 5 (5.1)). by statute has the force and effect' of law. Its
.
details and manner of carrying them out are
2. Financial · . condition and
"r
'results of oftentimes· left to the administrative agency
operation . . ... , entrusted ~ ith their enforcement (Commissioner
a. Gross sales/receipts· - - at least of Internal Revenue v. Solidbank Corp_., G.R. No.
P.1,000,000,000 for the p·receding .y~ar; 1481 91, ·November 25, 2003).
b. Net worth - at least ~300,P0O,000 at the
close of each taxable year; ....... ~· .Value of Revenue Regulations
c. Gross purchases . ... at · least ~· .. ? GF;NE~L RULE: An unconstitutional act, for
P800,000,000 for the preceding year; and . .,., - that : matter an executive order or a municipal
d. Top corporate taxpayers · l.i~!ei • and ordinance likewise suffering from that infirmity,
published by the SEC (R.R. No. 17:.10f Sec. ·· cannot be the source of any legal rights or dutfes.
5 (5.2)) . Nor can it justify any official act taken under it. Its
repugnancy to the· fundamental' law once
LARGE TAXPAYER CANDIDATES judicialiy declared results in its being to all intents
and purposes a .mere s·crap of paper. As the new
However, the following taxpayers are automatically Civil Code puts it: "When thJ·courts declare a law
classifi'ed as candidate to be a Large Taxpayer: and to be inconsistent with the Constitution , the
wiJI be notified in writing by the BIR: former shall be void and the latter shall govern.
1. All branches of a taxpayer under the Large Administrative or executive acts, orders and
Taxpayers Service; regulations shall be vali_d only when they are not
2. Subsidiaries, affiliates and entities of contrary to the - laws of the Constitution"
conglomerates/group of companies of · a Large (Commissioher of Internal Revenue v. San
Taxpayer initially listed as of November 16, 2010; - Roque Corporation, G.R. No. 187485, February
3. The surviving company in case of 12, 2013)'.
merger/consolidation involving a Large
Taxpayer; EXCEPTION:' In the same case, citing Sec. 246
4 · Any corporation that . absorbs the - of the NIRC, the court said that taxpayers.acting
operation/business in case of spin-off/s of any in good faith should not be made to suffer for
Large T ~payer; · · . . . adhering to general interpretative rules of the
5· Corporations with an authorized cap1tahzat,on of.
Commissioner interpreting tax laws, should such
at least ~300,000,000 registered with SEC; interpretation later turn out to be erroneous and
 TAX ADMINISTRATION AND ~E~FORCl!MENT .
Taxation Law .

- be reversed by the Commissioner or this Court.
Thus, a general interpretative rule issued by the
Commissioner may be relied upon by taxpayers
from th~.time the rule _is issued up to its reversal
by the · Commissioner or this Court
(Commissioner of -,ntemal Revenue v.. San
Roque Corporation, supra).
NOTE: Section 246 is not limited to a reversal
only by the Commissioner because this Section
expressly states, "Any revocation, modification
or reversal" without specifying who made the
revocation, modification 9r reversal. Hence, a
reversal by this Court is covered under Section
246 (Commissioner of Internal Revenue v. San
Roque Corporatio·n, supra) . ·
2. BIR Rulings
- less formal interpretations by the CIR or his ·
subordinates involving . tax provisions and ·
regulations. These are issued in response tou
~ueries of taxpayers relative to cl~rificatioq and •
interpretation of tax laws, which jnclu e· ( \
a. BIR rulings; ./'
·b. VAT rulings;
c. International Tax Atta·r Oivision (ITAQ) :'. · -•r
Rulings; and J ,( 1~
by himself/itself o_r his/its accre_dited agent or
representative (R. M. 0 . No. -03-01; R. M. C. No. 44-
01).
The SOF's power of review, which implies the power
tc;> reverse or modify, is limited only on rulings issued
by the CIR which are adverse on the taxpayer
(R.M.O. No. 03-2001 ; R.M.C. No. 44-01) . .
KINDS · OF BIR INTERPRETATIVE
RULINGS
1. Rulings of First !mpressions
- refer to ru lings, opinions, and interpretation of
the CIR with respect to the NIRC and other tax
laws without established precedent and which
are issued in response to a specific request for
ruling filed by the taxpayer with the Bureau. The
term also includes reversal, modification or
revocation of any existing ruling (DIZON,
Taxation, supra at 15).
) \/ Requ)sites for the Vali~ity of BIR Ruling of
Flrst ~rnpression: · . ·
a. Mu . ·ssued in accordance with the power
of. the (? R to make rulings and opinions in
.K connecli · with the implementation of

Rulings. z- , - - - ---0.-
d. Delegated Authorities or Un umbered , __: _
,,~ -
i~terna revenJue laws; and .
Must n t"Ove~ride_
-
, supplant, or modify the
·•' law b.ut ust' be consistent with the law it
:",<:
These rulings. can be r.epealed: mqdified,'. or ,,- ... intends t~_s~frry o~t (Commissioner of
ame~ded by a subsequent _rul[ni •ssued by-_ · ·. · ~'!;'.!!al , ReveQue v. Michel Lhuillier

supra at 14). . '-" "'~). _ : ,..~·-<;

the same or another CIR {DIZ<5J'f-J,,-J/(xa ion, ---·, - - / awnshr ~ trJr;. G.R. No. 150947, July 15,
1
.///~fl~3J. 1

=~:: is~m~~m~ryd;,ll"~~:·: ~ 0
-_. !~
1
1
;~~~~rauo~ho~!::~~t~~i~g':,c~:~i~: and
certain transaction, under _the, Jaw ' ts:::...8-J--'tflterpr~tat1~ns of the CIR, as delegated to a duly ·
taxa~le or not based_on the c1rcum~ts3f1ces
pr~v1ded by the taxpayer_(Commissioner of
Internal Revenue v. Lucio L. Co, G.R. No.
MAa_uth?n~.. ct internal revenue officer in response to
\spe9fic equest for ruling ~led by a taxpayer w~th
the BIR (DIZON, Taxation, supra at 16).
241424, February 26, 2020). ·
3. Deleg~ted Authorities or u·nnumbered
What sets apart BfR Rulings from other Rulings
issuances of the BIR is that it relates to a - rulings signed by revenue officials lower than
particular taxpayer's set of facts and the CI.R, who have been authorized to sig'n them
circumstances and a consequent ~ecause previous rulings on_ the same subj~ct
determination of- taxability or · tax -- matter had already been approved by the CIR
exemption, . when _ applicable (Id.) . ·
(Commissioner of Internal Revenue v.
Court of Tax Appeal~ (First.Division), G.R. 4. Revenue !Ylemorandum Rulings (RMR)
Nos. 210501, ~11294 & 12490, March 15, - rulings, opinions, and interpretations of the
2021). . CIR to the provisions of tax laws, as applied to
· specific set of facts with or without established
REVIEW OF RULINGS BY THE precedents (Id. at 13).
SECRETARY OF FINANCE
A ruling by the CIR shall be' presumed valid, unless 5. Re_venue Memorandum Circulars (RMC)
modified, reversed, or superseded by the SOF. A - issued to amplify the rules, precedents, ·1aws,
taxpayer has 30 days from the date of receipt of the and other orders issued by the BIR and other
ruling of the CIR to seek its review by the-S.OF, either
 \ I

MEM-Q~YAID
Sen Beda l-"-9ity C0lege ol Law - RGCT Ber 0perallons Center
/
'
agencies/offices, for the 'guidance and . · EXCEPTIONS: . . or reversal would be
compliance of revenue personnel (Id.). The revocation, modificati_on . of the following
given retroactive effect m any .
2
6. Bank Bulletins . instances;- (Mi-FaB ) d l'b rately Misstates or
1 Where the taxpayer e I e
- issued for the . guidance and compliance of
bank personn~I authorized to receive payment of
-
· omits material facts !rom his return ·
document required of him by th e BIR (NIR '
n
tef
taxes (Id. at 16).

2 the Facts subsequently gath~red by the

7. Revenue Audit Memorandum Orders
· BIR are materially different from the facts . on
(RAMO)
which the ruling was based (NIRC, S~c. 246),
-- guidelines for revenue officers in conducting
3_. Where the taxpayer acted ·in §ad fai th ((N_
IRC,
their tax audits and · for higher officials in
reviewing their reports of examination (Id.). Sec. 246) ; and . . .
4. Where the retroactive application would §en ePfitl
the taxpayer (Supreme Transliner, Inc. v. 8
- 8. Revenue Memorandum Orders (RMO) _ Family Savings Bank, Inc., G.R. No. 165617,
- directives outli_ning procedures which are
February 25, 2011).
necessary to carry out programs or to achieve
policy goals and objectives (Id. at 13). THE NON-RETROACTIVITY PRINCIPLE
9. Revenue Administration Orders (RAO) OOES NOT APPLY WHENN THVE R ULFINOGR
- issuances which cover subject matter relating ~>t INVOLVED IS NULL A 0 01 0 ·
to more or fess permanent administrative setup BEING CONTRARY TO LAW .
of the . BIR (e.g. , organizational structuf!JS, · i
Well-entrenched are the principles· that the
statements offunctions and liabilities, etc.) (I~. 'a'f 5~~ overnment is never estopped from collecting taxes
16). ". !:':'because of mistakes and errors of its agents and that
' ~'-· ·· ~- ··tRere are no ~ested rights in a wrong interpretation of
10. Revenue · Travel -Assignment ··or ders _ law (BIR R!Aing No. 370-11 , October 7, 2011) .
( ,. ,., .. },.,~ • I °"
(RTAO) . .. . ,. . ':-· t # • . -
- assign revenue personnel to ~pee~~-!:,!nits -:r~ DOCTRINE OF. OPERATIVE FACT
(R.M.O. No. 38-11). _ ·i J.;,>' · ., Taxpayer .· may rely upon a rule or· ruling issued_by
. ,<·· · ~,. .;f~
the CIR from tre time the rule or ruling is issued up
11. Reve_ nue S~ec,al Orde".. {R-~Q.),·: t. :~ to its rever.s.al t;,y the.elR or by the Courtr The reversal
- ms~ruct1ons ~r d_1re~t1ve~ ,.._ for Jhe- · t~ of the ru'l a.: or:·ruliitg is not given retroactive effect
a~_ mphshm~nt . of speci~I • ~~~t9J.lm~~ts qr (Commissioner of Internal Revenue _v. San Roque
m1ss1ons of significance which are tem~~ary m r,.: Power Corp., G.R. Nos. 187485, October 8, 2013). ·
nature or for a definite period of time not r·, :.- , .; . · -
exceeding 1 year (R.M.O. No. 38-1.1) ?,: : . ~;,;:.., · · ·"'· '-fhere·'~tfit'. however, be a rule or ruling issued· by
~},::, the .CIR that is relied upon by the taxpayer· in good
_N ON-RETROACTIVITY OF RULINGS . faith , The ruling may either be a: ,
GENERAL RULE: Any _revocation ,- 111odification, or 1. Specific ruling ; in which case the· reversal of the
· reversal of any of the rules or regulations or any of ruling must not be applied retroactiv~ly only with
the rulings or circulars promulgated by the CIR shall respect to the particular taxpayer who was
not be given retroactive application if the revocation, misled by the ruling; or .
modification or reversal will be prejudicial to 2. General interpretative rule, in which case. the
taxpayers (NIRC, Sec. 246; Commissioner of Internal reversal_must.n9t ,be appli~d retroactively to all
Revenue v. Philippine Health Care Providers, Inc., the taxp~ers . who were · mi_sle~ by the rule
G.R. No. 168129, April 24, 2007). (Commissioner' of Internal Reven~e v. San
. . Roque Power Corp., supra) . ·
Under SeGtion 246, taxpayers may rely upon a rule or
ruling issued by the Commissioner from ,the time the GENERAL INTERPRETATIVE RULE
rule or the ruling is issued up to its reversal by the It is a response to a query made not by a particular
Commissioner or this Court. The reversal is not given taxpayer. Example is _ BIR Ruling No. DA-489-03
retroactive effect. This, in essence, is the doctrine of where the query OI') refund was made by a
operative fact '(Commissioner of Internal Revenue v. government agency t~sked with proce~s_ ing tax
San Roque Power Corp., G.R: No~. 187485, October refunds and credits (Comf!lissioner of Internal
8, 2013). Reven1:1e v. San Roque Power Corp. , supra) .
 TA V ADMINISTRATION AND ENFORCE~ENT
1ftA Taxation Law

them to the Government (Philippine Refining Co. v.

ADMINISTRATNE ISSUANCES Court of Appeals, G.R. No. 118794, May 8, J996).
DISTINGUISHED ACCORDING TO
NATURE AND SUBSTANCE TAX DEFICIENCY V. TAX DELINQUENCY
Legislative Rule Interpretative Rule Tax Deficiency is the amount by which the tax
·mposed by the NIRC exceeds the amount reflected
As to nature :n the taxpayer's return; but the a_mount in the return
is increased by the amounts previously as~essed (or
A matter of subordinate Inquiry is not into the collected without assessment) as a deficiency, and
.legislation, which validity but into the decreased by the amount previously abated,
requires public hearing correctness or propriety credited, returned or otherwise repaid in respect of
and publication of the rule (Misamis such tax (NIRC, Sec. 56(8)(1)).
(Administrative Code of Oriental Association of
1987, Book VII, Chapter coco Traders, Inc. v. Tax Delinquency
2, Sec. 9). DOF, G.R. No. 108524, - refers to the state of a person upon whom the
November 10, 1994). personal obligation to pay t~e tax has been fixed by
lawful assessment and who thereafter fails to pay the
As to substance
tax within the time limited by law (U.S. v. Abejo, G._R.
Designed to implement Designed to provide No. L-12362, August 29, 1917).
a primary legislation by guidelines which the
providing the details administrative.agency is Civil Pena.l_ties
thereof in charge of enforcing A A,enalty of twenty-five percent (25%) or fifty per<?9nt
(50 Yo) may be im osed in addition to the tax required
(BPI Leasing Corporation v. CA,fi.R. No.• 127624,
Nove. mber 18, 2003). ~-------s to be paid in ~ses provided for by the NIRC (NIRC,
ec-~,,48) . -
-
Tax law imposing p alties for delinquencies are
STATUTORY OFFENSES - -~ _ intended to hasten ' tax payments by punishing
evasion qr neglect-of duty in respect thereof (ABAN,
_.,..
AND PENALTIES - Law
. of Basic
, Tax.atior'I -in the Philippines: Revised

-·.
.
. Edition (?00_
1), p. 208 {hereinafter ABAN]).
\---~- ........_
NOTE•'-The CIRihas no power to prescribe penalties
• 1 ~mceJ.t js' the ,Secretary of Finance who issues rules
General Provisions .~ - . ....,...- andfregulations (NIRC, Secs. 7 and 244).
Additions to the tax or deficiency tax shall.apply ~o,all- -- -; ,- , -· .·
taxes, fees and charges imposed in the IRC . ..:rhe~~ - Surcharge · .. .
amoun~ S? ~dded to the tax shall be col)ect~ t the A civil pen~lty imposed by law as an addition to the
same time, m the sam~ manner and as part of J~ tax · _,, ~sic..tax required to be pa~. A surcharge added to
(NIRC, Sec. 247(a)). _: i :the main tax is subject to interest (2 DE LEON, NIRC,
. supra at 683).
If the withholding agent is the Government or any of
its agencies, political subdivisions or
instrumentalities, or a GOCC, the employee thereof
RATES OF SURCHARGE
responsible for the withholding and remittance C?f the 1. Twenty-five percent {25%) of the amount
tax shall be personally liable for the additions to the due shall be imposed in the following:
tax prescribed in the NIRC (NIRC, Sec. 247(b)). a. Failure to file any return and pay the tax due
thereon on the date prescribed;
The term Mperson, w includes an officer or employee of b. Wrong venue -Unless otherwise authorized
a corporation who has a duty to perform the act in by the Commissioner, filing a "return with_~n
respect of which the violation occurs (see NIRC, Sec. internal revenue officer other than those with
247(c)). whom the return is required to be filed;
c. Failure to pay the deficiency tax within ~e
Purpose: To discourage delay in the payment of
time prescribed for its payment in the notice
taxes due to the Government and, in this sense, the of assessment; or
penalty and interest are not penal but compensatory d. Failure to pay the full or part of the amouo!
for the concomitant use of the funds by the taxpayer of tax shown on any return required to be
beyond the date when he is supposed to have paid filed, or the full amount of tax due for which
no return is required to be filed, on or before
 \ I
MEM:Q~y AI D
San Bede College ot Law - ROCT a., Oi>e<atione Cent..
the date prescribed for its payment (NIRC
Sec. 248(A)) . '
2. Fifty percent (50%) penalty in case of the
following: (WF) .
a. Willful _n eglect to file a return w ithin the period
prescnbed; or
NOTE: If the taxpayer voluntarily files the
ret~rn , without notice from the BIR, only
2~ ¼ surcharge shall be imposed for late
tiling and late payment of the tax.
But_if the taxpayer files the return only after
prior notice in writing from the BIR, then the
50%_ surcharge will b~ imposed ·(INGLES,
Rev,ewer, supra at 404).
b. .Ealseor fraudulent return willfully made
(NIRC, Sec. 248(8)).
Prima-facie Evidence of False or Fraudulent
Return Substantial Underdeclaration of ·
Taxable Sales, Receipts, or Income
failure to report sales, receipts, or income in an
amount exceeding 30% of that declared per
return (NIRC, Sec. 248(8)) .
Substantial Overstatement of Deductjons
claim of deductions in an amount exceeding 30%
of actual deductions (NIRC, Sec. 248(8)) .
NOTE: There must be a deliberateJ intent to
evade tax for the 50% surcharge to apply.
Nonetheless, a 25% _ surcharge shall apply
accordingly (McDonald's Phi Realty Corp. v.
Commissioner of Internal Revenue, CTA Case
No. 8766, December 15, 2016).
PAYMENT OF SURCHARGE
MANDATORY
GENERAL RULE: The payment of the surcharge is
mandatory, and the Commissioner of Internal
Revenue is not vested with any authority to waive or
dispense with the collection thereof (Lim Co Chui v.
Posadas, G.R. No. L-23487, February 11, 1925).
EXCEPTIONS:
Surcharge a_nd Interest may be deleted in the
following instances: · to be filed ;
1. When .there is good faith and honest belief that
one is not subject to tax on the basis of previous
interpretation of government agencies (Michel J.
Lhuillier Pawnshop, Inc. v. Commissioner of
Internal Revenue, G.R. No. 166786, September
11, 2006) ; or . assessed and collected on the unpaid
2. When the imposition of a tax statute ""!as
controversial (Cagayan Electric Power & Light
Co., Inc., v. Commissioner of Internal Revenue,
G.R. Nq. L-60126, September 25, 1985).
INTEREST
Interest in general is computed based on any unpaid
amount of tax at the rate of double the legal interest
rate for loans or forbearance of any money in the
absence of an express stipulation as set by the
Bangko Sentral ng Pilipinas from the date prescribed
for payment until the amount is fully paid (NIRC, Sec.
249 (A) , as amended by TRAIN Law) .
NOTE: Under RR 21-2018, the interest rate
prescribed for deficiency tax and delinquent tax
liabilities is 12 percent, which is twice the prevailing
interest rate of six percent from the Bangko Sentral
ng Pilipinas (BSP Circular No. 799, s. 2013) . Prior to
the Train Law, the interest rate was 20 percent.
For the period up to Deficiency and/or
December 31 , 2017 delinquency interest at
-~: 20% .
'
For the perio_d January 1, Deficiency and/or
2018, until ;.full payment delinquency interest at
of the tax ,1liabllihi
f "7~ 12%.
NOTE: The dquble imposition of both deficiency and
-- delinquency interest_under Section 249 of the NIRC
prior to l! s apien~~ ~nt will still apply for the period
'. between the -date prescribe for payment until
:·. December 31 , 2017 (R.R. No. 21-18, Sec. 6) .
CLAS~ES OF INTEREST
1. Deficiency Interest
- imposed on any deficiency in the tax due,
which shall be assessed an'd .collected from the
date prescribed · for its paymerit until the full ·
payment thereof, or upon issuance of a notice
and demand by the Commissioner of Internal
Revenue, whichever comes earlier (NIRC, Sec.
249 (BJ, as amended by TRAIN Law).
· 2. Delinquency Interest
- imposed in case of failure to pay:
a. The amount of tax due on any return required
b. The amount of tax due for which no return is
required ; or
c. A deficiency tax, surcharge or interest
thereon on the due date appearing in the
notice and demand of the CIR; there shall be
amount, shall be subject to the interest rate
above until the amount is fully paid, which
 TAX ADMINISTRATION AND ENFORCEMENT
· Taxation Law

interest shall form part of the tax (NIRC, Sec. 3. Interest on Extended f>ayment:
249 (C)). . - imposed when the taxpayer has opted to pay
by installmen~ but fails to pay the tax or any
NOTE: Before . passage of TRAIN law; . installment on the date prescribed for payment
delinquency and deficiency interest may be and in cases where the Commissioner has
imposed simultaneously. However, after the · authorized the extension of the time for the
effectivity of TRAIN law, in no case shall the payment of the tax (N/RC, Sec. 249 (0)).
deficiency and delinquency interest ·be
simultaneously imposed (NIRC, Sec. 249 (A), as ILLUSTRATIONS BASED ON R.R. NO.
amended by TRAIN Law). 12-99
ILLUSTRATIONS:
Company B has been assessed a deficiency
income tax of ~1.000,000.00, exclusive of Late filing and 25% surcharge Pay the tax
interest and surcharge, for 2015. The tax liability late payment of for late filing and due,
has .remained unpaid, despite the lapse of the tax; No BIR late payment; surcharge,
June 30, 2017 deadline for payment, as stated in intervention or 20% or 12% and penalties.
the notice and demand issued by · the · demand. interest from
Commissioner. The taxpayer paid the deficiency date due up to
income tax only on February 10, 2018. As a the time paid.
result, the civil penalties for late payment will ·be
computed as follows: , J Tax return filed 25% surcharge
' ...
on time,/ but only; No interest
Pay . the
surcharge;
Basic Tax Due - income Tax \.--~1.000,000 paid in t e charge because No need to
· Add: >.) payment is on pay the tax
·25% Surcharge for lafe - 250,000 'time, even at due.
payment ' /1 the wrong
20% Deficiency Interest from place.
April 16, 2016 to June 30,2 1-'7.
(441 days ) .} ·
241,643.84 · La e filing
J and ,50°/o ·surcharge,· Pay tax,
[1M* 20%*(441/365)) \ late . "'ayment or 12% plus·
Total Amount Due, JuneJ3o, r due /,,;?) to. in erest from penalties.
2017 ( r\ ~1-41 643. S~f -taxpayeis , date due (not ·
J .) . fie9
. , ., ,willful ect. from demand)
Add: , . . , ,::-,.:;-; to the time
20% Deficiency Interest from _d.
July 1, 2017 to December 31, ; . ena ties for 20% or 12% Pay the
. 2017 (184 days; based on /. deficie{lc ( tax.~ deficiency penalty.
basic tax of ~1,000,000) P -- time , interest
[1 M*20%*(184/365)j
, e in imposed on the
20% Delinquency Interest from computation
July 1, 2017 to December 31, deficiency tax
resulting to from date due
2017 (184 days; based on total deficiency tax.
amount due as of July 1, 2017) up to the date
[~1.491,643.84 *20% *184/365) paid; No
150,390.39
surcharge since
12% Delinquency Interest from there are no
January 1, 2018 to February grounds for the
10, 2018 (41 days; based on imposition of the
total amount due as of July ·1, 25% surcharge.
2017) 20,106.54 Penalties for 20% or 12% Pay the
[~1.491,643.84*12%*41/365] deficiency tax: deficiency penalty.
Total Amount Due, February Paid on time interest
·10, 2018 ~1. 762,962.69 BIR disallowed imposed on
deductions · deficiency tax
resulting to from date due
deficiency tax. up to the time
paid; No
surcharge since
 \ I

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Sin Seda IJrMMwity Coleoe <:A Law - RGCT Bar 0perat1ona Center
309

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there are no FAILURE OF A WITHHOLDING AGEN T
ground s for the .TO COLLECT AND REMIT TAX
imposition of the
Any person require~ to withhold, acc?unt f~r, and
006 25% surcharge.
remit any tax imposed or who willfully fails to WJthh?ld
Penalties for 50% surcharge; such tax, or account for and remit such tax, or aids
Pay. the
deficiency tax: 20% . or 12% and abets in any manner to evade any such tax or the
surcharge
Paid on time, deficiency payment thereof, shall be liable upon conviction to a
plus . the
but return interest pe_nalty equal to ·the total amount of the tax not
penalty .
found to be imposed on withheld, or not accounted for and remitted (NIRC,
false and deficiency tax Sec: 251).
fraudulent from date due
resulting to up to the date FAILURE OF A WITHHOLDING AGEN T
deficiency tax. paid. TO.· REFUND EXCESS WITHHOLDING
(/NGLE S, Review er, supra at 407-41 0) TAX -
Any employer/withholding agent who fails or refuses
NO SURC HARG E AND INTER EST IF to refund excess withholding tax shall be liable to a
TAXPAYER R~LIE D IN GOOD FAITH ON penalty equal to the total amount of refunds which
AN EARLIER RULIN G was not refunded to the employee resulting from any
excess of the amount withheld over the tax actually
The Supreme Court cancell ed the BIR's assessment due on their return (NIRC, Sec. 252) .
since the hospital eventu ally settled the unpaid ;J
inco(Jle tax. Notably, the Court allowed the waivef 'of·
_::. . NOTE: In both cases, the penalty shall be in additio n
the interest and surcha rge becaus e ·the hospital
·. ·":-; to other penalties provided for in the NIRC.
relied in _good faith on the BIR letter which opined that
the hospital is a corporation· purely for charitabl~ and
social welfare purpos es (Comm issione r of. Interna l ' ·-CRIMES,_ ~} ) THER OFFENSES AND
Revenue v. St Luke's Medica l Center, Inc. G.R. No, FORFEITU~ ES
203514 , Februa ry 13: 2017) . · , :' .. __:,. General Provisions
';•' ;.- 1. Any pei;sol} convicted of a crime penalized by the
FAILURE TO FILE,,-~-· CERTAIN NIRC i hah be subject to the penaities imposed
INFORMATION RETU RNS - by the C(?de in f3ddition to the payment of taxes.
The p,;iyrnetJt ofithe tax due after apprehension
GENERAL RULE: for faill:'re to file a~y.information shall ...no( t gg_n.sfr ute a valid defense in any
return, statement or list, or keep recol'(i, ortsu,pply any prosecution for violation of any provision of the
~atio n required on the date prescri bed th~refore, Code or in_any action for the forfeiture of untaxe d
the taxpayer shall be liable to pay ~1 .000.00 for each
. artic~_e! (NIRC, Sec. 253 (a)).
such failure. The aggreg ate amoun t , f9~ all' such.:.:
failures during the calenda r year shall~(l ot e_?(~ed 2. Any . person who willfully aids or abets in the
'925,000 .00 (NIRC, Sec. 250) . commission of such crime or who causes the
commission of any such offense by another shall
EXCEPTION: -When it is shown that such failure is be liable in the same manne r as the principal
due to reasonable cause and not due to willful neglect (NIRC, S~c. 253 (b)) .
(NIRC, Sec. 250).
3. If the offender is· not a citizen of the Philippines,
NOTE: Any employer/withholding agent, jncluding he shall be deported immediately after serving
the government or any of its political subdivisions and sentence · withou t further . proceedings for
GOCC, who/which fails to comply with the deportation· (NIRC, Sec. 253 (b)).
filing/submission of BIR Form No. 2316 ·within the
time required, may be held liable under Section 250 ·4. · If the offender is a public officer or employee:
of the Tax Code, for each f~ilure (R.R. No. 11-18, a. Maximum penalty shall be imposed;
Sec. 12). b. He shall be dismissed from public office; and
c. · He shall be perpetually disqualified from
The imposition of any of the penaltie s under the Tax holding any public office, to vote, and to
Cade, and the compro mise of the criminal penalty on participate in _any election (NIRC, Sec-. 253
such violations shall not relieve the violating taxpaye r (c)) .
from the obligation to submit the required docum ents
(R.R. No. 11-18, Sec. 12). 5. If the offender is a CPA, his ~ertificate as ·a CPA
shall, upon conviction, be automatically revoked
or cancelled '(NIRC, Sec. 253 (c)).
 r
TAX ADMINISTRATION AND ENFORCE~ENT
310
6. In the case of associations, partnerships or
corporations, the penalty shall be imposed on the
partner, president, general manager, branch
mal)ager, treasurer, officer-in-charge, and
employees responsible for the violation (NIRC,
Sec. 253 (d)).
NOTE: The fines to be imposed for any violation
. of the provisions of the NIRC shall not be lower
than the fines imposed or twice the amount of
taxes, interests, and surcharges due from the
taxpayer, whichever is higher_(N/RC, Sec. 253
(e)) .
SOME ACTS PUNISHABLE UNDER NIRC:
The BIR may institute a· criminal action against the
taxpayer for the commission of the following acts:
1. Willful attempt to evade or defeat any tax (NIRC,
Sec. 254); - ---~
Elements of Tax Evasion: (ESC)
# •
j.--
a. The End to be achieved (i.e.-; tHe payme t-of
less than that known by.,ttie .,taxp~ye to ~ - .
legally due, or the non- ayment .of ax -Wlien .
it is shown t~at a tax i du_e ); ,. . . . :'. '
b. Accompanying .§.tate of mmd: wh1cr IS evil, m
bad_ faith,_ willful, ,Of ..g;1iberatei ~nd -~<?!...' __ __ _ _ _
nd
accidental, a 1 . / . ! ..
c. Unlawtu,1 ~ourse of ac 101:' pr failure of action
(Comm1ss1oner of lnte~I Revenue v. The
c t t
i;:,S a e o
f 7i d J
o. a, r., . .
~ ,, \ 1,,7.1108
'R 'N
o., ...:i: '...!.le - 1 fa,"led-t0 ,~
September 14, 2004)., f'\ \• ;;-_
1..J ,1 ,,r,,.
''i.
2. Willful failure to file a return, keep ~ny ~ rd , 1 ·'PRES'GRIP1'10N IN CRIMINAL CASES
supply correct and accurate information, pay tax: v1
withhold and remit tax, or refund excess .taxe_s;:::-~ 1.frf,"!,the,time depending on the nature of the violation
withheld on compensation (NIRC, Sec; 255)~. · - O~
3. Willful!Y makin_g false entries, records or/ ~pprts, - 1:. If, a_,lu e or refu_sal to pay taxes due: _from
or usmg falsified or fake accourtta_qle / t rms
(NIRC, Sec. 257); • •
4. Unlawful pursuit of business or carrying on a
business for which an annual registration fee is
imposed without paying the tax required by law
{NIRC, Sec. 258); .
5. Failure or refusal to issue .receipts or sales
invoices; printing of receipts or sales invoices
without authority from BIR; printing of double or
multiple sets; printing of unnumbered receipts or
invoices or"not bearing the required information;
or failure to indicate VAT as a separate item in
the invoice or receipt (NIRC, Sec. 264; R.R. No.
18-11, Secs. 1 and 2);
6. Failure to obey summons (N/RC, Sec. 266); and
7. Perjury (NIRC, Sec. 267).
In addition to the penalty imposed for the
violations of the provisions of Title X, the same
shall carry with it the confiscation and forfeiture in
favor of the Government of the pro~eeds of the
Taxation Law
crime or value of the goods, and the instruments
or tools with which the crime wa!> committed.
(N/RC, Sec. 279) .
WHEN CRIME DEEMED COMPLETE
A crime is complete when the violator k~owingly
and willfully filed a fraudulent return, with intent to
evade and defeat the tax. The perpetration of the
crime is grounded upon knowledge on the part of the
taxpayer that he has made an inaccurate return
(Ungab v. Cusi, G.R. No. L-41919, May 30, 1980).
Corollary, an assessment of the tax d!ficiency is
not required in a criminal prosecut101') for . tax
evasion . However, in another case, the Court clarified
that although a · deficiency assessment is not
necessary, th~ fact that a tax is due must first be
proved before one can be prosecufed for tax evasion
(Commissioner of lntemaf Revenue v. Court of
"" Appf!als, Spouses Manly, G.R. No. 197590,
November 24, 2014). .
)
, ..:..
'
J ! .
•
,¥- • WILLFUL -BC:INDNESS DOCTRINE ·
axpayer can no longer raise the defense that the
errorso their t~i returns are not their responsibility
or that i is th fa It of the accountants they ·hired
(/NGLE RevieWerr supra at 413).
\ ',_ .;
. NO,:E: T~e only ·thin·g'that needs to be proven is that
the taxpayer was aware of his obligation to file the tax
fi • . . . .
9yt:9e
re urn,
fil t'-
voluntarily, knowingly, and intentionally
· d t (tdr'
, ne r: quire re urns ,.
,· I· :._ /'
, 1,. /J" 7',7 ..,
Ke prescriptive period for criminal cases is 5 years
ta..~pay~ . .•
f, ,•; J:.. 1service of final notice and demand for payment of
v J the deficiency taxes upon the taxpayer
2. If filing of false or fraudulent returns: from the
discovery and institution of judicial proceedings
for its investigation and punishment (NIRC, Sec.
281).
The prescription shall be interrupted when
proceedings are in.stituted against the guilty persons
a~d ~hall beg_ in to run. again if the proceedings· are
d1sm1ssed for reasons not constituting jeopardy
(NIRC, Sec. 281) . . - ·
The term of prescription shall not run when the
offender is absent from the Philippines (NIRC Sec.
281). '
PENAL LIABILITY OF CORPORATIONS
The penalties shall be imposed upon the responsible
corporat~ officers, partners, or employees. The
corporati~n. association or general co-partnership
 \ I
MEM:O~Y AID
San Bede lkMlrllfty College of law - RGCT Ber Operauone c.ntar
shall also be punis~ed by an additional fine (NIRC,
Sec. 256).
COMPROMISE PENAL TY
A compr~mis~ penalty_ i~ an amount paid by the .
taxpayer in heu of cnminal prosecution . It is an
amount paid to· compromise a violation for the penal
provisions of the NIRC. Since a compromise is in the
nature of a contract, it is now a well-settled doctrine
that a compromise penalty cannot be imposed or
collected without the agreement or conformity of the
taxpayer (Wonder Mechanical Engineering Corp. v.
CTA, G.R. L-22805, June 30, 1975).
EFFECT OF THE TAXPAYER'S FAILURE
TO COMPLY WITH THE COMPROMISE
AGREEMENT
Since compromise penalties are only amounts
suggested in settlement of criminal liability, if the
taxpayer reneges on his conformity to the payment of
the suggested compromise, the CIR may not enforce
it except through a criminal action against the
taxpayer for tax violation (R.M.O. No. 19-07; 111(5)).
This is because compromise penalty is neither a'tax
nor an administrative penalty for tax delinquency.
INFORMER'S REWARD
An informer Is any qualified person who voluntarily
provides definite and sY{om information- not. yet in the
possession of .the BIR nor of public knowledge;
leading to the discovery of frauds upon the internal
revenue laws or violaiions of any provision of the
NIRC, resulting to the recovery of revenues and fees'
and/or conviction of the gui_
lty party and/or ·imposition
, revenues, surcharges or fees recovered and/or
of any fine or penalty (R.R. No. 16-10, Sec. 2).
r '.'· 3.
An informer's reward is given to persons instrumental~
i>...i-.
in the:
1. Discovery of violations of-the NIRC; and
2. Discovery and seizure of smuggled goods
(NIRC, Sec. 282) .
1. For Violations of the NIRC
Requisites: (NIP4S-LR)
a. · The informer is Not disqualified. The informer
should not be any of the following: (B6C)
i. !llR official or employee or any other
incumbent public official or employee;
ii. Relative within the 6th civil degree of
consanguinity · of a- BIR official or
employee, or other public official or
employee; and
iii. Though already retired or otherwise
separated from service, BIR officials or
employees or other public officials who
acquired the information in the Course of
their duties during their incumbency
(R.R. No. 16-10, Sec. 3) ;
311
b. The informer voluntarily provides sworn
Information on the tax fraud or violation
allegedly .,. committed by the denounced
taxpayer (R.R. No. 16-10, Sec. 5(b)) ;
c. The said information is not yet in the
Possession of the BIR nor of fublic
knowledge or will reasonably come into the
possession of the BIR in the course of its
operations (R.R. No. 16-10, Sec. 5 (c));
d. The said information does not refer to a case
already fending or freviously investigated
or examined by the CIR or by the SOF or any
of their deputies, agents or examiners (R.R.
No. 16-10, Sec. 5 (d));
e. The said information does not refer to or is
not exactly .§.imilar to a previous information
filed by another informer covering the same
taxpayer ·describing the same scheme or
information covering th~ same taxable year
or period (R.R. No. 16-10; Sec. 5 (e));
f. Such information beads to the discovery of
frauds upon internal revenue laws or
violations of any of the provisions thereof;
and ·
g. There must be Recovery of revenues,
':' surcti~rges and fees (NIRC, Sec. 282(A);
~( .f R ;-R.1'/o. 16-10, Sec. 5).
..
NOTE; \ Informer's reward is conditioned
up9n thel)ayment an.d collection of unpaid or
deficien c{ltaxes (Mera/co Securities Corp. v.
Sbvell~no, ·_G.R. No. L-36181 , October 23,
•, ,, 1982).~ ,,,.,.\., f
' '... -·/./; ~- .:::_.;;
;..._-'
Amount of ~Reward: Ten percent (10%) of the
;'fin~ or penalty imposed and collected or one
·,- million pesos (fD1 ,000,000) per case, whichever p
is lower (NIRC, Sec. 282(A)) .
The same amount of reward shall also be given
to an informer where the offender has offered to
compromise the violation of law committed by
him and his offer has been accepted by the CIR
and collected from the offender (NIRC, Sec.
282(A)).
Grant of Informer's Reward is NOT Dependent
on Classification of Delinquent Taxpayer
That the informer's reward was sought and given
in relation to tax delinquencies of government
agencies provides no reason for disallowance.
The law on the matter makes no , distinction
whatsoever between delinquent taxpayers in this
regard, whether private persons or corporations,
or public or quasi-public agencies, it being
sufficient for its operation that the person or entity
concerned is subject to, and violated, revenue
laws, and the informer's report thereof resulted in
the recovery of revenues (Commissioner of .
 TAX .ADMINISTRATION AND ENFORCEMENT
Taxation Law

5. Percentage tax .
Internal Revenue v. Commission on Audit, G.R.
No. 1019!6, January 29, 1993) .
=- a tax imposed on a fixed ratio between the
gross sales or receipt and the burden imposed
upon the taxpayer. . · ·
2. For Discovery and Seizure of Smuggled
Goods 6. Excise ta~
Amount of Reward: Cash reward equivalent to taxes imposed on specified goods
ten percent (10%) of the FMV of the smuggled manufactured or produced in the Philippines for
and confiscated goods or one million· pesos domestic sale or consumption or for any. other
(ft1 ,000,000) per case, whichever is lower, shall · disposition and to things imported.
be given to persons instrumental In the discovery
·and seizure ofthe smuggled goods (NIRC, Sec. '
· 282(8)). 7. Documentary stamp tax
- an excise tax upon the privilege, opportunity
REWARDS or facility offered at exchanges for transaction of
INFORMER'S CASH
the business. It is an excise upo.n facilities used
SUBJECT TO INCOME TAX · in the transaction of the business.
The cash rewards of the informers shall be subject to
income tax collected as a final withholding tax, at the
8. Such Other taxes as are or her; after may be
rate often percent (10%) (NIRC,-Sec. 282(8)).
. imposed or collected by the BIR (N/RC, Sec. 21) . .
NOTE: Nqtwithstanding the provisions of ·
Subsections (A} and (B) of Sec. 282 of the NIRC, a11U SOURCES OF TAX LAWS
publi~ officials, . whethe~ incumberi! oc :retirep, tio.
acquired the information in the/ co of the
performance of their duties during their incumbency,
are prohibited from'claiming info me 's feward (NIR9, · i'
Sec. 282) . ~-) /k\

SOURCES OF
(IEDV-PEDO)
1. !ncome tax
- a tax on the yearly profits ns,
property, profession, trade, and office.

2. 5state tax
- a tax levied upon the. transfer of the net estate
of a pecedent to his heirs.

3. Donor's tax
- an excis~ tax imposed on the transfer of
property by way of gift inter vivos.

4. l£alue-Added Tax
..:...... a tax on consumption. imposed on each sale,
~arter, or lease of goods, properties, or services
in the course of trade or business as they pass
along the distribution chain, culminating with the
~ale to. the final consumer, and . on every
1mportatIon of goods, whether in 'the course of
trade or business or not.
 \ I

MEM:0-:RY Al D
s., Seda College al I.aw • ROCT Bar Clpsatlona Center

[ OUTLINE OF REMEDIES I TAXPA)'ER'S REMEDIES

1. Assessment: ·
a. Protest with request for reconsideration or
request for reinvestigation; and
b. Compromise and abatement.
Taxes are the lifeblood of the government and so
should be collected without unnecessary hindrance.
2. Collection:
a. Tax-Refund; and
However, such collection should be made in
b. Tax Credit.
accordance witb law. It is therefom necessary to
reconcile the apparently conflicting interests of the

I
authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of
common good, may be achieved (Reyes v.
Almanzor, G.R. N_os. L-49839-46, April 26, 1991). I ASSESSMENTS

TAX REMEDIES Self-assessing system governs Philippine internal

It refers to procedural steps that may be undertaken
by the government or a taxpayer for the resolution of
disputes concerning the levy or imposition,
assessment, collection, and refund of taxes · (2-C
DOMONDON, Bar Q&A Taxation: National Taxation
(2018) p. 209 [hereinafter 2-C DOMONDONJ).
..
·•
revenue taxes. Such a system imposes upon the
taxp'ayer the obligation to assess himself so he could
determine and declare the amount .to be used as tax
basis, any deductions therefrom, and finally, the tax
due (Philippine National Oil Co. v. Court of Appeals;
G.R. No. 109976~April 2(5, 2005).

GOVERNMENT REMEDIES ,.· 1. Power of the Commissioner to Make

1. Administrative Remedies · , .'. sseSSlfl_ent
a. Assessment; and · ··:'- '2?• ·EJriod of--h imitation on Assessment
b. Collection 3. A;sesf"}~ t and Protest ·
i. Enforcement of a tax lien; 4. ComprqrnJ~ and Abatement
ii. Distraint of personal prpperty_ ,,and 5. _Tax R11'u~d1f nd Tax Credit
garnishment of bank deposits; t .. .
iii. Levy of real property; · POWER OF T.HE COMMISSIONER TO
iv. Compromise and abatement; MAKEiASSl;SS.MENTS .
v. Penalties and fines; ' Internal ·re:ic~n1'~-~ t axes are self-assessing and no
vi. Non-availability of injunctiOJJ ,:estrain · further assessment by th~ government is required to
collection of tax; · ,1 ~ _p r~a~e the tax liability. An assessment, however, is
vii.. Forfeiture; and , . · ;-; ?'l:eleV;~l)l_ir:i ihe proper pursuit of remedies to enforce
viii. Suspension of business op,~tions: ~! • -taxpayeM iabilities a.rid certain matters that relate to

it, such as the imposition of surcharges and interest,

2. Judiciai Remedies in the application of statutes of limitations, and' in the
a. Civil; and establishment of tax liens (Tupaz v. Ulep, G.R. No.
b. Criminal. 127777, October 1, 1999).

EXECUTIVE COMMITTEE
DOHN ALFRED E, AQllnIZAN, Over-All Chairperson I NICHOLE VANE B. SANTQS, Chairperson for Academi~s I RONALYN .I\.
G~ClJI.A, Ad.Hoc Direcwr for Bar Matters I MARIELLE CIELO B. BELGIRA, Vice Chairperson for_Finance I JUAN INIGO S. MIGUEL,
V,~ Chairperson for Operations I ALISSA MARIE D.C. DELOS SANTOS, Vice Chairperson for Audit I CORINA R. TAMPUS, Vice
Cha!rperson for Secretariat I ARVY KEITH N. ·cHUNG, Vice Chairperson for Log~lics I ANTONIO JUN-JUN C. MANALIGOD IV, Vice
Chairperson for Membership IJORDAN N. CHAVEZ, Vice-Chairperson for Electronic Data Processing
SUBJECT COMMITTEE
JOSE LORENZO C. DAVE, Subject Chair I LOUISE MARIE C. CONTACTO, Ams/ant Sub1ect Chair I KATRYNA ANNE R. TOMENIO,
Subject Electronic Data Processing I SUBJECT HEADS: MARY GRACE A. GRANIL, General Principles I SHEENA ROSETTE DG.
DOMINGO, Administration, Enforcement, Remedies and Court of Tax Appeals IJERRLITO P. CUSTODIO, Local and Real Properfy Taxation .
I S1EVJE R. ARCILLA and PATRICK MARRION Y. MELENDRES, In come Taxation I MARY ANN C. TAN, Transfer Tax I MARILYN
H. MAI.ALUAN, Value-Added Tax I
7 iji):114iji$14&1:i4;i:
KATRINA MJCHAELA D. DELFIN, ARMANT. PAEZ, ANDREI ANNE U. PALOMAR, MARY KATHERINE A_. SIMEON,JAMES
KARL DANIEL B. ALVARO, ARJFSA JANE V. ~OMINGO, JOSEPHINE MARIE T. SALAZAR, YNA MAREI AGUILAR, NERY
ROYCE T. LAZARO, JOHN KENNETH Q. CRISOLOGO, LOIS DANIELLE P. DIMAANO, ANDRELA M. AQUINO, ANNA LOREN
DC. MANuEI. and GILBERT OWENS. APILADO .
t ~,,w~1@;t
Atty. NICASIO C. CABANEIRO, CPA, Atty. DANTE 0. DELA CRUZ, CPA, Justice JAPAR _B. DIMAAMPAO, Atty. EFREN
VINCENT M . DIZON, CPA
 REMEDIES
Taxation Law

It must be stressed that the assessment of internal
revenue taxes is one of the duties of the Bl~ under
Section 2 of the NIRC. In connection therewith, the
CIR may authorize the examination of any taxpayer
and correspondingly make an assessment
whenever necessary.
Thus to give more teeth to such power of the CIR,
to m~ke an assessment, t~e NIRC authori+es the
CIR to examine any book, paper, record, or data of
any person. The powers granted by law to t~e CIR
are Intended among other things, to determine the
liability of ~ny person for any national internal
revenue tax (Commis~ioner of Internal Revenue v.
Lancaster Philippines, Inc., G.R. No. 183408, July
12, 2017).
EXAMINATION OF RETURNS
DETERMINATION OF TAX DUE
After a return_ has been _filed, the Com~iss·oner :'.°""""'y'""-·1 ....._
(CIR) or his duly authorized represe~tatIv~ ~may
f or paym ent - Wo rse • it was addressed to the
·ustice · secr,etary, not to the taxpayers.
J(Commissioner of Internal Reven~e v. Pasco,
Realty and Development Corporation, G.R. No.
128315, June 29, 1999).
WITHDRAWAL OF RETURN,
STATEMENT OR DECLARATION
GENERAL RULE: Any. return _stateme,nt, _or
declaration filed in a·ny office authonzed to receive
the same shall not be withdrawn.
EXCEPTION: The same may be modified, changed,
or amended provided.that:
1 _ It is done within 3 years from the date of such
filing of the return ; and _ .
2 No notice of audit or investIgatIon of such has
AND · been actually served upon the taxpayer (NIRC,
Sec. 6(A), as amended by TRAIN Law).
SS,_ESSMENT BASED ON THE BEST
/A i .
1
• •

authorize the examination of any taxpayer and the ...,.::::;,. l;VIPENC_ E OBTAl NAB LE
assessment of the correct amount of tax (f'J~Re, Sec. - The GIR''shall ·assess the proper tax based on the
6(A), as amended by TRAIN Law).¼", ·: ..,, -----::--~- besl evidenc~ obtai~able in the following c~ses:
, ,-.. Y ,,,,_, · .. 1 Wtien a report'required by law as a basis for the
NOTE: The failure to file a return s.~~11 ~o preve~t ,. assessment of any national internal revenue tax
the Cl~ from authorizing th~ examinat10,n of any shall not be (fdrthcoming (e.g., the records are
taxpayer. The tax or a~y defic 1en,£Y tax so pssessed - lost);within ·the. time fixed by laws or rules and
shall be ~aid upon not_ 1ce and .demand_fro~ the CIR ,·reg~1&tions; 'or · .
or from his duly authorized repres7ntative tax (NIR_C,, 2. When there ,is reJson to believe that any such
Sec. 6(A), as amended by Law),,. --n ·· report.is false , indornplete, or erroneous (NIRC,
- - -S . (B)
. \/f ---
WHAT DOES NOT OONSTITUT.E', AN •--. i,. __, .• -~c,-~ ·; . . . . . : •

ASSESSMENT · - ,~-:·· .-.. ' ! (-<NOTE: By using 'he best evidence obtainable.,
1,.•~~ ::.· {Re CIR may m¥ e or amend the return from his
1. A written communication by a revenue offiyer~ f
tax liability of the taxpayer: givin llil'Q <..an7r :\ ,_',, own know_ledgeand from ~uch information a~ _he
opportunity to contest or disprove, the , BIR-.....:.:. ----- · can o~tam i:through testimony or otherwise, .
examine~s findi~gs is not a~ assessmgl')t-~i~ce - - - ~ . -.yh1ct1,_ shqll e prima facie correct and sufficient
it is yet indefinite. The said_ recom_ mehd~t1on , ,: /-_\ for al legal purposes (NIRC, Sec. 6(8)).
letter served merely as the pr,ma fac,e basJs for 1 1 , ! .1.. - 0 ..,,,

filing criminal information for the violation of ttie
NIRC (Adamson v. CA, G.R. No. 120935, May
21, 2009) .
2. The advice of tax deficiency and preliminary
five-day letter given by the CIR to an employee
of taxpayer are not valid substitutes for the
mandatory notice in writing of the legal and
factual bases of the assessment (Samar-I
Electric Cooperative, Inc. v. Commissioner of
Internal Revenue, G.R. No. 193100, December
10, 2014).
3. The revenue officers' Affidavit-Report, which
was attached to the criminal complaint filed with
the Department of Justice, does not constitute
an assessment. Revenue officers' Affidavit
merely contained a computation of respondents'
tax liability. It did not state a demand or a period
Best Evidence Obtainable
Includes the following:
a. Corporate and accounting records of _the
taxpayer who is the subject of the
assessment process;
b. Accounting records of other taxpayers
engag~d in the same line of business,
including · their gross profit and net profit
sales;
c. Data, record, paper, document, or any
evidence gathered by internal revenue
· officers from other taxpayers who had
personal transactions or from whom the
subject taxpayer received any income; and
cl. Record, data, document, and information
s~cured from government offices or
agencies, such as the SEC, the Central
Bank of the Philippines, the Bureau of
Customs, and the Tariff and Customs
 \ I
MEM:0-:RY Al D
San Bede College of Law - RGCT Bar Operat1or,s Center
Commission (Commissioner of Internal
Revenue v. Hantex Trading Co., Inc., G.R.
No. 1~6975, March 31, 2005) .
INVENTORY-TAKING, SURVEILLANCE,
AND PRESU~PTIVE GROSS SALES
AND RECEIPTS
Inventory-taking
The CIR may, at a~y time during the taxable year,
order inventory-tak1!'lg of goods of any taxpayer as
basis for determining his internal revenue tax
liabilities (NIRC, Sec. 6(C)).
Surveillance
The CIR may place the business operations of any
person. natural or juridical, under observation or
surveillance if there is reason to believe that such
person is not declaring his correct income, sales, or
receipts for internal . revenue tax purposes. The
findings may be used as the bases for assessing the
taxes for the other months or quarters of the same
or different taxable years and such assessment shall
be deemed prima facie correct ·(NIRC, Sec. 6(C)).
OPLAN KANDADO
BIR's program to strengthen the imposition of
prescribed administrative sanctions_ fer non-
compliance with essential requirements such as: the
issuance_of receipts, filing of returns, declarati9n of
taxable transactions, taxpayer registration, . and
paying the correct amount of taxes as mandated by
the norms/standards of their particular industry or
line of business, which may lead to suspension and
temporary closure of business -(R.M.0.- No. 3-09 (I)) ,
Types of Surveillance Pursuant '· to . Oplan
Kandado · .• -
a. Covert Surveillance - surreptitious_ and
undercover watch on the business
operations of a person for a certain~jieriod;
b. Overt Surveillance - commences with the
inventory-taking of the business documents
followed by the actual qbservation and close
monitoring of the business activities ?f. such
person, and is conducted for a mm~mum
period of 1O days and a maximum period ?f
30 days, unless otherwise extended in
writing by the authorized signatory; and
c. Short-duration surveillance (Tax
Compliance Check) - business operations
of the target taxpayer are ob~erved
purposes of detecting non-compliance wit
the Bureau's primary and secondary
registration requirements (R.M.O. No. 3 -o9
(111)(2)) .
315
PRESUMPTIVE GROSS SALES OR
RECEIPTS
The CIR, after taking_ into account the sales,
receipts, income or other taxable . base of _ot~er
persons engaged in similar businesses under _s1m~lar
situations or circumstances, or after considering
other relevant information, may prescribe a
minimum amount of such gross receipts, sales, and
taxable base in the following cases:
1. When a per~on has failed to issue receipts and
in<.toices; or
2. When there is reason to believe that the books •
of accounts or other records do not correctly
reflect the declarations made or to be made in a
return (NIRC, Sec. 6(C)).
BENCHMARKING OF TAXPAYERS
Process of setting a standard to determine the
performance level of taxpayers in a given line_of
industry or sector (R.M.O. No. 5-12).
CONSTRUCTIVE METHOD OF INCOME
, -~ DETERMINATION ·
The following are the general (constructive) methods
developed by the BIR for reconstructing a taxpayer's
income where the taxpayer keeps no record or
inadequate / ~ ords or where there is strong
suspicion fhat it has received income from
undisclose<J sources: (PNB-CUTS) ·
,,
;; .
- 1. Percet1t~_ge ~~thod
EtQ4i_v alent .G>f.,a ratio analysis of percentages
consfdered - typical of the business under
investigation to indicate potential areas of
f'- revenue adjustment in examination where
":, ·· ·. ·¥;.
·: revenue records do not exist; (2-G
, ,
··"' · 6o'ri;1oNDON, supra at 313).
2. Net Worth Method
=-the method of reconstructing income based on
theory that if the taxpayer's net worth has
increased in a given year in an amount larger
than his reported income, he had unde~stated
his income for that year; presumption of
unrepo~ed income; (2-C DOMONDON, supra at
309).
ILLUSTRATION: . . ·
As of January 1, 2020, Mia Therese's net worth
was P150,000.00. At year's end December 31,
-2020 her · net worth was P1, 150,000.00.
Pres~pposing that her ~020 income tax return
. showed only a gross income of t-700,000._00 and
there is no showing of receipt of excluded income
like gifts, non-taxable win.nings, life insuranc_~
proceeds and others ·of similar character, then It
may be presumed that she has unreported
income of P300,000.00 (Id.) .
 ·--......
REMEDIES
Taxation Law

Net Worth as at Dec. 31, 2020 191 ,150,000 last_day (ordinary or normal assessment) (NIRC,
Less: Net Worth as at Jan. 1, 2020 150,000 Sec. 203).
Presumed increase in net worth in
2020 191 ,000,000 EXCEPTIONS:
Less: Reported gross income · for 1. In case of false or fraudulent return with intent to
2020 700,000 evade tax or failure .to file a return - within 1o
Presumed 2020 unreported years after the discovery of the falsity, fraud or .
income ft300,000 omission (extra~rdinary or abnormal
assessment) (NIRC, Sec. 222(a)) ; · .
2. In case there 'is valid waiver of the Statute ·ot
3. §.ank Deposit Method Limitations - up to the e_xtended period agreed
- the . bank records of the taxpayer are
upon (NIRC, Sec. 222 (b)).
analyzed, and the Revenue Officer estimates
income based on_the total bank ·deposits after
,eliminating non-income items; (2-C
CONSTRUCTION OF STATUTORY
DOMONDON, supra at 314). PROVISION ON PRESCRIPTION
For the purpose of safeguarding taxpayers from any
NOTE: It is to be used only where the BIR unreasonable examination, investigation or
allowed legal access to the taxpayer's bank assessment, our tax ·1aw provides a statute · of
records . The Bank Deposits Secrecy Law limitations in the collection of taxes. Thus, the la~ on
prohibits inquiry into bank deposits. However'l"...,.' .,...,., p res ription, being a remedial measure, should be
!he BIR Commissio~er is authorized to ' inquire T
·1 } ii ~rail co~~strued in order to ~fford such protection'.
into the bank deposits of any taxpayer W?O _as .._,. J..A ' coroll~. the exceptions to the law on
~le~ _an application for ~m~roTi~e- oj
his ta
1
i,rescrip~on,.slib~ld perforce be strictly · constru~
hab1hty by reason of financial mc~pa~ (Id. )-;_ C9mmi siCJll t ofslr temal Revenue v. 8.F. Goodnch
· - . / ·· PH .; ~nc., G,R. No. 104171, February 24, 1999).
4. £ash Expenditure Method , . , ·11l ,:·:. :,~, , ... . .
- ass~mes that . the excess· 9f_a taxpaye~s _· •" Computing fo
V1?·~~escriptive Period , · ..
expenditures dunng a ,tax • penod 1ov.ec.._.h1s... _ · oth Art l 13 of\He:CIVII Code and the Administrative
reported income for tha enod is taxable to:the Coqe· d al with the"to.mputation of legal periods.
extent not approved
".) ..J
otherwise; (2-C· b
• _unaer the Civil ~Code~ year is equivalent to· 365
D0 MONDON, supra at _ 3 -o. <-i · - \ •.:.,_.:. .-_. days
-, . f • -
wJ'tet~er it :pe a j ~ular or a leap year. Under
.,,,/\ · - - 7 - -the:-AdrlJinistrativ Code, a year is composed of 12
5. Unit and Value MethodJ) , . -; : · .n;i,on}~~~ntl th' mfrqber of days is irrelevant. The
- ~e determination or verificati?n ross .~A~T l~"s,~tive;Code ~~ing the more re~nt law, it
r~1pts may be computed by appl~mg Prt , a_~d • s(~ H ~_ov~rn the cor:nputat_ ion of legal periods.· Lex
profit figures to the known ascertainable gual~---- Post~non derogat priori (Commissioner of lntemal
of business done by tHe taxpayer; '· ( le F~ ~~venue l(. Primetown Properly Group, tnc., G.R.
DOMONDON, supra at 314). _Q(J . No. !6
15{ 'August 28, 2007). '

6. !hird Party Information or -1'cces
Records Method
- third party contacts are the sources of
information {Id.); and
7. Surveillance and Assessment Method
(Handbook on Audit ·Procedures and
Techniques- Vol. I (2000) under RAMO No. 1-
00).
LIMITATION
PERIOD . OF
ASSESSMENT
GENERAL RULE: Within 3 years:
1. after the la.st day prescribed by Jaw for the filing
of the return ; or
2. from the date of actual filing of the return,
whichever comes later; provided that a return
filed before the last day prescribed by law for the
filing thereof shall be considered as filed on such
to J; l l~ stration of the general rule and computation
· A of the 3-year period:
Atty. Meg Valdez is a corporate .lawyer · earning
purely compensation income. As such she. is
required to fi!e her ·income tax return (ITR) not Jater
than April 15, 201~. If ~he files her ITR on April 15, •
2019, the 3-year prescriptive period shali start to.run
from that day. If she files her ITR on' a later date, e.g.,
June 10, 2019, then the 3-year period shall start from
June 10, 2019. On the other hand if her-lTR was
ON fil~d on an earlier date, e.g., Febru~ry 8, 2019, then
the 3-year period would start to .run from April 15,
2019,·the last day prescribed by law for filing the ITR
(2-C.DOMONDON,.supra at 2_
34).
BURDEN OF PROOF THAT A RETURN
WAS FILED .
It must be emphasized that in invoking the 3-year
prescriptive period as an affirmative defense, it is
incumbent upon a taxpayer to prove that he
 \ I
MEK-0-RY AID
Slr1 lkww1lfty College of Law - RGcT B a r ~ Center
sub~:~d at;.e~um. If he fails to do so, the conclusion
shou h eG a no such return was .filed, in which
case t e overnment _has 1o years within which to
make the co~es~onding assessments (M. TECH
Products Philtppmes, Inc. , v. Commissioner of
/ntemal Revenue, CTA Case No. 9331 Dece b
11, 2018, citing Taligaman Lumber_ Co.: Inc v.mT:;
Collector of Internal Revenue, G.R. No. L-157 16
March 31, 1962). , the number ·of attached pages. Hence, the
Requisites in order that a return may be
consl~e~ fil~ for purposes of computing the
prescnpttve penod: · _Nov~mber 23, 2015)_.
1. The re~m m~st be valid - it must comply.
substantially with the requirements of the law·
and · a. An amendment of the original income tax
2. The return ,:nust be appropriate - it is a return
!or the particular t~ required by law. Thus, an
income tax return cannot be considered as the
equivalent of a sales (VAT or percentage) tax
return (Butuan Sawmill, Inc. v. Court of Tax
Appeals, G.R. No. L-20601, February 28, 1966).
AMENDMENT OF TAX RETURN
GENERAL RULE: . The following shall govern in
case there is an amendment of the return·: ..
1. If.the amendment is substantial, the counting of
the prescriptive period shall be reckoned on the
date the substantial amendment was:made· or
2. If the amendment was superficial; the cou~ting
of the prescriptive period is still the ··original
period (Commissioner of [nt~rnal ~avenue v. ·
Phoenix Assurance, G.R. /119. ,L-19727, May 20,
1965). · i'
REASON: To prev~nt taxpayers i fr; m e~ading
the payment of taxes by simply reporting·in their
original return heavy losses and afnending~the··
same years later when the CIR has lost t\is
authority to assess the proper tax the~ .u nder.
The object of the NIRC is to impose taxes for the
needs of the Government and not to enhance
tax avoidance to its prejudice (Commissioner of
Internal Revenue v. Phoenix Assurance, ·G.R.
No. L-19727, May 20, 1965).
EXCEPTION: If the return is sufficiently
complete to enable the CIR to intelligently
determine · the proper amount of tax to be
assessed, then the prescriptive period for
assessment starts from the -filing of the original
return (A.L. Ammen Transportation v. Collector,
CTA Case No. 540, November lo, 1965).
Examples of substantial amendments: .
a. An amendment of an original income tax
return showing a net loss to shqw more
losses (Commissioner of lnte"!al Revenue
v. Phoenix Assurance, G.R. No. L-19727,
May 20, 1965). .
.
, 317
b. An amendment ·o f a creditable withholding
tax return which reflected an increase. in
payment of rental and contractor's income
resulting to an increase in the total amount
of tax due from t-3,784,151 .86 to
'93,889,733.24, or a difference in the
amount of t-105,581.38; it likewise revised
amendment · is substantial (Central
Azucarera Don Pedro, Inc. v. Commissioner
of Internal Revenue, CTA Case No. 8459, ·
Examples of superficial amend{Tlents:
return which only ·changed the amount of
Minimum Corporate Income Tax. Since the
Reg1;1lar Corporate Income Tax is higher, the
lat_ter was used in the computation of tax
payable. Hence, the. amendment is not
substantial (Central Azucarera Don Pedro,
Inc. v. Commissioner of Internal Revenue,
CTA Case No. 8459, November 23, 2015).
b.· Amendments of VAT returns and
withholding , tax· returns which only . revised
the number of attached pages. Hence, the
amengments were not substantial (Central
Azug/jrera Don .Pedro, Inc. v. Commissioner
of l(lte1 a1 Revenue, CTA. Case No. 8459,
Nq,<temlier 23, 2015) .
.I "•
·he chang~ in.amount to be paid was based
. '"'mere!y :Ql\~,!tie reflection of the payment
acc<>,~P,anied_ by the filing of the Original
Return. Hence, the · amendment is not
substantial. (Central Azucarera Don Pedro
Inc. v. Commissioner of Internal Revenue'
CTA Case No. 8459, November 23, 2015). '
FALSE RETURN
Contains wrong information due to mistake,
carelessness, or ignorance (Aznar v. Commissioner
of Internal Revenue, G.R. No. L-20569, August 23,
1974).
A substantial under-remittance of withholding tax on
compensation constitutes falsity to warrant the 10-
year prescriptive period (Samar-1 Electric
Cooperative, Inc. v. Commissioner of Internal
Rel(enue, G.R. No. 193100, December 10, 20!4) .
FRAUDULENT RETURN
For the 10-year pre·scriptive period to apply based
on fraud, such must be proved-as a fact by the-SIR
(ABAN, Law of Basic Taxation in the Philippines:
Revised Edition (2001), p. 274 [hereinafter ABAN]).
Such fact in a fraud assessment which has already
become final and executory shall be Ndicially taken
 REMEDIES
Taxatioh Law

Tax Appeals, G.R. No. L-13203, January 28,

cognizance of in a civil or criminal action for the
collection thereof (NIRC, Sec. 222(a) ; R.M.O. 26- 1961).
2001) .
FALSE RETURN V. FRAUDULENT
Substantial under-declaration . of taxable sales, RETURN V. FAILURE TO FILE RETURN
receipt~ or income, or a substantial overstatement of
deductions constitutes prima facie evidence of a
false or fraudulent return: Provided, further, That
failure to report sales, receipts, or income in an
amount exceeding 30% of that declared per return,
and a claim of deductions in an amount exceeding Merely Intentional or There is
30% of actual deductions, shall render the taxpayer implies a deceitful entry omission to file
liable for substantial under-declaration or deviation from with intent to a required tax
overstatement. (NIRC, Sec. 248 (B)) . the truth or evade the taxes return within
fact whether due the prescribed
Inadvertence without intent to evade tax does intentional or period
not make a return false not
The 10-year prescription applies in case of a false or
fraudulent return with intent to evade tax or of failure
to file a return. However, the Court reiterated that the •
entry of wrong information · due to .!Jlistal<e, , . :so.% · . 50% surcharge 50% surcharge
carelessness, or ignorance without the intent to . -sJrcb'arg"e:.. penalty applies penalty ·
evade tax does not constitute a false returq, un1es~~- .· _pen~lty. · does applies
proven otherwise . (Commissior,er of ,.' Internal not apply

,
Revenue v. Philippine Daily lnquirer/ lfJC; ·G._ F
J .No-: ·--. ~-, ,
213943, March 22, 2017) . • ..,.-. ) I ,.,. r·
' ' -. •

INSTANCES NEGATING FRAUD t

The following in~tances n~gate~!fie existen9e of
fraud and preclude the application of the 10-year
prescriptive period: (IARa-Nof -feU) - \· ·· - · , ..
1. The CIR failed to lmput . frau~K ·.iil _the , Taxpaye~.1s Taxpayer may Taxpayer may
assessment notice or . de -~ d fu~ axment- 1 • n~t ~u_bj~;~t to : be.sutiject to be subject to
(ABAN, supra at 274); ~"- , .
2. The CIR failed to Allege fraud in t,is ans'w r_to ·
I: s:;~I _.In~! . · ; crimiryal
~natty. pen~lty.
~riminal
penalty.
c · ·
1:
the taxpayer's petition for revie.w wh en.th~ c~~e_'-1,.., "fSan:iar-1 Electric Coope'at1·.,e In
· I d t th CTA (A BAN 7, ·, - - -- · .., c. v. omm1ss1oner
,s a)~pea e o e . , supt, . at, 2.___1_: ft:.~ f Jnter,.nal_Revenue, G.R. No. 19
#. . " ... ,

3100, December
2 75 , r - -- ,,0 ~014· Secs 22 248(8) d 255
3. The fact that the CIR Raised the ue tion of· - ... , '\~ ' '-. · ' . an ,. NIRC) ·
fra~d only for the_first time in his merr{orah • urn ;,__,,1 .~ Al ~U.RE T O FIL . EA RET.U R
which was filed with the CTA after he had rest d .l .... N
his case (Taligaman Lumberv. Commissioner of ln 5tances ~on·stituting Failure to File Return
Internal Revenue, G.R. No. L-15716, March 31 The following constitutes failure to file return to
1962); , warrant the_ 10-year presc riptive period:
4. The fact that the CIR did Not include the fraud · 1· A deficient return which prevented the CIR from
penalty in his deficiency assessment wtiich was computing taxes due. Such· defective return is
issued after the filing of the return is an indication · t(he sa~e. as if no return is filed at all
that he himself does not believe that there was Comm,sSt0ner - of Internal Revenue v.
fraud (Gomez v. Domingo, CTA Case No. 1168, Go'!zales, G.R. No. L-19495, November 24,
February 15, 1964); 19~6);
5. In an assessment, where the BIR appeared "Not 2 · Failur~ to report income_ in the returns whic1i
so sure" as to the real amount of the taxpayer's . w_ere clearly. no! exempted from tax. The Court
net" income, as wher~ the BIR arrived at three • did not. treat this as a simple ·omission as the
highly different computations (Republic v. Lim ~ame involved substantial sums (Standard
de Yu, G.R. No. L- 17438, April 30, 1964); hartered Bank v. Commissioner of Internal
6. The CIR merely Relied upon an alleged Revenue, CTA EB Case No. 731, September
13 2012
substantial ·under declaration of income tax • ): and .
resulting from his own computation · and 3 · Und eclared VAT-able sales more than 30% of
7. Mere Qnderstatement of gross e~rnings does ·t(~at ~ec~ared in Asalus' VAT returns
not of its-elf prove fraud (Yutivo Sons v. Court of omm,sSioner of Internal Revenue v. Asa/us
 \ I . ,
MEK-0-RY AID
Sat S e d a ~ Co!lege of Law - RGCT B a r ~ Center
Corporation G.R. No. 221590 . F, b
2017). ' e ruary 22,
WAIVER OF STATUTE OF LIMITATIONS
Requisites of a Valid Waiver of Statut 0 f
Limitations (FoSNA-DeDa3) ·e
1. The ~aiver must be in the proper Form
prescnbed by RMO 20- 90. The phrase "butnot
after _ _ _ _ _ 19_", Y.'.hich indicates the
expiry date of the period agreed upon to .
assess/collect the · tax after _the regular three-
year period of prescription, should be filled up·
2. The waiver must be .§.igned by the taxpay~r
himself or his duly authorized representative. In
the case of a corporation, the waiver must be
signed by any of its responsible officials. In case
the authority is delegated by the taxpayer to a ·
representative, such delegation should be in
writing and duly notarized;
3. The waiver should be duly Notarized;
4. The CIR or the revenue official authorized by
him must sign the waiver indicating that the BIR .
has Accepted _and agreed to the waiver: The
. date of such acceptance by the BIR should be
indicated. However,. before signing the wai~er,- .
the CIR or the revenue official authorized by him
must make sure that the waiver is . jn the
prescribed form, duly notarized, and '·executed
by the taxpayer or _his . .du.l y .•~uthorized ·
representative: . ' · ·- ·
5. Both the Date of !_Xecution by -the taxpayer and
Qate of §.cceptance by the· Bureau sh_ould be
before the ·expiration of the l)eriod of prescripfion
or before the lapse of the period agreed upon-in
case a subsequent agreement is executed;
6. The waiver must be executed in ,copies, the
original copy to be attached to the docket of the
case, the second copy for the taxpayer and ~he
third copy for the Office accepting th~ Wgiiver.
The fact of receipt by the taxpayer of hi~/h~r file
copy must be indicated in the original copy to ·
show that the taxpayer was notified _of .the
acceptance of the BIR and the perfection of the
agreement. (Commissioner of Internal Revenue
v. System~ Technology Institute, Inc., G.R. No.
220835, July 26, 2017).
NOTE: These requirements are mandato~ and
must strictly be followed. The Court did not
hesitate to strike down waivers which failed to
strictly comply with the provisions of RMO 20-90
and RDAO 05-01. (Commissioner of. Internal
Revenue v. Systems Technology Institute, Inc.,
G.R. No. 220835, July 26, 2017) .
n ot be in the form prescribed by
Waiver may _
R.M.O. No. 20-90 - "d forms ·
The taxpayer's failure to follow the aforesai · G.R. No. 213943, March 22, 2017) ;
' does not invalidate the executed waiver for as long
as the following are complied with:
1. The Waiver of the Statute of Limitations shall be
executed before the expiration of the period to
assess or to collect taxes. The date of execution
shall be specifically indicated i.n the waiver~
2. The waiver shall be signed by the taxpayer
himself or his duly authorized representative. In
the case of a corporation, the waiver must be
signed by any of its responsible officials;
3. The expiry date of the period agreed upon to
assess/collect the tax after the regular three-
year period of prescription should be indicated
' (R.M.O. No. 14-16). .
NOTE: However, in the case of Commissioner
of Internal Revenue v. Systems Technology
Institute, Inc., G.R. No. 220835, dated July 26,
2017, the Supreme Court ruled that the
· requirements laid out by R.M.O. 20-90 and
R.D.A.O. 05-01 are mandatory and must strictly
be followed; which is in conflict with the liberality
and relaxed guidelines of RMO No. 14-2016.
The Court in the aforesaid case did not touch
f~,..,
upon R.M.6. No. 14-2016 . nor mentioned the
..'
,>c.s\ same for this R.M.O. was raised by neither party .
.
. ~'f ·Defective Waiver is Valid When Parties are . in
'. · -~' P ari Dellcto ,
Failure to strictl,r comply with the requirements in the
a
execution of waiver under R.M .O. No. 20-90 and
R.D.A.O. N'o.~0~-01 renders the waiver defective.
tr However.J in b xception to the rule arises when the
r;::1,, parties (he.,
'"'' r. t l1he taxpayer and the BIR) are in .
~oth
pari d.~IJB(g,oc:);j,n,i q~al default". In which case, the
;}J,· court rna'y-inJer'.f~r;~a'.nd grant relief at the suit of one
of them, where public policy requires its intervention,
: . even though the result' may be that a benefit will be
:, , ·~e'iivec;I. by one party who is in equ,31 guilt with the
:_:·.C..'..oiher'.1:thtf'.Court upheld the validity of waiver on the
strength of the lifeblood doctrine. Hence, the
taxpayer should not be allowed to question the
defects in its own waivers and benefit from the flaws
to evade responsibility . in paying taxes
(Commissioner of Internal Revenue v. Next Mobile
Inc., G.R. No._212825, -December 7, 2015). ·
Waiver is defective when the BIR is at fault
The Court ruled· that the waivers executed by the
taxpayer were void because the Bl~ failed to provide
the accepting copies of the First and Sec~:md
· Waivers executed by Philippine Daily Inquirer.
These were in violation of RMO 20-90 and RDAO
05-01. Further, the Court also ruled that the waivers
executed by the taxpayer were defective since the
BIR did not follow its own rules on waivers. The
defect was· caused ·by the BIR; thus, .the waivers ·
have no effect and did not extend the three-year
prescriptive period under the NIRC (Commissioner
of Internal Revenue v. Philippine Daily Inquirer, Inc.,
 .
320
REMEDIES
Taxation Law

REASON: The BIR cannot hide behind the doctrine b. The request for reinvestigation must be
of estoppal to cover its failure to comply with RMO granted or acted upon by the CIR (Bank of
20-90 and RDAO 05-01 which were issued by the the Philippine Islands v. Commissioner of
BIR itself. A waiver of the statute of limitations is a Internal Revenue, G.R. No. 174942, March
derogation of the taxpayer's right to security against 7, 2008).
prolonged and unscrupulous investigations. Thus, it
must be carefully and strictly construed (Id.) . NOTE: The burden of proof that the
taxpayers reqyest for r~investigation had
Execution of waiver does not bar the taxpayer to been actually granted shall be on the CIR.
invoke prescription The grant may be expressed in
A waiver of the statute of limitations, whether on communications with the taxpayer or
assessment or collection, should not be construed implied from the actions of the ·CIR or his
as a waiver of the right to invoke the defense of authorized BIR representatives in response
prescription but, rather, an agreement between the to the request for reinvestigation (Bank of
taxpayer and the BIR to extend the period to a date 'the Philippine /slan_
ds v. Commissioner of
certain, within which the latter could still asse~s or Internal Revenue, G.R. No. 139736,
collect taxes due. Thus, the waiver does not imply October 17, 2005).
that the taxpayer altogether relinquishes the right to
invoke prescription (Commissioner of Internal 3. When the taxpayer Cannot be located in the
Revenue v. The Stanley Works Sales (PHL) Inc., ..,__, address given by him in the return, unless he
G.R. No. 187589, December_3, 2014) . , informs. the CIR of any change in his address;
, I j4 . ,. W _eg t,e warrant of Distraint or levy is duly
GROUNDS FOR SUSPENSIO Of( THE ..__,,. serv~d upon the taxpayer, his authorized
RUNNING OF .PRESCRIPTION : (PRC-DO) representative, or a member of his household
it . ufficient discretion, and no property :is
1. When the CIR is frohibited from making the
assessment or beginning the distraint_or levy or ,·.-,
a proceeding in court, and f9r 60 days
:s.~
- -
locctted· and ''\
When t""~
r.!l
11
,:;
· >
axpa~•er 1·s Out of the Ph·1·
Y!
·
1ippmes
thereafter; . {Nl~C, Sec. r22.3). ,· · -

ILLUSTRATION: When a -case is on app~~I ·to -_ ~;E-J SME~;~~D PROTEST

the CTA, the CIR is l?revented fr:om 1filing .an _,:· : -_-NOTE: };~~- 2020120?1 Bar Examination · Taxation
ordinary action to collect the 1 tax in .the regular.-.:...;:...._L~ l/al:51.is <;foes not include R.R. No. 22-2020
e:ourts to avoid multiplicity p sµits arid)~ rule of i · !1~te;1: ~ep{embe" '5, 1 2020 which took effect on
Its pendens. . •'; J·
·, 9St(Jl:ief-2, 2Q20 {15 ·days after its publication on
. _.'--1· ,.__ . , ,I / September
, , • 7, 2020', , but · for purposes of
Thi~- may ha~pen_ when there is a p~flc!Jng --.:.~-_discl!,ssion,, 'R.R. N<;. 22-_2 020 was included in the
pet1t1on for review in the _CTA from t~e decisi(!Q_l L \: 1 fT!f!_kmg-!of !he Merpory Aid. For the information of the
on the protested assessment, the fil ng of suqh ·-- rea(ier, . R.R: .No. 22-2020 provided for a Notice of
pe~tion interrupt~ the run~ing of t~e prescriP,tive ,lnfoff(1~1-fJ.o.[!ference in the assessment process.
penod for collection. The interruption is rord the , :;;. ,. " ~4"
time the appeal is filed in the CTA until its '/ 1 1. Kssessment
termination in the Supreme Court should there It is an official action of an administrative officer in
be an appeal to a highe~ court (Republic v. Ker det_ermining the amount of tax duEf from a taxpayer,
& Co., Ltd., G.R. No. L-21609, Septembe; 29, or 1t may be a notice to the effect that the amount ·
1966). therein stated is due from a taxpayer as a tax, with
a demand for payment of the tax or any deficiency
This also happens when the CTA suspends the stated therein (ABAN, supra at 175).
collection of the tax . liability of the taxpayer.
(ABAN, supra at 288). Requisites for Valid Assessment:
1. The · Final Assessment Notice (FAN) contains
2. When the taxpayer .Bequests for a t~e name, address, and Tl~ of the taxpayer; the
Reinvestigation which is granted by the ·c1R; kind of tax, period -covered basic tax and
penalties; signed by the autho,rized BIR official,
Requisites: and the date of payment of the tax. The demand
a. There must be request for reinvestigation letter (DL) contains the computation of the
and not a request for reconsideration deficiency tax, the factual and legal bases.of the
(Commissioner of lriternal Revenue v. asses~ment, and the demand for payment of the
Philippine Global Communications, G. R. tax. Thus, the FAN and DL must always go
No. 167146, October 31, 2006);. and together (R.R. No. 18-13, Sec. 3.1.3); · ,
 , ·. I
MEM:0-RY Al D
Sen Bede l.w-.ity College of Law - RGCT Bar e>i-atfons c.r,te,
2. The FAN/ DL. must be issued Qn account of or
covered by a validly issue~ letter of authority
(R.M.e. No. 75-18; Med,card Phil Inc. v.
Commissioner of Internal Revenue, G.R. No.
222743, April 5, 2017);
3. .The FAN/ DL m}Jst state the factual and legal
bases of the assessment and jurisprudence on
which it is based; otherwise, the assessment is
void (R.R. No. 18-13, Section 3. 1.3);
4. The FAN/ DL must be signed by the
Commissioner of his duly c;1uthorized
representative (R.R. No. 18-13, Section 3.1 .3);
s. The FAN/ DL must be issued within the original
prescriptive period as validly agreed between
the BIR and the taxpayer; and served by
personal delivery or by registered mail (R.R. No.
18-13,-Section 3.1.6) (NIRC, Sec. 222 .(b) and
~;~d . assessment has the same force and effect as
6. The FAN/ DL must be addressed and served to
correct person in his/ its registered or duly
notified address (R.R. No. 1813 Sec. 3.1.6) . · Revenue, ~.R. No. 148380, December 9, 2005).
PRINCIPLES GOVERNING TAX. ••<
ASSESSMENTS '".
.:...;._:..,__ _ _ _ _ _ _ _ _~ - - - : - - - - : - - - ~ ~
1. Not al! documents coming fr.om the BIR -":i the
containing a computation of the tax liability .can . · ·•
be deemed assessments. An assessment must "-
be sent to and received by a taxpaye? arid m·ust~ ·
demand payment of the taxes described) herein '
within a specific period (Commissioner of .,.
Internal Revenue v. Pasco, Realty Development ~\
Corp., G.R. No. 128315, June,J.9, 199{!).
. .,, .. J''t. ; ' iJJ
-~
2. All presumptions are in favor"of !~eicci;rrectness : ZiJ
of tax assessments. When assessm, nt isi made ,:t
by the CIR or his duty · authorized ,agen~. the ,~ft,~•,:-- that the mailed lette_r ~as indeed received by the
same is presumed correct ~nd· ma&:e r1 ~ood · -:;l..;. • ' .;..: ::aaaressee (Comm1ss1oner of Internal Revenue
faith. The taxpayer has the "duty ., to ~roye
otherwise. Verily, failure to present p~ of. ?fJ rror
in the assessment will justify judicial affltJ-fiance
of said assessment (Commissioner of Internal
Revenue v. Wyeth Suaco Laboratories, Inc.,
G.R. No. 76281, September 30, 1991) .
EXCEPTION: The prima facie correctness of a
tax assessment does not apply upon proof that
an assessment is utterly without foun_dation,
meaning it is arbitrary and capricious. Where_the
BIR has come out with a naked assessment; 1.e.,
without any foundati{?n · _ character, . the
determination of the tax due is without rational
basis (Commissioner of Internal Revenue v.
Hantex Trading ·Co., G.R. No. 136975l March
31, 2005).
3. Assessments should not · be based on
presumptions ·no matter how logical th e
. may be. In ord er t O stand the test
presumption be
of judicial scrutiny, the assessmt
· en~frr;~f~mal
based on actual facts (Coffee or
Revenue v. Benipayo, G.R. No. L-13656,
January 31, 1962).
4. Assessment is discretionary on the part of the
CIR. Mandamus will not lie for it will constitute
judicial encroachment on executive functions
(Mera/co Securities Corp. v. Save/lano, G.R. No.
L-36181, October 23, 1982) .
EXCEPTION: If in the exercise oLhis discretion,
there is evidence of arbitrariness · and grave
abuse of discretion · as .to go beyond statutory
authority (Mera/co Securities Corp. v. Save/lano,
G.R. ivo. L-36181, October 23, 1982).
5. The authority to make tax assessments may be
delegated to subordinate · officers. Said
that issue~l by the · Commissioner (Oceanic
Wireless Network v. Commissioner of Internal
ii 6 .. If the taxpayer denies ever having received an
· . ~;l;
~.,. assessment from the BIR, it is incumbent upon ·
latter to prove by competent evidence that
such notice was indeed received by the
' a·ddre_s·see. The onus probandi was. shifted to
BIR ta' prove by contrary evidence that the
taxpayej ~s.ceived the assessment in the due
course/of ~!I. · ·
; l
Whil. nlaile(\letter is deemed .received by the
addfess~:in ttle;-001..irse of mail, this is merely a
disputiibJ~ .ifilst1mption subject to controversy
and a d'ire'ct ~denial thereof shifts the burden to
· the party favored by the presumption to prove
v. Metro Star Superama, Inc. G.R. No. 185371,
December 8, 2010) .
i-low to prove presumption that maiied
matter is received. by the addressee
The facts to be proved to raise this presumption
:~e: That the letter was properly addressed with
postage prepaid ; and, · .
b. That it was mailed: Once these facts are
proved, the presumption is that the letter
was received by the addressee as soon as
it could have been transmitted to him in the
ordinary course of the mail. But if one of ~he
said facts fails ·to appear, the presumption
does not lie (Id.) . ·
7. BIR cannot assess a corporation . under
rehabilitation. The Court held that it was
improper for the BIR to have proceeded with the
collection of the deficiency taxes.-outside the
rehabilitation proceedings. The Court explained
 REMEDIES
Taxation Law

that the corporate ret\abititation is an attempt to
conserve and administer the assets of an
insolvent corporation in the hope of its eventual
return from financial stress to solvency.
Considering that ~here is already
Commencement Order that suspends all
enforcement of claims, the BIR should have
pursued its claim through the rehabil itation court
and not through the usual tax assessment and
collection process (BIR, et al. v. Lepanto
Ceramics, Inc., G.R. No. 224764, April 24,
2017).
KINDS OF ASSESSMENT (SJ-DIED) ,
1. Self-assessment
- assessed by the taxpayer himself, reflected in
the return filed by him, and paid on the day of
filing of the return (pay-as-you-file system)
(NIRC, Sec. 56(A); ABAN, supra at 176).
Examples: (DEVI)
a. Qonor's tax;
,c, , .,-
b. gstate tax;
c. ~AT; and y render the same totally or ·partially
d. Income tax. · ,·
tax will be jeopardized by delay caused by the
taxpayer's failure to:
a) Comply with audit and investigation ·
requirements to present his books of
accounts and/or pertinent records, or
a b) Substantiate all or any of the deductions
exemptions or credits q_laimed· in hi~
return (R.R. No. 30-02, Sec. 3(1)(a)) .
A jeopardy assessment is one issued by the
Commissioner if he believes that the collection
of taxes is in· jeopardy due to delay or other
causes. It n:,ay be issued when the taxpayer is:
(ReL-ReHIP)
a. Retiring from business subject to tax:
b. . Intending to:
i. Leave the Philippines;
li. Remove his property therefrom; or
iii. Hide or conceal his property;
c. ferforming any act tending to obstruct the
' .. proceed ings for the collection of the tax for
--- · the ,past or current quarter or year or to
inef{ecttve unless such proceedings are
.. , •--~- •beg~n't_i i~tely. (NIRC, Sec, 6 (d)).

2. Deficiency assessment--::,.. f
· ,J_.•·--'-· ASSESSMENT ROCESS (LAIP-FA)
- made by the tax assessor himself where the 1. !,ssuance of a ]:etter of Authority (LoA);
correct amount of the taxiscikterrnined after an · .2. Tax ~ udit or lnve ligation;
examination or investigation is conducted · . · ,:3.· lss f1!1~e of otice for·!nformal Conference;
(NIRC, Section 56(B~,: AB~~ '!pra a_t.176) - - --,-------/. _.. ·' 1 • .
(J ) ;,;,, j NQJE;, In · lieu of a Notice of Informal
3. !llegal and Void asseSSJJlent '- (,°, ,· .• /2~cmference, a Notice of Discrepancy shall now
- An assessment wherein the tax assessor has 1 ed. A_ Notice of Discrepancy shall be_
., % ~ ~-, lssu_
no power to act at all (Victorias Milling Co., Inc._ 1•~ . >-· ' sued) f, during· the course of an investigation
a
v. Court of Tax Appeals, G.R. No. L-2421'3, f j · ,"'f\ .;,co ducted by Revenue Officer, the taxpayer is
March 13, 1968). /cl . . . ,_ ~----- found ,to_ be liable for deficiency taxes. The
->'(, I ~otrc a~ms to provide the taxpayer with an
4 . Erroneous Assessment ·· {\_\ opportunity to present his position regarding the
- One wherein the assessor has the power to discrepar:icies identified (R.R. No. 22-2020) .
assess but errs in the exercise of such power
(ABAN, supra at 176). 4. Issuance of freliminary Assessment Notice;
5. Issuance of formal Letter of Demand/ Final
Assessment Notice (FLO/FAN);
5. Disputed assessment 6. Administrative Action/Inaction · on Disputed
- takes place when a taxpayer questions an
Assessment.
assessment and asks the Coilector to
reconsider or cancel the same because he
believes that he is not liable therefor (St. ISSUANCE OF A LETTER OF
Stephen's Association and St. Stephen's AUTHORITY. {LOA)
. Chinese Girls School. v. Commissioner of Letter of Authority
Internal Revenue, G.R. No. L-11238, August 21, The Letter of Authority:
1958). 1. gives notice to the taxpayer that it is under
investigation for : possible deficiency tax
6. Jeopardy assessment assessment; and
: a tax assessment made by an authorized 2. it authori~es or empowers a designated rev~nue
Revenue Officer without the benefit of complete officer to examine, verify, and scrutinize a
or partial audit, in light of the officer's belief that taxpayer's books and records, in relation to
the assessment and collection of a deficiency internal revenue tax liabilities for a particular
 . \ I
MEM,Q~y Al D .
Sin B e d e ~ College of I.aw - RGcr B a r ~ Cent.
period. (Commissioner of fntema/ Re"
• Ph.,. . .,enue v
Lancas,er ,,,ppmes, Inc., G.R. ·No.
183408
· TAX AUDIT OR INVESTIGATION
July 12, 2017). • The examination of the books of account and other
NOTE: In the absence_ of ~uch an authority, the ·
assessment or examination is a nullity. The
Court can~ot convert the letter Notice into the
LOA ~equ1red under the law even if the •same
was issued by the CIR himself (Medicard
Philippines Inc. v. CIR, G.R. No. 222743; April 5
201n . · Days
Electronic Letter of Authority (eloA)
Starting August 16, 2010, only eloAs shall be
issued by the Bureau for the audit or
investigation of tax liabilities, except estate tax
cases (R.M.O. No. 69-10) .
Requisites of a Valid eloA: (INC~O)
a. It must be !ssued by the proper approving
official. The approving official depends on
the investigating office:
i. Regional Director (RD);
ii. Assistant Commissioner-Large
Taxpayer Service (ACIR-LTS) - LTS ..
and its Divisions;
iii. Deputy Commissioner-Legal , . :.. and
Inspection Group Enforcement
Service and its Divisions; an d . ·
iv. CIR or any authorized officia l° ·'.:- Task
Force and Special Team€;· (R.M!o :·.No.
#10); . ~· ~--
b. It must Not contain a'n~ lnc;1r: 1uil ly -:.writt~n
character, notation or erasure ,(/3:(vf:O. fy_o.- ::
#10); .. .. ,- ; l·....
c. It must ~over only 1 taxable y·ear, ex6ept in
tax fraud cases authorized by ) ,he .~ IR or
Deputy Commissioner and exc~e1tax case.as?
(R.M.O. #10); and . . ,:<:,.
. .
' K.
_...,.. ... ""'
NOTE: The practice of issuing n loA
covering the audit of "unverified prior years"
is prohibited (De La Salle University, Inc. v.
Commissioner of Internal Revenue, CTA En ·
Banc, EB No. 671, June 8, 2011) ..
d. It must be served to the taxpayer within thirty
days (R.A.M.O. No. 1-00).
Under Sec. 6 (A) of the NIRC, there must be a
grant of authority before any revenue officer can
conduct examination or assessment. Equally
important is that the revenue officer · so
authorized must not go beyond the authority
given. In the absence of such authority, t~e
assessment or examination is a nullity
(Commissioner of Internal Revenue v. Sony
PHL, Inc., G.R. No. 17Bf?97, November 17,
2010) .
accounting records of the taxpayer to determine the
taxpayer's correct internal revenue liabilities,
pu~uant to its authority granted in the LoA (BOADO,
Compact Reviewer in Taxation (2018) p. 268
_[hereinafter BOADOJ) .
Effect . of Failure to Complete Audit within 120
Beginning June 1, 2010, there is no need for
revalidation of the LoA if the prescribed audit period
has been exceeded. However, the failure of the
Revenue Officer to complete audit shall be subject
· to th~ applicable administrative sanction (R.M.O.
· No. 44-10) .
ISSUANCE OF NOTICE OF . INFORMAL
CONFERENCE (NIC)
The Revenue Officer who audited the taxpayer's
. · -~ . records shall, among '. Others, state in his report
, ~. whether or not the taxpayer agrees with his findings
:t.L that the taxpayer is liable for deficiency tax or taxes.
1-~J If the taxpayer is not' amenable, based on the said
Officer's submitted report of investigation , the
"taxpay r • shall be informed, in writing, by the
Revenue DJ$.trict Office or by the Special
,.· lnvestigatioq .-rfiyision, -as the. case may be (in the
case of Revenue Regional Offices) or by the Chief
of Division concerned . (in the case of the BIR
· National Office) ofthe discrepancy or discrepancies
in the-,taxpay~ F:s~: pay,nent of his internal revenue
taxes. foF thei .R ~pose of "Informal Conference," in
.., order to afford· the taxpayer with an opportunity to
present his side of the case (R.R. No. 7-2018) .
., : N> ..- -
The lnformal 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
Revenue District Officer or the Chief of the Special
Investigation Division of the Revenue Regional
Office or tne Chief of Division in the Natioaal Office,
as the' case may be, shall endorse the case within 7
days from the conclusion of-the Informal Conference
lo the Assessment Division of the Revenue Regional
Office or to the Commissioner or his duly authorized
repres~ntative· for .issuan~ of a. deficiency tax
assessment (R.R. Nd. 7-2018).
NOTE: With the effectivity of R.R. No. 18-2013 on ·
December 15, 2013, the issuance of a Notice for
Informal Conference for audit investigations was
discontinued until it was reinstated by R.R. No. 7._
2018 which became effective on March 16, 2018.
However, 'R.R. No. 22-2020 now provides for the
. preparation of a NoD, instead of a NIC.
 324 .
REMEDIES
Taxation Law

ISSUANCE . OF NOTICE . OF ISSUANCE OF PRELIMINA~Y

DISCREPANCY (NOD)
If a taxpayer is found to be liable for deficiency fax in
the course of an investigation conducted by a
Revenue Officer, the taxpayer shall be informed
through a NoD. Such notice aims to fully afford the
taxpayer with an ·opportunity to present and explain
his side on the discrepancies found through a
· Discussion of Discrepancy". Said discussion shall
not extend beyond thirty (30) day.s from the receipt
of NoD (R.R. ·No. 12-99, as amended by R.R. No.
22-2020, Sec. 3.1. 1).
If the taxpayer disagrees with the discrepancy
detected during the audit/investigation, the taxpayer
must present an explanation and provide documents
to support his explanation within .five (5) days from
the date of the receipt oflhe NoD (R. R . No. 22-2020,
Annex A). The taxpayer has thirty (30) days from
receipt of the NoD to submit all necessary _ =_- ~- --if...!iot practicable, by substituted se~ice or by
documents that supports his explanation (R.~. No.
12-99, as amended by R.R. No. 22; 2020 -!_~ec. •.._ ,· ~2.~/ ,:tle ., Assessment was conducted within the
1
ASSESSMENT NOTICE (PAN)
PAN is issued to the taxpayer informing him ofttie ·
findings of the Revenue Officer if after review and
evaluation of taxp'ayer's reco~ds, there is a sufficient
basis to assess the taxpayerfor any deficiency taxe·s
(R.R. ,No. 12-99, Sec. 3.1.1, as amended by R.R.
No. 18-13).
NOTE: Prior to issuance of PAN , the taxpayer may .
be allowed to make voluntary payments of probable
deficiency taxes. and penalties (R.M.C. No. 11.-14).
Voluntary payment of PAN without FAN can be
refunded (Commissioner of Internal Revenue v. 3M
Philippines, Inc. , C. T.A. E.B. No, 1330, November
21, 2016).
. Requisites of a Valid PA~ (SAWI) .
1. Must be .§erved to the taxpayer personally and
t • : mail' (R.R. No. 12-99, Sec. 3.1 .1, as amended);

3.1 .1). · <""· ••- . , . . ., -....... sco~ -· of. authority given by a valid LoA
/.. A/" / . - - - tco;,;i.mJssjo;.rer:- of Internal Revenue V. Sony PH,
If aft~r the discussion, it is./.~till found that he . nc., G-.R, No.;._178697, November 17, 2010);
taxpayer is still liable for deficien axes/ and ttfe /, ~-: Must be in Writing and contain the facts and the
taxpayer does not agree the ' discrepancy ·or :- ·: · .,_ law _. pn whl9h ti')~ proposed assessment is based
address the same by payirw~the_ deficiency-taxes, - · ...:. ___ .(NIRC, Sec. ' 22d, Par. 2; R.R. No. 12-99, Sec.
the investigating office shah naorse the case for. . . .3.1. t, as amended}: and
issuance of a Preliminary 4 sessment Not_ce w1t~in· 4_._ Mus be !ssue,<;1 .bi •tfle CIR or his duly authorized
ten (10) days from t~e conclusi .!] ?f t~e.-91scuss1on .. ·. _-: rep _9~~mtat~ye. : <fhe duly authorized
(Id.) . . ' / : - - -- T--·- .representatives are·
..__f) \<~\\ _ I "' .' ,f / ~ even1,ie' Regidnal Directors·
DIFFERENCES BETWEEN·-NIC,A~o. . l ; • ,,- ,b.:zACIRl .TS; ana '
• . , , -. " . , ,., 'Ac10, .
NoD ·,, ,;:, . . • _ · .:,,~:/ l,, -Enforcement and Advocacy Service
. . . NIC . - NoD ·_- -~:.-; :-;-f --; , __\ (R.R. No. 112-99, Sec. 3.1 .-1, as amenped;
' . ' . -I 1:: \ .·,/
- __ #_.,. ,,.:#"..
, R.1.rf. C. N . 11-14) .

,;-~·. ?h .... 'Possible

. . . . ., • .:

As to the Period to Explain : · .• - '· . .

Scenarios after Issuance of PAN;
The taxpayer has 15 The taxpayer tias..5.; l •/L :-tjlXP~y~r's Rem~dies (PRI)
days from receipt of the days from receipt of --~. .t. .. Taxpayer may fay the assessment·
NIC to respond, failure · the NoD to present 2. Taxpayer"may file a Reply· or ,
to do so will result rn and explain his side 3. Taxpayer may !gnorePAN.
default (R.R. No. 12-99, (R. R- No. 22-2020,
Sec. 3. 1.1). AnnexA). · SCENARIO 1: Taxpayer Pays tt}e Assessment
If the taxpayer, upon receipt of the PAN, accepts and
. As to the number ~f days· the office .. BIR pays the assessment, a FLO/FAN shall be issued to
concerned has to
endorse the case for th'e ' . formalize the assessment, and Payment Form 0605
· issuance of an Assessment shall be duly prepared, filed and paid to
acknowledge and provide -evidence· for the
· Within 7 days from the Within. 10 days from settlement of the assessment (R.M.O. No. 26-16).
conclusion of the .the conclusion of the
Informal Conference Discussion (R. R. No. SCENARIO 2: Taxpayer Files a Reply .
(R.R. No. 7-2018). 22-2020). The taxpayer has 15 days from the date of receipt of
PAN' to reply (R.R. No. 12-99, Sec. 3.1 . 1, as
amended).

Req_
uisites of a Valid Reply:
1. Must be made within the - said 15-day period
(R.R. No. 12-99, Sec. ~-1.1); and •
 \ I
MEM:Q~y AI D
s., Beda lJrww,wfty Colege of Law - RGcT Bar~-- .
--.-•uone C -
2. Must be liled by the taxpayer h'
th . ed or IS duly
au . ~nz d re~re~entative, in person or through
reg,~ e~e ma, ~•th return card , with the office of
the u y authonzed representative of th C
(Regional Oirec~or, ACIR-LTS, ~Cl~ .
Enforcement Service) who signed the PAN
(R.M.C. No. 11-14; R.M.C. No. 3 9 _13).
SCENARIO 3: Taxpayer Ignores PAN
Taxpayer shall be considered in default and
FLO/FAN will be issued (NIRC,_Sec. 228, Par. 3) _an
NOTE: Taxpayer can still file a protest to-FLO/FAN
(NIRC, Sec. 228, Par. 4) .
ISSUANCE OF A FORMAL LETTER OF
DEMAND AND FINAL ASSESSMENT
NOTICE (FLD/FAN) . parties is considered substantial compliance of
1. Requisites of a Valid FLO/FAN
2. Period to Issue FLD/F AN
3. When FAN Can be Issued
4. When FAN Deemed Made
5. Three Scenarios After Issuance of FLD/F AN:
a. Taxpayer Pays Assessment;
b. Taxpayer Fails to File Protest; and
c. Taxpayer Files Protest; ·
i. Requisites of a Valid Protest;
ii. Reply to PAN v. Protest to FLO/ FAN;
iii. _P_ro-Forma Protest;
iv. Defenses of Taxpayer;
v. Rules on Payment When Protest is
Filed;
vi. Forms of Protest; '.,
vii. When Assessment Becomes Final,
Executory, and Demanda6ie.
REQUISITES OF A VALID FLD./FAN
(PANls-BeFS)
1. Must be issued after issuance .of a valid "PAN,
except for the jnstances where a PA~l is not
required (NIRC, Sec. 228, Pars. 1 and 2; R.R.
No. 12-99, Sec. 3.1 .2, as amended) ; ·
2. Must be Issued by the CIR or his duly authorized
representative. The term "duly authorized
representative" refers to the same person who is
authorized to issue· PAN (R.R. No: 12-99, Sec.
3.1.3, as amended; R.M.C. No. 11-14);
3. Must be §erved to the taxpayer personally and
if not practicable, by substituted service or by
mail (R.R. No. 12-99, Sec. 3.1 .6, as amended); ·
4. Must be served to the taxpayer Before the lapse
·of the prescriptive period for making assessment
(NIRC, Sec. 203); . · 4. When an article locally purchased or imported
5. Must be in writing and contain the facts and the
law on which the assessment is based (R.R. No.
12-99, Sec. 3.1.3, as amended); and
NOTE: A taxpayer must be informed in writing
of the legal and factual bases ·of the tax
assessment made against him, The use of the
word "shall" in these legal provisions indicates
the mandatory nature of the requirements laid
down therein (Commissioner of Internal
Revenue v. Enron Subic Power Corporation,
G.R. No. 166387, January 19, 2009) .
However, the Court ruled that although the FAN
and demand letter issued to petitioner were not
accompanied by a written explanation of the
legal and factual bases of the deficiency taxes,
the records showed that BIR sent a letter
explaining at length the factual and legal bases
of the d,eficiency tax assessments and denying
the protest to which the taxpayer had the
opportunity to respond.· This exchange of
correspondence and ·documents between the
the requirements of Section 228. (Samar-1
Electric Cooperative v. Commissioner of Internal
Revenue, G.R. No. 193100, December 10,
2014).
6. The assessment was . conducted within the
§cope of authority given by a valid LoA
_. .~-::, c: ~~ (Gq!11mj,~~ioner of. Internal Revenue v. Sony
·, - ' PH.--;.. Inc., G.R. No. 178697, November 17,
2010). ,.,
;l l
( l ft •
PERIOD/ TO ISSUE FLO/FAN
·· FLD/FAW shall be issued 15 days from date of
• > •
'
receipt ,b y the taxpayer
. if~. ,...,,~t-· · . ,.,-....
of the PAN , whether the
,).. · s~me wa~ Pr,?~~~_ted or not (R. M. 0 . No. 26-16).
, ".'i -. . '·- .....
, WHEN FAN CAN BE ISSUED·
;_,. -~~NERAL RULE: FAN can be issued only after a
--:~·.· P.,AN, was-issued. This is part of the requ irements of
due process and failure to comply therewith would
· render the assessment void (SVI Information v.
Commissioner of Internal Revenue, CTA -Case No.
8496, February 10, 2014) .
EXCEPTIONS: In the following instances where
PAN is not required, a FLO/FAN shall be issued
outright: (METER)
1. When the finding for any deficiency tax is the
result of Mathematical error in the computation
of the taxas appearing on the face of the return ;
2. When the 5xcise tax due on excisable articles
has not -been paid; .
3. When a discrepancy has been determined
between the Tax withheld and the amount
actually remitted by the withholding agent;
by an 5xempt person,- such as, but not limited to,
vehicles, capital equipment, machineries and
spare parts, has been sold, traded or transferred
to non-exempt persons; c;ir
 326
REMEDIES
Taxation Law

5. When a taxpayer who opted to claim a ,Befund
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 (R.R. No. 12-99,
Sec. 3.1 .2, as amended).
NOTE: The issuance of FAN before the lapse of
the 15-day period for' the taxpayer to file its ·reply
to the PAN inflicts no prejudice on the taxpayer
as long as the ~axpayer is properly served the
FAN and it is able to intelligently contest the FAN
by filing a protest within the period allowed by
. law (Medtex Corporation v. Commissioner of
Internal Revenue, CTA Case No. 8508,
September 1, 2014).
though the same is actually rec~iv~d by t~e taxpayer
after the expiration of the prescriptive period (Basilan
Estates v. Commissioner of /n(emal Revenue, G.R.
No. L-22492, September 5, 1~67).
GENERAL RULE: When_ a mail matter i_s sent by
registered mail, there exists a presum~tron that it
was received in the regular course of marl (Republic
v. Court of Appeals, G.R. No. L-38540, April 30,
1987).
For the presumption to apply, the following facts
must be proven: . .
1: Letter was properly addressed with postage
prepaid; and ..
2. Letter was mailed (Barcelon Roxas SecuritJes,
Inc. v. Commissioner of Internal Revenue, G.R.
' No. 157064, August 7, 2006).

REASON: A PAN preparatory to the issuanc~ g,t__ ~~of o~ Mailing_ .

FAN is not, legally speaking, an a~sessment " -r :fh~: egrstry_ rec_ erpt issued by the post _office, or t~e
even if it contains a computation of ttie tax ! offic1ajr recerpt issued by the profe_ss1onal co~ner
liabilities of a taxpayer and a1-dema,io for \-:-:.._:compan! c9ntaining sufficie~tly 1dent1fi~ble details of
payment of the computed tax... liabilitl~,s as the transactipn sr all constrtute sufficient proof of
made (Oakwood Management 'seryices, Jgc..-v: ~ - -mailing an( sh~II be attached t? the case docket
.
No.7989,August8, 2013). ·. ,., , r· I "·'
Commissioner oflntemal Reve uel crA Case
.- , \ .
. (R.R. No. 12-99,"Sec. 3.1.6, as amended).
1·, \ ,J · ·
·{ BIR re~ rd boo~ i~ ·nqt sufficient (Barcelon Roxas
Effect when PAN is not issued,before Fi'N ----·-- Sec rit1es, Inc. ' ·v. . 'Commissioner of Internal
If the PAN is not issued before the FAN, and,cJ~e • RevenuJ, G.R. l S,7064, August 7, 2006).
taxpayer only received the latte it is tantai;nountJo · :, :.. : , .-J
denial of due process. The- ~xpaY;efJ,nust be''·:.: ·· EX<;:E~f•o~: When there is a direct denial of the
informed of the facts and. l~w ~pon, :w~1ctn ne-·- - ·recefpt. ,Thfburaen 1s•shifted to the BIR to prove that
a~sessment is made. It _is not· merely.{a;,_~ rmal ·, ) hE;,·~~ft~~ mai ~d was/ re_~eived by the _ad_dressee
requirement but a substantive one. Howevec\,t~e1~ JB'a ce~on Roxas Secunftes v. Comm1ss1oner of
recognizes several exceptions wherein the..,,P.,¥J . ,, lf]tern'al Revenue, p .R. No. 157064, August 7,
need not be issued (Commissioner of ln{emai,1,'7:-:, f{!OJ). ~/ .
Revenue v. Metro Star Superama, (}.R. N<>. 18537:f;:.!:: :.-:.- :..,/ . ~.t ';;-.., /
December 8, 2010). / S)_.,) - t '. t~XP.~yer denies having received an
· l f ;~ t.l ~ s~~smlfpt"' from _the · BIR, it then becomes
The PAN is a part of due process and gives both the t ., incOJnbent upon the latter to prove by competent
taxpayer and the CIR the opportunity to settle lie • •-evidence that such notice was indeed received by
case at the earliest possible time without the need the addressee. While it is true that an assessment is
for the issuance of a FAN. On th_e other hand,~ made when the notice is sent within ·the prescribed
contains not only a computation _o~ tax llab1h_t1es period, the release, mailing, or sending of the same
but also a demand for payment w1thrn a prescribed must still be clearly and satisfactorily proved
period. (Commissioner of Internal Revenue v. GJM PHL
Manufacturing, Inc., G.R. No. 202695, February 29,
As soon as it is served, an obligation arises on the 2016).
part of the taxpayer to pay the amount assessed and
demanded. It also signals the time when penalties
and interests begin to accrue against the taxpayer THREE POSSIBLE SCENARIOS AFTER
(Commissioner of Internal Revenue v. Transitions ISSUANCE OF FLO/FAN
Optical Philippines, Inc., G.R. No. 227544, 1. Taxpayer may pay the assessment;
November 22, 2017). 2. Taxpayer fails to file protest; or
. 3. Taxpayer may file a protest.
WHEN FAN DEEMED MADE
SCENARIO 1: Taxpayer Pays the Assessment
The assessment is deemed to have been made on
After the issuance of the FAN/FLO the taxpayer
the -date when the demand letter ·or notice of I I
accepts and settles or pays the assessment in full,
assessment is released, mailed,. or sent, even· Payme·nt Form 0605 shall be duly prepared, filed
-
\ I

ME~Q~y AID
s., Beda Cohge d Law - ROCT B a r ~ c.,..;..
·.,. 327

and paid as evidence of the settlement of the

viii. Statement of the .Eacts and law in
assessment (R.M.O. No. 26016). - _
support of the protest (R.R. No. 12-85,
Sec. 6; R._R. No. 12-99, Sec. 3. 1. 3, as
SCENARIO 2: Taxpayer Fails_to File Protest
amended).
If the taxpayer fails to file a valid protest against the
FLO/FAN within 30 days from date of receipt thereof 2
the assessment shall become final, executory, and
R • t PAN P t tt FLO/FAN
demandable. No request for reconsideration or Reply to PAN Protest to FLO/FAN '
reinvestigation shall be granted (R. R. No. 12-99
Sec. 3.1.4, as amended). ' Period to file -

SCENARIO 3: Taxpayer Protests the FAN

15 days from receipt of 30 days fro"m the date of
the PAN the - receipt of the
1. Requisites of a Valid Protest: (WATh-FiCo)
FLO/FAN
a. Must be in Writing (R.R. No. 12-99, Sec. ·,~
3.1.4, as amended) ; · .. · Sufficiency · .· /~
b. Must be Addressed to the CIR or his duly
authorized representative (R.R. No. 12-99, Taxpayer generally Sufficient and
Sec. 3. 1.4, as amended) ; does not respond in an comprehensive to
c. Must be submitted within Thirty (30) days adequate manner to the explain the legal and
from receipt of FLO/FAN (R.R. No. 12-99, specific findings of the factual bases why the
Sec. 3.1.4, as amended); and revenue officer. assessment is
d. Must be Filed by the taxpayer or his duly incorrect, and certain
authorized representative, in person or ~ documentary evidence
through registered mail with return card , with . not presented during
the Office of the duly authorized the PAN phase and
representative of the CIR (Region.al Director, , : . - .jurisprudence relevant
ACIR-LTS, ACIR-Enforcement Service) who to the findings of the
signed the FLO/FAN (R.M.C . •No. 11-14; revenue officers are
R.R. No. 39-13); ..._ submitted or presented
/ .. • • """". -! ,,.
NOTE: The revenue officials. who--r~j,ved
the protests shall subftiit . a n; port on all :
Issuance of: f'Lf!.>/FAN Assessment becomes
protests filed to the CIR. ~ he. Offi~ of tf'!.E: but [lO;·IU~ Bi!l!YK"~for final, executory, and
CIR shall then create a databs:1se of the . additionaf:'Br!defreiency demand able. The
protests. If the protest filed· is-not if!clv.ded tax arises from such taxpayer is then liable to
the database, the same shafl·be consjdered .failure pay the deficiency
as not officially filed, hence, with_qut force t~~rf.,_,"~~
taxes:
and effect (R.R. No. 39-13).
.
__

e. Must Contain the following~(NartA-P.tti=)

~' -::- 1,
,~

i. Name of the taxpayer and adcfre•s·s for

the immediate past 3 taxable years;
ii. Nature of request whether Directory
reinvestigation or reconsideration . If it is
(R.R. No. 12-99)
a request for reinvestigation, specify
newly discovered evidence he intends 3. Pro-Forma Protest
to present; A prq-forma protest is not valid. The alleged
iii. Iaxable periods covered; "protest letter" basically informing CIR that it had
iv. Assessment number; . already written or.answered the PAN.and that it
v. Date of receipt of assessment notice or explained its position to the tax assessment is
ietter - of demand and date of neither a reques1 for reinvestigation nor a .
assessment notice; . request for reconsideration. !t must be
vi. · Itemized statement of the findings to emphasized.that a protest to the PAN is not the
which the taxpayer a~rees a~ a basis for same as the protest required in reply to the FAN
computing the tax due, which amount (Security Bank Corp. v.. Commissioner of
- should be paid immediately upon the Internal Revenue, C. T.A. Case No. 6564,
filing of the protest;
vii. Itemized schedule of the adjuS t ments
November 28, 2006).
.
with which the taxpayer does not agree;
and
 328 . REMEDIES
Taxation Law

4. Defenses of Taxpayer deficiency taxes· attributable thereto (R.R.

a. Prescription
An FLD/f AN must be served to the taxpayer
within the prescriptive period to make a valid
asses~ment (NIRC, Sec. 203). ·
. The defense may'be raised even for the first
.·tim~ on appeal when it is apparent on the
record that the assessment has already
prescribed (Commissioner of Internal
Revenue v.- First Sumiden Realty, Inc., CTA
EB No. 975, January 7, 2014) .
b. Legal and Factual Bases of Tax
Assessment
·The details in the assessment notices
issued to the taxpayer must be sufficient to
allow the taxpay~r to intelligently answer the
assessment as well as prepare the
documentary evidence for its protest. If~
BIR merely stated that per computerized -. r
matching, the taxpayer has ,,10'ndeclared ; t ) \ / ,,, dJscovered or additional evidence that a
importations, the assessment ,s liivalii ,....,.,
(Commissioner of Internal evenue 'v. BASF
No. 12-99, Sec. 3. 1.4, as amended by R.R.
No. 18-2013).
6. Forms of Protest .
When a taxpayer protests an assessment, he
must choose between a reconsideration or a
reinvestigation (/NGLES, Tax Made Less
Taxing: A Reviewer \1/ith Codals and Cases
(2018), p. 448 {hereinafter JNGLES, Reviewer]).
a. Request for Reconsideration
- a plea for a re-evaluation of an
assessment on the basis of existing records
without need of additional ev1dence which
may involve a question of fact or law or both;
and
b. Requ~st for Reinvestigation
., ... - a plea for the re-evaluation of an
~· ,. assessment on the ·basis of the newly-
· .: t;axpayer intends to present in the
_.. femvestl~tion wt,ich may also involve a

2013).
. I
/,- ,
//
·v 1 ,
PHL, Inc. , CTA EB No. 872, Sep_femberA·2; --
..
..
'ques ioh ofJaw or fact or both (R. R. No. 12-
.,._.
,:;- ,
'\99, $ ~c~P; , as amended).
. - .

1
f
An assessment basea on a umm ry List of , .. RECO.NSIDERATION V.
Pur_chases (SLP) cahr'fot be'used as1he sole ·-· - - · ______ J
REl,NVESTIGATION
basis. The SLP is do'ubtful, inc nclusive;
and unreliable. T CIB must ~ ove the
source of the informa ·on, ot_tret·se, the ., _ .
, assessment i~ in lid (Com'rqfo.s: ner o ;:;-j
Internal Revenue v. Fax N Parcel,, r.n ., cr-4· , . . . .. _ -.
EB No_. 883, February_, 14, 2013). ' . • I,
,~n~olv~J, re-evaluation Involves presentation of
\.\. ., ,'<!
_ . I ,,--01-, ---a~sessment based newly . discovered or
1/'' / . • r
5. Rules on Payment When Protest is filed ,: :- _ -· - - Qn ~x1st1ng record~ . additional evidence
aymEVi f --:;tha l !: ·· \ : .....,-. --~,~- . ..' .....,.: ~ -,..~ :,~_.,,_·· . :_: .
GENERAL RULE: No prio
. ·<-·
- _ ' ';,.

assessed internal revenue tax rsreq6ired when - - ~~ ,t~e.Sta~ute .of Limit~t~ons .·

protested or disputed. · · __.., / J ••
e's\ ~ ot · toll the Tolls the · Statute of
,_.. tt.tte~•of Limitations Limitations because -a
EXCEPTIONS:
a. If there are several issues involved in the reinvestigation , which
FLO/FAN, but · the taxpayer only . protests entails reception and
against the validity of some of the issues evaluation of additional
raised, the assessm_ent attributable to the evidence will take more
undisputed issues shall become final time · than
~xecutory, and demandable. The taxpaye~ reconsideration
shall be required to pay the deficiency taxes (Commissioner of
attributable thereto (R.R. No. 12-99, Sec. Internal Revenue v.
3.1.4, as amended) ; and Philippine Global
b. If there are several issues involved in the· Communications, G.R.
disputed assessment and the taxpayer fails · No. 167146, October 31,
to state the facts and the law in- support of 2006)
the protest against some of the several · . Submission of Docu~ents
issues on which the assessment is based
the same· shall be considered undisputed Not required Required within sixty
issues, in which case the assessme·nt shall
(60) days from date of
become final,· executory and demandable. filing of protest
The taxpayer shall be required to pay the
 -- \ I
MEM:Q~y AID
Sen Bedl College of Law - RGcT Barr.-.., __
-,,.., •UOOI
From the filing of the Fro th
protest
· m e submission of .
the complete supporting
documents
(2-C DOMONDON, supra at 370_371 , 374)
NOTE: The distinction is essential b
suspension of the period only occu ecahuse th e
. rs w en the
taxpayer requests for reinvestigation and .
by t11"'e CIR (INGL ES, Reviewer,
· is granted
supra at 448 ).
Submission of documents after protesf
For n~quests for r~investigation, the taxpayer shall
suf bh~mt alltreltev~n~ supporting documents in support
o. 1s pro es within 60 days from date of filing of
his letter of protest (R.R. No. 18-1 3, Sec. 3_1.4).
For requests for reconsideration, the 60-day period
shall not apply (R.R. No. 12-99, Sec. 3.1.4, a_s
amended). · Sec. 3.1.4);
Relevant Supporting Documents
Those documents necessary to support the legf
and factual bases in disputing a tax assessment,'o.t
determined by the taxpayer (R.R. No. 12-99, ·;e, c.
3.1.4, as amended).
NOTE: The BIR can only inform the ·fax:payer tu
submit additional documents. The BIR '' cannot
demand wha~ type of supporting'.° documents should
be submitted (Commissioner of Internal Re.venue v.
First Express Pawnshop Company, Inc. G. R. Nos:
172045-46, June 16. 2009).
REASON: Taxpayer would be placed at the mercy
of the BIR which may require production of
documents which taxpayer could not produce
(Standard Chartered Bank v. Commissioner of
Internal Revenue, CTA Case No. 5696, August 16,
2001).
Effect of Failure to Submit Documents
Non-submission of the documents _renders the
assessment final (R.R. No. 12-99, Sec. 3.1.4, as
amended).
The phrase the assessment shall become final
means that the FLD/F AN shall become final by
operation of law. The taxpayer shall be barred from
disputing the correctness of the FLO/FA~ by
introduction of newly discovered or add1t1o~al
evidence because it is deemed to have lost its
jurisdiction to present this evidence. T~e BIR shall
then deny the request for reinvestigation thro~gh th e
issuance of a Final Decision on Disputed
Assessment (FDDA) (R.M.C. No. 11-14).
Center
. 329
es Final,
7. When Assessment Becom . ·
Executory, and Demandable . executory
An assessment shall become final , th~
and demandable due to, among 0thers,
following grounds: 'd t st
a. Failure of the taxpayer to file a vah pro eN
within 30 days from receipt 'of th e FLO/FA
(R.R. No. 18-13, Sec. 3. 1.4); . .
b. Failure to submit all relevant documenttsfin
support-of his protest by way of reques or
reinvestigation within· 60 days from th e date
of filing thereof (R.R. No. 12-99, Sec. 3.1.4,
as amended by R.R. No. 18-2013);
c. Failure of the taxpayer to appeal to the CIR
or the CTA within 30 days from date of
receipt of the FODA isslled by the Cl R's duly
authorized representative (R.R. No. 18-13,
Sec. 3.1,4);
d. Failure of the taxpayer to appeal to the CT A
within 30 days from date of receipt of the
FDDA issued by the CIR (R.R. No. 18-13,
~ - ·Failure of the taxpayer to timely file a motion .
for reconsideration or new trial before the
CT A Division; or failure to appeal to the CT A
r . En Banc and Supreme Court based on
•· existing Rules of Procedure (RRCTA. Rule
8, Se~ 3(b) and (c)); or .
f. Fail re\ of the .taxpayer to receive any
assessment notices because it was served
in~ the address indicated in the BIR's
registration database and the taxpayer
transferred ·to a new address or closed or
• ceased operations without updating and
, transferring, or cancelling its BIR
"" Registration as the case may be (R.M.O.
· ·· ._,... t ,- No. 26-16) .
ADMINISTRATIVE ACTION OR
INACTION ON THE DISPUTED
ASSESSMENT
Final Decision on Disputed Assessment (FDDA)
It is th~ communication issued by the CIR or his duly
authorized representative containing the decision on
the protest to the FAN, whether the taxpayer's
protest is accepted or denied partially or wholly
(R.M.O. No. 26-16).
Three Possible Scenarios After Protest
1. Direct Denial or Grant of Protest thr,ough the
FDDA; .
a._ Requisites ofa Valid FDDA
b. · Taxpayer's Remedies
c. What Constitutes Final Decision Denying
Protest
2. Indirect Denial of Protest; or
, a. Examples
b. Taxpayer's Remedies
 -REMEDIES
· Taxation Law

Authorized The CIR as well as his duly authorized

3. Inaction by CIR or Duly
representative must indi~te clearly and
Representative.
unequivocally to the taxpayer whether an action
a. Taxpayer's Remedies
constitutes a final determination on a disputed
Disputed Assessment . assessment. Words must be carefu\ly chosen 1n
It is when -the taxpayer indicates its protest against order to , avoid any · confusion that co~ld
the delinquent assessment of the Revenue Officer . adversely affect the rights and interest of -the
for reconsideration, through a letter. After the taxpayer.
request is filed and received by the BIR, the
assessment becomes a disputed assessment (CIR A careful reading of the Formal Letter .of
v. lsabela Cultural Corporation, G.R. No. 135210, Demand (FLO) with Assessment Notices shows
July 11, 2001). that an exception to the rule on exhaustion of
administrative remedies is the estoppel on the
·Period To Act Upon the Protest or Administrative part of the administrative agency concer.ned.
Appeal · · The CIR is estopped from claiming that the 'filing
1. By CIR - in case of protest, within 180 days from of the Petition for Review (with the CTA) was
filing of protest (regardless of the form of premature because the taxpayer failed to
p~otest); in case of administrative appeal, within exhaust all administrative remedies (Allied
180 days from filing of the administrative appe~I. Banking Corp. v. Commissioner of Internal
Revenue, G.R. No. 175097, February 5, 2010).
Administrative Appeal - request for . . ,
reconsideration filed with the CIR to elev e the 1 J ; TThe FLO reads: "This is our final decision based
denial of protest made by his du!r31:1,t_~ nzed ;-· _, \/ on investigation. If you disagree, Y,OU may
representative (INGLES, Revif}we supra at appeal t~is ..final decision within 30· days fr9,m
458). V j ,.,-,, ·- - eceiRt ,fiereof, qtherwise said deficiency tax
', = : ., .. assessru~l),t-~a I become .final, executory. and
2. By Duly Authorized Represent~tive ,• ,' .. , / denvmdablf ·. It .,f'I PPe'ars from the foregoing
a. · Request for rein~estigation - 1thin 180 · . demf1nd I tt~r h,slt,the CIR has already made a
days from submission of the efevant- - - - -finartdecisi n' on t e matter and that the remedy
documents. • "' . . · --~- · .. t ,.-6f p~titioner ·s' o ~ppeal the fina_l decision wjthin
b. Request for reconsideration - \80 days •f ,_ 30 4ays. The JaXPfiY,er cannot be blamed for riot

3.1.4, as amended) ; r r;
. . V '
\~¥· -
v' I , '
-;;-:I-:.:-
from filing of protest (R R. Nor1 ~/:e9, Sec.- · ~-. filil)!;J[ ~ • protest a~ainst the . FLO .,since the
~ngu.~ge s~ ahp the tenor of the de11Jf3Rd
! ~1~/
: : . . ,~~~_!') ndicpte tlia .;jt is the final decision of the
SCENARIO 1: ~•rect Denial of_ Prot~st ".; i . . .. · on he matter (Allied Banking Co_rp. .v.
The CIR or his duly authorize<;! repres"e{ltaW e , / ( ) co'mmis ioner of Internal Revenue, GR. No.
renders a decision through FDDA . grantirig ~-pr,---::--_,..-\-;._ 1>750!}' , February 5, 2010) . •
denying the protest within the prescribed peribcUoJJ;,J_.!.Y"'/ ·
act upon the protest (R.R. No. 12-99~ S 1 5, as :rax~Y.~r•; R_!}medies in case ·of denial of Protest'_
amended). I _1 1 ). l Ji], w ~l~r ln part .
lVlf'f! ~FPO-A by Duly Authorize~ Representative -
Requisites of a Valid FDDA (ISP) · .. either:
1. Must be Issued by the CIR or his duly authorized a. File administrative appeal to the CIR within
representative. T~e · term· "duly authorized 30 days from receipt of the FDOA through
representative• refers to the same persons who request f~r reconsideration (R.R. No. 12-99,
are authorized to issue PAN and FLO/FAN (R.R. Sec. 3. 1.4, as am.ended) ; qr
No. 12-99, Sec. 3.1.4, as amended; R.M.C. 11-
14); . . NOTE: No request for reinvestigation shall
2. Must be .§erved to the taxpayer personally and be allowed i!'l administra~ve appeal and only
if not practicable, by substituted service or by issues raised in the decision of the CIR's
mail (R.R. No. 12-99, Sec. 3.'1.6, as amended); . duly autl)orized representative shall be
3. -Must be' in writing and contain the .Eacts and the entertained by the CIR ,(R.R. No. 12-99,
law on which the assessment is based (R.R. No. Sep. 3.1 .4, as amended):
12-99, Sec. 3.1.4, as amended);· and
4. Must state that the same is his final decision EFFECT OF FILING TH.E
(R.R. No. 12-99, Sec. 3.1.5, as amended}. ADMINISTRATIVE APPEAL: ; The
administrative appeal filed with the ciR will
The FAN may be considered as the Final toll the 30-day period to appeal to the CTA
Decision of .the . CIR on the Disputed and the denial of the administrative appeal
Assessment - When CIR is In ~stoppel or the inaction of the CIR thereon is the one
 \ I

~J:J:1£1tY_,11 D Ope,.,.,,_c..._
331

appealable to the CTA

./
Internal Revenue (Commissioner of.
The Assessment shall become final, executory,
Pharmaceuticals Inc Cv.;.A International ·
and demandable
October 25, 2011) . ·• E.B. No. 608,

b. Appeal to the CT A Withi What Constitutes Final Decision Denying the

receipt of FDDA (R.R. No n _30 days from
as amended) . · 12 99, Sec. 3. 1.4,
EFFECT OF FAILURE T
ADMINISTRATIVE APPEALO
TO THE CTA WITHIN THE 30-DAY
PERIOD: The assessment shall become
final, executory, and demandable (R R N
18-13, Sec. 3.1.4) . · · o.
2. FDDA by CIR .... either:
a . File a motion for reconsideration with the
CIR (R.R. 18-13, Sec. 3.1.4) ; or
NOTE: The motion for reconsideration of the
decision with the CIR will NOT toll the 30-
day period to appeal to the CTA (R.R. No.
12-99, Sec. 3 . 1.4, as amended).
b. Appeal to the CTA within 30 days from
receipt of FDDA (R.R. No. 12-99, Sec.. 3.'1.4,
as amended). . J
EFFECT OF FAILURE TO APPEAL TO
THE. CTA WITHIN THE 30-DAY PERIOD:
The assessment shall · become final ,
executory, and demandabfa.(R.R. No. 12-
99, Sec. 3 . 1.4, as amended) .
Protest (Tenor of Finality Rule) .
If the tenor of the letter shows the firm stand of the
BIR against the reconsideration of the disputed
assessment the letter should be considered the final
decision of t~e BIR on the taxpayer's administrative
protest or the FDDA ( Cagayan Corn Products Corp.
v. Commissioner of Internal Revenue, CTA Case
No. 8491, July 8, 2013) .
That final decision is the letter o{ denial where the
CIR not only demanded payment of the amount
assessed but wherein, he also gave the warning
that in the event the taxpayer failed to pay the
same, he would be constrained to enforce the
collection thereof by means of the remedies
prescribed by law (Reyes v. Commissioner of
Internal Revenue, CTA Case No. 6124, June 19,
2002).
Example:
r ·" Final Notice Before Seizure. The very title
- expressly indicated that it was final notice prior to
seizure of property. The letter itself clearly stated
that the taxpayer was being given the last
opportunity to f\ay; otherwise, its properties would
be subjected o ajstraint and levy (Commissioner of
Internal ReveQue ;;,_ lsabela Cultural Corp., G.R. No.
135210, July 11, W01) .
. ,. ....
,

};.·, Void FDDA d~~s not nullify a ·duly issued FAN:

1
FDDA BY CIR V. FDDA BY :- The decision resulting from a void FDDA is different-
'· '\fto.in .al") assessment from which it is based. The
AUTHORIZED REPRESENTATIVE .invalidity of one does not necessarily result to the
FDDA by CIR FDDA by Authorized invalidity of the other unless the law or regulations
Representative . otherwise provide. In tax assessments, the decision
of the CIR evidenced in the FDDA will only give rise
Remedies of the Taxpayer . . · .. -'.·. to a _disputed assessment, which may then be
appealed to · the CTA. Thus, the assailed decision
1. File a motion for 1. File Administrative arising from a voided FDDA may still be appealed
reconsideration Appeal to the CIR (denial due to inaction) and decided upon , without
with the CIR; or through voiding the assessment itself. (Commissioner of
2. Appeal to the CTA Request for Internal Revenue v. Liquigaz PHL, Corp. G.R. No.
Reconsideration; or 215534,AprH18, 2016).
2. Appeal to the CTA
SCENARIO 2: Indirect Denial of Protest
Effect of Filing of Motion for . Without rendering a FDDA within the prescribed
. .
Recons1derat1on/Admm1s• · t ra t,·ve Appeal with · period to act and on the merits of the protest, the CIR
the CIR . or his · duly authorized representative may
nevertheless execute administrative actions which
• toll the
30-day
Will not toll the 30-day Wl 11 th
the Court considers as denial of protest.
. . )
period to appeal to the period to appeal to e
CTA CTA Examples:
· ·th CTA within • 1. Civil collection instituted · during pendency of
Effect of Failure to Appeal to e . . protest (Commissioner of Internal Revenue v.
30-day perio~. , · · '

Union Shipping Corp., (;.R. No. 66160, May 21,
1990). - ' ,·
2. Issuance of warrant of distraint and levy to
enforce collection (Commissioner of Internal
Revenue v. International Pharmaceuticals, Inc.,
CTA E.B. No. 608, October 25, 2011) .
NOTE: However, when there is a subsequent
· civil action for collection instituted after the
service of the warrant, it is the civil action and
not the service of warrant that is considered as
denial of the protest (Commissioner of Internal
Revenue v. Union Shipping Corp., G.R. No.
66160, May 21, 1990).
3. . Referral by the CIR of request for reinvestigation .
to the Solicitor General (Republic v. Lim Tian
Teng Sons and Co., Inc., G.R. No. L-21731,
March 31, 1966)."
· __,,,,,---
Taxpayer's Remedies Avallabl~ •r lnfij_rect
Forms of Denial of Protest or H ' in·stralive -
Appeal (without FDDA) ,.,.
The remedies available to tile taxP,~ye in_ case
of direct denial .of prot t"'9r dfoi~istratiy.~
appeal by the CIR or his duly apthorized
. representative through FDDA are applicable to
indirect forms of denial.l -... t-"- --·- - ·-- - -- ··- fERIOQ~·1t w·n~ot result in the finality of the
, .· L.-1 ! ~:·;· ·
SCENARIO ~: Inaction by C ~ Ouly ~~ hor_
Representative ~ ...... · ·.l ,
The CIR or such represent tiy dqes h~t~cCupon . : ---=-._
the protest within the prescribed pdnod (R,~~1 o. 12- .
99, Sec. 3.1.4, as amended) \-: 1· ,
'-<
Taxpayer's Remedies
1. Inaction by the CIR _ ;,
- either: /' Q
a. Appeal to the CTA within 30 flt~ the
expiration of the 180..cJay period; or
b. A~ait the final decision of the CIR on the '
disputed assessment, and then appeal such
final decision to the CTA within thirty (30)
days after the receipt of a copy of such
decision (R.R. 12-99, Sec. 3.1.4, as
amended):. ' so would be tantamount to the taxpayer's
2. Inaction by Duly Authorized Representative
-either: · .
a. Appeal to the CTA within 30 days after the
expiration of the 180-day period counted
from ttie date of filing of the· protest ih case
of a request for reconsideration or from the
date of submission by taxpayer of the
required documents within 60 · days from
filing of protest in case of a request for
reinvestigation; or
b. Await the- final decision of the duly
authorized representative on the disputed
REMEDIES
-Taxation Law
assessment (R.R. No:'12-99, -Sec. 3.1.4, as
amend~d).
NOTE: The taxpayer does not have the
option to appeal to the CIR in case the CIR's
representative does not act on the protest.
The taxpayer must choose betwee~ the_ two
options. (PAGCOR v. BIR, · G.R. No.
208731, January.27, 2016).
· The ·options ·are mutually exclusive and
resort to orie bar the application of the other .
(R.R. No. 12-99, Sec. 3.1.4, as amended;
Rizal Commercial Banking Corp. v.
Commissioner of Internal Revenue, G.R.
No. 168498, April 24, 2007; Lascona Land
Co. v. Commissioner of Internal Revenue,
G.R. No. 171251, March 5, 2012).
If the taxpayer opted to wait the final
- decision of the CIR or his'•duly •authorized
t f -. .
Jj representative, he may later use the
j IT)eaies available to him in contesting said
decision, as discussed previously (R.R. 12-
'9~, Sec. 3. 1.4, as amended).
, •'"" ,,{";; .
'.... . :\ . .EFFECT~·o · AILURE TO APPEAL THE
. iNACTIOtfllO THE CTA·,WITHIN 30-DAY
. ., i , . FLD/FAN<;' as_J e taxpayer can wait for the
lzed:. - _-. :' .; ~) · /9-ecisio (Ri~i ' Commercial Banking Corp.
:, -J · 1 v::c _ omm,ss,cm r of Internal Revenue, G.R.
- -·J} t<;/ 16fi49f¥A,1ril 24, 2007). · ,
!, \ t •. -~,<---/ . 'v _ - · .
! -/ -~· "5'NOTE: Secti. n 229 of NIRC, as worded,
only required that an administrative cla!'!I
--;\>;)
. t, , __' / / - s~ould first b.e _filed._ The ~rimary p1:1rpose of
. -- ,_0_;;:.- filing an· administrative cla!m was to serve as
-«- "'a ot1ce of warning to the· CIR th~t court
action would follow unless the tax or penalty
..1_ alleged to have been collected erroneously
or illegally is refunded.
Thi_ s does not however mean· that the
taxpayer must await the final resolution of its
administrative claim for refund, since doing
forfeiture, of its right to seek judicial recourse
should th~ two-year prescriptive period
expire without the appropriate judicial claim
being filed . . -It bears _stressi11g that
respondent could not-be faulted for resorting
to court action, ·considering tf;lat the
prescriptive period stated therein was about
to expire (Commissioner · of Internal
Revenu~ v. Goodyear Philippin·es, Inc., G.R.
No. 216130; August 03; 2016). . ·
 \ I
t:1..Fl:!2.:R.Y_,11 D ~Center
ILLUSTRATION (1): (BAR
A Co., a Philippine corpor ~999 )
income tax deficiency as ation , received an
BIR on May 5 2 013 sessment from the
0
Co., filed its P~test With 31, 2013, A
2013, A Co. , submitted t • On July 30,
relevant supporting docum t~e BIR all
not formally rule on th/n s. he CIR did
January 25, 2 014 A ·c Protest but on
• o ., was served a
summons and a copy of th .
11 r f e complaint for
co ec _,on o the tax deficiency filed by the
BIR with the RTC. On February 20 2014 A
Co., brought a Petition for Revie.:V bef~re
CTA. The BI_R contended that the Petition is
premature since there was no formal denial
of the protest of A Co. and should th f official duty (NIRC, Sec. 227);
be dismissed . ere ore
I. Does th e CTA have jurisdiction o~er
the case? - certain conditions;
YES, because filing of the suit during
the . pendency of the protest is
considered a denial of the protest.
ii. Does the RTC have jurisdiction over
the collection cas~ filed by the BIR?
NO, because the petition for review was .
seasonably filed with the CTA within a
period of 30 days from receipt of .
summons (4 DOMONDON, Taxation:
Tax Remedies (2014), p. 4_5 9
[hereinafter 4 DOMONDON}) ..
ILLUSTRATION (2): (BAR 2009)
A taxpayer received an assessment notice
from the BIR on February 9 ,' 2013. The
following day, he filed a protest, in the form
of a request for reinvestigation, against the
assessment and submitted all relevant
documents in support of the protest. On
September 11 , . 2013 , the taxp~yer,
apprehensive because he had not rece1v~d
notice of a decision by the CIR on his
protest, sought your advice.
What remedy or remedies are available to
- the taxpayer? · .
The remedy available to the taxpayer is to
wait for the decisio_n of th e .CIR ~n th e
protest he filed. If his protest is denied ~e
would have a period of 30 days !ram receipt
of the denial within w~ich to
petition for review wi th th e
"~;io(~-~
DOMONDON, supra at 3 88)-
The CIR has a period of 1eo days tto;
submission of the relevant documt1en2013
013 or until Augus , ,
February 10, 2 • has the OPTION of
after which the taxpayer . w with the CTA
either filing a petition for revie
within a period of 30 days from th ~
expiration of the 180-day period or until
August 31, 2013 or . the ta~~ayer could
choose to wait for the dec1s1on on the
protest. In case of denial of his pr~test t~e
taxpayer may file the petition for review with
the CTA within a period of 30 days from
receipt of the decision (Id:} .
Taxpayer's Judicial Remedies (A-DISC)
1. Appeal to the CTA; (Please refer to Court of
Tax Appeals chapter)
2. Action for .Qamages against a revenue officer
by reason of any act done in the performance of
.
3. !njunction - to be issued by the CTA if
collection may jeopardize the interest of the
government and/or the taxpayer, subject to
1
4. By way of §pecial Civil Action - petition for
certiorari, prohibition, and mandamus to the
Supreme Court in cases of grave abuse of its
discretion, lack of jurisdiction or excess of
jurisd-iction (RULES OF COURT, Rule 65); and
5. Action to Contest Forfeiture of Chattel, at any
time before the sale or destruction of the
pro~[fy. ,bring an action against the per~on
seizing the property or having possession
thereof to recover the same, and upon giving
proper:bond; enjoin the sale; or after the sale
and withi n 6 months, an action to recover the net
proceeds may be realized at the sale (NIRC,
· Sec. 2-31,J::, ... .,__
· \ -, ;:, _, . : . -~
COMPROMISE AND ABATEMENT
, ·"- (Ta~payer's Remedies Before Payment)
COMPROMISE
A contract whereby the parties, by making reciprocal
concessions, avoid litigation or put an end to one
already commenced · (CIVIL CODE, Art. 2028) . In
case of tax assessment, it is a contract between the
government and the taxpayer to settle the liability.
COMPROMISE V. COMPROMISE
PENALTY
Amount of money paid Amount suggested in
by the taxpayer to settlement of criminal
settle his deficiency liability (R.M.O. No. 7-
taxes 15) .
NOTE: It may not
therefore be imposed or
 REMEDIES
Taxation Law

Instances o~ Doubtful Vall~lty: (DAF 3...A2VA)

exacted on the taxpayer, a. Delinquent accou,nt o.r disputed assessment
the violation shall be is one,resulting from Jeopardy assessment·
referred to the b. Assessment seems to be arbitrary in natur~
appropriate office for and there is reason to believe that it is
crimii:ial action in the lacking in legal and/or fcjlctual basis;
event that a taxpayer c. Failure to file protest on account of alleged
refuses to pay the failure to receive notice _of assessment anc1
suggested compromise there is reason to believe that the·
penalty (R.M.O: No. 7- assessment is lacking in legal and factual
15). basis; .
d. Failure to file a protest within th~ required
Amount 30-day period and there is reason to believe
that the assessment is lacking in legal and
Fixed percentage rate Fixed amount or based
depending on the· on a graduated table factual basis;
e. Failure to elevate to the CTA an adverse
ground for depending usually on the
decision of the CIR or his authorized
compromise which is gross annual sales,
representative within the required 30-day
computed based · on earnings or receipts of
period and there· is reason to believe that the
the basic assessed the taxpayer (R.M.O. No.
tax assessment is lacking in legal and factual
19-07)
r . . -.-,_ basis; • · ·
Remedy in Case of Non-Payment l ) i . i f. i,- ~ss~ ssments that failed to comply with the
by the Taxpayer · J., '/ _ / fpr!J)cili ies of Sec. 228 of the NIRC;
,.,,. . g . ... asse~,ment~ made based . on Best
1. Enforce the lnstitut~ a~ l'l)i a -a<?,tion, __....,._--..._ . E¥ic!.8ACe G),btainable and there- 1~ reason to
compromise; or (R.M.O ~· 9-0?J) - ,.--. ~-· -~,, · ,believ , l!Jlf...,t he same can . be disputed by
2. Treat it as 1 ):· .:~\. .s::~ ·sufficie(lt and .,_c ompetent evidence;
rescinded and _ ,, h. Validity, for,,- authenticity of Waiver of the
insist upon the - - - - - - - - · -statute ,pf{i ~ itations is at issue and th~re is
original demand · ::. · · . · . .__/ strong r:easo{l t o believe and evidence to
(clv:IL CODE, Art• 1;,~ - _
'
• • 'r.•
,h
. ,.,rove thE a i .LiS; ; t au th en t'1c; or
. \ '10 .
2041). . - ;• · · :: ·· i. / A~essrpent in¥olves an issue where a court
NOTE: erein~ tdifferent · 1 : . , - 7"i n5'de p n~ fe'rse. decision against the
from compromise tease_ \[efe . to : ·· "": -'.,:"..Bureali, but for which the Supreme Court
Compromise Penalty under Tax Administra°1ion'
Enforcement on page_311. 'v~,
·
7
. ·- -.,,:-:::-,: nas riot deciq.ed upon with finality (R.R. No.
.,...- '.;::?\) 30-ioo2, S · . 3, as amended _by R.R. No.
I·
(_ ' ) •
• .
• I,
-·
' .., '\ •
'
_;
a-•04) •
Q>,µ- f . .
APPROVING · AUTHORITIE~ . --...., Ni.!: :_ ~~-;;/· t;,¾-- ./ - . _
COMPROMISE OF TAXES :i)/ 1 .. ,.___ = -- (', \ R~J~: In all the above-mentioned cases, .a
_:_..:__ _ _ _ _ _ _ _ _ _ _ _ _ _->---,--'-_-'-,,
,.-.- . } ·f [:;. \:''-l \ ~ l_fltmu,:n rate of forty percent (40%) of basic
1. CIR - general-power to compromise tax..ijal:5ihty, 1. V,.; -- tax assessed or a lower amount subject to
2. National Evaluation Board (NEB) - the oasiG -,.,.,,....... • the approval of the NEB (NIRC Sec.
tax involved exceeds ~1 million OR the 204(A)(2)). '
settlement offered is less than the prescribed
minimum rates; or Offer for Compromise based on Financial
3. Regional Evaluation Board (REB) - with Incapacity may be Accepted upon Showing
respect to offers of compromise of assessments that: .
issued by the Regional Offices involving basic a. The corporation ceased operation or · is
deficiency taxes of ~500,000 or less or minor already dissolved . . Provided, that tax

l
criminal ·violations discovered by the Regional
liabilities corresponding to the Subscription
and District Offices (NIRC, Secs. 2Q4(A) and Receivable or Assets
7(c); R.R. No. 30-02, Sec. 6(2)). distributed/distributable to the stockholders
representing return of capital at the time of
GROUNDS: (DoFI) cessation of operation · or dissolution of
1. Doubtful validity - reasonable doubt as to the business shall not be considered for
validity of claim against the taxpayer exists; and compromise ; or
2. . Financial Incapacity - when the financial . b. The taxpayer, as reflected, in its latest
positioA of the .t axpayer demonstrates a clear Balance Sheet, is suffering from surplus or
inability to pay the assessed tax (NIRC, Sec. earnings deficit resulting to impairment -in
204(A)). the original capital by at least 50%, provided
 \ I

t1J!!£1lY,.J~lQ..'- 335

that amounts payable •o r d _

other than business-rel ~e to stockholders
which are includible in th a ed transactions
payable" are by. fiction : ~;ular ·_accounts
0 1
part of capital and not liabTty cons,dere~ as
further that the taxpa •~ • and prov,~ed
liquid asset to satisfy t~:rtaxa~a~~-;~fficrent
11
- c. The taxpayer is suffering fro • or balance sheet submitted to the
deficit co ted m a net worth BIR, provided that:
from tota~P~ake byfrodeducting total liabilities
1.The amounts payable or due to
, ' n m the latest audited
financial statements, provided th t . stockholders, other than
case of · d. · a rn the business-related transactions,
th I rn ,v,dual taxpayer, he has ·no
o erh~vf,a ~I properties under'the law other are considered as part of capital
th an rs _am, y home; or and not liability; and .
d. The ta~ayer is a compensation income 2.The taxpayer has no sufficient
earner no other source of income and liquid asset to satisfy the tax
~he family s gross monthly compensation liability
income does not exceed the levels of Zero net
The taxpayer suffers from a net
compensa~on income, if single, is p 10 ,500 worth-
worth deficit •based on the latest
o~ I~. or rf married, whose salary together audited financial statements, 10%
with hrs spouse is P21,000 per month, or provided that in case of individual,
less, and it appears that the taxpayer he has no other leviable properties Negative
possesses no other leviable/distrainable ii under the law other than his family net worth -
assets, other than his family home of these , i income. 10%
Regulations, and it appears that the ...;
taxpayer possesses no other leviable or 1. The taxl',?,ayer.is: 10%
distrainable assets, other than his family ' ) "
2. CofDP8i\Sation earner;
home; or ·· 3. With no other source income; ·
~ - The taxpayer has been declared by any 4. Whosr/ · ~ onthly income is
competent . , r, 191o.~ o, o Jess _if single and if
tribunal/authority/body/government agency marned, c9,mbmed monthly
as bankrupt or insolvent. (R.R. No._30-2002,· income is 1921,000 or less; and
Sec. 3(2)). 5. HaS:. no . '. otber leviable
properfi_es.ci~er than his family
income
FINANClAL INCAPACITY AND
COMPROMISE RATE :, The taxpayer has been declared by 20%
.. . -~nf ~. . . . . competent
tribunal/authority/body/government
agency as bankrupt or insolveRt.
(R.R. No. 30-02, Sec. 4)

NOTE: Lower amount can be granted subject to the

Corporation ceased operation or is Dissolved; approv~I of the National Evaluatio_n Board (NEB) if
non- assessments issued by the regional offices involving
already dissolved.
operating basic deficiency taxes of 19500,000 or less, and
companies minor criminal violations, as may be determined by
for less than · rules and regulations to be promulgated by the
three (3) Secretary of finance, upon recommendation of. the
years-20% Commissioner, discovered by regional and district
officials, may be compromised by a regional
Non- evaluation board which shall be composed of the
operating Regional Director as Chairman, the Assistant
companies Regional Director, the heads of the Legal,
for at least Assessment and Collection Divisions and the
three (3) Revenue District Officer having jurisdiction over the
years-10% taxpayer, as members (NIRC, Sec. 7(C)).

40°/o
Impairment in the original capital by
t
at least 50% based on lateS
 REMEDIES
Taxation Law

5. cases where final Reports of reinvestigation or

REQUISITES FOR THE COMPRO'!11SE reconsideration have been issued resulting to
OF TAXES: (LODA) reduction in the original assessment and the
1. The taxpayer has a t~x ,biability (R.R. No. 30-02, taxpayer . is agreeable to such . decision _by
Sec. 1); - signing the required agreement form;
2. There must be an Qffer (by the taxpayer or 6. cases which became final and executory after
Commissioner} of an amount to be paid by the final judgment of a court, _where compromise is
taxpayer (R.R. No. 30-02, Sec. 3); requested on the ground of doubtful validity of
3. A reasonable Doubt as to the validity of the claim the assessment; and
• against the taxpayer exists; or the financial 7. Estate tax cases where compromise is.
position of the taxpayer demonstrates a clear requested on the ground of financial incapacity
inability to pay the assessed tax; (R.R. No. 30- · of ttie taxpayer (R.R. No. 30-2002, Sec. 2).
02, Sec. 3) and . · .
4. There must be Aµproval (by the taxpayer or SOME . IMPORTANT APPLICATION
Commissioner, as the case may be} of the offer
in settlement of the original claim (R.R. No. 30- REQUIREMENTS (PW)
02, Sec. 6). 1. fayment by the taxpayer ~f the ~II a~ou_nt of his
compromise offer upon fihng the applrcabon; and
CASES THAT MAY BE COMPROMISED:
3 . Otherwise, his application for compromise
(DAC ) ·settlement shall not be processed by the BIR
1: .Qelinquent accounts; . [ H R: o. ·30-02, Seq. 2, a.s amended by R.R.
2. Cases under Administrative proJest after '-J . 9-13) ·
is~~ance of the F~N; . · 1 • j.. -,.. • • • [/ . ' • •

3. £1vll tax cases being disputed bef~re the courts, , In case of disapproval of. the applrcatlon, the
4. £ollection cases.filed in cou s; and' amounr paiq;.(N,n filing the application shall be

1
5. £riminal violati?ns e~cept _th?se_alre d" filed -.tr.i ,-,. :: z de~cted ·from tt)e taxpayer's outstanding tax
court or those involving criminal tax ud (R.R.
No. 30-02, Sec. 2). to--- . ____
·r ·,. ·_' ·
_-__....____ __ _
liabil'ties ff?.~.
. • ,r
p
30-02, Sec. 2, as amended).
.
·
NOTE: In criminal case , :°ther t~ 1n ,
.-.
. e
2.. Wai er in writing "b his privilege of the secrecy
.. ·. .of ank . osits · when he enters into
involving tax fraud, the Cl~s full~drsare~,o~ t~_· .... _, .. r · · co pro1{1ise bn f groun_d of his ·financial
compromise bef~re the"9ntorma~ojll, enmrnal ·,. - · inc1~•ty fflR.JJ.o. 30-02, Sec. 3) . .
complaint) Is filed m court:.. \ _:., -)._ • . I 1• · / •.< ;, i J ·
- • j:- GROU,.N'oS
1
a. After the case reache~ th _ prose~u!~r,'~ FOR DENIAL OF
st
office, th e prosecuto: mu gr e h•~.cqn~~nt_ 1j . 6nupROMIS'E BASED ON FINANCIAL
before he can enter rnto comprom,se,f >~-.;-- . •
b. Once the information ·is filed · in x.0u(l,'j E , c_lN_C_A_P_ '.A_C_I_TY
_________~ _
compromise is no longer permi~edwitll of~~1_f : If t e ·taxpayer has a Tax Credit Certificate,
without the consent of the P o~epytor i~s d, nder the NIRC; or · .
(People v. Magdaluyo, G.R. No. L-1~ 35, 1~ A' J.2, ti thel a payer has a pending claim for tax refund
April 20, 1961). ....VL or tax credit with the BIR. DepartmentofFinance
· One-Stop-Shop Tax Credit and. Duty Drawback
A compromise can never be entered into Center (Tax Revenue Group or Investment
after final judgment, because by virtue of Incentive ·Group} antllor the courts; or ·
such fjnal -judgm~nt, the Government had 3. If the taxpayer has an existing . fina.lized
already acquired a vested right (R.R. No. agreement or prospect of future agreement with
30--02, Sec. 2). · any party that resulted or could result to an
increase in the equity of the taxpayer at the time
CASES ·THAT .ARE NOT SUBJECT TO of the offer for compromise or at a definite future
COMPROMISE: (WiF2S-ReFE) - time; or · ·
1. Withholding tax cases, unless the applicant 4. If the taxpayer faile<;I to execute a waiver of his
taxpayer inv9kes provisions of law that cast privilege of the secrecy of bank deposits under
doubt on the taxpayer's obligation to withhold; Republic Act No. 1405 or under other general or
2. Criminal tax Fraud cases confirmed as such by special laws (RR. No. 30-02).
the CIR or his duly authorized representativ~;
3. Criminal ·violations already filed !n court; APPROVAL OF OFFER OF
·4. Delinquent accounts with duly approved COMPROMISE .
_§chedule of ins~llment payments; Except for offers of compromise where the approval
is delegated to the REB pursuant to the succeeding
 \ I
337
.MEM-Q~y AID
San Seda ~ Colege of Law - ROCT Bar Opmatlons Center
__ ......
..
..
. . .

paragraph, all compromise settlements within the
jurisdiction of the National Office (NO) shall be
approved by a majority of all the members ·of the
NEB composed of the Commissioner and the 4
Deputy Commissioners . All decisions of the NEB,
granting the request of the taxpayer or favorable to
the taxpayer, shall t,ave the concurrence of the
Commissioner (R.R. No. 30-02 as amended) .
COMPROMISE OFFER MUST BE PAID
UPON FILING
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 (R.R. No. 30-02 as
amended).
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 (R.R. No. 30-02 as
amended) .
EFFECT OF JUDICIALLY APPROVED
COMPROMISE AGREEMENT
When given judicial approval , a compromise
agreement becomes more than a contract binding
upon the parties. Having been sanctioned by the
court, it is entered as a detertnination of a
controversy and has the force and effect of a
judgment. It is immediately executory and not
appealable, except for vices of consent or forgery .
The nonfulfillment of its terms and conditions justifies
the issuance of a writ of execution ; in such an
instance, execution becomes a ministerial duty of -·
the court (Metro Manila Shopping Mecca Corp. v.
Toledo, G.R. No. 190818, November 10, '2014, J.
PERLAS-BERNABE).
REMEDIES IN CASE THE TAXPAYER
REFUSES OR FAILS TO FOLLOW THE
TAX COMPROMISE
1. Enforce the compromise (CIVIL CODE, Art.
2041). . d. Armed c~nflicts su.ch as war or insurgency;
NOTE: If it is a judicial ~ompromise, it can:;
enforced by mere execution (CIVIL CODE, · f. Continuous heavy losses inc~rred by the
2037).
2. Regard it as rescinded and insi st upon original
demand (CIVIL CODE, Art. 2041).
ABATEMENT
Cancellation of the entire tax liability of th e taxpayer
(NIRC, Sec. 204(8)).
I !nterpretation of said law·
WHO HAS THE AUTHORITY TO A~ATE
. b te or cancel internal
CIR has the sole authority to a a . t (R R No.
alties and/or mteres · ·
revenue taxes! pen (B) in relation to
204
13 _0 1, Sec. 4 pursuant to Sec. •
7(c)) .
COVERAGE OF ABATEMENT _
GENERAL RULE: The CIR's authority to
compromise is generally applicable to surcharge
and compromise penalties only (R.R. No. 13- 01 ,
Sec. 4). ·
EXCEPTION: In meritorious instances, the CIR may
abate the interest as well as basic tax assessed ,
provided, however, that cases for _abatement or
cancellation of tax, penalties and/or interest by the
CIR shall be coursed through certain officials (R.R.
No. 13-01, Sec. 4) .
GROUNDS FOR ABATEMENT: (EC)
1. The tax or any portion thereof appears to be
unjustly or gxcessively assessed ; or
2. The administration and ~ollection costs involved
do not justify the collection of the amount due
: (NIRC, Sec. 204(B)) .
Instances When the Penalties and/or Interest
Imposed on Ttle Taxpayer May Be Abated on the
, Ground that the Imposition thereof is Unjust or
Excessive: (Wl;-SIBLO)
1. Filing of the ret urn/payment of tax at the Wrong
vetiue; .. · ·
2. Taxpayer's ·m1stake in payment of tax is due to
grroneous written official advice of a Revenue
Officer; _
3. "[axpaye_r's f~ilure to file the return and pay the
tax on time 1~ due ·to §ubstantial losses from
prolonged . labor disp_ute, force majeure,
legitimate business reverses such as in the
following instances:
a. La~or strike for more than six · (6) months
which _has caused the temporary shutdown
of bus1r:iess;
b. Pl:Jblic turmoil;
c. Natural calamity such as lightning
earthquake, storm , flood and the like· '
e. Substantial losses sustained due to fi
robbery , theft or embezzlement' ire,
t~xp~~er for the last two (2) years;
g. L1qu1d1ty problem of the taxpayer for the I t
three (3) years; or as
h. Such other instances which the CIR
·deem analogous to the enumeration ab may
. ove.
4. Assessment resulted from tax ,
compliance with the law due ~ayers . non-
0
a difficult
'
 REMEDIES
Taxation Law

5. Taxpayer's failure to .file the return and pay the REPEATED REQUEST FOR
correct tax on time due to circumstances ABATEMENT DOES NOT PREVENT THE
§.eyond his control; · COLLECTION OF DEFICIENCY TAX
6. !:ate . payment of tax under meritorious
The taxpayer questioned the computation .of the
circumstances such as those provided
deficiency tax but did not protest the FAN. Instead, it
hereunder:
repeatedly requested to pay the deficiency in
a . Use of wrong tax form but correct amount of
monthly installments. Moreover, due ~o its sensitive
tax was remitted ;
financial situation, the taxpayer requested for the
b. Filing an amended return under meritorious
reduction , waiver; and abatement_of the interest and
circumstances;
compromise penalty.
c. Surcharge erroneously imposed;
d. Late filing of return due to unresolved issue
The Court held that the repeated requf:?St of the
on classification/valuation of rear property;
taxpayer for reduction, waiver. or abatement did not
e. Offsetting of taxes of the same kind , i.e.,
induce the BIR to postpone its collection nor did it
overpayment in one quarter/month is offset
warrant the suspension of the prescriptive period for
against underpayment in another
the BIR to collect the assessed taxes (Asia United
quarter/month;
Insurance Inc. v. Commissioner of Internal Revenue,
f. Automatic offsetting of overpayment of one
kind of withholding tax against the C. T.A. Case No. 8916, May 17, 2017).
underpayment in another kind·
g. Late rem~nce of w~holding • on ;=. :4~ P~pVAL OF TAX ABATEMENi MUST
compensation of expatriates fur services : . BE
SUPPORTED BY A TERMINATION
!'8ndered in the Philippin~ ,pen~ir(g' 'ttl,g~ .:UTTER ; · ·
ISS~_a n~ by the SEC ofJ!e lice{l~ lhe- o • • • • , •

Ph1hppme branch office r sub~Jary; ~ - - ~ - - ~~- appJ1~tiQn·. 'for tax. abatement 1s d~med
h. Wrong use of Tax Creg~r§ficat€{TCC) _approv~d '<?hly UPQQ the issuance of a termination
where Tax Debit Memo ·'1"j>M) \vas not letter by_~he Bt'}--The,_last step of the tax abatement
properly applied for; ~ nd : proce~s ; 1s the, ,~suance of termination letter. The
i. Other analogous instan t---- - er.e_lS5!Jance ?td a1 Certification is not sufficient
__, \ _ proof thjit the .taxpay r's application was validly
7. Other similar or analogous cases (R.R>. No. t3- ___ ,approv~. (A5r-trust Devy Bank, Inc. v.
01, Sec. 2 as amended by-R.R Ncr:A2). · .. Comm,,~10ner . f]t ~ma/ Revenue, G.R. No.
,...
,:.·
.,,.,.
- - - - -..aJ:J-68,~81!
I ,/' "'
AP[i/ 19, 2017I1•
,. ~ . . •

NOTE: In all the above-mentioned ciIB,es, the · · '- -. ; • :

abate_me~t shall cover surcharges, inte(e~. a nd .,/ ·cdMPROMISE V. ABATEMENT
compromise penalty except Nos. 3.and 5 .&(bf, .
and 6(g) in which _
case the abatement sh.ill
.,.
not-~ Comp~o;i;~,~ · Abatement
.(NIRC, Sec: 204 (A)) _< . . (NIRC, Sec. 204 (B))
indude interest (R.R. No. 13J-01, Sec 2 ·--~,. _. :-; ~.... ~·,, ·-• .
.r ---- -
/1. .,,-."-_;,_., --~Z?ff' Natliri;: -::;: '.;
Instances of Abatement ·on Gro -nd . that -
Collection Costs are More Than Tax -so"u,sht: · . A
Involves· a reduction Involves the cancellation
(AWARD) - of th e taxpayer's of the entire tax liability of
1. Abatement of penalties on assessment liability a taxpayer
confirmed by the lower court but &>pealed by
taxpayer to a higher court;
2. Abatement of penalties on Withholding tax
assessment under meritorious circumstances·
3. Other Analogous instances; '
4. Abatement of penalties on ·assessment reduced
after Reinvestigation but taxpayer is still
contesting reduced assessment; and · 1. Reasonable doubt 1. The tax or any portion
as to validity of thereof appears to be
5. Abatement of penalties on .Qelayed installment
assessment; or unjustly or excessively
payment under meritorious circumstances (R.R.
2. Financial
No. 13-01, Sec. 3). assessed;or
incapacity of 2. The administration and
taxpayer. collection costs involved
NOTE: For items 1 and 4 above, the abatement
of the surcharge and compromise penalty shall do not justify the
be allowed only upon written application by the . collection of the. amount
taxpayer (R.R. No. 13-01, Sec. 3). due.
 \ I

MEM:Q~y AID
s., Beda Cclege of L.- - RGcT Bar Operauo,.,. Centar

TAX REFUND OR TAX CREDIT and refund their value upon proof of destruction
Taxpayer's Remedies after Payment (NIRC, Sec. 204(C)).

TAX REFUND AND TAX
DEFINITION
1. Tax Refund - actual reimbursement of the tax
(ABAN, supra at 325).
2. Tax Credit - refers to the amount of tax due to
a taxpayer resulting from overpayment of a tax
liability or erroneous payment of a tax due (R.R.
No. 5-0Q).
The government issues a tax credit certificate (TCC)
or a tax credit memo covering · the amount
determined to be reimbursable after proper
verification and the same may be applied against
any sum that may be due and collectible from the
taxpayer (R.R. No. 5-00).
All TCCs issued by the BIR shall not be allowed to
be transferred or assigned to any person (R.R. No.
14-11, Sec. 2) .
NOTE: The options of tax refund or tax credit are
alternative and the choice of one precluges the
other. However, failure to indicate a choice by the
taxpayer will not bar a valid request for _a r_ef~~d, _
should this option be chosen later on. The md1cat1on
of the chosen option is only for th_e purpose of tax
administration (Phi/am Asset Management Inc. v.
Commissioner of Internal R~venue, G.R,. Nos.
156637 & 16200~, December 14, 2005).. ·
' ,;
TAX CREDIT CERTIFICATE ·,..
CREDIT, NOTE: The NIRC vests upon the CIR, being the
head of the BIR, the authority to credit or refund
taxes which are erroneously collected by the
governm·ent. This specific statutory mandate
cannot be ·overridden by adverse
interpretations made through mere
administrative issuances, such as RMC No.
42-99, which - as argued by the CIR - shifts
to the executing agencies (particularly, NPC in
this case) the power to refund the subject taxes.
Thus, Item B (3) of RMC No. 42-99, an
administrative issuance directing petitioner to
claim the refund from NPC, cannot prevail over
Sections 204 and 229 of the NIRC, which
provide that claims f'?r refund of erroneously
collected taxes must be . filed with the CIR
(Mitsubishi Corp. -Manila Branch v.
Commissioner of Internal Revenue, G.R. No.
175772, June 5, 2017) .
AUTHORITY OF THE OMBUDSMAN
· ·VVHEN THERE IS SUSPICION IN THE
GRANT OF TAX- REFUND .
The determination of whether to grant a tax refund
falls within ,. the·, exclusive expertise of the BIR.
Nonetheless, when there is suspicion of even just a
tinge of ifupropriety in the grant of the same, the
Ombudsman 'could rightfully ascertain whether the
determinatfon'""'was done in accordance with law and
identify the persons who may be held responsible .
thereto.
• J: ;'\J'o.·

A certification duly issued to the taxpayer nar:ne~ In thaf sense, the Ombudsman could not be accused
therein by the CIR or his duly · au th orize of unlawfully intruding into and ·intervening with the
. BIR Accountable Form Bl R's exercise . of discretion (Commissioner of
representative, red~ce d ma . fonnalities,
in accordance with the prescribed - - d Internal Revenue v. Office of the. Ombudsman, G.R.
acknowledging that the grantee-ta~payer name No. 115103,Apri/11, 2002).
therein is legally entitled to a tax credit.
GROUNDS FOR FILING A CLAIM FOR
TCC may be used in TAX REFUND ORTAX CREDIT: (EPS)
The money value . of_t~e · of his internal
payment or in satisfaction of any d d) or may 1. -Tax is grroneously ?r illegally assessed or
revenue tax liability (except th ose ex~Iuo~he,'.wise be collected;
be converted as a cash refu nd , or may d ce with
arid in accor an There is erroneous payment of taxes when a
disposed of in the manner scribed by the
the limitations, if any, as m~y b~ ii~~s (R.R. No. 5- taxpayer pays .under a mistake of fact, where he
provisions of the Revenue Regu a is not aware of an existing exemption in his favor
00, Sec. 1.B). at the time the payment was made (51 Am. Jur. ,
cited in UST Cooperative Store v. City of Manila,
G.R. No. L-17133, De.cember 31, 1965).
AUTHORITY OF THE CIR sly or illegally
1. Credit or refund_ t~xe_s err:;::~thout authority; An "erroneous or illegal tax" is defined as one
received, or penalties •,:r,P0 revenue stamps levied wit~out _statutory authority, or upon
1
2. Refund the value of m_tern;od condition by the property not subject to taxation or by some
when they are returned in g person having no authority to levy the tax, or one
purchaser; an~ or change unused which is some other similar respect is illegal"
3. In his discretion, redeem de.red unfit for use
stamps that have been ren
 REMEDIES
Taxation Law

circumstances (Commissioner of · Internal

(Commissioner of Internal Revenue v. Pilipinas .
Shell Petroleum Corp., G.R. No. No. 1.88497,
April 25, 2012).
2. ~natty is collected without authority; and
3. Sum collected is excessive· or in any manner
wrongfully collected (NIRC, Sec. 229;
Commissioner of Internal Revenue v. Fortune
Tobacco Corp., G.R. Nos. 1672~4-75, July 21,
. 2008).
REQUISITES OF TAX REFUND OR TAX
CREDIT: (GroC:-Cat-2Proven)
1. There must be a legal Groun_d or basis for_tax
refund or tax credit (NIRC, Sec. 229);·
2. There must be a written Claim for refund or
credit filed by the taxpayer with CIR (NIRC, Sec.
0
Revenue ,v. Philippine -American Life ln_surance
co., G.R. No. 105208, Mf!Y 29, 1995) such as:
a. Assurance on the _pa!1 of · the BIR
(Commissioner of Internal Rev~nue v. ·
Philippine National Bank, · G.R. No. 161997
October 25, 2005); and
b. Agreement between the ·BIR and the
taxpayer to await th~ result ?f a .pending
case involving similar issues raised m refund
(Panay Electric Co., Inc. v. Collector ·of
Internal Revenue, G.R. No. L-10574, May
28, 1958).
s. Prior payment of the tax must be Proven. There
must be actual collection and receipt by the
government of the tax sought to -be recovered
and this requires factual proof (Collector of
· Internal Revenue v. Li Yao, .G.R. No_. L-11861, \
December 27, 1963). I

229; Vda . de Aguinaldo v. Commissioner of ·.

Internal Revenue, G.R. No. L-19927, February u l RJEASON : A claim for refund partak~s the
I
26, 1965); ·
. .
P\._ natule of an exemption which cannot be allowed I
unless granted in the most explicit and
REASON: The claimant must filG' a ritten claim _ tegorical fanguage (Commissioner of lnter'nal
before resorting to an action) n court to: _ Re en · e· ·
~.\.-~- 1211 o5, ~.,
.Q · ... Johnson & Son, Inc., G .R . ·N o.
a. Afford the CIR an. opportuni to correct lhe
,, ~u e' 25;•• 1999,,,. · · · - ·
action of subordinate officers; and · \ r ., .
b. Notify the _g~vemmer t that su~h t¥es hav / · · ESSENTIAL ·- SIC CONDITIONS IN
-been questioned and -the notice should ,.be /, ,__ ,
bor~e in mind in e~tim ating the revenu~,:. _1 , _,,!)_RbER FOR. AXPAYER TO BE IT
available for expenditure (NIRC, Sec. 229t '.., :_ ~}ENTITLED TO 1( IREFUND CLAIM OR
Commissioner of Internal Rey enue- v _ ' -.. ,tSSU~t,19E
,.pj; A . TAX CRE.DIT
Acosta, G.R. No. 154068, August 3; 2 007). · ·i. -- CERTif;lCAJE ,
%· . --:-:
· .-=::-,:-~j-:-:- -:--=-....-----,- - - -- - _ ; _ - -
EXCEPTIONS: ";5, , ) .>_, .J:..h~ '-claim is filed with the Commissioner of
a. A return filed showing an overpayment 's -i:in' ·· __.Y Internal Rev~n ye -within the ~o-year period
be considered as a writte claim fo~ redi r/ E ; \\ ~ r~m tli~ date of payment of the tax; . _
refund (NIRC, Sec. 204 (CJ); an r ----..:. .n
··- -2. · !t 1s. Sti<)W. ~n the retu_m of the recipient that the
b. The Cl R may, even without tlie rittenp laim
therefor, refund or credit any tax where on
the face of the return upon which the
M •~come P.ay~ent rece1yed was. declared as part
e'f the gross income; and
3. J.he fact of withholding is established by a copy
payment was made, such payment appears of a statem 7nt duly· issued by the payor to the_
clearly to . havQ been e"oneously paid payee showing the .amount paid and the amount
(NIRC, Sec. 229). of the tax withheld therefrom (Commissioner .of
; -lnterna~ R_evenue .v. Team (Philippines)
3. Tne claim must be a Categorical demand for Operation~ Corporation ·(formerly Mirant Phils.,
reimbursement (Bermejo v. Collector of Internal Operation Corporation), G.R. No. 179260 April
Revenue, G.R. No. L:-3029, July 2-5, 1950); 2, 2014). .

4. The claim with the CIR and the 30-day period to TWO-YEAR PRESCRIPTIVE PERIOD_
appeal to the CTA (R.A. No. 1125, Sec. 2) must FOR REFUND .
be filed within i years from the date of payment
GENERAL RULE: The two.:Year prescriptive period
of the tax or penalty; and ·
ru~s from the payment of the 1!3x _(NIRC, Sec. 229).
RULE: The administrative claim must be filed EXCEPTIONS: _.
within the said 2-year period, regardless of any 1. Overpaid quarterly Income taxes - from the
supervening cause (NIRC, Sec. 229). date the final adjustment return is filed after the
end of the taxable year (Commissioner of
NOTE: The 2-year period may be suspended for
reasons of equity and· other special
 - \ I
MEM:Q~y AID
S., Beda LrMralty Colege of Law - RGCT Bar Oper8liona Center
Internal Revenue v. Court of Appeals, G.R. No.
117254, -January 21, 1999). · Commissioner . of Internal Revenue, G.R. No.
- .
REASON: It is at that point where it can already
be determined whether there has been
overpayment' (Commissioner of Internal
Revenue v. Court of Appeals, G.R. No. 117254
January 21, 1999).
2. When the final adjustment return was
actually filed before the last day prescribed
by law for filing - from the date of actual filing
(Commissioner of Internal Revenue v. Court of
Appeals, G.R. No 117254, January 21, 1999) . .
3. Tax sought to be refunded is illegally or
erroneously collected - from the date the tax
was paid (Commissioner of Internal Revenue v.
Victorias Milling, G.R. No. L-24108, January 3
1968). .,
- invoices issued to the customers (Silkair
4. Tax is paid only in installments or only in part
- from the date the last or final lnstallment or
payment {Collector v. Prieto, G.R. No. L-11976,
August 29, 1961).
5. Taxpayer merely made a deposit - from the
conversion of the deposit to payment (Union
Garment v. Collector, CTA Case No. 416,
November 17, _1958).
REASON: Merely making a deposit is not
equivalent to payment until the amount is
actually applied to the specific purpose for which
it was deposited (Union Garment v. -Collector of
Internal Revenue, CTA Case No. 416,
November 17, 1958).
6. Tax has been withheld from source (through
the withholding tax system) - from the date it
falls due at the end. of the t~xable year (2-C, '
DOMONDON, supra at 448) .
COMPUTATION OF 2-YEAR PERIOD
FOR . FINAL AND CREDITABLE
WITHHOLDING TAX
The return for final and creditable withholding taxes
shall be filed and the payment made not later than
the last day of the month following the close of the
g_uarter during which withholding was made. (NIRC,
Sec. 58(a))
NOTE: The final withholding taxes are considered as
full and final payment of th.e income tax due, and
thus, are not subject to any adjustments. Thus, the
2-year prescriptive period commences to run from
the time the refund is ascertained, i.e.• th e date such
tax was paid and not upon the discovery by th e
taxpayer of the erroneous or excessive payment of
341
•'
taxes (Metropolitan Bank & Trust Co. v.
182582, April 17, 2017) .
PARTIES ENTITLED TO TAX REFUND
OR TAX: CREDIT
' GENERAL RULE: The per~on entitled to ask for a
refund/credit is the taxpayer who paid the same.
1. Where tax has been.shifted
The person on whom the tax is imposed by law
and who paid the same is the one entitled to the
credit or refund even if he shifts the burden
thereof to another.
The ·statutory taxpayer is the proper party who
can claim the refund. The rule applies even if the
tax has been actually shifted by the taxpayer to
his customers and even if the tax has been billed
as a separate item in the delivery receipts and
(Singapore) Pte. Ltd. v: Commissioner of
Internal Revenue, G.R. No. 166482, January 25, ·
2012) .
. 2. Where claimant exempted from both
dire~t and indirect taxes .
If the law confers exemption only from direct
taxes, tlf 1 statutory taxpayer is the proper party
to file lfie, claim for refund/credit. On the other
hand} f the exemption conferred applies to both
direct and indirect taxes, a claimant is entitled to
tax,ref1.,md£credit even if the applicable tax was
merely shift~d to it (Silkair (Singapore) Pte. Ltd.
v. Commissioner of Internal Revenue, G.R. Nos.
171383 and 17239, November 14, 2008) .
-3~ .Where, donor's tax was assumed by
donee .
Where under the terms of donation, the donor's
· tax was assumed by the donee but said tax was
advanced by the donor, ttie donee was the
proper party to claim refund of the donor's tax (2
DE LEON, The National Internal Revenue Code
Annotated (2016), p. 469-470 [hereinafter, 2 DE
LEON, NIRC}).
TAXPAYER'S REMEDIES WHEN NOT
ACTED UPON OR DENIED
1. If the CIR takes time in deciding the claim and
the period of 2 years is about to end, the sult or
proceeding must be started in ·the CTA before
the end of the two-year period without awaiting
the decision of the CIR (INGLES, supra at 469);
or
2. If the clairT_l is denied by the CIR within the two-
year period, the taxpayer has 30 days from
receipt of the denial within which to appeal to the
CTA (R.A. No. 1125, Sec. 11). .
 342 .
REMEDIES
0
Taxation Law

and shall , not be aliowed as payment for

SUBMISSION OF DOCUMENTS IN
· internal revenu~ taxes and the amount
SUPPORT FOR THE TAX REFUND OR covered by the certificate shall -revert to the
TAX CREDIT general fund (NIRG, Sec. 230 (B)).
The submission of complete supporting ·d9cuments
is necessary to support a claim for refund or for NOTE: ·Un utilized TCCs may be converted
issuance of tax credit. However, failure to ·submit into cash refund during the validity period of
documents in support .of a taxpayer's claim for the TCC (R.R. No. 5-00). '
refund at the administrative level does not prevent
the CTA from entertaining the appeal. Non- BURDEN .OF PROOF FOR A CLAIM OF
submission of documents in the administrative level REFUND l
.is not fatal to a judicial claim for refund. The cases
The burden of proof to establish enti~lem~nt to
filecf' before the CTA are litigated de novo and party
litigants should prove every minute aspect of their . refund is on the claimant . taxpayer. ~emg m the
cases (Commissioner of Internal Revenue . ".'· nature of a _claim for exemptioi:1, ref~nd 1s ~~strued
Philippine ·aank of Communications, CTA EB No. in strictissimi juris against the entity cla1m111g t~e
933 re: CTA Case No. 7915, October 7, 2013) . refund and in favor of the taxing power. This is the
reason why a claimant must positiyely show
compliance with the statutory requirements provided
OFFSETTING OF TAX DEFICIENCY AND for under the NIRC in order to successfully pursue
CLAIM OF REFUND - ·-one:$. claim (Winebrenner & Inigo Insurance
· Offsetting of taxes is allowed only when the • 1 ·~ roke s, Inc. v. Commissioner of lnterr:,[!IRevenu,e,
determination of the taxpayer's_lia~ility i~ · te~i.{l_ed 1.G./?. 0}06526, January 28, 2015).
with the resolution of the claim for r7fun of" . , . !..,../ .,1,
erroneously, . or illegally collected ;-t~xes nder ---.OTI-IER C0~ SIDERATIONS:
Section 229 of the NIRC (CommJ sioner of ntertlaT , c;'
1 Pay_,;,ent und~ protest not required.- any suit
Revenue v. Toledo _Power Co. G. ; No. 19641.5, ~.' '-_ ~\ or hrocelqJng for refund · or credit may be
December 2, 2015) . .' maintaine(\ wh~er ·or not such tax, penalty, or
' NT'S L.l'A
~ BILITY ;~ FOR ·,- su I has ~'e~ ..eaid under · protest or duress
GOVERNME ~ -. · ,,,_, ,. : .. -~_ A Nl'1C, Sec/ 2'9) .
INTEREST l . • , ... • :--: ~; • i ;.--... .
GENERAL RULE: Goveml}lent can nat15e required "'~- ! :'2. The ~~dy of ta r~fund cannot be availed of to
to pay interest on taxes refunde~~ the, ~ pay-er in~. . . .. · ~i3/Jbj he igh to contest th~ validity of an
the absence of a statutory( rd\11sion · tfeJ.irlX or.· . : :-:,:-·~ ,A s~mel')t once the same has peen lost not
expressly directing or authg,rizing such ~ayment , /4.,9.n )'/ t>y failure to ~ppe~I -~ut b~ the lapse of the
(Commissioner of -Internal Revenue v. Sweener, ._.., / V ~~leme tary period within which appeal could
G.R. No. L-12178, August 21, 1959). . ,,r·-~~--;-:-\-:1 : ,.~ave,' een taken (Commissioner of Internal
/ _ •·,.:: '-t:_, ___ _;..:,· -Re~e~~ v. Concepcion, G. R. No. L-23912,
EXCEPTIONS: ·· l f )1 '½, ~ - - - March ~S, 1968).
1. When the CIR acted with patent tklt'ra,r_iness. .... ~-Y .
. Arbitrariness presupposes inexcusabl~f' or ' A withholding agent' has a legal right' to' file a _
obstinate disregard of legal provisions , claim for refund for the following reasons: ·
(Commissioner of Internal Revenue v. American · a.. He is considered a "taxpayer" as he is
Rubber Co., G.R. No. L- 19667, November 29, personally liable for the withholding tax as
1966); and . well as for deficiency assessments,
2. Refunds and credits of income taxes withheld on .· surcharges, and penalties, should the
the wages of the employees (NIRC, · Sec. 79 amount of the tax withheld be finally found
(C}), to be less than the amount that shoul~ have
been withheld under law; and
Forfeiture of Tax Refund or Tax Credit
. b. As an agent of the taxpayer, his-authority to
.a. Forfeiture of refund - a refund check or
file the necessary income tax return and to
warrant which remains unclaimed . or
remit the tax withheld to the government
uncashed within 5 years from date of mailing
impliedly inclu(fes the authority to file a claim
or delivery shall be forfeited in favor of the
for refund and to bring an action for recovery
government and the amount thereof shall
· of such claim (Commissioner -of Internal
revert to the general fund (NIRC, Sec.
Revenue v. Smart Communication, Inc.,
230(A)).
G.R. Nos. 179045-46, August 25, 2010).
b. Forfeiture of tax credit - a TCC which
remains unutilized after 5 years fr~m date of NOTE: While th·e withholding agent has the
issue1.. shall, unless revalidated,- be invalid right to recover the taxes erroneously or
 \ I .
MEK-O~Y AID
s., S e d a ~ CClege of Law - ROCT Bar Operauor,. Center
illegally collected, he nevertheless has the
obligation to remit the same to the principal
taxpayer (Commissioner of Internal
Revenue v. Smart Communication, Inc.,
G.R. Nos. 179045-46, August 25, 2010,
supra) .
c. Sections 204(A) and 229 (Par. 2) pertain to
the refund of erroneously or illegally
collected taxes, while Section 112(A)(C)
refers only to administrative claims with the
Commissioner of Internal Revenue for
excess input VAT (Commissioner of Internal
Revenue v. Dash Engineering PHL, Inc.,
G.R. No. 184145, December 11, 2013).
d. Claim of refund or tax credit for unutilized
creditable input VAT is governed by Section
112 (A) of the NIRC. (Please refer to VAT
chapter).
e. Sec. 229 of the NIRC refers to judicial action
for the recovery of tax, while Sec. 204
applies to administrative claims filed with_the
BIR (2 DE LEON, NIRC, supra at 554) .
CARRY-OVER EXCESS INCOME
A Corporation may Carry-Over Excess Income
Tax Payments in the succeeding taxable years i11_
lieu of Tax Credit or refund
In case of excess · income tax payments, the
corporation is given another op~or:i aside .from tax
credit or refund. Such excess ' payments may · be
carried-over and credited against tt)e estimated
quarterly income tax' liabilities for the ~xable
quarters of the succeeding ·taxable • years (NIRC,
Sec. 76) .
The options are mutually exclusive. Once t_h e option
to carry-over the excess payments is made_;,~such ·
shall be considered irrevocable for that taxable
period and no application for refund_or issuance of a
tax credit certificate shall be allowed (NIRC, Sec.
. 76).
NOTE: The irrevocability rule (Sec. 76) is limited
only to the option of carry-over ~uch tt:iat taxpayer
is still fr~ to change its choice after electing· refund
of its excess tax credit. But once it opts to (A;lrry over
such excess creditable tax, after electing refund or
issuance of tax credit certificate, the carry-over
option becomes irrevocable. Accordingly, th~
previous choice of a claim for refund, even if
subsequently pursued, may no longer be granted.
XXX Sections 76 and 228, paragraph (c) of the ~IR~.
as amended, unmistakably_evince that_ choice of
refund or tax credit certificate is not irrevocable
(University Phys_icians Services, Inc.
Management, Inc. v. Commissioner of Internal
Revenue, G.R. No. 205955, March 7, 2018).
343
EXCESS INPUT VAT (SEC. 112) VS.
EXCESSIVELY COLLECTED TAX (SEC.
229)
In a claim for refund or credit of "excess" input VAT .
under Section 110(8) and Section 112(A), the input
VAT is not "excessively" collected as understood
under Section 229. At the time of payment of the
input VAT the amount paid is the correct and proper
amount. The person legally liable for the input VAT
cannot claim that he overpaid the input VAT by the
mere existence of an "excess" input VAT. The term
"excess" input VAT simply means that the input VAT
available as credit exceeds ttie output VAT (Coca-
Cola Bottlers Philippines, Inc. v. Commissioner of
Internal Revenue, G.R. No. 222428, February 19,
2018) .
From the plain text of section 229, it is clear that what
can be refunded or . credited is a tax that is
"erroneously, illegally, excessively or in any manner
wrongfully collected." In short, there must be a
. wrongful payment because what is paid, or part of it,
.:: is legally due (Coca~Cola Bottlers Philippines, Inc. v.
· ·.t Commissioner of Internal Revenue, G.R. No.
·-~ 2.22428, Fef!~uary 19, 2018).
•,., ._· ... :, ~. i._;.,_,,,·7
DISTINCTJQN BETWEEN THE
' APPLIC1•TION OF THE 2-YEAR
PRESC~l~l l~E PERIOD UNDER SEC.
112 AND SEC: 229
Under Sec. · 112, the 2-year prescriptive period
· applies _only to the administrative claim before the
• CIR and not to judicial claim before the CTA because
the taxpayer always has 30 days from the decision
~- of the CIR or from the lapse of the 120-day period
even ,after the lapse of 2 years from the taxable
quarter where the sales were made. Thus, it is only
the administrative claim that must be filed within the
two-year prescriptive period; the judicial claim need
not fall within the two-year prescriptive period (CIR
v. Mindanao Geothermal · II Partnership, G.R. No.
191498, January_15, 2014) .
Under Section 229, the taxpayer need not wait for
the action of the CIR on the claim for refund before
taking his claim to the CTA. Both the claim for refund
and the appeal to the CTA must be done within the
two-year period. Hence if the period is about to
expire, and the CIR has not acted upon the claim,
the taxpayer may file and appeal with the CTA,
without waiting for the CIR. The suit or proceeding
must be started in the CTA before the end of the two-
year period without awaiting the decision of the CIR
(INGLES, Reviewer, supra at 469).
NOTE: Prior to the effectiVity of the TRAIN Law, the
Supreme Court, in the case of Commissioner of
Internal Revenue v. Mindanao Geothermal 11
 REMEDIES
344 TS?(ation Law

Partnership, held that in case of denial of the claim EXCESS INPUT VAT V. EXCESSIVELY
for VAT.refund or failure of the Commissioner to act . COLLECTED TAX
on the said claim, the taxpayer affected may appeal
the unacted claim with the CTA.

However, pursuant to TRAIN Law, the inaction. t~e O!

Commissioner on the application for refund within
the prescribed period was removed as a ground to
appeal the claim. Further, the BIR has clarified in its Input VAT available as Input VAT collected is
issuance that failure on the part of the BIR to act on credit exceeds the more than what is
the application within the ninety (90)-day period shall output VAT legally due .
be punishable under Sec. ·269 of the Tax Code. In
the event that the 90-day pe,:iod has lapsed without
BIR's decision, the VAT refund claim may still
continue to be processed administratively (R.R. Not "excessively" Involves erroneously,
13-18, Sec. 4.1n-1, as amended by R.R. 26-18, • collected because at the illegally, excessively or
Sec. 2). time its collection, the in any · manner
amount paid is correct wrongfully collected
There seems to be two schools of thought on the and proper. tax.
jurisdiction of the . CTA in the refund of exce~s ... ...
creditable input taxes. First, the inactio · of he Tt}e . erm ! . "excess"
Commissioner t? act ?n the claim for effin~ ithin , _ , J JfnP.19 . e4ns that the.
the 90-day penod will be deemed ~ng..,._._ ·-~ ioput VAT available as
hence, the taxpayer . may file a ,j( iciaL c(qinf...l.e. f_,-exfE!e~s ere~
the
appeal to the CTA within 30 da¼l ttie efrq.m". . - - - -~-:, - -outp~t VAT.. \, ; ,
,·t"., ~., ,,.,,,. < '' - ' '•. . ~
I' i
. I ·t""'
on ::>·. -'
I
1
-~ .,'!
, --~ ""

. Second, the inaction by the Commissroner lo act

the claim for refund within th,e 90-da peri d will not _,
be considered a denial of tl:iec laim for reftmtt-rtre--;---·
<-, ' •

. ··.. , . : ';'•, ::,.,_-c,.•· Rig~i'°to'Refund :. : . ' . . '

i
• •"<j • , :.: ,:,-- - :,_ ...... •7\\ • • , •

taxpayer has to ' wait fo '. 1the r <leciSioA oL Jhe ' '; ·C~rinov claim fbr'fefu1d Can claim for refund or
Commissioner before .he cc1n fil~_.an appeai with the_. .. ~·: · _. 9r creqlt of input :VATI s credit.
CTA within 30 days from the' eb~ipt of1h1.\jecisiorf · ;·' :._':'· ;rexce si~ly" c611ecte .
denying the claim. ; , : .\ \-;'". -\~ !; ,,, .·. · .,
. . \> , . \..,,,) \ . . • l .,.... -
'\

Th~ Supreme Court has not et rendered a~d:~ci~io~n-·:

which addressed the apparent onflict broug~t about-
.. ;;, ' •

I · . '//,.
t.

~1
A9~!nistrat ve Claim. 2
. . . .
Judicial claim for refund
by the amendment by the TRAI Law to\.Sec. 11 ic5f>-· ~< f ears from the close of is 2 years from the date
the NIRC. It is believed that the forrne~ le'-stml F>:·\ ~tbe- taxable , quarter of payment of the tax •
applie~. This is supported by Sec. i(a)(2)·6(1~A, O;,.:_-· ,wh~n trl~ ·S81e was illegally or wrongfully
1125, as amended by RA. Nos. 345:y: ·g2~2 and -~ ~aa e . Y tfie person collected. ·
9503. · · ·~ -i [ \/ L l
leg 1 lie le to pay the
output VAT. Should the input VAT
Accordingly, a taxpayer· need not wait for the be' iri fact "excessively"
decision of the CIR before elevating the matter to the Judicial claim: within 30 collected, mean.ing, the
CTA as long as the 120-day (now 90 days under the days from the receipt of person liable actually
TRAIN Law) · period has · expired. This . is the decision of the pays more than what is
demonstrated in a long line · of cases (Site/ Commissioner denying legally due, he must file
Philippines Corporation v. CIR, G.R. No. 201326, fully or_partially the claim a judicial claim for
February 8, 2017; Deutsche v. CIR, G.R. No. for tax refund. refund within 2 years
197980, December 1, 2016; Coral ·Bay Nickel from· his date of
Corporation v. CIR, G.R. No. 190506, June 13, NOTE: In case of payment. In such case,
2016; Procter and Gamble Asia PTE Ltd. v. CIR, inaction by the rules for- ordinary tax
G.R..No. 204277, May 30, 2016). ' Commissioner of refund or . credit will
Internal Revenue in govern (i.e., NIRC, sec.
cases involving disputed 229)
~ssessments, refunds of
internal revenue taxes, Both the claim for
fees or other charges, refund and the ·appeal
penalties in relations ·to the CTA must be
thereto, or other.matters done within the two-
 \ I

MEK-0-:RY Al D
San Beda College dt I.aw - RGCT Bar Q1>en,t1ona Center
345

arising under the year period (INGLES 3. Summary or Administrative Remedies

National Internal Reviewer, supra at
Revenue Code or other 469) .
laws administered by
the Bureau of Internal
Revenue, where the
National Internal
Revenue Code provides
a specific period of
action. the inaction shall
be deemed a denial
(Sec. 7(a)(2), R.A. No.
1125, as amended by
R.A. Nos. 3457, 9282
and 9503).
The judicial claim need
not fall Within the two-
year prescriptive period
(CIR v. Mindanao
Geothermal II
Partnership, G.R. No.
191498, January 15,
2014).
Person Claiming Refund
He is· not the taxpayer
who legally paid the
input VAT because of
the shifting of VAT or
indirect tax payment of
the buyer.
Application of Credit
a. Tax lien
b. Distraint of personal property
c. Levy of re.al property
4. Judicial Remedies
a. Civil
b. Criminal
5. lnjunct_
ion
POWER TO COLLECT .
Collection
It is the means, process, and method of
implementing the tax law for the purpose of
satisfying the tax obligation. It is the actual effort in
obtaining payment of the tax (1 DOMONDON, Bar
Q&A Taxation: General Principles of Taxation
"(2018) p.190).
Requisites: (AG-NoWri-Pre-FLo-NoEnt
The following are the requisites before taxpayer may
be required -to·pay the assessed:
1. There must be an Assessment that has become ·
final , executory, and collectible;
2. The amount being collected must be part of the
.: Government's accounts receivable; .
· ·. --. : . 3. ; '1:he al'JlOUnt being collected must Not have been
:: Written-of! or cancelled; .
He is . the taxpayer of 4 . The right~\the government to collect has not yet
the illegally or Prescril:5ea;
wrongfully · collected 5. The prop r procedure for collection whether
tax. administr tive or judicial are followed;
...· The taxpayer can still be Located; and
The goyernme:nt is Not ~oined from coll~cting
the tax·(2-C DOMONDON,, supra at 334).
·. .

GENERAL · RULE: A , 1. Payment of :·: any PERIOD OF . LIMITATION . ON

taxpayer can apply his
input VAT only against
his output VAT.
EXCEPTION: Taxpayer
is expressly Mzero-rated
or effectively zero-rated"
under the law because
there is no output VAT
arising from vatable
sales.
(BOADO, supra at 251-25)
internal revenue tax
liability (except those'-
excluded); · .: •
2. May be converted as
a cash refund; or
3. Otl:ler manner and in
accordance with the
limitations, if _any, as
may be prescribed PY
the provisions of the
Revenue Regulations
(R.R. No. 5-00, Sec.
1.B).
__ ·cou:.ECTION
GENERAL RULE: The prescriptive period to collect
the taxes due is 5 years from the date of assessment
(NIRC, Sec. 222 (C)).
EXCEPTIONS:
1. False or fraudulent return with intent to evade
taxes: within 10 years from discovery without
need for prior assessment. The government
may file ·a proceeding in court (NIRC, Sec. 222
(a)). . .
2. Failure or omission to file a return: within 10
years fro·m discovery without need for
assessment (NIRC, Sec. 222 (a)).
3.. Waiver in writing e:,secuted before the 5-year
period expires: period agreed upon (NIRC, Sec.
. 222 (d)).

[ COLLECTION
,.

I
1. Power to Collect . .
2. Period of Limitation on Collection
 REMEDIES
346 Taxation Law

Distraint and levy proceedings are validly begun

ASSESSMENT NECESSARY BEFORE or commenced by the issuance of the warrant
COLLECTION and service thereof on the taxpayer (Bank of the
GENERAL RULE: Assessment precedes collection Philippine Islands v. Commissioner of lntemat
(NIRC, Sec. 203). Revenue, G.R. No. 139736, October 17, 2005).

EXCEPTION: When the unpaid tax is a tax due per
return as in case of a self-assessed income tax
under the pay-as-you-file system in which case,
collection may be instituted without need of
assessment pursuant to Sec. 56 of the NIRC
(DIMAAMPAO, Tax Principles and Remedies
(2018), p. 175 [hereinafter DIMAAMPAOJ).
NO PROCEEDING FOR COLLECTION
WITHOUT ASSESSMENT
GENERAL RULE: No proceeding in court without
assessment for the collection of such taxes shall be
commenced (NIRC, Sec. 203).
EXCEPTION: A proceeding in court for the _ llection ,
of tax may be filed without prior assessment , n the •~.)
2. If collection is through judicial remedies (civil or
criminal) - when the governme~t files the
complaint with the proper regular tnal court, or
whe.re the assessment is appealed to the CTA,
by filing an answer to the taxpayer'~ petition for
' review wherein payment of the tax Is prayed for
(Philippine National Oil Co. v. Court of Appeals,
G.R. No. 109976, April 26, 2005).
Suspension of Running of Statute of Limitations
(Please refer to discussions under Assessment on ,
page 320.)
_ ADMINISTRATIVE REMEDIES
'1. Tax Jien
/2.
_i Q_istr~int of personal property

following cases:
1. False or fraudulent return wjp'i inten to
i- _•
evade
• L.'evy. of real property
"'
tax; or · ,,------~~ - IE ·
2. Failure to file return (NIRC, Sec. 222 (a). . .. ; ·. _T_AX
__L....,...._N.::..,,..-,-~~--------~--:-
' .:~· Tax lien~is a 'legal claim or charge on ·property, ·real
NOTE: A warrant of distraint and/,or le without ' or perso al, establlst}ed by law as security in default
issuance of a FAN is void (Go lien Harvest "G/ooa - - - otthe- p yment ortaxe,.s (Hongkong and Shanghai
Corp. v. Commissioner of Infernal Revenue,."CTA . -~p_king/ Corp . .V. _..R afferty, G.R No. L-13188,
Case No. 7503, September. 18, 2009). • · _. ' ,Noveml!;!_ 15, 191-8). ~ ' -
--n ,.,,\.}
·-:· I
',··-·,
• .., I ,
..A

ASSESSED TAX-c.f) B~COMES- -~ -1a / ~ .!! :created __in favor ?f the government is
COLLECTIBLE WHEN: •-;,,-,, su~.9~ _ o ¥all other claims or preferences
----------------- - (Pf#A?tMPA , supra -at 216) .
The government can cpllect when the asses,smf?_flt . .,..(7 , , / J
becomes final and executory for: ( s· - . _ _ , ., .-· -I ·
·1. Failure to protest FLD/FAN within the Rrescnb6ci {j,~ r NA'JURE AND EXTENT OFTAX LIEN
period; . ./ C ---...=:. · · f any\. person, corporation, pa_ rtnership, joint-
2. Fail_ure to appeal FDDA within the P~1bed r. a , o~~~association or insurance company liable to
pe~od; or . . - · 1l L;.,ppy_ an internal revenue tax, neglects or refuses to
3. Failure to appeal an adverse dec1s1on of the pay the same after demand, the amount shall -be a
court within the prescribed period. lien in favor of the Government from the time when
the as~essment was··_made until paid, with interests,
If the assessment has become final and executory, penalties, and costs in addition thereto upon all
the assessment is considered correct which may be property and rights to property belonging to tt(e
enforced by summary or judicial remedies (R.R. No. · taxpayer.
12-99, Sec. 3. 1.1, as amended by R.R. No. 18-13,
supra). Provided, that this lien shall not be valid against any
mo~gagee, purchaser, or judgment creditor until
A taxpayer who fails to contest the BIR assessment ~ot1ce of such lien shall be filed by the Commissioner
in the CTA cannot contest the sarne in an action to in t~e office of the Register cif Deeds of the province
collect (Basa v. Republic, G. R. No. L-45277, August or city where the property of the taxpayer is situated
5, 1985). or located (NIRC, Sec. 219).

TAX IS DEEMED COLLECTED WHEN: LIEN IN FAVOR OF THE GOVERNMENT

1. If collection is through summary remedies ARISES:
(distr~int and levy)-when government avails of 1. With respect to personal property _ from the time
a distraint and levy procedure prescribed under the tax became due anct payable; a·nd
the NIRC (ABAN, supra at 283-284).
 \ I
MEK-Q~y AID
Ssl 9ecle lkwerelty Colege of Law - ROCT B e r ~ Cent.-
2.
·t r .
With respect to real property - from the t·
reg1s ra _•o~ with the Register' of Deeds
,me o
f
(Comm1ss1o?er of Internal Revenue v. National
Labor Relations Commission, G.R. No. 74965
November 9, 1994). ' paymen_t, a person fails to pay his delinquent tax
GOVERNMENT'S CLAIM PREDICATED
ON TAX LIEN IS SUPERIOR TO CLAIM
BASED ON JUDGMENT
Tax claim must be given preference over any other
clai_m of any other creditor, in respect of any or all
properties of the insolvent.
The tax lien attaches not only from the service of the
warrant of distraint but from the time the tax became
due and payable (Commissioner of Internal
Revenue v. National Labor Relations Commission ,
G.R. No. 74965, November 9, 1994) . '
NOTE: The power of the court in execution of .
judgments extends only to properties
unquestionably belonging to the judgment debtor. •·
Execution sales affect the rights of the judgment · .
debtor only, and the purchaser in an auction sale
acquires only such right as the judgment debtor had
at the time of sale (MAMALATEO, Reviewer on
Taxation (2019), p. 693 {hereinafter MAMALA TEO,
Reviewer]).
VALIDITY OF A TAX LIEN
The lien shall be valid_ against any -n:iortgagee,
purchaser or judgment creditor ohly when notice of
such lien shall be filed by the CIR in,.th~~office Of
the Register of Deeds of the province or'city ,where
the property of the taxpayer is situated or located
(NIRC, Sec. 219). . , .·
,
EXTINGUISHMENT OF TAX LIEN~
Tax liens may be extinguished as follows: (P 2 FD)
1. By fayment or rescission of the tax;
2. By frescription of the right of the government to
assess or collect (NIRC, Secs. 203 and 202);
3. By failure to file notice of lien in the office of the
Register of Deeds as against ·mortgagee,
purchaser or judgment creditor (NIRC, Sec.
219); or · ·
4. By Qestruction of the property subject of the Ii.en .
NOTE: In cases of Nos. 1 & 2, there is no more
tax liability; Under Nos. 3 & 4, the taxpayer is still-
liable (2 DE LEON, NIRC, supra at 498-499).
DISTRAINT OF PERSONAL PROPERTY
Distrai~t is •a remedy · whereby the collection of
• delinquent taxes is enforced on the goods, chattels
or effects and other personal ·property of whatever
?haracter of the taxpayer (NIRC, Sec. 205 (a)).
KINDS OF DISTRAINT:
1. Actual Distraint .
Resorted to when at the time required for
obligation (NIRC, Sec. 207 (A)) . It consists in the
actual seizure and taking possession of personal
• property -of the taxpayer (MAMALA TEO,
Reviewer, supra at 695) .
2. Constructive Distraint
Issued where no actual tax delinquency of the
taxpayer is necessary before the same is
resorted to by the governrr,ient. (Id.).
It is a preventive remedy to forestall possible
dissipation of the taxpayer's· assets when
delinquency take;s place (ABAN, supra at 238) .
PROCEDURE FOR ACTUAL DISTRAINT
(CSRNS)
1. Commencement of distraint proceedings;
2. ~ervice of warrant of distraint;
. 3. Report on the distraint;
• : 4. .t;!otice of sale of distrained properties; and
. -~5~_\'§~I~ at J~ublic auction. ·
... -."'"• .
1. CommenP,ement of distraint proceedings by:
a. CIR}o his duly authorized representatives -
w h'ere tn.e amount involved is in excess of
·~
~ ·1M· or •
b. F evetiue District Officer - where the amount
involved· is P.1 M or less (N/RC, Sec. 207
(A)) . .. -
2. Service of warrant of distraint
a. Distraint of Tangible Properties
T-he officer serving the warrant of distraint
shall make or cau~e to be made an account
of the goods, or other personal property
distrained. A signed copy of which shall be
left either with the owner or person from
whose possession such personal property
was taken, or at the dwelling or place of
business of such person, and with someone
of suitable age· and discretion, to which list
shall be added a statement of the sum
demanded and note of the time and place of
SJ:lle (NIRC; Sec. 208) .
b. Distralnt of Intangible Properties
i. Stocks and other securities
shall be distrainec:i by serving a copy of
the warrant of distraint upon the
_ taxpayer and upon the president,
manager, treasurer, or - other
responsible officer of the corporation,
company or association, which issued
the said stocks or securities;
 REMEDIES
Taxation Law

. ll. Debts and credits . b. The CIR or his duly authorized

shall be distrained by leaving a copy of representative has the power to lift the order
the warrant of distraint with the person, of distraint (NIRC, Sec. 207 (A)). .
or his agent, owing the debts or having
in his possession or under his control 4. Notice of sale of distrained properties
such credits; and · a. Notice shall specify the ti_m e and place of
iii. Bankaccoun~ . sale and the articles distrame~;,
shall be garnished by serving a warrant b. The time of sale shall not _l:~e less than 20
of garnishment upon the taxpayer and days after notice to th_e owner or possessor -
upon the president, manager, treasurer, of the property and posting of such notice;
or other responsible officer of the bank ·and
(NIRC, Sec. 208) . c. The posting-shall be made in not less ~han _2
public places in the city or municipality
-Garnishment where the distraint is made. One place for
Refers to a warning to a person in posting of such notice is at .t~e '?ffi~e of ~he
whose· hands the· effects of another are Mayor of such city or mumc1pality m which
attached, not to pay the money or the property is distrained (NJRC, Sec. 209).
deliver the property or allow withdrawal
of deposits .of the defendant in his hands 5. Sale at public auction .
(MAMALA TEO, Reviewer, . supra at a. Sale must be held at the time and place
696). ·, .._ stated in the notice;
, j . ....._j j / b., '•1rmax be conducted _b y the Revenue ~cer
By the process of garnishmf'll, t he_ _ .. . 1 , 9r ttirough a duly licensed commodity __ or
plaintiff virtually sues the garrjist,ee for " stock e~cp ange; ·
a debt due to defendant. ,The debtor - - - r;;. '[ e_".sale 1s conducted by officer, other tha_n
stranger becomes a fo(ced interven?f , · - • ,v(" . '\the ?ffice9. serving the warrant at a public
(Director of Bureau of Commerce and .·.'·.. .•.''\ ·a~ct10,n,a~~y1e prope~ shall be sold to the
Industry v. Pedro Concepcion, G.R. No. , . · tughest l;!id,cf~~ or ca~h. _. .
L-9031, May 22, 1922), In othe~?"rd , - · - .- - ~ :--,· It sale 1,s ~!tirgu~~ a license~ commodrty·or
through the service . of . the wnt .. of - , . ;• tock exchange~rt must be with the approval
garnishment, the 9 amishee· ~ecomes. a>_ ..-:-- .· _:, ~ f the CIR;----1 . _·: .
1
"virtual party" to, OF "forcearntervenor''": ·•· _·. •_, , e. ; lri;case .of stocj<s and other securities, the
in; the case, and the trial C<;?ur!_ thereoy1_.-:·-_ -7J tffi,cer makipg the sal~ shall execute a bill c;,f
1
acquires jurisdi~tion to bind-! ~i to -~ ..: : , ·::, _;;(.~~ !:{le, which s~~II be del!v~red to th~ b~yer
compliance with all ordersr, and · , - ,/_:.._\" •, and to th • corporation, company or
processes of the ial court with· a -view ~ / f?' v/ association .(CCA) which issue~ the stocks
to the coruplete , satisfa,ction of _.._thei r : n \ r-") or othe~ s~ urities. Upon receipt of the copy
judgment of the court .(Bank of the.-':._:.'....._:..--_.,....., of19.e brll,of sale, an entry of transfer should
Philippine Islands v. Car/it - -,,1 G.R. '{"\_ be \, made in the · CCA's book, and a
No. 190144, August 1, ~012). .u f . \S c rresponding certificate of stock shall ·be
issu~d if required ;
Bank accounts may be distrafned Any residue over and above what is required
notwithstanding the Bank Secrecy Act to pay the entire claim including expenses
(R.A. 1405) wh!ch prohibits inquiry into shall be r~turned to the owner of the
bank accounts, • since in the case of property sold; and
distrain( no inquiry is made. The BIR
simply seizes so much of the deposit as
NOTE: Expenses chargeable upon seizure
is sufficient to discharge. the obligation
shall include only those actual .expenses of
without having to know how much the
seizure and preservation of the property
deposits are, or where the money or any
pending the sale and does not include
· part of it came from (Opinion of Sec. of
services of the RO (NIRC, ·Sec. 209).
Justice, No, 54, s. 1956). I

g. The officer making the sale shall -make a

3. Report on the dlstraln_t written report· of the proceedings to the ~IR
a. It shall be submitted by the distraining officer within two (2) days after the sale (NJRC, I
to the Revenue District-- Officer, and to the Sec. 211). 1·
Revenue Regional Director within 10 days ' . ..
.

from receipt of warrant. Right of Rreemption

If at any time prior to the consummation of the
sale, all proper charges are paid to the officer .
 \ I

MEM:O~Y AID
sw, Bede U1Nel9ily COleQe of law - RGCT Bar Operatlona Centet
, 349

conducting the sale, the distrained properties ACTUAL DISTRAINT V.

shall be restored to the owner (NIRC, Sec. 210) . CONSTR,UCTIVE DISTRAINT
Purcha~e by the Government at Sale upon
Olstralnt
When the amount bid for the distrained property ,
is:
a. .Not equal to the amount of tax; or
b, Very much less than the actual market value
of the property offered ·for sale (NIRC, Sec.
212) .

. . The CIR or hi~ deputies may purchase on behalf · There is a taking of Taxpayer is merely
of the National Government for the amount of possession , prohibited from
-taxes, penalties and cost due thereon (NIRC, disposing of his
Sec. 212). property
Property so purchased may be resold by the CIR
or his deputy; the net proceeds shall be remitted _
to the National Treasury and accounted as Effected by service of Effected by requiring
internal revenue (NIRC, -Sec. 212). warrant of distraint or the taxpayer to_sign a
leaving a list of the receipt of the property
CONSTRUCTIVE DISTRAINT property or leaving a list of such
property ·
It is issued in the following cases when the taxpayer
is: {B-PRO) . (2 DE LEON, NIRC, supra at 484) .
1. Retiring from any ~usiness subject to tax; '_· - :~ --~'>- - :5-~~:
2. lntem;jing to leave the fhilippines ; FURTHER DISTRAINT .
3. Intending to Remove his properties therefrom or , The remedy, by'pistraint and levy may be repeated if
to hide or conceal his property; or necessary / u~tll the full amount of the tax
4. Intending to perform any act tendi_ng to Obstruct t delinquens;y ~ue, jncluding all expenses is collected
the proceedings for collecting(._ th·e tax due or ·_~ from the:1axp~yer~(N/RG, Sec. 217).
which may be-due from him (NIRC, s_ec. 206) . ., 0

LEVY QF REAL PROPERTY .

CONSTRUCTIVE
EFFECTED:
1. By requiring the taxpayer or any person . ~aving
possession or control of such propec:ty to sign a--
receipt covering the ·property distfained ,and
obligate-himself to preserve the same !ntac1 and
unaltered and not to dispose of the same in anY,
manner whatever, without the express authority
of the CIR _(NIRC, Sec. 206) .
2. Punishment in Case of Violation: .
Upon· conviction, fine of not less th~n twice the
value of the property so sold, encumbered or
disposed of but not less than '95,000, · or -suffer
imprisonment of not less than 2 years and 1 day
but not more than 4 years, or both (NIRC, Sec.
276). If the taxpayer . refuses, the officer w!II
prepare a list of the prbperties distrained and will
leave a copy thereof in the premises, in the
presence of 2 witnesses (NIRC, Sec. 206) .
IS 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
(DIMAAMPA_O, supra at 185).
NOTE: Improvement attached to the land, by
express provision of law (CIVIL CODE, Art. 415),
though not physically so united, the sugar quotas are
inseparable therefrom, just like servitudes and other
real rights over an immovable and should be
considered as real property subject to levy, not
distraint (Presbitero v. Fernandez, G.R. No. L-
19527, March 30, 1963) . ·
WHEN _
LEVY MAY BE EFFECTED
After the expiration of the time required to pay the
delinquent tax obligation, real property may be levied
upon before, sin:iultaneously, or after the distraint of
personal property belonging to the ' delinquent
taxpayer (NIRC, Sec. 207(8)) ; and the remedy by
distraint and levy may be repeated, if necessary,
until the full amount, including all expenses, is
collected (NIRC, Sec. 217).
 JiEMEDIES
Tax~tiqn Law

and conspicuous place , in the barrio or

In case the ·warrant of levy is not issued before or district in which tlie real property lies; and
simultaneously with the warrant of distraint, and the b. Publication once a week for 3 consecutive
personal property of t_ he taxpayer is not l>ufficie~t to weeks in a newspaper of general circulation
satisfy his tax delinquency, the CIR or his authorized in the municipality qr city where the property
representative shall, witliin 30 d~ys after the is located. (NIRC, Sec. 213) . _ _
execution of the distraint, proceed with the levy on
taxpaye_r's real property (NIRC, Sec. 297(8)) .
4. Public Sale of Propehrtyfunder Let.vyb
2 2 Taxpayer is given the rig to pre-emp ion e1ore
PROCEDURE FOR LEVY (ISAP-R F )
sale (NIRC, Sec. 21;3) . - .
1. Issuance of Warrant of Levy; RIGHT OF PRE-EMPTION: The taxpayer may _
2. Service of the Warrant of Levy; discontinue all the proceedings by paying the
3.' Advertisement of the Sale; taxes, penalties and interest at any_time befo~
4. Public Sale of Property under Levy; the day fixed for the sale (NIRC, Sec. 213).
5. Redemption of Property sold;
6. Forfeiture to the Government; If he does not exercise it, the s·a1e shall proceed
7. Resale of Real Estate Taken for Taxes; and
at:
8. further Distraint and Levy.
a. Main entrance of the municipal building or
city hall; or _ · _ ,
1. Issuance of Warrant of Levy th t· t d b. on the premises of the property to be sold,
Preparation of a du 1Y au en •~a e ·
certificate containing: (DNA) -
a. Q~scription of the property levi~d; [~ )
l' as the officer ·conducting the proceedings
sHaU determine and as the notice of sale
sh 11" ecify (NIRC, Sec. 213).
b. Jiame of the taxpayer; and · i .., ,1_
c. Amount of tax and penalty due ~rom h~ _...•.........,_ NO e. e~rtifif ate of Sale shall be delivered to
The certificate containing ,0NA sh all operate ,. --~( the purch~r. - f t he proceeds of the sale exceed
with the force of a legal execution throughout tl1ie i\ ..
-t, th e claim a(ld cos.t of sale, th e excess shqll be
Philippines (NIRC, Sec._2 a ). ___ ,, /.. turned over to · heo wner of the property (NIRC,
I "· .,..,,_ ~·,-~ fet. 213). ,'-t"'_,.~ _
2. Service of the Warrant o levy '~-.~< ~-; , ' ,__,,.. / • · --. ' ·
Levy shall be effected by wr1ting upofl fhe said~- ::.:.c1,;,~ Red~ '!'pt,on of-Property (NIRC, Sec. 214)
certificate a description of he ptop_erty upon- ·r:..:" -- - . · .- . ,
which levy is made. At t s me time ,Writterr-\ ! :.: .·'.. _ VV1th11'\.., year from the date of sale.
notice of the levy shall be m ailed or serv@d ~pon:_·; 1---:[f S::::1 • f - ·
a. The Register of Deeds of the provin~ or city . r;:;
t{~TE. In ~ase of natural persons, ~or purposes
''-J~:s_-
4

where the property is located; ar:id ::._--:-;:'of' _reckoning · the one-year. period on, th~
b. Upon the delinquent taxpayer, o if ~he\ ~ [ [ . ... ' f ~for~Glos~d. a~se! of natural persons and ,the
absent from the Philippines to ·s -agent or - period ~ 10 which to pay Capital Gains Tax or
the manager of the busine~s in -respect to Cte l!,<;1bl Withholding Tax and Documentary

to the occupant of the property in question

n
which the liability arose, or if thereJ>e ne, rv1A.\. Stamp. ax on th_e foreclosure of Real Estate
- - - · Mortgage, the period shall be reckoned from the
(NIRC, Sec. 207 (BJ). date of registration of the sale in the Office of the
Register of Deeds. ·
3. Advertisement of the Sale
/ The advertisement shall contain: (ANTS)_ For juridical persons in an · extrajudicial
a. Amount of tax and penalties due; _ foreclosure, Section 47 of The ·General Banking
b. ttame of the taxpayer against whom taxes ~aw _of 2000 (R.A. No .. 8791) provides that its
are l~yled; nght of redemp tion shall be until, but not after,
c. Time and place of sale; and the registration of the certificate of foreclosure
d. §hart Description of the property to be sold. sal~ '-:V!th the applicable Register of Deeds,
which ,n no case 'shall be · more than three
The advertisement shall be made within 20 months after foreclosure · whichever is earlier.
days after the levy, and the -same shall be The right of redemption ;hall be reckoned from
for a period of at least 30 days (NIRC, Sec. the date of approval by the executive judge
213). (R.M.C. No. 55-11).

Advertisement shall be effectuated by: .WHO MAY REDEEM: The delinquent taxpayer
(PoPu) or anyone on his behalf. ·
a. Posting a notice at the main entrance of the
municipal building or city hall and in a public
 \ I

MEt4Q~y AID
s., eec:ta lkwWafty College of Law - ROCT e. 0perationa c -

TO WHOM MADE: To the Revenue District
Officer (RDO).
HOW MADE: Upon payment of the taxes,
penalties, and interest thereon from the date of
delinquency to the date of sale, together with
interest on purchase price at 1q% per annum
from the date of sale to the date·of redemption.
NOTE: The owner shall not be deprived of the
possession of said property and shall.be .entitled
to the rents and other income thereof until the
expiration of the time allowed for its redemption
(NIRC, Sec. 214) .
Effects of Redemption of Property Sold:
a. Such payment shall entitle the taxpayer the
delivery of the certificate issued to the
purchaser and a ~rtificate from RDO that
he has redeemed the property; and
b. The RDO shall pay · the purchaser ·the
amount by which such property has been
redeemed and said property shall be free
from lien of such taxes and penalties (NIRC,
Sec. 214).
NOTE: The remedies of distraint and levy_as
well as collection by civil and criminal action
may, in the discretion of the CIR, be pursued
singly or independently of each other, or all
of them simultaneously (ABAN, supra at
234) .
8. Further Distraint and Levy
The remedy of distr~int and. levy may be
repeated, if necessary, until the full amount of
the tax delinquency due including all expenses
is collected frorri the taxpayer (NIRC, Se_c. 217).
Otherwise, a clever taxpayer who is. able to
conceal most of the valuable part of his property
would escape payment of his tax liability by
. sacrificing an insignificant portion of his holdings
(Castro v. Collector. of Internal Revenue, L-·
12174,,April 26, 1_962).
D.I STRAINT V. LEVY

6. Forfeiture to the Government (N/RC,. Se~.

215) . .. '
Grounds: .,., t .
a. No bidder for real property, or ··r • ,. ..
b. nie highest bid is for an -1:frnoun_t insufficient ·• Distrairif is- ~ffed~d by Levy shall be effected by ·
to pay the_taxes, penalties,, and co.sts. , , the · seizure ef ' the writing. ·upon the · duly.
. ;, ~4= goods, ~.hChattels' .• or authenticated certificate·
The Register of Deeds shall tr~nsfer title to effects. · the description of the
the Government upon registrat\on with his property upon which the
office of the declaration of forfeiture·(NIRC, levy is made and at the
Sec. 215). ..:, · same time, written
.. · notice of the levy shall
be mailed to or served
1_year from forfeiture, the taxp~y~f- may
redeem the property otherwise, the upon the Register of
forfeiture shall become absolute (NIRC, Deeds and upon the
Sec. 215). I' taxpayer.

7. Resale of Real Estate Taken for Taxes

The CIR shall have charge of any real estate
obtained by the Government in payment of
taxes, penalties, or costs arising under the - . - Notice of Sale . ·· . ,
NIRC, or in compromise or adjustment· of any
claim (NIRC, Sec. 2t"6). The notice of the sale Within 20 days after the
shall be exhibited in not !evy, the real pr<?perty
!he CIR may: · . less . than ·2 public will be advertised for
a. Sell and dispose of the same at a pubh~ places ·in the · sale for a, period of at
auction upon giving of not less than 20 days municipality or city least 30 days. The·
notice; or . - where the distraint was advertisement shall be
b. Dispose of the same at a private s_ale with mad~. . 1 . _place ·, of effected by ·posting a
the approval of the Secretary of Finance posting 1s the Office of notice at the . main
(NIRC, Sec. 216). the Mayor. entrance ~f 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
publication once every
week for 3 consecutive
weeks in a newspaper of
general circulation.
.. Acquisitio~ by the ·Government . _
Purchase by the CIR c;,r The Internal Revenue
his deputy on behalf of Officer conducting the
the National sale - shall declare the
Government (NIRC, property forfeited in
Sec. 212) . favor of the Government
(NIRC, Sec. 215).
Right of Redemption
The taxpayer is not The right of redemption -
given the right of is granted in case of eal
redemption with property levied J,.: pon
respect to distrained ahnd sold / o~ forf~ ited to
· personal property. t e govemmen .
.____ _ __ __ __._ __,.-------:,---. -'-- ~
Both distraint and levy are s~mmary remedies and )>- -~;_,
cannot be availed of where the , amoupt of tax ~, ,
involved is not more than P1oo· (NIRC, Sec-:-205 - - ·
(BJ) . -;~, :
• . __,,.., ....! ••. : • • . ~·· ,.
Real property placed . under evy may be sold at ·
public auction for less than it~-market aiu'e (NIRC,:
Sec. 215) since the taxpayer is given th~' _right to •· I " ,' . ·
redeem (NIRC, Sec. 214) . With respect to distrained
personal property the rule is different because;'llh~n
the amount bid is very much less than the
market value, it is the Government hat m
purchase the same (NIRC, Sec. 21 2) . JQj
COMPROMISE AND ABATEMENT
(Please refer to discu_ssions under Assessment on
pages 333 to 338.)
PENALTIES AND FINES
Increments to the basic tax incident to the taxpayer's
non-compliance with Qertain legal requirements (see
NIRC, Sec. 248).
SURCHARGE, INTEREST
COMPROMISE PENAL TY
(Please refer to the Chapter on Tax Administration
and Enforcement on pages 306 to 309.)
OTHER REMEDIES
1. suspension of Business Operadtio ns_
(Please refer Power to Suspen 8 usmess
Operations of a Taxpayer on pages 296 to 297).
REMEDIES
Taxation Law
2. Forfeiture (of Confiscated Article)
Forfeiture ·
The - divestiture of . property _without
compensation, in consequence of a default or
offense (Bal/antine's Law Dictionary, p. 519) .
Seizure v. Forfeiture .
In seizure for the enforcement of tax lien, the
residue , after deducting the tax liability and
expenses, .will go to the taxpayer (Bank of the
Philippine Islands v. Trinidad, G.R. No. 16014,
October 4, 1941).
In forfeiture, ·all the proceeds of the sale 'will go
to the coffers of the government (U.S. v. Surla,
G.R. No. 6536, September 2, 1911).
A · taxpayer in forfeiture or seizure · cases to
. enforce tax lien may still be subject to criminal
L.J lt . . J
action even if his property has been forfeited
• (Garcia v. Collector of Internal Revenue, G.R.
f No: 4'4~ 2, November 3, 1938).
\f j > · . -
En~~~e'}lep\ of the Remedy of Forfeiture:
-q:.... Jn case of personal property - by seizure
-~ •(• ,- and s.atO or destruction of the specific
orfelted prop~rty; and _
b. n case (c) reai property - by judgment of
ondefl\natioQ ';nd sale in a legal action or
··· .- _-.. - proceed_ l r\'g, civil or criminal, as the .case
/lrn_~y require"(1Jl C, Sec. 224) . _ .
_ c. ;f._bij ' remedy Is -different from the provjsion
I ;· _, 1
/~ ir~cting forfeitf! re of real property in certain
' cases in the rei-nedy of levy under Sec. 215.
I ·· ....\ yJudicial intervention which is required for
l :_.5tY forfeiture of real property under Sec. 224 is
ae.fu.~J II:-
·t\ ?)) not esseri ·a1since the taxpayer has the right
- '- - of q.emption (2 DE LEON, NIRC, supra at
2 ; 523) . -
___ NOTE: The forfeiture need not be for the
whole tax liability which could merely be for
the amount equivalent to the fair market
value of the property (Castro v. Collector of
Internal Revenue, G.R. No. -L-12174, April
26, 1962).
· WHEN FORFEITED · PROPERTY BE -
SOLD OR DESTROYED (NIRC; SEC. 225)
AND 1. Sold
- in case of forfeited chattels and removable
fixtures, so far as practicable, under the same
conditions as the public notice an-d the time and
manner of sale as are prescribed for sales of
. person<;1I property distrained for non-payment of
taxes;
I I
 \ 1
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San Bede i.w-.ty College of Law - ROCT Bar Operations Center
2. .Destroyed
- _in case of distilled spirits, liquors, cigarettes
other manufact~red products of tobacco and. ali
apparat~s used in or about the illicit production of
such articles, by the CIR when the sale of the
same f~:,r consumption or use would be injurious
to pubhc health ur prejudicial to the enforcement
of law; and
3. Sold or destroyed
- in cas_es of all other articles subject to excise
tax, which have been manufactured or removed
in violation of the NIRC, dies .for printing or
making of internal revenue stamps and labels ·
which are in imitation of or purport to be lawful
stamp_s , or labels, in the discretion of the
Commissioner.
NOTE: Forfeited property shall NOT be
destroyed until at least twenty (20) days after
seizure _(NIRC, Sec. 225). ·
INSTANCES WHEN FORFEITURE
APPROPRIATE: (LADI)
1. kiquor or tobacco shipped under a false name
or brand (NIRC, Sec. 262);
2. ~I chattels, machinery, and removab_le fixtures
of any sort, used in the unlicensed production of. ·
articles (NIRC, Sec. 268 (B)); and · .:. ,.., .. ,,
-3. .Qies used for_the printing or making- ~f 'any
internal revenue stamp, label o(tag which is in .-·
imitation of or purports to ~b~t a la~I, stamp,
label or tag (N/RC, Sec. 268.( B)); . , '::-;: ..~1 ·
4. Goods Illegally Stored or Remov.f3~. (r,JIR(?., Sec.~
268,(C)).
JUDICIAL REMEDIES
Kinds of Judicial Remedies
1. Civil Action
2. Criminal action
NOTE: No civil or criminal action for the recovery of
taxes or the enforcement or any fine, · penalty or
forfeiture under the NIRC shall be filed in court
without the approva·I of the Commissioner of Internal
Revenue (NIRC, Sec. 220). · maintain that .it is .the Solicitor General who has
CIVIL ACTION
.When-Civil Action, as tax remedy, is reso~.e~Tt
A civil action is resorted · to when a tax ,a 1.1 Y
becomes. collectible, that is, the asse~~~e~~
becomes final -and unappealable, or the decisio d .
commissioner has become final, executory an
demandable (DIMMMPAO, supra at 200).
CIVIL ACTION FOR COLLECTION OF
TAXES IS INSTITUTED:
1. By filing a civil case for collection of a sum of
money ·with proper regular court (NIRC, ·Sec.
222) ; or ·
2. By filing an answer to the petition for review filed
by taxpayer with CTA (Fernandez Hermanos,
Inc. v. Commissioner of Internal Revenue, G.R.
No. L-21551, September 30, 1969) .
Can the BIR file a civil action for collection
pending decision of the administrative
. protest? ·
YES. The request for reinvestigation and
reconsideration was in effect considered denied
by CIR when the latter filed a civil suit for
collection of deficiency income (Commissioner
of Internal Revenue v. Union Shipping, G.R. No.
L-66160, May 21, 1990).
)1 FORM AND MODE OF PROCEEDING
IS _.,·
.. (NOA):
_ '. · 1. Civil actions shall be brought in the ~ame of the
". Government of the Philippines (i.e., Republic of
':: ?_tfle,_f'l)it,:V.f!rsus a delinquent taxpayer) . .
,. 2. If sl'iall be:conducted by legal Officers of the BIR.
3 . No civil .6r criminal action f~ the recovery of
,., taxes sJ;raJI ~e filed in court without the·APproval
of the J~I~ (N_IRC, Sec. 220), but the latter may
delegate §UC · power to his subordinate officials
ih the legal "service through administrative
issuances ·(NIRC, Sec. 7) .
• ' ..;·-,_.: ~- > .
PARTICIPATION Oi= THE SOLICITOR
, GENERAL ·
· ~., ·In vJew of the amendment of Sec. 220-of the NIRC,
; .. the written conformity of the CIR (and no longer of
the Solicitor C3eneral or the Government Corporate
Counsel), should be_secured (2 DE LEON, NIRC,
supra at 501) . -· · --_ · •
Sec. 220 of the NIRC must not be under~tood as
overturning the long-established procedure before
the SC in requi~ng the Solicitor General to represent
the interest" of the ~epu,blic. This court continues to
primary responsibility to _appear for the government
in appellate proceedings. (Commissioner of Internal
Revenue v. La Suerte Cigar, G.R. No. 144942, July _
4, 2002) .
JURiSDICTION
(Please refer to Court of Tax Appeals chapter).
CRIMINAL ACTION
The remegy of criminal action is _resorted to, not only
for collection of taxes! but also for enforcement of

. statutory penalties of all torts (DIMAAMPAO, supra
at 204).
CRIMINAL CASES
All violations of any provision of the NIRC shall
prescribe after 5 years (NIRC, Sec. 281) .
WHEN SHALL PRESCRIPTION BEGIN
TO RUN:
1. From the day of the commission of the violation
of the law (NIRC, Sec. 281) ; or
In case of willful failure to pay deficiency tax, the .
5-year prescriptive period should be ~eckoned
from the date of the final notice and demand for
payment of the deficiency taxes. This is because
prior to the receipt of the letter-assessment, no
violation has yet been committed by the
taxpayers (Um, Sr. v. Court of Appeals, G·.R.
Nos. L-48134-37, October 18, ,1990).
2. If the same be not known at the time - from-the ..::..
discovery thereof and the institution of judicial
proceedings for its investigation' arid p_unf;,IJ..men~
(NIRC, Sec. 281). f · ":.~' ::. j ~GLEf
WHEN CRIMINAL ACTIO~ IS ,,
IMPRESCRIPTIBLE ,..
In case of falsity or fraud with intent to evade the ta;,
th~ _right o_f t~e. govem~e~t o co~ec~, through.·-.~ .. ,. "'; ·. .
cnmmal action 1s 1mprescnpt1bfErtor a~Jq~g a the ' - .
period from the discovery and n titutiol(of judicial - ·
procee~i~gs for its in~estigati_ o.,,..and puniShf!leOt, up ·, I_, ~udgreo n the criml~al case shall not only impose .
to the fihng of the information in court, does no 1
exceed 5 years (Lim, Sr. v. Court of Appeals;l~.R. -
Nos. L-48134-37, October 18, 1990). . -...._, ( l E~\~¥J_he CIR (NIRC, Sec. 205).
- - -
INTERRUPTION OF PRESCit~}iVE
PERIOD / .}
...
The period shall be interrupted: . imposed therein (NIRC, Sec. 253 (a))
1. When proceedings are instituted against the
guilty persons; or
NOTE: The period shall begin to run again if
the proceedings are dismissed for reasons
not constituting jeopardy (NIRC, Sec. ~81) .
2. When the offender is absent from the Philippines
(NIRC, Sec. 281) .
TWO COMMON CRIMES PUNISHABLE
1. Attempt to evade or defeat tax (NIRC, Sec. 254) ;
and
2. Failure to file return, supply correct and accurate
information, pay tax, withhold and remit tax and ·
refund excess taxes withheld on compensation
{NIRC, Sec. 255).
~ -
RE~EDIES
Taxation Law
ELEMENTS FOR CONVICTION FOR
FAILURE TO MAKE OR FILE A RETURN
UNDER SECTION 255 OF NIRC: (RFW)
1. The accused was Required to pay any tax, make
a retl!rn, keep any record, or supply correct and
accurate information, or withhold or remit taxes
withheld , or refund excess taxes withheld on
compensation, at the time or times required by
lavt or rules and regulations;
2. • The accused .Eailed to pay the required tax,
make a return , or keep the required record, or
supply the correct and accurate information; and
. 3. The accused Willfully failed to pay such tax,
make such return, keep such record, or supply
such correct and accurate information, or
withhold or remit taxes withheld, or refund
excess taxes withheld on compensation, at the
time or times required by law or rules and
regulations (NIRC, Sec. 255).
l ,WILLFUL BLINDNESS DOCTRINE
_ taxpayer can no longer raise the defense that the
errots on the,ir1ci3X returns are not their r~sponsibility
hat it is, the fault of the accountants they hired
N tRq ~ upra at 413).
(Please '.refer to Statutory Offenses and Penalties
un er x Adm1n,str~Ji&n and Enforcement for other
Vi?Jafion~s on pages 306 to 312.)
. ~ ' .
w,~5?l1on m v1plat1on of the NIRC also
I·fonsy(~tes/ a ooll~ct!on method because the
!~9alo/ but shall f Is~ order the payment of the ·
. \ axes,subJect of the criminal case as finally decided _
'.>--., .
Any pers<;Jl c?nvicte~ . of a crfme penalized by the
,1 /Nl~C shall, in add1t1on to ~eing liable for the
P ymen ?f the tax, be subJect to the penalties
·
FORM AND MODE ·oF PROCEEDING
. Same with civil action (NIRC, Sec. 220)_
JURISDICTION
(Please refer to Court of Tax Appeals chapter).
IMPORTANT PRINCIPLES ON CRIMINAL
ACTIONS
1. A~sessment is not necessary before
fih~g a criminal action and criminal
action may be filed during the pendency
of an administrative protest in the BIR.
---
-- \ I
MEM:O~Y AID
s-, 9ec1a l.W,w9liy Colege of i._. - RGCT B a r ~ Centw
It is not a requirement for the filing thereof that
there be a p~cise co~p~tation and assessment
of the tax, since what ts involved in the crim inal
action is not the collection of tax but a criminal
prosecution for the violation of the NIRC
provided, however, that there is a prima faci~
showing of a willful attempt to evade taxes or
failure to file the required return (Ungab v. Cusi,
G.R. Nos. L-41919-24, May 30, 1980 in relation
to Commissioner of Internal Revenue v. Court of
Appeals, G.R. No. 119322, June 4, 1996·
Commissioner of Internal Revenue v. Pasco~
Realty Development Corp. , G.R. No. 128315
June 29, 1999). ' any provision of this. Code or 'in any action for the
Protesting an assessment cannot stop criminal
prosecution under ·t~e NIRC (INGLES,
Reviewer, supra at 413).
EXCEPTION: The fact that a tax is due is not
proved.
Before one is prosecuted for willful attempt to
evade or defeat any tax under Secs. 253 and
255 of the NIRC, the fact that a tax is due must
first be proved (Commissioner of Internal
Revenue v. Court of Appeals, G.R. No. 119322, ·
June 4, 1996). . • regards the tax which he is sentenced to pay
Reconciliation
If the tax alleged to have been evaded is
computed based on reports approyed by the
BIR, there is a presumption of 'regularity of the
previous paym_ent of taxes, so that ,unless and
until the BIR has made a final determination ·of
what is supposed to be correct taxes, the
taxpayer should not be placed in the crucible of
criminal prosecution (Commissioner-bf Internal :
Revenue v. Court of Appeals, G.R. No. 119322,
June 4, 1996). · '
2. Effect of Acquittal of the Taxpayer in a
Criminal Action
It does not necessarily result in the exoneration
of said taxpayer from _his civil liability to pay
taxes.
REASON: The duty to pay tax is imposed by
statute prior to and independent of any attempt
?n the part of the taxpayer to evade payment. !t
1s neither a mere consequence of the felonious
acts charged nor is it a mere civil liability derived
from a crime (Republic v. Patanao, GR. No. L-
14142, May 30, 1961).
The civil liability to pay taxes arises not because
· of felony but upon taxpayer's failure to pay
taxes. Criminal liabUity in taxation arises as a
result of one's liability to pay taxes (INGLES,
supra at 412).
3. Effect of Payment of Tax Due After
Apprehension
Any person convicted of a crime penalized by
the NIRC shall'in addition to being liable for the
payment of the tax, shall be subject to the
penalties imposed herein. Payment of the tax
due after apprehension shall not constitute a
valid. defense in any prosecuti9n for violation of
forfeiture of untaxe_d articles (NIRC, se·~- 253) .
4. Effect of Subsequent Satisfaction of
Civil Liability
The subsequent satisfaction of civil liability by
payment or prescription does not extinguish the
taxpayer's criminal liability . (People v. Tierra,
G.R. Nos. L-17177-80, December 28, 1964) .
-' -· 5. No Subsidiary Imprisonment
. In case·of insolvency on th.e part of the taxpayer,
subsidiary imprisonment-cannot ·be imposed as
(PeopleJ v? Jean-Arnault, GR. No. L-4288,
November 20, 1952). ·
. • t! i
However,; it may be imposed in ca§es of failure
t9 pay_the f~ne imP,osed (NIRC, Sec. 280) .
Criminal·action may be filed despite the
lapse of the period to file a civil action for
c~llection of taxes
When the civil action arising out of a tax
delinq~e~cy is extinguished by th_e 5-year
prescnpt1on period for collection, it is still
possible for such tax to be collected by criminal
action because actions of this kind prescribe
qnly after the lapse of 5 years counted from the
discovery of the crime and the institution of
proceedings for its investigation and punishment
(NIRC, Sec. 281) .
7. Filing of a criminal action is not an
implied assessment by the CIR
An affidavit, which was executed by revenue
officers stating the tax liabilities of a taxpayer
and attached to a criminal complainf for tax
evasion , cannot be deemed as an assessment
(Commissioner of Internal Revenue v. Pascor
Realty, G.R. No. 128315, June 29, 1999).
The recommendation letter of the CIR
(addressed to the DOJ for the filing of a criminal
 . REMEDIES
· Taxation Law

complaint against the taxpayer) cannot . be

considered a formal assessment. A cursory
perusal of the said letter would reveal three key
points:
a . .It was not addressed to the taxpayers;
b . There was no demand rnade on the
taxpayers- to pay the tax liability, nor a·period
for payment set therein; and , ·
Assessment must be Assessment· is not
c. The letter was never mailed or sent to the
final and executory necessary before filing a
taxpayers by the CIR (Adamson v: Court of criminal action · ·
Appeals, .G.R. No. 120935, May 21, 2009) . . ' ' ... ;,..,••...
· Presc'ription ""i' {".- • -: '
In fine, the said recommendation letter served
merely as the prima facie basis for filing Five (5) years from the Five (5) years from the
criminal information that the taxpayers had date of assessment ay of the commission of
violated (penal provisions) of the NIRC the violation of the law or
(Adamson v. Court of Appeals, G.R. No. the discovery of the
120935, May 21, 2009) . crime
, -···~;..~~
8. No Reservation to Fil~ Civil Action ,. - - - Effe~t
.
~f .Pe~ding·~dmi.~iS!~a~il
. . .... e Protest
. . . .
;-

Under R.A. 9282, the filing of ,:t,e Bl can•• file a civil Protesting an
a.er •n • pen'ciing. the
CJ
implies also the filing of th assessment cannot stop
reservation for the filing of ther' decision' .,I of , an criminal prosecution
made under this law, unlike on'9- ·· administrat1.v e protest
under the RPC (MAMALA TEO,, ,i ,
at 724) . -~- "
· . - ,..f ln -.:'... -~
pn t t .e . :· . Compli
sec 2cJ ·
with\ <f(JIR.C Comply wlth NIRC, Sec.
" ,--~- ; 20 .
<·
9. Assessment is _still N~ sary e
Accused is Found Gullty Under ~ec. 2· 5 5
1
.. . L-
··- ·- - - -·,-,=:--:-,,.....;.·.....__ _ _ _ _ __ ___,
oftheNIRC ,---U\ •..· .._.. :•.:- :r,::•·. • -..c.., :
· - \.-<\~-:·- -- ---.-:....INJU.,N,G'FION · .
reasonable doubt for v1olat1on of Sec. ~~-5\j~¾t . , [·
In case the accused__ is ( !,9u. d guilo/)'l;_>eyo_nd "\ ! ::: No lriJµ n~tion .to Restrain Tax Collection

NIRC (f?r failur~ to file t . ret~~ or t~ ,,

<' GE_N ~W'L RIJLE: N court shall have-the authority
.r
.

. - j ,,,;,-t~ ~r~nt ':1n unctiol} to restrain tl"\e collecti~n of any

correct informat1on), th~ 1m os1t1on of .t~e CIYl!:-~ .~i;,~1o~al !,tlternal reyenue tax, fee or charge imposed
liability by the CTA 1s not automat1e -,-a6d [ . ;', \_(N(RC e 218)~· •
assessment notice from the BIR is ecessa~ --- ··, .._ \ _.,,, . ~
(People V. Mendez, CTA Cri'7?, Case-'N s 13 . ;{=~~~TfQJ!I:"'
and 015, January 5, 2011). · · l\f . {Wt\en iR·tFie opinion of the CTA:
ollection of the tax would jeopardize ·the
REASON: The computation presented by the
government and/or taxpayer; and
prosecution to prove civil'liabilities may not be
2. Shall thereafter require the_taxpayer to deposit
used because the . BIR did not follow the
assessment p'rocedures provided for in the . the amount claimed or to file a surety bond for
NIRC and in the implementing regulations ' not more than double the amount with the court
(R.A. No. 9282, Sec. 9) . ·
(People v. Mendez, CTA Crim. Case Nos. · 013
and 015, January 5, 2011) . .

CIVIL ACTION V. CRIMINAL ACTION

Civil Action Criminal Action (NIRC,
(NIRC, SEC. 205 (B)) SEC. 205 (B))

Purpose

Instituted by the Instituted to penalize a

government to coll.a ct taxpayer for violating the
internal revenue taxes
 \ I

MEM:0-RY AI D
SM 8edll U'w.wly College d law · RQCT B a r ~ Center

TABLE OF COMPARISON OF REMEDIES

I

TABLE 1 - DISTRAINT OF PERSONAL PROPERTY

CIR - If amount of tax due is more than ~1 M Local Treasurer or his deputy (LGC,
Revenue District Officer - If amount of tax Sec. 175(a))
due is ~1 M or less (fl!IRC, Sec. 207(A)) .

Notification to be exhibited in not less than two
(~) p~bli~ places in the city or municipality where
d1straint Is made. One place for posting is the
offi~e of the Mayor of the .city or .municipality in
which the property is distrained.(N/RC, Sec. 209).
Notification to be exhibited in ·not less
than three (3) public and conspicuous
places in the territory of the LGU where
distraint is made. One place for the
posting of the notice shall be at the
office of the chief executive of the LGU
where the property is distrained (LGC,
Sec. 175(c)).

Within two (2) days after the·· sale-,.!th~ ~:~fficer Wfthi~

...... .
five (5) days after the sale, the
making the same shall make 'a report of the -local· treasurer _shall make a report of
proceedings in writing· to the .Cl;R and shall ttiei proceedings in writing to the local
himself preserve a copy of such re port as an c h el executive concerned (LGC, Sec.
official record (NIRC. Sec. 211) . :1~s{a)J. ·
)
;- \.
i .:,.-r,;~~ .
Not less than twenN (20) days,aftei 11otice to the Not less than twenty (20) days after
owner or posse~sor qf the propeqy and the notice to the owner or possesso~ of the
posting of such notice (NIRC Sec. ~P~- ·property and the publication or posting
of such notice (LGC, Sec. 175(c)).
f!ii~·•:
M .... ,,. .,

;,,:-1 :);

The CIR may purcH~se the··same on behalf of the Should the property distrained be not
National Government if: disposl:ld of within _one hundred twenty
1. The amount of bid is not equal to the amount (120) days from the-date of distraint, the
of the tax ; or . same shall be considered as sold to the
The amount of bid is very much less than the LGU concerned for the amount of the
actual market value of the articles offered for assessment made thereon by the
sale (N/RC, Sec. 212) . Committee (LGC, Sec. 175(e)).
 REMEDIES
Taxation Law

TABLE 2 - LEVY UPON REAL PROPERTY

W'thin
1 thirty (30) days after the levy, the
Within twenty (20} days after levy, th e
officer conducting the proceedings s~all 1 al treasurer shall proceed to publicly
~~vertise for sale or auction the property or
advertise · the property or a usable portion
a usable portion thereo~ ~s may be
thereof as may be necessary to satisfy th e
necessary to satisfy the. claim and the cost
claim and the cost of sale; and s~ch
of sale; and such advertisement shall cover
advertisement shall cover a period of th irty
a period of thirty (30) days (LGC, Sec. 178).
(30} days (NIRC, Sec. 213).
th Levy shall be effected_by writing upo~ ~he
Levy shall be effected by writing upo~ . e duly authenticated certificate the description
duly authenticated certificate a _description of the property upon which l?vy is made. At
of the property upon which levy 1~ made. At the same time, a written notice of levy shall
the same time, written notice of levy shall be be mailed to or served upon the:
mailed or served upon the: 1_ Assessor and Register of Deeds of th_e
1. Register of Deeds for the province or province or city where the property 1s
nd
city where the property is located; a located to annotate the levy on the tax
Delinquent taxpayer, or if he be absent 'fi t f t'tl
from the Philippines, to his-agent or.the__ declaration and the cert, ,ca e O I e;
manager of the .busi.ness in respect to . · . and_ 'f h be absent
which the liabillty arose, or i{ there be . 2.•, D~hnquent ~~xp~yer, or 1. e h
none to the! o'ccupant of the-property ·in , from the Ph1hppmes,. to his_agent or t e
i· (NIRC1.•sec. ·207(b)) . ·· · · rganager of the business m _respect to
ques ion · , ·, · -· · · -- - • which the liability arose, or 1f there be
., ;~ ~.~- ·, , ,,. ·'none,' to the occupant of the property in
. . ' , qUE:S~~o~ (4,GC, Sec. 176).

P~tin~ a.notice at the main entrarice of 1! Posting g ndtice at the main entrance of
the municipal buiiding ·or city hall; . the rol'.mici~~I buildin~ or city hall; .
In a public and ~onspicuous place _in the In a gublic aod consp~cu?u~ plac~ m the
barrio 'or tlistrict in which the real estate 1 _ ., ~amb or barangay district m which the
lies; and ·1 \_' ;~, ··,·---- 1 ---. - : ' . . ·- ·real<esta_te· lies; and
Bn,\JBli~ tion on~' a·week (ot,thr~e (3) -3:;, By publication once a week for three (3)
weeks in "a newspaper of gene'rar •>
weeks in , a newspaper of general
circuiation in the ' mtini~ipallty.,-or_{cii · _dirculatiOFl in the municipality or city
where\ the pro~rty ' is ]ocf!ted 1-(N/RC;. . .....~where .the property is located (LGC,
Sec. 213) <. ·.-->-·
r
'r' I : .,
1

- '·

..
t-:-;~;..
r.:fof),.C.,.,178).
. ' ' . ) " .
..
•

The Revenue Colleptfdn-Officer-may, ·upon\ ,Th_E}Aocal treasurer may, by ordinance duly

approval of th~- Revenuf?. Distrlct -,_Qtti'cer,. approved, advance ~n amount sufficient to
advance an amount sufficient1:o ·defray-ff1e defray the costs of collection by means of
costs · of co_llection ·by means of summary the remedies provided in the law (LGC, Sec.
remedies (NfRC, Sec. 213). 178).

The Internal Revenue Officer shall declare
the property forfeited to the Government in
satisfaction of the claim if:
1. There is no bidder for real property
exposed for sale, or · advertised for sale; or
2. The highest bid is for an amount
insufficient to pay the taxes, penalties
and costs.
It shall be the duty of the Register of Deeds
concerned, upon registration with his office
of the declaration of forfeiture to transfer the
title of the property to the Government
without the necessity of court order (NIRC,
Sec. 215).
The local treasurer conducting the sale shall
purchase the property 1n behalf of the local
government unit:
1. If there is no bidder for th_e real prop_erty
2. If the highest bid is for an amount
insufficient to· pay the taxes, fees, or
charges, related surcharges, interests,
penalties, and costs.
It shall be the duty of the Regist~r of Deeds
concerned, upon registration with his office
of the declaration of forfeiture to transfer the
title of the property to the Government
without the necessity of court order (LGC,
Sec. 181). ·
 \ I . .

MEM:0.:RY AID
San 11.da Cclege of Law - ROCT Bar Cenciar

Upon giving of not less than twenty (20) The Sanggunian concerned, ·by an
day notice, the CIR may sell and ordinance duly approved a_nd upon
dispose of the real property. • notice of not less than twenty ·(26) days,
Sale may be at public auction or in a may sell and dispose of the real
private sale (upon approval of the SOF). property.
Proceeds of the sale shall be deposited 2. Sale is only by public auction.
with the National Treasurer and an · 3. The proceeds of the sale sti~ll-accrue to
accounting of the same shall be the general fund of the LGU concerned ·
rendered to the Chairman of the COA (LGC, Sec. 182).
(NIRC, Sec. 216). -

The redemption price shall be: . The redemption price shall.be:

1. Amount of public taxes, penalties, and 1. Amount of taxes. fees, or charges, and
interest thereon from the date of related surcharges, _ interests, or
delinquency to the date of sale; and penalties from· the date .of delinquency '
lntere~t on the purchase price at the to the date of sale; plus
rate of fifteen percent (15%) per annum 2. Interest on the purchase price at the
from the date of purchase to the date of rate of not more than two percent (2%)
redempti_on (NIRC, Sec. 214). per.month from the date.of purchase to
the date of redemption (LGC, Sec. 179);
 REMEDIES
360 Taxation Law

TABLE 3 - PERIOD OF COLLECTION AND ASSESSMENT AND SUSPENSION

THEREOF

An assessment is a finding by as Assessment in real

the taxing authority that the ·. property . taxation means ·
taxpayer has not paid his the act or process · of
correct taxes. The ultimate determining the value of
purpose of assessment is to the property subject to tax
ascertain the amount that a (LGC, Sec. 199(()).
taxpayer should pay. This is
the context in which
assessment is issued for
internal revenue taxation .

Internal revenue taxes shall be Local taxes shall · be No express provision on

assessed within three (3) years assessed within five (5) prescriptive period for·
after the last day prescribed by. years from the date assessment.
law for filing a. return or actual 'they _become · due
filing of retµrn;· . whichever (L~C, "Sec~ 194(a)).
comes later (f'jlRC, _Sec. 203) , · , 0 . ;, •
· ~.. ; . • · · • When ' ther~ is fraud or
·- --~-•.. )!}~~t -· to , ~vade •._the
payment of.taxes, fees
. ~r -charges ....: ten ~(10)
years from disCQv~ry-of
. .. the Jraud or iritenf fo •
evade tl,e payment
(LGC, Seh 194(6)). : ·
- • ~f

1:. I~-·.. ca·s~ ~.--bf. _false ~.'.. Q( i Qcau.ix~i·::fees, and N/A

' fraudulent -retu,.rn or failu ~e ..charge~ ;y.,hich accrued
to file 'a retu rri - with.in ten before: tbe- effeotivity of1
_·(10) ye'ars after ~~ ve& Jfl(, L~c· - Jfiree (~)
of. falsity, fraud ot 011:Jjssio'.n·· y~ats.(1rorn_ ,~ the d~te
(NIRC, Sed: '222(a}): .--: - . · ·;~hey bequtie due. /
Waiver of" .Statute- ef (t:GC;-~ec.':Y,94(a}j.
Limitatl OI} · :: · '. up , to' . . _the· ._.,··. I,\\ . / ,•·
extended · period. agreed : /: •~--:. . ,.~-
... • •• f Ji,,, ...

upon (NIRC, Sec. 222(b))'.' : __ _,.,,.

This is not expressly provided 1. Local taxes, fees, 1. Basic real property tax
for in the NIRC; subject to the or charges may be shall be · collected
opposing view that the 5-year collected within five within five (5) years
period applies, whether the (5) years from the from the date they
assessment ·is normal or date of assessment become due . .
otherwise. The prescriptive by administrative or 2. In · case of fraud or
period for collection is five (5) judicial action intent to evade
years following the assessment · (LGC, Sec. 1-94(c))., . paym_ent, such action
of the tax. may be instituted for
2. In case of fraud or the .collection -of the
In case of false or fraudulent intent to evade same within ten (10)
return or non-filing of return, the payment - within years · from the
BIR may file an ordinary action ten (10) years from discovery of such
to collect' even without an discovery of fraud fraud or intent to
assessment within ten (10) (LGC, Sec. 194(b)). evade payment (LGC,
years from the date of Sec. 270) .
discovery of falsity or fraud or
non-filing.
 \ I

MEM:0-RY AI D
San 8 l.JnMlrs,ty Colege of Lew - RGCT Bar ()perutions Center
·
.
361

In case the taxpayer has

waived • the Statute · of
Limitations. collection shall be
extended within the period
agreed upon (NIRC, Sec. 222).

The CIR is prohibited from The prescriptive The period of prescription

making the assessment or periods (for within which to collect
beginning distraint or levy assessment and shall be suspended for the
or a proceeding in court and collection) shall be time during which :
for 60 days thereafter; suspended during 1. The treasurer is
2. When the taxpayer which: · · legally prevented from
requests for· reinvestigation 1. The treasurer is collecting the tax;
which is granted by the legally preverite'd 2. The owner of the
CIR; from ·making the property or the person
3. When the taxpayer cannot - assessment or having legal interest
be located in the address collection; therein requests for
given by him in the return 2. The taxpayer rein'vestigation and
filed upon which the tax is, requests for executes a waiver in
being assessed · or reinvestigation and writing before the
collected ; executes a waiver expiration of · the
4. When the warrant of in writing b~fore the period within which to
distraint or levy is duly expiration · of · the collect; and
served upon· the taxpayer, period within which 3. The owner of the
his authorized to assess or collect; property or the person
representative, or .a and having legal interest
member of his household 3. The taxpayer is out therein is out of the
with sufficient discretion of the co,untry or country or otherwise
and no property could b~ otherwise · caflnot cannot · be located
. located ; and be located (LGC, (LGC, Sec. 270).
-5. When the taxpayer is out of Sec. 194(d)) .
the Philippines (NIRC, Sec.
223) .
362
Rule: No.
Exception: If the taxpayer
only disputes or protests
against the validity of some
of the issues raised, the
taxpayer shall be required
to pay the deficiency tax or
taxes attributable to the
undisputed issues (NIRC,
Sec. 228) .
The assessment in the Notlce of Assessment issued by
Formal Letter of Demand the Local Treasurer (LGC, Sec.
or Final Assessment 195).-
Notice (FLO/FAN) (NIRC;
Sec. 228).
Please note ) hat the·
procedure inRR. No. 18-
13 must fi~t befollowed'.
The assessment may be
protested by filing a
request for reconsideration
or reinvestigation within
thirty (30) days from
receipt of the
assessment (NIRC, Sec.
228).
Office of the duly Local Treasurer
authorized representative (LGC, Sec. 195)
of the CIR who signed the
Rule: No
Payment under protest is not
necessary. The LGU concerned
should not supply · additional
requirements . onerous to the
taxpayers by requiring prior
payment on protest against the
latter's local tax assessment
which is not mandated by Sec.·
195 of LGC (Rock Steel
Resources, Inc. , v City of Davao,
CTA Case AC No. 139, August
'11, 2016) .
...
,. ;
/ pursuant to Sec. 253 of
Wit~in sixty (60) days from
receipt of the notice
assessment (LGC, Sec. 195).
REMEDIES
Taxation Law
Rule: Yes.
Exception: Where the
question raised is on the
very _authority and power of
the assessor to impose the
assessment and of the
treasurer to collect the tax
(LGC, Sec. 252).
Grounds available to the
taxpayer for protesting the
payment of the basic real
property" tax: {EUDIP)
1. The property is gxempt
from the payment of real
property tax under Sec.
234 of the LGC;
2. The assessment on the
property is excessive or
Unreasonable, and is
the subject of appeal
pursuant to Sec. 231 of
the LGC .
3-. The tax is subject to
Jlc:_ .. -
Qiscount authorized
under Sec. 251 of the
LGC;
• 4 . The assessme·n t · is
!llegal or erroneous,
the LGC . ·
5 - · The period within which
to collect the real
property tax has
~rescribed ; as provided
in Sec. 270 of the LGC
(Ursa/ on Local
Government Taxation).
of The protest must be filed
within thirty (30) days from
payment of tax.
·Note: The protest may be_
filed at the time of payment
of the tax being protested
(LGC, Sec, 252(a))).
Local Treasurer
(LGC, Sec. 252(a))
 p \ /

MEM:Q~Y AID
s., Seda l)Vl,oefSily Colege of Law - RGCT Bar Ope,a!lon,j Center
363

One hundred eighty Sixty (60) days from receipt of Sixty (60) days from receipt
(1 80) days from filing written protest (LGC, Sec. 195), of written protest
of protest in the case of (LGC, Sec. 252(a)) .
the CIR.

2. One hundred eighty

(180) days from fili_ng
·of protest or
submission · of
documents, as the
case may be in the
case of the CIR's d~y
authorized
represen1ative (NIRC,
Sec. 228) .

CTA Division' (NIRC, 1. Court of Competent 1. LB~ (Local Board of

Sec. 228) Jurisd iction (LGC, Sec. 195) Ass13ssment Appeals)
CTA En Banc (MTC or RTC- depending on 2. CBAA (Central Board of
Supreme Court (R.A. jurisdictional amount) Assessment Appeals)
.No. 1125, Sec. 18) . 2. . Appeal to: 3. CTA En Banc (A.M. No .
a . . RTC - decision of MTC 05-11 -07-CTA)
(A. M. No. 05-11-07- 4. Supreme Court
CTA); ~•
b. CTA Division-! decision
of RTC
3. CTA En Banc (A. M. No. 05-
11-07-CTA)
4. Supreme Court
 . .
REMEDIES
364 Taxation Law

ASSESSMENT PROCESS WITH GOVERNMENT AND TAXPAYER'S. REMEDIES

(EXCLUDING R.R. No. 2-2020 WHICH IS NOT YET INCLUDED IN THE 2020/2021 BAR
EXAMS)
If taxpayer does not agree w ith his
deficiency taxes and findings of the
Issuance of Letter of Tax AudiU Investigation by RO, a Notice of lnfonnal Conference
Authority the Revenue Officer (RO) (NIC) shall be issued for taxpayer to
present his side of the case

After discussion and presentation of

supporting documents, taxpayer is
If taxpayer is still not amenable, .the still liable for deficiency taxes
case shall be forwarded to the
Assessm.ent Division of Regi~nal
Office, or the CIR or the CIR's ,------ - ---------- ~--,
authorized representative for 1
If taxpayer is amenable for the
issuance of PAN , except in cases deficiency taxes, taxpayer pays
· provided under Sec. 228 of the amount
NIRC I

~·
,------------- ... . --- --- -- ,
axpayer file§_a reply to the PAN , ·-
. )•
( -~ - -- - - - - -- --'
, Taxpayer pays : 1 .i Taxpayer ignores the PAN •
with·~ 15/ctays~:
:, _____________
amount ), ' _,..
------- -
I, I ·

-- - ------- - I

, ..>
If thE: taxpayer's ref!IY is ·It_tl5,e taxpayer was nol able to refute
meritoriou's, the -_ttl~ findings in PAN or if he is in
assess ent s all be- - .--: ,~e!ault, FLD/Ff'N shall belssued
dismissed0 ,,,
\)
~-
i7·c
' .'

,------ ------- ' I

J
'
I

I
Taxpayer pays the
assessment
I
I
I
I I
I I

'--------------~
I

If the decision is in If duly authorized

, favor of the taxpayer, representative If CI.R denied
If there is inaction by CIR
assessment is denied. protest protest (FDDA)
·. or authorized
dismissed. (FDDA) representative within 180
days

, ,,.-- -- - ------ ' \ I, ---- ----- ' I , ,,,---- ---- .... , ., ---- ... ,---- ---- ....
I Appeal to the '
Administrative
appeal to CIR
I
I
I
CTAwithin
I
I
I
I
I
I
Motion for
reconsideration I I
\ I
I I Appeal to the
CTA Within 30
' I
I, I
I.
Wait for the 'II
30 days ·
- I
I
within 30 dc1ys
Note: This will toll I
I I
I
I
I
with the CIR I I
days
I I
I I
decision of
the CIR/
I
I
Note: This will I I I I

--------- ,
I I I I I I Note: For I
I the prescriptive I , I not toll the 30- I I I l authorized I
period to appeal to ' day prescriptive ! I inaction after the
____ ,
I I I I representative I
I
___________
I I I \
, the CTA. ,,, expiration of the I , ___ - -
period to appeal I I
,,--- --------
I
I
__ _______
I I I
I
.... to the CTA. ., 180-day period
Note: ' ,' I
', _·7 -- - - -
___ ., I
I I
I .If denied, Appeal
to the CTA within
'I
I
I
- - - - - - - - - Taxpayer's Remedies I 30 days from
I
I
Government Remedies I
receipt of such. I
I I

- -- - - -- - -- .,
\ c1Ar.isinn I
....
 MEM:0,Rv Alo
SM 8eda College of l8w - ROCT Bat Center

------------, PROCEDURE FOR DISTRAINT AND LEVY

Delinquent taxpayer fails to .____..

NIRC
If the ?elinquent tax is more tha.n ~1 M, CIR seizes suffic.ient personal property
to satisfy the tax, charge, and expenses of seizure (NIRC. Sec. 207(A)J .
pay tax on time. , --..

- If the delinquent tax is not more than ~1M , Revenue District Officer seizes
sufficient personal property to satisfy the tax, charges, and expenses of.seizure
If the bid is not equal to the
amount of tax or very much Report on distraint shall, within 1O days from receipt of warrant be submitted to
less than the fair market RDO and Revenue Regional Director provided· that the Commissioner has the
value of goods distrained, power to lift such order (NIRC, Sec. 207(A)) . _
the CIR may purchase
property for the National
Government. The property The distraining officer accounts for the goods distrained (NIRC, Sec. 208) .
may be resold and the net
RDO posts notice _in at least two (2) public places in the municipality/ city where
proceeds shall be remitted i.--
the distraint is made. One place of posting ·must be at the mayor's office. Time
to the National Treasury as
of sale shall not be less than twe_nty (20) d~ys after the notice (NIRC, Sec. 209).
internal revenue (N/RC,
Sec. 212) . Goods shall be restored to owner if charges are paid (NIRC, Sec. 210) .
If the bid is just right, the -Otherwise, officer conducts public auction.
officer sells the goods to the
highest bidder for cash or,
with the CIR's approval, Excess proceeds over the entire claim shall be returned to the owner. No charge
through commodity/ stock shall be imposed for tJ,e services of the officer (NIRC, Sec. ·209) .
exchanges (NIRC, Sec. i----.
2091. . Within two (2) days after sale, officer shall report to CIR (NIRC, Sec. 211) . Within
five (5) days after sale:·!=listraining office( shall enter return of proceedings in the
Internal revenue officer, record of Revenue C.ollectio_n Officer,_1300, and Revenue Regional Di~ector
designated by the CIR, shall (NIRC, Sec. 213). ,y , : \..i .., . ':
•

prepare a certificate with the

force of a nationwide legal
execution (NIRC, Sec. 207(8)).
Levy shall be effected by_'writing
upon said certificate
description of the property. :
Notice pf the levy shall be
served upon the Register of
Deeds of LGU where the
property is located and upon the
owner (N/RC, Sec. 207(8)).
Within 10 days from receipt of
warrant, .report must be
submitted to the Commissioner
or his repres·entative, the
Commissioner or his authorized
representative may· lift the
warrants (NIRC, Sec. 207(8)).
Real pr~perty may b~ levied on before, i imultaneously, or after ttie distraint of
a !+- personal property (NIRC, Sec. 20_ 7 (f!)) . . \
. . (: . ... .
Within ten (10) days ;after receipt pf the \'9'.arra _1; levying officer shaH report to
the .CIR who shall have ttie authority_Jo lift {tie warrant of levy (NIRC, Sec.
207(8)). :~~·
Within twenty (20) dayi'after.levy, officer shall post notice at the main entrance
of the municipality/city t,alf and -in a public place in the barrio/distrjct where the
reai estate fies for ~t least 30 days and publish it once a week for 3 weeks.
Owner may prevent sale by paying all charge (NIRC, Sec. 213).
-
Sale shall be held at the main entrance uf the municipality/ city hall~ or on the
•premises of the property (NIRC, Sec. 213).
I

If there is a bidder and the highest bid is sufficient, excess of

ff there is no bidder or the highest bid is
.proceeds of sale over claim and cost of sale shall. be turned over
insufficient the officer conducting sale shall
to the owner. Within five (5) days after sale, levying officer shall_
forfeit the property to the government. Withir:i
enter return of the proceedings upon the re90rds of the RCO,
two (2) days, he shall make a return of the
RDO , R.R.D (NIRC, Sec. 213) . Within one (1) year from sale,
forfeiture. The Registrar of Deeds shall transfer
owner may redeem by paying to RDO amount of the taxes,
title to the government without need of a c_o ~rt penalties, and interest from date of delinquency to th~ date of
order, upon registration or forfeiture. • Within sale and 15% per annum interest on the purchase price from
one (1) year from forfeiture , , taxpayer may the date of purchase to date of redemption . Owner shall_ not be
redeem said property by paying full amount of deprived of P,ossession and shall be entitled to the fruits until one
the taxes and charges (NIRC, Sec. 215) . CIR (1) year expires (NIRC, Sec. 214) .
may, after twenty (20) day notice, sell prope~
at public auction or at a private sale w 1th .
approval of SOF. Proceeds shall be deposited Levy and distraint may be repeated until the full amount due and
with the National Treasury (N/RC, Sec. 216). all expenses are collected (NIRC, Sec. 217). .
 REMEDIES
366 . Taxation Law

TABLE 5 - PERIOD OF REFUND

Provincial or city
Commissioner of Infernal treasurer (LGC, Sec.
Revenue (NIRC , Sec.229) 253)
Exception: VAT
BIR Office (Large Taxpayers
Service (LTS), Revenue District ·
Office (RDO)) having jurisdiction
over the principal place of
business of the taxpayer. Claims
for input tax _refund of direct
exporters shall be exclusively
filed with the VAT Credit Audit
Division (VCAD) (R.R. No. 13-18,
Sec. 4.112-1 (c)).

Within two (2) years after . the Within two (2) years from the date of Within two (2) years
payment of the tax. · - payment of the tax, fee , or charge , from the date the
or from the date the taxpayer is taxpayer is entitled to
Exception: Excess inpit VAT entitled {O! - relu~d or credit (LGC, such reduction or
2 years from the , close of · the Sec. 19!3) · adjustment ·
taxable quarter ythen tt:,e sale
was made by the person legally
liable to pay the output V f-,T .- - - -
~· .
Note: Only applies to any- VAT-
registered person, whose sales
are zero-rated Qf effectively.zero-
rated (Sec. 112 A,' NIF?C).
.
' ...,·
. ( l •
The NIRC does not expresslR ,LGC does not expressly provide a Within sixty (60)
provide for a ·period within whic §_~cl ficperib~ within which the local days from receipt of
to decide for tax refund cases . .:.!:_ ·treijsurer )nust+decide the written the written claim for
• •

Exception: Excess input

I 'r I

,'f/
• - --bl~im •.!for re~u~d :Or -,.,Gredit.

the efored~ossibJe for a taxpayer to

90 ~ay~ from_ the filing o!_the su Jlli 1 a.n'~ad~ lstrative claim for
It is, refund

apphcat1on/cla1m for refu_nd Up to efunct._ve . arly in the two-year

the release of the payment of the period and initiate the judicial claim
VAT refund (R.R. No. 26-18) already near the end of such two-
year period due to an extended
inaction by the local treasurer. (City
of Manila v. Cosmos Bottling
Corporation, G.R. No. 196681 .
June 27, 2018.)

If the CIR takes time in
deciding the claim and the
period of 2 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 (INGLES,
· Tax Made Less Taxing: A
The taxpayer shall have thirty (30)Appeal to the .LBAA
days from the ·receipt of the denial
within sixty (-60) days
of or inaction on the letter-protest or
from receipt of the
claim, ~ ot any time later, even iflocal treasurer's
within two (2) years from the date of
denial or the
payment. • ·
expiration of the 60-
day . period (LGC,
REASON: An assessment was Secs. 226 and 253)
made and, if not appealed in court
within 30 days, it becomes
 \ I

MEK-0-RY AID
S#I 8eda U ~ College of Law - ROCT Bar Operatldne Center
367 .
.)

Reviewer with Codals and

conclusive al")d unappealable (City Adverse decision of
Cases (2018) , p. 469); or
of Manila v. Cosmos Bottling the LBAA may be
If the claim is denied by the
Corporation, G.R. No. 196681. appealed to the
CIR within the 2-year period , June 27, 2018) . CBAA (LGC, Sec.
the · taxpayer has 30 days
229(c)) . ,,_ ·
from receipt of denial to
appeal to the CTA (R.A. No.
1125, Sec. 11) .

Exception : Excess input VAT

Appeal'to the CTA:
1 . within 30 days from the
receipt of the denial (R.R.
No. 13-18, Se9. 4. 112-1 (d);
or
within 30 days. after the
expiration of the 90-day
period without any action on
the part of the _C IR (BOADO,
supra at p. 255; Sec. 7(a)(2),
R.A. No. 1125, as amended
by R.'Ji.. Nos. 3457, 9282 and
9503) .

Note: The taxpayer a/ways has

30 days from the decision of the
CIR or from the lapse of the 120-
day period even after the lapse of
2 years from the taxable quarter
where the sales were ma~e- (CIR
v. Mindanao Geotherm~I II
Partnership, G.R. No. 19'1 498,
January 15, 2014) .
 --..........
. .
~-
368 COURT OF TAX APPEALS
· · . Taxation Law

ICOURT OF TAX APPEALS I 5. To promulgate Rules and regulations for the

conduct of its business (R.A. No. 1125 as
· amended, Sec. 8);
6. To require froduction of papers or documents
by subpoena. duces tecum {R.A. No. ' 1125, as
amended, Sec.. 10) ; .
SALIENT FEATURES OF THE COURT OF
7. To punish Contempt' (R.A. No. 1125, as
TAX APPEALS ame.flded, -Sec. 10); .
1. The Court of Tax Appeals (CTA) is a regular 8. To §.ummon witnesses by subpoena (R.A. No.
court vested with .exclusive appellate jurisdiction 1125, ·as amended, Sec.· 1O); .
over. those cases arising out of the NIRC and 9. To administer Oaths (R_.A. No. 1125, as
CMT A (Commissioner of Internal Revenue v. amended, Sec. 10); and
_Court of Appeals, G.R. No. 104151, March 10, 10. To assess Damages against appellant if appeal
1995). to CTA is found to be frivolous or dilatbry (R.A.
2. CTA is a highly specialized body created for the No. 1125, as amended, Sec.16).
purpose of reviewing tax cases (Commissioner
of Internal Revenue v. General Foods (PHL),
Inc., G.R. No. 143672, Aprif 24, 2003).
COMPOSITION AND ORGANIZATION OF
3. A Coury of special or limited jurisdiction and as MEMBERS OF CTA . .
such, it can only take cogni~ance of such 1. Consists of a Presiding Justice and 8 Associate
matters as are clearly within its jurisdiction (Ker •·· · · • Justices
& Co., Ltd. v. Court of Tax Appeals, G~R: NP- L- · a. • Each whom appointed by the President; and
12396, January 31 , 1962). . · b., Upon nomination _by the J1Jdicial and Bar
4. The proceedings are judicial in i:,atu~e although Council (R.A. No. 9503, Se°c.1). ·
the CTA is not bound by the tech~ical rules of
•evidence (R.A. No. 1125, ~s BIJlen<jed, ,Sec. 8). 2. 1t·may sit.~n bane or in 3 Divisions, each Division
5. Procedure is govern~d bythe Revi sed:Rules of composed of 3 Justices (R.A. No. 9503, Sec.1).
1 ' •

the Court of Tax Appeals (RRCTA) - 'A.M. No . .

05-11-07-CTA which topk-etfect on December · -·- 3.- The-iPresiding Justice and .the 2 most Senior
1.5, 2005. The Rules· of cburt apply only Assqciate Justices :Shall serve as Chairpersons
~uppletorily. 1 · , of t~e 3 Divisio~~ (R.A. No. 9503, Sec.1).

POWERS OF THE ~TA: \ 1 (SE~O-RPC- . I

.. : QUORUM~REQUIREMENT
SODa) . ' ,-, '-. I· t

1. To §.uspend the collection of the tax pendJrig.

appeal (RRCTA, Rule 10, Sec'. 1); , . /..._. · ··: ..
2. To receive gvidence (RRCTA1.. Rule 12,.Sec'. 2_t r, 1 •

3. To render Decisions on cases brought-before r -- 2 Justices

(RRCTA, Rule 14, Sec. 1); J : , .,.. . j R.f( No. 9503, Sec. 2)
4. To issue Order authorizing distraint of personal • t ·_ .. \ ..
property and levy of real property (R.'A. ·No. , .., _-_voTE REQUIREMENT
92~2. Sec. 13); En bane: The affirmative votes of five (5) members
of t~e. court en bane shall be necessary to reverse.a
dec1s1on of a div_ision; arid only a simple majority pf

DOHN ALFRED E. _AQUILIZAN, Over-All Chairperson I NICHOLE VANE B. _SANT?S, Chairperson for Academics I RONALYN A.
GACULA, Ad Hoc Director for Bar Matters I MARIELLE CIELO B. BELG IRA, Vice Chairperson for Finance I JUAN INIGO s. MIGUEL,
Vice Clwirperson for Operations I ALISSA MARIE D.C. DELOS S~OS. Vice Chairperson for Audit I CORINA R. TAMPUS, Vice
Chairperson for Secretariat I ARVY KEITH N. CHUNG, Vice Chairperson for l ogistics I ANTONIO JUN-JUN c. MANALIGOD IV, Vice
Chairperson for Membership I JORDAN N. CHAVEZ, Vice Chairperson for Electronic Data Processing · ·
SUBJECT COMMITTEE .
JOSE LORENZO C. DAVE, Sub1ect Chair I LOUISE MARIB C. CONTACTO, Assistant Subject Chair I KATRYNA ANNE R. TOMENIO,
Subject Electronic Data Processing I SUBJECT HEADS: MARY GRACE A. GRANIL, General Principles I SHEENA .ROSETTE DG.
DOMtNGO. Administration, Enforcement, Remedies and Court of Tax Appeals IJERRLITO P. CUSTODIO. Local and Real'Property Taxation
I STEVIE R. ARCILLA and P~TRICK MARRION Y. MELENDRES, In come Taxation I MARY ANN C. TAN, Transfer Taxi MARILYN
H . MALALUAN. Value-Added Tax I . . . .
s•J=i)Nitl¾l~,:14,t
KATRINA MICHAELA D. DELFIN, ARMANT. PAEZ, ANDREI ANNE U. PALOMAR, MARY KATHERINE A. SIMEON,JAMf.S
r
KARL DANIEL B. ALVARO, ARIESA JANE V. DOMINGO, JOSEPHINE MARIE T. SALAZAR, YNA MAREI AGUILAR, NERY
ROYCE T . LAZARO, JOHN KENNETH Q. CRISOLOGO, LOIS DANIELLE P. DIMAANO, ANDRELA M. AQUINO, ANNA LOREN
DC MANUE L and GILBERT OWENS. APILADO
. a~$ili C
A NICASIO C. CABANEIRO, CPA, Atty. DANTE 0 . DELA CRUZ, CPA, JusticeJAPAR B. DIMAAMPAO, Atty. EFREN
tty. VINCENT M. DIZON, CPA . _
 ME~O~YAID
Sen Seda Umoersily College of law - RGCT Bat Operations Center
the justices present is needed to promulgate
resolution or decision in all other cases (R.A. No.
9503, Sec. 2) .
NOTE: The Court shall sit en bane in the exercise of
its administrative, ceremonial and non-adjudicative
functions (R_RCTA, Rule 2, Sec. 2) .
Division: Concu_rrence of 2 members of Division
shall be necessary for the rendition of decision or
resolution in Division level (R.A. No. 9503, Sec. 2) .
Majority of justices
present
Concurrence
members
Where the necessary majority vote cannot be had ,
the petition shali be dismissed; in appealed cases, ·
the ·judgment or order appealed from shall stand
affirmed; and on all incidental matters, the petition or
motion shal~be denied (RRCTA, Rule 2, Sec. ·3) .
. When The Required Quorum Cannot Be .
Constitut'ed
When the required quorum cannot be constituted
due to any vacancy, disqualification, inhibi~ion ,
disability, or any other lawful cause, the Presiding
Justice shall designate any Justice of other
Divisions to sit temporarily therein (R.A. N_o. 9503,
Sec. 2). · The law creating the CTA specifically provides that
POWER TO RECEIVE EVIDENCE
The CTA may receive evidence in the following
cases: (OG)
1. In all cases falling within the Original jurisdiction
of the Court in Division pursuant to Sec. 3, Ru!e
4 of RRCTA (RRCTA, Rule 12, Sec. 2) ; and
2. In appeals in both civil and criminal cases where
the Court .§rants a new trial pursuant to Sec. 2,
Rule 53 and Sec. 12, Rule 124 of the Rules of
Court (RRCTA, Rule .12: Sec. 2).
NOTE: The power of the Court of Tax -Appeals to
~xercise its appellate jurisdiction does not preclude
~t.from considering evidence that was not presented
1n t~e administrative claim 'in the Bureau of Internal
Revenue. The Court of Tax Appeals is a court of
record, and it may receive new and additional
evidence not presented at the ;,:dminis_trative
level. Parties are to litigate and prove their case
anew before the court and formally offer . their
a evidence (Philippine Airlines, Inc. vs. Commissioner
of Internal Revenue, G.R. No. 206079-80, January
17, 2018) .
Evidence can be taken by a:
1. Justice of the CTA
It may be made motu proprio or upon proper
motion, when: .
a. The determination of a question of fact
arises at any stage of the proceedings ; or
b. The taking c;,f an account_is necessary; or
c. The determination of an issue of fact
requires the examination of a long account
(RRCTA , Rule 12, Sec. 3) .•
. Upon ·completion of the hearing the Justice
concerned shall submit to the Court a written
report thereon, · stating .. the findings and
conclusion (RRCTA, Rule ·12! Sec. 3).
2. Court official
of 2 a. Clerk of Court;
b. Division Clerk of Court;
c. Their assistants who are members of the
Philippine Bar; and
d. Coi:!rf attorney (RRCTA, Rule 12, Sec. 3).
."'?> ... 't
PURPOSE: .Making comparison ·,with the original
and identificc;1fibn by witnesses of the received
document~ry ~v"r~ence (RRCTA, Rule 12, Sec. 3) .
f • "\ .
It applies· only in ciefault or ex parte or where the
- : parties:agr~;in writing. The court official shall have
' no powe( to rule ,on objections (RRCTA, Rule 12,
Sec. 3) .. - w -- ·
~CJ~ shall NOT be Governed by the Technical
.. .Rules _of.l:vidence ·
proceeding before it shall not be governe~ by the
technical rules of evidence. The paramount
consideration remains the ascertainment of truth.
Verily, the quest for orderly presentation of issues is
not an absolute. It should not bar courts from
considering undisputed facts to arrive at a just
determination of controversy (5 DIMAAMPAO, Tax
Principles and Remedies, (2018); p: 274 [hereinafter
DIMAAMPAO]).
CTA is bound by the Rules on ·oocumentary
Evidence
Under Sec. 8 of R.A 1 25, the CT A is described as
a court of record. As cases filed before it is litigated
de novo, party litigants should prove every minute
aspect of their cases (DIMAAMPAO, supra at 275) .
Indubitably, no evidentiary value cari be given the
pieces of ' evidence submitted by the BIR, not
formally offered, as the rules on documentary
evidence require that these documents must be

formally offered before the CTA (Dizon v. Court of
Tax Appeals, G.R. No. 140944, April 30, 2008) .
JURISDICTION .OF THE
COURT OF TAX APPEALS
The CT A has jurisdiction over both civil and criminal
aspects of a tax case. The concentration of tax
cases in one court will enhance the disposition of
. these cases since it will take them out of the
jurisdiction of regular courts which, admittedly, do
not have ·expertise in . the field of taxation
(DIMAAMPAO, supra at 274).
The law intends the CTA . to have exclusive
jurisdiction to resolve all tax problems. With resped ,
to administrative issuances, these are issued by the •
Commissioner under its power to male-ruling·~ or
opinions in connection with the implem._e11tation of ·
the provisions of internal revenue 1• ws.; Tax rulings _.
are official positions of the Bureau on inquiries of
taxpayers. Hence, the determinatid of the validity of
these issuances clearly falls within: the exclusive
· appellate jurisdiction of the Cour:t of Tax Appeals,
subject to prior review by the Sec,-etary of Finance
' (Commissioner of Internal Revenue vs. Court of Tax
Appeals and Petron .Corpora tion, G.R. No 207843, • _
February 14, 2018).
1
·
' ;
\ ·· · .. ·- __
• :_ , ; ,
7 __ -- .· ·
The Court explicitly ruled tliat the CTA 'rpay,Jake- 1
cognizance of cases directly challenging · tlie
constitutionality or validity of a tax law, regulation'br __ ,_..,-___-;, _
administrative issuance (such as revenue orders-..!.!._L: .
revenue memorandum circula , a , ruling~) - · · . · .
(Banco De Oro v. Republic, G.R. o.-- 1'98756,
August 16, 2016) . .1
The CTA, by constitutional mandate, is
with jurisdiction to issue writs of certiorari in
cases falling within its exclusive jurisdiction
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 its exclusive appellate
jurisdiction. It follows that the CTA, by constitutional
mandate, is vested with jurisdiction to issue writs of
certiorari in these cases (City of Manila v. Grecia-
Cuerdo, G.R. No. 175723 February 4, 2014).
The power to issue writs of prohibition and injunction
is supplementary to its appellate jurisdiction
of
(Commissioner Internal Revenue v. Yuseco, G.R.
No. L-12518, October 28, 1961).
COURT OF TAX APPEALS
·- . Taxation Law
. JURISDICTION OF CTA OYER CIVIL
CASES
1. Exclusive Original Jurisdiction of CTA
Division
Those involving final ar:td . executory
assessments for taxes, fees, charges and
penalties, where the principal amount of taxes
and fees, exclusive ·of charges and penalties,
claimed is one million pesos ·(P1 ,000,000) or
more (RRCTA, Rule 4, Sec. 3(c)(1)).
NOTE: Collection cases where the principal
amount of taxes and fees, exclusive of charges
and penalties claimed is less than one million
pesos (P1 ,000,000) shall be tried by the proper
MTC, · MeTC, o"r RTC, depending on their
respective jurisdiction. The jurisdiction of the
CTA in these cases shall be appellate (R.A. No.
9282, Sec. 7(c)(1)) .
: ;2. ~· Ex~lusive Appellate Jurisdiction of CTA
· Division (RRCTA, Rule 4, Secs. 3(a), 3(b)(2)
. and 3(c)(2)) : (DIReCSS)
... ' . ...
a. Q.ecisions of the CIR involving: (ORO)
i. Q.isputed assessments;
In cases of undisputed assessments,
being an action for the collection of sum
t, .. _of mo·ney, ' the · CTA has exclusive
•
origf~~I juf isdiction over undispute~
• ·-, .r as~ssro_!3nts when the amount involved
• , ., is P1 millipn or more. (RRCTA, Rule 4, .
i .:, Sec. 3(c)(1)). ·
,·'
--' . ii. i. Befu~ds of internal revenue taxes, fees
'r' OF other charges, penalties in relation
• Jhereto; or .
,
iii:- Qther matters arising under the NIRC,
or other laws administered by the BIR.
The term "other matters" is limited only
by the qualifying phrase that follows it.
The appellate jurisdiction of the CTA
Division' is not limited to cases which
involve decisions of the CIR on matters ·
relating to assessments or refunds. It
covers other cases that arise out of the
NIRC or related laws administered by
the BIR. The issue of prescription of the
BIR's right to collect taxes may be
considered as covered by the ter.m
"other matters" over which the CTA has
appellate jurisdiction (Commissioner of
Internal Revenue v. Hambrecht & Quist
PHL; Inc., G.R. No. 169225, November
17, 2010).
 m \ /
MEM:Q,RY Al D·
San Seda l..nYeRlt)' Colege of Law - RGCT Be, ()pe<atlons Center
b. inaction by the CIR involving (DROW)
i. Disputed assessments;
ii. Refunds of internal revenue taxes, fees
or other charges and penalties imposed
thereto;
iii. Qther matters arising under NIRC or
other laws administered by the BIR,
Where the NIRC provides· a specific
period for action (RRCTA, Ruie 4, Sec.
3(a)(2)).
NOTE: The inaction by the CIR within
the 180-day period uhder Sec. 228 of
the NIRC is deemed a denial for
purposes of allowing the taxpayer to
appeal with the CTA but it dqes not
necessarily constitute the CIR's formal
decision (RRCTA, Rule 4, Sec. 3(a)(2)) .
In case the CIR fails to act on the
disputed assessment within the 180-day
period from date of submission of
documents, a taxpayer can either:
1.) File a petition for review with the
CTA within 30 days after the ·
expiration of the 180-day period
(NIRC, Sec. 228); or _
2.) Await the final decision of _the CIR
on the disputed assessments
beyond the 180-day period; the
taxpayer may appeal such final
decision to the CTA (RRCTA , Rule
·4, Sec. 3(a)(2)).
Such taxpayer may appeal to the
CTA by petition for review filed
within 30 days after receipt of a
copy of such decision or ruling! or
expiration of the period fixed by law
for the Commissioner of Internal
Revenue to act on the disputed
assessments (RRCTA, Rule 8, Sec.
3(a)).
NOTE: These options are mutually
exclusive, and resort to one bars
the application of the other
(INGLES, Tax Made Less Taxing: A
Reviewer with Coda ls and Cases, p.
479 {hereinafter ING LES,
Reviewer]).
c. Decisions Resolutions or Orders of the
RTC in Local Tax Cases decided ·or
resolved by them in the,gxercise of their
Original Jurisdiction (RRCTA. Rule 4,
Sec. 3(a)(3)) .
The term "local taxes" in the aforementioned
provision should be considered in its general
371
and comprehensive sense, whic~ e~brac~~
real property tax assessments, in line w
the precept "what. is generally spoken sh_all
be generally understood" (Salva v. Magptle,
· G.R. No. 2204'40, November 8, 2017) .
The CTA, sitting as Division , has jurisdi~tion
to review by appeal -the decisions, rulings,
and resolutions of the RTC over local tax
cases which ·includes real property taxes
(Natio~al Power Corp. v. Municipal
Government of Navotas, G.R. No. 192300,
November 24, 2014).
Before the case can be raised on appeal to
the CTA, the action before the RTC must be
in the 'nature of a tax case. If the case is
essentially one for recovery of ownership
and possession of the property, with
damages, which is not anchored on a tax
issue, the RTC's ruling could not be
characterized as a local tax case over which
the CTA could have properly assum_ed
jurisdiction on appeal {Ignacio v. Office of
City Treasurer of Quezon City, G.R. No.
2216.20, September 11, 2017).
NOTE: With the passage of R.A. No. 9282,
the authority to exercise either original .or
appellate jurisdiction over local tax cases
depended on the amount of the claim (China
Banking Corp. v. City Treasurer of Manila,
G.R. N9. 204117, July 1, 2015).
d. Decisio.ns of the fommissioner of
Customs involving (DuSe-FO)
f" Liability for customs Duties, fees or
other money charges; ·
ii. Seizures, detention or release of other
property affected; ·
iii. fines , forfeitures, or other penalties in
relation thereto; or
iv. Other matters arising under the customs
iaw or other laws administered 'by the
BOC (RRCTA, Rule 4, Sec. 3(a)(4)) .
e. Decisions ofthe ~ecretary of Finance
On Customs cases elevated for automatic
review from decisions of the Commissioner
of Customs which are adverse to the ·
Government under the CMTA; (RRCTA ,
Rule 4, Sec . .3(a)(5)).
REASON AND PURPOSE OF
AUTOMATIC REVIEW: To protect the
Government against corrupt and conniving
customs collector. The owner of the goods
cannot be expected to appeal the collector's
decision when it is favorable to him.
(DIMAAMPAO, supra at 277) .
 COURT OF TAX·APPEALS
Taxation Law

Instances where decisions . .of the
Secretary· of Finance may be the subject
of an appeal to the CTA in Division
i. Decisions of the Secretary of Finance
in forfeiture cases automatically
elevated for review (CMTA, Sec. 1127);
and,
ii. Decisions of the Secretary of Finance in
other cases automatically elevated for
review where the COC has not rendered
a decision within the prescribed period
or when any decision rendered by the
·commissioner is adverse to the
government (CMTA, Sec. 1_ 128).
i. Local tax cases (RRCTA, Rule 4, Sec.
2(b)); and, · . .
ii. Tax collection cases (RRCTA, Rule 4
Sec. 2(c)) '
NOTE: In local tax collection cases, the
amount of the claim determines ~here the
case should be flied. When the claim do~s
not e'Xceed ~300, 000 (or ~400, 000 in
Metro Manila), the case should be filed to ·
MTC, not the RTC. The RTC exercises
appellate jurisdiction in those cases (China
Banking Corporation v. City ·Treasu!er of
- Manila, G.R. No. 204117, July 1, 2_ 0 .15).

NOTE: The decision of the Secretary of The CTA has jurisdiction to determine if the
Finance on • disputed assessments warrant of distraint and levy issued by the
involving customs duties and taxes and BIR is · valid and to rule if the Waiver of
other matters related thereto shall be Statute of Limitations was validly effected
subject to the exclusive jurisdiction of (Philippine _Journalists, Inc. v.
the CTA (CMTA, Sec. 201). Commissioner of Internal Revenue, G.R.
,L C No. ~62852, December 16, 2004).
f. Decisions of the §.ecretarv of Trade and-. ,
Industry in the . case of ,non-agricultural c. Decislqns, Resolutions or Orders on
product, · commodity or · article. and the - - , Motions for Reconsideration or New Trial
§.ecretary of Agriculture in the case of , Court
~of the in Division in the Exercise of
agricultural product, commodity, or article, · -- ·: · its Exclusixe-Original Jurisdiction
involving dumping (~.A. No. 8752) and · Tax collection cases where the principal
countervailing duties ' (8!A. No. 8751) a na · ---:--- -- - ---- mount of. taxes and fees exclusive of
safeguard measures fR:-A. No. 8800), where, · ' hargesiand penalties claimed is one million
~ither party mar appeal _the _9-1,cision -to _. , · _; ,P,~~os (191 ,000,000)_or more is under the
impose or not to 1mpose.sa1d dµ_!!,e~. _ __ · ·_: _____ I exclusive . origi nal -jurisdiction of CTA
. \~::. '] : 'division: (R CTA, Rule 4, Sec. 3(c)(1))-
3. Exclusive Appellate Jurisdiction-Jif CTA - ' /, -(_: , ':
En Banc (RRCTA, Rule 4, Sec. 2). ,<~ ·. /_/.__ 'NOT ~: The filing of a motion for
/ :-,:,_ _ _:__ ,_:~~,,-'-' re~~sid~r~tf'o_n ~r new trial before the CTA
a. Decisions or Resolutions on M~tions ti,_r f i :-_ :-· \ \j....- <. -· l)~vis1on 1s an indispensable requirement for
Reconsideration _ or New Tria ,of the- · --.,,_....,. . ,_ fih~g _an 1 Ppeal before the CTA En t;3anc.
Court in Division In the Exercise of its -.. ' . _ Failure to file such motion for
Exclusive Appellate Jurisdiction · over: ,,. ' - - 't · reconsi_deration or new trial is cause for
(ALT) · . " 1-,. - dismis·sal of the appeal before the CTA En
i. Cases arising from Administrative Banc (City of Manila v. • Cosmos Bottling
agencies - BIR, BOC, DOF, DTI, DA; - Corporation, GR, No. 196681, June 27,
ii. Local tax cases decided by the RTCs in 2018).
the exercise of ttieir original jurisdiction;
and, The same is true in the ca!>e of arr-amended
iii. !ax collection cases decided by the decision. Section 3, Rule 14 of RRCTA
RTCs in the exercise of their original defi~e~ an amended decision as "any action
jurisdiction involving final and executory modifying _o r reversing a decision of the
assessments for taxes, fees, charges, ~ourt en bane or in Division." As explained ·
and pehalties, where the principal in CE Luzon Geothermal Power Company, .
amount of taxes and penalties cl~imed . Inc. v. Commissioner of Internal Revenue,
is less than one million pesos an amended decision is a different decision,
(191,000,000) (RRCTA, Rule 4, Sec. _ and th~s, \s a proper subject 'of a motion for
2(a)) . reconsideration (Asiatrust Development
Bank, Inc. v. Commissioner of Internal
b. Decisions, Resolutions or Orders of ,he Revenue, G.R.No.20153Q,April19, 201n.
- RTCs dec;:ided or resolved by them in the
Exercise of their Appellate Jurisdiction d. Decisions of the CBAA ·in: the Exercise of
over: its Appellate Jurisdiction _ over cases
 \ I
MEM-O~Y AID _.
san Seda University College of law - RGCT Bar Operations Cef1ter
involving the assessment and taxation of
real property originally decided by the
provincial or city board of assessment
appeals (RRCTA , Rule 4, Sec. 2(e)).
JURISDICTION OF THE CTA
CRIMINAL CASES
1. Exclusive Original Jurisdiction of CTA
Division _
Those arising from violations of the NIRC or
CMTA and other laws administered by the BIR
or BOC. where _the principal amount of taxes and
fees , exclusi~e _ of .charges and penalties,
claimed is one million pesos_ ~1,000,000) or
more (RRCTA , Rule 4, Sec. 3(b)(1)).
Regular courts shall have jurisdiction in .
. offenses or felonies where: · of the Court in Division in the Exercise of
a. - The p_ rincipal amount of taxes· and fees,
exch,1sive of charges and penalties claimed
is.less than one million pesos ~1 ,000,000);
or, . c. 'Decisions, Resolutions or Orders of the
b. No specified amount is ·claimed (R.A. No.·
1125, Sec. 7(b)(1)) .
Inclusion of Civil Action in Criminal Action
The criminal action and the corresponding civil
action for the recovery of civil liability for taxes
and penalties shall be deemed jointly instituted_
in the same proceeding. The filing of criminal
action shall necessarily carry with it the filing of
civil action . No right to reserve the filing of such
civil action separately from the crip1inal action
shall be allowed or recogni~ed (RRCT~ . Rule 9,_·
Sec. 11).
2. Exclusive Appellate Juri~diction· of CTA
Division (RRCTA, Rule 4, Secs. 3(a),
· 3(b)(2) and 3(c)(2))
a. Appeals from the Judgments,
Resolutions or Orders of the RTCs in
their Original Jurisdiction in Criminal
1
Offenses . · • CIR on the protest of the taxpayer against
T~ose offenses arising from violations of the
NIRC or CMT A and other raws administered
by the BIR or BOC, where the principal
amount of taxes and fees, exclusive of
charges and penalties, -claimed is less than -
one million pesos ~1.000,000) or where
there is no specified amount claim (RRCTA,
Rule 4, Sec. 3(b)(2)).
b. Criminal Offenses over Petitions for
Review of the Judgments, Resolutions or
Orders of the RTCs in the exercise of
their Appellate Jurisdiction ~ver tax cases
_originally decided by the MTCs or MCTCs
· 373
(R.A. No. . 1125, . as amended, · Sec.
7(b)(2)(b)) .
· 3. Exclusive Appellate Jurisdiction of CTA
En Banc (RRCTA , Rule 4, Sec. 2(f), (g) and
OVER
(h))
a. Decision~, Resolutions or Orders on
Motions for Reconsideration or New Trial
of the Court in Division in the Exercise of
its Exclusive Original Jurisdictfon over
cases involving Criminal Offenses arising
from violcttions of the NIRC or CMTA and
other laws administered by the BIR or BOC
(RRCTA , Rvle 4, Sec. 2(f)).
b. Decisions, Resolutions or Orders on
Motions for Reconsideration or New Trial
its Exclusive Appellate Jurisdiction over
Criminal Offenses mentioned in paragraph
A (RRCTA, Rule 4, Sec. 2(g)).
RTCs in the Exercise of their Appellate
Jurisdiction . over Criminal Offenses
.. . mel)tioned in paragraph A (RRCTA, Rule 4,
· '.. -~ ,& ;~\- S ~cf;~(h)) . .
• • . t;...
t~ I Ai,Pf,ALINGENERAL I
Ift; ?.(,._;? \ :··_-:·\. - .
H E CTA En Banc, NOT CA
APPEAL=-=ro T _
. -.
?' Under the modified appeal procedure, the decision
. ....:.:;of a division of the CTA may be appealed to the CTA
·,,{~-~..: Eo Banc: TIJe decision of the CTA En Banc may in
tu_rfl be directly appealed to the SC only on a
question of law DIMAAMPAO, supra at- 2-73, R.A.
-9282, Sec. 18 & 19). ·
I
SUBJECT OF APPEAL
What is appealable to the CTA are decisions of the
assessments (Commissioner of Internal Rev~ritie v.
V. Y. Domingo Jewellers, Inc., G.R. _ No. 221780,'
'March 25, 2019).
A decision is appealable when it. constitutes the final
action taken by him or his authorized deputies with
respect to the taxpayer's liability (PAES):
1: -.e.reliminary collection letters, post reporting
notices and pre-assessment notices are not
appealable, becaus~ they are not the final
decision of the Commissioner.
2. The· Action ta~en by the Com_missioner in
response to the taxpayer's protest on the
 '
COURT OF TAX APP_EALS
374 . Taxation Law

8 Wh there is a request for reeonsideration,

assessment would constitute an appealable
decision.
3. An Exchange of communication between ttthe
taxpayer and the· Commissioner, and th~ 1a er
states that his action is final, then, period for
appeal begins to run (Commissioner of Internal
Revenue v. Bank of the Philippine /~lands, G.R.
No. 134062, April 17, 2007). . . . .
4. Commissioner must -State that his dec1s1on 1s
final for period of appeal to 'run (Dy Pac & Co.,
Inc. v. Court of Tax Appeals, G.R. No. L-31369,
October 18, 1977). ·
INSTANCES WHEN DECISIONS ARE.
FINAL
1 A demand letter for tax deficiency issued and
· signed by an authorized subordinate officer with
the y.,arning that failure to -pay would result to
issuance of a warrant of distraint and levy
without further notice (Oceanic Wiceless
Network, Inc. v. Commissioner o tqtemal f
Revenue, G.R. No. 148380, Dec~mber,~, 20~p)._ '·-- ,. -, (R._R/ N(?. 12-99, Sec. 3. 1.5(6)).
2. A letter of BIR Commissione • re,te! atmg
previous demand to pay/ a l s -ss~~nt - - _ Tbe jurisdiction'· of the CTA is to review by appeal
(Commissioner of lntemaJ . R,evenue v Ayala :
Securities Corp. , G.R. No. L- 9~fJ5, N vember .1
21, 1980). ,.
3. The filing of a judicial ctio for collection.may__ · ... - appeal--1s pretriafure ·._(Commissioner of Internal
be treated by the taxpqy~ r_ as a denial of a
protest (Commissione of lnt~mal Rer.enue v:
Union Shinping, G.R. No~. L-66160,r, May 21,,
,., '( H'
· .,ssua
ennce of warrant of distraint
. and levy to
enforce collection of defic1_ency assessment is
t tamount to outright denial of the reques_t for
r!~onsideration which is appealable to -the _cTA
(2 CASASOLA, NIRC - (2013) p_. 1258
[hereinalter 2 CASASOLA]).
INSTANCES WHERE CTAWOULD HAVE
JURISDICTION EVEN IF THERE IS NO
DECISION .
1 _ If the CIR has not acted in_a tax ~efu~d case
and the two-year prescript,~e period 1s about to
expire (RRCTA, Rule 8, Sec. 3(a)). .
2. If the Commissioner of C~_stot1s i has fun~
rendered a decision on an app ,ca ,on or ~e n
of internal revenue taxes and the suit is about to
prescribe (RRC TA, Rufe 4, Sec. 3(a)(4)).
3. Where the CIR has not acted upon abpr~te~ted
• assessment within 180 days from.su m1ss1on
.· ~- , of:an relevant documents supporting the protest
_
.. ;. / " • .
decisions of the _ CIR on disputed assessments.
When a taxp_ayr r ,do s not pr?test an assessme~t
· • and ap~als ' the. as~essment itself to the CTA, his
. Rev,enuq v. Villa, · G:.R~ No. L-23988; January 2,
. · 1968). / -' ,• ..;
: ; ,
- •f ., I

1990). ,---: . ·,.,.,.. _' -· - - r --T-he ~utbority ~o,..l)'lake tax assessments may be
4. A For'!1al Letter of De a~a with A~~~ssment· , ! ,_Qel g?J~_1; fo s~bordinate officers. Sai~ assessment
(FAN) issued by the BIR o_ a_ taxp_ayer t-Jllt~ou~h
7
! . h§lo/the same force a~d effect as that- ,$sued by the_
ordinarily must first be ad m1strat1vely prote~t~d i CQ,mmissioner himself, if not reviewed or revised by
by the latter, but the language and the .{eno~-:-- --the latter. ' Hence, the same would have been a
thereof indicate that the same is the-:- fir1_~1 ._:; . \ prope sobject _for,.appeal to the Court of Tax Appeals
decision of the CIR on the matter...(Al1e'd-Bc!fking~· .: .- (Qceanic V(lfeless Network, Inc. v. Commissioner of
Corp. v. Commissioner of lntem I Revl?ue, . ,/ntern_al Revtinue, G.R. No. 148380, December 9,
G.R. No. 175097, February 5, 2010) . ' .' , 2005)'. __ -~ -
s. Tenor of finality rule: Where several ·requests._ • __ ._ .-
for ·reconsideration are filed with · the
Commissioner, the appealable decision is that . NEW ISSUES CANNOT BE RAISED FOR
which affirms the disputed assessment in terms THE FIRST TIME ON APPEA~
which clearly indicate the finality of the action
GENERAL RULE: New issues cannot be raised_
taken by the Coml'T)issioner (Dy Pac & Co., Inc.
for the first time on appeal (Del Rosario v.• Bonga,
v. Court of Tax Appeals, G.R. No. L-31369,
G.R. No. 136308, January 23, 2001) .
October 18, 1977). . .
6. The Commissioner did not rule on the taxpayer's .
motion for reconsiderati9n of the assessment. It REASON: The court which is-supposed to review
was only when taxpayer received the summons would not review· but determine and ·decide for the
on the civil action for the·collection of deficiency first time, a question not raised at the administrative
forum (Commission.e r of Internal Revenue v.
income tax : that the period to appeal
Wander PHL, Inc., G.R. No. L-68375, April 15,
commenced to run (Commissioner of Internal 1988).
Revenue v. Union Shipping Corp., G.R. No. L-
66160, May 21, 1990). _ EXCEPTIONS:
7. · Preliminary collection letter may serve as the
1. Defense of Prescription
final assessment notice (Columbia Pictures,
Prescription is a matter of defense; hence, the
Inc., v. Court of Appeals, G.R. No. 110318,
burden is on the taxp~yer to prove that the full
August 28, 1996).
 \ I
MEM-Q~Y AID
San Bede Collage of Law - RGCT Bat Operet1ona Center
period limit~~ion has ex~ired , and this requires
him to pos1t1vely establish the date when the
period started running, and when the same was
fully accomplished (Quero/ v. Collector of
Jntemal Revenue, G.R. No. L-16705, October
30, 1962).
2. Errors of administrative officials
REASON: It is axiomatic that the Government
cannot and must not be estopped particularly in
matters involving taxes. Taxes are the lifeblood
of the nation through which the government
agencies continue to operate and with which the
State effects its functions for the welfare of its
constituents. The errors of certain administrative
officers should never be allowed to jeopardize
the Government's financial position
(Commissioner of Internal Revenue v. Court of
Appeals, G.R. No. 106611, July 24, 1994) .
The Government cannot raise the issue of
incapacity for the first time on appeal
While it is axiomatic that the ·Government can never
be in estoppel for tax purposes, it was held by the
SC that the BIR should not be allowed to defeat c;in ·
otherwise valid claim for refund by raising the
question of incapacity for the first time on appeal
before the ·sc, where it was never raised in the
administrative level and neither was it raised before
the CTA. In the absence of explicit" statutory
provisions to the contrary, the Government must
follow the same rules of procedure which bind
private parties (Commissioner of Internal Revenue
v. Procter and Gamble, G.R. No. L-66838,
December 2, 1991, Re·s o/ution).
BURDEN OF TAXPAYERS ON APPEAL
TOCTA
It is the burden of taxpayers on appeal to CTA to
prove by a full disclosure of data on his possession
that: (WPC)
1. The tax assessment is Wrong;
2. The tax assessme11t is merely a fresumption
and not based on actual facts ; and
3. The correct ~amputation of ![ability, if any (Sy
Pov. Court of Tax Appeals, G.R. No. 81446,
August 18, 1988) .
The burden of proof is on the taxpayer contesting the
validity or correctness of the assessment to prove
not only that the one who rendered the assailed
decision is wrong but that the taxpayer is right.
Proving that the assessment i$ wrong is not enough
(H. Tambunting Pawnshop, Inc. v. Commissioner of
Internal Revenue, c. T.A. Case No. 6238, October 8,
2004).
However, although assessments by tax e~ami~ers
are presumed correct and made in good faith, pmna
facie correctness of a tax · assessment does not
375
apply upon proof that an assessment is utterly
without foundation, meaning that it is arbitrarily and
capriciously made (Keansburg Marketing Corp. vs._
Commissioner of Internal Revenue,· CTA Case No.
9076, Jan. 5, 201 Bf.
REASONS:
1. The tax court could settle nothing, and
2. The way is open for s·ubsequent assessments
and appeals. The roots-of controversy must be
cut (Sy Po v. Court of Appeals, G.R. No. L-
81446, August 18, 1988) .
WITHDRAWAL OF AN APPEAL
RENDERS THE ASSAILED DECISION
FINAL AND EXECUTORY
By withdrawing the appeal, petitioner is deemed to
have accepted the decision of the CT A. And since ·
the CT A had already denied taxpayer's request for
the issuance of tax credit certificate for insufficiency
of evidence, it may no longer be included in
taxpayer's future claims. Petitioner cannot be
allowed to circu_m vent the denial of its request for tax
credit by abandoning its appeal and fiHng a new
claim (Central Luzon Drug Corp. v. Commissioner of
Internal Revenue, G.R. No .181371 , March 2, 2011).
JURISDICTION OF CTA OVER A
SPECIAL CIVIL ACTION FOR
CERTIORARI ASSAILING AN
INTERLOCUTORY ORDER
. While there is. no express grant of such power with
respect to the CTA , the Constitution provides that
judicial power shall be vested in one SC and in such
lower courts as may be _establ_ished by law and that
Judic;::ial· power includes the duty to settle actual
controversies 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.
Thus, the CTA, by constitutional mandate, is vested
with jarisdiction to issue writs of certiorari in these
cases. For any appellate court to effectively exercise .
its appellate jurisdiction, it must h_ave the authority to
issue, among .others, a writ of certiorari (City of
Manila v. Grecia-Cuerdo, G.R. No. 175723,
February 4, 2014).
Interlocutory Order of CT A Not Appeal able
It was ruled that no appeal is proper from an order of
the CT A requiring the filing of a bond to suspend tax
collection during the pendency of the appeal in as
much as the same is interlocutory (Republic v. Juan,
G.R. No. L-24740, July 30, 1979).
Equally settled is the rule that an order denying a
motion to quash, being interlocutory, is not
 COURT OF TAX APP~LS
376 . · Taxation Law

Under Presidential Decree No. _242 (P.O. No. 242),

immediately appealable, nor can it be the subject of all disputes and claul)S ~olely ~etween
a petition for certiorari. Such order may only be ent agencies and offices, including
reviewed in the ordinary course of law by an appeal government-owned or controlled corporations, shall
from the judgment after trial (Judy Ann~ Santos v. governm d' d" t d b
- be administratively settled o~ _a JU 1ca e y the
People, G.R. No. 173176, August 26, 2008). • stice the Sohc1tor General, or the
Secret ary Of Ju · - ·. .
· ·G · ment Corporate. Counsel, depending on the_
There is no doubt that the CTA Order granting the . overn and•· government agencies · ·mvo
· Ive d. . Wh en·
motion to declare in default and allowing the issues · d tr ·
the law says "all disputes, c1aims an :con overs1es
presentation of evidence ex parte, is an int~rlocutory ·soleiy" among government . agencies, the !aw
order. Since the CTA Orders are merely means all, without exception (Power S~ctor
interlocutory·, no appeal can· be · taken therefrom. Assets .. and Liabilities Management Corp. v.
Rules of Ciyil Procedure, as amended, applies
. Commissioner of Internal Revenue, G.R. No.
suppletorily to proceedings before the _Court of Tax
198146, August 8, 2017).
Appeals (Commissioner of Internal Revenue v.
Court of Tax Appeals and CBK power Company
NOTE: The second paragrapti of Se~tion 4 of t_
he
Limited, G.R. No. 2013054, July 29, 2015) .
1997 NIRC, providi11g for the exclusive appellate
jurisdiction of the CTA as . rega~ds ~he __CIR's
FINDINGS· OF FACT OF CTA NOW .. decisions on matters ..mvolvmg disputed
REVIEWABLE _ assessments, refunds in· internal revenue · taxes,
The Court will not lightly set aside t~e conch,.isio~s·-~~- - f,ees--or. other charges, pena~i~s imposed in rel~ti~n
reached by the CTA which, by the very _pa r~ of its .; t~ere~o, or other matters arising under NIRC, 1s m
function of being dedicated exclusi . ely tp he ;~ ··confljct with .P~. No. 242.
resolution of tax problems, ):l's ac90r'dingly . ..... ..., · J,· ,,- -
developed an expertise on th~ subject, nles's ~!}_~e--:--•:ro.barmnnize•Sect(on 4 of the 1997 NIRC with·P.D.
has been an a~us~ or imp5~vi~ nt exe/ clse of . . ~o. ~4~. t~e- f~~towing interpretation shou~d be
authority (Comm1ss1oner of Intern.al. Revenue y. ·' ,_ adopted; .., ·
1
Toledo Power, ,Inc., G.R. No. 183880, Jar;w ary 20, . 1. As regards private entities and the BIR, t~e
2014).
.
i?
· -~
i
\ · :
--- -:-- ~o~~r to d~r d~ d_isputed_assessments, refunds
_.: of in~ernal revenu~ !c3xes, fees or other charges,
Factual findings ma~e _by th~ •.P;f\ can · ~nly ~~e_ •• pe'n,altie_s in• relatipn thereto, or other matters
disturbe~ on. appeal ,t !hE:Y _are 1~upp_ lled by · · _ - arising under th~ NI RC or other laws
substantial evidence or there ,s }i showi~~ ff-gross _~-
1- ttte
administer~. b.~ BIR is vested in the CIR
error or abuse on the pa~ of the "FA Int~.~ a,_ ence . i . · .,,sµ6Je,ct to ,the exclusive appellate jurisdiction of
of any clear and convincing proof to the conJr~ry, he · ! · , ,:tlJe; CTA, ·in accordance with Section 4 of the ·
Court must presume tha~ · tbe CTA ren~er7c;l:-;a • : _,-~- --N~RC; and / - . ·
decisio~ .which is vahd m every resp~9t . ?· , yYhere" the d,isputing parties are all public
(Commissioner of Internal Rev.enue To/e.d <ll_ ..::_·. · · · entities (cove~rs .disputes between the BIR ana
Power, _Inc., G.R. No .. 183880, Janu rY ?!'{ 20-~4]" ....__
r,\
:· -othe[ ,9o~ernment entities), the case shall be
PRINCIPLE OF NON-E;XHAUStlO~ i OF ;. f: govetreef by P.O. No. 242 (Id.). ·.
ADMINISTRATIVE REMEDIES APPLY TO-- Exception to the rule on exhaustion of
CTA · administrative 'remedies; Estoppel _
Before a party is allowed to seek the il')terv~ntion of The CIR must indicate clearly and unequivocally to
a
the courts, ·it is pre-condition that he avail of all the taxpayer whether an action constitutes a final
administrative processes afforded him, such that if a detetmination on a disputed assessment. The fact
remedy within the admlnistrative machinery can be that in the Formal Letter of Demand . with
resorted to by giving the administrative officer ~very Assessment Notices, CIR used the word "appeal"
opportunity to decide on a matter that comes within instead of "protest", "r~investigation", · or.
his jurisdiction, · then such . remedy !JlUSt be ~reconsideration". Although there was no direct
exhausted first before the court's power of judicial reference for taxpayer to bring the matter directly to
review can be sought, otherwise, the premature the CTA, it cannot be .denied that the word "appeal"
resort to the court is fatal to one's cause of action un~~r prevailing · tax laws refers to the filing of a
(C_
o mmissioner of Internal Revenue v. Court of Tax petition ~or Review with the CTA. (Allied Banking
Appeals, G.R. No. 207843, ju/y 15, 2015)_. Corporation v. <:;ommissioner of Internal Revenue,
G.R. No. 175097, Fe_bruary .S, 20 1o).
The Secretary of Justice has jurisdiction over tax
cases arising between Government Agencies
and Offices
 \ I
MEK-0,RY Al D
San Seda l.Jnlllerslty College o1 Law - RGCT Bar Ope,,.tlon
s Cente,
ISSUANCE
OF INJUNCTION OR .
TEMPORARY RESTRAINING ORDERS-
BY COURTS
No court shall have the authority to gr t .
· ·
In1unc t·,on to res tram
· th e collection of any ant· an
. na Ional
internal revenue tax, fee , or . charge imposed b
NIRC. By way of exception pursuant to Sec. 11
R.A._no_. 1 as amended , it is only the CTA th~t ·
has 1unsd1ct1on to suspend
. . the
. collection of ta xes
bu~ ?n Iy un d er ce_rtam cond1t1ons that when in its
opinion , the colle~t,on by the BIR may-jeopardize the
interest of the QOVemment and/or the taxpayer and
which case the CTA may suspend the collection of
- taxes and require the taxpayer ~ither to deposit the
amount claimed or to file a surety bond for not more
than .double ~he amount being assessed (R. M. o. No.
42-2010).
MANDAMUS DOES NOT LIE AGAINST
THE PERFORM~NCE OF A 8, Sec. 3(b) and (c)): ·
DISCRETIONARY POWER LIKE THE
CIR'S POWER TO ASSESS
Purely administrative and discretionary functions
may not be interfered by the courts. Since the office
of the Comrryissioner of Internal Revenue is cqarged
with the administration of revenue laws, which is the
primary responsibility of the executive branch of the .
government, mandamus may not be against the
Commissioner to compel him to .· impose· a tax
assessment not found_by him to be-due or proper for·
that would be tantamount to a usurpation of
executive functions (Mera/co Securities Corp.
v. Savellano, G.R. No. L-36181, October 23, 1982) .
CTA EN BANC CANNOT ANNUL
JUDGMENT OF THEIR DIVISIONS
SC, CA, and CTA en bane cannot annul judgment
of their divisions. Annulment of Judgment (Rule 47
bf the Rules 9f Court) involves exercise o! original
jurisdiction and implies power by a supe~ror court
against the final judgment, decision or r~hn~ of an
inferior court based on the grounds of extrinsic fraud
and lack of jurisdiction. The Divisions are not
separate and distinct courts but are di"'.isions of one
and the same court. There is no hierarchy _of courts
within the SC, CA. and CTA, for each re~am_ a_s _one
court notwithstanding that they also work ,n divis,~ns
. . v Kepco /IIJan
(Comm1ss1oner of Internal Revenue ·
Corporation, G.R. No~ 199422, June 21, 2016) -
I
·I
APPEAL IN CIVIL CASES
WHOSE DECISIONS ARE APPEALABLE
1. Appeal to the CTA Di~ision (RRCTA , Rule
8, Sec.3 (a)) :
Any party adversely affected by a decision or
ruling or inaction of: .
a. The Commissioner of Internal Revenue-
b. The Commissioner of Customs· '
c. The Secretary of Finance· '
I '
d. The Secretary of Trade and Industry;
e. The Secretary of Agriculture; or
f. The Regional Trial Court in the exercise of
its original jurisdiction.
2. Appeal to the CTA En Ba;,c (RRCTA, Rule
Any party advers·ely affected by a decision or
ruling of:
a. The.CTA in Division in a motion for
reconsideration or new trial;
b. The CBAA; or
c. The RTC in the exercise of its· appellate
jurisdiction. ·
PERIOD .'T O APPEAUMODE OF APPEAL
1. App~al to the CTA Division
By Petition for Review within 30 days -after the
receipt f ..;..tti,e decision , ruling or after the
expiration~of the period fix~d by law for the CIR
to act on the disputed assessments (RRCTA ,
. Rule 8, Sec. 3(a)).
. ,. . _
" -~ OTE: · while the GENERAL RULE . is that a
taxpayer has 30 days to appeal to the CTA from
the final decision of the CIR , the said rule cannot
·be applied if the Assessment Notice irself clearly
states that the taxpayer must file a protest with
the CIR or the Regional .Director within 30 days
from receipt of,the Asse.ssment Notice (Misnet,
Jnc. v. Commissioner of Internal Revenue, G.R.
No. 210604, June 3, 2019).
In case of disputed assessments, the inaction of
the CIR within the 180-day period shall be
deemed a deni~I for purposes of allowing the
taxpayer to appeal to the Court ·an~ _does not
necessarily constitute tt}e formal dec_IsIon of the
former on the tax case. The taxpayer ·may
instead opt to await the decisi on of the CIR on
the disputed assessment even _beyond the 180-
day period . In this case, the Final As~essment
' Notice (FAN) will not become final and
executory. If the taxpayer waits for the decision,
which turns out to be adyerse, only then must he
appeal such adverse decision to the CTA within

30 days from receipt thereof (RRCTA, Rule 4,
Sec. 3(a)(2); Rizal Commercial Banking Corp. v.
Commissioner of Internal Revenue, G.R. No.
168498, June 16, 2006) .
In case of inaction of the Commissioner of
Internal Revenue on claims for refund of internal
revenue taxes erroneously or illegally collected,
the taxpayer must file a petition for review within
the two-year period pres~ribed by law from
payment or collection of the taxes (RRCTA, Rule
8, Sec. 3(a)) .
NOTE: .For the CTA to have jurisdiction, the BIR
Commissioner must first render his decision,
otherwise, there is nothing to review, and
jurisdiction would not be acquired
(Commissioner of Internal Revenue v. Takasago
PHL, Inc., CTA EB No. 835, October 15, 2012).
Thirty (30) day Prescriptive Period for Appeal
with .the CTA f .
a. Runs from the date the taxpayer refeives
the appealable decision or 30 days after the
lapse of 180 days (within hich the BIR
should act) (INGLES, Re_vif wer, supra at .
479). . ·'
The two periods anf mutually exclusive -
(RCBC v. Commissioner of Internal
Revenue, G.R. No. 168498, June 6, 2006),:-
--i . --·>i ' ,NOTE: Jhe Motion for Reconsideration or
• \ I '
NOTE: A motion fof reconsideration· onhe-'-,
denial of the administratlve prote's fdoes not .
toll the 30-day period to appeal to the' CTA
(Fishwealth Canning Corp. v. Commissioner-
of Internal Revenue, G.R. No. f l.9343 • -- ,..
January 21, 2010) . The thirty (30):d~y..'... _~.
period to appeal to the CTA is still reckoned
from t~e date the taxpayer is notified dt the
denial of the CIR (INGLES, Reviewer, s~pra
at 479).
b. The 30-day period is jurisdictional and
mandatory. Failure to comply therewith may
be raised in a motion to dismiss ·
(Commissioner of Internal Revenue v. First
Express Pawnshop Co., Inc. , G.R. Nos.
172045-46, June 16, 2009).
Thirty-day Period to Appeal Subject of a
Motion for Extension of Time ·
Sec. 11 of R.A. No. 9282 state that the
Petition for Review shall be filed with the
CTA following the procedure analogous to
Rule 42 of the Revised Rules of Civil
Procedure (RRC). Sec. 1 of Rule 42 of RRC
provided that the Petition for Review must
be filed with the CA within: (1) the original
15-day period from receipt of the judgement
COURT OF TAX APPEALS
Taxation Law
or final order; (2) an extended period of 15
days from the lapse of the original period·
and (3) only for the most compelling
reasons, anothe! extended period not to
exceed 15 days from the lapse. of the first ·
extended period (SM Land, Inc. v. City of
Manila, G.R. No. 197151, October 22
2012) . '
Following by analogy, the 30-day original
period for filing a Petition for Review with the
CTA, may ,be extended for a period of 15
days. No further extension shall be allowed
thereafter, except only for the most
compelling reasons, in which case the
extended period shall not exceed 15 days
(SM Land, Inc. v. City of Manila, .G.R. No.
197151, October 22, 2012). -
Mode of Appeal
Petition for Review under Rule 42 of the
. , ~ ules of Court (RRCTA, Rule 8, Sec. 4) .
I
2. Appeal to the CTA En Banc (RRCTA,
Rule 8, Sec. 3(b) and (c))
a. Within fifteen /15) days from receipt of the
guestior'led decision or ruling of CTA in
Division oh a motion for reconsideration or
new trial.
-
____ , MotJon for New [T"rial is a condition precedent
· bel ore orin~ing the case to the CTA En Banc
/ : (INGLES, Reviewer, supra at 486). Before
J the ct ~. En Banc could take cognizance of
the.' petition for review. concerning a case
. ,' '
~al~m~ . under its exclusive appellate
JU~ 1ct1_on, the litigant must sufficiently
show that it sought prior reconsideration or
mo · ed for a 'new trial with the concerned
CTA division (Commissioner of Customs v.
Marina Sales, Inc., G.R. No. 183868,
November 22, 2010).
They may b~ relaxed only for very exigent
and pe~s~as_,ve reasons to relieve a litigant
. of an miustIce not commensurate to his
careless non~ob_servance of the prescribed
rules (Comm1ss1oner of Customs v. ·Marina . I
Sales, Inc., supra):
Upon proper motion and the payment of the
full amount of the docket and other lawful
fees and deposit for costs before the
expiration of the reglementary period,. the
CTA ~ay grant an additional penod not
excee?1~g fifteen days from the expiration of
the_?ngmal period within which to file the
petition for review (RRCTA Rule 8 Sec.
3(b)). ' '
 • w \ /
MEt40~Y.ALO
San Beda Urivereity Colege of Law • ROCT Bar Operations C«,ter
b. Within thirty (30) days from receipt of the
questioned decision or ruling of the CBAA
and RTC in the exercise of their app~
jurisdiction.
Mode of Appeal: Petition for Review under
Rule 43 of the Rules of Court (RRCTA , Rule
8, Sec. 4)
Effect of Perfection of Appeal (No
Injunction Rule)
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 tax liability
(RRCTA, Rule 10, Sec. 1) .
REASON: Lifeblood theory (Angeles City v.
Angeles Electric Corp. , G.R. No. 166134,
June 29, 2010)
Thus, the remedy of injunction is not
available to restrain collection (No Injunction
Rule)(NIRC, Sec. 218) .
EXCEPTIONS:
i. If in the opinion of the CTA, the
collection of tax may prejudice the
interest of the Government or the
taxpayer (R.A. No. 9282, Sec. 9); AND
ii. If the taxpayer is willing to deposit the
amount being collected or to file a surety
bond for not more than dou_ ble the
amount of tax to be fixed by the court
, (R.A. No. 1125, Sec. 11 ) .. · exercise of its original jurisdiction - file a
WHEN TO FILE THE MOTION
SUSPEND COLLECTION OF T AA
May be filed together with the petition for review or
with the answer, or in a separate motion filed by the
interested party at any stage of the proceedings
(RRCTA, Rule 10, Sec. 3).
Requisites for Suspension of Collection of Tax:
(DIVA-F) .
1. The taxpayer may be required to Q.eposit the
amount claimed or to file a surety bond for not
more than double the amount with the Court
(R.A. No. 1125, Sec. 11);
2. !n the opinion of the CTA, the collection may
jeopardize the interest of the Government
and/or the taxpayer (RRCTA , Rule ·10, Sec. _2) ;
3. . The motion for the suspension of the collection
of tax shall be Verified and shall state clearly
and distinctly the facts and the grounds relied
upon in support of the motion (RRCTA, Rule
10, Sec. 4); ..
4- There is an Appeal to the CTA from a decision
of the CIR; and
5. That the appeal is not frivolous or dilatory.
Bond may be dispensed with under exceptional
cases, viz:
1. The taxpayer need not file a bond if the method
employed by the Collector of Internal Revenue
in the collection of the tax is not sanctioned by
the law (Sps. Pacquiao v. Court of Tax Appeals,
G.R. No. 213394, April6, 2016) .
2. The order of the Collector of Internal Revenue to
effect collection of the alleged income taxes
through summary administrative proceeding had
been issued well beyond the 3-year period of
limitation (Sps. Pacquiao v. Court of Tax
Appeals, supra) .
PURPOSE: To prevent the absurd situation wherein
the court would declare that the collection by the
sumn:iary methods of distraint and levy was violative
of law, and then , in the same breath, require the
taxpayer to deposit or file a,bond as a prerequisite
, for the issuance of a writ of injunction (Sps. Pacquiao
v. Court of Tax Appeals, supra).
I I
APPEAL IN CRIMINAL
CASES
PERIOD TO APPEAUMODE OF APPEAL
1. In criminal cases .decided by the RTC in the
notice of appeal pursuanno Sections 3(a) and
• 6, Rule 122 of the Rules of Court within 15 days
TO from receipt of a copy of the decision or final
order with the court which rendered the final
judgment or order appealed from and by serving
a copy upon the adverse party (RRCTA, Rule 9,
Sec. 9 (a)) .
NOTE: The Court in Division shall act on the
appeal (RRCTA , Rule 9, Sec. 9 (a)) .
2. In criminal cases decided by the Co'-'rt
Division - file a petition for review under Rule
43 of the Rules of Court within 15 days from
receipt of a copy of the decision or resolution
appealed _from (RRCTA, Rule 9, Sec. 9(b)) .
NOTE: The CTA En Banc shall act on the
appeal. The CTA En Banc may, for good cause,
extend the time for filing the petition for review
for an additional period not exceeding 15 days
(RRCTA, Rule 9, Sec. 9(b)) .
 COURT OF T~ APPEALS
· Taxation Law

3. In cases decided by the RTC in the exercise ·

of their appellate jurisdiction - file a petition PROCEDURE AFTER
for review under Rule 43 of the Rules of Court
within 15 days from receipt of a copy of the DECISION OF THE CTA
decision or final order appealed from (RRCTA,
Rule 9, ~ec. 9(c)).
DIVISION.
NOTE: The CTA En bane shall act on the
appeal. In criminal actions involvii:,g violat\ons of RULES OF PROCEDURE
the NIRC and other laws enforced by the BIR,
Pursuant to R.A. No. 9282, the ~ecision of a
the C1R must approve their filing while in those
division of CTA is no longer appealable to the Court
involving violations of the CMT and other laws
enforc~d by the BOC, the c_oc must approve
of Appeals but to the CTA En ·Banc.

their filing (RRCTA,· Rule 9, Sec. 2). · REMEDIES OF THE PARTY Ai=FE,CTED
SOLICITOR GENERAL . AS COUNSEL .=B:..:Y:.. .::_ _ _~----;---.-:-;--::-:::---=-;--=----;:;;::;-:;=-:~
FOR THE PEOPLE AND GOVERNMENT 1. A ruling, order, or decision of a Division of
the CTA - file a motion for reconsideration or
OFFICIALS SUED IN THEIR- OFFICIAL new trial before the same Division .within 15 days
CAPACITY .,...._ _ from notice thereof: Provided, however, that in
The Solicitor General shall represent the ~eople..-of · _~· -criminal cases, the GENERAL RULE applicable
the Philippines and government offic!als stied in their , J / •. i in.'regular courts on matters of prosecution and
official capacity in all cases Qrough to .the cfl1rt in . ::_ :: • ·. appeal shall likewise apply (R.-"!. No, 1125 as
the exercise of its appellate jurisaiction;., tie: may · ~amende<J, Se c. 11) . . . · . ·
deputize legal officers of the BfR\ c~ses·· br.9ugh - -- - · -· • ·
under the NIRC ana other raw enforced byBIR) or. -: 2. The re~~lµtion of the Division of the CTA on
the legal officers of BOC ,(cases,,. 'oroug_n t under ,. .. . ,/ .- a motion fQt reconsideration or new trial - file
CMTA or other laws enforced by BOC), to appear in . . · a. p~tition .f or ~review with the CTA En Barie
behalf of the officials of said agencies in th ir•officia1--!-~- RR(;TA, Rule· f3,JS~c. 3(b)). :
capacity: Provided, the Sor itor...General s.palrh~ve . . ·, ' : . .; ·
direct control and sur;?ervision at air times over them· - . ; 3.~ ThE(_decision or ~uling of the CTA En Banc -
(RRCTA, Rule 9, Sec. 10). • · ._ :-_. '.; \ . ,:: :~· ~--_[~~' With ,theiSupr~'1'.'e Court a verified petition
.,,., ' .· , t r ;reyiew ;o certiorari within 15 days from .
EFFECT OF INSTITUTION Or CRf'¥1NAL · j-- . ....-,.,r.ec'eipt of tr,e decision or ruling pursuant to Rule
ACTION ·,,\ ' I _;.-:/45',<)fthe. Rules o Court (RRCTA, Rule 16, Sec.
The institution of the ~riminal actio~ ~hall interr~pt_. f::--:.;:;~-v- _;_, ., .- . .
the running of the ·period o! prescnptron (RRGT~.J_f l.':.: ~E\ F-FEC
~ "QF ~,;;.PP FILED WITH THE .
Rule 9, Sec. 2(2)). . / Q . ·-v- . .. " EAL
_;_. '() r . .: SU~~l;ME COURT
INCLUSION OF CIVIL ACTION IN ./1 :Toe p~ndil")g motion for reconsideration or for new
CRIMINAL ACT10N _, . Fial .in th.e CTA En Banc shall be . deemed
In cases within· the jurisdiction of the CTA, the abandoned (RRCTA, Rule 16, Sec. 2).
· criminal action and the corresponding civil action for .
the recovery of civil liability for taxes -and penalties WHEN MOTION FOR
shall be deemed jointly in~tituted in the same . RECONSIDERATION MAY BE FILED
proceeding. The filing of the criminal action shall
Any -aggrieved party may seek a reconsideration or ·
necessarily carry with it the filing of the civil a~tion.
new trial of any decision, resolution or order of the
No right to reserve the filing of such civil action
CTA He shall file a motion for reconsidetation or
separately from the criminal action shall be allowed
new trial within· 15 days from the date he received
or recognized (RRCTA, Rule 9, Sec. 11).
notice of the decision, resolution or order of the
CTA in question (RRCTA, Rule · 16, Sec. 1).

GROUNDS OF A MOTION FOR NEW

TRIAL ,..
1. fraud, Accident, Mistake or Excusable
negligence (FAME) which cirdinary -prudence
could not have guarded against and by reason

I
 mW \ I
San Bede
AID
Colege of Lew - RGCT Bar Operations Center
of w~i~h ~uch_ a~gri~ved party has probabl
been impaired m hts rights ; or y
2. Newly discovered evidence, which he could t
with reasonable dili_gence, have discovered
produced at the tnal and which , if presented
would probably alter the result (RRCTA, Ruf~
15, Sec. 5) .
Where there is clear showing of entitlement ·to
refund, the technical rules may be waived· so as to
allow a new trial even if the requisites or grounds are
not met, ~specially wh~re . the failure to present
evidence in !~e . first instance was adequately
explained (Ph1hppme Phosphate Fertilizer Corp. v.
Commissioner of Internal . Revenue, G. R. No.
141973, June 28, 2005),
-
MOTION FOR RECONSIDERATION A .
REQUISITE FOR A .PETITION FOR
REVIEW OF A DECISION OF A CTA
DIVISION
In order for the CTA En Banc to take cognizance of _
an appeal via a pet_ition for r~view, a timely motion.
· for reconsideration or new trial must.first be filed with
the CTA Division that issued the assailed decision or
resolution. Failure to do so is a ground for the
dismissal of the appeal as. the word "must" indicates
that the filing of a prior motion is mandato'i:y, an·d not -
merely directory (Asiatrust Development Bank, Inc.
v. Commissioner of Internal Revenue, G.R. No. ·
201530, April 19, 2017).
EFFECT OF FILING A MOTIO.N FOR
RECONSIDERATION· OR NEW TRIAL
The filing of a motion for reconsideration -or new trial
shall suspend the running of the period within which .
an appeal may be perfected (RRCTA , Rule 15, .Sec. -
4). ..
. -
NOTE: Rule ·37, Sec. 1 of the Rules of Court was
adopted by the RRCTA in Rule 15, Sec. 5. RR.CT A
has not included the phrase "motion for
reconsideration." Thus, for tax matters Rule 37
applies only . to "motions for new trial" (4
DOMON[!ON, supra at 784).
OMNIBUS MOTION RULE
A motion for new trial shall include all grounds then
available and those not included shall be deemed
Waived (RRCTA, Rule 15, -Sec. 5).
OPPOSITION TO MOTION FOR
.!!,_ECONSIDERATION OR NEW.TRIAL
The_ adverse party may file an ·oppositio~ ~<? the
matron for reconsideration or new trial within ten
.days after his receipt of a copy of the motion for
381
. .
r~consideration or ne'!,' trial of a decision, resolution
or order of the CTA (RRCTA, Rule 15, Sec. 2) .
. .
HEARING OF THE MOTION
The motion for reconsideration or new.tria~. as well
as the opposition thereto, shall embody all
supporting arguments and the movant shall set the
same for hearing on the next available motion day.
Upon the expiration · of the period, without any
opposition having been filed by t.he other party, the
motion for reconsideration o·r new trial shall be
considered . submitted for resolutfon, · unless the
Court deems it necessary to hear the parties on oral
argument, in which case, the Court shall issue the
proper order (RRCTAI , Rule 15, Sec. . 3) .
EFFECT ·oF NON-COMPLIANCE WITH
THE . REQUIREMENTS. FOR CONTENTS
OF MOTION FOR RECONSIDERATION
AND MOTION FOR NEW TRIAL
· It shall be deemed proforma, which shall not toll the
reglementary period for appeal (RRCTA, Rule 15, ,
Sec. 6). ·
- NO SECOND MOTION FOR · .
, RECONSlbERATION OR FOR NEW
: TRIAL :'
; No party shalfibe allowed to file a second motion for
, ':', reconsid~ration of a decision, final resolution or
)1 order; o~'for n~w trial (RRCTA, Rule 15, Sec. 7) .
.. ,.:_ ~-."t-. ,. ..
·c: RULING
-,JO •,-.',; • '
_
·/' The Court shall resolve the motion for
-~ feconsideration pr new trial within 3 months from
.: ,., the . ,ime . it is deemed submitted for resolution
. .._, (~RCTA, RUie 15, Sec. 8) . . ·
In .. cases falling under the exclusive appellate
jurisdiction of the CTA en bane; the petition for
review of a decision or resolution of the CT A in
Division must be preceded qy the filing of a timely
motion for ·reconsideration or new trial with the
Division (RRCTA, Ri.JJe 8, _Sec.'1).
JUDICIAL PROCEDl)RES FOR
COLLECTION OF TAXES .
1. Internal Revenue Taxes
The Government . may enforce collection of ·
internal revenue taxes by:
a. Civil action
. i. By ,filing a civil case for collection of a
sum of money with the proper regular_
court (NIRC, Secs. 203 and 222) ;
(MAMALA TEO, Reviewer on .Taxation
(2019), p. 709) or
ii. By filing an answer to the petition for
review filed by taxpayer with CTA c}d);
 COURT OF TAX APPEALS ·
Taxation Law

b. Criminal action National Tax

i. Attempt to evade or defeat tax (NIRC,
Sec. 254) ; or
ii. Failure to file return , supply correct and
accurate information, pay tax, withhold
and remit tax and refund excess taxes
withheld on compensation (NIRC, Sec.
255).
GENERAL RULE: The period for assessment
prescribes within 3 years: ·
1. After the last day prescribed by law for the filing
of the return; or
2. After the day the return was filed , if the return
was filed beyond the period prescribed by law,
whichever is-later (NIRC, Sec. 203) .

NOTE: The judgment in the criminal EXCEPTIONS:

case shall not ·only impose the penalty
but shall also order the payment of taxes
subject of the criminal case as finally
decided by the Commissioner (NIRC,
Sec. 205).
Any person convicted .of a crime
penalized by the NIRC shall, in addition
to being liable for the payment of the tax,
be subject to the penalties imposed
herein (NIRC, Sec 253(a)). ..-
4 1
· • ~riod, so -agreed upon may be further extended by
1. False, fraudulent return with intent to evade
taxes: within 10 years from date of discovery of
the falsity or fraud ; and
2. Failure to file a return, at any time within 10
years after the discovery of the omission of the
return (NIRC, Sec. 222 (a)) .
NOTE: Before the expiration of the 3-year
prescriptive period, both the Commissioner and the
taxpayer may agree in writing to extend the period of
assessment (waiver of the prescriptive period). The

Form and Mode Proceeding: - · I ' . . -

1
· subsequent w itten agreement made before the
Same for both Civil and Criminal actions .expiration,,, of tlie period previously agreed upon
i. It shall be brought in the name of he· (NIRC, Sec. 2'22 b)).
Government of the Phil ippines (i.e.
Republic of the Philippines v. dt linque'nt . For the 110-ye~ pre~criptive period to apply based
taxpayer) . · on fraud, such m1:1st be proved as a fact by BIR
'
ii. It shall be conducted by legal officers-of -··. ··-tAB'A.N,- supra
I
at ' 274). •
, \. >J '
the BIR. ,. . \ _ ·
iii. No civil or criminal action for the PRESCRIPTIV PERIOD FOR THE
recovery of the taxes shall -be filed in
court without the approval 1i( t e-CIR - 1-:
. - { '.- ./ COLLECTION OF TAX
(NIRC, Sec. 22or 1
., .., ~: ·• I ..
2. Local Taxes 't... 1 ,I ~A[JY· internal revenue The cbll_ection of local
Th!3 LGU concerned may enforce the collect1 n tax which has been tax shall . prescribe
of delinquent taxes, fees, charges nd other I ' 1
a~sesse . may be within five (5) years
revenues by civil action in any court of -- - . colle t~d within 5 years from the date of
competentjurisdiction (LGC, Sec. 183). , fqlLowing )~ the assessment (LGC, Sec.
a. Court action - The LGU may file an ordinary asse~sment of tax 194, Par. c).
suit for the collection of sum of money ·(NIRC, Sec. 222 (c)) .
before the MTC, RTC or CTA Division However, any internal
. depending upon the jurisdictional amount revenue tax which has
b. Declaratory relief been assessed, may be
c. Injunction - to be issued by the CTA if collected within the
collection may jeopardize the interest of the period agreed upon in
. government and/or the taxpayer, subject to writing before the
certain conditions (R.A. No. 9282, Sec. 9) . ex~iration of the 5-year
penod. The period
PRESCRIPTIVE PERIOD. FOR THE agreed upon may be
extended - by
ASSESSMENT OF TAX
subsequent written
Local Tax agreements made
The assessment of local tax shall prescribe within 5
before the expiration
years from the date taxes, fees, or charges become
previously agreed upon
due (LGC, Sec. 194(a)). However, in fraud or intent
(NIRC, Sec. 222 (d)) . .
to evade the payment of taxes, fees , or charges, the
same may be assessed within 10 years from the
date of the discovery thereof (LGC, Sec. 194, Par.
b).

I
 W \ I

MEM:0,RY AI D
Sen Bedll Universlty College of law - RGCT Bar Canter
383

GROUNDS FOR THE SUSPENSION OF

THE RUNNING OF THE PRESCRIPTIVE .
PERIODS

1. For the feriod during 1. The Treasurer is

which the legally prevented
Commissioner is from the
prohibited from assessment or
making the collection of the
assessment or tax;
beginning distraint or 2. The taxpayer
levy or a proceeding requests for a
in court and for sixty reinvestigation
(60) days thereafter; and executes a
2. When the taxpayer waiver in writing
requests for before the
Reinvestigation expiration of the
;hich is granted by period within
the Commissioner; which to assess or
3. When the taxpayer collect; and ,
farinot be located in 3. The taxpayer is
the address given by out of the country
him in the return filed or otherwise
upon which a tax is cannot be located
being assessed or (LGC, Sec. 194) .
collected; except if
the taxpayer informs
the Commissioner of
any change in
address;
4. When the warrant of
'Qistraint or levy is
duly served upon the
taxpayer, his
authorized
representative, or a
member or his
household with
sufficient discretion,
and no property
could be located; and
5. When the taxpayer
is Out of the
Philippines (NIRC,
Sec. 223).
 0,
-- -
.

384
COURT OF TAX APPEALS
_ Taxation Law

Administrative , ceremonial and non-adjudicative functions

Civil Cases ·
1. Decisions or resolutions on motions for reconsideration or new trial of the Court in
Division in the exercise of their appellate jurisdiction over: (ALT) ·
a. Cases arising from Administrative agencies - BIR, :BOC, D~F, D_T~ , D~; . _
b. ,bocal tax cases decided by the RTCs in _the exercise of their ongmal Jurisdiction;
and
c. Tax collection cases decided by the .RTCs in the· exercise bf their original
jurisdiction involving final and executory assessments for t~xes, f~es, c_harges and
penalties, where the principal amount of taxes and penalties claimed 1s less than
P1 Million (RRCTA , Rule 4, Sec. 2(a)).

Decisions, resolutions or orders of the RTCs decided or resolved by them in the

exercise of their appellate jurisdiction over:
a. Local tax cases (RRCTA, Rule:4, Sec. ·2(b)) ; and ·
b. Tax collection cases where the principal amount of taxes and fees, exclusive·of
charges and penalties·claimedis less than ft1 ~illion; (RRCTA , Rule 4, Sec. 2(c)).· .

Decisions Resolutions or Orders on Motions for Reconsideration or New Trial of the

Court in ·oivision in the Exercise of. its exclusive original jurisdiction (RRCTA, Rule 4,
Sec. 2(d)) ; and
Decisions of the C!3M in the exercise of i.ts appellate jurisdiction (RRCTA, Rule 4, Sec.
2(e)) . . · ,

Criminal Cases
1. Decisions, Resolutions.or Orders on motions for reconsideration or new trial of the court
in division _in the~exercise of its ·exclusiv~· oriqina/'jufisdiction over cases involving

administered by theJ31Ror BOC (RRC_TA, .Rule 4:

crim.inal offenses arising from violations:-- of the NIRC . or CMTA and other laws
Sec. 2(f)) ;
Decisions, Resolutions or O_rders on motions for reconsideration or new trial of the court
in division -in the exercise: ot'its exdusive appellate jurisdiction over criminal offenses
mentioned in paragraph ~JRRCTA, Rule 4, Sec., 2(g)) ; and
3. ~~cis_io~s, Resolu!ib~s or Orders . of. the, RfCs in the exercise of their appellate
1unsd1ct1on over criminal offense_s m_entioned ih paragraph A (RRCTA Rule 4 Sec:
2(h)). . . ' ' '

Civil Case
Tax collect_ion cases fmiolvi~g ~nal and executo~ assessments for taxes, fees, charges
and p~nalt1e~, wh~re the p~mc1pal amount of -taxes and fees, exclusive of charges and
penalties, claimed 1s P1 M1lhon or more (RRCTA, Rule 4, Sec. 3(c)(1)). ·

Criminal Case
Criminal offenses arising-from vi?la~ions of the NIRC or CMTA and other laws administered
by the _BIR or_BOC,_ where _t~e principal amount of taxes and fees, exclusive of charges and
penalties, claimed 1s P1 M1lhon or more (RRCTA, Rule 4, Sec. 3(b)(1)).

Civil Case (DIReCSS)

1. Qecisions of the CIR involving:
 . .. .
. . .
0
....
MEK-O~YAI D
$1111 Bede~ Colege of Law - RGCT Bar Oporatlons Center
,;,_-_·
.... ......
~--~4
· 385
-
.

Disputed assessments·
Refunds of internal rev~nue taxes fees or other charges.in relation thereto ; or
c. Other matters arising under the ' NIRC or other laws administered by the BIR
(RRCTA , Rule 4, Sec. 3(c)(1)) .
!naction by the CIR involving:
a. Disputed Assessments· •
b. Refunds of internal re~enue taxes, fees or other charges and penalties imposed
thereto; and
c. Other matters arising under N_ IRC or other laws administered by the BIR. Where
the NIRC provides a specific period for action (RRCTA, Rule 4, Sec. 3(a)(2)) .
Decisions , Resolutions or Orders of the BTC in Local Tax Cases decided or resolved
by them in the !;_xercise of their Original Jurisdiction (RRCTA, Rule 4, Sec. 3(a)(3)) ;
Decisions of the £ommissioner of ~ustoms involving:
a. Liability for customs Duties , fees or other money charges; ·
b. Seizures, detention or release of other property affected ;
c. Fines , forfeitures or other penalties in relation thereto; or
d. Other matters arising under the customs law or other laws administered by the BOC
(RRCTA , Rule 4, Sec. 3(a)(4)) . .
Decisions of the .§ecretary of Fine· , on customs ca_ses elevated for au_tomatic review
from decisions of the Commissi~r t(<;;ustoms which are adverse to the Government
under the CMTA (RRCTA, R'.Jk. I/ ftt-,.3(a)(5)) ; and
Decisions of the .§ecrefary 'JI 'fradt"'d Industry in the case of non-agricultural product,
commodity or article, an~ tht !tcl9\ary of A_griculture in the case of agricultural product,
commodity or article,, lowelvin~_, dumping ,;1nd countervailing _duties and safeguard
measures under R :~. '11. IIOO (Safeguard Measures Act). (RRCTA , Rule 4, Sec.
3(a)(6)) .

Criminal Cases .
1. Appeals from the . judgments , resolutions _or orders of the RTCs in their . original
jurisdiction in ~riminal offenses where the princ ipaJ amo1.,mt of taxes and fees , exclusive
of charges and penalties, claimed is less than fD1 MHlion or where there is no specified
amount claim .(RRCTA, Rule 4, Sec. 3(b)(2)); and
Criminal offenses over petitions f~r ~eview of the judgments, resolutions or orders of
the RTCs over tax cases originally dec1ded by the MTCs or MCTCs; (R.A. No. 1125, as
amended (Sec. ·7(b)(2)(b)) .

Civil Case
1. Tax collection cases where the principal amount of taxes and
fees, exclusive of charges and penalties, claimed is less than
t-1 Million (RRCTA , Rule 4, Sec. 2(a)); and
Local Tax Cases (RRCTA, Rule 4, Sec. 2(b)) .

Criminal Case
~~:i'iii~~~ Criminal offenses arising from viol~tioris of the NIRC or CMTA and
other laws administered by t_he Bl~ or BOC, "'!here the principal
amount ~f taxes and - fees, .~xclus1ve of charges and penalties,
claimed 1s less than fD1 Million or where there is no specified
amount claimed (RRCTA , Rule 4, Sec. 3(b)(2)).
 / /-------- · ------ ,.
j (--------., (---- -,- -, I
'
{ Petition for Review Petition for Review on \
!J.§ f
I {Rule 42 of the ROC)
l
I ,
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Motion Certiorari I

:5a
WI.thin 30 days after 1· . Review I · for (Rule 45 of the ROC) \
1 the receipt of the 1- 1 (Rule 43 ·of ! Recon Within 15 days from . I
1
a. fl I
1
decision or ruling or
after the lapse of 180
. I ..--... I
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the ROC)
Within 15
. . . - -... 1
l
siderat
Ion/Ne
receipt of resolution of the
CTA en bane on the

~i l days within which the

BIR should. act .
(RRCTA, Rule 8,
I
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Recons
I
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receipt of
resolution
days from

0
1
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Within
motion for reconsideration
or new trial (RRCTA, Rule
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Secs. 3(a) and 4) In _I Q n/New CTA

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15 · 16, Sec. 1) 0
m days w
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0.
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Rule 43 of the 1 I sideratl COURT, Rule 45)
I Appeal I I siderat I ROC I I on/New Within 15 days from
I (RULES . OF
: COURT, Rule
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from receipt of I I Within the CTA en bane on the
1 122, Secs.
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I Within 15 : 0 I 15 I decision or 1 z I days reconsideration or new
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1
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A, Rule
abandoned if, during its 1
D.
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a. Cl) upon the 1 I
pendency, the movant : en
adverse party.
A, Rule
15,
I
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I 15,
Sec. 1) shall appeal to the SC. 1

_____
(.) (RRCTA , Rule I (RRCTA, Rule 1 1
(RRCTA, Rule 16, Sec.
-
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j er:
<:
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er: ·c
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c·- .!!?
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..._ _______ I
/I
 LOCAL TAXf\TIOM
- Taxation·Law

LIMITATIONS IMPOSED UPON

-_ _P_RI_N_c_1_P_L_E_s_l
l'-_G_EN_E_RAL_ CONGRESS ·
The Legislature, in providing guideiines...__
limitations .on the LGU's power of taxation, must~nt_d
see that: . 11I
LOCAL GOVERN-MENT TAXATION 1. The taxpa·yer will not be overburdened or
It is the power of the Local Government Units (LGUs) saddled with multiple and unreasonable
to impose and collect taxes on their constituents in impositions;
order to raise revenues to -enable them to perform 2. Each LGU will have its fair share of available
the functions for which they have been organized (V resources; .
DOMONDON, Taxation (2013), p. 1 {hereinafter, V 3. The resources of the National Govern.ment will
DOMONDON, Taxation}). - not be unduly disturbed; and ·
- 4 . Local taxation will be fair, ...uniform, and just
GRANT OF LOCAL TAXING POWER (Manila Electric Co. v. Province of Laguna, G.R.
1. Each local government unit shall have the power No. 131359, May 5, 1999). ·
to create its own sources of revenues and to levy
taxes, fees, and charges subject to such NATURE OF THE TAXING POWER OF
· guidelines and limitatfons as the Congress may LGUs
provide, consistent witt:i the basic policy of local ,. -1-._N_o_t_i_n_h_e_r_e_n_t_b_u_t_a--"'.d=-ir_e_c_t_g_r_a_n-:-t----
autonomy. Such taxes, fees, and charges snail ' The taxing power of provinces, cities,
accrue exclusively to the local ~o\lei"rn ents • . municipalities, and barangays, though not
(CONST. Art. X, Sec. 5) . . ,, _. _.,. ,_ ( . --- . -. inherent, is not a mere delegation - by the
2 . . Each local gov_~rnment unit sl)all e~e~c1se 1{s fegislative body, but a direct gra_nt from ttie
power to create ,ts own sour eS>sgf ; e'(enu~,_and-~ _·· - ' - Constitution (CONST, Art. x, Sec: 5).
to levy taxes, fees. and charges subject lo the ·
provisions herein, consisteht i h ttie basic The'power to tax is no longer vested exclusively
policy of local autonomy. Such .taxes, fees, and on Congress. Local legislativE;! bodies are now
charges shall· accrue exclus·ively to the- local ·· given direct authority to levy taxes, fees, and
government units (LOC'AL, I GOVE NMf=NT ·other charg~s pursuant to Art. x, Sec. 5 of the
CODE, Sec. 129 [hereina;~ , ~GCJ).__ . _ · 19&7 constltOtio'l f Batangas Power Corp. v.
. • 1 .-- · \ . -~atqn~s <fity, G.'.' . No. 152675, April 28,
NOTE: Congress cannot abo ish ·., the -· local · ·,--- --- 2004).,_ ; --..,.,,~
government's- power to tax as it! can no :·a'l?ro__gate ' . , , .,. _ :' . '
what is expressly_ granted b the fu, ~ame~t~l~l aw.. ; ·: ,-· ·--w~i re thJ re is neither a grant nor a prohibition
The only authority conferred_ to Co gress ,s -J0 , - · ' by· statute the taxing power must be deemed to
provide the guidelines and lim'l\ations P the: lo~I - .. · - ~exist- alth~ugh ,Congress may provide statutory
government's exercise of. the · power to tax -~(,Q__ ..;,::-__: · -' _. .lim1tatibns. arid guidelines (Film Development
DIMAAMPAO, Tax Principles and Re(!ledie:,s;(2!)1 B)~ . - .... · -- ccii.mcU of the -Philippines v. Colon Heritage
p . 143 [hereinafter, DIMAAMPAO])~ " · ' :'
·,, __ • ·: ·Realty-Corporation, G.R. No. 203754, June 16,
·. .t! ...'- 20-15).

. REASON: To safeguard the viability and self-

sufficiency of LG Us (Manila -· Electric Co. v.

EXECUTIVE COMMITTEE ·,:. ·: ·•. -.. · · · .. · ·

DOHN ALFRED E. AQUILIZAN, Over-All Chairperson I NICHOLE VANE B. SANTOS, Chairperson-for Academics I RONALYN A.
GACULA, Ad Hoc Director for Bar Matters I MARIELLE CIELO B. BELGIRA, V_ice Chairperson for Finance I JUAN INIGO S. MIGUEL,
Vice Chairperson for Operations I ALISSA MARIE D.C. DELOS SANTOS, Vice Chairperson for Audit I CORINA R. TAMPUS, Vi_ce
Chairperson for Secretariat I AR VY KEITH N. CHUN~. Vice ~hairperson for Logistics I ANTONIO JUll!·JUN _C . MAN ALIGOD IV, Vice
Chairperson for Me mbership I JORDAN N. CHAVEZ, Vice Chairperson for Electronic Data Processing
SUBJECT COMMITTEE .. . . ·
JOSE LORENZO C. DAVE, Subject Chair I LOUISE MARIE C. CONTACTO, Assistant Subject Chair _!. KATRYNA ANNE R. TOMENIO,
Subject Electronic Data Processing I SUBJECT HEADS: MARY GRACE A. GRANIL, General Principles I SHEENA ROSETTED~-
DOMlNGO, Administration, Enforcement, Remedies and Court of Tax Appeals I JERRLITO_P. CUSTODIO, Local and Real Property Taxation
I STEVIE R. ARCILLA and PATRICK MARRION Y. MEL_ENDRES, Income Taxation I MARY ANN C. T~, Transfer Taxi MARIL~
H . MALALUAN, Value-Added Tax I ,

KATRINA MICHAELA D. DELFIN, ARMANT. PAEZ, ANDREI ANNE U. PALOMAR, MARY KATHERINE A. SIMEON,J~
RL DANIEL B ALVARO ARIESA JANE V. DOMINGOrJOSEPHINE MARIE·T. SALAZAR, YNA MAREI AGUIL'.\R, NER
~YCE T. LAZARO, JOHN KENNETH Q. CRISOLOGO, LOIS DANIELLE P. DIMAANO, ANDRELA M. AQUINO, ANNA L~REN
DC. MANUEL and GILBERT OWENS. APILADO . a
;1•i1M#;b I REN
CASIO C. CABANEIRO, CPA, Atty. DANTE 0 . DELA CRUZ, CPA,Justice JAPAR B. DIMAAMPAO, Atty. _EF
Atty. NI · VINCENT M. DIZON, CPA
 MEM-Q~y AID
SW\ 9eda l..JriVIMSlty College of law - RGCT Bar " --
, ....,.,.,.9:'<>"s Center
389

Province of Laguna, G.R. No. .M

1999). . 131359, ay 5, governments to vary the rates of taxation to a
limited extent and within certain parameters
2. Limited (LGC, Secs. 197-283).
It is neither plenary nor absolute Th .
of the legislature over the taxi~g etahut~onty
Ioca I governments is
tPhhe~,~of_(AB(ARN, _
11ppmes
. au onty of
merely to Limit the exercise
L aw of Basic Taxation in the
ev,sed 2001 Edition), p. 39
{hereinafter, ABANJ) .
392
r_ I LOCAL TAXATION
I
3. Legislative LOCAL TAXES
It may be . exercised by the local leg· 1 t· These are taxes that are imposed and collected by
~"'· .
bU\J1es h 1s a 1ve local government units in order to raise revenues to
i._e.. t e Sanggunian Panlalawigan or
Pan/ung_sod, a~ the -case may be (Mactan Cebu enable them to-perform the functions for which they
lntemat,onal Airport Authority v. Marcos t 1 have been organized (V DOMONDON, Taxation,
G.R. No. 1~0082, September 11, 1996). ' e a. , supra at 1).

4. Territorial FUNDAMENTAL PRINCIPLES

It can only be exercised within the territorial GOVERNING LOCAL TAXATION: (UE- ·
jurisdiction of the LGU (CONST., Art. X , Sec. 5). PUL-PRIB-PRO}
1. Taxation shall be Uniform in each LGU ;
Accrual of Tax: Taxes, fees, and char~es collected 2. Taxes, fees, charges, and other impositions
shall accrue exclusively to the LGUs (LGC, Sec. shall :
. 129). The National Government cannot share from a. · be ~guitable and based as much as
the tax levied by the LGUs . However, LGUs have a .• possible on the taxpayer's ability to pay;
share from National Government taxes through tlieir b . be levied and collected for fublJc purposes;
Internal Revenue Allotment (IRA) (LGC, Sec. 129). c. not t:>e Y,njust; excessive, oppressive, or
confiscatory; and .
"JUST SHARE" OF THE NATIONAL d. nofbe contrary to ,baw, public policy,
TAXES UNDER SEC. 6, ARTICLE X OF national economic poli~y. or in restraint of
trade~ "--
THE 1987 CONSTITUTION REFERS TO 3. Collection of·lo~J-taxes ·and other impositions
ALL NATIONAL TAXES to
shall nbf be left any Private person; .
The phrase "national internal revenue taxes" in Sec. 4. Revenues collected unde-r the LGC shall inure
284 is undoubtedly more restrictive · than the solely to the .§.enefit of and subject to
term "national taxes" written in Section 6. The intent pisp_9$.ition by the LGU levying the tax or other
of the people in respect of Section 6 is really th~t the imposition unless otherwise specifically
base for reckoning the just share of the L:GUs should provided therein; and
include all national taxes as opposed to .national 5. Each LGU shall , as far as practicable, evolve a
internal reve·n ue taxes under Sec. 284. This includes Progressive system of taxation (LGC, Sec.
not only what is enumerated under Sec. 21 of the 130).
NIRC, but also other national taxes like customs
duties which are also taxes because they are LOCAL · ·TAXING POWER AND
exactions whose proceeds become public funds AUTHORITY
(Congressman Mandanas v. Ochoa, G.R. No. The power to impose a tax, fee , or charge or to
199802, July 3, 2018). generate revenue under this Code shall be
exercised by the Sanggunian of the local
SCOPE OF LOCAL GOVERNMENT government unit concerned through an appropriate
TAXATION ordinance (LGC, Sec. 132) . '
. 1. Sangguniang Panlalawigan· - for provinces.
1. Local Taxation · th r 2. Sangguniang Panlungsod - for ·cities.
Imposition of license taxes, fees , and O e 3 . · Sangguniang Pambayan - 'tor municipalities~
impositions including community tax, as a 4. Barangay Council - for barangays or barrios
means to ~reate its own sources of revenue (LGC, Sec._ 41 (b)).
(LGC, Secs. 128-196) .

2. Rear Property Taxation · a

System of levy on real property imposed on al
country-wide basis, . but authorizing th e loc
 ' I

LOCAL TAXATION
Taxatiqn Law

COMPOSITION OF THE SANGGUNIAN c. Sangguniang Kabataan chairman (LGC

Sec. 390). '
1. Sangguniang Panlalawigan
a. Vice governor as the presiding officer;· ILLUSTRATION: (2003 Bar Question) ·
b. Regular Sanggunian members;
In order to raise revenue for the . repair and
c. President of the provincial chapter of the liga
maintenance of the newly constructed City Hall of
ng mga barangay;
Manila, the City Mayo( ordered the collection of
d. President of the panlalawigang pederasyon
fl'1.00, called "elevator tax," every time a person
ng mga Sangguniang Kabataan ;
rides any of the elevators in the city hall. Is the
e. President of the provincial federation of "elevator tax" a valid imposition?
Sanggunian members of municipalities and
component cities; and
ANSWER: NO. The imposition of a tax, fee, .charge,
f. Sectoral representatives (LGC, Sec. 467
or the generation of revenue shall be exercised by
(a)).
the Sanggunian of the LGU through an appropriate
ordinance (L(;C, Sec. 132). The city mayor alone · ·
2. Sangguniang Panlungsod could not order the collection of tax.
a. City vice mayor as the presiding officer:
b. Regular Sanggunian members, NOTE: The exercise of the power to tax by the local
c. President of the city chapter of the liga ng legislative assembly is subject to the veto power of
mga barangay, ·
the local chief executive (LGC, Sec. ~5).
d. President of the panlungsod na pederasyon
ng mga sangguniang kabataan; and tOCAkT AX ORDINANCE
e. Se_ctoral representatives (LGC,~ (f} . \..._} -L<0cal Sang~unians. have the authority to enact the
3. Sangguniang Bayan . /' · ·· · following, ta~ ·! dinan;e: h . t •
a. Municipal vice mayor as ,pres1tf11ig officer; 1. lmP.o ing taxes , ,ees, or c arges, or o generate
I' '· . ,,- revenue~ ,"' )
b. Regular Sanggunian members; · ;- ' .£:. · ~: Pres.cribingf pe allies for violation '· of tax
9. President of the municipal chapter of the liga , , ,.J
ng mga barangay, , - -·---- ___ ..,.,r.dii;ance:\ • .
7
d President of the pambayiJng pederasyor:, ng _3. Gra ting loca.l ax xemptions and ·incentives;
· mga sangguniang kabataan; and . . _ • ,,and ' · ..,_ , ·
e. Sectoral representati'ifes (LGC;- Sec. 446 .. _:' 4 : Con~OCling tax c:f~li~quencies (V DOMONDON,
(a)) . \/·. - - - - ~ - -Ta ation, supra a 65) . .
, r: ::. - I ..._,,; i'
. 0 ., ·,. .:- : / t--... · f . , .
NOTE: · There shall _be 3 -~)coral , P~OCEDURE F~ R APPROVAL . AND
representatives: one from the women, on_b fr'oi:n- . 'EFFECTIVITY OF T AX ORDINANCE AND
the agricultural or industrial workers an'i:f ,09e, ~,<-:-;·:REV.ENUE- MEA~URE:
from any of the following sectors: the urban poor, J. ·'· ~-:-:- . -·=--:-.--::--::--.------------
indigenous cultural communities, ( ctis~bled - ---:-·'1 . ~ 11\" 9\°tp,r~posal (A.O. No. 270, Art. 276
persons, or any other sector as - may be I\. , (~ii)) [beremafter, /RR of LGC}) : .
. determined by the sanggunian concerne ,( GC, 1
f I
' .. [:'_.._\ ~ • · •
Secs. 467 (b), 457 (b) and 446 (b)}:" 2. Pubhcat1on or Posting .
Within ten (10) days from filing the same, it shall
The regular members of the Sangguniang be posted for three (3) consecutive days in a
Panla/awigan, ·Sangguniang Panlungsod, and newspaper of_local circulation or shall be posted
Sangguniang Bayan ~hall be elected by district, simultaneously in at least four (4) conspicu ous
as follows: places within the territorial jurisdiction . of \t,e
a. First and second-class provinces - 1o LGU where there are no newspapers of local
b. Third and fourth class province~~ 8 circulation (/RR of L~C. Art. 276 (b)(1)).
c. Fifth and sixth class provinces - 6
d. lo provinces having more than 5 NOTE: The tax ordinance will be null and void if
legislative districts - each district shall it fails to comply with the publication requirement
have 2 sangguniang panlalawigan (Coca-Cola v. City of Manila, G.R. No. 156252,
membeFS (LGC, Sec. 41 (b)) . June 27, 2006) . .

4. Sangguniang Barangay 3. Notification

a. Punong barangay as presiding officer; The sa·n gguni~n shall cause the sending of
b. The 7 regular Sangguniang barangay written notices of the proposed ordinance
members elected at large, and enclosing a copy to interested or affected parties
operating or doing busi.ness within the territorial
jurisdiction of the LGU. The notice(s) shall
 \ I
AEM:O~Y AI D
s-, Be<il U"Mnlty Colege of Law - RGCT Ba, Openitione Center
specify the date(s) and venue of the public
hearing (Coca-Cola v. City of Manila, G.R. No.
156252, June 27, 2006).
4. Mandatory Public Hearing
The public hearing shall be held no less than ten
(1 0) days from the time notices were sent out,
posted, or published (LGC, Sec. 187).
5. Reading of the Proposal
A third read ing is necessary for an" ordinance
unless decided otherwise by~ majority of all the
Sanggunian members (/RR of the LGC, Art. 107 ·
(c}; Municipality of Paranaque v. V.M. Realty
Corporation, G.R. No. 127820, July 20, 1998).
6. Approval of Ordinances
a. The ordinance must be approved by a
majority of the members of the Sanggunian
present provided that there is a quoru·m;
b. It shall be presented to the Local. Chief
Executive (LCE) who may either approve or
veto the proposed ordinance. The veto shail
be communicated to the Sanggunian within
fifteen (15) clays (in case of a province) a·nd
ten (10) days (in case of a city or a
municipality); otherwise, the ordinance shall
be deemed approved ; and
NOTE: The veto may be based on the
ground that the proposed ordinance is ultra
vires or prejudicial to the public welfare. The
LCE may veto an ordinance or resolution
only once. · ·
c. The Sanggunian concernea may override
. to which the Sanggunian enacting the
the veto of the LCE by 2/3 vo~e of all its
members (/RR of the LGC, Arl. 108 and
109).
7. Review of the Approved Ordinance by
Higher Sanggunians
a. By the Sangguniang Panla/awigan:
Within three (3) days after approval, the
secretary to the Sangguniang
Panlungsod/Bayan shall transmit to the
Sangguniang Panla/awigan for review,
copies of approved ordinances.
If no action has been taken by the
Sangguniang Panlalawigan within thirty (30)
days after submission of such an ordinance,
the same shall be presumed valid .
b. By Sangguniang Pan/ungsod/Bayan
Within ten (1 0) days after its enactment, the
Sangguniang Barangay shall furnish copies
of the approved ordinance to . the
Sangguniang Pan/ungsod/Bayan for review.
If the Sangguniang Panlungsod/BaY_an fails
to take action on barangay ordinances
within thirty (30) days from receipt thereof,
the same shall be deemed approved (/RR o(
LGC, Arts. 110-111).
8. Publication and Posting of Tax
ordinances and Revenue Measures.
a. Within ten (10) days after their approval,
certified true copies of all tax ordinances or
revenue measures shall be:
i. Published for three (3) consecutive days
in a newspaper of local circulation ; or
ii. Posted in, at least; two (2) conspicuous
and publicly accessible places where
there are no newspapers of local
circulation (/RR of the LGC, Sec. 276
(a)) .
b. .If the tax ordinance or revenue measure
contains penal provisions as authorized in
Art. 280 (Attempt to Enforce Void or ·
Suspended Tax Ordinances and Revenue
Measures) of IRR of LGC , the gist of such
tax ordinance or revenue measure shall be:
i. _. Published in a newspaper of general
. ~circulation w ithin the province where the
Sanggunian concerned belongs.
ii. Ir, the absence of any newspaper of
general circulation within · the province,
posting of such ordinance or measure
shall be made in accessible and
• COflspicuous public places in all
municipalities and cities of the province
ordinance or revenue measure belongs
(/RR of the LGC, Sec. 276 (a)) .
c. In the c;ase of highl~ urbanized · and
independent component cities, the main
features of the ordinance or resolution duly
ena~ted or adopted shall:
i. Be posted in at least two (2)
conspicuous and publicly accessible
place-s (/RR of the LGC, Sec. 276 (a));
. and
ii. Be published once in a local newspaper
of gener~I circulation within the city.
NOTE: In . the absence thereof, the
ordinance or resolution shall be
published_in any newspaper of general
circulation (LGC, Sec. 59).
9. Effectivity
a. Unless otherwise stated in the ordinance
the same shall take effect after ten (1 0) day~
from the date a copy thereof is posted on a
bulletin board at the entrance of the
provincial capitol or . city, municipal, or
 LOCAL TAXATIO'N
- .T_
axation Law

emp~ion will NOT apply (Victorias Milling Co.

barangay hall, as the case may be, and in,
at least, two (2) other conspicuous places in Municipality of Victorias Negros Occident~/
No. L-21183,.Septeirlber 27, 1968).
1
v.
' -R.
1·
the IQcal government unit concerned (LGC,
Sec. 59);
b. In case· the effectivity of any tax ordinance NOTE: Upon _the advent of the 1987 Constitur
or revenue measure falls on any date other the taxing power of LG Us is now a dir~ct grant un'~~;
than the beginning of the quarter, the same Sec. 5,. Art. X. The LGC ?f .
19_91'_1s no longer a
shall be considered as falling at the delegation, but rather, a hm1tat1on (Mactan Ceb
beginning of the next ensuing quarter and International Airport Authority v. f.4arcos, G.R. Nou
the taxes, fees, 9r charges due shall begin 120082, September 11, 1996): · - ·
to accrue therefrom (/RR of the LGC, Sec.
276 (a)) . ILLUSTRATION:
The Province of Bula~n levied amusement·· tax, .
REQUISITES FOR IMPOSITION OF FEE . under. Sec. 140 of the LGC, on the cockpit ,arena
OR TAX AUTHORIZED BY THE LGC: owned by Juan dela. Cruz, a private indi~iduai: Juan
(WUF) questions the authority of the province to impose the
. amusement tax under the Principle of Pre-emption.
The rate, should be:
Is he correct?
1. Within the range of rate provided by the LGC;
2. Y.nifonn throughout the political subdivision; and ANS: YES. Proprietors of cockpits are subject to
3. Eair and reasonable to the taxpaY,ers (V" . 18%- pe· centage tax under Sec. 125 of the NIRC.
DOMONDON, Taxation, supra at 85). · l /TJi~ P. incip e of. Pre-Emption stat~s that when the
'
-~ . " atiQnal pgver1_1ment el~cts to tax a particular area,
RESIDUAL TAXING POWER, v it impliedly wi hji'Qlds from the local ·government the
LGUs may exercise the power to'levy taxes, fees, or - - delegated P.bwer IQ tax the same field · (Victorias
char~es on ~my base or su Je~ not otherwis@ . -~illi~g C~-,-.[n9.~. v1 Municipality of Victorias Negros
specifically enumerated in the LGe or ta d under Occ1de ta/, G.R. No. L~21183, September 27,
the provisions of the National Int rnal Revenue . 1968). Hence, the p~in iple of pre-emption prevents
Code, as amen,;led, or other applicable laws -([ Ge--;-· --- tGUs fr~m _imposin§l. taxes on subjects which a"re
Sec. 18611• -<-.., · 1 · already subJect fo taxes under the NIRC. .
. 1· i, 1
Limitations of the Residuaf'r1 ~ ng P.owl!t · ·, · : -· - ,, ,;._.,.,. _ , 1
1: Constitutional limitations on axing po~ er; . ---- ----r-: ·- , ., . . _ . . . _
2. Common limita~ions on the-t~fing pow~,tot l~cal " . .
1
,_COMMON LIMITATIONS
government urnt_s as prescnbed m Sec.-1"33 of \. . . : ·-·>o ·' ~r• QC .
the LGC; ... · 1'<-:._ v
"" +~ v' TAXING L . AL
3. Fundamental principles governing the,~xerci~e-~ - ,-:. , i::,) , / . p'oWERS
of the taxing power by local over9"1~n~ as :. __ : "'.,,. . . A ; -
prescribed under Sec. .'130 of _.. .., th I
., J LGC,
particularly the requirement that tfiey must.'not _ : • . • •. ,
be ·unju st , excessive, oppressive, : or ~J • - J '
confiscatory";
lG s CANNOT LEVY THE FOLLOWING·
. ·
4. The requirement prescribed in Sec 186 of the {IDEC-PAPI-EX-PET-RMEBG)
LGC which directs that the ordinance levying 1. !ncome tax, exc,ept when levied on banl<s and
such residual taxes shall not be enacted without ' other financial institutions;
any prior public hearing conducted for the ·
purpose; and NOTE: Cities and Municipaiities may impose
5. The principle of pre-emption (ABAN, supra at business taxes on banks and other financial
396-397). ' institutions (LGC, Secs. 143 (f) and 151) . .

PRINCIPLE · OF · PRE-EMPTION OR · · 2. Qocumentary stamp tax; ·

EXCLUSIONARY DOCTRINE
Where the National .Government . elects to tax a
particular area, it impliedly withholds from th~ local
government the delegated power to ta_x the same
field. Thi~ doctrine principally rests on the jntention
·of the Congress. Conversely, should the Congress
allow municipal corporations to cover fields of
taxation it already occupies, then the doctrine of pre-
3. Taxes on sstate, inheritance, gifts, legacies, and
other acquisitions mortis causa;
EXCEPTION: y'Vh_ en oth~rwise provided by the
-Code (i.e. tax on transfer of real.property) (LGC,
Sec, 135). Rowever, transfers made pursuan~ to
R.A. No. 6657 (Compre_hensive Agranan
Reform Law) shall . be exempt from tax on
transfer.
 \ I
MEM:Q~y AID
s.n_Beda I..WYefdy Colege d Law - RGCT Bar Operations Center
4. fustoms duties, registration fees of vessels and
wharfa~e on wharves, tonnage dues, and all
other kmds (?f customs fees, charges and dues;
EXCEPTIONS:
a. Wharfage on wharves constructed and
maintained by the local government unit
conce~ed ; and
b. Issuance of licenses for the operation of
fishing vessels of 3 to_ns or less by
municipalities (LGC, Sec. 149 (b)(3)) and
cities (LGC, Sec. 151).
Wharfage - it is a fee assessed against the
cargo of the vessel engaged in foreign or
domestic tra~e based on quantity, weight, ·or
measure, received and/or discharged by the
vessel (LGC, Sec. 131 (y)). · conditions· as the Board may determine
5. Taxes, fees , charges, and other impositions
upon goods:
a. Carried into;
b. Out of; or
c. _fassing through the territorial jurisdictions
of L GUs in the- guise of charges for
wharfage, tolls for bridges, or otherwise.
NOTE: LGUs may prescribe the terms and
conditions for the imposition of 'toll fees or
charges for the use of any public road, pier, or
wharf funded and constructed by tnem. A
service fee imposed on · vehicles using
municipal roads leading to the wha"rf is, thus,
valid. However, Sec. 133 (e} of R.A. No. 71~0
prohibits the imposition, in the · guise
of wharfage, of fees ....:. as well as all other: taxes
or charges in any form whatsoev~r - _on- g~ods
or merchandise. It is, therefore, 1rr~levant 1f the
fees imposed are actually for police surveillance
on the goods because any other fqr111 of
imposition on goods passing · through the
territorial jurisdiction of the municipality is clearly
prohibited by Sec. 133 (e} (Palma Development
- Corp. v. Municipality of Malangas, G.R. No.
152492, October 16, 2003) .
6. Taxes, fees , or charges on Agricultural and
aquatic products when sold by marginal fc:1rmers
or fishermen ;
Marginal Farmer or Fish~rman - refers_to an
individual engaged in subsistence farming or
fishing which shall be limited to the sale, barter,
· . G.R. No. 158881 , April '16,· 2008) .
or exchange- of agricultural or marin~ products.
produced . by himself and his immediate family
(LGC, Sec. 131 (p)) .
-7. Taxes -on business enterprises that are: (BOI)
a. Certified by the Board -of Inve st ments
as fioneer or non-pioneer; a nd ·
b.· For a period of 6 and 4 years , respectively,
from th~ date of registration.
However, the · grant of the Income Tax
Holiday for registered enterprises under
E.O. No. 226 ·(Omnibus Investment Code of
1987) is subject to the following rules:
i. Fully exempt - for 6 years •from
commercial operation for pioneer firms
and for 4 years for non-pioneer firms.
ii. • Proportionate - for a period of 3 years
from commercial operation , registered
expanding firnis shall be entitled to -
exemption from income tax levied by the
National Government proportionate to
their expansion under such terms and
(E.O. 226, Title Ill, Art. 39 as amended
by R.A No. 7918). · .
•• 8. ExGise taxes on articles enumerated under the
NIRC, as amended , and taxes., fees, or charges
on petroleum products;
This covers 2 distinct limitations:
a..,Excise taxes on articles enumerated under
the NiftC:-- only excise taxes are prohibited.
Thet e:s'l)ould be-a mirror image between the
go6ds• sbught to be• taxed by the LGU and
1,
the g9ods either un9er ad valorem tax or
specific tax.
b. Taxes, -rees, or charges ·on • petroleum
pro.ducts - · all kinds of taxes are prohibited.
Since the law .does not distinguish, LGUs
are prohibited from imposing not only"excise
taxes on petroleum products, but all taxes,
fees ,. and charges (Petron Corp. v. Tiangco,
G.R. No. 158881, April 16, 2008).
The language of Sec. 133(h} makes plain that
the prohibition with respect to petroleum
products extends not only to excise taxes
thereon, but all "taxes, fees ; and charges." The
earlier reference in Par. (h} to excise taxes
comprehends a wider range of subjects of
taxation: all articles already covered by ·excise
taxation under the NIRC, such as alcohol
products, ~obacco products, mineral . products, ·
automobiles, and such non-essential goods
such as jewelry, goods made of precious metals,
perfumes, yachts, and other vessels intended
for pleasure or sports (Petron Corp. v. Tiangco,
In contrast, the later reference to "taxes, fees ,
and charges" pertains only to one class of
articles of the many subjects of excise taxes,
specifically "petroleum products" . While LG Us
are authorized to burden all such other class of

goods with ·taxes, fees, and charges," excepting
excise taxes, a specific prohibition is imposed
baning the levying of any other type of taxes with
respect to petroleum products (Pet,:on Corp. v.
nangco, G.R. No. 158881, April 16, 2008).
9. Percentage or value added tax (VAT) on sales,
barters, exchanges, or similar transactions on
goods or services;
EXCEPTION: When otherwise provided bylhe
Code, such as the following : · ·
By Provinces/Cities:
a. Tax on Business of Printing and Publication
Percentage Tax - shall not exceed 50% of
1% (or 0.5%) of their gross receipts, or in
case of newly started business, the rate
shall not exceed 1/20 of 1% of the capital
investment.
b. Amusement tax -- • 1
, ·y ) .
Percentage Tax - shall not exceed 10% of
gross· receipts from aqmission fees (LGC,
Secs.- 136 and 140).
I . . transportation 6f t e pas~engers or goods be by
EXCEPTION: The holding of operas-, - · - - - - - 7notor vehicle·fFif'. ·Philippine Industrial Corp. v.
concerts. dramas, recitals, painting and art
exhibitions, flower show , musical
programs, literary an · rijtorical~.
presentations, except _p9P rock( §r:sr 1lar - - , - .11 . a1:io1"i p~~mi.~n'ls paid byway.of ,B.einsurance
concerts (LGC, Secs. 1-36 and 1~~t . , . I
By Municipalities or Cities: / ....
a. Manufacturer · r. . . ,-.-~ .. grocures a third person to insure him against .
i. Gross sales of ~ .500,000 or more , - 1-' L-- · loss Qr liaqility by reason of such · original
ii. Percentage T.ax - not exceedij .37.5%.
of 1% based on the preceaing year's
4
sales ·
b. Wholesalers, distributors, or dealers
i. Sale receipts for the preceding palendar
year of ~.000,000 or more
ii. Percentage Tax- not exceeding 50% of
1% (or 0.5%) on the gross sales or
receipts
c. Contractors
i. Gross receipts of ~ .000,0.00 or more
ii. Percentage tax - not exceeding 50% of
1% (or 0.5%) on their gross receipts
(LGC, Sec. 143).
If the gross sales or receipts do not exceed the
above prescribed amount, the LGU is pre-
empted from imposing any percentage tax
(LGC, Sec. 133 in relation to Sec. 143).
LOCAL TAXATION
Taxation Law
10. Taxes on the gross receipts of:
a. Transportation contractors;
b. Persons engaged in the transportation of
passengers or freight for hire; and
c. Common carriers by air, land, or water.
EXCEPTIONS:
i. When otherwise provided by the LGC;
and .
ii. On the operation and franchising of
tricycles (/RR of LGC, Art. 221 (j)).
The transport of goods or cargoes by
transportation contractors, . persons , who
transport for hire, and common carriers is
subject to 12% VAT._ (NIRC, Sec. 108 (A)).
The transport of passengers by transportation
contractors, persons who transport for hire, and .
common carriers is subject to 3% tax on their
, qu~rterly gross receipts (NIRC, Sec. 117). ·
I •
--------- NOTE: Pipeline concessionaires are considered
as commnn y rriers . The definition of "common
carriers" in th Civil Code makes no distinction
. , as to the rpeaos of transporting, as long as it is
. by land, wat€r.' or air; nor does it provide that the
.~ Court of Appeals, G.R. No. 125948, December
29, 1998). J
·· , ,. ::- . ; .
Of~ ~t ocess1on; ,
/'
t.--.? ~einsurance one by which an insurer
ipsura?te,</NSURANCE CODE, Sec. 97).
• - ~-, · ·
l · ,1 • ' Retrocession - transaction whereby one
insurance entity (retrocessionaire) agrees to
inderpnify another insurance entity (the
"reinsurer") against all or part of the loss that the
la~er sustains under. a policy or policies of
reinsurance that it has issued (DIZON, The
. Insurance Code of the Philippines (2009), p.
.533-534). : ·
12. Truces, fees, or charges for the:
a. Registration of Motor vehicles· and
b. Issuance of all kinds of licen;es or permits
for the driving thereof;
EXCEPTION: Tricycles (LGC, ·Sec. 133 (i)).
. NOTE: Subject to .the guidelines prescribed
by the Department of Transportation and
._Communication (DOTC, now two separate
entities, DoTR and Doc respectiv~ly),
 \ I
MEM-Q~y AI D
San Beda College of law - RGCT Bar "---•'----
.....,..a=.., Center
municipalities
. .and cities can r egu 1ate the
operation of tnc~cles and grant franchises
for the operation thereof w·th· . laws (No. 12) (ABAN, supra at 402-406) .
· I· · 1 in their
tem·t ona Jurisdiction (LGC, Secs. 447(3 '( )
and 458 (3}(vi)). · 1 VI
13. Taxes, fees , or other charges on Phili ·
products a~tually gxported ; ppine
EXCE~TION: \/"'.'~en _o_therwise provided by the
Code (1.e. , mumc,pa/Jties may impose taxes on
exporters of essential commodities) (LGC s
143(c) and 151). • ecs.
14. Taxes, fees, or cha,rges on
a. Count~side and Barangay business
ent~rpnses; and
b. Cooperathi~s duly registered under·R.A. No.
6810 (Magna Carta for Countryside and
Barangay Business Enterprises) and R.A.
No. 69~8 . (Cooperative Code of the
Philippines).
15. Taxes, fees, or charges of any kind on the
National Government, , its agencies and
instrumentalities, and local government unit
(LGC, Sec. 133).
ILLUSTRATION:. (2016 Bar Question)
In 2014, M City approved an ordinance levying
customs duties and fees on gopds coming into
the territorial jurisdiction of -the city. Said city
ordinance was duly published ori February 15,
2014 with effectivity date on March 1, 2014. Is
there a ground for opposing said .ordinance?
ANS: YES. The ordinance is ultra vires. The
taxing powers of LGUs, such as M Cify, cannot
extend to the levy of taxes , fees, and charges
already imposed by the national government.
This includings the levy of customs duties under
the Tariff and Customs Code (now the Customs
Modernization and Tarrifs Act of 2016) (LGC,
Sec. 133 (o)) .
THE ENUMERATED COMMON
LIMITATIONS MAY BE C~ASSIFIED AS
FOLLOWS:
1. Taxes which are levied under the NIRC unless
otherwise provided by the LGC (Nos. 1, 2 , 3, 8,
9, 10 above);
2. Taxes, fees, and charges which are imposed
under the Tariffs and Customs Code (No. 4);
3. Taxes, fees, and charges where the . imposition
of which contravenes existing governmental
policies or which are violative of the fu.ndamental
principles of taxation (Nos. 5, 6 , 7 , 11 , 13, 14,
15); and · NOTE: When public safety and welfare so
4. Taxes, fees, and charges imposed under special
I TAXING POWERS OF
LGUS
THE TAXING POWERS OF LGUs MAY
I
BE CLASSIFIED AS FOLLOWS: (CoS-
CoR)
1. · Common revenue-raising powers (LGC, Secs.
153-155);
2. §.pecific powers (LGC, Secs. 135-143; 147-149;
151-152); .
· 3 . Community tax (LGC, Sec. 156) ; and
4. Residual taxing powers. (LGC, Sec. 186) .
,
_
C OMMON REVENUE-RAISING
POWERS: (SPUT)"
-1 . Reasonable fees and charges for §.ervices
. rendered·(LGC, Sec. 153);
2. Public. utility charges for the operation of public
utilities owned, operated , and maintained: by
LGUs within their jurisdiction (LGC, Sec. 154);
and
, 3. Ioli, fees, or c;:harges for the l)Se of any public
road, pier or wharf, waterway, bridge, f~rry, or
telecomml.!nicalion system funded and
consfriJc!ed by the LGU concerned (LGC, Sec.
155) .
·· ·· Toll - ·a fee imposed on goods or persons
travelling . public roads or bridges (V
DOMONDON, Taxation, supra at 159) .
Charges - a pecuniary liability, as re'nts or fees ,
against persons or property (LGC, Sec. 131(g)) .
Fee - a charge fixed by law or ordinance for the
regulation or inspection of a business or activity
(LG(;, Sec. 131(/)) . It includes charges fixed by
law or agency for the services of a public officer
in the discharge of his official duties (/RR of
LGC, Art. 220(/)) .
EXCEPTIONS:
1. Officers and enlisted men of the AFP ;
2. Members of the PNP on mission ;
3. Post office personnel delivering mail; and
4. Physically handicapped and disabled citizens
who are 65 years or older (LGC, Sec. 155, par.
1):
requires, the Sanggunian concerned may
 LOCAL TAXATION
· Taxation Law

discontinue the collection of .the tolls, · and, . Article 415 of the Civil Code (Province f
thereafter, the said facility shall be free and open Pangasinan v. Team Sua/ Corp., c. T.A. E~
for public use (LGC, Sec. 155, par. 2). Case No. 1883 (C. T.A. AC No. 173), August
30, 2019).
SPECIFIC POWERS OF LGUS TO
IMPOSE TAX . b. Tax on Business of frinting and
Publication
1. Provinces (RP 2-F-SGQ-PAD) r-=,;~' - - - - - - - - - - - -
a. Tax on Transfer of Real Property Business of .printing and/or
Ownershf publication of books, cards,
posters,-etc.
Sale, donation, barter, or any
other · niode of transferring Not more than 50% of 1%; or
ownership or title ofreal property In case of a newly· started
business: not more than 1/20 Of
Not more than 50% of 1°% {0.5%) 1%

The total consideration involved Gross annual receipts for the

or of the fair market value in case preceding year or
the monetary consideration In case of a newly start13d
involved in the transfer is not business: capital investment
substantial, whichever is ~igher , " ,
~~~~~.,,st Printing of DepEd/CHED/TESDA
Transfer ~r d·ispositi.on'.pursu~nHo , _-;_' prescribed texts or references
R.A. No. 6657 (Compr~heosive
Agrarian Refo'!71 Prgg(afnr' . . .: - (LGC, Sec. 136) ·
........ .... .
.
Seller, dbnor, r' , tra sferor: The press is not exempt from the .taxing
executor, or.tadministrato~ power. of th~ State and that what the .
-----,---------1 .- - ----- -- Constitutional '-, guarantee of free press
Within 60 -d~y; 'frbm the' d;te of · prohibits are laws which single out -or. target
of.
the execution a
~e deed or from : . · group ~Ion ng to the p~ess for a special
1
the date of tb!'.;'d~ede,nt'~ 9eath · 'tre~,megt or w~ich in any way discriminate
{LGC, Sec. 135) - · _ ·. _ , · ~- -- -· 1· - . - -- -! :!!1e, ~re~s o_n J,h,,e ba~is of the content of the
, 'J .\,,./.
', ,,
l •
,.,, '/,pubhcatron
•
. .
.,. .•
,(tolentmo v. Secretary . of
E_mbassi~s. consa[ates, \ and -:: 1.oth~r l· ·· / ·.
~"-)-Finan e, G.R, Nd. 115455, October 30,
diplomatic offices are deemed pa~ ot t)le ~~-1 / ("., _:, 19~5).
territory of the country \)ley repre._se11t a~d , /: _;-., :.. r· I' . . .
therefore, are exempt_fro any natiQnal or~~ ---- · .~ ~·"· N~~E: . _The tax on pubhcatrons rs a
local taxes based on the gen~rally ~c.~pted ~-•v-·• .-· "' • . ,Pro.~m9 al _ tax separate and distinct from the
principlethatthetaxlawsofonecoui)try-'are , ,r. .: ._ ....:~. buJJ~~ss. _tax imposed by ci~ies . a_nd
not applicable to another. qonseque11tlt, the f-. : : ) __. ,.
.murnc1pallt1es (LGC, Sec. 143 (h) tn relation
purchase of property by the E_ mbassy oflhe,..,, -~,---·· · to Sec.151).
Islamic Republic of Iran of a real property in
the Republic of the Philippines for official c. Franchise Tax
use as the ambassador's residence was
Enjoyment of a franchise
considered as tax exempt and the transfer
(secondary franchise)
taxes paid by the buyer under protest was
ordered refunded (DOF ;?nd lndorsement Not more than 50% of 1%; or
dated February 10, 1993 to the Treasurer of In case of a newly started
Makati). business: not more· than 1/20.of
1%.
Conveyance of Shares are NOT
COVERED by Sec. 135 of the LGC Gross annual receipts fol' the
The transfer of Mirant Asia Pacific Ltd. preceding year; or
(MAPL) shares. is not a transfer of real In case of ' a newly started
property ownership under Section business: capital investment.
135 of the LGC. Clearly, MAPL shares are
equities and, by definition, not real REASON: Franchise tax shall be
p~operties under the based on gross receipts precisely
contemph;ltion of Section 135 in relation to because it is a tax on business,
 \ I .

MEM:O~Y·AI
98:'
D
S1W1 Bed& lkiiWnllty Coleoe Law- RGCT 0perat1on8 Center

rat~er tha~ on persons or property

(City of Inga v. Camarines Sur IJJ
Electric Cooperative • Inc It is vested on the It is vested in the
(CASURECO 1/1), G'. R: No: · individuals who corporati_
on.
192945, September 5, 2012). compose the
corporation , not in the
Notwithstanding any exemption corporation itself.
granted by any law or other special
law, the province may impose a tax
on businesses enjoying · a
franchise It cannot be conveyed It may ordi.narily be
(LGC, Sec. 137) in the absence of conveyed or mortgaged
legislative authority to under a general power
Franchise Tax do SO . . · granted to a corporation
to dispose of its
A franchise tax is a tax ori the privilege of
property .
. transacting business in the state and
. exercising corporate franchise granted by (AQUINO, Philippine .Corporate.Law Compendium
the state. It is not levied on the corporation (2018), p. 39)
simply for existing as a corporation, upon its
property or its income, but on its exercise of Difference between Franchise · Tax
the rights or privileges granted to it by the Imposed by the NIRC and the LGC ..
. government. It is within this context that the In its general sense, a franchise is a .
phrase tax on businesses enjoying ··a privilege conferre~ by government authority,
franchise in Sec. 137 of the LGC should be which does not belong to citizens of the
interpreted and understood (City of lriga v. . _ -·- couri !Y generally as a matter of co~mmon
Camarines Sur Ill Electric Cooperative, Inc. ·::' < ~-~·, ri_g_~ ?~4The right under a primary or general
(CASURECO Ill), G.R. No. 192945; ,.
franchise
. is vested in the individuals who
September 5, 2012) . corrip9se the corporation and not in the
cor 'ora'qon itself. · - · -
_The tax covers special . .or secor,dary
franchises which refer\ to the right or · Ip its ~pe\:ific sense, a franchise may refer
privileges conferred upon an existing to a gener.al or primary franchise, or to a
corporation such as the- right to use the ......s~J~~qr~ ondary franchise. In Section
streets of a munii:;ipality to lay ·pipes of 1'34> (mF dl the LGC, Congress defined a
:; franchise in the sense of a secondary ·or
1~:
tracks, erect pole_s , or string wires (National
Power Corp. v. City of Cabanatuan, G.R. t:·~;tl _ specia~ franchise. This is to avoid any
No. 149110, April 9, 2003) . ,: ..;,i., .
t1 i HR~fus,on wt,en the ~ord franchise is used
· ., .• in the context of taxat_ ion. As commonly
PRIMARY FRANCHISE AND used, a franchise tax· is "a. tax on the
privilege of transacting business in the state
SECONDARY FRANCHISE" . and exercising corporate franchises granted
DISTINGUISHED by the state." It ·is not. levied on the
corporatiqn simply for. existing as a
·corporation, upon its property or its income,
but on its exercise of the rights or privileges
'
granted to it by the government. It is within
It is a franchise to exist It is · a franchise this context that the phrase "tax on
as a corporation. conferring certain rights businesses enjoying a franchise" in Section
and privileges upon 137 of the LGC should be interpreted and
existing corporations, understood _(National Power Corporation v.
such as the right to use · City of Cabanatuan, G.R. No. 149110, April
the streets of a 9, 2003). · . ·
municipality to lay pipes
of tracks, erect poles, or To stress, a franchise tax is imposed based
string wires. not on the ownership but on the exercise by
the corporation of a privilege to do business.
The taxable entity is the corporation which
exercises the fran·chise, and. not the
individual stockholders (ld.J,

Requisites to be Liable for Local
Franchise Tax: (ST)
i. That one has a "franchise" in the sense
of.a secondary or §pecial franchise; and
ii. That it is exercising its rights or
privileges under this franchise within the
Ierritory of the pertinent local
government unit (City of lriga v. ·
Camarines Sur Ill Electric Cooperative,
Inc. (CASURECO Ill), G.R No. 192945;
-September 5, 2012; National Power
Corp. v. City of Cabanatuan, G.R. No.
149110, April 9, 2003) .
Simultaneous Imposition of Franchise
and Local Business Tax
While the 'city or business tax' and the
'franchise tax' are both based on the gross
receipts and sales of petitioner's business,
the 2 taxes, however, are differerit in term~
of their nature or character (Sky Cable Corp.
v. Quezon City, CTA AC No. 102:'i=epruary •
10, 2014) . · · " L ·-· ,
r . ,,, sai ~ranch or sales office which shall
A business tax is im vilege-· -:-
of engaging in the b . cting a
system of commu as .a
franchise tax is imp cise of
enjoying a franchise · bl orp.- v. - ·--- --- -l bustli1~s p. erations at a year later t~an
Quezon City, CTA G-1/o, 02, F ary 10,
2014). ~< __..,.\
, ..... , ; ~.
Clearly, while the citY tax \~nd ~n9hise ax-··- - --t :- ....,/(IRR'Of LGC, 226 (d)) .
.are both imposed y: the sa~e_,,. taxing
authority, on the same subjec, matter and · ·
for the same taxing ~ riod, the imPQ_S~ion ,._ \.,. · ; ;. -:/ 01;1/rry ~'isou~ces Extracted from
thereof, ho:-vever, does not ~.constitute ,.--.- \ · .
double taxation as they ar~ not of the same...'..:- : .. _\
kind or character (Sky Gable Corp. -- v.
Quezon .City, CTA AC No. 102, ~e- ruati,10,
201~. . :
When an Entity Has No Franchise, LGU
Cannot Assess It With Franchise Tax
Sec. 137 of the Local Government Code
categorically states that franchise tax can
only be imposed on businesses enjoying a
franchise. When the taxpayer has no
franchise, a local gov_ emment unit cannot
assess him with a franchise tax. Thus, local
franchise tax is imposed on the privilege of
operating a franchise, not a tax on the
ownership of the transmission facilities. It is
clear that such tax is not a liability of the
NPC (National Power Corporation v.
Provinciai- Government of Bataan, G.R. No.
180654, April 21, 2017).
----
LOCAL T~ATION
Taxation·Law
Determination of Capital Investment as
Basis of Franchise Tax of a New
Business
The capital investment to be used as basis
of the tax of a newly started bus_iness shall
be determined in the following manner: (AS-
RT)
i. In the locality where the principal office
of t~e business is located, the paid-up-
capital stated in th(!! Articles of
incorporation, in case of corporations, or
in any §.imilar document in case of other
types of business organizations or
enterprises shall be considered as the
capital investment; .
ii. Where there is a branch or sales office
which commences business operations
during the same y_ear as the principal
office but which is located in another
province or in a city outside the
province, the paid-up capital referred to
1
• • .,. •.. above shall be Reduced by the amount
; oN he capital investment made for the
•- ..... 'be taxable instead by the province or
, .. · ·ci\}'-W.ere it is located; or
:;., ii. Where tli'e newly started business.·is a
\ branct1 p sales ·office commencing
J that ·of \lie principal office, capital
i .. ~nve:stme1t ~shall mean the Iotal funds
• ' • ,J , nve,sted mr the br~nch or sales •office
.,. , _. 1._ 1 J
J ·
;, . ·ti.-' Tax , on Sand Gravel and other
,Public Land
\sif~~
.-:. , - - - - - -- - - - - - - ,
Extraction of ordinary stones,
gravel, sand, earth and other
quarry resources as defined under
2Tra"nsiictionih the NIRC, from PUBLIC LANDS
:s.raxef ~~7.:;·:: or from the beds of seas; lakes,
•• . . rivers, streams, creeks, and other
public waters within its territorial
jurisdiction
Tax Rate Not more than 10%
Tax Base· Fair market value in the locality
per cubic meter of the subject
Issued exclusively by the
Who Issues provincial governor pursuant to
Permit the ordinance of the Sangguniang
Panlalawigan
Distribution a. Province- 30%
of Tax b. Component city or
Proceeds m1,micipality where resources
extracted- 30%
 MEK-O~v AI D ·
s., Seda College of Law - RGCT Ber Operations Center
c.Barangay where resources
extracted- 40%
The proceeds of the tax on sand
gravel and other quarry resource~
in highly-urbanized cities:
Highly urbanized city- 60%; and
Barangay where the sand, gravel,
and other quarry resources are
extracted - 40%
(LGC, Sec. 138 and /RR of L~C, Art. 239)
NOTE: The authority to impose taxes and
fees for extraction of sand and gravel
belongs to the province and NOT to the
municipality where they are found
(Municipality of Saf'!_ Fernando La Union v.
Sta. Romana, G.R. No. L-30159, _March 31,
1987).
Province has no authority to impose taxes·
on stone, sand, gravel , earth, and other
quarry resources extracted from PRIVATE
LANDS because such tax is a tax upon the
performance, carrying on, or exercise of an
activity, hence an excise tax upon an activity
already being taxed under the· NIRC. The
common limitations prohibit the LGU from
imposing · such tax (V DOMONDON,
Taxation, supra at 103) .
A governor'!? permit is a prereQuisite before ·
one can engage in a quarrying business if
an ordinance is promulgated imposing a
requirement therewith (Province of Cagayan
v. Lara, G.R. No. 188500, July 24, 2013).
e.
Exercise or practice of profession
requiring government licensure
examination
Not to exceed 19300
Reasonable classification by the
Sangguniang Panlalawigan
Professionals exclusively
employed in the government
Payable annually on or before
January 31 or before beginning
the practice of the profession
Province where he practices his
profession or where the principal
office is located
NOTE: Employer of a pe~son subject ~o
professionaf tax shall require payment . Y
that person of the tax on his profession
b·efore· employment and annually thereafter
(LGC, 139 (c)).
The professionals subject to tax herein
imposed are only those who have passed
the bar.examinations, or any board or
other examinations conducted by the
Professional Regulation Commission (PRC)
(/RR of LGC, Art. 228 (f)) .
For example, a lawyer who is also a
Certified Public Accountant (CPA) must pay
the professional tax imposed on lawyers and
that fixed fcir CPAs, if he is to practice both
professions (/RR of-LGC, Art. 228 (f)).
A person who has paid the corresponding
professional tax shall be entitled to practice
his profession j n any part of the Philippines
without being subjected to any other
national or local tax, license, or_fee for the
practice of such profession (LGC, Sec. 139
·" (b)t - ·
ILLUSTRATION: (2005 Bar Question)
X is ·a CPA-lawyer engaged in the practice
of hi~ two professions. He has his main
. office in Makati City and maintains a branch
office in Pasig City. X pays his professional
. ta~ ~as .-a .. CPA in Makati City and his
· profes!!poal'tax as a lawyer in Pasig City.
i. May Makati City, where he has his main
office, require hi_m to pay his
~professional tax as a lawyer?
ANS: NO. X has the option of paying his
professional tax as a lawyer in Pasig
City where he practices law or in Makati
City w_here he maintains his principal
office. The professional" tax paid as a
lawyer in Pasig City will entitle him
to practice his profession in any part of
the Philippines without being subjected
to any other tax for the practice of such
profession . ·
ii. May X refuse to pay professional tax as
a CPA since he already paid his
professional tax ~s a lawyer?
Al')IS: NO. X must pay the professional
tax imposed on lawyers and that fixed
for CPAs, if he is to practice both
professions.
 LOCAL TAXATION
Taxation Law

. f. basically belong to artistic forms of

entertainment, while the' forme~ ,cater
Ownership, lease, or operation of sports · and gaming · (Principle o(
theaters, cinemas, concert halls, Ejusdem . Generis) (Philippine
circuses, boxing stadium, and Basketball Association v. . Court of
other places of amusement Appeals, G.R. No. 119122, August 8,
20_D0) .
.Not more than 10% (as amended It is the intent of the Legislature not to·
by R.A. No. 9640 (An Act impose VAT · on pe-rsons already
Amending Sec. 140 (A) of the covered by the amusement tax. Thus,
LGC, May 21, 200f)) the gross receipts derived ,by
admission respo'ndents-from adrntssion tickets in
showing motion pictures, _filnis, or
movies are subject to the amusement
Operas, concerts, dramas, tax and not VAT under the NIRC
recitals, painting and art · (Commissioner of Internal Revenue v. .
exhibitions, flower shows, SM Prime Holdings, Inc., G.R. No.
musical programs, literary and 183505, February 26, 2010).
oratorical presentation
. ,;· _-:---,[" ~· _ Places upon which Provinces / Cities
Except (Taxable): Po ,~rocK, or· 1 1 ~aQ!IOf Impose Amusement Tax
similar' concerts ,f / ......J..'-··. \. ,! ~a, ca~se
---- - The NIRC Already Imposes
.. Ahlu$eft\ent Tax):
ax shall be y~ - . ·- ~ !:.._ ·.Cockpits;
e province munjc1pality. , - •. 11 . Ca ret ;
ment' place§ ;~:~ ~\ \ii. N'g~t or day clubs; .
I . -.., ___l;v__.' Boxi_n~ ibitions; · . ·
-·-··- ·- . · : Pr?f~~J.2ral b~sketball games;
\ ·' · :- ;. · ;,. / y1. JaI-». a,; ancl
I
Amusement is a plegSu le g!Y~fSion and; ...,· .. ,. : ;Vii. Ra tr,a s (NIRC, Sec. 125).
entertainment. It isl..·.( synonxr'Q us. Q...-· · 'J;-..:; •
relaxation , avocation, pas · e, oHUn {LGC, _ •, .. · t .~t:lq TE: Under the principle of pre-emption,
Sec. 13f (b)). \ \': ,;_; ,,; _-:- , • J.:{J~ey ~re not subject to amusement tax
. 1 .__ : · )¼~> because they -are already sub}ect to other
~musement places i_nch.Jde the,fte~.__.. L~ percentage tax und~r Sec._-125 of the NIRC ,
f· -,\ · )
_

cinemas, concert halls, circuses, and' olh~r ·
pla~s . of amusem~nt where il}e se~~
adm1ss1on to entertain oneself 15y__s~ij1g or
viewing the show or performanceJ::{ t.,GC,
Sec. 131 (c)) .
Businesses not Subject to Amusement
•Tax:
I. Resorts, swimming pools; bath ·
houses, hot springs, and tourist
spots - cannot be considered as among
~he "other places_ of amusement'"
contemplated by'Sec. 140 of the LGC
and which may properly be subject to
amusement tax (Principle of Ejusdem
Generis) (Pelizloy Realty Corp. v.
P~ovince of Benguet, G.R. No. 183137,
April 10, 2013).
(LGC, Sec. 133(0) m relat10n to NIRC; Sec.
12.~~ · · ·
· _ ,\ \ .
M \1):
1
\ Annual . fixed tax for every Delivery
- . " truck or van of manufacturers or
producers, wholesalers of, dealers,
or retailers in, certain roducts
Use by manufacturer, producers,
· wttolesalers, dealers, or retailers of
truck, van, or vehicle in the delivery
or distribution ··of distilled spirits,
fermented liquors, softdrinks, cigar
and cigarettes·, and other products,
determined b_y the Sangguniang
Pan/alawigan, tp salf3 ·outlets or
consumers,· whether directly or
indirectly, within the province

II. Professional basketball games - they Not to exceed 19500

do not fall within the meaning of "other
places of amusement" under the same , Every truck, van, or vehicle
· category as theaters, cinematographs, (LGC, Sec. 141)
concert halls and circuses which
 \'
MEM:0-:RY AID
68"1 Bede Unlwlsity Colege of lAlw - RGCT Bar C)peratjc,na Center
NOTE: They shall be ·exempt from the tax
on peddlers which may be imposed by
municipalities (LGC, Sec. 14_1 (b)).
2. Munic_i~ali~ies (MaWD2 ER-CBP-Not)
A municipality may levy on those taxes, fees
and charges not otherwise levied by province~
(LGC, Sec. 142). . 143 (c)).
Tax on Various Types of Business
A municipality- may impose taxes on the
following businesses:
a. On Manufacturers, assemblers, re-
packers, processors, brewers, distillers,
rectifiers, and compounders · of liquors,
distilled · spirits, and wines or
manufacturers of any article of
commerce of whatever kind or nature; .·
Tax Rate: Grad_uated scale -of P165-P24,
· ·375 per annum or a rate not exceeding
37.5% of 1% (LGC, Sec. 143 (a)).
Tax Base: Gross sales or receipts for the . ·
preceding calendar y~ar (LGC, Sec. 143.
(a)).
b. On Wholesalers, Distributors, or Dealers· - '
in any article of commerce wha!ever qt
kind or nature; · T;ix, ~ ate: ?% for P4~0, 000 or less; 1% for
, ..
Tax Rate: .Graduated s cale ~of P18 - P,10,
000 per annum or rate hbt exceedjn__~ 5Q 0~ ';
of 1% when the gross receipts exceed P2f
000, 000 (LGC, Sec. 143 (b)f.
: .
Tax Base: Gross sales or receipts for the
preceding calendar year (LGG,' ·~ec.. 1.43
(b)) . Z.i:,- ·,.
Wholesale - Sale where the purchaser
buys or imports ·the commodities for resale
· to persons other than the end_ u~e~
regardless of the quantity of the transaction
(LGC, Sec.' 131 (z)).
Dealer - 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 (LGC, Sec. 131 -(k)) .
c. On gxporters, and on manufacturers,
millers, producers, wholesalers,
distributors, dealers or retailers of
essential commodities;
Tax Rate: Not exceeding 1/2 of the rates
prescribed under Nos. 1, 2 & 4 (LGC, Sec.
·
Essential Commodities (RW-CLAP-SC) ·
i. Rice and corn; .
ii. Wheat or cassava flour, meat, dairy ·
products, locally manufactured,
. processed; or preserved food, sugar,
·salt and other agricultural, marine, and
fresh water products, whether in .their
original state or not;
iii. ~ooking oil and cooking gas;
iv. Laundry soap, d~tergents, and
medicine; . .
v. Agricultural implements, equipment
and post- harvest facilities, fertilizers,
pesticides, insecticides,·herbicides, and
other farm inputs;
vi. Poultry feeds and other animal feeds; ·
vii. 'icho.ol supplies; and ·
viii. ~ement (LGC, Sec 143 (c)) .
- d. · On Retailers;
the excess over P400, 000 (LGC,' Sec. 143
(d)) . . ,
Mc-""tt •
Tax Base: Gross sales.. or receipts for the
preceding calend~r year (LGC, Sec. 143
(d)).
NOTE: Barangays shall have the exclusive
power to levy the business tax on retailers
as provided under Sec. 1S2·of the LGC; if
gross sales or receipts do not exceed PSO,
000 in. case of cities or '930, 000 in case of
municipalities (LGC, Sec. 143 (q)).
Retail - a sale where ·the purchaser buys
the commodity for his own consumption,
irrespective of the quantity of the commodity
sold (LGC, Sec. 131 (w)).
e. On ~ontractors -and other· independent
contractors; ·
Tax Rat_e: Graduated scale of P27.50-P11,
500 per annum or rate not exceeding 50% .
of 1% (LGC, Sec. 143 (e)). . ·
Tax Base: Gross sales or recefpts for the
p_
receding calendar year (LGC, Sec. 143
(e)) .
 LOCAL TAXATION
· · Taxation Law

Contractor - includes persons, natural or preferred shares, including placing the

-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
(LGC, Sec. 131 (h)).
same in a trust account yielding interest is
not tantamount to doing bul?iness whether
as a bank or other financial institution, but
an activity that is ,esse~tial to its nature as a
Coconut Industry .lnvest'!lent ~und (~IIF)
holding company. Accordingly, 1t cannot be
held liable for LBT under Section 143 (f) of
the LGC (Id.).

Transportation contractors are not g. On feddlers engaged •in the sale of any
included in the·term "contractor" as defined merchandise or article of commerce; and
in Sec. 13_ 1_of LGC. The taxing power of
LGUs does not extend to taxes on the gro~s Tax Rate: Not exceeding ft50 per peddler
receipts of transportation contractors (LGC, annually (LGC, Se~. --.143 (g)) . ,.
Sec. 133 OJ).
Peddler - any person who, either for himself
f. On · §.anks and . other .financial or on com'mission, travels from place to -
institutions; place and sells his goods or offers to sell

Tax Rate: Not exceeding 50% of 1% (CGC, 1 1

..
·~
and deliver the same (LGC, Sec. 131t (t)) . ,

Sec. 143 (f)). ,:.... \~! / h -On . any business, Not otherwise
sp4[tClfied in the preceding parag_raphs,
Tax Base: Gross sales or' receipts for the . . _ wllich ,t he Sanggunian concerned may
preceding calendar year aerived fro- -~---.. _ deein,proper to ta~.
" .
interests, commission aM discounts from ;• .•.;,- , " .,,• : _:
lending activities, financial -';",_ ~ONDITIONS:
leasing, dividends, rentals on property and : ·.. '•, i. Bu~inEJSS • not -subject . to VAT or
profit from exchan e o sale _o f property;--. -- ·· -- --i per~ n~ .g~, tax under NIRC; or
insurance premium (l:.GG, Sec. 143 (f)J:- : , .,: ji. If t~e- bu~i~ess is s_ubject to .VAT or
/. - ,, -:· --::-. ; _ percfentag;e,tax under. NIRC; the tax rate
NOTE: All other iocome and receipts ,of : · ·• - _J > ;shal not exceed 2% of gross
banks . and financia institqtions n ot 1,_, :--:- 1 }-,:J; sal~S/receipts of _the preceding cal~ndar
otherwise enumera ed above 'shall be . · ,'• //f::Y y9;ar (LGQ; Sec. 143 (h)). _
I · i .
excluded from. the t xing authoritx pf t e
LGU (/RR of LGC, A . 32 (f)).·
.
/ :.i._~~: 0" _, //·, /
;,~XCEPJ ION:_ Any business enga~ed
'- '5 1 ' / ' . ,.:-: \ \ :'; J . ,_,. in the p roduction, manufacture, refining,
Section 143 (f) Is premised on the fact-L0_..:..,.- ,.,,.,.,., ~ JUst~tiution , or.sale of oil, gasoline, and
that the persons made liable for such tax - ,...,. , '·, ) other petroleum products stiall not be
are banks or other financiaH nstitutions 1 .f :- _\' '. \ _,, subject to any local tax (/RR of LGC, Art.
by virtue ' of their being engaged in the , / l, " r ..,...;,.s,• 232 (/1)) .
business as such · ._ - - - •
This is why the LBT under -Sec. 143 (f) are When a municipality or city has already
imposed on their gross receipts from imposed · -a business · tax on
"interest, commissions and discounts manufacturers, etc. of liquors, distilled
from lending activities, • income spirits, wines, and any other ,article of
from financial leasing, dividends, rentals on commerce pursuant to .Sec. 143 (a) of
property and profit from exchange or sale of the LGC, said municipality or city may
property, insurance premium (City of Davao no longer -subject ·.the . same
v. Randy Allied Ventures, Inc. , GR. No. manufacturers, etc. to a business tax
241697, July 29, 2019). . under Sec. 143 (h) of the same LGC.
Sec. 143 (h) may be imposed only on
In this case, Randy Allied Ventures , Inc. businesses that are subject to··excise
(RAVI) is not a bank or other financial tax, VAT, or percenta·ge tax under the
institution. Rather, it is a holding company. It NIRC, and that are not otherwise
holds San Miguel Corporation (SMC) shares specified in preceding paragraphs (i.e.,
on behalf of the National Government. Secs. 143 (a) to 143 (g) of the LGC)
These shares shall be used only for the (City of Manila v. ·c oca-Cola Bottlers
benefit of the coconut farmers. Thus, RAVi's PHL, Inc., G.R. No. 181845, August 4,
management of the dividends from the SMC 2~09):
 #Ii \ I .
403
MEM:Q~Y AID
Sen Seda i.w,,er9lly Colege of Law - RGCT Bar Or,enitions Center

another person excluding discounts if ·

NOTE: In lhe case of Super Grocers determinable at the time of sales, sales return,
Inc. v. Municipality of San Pedro (CTA excise tax, and VAT {LGC, Sec. 131 (n})
AC_ . No. 86, February 25, 2013),
, petItIoner challenged · their N01..E: There is constructive receipt, when th e
reclassification from "retailer of consideration for the articles sold, exchanged or
essential and non-essential leased, or the services rendered has already
commodities· to "owners or operators of been placed under the control of the person who
privately-owned supermarkets, sold the goods or rendered the services ~ithout
shopping centers including mini-marts.· any restriction by the payor (E_m;sson
The CTA opined -that petitioner's Telecommunications, Inc. v. City of Pas,g, G.R.
business activities fall under the No. 176667, Nov. 22, 2007). ·
classification as retailer of both
essential and non-essential goods Gross Revenue - includes those amounts
under Secs. 143 (c) and (d) of the LGC, which have not actually been received yet
therefore, its re-classification cannot be (INGLES, Tax Made Less Taxing (2018), p. 511
allowed as it violates the limitation [hereinafter INGLES, Reviewer]).
prov.ided under par. (h) of Sec. 143 of
the LGC. NOTE: The imposition of local business tax
based on petitioner's gross revenue will
BUSINESS TAX DISTINGUISHED FROM inevitably result in the c_pnstitutionally proscribed
double taxation inasmuch as petitioner's
INCOME TAX revenue or income for a taxable year will
definitely include its gross . receipts already
reported during the previous year and for which
Business taxes Income tax is a tax on all • ·• - _local bu·siness tax has already been paid .
imposed in the exercise yearly profits arising ·- (Ericsson · Telecommunication v. City of Pasig
of , police power . for from property, G.'R. No. '176667, November 22, 2007) .
regulatory purposes .
professions, .trades,. or
are paid for the offices, or as tax on a Rates of Jax in Municipalities Within Metro
privilege of carrying on person's income, Manila Area 1
a business in _the year emoluments, profits, The municipalities within Metro Manila may levy
the tax was paid and the like taxes at rates which s_hall not exceed by 50% the
maximum rates prescribed in Sec.143 of the
Paid at the beginning of Due on or before the LGC for o ttier municipalities (LGC, .Sec. 144).
the year as a fee to 15th day ·of the 4th month
allow the business to following the close of the .t CQndominium Corporations - - generally
operate for the rest of taxpayer's taxable year exempted from local business taxation under the
the year LGC, irrespective of any local ordinance that
seeks to declare otherwise. They are prohibited
Prerequisite to the Due when the taxpayer from doing activities for profit under the
conduct of business has earned income as a
Condominium Code, hence, they are not
result of the conduct of
"businesses" under the LGC (Taguig City
its business Government v. Serendra Condominium ·
(Mobil Philippines v. City Treasurer of Makati, G.R. Corporation, C. T.A. A. C. No. 229, September
No. 154092, July 14, 2005) 10, 2020, . citing Yamane v. BA Lepanto
Condominium Corp., G.R. No. 154993, October
Tax Base of Local Business Tax 25, 2005) .
Gross sales or receipts, not gross revenue
(Ericsson Telecommunication v. City of Pasig EXCEPTIONS: When unit owners of a
G.R. No. 176667, November 22, 2007) . condominium would band together to engage in
activities for profit under the shelter of the
Gross Sales or Receipts - include the total c~ndominium corporation, in which, such activity
amount of money or its equivalent representing would be prohibited under the Condominium
the contract price, compensation, or service ~ee, Act. Even · though such activities would be
including the amount charged .or ma!enals considered as ultra vires, since they are
supplied with the services and deposits or engaged in beyond the legal capacity of the
advance payments actually or constructively condominium corporation, the principle of
received during the taxable quarter for the estoppel would preclude the corporation or its
services performed or to be performed for officers and members from invoking the void
 -

LO~AL -TAXATION
Taxatioo Law

nature of its undertakings for profit as a means as an extension of the principal office {IRR
of acquitting itself of tax liability (Taguig City of the LGC, Art. 243· (a)(2)).
Government v. Serendra Condominium
Corporotion, C. T.A. A. C. No. 229, September Offices used only as display areas of the
10, 2020, citing Yamane v. BA Lepanto product.where no stocks or items are stored
Condominium Corp., G.R. No. 154993, October for _sale, although orders for the products
25, 2005). may be received thereat, are not branch or
sales offices as herein contemplated (/RR of
Payment of Business Taxes the LGC, Art. 243 (a)(2)) . A warehouse
a. The taxes shall be payable for every which accepts orders and/or issues sales
separate or distinct establishment or place invoices independent of a branch with sales
where business subject to the tax is office shall be considered as sales office
conducted and one line,of business does nqt (ABAN, supra at 415) . ·
becom~ exempt by being conducted with
some other business for which such tax has b. Where the're is no branch, sales office, or
been paid (LGC, Sec. 146 (a)) . warehouse - the sale shall be duly
recorded in the principal office and the taxes
The basis for the computation of business due shall accrue and shall be paid to such
·tax is the gros~ sales/receipts for the city or municipality (LGC, Sec. 150 (a)) .
preceding year and the latest income tax
returns and financial statements for l ,: Principal office - the head.or main office
purposes· of verifying the accuracy b the \. 'J ! of the business appearing in pertinent
declarations that they have -made the - .J.. 09l ents submitted to the SEC and .
previous year {LGC, Sec. 146 (a)) specifi lly mentioned in the Articles of
> Inc rporafton (/RR of the LGC, Art. 243
Presumptive Income _(b.8) el Approach ., .. . .• (aJ(-1)).. ,.<'·.
Assessment (PILAA) t 1 ;,;- ..f ' /~
The PIL...AA may be used only if the taxpayer . c. If ther~ is n~ liranch but there is a factory,
is unable to provide pr&, of its incqme-(F/rs .- -- - - - project 'officd! plant, or plan~tlon· in
Planters Pawnshop, lnc,-J(. City Treasurer.of · · . • .r pursuit of usr ess ·
Pasay City, CTA EB No. 501, December lo/ -___.- ·_. ' . : ---~ ,
2010). \A -- ._ .·. , · .:_, _ _ T'b_E;/ ollowing 1s~~es allocation shall apply:
· ,-:;.,;; : '. 1/ ,;. 30% of.all sales recorded in the principal
b .. The tax on a business must be Raj~ by th~ , !-~ : . ·'0- 1 office - ' taxable by the · city or
person conducting the same (LGC; S~c. !46 I /. -~ -../ municipal.ity where the principal office is
(a)) . / -'1 ,,. (:-- / located (IRR of LGC, Art. 243 {b)(3));

c. In cases where a person ~ nduc~ : · bJf

1 ii. , 0% of <?II sales recorded in the principal
operates 2 or r,:iore of the businesses
me~tioned in Sec. 143 of LGC which/are 1 1
subJect to: · l
i. Same rate of tax _- t~e tax shall be
computed on the .combined total gross
sales or receipts of the said 2 or more
related businesses (LGC, Sec. 146 {b)).
ii. Different rates of tax - the gross sales
or receipts of each business shall be
separately reported for the purpose of
computing the tax due from . each_
business {LGC, Sec. 146 (c)).
i~ ffice - . taxable by the - city or
f \"4. .,. , m unicipality where the factory, project
,. office, plant, or plantation is located
(/RR of LGC, Art. 243{b){3)); if the
plantation is · located in a locality other
. than where the factory is ·located, the
70% sales allocation shall be divided as
follows: .
1.) 60% - city or rpunicipality where the
factory is located (/RR of LGC, Art.
?43 {b){4)(i));

Situs of Business Tax 2.) 40% - city or municipality where the

a. When ther, is a branch or sales office or plantation is located (/RR of LGC,
warehouse In the city . or municipality Art. 243·{b){4)(ii)) . '
where the sale was made - tax shall ·
accrue and shall be paid to the municipality Where there are two or more
where such branch or sales outlet is located factories, project offices, plants, or
{LGC, Sec: 150 (a)). plantations, located in different--
Branch office - a fixed place in a locality localities the 70% sales allocation
which conducts operations of the b1:1siness mention~d ab~ve. shall be prorated
-- \ I
MEM-Q~y AID
sw, Seda l,W"'8nally College of Law • ROCT Bar
among the localities where the
factories, project offices. plants. and
plantations are located in proportion
to their respective volumes of
production during the period for
which th~ tax is due (/RR of LGC,
Art. 243 (b)(5)).
Plantation - a tract of-agricultural land
d. Where Sales are made by Route
where trees or seedlings are planted,
whether fruit bearing or riot, uniformly
spaced or seeded by broadcast
methods or normally arranged to allow
highest production. Inland fishing
ground shall be considered as
plantation (/RR of LGC, Art. 243 (a)(4)).
ILLUSTRATION: (2010 Bar Question)
F, Inc. maintains its principal office in
Quezon City. It has branches/sales
offices in Cebu and Davao. Its factory°is
located in Marikina City. Its principal
office in QC is also a sales office. Sales
of finished products for calendar year
2009 in the amount of P10, 000, 000
were made at the following locations: i)
Cebu branch - 25%; ii) Davao branch -
15%; and iii) QC branch - 60%. Where
should the applicable local taxes on the ·
shoes be paid? ·
ANS:
1.) Twenty-five percent (25%). of the
total sales or P2,500,000 shall be
taxed in Cebu; - / ··
2.) Fifteen percent (15%)' of the total
sales or P1 ,500,000 shall be taxed
in Davao; and - storage area and no transactions are
3.) The remaining sixty percent (60~0
sales amounting to ~6. 000, 0 6 made therein. Discuss the situs of local
which are recorded in the principal
office, is divided into the follqwing:
a.) Thirty percent (30%) thereof ?r
~1 800 000 is - taxable in
Qu,ezo~ City where the principal
office is located; and
b.) Seventy percent (70%) ?r
~4,200,000 is taxable in
Ma.rikina City where the factory
is located.
Under the law, manufacturers
maintaining a branch or sal~s
outlet shall record the . sale in
the branch or sales outlet
making the sales and t~e
tax in the city or murnc1pal1ty
where the branch or sales outlet
. I ted Since F Inc.
is oca_ · the sales
maintains one f~ctory,
405
recorded in the principal office
shall be allocated and 30% of
said sales are taxable in th e
'place where the princ!pal office
is located while 70% Is taxable
where the factory is located
(LGC, Sec. 150).
Trucks, Vans, or Vehicles
i. Sale made in the locality where
manufacturer, producer, wholesaler,
retailer, or dealer has a branch, sales
office, or warehouse, the sales are
recorded in the branch, sales office, or
warehouse - tax due is paid to LGU
where such branch, saies office, or
warehouse is located (/RR of LGC, Art.
243 (d)). . .
ii. Sale made in the ·Iocality where
manufacturer, producer, wholesaler,
retailer, or dealer has no branch, sales
office or warehouse .- sales are
recorded in the b_ranch, sales office, or
warehouse from whe_re the route trucks
withdraw their products for sale and tax
due is to be paid to the·LGU where such
branch, sales office, or warehouse is
located (/RR of LGC, Art. 243 (d)).
j • •
.: '
11..:;LUSTRATIONS:
lf Ml is· ,a corporation engaged in the
'-', - tradin*f books. It holds office in_ Pasig
,. ;i..'";·-: Oity{ Whei-e ali transactions are made
including the issuance of sales invoices.
However, it also maintains a warehouse
in Mandaluyong City which serves as its
taxation.
ANS: Ml should be assessed at the
gross sales or receipts of the preceding
year by Pasig City. Likewise, Pasig City
may collect . the Mayor's permit and
other regulatory fees . On the other
hand, Mandaluyong · City, where the
warehouse · is - located but where no
transactions are made, may only collect.
the Mayor's permit fee and other
regulatory fees provided for under its
. existing local tax ordinances (DOF
dated March 29, 1993 fetter to.
Megastrot, lnc)-
ii. MC is a subsidiary of SMC. It is a
manufacturer with a principal office in
Pasig City maintained for management
and administrative purposes. It has a
factory and sales office in Quezon City,
- - ---- --

406 LOCAL TAXATIO~

Taxation Law

where said route trucks withdraw their

products for delivery to the customers in
Pasig City. Discuss the situs of local The 70% above shall
taxation. be divided as follows:
60%_ . - . city or
ANS: MC should pay business taxes to munic1pahty where the
Quezon City and. not to Pasig City. factory is located·
However, Pasig City may levy and 40% city' or
collect the annual fixed tax for every ....iFl•.sq municipality where the
delivery truck or van of MC delivering plantation is located
goods within Pasig City. The IRR of the (LGC, Sec. 150 (c)) .
LGC provides in Art. 243, Par. 2, that
"for route sales made in a locality where Prorate the 70%
a manufacturer, producer, wholesaler, above amon_g the
retailer, or. dealer has no branch, sales localities according to
office or warehouse, the sales are volume of production
recorded in the branch, sales office, or (LGC, Sec. 150 (d)).
warehouse from where the route trucks
withdraw their products for sale, and the The · sales are
tax due on such sales is paid to the LGU recorded in the
where such branch, saies office or branch, sales /office or
warehouse is l_ocated" (DOF dated warehouse (/RR of
February 26, 1993 letter to -San Miguel LGC, Art. 243 (d)(1)).
Corporation).
The sales are
SUMMARY ON SITUS· recorded in the
branch, sales office, or
warehouse · from
where the route trucks
·Sale · ,; is recorded withdraw . their
whefe -'such branch or products for sale (/RR
s~~s outlet is, located of' LGC,' Art. 243
.(LG(!_, 1Sec., 150 (a)). _ (d)(2)).
Sale shall , -~ ' . duly .
rElCOrded in . I . the . "~.. .· NOTES:
principal office (LGO, J, '_:,.:~,· i. . Aslong~sthereisabranch,thesalewill -
Se~. 150 (a)) . ·. _' ( : ~---:---:\ \ ?· . 1 _, · be re~rded there. .
- -- - --.......---·- '-I '---' · _,.,.. .. ii. · ,Th~ ·rules for allocation apP-IY only if
of-a( ·r sales · . '.. 1 the·re is no branch .
1
· in , the ' /. • .. \ iiL ' The sales allocations shall be applied
principal office . - . _,.. irrespective of whether or not sales are
taxable by the city or made in the locality where the facto~,
municipality where the project office, plant, or plantation 15
principal office is located.
located; iv. A city can validly tax orders booked.and
70% of all s~les paid for in the company's branch office
recorded in the in the city, even if the orders ~re
principal office delivered outside the city (Phi/ipp!ne
taxable by the city or Match v. City of Cebu, G.R. No. L·
municipality where the 30745, January. 18, 1978).
factory, project office,
plant, or plantation is Retirement Of Business · . •on
located LGC, Sec. 150 A business ·subject to tax shall, upon term1nat1
5
(b)). thereof; submit a sworn statement of its grosc
sales or receipts for the current year (J-GC, Se ·
145).

MEM:0-Rv AID
s., S e d a ~ Colege of Law- RGCT Bar 0pef8tione Center
NOTE: Termination shall mean that business
operations ~re stopped completely. Any change
in ownership, management and/or name of the
busines~ shall not constitute termination as
contemplated in this Article. Unle~s stated
otherwise, assumption of the business by any
new owner or manager or registration of the
same business under a new name will only be
considered by the LGU concerned for record
purposes in the course of the renewal of the
permit or license to operate the business (/RR of
LGC, Art. 241 (a), par. 2).
If the tax paid during the year be less than the
tax due on said gros~ sales or receipts of the
current year, the difference shall be paid before
the business is considered officially retired
(LGC, Sec. 145) .
Procedural Guidelines For Retirement Of
Business
The local treasurer concerned shall see to it that •
the payment of taxes of a · business · is not,
avoided by simulating the termination · or
retirement thereof. For this purpose, the
following procedural guidelines shall be strictly
observed:
a. The local treasurer shall assig'1 every
application for the termination or r~tirement
of business to an inspector in his office who
shall 96 to the address of the business on
record -to verify if it is really no long~r
operating . If ·the inspector finds , that the
business is simply placed under a new
name, manager and/or new owner, the local
treasurer shall recommend to the mayt:>r the
disapproval of the application for the
termination or retirement of said business.
Accordingly, the business . continues to
become liable for the payment of all taxes,
fees , and charges imposed thereon under
existing local tax ordinances; and .
b. In the case of a new owner to whom the
business was transferred by sale or other
form of conveyance, said new owner sh~II
be liable to pay the tax or fee for the tra_n~fer
of the business to him if there is an existing
ordinance prescribing such transfer tax (/RR
of LGC, Art. 241 (a) par, 3).
ILLUSTRATION:
In 2012 Mobil's gross receipts were
t-1,000,000. The business tax rate imposed by
the City of Makati is 5%. On January 1, 20~ 3,
Mobil paid their business tax of t-50, 000, which
was based on their gross receipts of 2012.
However, in October 2013, Mobil decided t~
close down their operations. At the end 0
October 2013; their gross receipts were P.?OO,
,,
407
000. City of Makati as~essed Mobil an additional
of t-35, 000 (5% of t-700, 000) based on 2013
gross receipts.
a. Is the City of Makati correct?
· . NO. Payments made by Mobil in 2013
based on 2012 gross receipts are not
payments for business tax incurred in 201 ~-
The business taxes paid in the year 2013 Is
for the privilege of engaging in business for
the same year, and not for having engaged
in business for 2012. It , is paid at the
· begfnning of the year as a fee to allow the
business to operate for the rest of the year.
The amount of tax computed based on
petitioner's gross sales for 2013 is only
~35,000'. Since the amount paid (11'50,000)
is more than lhe amount computed based
on petitioner's actual gross sales for 2013, .
Mobil, upqn its retirement, is not liable for
additional taxes (Mobil Philippines v. City
Tre,asurer of Makati, G.R. No. 154092, July _
14, 2005).
•f · ~.on·• th e year an establishment retires· ~r
termin\ates its business within the
municipality, it would be required to pay the
difference in the amount if the tax collected,
based on._ previous year's gross sales or
receigts, is ·less than the actual tax due
, ·bas~ on,_thft,current year's_gross sales or
·rece1pts (Mobil Philippines v. City Treasurer
-:< ~...:,
of Makati, G.R. No. 154092, July 14, 2005) .
In the above example, the taxpayer will be
."~ .: • , · , n, , entitled to a refund of 11'15, 000 (11'50, 000 -
, . 1!35, 000).
b. Assuming at the end of October 2013,
Mobil' s gross receipts amounted to
11'1,200,000. Are they required to pay
additional tax? .
YES. Mobil is required to pay P10,000, the
differe·nce of 11'60,000 (P.1 ,200,000 x 5%)
and 11'50,000. If the tax paid during the year
be less than the tax due on said gross sales
or receipts of the current year, the difference
shall be paid before the business is
considered officially retired ·(LGC, Sec. 145) .
..
Municipal Fees and Charges
a. The municipality may impose and collect
such reasonable .fees and charges on
bu~iness and oc~upation "(LGC, Sec. 147);
EXCEPTION: Professional taxes
reserved for provinces on the practice of any
profession or calling, commensurate with
 . I

408 · LOCAL TAXATION

. · , Taxation Law

the cost of regulation, inspection, and

licensing before any person may engage in
b.
-Service Fees or Charges.
such business or occupation , or practice Subject: Service rendered in connection
such profession or calling (LGC, Sec. 147). with the regu~ation or use of . barangay-
owned properties or service facifities such
b. Fees for sealing and licensing of weights as pa/ay, copra or tobacco dryers.
kand measures (LGC, Sec. 148); and .
c.. Fiskhery rentals, fees and charges (LGC, Ta~ Rate: Reasonable fees and charges
Sec. 149). . · . (LGC, Sec 152 (b)}. ·

3. Cities c. Barangay Clearance

Except as otherwise provided in the LGC, the
city may levy the taxes, fees, and charges which
the province or municipality may impose.
a. The taxes, fees, and charges levied and
collected by highly urbanized and
independent component cities shall accrue
to them and distributed in accordance with
the provisions of.the Code.
This is a pre-requisite for the issuance of
license· or permit to any activity. No city or
munic_ipality may issue any license or permit
for any business- or activity unless a
clearance is first obtained from the barangay
where such, business or activity is located or
con~ucted (LGC, Sec 152 (c)).
____ Tax Rate: Reasonable fee ·

b. The rate of taxes that the city may le'lY. may

exceed. the maximum rates.allowe f;r he ·
U J\lj The application for clearance shall be acted
upon . ithin seven (7) working days from the
province or municipality by not more than · _ filing th~reof. In the event that the clearance
50% (LGC, Sec. 151). ...- __.-,____ is ~ .issue,d within the sa'id period, the city
v • or u j~ipplity may issue the said license or
EXCEPTION: The rates o rofessional arid .:.~:. J{ . permir(.a;c, Sec 152 (c)) . .
amusement taxes. • 7 f ,.:, ',': • - d. -Other F.if-~nd Charges ·
Under the LGC, thef e-are threel typ~s.~p f- · · , .-.- · J>~ ~ ubjecfs : .
cities~ Component Cities (CGs);,<-··r~ j.i.
Comme~-Gfa1 breeding of fighting cocks,
Independent Compo en q itie .(IC s), and~·:::_,, . ·:• ,(2~ 1 ockfights, .and cockpits; ·
Highly Urbanized Citips~( UC~f:'" ccs and--. I,.- - _,(:;1 . ' .
HUCs are independent o the(PJf> ince-_ ... ;· _-(:-''· </- ,
1 ·Comniercial breeding -'- an annual sale
(LGC, Secs. 451-452). ~J-. · - · • j -;_..:.:,_'"'-,' / of-more then five (5) fighting cocks of a
"-,;~ .,- ~ - duly registered breeder (/RR of LGC,
This means that taxes, fees, an charg~~ l~/:..,-\ :- ~) Art.' 240 (d) (1 )).
levied and collected by ICCs ana HCJ6s-.:-~ · b,...
accrue solely to them (LGC,. er!!}, - """---"\'- ~-i. S. ~laces of recreation which charge
4. Barangays (SR-SBO)
l
-'
~1
.I\~\_~\. admission fees; and
lV 0
Barangays may levy the following taxes, fee::-:s:'.",-
'- - - - - Place of Recreation - include places of .
and charges which shall accrue exclusively to amusement where · one . seek~
them: · admission to entertain himself by seeing
or viewing ·the show or performance or
a. Taxes on .§.tores or Retailers those where one amuses himself by
direct participation (/RR of LGC, Art 240
Subject: Stores or retailers with fixed (c)(3)) .
business establishments with . the gross
sales or receipts for the preceding calendar iii. Biliboards, signboards, neon signs, and
. year of ~50,000 or less (for barangays in outdoor advertisements (LGC, Sec 152
cities) and ~o.ooo or less (for barangays in (d)). .
municipalities).
SUMMARY RULES ON DISTRIBUTION
Tax Rate and Base: Not exceeding 1% of OF TAX PROCEEDS BETWEEN LGUS _
the gross sales or receipts (LGC, Sec 152
GENERAL RULE: Revenues shall inure sorely to •
(a)).
the benefit of the LGU levying the tax (LGC, Sec.
130 (d)). . .
 M ''
MEM:0-:RY AI D
San S e d a ~ ~ of Law - ROCT Bar Operations Center

EXCEPTIONS: (SAC) . 3. Persons who · become J 18

1. Tax on §and , gravel and other quarry resources: years of age on or after u 1Y
30% to the Province , 30% to the Component 1 (LGC, Sec. 161) ; .
City or Municipality, 40% to the barangay (LGC, 4. Persons who cease to
Sec. 138); belong to an exempt class
2. Amusement Tax: shared equally by the province on or after July 1 (LGC, Sec.
and municipality (LGC, Sec. 140 (e)) ; and
161);and .
3. Community Tax (in case the tax is collected by 5. Corporations established
barangay treas_urers ): 50% to .the municipality, and organized on or after
50% to the barangay (LGC, Sec. 164 (c)). July 1 (LGC, Sec. 161) .

COMMUNITY TAX PS.00 plus pt1.00 for every

tt is a poll or capitation t_a x imposed upon the P 1,000 income regardless of
residents of a city or municipality (V DOMONDON. whether from business,
Taxation, supra at 161). exercise of profession or from
property (not to exceed P5,
RULES ON COMMUNITY TAX 000)

Cities or municipalities (LGC, NOTE: In case of husband and

Sec. 156) wife, the additional tax shall be
,~.~·-~•·"~ based on the total property,
Individuals and Juridical gross receipts, or earnings
Persons owned or derived by' them.
Every inhabitant of the P500 plus annual additional tax
Philippines (regardless of (not to exceed P10 , 000)
citizenship):
1. Who is 18 years or over; and Annual additional tax in
2. Has been , regularly accordance with the following
employed on a wage or schedule:
salary basis for at least .30 For every PS, 000 worth of real
consecutive working days property owned by it during the
during any calendar year; <?r P(~ceding year based on the
3. Is engaged in business or valuation used for the payment
occupation ; or · · · of the real property tax - pt2.00;
4. Owns a real property with an and
aggregate assessed valu.e For" every pt5, 000 of gross
of pt1, 000 or more; or receipts or earnings derived by
5. Is required by law to file an it from its business in the
income tax retur_n. Philippines during the
preceding year - pt2.00.
•Every corporation no matter
how created or organize'd, Residence of the individual or in
whether domestic or resident the place where the principal
foreign , engaged in or doing office of the juridical entity is
business in the Philippines located. ·

Absolutely (LGC, Sec. 159) : Accrues on the 1st day of

Diplomatic; and Consular January of each year which
Representatives. · shall be paid not later than the
last day of February of each
Exempt for the rest of the year.
year: . .
1. Transient visitors when their If a person reaches the age of
stay in the Philippir)eS does 18 years or loses the benefit of
not exceed 3 months (LGC,
exef'!lption on or before the last
Sec. 159); . day of March, he shall have 20
2. Persons who come to reside
days wit_ hin . which to pay the
in the Philippines on or after
community tax . without
July 1 (LGC, Sec. 161) ;
becoming delinquent.
 --
LOCAL TAXATION
Taxation Law

additional tax, be
Corporations established and considered as part of
·organized_on or before the last the gross receipts or
day of March shall have 20 days earnings of said
within which to pay the corporation (LGC, Sec.
community · tax without 158).
becoming delinquent.

An interest of 24% per annum

from the due date until it is paid
shall be added to the amount No case shall No case shall exceed ten
due. · exceed five thousand pesos (1910, 000)
thousand · pesos (LGC, Sec. 158).
(195, 000) -(LGC,
Sec. 157) .
COMMUNITY TAX PAYABLE
The following are exempt from comm~nity tax:
1. Diplomatic and consular repres~ntatrves;_ and
2. Transient visitors when their stay m the
They shall pay an It shall pay a~ .ai:inual. --; . · _Philippines does not exceed three (3) months
annual community community ta~,.- of t,....five I_ ' (LGC, Sec. 159).
. .
tax of five pesos hundred pesos"'( f'500I ): a'nd • •
{195) and an an additlonal ta,s, ,.. m ··c "'C>MMUNIT¥ TAX CERTIFICATE
additional tax of accordance · ith" ~the; Wis issuec;t to e;yef'f person or corporation upon
. . . < /
one peso (191) for following.• .-· I·,.1 I1 payment oftt)e-comm~ nity tax. It may also be issued
every one / ,:- i to any persoq or corporation not subject to the
thousand (191, 000) 1cF;qr . e'very t Five . communjty tax Llp~on· payment of one peso (191.00)
of income V,o}!sa~tl pesos ·-(195;- (LGC, Sec. 162) . ..
regardless of 000) . worth ~of real . t . :. ,.
whether from propert}' iQ · the · Certain . occasions -! ·when Community Tax
business, exercise
of profession, or
'f hilipp1 es \o~~~.9 bx_ i~ ·:_ - .. ~.C~rtificat~
q~n9g\ the \ P; eced1ng
-.s R~quired to be Presented:
; 1. A~_.' i9divi9ual ~j ,ybject to community_ tax
from property year" "based -, O!), .. ~he , acknowledges ahy document before a notary
{LGC, Sec. 157). valuation used: for U:,e . _; : public; . - •
payment ?f -,. feaJ •._l ,., 2:-'° Takes . the Oath of office upon election or
NOTE: In case of
husband and wife,
property tax, under T ,._ ,· ', a'ppointment to any position in the govemlllent
existing laws,/ 6uncl" •i~ · -' ,· _.:...> - .service· ,
the additional tax the asseS$men oils of """"' · · 3:'°',. ~e.ceiv~~ a~y License, certificate, or permit from
herein imposed the city or rn@i6p' ity ,.:._ any puolic authority;
. where the real property
shall be based
upon the total is situated - Two pesos
' ,:,_ f ... Pays any tax or fees;
5. Receives any money from any public fund;
property owned by (192.00); and
-6. Transacts other official bu~iness; or
them and the total
7. Receives any salary or wage from any person or
gross receipts or 2. For every Five
corporation (LGC, Sec. 163).
earnings derived thousand pesos (195,
by them {LGC, 000) of gross receipts
· The presentation of the community tax certificate
Sec. 157). or earnings derived by
shall not be required in connection with the
it from its business in
registration of a voter (LGC, Sec. 163 (a)(2)).
the Philippines during
the preceding year -
ILLUSTRATION: .
Two pesos (192.00)
Ariel Roque Corporation is a domestic corporat~on
(LGC, Sec. 158).
which has the following income and properties
recorded as of the erid of the preceding year:
NOTE: The dividends
received by a
Gross receipts in the Philippines, P10,000,000 tot~I
corporation from
fair market value of properties owned and located rn
another corporation
the Philippines is P50,000,000. Under its t~x
however shall, for the
declaration, its properties' assessed value 15
purpose of the
equivalent to P20,000,000.
 \ I
MEM/~\RY AID
9fo<II, olleQ11 ol Law - RO 1 0111 ep..,.11o,,8
Th amount of community tax would be:
Basic
Additional Community tax
[(10 million +20 mlllion)/,.5 ,000]x,.2
Limit (per LGC , Sec. 158 )
Total community tax
(P500 + P10,000 Limit)
COLLECTION OF TAXES
Calendar year, unless
otherwise provided ir1 the LGC
May be paid in lump-sum or
quarterly installments
First ( 1"1) day of January of each
year. However, new taxes ,
charges, and fees or changes in
the rates thereof shall accrue on
the 1st day of the quarter
following the effectivity of the
ordinance imposing such new
levies or rates .
Within the first 20 days of
January or of each subsequent
quarter as the case may be .
Only for a period not exceeding
6 months for justifiable reason
or cause without surcharges or
penalties
Surcharge not exceeding 25%
of the amount of taxes not paid
on time and an interest at th,e
rate not exceeding 2% per
month of the unpaid taxes,
including surcharges, until such
amount is fully paid but in no
case shall total 36 months.
Shall be collected by the
provincial, city, municipal , or
barangay treasurer, or their duly
authorized deputies. The
provincial, city, or municipal
treasurer may designate t~e
barangay treasurer as his
deputy to collect local taxes,
fees, or charges.
The local treasurer may, by
himself or through any of h!s
deputies duly authorized m
writing , examine the b~oks,
accounts, and other pertinent
records of any person ,
partnership, corpora tion , or
,- 500 association subject to local
taxes, fees, and charges in
12,000 order to ascertain , assess and
collect the correct amount of the
10,000
tax , fee , or charge. Such
examination shall be made
during regular business hours,
only once for every lax period.
(LGC, Secs. 165-171)
OTHER POWERS PROVIDED IN THE
LGC
1. Power to Prescribe Penalties for Tax Violations
and Limitations thereon
a. Limited as to the amount of Imposable fine
as . well as the length or period of
imprisonment;
b. The Sanggunlan is authorized to prescribe
fines or other penalties for violations of tax
ordinances, but, in no case, shall fines be
less than ,-1,000 nor more than ,.5,000 nor
shall the imprisonment be less than 1 month
nor more than 6 months;
c. Such fine or other penalty, or both, shall be
imposed at the discretion of the court; and
d. The Sangguniang Barangay may prescribe
a fine of not less than P100 nor more than
'91,000 (LGC, Sec. 516) .
·2. Power to Adjust Local Tax Rate
Adjustment of the tax rates should not be more
often ·than once every 5 years, and in no case
shall such adjustment exceed 10% of the rates
fixed under the LGC (LGC, Sec. 191).
NOTE: Sec. 191 of the LGC presuppos.es that
the following requirements are present for it to
apply, to wit: (i) there is a tax ordinance that
already imposes a tax in accordance with the
provisions of the LGC; and (ii) there Is a second
tax ordinance that made adjustment on the tax
rate fixed by the first tax ordinance. In this case,
Sec. 191 of the LGC will not apply becau~e with
the assailed tax ordinance, there is no outright
or unilateral increase of tax to speak of. The
resulting Increase in the tax rate for retailers was
mer~ly incidental (Mindanao Shopping
Destination Corp. v. Duterte, G.R. No. 211093,
June 6, 2017) . '
3. Power to impose Surcharges and Interest
The Sanggun/an may impose a surcharge not
exceeding 25% of the taxes, charges, or fees not
paid on time and an interest rate of not more
than 2% per month of the unpaid tax, charge, or
fee including the surcharge thereon , but in no
case shall the same total 36 months (LGC, Sec.
168).
 LOCAL TAXATION
Taxation Law ·

authorizes the province to impose franchise tax

ILLUSTRATION:
Mr. A failecf.to pay_the local tax on his business "notwithstanding any execution granted by any .law
for the year 2020 in a total amount of P1, 000, · or other special law" is all encompassihg and clear
He was assessed by the LGU on June 20, 2021. (City of San Pablo Laguna v. Reyes, G.R. No
The Sanggunian imposes a 25% surcharge and 127708, March 25, 1999).
a 2% interest per month as penalties for late
taxpayers. How. much is_ his total tax liability EXCEPTIONS: .
including surcharges and interests? The following is the exclusive ·list of entities which
are still exempted from local taxes: (WaCH-B0I-
Local tax pay_able . ft 1,000 CoP)
Surcharge: ft1 ,000 x 25% 250 · 1. Local Water districts; .
Interest: ft1 ,000 x 2% x 5* 100 2. ~ooperatives duly registered under RA 6938;· _
Total local tax liability ft 1,350 3. Non-stock . and non_- profit Hospitals and
educational institutions.
*The 5-month period shall be counted after 4. Business enterprises certified by B01 as pioneer
· January 20, 2021 . ·,, or non-pioneer for a period of 6 and 4 ·years,
- . - - respectively, from the d_ ate _o f registration;·
1
Power to Grant Local Tax Exemptions 5.. Business entity, association, or cooperatives
Local government units 'may, · through registered under RA. No. _6 810 (Country~ide
ordinances duly · approved , grant tax ., ·~- _ al")d Barangay Business Enterprises); and
.exemptions, incentives, or reliefs . under such · r p.·. f r,ioter and/or publisher of · books or other
terms and conditions, as they may )deem 1.,__) : · ¾I r9 ding aterials prescribed.by DECS as school.
necessary (LGC, Sec. 192). -<""\ ("\.. - · . textstor;references, jnsofar as receipts from the
" ..• '\.- · · _ . -printing and or publishing thereof are concerned
The distinction betwe_en local t5 1ness ~ x,.and _ _ _ _ (lRR of,L'sC, 'A[t. 283) . .
real property taxes in terms 6f t~e powp r of the :, ._, . \ . " "
LGU to grant exemptions s...that: ,For real ·. -FRANCHISE ; . · GRANTED AFTER
prope~ tax, the . LGUs .. cannp t_ add on the · EFFEQTIVIT.Y . OF~ LGC NOT COVERED
exe~pt1ons stated m th~ [G,,C; whereas fo~Tocar - ·- BYTHE WITHDRAWAL
business tax. the LGU - are free to grant - . -_ · ·
exemptions (INGLES, Revie~ r. sup~ at 532: . : ~ e . with?rawal . qf .. exemptions . or incentives
533) . ~.... r_i.l _ ~- ·prov1d~ ,1~Jpe 1GC ca only affect those franchises
\,._;\ - , 1 -:-.~ ra~~~ ~:ertor to he.,.; effectivity of the law.' Here,
The power to grant a ~xem tio~ , tax_ .
incentives, and tax rel_iefs shall not ~ply o · - eff~
L.·, peJ•~Fler.;_s fra chis w,as' granted 2 months after the ·
q! i~ of.t)ie said . aw, it is thus not covered by
regulatory f~es which are levied un~er tha poh~e . witfidrawal. However, the "in lieu of all
power of the LGU (ABAN, supra at 395}. 1 '1 -:-;:- . tax~~ cLa se app ies only to national internal
, ·-'-..:L: seve11~e ~ es and not to loGal taxes. Furthermore·,
TAX EXEMPTION CERTIFICATE,,';: 1 " the• : inv ie ' of.all taxes" _c lause in RA. No. 7294
Tax exemptions shall be conferred through the • 1 , J koq n '8~ ,.:S~ART's legislative franchise) was
issuance of a non-transferable tax exemption · · : re nd~ e<f meffective by the advent of the VAT Law
certificate (IRR of LGC, Art. 282) . · .. (Smart Communications, Inc: v. City of Dai ao, G.R.
No. 155491, September 16, 2008) . _·
·TAX EXEMPTIONS EXISTING BEFORE
Aside from the national franchise tax the franchisee
THE EFFECTIVITY OF THE LGC HAS is still liable to pay the local franchise' tax, unless it is
BEEN ABOLISHED expressly and unequivocally exempted· from the
Unless . otherw!se provided by the LGC, tax ~ay~ent thereof under its legislativ.e franchis1;3. The
ex~mptions or incentives granted to, or presently m heu of-all taxes• clause in. a legislative franchise
enJoyed by all persons, whether natural or juridical should categorically state that the exemption applies
including government-owned or controlled to both local and national taxes· otherwise · the
corporations are withdrawn upon the effectivity of the exe~ption claimed should be strictly construed
LGC (LGC, Sec. 193) . · ag~mst the ~axpayer and liberally in favor of the
taxing authonty (Smart Communications, Inc. v. City ·
A general law cannot be construed to have repealed of Davao, G.R. No. 155491., September 16, 2008).
a special law by mere implic~tion unless the intent to
repeal or alter is manifest and it must convincingly All re_alties which are actually, · directly, and
demonstrate that the 2 laws are so clearly repugnant ~xclusively used in the operation ot' its franchise are
and patently inconsistent that they cannot co-exist. exempted' from any property_tax (City Government
The provisions of Sec. 137 of the LGC · which
 \ I

MEM:O~Y AID
sw, Beda U'Mnllty Cohoe Of Law - RGCT Bar Opwa11one Center

of Quezon City v. Bayan Telecommunications Inc

G.R. _No. 162015, March 6, 2006) . ' ., GUIDELINES FOR GRANTING TAX
EXEMPTldNS, RELIEFS AND
This franchise tax is "in lieu of income tax and any INCENTIVES
and all taxes, ·dutie~, ~s. an?
charges of any kind,
1. Tax Exemptions and Reliefs:
nature, or descnptron levred, established, or
a. Tax exemptions ·should be conferred via a
collected by any authority whatsoever, local or
tax exemption certfficate; .
national, on its franchise, rights, privileges, receipts,
b. May be granted in cases of natural
revenues, and profits, and on propenies used in
calamities, civil disturbance, general failure
connection with its franchise, from which taxes of crops, or ·adverse economic conditions
duties, and charges, the Grantee is hereby expressly · such as substantlal decrease in prices of
exempted" (National .Grid Corporation - of the agricultural or agri-based products;
Philippines v. Ofeliam Oliva, City Treasurer of Cebu, c. The grant shall be through an ordinance;
G.R. No. 213157, August 10, 2016) . d. Any exemption or relief granted to a type or
kind of business shall apply to all
NOTE: In case of Real property Taxes, the property businesses similarly situated; .
must be used in connection with its franchise in order e. The same may take effect only during the
to be exempt. Properties "exclusive of this calenqar year not exceeding 12 months as
franchise·, or those held by the corporation in a may be provided in the ordinance; and
capacity that is not related to the exercise of its f. In case of shared revenues, the relief or
franchise, shall be assessed with RPT (National Grid exemption shall only extend ·to the LGU
Corporation of the Philippines v. Ofeliam Oliva, City granting such (/RR of LGC, Sec. 282 (b)(1 )).
Treasurer of Ce_bu, G.R. -No. 213157, August 10,
2016). :.. 2. Tax Incentives: •
a. Shall be granted orily to new investments in
DIFFERENCE BETWE,EN 'SMART V. · . -, " .. ' the locality
... '
and the ordinance shall prescribe
CITY OF DAVAO' AND 'NGCP V. OLIVA' the terms and conditions therefore;
· b. The 1frant shall be for a definite period not
exc,eeding 1 calendar year;
c. The grant shall"-be through an ordinance
1
pa·s s~ prior to the 1st day of Jam1ary of any
~n lieu of all taxes" "in liey of income tax
applies only to all other and ?)ny and all taxes, ...
f
¥9ar; nd \ . · .·
d. .Tax jncentive,,.granted to a type or kr~d of .
internal revenue taxes local or national" '• bus·iness·' 's'hall apply to ., all businesses
and not to local taxes ~-, simi1c.1rly situated (/RR of the LGC, Sec. 282
(b)(2)) . .
Franchise does - not Franchise categorically · . :
categorically grant an states that t~e f~anchise
exemption . from Local tax shall be tn heu of all
Taxes taxes whether national
or local ·"' PRESCRIPTIVE PERIODS
REASON: The grantor REASON: The_ grantor
FOR THE-ASSESSMENT
of the Franchise is the of the Fran~hrse, · the AND COLLECTION OF
National Government. It National Government,
could not be implied that categorically states that LOCALTAXES
'in lieu of all taxes', the franchise tax shall
includes those levied by be 'in lieu .of a!I taxes ,
locai governments that national or local
have no say in the grant PRESCRIPTIVE PERIODS FO~
of the franchise . ASSESSMENT:
(Smart Communications, Inc. v. City of Davao, G.~. 1. Local taxes, fees , or charges - 5 years from the
No. 155491; September 16, 2008; Natio~al G'!d date they became due (LGC, Sec. 194 (a)) .
Corporation of the Philippines v. Ofeliam Oltva, c,ty 2. When there is fraud or intent to evade the
Treasurer of Cebu, G.R. No. 21315-7, Augu5 f 10, payment of taxes, fees ; or char~es - 10 years
2016). from the discovery of the fraud or intent to evade
. the payment (LGC, Sec.- 194 (~)) .
 414
'
LOCAL .TAXATION
Taxation Law

PRESCRIPTIVE PERIOD OF . -
COLLECTION TAX REMEDIES OF THE "-
Local taxes, fees , or charges may be collected within L()~AL GOVERNMENT
5 years from the date of assessment by
administrative or judicial action . No such action shall UNITS
be instituted after the expiration of such period {LGC,
Sec. 194 (c)) .

GROUNDS FOR THE SUSPENSION OF LOCAL GOVERNMENT'S LIEN

THE RUNNING OF THE PRESCRIPTIVE
PERIODS: (PRO)
1. The treasurer. is · 1egally Prevented from the
assessment or collection ofthe tax; ·
2. The taxpayer requests for a Reinvestigation and
executes a waiver, in writing , ·before the
expiration of the period within which to assess or
collect; and
3 . The taxpayer is Out of the country or, otherwise,
~nnot be located {LGC, Sec.. 194 (d)) :
'J'. 7
Local taxes, fees , charges, and other revenues
constitute a lien, superior to all liens, ch.arges, or
encumbrances in favor of any person, enforceable ·
by any appropriate administrative or judicial action
(LGC, Sec. 173) .
How Local Government lien is extinguished
The lien may only be extinguished upon full payment
of the delinquent local taxes, fees, and charges,
including related surcharges and interest (LGC, Sec.
17~ -
...

I OUTLINE OF REMEDIES
/:'
l ~OMINISTRATIVE ACTION
By Administrative Action through Distraint of
Personal -.p}op·e rty and by Levy upon Real
--~fope
,//':""',, /;- , ,I

REMEDIES OF THE LGU ·; ·: - Distraint bf af}Y ,p,~onal property belonging to

- - - - - -- - - - - - - - - - - ' - - - - - ·• - he·1axpayer' or su 1ect to the lien {LGC, Sec.
1. Local Government's Lien__, . ·._ ·-, ·· . · - · •·,;1751 'f'"~
2. Administrative action · -. ,_ ~' · ' ..:::· ~- 'i '
a. Distraint
b. Levy
3. Judicial Action
:~U --: · ·'.' '- , .:
,",;-;,
.,~\
\.,~_
·r·~ ._,
•: · ?
At any, ime prior to the consummation of the
salt 'ttfEi taxpayer may pay the proper charges
{L G.§/ Sec. 175 (d)) .
1

• '- :., . .
REMEDIES OF THE TAXPAYER · y VYhen ersonal property considered sold to . ,
1. Administrative
a. Before Assessment
~-ff,\ ~ ~GU· Should the property distrained not be
7, . '...::.....:.::_-2-· disposed of within one hund(ed -twenty (120)
i. Question the Coristitutiohalify 6~ days, the same shall be considered as sold to
Legality of Tax Ordinances O R Ye ue ri\ 1\ ·, the!L:GU (LGC, Sec. 175 (e)). .
-1·

Measures on Appeal LV 0-
ii. Declaratory Relief U_nlike the NIRC, the Local Tax Code does not
b. After Assessment contain any specific provision prohibiting courts
i. Protest from enjoining the collection of local taxes. such
ii. Claim for Refund or Tax Credit statutory lapse or · intent ' may have allowed
iii. Redemption · · preliminary injunction· where local taxes are
c. Compromise involved, but it cannot negate the procedural
2. Judicial rules and requirements under Rule 58 of the
a. Court Action Rules of Courts (Valley Trading Co. v. ' CF/ of
b. Declaratory Relief lsabela, G.R. No.
L-49529, March 31, 19~9).
c. Injunction
.2 . . Levy of any real property belonging to the
delinquent taxpayer (LGC, Secs. 176-180) ..

At any time before th; date fixed for the sale, the
.taxpayer may stay the proceedings by paying
the taxes, fees , charges, penalties, and interests
(LGC, Sec. 178).
 \ I

M.EM:0-liY Al D
Sat> Seda College of Law - RGCf Bar ()perattona Center

The LGU may purchase the real property

advertised fo.r sale when:
a. There is no bidder; or
b. The highest bid is for an amount insufficient
to pay the taxes, fees, charges, surcharges · Original If principal amount of taxes, fees
interests, or penalties (LGC, Sec. 181) . ' exclusive of charges and penalties
does not exceed P300 , 000 or P400 ,
further Distraint and Levy: The remedies of 000 in Metro Manila
distraint and levy may be repeated if-necessary -
until the full amount due, including all expenses
is collected (LGC, Sec. 184). ' Original If principal amount of taxes, fees
exclusive of charges and penalties
Properties Ex~mpt from Distraint and Levy . exceeds P300, 000 or ~400, 000 in
1. Tools and rmplernents necessarily used by the Metro Manila.
delinquent taxpayer in his trade or employment;
2. One (1) h_orse, cow, carabao, or other beast of Provided: The amount is less than
burden , such as the delinquent taxpayer may P1 ,000,000.
· select, and necessarily used by him in his
ordinary occupation ; Appellate The RTC shall exercise appellate
3. His necessary clothfng and that of all his family; jurisdiction over all cases decided by
4. Household · furniture and utensils for the MeTCs, MTCs, -and MCTCs in their
housekeeping and used for that purpose by the respective territorial jurisdiction
delinquent taxpayer, such -as he may select, of a
value not exceeding ~10, 000;
5. Provisions, including crops, actually provided for
individual or family use sufficient for 4 months; Origi~al .Jf principal amount of taxes, fees
6. The professional libraries of doctors, engineers,
' . . exclusive of charges and penalties is
lawyers, and judges; .f-1 ,000,.000 or above

NOTE: Professional libraries and equipment of Appellate ,-Qver appeals from the judgments,
professionals are exempt from execution not ;· resolytions or orders of the RTCs in tax
exceeding 19300, 000 (RULES OF COL)RT, Rule , collection cases originally dedded by
39, Sec.13 (g)). _th~m in tl)eir respective jurisdiction

7. One fishing boat and net, not exceeding the total

value of ~10, 000, by the lawful use of which a Decisions or resolutions over
fisherman earns his livelihood ; and petitions for review of the CTA
8. Any material or article forming part of a house . Division in the exercise of its
or improvement of any real property (LGC, Sec. exclusive appellate jurisdictio·n
185). over local taxes decided by the
RTC in the exercise of their
JUDICIAL ACTION original jurisdiction; and ·
The LGU concerned may enforce the collection of
delinquent taxes, fees, charges , or other revenues 2. Over petitions for review of the
by civil action in any court of competent jurisdiction judgments, resolutions, or
within 5 years1from the date taxes, fees, or charges orders of the RTCs in the
exercise of their appellate
become due (LGC, Secs. 183 and 194).
jurisdiction over tax collection
The local government may file an ordinary suit for cases originally decided by the
MeTCs, MTCs, and MCTCs, in
the· collection of sum of money before the MTC,
their respective _
territorial
RTC, or CTA Division depending upon ~he
jurisdiction.
jurisdictional an::munt (V OOMONDON, Taxation,
supra at 225). (B.P. Big. 129, Secs. 19 (8), 22, 33(1), as amended
by R.A 7691 , Sec. 5; R:A: No. 1125 , Sec. 7 (b)(1)
· and Sec. 7 (b)(2)(c), as amended by R.A. No. 9282,
Sec. 7; REVISED RULES OFTHE COURT OF TAX
APPEALS · [hereinafter, RRCTAJ, RULE 4, Sec
2(a)(2), 2(b) and 3(3))
 LOCAL TAXATION
. Taxation Law

,(Ori/on v. Mayor Lim, G. R. No. -11_2497,

REMEDIES NOT EXCLUSIVE August 4, 1994). He cannot replace 1t with
Either of the remedies through administrative action his own version of what the ordinance
or judicial action or . all may be pursued should be, nor can he declare such
concurrently or simultaneously at the discretion of ordinance as unjust, excessive,_ oppressive,
the local government unit concerned (LGC, Sec. .or confiscat<?ry (/NGLES, Reviewer, supra
174). at 537) .

When disputing an ordina.nce, there is no .

need for a written protest to be made. Ttie
TAX REMEDIES OF THE . '
written protest is only needed when
TAXPAYER protesting against an assessment (Id.).
• I

· A.taxpayer may_file a compiaint ass~iling the

ADMINISTRATIVE
1. Before Assessment:
a. Question the Constitutionality or
Legality _of Tax Ordinances or ·- _
Revenue Me·asures on Appeal ,,.-.-· ,·
i. Within thirty (30) days fr<?m eff~ tivity-
. thereof to the Secretary of Justice;"'- ·
ii. The decision by the ~ecretarx,.of Justice
must be rendered withih sixty (60) day.s -
from the date of th rece1p ' . t,,,,;,.
of th_e
'G ·
appeal; and c /
iii. Taxpayer must file_~n appropriate action · ·,
with a court of competent j fisdiction---------- is made., he RTC will dismiss the case
within thirty (30) d y.s from:
1.) The receipt of th decisi~f of the
validity .of the ·ordinance and praying for a
refund of . it~ perceived overpayments
without first filing a protest to the payment of
taxes due under the ordinance (Jardine
Davies Insurance Brokers v. Alip~sa, · G.R.
No. 118900, February 27, -2003) .
J . ~- · .' Suell appeal shall not have the e~ct of
_;, ) I suspen..ding the effectivity of the ordinance
-... -·~ ...... ~nc! th~ \accrual and payment of the tax
· ( GC Se .._187). · ,
. , . _ - "\ .._ 'f -<..,,
· .
• ~•l , . :.. ,.: \ YJhen q1sp~ing an ordinance, appeal to the
b OJ [ rrandatory. If no appeal to the DOJ
_-•., : :·:./ f Jardine~' ba~ies Insurance ~rokers V.
._ · r\

1-. -~ /,-
t4liposa,i G;R No. 118900, _February · 27,
Secretary of d stice; or-- , ' ·. i'2Q03). 1
1
2.) The lapse of .t~ ~0-day~h riod-to;! - · ·--:, ~· -,: ;t:__/ j *""I' • ·. ·.

_ decide (LG e , . 87) :- :..J\ , · · J tycasQS ~ here the validity or legality of a tax
_\-::, 1~. . //:_' , ' ;.ordina'nce is questioned, the rule that the tax
~OTE: Court of com peten_t _1unscl_ 1ct19n .... ,...,- · y/\/.- must first be paid before a protest is lodged
refers to the RTC when case 1s r:esolve~ to.--;-.:: :-:. _; does not apply. Taxpayers must first receive
determine any question , construction, · ' . r. ,J.:.: .:.,..: -- . a assessment before this rule is trigg_ ered.
validity of a ta~ l~w ~-nd for the-{& c s3ca~io . *- . . " t r!o( p yment under protest is not required

of the taxpayE:r s hab1hty ther~'un~er (Xi1:UG ·;. ii ; \ \.w eri !he taxpayer is questio~ing th~ very
& ACOSTA, Tax L?w and Junsprudence L.; 1 ' · . ,·<>authority of the assessor to impose taxes ·
(2014), p. 490; RULES OF COURT, Rule ....,..,,__,_,,,..,., (Aala v. Uy, G.R. .NQ. 202781, January 10,
63, Sec. 1). · 2017) .

Sec. 195 as a taxpayer's remedy is

separate, distinct, and independent from
Sec. 187. A taxpayer's failure to avail of the
remedy under Sec. 187 (appeal to the
Secretary of Justice), does not necessarily
bar recourse ·to Sec. -195 (appeal with the
court of competent jurisdictio_ n) when the
same is grounded on the illegality of the tax
measure complained of (Michigan Holdings,
Inc. v. City Treasurer of Makati, CTA EB No.
1093,April13,2016) .
Sec. 187 authorizes the Secretary of Justice
to review only the constitutionality or legality
of the tax ordinance and, if warranted,. to
revoke it on either or both of these grounds
I constitutionality or legality of a tax ordinance
Illustration (2003 Bar Question):
X, a taxpayer · who ·believes . that an
ordinanc_e passed by the City Council of
Pasay is unconstitutional · -for . being
discriminatory against him, wants· to know
frpm you, his tax lawy~r. whether or not he
. can file an appeal. In the affirmative, he asks
you whe~e such appeal ~hould b~ made: the,
S~cretary of Finan·ce, the Secretary of
Justice, the Court of Tax Appeals, or the
regular courts. What would your advice ·be
to your client X? ·
ANS: The appeal should be made with the
Secretary of Justice. Any question on 'the
 W \ /

MEM:Q~y AID
si,, Seda lk"Mll'lltY Colege d law - RGCT Bar Operations Center

may be raised on appeal with the Secretary

PROCEDURE:
of Justice within thirty (30) days from the
effectivity thereof (Sec. 187, LGC). Protest (within 60 days from receipt of notice of
assessment)
Illustration (2014 Bar Question)
The Sangguniang Panglungsod of Baguio t
enacfed a tax ordinance imposing tax on all
Local Treasurer (Decision: _60 days from the filing
tourists and travellers going the Baguio City
of the protest)
to maintain the cleanliness and for the
beautifie{:ltion of the city. Claiming the tax to
be unjust an association of' travel agencies
filed a petition for declaratory relief before If the local treasurer
· the RTC. The RT~ issued a TRO enjoining . finds the protest - If not meritorious, in
the city a from imposing · the local -lax. meritorious in whole or who'le or in part, he
Aggrieved, Baguio City filed a petition for in part, he shall issue a shall deny the protest,
certiorari befo~e the SC seeking to set aside notice canceling, wholly wholly or partly, with
the TRO on the ground that collection of 'or partly, the notice to the taxpayer.
taxes cannot be enjoined. Will the petition assessment.
prosper?

ANS: Yes. The RTC has no jurisdiction to Taxpayer shall have 30

entertain any action concerning the validity
of-a tax ordinance. Rather, it is the Secretary
of Justice who has jurisdiction on any
question on the legality of the ta_x ordinance:
but said appeal shall not suspend the
effectivity of the ordin~nce and the accrual
and payment of the tax levied (LGC, Sec.
187).
b. Declaratory Relief ·· whenever
Applicable.
When the taxing law or ordinance i~
(L GC, Sec. 195)
unconstitutional or illegal, a petition for
declaratory relief may be filed with the RTC
to prevent an impending violation of the
rights of the taxpayer (RULES OF COURT,
Rule 63) .
2. After Assessment:
a. Protest
If there is a protest filed: A written protest
must be filed within sixty (60) days from
receipt of notice of assessment (LGC, Sec.
195). Payment under protest is not
necessary. This is because the law on local
government taxation, save in the case _of
real property tax, does not expressly require
"payment under protest" as a proced_ure
prior to instituting the appropriate
proceeding in court (City Treasure~ of
Manila v. Philippine Beverage Partners,
Inc., G.R. No. 233556, September . 11,
2019) .
days from : receipt of
the denial of the
protestor from the
lapse of 60 day period
to decide within which
to appeal with the
court of competent
jurisdiction; otherwise,
the assessment
becomes conclusive
and ·unappealable.
' '
If no protest filed: the assessment shall
· become final and executory (LGC, Sec.
195).
Clearly, .with the passage of R.A. No. 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 Court
cannot consider the City Treasurer as the
entity that exercises original jurisdiction not
only because it is not a "court" within the
context ofBatas Pambansa (B.P.) Big. 129,
but also because, as explained above, ""B.P.
Big. 129 expressly delineates the appellate
jurisdiction of the RTC, confining as it does
said appellate jurisdiction to cases decided
by Metropolitan, Municipal, and Municipal
Circuit · Trial Courts" (China Banking
Corporation v. City Treasurer, G.R. No.

204117, July 1, 2015) .
b. Claim for Refund or Tax Credit
In order to be entitled to a refund or credit of
local taxes, the following procedural
requiremen'ts must concur:
i. Must file a written claim for refund or
credit with the local treasurer; and
ii. The case or proceeding for refund has
to be filed within 2· years from the date
of the payment of the tax, fee, or charge
or from the date the taxpayer is entitled
to a refun_d or _
credit (LGC, Sec. 196)._
In Local Taxation, supervening causes are
allowed as reckoning points for prescriptive
period purposes. In national taxes, they are
not considered· (INGLES, Reviewer, supra
at 541) . · (Id.) .
Summary of the Remedies of the Taxpayer · i r
Under Sections 195 And 196 ot~the .Local _j
Government Code / ·,:--·· ., i
a. Where no payment is made · ;
The taxpayer's procedural remedy 1s ·----...
governed strictly by Section 195. That is, in
case of whole or partial denial of the protest,
or inaction by the local treasurer, the ·
taxpayer's only recourse is to appeal the·· ~----~- - ·Inaction on yhe·Letter Protest
assessment with the court of competent
jurisdiction. TJ,e appeal before the -court
does not seek a refund but only questions' .
the validity or correctness of the assessment'___
(City of ·Manila v. Cosmos Bottling
Corporation, G.R. No. 196681, June 27,
2018; cited in City Treasurer of Manila v. " ... ,- -'- •'
Philippine Beverage Partners, Inc., G.R. No. ; ·
233556, September 11, 2019). · .!_ -· .
" ½,.-)
b. Where payment was made J
\ 1
The taxpayer may thereafter maintain an
action in court questioning the validity and
correctness of the assessment (LGC,
Section 195) and at the same time seeking
a refund of the taxes (Id.).
REASON: It would be illogical for the
taxpayer to only seek a reversal of the
assessment without praying for the refund of
taxes. Once the assessment is set aside by
the court, it follows as a matter of course that
all taxes paid under the erroneous or invalid
assessment are refunded to the taxpayer
(Id.).
The same implication should ensue even if
the taxpayer were to style his suit in court as
an· action for refund or recovery of
erroneously paid or illegally collected tax as
pursued under Section 196 of the LGC. In
LOCAL TAXATION
Taxation Law
such a suit for refund, the taxpayer cannot
successfully prosecute his th·eory of
erroneous payment or illegal collection of
taxes without necessarily assailing .the
validity or correctness of the_a_ssessment he
had administratively protested (Id.) ..
NOTE'S:
a. It must be understood that the suit for refund
is conditioned on the prior filing of a written
claim for refund or credit with the local
treasurer. In this instance, what may be
considered as the administrative claim for
refund is the letter-protest submitted to the
treasurer. Where the taxpayer had paid the
assessment, it can be expected that in the
same letter-protest, he would also pray that
the taxes paid should be refunded to him
.
• b. ~There is really no particular form or style
- necessary for the protest of an assessment
· or claim of refund of taxes'. What is material
.. is the substance of the letter submitted to
the local treasurer (Id.) .
~,~-· ,(
. Judiciaf Act.ion for Refund; Instituted
YJithin 3~ ·pays from the Denial of or
The institution of the judicial action for
.refund must be made. within thirty (30)
' days from the denial of or inaction on
- ---.. ,, the letter-protest or claim, not any time
• •. '._later, even if within· two (2) years from the
I .-· ,
.
., date of payment (LGC, Sec. 196).
". ,
\ -,_ Notice that the filing of such judicial claim
- for refund after questioning the
assessment - is within the ·two-year
. prescriptive period specified in Section.
,•196. Take note that the filing date of such
judicial adion necessarily falls on the
beginning portion of the two-year period
from the date of payment. Even though the
suit is seemingly grounded on Section
196, ·the taxpayer could not avail of the
full extent of the.two-year period within
which to initiate the action in court (City
of Manila v. Cosmos Bottling Corporation,
G.R. No. 196681, cited ·in Treasurer of
Manila v. Philippine Beverage Partners,
Inc., . G.R. No. 233556, September 11,
2019) . . ·
REASON: This is because an assessment
was made, and if not appealed in court
within thirty (30) days from -decision or
inaction on the protest, it becomes
concl_usive and unappealable. Even if
the action in court is one of claim for
 m \ /
·MEM:0,RY AI D
San 8eda u,._wtty College of Law - ROCT Bar Operations Center
419

refund , the taxpayer cannot escape
assailing the invalidity or incorrectness of
the assessment because the very
foundation of his theory is that the taxes
were paid erroneously or otherwise
collected from him illegally. Perforce, the
subsequent judicial action , after the local
treasurer's decision or inaction , must be
initiated within thirty (30) days later. It
cannot be anytime thereafter because the
lapse of 30 days from decision or inaction
results in the assessment becoming
conclusive and unappealable {Id.) .
c. Right of Redemption
- 1 year from the date of sale (LGC, Sec.
179, par. 1).
The owner shall not be deprived of.
possession and shall be entitled to
rentals/income thereof until -the expiration of
the time allowed for its redemption (LGC,
Sec, 179) .
3. Compromise
The Sanggunian concerned may ·authorize the
city or municipal treasurer to settle an offense
not involving the commission of fraud .before a
case therefor is filed in court, upon the P.ayment ·
of a compromise penalty ·o f not less that 19200
(LGC, Sec. 148 (b) in relation to Sec. 151). · ·
When given judicial approval, a compromise
agreement becomes more than . a. contract
binding upon the parties. · Having · been,
sanctioned by the court, it is entered as a
determination of a controversy and has the force
and effect of a judgment. It is irpmediately
executory and not appealable, except for vices
of consent or forgery. The nonfulfillmenJ of its
terms and conditions justifies the issuance of a
writ of execution- in such an instance, execution
becomes a mini~terial duty of the court (Metro
Manila Shopping Mecca Corp. v. Liberty Toledo
(Resolution), G.R. No. 190818, November 10,
2014).
_refund cases a~d the 2-year period is about
to lapse (LGC, Sec. 196) - b~fore MTC,
RTC, or CTA Divjsion depending on the
amount of tax.
Petitioner cannot seek the issuance of a writ
of prohibition to enjoin respondents from
collecting . the assessments which have
become final and unappealable on account
of petitioner's failure to appeal the same with
the RTC within thirty (30) days from the
denial of the protest (Benguet Electric
Cooperative v. Municipality of La Trinidad,
Benguet, CTA EB No. 1091, May 6, 2016) .
2. Action. for Declaratory Relief
Please see the further discussion in the
Remedial Law Memory Aid (Special Civil
Actions).
3. Injunction
The LGC does not specifically- prohibit -an
injunction enjoining the collection of taxes
(Angeles City v. Angeles City Corp., G.R. No.
166134, June 29, 2010) .
• t1' •
It must be 'emphasized that although there is no
express ~ prohibition in the LGC, injunctions
- enjoining •· t~e collection of local taxes are
frowned upon. Courts , therefore, should ·
exercise · extreme caution in issuing such
· injunction~ (A ngeles City v. Angeles Electric
Corporation,
,
G.R. No. 166134, June 29, 2010).
With regard to national taxes, the NIRC explicitly
prohibits courts from enjoining the collection of
taxes, with the sole exception of the CTA
(JNGLES, Reviewer, supra at 539).

JUDICIAL REMEDIES
1. Court Action; when available
a. Within thirty (30) days after receipt of
decision or lapse of sixty (60) days in case
of Secretary of Justice's inaction (LGC, Sec. ·
187)- before the RTC;
b. Within thirty (30) days from receipt when
protest of assessment is denied or lapse of
sixty (60) days in case of local treasurer's
inaction (LGC, Sec. 195) - before the MTC,
RTC, or CTA Division depending on amount
of tax; and
c. If no action is taken by the treasurer in
 LOCAL TAXATION
T?Xation Law

I
TABLE OF TAXi:NG POWERS OF LOCAL GOVERNMENT]
UNITS ..

donation , barter, Transfer under the

any other • mode consideration or Comprehensive Agrarian
transferring ownership or . fair market Reform Program.
~"~ ·title of real property. value in case
monetary
consideration is
not substantial.

Business of printing and Gross annual Not more Printing · of DepEd

publication of books,. eards , .receipt_s-..· for .th.e than 50% of (CHED / TESDA)
posters, leaflets, handbills, ptecedif!g y~ar. 1% prescribed texts or
certificates, . · · re9elpts, 1-------...-------, references.
pamphlet~. . ancf ot ers of Ca.pital In case of a
similar nature. · . · _.,. Investment - In .newly
.,, . • case o,f ,P. ne V{ly started ,
started·. - 6usiness: ..
business. 1/20 .-0f:; 1_%.
- ..... #

Enjoym~nt of a franchise. Gross. annu I ~ot ;~ . mdre When exemption is

- ;.i: '
receipts for tHe than 50% of expressly granted in the
preceding year: 1% . - law granting · the
t---,-,------+-----,---1 franchise (National Grid
Capital :.>..
• a
In case 'of Corporation v. Ofeliam
·, ,
lnvestmerit , ,"~·-1n' .newly
. Or,va, GR
. . No. 213157,
•J Cc!Se .o f a ·newly · started , August 1o, 2016) .
•- .,1 . _
starte.d •. \ . 1ousine~s.
, •• l~. ·pusJrieS~~ ·'.,. _j- 1/20 .o f1.%

,
•. of ' ' ordinary· Fair
.. '..market ' ,Not more
,

stones, sand, gravel;-earth, v~l_4e ·~ in -.. t~e than 10%

\,.-'
Province has no
authority to impose taxes
and other quarry resource~ locality ,,., ,....p er on quarry extracted from
as defined under the NIRC cubic· meter of PRIVATE LAND. ·· That
from public lands or from the subject. would aiready be in the
the beds of seas, lakes, n-ature of an Excise Tax
rivers, streams, creeks, and · NOTE: and is, thus, prohibited
other public waters within its Distribution of by the · Common
territorial jurisdiction. proceeds of the Limitations of Local
tax: Taxation ,. · (V
Province - 30% DOMONDON, Taxation,
Municipality supra at 103).
where
resources are
extracted - 30%
Barangay where
resources are
· extracted - 40%

practice of Reasonable Not to Professionals

requiring classification by exceed exclusively employed in
the Sanggunian ~300 the gove~ment
 \ I

MEK-0-RY AID
s., Bede College of Lew - ROCT Bar ()peratlona Center

lease, or Gross receipts Not more Operas, concerts,

. of theaters, fror:n admission · than 10% bf dramas, recitals,
cinemas, concert halls fees . gross . painting, and art
circuses, boxing stadia , and receipts exhibitions, flower
other places of amusement. from shows, musical
admission programs, literary, and
fees oratorical presentations
except - pop, · rock, or
similar concerts. ·
by · manufacturer, Every truck, · Not No Exception.
producers , wholesalers van , or .vehicle. exceeding
dealers, retailers, of truck: P500
van, vehicle in the ·delivery
or distribution of distilled
spirits, femiented · liquors ,
softdrinks, cigar, ahd
cigarettes, and other
'products, determined by the
Sangguniang
Panlalawigan, to sale ·'
outlets or consumers,
whether directly · or
indirectly.

SECTIONS 142 - 150 OF THE tGC

.•

Manufacturers, Gross · sales or · receipts

assemblers, repackers, for the preceding
processors, brewers, calendar year. ~-
distillers, · rectifiers, and 1----------1
compounders of liquors, - If the gross sales or
distilled spirits, and .receipts amount to
wines or manufacturers t-6 , , 500, 000 or
of ani article of more for the
preceding calendar
commerce of whatever
year, a percentage
kind or nature.
tax not exceeding
37:5% _of 1% of
gross receipts is
imposed, instead.

Gross annual receipts · Graduated annual

Wholesalers,
Distributors, or Dealers for the preceding fixed tax.
1,.------,------1
in any article . of calendar year.. If the gross sales or
commerce of whatever receipts amount to
kind or nature. P2, 000, 000 or
more for the
preceding c~lendar
year, a percentage
tax not exceeding
 ·LOCAL TAXATION
· Taxation Law

50% of 1% of gross
receipts is imposed,
instead.

~xporters and Gross sales or receipts Not exceeding one-

manufacturers, millers, for the . preceding half of the rates for
producers, wholesalers, calendar year. . sales of articles
distributors, dealers, or mentioned in
retailers of essential paragraphs (a), (b),
commodities. and (d) of Sec. 143
ofLGC.

Gross sales or receipts If the gross sales or The barangay has

for the preceding receipts for the exclusive power to
calendar year. preceding calendar tax retailers if the
.year is ,.400, 000 or gross receipts do not
less - 2%; and exceed:
,-_·.. ,... ... ;· ""'""..,., • If the gross sales or ,.50, 000 or less in
!\ , re~ipts for the .cities;
.,, ·-.,_ l · , . :.:._ ~- ,,,, prececling calenda·r ,.30, 000 or less in
, v-' _,._~ ,...,. . ·-.... year is mqre than municipalities.
· . -i/ ,.,--- - ··~-"- ,.-4_0Q; 000 -, 1%
Contractors and 6thef Gfoss receipt~. for\ . the \;raduatM nnual Transportation
independent ' . . preceding calendar year. ijxed t~. , ) i. Contractors.
contractors. ! r··--,.1·
1-"'
~- --- -- ·-- -· - ...:.. -- • • --i
· , '- 11
,

, ,, -, , If the gross sales or

. ;1 _A, ; •. \ I,
receipts ,• amo • l to
; · t - '.\ · . P~;: , ooo, ooo; or
-~';_. ··-·-:--;---,--. ~ . - - .• more
.. ,\ .\ 1 I -, , ·for. _. ;• the !
'-:- ..,,r.,~
• , •• • ~.,,---
1 / :'p~eced'ng calendar i
',; r -:-,, i ·' ·:,...,,.,- · ·year, ,a percentage
, ,·-~-·"'. ! / r.-;\ :, tax ,not ex~eding
• ' .......
· . • . , •·. i, ,
- _·
rp- , ,r' ..,..,_
'J .
500''1
',:

:.._. ___a>.- • receipts 1s imposed,

0 , :
1/o_ of 1_ 1/qt()f gross
't ,r ,.a,:,-
. , , •!1~, eai.r.
, , v- ~-~,. .,.~ • •
..... . -.,;1 -- t .• ..,,. .....
"·· .. , i'; ' .. •
and . other Gross• receip~ 1 ~n thEf Rate not exceeding All other iocome and
preceding calendar-year 50% of 1%. receipts of banks and
derived from interests, financial institutions
commissions, and not otherwise
disco1.,mts from lending enumerated (/RR of
activities, income . from LGC, Art. 232 (f)).
financial leasing,
dividends, rentals on
property, and profit from
exchange or sale of
property, insurance
premium·.

feddlers engaged in the Per Peddler. Rate not exceeding

sale of any merchandise PSO.
or article of commerce.

On any business Not. The Sanggunian Any business

otherwise specified concerned may engfiged in the
above. impose a schedule production,
 \ I

MEt4Q~y AID
s., Seda Colege of Law • RGCT Bat Operations Center

graduated tax manufacture,

Incidental rates, but in nq case refining, distribution,
Activities relative to the to exceed the rates or sale of oil,
business are not prescribed in Sec. gasoline, and other
taxable
143 of LGC. petroleum products
(/RR of LGC, Art. 232
(h)).
Municipalitie~ may impose and Collec:t reasonable fees and charges on business and occupation
and , except m case of professional tax (which only provinces & cities may levy], on the practice
of any profession or calling commensurate with the cost of regulation, inspection , and licensing
before any person may engage in such business, occupation, practice of such profession, or
calling (LGC, Sec. 147).

Cities may levy the taxes, fees, and charges which ~he province or the municipality may impose.

The rates of taxes tha·t the city may levy may exceed the·m 9ximum rates allowed for the province or municipality
by not more than fifty percent (50%) except the rates of pro!~s~sional a~q amusement taxes .
. ' '
BARANGAYS SECTION 152 OF THE LGC SR-SBO
- - - - .. -~l'"'. . ~1' ~~W:""'
,
··-··. _ '.__ • _ '
Sou·rces ·of Revenue
• _ "-.!'°" ·2::..t-.x-l.•.,,.~-~

Barangay Taxes on .§.tores or Retailers - with fixed
business establishments.
-, • With the g-ro~s sa les ·or receipts for the preceding
! ·'.calendar/ yea ( ·of P50, 000 or less (for barangays_in
,·~~ the citie~). _.~(ld J~~-~. _
ooo or less (for barangay in
,.·" municipcl!!ties} ~t. ?i,tate not exceeding 1 % of such
i '" gross sales· or receipts.

~rvice fees or charges -. , .such reasonable fees or charges for services

re_nqer~d _in connection with the regulation or the.
use of" bal angay - owned properties or service
facilities such as palay, copra, or tobacco dryers .

f!arangay clearance Such reasonable fee as the Sangguniang

Barangay may impose.

Qther Fees and Charges The barangay may levy reasonable fees and
1. Commercial breeding of fighting cocks, cockfights, charges.· ,
and cockpits; · . . .
2. Places of recreation which charge admIssIon fees,
3. Billboards, signboards, neon signs , a~d outdoor
advertisements
 LOCAL TAXATiON
Taxation Law

PROCEDURE FOR DISTRAINT OF PERSONAL PROPERTY LGC, SEC. 175 A-F

Upon f~ilure of the person owi~g any l~cal tax, fee, or charge to pay the same at the tim~ _r quired .to pay, the
LT or his deputy may, upon wntten notice, seize or c~nfiscate any personal property belonging to that person.
7
. .

a. The_ local treasurer or his deputy may, upon written notice, seize or confiscate any personal proP,erty
belonging to that person or any personal property subject to the lien in sufficient quantity to satisfy the tax.
b. The local treasurer or ·his deputy shall issue a duly authenticated certificate (serves as a warrant} showing
the fact of delinquency and the amounts of the tax, fee, or charge and penalty due. _

ij

The officer executing the distraint shall make, or cause to be made, an account of the good, chattels, or effects
distrained, a copy of which signed by hims~lf,<Sfate~entof suryrdemanded, and a note of time and place of the
sale shall be left either with: r· · i , •·

1. The owner; _, , -· ,
2: Person from whose possessipn.the goods, chattels, effect~ are la~etrt; or ·
. . . / . -
3. At the place of business of} hat p'erson·a nd.with someone.of suitabJe·age' and discretion
-
\ -

• ,-: ,.___ • ' ' 'ti: : ,

The officer shall cause a n tification to be exhibited in not less thanJhree (3· publicJand conspicuous places in
the territ~ry of the LGU whp.re1h..e;dist,rain(Js made·; specifying: , ,· ) • ~-·- t ·'
1. The time and place of sale; and • , · :. r - -· . . -. · 1 · : - ,

2. The articles distrained."". ,. ,<'~ ,/_ -_; , i . _ ,-;~. ·.. ; ' ./ /

. . .., ·,':_, .,,: .. . . .>·" ""j_l . >' ,f . -
NOTE: The time of sale shal ,not be less than twen~ (20) day~-after the notice !b the owner and possessor of
the property and the publication or posti(lg of,th~ -',not1~( Pne ·p1~f e forlhe posµng of the notice shall be at the
office of the chief executive of the LGU irf,.. which:lhe
4. ---
property
..... .--
rs -distrained.
• . i
0

At any time prior to the consummation of the sale, the taxpayer may pay the proper charges to the officer
conducting the sale. However, should the property distraint be not disposed qf within one hundred twe_nty
(120) days from the date of distraint, the same shall be considered as sold to the LGU concerned. - ·

Within five (5) days after the sale; the local treasurer shall make a report of ·the proceedings in writing to the
local chief executive concerned.

ij
.,,,•~~• ··•·. .• ., . .f' J.., ._ ,, ~·, .. v.;. .. < .• - . :- .
. ' : , ''-,. , . . . ' ·· Disposition ·ofJ~ro'ceeds ·' ·
• • - .r, ' •

The proceeds of the sale shall be applied to satisfy the tax, including the surcharges, interest, and 0th0~
penalties incident to ·delinquency, and the expenses of the distraint and sale. The balance over and above wha
I

J
is -required to pay the entire claim shall be returned to the owner of th·e property sold.
 \ I

MEM:Q~y AID
s., Beda lk'MnitY College d law · ROCT Bar Clpefations Center
425

PROCEDURE FOR LEVY OF REAL PROPERTY LGC, SEC. 176, 178

Notice of Delinquency (LGC, Sec. 175 (a-f). See discussion above on notice of delinquency for distraint.
Levy on Real Property (LGC, Sec. _176). After the expiration of the time required to pay the delinquent tax,
fee, or charge, real property may be levied on before, simultaneously, or after the distraint of personal
property .

The treasurer shall prepare a duly authenticated certificate showing the name of the tax.payer and the amount
of the tax, fee, or charge, and penalty due from him. Said certificate shall operate with the force of a legal
execution throughout the Philippines. · ·

Levy shall be effected by writing upon said certificate the description of the property upon which levy is made.

Written notice shall be maired and served upon:

1. the assessor and the Registrar of Deeds who shall annotate the levy on the tax
declaration and certificate of title of the property; and,.
2. delinquent taxpayer or, if he is absent from th~ Philippines, to his agent or the manager of the business
.

u '•
·-
in respect to which the liability arose, or if there be hone, to the occupant of the property in question. -
.

Advertisement of sale through posting and publication of. notice - wit{in ~O days after the levy and shall cover
a period of at least thirty (30) days. It shall be effected bY.: · l ·;.
1. a. posting a notice at the main entrance <?f th~ ':1unicipal buildi.2~f~r _city h.all~~Qd in a public and conspicuous
place in the barangay where the real property 1s located; and ~,. . .. ·' "~ . . . .
2. by. publication once a week for· three (3) weeks in a ~ewspaper of general circulation in the province, city,
or municipality where the property is located.
,...,.., -
NOTE: The advertisement shall contain the amount of taxes:)ees, o_r~parges, and penalties due ther~on, and
the time and place of sale, the name of the taxpayer against whom the taxes, fees, or charges are levied, and
a short description of the property to be sold. ·
u

.
At any time bef~re the d~te fixetd
charges, penalties, a~d ~nter~s s.
f(
f th sale the taxpayer may stay the proceedings by paying the taxes, fees,
he~ails t~ do so, the sale shall proceed and shall b_e held either at the main
nici al building, on the property to be sold, or at any other place as
entrance of the provincial, city, or -mu _P th and specified in the notice of sale.
determined by the local treasurer conducting e sa Ie , .
u
 426 . -LOCAL TAXATION
Taxation Law

Any excess in the proceeds of ·the sale ov~r the claim arid cost of sales shall be turned over to·the owner of the
property. . · · . . . .,

In cas_e the taxpayer fails to redeem the property· within •1 year from the date of sale, the local tre~.surer shall .
execute a deed conveying to the purchaser so much of the property as has been sold, free from hens of any ·
~xes! fees, charges, related surcharges, interests, and penalties (LGC, Sec. 176). ·

-----

( I
- \ I
MEM:Q~Y AI D
s.-, Bede \.kWelSity Colege of Law - ROCT Bar Clpemtjons Centet

TAXPAYER'S REMEDIES FROM ASSESSMENT OF

LOCAL TAXES OTHER THAN REAL PROPERTY
TAXES

Local Treasurer (LT) assesses local taxes within

five (5) years from date· they become due or ten
(10) years from discovery of fraud or intent to
evade payment (LGC, Sec.194 (a) and (b)) .

LT issues notice of assessment (LGC, Sec.195)

Taxpayer files written protest with the local

tre_asurer within 60 days from receipt of
assessment (LGC. Sec. 195).

l
IF protest made within prescribed period, · LT
decides within 60 days from date of filing (LGC,
Sec. 195).

"'
If LT does not decide within 60 days, taxpayer
appeals to court of competent jurisdiction (regular
courts) within 3~ days from lapse of 60 days. If
LT issues notice cancelling partially/wholly the
assessment or if LT does not grant protest, same
procedure as lapse of 60-clay period (LGC, Sec.
1951.
'

Appeal to·CTA division via Ru~e ~2 _of_the Rules of

Court if the RTC has original iunsd1ct1on (RRCTA.
Rule 8, Sec. 4 (a)) .

If the CTA Division decides against taxpayer'. file a

. Motion for Reconsideration within 15 days with the
same division (RRCTA, Rule 8, Sec. 3 (b)) . .

t CT A.en· bane via Rule 43 of the Rules of .

Appea 1 o . •·
Court, if the decision is from ~n RTC exercising
. appellate jurisdiction (RRCTA, Rule 8, Sec. 4 (c)) .

1
t SC via Rule 45 petition for review
Appea 1 o
(RRCTA, Rule 16, Sec. 1).
 LOCAL TAXATION
Taxation Law
l
PRO~EDURE FOR DISTRAINT AND LEVY FOR THE -
PURPOSE OF SATISFYING LOCAL TAXES

Tax constitutes a lien superior to all liens and may

only be extinguished upon payment of. the tax and
the related charges (LGC, Sec. 173).

Time for payment of local taxes

expires.

Local_ Treasuter (LT) shall, upon written notice, seize.

sufficient personal property. The LT or his deputy shall Real property may be levied on
issue a certificate showing the fact of delinquen,cy and before, simultaneously, or after
the amounts of the tax, fee, ·or charge and penalty dLe. 1 ~istraint of pe·rsonal property (LGC,
Such certificate shall serve as sufficient warrant for thd Sec. 176).
di~traint of personal property (L GC, §e~. 175 (a)) .

.
The officer executing the distraint shall make an NOTE: ., See ·Annex of RPT: The
- p~ocedure for levying real properties
accounting of the distrained gt>ods (LGC, Sec. 1.75).
_, tq satisfy, local taxes is the same as
l~vy pro~edurE: 1 for satisfying real
Officer posts notice in not less t_ban 3 public) and l ~operty taxes (LGC, Secs. 2~8-266)
conspicuou~ places in th e l!GU Wl}ere the propei:ty"~is , . ,. .; ,,
distrained. The time of sale shall h·t,.'be less than·20 - .. /.~xj:ept=tPublii:;ation is once a week
days after notice to the owner or possessor, and the . ·~r. thr~e weeks for local taxes (LGC,
posting or publication of notice (LGC, Sec: 1-!5 (c)). : • / Sec. 178) an_st once a week for. two
' . ( ( ,. : i- _ , ,- \
7 w eks for n;_al property taxes.
Before the sale, -goods or effects p is.train"ei"d..:. shall -be
r~sorted to the owner if all charges a_~ paJd (LGC, Sec. , \ ,.._ •·
175 (d}).
.___ _ _ _ _ _ _ _ _ _ _ _ _;;...._____
' 1 f 1 \ '. '- _ ,
.;;.;..;;.._..1_ ... ~,,.,..

At the time and place fixed in the notice, the officer

conducting the sale shall sell the goods or effects so
distrained at public auction to the highest bidder for
cash. Within five days, the LT shall report the sale to
the LGU Chief executive. Excess of proceeds shall be
returned to the owner of the property sold (LGC, Sec.
175 (e)).

If property distrained is not disposed within 120 days,

it shall be considered sold to the LGU for the amount
of the assessment made by the Committee on
Appraisal (and to the extent of the same amount); the
tax delinquencies shall be cancelled (LGC, Sec. 175
(e)).

If pro~ee~s of sale _are insufficient, other property .may

be d1stra1~ed unti_ l full amount due, including all
expenses, 1s collected (LGC, Sec. 175 (()).
 \ I

MEM-~\RV AID
San Becia
.
Colege of law. RGCT Bar ()pa-a,._
...,.,s Center
429

IGENERAL. PRiNCIPLES ] However, upon the advent of the LGC , the

provisions of the Local Tax Code and the Real
Property Tax Code were repealed (LGC, Sec.
534 (b)) . Consequently, the law that governs
REAL PROPERTY TAXES real property ,taxes is now the LGC. Therefore ,
real property taxes are classified as local taxes.
A real estate tax is a direct tax on th .
·1d· e ownership of
Ian d s an d b u1 mgs or other imp· rovem' t h 5. It is Proportionate because the tax is· calculated
· II en s t ereon
not espec1a Y exempted and is paya· bl ' on the basis of a certain percentage of the value
h "h th .' e regardless
o w e, er e property
f
.
is used or not Ith
, a ough the assessed (ABAN, Law of Basic Taxation in the
va Iue may -vary in. · accordance w1·th such Philippines (2001), p. 436-437 [hereinafter
fa ctor (Viii
, anueva v. City of floilo , G. R. No L- ABAN, Basic Taxation]) .
December 28, 1968) . · 26 521,
FUNDAMENTAL PRINCIPLES
NATURE OR ·CHARACTERISTICS OF GOVERNING REAL PROPERTY
REA~ PROPERTY TAX: (DIAL PRO) TAXATION: (ACUPE)
1. Q1rect tax ~n the ownership of real property 1. Real property shall be Appraised at its current
where the impact and incidence of taxation and fair market value· - ·
devolves on the same person; ' -
2. It creates a single, !ndivisible obligation; "Fair market value" is the price at which a
3. ~d valorem tax where the value of the property property may be sold by a seller who is not
1s the tax base; compelled to sell and bought by a buyer who is
. ~ot compelled to b':JY (LGC, Sec. 199(/)).
NOTE: It is an ad valorem tax because it is a
_levy on real property determined on the basis of 2. Real pr,op_erty shall be ~lassified for assessment
a fixed proportion of the value of the property purposes on the basis of its actual use;
(LOCAL GOVERNMENT CODE, Sec. 199(c)
[hereinafter LGCJ). ' "Actual use'·' refers to the principal and
predominant utilization of the property by the
4. ,bocal tax; and person in possession th~reof (LGC, Section
199(b)). : ,
NOTE: In a case decided prior to the advent of i .,., \:,: r ' ~. f:~ ., '1: - r;-:,,,

the LGC, the Court ruled that the real property 3. Real-property sl'iall be assessed on the basis of
tax has been considered and held to be a a Y.niform classification within · each local
national, not a local tax in Meralco Securities government unit;
Industrial Corp v. CBAA {G.R. No. L-46245, May -~· _:Y-he ~ppraisal, assessment, levy, and collection
31, 1982) . The realty tax is enforced throughout of rearproperty -tax shall not be let to c1ny Private
the Philippines and not merely in a particular person; and -
municipality or city but the proceeds of the tax 5 . The appraisal and assessment of real .property
accrue to the province, city, municipality and shall be 5quitable (LGC, Sec. 198). ·
barrio where the realty taxed i·s situated (V/TUG
& ACOSTA, Tax Law and Jurisprudence (2000),
p. 479).

t4i.J*ii©i-t•ltltliii3
DOHN ALFRED E. AQUILIZAN , Over-All Chairperson I NICHOLE VANE B. SANTOS, Chairperson for Academics I RONALYN A .
. G:<CULA, Ad Hoc Director for Bar Matters I MARIELLE CIELO B. BELGIRA, Vice Chairperson for Finance I JUAN INIGO s. MIGUEL,
Vice Chairperson for Operations I ALISSA MARIE D.C. DELOS SANTOS, Vice Chairperson -for :-tudit I CORINA R. TAMPUS, Vice
Chairperson for Secretariat I ARVY KEITH N. CHUNG, Vice Chairperson for Logistics I ANTONIO JUN-JUN C. MANALIGOD IV, Vice
Chairperson for Membership I JORDAN N . CHAVEZ, Vice Chairperson for Electronic Data Processing
SUBJECT COMMITTEE
JOSE LORENZO c. DAVE, Subject Chair I LOUISE MARIE C. CONTACTO, Assistant Subject Chair I KATRYNA ANNE R. TOMENIO,
Subject Electronic Data Processing I SUBJECT HEADS: MAR,Y GRACE A. GRANIL, General Principles I SHEENA ROSETTE DG.
DOMINGO, Administration, Enforcement, Remedies and Court of Tax Appeals IJERRLITO P. CUSTODIO, Local and Real Property Taxation
I STEVIE R. ARCILLA and PATRICK MARRION Y. MELE~RES. Income Taxation I MARY~ C . TAN, Transfer Taxi MARILYN
H. MAI.ALOAN, Value-Added Tax I

KATRINA MICHAELA D . DELFIN, ARMANT. PAEZ, ANDREI ANNE U . PALOMAR, MARY KATHERINE A. SIMEON, JAMES
KARL DANIEL B ALVARO ARIESAJANE V. DOMINGO,JOSEPHINE MARIE T. SM.AZAR, YNA MAREI AGUILAR, NERY
ROYCE T. LAZARO, JOHN KENNETH Q. CRISOLOGO, LOIS DANIELLE P. DIMAANO, ANDRELA M. AQUINO, ANNA LOREN
DC. MANVEL and GILBERT OWENS. APILADO
7 IRO CPA Atty. DANTE O. DELA CRUZ, CPA,JusticeJAPAR B: DIMAAMPAO, Atty. EFREN
Atty. NICASIO C . CAB ANE • ' VINCENT M . DIZON, CPA

.
Q ... . . . . .-(
430 . ..
.
FOR TAXATION PURPOSES, REAL
PROPERTY CONSISTS OF THE .
FOLLOWING:
1. The immovables In Art. 415 of the Civil
Code which include:
a. Land, buildings, roads and constructions, of
all -kinds adhered to the soii;
b. Trees, plants, and growing fruits , while they
are attached to the land or form an integral
part of an immovable;
c. Everything attached to_an immovable in a
fixed manner, in such a way that it cannot be
separated therefrom without breaking · the
material or deterioration of the object;
d. Statues, reliefs , paintings or other objects
for use or ornamentation , placed in buildings
or on lands by the owner of the immovable
in such a manner that it reveals the intention
to attach them permanently to the
tenements;
e. Machinery, receptacles, instrume ls or
implements intended by the wneJ f the. --·--
tenement for an industry or arks wh ich
may be ·carried on in a building or.on a piece
of land, and which tend directly to meet the
needs of the said industry-Of works; ·
f. Animal houses, pigeon-houses, beehives,
fish ponds or breeding places of -similar
nature, in case their owner has plated th~m
or preserves them with the intention to·have
. them permanently attached to ~heilaJld, and
!arming a permane~t part of it; t9; animals-
m these places are mclud d; · ~;.,
g. Fertilizer actually used on a piece of;land;_
h. Mines, quarries, and slag dumps, while -tt)e • I ./(~; fne owner for an-industry or work ·which may be
matter t~e~eof for~s part of the bedJ and.r i -~ ~-< __tarr~ d on in a.. building or on a piece of land and
_waters either ~nnmg or ~~gnant,: _'<.:_.__. 1 , __ > , ~ h~ch ,t~~d directly to meet the needs "Of ~aid.
i. Doc~s and structure~ which, though ~~atmg ,
are intended by their nature and 01?.Jart to
remain at a fixed' place on a river, lake, or
coast; and
j. Contracts for public works, and servitudes
and · other real rights over immovable
property.
2. Machinery as defined under Section
199(0) of • the LGC and clarified by
Department of Finance in Local Finance
Circular 001-2002. - prop~rty for real property tax purposes not
Machinery
Embraces machines, equipment, mechanical
contrivances , instruments, appliances or
apparatus which may or may not be attached,
permanently or1emporarily, to the real property.
It includes the physical facilities for produ'ction,
the installations and appurtenant service
facilities , those which are mobile, self-powered
or self-propelled , and those not permanently
I
REAL PROPERTY TAXATION
Taxation Law
attached to the real_property whjch are actually,
directly, and exclusively-used to meet the needs
of the particular. industry, busine.ss or activity
and which by their very na~ur~ and purpose are
designed for, ?r nec~ssary to_its m_anufacturing,
mining, logging, . commercial, industrial or
agricultural purposes, (LGC, Sec. 199(o)r
Machinery also includes: .
a. Immovable Property by Destination
mact,inery essential to the business.
Requisites to be classified -as real
property: .
i. Actually, directly, and exclusively used
to meet the needs of the particular
industry, business; or activity; and
ii. By their very nature and purpose are
designed for, or necessary to
manufacturing , mining, logging,
commercial, industrial, or agricultural
- • purposes (LGC, Sec. 199(0)).
NOTE: Movable equipment to ~e immobilized in
. contemp ation' ofthe law must first be "essential"
and "princjpaf' elements" of an industry or. works
without which such industry or works would b·e
"unable to func_io'n or carry on the industrial
- for which it was established" (Mindanao
·Bus *Co. v. ,erty A·sessor, G.R. No. L-17870,
· - · September 29, 11J,62) . .
1
1 ·
.
r_-;
·. · / 1,1 _· , •
~o'fi'e r -barQeSl are' categorized as immovable
1 -· ,'·. property by des'ti11ation , being in the nature of -
I · /,:machine .. and other implements intended by·
_. ... mdust~ · o work (FELS Energy, Inc. v. The
Ii i_ I·Province of Batangas, G.R. No. 168557,
• L Eebruary 16, 2007).
_ ..
In classifying machinery·as real property for
real ·property tax, LGC prevails over Art.
415(5) of Civil Code .
The Supreme Court disagrees on harmonizing
Art. 415(5) of Civil Code and the LGC for this
woul~ necessarily _mean imposing additional
requirements for classifyin·g machinery as real
provided for, or even in direct conflict with, the
provisions of the LGC. As between the Civil
Code, a general law governing property and
property relations, and the LGC, a· special law
wanting_local government units the power to '
impose real property tax, then the latter shall ·
prevail (Manila Electric Company v. The City
Assessor and City Treasurer of Lucena City,
G.R. No. 166102,August5, 2015).
 \ I
MEM:0,RY AI D
San Seda Univwaity College of Law - RGCT Bar Open,t1ons Center
b. lmm~vable Property by lncor.poratlon _
machinery permanently attached.
NOT~:- T~e pipeline system of Meralco
Se':llnt,es ,s classified as real property· and ,
subJect to tax because it is indubitably a
construction adhering to the soil. It is
attached to the land in such a way that it
cannot be separated therefrom without
dismantling the steel pipes which were
welded to form the pip_e line; and does not fall
within the classe_s_ of exempt real property
(Mera/co Secunt,es Industrial Corp. v.
Central Board of Assessment Appeals, G.R.
No. L-46245, May 31, 1982).
The Court reit~rates that the machinery
subject to real property tax under the
LGC ftmay or may not be attached
pennanently or temporarily to the reai
property" and the physical facilities for
production, installations, and appurtenant -
service facilities, those which are. mobile,
self-powered or self-propelled, or are not
pennanently attached must (a) be actually, -
directly, and exclusively used to meet the
needs of the particular industry, business , or
activity; and (b) by their· very nature and
purpose, be designed for, or necessary for
manufacturing, mining, logging,
commercial, industrial, . or agricultural
purposes (Manila Electric Compapy v. The
City Assessor and City Treasurer of Lucena
City, G.R. No. 166102, August 5, 2015). ·
ILLUSTRATION: _ ,
Oil companies install underground -tanks -in the
gasoline stations located on land leased by the oil
companies from the owners of the land where the
gasoline stations are located. Are t!Jose
underground tanks, which Yfere not placed there by
the owner of the land but which were instead placed
there by the lessee of the land, considered reaL
property for purposes of real property taxation under
the LGC? Explain. (2Q.03 Bar Question)
ANS: Yes, the underground tanks although installed
by the lessee are considered real property for
purposes of th~ imposition of real property taxes.
These m_achinery and equipment are _taxabl_e as
necessary _fixtures of the gasoline station without
Which, the gasoline station would be . useless.
However, for purposes of executing a final Judgment,
the subject machinery and equipment would not be
co~sidered as real property (Caltex v. Central Board of
Assessment Appeals; G.R. No. L-50466, May 31,
1982).
..
. .
_, -.r'
· 431
~; .
Summary of Rules on Machinery:
1. If permanently attached - subject to real
property tax (RPT) (Mera/co Securities Industrial
Corp. v. Central Board of Assessment Appeals,
G.R. No. L-46245, May 31: 1982); and
2. If not permanently attached:
a. Essential and principal element of an
industry without which such industry, work,
or activity cannot function - subject to RPT
(Manila Electric Compaoy v. The City
Assessor and City Treasurer of Lucena City,
GR. No. 166102; August 5, 2015) ; or
b. Not an essential and principal element of an
industry, work, or activity - not subject to
RPT because machinery which are of
general pur pose shall not be considered
within the definition of machinery under IRR
of LGC (/RR of LGC, Art. 290(0)) .
IMPOSITION OF RE.A L
PROPERTY TAX
.
·LGLis THAT
MAY LEVY RPT -(1MP0s1NG -
AUTH0R1TY>:
1. Province;
2. City; and .
3. ~f 2
';'.ci~al{ty w1t~-in Metro Manila (LGC, Sec.
NOTE: Pres_ently, there is only one municipality
in Metro Manila - the Municipality of Pateros.
EXTENT OF TAXING POWERS:
Province or city or municipality within . the Metro
. Manila Area do not only have the power to levy an
annual .ad valorem tax on real property but they may
also fix a uniform rate of basic real property tax
applicable to their respective localities (LGC, Secs.
232-233).
No pubiic hearing shall be required before the
enactment of a local tax ordinance levying the basic
real property tax (A.O. No. 270 (1992), Art. •324) in
comparison with local business tax ordinance which
requires public hearing (LGC, Sec. 187). ·
While a local ·government unit is authorized under
several laws to coll~ct real est.ate tax on properties·
falling under its territorial jurisdiction , it is imperative
to first show that these properties . are
unquestionably Within its geographical boundaries
(Sta. Lucia Realty & De_v't., Inc. v. City of Pasig, G.R.
No. 166838, June 15, 201t).
 REAL PROPERTY TAXATION
ILLUSTRATION:
An Ordinance was passed by the Provincial Board
of a Province in the North, increasing the rate of
basic real property tax from 0.006% to 1% of the
assessed value of the real property effective January
1, 2020. Residents of the municipalities of the said
province protested the ordinance on the ground that
no public hearing was conducted and, therefore, any
increase in the rate of real property is void. Is there
merit in the protest? Explain.
ANS: No. The protest is devoid of merit. No public
hearing is required before the enactment of the local
tax ordinance levying the real property tax (A. 0 . No.
270 (1992), Art. :)24).
. .
PROCEDURE IN THE ADMINISTRATION
· . Taxation Law
FOR NEWLY ACQUIRED PROPERTY OR
IMPROVEMENT ON REAL PROPERTY: A
sworn statement must be filed within 60 days
after acquisition or upon completion or
occupancy of the . improvement, whichever
comes earlier (LGC, Sec. 203) .
PURPOSE OF DECLARATION: A tax
declaration only enables the assessor to identify
· the property for purposes of determining the
assessment levels. It does not bind the assessor
when he rnakes his assessment because real
- property shall be classified, valued and
assessed on the basis of its actual use
regardless of '-'.'here located, whoever owns it,
and whoever uses it (V DOMONDON, supra at
32 7)-

0F REAL PROPERTY TAX (DLA-DP) A tax declaration does.not prove ownership. It is

Step 1: .Qeclaration of Real Property (LGC, Secs. merely an indicium of a claim of ownership (De
202 and 204) _ ve1;e,-Cruz v. Mig_u el, G.R. No. 144103, August-

Step 2: ,bisting of Real Property in the 'Assese m..ent -·

. 1j 1 f 3 1i, '2005) . However, real property tax
gecldrations -are good indicia of possession in
Rolls (LGC, Secs. 205 and 207) the c nc~pj of an owner for no one in his right
. · ; ~ _ , ind wc;,uJd' bi paying taxes for a property that
Step 3: &,praisal and Valuatiop of R7al !?rope~ . ; .,\,," is ot i ... h,i •actual or constru~tive possession
(LGC, Secs. 212-214, 220 and 2 -225) F ,,\ ,,,~
(Co ; solkl~ted Rural Bank (Cagayan Valley) ./nc.

Step 4: ,Qetermining Assessed

: v. Court o~,4ppej1/s, G.R. No., 132161, January
alue an tba..Tax. ....... ~.,.____ "17, -'2005) . • ' ~
Due (LGC, Sec. 218) ·-... · -. , ,,' } l· .
. t ' A tax declar~ tion ·n the name of a person who
Step 5: fayment and Collection -of'. Ta .(1.:<fC,_Secs.,·· ·:_~ ._.- ha~ ,,be;·~uc~ ssip al or administrative righ!s to a
247, 249, 250, 251 and 252~ r --:)-1 - - -:-.- ·, --~- - q.e9,8q,ent's fustate' ls null and voi~ because real
' J \ 6 ,. 1 ·· .,;
1 prd.J)erty tax shall ,f>e assessed m the name of
STEP . 1: DECLARATION 0 1='\-:.~ ~~ L. : 1··.· ·: / .) he·?person ·o~ ing or administering" the
PROPERTY i . /_0:;-'o/6perty· in whicn the tax is levied (Cenido v.
1. Declaration by Owner or Administrci_ t ~rr :·· -;:-~\ ~, j pacionado, G(R. No. 132474, November 19,-
_AII persons, natural or juridical, myniog ·or :.!.__ :...:-- 19~9) . . •
administering r~al . property, · . incrucf g } ltneo ·""'
improvements therein, are requrrec:f o prepare
1
·1 1.J\ss"es;ment of Property Subject to Back
-. . Ta;es
and file: ....._,.,•_, ·For properties declared for the first time:
Real property shall be assessed for back taxes
• for not mpre than 10 years prior to the date of
initial assessmer:it (LGC, Sec. 222) .
Once every 3 years during the
period from January 1 to June 30
Taxes shall be ·computed on the basis of
Provincial/City/Municipal Assessor applicable schedule of values in force during the
corresponding period (LGC, S~c. 222).
(LGC, Sec. 202)
If such taxes are paid on or before the end of the
Contents of the sworn statement: qu~rter following the date· . th~ notice of
a. True value (currenUfair rriarket value) of asse~sment was received by the .owner, no
their property whether previously declarecj interest for delinquency shall be imposed
or not, taxable or exempt (A. 0. No. 270 thereoh; otherwise, taxes shall be subject to
interest ~t the'rate of 2% per month or a fraction
(1992), Art. 293(a)); and . . .
thereof from the date of the receipt of the
b. Description of the property suffico1enNt,n de2t7a011,
assessment until such taxes are fully paid (LGC,
for assessment purpose (A. • o. Sec. 222). .
(1992),·Art. 293(b)). .
 \ I
MEK-0,RY AI D
Sin S e d a ~ College d t.N - ROCT 8- Center
Notice of Transfer of Real Property
Ownership
Any person w ho transfers real prop~rty
ownership to another is required to notify the
assessor concerned w ithin 60 days from the
date of the transfer. The notification shall
include.
1. Mode of transfer;
2. Description of the property; and
3. Name and address of the transferee (LGC,
Sec. 208).
The voluntary declaration of a piece of property
for taxation purposes manifests not only one's
sincere and honest desire to obtain title to the
property and announces his adverse claim
against the State and all other interested parties,
but also the intention to contribute needed
revenues to the government (\/ DOMONDON,
supra at 328).
It is 'the duty of each person' acquiring real
estate in the city to make a new declaration
thereof, with the advertence that failure to do so
shall make the assessment in the name of the
previous owner 'valid and binding on all persons ..
interested, and for all purposes, as though the
same had been assessed in the name of its
actual owner (Tajonera v. Court oi Appeals,
G.R. No. L-26677, March 27, 198!).
2. Declaration by Provinci~I/City/Municipal
Assessor · ·· . .
When any person required under Sec.2oi of the .
LGC refuses or fails to make a deciaration withi n
the time prescribed , the provincial, city, or
municipal assessor shall himself _dee are th~ _
property in the name of the defaulting owner, 1f
known or against the unknown owner. No oath
by the assessor is required (LGC, Sec. 204).
This is because all real property, wheth~r
taxable or exempt, shall be appra!~ed _at its
current and fair market value prevailing m the
locality where the property is situated (LGC,
Sec. 201) .
STEP 2: LISTING OF REAL PROPERTY ..
IN THE ASSESSMENT ROLLS
1. Real property, whether taxable o~ exempt, shall
be listed valued and assessed m the name of
the owner ' administrator, or anyone h avmg
· legal
interest in' the property. The exceptions are: d
a. Undivided real property of a dece~s~
person - in the name of the_esta~e or
or devisees without designating t
individually;
433
. .
b. Undivided real property other than fthat
owned by a deceased - in the name o o~e
or more co-owners; Provided : Such heir,
devisee or co-owner shall be liable severally
and proportionately for all obligations
imposed by the LGC and the payment ~f_real
property tax with respect to und1v1ded
· property.
c. Corporation, partnership, and
association - same manner as that of an
individual; and
d. Owned by the Republic of the
Philippines, · its instrumentalities,
political subdivision, the beneficial use
of which is transferred to a taxable
person - in the name of the possessor,
grantee, or of the public entity if such
property has been acquired or held for
. resale or lease (LGC, Sec. 205) .
2. All declarations shall be kept and filed under a
uniform classification system to be established
by the provincial, city or municipal assessor
(LGC, Sec. 207) .
STEP 3: APPRAISAL AND VALUATION
OF REA~ PROPERTY
Appraisal i~ the act or process of determining the
value of prop~rty as of a specific date for a specific
purpose-(LG C, Sec. 199(e)) . .
"Fair market value" is the pr~ce at which a property
may be sold by a seller who is not compelled to sell
and bought by a buyer who is not compelled to buy
(LGC, Sec. 199(/)).
Determination of Fair Market Value (FMV)
1. For Land
a. Assessor of the province, city, or
municipality or his deputy may summon the
owners of the properties to be affected or
persons having legal interests therein and
witnesses and may administer oaths and
take depositions concerning the property, its
ownership, amount, . nature, and value
· (LGC, Sec. 213).
b. Assessor prepares a schedule of FMV for
· different classes of real properties si_ tuated
in their respective LGUs for enactment by
ordinance of the Sanggunian concerned
(LGC, Sec. 212).
c. The schedule of FMV is published in a
newspaper of general' circulation in the
province, city, or municipality conc~rned or
in the absence thereof, shall be posted in
the 'provincial capitol , city,. or municipal hall
and in two other conspicuous public places
therein (LGC, Sec. 212) . ·
 434 . REAL PR~PERTY T~TION ·
· Taxation Law
d· The provmc1a,
. · I city, or
. municipal assessor
i. Rate not exceeding, 5% of original .
may recommend to the Sanggonian OR replacement or reproduction cos~ st
concerned am~ndments tb correct errors in each year of use; and . · or
valuation in ·the schedule of FMV. The ii. Remaining .value shall· be fixed at not
Sanggunian shall act by ordinance within 90 less than 20%· of the replacement
days from receipt thereof (LGC, Sec. 214) . repro~uction cost_ for so long as ti;
machinery remains useful anct -
2. For Machinery operation (LGC, Sec. 225) . in
a. For brand new machinery: FMV is the
acquisition cost (LGC, Sec. 224(a)) . STEP 4: DETERMINING THE ASSESSED
If the _machinery is imported, th·e acquisition
VALUE AND THE TAX DUE _(LGC, SEC.
cost includes freight, insurance, bank and 218) .
other. charges, brokerage, arrastre and_ Assessment
~andhng, duties and taxes,- plus cost of The act or process of determining the value of a
~nland . . transportation, handling , and property, or proportion thereof .subject tci tax
mst~llat1on charges at the present. site (LC3C, including the discovery, listing, classification, and
Sec. 224(b)). appraisal of properties (LGC, Sec. 199(()).

NOTE: The cost in foreign currency of Basis of Assessment of Real Property

imported machinery- shall be . con erted ·to• GENERAL RULE: Real property shall be clas~ified,
peso cost on the basis of foreign currency .v~l,ue<j, and__assessed on the basis o~ its a~tual use
exchange rates as fixed by th Ceptral B,2.rik -; r~ga..rdle~s of ~ here located, whoever owns it, a'nd
(LGC, Sec: 224(b)) . .• ,. · 1/,. · -whoe~e~ uses t'(LGC, Sec. 217).
• -- - .. - -.. .,.J •

~a.nd
b. In all other cases (LGO, Sec. . ~4(aj): NOTE. Unpaid realty taxes attach to the property
. · r ) -• . .' .\ arJ charg~able :against th.e person who had
Formula: I - . .. actual qr ben~fici~I · _use and poss~s~ion of ft
-- •. :' J--..- --- - - - - regardle~s of IJ.'.hether ;pr . not he is the qwner. To
Remaining ,"":_ 1 . -:· · · .. imposeJ he RPT '- on··th~ subsequent owner wt-lich
economic _life Repl~~em:_ n tl FMV" . w~s neither the owner nor the beneficial user of the
X ~S fro u': .9n, = _. -- · --. p·ropertv::dvring ..the designated periods would not
Estimated
economic life
.._

-'
<·_;_ -
,.,L•~

(..,-) ,
l .........

: . I(.
i' JI ---' '
•

_only q,.e; ~9r:i.t raryto law but also unjust '(Estate ot Um

99::,·o'f;' Maqila, G.R. No. 90639, l=ebruary 21,
Where: '-;:-.,-. · 199 ~~1 . ,] · ·'
i. Economic Life -
.J
estimated p,eriod
I '/ .;
J.,... (:. _; ; ,/ /
over _which it · is a_nticipated thaJ,~ - 1;-- ., ( A~~~al use / · . . .
machinery or equipment -..may -.. . . &J._,-::_-_. ) :.~efers to , he purpose for which the property 1s
profitably utilize~ (LGC, Sec,' -& (k)) . ,. prin~iRal!Y 'f ~ .e'dominantly· utilized by the person· in
· - ( ' r. 1posse _§1011,ttiereof (LGC, Sec. 199(b)).
ii. Remaining Economic Life - p~riod of l / 1 .,\ \. .
time ·e xpressed in years from the pate of EXCEPTION: In cases where there are mixed land
appraisal to the date when the uses, the predominance rule is applied (LGC, Sec.
machinery becomes valueless (LGC, 217, in relation to Sec. 199(b)). __
Sec. 199(r)).
FOR MIXED .LAND USES: For lands located in
iii. Replacement or r,eproduction _~ost - areas of mixed land uses, such as residential with
cost that would be incurred on the basis commercial or industrial, the predominant use of the
of current prices, in acquiring an equally lands in that area shall govern the classification,
desirable substitute property, o'r the cost valuation, and assessment thereo(. If · · the
-of reproducing a new replica of the predominant use is residential, :all lands in that area
property on the basis of current prices shall be assessed as residential; if the predorijinant
with the same or closely similar material use is _commercial or industrial, all lands that areain
(LGC, _Sec. 199(t)). · shall be assessed as such (Local As~essment
Regulations No. 1-04 (2004), p>- 138 {hereinafter
c. Depreciation allowance: Manual on Real Property Appraisal and Assessment
For purposes of assessment, a depreciation _Operations]).
allowcmce shall be made for machinery at a:

r ,..
 \ I 435
MEM--Q~Y Al D
s., 8edll Cclege of Law - RGCT Bar ai-,tlions Center

FOR BUILDINGS USED FOR A PURPOSE Assessment Leyel . he fair market value of
DIFFERENT FROM THAT WHICH THE LAND IS The percentage applied to t . · the taxable value
CLASSIFIED: A lot or parcel of land classified and - the real property to determ1~ye (LGC Sec. 199(g)) .
appraised as commercial or industrial occupied by (assessed value) of the prope '
the building used for both residential and commercial d·by ordinance of the
or industrial purposes shall be assessed on the basis Assessment levels shall be fiixe d·ng
of the predominant use of the building or buildings. appropriate Sangguman a rates not excee
. [ t ) 1
If the predominant use of the building is residential, L GC, Sec. 218 · ·
those prescribed in Sec_. 21 8 ] (_
the assessment level fixed thereon for residential
land shall be applied ·on the market value of-the -lot ASSESSMENT LEVELS FOR LAND
or parcel determined on the basis of the schedule of
base market values; if industrial or commercial, the
assessment level for industrial or commercial _shall
be applied on the_basis of the schedule of the base 20%
Residential
market values (Manual on Real Property Appraisal
and Assessment Operations, supra at p. 138). Agricultural 40%

ILLUSTRATIONS (2002 BAR QUESTION): Commercial, Industrial, 50%

The residential lot of A is located in a commercial
area in front of the public market. On 1997. A then
left for United States to stay there perma,nently, as a
consequence, the property has been rer:ited to a .
single proprietor engaged in the sale of ~ppliances
and agri..-products. The Provincial Assesso~•
reclassified the property as commercial for tax
purposes starting January 1998. · Is it proper for tt:ie
Provincial Assessor.to reclassify the properJy'?,
ANS: Yes, the reclassification is proper. The law ...
focuses on the actual .use of the property for
classification, valuation , and assessment purposes,
regardless of owriership. Sec. 217 of the LGC
provides that "real property 'shall be _classified ,
valued and assessed on the basis of its actual use .
regardiess of where located, whoeve:( o,wns it, and '.
whoever uses it". ·
.
On the taxable year of 2011, Mr. Juan dela Cruz•.
. incurred real property taxes over his residential
house and lot in Batangas. On January 3., '2012 he .
sold the said ho~e and lot to Mr. Pedro Santos.
Who is liable for the unpaid real prop~rty taxes for
the year 2011?
ANS: Mr. Juan dela Cruz. Unpaid real property taxes
attach to the property and are chargeable against
the person who had actual beneficial use and
possession of it regardless of whether or not he is
the owner. To impose the real property tax on the
subsequent owner which was neither the owner nor
the beneficial user of the property during the
designated periods would not only be contrary to law
- but also unjust (Estate of Lim v. City of Manila, G.R.
No. 90639, February 21 , 1990). · reserved area by the government, which may or
Assessed Value or Taxable Value
It is the fair market value of the .real property
multiplied by the assessment level (LGC, Sec.
199(h)J.
and Mineral
Timberland 20%
'" (LGC, Sec. 218(a))
f<"··i C.lasses . Of · Real Property for Assessment
. . P.u rposes: {.f.V'CIMTS)
•; ·1 ;;-- Reside'n tial land - land principally devoted to
'> • haBltation-(LGC, Sec. 199(u)) .
,.
2. Agricult~r~I land :.... land devoted principally to
the planting b f trees, raising of crops, l_
i vestock
and pbult,-y, dairying, salt making, inland fishing
and ~·simila r aqua cultural activities, and other
agncul h.irat: actJvlties, and is not classified as
mineral, · tlmbefr, residential , · commercial, or
industrial land (LGC, Sec. 199(d)). ·
•.,.r: :!;i: . . '
:.:. 3:"i -commercial land - land devoted principally for
• the object of profit and is not classified as
agricultural , industrial, mineral, timber, or
residential land (LGC, Sec. 199(i)) .
4. Industrial land - land devoted principally to
industrial activity as capital investment and is not
classified as agricultural,' commercial, · timber,
mineral, or residential land (LGC, Sec. 199(n)) .
5. Mineral land - land in which minerals, metallic
or non-metallic, exists insufficient quantity or
grade to justify the necessary expenditures to
extract and utilize such materials (LGC, Sec.
199(p)).
6. Timberland land identified as forest O (
may not be granted-. to a concessionaire,
licensee, lessee, or permittee (Manual on .Real
Property Appraisal and Assessment Operations,
supra at 10) .
 REAL PROPERTY T~TION
· Taxation Law

7. Special - those: .
a.
lands, buildings, and other improvements
actually, directly, and exclusively used for
hospitals, cultural, or scientific purposes;
and p300,009.oo
b. owned and used by local water districts and
GbCCs rendering essential public services 300,000.00 500,000.00 30%
·in the supply and distribution of water and
electricity (LGC, Sec. 216). 500,000.00 750,000.00 35%

The city or municipality within the Metropolitan 750:000.00 1,000,000.00 40%

Manila · Area, through their respective
1,000,000.00 2,000,060.00 45%
Sanggunian, shall have the power to classify
lands as residential, agricultural, commercial, 50%
2,000,000.00
industrial, mineral, timberland, or special in
accordance with their zoning ordinances (LGC, (A.O. No. 270 (1992), Art. 309 (2))
Sec. 215). ·
COMMERCiAL/INDUSTRIAL FAIR .
2. ASSESSMENT LEVELS FOR MARKET VALUE
BUILDINGS AND., OTHER · ·
STRUCTURES ...

Residential . ~, ), '
.. 300,000.00 , . 500,000.00 35%
/
.. • "' •

Agricultural
I ~'
··
l
soo,poo.09
•
7so,ooo.oo 40%

1-c_o_m
_m_e_r_ci_a1_1._1n_d_us...:..t_ria_1~_3.. , 0-=--8-
0°.¼
--_-----;,----~-, -. ~. - 7so,ooo.oo_. :~-1.009,000.00 50%
Timberland .. i:·,1,ooQ;ooo.00 .. 2;000,000.00 60%
L....,c-:-~---=-:-=-:::-:-:----'-~-":--,----
(LGC, Sec. 21B(b))
-·--:---- •
(·<·~ ·.-----~ 1-:__, - 2;000:Qpo.oo I .

70%
. J \'(',/ \ . ' r--'---::----t------
~-::---=-·--,,.,.---;:-
RESIDENTIAL FAIR MARKET VAlUE , . ·.,/'qoo})OO.Q 75%
'. ,- . \ """'it~ 1I
. . A·sses~f'.?t f: ·_ .. _ ·1:6,qoo,000.00
t•t""":.~-"-•J~~
1-:(..:.,_.;:;...;.._ _ _t - - - - - - t - - - --:----c--,
:'" .\ over Not Over '· ' .'Lev_ el'_. BO%
,, :·. >t~
.·· -<·

Oo/o) , . ...
._,. - ff-: .-,,.:i~(A.·
s,o:. .No.
·. 270
( . (1992), Art. 309 (2))
P175,000.00 ...,,., . .
;T • <'
,
P175,000.00 300,000,00 . 10°~...... ' },/t. TIMBE~LAND FAIR MARKET VALUE
I

•· .. ,. ~-q;i°l~~£~-~~~-~"I""~"· ' •
r--•>!:'.:-,::s·:.., t , '\ { ;. A;sJs~meni:·.
300,000.00 500,000.00 · 20% _ :',9Y!~l~,..,,.~-2l 0.~ r~A~,,~•.:'.·;;" --
.: ___ ···:,-r;-!~~~--
., •···· ih::'i ---- -~· -· _,,, ·,;_.
.'t.>..:-~~-:..~.:1:~·..::-;.:;;~~~ ; ·· ..'"'
·i', · >:
,:,Level
'
500,000.00 750,000.00 25% · P300,000.00 45%
750,000.00 1,000,000.00 · 30% 300,000.00 500,000.00 50%
1,000,000.00 2,000,000.00 35% 500,000.00 750,000.00 55%
2,000,000.00 5,000,000.00 40% 750,000.00 1,000,000.00 60%
5,000,000.00 10,000,000.00 50% 1,000,000.00 2,000,000.00 - 65%
10,000,000.00 60% 2,000,000.00 '
70%
(A.O. No. 270 (1992), Art. 309 (2)) (A.O. No. 270 (1992), Art. 309 (2))

Whenever real property has been .divided into

condominium, each condominium owned shall be
separately assessed; for purposes of real property
taxation and other tax purposes to the owner thereof,

I ,
 \ I
437
MEM-Q.:RY AID
San S e d a ~ ColeQe at urw - RO T Bar e>i--at1ons Center

and tax on each such condominium shall constitute Purposes of the General Revisi~n: (~U-BE)

2:
a lien solely thereof (R.A. No. 4 726 as amended by 1 Egualizes and Updates valuations , .
R.A No. 7899, Sec. 25 [hereinafter Condominium Brings to lightor rediscovers many properties
Act]). that have been "lost" from the tax roll ; and .
3 . Enables the assessor to purge from hi~
3. ASSESSMENT LEVELS FOR assessment roll the double assessment an
MACHlNERIES assessment of properties that had been
destroyed that has accumulated through t_he
years (CABALUNA, Jr., Real Property Taxation
(2002), p. 146 [hereinafter CABALUNA , Real
Property Taxation]).
Residential 50%

Agricultural
Valuation of Real Property: The provincial ,
40%
municipal, or city assessor or his duly authorized
Commercial & · representative shall make a classification,
80% appraisal, and assessment of real property
Industrial
irrespective of any previous assessment or
(LGC, Sec. 218(c)) taxpayers ' valuation thereon when :
a. Real property is declared and listed for
4. ASSESSMENT LEVELS FOR taxation for. the first time;
SPECIAL CLASSES OF REAL b. There is an ongoing general revision of
PROPERTY property classification and assessment; or
c. A request is .made by the person in whose
name the property is declared (LGC, Sec.
220).

The assessment of real property shall not be

increased oftener than once every 3 years, except in
Cultural 15% · case of new improvements substantially increasing
the value of said property, or any change in its actual
Scientific 15%
use (LGC; Sec. 2?0).
Hospital 15%
· . When real ,pr~perty· is assessed for the first time or
Owned and used by local water when an· existing: a ssessment is increased or
10% decreased,· ·-the provincial , city or, municipal
districts
assessor shall within 30 days give written notice of
Owned and used by GOCCs such new or revised assessment .to the person in
rendering essential public ·.whose ·name .the property is declared (LGC, Sec.
services in the supply and 223) . ·
10%
distribution of water and/or
generation or transmission of Date Of Effectivity of Assessment Or
electric power. Reassessment
RULE: All assessments or reassessments made
(LGC, Secs. 216 and 218(d)) after January 1 of any year shall take effect on
January 1 of _the succeeding year (A. 0. No. 270
Revision Of Real Property Assessments (1992), Art. 312). .
GENERAL REVISION OF REAL PROPERTY
ASSESSMENTS: The provincial·, city, or municipal EXCEPTION: Reassessments shall be made within
assessor shall undertake a general revision of real ninety (90) days from the date any such cause or
property assessments within 2 years after the causes occurred and shall take . effect at the
effectivity of the LGC and every 3 years thereafter beginning ·of the quarter next following the
(LGC, Sec. 219). reassessment if made due to: (DUVIC)
1. Its partial or total Qestruction;
The provincial assessors, the city assessors, and the 2. Major change in its ac\ual Y.se;
municipal assessors of Metropolitan Manila Area 3. Great and sudden inflation or deflation of real
shall prepare the schedule of fair market .values for property Y,alues; ·
the different kinds and classes of real property 4. Gross !llegality of the assessment; ·and
located within their respective territorial jurisdictio~s 5 . Any other abnormal ~ause (A.O. No. · 270
within one ( 1-) year from the effectivity of !he C_ode in (1992) , Art. 312).
accordance with such rules and regulations issued
by DOF ((A.O. No. 270 (1992), Art. 310(b)).
 0

438
REAL PROPERTY TAXATION
· . . ._ Taxation Law

STEP 5: PAYMENT AND COLLECTION 1. ·To be posted by the city or

OF TAX . municipal treasurer · in
Procedure for Determination 9f Real Property conspicuous and. publicly
Tax Due: accessible place at the city or
1. Take the schedule of FMV (LGC, Sec. 201) ; municipal hall:
2. Take the assessment level by determining the a. For Basic RPT and
classification of property (LGC, Sec. 218) ; Additional tax for SEF - on
3. Multiply the FMV by the assessment level to get · or before January 31 of
each year; and ·
the assessed value (LGC, Sec. 199(h)) ;
4. Real property tax is computed by multiplying the b. For any other tax - ·any
assessed value by the RPT _rate (LGC, Sec. other date provided in the
233) . ordinance · (LGC, Sec.
249) .
2. Publication in a newspaper of
January 1st of every , year and general circulation in the ·
such will constitute as a lien locality once a week for two
superior to any other lien, (2) consecutive weeks (LGC,
mortgage or encumbrance of any Sec. 249).
kind (LGC, Sec. 246) .

1. Basic real ·property truv ana --.: ..... Paiments of real property taxes shall first be applied
1
r
additional tax !gi:r's~ cial • J 1.fo prior -y_ears' . qelinquencies, · interests, and
Education Fu11,d ,.,jn 4 equal ,..,~ ,..._ ·penaltie~f i( an , and only after said delinquencies
1
installments ~pn r ' 9efore are' s~ttl~d may -tax payments be credited for the
March 3 / ., ~upe .J OI~ GUrlent perioct (LGC, Sec. 250) .
September, 307"' December ", . - .,. ,c··,
1
31 ); · ;. . • / ,:' !.)nder t~e Se<?, ?47 of-Jhe LG_ C, provincial tr~asurE!rs
2. Other speci~I levies - are obviously r.~lie'{ed!?f the authority to collect real
govemed·byJordinance-of the_ · · · - property.tax; hoyJever, 1t appears that such omission
Sangg_unfan_ cdhcemed , is·p nly a!typograpliica1 error:
(LGC, Sec;. 250). ·,_ _ ';1._ Sec 170of th~ Lqqprovidesthatalllocaltaxes, _
· ., .....,_ , , --: · fees;.-:-af)d charges! shall be collected by the
?f f
The coll~~~o~ ~ PT ·~~}Jl _be the -;- ·,1 -_-~ --Pf~~'Q?ial, cey, · municipal, or barangay
•<S'!Y _· -J ·
-r~
resp?~s1b1ilfy' ._ .o . the or .. , . , _1reas}'rer. ,;
mumc1pal treasurer oncer(lec;i. . . i · _.-, .,·v l J.' •
.The city or . uniciP<!I trea,surr.,r- .... _J .• ~ e'c .. 4! 0,(d)(6) of the LGC provides that _ the
may deputize the ~ara~gay ~~:. -:,- . provJ,rlc1al treasurer shall exercise technical
trea~urer to collect all 1,a~~s, on_ I_\ ·:. '-· ) ,upe~ision ,. over all treasury officials of
real property . l~ted · T,, t~e. •.. .• compone'nt 'cities and municipalities.
barangay: Provided, the'earangay , , · ~, . , ,_.,, _ · · .
treasurer . is prqperly · one:ied 1
'\ '. _"3. ·~eal p roperty tax is a shared tax where the
(LGC, Sec. 247). •, · ', d, proceeds thereof ar.e distributed:
· a. 35% to the province which shall accrue to
2% for each month on unpaid
the general Jund;
amount until the delinquent
- b. 40% to the general fund of the municipality.
amount is paid provided in no
where the property is located; and
case shall the total interest exceed
c. 25% to the barangay where the property is
36 months (LGC, Sec. 255) .
-located (CABALUNA, Real Property
Discount not exceeding 20% of Taxation, supra at 245-246) .
annual tax (L'GC, Sec. 251).
4. Property owners, h9wever, at their option or
Discount not ex.ceeding 10% of convenience, may _pay their real property ta·xe~
annual tax due (/RR of LGC, Art. to the provincial treasurer of the province · to
342) . which the ~unicipality where the subject
property is located belongs (A.O. No. 270
(1992); Art. 338).
 \ I

MEt4.Q-:RY AI D
s.,, e.c- u-w.ity College cl Law - RGCT Bar Clpe<atjons Centl!<
. .
439

PERSON/5 LIABLE TO PAY REAL PROPERTY
TAX: Unpaid realty taxes attached to the property
are chargeable against the person who has actual or
beneficial use and possession of it regardless of
whether or not he is the owner. To impose unpaid
realty tax on the subsequent owner which was
neither the owner nor the beneficial user of the
property during the designated periods would not
only be contra ry to law but also unjust (Testate
Estate of Um v. Cffy of Manila , G.R. No. 90639,
February 21, 1990) .
. 3. Imposed by other laws (e.g. R.A. No . 727.9 · also - ...
-known as Urban· Development and Housing· Act
of 1992).
NOTE: Taxes on Basic Real Property Tax , Special
Levies for Special Education Fun~ and on l?le Lands_
cannot be imposed by municipalities outside Metro
Manila (LGC, Secs. ·2:)2, 235, and 236).
BASIC REAL PROPERTY TAX

PRESCRIPTION OF COLLECTION OF SUMMARY OF RATES OF BASIC RPT

TAXES:
1. Basic real property tax and any other tax
- 5 years from the date th~y became due (LGC, 1% of
Not exceeding
Sec. 270). Province
assessed value

2. When there-is fraud or intent to evade the Not exceeding 2% ·of

City
payment of taxes assessed value
- 1O years from discovery of the fraud or intent
to evade the payment (LGC, Sec. 270) . Municipality within Not exceeding 2% of
Metro Manila assessed value
GROUNDS FOR THE SUSPENSION OF (LGC, Sec. 233)
THE RUNNING OF THE PRESCRIPTIVE
NOTE: · he: t:GC prescribes the limits . The Actual
PERIODS: (PRO) rates- are , -.determined by the Sanggunian
1. The local treasurer is legally J~revented · from Panlalawigan·,or Panlungsod as the case may be
collecting the tax; . (LGC, Secs: 458(2)(ii) and 468 (2)(ii)) .
2. The owner of the property or th~ person havi_ng ,•,
':' ,
legal interest therein requests for a , Formula_:'
Reinvestigation and executes a waiver. in writing Market value XXX
before the expiration of the period within which Multiplied by: Assessment level xo/o
·to collect; and . " Assessed v~lue XXX
3. The owner of the property or thep erson having· .. -Multiplied by: .Rate of tax xo/o
legal interest therein is Out of the country or Real pro perty tax XXX
otherwise cannot be locat~d (LGC, $ec. 270) ,
Under the principle of fiscal autonomy, assessment
NOTE: These are the same grounds for susP.ending - levels and tax rates can vary among different LGUs
assessment and collection of local taxes (LGC, $ec. as long as they are within the above ceilings (LGC,
194 in relation to Sec. 270) .
Sec. 129).

Assessed Value/Taxable Value

The fair market value of the real property multiplied
TYPES OF REAL by the assessment level (LGC, Sec.199(h)):
PROPERTY TAX , I
Fair M~rket Value
The price at which a property may be sold by a seller·
who is not compelled to se)I a"rid bought by a buyer
TYPES OF REAL PROPERTY TAX: (BSI) who is not compelled to buy (LGC, Sec. 199(/)).
1. §asic Real Property Tax (LGC, ~ec. 233) ; and
2. .§pecial Levies (FIL) SPECIAL LEVIES ON REAL PROPERTY
a. For Special Education .Eund (LGC, Sec. 1. Special Education Fund (SEF) - 1 % of
235); . assessed value which shall be in addition to the
b. On Idle Lands (LGC, Sec. 236) ; and basic real estate tax to finance ttie Special
c. By ,bGUs (LGC, Sec. 240) . Education Fund (LGC, Sec. 235);
 REAL PROPERTY TAXATION .
Taxation Law
. . .
Art. 272 of the LGC provides -that: iv. Any ~ause which physically or legally
a. The proceeds of the additional 1% RPT prevents the owner of 'the property O .
accruing to the SEF shall be automatically person_ having_l_e~al interest t~erein fro~
released to the local school boards; improving, utilizing, or cultivating the
b. In case of provinces, the proceeds of SEF same (A.O. _No. 270 (1992), Art. 329).
shall be divided equally between the ·
provincial and municipal school boards; and . REASON FOR IMPOSING AD VALOREM
c. Said proceeds shall be allocated as .TAXES ON IDLE LANDS: To penalize property
determined and approved by the local owners who do not use ~~eir. property
school board concerned only ·for the productively, and to enqourage ut1llzat1on of land
following purposes: resources in order to contribute to national
i. Operation· and maintenance of public development (V DOMONDON, supra at 257-
schools; 258). .
ii. Construction and repair of school . .
buildings, facilities, and equipment; 3. Special Assessments (or Special Levy)-
iii. Educational research; on lands comprised within its territorial
iv. Purchase of books and periodicals; and jurisdiction specially benefited by public works,
v. Sports development. projects, or improvements funded by the LGU
concerned shall not exceed 60% of the actual
2. Additional Ad Valorem on Idle-Lands -
not exceeding 5% of the assessed value of the
property (LGC, Sec: 236); ' ·· ~ -
u .),_
- · - cost of such· projects and improvements,
_Including the: costs of acquiring land and such
j \ / othe~real property in connection therewith (A.O.
-~ , j.. - - fio. 2 ~Q ( 1992), Art. 331). _
Lands Considered Idle: \.--: . - .
a. Agricultural lands more than hectare in Require en~ in the imposition of the
area, suitable for cultivation, dairying , inlan9 .-\ - 'r Sp.ecia~}l i ssment: (TNP)
fishery, -and other agricultural uses, 1/2 .of /~ - _;;:, a. Tax \Ordinal\ce: There must be a tax
which remain uncultivated or unimproved by -_. '\ brdina'nc;e •· _which shall describe with
the owner of the prope · or pers9n"having - ~ - - - - - -~eason~b'Je accuracy the following:
· legal interest"therein ~ - No. 270 (f992); , ' , _. ·; ·/ (NEMBAj ·
X'
-r·--:--j'I"~~?
Art. 328(a)); ,<\ '." .. ,-:-· : 11. _tfat~re. e*ent, and location of the public
b. Non-Agricultural lands~more tnan 1,000 .: : · · · .- / fS::'works, projects or improvements to be
sq. m. in area if mor l;lan t/2~"of w hicn _ t.··)'lun erta.._keri·
remain unutilized or n(mprovea! by th~. · , \ / ; gslimatetJ ~ost thereof; · _
?wner of the ~roperty or person havw_g legal ~-- ._.:.. v 11 . Metes and Bounds by monuments and
interest therein (A.O. No. 270 (1992) ' Alf. :,--:::'\ fine; and .
328(b)); a_nd .. . . ,\( iv. The number of Annual installments for
c. Res1dent1al lots in s~~d1v1s1c?n,, al5'-!-c:...:_ _:- <. t~t.o.e payment of the special levy which in

Jv1 f. \. \
approved by proper authont,es r !;_:l ar9less of
area (LGC, Sec. 237). ·,,.
If ownership is transferred, the individual
owners shall be liable for the tax. On the
other hand, if ownership of individual lots is
not . transferred; the subdivision owner or
operator shall be liable {IR_R qf LGC, Art.
328).
Not Considered as Idle Lands:
'" ··."" · \/'Cno case shall be less than 5 years nor
more than 10 years (LGC; Sec._241) . .
b. · _tfotice: The owners of the real property to
~e affected or the persons having legal
interest shall be notified in writing as to.the ·
date and place of tl")e public hearing to afford
the latt~r the opportunity to express their
positions or objections relative to the
proposed ordinance (LGC, Sec. 242) .
,. . .

a. Agricultural lands planted to permanent or c. fublic Hearing: The Sanggunian shall

perennial crops with at least 50 trees to a
~onduct public hearing on the proposed
hectare; and _
imposition of · special _assessment (LGC,
b. Lands actually used for grazing purposes Sec. 242) . -
(A.O. No. 270 (1992), Art. 328(a)).
EXCEPTION: The Special Levy shall not apply
LGU may Exempt _Idle Lands.from to the following: ·
Additional Levy by Reason of: (FC 3)
a. Lands exempt from basic real property tax;
i. force majeure; and . ·
ii. Civil disturoance;
b. Remaind~r of the laild portions donated to
iii. Natural Calamity; or
the local government unit concerned for the

I
 M \ I

MEM-Q~y AID
Bar
Sen Bede UrMnity of I.aw - RGCT Opel1ltlons Center

construction of said projects (A.O. No. 270

· . e~ are
3. All machineries and equipm d b
(1-992), Art. 331). actually, directly, and exclusively use ;
local Water utilities and governm~nt-owned
NOTE: Special levy or special assessments controlled corporations engaged in the _supp 1Y
may be imposed even by municipalities and distribution-of water and/or generation and
outside Metro Manila (LGC, Sec. 240) . transmission of electric power; .
4. All real property owned by duly .registered
4. Imposed by other laws Cooperatives as provided for under R.A No.
Socialized Housing Tax (Urban Development 6938;-
and Housing Act of 1992) - LG Us are authorized 5. Machinery and equipment used for follution
to impose an additional one-half percent (0.5%) control and environmental protection (A.O. No.
of the assessed value of all lands in urban areas· 270 (1992), Ari. 325);
in excess of '950,000, except those lands which 6. When a law 'granting a franchise expressly
are exempt from the ~overage of RA. No. 7279. states that it shall be 'in lieu of all taxes, national
or local' and the real property held by a
SUMMARY OF RATES . franchisee must be used in connection with its
Tax Rate ' ·. ' ..-: · :, franchise (National Grid Corporation of the
. . . Philippines v. Ofelia M. Oliva, G.R. No. 213157,
Basic RPT (LGC, Province- - not exceeding August 10, 2016);
Sec. 233) _ 1 % of assessed value • 7. !die lands exempt from tax (LGC, Sec.' 238); and
8. Condonation or reduction of real property tax
and interest (LGC; Sec. 276).
City/Municipality in Metro
Manila - not exceeding 2% . '
of assessed value ,, ··· Real property owned by the Republic of
the Philippines or any of its political
SEF (LGC, Sec. Additional 1% of _the subdivisions;
235) - assessed value
Properties exempted: All real properties (LGC,
Ad Valorem on Idle Not exceeding '5% of the
Sec. 234 (a)). ·
Lands (LGC, Sec. assessed value. r
236) ... - ..... ' .lo_ •
i
-. EXCEPTIPN ~, When the beneficial use thereof
Special Not exceeding 60o/o of t_ he has een .granled for consideration or otherwise
Assessment (LG<;;, actual cost··-of ·such ' 'projects to a;taxabler pe~9n (LGC, _Sec. 234 (a)) .
Sec. 240) . and improvements ·;.~'' _- ..
ILLUSTRA'.TION;
Socialized Housing Additional oneJhalf percent Everi granting th_at _the natio~al government
Tax (R.A. No. 7279, (0.5%) of the assesse? value own? the carriageways and terminal stations of
Sec. 43) ';"}
. the RT: the exemption wo~ld not apply
because _ their beneficial use ·has ·been granted
to the Light Rail Transit Authority, a taxable
entity (Light Rail Transit Authority v. Central
Board of Assessment Appeals, G.R. No.
TAX EXEMPTIONS, 127316, October 12, 2000).
CONDONATIONS, Furthermore, unlike public roads which are open
REDUCTIONS for use by everyone, the LRT is accessjble only
to those who pay _the required fare ._Although
LRT is a public utility, it is nonetheless profit-
earning. It actually uses those carriageways and
PROPERTIES EXEMPTED FROM REAL terminal stations in its public utility business and
PROPERTY TAX: (RC-WCP-FIC) earns money ·therefrom (Light Rail Transit
1. Real property owned by the Repu?l!c. of ~he Authority v. Central Board ·of Assessment
Appeals, G.R. No. 127316, O~tober 12, 2000).
Philippines or any of its political subd1v1s1ons,
2. Charitable institutions, churches, parsonages, or
-convents appurtenant thereto, mosque s , non - a. Governme,nt-owned or controlled
corporations are not exempted from RPT.
profit or religious cemeteries, and all _lan~f · Their exemption has. be_en withdrawn by
buildings and improvements actually, di~ec y Sec. 193 except those granted to local water
' • s charitable
· and exclusively used for re 1-1giou , ' districts, cooperatives d,uly registered under
or educational purposes; .RA No. 6938 (Cooperative Code of the
 442 . REAL. PROPERTY TAXATION -
. . · Taxation Law
Phili~pines), non-stock and nc;m-profit Authority v. Court of Appeals, G.R N
hospitals and educational institutions and 155650, Julr, 20, 2006). · 0.
unless otherwise provided in the 'LGC
(Mactan Cebu International Airport Authority However, when the t'ax exemption of th
v. Marcos, G.R. No. 120082 September 11 property of the Republic or . e
I1
1996). . . ' ' instrumentality ceases on the ground th s
- at
beneficial use then~of has been granted i
Sec 234 enumerates the properties exempt' a consideration or otherwise,,to-a taxab~r
from real property tax. But the last person·, the u~paid tax attaches -, to th:
_ paragrap~ of Section 234 further qualifies property and 1s .. chargeable against the
the retention of the exemption insofar as the taxable person wh~ had ac!ual or benefi<;iaL
real property taxes ~re conce·rned by limiting - use and posses~1on of 1t regardless of
the retention only to those enumerated whether or not he is the owner (Government
there-in; all others not included · in the Service Insurance System v. qty Treasurer
enumeration lost the privilege upon the and City Assessor of Manila, G.R. No
effe~tivity of the LGC (Id.). . .· 186242, December: 2_3, 2009) : · ·

NOTE: In Mactan Cebu-International Airport ·GOCCs are not covered by the exemption
Authority v. Marcos (G.R. No. 120082, since ·the exemption only : refers · to
September 11, 1996), the Supreme Court__ ----· instrumentalities without personalities
ruled that Mactan Cebu International Al ort ·*, • . distinct from the government '(Philippine
Authority (MCIM) is a gove.rnment ·owned / , Fisheries Development Authority v. Central
and controlled corporation (GOCC) created , Boara- of Assessment Appeals, G.R. No.
under R.A. No. 6958 which provides therein ~- ... :J 780:}0, '[}ecember 15, 2010).
tr:iat 1t shall be exempt from .realty ,!axes , · - ". _, v ...., · • _

im~osed the Nati~n_al go.ver !lle~t or a~y :: _.,..· A fi~ni_ng_p.~rf;_which is de~oted .~~r pu_blic use
of. its poht1cal subd1y1s1o'n~.- agencies an.d •.. _ ),;'. and falls w1th11: the term ports 1s owned by
instrumentalities. This tax exemAtion was ·, '. , the Repablic 9f the Philippines and thus
withdrawn by virtue of Sec 234 of RA. No.~--:---- -- ---exempt;fi'om real estate tax (Id). ·
. .. i ; ..,..,-<.
7160 .- ' •• ' '.;; • I . l '
1 ..., ~-- .. • •: '. c. :f nstrum~ntality r efers to any agency of the
·-_j
Cebu · lntematJonal A,rport 1,.:'f, ufnority .
(MC/AA) v. City of Lap -1:.apu (G.R. No.
r.
However, in.the ~uoseque~t ca_se f Mact~n~~- · --~·,____ tf~~onaf. Goverr ment, not integrated wit~in
1 , ,_)'ti_e/ depa~ent framework, v~_sted with
-- . - · /,,'."special' functi ns or jurisdiction by law,
181756, June 15, 2015), the ~upreme Gourt-' · · :.,,.J,, \:.,;.end~Wed wljh some if not all corporate
ruled that .MIM and MCIAA are ._.NOT l/ vA~/ powers, administering special funds, and ·
GOCCs nor corporations created und~r, t~e. ,~,'\ >.,) ~njoying ,op erational autonomy, usually
1 __:_;.;/ , . "'through a charter (E.O. No. 292, Sec. 2(10)).
Constitution but go er:nment.:..h......:1
instrumen~alities V!=lSted with; corj:>prate ... "\ .. 'C / .
~ow~r~ and performing essenu:i-( ~Y.blic r\ A/).,\"'~ -~G6vernment instrumentalities vested with
services pursuant to the Revised I v , ;;,, · · corporate powers or government corporate
Administrative Code. Consequently, fhey entities are exempted from RPT. When the
are exempt from real property taxes. In law vests in a government instrumentality
effect. the case of MCIM v. City of Lapu- corporate pqwers, the instrumentality does
Lapu overruled the case of MCIM v. not. become a corporation : Unless the
Marcos. government instrumentality is organized as
. • a stock or non-stock corporation, it remains
b. Local governments have no power to tax the government instrumentality ex_erGisin·g not
national government, its agencies and only governmental but also corporate
instrumentalities, except as . otherwise powers "(Manila • International Airport -
provided in the LGC pursuant to the saving Authority v. Court of Appeals, G.R. No.
clause in Sec. 133 stating uunless otherwise 155650, July 2P, 2006).
provided in this Code." The exception to the
exemption i(I Sec: 234(a) of - the LGC . Likewise, when the l~w ma~es a
subjects real property owned by the government instrumenta.lity operatio'!~lly
Republic, whether titled in the name of the autonomous, the instrumentality remains
nati6nal government; ifs agencies or part of the National Government machinery
instrumentalities, to real estate tax if the although not integrated w~th the depart~ent
beneficial use of such property is given to a framework (Manila . International Airport
taxable entity (Manila International Airport

Authority v. Court of Appeals, G.R. No.
155650, July 20, 2006).
Examples of government instrumentalities
vested with corporate powers or juridical
personality:
i. Bangko Sentral ng Pilipinas
ii. Philippine Rice Research Institute;
iii. Laguna Lake Development Authority;
iv. Fisheries Development Authority;
v. Bases Conversion and Development
Authority;
vi. Philippine Ports Authority_;
vii. Cagayan de Oro Port Authority;
viii. San Fernando Port Authority;
ix. Cebu Port Authority;
x. Philippine National Railways;
xi. Mactan International Airport Authority
{Id.);
xii. Light Rail Transport Airport Authority
(Ught Rail Transport Authority v.
Quezon City G.R. no. 221626, October
9, 2019);
xiii. Phi!ippine Heart Center (Philippine
Heart Center v. Local Government of
Quezon City, G.R. No. 225409, March
11, 2020J-,
All these government instrumentalities
exercise corporate powers but they are
not organized as stock or non-stock
corporations as required by Section·
2(13) of the Introductory Provisions_of
the Administrative Code of 1987 which
pertains to Government-Owned and
Controlled Corporations (GOCCs).
These government instrumentalities are
sometimes loosely called g_overnment
corporate entities. However, they are
not GOCCs in the strict sense as
understood under the Administrative
Code, which is the . gov~ming law
defining the legal relationship and stat~s
of government entities . (Mam/a
International Airport Authority v. Court of
Appeals, G.R. No. 155650, July _20,
2006).
d. An installment purchaser of land and
building.within a housing project of the GSIS
is liable to pay real estate taxes from the
time possession of such prope~ was
transferred to him, although pending full
payment of the purchase price, th e seller
retains ownership and title over the property
(City of Baguio v. Busuego, G.R. No. L-
29772, September 18, 1980).
2, Charitable institutions, churches,
parsonages, or convents appurtenant
. 443
r
· fit or religious
thereto, mosques, non:rob ildings and
cemeteries, and all Ian s, u_ ctl , and
improvements actually, dire relr ious,
exclusively used for 9.
charitable, or educational purposes,
This LGC provision is similar to Sec·. 28 (3 ), Art.
VI of the Constitution.
All revenues and assets of non-Stock, no~-profit
educational institutions used actually, directly'
and exclusively for educational purposes shall
be exempt from taxes and duties (CONST. Art.
XIV, Sec. 4(3)) .
NOTE: For non-stock, non-profit educational
institutions, the exemption covers "all revenu~s
and assets" (CONST. Art. XIV, Sec. 4(3)) ~h1le
for property actually, directly, and exclus_1vely
used for religious, charitable, or educational
purposes, the exemption covers "lands,
buildings, and improvements" (CONST. Art. VI,
Sec. 28) .
The Ui:,iversity of the Philippines (UP) is
exempt from real proP.erty taxes
Pursuant 'io Sec. 25 of RA. No. 9500 or the UP
Charter of 2008, all revenues and assets of the
University · of the Philippines _ used _for
educational purposes or in support thereof shall
be exempt . from all taxes and duties
notwithstqnding any general or special law to the
contrary. Considering that the subject land and
the revenue derived from the lease thereof are
used by UP: for educational purposes and in
support of its educational purposes, UP should
not be assessed , and should not be made liable
for real property tax on the land subject of this
case. (University of the Philippines v. City
Treasurw of Quezon City, G.R. No. 214044,
June 19, 2019).
NOTE: Under Republic Act No. 950(}, this tax
exemption, however, applies only to "assets of
the University of the Philippines." referring to
assets owned by UP. AIL improvements on the
leased land which shall be owned by toe lessee,
Ayala Land, Inc. are not "assets" owned by _UP;
and thus, UP's tax exemption under Republic
- Act No. 9500 does not extend to these
impro~ements during the term of the lease {Id.) .
Improvement refers to valuable addition made
to a property or an ~melioration in its condition
amounting to more than a mere repair 0 ~
replacement of parts involving capital
expenditures and · Iabor, which is ihtended to
enhance its value, beauty, or utility or to adapt it
for new or further purposes amounting to more
than_ a mere repair or replacement of parts
444 . REAL PROPERT-Y TAXATION
Taxation Law

involving capital expenditures and labor and school for training nurses, a nurses' home
normally requiring a building permit ((A. o. No. property used to provide housing facilities fo~
270 (1992), Art. 290(m)) . interns, resident doctors, superintendents, and
other members of the hospital staff, and
Defini,ion of Actual, Direct, Exclusive and recreational facilities for i,tudent nurses, interns
Exclusively used: and residents" such as "athletic fields," including
Actu_ally is opposed to something , merely "a farm used for the inmates of the institution"
possible, or to something which is presumptive (City Assessor of Cebu v. Association of
or constructive (National Power Corporation v. Benevola de Cebu, G.R. No. 152904, June 8,
C~ntral Board of Assessment Appeals, et. al., 2007) .
G.R. No. 171470,' January 3q, 2009).
When a non-stock, non-profit educational
Directly is defined as that use without·anything institution proves that it uses
intervening proximately or without an intervening its revenues actually, directly, . and exclusively
agency or person (National • Power Corporation for educational pu_rposes , it shall· be exempted
I
v. Central Board of Assessment Appeals, et. al. , from income tax, VAT, and local business 1ax.
G.R. No. 171470, January 30, 2009) . On the other hand , when it also shows that it
uses· its assets in the form of real .property for
Exclusively means apart from all others; educational purposes, it ~hall be exempted from
without admission of others to participation; in a RPT (Commissioner of Internal Revenue v. De
manner to exclude (National Power Comoration r /', ·• ·ta.,Sal/e University, G.R. No. 196596, November
V. Central Board of Assessment Appeals, et. al, , . l 9,r2016) . ,
G.R. No. 171470, January 30, 2009).-. 1 ,.. ·-~-:....
• , • .1 ILLUSTRAT-ION: (2011 Bar Question)
Jrim;
Exclusively . used. means/ the".., :,r . _.,,-or ·~ ---------. ,Jhe ·-head, priest of the religious sect - Tres
inherent use and does not p · lude such Person s olQ Dios, as the corporation sole,
incidental uses as are di ectly connec ed with, .·, rented out'a s,'ooo sqm . lot registered in its name
essential to, and in furtf eran~ of th~ primary -· for use as\ ~<;:hoql s ite of a school organized for ·
use (Manual on Real Property Appraisal- and--· ··- -·profi_ t . The ~ect ';JS~ the rentals for the support
Assessment Operations, :supd at 2) . t - _:. and upkeep ;pf its i:>riests. Is the rented lot subject
. J ' . • to r~al prop~rty..ta' ?-
The test of e~emption from taxation TsJhe use ot" , ,..
·the property for purposr s,..T ntio~et( in the - l -- -~~: _NO_. . be ,~ot -~ exempt from real property
Constitution (Commissio er oflntema 8e.l(e[l ue • · ·, fa~es/ s1 ~ce 1t , 1s actually, directly, and
v. De La Salle University, nc, G.R. No. 196596, ! , ~exe:lusivelj used ,by the school for educational
November 9, 2016) . Thus~ it does not ?,lati~r J_,.,.--v_,. (-·•pµfposes. Thus "" the corporation sole is exempt .
who the qwner of the properfy is even if it ·s n pt"7 1 -:- , :~_Jrom .real property tax under Section 234{b) of
a tax-exempt entity, as long as
·it i~ be·Qg !J~ed 1-.:~.:-..'· - the LG9. .t •
for religious, charitable, or- ·e'cf99ational - - ~ 1 . ' ;> ,, .
purposes, then it is tax exempt (V DGMONDp N, l .:_3., All machinery and equipment that ~re
supra at 273). · ,.. • actually, directly; and exclusively_used
by local Water utilities and government-
What is meant by actual, direct and exclusive owned or controlled corporations
use of the property for charitable purposes is the engaged in the supply and distribution of
direct and immediate and actual application of water and/or generation and
the property itself to the purposes for which the
transmission _of electric power;
charitable institution is organized . It is not the
use of the income from the real property that is Requisites: . .
. determinative of whether the property is used for
a. That ·the machineries and ·equipment are
tax-exempt purposes (Lung Center of the
actually, directly, and exclusively used by
Philippines v. Quezon City, G.R. No. 144104,
local water districts and GOCCs; and
June 29, 2004) .
b. The local water districts and GOCC claiming
exemption must be engaged in the supply
The exemption in favor of property used
and distribution of water· and/or the
exclusively for charitable or educational
generation and transmission of electric
purposes is "not limited to property actually
power (National Power Corporation -v.
indispensable therefore,· but extends .to facilities
which are "incidental to - and reasonably Central Board of Assessment Appeals, et.
necessary for" the accomplishment of ,said al., G.R. No. 171470, January 30, 2009).
purposes; such as, in the case of hospit~ls, "a

PROPERTIES EXEMPTED: Machinery and
equipment only (LGC, Sec. 234(c)).
NOTE: It is clear from Sec. 234 (c), LGC, that it
is the machinery and equipment which are
exempted from the payment of real property
tax. not the water or electricity that such facilities
generate for distribution. Thus, the contention of
the National Power Corporation (NPC) that it is
the one which utilizes the generated electricity
tor transmission or distribution to the customers,
not Mirant Sual Corporation (MSC), does not
justify the exemption claimed (National Power
Corp. v. Province of Pangasinan, G.R. No.
210191 , March 4, 2019) . ·
The GOCC claiming exemption from RPT
must be the entity actually, directly, and
exclusively using the real properties
The unpaid realty tax attaches to the property
but is directly chargeable against the taxable
person who has actual and beneficial use and
possession ' of the property regardless of
whether or not that person is the owner. NPC (a
GOCC created under RA 6395, as amended) is
neither the owner nor the possessor or
beneficial user of the subject facilities . Hence, it
cannot claim for exemptions and privileges. Until
the transfer of the project to NPC, it does not
have anything to do with the use and operation
of the power plant. The direct, actual , exclusive ,
and beneficial owner and user of the power
station, machineries , and equipment certainly
pertains to MSC (a private
corporation/contractor) (Id.) .
Thus, the assumption by NPC of real property
tax liabilities under the Energy Conversion
Agreement with MSC is of no moment. Such
undertaking does not justify the exemption or
entitlement to privileges. The privilege granted
to NPC cannot be extended to Mirant. To rule
otherwise would be to allow the circumvention of
our law on exemptions and grant of privileges
(Id.).
4. All real property owned by duly
registered Cooperatives as provided
under R.A. No. 6938;
PROPERTIES EXEMPTED: All real properties .
The exemption is given without distinction. The
law does not distinguish if the property ow~ed by
the cooperative is used by the cooperative or
not. (Provincial Assessor of Agusan def Sur v.
Fi/ipinas Palm Oil Plantation, Inc, G.R. No. '
183416, October S, 2016, where the cooperative
leased the land to a private corporation) .
. ent used tor
5. Machinery and equipmd environment
Pollution control an
protection;
t re Devices
Pollution Control and lnfra 5 l_ruc u ui ment ,
Refers to infrastructure, machinery, eq P d'
f impoun in 9,
and/or improvements use d . ~r . filt •ng
treating or neutralizing, prec1p1tating , . 1 e~st~
conveying and cleansing mine ind ust nal w .
and tailings as well as eliminating or red~ci~;
hazardous effects of solid particles, chemica '
liquids, or other harmful by-products ~nd g~~es
emitted from any facility utilized in mining
operations for their disposal (R.A. No. 7942,
known as the Philippine Mining Act of 1995, Sec.
3(am)) .
Pollution control devices acquired , constructed,
or installed by contractors shall not be
considered as improvements on the land or
building where they are placed, and shall not be
subject to real property and other taxes or
assessments (R.A. No. 7942, Sec. 91) .
NOTE: R.A. No. 7942 expanded pollution
control ' to include infrastructures and
improvements.
PROPERTIES EXEMPTED: Machinery,
equipment, infrastructures, and improvements.
A claim for exemption under Sec. 234 (e) should
be supported by evidence that the property
sought to- be exempt is actually, directly and
exclusively used for pollution control and
environmental protection (Provincial Assessor of
Marinduque v. CA, G.R. No. 170532, April 30,
2009) ;,
EXCEPT AS ABOVE PROVIDED:
Any exemption from payment of real property
tax previously granted to, or presently enjoyed
by, all persons, whether natural or juridical,
including all government-owned or controlled
corporations, are hereby withdrawn upon the
effectivity of the LGC (LGC, Sec. 234) .
6. . When a ·1aw granting a Franchise
expressly states that it shall be 'in lieu of
all taxes, national or local' and the real
property held by a franchisee must be
used in connection with its franchise
(National Grid Corporation of the
Philippines· v. Ofelia M. Oliva, G.R. No.
213157, August 10, 2016);
This franchise tax is "in lieu of income tax and
any and all taxes, duties, fees , and charges of
any kind, nature, or description levied ,
 REAL PROPERTY TAXATION
Taxation Law

established, or collected by any authority documentary evidence in su~port of suc.h claim

whatsoever, local or national, on its franchise, (i.e., corporate charters, title of ownership
rights, privileges, receipts, revenues, and profits, articles of incorporation, contracts, affidavits'
and on properties used in connection with its etc.) (LGC, Sec. 206)."' '
franchise, from which taxes, duties, and
charges, the Grantee is hereby expressly Authorify of LGUs to Grant Tax Exemptions .
exempted". For the real property held by a As a general rule, the power to tax includes the -
franchisee to be exempted from · real property power - to exempt. Since the power · of local
tax, it must use such property in' connection with · governments to levy taxes is merely a delegated
its franchise. Any other property held by the power, then there must also be a specific
franchisee exclusive of its franchise or not in delegation to the LGUs to grant tax exemption
furtherance thereof shall be subject to real (V DOMONDON, supra at 266-267).
property tax (Nationa~ Grid Corporation -of the
Philippines v. Ofeliam Oliva, G.R. No. 213157, LGUs have a delegated power to exempt from
August 10, 2016). · • local taxes, as provided under Sec. 192 of the
LGC which provide$ the authority of LGUs to
The phrase "exclusive of this franchise" means grant tax exemptions, incentives, or reliefs
that real estate, buildings, _and personal property through ordinances duly approved, However,
used in the exercise of the franchise are not there is no equivalent of Sec. 192 under RPT
~ubject to the same tax as other corporations authorizing LGUs to exempt real property from
(National Grid Corporation of the Philippines v., taxaJion. Sec. 276 of the LGC provides for
Ofe/iam Oliva, G.R. No. 213157,- 'A ug t 10, ) j I condonation or reduction of RPT and interest,
, > ,< J... • • - ---... , ~nd Se.9'. 239 provides that, a province or city or
. ·L,,. /
2016). ·
1
,-J-' ---municipality within Metropolitan Manila Area
7. Idle Lands -Exempt fro Ta~ (LGC ..Se . ·--·· ay exempl idle lands from the additional ,levy.
238); and • ,...___ 'I' , . ,,, . Hence, tbe~_J may be condonation by the
, "'- : • '' ' : .\ San\,guriian 1in cases of general failure of crops,
Please refer to previous discussions O . Types of " , ·substantial decr~ase in price of agricultural or
Rea(Property Tax on page d. \ . --··- ~- - agri~:base pro~uct~ ot calamity (V DO MONDON,
· '" -~ · . :sup1p at 266,-267) .
• '. • , > ,I',_ • t '
8. Condonation or Redu ion of Real , ·.. · ' I ' ...-.. .
Property Tax and lnte~st C.~_.., ,'.: \.:---~ ·:_ _ -~~if&J:9U~ ar~ a_u~~~ized to grarit e~~mptions ·
a. By the Sanggunian up nJ t com'Jl8.(ldation . l . • onlx f~om t,-le-,!~P,Os1t1on of the a~d1t1onal _ad
of the Local Disaster Coordi ating-j3o ocil: , . · i / _.a!o~~m tax ~n Iqre lands (but not exemption
(FAC) '.j · - . ! ,, -~_,_froip the b;3s1c re~I property and the special
o!
i.. In case a general failure of crops;·~z._~._J,.,_:- _},::---e.ducatio fund), they may condon~_the pay_n:ient
ii. Substa_ ntial decrease in the pnCEt'__Pf: ! 1 ;·_, \ :.-~ 9f real property taxes under certain cond1tIons
Agricultural or agri-based proquctsi or--~--_..!.··_-~ (Id:.· v· . · .
iii. ~alamity in the province , ~;eity, ;
municipality (L'GC, Sec; 2-76). ·-- 1 1
o·r---: ,"· -~--.
1\ 1 , ...~.-. ~I iab1hties for RPT on property, machinery,
• · 1. :,_> and ~quipment, including any special levies
NOTE: The Sanggunian, based on_ an .,.. accruing to the SEF, actually and directly used
ordinance passed prior to the first (1st) day by Independent Power Producers for the
of · January of any year and upon production of electricity untler Build-Operate- ·
recommendation of the Local Disaster Transfer contracts with GOCCs, for·all years up
Coordinating Council, may condone or to 2014, are reduced to an amount equivalent to
reduce, wholly or partially, the taxes and the tax .due if computed based on an '
interest thereon for _the succeeding year or assessment level. ·of fifteen 15% of the fair
years in the city or municipality affected by market value (FMV) of said property, machinery,
the calamity. (A.O. No, 270 (1992), Art. and equipment depreciated at the rate of 2% per
367) . annum, less any ?'mounts -already paid by the
IPPs. All fines, penalties, and interest on such
b. By the President of the Philippines-- when deficiency_ RPT liabilities are also condoned
public interest so requires _(LGC, Sec. 277). .(R.M.C. No. 6-2015, Sec. 1). ·
I

PROOF OF TAX EXEMPTION: Every person by

or for whom real property is declared who shall
claim the exemption shall file with the provincial,
city, or municipal assessor within 30 days from
date of declaration of real property. sufficient
 \ I
.MEM:Q~Y At'D
San Bede College d law - RGCT Bai Operations Cen*
ILLUSTRATION: (2013 Bar Question)
Mr. Arnaldo leased a piece of land owned by the
Municipality of Pinagsc1bitan and built a
warehouse o.n the property for his business
operations. The Municipal Assessor assessed
Mr. Am;:tldo who objected 'to the assessment,
contending that he should not be asked to pay
realty taxes on the land since it is municipal
property. Was the assessment proper?
ANS: YES . The assessment is proper. The land,
although owned by ·the Municipality, is not
exempt from real property tax because the
beneficial use has been granted to· a taxable
person (LGC, Sec. 234 (a)).
DISTRIBUTION OF
PROCEEJ)S
BASIC RPT (LGC, SEC. 271)
The proceeds of the basic real property tax,
including interest thereon, and the proceeds from the·
use, lease or disposition, sale, or redemption of
property acquired at a public auction shall be
distributed as follows:
1. Provinces
a. Province - 35% shall accri.le to the
general fund . · ·• ·
b. Municipality where the property is located
- 40% shall accrue to the general fund
c. Barangay where the property is located -
25% shall accrue to the general fund
2. Cities . · '
a. City - 70% shall accrue to the gen~ra~ fund
b. Barangay - 30% which shall be distributed
in the following manner:
i. 50% to the barangay were the property
is located; and
ii. 50% shall accrue equally_ to all
component barangays of the city·
The share of each barangay shall . be
released without need of any further action,
directly to· the barangay treasurer on a
quarterly basis within 5 days after th e e nd of
each quarter-and shall not be subject to
lien or holdback for whatever pu~pose
to such rules as may .be prescribed by
for this purpose.
3. Municipality within Metro Manila e to the
a. Metro Manila - 35% shall accru
general fund ·
447
b. Mu~icipality where the property, ~~~odcated -
35% shall accrue to the genera ct · t ·buted
c. Barangay - 30% which shall be is ri
in the following manner: · ·
.I. 5001/0 to the barangay where the property
is located; and
ii. 50% to all component barangays of the
municipality, equally .
SPECIAL EDUCATION FUND
The proceeds of the additional one per~ent ( 1% ) real
property tax accruing to special education fund shall
be automatically released to the local school boards
(A.O. No. 270 (19~2) , Art. 363(a)) .
In case of provinces, the proceeds shall be divided
equally between -the provincial and municipal school
boards (A.o.,.No. 270 (1992) , Art. 363(b)) .
Proceeds shall be allocated as determined and
approved by the local school board_concerned only
for the following purposes:
1. Operation and maintenance pf public schools;
2. Construction and repair of school buildings,.
facilities. and equipment;
· · 3.~-Educational research ;
, 4. Purcnas·e_<lf books and periodicals; and
\ 1 5. Sports qe_ v elopment (A.O. No. 270 (1992) , Art.
363(c)) · . -
. f t \
TAX 0~ IDLE.LANDS
The proceeds shall accrue ·to the respective general
fund of the province or city where the land is located.
In the case of a municipality within the Metropolitan
Manila Area, the proceeds shall accrue equally to
the Metropolitan Manila- Authority and the
'municipality wh·ere the land is located. (LGC, Sec
273) .
Accordingly, the proceeds of this tax shall be treated
in the income account as revenue from taxation
(A.O. No. 270 (1992) , Art. 364) .
SPECIAL LEVY
The proceeds of the special levy on lands benefited
by public works, projects, and other improvements
shall accrue to · the general fund of the local
government unit which financed such public works,
projects, or other improvements (LGC, Sec. 274) .
. Accordingly, the proceeds of this tax shall be treated
in the income account as revenue froo, taxation
(A.O. No. 270 (1992) , Art. 365).
 REAL PROPERTY TAXATION ·
Taxation Law

LIEN ON THE PROPERTY SUBJECT TO

REMEDIES IN REAL TAX
PROPERTY TAXATION L" n is a legal claim on .the property subject toRPT
(LGU) atsecurity for the payment of the tax obligation (V
DOMONDON, supra at 360-361) . .

It is superior to all _liens, cha_rges or encumbrances

NOTICE OF DELINQUENCY · ect,·ve of the owner or possessor thereof, and
irresp · · · d" · I t· I
When the real property tax becomes delinquen_t. the is enforceabl.e by administrat(ve or JU 1c1a ac 10n. t
local treasurer concerned shall immediately cause a is extinguished only upon payment of tax and related
notice of the delinquency which shall specify . the interests and expenses (LGC, Sec. 257).
date upon which the tax became delinquent a'nd that
personal property may be distrained to effect It is c~nstituted on the property subject to th~ t~
payment of the tax, surcharges, interests, ;:ind from the date the real property tax accrued which 1s
penalties. The notice of the delinquency shall ~e: . . on the first day of January (LGC, Sec. 246) .
1. Posted at the main entrance of the provincial ENERAL
capitol, or city or municipal hall and.in a publicly CIVIL REMEDIES, IN .G
accessible and conspicuous place in each 1. Adm~nistrative Action
barangay of the local government unit - .;. ., a. Distraint of personal property
concerned; and .
2. Published once a week for 2 con} ecutive weeks,
LJ J '/ ·
distraint of any personal property
in a newspaper of general circulation
1 in the · €longing to the taxpayer or _subject to the
province,' city, or municipality (A. O~ No. 270 ,.._._..__..._ lien-.{i-GC~Sec. 175).
(1992), Art. 345). ,, "D"' -~- ·,·.,;.. \ .....-')J .
.. / ;/:.. -z~
Only the registered ow~er of the property 1s d~emed _·...
r,t any tfme rt.or to the consummation of the
sale, the tax ayer may pay the proper
the taxpayer who is entitled to a .notice of~ - - ------iharges ·rc G , Sec. 175(d)).
delinquency and other proceedings _relative tq t~e . _ . • • .- • r
tax sale (Lukban v. Optimfm· Deyelopment _B af:/1-:,._ -} ·- hen Personal Property Considered
G.R. No. 205785, January "L0,. 2016f. Tbe oas1c real \::· · _ i :;ol~
to LGU .
property tax and any other_ tax . relat~ ereto th - / -,Should .th property distrained be not
constitute a lien on the property subJect to} t /f-.GC!, ,,\:) / , (}!;~posed of ith in 120 days, the same shall
Sec. ~57). \:~ , · :_ · ' ·-·; ,>(~-6e consider~a -as sold to the . LGU (LGC,
· L -, ·.,.·' J ;\_., Se01 175 (e)).
REMEDIES OF THE LGUS FOR (f_ ~~ ---;:\ t- ) · _
COLLECTION OF REAL PR.OPER't-Y. T°A'xf l:. ~:-.,, ·, u,ir .e tt;)e NIRC, the Local Tax Code _does
The LGU concerned may avail any (or ALL)1 of the - ' ci.9-t contain any specific provision prohibiting
following remedies: . ..\ '-\ -courts from enjoining the collecti?n of local
1. Lien on property subject to tax (LGC, Sec. 257) ; · taxes. StJch statutory lapse or intent may
2. Civil Remedies,' in General , have allowed preliminary injunction where
a. Administrative action local taxes are involved. But it cannot
i. Distraint of personal property (LGC, negate the procedural rules- . and·
Sec. 254(b)); requirements under Ruie 58 of the Rules of
ii. Levy on real property subject to tax Courts (Valley Trading v. CF/ of /sabela,
(LGC, Sec. 258-265); or · G.R. No: L-49529, March 31, 1989).
b. Judicial action (LGC, Sec. 266 in relation to
Sec. 270).
b. Levy on the Real Property subject to
Tax ' ·.
NOTE: The LGC does not provide for a hierarchy of
remedies on what should be first exercised, the
administrative or judicial remedies, subject to the When levy is made _ .
doctrine of exhaustion of administrative remedies (V After the expiration of. the time required to
DOMONDON, supra at 361) . pay the tax levied, the real property subject
to the tax may be levied upon (LGC, Sec.
258).

Levy may be made on or before, or

simultaneously with, the institution of t~e
(
 \ I
MEM~O~Y Al D
Sen Seda Colege of Law - RGCT Bar C)penition1 Center
civil action for the collection of
delinquent tax (LGC, Sec. 258) .
How levy Is made
i. The provincial or city treasurer, or a
treasurer of a municipality within the
Metro Manila Area , as the case may be
shall issue a warrant of levy and a duly
authenticated certificate showing the:
1.) Name of the delinquent owner of the
property or person having legal
interest therein ;
2.) Description of the property; ·and
3.) Amount of the tax due and the
int~rest thereon (LGC, Sec. 258) .
ii. The warrant shall be mailed to or served
to:
1.) Delinquent owner of the real
property or person having legal
interest therein, or in case he is out
of the country or cannot be located,
_ to the· administrator or occupant of ,
the property;
Service of the Notice of Levy and
Warrant of Levy Must Be Made at
the Proper Address _-
The Court must protect private
property owners · from undue·
application of · law authorizing the
levy and sale of their properties tor.
non-payment of real property taxes.
_Unscrupulous parties can commit a
simple, seemingly irrelevant
technicality such as deliberately
sending billing statements, notices
of delinquency and levy to wrong
addresses under the guise of
typographical · lapses and then
proceed with the levy and auction
sale of these valuable properties
without the knowledge and consent
of the owners. Before the owners
realiz~ it, their precious properties
have already been confiscated and
sold by the local government units
or officials to so-called "innocent
third parties" who are in fact their
cohorts in the unscrupulous
scheme. This is barefaced robbery
that the Court cannot sanction (Cruz
v. City of Makati,, G.R. No. 210894,
September 12, 2018) .
Service of the Assessment_Mu st
Be Made on the Taxable Person
With respect to real property tax
assessments on properties belong
to exempt taxpayers leased to
the taxable entities, jurisprudence
requires that the local government
units not only allege but also prove
that the properties of the PHC, a
government instrumentality (hence
exempt from real 'property ta~es),
have indeed been leased to private
individuals; and the assessments,
validly served on the
lessees which have actual and
beneficial use thereof (Philippine
Heart Center v. Local Government
of Quezon City, G.R. No. 225409,
March 11 , 2020) . .
Notably, it is the "taxable person"
with beneficial ·use who shall be
responsible for payment of -real
property taxes due on government ·
properties. Any remedy fqr the
collection of taxes should then be
directed against the "taxable
person," · the same being an
aGtion in personam (Id.). -
2.) Assessor; and
3.) Registrar of Deeds where the
property is located for annotation of
the levy on the tax declaration and
ertificate of title of the property
(LGC, Sec. 258) .
The levying officer shall submit a
report on the levy to the Sanggunian
concerned within ten (10) days after
receipt of the warrant by the owner
of the property or person having
legal interest therein (LGC, Sec.
258) .
NOTE: Levy may be repeated if -
necessary,-until the full amount due
including all expenses, is collected
(LGC, Sec. 265).
Advertisement and Sale of Levied Real
Property
i. Advertisement
WHEN: Within 30 days after service of
the warrant of ~evy, the local treasurer
shall proceed to publicly advertise. for
sale or auction the subject real property
or a usable ,portion thereof as may be
necessary to satisfy the tax delinquency
and ex~enses of sale (LGC, Sec. 260) .
It shall be effected by:
1.) Posting· a notice at the main
entrance of the provincial, city, or
 REAL PROPERTY TAXATION
· Ta>(ation Law

municipal building, and in a publicly forfeiture (City of Davao v. Intestate

~ccessible and conspicuous place Estate ofDalisay, G.R. No. 207791, July
in the barangay where the · real 15, 2015) .
property is located; and
2.) By publication once a week for 2 RESALE OF FORFEITED REAL ·
weeks in the province, · city, or PROPERTY: The Sanggunian
municipality where the property is concerned may, by · ordinance duly
located (LGC, Sec. 260). approved, and upon notice of not less
than 20 days, sell and dispose of the
ii. , Sale real property acquired (LGC, Sec. 264).
The sale shall be held either at the main
entrance of the provincial, city, or iii. Report of S_a le
municipal building, or on the property to Within 30. days after the sale, the local'
be sold, or · at any other place as treasurer or. his deputy shall make a
specified in the notice of the sale (LGC, report of the sale to the Sanggunian
Sec. 260). · _ ' concerned (LGC, Sec. 260).

NOTE: At any time before the date fixed
for the sale, the owner of the real
property or person having legal interest _ _.._._._,,,__
therein may stay the proceedings by
paying the delinquent tax, the interest
- due thereon, and the expenses of sale,
(LGC, Sec. 260) . /:~ J 1/ .~-- ·--:---"~ -
. DISPOSITION OF PROCEEDS: The ..
proceeds of the sale in excess of the · :'r•
-delinquent tax, the interest due thereon,
and the expenses of sale shall be · - - -
remitted to the owner of the real
In case of forfeiture of real property, the
local treasurer shall make a report of his
proceedings within two (2) days from '
the satisfaction of the claim which shall
be reflected upon the records of his
.,office (LGC, Sec. 263).
Iv~ _Issuance of Certificate of Sale
\. The local treasµrer shall prepare and
deliver to the purchaser a certificate of
sal~ '(!fG,O,. Sec. 260) .
J Redemption"'of Property .

,l, \,----..:.. ~..: · . _:_ ____ J

property or person having legal interest :PERIOD OF REDEMPTION: Within 1 year
therein (LGC, Seo0'2?0). : .. !ro,m the date of sale (LG(?, S~c. 261).
_ EFFECT IF THERE fs' NO Ei'1ODE1oR, OR : :
IF THE HIGHEST BID IS FOR- AN ;
T :
1
Th~
period of redemption of tax delinquent
;// '•. properties should be counted not from the
AMOUNT INSUFFICIENT TO PAY --...J......· =r_>,, ·.
.date of registration of the certificate of sale,
THE REAL PROPERTY TAX AND THE{;;-::-: . \ ,., _'.· as previously provided by Sec. 78 of P.O.
RELATED INTEREST AND COSTS OF .-.:- 1 - • , No. 464, but rather on the date of sale of the
SALE (FORFEITURE OF REAL ,.,__,.,,.r· ,._ ~ax d~linquent property (The ,City of Davao v ·
PROPERTY): The local treasurer • ,f /\ ,,. \ • The Intestate Estate of Amado S. Da/isay,
conducting \he sale shall purchase the 1• ''. ''"\. G.R No. 207791, July 15, 2015) .
property in behalf of . the local ,___..
government unit conce_rned (LGC, Sec. EXCEPTION:
263). In City Mayor v. RCBC, the subject City
Ordinance explicitly provides that the 1-year
If the property is not redeemed within 1 redemption period should be counted from
year from the date of forfeiture, the the date of the annotation of the sale· of the
ownership of the property shall be property at the proper registry.
vested on the local government unit
concerned (LGC, Sec. 263). The SC ruled that si~ce it is.the policy of the
law to aid .rather than to defeat the owner's
NOTE: The term "forfeiture" in Section right, redemption should be looked upon
263 of the LGC refers to the date when with favor and where no injury will fol_low, a
the tax delinquent properties were sold liberal _construction will be given to our
at a public auctioo. The forfeiture of tax redemption laws, ·specifically on the
delinquent properties transpires no la_ t er exercise of the right to redeem. To
than the purchase made by the city _d ue harmonize the provisions of the two laws
to lack of a bidder from the public. This (City Ordinance and Sec. 261 of the LG~)
happens on the date of the s?le, and not and to maintain the policy of the law to aid
upon the issuance of the declaration of rather than to defeat the owners right to
 \ I
MEM-Q~y AI D
s.r, II«- U'werwity Colege of Law - RGCT e., Cent•
redeem his property. the redemption period
shall be_reckoned 1 year from the date of the
annotation o_f the sale of the property at the
proper r~Istry (City Mayor v. . Rizal
Commercial Banking Corp. , G.R. No
171033, August 3, 2010) . · Development Corp, et. al. v. AgoJo, G.R. No.
HOW EFFECTED: Upon payment to the
l~I treasurer . of the amount of the
delinquent tax, including the interest due
thereon and expenses of sale from the date
of delinquency to the date of sale plus
interest (LGC, Sec. 261). ' otherwise the saleJs null and void although
EFFECT Of: REDEMPTION: It will
invalidate the certificate of sale and a
certificate of redemption shall be issued by
the local treasurer or his deputy to the owner
of the delinquent real property or person
having legal interest therein (LGC, Sec.
261) .
EFFECT OF FAILURE TO REDEEM
PROPERTY: The local treasurer shall
execute a deed conveying to the purchaser
the subject real property, free from lien of
the delinquent tax, interest due thereon, and
expenses of sale (LGC, Sec. 262) :
NOTE: From the date_ of sale until the
expiration of the period of redemption, the
delinquent real property shall remain in
possession of the owner or person having
legal interest therein who shall be entitled to
the income and other fruits thereof (LGC,
Sec. 261).
Only a person having "legal interest" in
the property may effect redemption
·Legal interest" is defined as interest in
property or a claim cognizable at law,
equivalent to that of a legal owner who has
legal title to the property.. It must be one that
is actual and material, direct and immediate,
not simply contingent or expectant. Mere
use or possession of property alone does
not vest legal interest therein sufficient to
clothe the possessor with the legal
personality to redeem it (Onstott v. Upper
Tagpos Neighborhood Association, Inc.,
G.R. No. 221047, September 14, 2016) .
Effect of Absence of Notice to Delinquent
Owner, Posting, and Publication of Sale
The holding of the tax sale despite the
absence of the requisite notice was
tantamount to a violation of substantial right
to due process. Notice to the delinque~t
owner is. required as a prerequisite to a valid
tax sale. This is premised' on the rule that a
· in
sale of land for tax delinquency ,s
derogation of property and due process
°
rights of the registered owner. In rd er to be
valid, the steps required by law must ~e
strictly followed (Corporate . Strategies
208740, November 19, 2014) .
Administrative proceedings established for
the sale of private lands for non-payment of
taxes being in personam , it is essential that
there be actual notice to the delinquent,
preceded by proper advertisement or
publication (Puzon v. Abellera G.R. No.
75082, January 31 , 1989) .
NOTE: The personal notice required is the
service of the warrant of levy in accordance
with Sec. 258 of the LGC (V DOMONDON,
supra at 365).
2. Judicial Action
The LGU concerned may enforce the collection
of the basic real property tax or any other tax in
relation t~ereto by civil action in any court of
· competent jurisdiction (i.e . MTC , RTC) subject
to the period of collection prescribed under the
LGC: I
a . Within 5 years from the date they become
due; or
.b . In case of fraud or intent to evade payment
·of the tax, within 10 years from the discovery
of such fraud or intent to evade payment
(LGC, Sec. 266 in relation to Sec. 270).
REMEDIES IN REAL
PROPERTY TAXATION
(TAXPAYER)
THE TAXPAYER HAS THE FOLLOWING
REMEDIES IN REAL PROPERTY
TAXATION:
1. Question legality of a tax ordinance and revenue
measures (LGC, Sec. 187) .
2. Administrative action:
a . Payment under Protest (LGC, Sec. 252);
b . Claim for refund or credit (LGC, Sec. 253) ;
or ·
c. Remedy against the Assessment (LGC,
Secs. 226 and 229) .
 REAL PROPERTY TAXATJON
_ - - .Taxation Law

3. Judicial action: QUESTION THE LEGALITY OF A TAX

a. Co1,1rt action (REVISED RULES OF THE ORDINANCE , . AND . REVENUE
COURT OF TAX- APPEAL, RULES 8 AND MEASURES.(LGC, ·SEC. 187)
16);
b. Action assailing validity of the tax sale (LGC, 1. Within 30 days from effectivity thereof to ii;
Sec. 267); Secretary of Justice; :
c. Injunction, only when pendin,g before the 2. The decision by t~e Secretary of Justice must be
CT A (Philippine Ports Authority v. The City ·rendered within 60 days fro111 the d_ate of the
of Davao, et. al., G.R. No. 190;324, june 6, receipt of the appSal;
201~. · ·i
3. Taxpayer must file an appropriate _action with a
4. Compromise. · cou~ of. competent ju_risdiction within ..30 days
from ;
In disputes involving r~al property taxation, the 4. The receipt of the decisioh of the Secretary of
1
general rule is to require the taxpayer to first avail of Justice; ·or ·

administrative remedies and pay, the tax under 5. The lapse of the 60-day period to decide (LGC,
protest before allowing any resort to a judicial action , Sec. 187). ·
except when the assessment itself is alleged to be
illegal , or is made without legal authority · (Capitol NOTE: Court of competent jurisdiction refers to the
Wireless, Inc. v. Provincial Treasurer of Batangas, Regional Trial Court (RTC) when case is resolved to
G.R. No. 180110, May 30, 2016) . determine any question or construction or validity of
, p tax...law and for the declaration of the taxpayer's
For example, prior resort to administrativEt action is · ,li~l?ility, thereunder (VITUG & ACOSTA, Tax Law and
required when among the issues raised 1s'--an__;:' -'- Jurisp ru ense (2014), p. 490; RULE? OF COURT,
~llegedly erroneous . assessment, ., like ~when·-~lhe "Role 63,_.S ec. ,1)'. .
reasonableness of the amour:itjs ch lle~ged ,.while - - - " , ., \ .· · ·
direct_cou~ ~ction is.per~itted ',Yh.,e,o ~n{y the'legality, . . a~.~,..
A e~. 1~5,.. ta?(payer's remedy is separate,
power, validity or aythonty op the a~~ssment itself ;, ,'° distinct, an · 1 independent fron:i Sec. 187. A
is in ques~iQn. Stated differe tly, th~-gene{al rul~ of 1
. taxpayer s fail(tre to~ vail of the remedy under Sec.
a prerequIsIte recourse to adn')i.nistrative remedies- --·---- 187- (appeal to ,the· Se'creta_ry of Justice), does not
applie~ when ~uestions of (fact-are raiseq, but '!he necessarily bar r ecou rse to Sec. 195 (appeal with
exception of _direct court ~c~i?O: .15 allo~ ed wh~'1;-, -!~e court of corTjP,eJ~1t 'j~risdiction) when the same
purely questions of . la~ , are ..,mvolye~ (Cap,tor · ·. · · Is gro ~?J<;i. onl fhe --illegality of the tax measure
Wireless, Inc. v. Provmc,al T~eflsurer b(;~?-.}~ng as,- - -1-:--.~ mpla_!~~~ ' of ! (Mlcbigan Holdings, · Inc. v. City
G.R. No. 180110, May 30, 201.6) . J .• ,· ,r-. · , ' Treasurer/ of Makati,, GTA EB No 1093 Apr1·I 13
-····- 1· , ''2nf6j:'::l I::
_::;· . '$ • '· " '

ERR 0 NEOUS ASSESSMENT

\() "· ' / ~~/-----
, "'-~) "-., 1,....- ;,,,/;"- ·.
~/· _f •
. " , .
An_ erron~ous _assessment_ presupposes that~-! h~' !i ,· r~~ti5>n 187 autho~iz~s !he ~ecretary of Jus.tice to
taxpayer Is subJect to the tax bu . is. dispu\1ng t~e...:_:__: . . .rev~~w onl¥ the _const1tut1onahty or legality of the tax
correctness of the amount assess~d. ~ itl;I I arr .-..-.ordI ~a~<?e ~nij, ,1f warranted. to revoke it on ·either or
erroneous assessment, the taxpayer claim thaf the • ,bo~I\ Pt th~e grounds (Drilon v. Mayor Lim, G. R.
local assessor erred in determining any'of t e->iterns -~? · 'fJ/ 49Z, Aug~st 4, 1994r He cannot replace it
for computing the real property tax, i.e., the value of wiffi his own version of what the ordinance should
the real property or the portion ·thereof subject to the be, neit_h er can he ·declare such ordinance as unjust,
tax and the proper assessment levels. In case of an excessive, oppressive, or confiscatory (INGLES,
erroneous assessment, the taxpayer must exhaust Tax Made Le~s Taxing (2018); p. 537 [hereinafter
the administrative remedies provided 1.1nder the LGC INGLES, Reviewer]). ·
before resorting to judicial action (City of Lapu- Lapu
v. PEZA , G.R. No. 184203, November 26, 2014) . W~en disputing an ordinance, there is no need for a .
written prote_st to be ma_de. 1:he written protest is only
ILLEGAL ASSESSMENT needed when protesting against an assessment
(Id.).
An assessment is illegal if it was made without-the
authority under the law. In case of an illegal
assessment, the taxpayer may directly resort to A taxpayer_may file a complaint assailing the validity
judicial action without payi~g under protest the of th~ ordinance ·and praying for a refund of its
assessed tax and filing an appeal with the L,ocal and perceived overpayments without first filing' a protest
Central Boards of Assessment Appeals (Id.). to the payment of taxes due under the ordinance
(Jardine Davies Insurance Brokers v. Aliposa, G.R.
No. 118900, February 27, 2003).

Such appeal shall n·ot have the effect of suspending

I
 \ I
MEM:0,RY AID
San Seda l.kweBlty Coleoe of Law - ROCT Ba, ()pen,11one Cen1e,
the effectivity of the ordinance and the accrual and
payment of the tax {LGC. Sec. 187) .
When disputing an ordinance, appeal to the DOJ is
manda_t o~- If_no appeal to the DOJ is made, the
RTC will d1s~1ss the case (Jardine Davies Insurance
Brokers v. Al,posa, supra) .
In cases ~here t~e validity or legality of a tax
ordinance 1s questioned, the rule that the tax must
first be paid before a protest is lodged does not
apply. Taxpayers must first receive an assessment
before this rule is triggered . Prior payment under
protest is not required when the taxpayer is
questioning the very authority of the assessor to
impose taxes (Aala v. Uy, G.R. No. 202781, January
10, 2017). · words "paid under protest" (National Power
ILLUSTRATION (2003 BAR QUESTION)i
x, a taxpayer who believes that an ordinance passed
by the City Council of Pasay is unconstitutional for
being discriminatory against him, want to know from
you, his tax lawyer, whether or not he can file an
appeal. In the affirmative, he asks you where such
appeal should be made: the Secretary of Finance, or
the Secretary of Justice, or the Court of Tax Appeals ,
or the regular courts. What would your advice be to
your client, X? · days from receipt (LGC, Sec. 252) ;
ANS: The appeal should be made with the Secretary
of Justice. Any question on the constitutionality or
legality of a tax ordinance may be raised on appeal
with the Secretary of Justice within thirty (30) days
from the effectivity thereof (LGC, Sec. 187).
ADMINISTRATIVE ACTION · -
1. Payment under Protest (LGC, s_ecs. 252
and 256)
When remedy available
The protest contemplated in Sec. 252 of th_e
LGC is needed when the issue involved 1s
purely factual in nature such as t he question is
as to the reasonableness of- the amount
assessed. Hence, if a taxpayer disputes the
reasonableness of an increase in a real estate
tax assessment he is required to "first pay the
tax" under pr~test. Otherwise, _the city or
municipal treasurer will not act on his protest ( Ty
v. Trampe, G.R. No. 117577, December 1,
1995; Jetti Petroleum, Inc. v. Talento, C. T.A. EB
Case No. 2093 (C. T.A. Case No. AC 211)
(Resolution), December 17, 2020).
The remedy is also available when the issues
involved are both factual and legal in nature
such as when there is a question bo th as to th e
reasonableness of the amount assesse · d. and
the authority of assessor (Dr. Pablo R. Olivares
v. Mayor Joey Marquez G.R. No. 155591 •
September 22, 2004; Jetti Petroleum, Inc. v.
Talento, C. T.A. EB Case No. 2093 (C. T.A. Case
No. AC 211) (Resolutibn}, December 17, 2020) .
When remedy is not available .
When the issues involved are purely legal '"
nature (i.e., the authority of the assessor is in
issue), it is not the LBAA, but the regula r cc:,urts
which has jurisdiction over the case . (National
Food Authority v. Municipality of Shariff Aguak,
C. T.A. AC No. 202, July 22, 2020; citing Ty v.
Trampe,· G.R. No. 117577, December 1, 1995).
Requisites to file protest: (PC-WF)
a. The taxpayer should first fay the tax and
Cause the annotation on the tax receipts the
Corporation v. The Provincial Treasurer of
Benguet, G.R. No. 209303, November 14,
2016; citing LGC, Sec. 252); and
b. The protest must be in Writing and filed
within thirty (30) days from payment of the
tax to the provincial, city treasurer, or
municipal treasurer, in the case of a
municipality within Metropolitan Area, who
shall decide the protest within sixty (60)
NOTE: Failure to comply with this
mandatory requirement is fatal , and any
appeal shall not be entertained by the LBAA
· (Natiqnal Power Corpora.tion v. The
Provincial Treasurer of Benguet, G.R. No.
209303, November 14, 2016) .
When to file protest
. The protest in writing must be filed within 30
days from payment of the tax to ttie local
treasurer concerned (LGC, Sec. 252).
Period to decide on the protest
The local treasurer shall decide the protest
within 60 days from receipt (LGC, Sec. 252) .
EFFECT IF THE PROTEST IS DECIDED IN
FAVOR OF THE TAXPAYER: The amount
or portion of the tax protested shall be
refunded to the protestant, or applied as tax
credit against his existing or future tax
liability (LGC, Sec. 252) . .
EFFECT IF THE PROTEST IS DENIED OR
IF THE 60-DAY PERIOD EXPIRED: The
taxpayer may appeal'to the LBAA within 60
days from receipt of the local treasurer's
denial or the expiration of the 60-day period
(LGC, Sec. 252 in relation to Sec. 226).

454 · Taxation Law
NOTE: The adverse decision of the LBAA
may be appealed to the CBAA and to the
CTA En Banc, successively, as in the case
of protest against assessments (LGC, Sec.
229(c) in relation to Sec. 230) .
2. Claim for Refµnd or Credit (LGC, ·Sec.
253)
When an assessment of basic real property tax
or any other tax levied is found to be illegal or
erroneous and the tax is accordingly reduced or
adjusted, the taxpayer may file a written claim
for refund or credit with the provincial or city
treasurer within 2 years from the date the
taxpayer is entitled to such reduction or
adjustment (LGC, Sec. 253).
Period to decide on the claim
The treasurer shall decide the claim wi.thin 60
days from receipt thereof. In case of denial, the . • __
taxpayer may appeal to the LBAA (as ·r1 protest
cases) and to the CBAA, if LB ivr s
adverse decision (LGC, Sec. 253).
'1- , /__
EFFECT IF CLAIM FOR REFUND,OR CREDlT
IS DENIED OR iF THE.,("' 60~~ .PERIOD
EXPIRED: The taxpaye may ' ppeJI to the
LBAA within 60 days fro, receipt of th~_local
trEasurer's denial or the e~ ifation oft e 6Q~ay
P,eriod (LGC, Secs. 226 na?52(d)) . \
, t ) - I'\
NOTE: The adverse decision of th~"'~AAJuaY- ~ - -nf~:·1ast attion.,,.-o f the local assessor on a
be appealed to the cw· -~in 30 ~a' ~]~a_nd to
the CTA fn Banc [within 30 days], su~;;sively'
as in the case of protest against asses~~~n.ts ..
LGC, Sec. 229(c)).
. . , ' -~ _:~-'- : _:..~ ·t he· r~erty owner the remedy of filing a motion
3. ~emedy Again_st Assessme)lt: (~GC, ~.... _, . - fo( egonsideration before ·th~ local assessor
e,cs. 226 and 2_29) - , ;,
\ '
' en remedy available ' ,
uestion the "act" of the assessor (/NGLES,
·ewer, supra at 578). · ·
MPLE: Questioning the very authority and
power of the assessor to impose the
assessment and of the treasurer to collect the
tax., ·These are not questions that merely
amounts to the increase in the tax but attacks on
the ·very validity of any increase. -
Sec. 226, in declaring that any owner or person
having legal interest in the prope~ ~ho (s not
satisfied with the action of the provincial, city, or
municipal assessor in the assessment of his
property may appeal to the LBAA shou_ld be read
in conjunction with Sec: 252(d), which states
that in the event that the protest is denied, the
·taxpayer may avail of the remedies as provided
REAL PROPERTY'T~TION
for in Chapter 3, Title II, Book II of the l,Gc
[Chapter 3 refers to Assessment Appeals, Which
includes Sections 226 to 231].
The action referred to in Sec. 226 of the LGC as
protest of real property tax assessment refers to
the local assessor's act of denying the protest
filed pursuant to Sec. 252. Without the action of
the local assessor, th~. appellate authority of the
LBAA cannot. be invoked (ABAN, Basic
Taxation, supra at 465).
Who may appeal
The owner or person having legal interest in the
property who is not satisfi~~ with the ·acti_on of
the provincial, city, or municipal ass~ssor in the
assessment of his property may appeal to the
Local Board of Assessment Appeal.s (LBAA) by
filing petitio'n under oath together.with C?Pies
of the tax declarations and such affidavits or
documents submitted in support of the appeal
1 I 7(LGC Sec. 226) . ·
'--, ' I
- NOT : >-A' pe.rson legally burd~ned with the
- -. obligation-• to P-ay for the tax imposed on a
. , __ prol?erty ,al:t l_ e pl interest in the property and
..:·'.'.: the 'perso,:iality to _protest a tax assessment on
the ~roperty'(V..bOMONDON, supra at 403).
. '- _
No motion fo{rec~nsideration of the adverse
. ,·. decision ofqtheJocal assessor/treasurer; the
ren<eay .is tb appe I to the LBAA.
\. :__ parti~ular ,assessment shall be the notice of
J,..,. V
• . •1 assessment; it is this last action which gives the
g wner slthe pr9perty the right to appe'al to th~
•. . - --_-;,--: i' t:.BM.' The procedure likewise does not permit
• Ii : \ (If ELS Energy, Inc. v. The f?rovmce, of Bat~ngas,
'1 { , µ.R No. 168557, February 16, 2007).
·
The failure to appeal within the statutory period
· renders the assessment final and unappealable
(Victorias Milling v. CTA, G.R. No. L-24213,
March 13, 1968).
A taxpayer · who is not satisfied with the
assessment of his property should appeal to the
LBAA within 60 days from receipt of the
written notice of assessment. The filing of a
petition' for injunction in the Regional Trial_Cou_rt
upon the issuance of a warrant of levy is not in
accordance with the remedies provided in the
• LGC (Republic v. City of Kidapawan, G.R. No.
166651, pecember 9, 2005).
Where referral to the LBAA is not required
In cases where an appeal to. the LBAA is not a
speedy and adequate remedy and when only
 \ I
MEM:O~Y AID
s.,, S e d a ~ Colege of Law - RGCT S.. Openition,i Center
legal issues are to be resolved , an appeal to the
LBAA is not necessary (City Government of
Quezon City v. Bayan Telecommunications
Inc., G.R. No. 162015, March 6, 2006). ' b.
NOTE: In the case of City Government of
Quezon City v. Bayan Telecommunications, Inc.
(G.R. No. 162015, March 6, 2006), the Supreme
Court agrees with Bayantel that an appeal to the
LBAA is not a · speedy and adequate remedy
within the context of Section 2 of Rule 65 of
Rules of Court (Petition for Prohibition) with the
reality that Bayantel's real properties were
already levied upon on account of its
nonpayment of real estate taxes thereon.
Moreover, one of the recognized exceptions to
the exhaustion-of-administrative remedies rule
is when, as here, only legal issues 'are to be
resolved. In fact, the Court, cognizant of the
nature of the ·questions presently involved, gave
due course to the instant petition. ·
When to appeal
The appeal shall be made within 60 days from .
the date of receipt of the written notice of
assessment (LGC, Sec. 226) .
Period to decide on the Appeal
The LBAA shall decide the appeal within 120
days from the date of receipt of such . appeal
(LGC, Sec. 229 (a}) . , '- . ;
.'
Period to appeal decision ·of the LBAA
. The owner of the property or .the person havi_ nQ·
legal interest therein or the assesso~ who is not
satisfied with the decision of the LBAA may,
within 30 days after receipt of the decision -of the
LBAA, appeal - to the Central Board of
Assessment Appeals (CBAA) (LGC,- ~ec. · 229 _
(c)) . .
Any party adversely affected by a decision_ or
ruling of the CBAA may file a Petition for Review
(Rule 43) to the CTA En Banc within 30 d~ys
· from receipt of the questioned decision or ruling
of the CBAA (REVISED RULES OF THE
COURT OF TAX APPEALS, Rule 8, Secs. 3(c)
and 4) .
Effect of Appeal on the Payment of RPT . Compliance
Appeal on assessments of real property shall , in
no case, suspend the collection of the
corresponding realty taxes on the property
involved (LGC, Sec. 231).
JUDICIAL ACTION
1. Court Action
a. Appeal to the Court of Tax A~pe~ls En Ban~
within 30 days from receipt in case 0
adverse decision by the CBAA (REVISED
TAX
RULES OF THE COURT OF
APPEALS, RULE 8, Sec. 4(c)) .
Appeal by petition for review on_ cderti~r~~~~
the Supreme Court within 15 ay . f
receipt of adverse .decision or the denial_o
the motion for reconsideration or new trial ,
as provided in Rule 45 of the Rules of Court
(REVISED RULES OF THE COURT OF
TAX APPEALS, RULE 16, Sec. 1).
2. Action Assailing the .Validity of the Tax
Sale
No court shall entertain any action assailing the
validity of any sale at public auction of real
property or rights therein until the taxpayer shall
have deposited with the court the amount for
which the real property was sold together with
interest of 2% per month from date of sale to the
time of institutio_n of action (LGC, Sec. 267) .
The Deposit is a Jurisdictional Requirement
The deposit of the amount for which the property
was sold plus interest equivalent to 2% per
~':month required under Sec. 267 of the LGC is a
·· · jurlsdictional requirement, the non-payment of
which warrants the dismissal of the action
(Spouses, ..; Wong v. City of 1/oilo, G.R. No.
161748, July-3, 2009).
' Deposit Requirement
Purpose ·o t the
The ·deposit precondition is an ingenious legal
device to . guarantee the satisfaction of the tax
delinquency, with the local government unit
keeping the payment on the bid pri9e no matter
the final outcom~ of the suit to nullify the tax
sale. It is essentially meant to reimburse the
purchaser of the amount he had paid at the
auction sale should the court declare the sale
invalid. Thus, the requirement is not applicable if
the plaintiff is the gove.rnment or any of its
agencies as. it is presumed to be solvent, and
more so where the ttax-exempt status of such
plaintiff as basis of the suit is acknowledged
(National Housing Aut~ority v. 1/oilo City, G.R.
No. 172267, August 20, 2008) .
Burden of Proof is on the Purchaser to Show
.
The purctlaser at an auction sale to satisfy a tax
delinquency has the burden of proof to show that
there was compliance with all the pre~cribed
requisites for a tax sale. There is no presumption
of regularity of any administrative action which
results in depriving a taxpayer of his property
through a tax sale. This is actually an exception
to the rule ths:1t administrative proceedings are
presumed to be regular (Francia v. Intermediate

Appellate Court, G.R No. L-67649, June · 28,
1988).
3. Injunction
The Court of Tax Appeals had jurisdiction over
petitioner's appeal to resolve the question of
whether or not it was liable for real property tax.
In this case, the real property tax liability was the
very reason for the acts which petitioner.wanted
to have enjoined. It was the Court of Tax
Appeals, and not the Court of Appeals, that had
the power to preserve the subject of the appeal,
to give effect to its final determination, and, when
necessary, to control auxiliary and incidental
·matters and to prohibit or restrain acts which
_ might interfere with its exercise of jurisdiction
over petitioner's appeal. (Philippine Ports
Authority v. The City of-Davao, et. al., G.R. No.
190324, June 6, 2018).
REAL PROPERTY T~T-ION
.- Taxation Law
'
· NOTE: At this stage, the provincial or .
treasurer or municipal treasurer of Metropol'~ity
Manila who· has been conferred the authori~~n
file the ci'l_il action · m~y enter int~ ·
such compromise agreement m the p_endin
9
court action to collect delinquent tax upo
authority of the sanggunian by · a. mer;
resolution. Thus, there is no need to pass an
orainance for the purpose as such procedure is
part of the remedy of judicial action availed of by
the local government unit (Id.). .
Guidelines in C.ompromising Delinquent Real
Property Taxes: (OBT-D2 Re-AOS)
1. A duly enacted Ordinance, granting authority
upon the provincial or city treasurer or·municipal
treasurer of Metropolitan Manila (MMA) to enter
into a compromise agreement and prescribing
the terms and con~itions thereof is required ;

COMPROMISE l ·1 A .,,NOTE: If the compromise agreement is entered

Compromise Of Real Property Taxes Is ot _.,, J. \j injo ~s a procedural requirement ·in a pending
Specifically or Explicitly Conferrpd b-Y, th~ LGC qourt ~..ctlon for collection of delinquent real
The settlement of delinquent real property tax by _____ · prqperty tax, a mere resolution of the
way of a compromise ag_reement is not specifically sangg,uriian';, granting authority upon the
and explicitly conferred by the Local Government ., .,.,,. pro inci~ or city. reasure,r or municipal treasurer
Code of 1991. Equally significant however is there is •'.:"' · -/, of MMA t9 ~nter into a compromise agreement
likewise no prohibition. Therefore, the compromise \ '."-. will suffice. (Jl -
agreement may be resorted to in the settlement of a •·· ·
delinquent real property tax which must be provided ·_\ ;r ':--2;_~.)'T he aggregat · e~iAque~t real·property ·tax is so
for in the real property tax ordinance, - or in_ any"/.,, •:. ,// r: mu 0
,_ and too ijurdensome to the proper:ty
amendments thereto, conferring authority upon. the_2.: "--·:_. _ _ ow ~~-} xpayer and there exists serious-doubt
_ provi~cial o~ city trea~_urer or the ~unicipal treasurer : r.: .., ~.\ ,~ t , X-ttl? O'v\'.t'ler t~xp~yer could e~er pa~ t~e fun ·
of Metropolitan Marnia to enter mto a compromise ): 1 1
<-1· A '.~ ¥t of tax hap1hty at one time within the
_agreement · consistent . .with their statutory_- I 1//.!ern,Mder of t~e statutory period for collection;
responsibility to collect real property tax (Bureau of'1-:·/~ ~-% +erm of payment must not be beyond the
Local G(?vemment Finance Opinion, January _6, TPV\ ::.,J ~ mamder for e _statutory p_erio_d for collection,
lC -:.:.::..;____:,__ qr ey 0~ the period of redemption, as the case
<Yr
2010).
17 , - m iY, bj; . '
When Parties May Enter Into Com romise q r1; e.c.o,mprom1se agreement does not Defeat tax
Agreements: (DEA 2F-P) it:•-~ ollectio_n efforts of the local taxing authority or -
1. Prior to the Qistraint of personal property or the does not serve to Qisco,1Jrage diligent taxp-ayers;
gxpiration of the year for which the tax is due; 5 - The amou_nt of tax liability•is not B,!duced;
2. At ·any time before the date fixed for the Auction 6 · The compromise agreement -· is- most -
sale; · ~dvantageous to the local taxing authority 'vis-a-
3. Within one year from the date of Auction sale; vis the tax collection costs and circumstances·
4. Within..one year from the date of forfeiture by 7 - · Th~t in_ case of real property Other 'than th-e
the Local Government u_,nit for want of bidder; delinquent re_ al property is-offered as payment to
and, settle the del!!)quent tax obligation, the·following
5. During the f13ndency of a civil action for the should be taken into consideration: (LOAF-
collection of_delinquent real property tax (Id.) . UMC) · · .
a. The property offered in settlement of
NOTE: The parties thereto may enter into a delinquent real property tax must be
compromise a compromise _agreement at any ,bocated within the fi!rritcirial jurisdiction of
stage of the judicial proceeding in an action to the local ~axing authority; . .
collect .delinquent real property tax which shall b. The delinquent taxpayer is the OwnEfr in fee
be . submitted to the court for · approval. · simple -of the real property as shown in· the
Thereafter, it becomes the judgment or decision Transfer Certificate of Title·
subject to execution in accordance with the C. -The owner-taxpayer has 'the Absolute riglit
Rules of Court (Id.). , to convey the propertya nd willhold the local
-- \ I
MEM~Q~y AID
s-, 8tda Colege ct'-- - RGCT Bar 0perat1cna Cer-Aer
government unit free from any suit claim
obligation, or liability that may arise f~om th~
transfer of ownership or title thereof·
d. The property is free from a~y lien,
encumbrance, or any other obligation due to
or claim by a third person;
e. Toe property is yP-to-date in the payment of
real property tax;
f. Toe Market value of the property as may be
determined by the · assessor or the local
appraisal committee is sufficient to cover the
amount of delinquent real property tax,
induding interests, penalties, and
surcharges, as well as any incidental
expensesincurred;and,
g. Toe property being offered does not post
any ~ost or liability to the local government
unit;
8. Such other terms and conditions most
advantageous to the local taxing authority and in
conformity with the provisions of the Local
Government Code on real property taxation
(Id.).
BOARD OF
ASSESSMENT
APPEALS
LOCAL BOARD OF ASSESSMENT.
APPEALS (LBAA)
COMPOSITION:
1. Registrar of Deeds as Chairman; : 1
;! '
2. Provincial or City Prosecutor, as member;
3. Provincial or City engineer, as member; and
NOTE: They shall serve in an ex officio capacity
without additional compensation (LGC, Sec.
227(a)).
4. In . the absence of nos. 1 to 3, the persons ·
performing their duties, whether in an acting
capacity or as duly designated officer-in-charge,
shall automatically become the Chairman and
members (LGC, Sec. 227) .
TERM OF OFFICE: Co-terminus with their term as
Registrar of Deeds, Prosecutor, or Provincial/City
Engineer.
MEETINGS: The Board of LBAA shall meet once a
month and as often as necessary for prompt
disposition of appealed cases (1,.GC, Sec. 22B) .
PER DIEMS ENTITLEMENT: No member of !he
Board shall be entitled to per diems or trav~ling
expenses for his attendance in Boa~d me~ting~~
except when conducting an ocular inspection
connection with a case under appeal (LGC, Sec.
228) .
CENTRAL BOARD OF ASSESSMENT
APPEALS (CBAA)
Composition: .
One (1) Chairman and two (2) members appointed
by the President (LGC, Sec. 230).
TERM OF OFFICE: 7 years without reappointment
(LGC, Sec. 230) .
REQUIREMENTS FOR CBAA CHAIRMAN AND
MEMBERS:
1. Filipino Citizens;
2. At least 40 years old at the time of their
appointment; and
3. Members of the Bar or Certified Public
Accountants for at least 10 years imm~iately
preceding their appointment (LGC, Sec. 230).
SALARY: The chairman of the Board of Assessment
Appeals shall have the salary grade equivalent to the
rank of Director Ill under the Salary Standardization
Law exclusive of allowances and other emoluments.
The members of the Board shall have the salary
grade equivalent to the rank of Director II under the
Salary Standardization Law exclusive of allowances
and other emoluments. The Board shall have
appellate jurisdiction over all assessment cases
decided by the Local Board Assessment Appeals
(LGC, Sec. 230).
HEARING OFFICERS (3) - appointed by CBAA. '
They will hold office in:
1. Luzon - Manila
2. Visayas - Cebu City
3. Mindanao - Cagayan De Oro City (LGC, Sec.
230).
TERM OF OFFICE: 6 years without reappointment
(LGC, Sec. 230) .
QUALIFICATION: Same qualifications as judges of
MTC (LGC, Sec. 230).
SALARY: The Hearing officers shall each have the
salary grade equivalent to the rank of Director I
under the Salary Standardization Law exclusive of
allowances and other emoluments (LGC, Sec. 230).
 REAL PROPERTY TAXATION
. Taxation Law

I LOCAL TAXATION V. REAL PROPERTY TAXATION]

Provinces, Cities, Municipalities, .and Provinces, Cities, and Municipalities

(LGC, Secs. 134,142,151 and 152). in Metro Manila Area (LGC, Sec.
232).

Expressly provided. No power to grant tax exemptions.

Local government units may, through ordinances Exemptions from RPT granted
duly approved , grant tax exemptions, incentives, or under Sec. 234 of the LGC granted
reliefs under such terms and conditions as they may by Congress.
deem necessary (LGC, Sec. 192).

Unless otherwise provided in the L.GC, all •local On the 1st day of January (LGC,
taxes, fees, or charges shall accrue on the 1st day Sec. 246) .
of January of each year; howe'.'.er, n.e.w taxes, fees
or charges, or chan8es •it(the,..ratf s thereof,. ~hall
a
accrue on the 1s~ay ) he qqa_!!.er ne~ fqllo~ag_
the effectivity ,,of ttie ._rdinance"impo&lQ_Q s,uch e_,w
, ••
levies or rates (~G'G" Sec. 166). ·· . , f ,_- ••

May be p~id~in ~Oarteny;s~alliQents -(L.G"C, Sec:· ,_May,

be paid in four equal
165). I ' )/ / .:: . ''. Ji. - · installments. (LGC, Sec. 250).
; t I :·· ·(-'_. ·
' .
st c5n~or before the. 31st of March
2;f1f!;:. on or before 30th· of June
3rd _:_ lon or before 30th of
$~ tem6er ·
J th - ·or:t or before 31st of.December

,. ..,., .
ie.·(5) ,ye~rs. No express provIsIon on
from t Gp, ·,. e"q_ prescriptive period of assessment.
(L_
194(a)). r \ ,../
When there I '. to ~evade the
payment of taxe , es - ten (10)
years from discovery of the fraud or intent to
evade the payment (LGC, Sec. 194(b)).

Within 5 years . from the · date of assessment by Within 5 years from the date they
administrative or judicial action; within 10 years from become due; within 10 years-from
the discovery of fraud or intent to evade payment the discovery of fraud or intent to
(LGC, Sec. 194(c)). evade payment. (LGC; Sec. 270).

1. Local Government's lien (LGC, Sec. 173). 1. Lien on property subject to tax
2. Administrative action: (LGC, Sec. 257); .
a. Distraint of personal property; 2. Civil Remedies, in General
b. Levy upori real property (LGC, Sec. 174); a. Administrative action
3. Ju~icial action (LGC, Sec. 174). i. Distrain·t of personal
property (LGC, Se_c.
254(b));
 \ I

MEM:Q~y AID
sw, 9ec11 lrMnll)o College of lAw · ROCT Ber Ope,.uon. Center

ii.Levy on real property

subject to tax (LGC,
Sec. 258-265); or
b. Judicial action (LGC, Sec.
266 in relation to Sec.
270).
Administrative 1. Question legality of a tax
a. Before Assessment ordinance and · revenue
i. Question the Constitutionality or measures (LGC, Sec. 187);
Legality of Tax Ordinances or Revenue 2. Administrative action:
Measures on Appeal a. Payment under Protest
ii. Declaratory Relief (LGC, Sec. 252);
b. After Assessment b. Claim for refund or credit
i. Protest (LGC, Sec. 253) ; or
ii. Claim for Refund or :rax Credit c. Remedy against the
· iii. Redemption Assessment (LGC, Secs.
c. Compromise 226 and 229) .
Judicial 3. Judicial action:
a. Court Action a. Court action (REVISED
b. Declaratory Relief RULES OF THE COURT
c. Injunction OF TAX APPEAL, RULES
BAND 16);
b. Action assailing validity of
the tax sale (LGC, Sec.
267) ; .
c. Injunction, only when
pending before the CTA
(Philippine Ports Authority
v. The City of Davao, et.
al. , G.R. No. 190324, June
6, 2018) .

4. Compromise.

Payment under protest is not necessary (LGC, Sec. Payment under protest is
195). necessary. (LGC, Sec. 252) .
460 . REAL PROPE.RTY TAXATION
. . Taxation Law

PROCEDURE OF ~SSESSMENT OF LAND VALUE FOR-·REAL PROPERTY-

TAX ·

Owner fleclar_~~•(eal property once START If owner or administrator refuses or fails to

every years (LGC, Sec. 2_02) . declare re~I property, the assessor will
declc,ire the re al property (LGC, Sec . 204).

Sworn statement ; No oath shall be re uired

Once every 3 years When owner re~ses or
during the period from fails to make such
January 1 to June 30 declaration within the
time rescribed
(LGC, Sec. 202) (LG~, Sec. 2rf4)
f'.ssessor prepares an a$sessment roll
. all real property , whether taxable or exempt,
located within the ir territorial jurisdiction shall
be listed . e-real prop~rty shall be listed ,
valued:end assessed in the ame I
or.the
,
owner

Owner- · who shall clai sessment, the assessor

wittrthe assessor e (LGC, $ec. 2?3).
evidence in support of s
from the date of declara · 'th' - d •
Sec 206) ssment w1 m 60 ays
' · • • the Local Board of
AA) . (LG9, Sec 226).
·,
. .
. ' .

120 days from receipt of

ec. 229) . _ . _ .

O_wner may appeal to the -Central Board of · .

Asses~ment Appeals (CBAA) within 30 days from
receipt of notice if LBAA rejects protest (LGC,
Sec. 229) . · ·
NO The real
property shall
Owner may appeal to the CTA en bane within 30
be listed as
days from receipt of decision if CBAA rejects
taxable in the
protest (REVISED RULES 0'R-IE COURT OF
assessment
TAX APPEALS, RULE 8, Sec. 4(c)).
roll (LGC,
Sec. 206) .
Appeal to the Supreme Court within 15 days
The real property shall be (REVISED RULES OF THE COURT-OF TAX
dropped from the assessment APPEALS, RULE 16, Sec'. 1).
roll (LGC, Sec._~06 ).

END .

J
-TAXPAYER'S REMEDIES INVOLVING COLLECTI9N
OF REAL PROPERTY TAX

Start ISSUE

Assessor prepares and submits

assessment roll to localreasurer
on or before the 31 •1 day of Taxpayer question 1'axpayer question
December each year (LGC, Sec the reasonableness the legality, power,
248). or carectness of validity or authority
amount assessed of an assessment

Local treasurer shall, ii case of:

a. Basic real property tax and
additional tax for Special Owner pays the tax The proper remedy for the
Education Fund (SEF) - on and written protest · taxpayer is to file directly in the
or before 3'151 day of January must be filed with regular courts the necessary
each yea~ or ry the local treasurer judicial action (ABAN, Law of
b. Other tax levied under Real within thirty(30) Basic Taxation in the Philippines
Property Taxation (special days from payment (Revised 2001 Edition), p. 463;
levies by LGUs and special (l,GC, Sec. 252) .C,apitol Wireless, Inc. v. Provincia
levies on Idle Lands) ,_ any Treasurer of Batangas, G.R. No.
other date prescribed by the 180110, May 30, 2016).
Sanggunianconcemed,
posts notice of the dates when the
tax may be-paid without interest,
at a conspicuous and publicly Local treasurer must decide within 60
accessible place at the LGU hall days from receipt of protest (LGC,
or publish the same in a Sec 252 '
newspaper of general circulation
in the LGU once a week for two
(2) consecutive weeks(LGC, Sec.
1
249).
The protest Denial of the
is d~cided protest or
l.ocal treasurer collects the tax inaction of the ,
starting January 1 of the calendar in favor of ,
the taxpayer local treasurer
year (LGC, Sec 246, in relation to
Secs. 249 and 257).

The amount or portion Taxpayer may appeal to

of the tax protested will the LBAA - ..
be applied as tax credit a. within 60 days from
or refunded(LGC, Sec. the receipt of notice
raise an issue
252(c)). of denial; or
about the
b. upon expiration of the
assessment
6Cklay period for the
local treasurer to act
on appeal (LGC,
.LGU Sec. 252 in relation to
collected Next page Sec. 226).
real property
tax. END

r
 REAL-PROPERTY-TAXATION
462 · .· Taxation Law

Continuation

Taxpayer may appeal to

The amount or portion the LBAA ·
of the tax protested will . a. within 60 days fr~m
be applied as tax credit the receipt of notice
or refunded (LGC, Sec. of denial; or
252(c)) . b. upon expiration of the
- 60-day period for the
local treasurer to act
Refund or tax credit on appeaj (LGC,
must be claimed with Sec. 252 in relation to
the local treasurer Sec: 226). ·
within 2 years from the
date taxpayer is entitled
. to such (LGC, Sec.
253). LBAA must decide within
120 days from receipt of
appeal (LGC, Sec. 229).

Local tre
decidewi
from re If LBAA rejects protest or
claim for refund, owner may appeal
to the CBAA within 30
Sec. 2£ ID) ·11
' ..!'."'
yr
'.\ days from r~c.eipt of
Jl
"V n,, notice (LGC, Sec.229).

I
/' .>'\ ·t--------i
..------,,,,,·½ ' - , - -- - - - - r - - - - - . . . . . J

~"17'- ·- 1, It , .,-,~-,--.
;....:, . -. t·11 ~-, .,
&.::< - . ~J.-;; . .';ci • ·r--
1 i',--- - - - - - ' ' - - - - - - - - ,
J If CBAA cejects protest or
Granted 1
.· efund, owner.may appeal
the claim . o the CTA en bane within
for refund 0 days from receipt of
·; ecision (REVISED
RULES OF THE COURT~
· OF T-AX APPEAL, RULE
. / 8, Sec. 4(c)).

Taxpayer is Appeal to the Supreme

happy. END· Court within 15 days
(REVISED RULES OF
THE'COURT OF TAX
APPE~L, RULE 16, Sec.
1). '

END
 \ I

MEt40~Y A-ID ,
s-, Seda UnN99ity College of law - RGCT Bar Openitiona Center

PROCEDURE FOR LEVY FOR PURPOSES. OF

SATISFYING REAL PROPERTY TAXES

_Tax constitutes a lien on the Time for payment Warranty of Levy issued
property superior to all liens of the real property by the Locaf Treasurer
& may only be extinguished taxes expires · (LT), which has the force
upon payment of the tax and of legal execution in the
START charges (LGC, Sec. 257) LGU concerned (LGC,
Sec 258 :

- Warranty is Written notice of the Thirty days from service qf warrant, local treasurer shall
mailed to or levy. & the warrant advertise sale of the property by:.
served upon the is maile~/served 1.' Posting notice at main entrance of LGU hall/bldg.
delinquent owner upon the assessor .and in a conspicuous plac~ AND
(Sec. 258) and the Register of ' 2. By publication once a week for 2 .weeks
Deeds of LGU (LGC,_Sec. 260) . .
(LGC, Sec. 258) Note: In cases of levy for unpaid local ta~e$ publication
is once a week for-3 weeks(LGC, Sec. 178).

Al any time before the Sale is held:

date fixed for the sale , 1. At the maip entrance of
the owner may stay the • the LGU Qui)ding OR
proceedings by paying 2.·on the property to be .
the delinquent tax, sold; OR ·
interest due thereon 3. At a ny other place
and Jhe expenses of specified in the notice
sale (LGC, Sec. 260) ,(~Ge,. Sec._260)

NO
YES a
bidder?

Local Treasurer shall purchase the property in

Within thirty (30) days after ttfe ~ale,
behalf of the LGU (LGC, Sec 263).
the LT or his deputy shall make a report
Note: ·LT may purchase.if there is no bidder or if
of the sale to the sanggunian the highest bid is insufficient in -cases of levy for
concerne9 (LGC, Sec. 26(J. unpaid local taxes(LGC, Sec. 181)

Next page
 REAL PROPERTY.TAXATION
· Taxation Law

Within thirty (30) days ·after the sale,
the LT or his deputy shall make a repor1
-of the sale to the sanggunian
concerned (LGC, Sec. 260).
Local Treasurer shalr purchase the property in
behalf of the LGU (LGC,·Sec 263).
. Note: LT may purchase if there is no bidder or if
the highest bid is insufficient in cases of levy for
unpaid local taxes (LGC, Sec. 181).

LT shall prepare and deliver to

purchaser the certificate of-sale (LGC,
Sec. 260).
l
Register of Deeds shall transfer the title of the
forfeited property to the LGU concerned without
need of a court order (LGC, Sec. 263).
·Proceeds of sale' in excess of .
delinquent tax, interest & expenses of
sale remitted to the owner (LGC, Sec
260).
Within 1 year from forfeiture, the owner may
redeem the property by paying to the local
. treasurer the full amount of tax and related

u N .•
' Within one· year-from sale, owner shall interest and the costs of sale otherwise the
have the righ' to red_ e eiri the property . ownership ·shall be vested on the LGU
upon payment of the following: tonc~rned (LGC, Sec. 263).
· 1. Delinquent tax;
. I !.
~----
2. 'Interest ·due thereon ;
3. Expenses of sale
delinquency to the
4. Additional inte he Sarig!{~'r/ian concerned may, by ordinance
2% per month on ly_app oved and upon notice of nofless than
from date of sale · enty {20) day~. sell and dispose of the real /
redemption (LGC, - - --1- Property acquired u nder Sec. 263 of the LGC.

From the date of s I

expiration of the pe
the delinquent own
possession of the p
to the income and
(Sec. 261).

Local Treasurer retu

purchaser/bidder ttie p
interest of 2% per month (,
261).

! .
The local treasurer shall execute a deed
of conveyance to the purchaser If

-
property is not redeemed (LGC, Sec.
262).

L ,--L_e_vy
_ m_a_y_be
_ r_e_p_e_a -te_d_u_n_ti_l _
amount due, including ali expens.es,
. is collected (LGC, ·sec 265).
!
·
th_e_f_u_ll

'