TAXATION LAW No direct; but

Direct benefit
General benefit healthy
Benefits in the form of
GENERAL PRINCIPLES No special/ economic
Received just
direct standard is
compensation
Taxation attained
Inherent power of the sovereign exercised through the legislature to Non-
Cannot impair; Superior; may
impose burdens upon subjects and objects within its jurisdiction for the impairment of Superior
inferior impair
purpose of raising revenues to carry out the legitimate objects of contract
government. Taxes paid No transfer;
Transfer of There is
become part of only restraint
property rights transfer
It is the power by which the sovereign raises revenue to defray the public funds in use
expenses of government. It is a way of apportioning the cost of All persons,
All persons,
government among those who in some measure are privileged to property, Only particular
Scope property and
enjoy its benefits and must bear its burden. liberty, rights & property
excises
privileges
Taxes Only Only
May be
Enforced proportional contributions from persons and property, levied government or government or
Who exercises granted to
by the State by virtue of its sovereignty for the support of the political political
public utilities
government and for all its public needs. subdivisions subdivisions
Subject to Can‟t be
Surrender
“enforced contributions” – taxes are obligations created by law; never compromise bargained
founded on contract or agreement; not dependent for their validity
upon the individual consent of persons taxed Purposes of taxation
“proportional” – based on one‟s ability to pay 1. Revenue purpose – basic purpose of taxation is to raise
“levied by State” – power to impose taxes is a legislative power; revenues
cannot be imposed by the executive nor by courts 2. Sumptuary or regulatory purpose – secondary purpose is to
promote the general welfare and to protect the health, safety or
Characteristics of taxation morals of inhabitants
1. Inherent a. Taxation can strengthen anemic enterprises
2. Legislative b. Taxes may be increased in period of prosperity to curb
3. Generally imprescriptible spending power and halt inflation and lowered in periods of
4. Applies prospectively slumpt to expand business and ward off depression
5. Subservient to the non-impairment clause c. Taxes on imports may be increased to protect local
6. May be exercised jointly with police power or eminent domain industries
7. Power is unlimited d. Taxes on imported goods may be used as a bargaining tool
by a country by setting tariff rates first at a relatively high
Nature of taxation level before trade negotiations
1. Inherent in the State, being an attribute of sovereignty e. Taxes can discourage certain business (tobacco and alcohol
Power to tax is an incident of sovereignty and is unlimited in its f. Taxes can also minimize inequity
range, acknowledging in its very nature no limits, so that security Cases:
against abuse is to be found only in the responsibility of the SC held that levy of 30% tax on videogram operators was
legislature which imposes the tax on the constituency who are to imposed primarily to answer the need for regulating the video
pay it. This is so because the very existence of the State is industry, particularly rampant film piracy and flagrant violation of
dependent on taxes. intellectual property rights.
2. Legislative in character
State is free to select the object of taxation, such power being Power of taxation maybe used as an implement of police
exclusively vested in the legislature. This means that in the power with the end in view of regulating a particular
legislature primarily lies the discretion to determine the nature activity.
(kind), object (purpose), extent (rate), coverage (subject), and To determine whether an imposition is a tax or a regulatory fee,
situs (place) of taxation. IOW, legislature wields the power to following may be inquired into:
define what tax shall be imposed, why, how much, against 1. Purpose of imposition
whom/what and where. If generating revenue is the primary purpose and regulation
XPTN: Where the Constitution provides otherwise is merely incidental, imposition is a tax; but if regulation is
Basis: Taxes are a grant of the people who are taxed, and the the primary purpose, the fact that incidentally revenue is
grant must be made by the immediate representatives of the also obtained does not make imposition a tax.
people. a. Royalty fees imposed on movement of petroleum fuel
are regulatory fees. It was exacted on a per liter basis
POWER OF TAXATION AS DISTINGUISHED FROM POLICE because the higher the volume of fuel entering the
POWER AND EMINENT DOMAIN special economic zone, the greater the extent and
frequency of supervision and inspection required to
Eminent ensure safety, security and order within the zone.
Taxation Police Power
domain b. Margin fees are regulatory fees. They are imposed to
Take private curb excessive demand upon international reserves in
Promote public
Purpose Raise revenue property for order to stabilize currency. It is applied to strengthen
welfare
public use the country‟s international reserves and is not imposed
Limited to for revenue purposes. Hence, it is not deductible
Generally Limited to cost market value business expense.
Amount c. Universal charges are regulatory fees. It is levied to
unlimited of regulation of property
taken ensure the viability of the country‟s electric power
Altruistic industry.
Enjoyment of 2. Amount of exaction
Compensation feeling of
public services If amount levied is too high and/or if the amount levied is
contributing
Property Taken Money Any property Property not related to costs of regulation, the exaction should be
considered a tax as it is levied for revenue purposes.
Page | 1
 Cases:
Amount collected from the imposition of the domestic sales
of fertilizer grades was too excessive to serve a mere
regulatory purpose.
For fees to be regulatory in nature, same must be no more
than sufficient to cover the actual cost of inspection or
examination.
3. Designation
Principles of sound tax system (Canons of taxation)
1. Fiscal adequacy – source of government revenue must be
sufficient to meet governmental expenditures and other public
needs
2. Administrative feasibility – taxes should be capable of being
effectively enforced
3. Theoretical justice – good tax system must be based on
taxpayer‟s ability to pay
Case: While administrative feasibility is a canon of a sound tax
system, non-observance thereof will not render a tax imposition invalid
except to the extent that specific constitutional or statutory limitations
are impaired.
Theory and basis of taxation
TN: Theory of taxation explains why there is a need to impose taxes
while basis or rationale explains the reason why a State may impose
taxes.
1. Lifeblood theory
The existence of government is a necessity; it cannot exist nor
endure without the means to pay its expenses; and for those
means, the government has the right to compel all its citizens and
property within its limits to contribute in the form of taxes.
It can be manifested in following principles:
a. Prohibition against set-off of taxes
b. Prohibition against issuance of an injunction to restrain
collection of taxes
XPTN: When in the opinion of the Court the collection may
jeopardize the interest of the government and/or taxpayer,
the Court at any stage of the proceeding may suspend the
said collection and require the taxpayer either to deposit the
amount claimed or to file a surety bond for not more than
double the amount with the Court.
TN: CTA cannot issue writ of injunction in the exercise of its
original jurisdiction; it can only in its appellate.
c. Presumption of correctness of assessments
2. Necessity theory
Taxation is a necessary burden to preserve the State sovereignty
and a means to give the citizenry an army to resist aggression, a
navy to defend its shores from invasion, a corps of civil servants
to serve, public improvements for the enjoyment of the citizenry,
and those which come within State‟s territory and facilities and
protection which a government is supposed to provide.
3. Benefits-protection theory (Symbiotic relationship)
Basis of taxation is found in the reciprocal duties of protection
and support between the State and its inhabitants. In return for
his contribution, the taxpayer receives the general advantages
and protection which the government affords the taxpayer and
his property.
Taxes are what we pay for a civilized society. Hence, despite the
natural reluctance to surrender part of one‟s hard-earned income,
every person who is able must contribute his share in the running
of the government and the latter, for its part, is expected to
respond in the form of tangible and intangible benefits intended
to improve the lives of the people and enhance their moral and
material values.
4. Jurisdiction over subjects and objects
Jurisdiction is a reason why citizens must provide support to the
state so the latter could continue to give protection. The basis or
rationale of taxation is also used to explain why taxation is
basically territorial in character because it is only within the
territorial boundaries of taxing authority where tax laws may be
enforced. This is so because it is only within the confines of its
territory that a country, state or sovereign may give protection.
“The power to tax involves the power to destroy” – J. Marshall
Power to tax includes the power to regulate even to the extent of
prohibition or destruction.
Describe the degree of vigor with which the taxing power may be
employed in order to raise revenue
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 support of the government. Therefore, it should be
exercised with caution to minimize injury to the proprietary rights of a
taxpayer. It must be exercised fairly, equally and uniformly, lest the
tax collector kill the “hen that lays the golden egg”.
Reconcile with “the power to tax is not a power to destroy
while the court sits” – J. Holmes
1. Imposition of a valid tax could not be judicially restrained merely
because it would prejudice the taxpayer‟s property
2. An illegal tax could be judicially declared invalid and should not
work to prejudice a taxpayer‟s property.
3. J. Marshall‟s view refers to a valid tax while J. Holmes view refers
to an invalid tax.
INHERENT AND CONSTITUTIONAL LIMITATIONS OF
TAXATION
Inherent Limitations
1. Public purpose
Right of taxation can only be used in aid of a public purpose. It
cannot be used for purely private purposes or for the exclusive
benefit of private persons
Reason: Power to tax exists for general welfare; hence, implicit in
its power is the limitation that it should be used only for public
purposes.
Not defined
It is an elastic concept that can be hammered to fit modern
standards; does not only pertain to purposes which are
traditionally viewed as essentially government functions but also
includes purposes designed to promote social justice.
Legislative prerogative
Power to determine whether the purpose is public or private
resides in Congress. However, this will not prevent court from
questioning propriety of statute on the ground that the law is not
for public purpose; but once settled that it is public, court may no
longer inquire.
Purpose is deemed public as long as ultimate result favors the
welfare of the public in general. It is the purpose, not the number
of persons benefited.
Cases:
So long as purpose is public, it does not matter whether the
agency through which the money is dispensed is public or private.
Imposing a capital recovery component on domestic sales of all
fertilizer grades and such exaction collected until adequate capital
was raised to make Planters Product, a private company, viable,
is invalid for not serving a public purpose as the ultimate
beneficiary was a private company.
2. Inherently legislative or non-delegability of taxing power
Only the legislature can exercise the power of taxes unless the
same is delegated by the Constitution or through a law which
does not violate the Constitution
XPTN:
a. Art. VI, Sec. 28(2) – Delegation of Tariff Powers to the
President
Congress may, by law, authorize the President to impose
tariff rates, import and export quotas, etc.
b. Art. X, Sec. 5
Each LGU shall have the power to create its own sources of
revenue and levy taxes, fees, and charges subject to such
guidelines and limitations as the Congress may provide,
consistent with the basic policy of local autonomy.
Page | 2
 ABAKADA Guro Party List vs. Ermita
 RA 9337 authorizing President to increase VAT rate
from 10% to 12% upon recommendation of Secretary
of Finance on existence of either two conditions, is
valid.
 No discretion would be exercised by President. Entire
operation or non-operation of 12% depends upon
factual matters outside control of executive. Also,
“shall” was used which connotes mandatory order and
is inconsistent with idea of discretion.
 In making recommendation, Secretary of Finance acts
as agent of legislative department; becomes means or
tool by which legislative policy is determined and
implemented.
Board of Assessment Appeals of Laguna vs. CTA
Power to tax may be delegated to LGUs. This means that
there may be delegated such measure of power to impose
and collect taxes as the legislature may deem expedient.
Basis: Power to create LGUs by implication confers upon it
the power to tax
c. Delegation of emergency powers to the President
d. Delegation to the President to enter into executive
agreements and to ratify tax treaties subject to the
concurrence by the Senate
e. When delegation relates merely to administrative
implementation
Osmena vs. Orbos
For valid delegation of power, it is essential that the law
delegating the power must be:
1. Complete in itself, that is, it must set forth the policy to
be executed by the delegate
2. It must fix a standard – limits of which are sufficiently
determinate or determinable – to which the delegate
must conform
 A standard defines legislative policy, marks out its
limits, and maps out its boundaries and specifies
the public agency to apply it
f. Delegation to the people at large
3. Territoriality or situs of taxation
Taxing power is limited to person and property within and subject
to its jurisdiction
Rules observed in fixing tax situs
1. Poll/capitation/community tax - Residence of taxpayer,
regardless of source of income or location of property
2. Property tax
a. Real property – where it is located, regardless if owner
is resident or non-resident
b. Personal property -
1. Tangible – where property is physically located
although the owner resides in another jurisdiction
2. Intangible – generally, domicile of the owner,
following mobilia sequentur personam
XPTN: (1) Where the intangible personal property
has acquired a business situs in another
jurisdiction and (2) when the law provides for the
situs of the subject of the tax
 Example: Shares of stock – situs is the state in
which they are permanently kept regardless of the
domicile of the owner or the state in which the
corporation was organized
Situs is in the Philippines
a. Franchise exercised in the Philippines
b. Shares of stock, obligations and bonds issued by
domestic corporation organized and constituted in
accordance with Philippine laws
c. Shares, obligations and bonds issued by foreign
corporation where 85% of its business is located
in the Philippines
d. Shares, obligations and bonds issued by foreign
corporation which has acquired business situs,
when such have been used in the furtherance of
business of foreign corporation
e. Shares/right in a partnership business or industry
established in the Philippines
XPTN: When the foreign country grants exemption or
does not impose taxes on intangible properties of
Filipino citizens
3. Excise tax – imposed on the exercise of a right or privilege;
situs is where the transaction was performed
a. Income tax
b. Donor‟s tax
c. Estate tax
4. Business taxes
a. Real – where property is located
b. Personal – where sale was perfected or consummated
c. VAT – where transaction is made; either where the
property is sold and consumed or where the service is
to be performed
Cases:
 Destination principle – goods and services are taxed only in
the country where these are consumed
 Cross border doctrine – no VAT shall be imposed to form
part of the cost of the goods destined for consumption
outside the territorial border of the taxing authority
 Hence, actual export of goods and services from Philippine
to a foreign country must be free of VAT while those
destined for use or consumption within the Philippines shall
be imposed with VAT
 Export processing zone, for tax purposes, are considered
foreign territory. Hence, sales to those inside this zone are
already taxed as exports.
4. International comity
Comity is respect accorded by nation to each other as co-equals.
Property or income of a foreign state or government may not be
the subject of taxation by another.
Basis: Sec. 2, Art. II, Constitution – GAPIL
Principle of Sovereign Equality among States
Finds its roots in the rule of par in parem non habet imperium
Case: By their voluntary act, nations may surrender some aspects
of their state power in exchange for greater benefits granted or
derived from a convention of pact.
Principle of comity entails an exchange in benefits.
5. Exemption of government entities, agencies and
instrumentalities
Properties of national government and LGUs are not subject to
tax. However, nothing can prevent Congress from decreeing that
even instrumentalities/agencies of government performing
governmental functions may be subject to tax.
Governmental functions Proprietary functions
Tax exempt Subject to tax
XPTN: Expressly taxed XPTN: Expressly exempted
GR: GOCCs perform proprietary functions; hence, subject to tax
XPTN: Sec. 27(c), NIRC, as amended
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation (PHIC)
4. Local water districts
Instrumentality of National government is exempt from
local taxation
 Real properties of MIAA are owned by Republic and thus
exempt from RPT
 Instrumentality is broader than GOCCs. While an
instrumentality may include GOCC, there may be an
instrumentality that will not qualify as GOCC
 MIAA is an instrumentality that is not a GOCC
 PFDA is exempt from RPT being an instrumentality but
exemption does not extend to portions that were leased to
taxable persons for their beneficial use
Philippine Reclamation Authority is exempt from RPT
Page | 3
 PRA is not a GOCC. Instead, it is an instrumentality vested with
corporate powers and performing an essential public service
pursuant to Admin Code. Being an incorporated government
instrumentality, it is exempt from payment of RPT.
PRA is not organized as stock or non-stock; not created
commercially and compete in the private market.
GR: Real property owned by Republic is exempt from RPT
XPTN: When beneficial use is granted to a taxable person
Doctrine of supremacy of National government over LGUs
No state or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from consummating
its federal responsibilities or even to seriously burden it in the
accomplishment of them. OW, mere creatures of State can defeat
national policies through extermination of what local authorities
may deem to be undesirable.
Cases:
 Sales made in Philippines to US Army and US Navy are made
to instrumentalities of US government, and therefore, not
subject to tax by Philippine government
 Law exempting from taxation property owned by Republic,
any province, city, municipality makes no distinction
between property held in a sovereign government or political
capacity and those possessed in a private proprietary and
patrimonial character and where the law does not
distinguish, neither may we.
 Tax on property of government, national or local, would
merely have the effect of taking money from one pocket to
put it in another pocket.
 Is public land reserved by President for warehousing in favor
of a GOCC and the warehouse thereon, exempt from RPT?
a. Land – Yes. Republic may form separate personalities –
GOCCs – and they are allowed to hold properties in
their own name. therefore, it may be stated that tax
exemption of property owned by Republic refers to
properties owned by government and by its agencies
which do not have separate and distinct personalities
(unincorporated entities). Land remains absolute
property of government. It did not part with its title by
reserving it.
b. Warehouse – No. Exemption does not extend to
improvements on public land made by preemptioners,
homesteaders, and other claimants, occupants, at their
own expense and these are taxable.
 RA 1394 states that, to be tax exempt, equipment and spare
parts should be “for the use of industries”, the coverage
herein should not be enlarged to include equipment and
spare parts for use in dispensing gasoline at retail. In this
case, pump parts are not used in petitioner‟s industry of
processing gasoline, or manufacturing lubricating oil, grease
and tin containers, hence, taxable.
Constitutional Limitations
1. Due process
2. Equal protection
3. Uniformity, equitability and progressivity of taxation (Sec. 28(1),
Art. VI)
4. Non-impairment of obligations of contracts
5. Non-imprisonment for non-payment of poll tax (Sec. 20, Art. III)
6. Appropriation, revenue, and tariff bills must originate exclusively
in HR
7. President‟s veto power on appropriation, revenue, tariff bills (Sec.
27, Art. VI)
8. Grant by Congress of authority to the President to fix tariff rates,
import and export quotas, etc. (Sec. 28(2), Art. VI)
9. Religious freedom
10. Tax exemption of properties actually, directly and exclusively
used for religious, charitable and educational purposes (Sec.
28(3), Art. VI)
11. Tax exemptions granted to non-stock, non-profit educational
institutions (Sec. 4(3) and (4), Art. XVI)
12. No public money or property used for a particular sect, priest,
religious minister, etc. (Sec. 29(1), Art. VI)
13. Grant of tax exemptions (Sec. 28(4), Art. VI)
14. Local taxation – power of local governments to create its own
sources of revenue and to levy taxes subject to Congressional
limitations (Sec. 6, Art. X)
15. Special fund – money collected for a special purpose shall be
considered a special fund
16. Non-impairment of SC‟s jurisdiction in tax cases (Sec. 5(2)(b), Art.
VIII)
1. Due process of law
 One may be deprived of property as long as the requirement
of due process – notice and hearing – have been complied
with
 Usually violated where the tax imposed is for a private
purpose, tax is imposed on property outside the state (extra-
territorial taxation) and arbitrary or oppressive methods are
used in assessing and collecting taxes
 May be invoked where a taxing statute is so arbitrary that it
finds no support in the Constitution, as where it can be
shown to amount to a confiscation of property.
Violations of due process clause
a. Tax amounts to confiscation of property
b. Subject is outside the jurisdiction of taxing authority
c. Purpose is other than public
d. Law applied retroactively imposes unjust and oppressive
taxes
e. Law is in violation of inherent limitations
MCIT is not violative of due process
Where 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 persuasive character.
Income Capital
Denotes a flow of wealth during a definite Fund or property
period of time existing at one
All the wealth which flows into the distinct point in
taxpayer other than a mere return of time
capital
Gain derived and severed from capital
 Requisites for income to be taxable
1. There must be gain
2. Gain must be realized or received
3. Gain must not be excluded by law or treaty from
taxation
 An income tax is arbitrary and confiscatory if it taxes capital
because capital is not income. MCIT is not tax on capital. It
is imposed on gross income which is arrived at by deducting
the cost of goods and other direct expenses from gross
sales. Capital is not being taxed.
 MCIT is not additional tax imposition; it is imposed in lieu of
normal net income tax.
Expanded Senior Citizens Act is constitutional
 It is a legitimate exercise of police power which is the most
essential, insistent and the least limitable of powers,
extending as it does to all the great public needs. It is the
power vested in the legislature to make, ordain, and
establish all manner of wholesome and reasonable laws,
statutes and ordinances as they shall judge to be for the
good and welfare of the commonwealth and of the subjects
of the same.
 For this reason, when conditions so demand as determined
by legislature, property rights must bow to the primacy of
police power because property rights, though sheltered by
due process, must yield to general welfare.
 Police power as an attribute to promote the common good
would be diluted considerably if on mere plea of petitioners
Page | 4
 that they will suffer loss of earnings and capital, the  Subject of every state ought to contribute towards the
questioned provision is invalidated. support of government in proportion to their respective
 Petitioners have not been able to show properly WON the abilities, that is, in proportion to the revenue which they
tax deduction scheme really works greatly to their respectively enjoy under the protection of the state
disadvantage. No financial report.  Progressive tax is entirely different from tax pyramiding
which is tax imposed on another tax. Taxpayer cannot be
2. Equal protection of laws compelled to pay a tax on the tax itself.
Constitution requires uniformity, not equality, in taxation
Test of uniformity is based on the requisites for valid classification Regressive taxes
under equal protection clause  Not really prohibited; constitutional provision should be
Equality Uniformity construed to mean simply that direct taxes are to be
means that tax shall be strictly means that personal things preferred and indirect taxes, as much as possible, should be
proportional to the relative belonging to the same class minimized.
value of the property shall be taxed at the same rate  Mandate to Congress is not to prescribe, but to evolve
Equality of taxation is Uniformity requires that all progressive tax system; merely directive, not justiciable
accomplished when the burden taxable property subjected to right.
of tax falls equally and tax shall be alike and this
impartially upon all persons and requirement is violated if 4. Non-impairment of contracts
property subject to it, so that particular kinds, species or Any law which enlarges, or in any manner changes the intention
no higher rate or greater levy items of property are selected of parties discoverable in it, necessarily impairs the contract itself.
in proportion to value is to bear whole burden of tax This only applies where it is claimed that the obligation of a
imposed upon one person/ while others who should be contract is impaired by a law of the state. It does not apply to
species/property than upon equally subjected to it, are left mere decisions of courts construing a contract.
others similarly situated or of untaxed.
like character Is tax exemption revocable?
 It depends. If grant of exemption does not constitute a
 Does not require equal rates of taxation on different classes contract, but is merely a spontaneous concession by the
nor prohibit unequal taxation as long as inequality is not legislature, not connected with any service or duty imposed,
based upon arbitrary classification it is revocable by the power which made the grant.
 Merely require that all persons subjected to such legislation Exemption does not confer a vested right; hence, it may be
shall be treated alike, under like circumstances and modified or repealed by legislature unless modification or
conditions, both in the privileges conferred and in liabilities repeal would impair the obligation of a contract.
imposed.  If basis of exemption is by virtue of a franchise granted by
 Equality among equals as determined according to a valid Congress, exemption is revocable. Constitution is explicit
classification. By classification is meant the grouping of that no franchise shall be granted except under the condition
persons or things similar to each other in certain particulars that such privilege shall be subject to amendment, alteration
and different from all others in these same particulars. or repeal by Congress.
 If exemption constitutes a binding contract and for valuable
Classifications, when proper consideration, government cannot unilaterally revoke.
Power to select subjects of taxation and apportion public burden
among them includes the power to make classifications Contractual tax exemption
In real sense of the term and where the non-impairment clause
Valid classification, requisites can rightly be invoked, are those agreed to by the taxing
1. Based on substantial distinction authority in contracts, such as those contained in government
2. Must apply both to present and future conditions bonds or debentures, lawfully entered into by them under
3. Must be germane to purposes of the law enabling laws in which the government, acting in its private
4. Must apply equally to all members of the same class capacity, sheds its cloak of authority and waives its governmental
immunity.
Cases:
 No discrimination or class legislation if a statute authorizes GR: Tax exemptions or incentives granted to or presently
the City of Manila to levy occupation taxes while that same enjoyed by natural or juridical persons are withdrawn upon
authority is withheld from other cities and municipalities. It effectivity of LGC.
is not for the court to decide what cities or municipalities XPTN: Entities expressly enumerated
should be so authorized. There is substantial distinction:
Professionals in Manila could expect more lucrative income Case:
than those in other cities or municipalities.  Not only are existing laws read into contracts in order to fix
 While it is true that Ormoc Sugar Company was the only obligations as between parties, but the reservation of
sugar central in Ormoc, still, the classification to be essential attributes of sovereign power is also read into
reasonable should be in terms applicable to future conditions contracts as a basic postulate of the legal order.
as well.  Contract clause has never been thought as a limitation on
the exercise of state‟s power of taxation save only where a
3. Uniformity, equitability and progressivity of taxation (Sec. tax exemption has been granted for a valid consideration.
28(1), Art. VI)
5. Non-imprisonment for non-payment of poll tax
Uniformity of taxation
 All taxable articles or kinds of property of same class shall be 6. Appropriation, revenue and tariff bills must originate
taxed at the same rate exclusively in House of Representatives
 Different articles may be taxed at different amounts Case: It is not the law but the revenue bill which is required to
provided that the rate is uniform on the same class originate exclusively in HR. What consti means is that the
everywhere, with all people and at all times. initiative for filing the revenue bills must come from the districts,
members of HR can be expected to be more sensitive to local
Progressive system of taxation needs and problems. Consti does not prohibit filing in Senate of a
 Rate goes up depending on the resources of person affected substitute bill in anticipation of its receipt of bill from HR, so long
 Built on the principle of taxpayer‟s ability to pay
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 as action by Senate as a body is withheld pending receipt of
House bill.
7. Presidential veto (Sec. 27(2), Art. VI)
Power to veto any particular item/s in an appropriation, revenue
or tariff bill but the veto shall not affect the item/s to which he
does not object.
8. Presidential power to fix tariff rates (Sec. 28(2), Art. VIII)
Authority, by law, to fix tariff rates, import and export quotas,
tonnage and wharfage dues and other duties or imposts
9. Freedom of religion (Sec. 5, Art. III)
Case: Municipal license to tax on the sale of bibles and religious
articles by non-stock, non-profit missionary organization at
minimal profit constitutes a curtailment of religious freedom and
worship which is guaranteed by Constitution. However, income of
such organization from any activity conducted for profit or from
any of their property, regardless of disposition made of such
income, is taxable.
10. Exemption from property tax of properties of religious
and educational institutions (Sec. 28(3), Art. VI)
 Charitable institutions, churches, parsonages or convents
appurtenant thereto, mosques and non-profit cemeteries,
and all lands, buildings, and improvements, actually, directly,
and exclusively used for religious, charitable or educational
purposes
 Reason: Cemeteries are exempt because of difficulty of
collecting tax and the impropriety of selling graves of the
dead to defray the expenses of carrying on the government
of the living.
 Churches, parsonages, convents, etc. are exempt because
such institutions perform work which would otherwise have
to be carried in by the public at the expense of taxpayers
 Charitable institutions – to be considered one, an
organization must meet the substantive test of charity
 They provide free goods and services to the public which
would otherwise fall on the shoulders of government.
Actually, directly and exclusively used (ADE)
 Case: What is exempted is the institution itself; those
exempted from real estate taxes are lands, buildings and
improvements actually, directly and exclusively used for
religious, charitable or educational purposes.
 If real property is used for one or more commercial
purposes, it is not exclusively used for exempted purposes.
What is meant by ADE use is the direct and immediate and
actual application of the property itself to the purposes for
which the charitable institution is organized. It is not the use
of the income that is determinative.
 Portions of the land leased to private entities as well as
those parts of hospital leased to private individuals are not
exempt from taxes.
 Case: Property is used for educational purposes, for
permanent residence of President and Director and their
families and commercial purposes because ground floor is
rented by a commercial establishment.
 Test of exemption is the use of property for purposes
mentioned in the Constitution.
 Exemption extends to facilities which are incidental to and
reasonably necessary for the accomplishment of main
purpose.
 While use of 2nd floor for residential purposes may find
justification under the concept of incidental use, which is
complimentary to main purpose – educational, the lease of
ground floor cannot by any stretch of imagination be
considered incidental to purposes of education. Half of
assessed tax should be returned to school.
 Case: Charitable institution does not lose its character as
such and its exemption simply because it derives income
from paying patients, whether out-patient or confined in the
hospital or receives subsidies from government, as long as
the money received is devoted or used to charitable object
which it is intended to achieve, and no money inures to the
private benefit of the persons managing or operating the
institution.
 Hospital which has a school for training nurses and midwifes
is still exempted from RPT. The school is a facility incidental
or reasonably necessary for the accomplishment of the
purposes of the hospital as students practice.
 Case: While YMCA is exempt from RPT, it is not exempt from
income tax on rentals from its property.
 To fall under the exempt corporations under the NIRC, it is
required that they operate exclusively for charitable or social
welfare purpose. In case an exempt institution earns income
from its profit activities, it will not lose its tax exemption.
However, its income from profit activities shall be subject to
income tax. For proprietary educational institutions and
hospitals, the rate shall be 10%.
11. Tax exemptions granted to non-stock, non-profit
educational institutions (Sec. 4(3) and (4), Art. XIV)
Case: ADE used refer to religious institutions cannot be applied
here. What should be applied is its literal interpretation which is
“solely”
Sec. 4(3), Art. XIV Sec. 28(3), Art. VI
Grantee Non-stock, non-profit Religious, educational,
educational institution charitable
Taxes covered Income tax, custom Property tax
duties, property tax
CIR vs. De La Salle University
 All types of income are not subject to tax.
 Constitution provides that all revenues and assets, land,
buildings, and improvements of NSNPEI actually, directly
and exclusively used for educational purpose shall be
exempt from tax.
 Insofar as NSNPEI is concerned, Sec. 30 of NIRC is declared
unconstitutional.
12. No public money or property used for a particular sect,
priest, religious minister, etc. (Sec. 29(1), Art. VI)
XPTN: Money may be set aside for a particular sect, priest or
religious minister or dignitaries if they are assigned to the
following institutions: leprosarium, orphanage, penal institution
and armed forces
13. Grant of tax exemptions (legal basis: Sec. 28(4), Art. VI)
 Inherent power to tax carries with it power to grant tax
exemptions
 In granting tax exemptions, an absolute majority vote of
members of Congress is required while in withdrawal of such
exemption, relative majority vote is sufficient
GR: Strict construction rule
 Simply means that if, after the application of all rules of
interpretation, for the purpose of ascertaining the intention
of legislature, a well-founded doubt exists, then the
ambiguity occurs which may be settled by rule of strict
construction
 Intent to grant exemption must be expressed in clear and
unmistakable terms, it can never be implied from language
that will admit of any other reasonable construction.
 If an exemption is found to exist, it must not be enlarged by
construction, since the reasonable presumption is that the
state has granted in express terms all it intended to grant at
all, and that unless the privilege is limited to the very terms
of the statute, the favor would be extended beyond dispute
in ordinary cases.
XPTNS:
1. Rule does not apply where the statute granting the
exemption expressly provides for a liberal construction
2. Does not apply to taxes relating to special cases and
affecting only special classes of persons
3. In case of property owned by the state or the city or other
public corporation, an express exemption should not be
construed with the same degree of strictness that applies to
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 exemptions contrary to the policy of the state since as to TAX AS DISTINGUISHED FROM OTHER FORMS OF EXACTIONS
such property, exemption is the rule and taxation the
exemption. Tax vs. Tariff
4. Exemptions to traditional exemptees
5. Exemptions in favor of government, its political subdivisions Tax Tariff
or instrumentalities
An all-embracing term to
6. If taxpayer falls within the purview of exemption by clear
include various kinds of A kind of tax imposed on
legislative intent
enforces contributions imposed articles which are traded
upon persons for the internationally
Tax exemption Tax amnesty
attainment of public purpose
Immunity from civil liability Immunity from all criminal and
only civil obligations arising from
Tax vs. Customs Duties
non-payment of taxes
An immunity or privilege, a General pardon given to all
freedom from a charge or taxpayers Tax Customs Duties
burden of which others are Those charged upon
Broader term which include not
subjected commodities on their being
only customs duties but other
Generally prospective Applies only to past tax imported in or exported from
taxes as well
periods, hence, retroactive the country

14. Local taxation – grant of power of taxation to LGUs (Sec. Taxes vs. Special Assessment (SA)
5, Art. X)
 Each LGU shall have power to create its own sources of Tax Special Assessment
revenues and to levy taxes, fees and charges subject to such Enforced proportional
guidelines and limitations as Congress may provide. Enforced proportional contribution from owners
 A municipal corporation unlike a sovereign state is clothed Definition contribution from persons of lands especially for
with inherent power of taxation and property those peculiarly benefited
 The charter or statute must plainly show an intent to confer by public improvements
that power or the municipality cannot assume it. Basis Based on necessity Based wholly on benefits
 Any doubt/ambiguity must be resolved against municipality Levied on:
 Congress cannot abolish the local government‟s power to tax 1. Persons
as it cannot abrogate what is expressly granted by the Subject Levied only on land
2. Property
fundamental law. The only authority conferred to Congress 3. Acts
is to provide the guidelines and limitations on local Exceptional both as to
government‟s exercise of the power to tax. Scope Has general application
time and locality
Not a personal liability of
LGUs power to tax is the most effective instrument to
Person person assessed; his
raise needed revenues Personal liability
liable liability is limited only to
This must always be upheld to avoid severe tax erosion. This is
the land involved
consistent with state policy to guarantee the autonomy of local
TN: Levy SA is an exercise of taxing power but the exercise of taxing
government and the objective of LGC that they enjoy genuine
power does not necessarily make the SA a tax.
and meaningful local autonomy.
Tax vs. License
15. Special Fund – Money collected for a special purpose shall
be considered a special fund (Sec. 29(3), Art, VI)
 All money collected on any tax levied for a special purpose Tax License Fee
shall be treated as a special fund and paid out for such Imposed for revenue Imposed for regulatory
Purpose
purpose only purposes purposes
 Case: Establishment and maintenance of OPSF is well within Imposed under the power Imposed under the police
Basis
that pervasive and non-waivable power and responsibility of of taxation power of the state
government to secure the physical and economic survival Limited to the cost of the
and well-being of community, that comprehensive sovereign license and the expenses
authority we designate as police power of the state. ] of police surveillance and
 Hence, while funds collected may be referred to as taxes, regulation
Amount No limit as to amount
they are exacted in the exercise of police power XPTN: License fees for
 While it is placed “trust liability account”, OPSF is segregated non-useful occupations;
from general fund and it remains under scrutiny and review wider discretion is given
of COA. This complies with the constitutional description of a to municipal corporations
special fund. Normally paid before
Time of Normally paid after the
commencement of
payment start of business
16. Exclusive appellate jurisdiction of SC over judgments of business
lower courts involving legality of taxes, imports, Effect of
Failure to pay does not Failure to pay makes
assessment fees, penalty non-
make the business illegal business illegal
payment
REQUISITES OF A VALID TAX TN: Imposition is a tax if primary purpose is to generate revenue; but
if regulation is primary, the fact that incidental revenue is also
1. Must be for public purpose obtained does not make imposition a tax
2. Rule on taxation should uniform
3. Either the person the property being taxed must be within the Cases:
jurisdiction of the taxing authority  In exacting universal charge through EPIRA, state‟s police power
4. That the assessment and collection be in consonance with the is invoked. Universal charge is not a tax.
due process clause  Coconut levy funds partake of nature of taxes; can only be used
5. The tax must not infringed the inherent and constitutional for public purposes
limitations of the power of taxation  Building permit is a regulatory imposition
Page | 7
 1. In processing application, building official sees to it that the burden thereof may be shifted or passed to
applicant conforms with standard requirements another
2. Clearances from various regulatory agencies may be Example: VAT, Excise tax, other percentage tax
required before building permit may be issued (OPT) and documentary stamp tax (DST)

Tax vs. Toll Specific vs. Ad valorem

Tax Toll Imposed and based on weight or volume capacity

Specific
Sum of money for the use Example: Tax on tobacco and petroleum
Enforced proportional of something, a Based on selling price or other specified value of
Definition contributions from consideration which is Ad valorem goods
persons or property paid for use of a property Example: Tax on automobiles
which is of a public nature Choice between ad valorem or specific depending
Mixed
Basis Demand of sovereignty Demand of proprietorship on the condition attached
Amount depends upon
the cost of construction or General vs. Special
Amount No limit as to amount
maintenance of public
improvement used General/
Imposed solely to raise revenue for government
May be imposed by Fiscal/
May be imposed only by Example: Income tax, donor‟s tax
Authority government or private Revenue
the government
individuals or entities Imposed and collected to achieve a particular
Special/ legitimate object of government
Tax vs. Penalty Regulatory/ Example: OPSF which was collected to protect
sumptuary local consumers by stabilizing and subsidizing
Tax Penalty domestic pump rates
Sanction imposed as
punishment for violation National vs. Local
Enforced proportional
of a law or acts deemed
Definition contributions from National Imposed by national government
injurious; violation of tax
persons and property
laws may give rise to Local Levied and collected by LGU
imposition of penalty
Designed to regulate Personal vs. Property
Purpose Intended to raise revenue
conduct
May be imposed by Fixed amount imposed on individuals
May be imposed only by Personal
Authority government or private Example: Community tax
government
individuals or entities Imposed on real and personal property in
Property proportion to its value
Tax vs. Debt Example: RPT
Taxes laid upon manufacture, sale or consumption
Tax Debt Excise or of commodities within the country; upon licenses
Based on law; does not Based on contract or Privilege to pursue certain occupations and upon corporate
Basis privileges (e.g. VAT)
depend upon consent judgment
Effect of Taxpayer may be
No imprisonment for Progressive vs. Regressive
non- imprisoned for his failure
failure to pay a debt
payment to pay the tax
May be payable in One whereby the rate increases as tax base
Mode of Generally payable in Progressive
money, property and increases (e.g. income tax)
payment money One where the tax rate decreases as tax base
services Regressive
Assignability Not assignable Can be assigned increases (VAT)
Tax rates are partly progressive and partly
Does not draw interest Draws interest if Mixed
Interest regressive
unless delinquent stipulated or delayed
Tax rates are fixed (in amount or in percentage)
Imposed by public Can be imposed by Proportionate
Authority on a flat tax base (e.g. real estate tax)
authority private individuals
Prescription Determined under NIRC Governed by Civil Code
DOCTRINES IN TAXATION
Cannot be set-off
Set-off XPTN: If both are due Can be set-off Construction and interpretation of tax laws, rules, and
and demandable regulations
Reason: Government and taxpayer are not mutually creditors and
debtors of each other; claim for taxes is not such a debt, demand, a. Tax laws – strictly against the state; liberally in favor of taxpayer
contract or judgment as is allowed to be set-off. GR: Taxes are burdens which must be endured by taxpayer;
TN: Debts are due to government in its corporate capacity while taxes must not be presumed to go beyond what the law expressly and
are due to the government in its sovereign capacity clearly declares
XPTN: Principle of separability and presumption of validity of tax
KINDS OF TAXES laws
Principle of separability: That a tax law is not rendered invalid by
Direct vs. Indirect one provision when there are other provisions which can be
imposed
Taxes wherein both tax liability as well as the b. Tax exemption and exclusion
impact or burden of the tax falls on the same GR: Strictissimi juris against taxpayer and liberally in favor of
Direct
person taxing authority
Example: Income tax, estate tax and donor‟s tax Must be able to point out a specific provision of the law
Indirect Taxes wherein tax liability falls on one person but exempting a taxpayer from the common burden
Page | 8
 XPTNS:
1. When the statute provides for a liberal construction
2. When special taxes relating to special cases and/or
taxpayers
3. Exemption of public properties
4. Exemption to charitable and educational institution or their
property
5. Exemption in favor of government political subdivisions or
instrumentality
6. Tax refund based on solutio indebiti
c. Tax rules and regulations
 Rules and regulations should be applied prospectively unless
legislative intention provides otherwise
Grounds for retroactive application of a revenue
ruling
1. Where the taxpayer deliberately misstates or omits
material facts from his return or any document required
of him by the BIR
2. Where the facts subsequently gathered by the BIR are
materially different from the facts in which the rulings
is based
3. Where the taxpayer acted in bad faith
 Reversal of a BIR Ruling favorable to a taxpayer would not
necessarily create a perpetual exemption in his favor for
after all, the government is never estopped from collecting
taxes because of the mistakes or errors on the part of its
agents
 Commissioner is not bound by the decisions of the previous
commissioners
 Examples: Disposal of idle lands are now subject to VAT
being incidental to corporate operations; exemptions of
exchange of properties without consideration i.e.
encroaching properties – changing boundaries, not anymore
exempted
d. Penal provisions of tax laws – Strictly against the
government; always in favor of the accused
e. Non-retroactive application to taxpayers
GR: Cannot be applied retroactively
XPTN: Provided it is expressly declared or is clearly the legislative
intent
Prospectivity of tax laws
GR: Tax laws are applicable only to present and future circumstances.
It should not be applied to past transaction. Otherwise, it is a violation
of the due process clause
XPTN: Tax laws may be applied retroactively provided it is expressly
declared clearly by legislative intent
Imprescriptibility of taxes
GR: Power to tax is imprescriptible as it is inherent in character, being
inherent, it therefore exists with the existence of the State and will
only cease upon the death of the State (power to tax itself can never
prescribe)
XPTN: But the administrative aspect will prescribe (collection,
assessment, right to refund will prescribe)
Double taxation
Means taxing twice for the same tax period the same thing or activity,
when it should be taxed but once, for the same purpose and with the
same kind of character of tax
Strict sense (Direct double taxation)
1. Same property must be taxed twice when it should be taxed once
2. Both taxes must be imposed on the same property or subject
matter
3. For the same purpose
4. By the same state, government, or taxing authority
5. Within the same territory, jurisdiction or taxing district
6. During the same taxing period
7. Of the same kind or character of tax
Broad sense (Indirect double taxation)
There is double taxation in the broad sense if any of the elements for
direct duplicate taxation is absent. But ultimately, same subject or
object being taxed twice must be present.
Ground for invalidating a tax law
Not double taxation but violation of equal protection clause
It violates the constitutional limitations of the power to tax
Modes of eliminating double taxation
1. Allowing reciprocal exemption either by law or by treaty
By entering into treaties; this is not automatic
Deutsche Bank vs. CIR
 Non-compliance with the 15-day for prior application under
the administrative issuance should not operate to
automatically divest entitlement to the tax treaty relief
specially in claims for refund. Basis is pacta sunt servanda
which requires good faith in the compliance of a treaty
entered into.
 Failure to make prior application for tax treaty relief does not
preclude availment.
 Petitioner applied, though belatedly, for a tax treaty relief, in
substantial compliance with the administrative issuance.
 Denial of the availment of tax relief for the failure of a
taxpayer to apply within the prescribed period under the
administrative issuance would impair the value of the tax
treaty. At most, the application for a tax treaty relief from
BIR should merely operate to confirm the entitlement of the
taxpayer to the relief. A state that has contracted valid
international obligations is bound to make in its legislations
those modifications that may be necessary to ensure the
fulfillment of the obligations undertaken. Thus, laws and
issuances must ensure that the reliefs granted under tax
treaties are accorded to the parties entitled thereto.
SC Johnson Case:
 To eliminate double taxation, tax treaty resorts to several
methods:
1. It sets out respective rights to tax of the state of source or
situs and of the state of residence with regard to certain
classes of income or capital
2. State of source is given a full or limited right to tax together
with the state of residence. Treaties make it incumbent upon
the state of residence to allow relief in order to avoid double
taxation.
 2 methods of relief:
1. Exemption method – the income/capital which is taxable in
the state of source/situs is exempted in the state of
residence, although in some instances, it may be taken into
account in determining the rate of tax applicable to
taxpayer‟s remaining income or capital
2. Credit method – although income/capital which is taxed in
the state of source or situs is still taxable in the state of
residence, the tax paid in the former is credited against tax
levied in the latter. Tax paid in state of source is credited
against the tax levied in the state of residence.
 In negotiating tax treaties, the underlying rationale for
reducing the tax rate is that the Philippines will give up a
part of the tax in the expectation that the tax given up for
the particular investment is not taxed by other country,
 SC Johnson must prove that the RP-US Tax Treaty grants
similar tax reliefs to residents of US in respect of taxes
imposable upon royalties earned from sources within the
Philippines as those allowed to their German counterparts
under RP-German Tax Treaty.
 Ultimate reason for avoiding double taxation is to encourage
foreign investors to invest in the Philippines
 Purpose of 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/subjects of contracting party may enjoy the
Page | 9
 privileges accorded by either party to those of the most
favored nation.
 Entitlement of 10% rate by US firms despite the absence of
matching credit would derogate from the design behind the
most favored nation clause to grant equality of international
treatment since the tax burden laid upon the income of
investor is not the same in two countries. Similarity in the
circumstances is a condition for the enjoyment of most
favored nation treatment.
2. Allowance of tax credit for foreign taxes paid
Taxes paid abroad are allowed as deductions from the local taxes
that are due to be paid
3. Allowance of deduction for foreign taxes paid
Instead of looking at taxes due and payable, deductions are made
from the taxable income
4. Reduction of Philippine tax rate
Imbedded in the tax law, such as tax sparing rule
Escape from taxation
1. Shifting of tax burden
Process by which the burden of a tax is transferred from the
statutory taxpayer or the one whom the tax was assessed or
imposed to another without violating the law
Impact of taxation (liability) is the point on which a tax is
originally imposed
Incidence of taxation (burden) is that point on which the tax
burden finally rests or settles down.
Ways of shifting the tax burden
1. Forward shifting – when the burden of the tax is transferred from
a factor of production through the factors of distribution until it
finally settles on the ultimate purchaser or consumer
2. Backward shifting – when the burden of tax is transferred from
consumer or purchaser through the factors of distribution to the
factors of production
3. Onward shifting – when the tax is shifted two or more times
either forward or backward
TN: Only indirect taxes may be shifted.
2. Tax avoidance
It is the exploitation of legally permissible alternative tax rates or
methods of assessing taxable property or income in order to
avoid or reduce tax liability. This should be used by taxpayer in
good faith and at arms length.
Example: When taxpayer avails of deductions allowed by law.
3. Tax evasion
Connotes fraud by using pretenses or forbidden devices to lessen
or defeat taxes
A scheme used outside of those lawful means and when availed
of, it usually subjects the taxpayer to further or additional civil or
criminal liabilities.
Aka “tax dodging”
3 Factors to be considered
1. End to be achieved – payment of less taxes than that known
by taxpayer to be legally due or non-payment of a tax when
it is shown that a tax is due
2. Evil or deliberate state of mind
3. Course of action which is unlawful
Substance over form doctrine
Provides that taxability is determined by the reality of the transaction
rather than the appearance which may be contrived
Exemption from taxation
Grant of immunity, express or implied, to particular persons or
corporations from the obligation to pay taxes
a. Broad sense – tax does not apply to all persons in the jurisdiction
of the taxing authority
b. Narrow sense – grant of immunity, express or implied, to a
particular person or entity, from a tax on property or excise tax
which persons/entity are generally obliged to pay
Nature of tax exemption
1. Mere personal privileges to the grantees
2. Generally revocable by the government unless founded on
contract which is protected by the non-impairment clause
3. Implies a waiver on the part of government of its right to collect
what otherwise would be due
4. Not necessarily discriminatory so long as the exemption has a
rational basis
Kinds of tax exemption
a. As to source
1. Constitutional – exemption originates from the Constitution
2. Statutory – emanating from legislation
3. Contractual – based on contractual stipulation
4. Treaty – based on treaty provisions
5. Ordinance – based on an ordinance exempting payment of
local government taxes
b. As to manner of creation
1. Express – expressly granted by organic or statute law
2. Implied – whenever particular persons, properties, or excises
are deemed exempt as they fall outside the scope of the
taxing provision
c. As to scope of extent
1. Total – when certain persons, property or transactions are
exempted from all taxes
2. Partial – When certain persons, property or transactions are
exempted from certain taxes
d. As to object
1. Personal – those granted directly in favor of such persons as
are within the contemplation of the law granting the
exemption
2. Impersonal – those granted directly in favor of a certain
class of property
Rationale behind tax exemptions
1. Public interest will be served by the exemption allowed
2. Such public benefit or interest is sufficient to offset the monetary
loss entailed in the grant of the exemption
Grounds of tax exemption
1. Contract
2. Some ground of public policy
3. Treaty created on grounds of reciprocity or to lessen the rigors of
international double or multiple taxation
Revocation of tax exemption
Since taxation is the rule and exemption therefrom is the exception,
the exemption may be withdrawn at the pleasure of taxing authority.
Cases:
 SC noted that the LGC unequivocally withdrew exemptions from
payments of RPT granted to natural or juridical persons, including
GOCCs. Since MCIAA is a GOCC, it follows that its exemption
granted under a charter prior to the LGC has been withdrawn.
 SC noted that the “in lieu of all taxes” clause in its charter has
become functus officio with the abolition of franchise tax on
telecommunication companies in accordance with the VAT law.
 SC held that there is no vested right in a tax exemption and more
so when the latest expression of legislative intent renders its
continuance doubtful.
XPTN: Exemption cannot be withdrawn if it was granted to
private parties based on material consideration of a mutual
nature, which then becomes contractual and thus covered by
non-impairment clause
 SC held that the salaries of members of the judiciary are subject
to income tax as applied to all taxpayers. Payment of income tax
by justices and judges do not fall within the constitutional
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 protection against decrease of their salaries during their
continuance in office.
Equitable recoupment
Means that when the refund of a tax illegally or erroneously collected
or overpaid by a taxpayer is barred by the statute of limitation and a
tax is being presently assessed against said taxpayer, said present tax
may be recouped or set off against the tax, the refund of which has
been barred. Same is true if it was the government.
Case: This doctrine is not applicable in this jurisdiction in light of the
lifeblood theory.
Prohibition on compensation and set-off
Taxes cannot be the subject of compensation because the government
and taxpayer are not mutually creditors and debtors of each other. A
claim for taxes is not such a debt, demand, contract or judgment as is
allowed to be set-off.
There can no off-setting of taxes against the claims that the taxpayer
may have against the government. A person cannot refuse to pay
taxes on the ground that the government owes him an amount equal
to or greater than the tax being collected.
Taxes cannot be the subject of set-off because they are not in the
nature of contracts between parties but grow out of a duty to, and, are
positive acts, of the Government, to the making and enforcing of
which, the personal consent of taxpayer is not required
XPTN: Taxes and taxpayer‟s claim against government are both
overdue, demandable, and fully liquidated – compensation may take
place. This should only apply when case involves application of solutio
indebiti or local government taxes.
Compromise and tax amnesty
Compromise
Allowed and enforceable when the subject matter thereof is not
prohibited from being compromised and the person entering into it is
duly authorized to do so. In fact, under the Tax Code, payment of
internal revenue taxes may be compromised on the grounds of
doubtful validity of the assessment or financial incapacity.
Tax amnesty
A general pardon or intentional overlooking by the State of its
authority to impose penalties on person otherwise guilty of evasion or
violation of a revenue or tax
Tax amnesty Tax exemption
Immunity from all criminal, civil
and administrative liabilities
Immunity from civil liability only
arising from non-payment of
taxes
Applies only to past tax periods Has prospective application
Tax condonation/remission
It is equivalent and is in the nature of a tax exemption. Hence, it is a
grant of immunity, express or implied, to particular persons or
corporations from the obligation to pay taxes.
Case:
Tax amnesty is a general pardon or intentional overlooking by the
State of its authority to impose penalties on persons otherwise guilty
of evasion or violation of a revenue or tax law. It partakes of an
absolute forgiveness or waiver by the government of its right to collect
what is due it and to give tax evaders who wish to relent a chance to
start with a clean slate. A tax amnesty, much like a tax exemption, is
never favored nor presumed in law. The grant of a tax amnesty,
similar to a tax exemption, must be construed strictly against the
taxpayer and liberally in favor of the taxing authority.
Amnesty taxpayers may immediately enjoy privileges and immunities
under tax amnesty law, provided they fulfill the suspensive conditions
imposed therein.
NATIONAL TAXATION
(National Internal Revenue Code of 1997, as amended by RA
10963 or the Tax Reform for Acceleration and Inclusion Law)
TAXING AUTHORITY
Jurisdiction, power, and functions of the Commissioner of
Internal Revenue
Interpreting tax laws and deciding tax cases
Power to interpret the Tax Code and other tax laws shall be under the
exclusive and original jurisdiction of CIR, subject to review by
Secretary of Finance.
Power to decide disputed assessment, refunds of internal revenue
taxes, fees or other charges, penalties imposed in relation thereto, or
other matters arising under Tax Code or other laws administered by
BIR is vested in CIR, subject to the exclusive appellate jurisdiction of
CTA.
Non-retroactivity of rulings
GR: Rulings and circulars, rules and regulations promulgated by the
CIR may be applied retroactively
XPTN: If application will be prejudicial to the taxpayers
XPTN to XPTN:
1. Where the taxpayer deliberately misstates or omits material facts
from his return or any document required of him by the BIR
2. Where the facts subsequently gathered by the BIR are materially
different from the facts on which the ruling is based
3. Where the taxpayer acted in bad faith (NIRC)
4. Where the nullity of the issuance was declared by Courts and not
by the CIR (Case)
TN: Non-retroactivity principle does not apply when the ruling involved
is null and void for being contrary to law.
Rule-making authority of the Secretary of Finance
Secretary of Finance, upon recommendation of CIR, shall promulgate
all needful rules and regulations for the enforcement of tax laws.
INCOME TAX
Definition, nature, and general principles
Income tax – tax on all yearly profits arising from property,
professions, trades and offices
Nature of income tax
An excise tax and not a tax on property
It is levied upon the privilege of receiving income or profit.
General principles of income taxation
1. RC – within and outside the Philippines
2. NRC – within only
3. RA and NRA – within only
4. DC – within and outside
5. FC and NRFC – within only
Criteria in imposing Philippine income tax
1. Citizenship or nationality principle – Citizen of the Philippines is
subject to Philippine income tax (a) on his worldwide income, if
he resides in the Philippines (b) only on his Philippine source
income, if he qualifies as a non-resident citizen where his foreign-
source income shall be tax-exempt.
2. Residence or domicile principle – An alien is subject to Philippine
income tax because of his residence in the Philippines. A resident
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 alien is liable to pay Philippine income tax only from his income TN: Taxpayer shall submit proof to Commissioner to show his
from Philippine sources but is tax-exempt from foreign-source intention of leaving the Philippines to reside permanently abroad or to
income return to and reside in the Philippines.
3. Source of income principle – An alien is subject to Philippine
income tax because he derives income from sources within the Resident alien
Philippines. Thus, a non-resident alien or non-resident foreign Individual whose residence is within the Philippines and who is not a
corporation is liable to pay Philippine income tax on income from citizen
sources within the Philippines
Non-resident alien
Types of Philippine income taxes Test to determine if ETB: Whether his total aggregate stay for a
1. Graduated income tax on individuals taxable year exceeds 180 days
2. Normal corporate income tax a. If 181 days – ETB
3. Minimum corporate income tax b. If 180 days and below – NETB
4. Special income tax on certain corporation
5. Capital gains tax on sale or exchange of unlisted shares of stock Domestic corporations
of a domestic corporation classified as a capital asset One created or organized in the Philippines or under its laws
6. Capital gains tax on sale or exchange of real property located in
the Philippines and classified as a capital asset Foreign corporation
7. Final withholding tax on certain passive investment incomes One created or organized under the laws of a foreign country
8. Fringe benefit tax
9. Branch profit remittance tax Resident foreign corporation
10. Tax on improperly accumulated earnings Foreign corporation engaged in trade or business within the Philippines
or having an office or place of business therein
Taxable period
1. Calendar period or calendar year – an accounting period which Non-resident foreign corporation
starts from January 1 and ends on December 31 Foreign corporation not engaged in trade or business within the
2. Fiscal period or fiscal year – an accounting period of 12 months Philippines and not having any office or place of business therein
ending on the last day of the month other than December 31 Joint venture and consortium
3. Short period – an accounting period wherein income shall be Taxable
computed on the basis of a period less than 12 months XPTN: Joint venture or consortium undertaking construction projects or
engaging in petroleum, coal, geothermal and other energy operations
Kinds of taxpayers pursuant to an operating consortium agreement under a service
Individuals Corporations contract with the government.
1. Citizens 1. DC
1. RC 2. FC Income
2. NRC a. RFC
2. Aliens b. NRFC Definition and nature
a. RA 3. Partnership
b. NRA-ETB a. Taxable partnership Income
c. NRA-NETB b. Exempt partnership Means the gain derived from capital, from labor, or from both
3. Estates and Trusts 1. General combined, including profits gained from dealings in property or as well
a. Revocable trust Professional as any asset clearly realized whether earned or not
b. Irrevocable trust Partnership (GPP)
2. Joint venture or Amount of money coming to a person or corporation within a specified
consortium time, whether as payment for services, interest or profit from
undertaking investment
construction
activity or It refers to all wealth which flows into the taxpayer other than as a
engaged in mere return on capital. (RR No.2) Thus, as stated in one case, mere
petroleum advance in the value of property or a corporation in no sense
operations with constitutes the income specified in the law. Such advance constitutes
operating contract and can be treated merely as an increase in capital.
with government
Nature of income
Resident Citizen Income is that flow of services rendered by that capital by the
Citizen of the Philippines without the intention of transferring his payment of money from it or any other benefit rendered by a fund of
physical presence abroad whether to stay permanently or temporarily capital in relation to such fund through a period of time. Income is the
as an overseas contract worker “fruit” of capital or labor severed from the tree.

Non-Resident Citizen Capital Income

Citizen of the Philippines who: Fund or property existing at one Denotes a flow of wealth during
1. Establishes to the satisfaction of the Commissioner the fact of his distinct point in time while a definite period of time
physical presence abroad with intention to reside therein A fund A flow
2. Leaves the Philippines during the taxable year to reside abroad wealth Service of wealth
either as an immigrant or for employment on a permanent basis
3. Works and derives income from abroad and whose employment
Stock dividends
thereat requires him to be physically present abroad most of the
Generally, stock dividends represent capital and do not constitute as
time during the taxable year
income to its recipient. Mere issuance thereof is not yet subject to
“most of the time” – contract worker must have been outside the
income tax as they are nothing but an enrichment through increase in
Philippines for not less than 183 days during such taxable year
value of capital investment. Such are considered unrealized gain and
4. Has been previously considered a non-resident citizen and who
cannot be subjected to income tax until that gain has been realized.
arrives in the Philippines at any time during the taxable year to
reside permanently in the Philippines with respect to his income
However, it constitutes income if a corporation redeems stock issued
derived from sources abroad
so as to make a distribution. This is equivalent to the distribution of a
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taxable dividend the amount so distributed in the redemption
considered as taxable income.
Damages
Compensation for physical injuries/disability or death, or for causes
beyond the control of the employee and only those actually resulting
therefrom are excluded from computation of the gross income.
Attorney‟s fees and costs of suit are only excluded if the amount
awarded is equivalent to the actual expense incurred. This shall not be
considered as income and not taxable because it is a mere
reimbursement of the expense. Any amount in excess of the actual
expense is considered taxable income. Moral, exemplary, and any
other type of damages are taxable.
ONLY ACTUAL DAMAGES ARE EXCLUDED. Other types of damages are
INCLUDED in the GI and TAXABLE.
Rule: Any payment for reparation of damage is excluded;
When income is taxable
Income, gain or profit is subject to income tax when following
conditions are present:
1. There is income, gain or profit (existence of income)
For tax purposes, income does not only refer to money a
taxpayer receives but includes anything of value
2. Income, gain or profit is not exempt from income tax
An income may have other elements but the law may specifically
exclude the same from income for tax purposes, i.e., certain
passive incomes excluded from income as they are already
subject to final taxes
3. Income, gain or profit is received or realized during the taxable
year (realization of income)
Even if there is material gain, not excluded by law, if the material
gain is not yet realized by taxpayer, then there is no income to
speak of
When income considered received for income tax purposes
1. Actual receipt – If actually or physically received by taxpayer
2. Constructive receipt – if constructively received by taxpayer
Example: Deposits in banks, interest coupons, undistributed share
of partner in profits of a general partnership
Constructive receipt doctrine
Provides that an item is treated as income when it is credited to the
account of taxpayer, or made unconditionally available to taxpayer; no
physical possession is required.
Conditions to recognize income
1. Earning process is complete or virtually complete
2. Exchange has taken place
Tests in determining whether income is earned for tax
purposes
1. Realization test
Elements:
1. That the earning process must be complete or virtually
complete
2. That there was an exchange or transaction
There is no taxable income until there is a separation from capital
of something of exchangeable value, thereby supplying the
realization or transmutation which would result in the receipt of
income.
Income is not deemed realized until the fruit has been plucked
from the tree.
2. Economic benefit test, doctrine of proprietary interest
Where stock, options, shares of stock or other assets are
transferred by an employer to an employee to secure better
services they are plainly compensation which is taxable income.
3. Severance test
More or less the same with realization test
There is separation of capital from something of exchangeable
value and that the transaction must be complete.
Tax-free exchanges
No gain or loss shall be recognized if in pursuance of a plan of merger
or consolidation:
1. A corporation which is a party to a merger or consolidation
exchanges property solely for stock in a corporation, which is a
party to the merger or consolidation (property for stock)
2. A shareholder exchanges stock in a corporation, which is a party
to a merger or consolidation solely for the stock of another
corporation also a party to a merger or consolidation (stock for
stock)
3. A security holder of a corporation, which is a party to a merger or
consolidation, exchanges his securities in such corporation, solely
for stock or securities in another corporation, a party to the
merger or consolidation (security for stock)
4. If property is transferred to a corporation by a person in
exchange for stock or unit of participation in such a corporation of
which as a result of such exchange, said person, alone or
together with others, not exceeding four (4) persons gains control
of said corporation provided that stocks issued for services shall
not be considered as issued in return for property. (estate
planning or transfer of a controlled corporation)
Situs of income taxation
1. From sources within the Philippines: all kinds of taxpayers are
subject to income tax on income derived from sources within the
Philippines.
2. From sources without the Philippines: only Resident Citizens and
Domestic Corporations are liable to income tax on income derived
from sources without the Philippines
3. Income partly within and partly without the Philippines: Taxable
income attributable to sources within the Philippines may be
determined by processes or formulas of general apportionment
prescribed by the Secretary of Finance.
Gross income
Definition
Except when otherwise provided, all income derived from whatever
source, including, but not limited to, the following items:
1. Compensation for services in whatever form paid, including, but
not limited to fees, salaries, wages, commissions and similar
items
2. Gross income derived from the conduct of trade or business from
the conduct of trade or business or the exercise of a profession
3. Gains derived from dealings in property
4. Interests
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partner‟s distributive share from the net income of GPP
TN: List is not exclusive.
Concept of income from whatever source derived
“all income from whatever source”
Encompasses all accessions to wealth, clearly realized and over which
the taxpayers have complete dominion
All income not expressly excluded or exempted from the class of
taxable income, irrespective of the voluntary or involuntary action of
the taxpayer in producing the income
Includes income derived for illegal source
Gross income vs. net income vs. taxable income
Gross income All income minus exclusions
All income subject to income tax
Taxable income All pertinent items of gross income less
deductions, if any, authorized for such types of
income by NIRC or other special laws
Net income Gross income less allowable deductions
Classification of income subject to tax
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1. Compensation income
3. Professional income
Compensation
All remuneration for services performed by an employee for his Refers to fees received by a professional from the practice of his
employer under employer-employee relationship unless specifically profession provided that there is no employer-employee relationship
excluded by Tax Code between him and his clients
May be paid in money, or in some medium other than money, such as Includes fees derived from engaging in an endeavor requiring special
stocks, bonds, or other forms of property training as a professional as a means of livelihood, which includes, but
is not limited to, the fees of CPAs, doctors, lawyers, engineers and the
Items not included in compensation income like
1. For agricultural labor paid entirely in products of the farm where
the labor is performed Difference with compensation income
2. For domestic service in a private home Lies with existence or absence of employer-employee relationship
3. For casual labor not in the course of the employer‟s trade or If there is – compensation income
business If none – professional income
4. For services by a citizen or resident of the Philippines for a foreign
government or an international organization 4. Income from business

TN: Compensation income earners are expressly excluded from Business income
availing of deductions under Sec. 34. Refers to gross income derived from the conduct of trade or business
or the exercise of a profession
2. Fringe benefits
5. Income from dealings in property
Any good, service or other benefit furnished or granted in cash or in
kind by an employer to an individual employee (except rank and file Only gains derived from the sale or exchange of property considered
employees) such as, but not limited to, the following: as ordinary assets
a. Housing
b. Expense account Types of Properties
c. Vehicle of any kind 1. Ordinary assets
d. Household personnel, such as maid, driver and others 2. Capital assets
e. Interest on loan at less than market rate to the extent of the
difference between the market rate and actual rate granted Ordinary assets
f. Membership fees, dues and other expenses borne by the 1. Stock in trade of the taxpayer or other property of a kind which
employer for the employee in social and athletic clubs or would properly be included in the inventory of the taxpayer if on
other similar organizations hand at the close of the taxable year
g. Expenses for foreign travel 2. Property held by the taxpayer primarily for sale to customers in
h. Holiday and vacation expenses the ordinary course of his trade or business
i. Educational assistance to the employee or his dependents 3. Property used in trade or business of a character that is subject
j. Life or health insurance and other non-life insurance to allowance for depreciation
premiums or similar amounts in excess of what the law 4. Real property used in trade or business of the taxpayer
allows
For those engaged in real estate business, following are
Rationale ordinary assets:
Employer shall assume the fringe benefits tax imposed on the taxable 1. All real properties acquired by real estate dealer
fringe benefits of the managerial or supervisory employees but 2. All real properties acquired by real estate developer, whether
employer can deduct such fringe benefit tax as a business expense developed or undeveloped
from its gross income. As for rank-and-file, their fringe benefits shall 3. All real properties held for sale or lease in the ordinary course of
be treated as part of their compensation income, which must be business or which would be properly be included in the inventory
withheld and deducted by his employer from the compensation income 4. All real properties acquired for lease/rent
of employee. 5. All real properties acquired in the ordinary course of business by
a taxpayer habitually engaged in the sale of real estate
Fringe benefit tax TN: Change of nature from ordinary to capital may happen when the
35% FWT imposed on the grossed-up monetary value of the fringe real estate business transfers the property to an ordinary person.
benefit furnished or granted to employee except rank and file
employees by employer Capital assets
Property held by taxpayer whether or not connected with his trade or
Grossed-up monetary value of the fringe benefit business, except those enumerated as ordinary assets
Represents the whole amount of income received by the employee
which includes the net amount of money or net monetary value of Types of gains from dealings in property
property which has been received plus the amount of the fringe 1. Ordinary gain vs. capital gain
benefit tax thereon otherwise due from the employee, but paid by 2. Actual gain vs. presumed gain
employer for and in behalf of his employee 3. Long-term capital gain vs. short-term capital gain
To get grossed-up, divide actual monetary value of fringe benefit by 4. Net capital gain, net capital loss
65%
XPTN: Employees of: Ordinary gain vs. Capital gain
1. NRA-NETB – 75%
2. RHQ, ROHQ – 85% Ordinary gain Capital gain
3. OBU – 85% Any gain from the sale or Gains realized from the sale,
4. Petroleum Service Contractors – 85% exchange of property which is not exchange, or other disposition of
XPTN to XPTN: Employees of RHQ, ROHQ, OBU, and petroleum a capital asset or property the properties of a taxpayer
service contractors who registered with SEC after Jan. 1, 2018. classified as capital assets
They no longer enjoy preferential tax treatment. Derived from property used in Derived from property not used in
trade or business trade or business WON connected
Fringe benefits and De Minimis benefits – see codals thereto
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Ordinary gains are not adjusted Some types of capital gains are NOLCO vs. NOCOLCO
by the holding period adjusted by the holding period
Only ordinary losses may be Ordinary losses may be deducted NOLCO NOCOLCO
deduced from ordinary gains from certain types of capital gains Concept in ordinary income Concept in capital gains taxation
Concept of net operating loss Concept of net capital loss taxation
carryover (NOLCO) applies to carryover (NOCOLCO) applies to Enjoyed by corporations, not Enjoyed by individuals, not
ordinary gains taxation capital gains taxation individuals corporations
Deductions are usually allowed Generally, no deductions are May be availed over a period of 3 May be enjoyed of only during
for ordinary gains allowed from capital gains years succeeding year
Ordinary gains are subject to the Capital gains are subject to final
graduated rates or corporate taxes Will be discussed in full for each type of taxpayer
income tax rate as the case may
be 6. Passive investment income
Ordinary income is to be included Income from capital gains tax are
in the annual income tax return not included in the annual income Passive income
tax return Income derived from any activity in which the taxpayer does not
materially participate
Actual gain vs. Presumed gain 1. Interest income – amount of compensation paid for the use of
money or forbearance from such use
Actual gain Presumed gain 2. Dividend income – any distribution made by a corporation to its
There is actual gain whenever an There is presumed gain whenever shareholders out of its earnings or profits and payable to its
individual or corporation sold an individual sold real property shareholders, whether in money or in other property
shares of stock treated as capital treated as a capital asset located Taxable at the time of their declaration by the corporation, and
asset in the Philippines or a corporation not at the time of actual payment of dividends, since dividend
sold land/building treated as a income is taxable whether actually or constructively received
capital asset located in the a. Cash dividend – taxable
Philippines b. Property dividend – taxable
Actual gain arrived at by Presumed gain does not consider c. Stock dividend – not taxable; it only represents the transfer
deducting the cost of adjusted the cost of the property sold of surplus to capital account and, as such, is not subject to
basis of the property sold from income tax
amount realized XPTN:
1. Change in the stockholder‟s equity, right or interest in
Short-term capital gain vs. Long-term capital gain the net assets of the corporation
2. Recipient is other than the shareholder
Short-term capital gain Long-term capital gain 3. Cancellation or redemption of shares of stock
4. Distribution of treasury stocks
If capital asset has been held for If capital asset has been held for
not more than 12 months more than 12 months 5. Dividends declared in the guise of treasury stock
dividend to avoid the effects of income taxation
6. Different classes of stocks were issued
Holding period
d. Liquidating dividend – taxable; where a corporation
In case of a taxpayer other than a corporation, the following
distributes all of its property or assets in complete liquidation
percentages of the gain upon the sale or exchange of a capital asset
or dissolution, the gain realized from the transaction by
shall be taken into account in computing net capital gain:
stockholder, whether individual or corporate, is taxable
1. 100% if the capital asset has been held for not more than 12
income or deductible loss
months
3. Royalty income – any payment of any kind received as
2. 50% if the capital asset has been held for more than 12 months
consideration for the use of or right to use any patent, trademark,
design or model, secret formula or process, industrial commercial
Capital loss limitation rule
or scientific equipment, information concerning industrial,
Losses from sales or exchanges of capital assets shall be allowed to be
commercial or scientific experience
deducted only to the extent of gains from such sales or exchanges.
4. Rental income – refers to amount or compensation paid for the
IOW, capital loss can be deducted from capital gains only; not allowed
use or enjoyment of a thing or a right and implies a fixed sum or
to be deducted from ordinary gains.
property amounting to a fixed sum to be paid at a stated time for
XPTN: If a bank or trust company incorporated under the laws of the
the use of the property. It includes all amount or property
Philippines, a substantial part of whose business is the receipt of
received from the lease contract, whether used in business or not
deposits, sells any bond, debenture, note or certificate or other
evidence of indebtedness issued by a corporation/government, with
7. Annuities, proceeds from life insurance or other types of
interest coupons or in registered form, any loss resulting from such
insurance
sale shall not be subject to the foregoing limitation and shall not be
included in determining the applicability of such limitation to other
Annuity
losses.
Refers to the periodic installment payments of income or pension by
insurance companies during the life of a person or for a guaranteed
Net capital loss carry-over rule (NOCOLCO)
fixed period of time, whichever is longer, in consideration of capital
If any taxpayer, other than a corporation, sustains in any taxable year
paid by him. The portion of proceeds from insurance that represent a
a net capital loss, such loss (in an amount not in excess of the net
mere return of the premiums is not taxable while the portion that
income for such year) shall be treated in the succeeding taxable year
represents the interests is taxable.
as a loss from the sale or exchange of a capital asset held for not more
than 12 months.
8. Prizes and awards
IMPT: Capital limitation rule applies to both individual and corporate
Refers to amount of money in cash or in kind received by chance or
taxpayers but NOCOLCO only applies to individuals.
through luck
Generally taxable except if specifically mentioned under the exclusions
from the computation of gross income

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9. Pensions, retirement benefit or separation pay ii. Taxpayers who may avail

Pensions All taxpayers can avail of exclusions because excluded receipts are not
Refers to amount of money received in lump sum or on staggered considered as income for tax purposes.
basis in consideration of services rendered given after an individual
reaches the age of retirement iii. Distinguished from deductions and tax credits
Generally taxable to the extent of the amount received, except if there
is BIR approved pension plan Exclusions vs. Deductions
Exclusions Deductions
Separation pay Flow of wealth to the taxpayer Amounts which the law allows to
May or may not be taxable depending on the voluntariness or which is not treated as part of be subtracted from gross income
involuntariness of the cause of separation gross income because it is in order to arrive at net income
exempted or it does not come
10. Income from any source within the definition of income

Encompasses all accessions to wealth, clearly realized, and over which Exclusions vs. Deductions vs. Tax Credits
the taxpayers have complete dominion.
Includes all income not expressly excluded or exempted from class of Exclusions Deductions Tax credits
taxable income, irrespective of voluntary or involuntary action of Amounts that are not Amounts subtracted Amounts subtracted
taxpayer in producing income included in gross from pertinent items from the computed
income of gross income in tax in order to arrive
Forgiveness of indebtedness order to arrive at at taxes payable
a. Individual performs services for a creditor who, in consideration taxable income upon
thereof, cancels debt – compensation for services which the tax rate is
b. Creditor merely desires to benefit debtor and without applied
consideration cancels the debt – gift Not income Part of income Taxes that are not
c. Corporation forgives debt of stockholder – dividend collected

Recovery of accounts previously written off Exclusions

Tax Benefit rule or Equitable Doctrine of Tax Benefit – recovery of
amounts deducted in previous years shall be included as part of the
gross income in the year of recovery to the extent of the income tax
benefit of said deduction
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
said deduction, his subsequent recovery thereof from his debtor shall
be treated as a receipt of realized taxable income. Conversely, if the
said taxpayer did not benefit from the deduction if the said bad debt
written-off, then his subsequent recovery shall be treated as a mere
recovery or a return of capital, hence, not treated as receipt of realized
taxable income.
Receipt of tax refunds or credit
If a taxpayer receives a tax credit certificate or refund for erroneously
paid tax which was claimed as a deduction from his gross income that
resulted in a lower net taxable income or a higher net operating loss
that was carried over to the succeeding taxable year, he realizes
taxable income that must be included in his income tax return in the
year of the receipt.
Exclusions and exemptions
Exclusions – Item that are not included in the determination of gross
income because:
1. They represent return of capital or are not income, gain or profit
(e.g. life insurance)
2. They are subject to another kind of internal revenue tax (e.g.
gifts, bequests, devices)
3. They are income, gain or profits that are expressly exempt from
income tax under the Constitution, tax treaty, Tax Code, or
general or special law (e.g. PEZA)
i. Rationale
Some receipts are excluded from gross income because they are not
income. Even if they are by definition income, the exclusions are not
subject to tax because of policy considerations such as to avoid the
effects of double taxation or to provide incentives for certain socially
desirable activities.
1. Proceeds of life insurance, payable upon the death of the
insured to the heirs or beneficiaries, but not the interest
payments thereon if such amounts are held by insurer under an
agreement to pay interest
Conditions:
1. Proceeds must be paid to heirs or beneficiaries
2. Upon death of insured
Reason is other than death: Subject to tax up to the extent
of excess of premiums paid
3. Whether in a single sum or otherwise
Instances when life insurance proceeds are not excluded
1. Life insurance policy is used to secure a money obligation
2. Life insurance policy was transferred for a valuable
consideration
3. Recipient of insurance proceeds is a business partner of
deceased and insurance was taken to compensate the
partner-beneficiary for any loss in income that may result as
the death of the insured partner
4. Recipient of insurance proceeds is a partnership in which the
insured is a partner and the insurance was taken to
compensate the partnership for any loss that may result
from the dissolution of the partnership caused by death of
insured partner
5. Recipient of life insurance proceeds is a corporation which
the insured was an employee or officer
Interests on life insurance proceeds
If amounts of life insurance proceeds are held by insurer under
an agreement to pay interest thereon, interest payments shall be
included in gross income
Rationale: Interests do not form part of indemnity but are
earnings or income from use of capital which are taxable.
Relevance of revocability or irrevocability in the
designation of beneficiary
Not relevant for exclusion of life insurance proceeds from gross
estate; material only in determining whether the proceeds form
part of gross estate or not.
2. Amounts received by insured as return of premiums paid
under life insurance, endowment or annuity contracts, either
during the term or at the maturity of the contract or upon the
surrender thereof
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 Conditions:
1. Amounts are received by insured
2. Under a life insurance, endowment, or annuity contract
3. Either during the term or at maturity of the term mentioned
in the contract or upon surrender of the contract
TN: Amount returned is not income but return of capital. They
represent earnings which were previously taxed.
Tax treatment of proceeds received under endowment
policies
a. If insured dies and beneficiary received the life insurance
proceeds – Not taxable and excluded
b. If insured does not die and survives the designated period –
amount pertaining to premiums are excluded but the excess
shall be considered part of gross income
3. Gifts, bequests and devises, but not the income from such
property; if the amount received is on account of services
rendered whether constituting a demandable debt or not such as
remuneratory donations or the use or opportunity or use of
capital, the receipt is income
TN: Income from property acquired and transfers of divided
interests shall be included in gross income
Rationale: Property is subject to donor‟s or estate taxes as case
may be. As to income from property, what is only excluded is the
property itself.
4. Compensation for injuries or sickness whether by suit or
agreement including amounts received through accident or health
insurance or under the Workmen‟s compensation Act, but not
damages or compensation recovered for loss of profit in loss or
damage to property which would be taxable
Kinds of compensation or damages are excluded
1. Amounts received through Accident or Health Insurance or
Workmen‟s Compensation Act as compensation for personal
injuries or sickness
2. Amounts of any damages received whether by suit or
agreement on account of such injuries or sickness
Rationale: Mere compensation for injuries or sickness suffered
and not income
5. Income exempt under treaty binding upon the Government of
the Philippines
Reason: Although it is income, it is excluded by reasons of public
policy which recognizes the principles of reciprocity and comity
among States.
6. Certain retirement benefits, pensions, gratuities, more
particularly:
a. Retirement benefits received under RA 7641 and those
received by officials and employees of private firms, whether
individual or corporate, in accordance with a reasonable
private benefit plan maintained by employer provided:
(i) That the retiring official or employee has been in the
service of the same employer for at least ten (10) years
and is not less than fifty (50) years of age at the time
of his retirement
(ii) That the benefits granted shall be availed of by an
official or employee only once.
Elements:
1. A reasonable private benefit plan is maintained by the
employer
Reasonable private benefit plan – a pension,
gratuity, stock bonus or profit-sharing plan maintained
by an employer for the benefit of some or all of his
officials or employees, wherein contributions are made
by such employer for the officials or employees, or
both, for the purpose of distributing to such officials
and employees the earnings and principal of the fund
this accumulated, and wherein it is provided in said
plan that at no time shall any part of the corpus or
income of the fund be used for, or be diverted to, any
purpose other than for the exclusive benefit of said
officials and employees
2. Retiring official or employee has been in the service of
the same employer for at least 10 years
3. Retiring official or employee is not less than 50 years of
age at the time of his retirement
4. Benefit had been availed of only once
5. Retirement plan must be submitted to and approved by
BIR
b. Any amount received by an official or employee or by
his heirs from the employer as a consequence of
separation of such official or employee from the service of
the employer because of death sickness or other physical
disability or for any cause beyond the control of the said
official or employee.
Conditions:
1. Amount received by official, employee or his heirs
2. From employer
3. As a consequence of separation of such official or
employee from the service of the employer
a. Because of death, sickness or other physical
disability
b. For any cause beyond the control of such official
or employee, such as retrenchment, redundancy
or cessation of business
IOW: Separation must be involuntary in order for it to be
excluded from gross income.
Terminal leave pay
SC held that terminal leave pay received by a government
official or employee is not subject to withholding (income)
tax. The rationale behind the employee‟s entitlement to an
exemption from withholding tax on his terminal leave is that
commutation of leave credits, more commonly known as
terminal leave, is applied for by an officer or employee who
retires, resigns or is separated from the service through no
fault of his own. In the exercise of sound personnel policy,
the Government encourages unused leaves to be
accumulated. Terminal leave payments are given not only at
the same time but also for the same policy considerations
governing retirement benefits. In fine, not being part of the
gross salary or income of a government official or employee
but a retirement benefit, terminal leave pay is not subject to
income tax.
c. Provisions of any existing law to the contrary
notwithstanding, social security benefits, retirement
gratuities, pensions and other similar benefits
received by resident or non-resident citizens of the
Philippines or aliens who come to reside permanently in the
Philippines from foreign government agencies and other
institutions, private or public.
d. Payments of benefits due or to become due to any
person (residing in the Philippines) under the laws of the
United States administered by the United States Veterans
Administration
e. Benefits received from or enjoyed under the SSS in
accordance with the provisions of Republic Act No. 8282.
f. Benefits received from the GSIS under Republic Act No.
8291, including retirement gratuity received by government
officials and employees.
Contributions to SSS, GSIS, PHIC, and Pag-Ibig in
excess of mandatory contributions
Subject to income tax
7. Miscellaneous items, likewise exempt, including:
a. Income of foreign governments or financing institutions
owned, controlled or enjoying refinancing from such foreign
Page | 17
 governments and of international or regional financial
institutions established by foreign governments from their
passive investments in the Philippines
b. Income of the Philippine government and its political
subdivisions derived from public utilities or in the exercise of
essential governmental functions
c. Prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary or civic
achievement but only if:
(i) The recipient was selected without any action on his
part to enter the contest or proceedings; and
(ii) The recipient is not required to render substantial
future services as a condition to receiving the prize or
award
d. All prizes and awards granted to athletes in local and
international sports competitions whether held in the
Philippines or abroad and sanctioned by their national sports
associations
e. 13th month pay and other benefits received by officials and
employees of public and private entities which shall not
exceed P90,000
(i) Benefits received by officials and employees of the
national and local government pursuant to RA 6686
(ii) Benefits received by employees pursuant to PD 851
(iii) Benefits received by officials and employees not
covered by PD 851
(iv) Other benefits such as productivity incentives and
Christmas bonus.
f. GSIS, SSS, Medicare and Pag-Ibig contributions and union
dues of individuals
g. Gains from the sale of bonds, debentures or other certificate
of indebtedness with a maturity of more than 5 years
h. Gains from the redemption of shares of stock in a mutual
fund company
Also, under Section 33(C), NIRC, the following fringe benefits are not
taxable: (not subject to FBT)
1. Fringe benefits authorized and exempted from tax under special
laws;
2. Contributions of the employer for the benefit of the employee to
retirement, insurance and hospitalization plans;
3. Benefits given to rank and file employees, whether granted under
a CBA or not;
4. De minimis benefits
5. Benefits granted to employees as required by the nature of, or
necessary to the trade, business or profession of employer
6. Benefits granted for the convenience of employer
a. Housing privilege of military officers inside or near the
military camps
b. Housing unit situated inside or at most 50m from the
perimeter of the business premises
c. Temporary housing of an employee for 3 months or less
d. Expenses of employee which are reimbursed by employer
which are:
(i) Receipted under the name of employer
(ii) Not personal expenses of employee
e. Business expenses which are paid for by the employer for
foreign travel of his employees in connection with business
meetings or conventions
Deductions from gross income
Deductions – items or amounts authorized by law to be subtracted
from the pertinent items of gross income to arrive at taxable income
TN: Compensation income earners cannot use deductions
a. Concept as return of capita
Income tax is levied only in income, which may be gross income or net
income; hence, amount representing return of capital should be
deducted from the proceeds from sales of assets and should not be
subject to income tax.
b. Itemized deductions vs. Optional Standard Deduction
Itemized deductions or
RC, NRC, RA
OSD (40% of gross sales or gross receipts)
Itemized deductions only
NRA-ETB Law explicitly excluded non-resident alien
from OSD
Itemized deductions or
DC, RFC
OSD (40% of gross income)
Itemized deductions or
GPP and partners OSD – may be availed only once, either by
GPP or partners comprising partnership
TN: NRA-NETB and NRFC cannot avail of Itemized deductions and
OSD because their tax is on gross income.
General requisites of deductibility
1. Necessary in trade or business of taxpayer
2. Actually paid or incurred
3. Reasonable in amount
4. Supported by document
Itemized Deductions
A. Expenses
Requisites
1. Expense must be ordinary and necessary
Ordinary – when it connotes a payment which is normal in
relation to the business of taxpayer and the surrounding
circumstances
Necessary – where expenditure is appropriate and helpful in the
development of taxpayer‟s business
2. Paid or incurred during the taxable year
Means that the deduction shall be taken for the taxable year in
which paid or accrued or paid or incurred dependent on the
accounting method in which net income is computed
3. In carrying on the trade or business of the taxpayer
4. Must be supported by adequate invoices and receipts
5. Must not be against law, morals, public policy, or public order
6. It must be reasonable
7. Tax required to be withheld on the expense paid or payable is
shown to have been remitted to the BIR
Substantiation rule
It is required that before business or professional expenses are
allowed as deductions from gross income, the taxpayer must satisfy
the BIR that the deductions being claimed are indeed ordinary and
necessary expenses incurred during the taxable year carrying on any
trade or business. The taxpayer shall substantiate the expense being
deducted with sufficient evidence such as official receipts or other
adequate records.
Types of business expenses
1. Reasonable allowance for salaries or other compensation for
personal services actually rendered to the taxpayer
2. Reasonable allowance for travel expenses in the pursuit of trade,
business or profession
 Requisite for deductibility:
a. Must be paid or incurred while away from home
b. Must be incurred in the pursuit of taxpayer‟s trade or
business
c. Must be reasonable and necessary
3. Reasonable allowance for rentals and or other payments required
for the continued use or premium of the property for the purpose
of the trade or business and to which property the taxpayer has
not taken or is not taking title or in which he has no equity.
 Requisites for deductibility of rental expenses:
a. Made as a condition to the continued use or possession of
property
b. Taxpayer has not taken or is not taking title to the property
or has no equity other than that of a lessee, use or
possessor
c. Property must be used in trade or business
d. Subjected to withholding tax of 5%; otherwise, it shall be
disallowed as a deduction
Page | 18
  Requisites of deductibility of repairs expenses:
Incidental repairs which neither materially add to the value
of the property nor appreciably prolong its life, but keep it in
an ordinary working condition
4. Reasonable allowance for entertainment, amusement and
recreation expenses provided that they are connected to the
development and operation of the trade, business or profession
and that it is not contrary to law, morals, public policy or public
order.
 Allowable deductions for professionals
a. The cost of supplies used by him in the practice of his
profession
b. Expenses paid in the operation and repair of transportation
equipment used in making professional calls
c. Dues to professional societies and subscriptions to
professional journals
d. The rent paid for office rooms
e. The expenses of the fuel, light, water, telephone, etc. used
in such offices; and
f. The hire of office assistants
 Requisites of deductibility of entertainment/representation
expenses
1. Must be paid or incurred during the taxable year
2. be directly related to or in furtherance of the conduct of the
trade, business or exercise of the profession
3. not be contrary to law, morals, public policy or public order
4. does not constitute a bribe, kickback or other similar
payment
5. must be duly substantiated by adequate proof
6. The appropriate amount of withholding tax if applicable
should have been withheld therefrom and paid to the BIR
7. not exceed such ceilings prescribed by the Secretary of
Finance
 Ceiling on entertainment, amusement and recreational
expenses
a. Sellers of goods or properties – 0.5% of their net sales as
representation expenses
b. Sellers of services – 1% of their net revenues as
representation expenses
TN: List not exclusive.
Advertising expenses
Deductible depending on its nature
a. If it is an advertising to stimulate the current sale of merchandise
or use of services – deductible as business expense
b. If it is an advertising designed to stimulate future sale or
merchandise or use of services – not deductible; a capital
expenditure
TN: Expenses relating to the recapitalization and reorganization of the
corporation, promotion expenses and commission or fees for the sale
of stock reorganization are capital expenditures.
Litigation expenses are not deductible.
Private Educational Institutions
Have an option to elect either:
1. To deduct expenditures otherwise considered as capital outlays of
depreciable assets incurred during the taxable year for the
expansion of school facilities
2. To deduct allowance for depreciation thereof
B. Interest
Requisites for deductibility
1. Indebtedness of taxpayer
2. Interest expense paid or incurred upon indebtedness
3. Indebtedness must be connected with TP‟s t/b/p
4. Interest expense paid or incurred during taxable year
5. Interest stipulated in writing
6. Interest legally due
7. Interest payment arrangement must not be between related TPs
8. Must not be incurred to finance petroleum operations
9. In case interest was incurred to acquire property used in t/b/p, it
was not treated as capital expenditure
Interest expense is not deductible
1. Indebtedness on which an interest is paid in advance through
discount or otherwise – such interest shall be allowed as a
deduction in the year the indebtedness is paid. If indebtedness is
payable in periodic amortizations, amount of interest which
corresponds to the amount of the principal amortized or paid
during the year shall be allowed as deduction in such taxable year
2. If both TP and person to whom payment has been made or is to
be made are related persons specified in Sec. 36(B)
3. If indebtedness is used to finance petroleum exploration
Tax Arbitrage Rule
Interest expense is reduced by 33% of the interest income subject to
final tax
Interest arbitrage
Circumstance which is presumed to exist because by putting excess
funds in deposits/securities subject to 20% withholding, taxpayers are
able to avoid the 32% tax which will happen if same funds are
invested in revenue-generating activities.
Optional treatment of interest expense
At the option of TP, interest incurred to acquire property used in trade,
business or exercise of a profession may be (1) allowed as a deduction
or (2) treated as a capital expenditure.
Interests due from tax obligations
Deductible as interest expense; tax obligations constitute indebtedness
for purposes of deduction from gross income of the amount of interest
paid on indebtedness
C. Taxes
Requisites for deductibility
1. Payments must be for taxes
2. Must be paid or incurred within the taxable year
3. Must be incurred in connection with trade, business or profession
4. Must be imposed by law on and payable by TP
5. Taxes are not specifically excluded by law from being deducted
Tax Benefit Rule
a. Taxes allowed as deductions, when refunded or credited, shall be
included as part of gross income in the year of receipt to the
extent of income tax benefit of said deduction.
b. Bad debts claimed and allowed as deductions from gross income
deducted but subsequently paid or recovered
c. Casualty losses deducted as such but later recovered
Taxes not deductible
1. Philippine income tax
2. Foreign income taxes unless the taxpayer does not make use of
the tax credit privilege under Section 34©(3).
3. Estate and donor‟s taxes
4. Taxes assessed against local benefits of a kind tending to
increase the value of the property assessed (special assessments)
5. VAT
TN: In case of NRA or FC, deduction is only allowed if and to the
extent that the taxes for which deduction is claimed are connected
with income from sources within the Philippines.
Surcharges and fines for delinquency are not deductible.
Special assessment is deductible if it pertains to maintenance or repair
of local benefits. If construction of local benefits, it shall be treated as
capital expenditure.
Senior Citizen’s discount
20% sales discount shall be treated as a tax deduction, which means it
shall be deducted from the income before tax, unlike tax credit where
it shall be deducted from tax.
D. Losses
Requisites for deductibility
Page | 19
1. Losses must actually be sustained and charged off within the
taxable year
2. Evidenced by a closed and completed transaction
3. Loss is not compensated by insurance or otherwise
4. In case of individual, the loss must have been incurred in the
business, trade or profession of TP or incurred in any transaction
entered into for profit though not connected with his trade or
business
5. In the case of casualty loss, declaration of loss is filed within 45
days from the occurrence of the casualty loss
TN: Loss shall not be allowed as deduction if it was claimed for estate
tax.
Kinds of losses allowed
1. Ordinary losses- losses that are incurred by a taxable entity as a
result of its day to day operations conducted for profit or
otherwise
2. Losses from casualty, theft or embezzlement (Casualty losses) –
loss or physical damage suffered by property used in t/b/p that
results from unforeseen, identifiable events that are sudden,
unexpected, and unusual in character
3. Net Operating Loss – excess of allowable deduction over gross
income of a business for any taxable year
Treatment of other types of losses
a. Capital losses – may not be deducted from ordinary gains; only
deductible against capital gains
b. Securities becoming worthless – if securities become worthless
during the taxable year and are capital assets, loss shall be
considered as a loss from sale or exchange of capital assets;
deductible against capital gains
c. Losses on wash sales of stock or securities
Wash sales – sale or other disposition of stock or securities where
substantially identical securities are acquired or purchased within
a 61-day period, beginning 30 days before the sale and ending 30
days after the sale
Not deductible, unless claim is made by dealer in stock or
securities and with respect to a transaction made in the ordinary
course of business of such dealer
d. Wagering losses – allowed only to the extent of gains from such
transaction
Net Operative Loss Carry-over (NOLCO)
Net operating loss for any taxable year immediately preceding the
current taxable year, which had not been previously offset as
deduction shall be carried over as a deduction from gross income for
the next 3 consecutive taxable years immediately following the year of
such loss, provided however that any net loss incurred in the taxable
year during which TP was exempt from income tax shall not be
allowed as a deduction.
NOLCO shall be allowed only if there has been no substantial change
in the ownership of business or enterprise, meaning –
a. Not less than 75% in nominal value of outstanding issued
shares is held by or on behalf of the same persons
b. Not less than 75% of paid up capital is held by or on behalf
of the same persons
TN: One corporation or enterprise should not be allowed to
benefit from the operating losses accumulated by another
corporation.
TPs entitled to deduct NOLCO
1. Individual engaged in t/b/ exercise of profession
2. DC and RFC subject to normal corporate income tax
TN: Corporation who is liable to MCIT cannot enjoy the benefit of
NOLCO.
Not qualified to NOLCO
1. OBUs for a foreign banking corporation and FCDU of a domestic
banking corporation
2. Enterprise registered with the BOI enjoying the Income Tax
Holiday Incentive
3. PEZA-registered enterprise
4. SBMA-registered enterprise
5. Foreign corporations engaged in international shipping or air
carriage business in the Philippines
6. Any person, natural or juridical, enjoying exemption from income
tax
E. Bad Debts
Refer to those debts resulting from the worthlessness or
uncollectibility, in whole or in part, of amounts due the taxpayer by
others, arising from money lent or form uncollectible amounts of
income from goods sold or services rendered
Requisites for deductibility
1. There is an existing indebtedness due to TP which is valid and
legally demandable (not losses from investments)
2. Connected with t/b/p of TP
3. Actually ascertained to be worthless, uncollectible, and charged
off within taxable year
4. TP must show that it is uncollectible even in the future
5. Not sustained between related parties
6. If they are recovered, they should be included as part of gross
income in year of recovery
To prove worthlessness: TP must prove he exerted diligent efforts
to collect, such as:
a. Sending statement of account
b. Sending collection letters
c. Giving of account to lawyer for collection
d. Filing a collection case
F. Depreciation
Gradual diminution in the useful value of tangible property resulting
from wear and tear and normal obsolescense
Requisites for deductibility
1. Allowance for depreciation must be reasonable
2. Must be for property used in t/b/p
3. Must be charged off during the taxable year
4. Statement on the allowance must be attached to the return
Case: Depreciation as a deduction is allowed so that the owner of
assets can set aside money to buy a replacement or gradually recover
the acquisition cost. Law does not authorize the depreciation of an
asset beyond its acquisition cost. Reason is that deductions from gross
income are privileges, not matters of right. More importantly, the
recovery of amount more than the invested capital will run counter to
the purpose of depreciation allowance.
Depreciation period
a. Personal properties – 5 years
b. Real properties – 15 to 25 years depending on the economic or
useful life of the asset
Rules
a. In case a TP purchases an asset used in his trade or business, he
is not entitled to claim amount as deductible business expense
considering that the same is capital expenditure, but TP is
allowed to claim depreciation of the asset as a deduction.
b. Under a lease agreement with provision that all permanent
improvements shall accrue to the lessor upon end of lease
contract, lessee who is engaged in t/b can claim depreciation of
improvements while lessor can claim depreciation of leased
property excluding the improvements.
c. Under a lease to own contract, lessee who introduces
improvements shall have the right to claim depreciation of
improvements only while lessor claims depreciation of the leased
property only. Lessee cannot claim rentals for lease as deductible
business expenses because he acquires interest other than as a
mere possessor of property. Upon expiration of contract, lessee
owns property in full and lessor loses all rights over the property.
G. Depletion of Oil and Gas Wells and Mines
See codals
Page | 20
H. Charitable and other Contributions
Partially deductible
1. Contributions or gifts actually paid or made within the taxable
year to:
a. Government of the Philippines or any of its agencies or
political subdivision exclusively for public purposes
b. Accredited domestic corporations or associations organized
and operated exclusively for (1) religious, (2) charitable, (3)
scientific, (4) youth and sports development, (5) cultural or
(6) educational purposes or for (7) rehabilitation of veterans
c. Social welfare institutions
d. Non-accredited non-government organizations
2. No part of the net income of which inures to the benefit of any
private stockholder or individual in an amount not in excess of
10% in the case of an individual, and 5% in the case of
corporation, of TP‟ s taxable income derived from t/b/p as
computed without the benefit of this
Deductible in full
a. Donations to the government
Donations exclusively to finance, to provide for, or to be used in
undertaking priority activities in (1) education, (2) health, (3)
youth and sports development, (4) human settlements, (5)
science and culture, and in (6) economic development according
to National Priority Plan determined by NEDA
b. Donations to certain foreign institutions and international
organizations
In pursuance of or in compliance with agreements, treaties, or
commitments entered into by government and foreign institutions
or international organizations or in pursuance of special laws
c. Donations to accredited non-government organizations
NGO means a nonprofit domestic corporation
1. Organized and operated exclusively for (1) scientific, (2)
research, (3) educational, (4) character-building youth and
sports development, (5) health, (6) social welfare, (7)
cultural or (8) charitable purposes, no part of net income of
which inures to the benefit of any private individual
2. Which, not later than 15th day of 3rd month after close of its
taxable year in which contributions are received, makes
utilization directly for the active conduct of the activities
constituting the purpose or function for which it is organized
and operated, unless extension is granted by Secretary of
Finance
3. Level of administrative expense of which shall not exceed
30% of total expenses
4. Assets of which, in the event of dissolution, would be
distributed to another nonprofit domestic corporation
organized for similar purpose or to the state for public
purpose, or to another organization to be used in such
manner as judgment of the court shall best accomplish the
general purpose for which the dissolved organization was
organized
I. Research and Development
Deduction from gross income is limited to those which are related to
the trade or business of taxpayer
J. Pensions Trusts
Requisites for deductibility
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
3. Funded by employer
4. Amount contributed must no longer be subject to the control of
the employer
5. Payment has not yet been allowed as deduction
Optional Standard Deduction
a. Individuals, other than non-resident alien – OSD not exceeding
40% of his gross sales or gross receipts
b. Corporation, except NRFC – OSD not exceeding 40% of its gross
income
Unless taxpayer signifies in his return his intention to elect the OSD, he
shall be considered as having availed himself of the itemized
deductions. Such election shall be irrevocable for the taxably year for
which the return is made. Individual entitled to and claimed for OSD
shall not be required to submit financial statements required.
General professional partnership and partners comprising such
partnership may avail of OSD only once, either by GPP or partners
comprising partnership.
c. Items not deductible
In computing net income, no deduction shall in any case be allowed in
respect to:
1. Personal, living or family expenses
2. Any amount paid out for new buildings or for permanent
improvements, or betterments made to increase the value of any
property or estate
XPTN: Not apply to intangible drilling and development costs
incurred in petroleum operations which are deductible as
depletion of oil and gas wells and mines.
3. Any amount expended in restoring property or in making good
the exhaustion thereof for which an allowance is or has been
made
4. Premiums paid on any life insurance policy covering the life of
any officer or employee, or of any person financially interested in
any trade or business carried on by taxpayer, individual or
corporate, when taxpayer is directly or indirectly a beneficiary
under such policy
Losses from sales or exchanges of property
No deductions shall in any case be allowed in respect of losses from
sales or exchanges of property directly or indirectly –
1. Between members of a family
2. Between an individual and corporation more than 50% in value of
the outstanding stock of which is owned, directly or indirectly, by
or for such individual
XPTN: In case of distributions in liquidation
3. Between two corporations more than 50% in value of outstanding
stock of which is owned, directly or indirectly, by or for the same
individual if either one of such corporations, with respect to
taxable year of corporation preceding the date of the sale of
exchange was under the law applicable to such taxable year, a
personal holding company or a foreign personal holding company
XPTN: In case of distributions in liquidation
4. Between grantor and fiduciary of any trust
5. Between fiduciary of a trust and fiduciary of another trust if the
same person is a grantor with respect to each trust
6. Between fiduciary of a trust and beneficiary of such trust
Individual Taxpayers
A. RC, NRC, and RA
Compensation Income Earners
Net Taxable Income
But not Tax Rate
Over
over
250,000 0%
250,000 400,000 20% of excess over 250,000
400,000 800,000 30,000 + 25% of excess over 400,000
800,000 2,000,000 130,000 + 30% of excess over 800,000
2,000,000 8,000,000 490,000 + 32% of excess over 2,000,000
8,000,000 2,410,000+35% of excess over 8,000,000
Self-employed and Professionals
Gross Sales/Receipts Tax Rate
Not exceeding P3M Option 1: Regular PIT Rates or
Option 2: 8% of gross sales/receipts in
excess of P250,000*
Page | 21
Above P3M Regular PIT Rates Carry Forward of Excess Minimum Tax
*This is in lieu of income and percentage tax Any excess MCIT over the NIT shall be carried forward and credited
against NIT for 3 immediately succeeding taxable years
Mixed Income Earners
Type of Income Tax Rate Branch Profit Remittance Tax (BPRT)
Compensation Income Regular PIT rates Any profit remitted by a branch to its head office shall be subject to
Income from business or practice 15% tax which shall be based on total profits applied or earmarked for
of profession: remittance without any deduction from tax
a. Gross sales/receipts not Option 1: Regular PIT Rates or
exceeding P3M Option 2: 8% of gross Interests, dividends, rents, royalties, including remuneration for
sales/receipts* technical services, salaries, wages, premiums, annuities, emoluments
b. Gross sales/receipts above Regular PIT Rates or other fixed or determinable annual, period or casual gains, profits,
P3M income and capital gains received by a foreign corporation during each
*This is lieu of income and percentage tax. taxable year from all sources within the Philippines shall not be treated
as branch profits unless the same are effectively connected with the
B. NRA-ETB conduct of its trade or business in the Philippines.

Taxable in the same manner as RC, NRC and RA on taxable income
received from all sources within the Philippines
Take note of Matrix
C. NRA-NETB
25% upon the entire income received from all sources within the
Philippines
XPTN: Sale of shares of stock and real property (see Matrix)
Individual Taxpayers Exempt from Income Tax
a. Senior Citizens
They are not exempt from income taxes unless they are
considered minimum wage earners
b. Minimum Wage Earners
Worker in the private sector who is paid the statutory minimum
wage; or to an employee in the public sector with compensation
income of not more than the statutory minimum wage in non-
agricultural sector where he/she is assigned
Holiday pay, overtime pay, night shift differential pay and hazard
pay shall likewise be exempted. Other benefits in excess of
P90,000 shall be subject to tax.
If they earn other income, such as income from conduct of t/b/p,
in addition to compensation income, such will not be exempted.
c. Exemptions granted under international agreement
Philippines is a signatory of certain international agreements and
a party to different tax treaties which specifically provide for the
exemption of certain persons or entities from taxes imposed by
Philippines.
Example: Diplomats or ambassadors of other countries; World
Health Organization
Corporate Taxpayer
A. DC and RFC – 30% of taxable income
15% GIT Option
Option to be taxed 15% on gross income shall be available only to
firms whose ratio of cost of sales to gross sales or receipts from all
sources does not exceed 55% (IOW, COS does not exceed 55% of
gross sales/receipts)
a. Minimum Corporate Income Tax – applies to both DC and RFC
b. Branch Profit Remittance Tax – applies to RFC only
XPTN: Activities which are registered with Philippine Economic
Zone Authority (PEZA) shall not be subject to BPRT
c. Itemized deductions vs. Optional Standard Deductions
Both DC and RFC have these options
Minimum Corporate Income Tax (MCIT)
2% of the gross income as of end of taxable year, beginning on the 4 th
taxably year immediately following the year in which such corporation
commenced its business operations, when the 2% MCIT is greater
than 30% NIT
B. NRFC – 30% of gross income
a. Non-resident Cinematographic Film Owner, Lessor or
Distributor – subject to 25% of its gross income from all
sources within the Philippines
b. Non-resident Owner or Lessor of Vessels chartered by
Philippine nationals – subject to a tax of 4.5% of gross
rentals, lease or charter fees from leases or charters to
Filipino citizens or corporations, as approved by Maritime
Industry Authority
c. Non-resident Owner or Lessor of Aircraft Machineries and
other equipment – subject to 7.5% of gross rentals or fees
d. Interest on Foreign Loans – 20% FWT on the amount of
interest
Income tax on special corporations
A. Proprietary educational institutions and hospitals
a. If income from unrelated trade/business/activity exceeds
50% of total gross income derived from all sources – treated
as an ordinary corporation taxable at the rate of 30% on
entire taxable income
b. If it does not exceed 50% - subject to preferential rate of
10%
Unrelated trade, business or other activity
Any trade, business or other activity, the conduct of which is not
substantially related to the exercise or performance by such
educational institution or hospital of its primary purpose or
function
B. Government-owned or controlled corporations, agencies,
or instrumentalities
30% on their taxable income
XPTN:
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation (PHIC)
4. Local water districts
C. International carriers doing business in the Philippines
2.5% on its Gross Philippine Billings
May avail of preferential rate or exemption on the basis of tax
treaty or reciprocity
a. International Air Carrier
 Gross Philippine Billings means amount of gross
revenue derived from carriage of persons, excess
baggage, cargo and mail originating from Philippines in
a continuous and uninterrupted flight, irrespective of
place of sale or issue and place of payment of ticket or
passage document
 Tickets revalidated, exchanged or indorsed to another
international airline form part of GPB if passenger
boards a plane in a port or point in the Philippines
 For a flight which originate from Philippines but
transshipment of passenger takes place at any port
outside Phil on another airline, only aliquot portion of

Page | 22
 cost of ticket corresponding to leg flown from Phil shall
form part of GBP
b. International Shipping – Gross Philippine Billings means
gross revenue whether for passenger, cargo or mail
originating from the Philippines up to final destination,
regardless of place of sale or payments of the passage or
freight documents
D. Off-shore banking units (RFC)
Interest income derived by OBUs from foreign currency
transactions with:
a. Residents other than OBUs and local commercial banks –
10%
b. Non-residents, other OBUs, and local commercial banks –
Exempt
E. Domestic depository banks (foreign currency deposit
units)
Interest income derived by a domestic depository bank under the
expanded foreign currency deposit system from foreign currency
transactions with:
1. Residents – 10%
2. Non-residents – Exempt
F. Resident foreign depository banks (foreign currency
deposit units)
Same with domestic depository bank
G. Regional or area headquarters and regional operating
headquarters of multinational companies
a. RHQ/RAHQ – Not subject to income tax
b. ROHQ – subject to 10% tax on their taxable income
Improperly Accumulated Earnings Tax (IAET)
In addition to other taxes imposed on corporations, 10% IAET shall be
imposed for each taxable year on the improperly accumulated taxable
income of each corporation formed or availed for the purpose of
avoiding income tax with respect to its shareholders or shareholders of
any other corporation, by permitting earnings and profits to
accumulate instead of being divided or distributed.
XPTN: Shall not apply to –
1. Publicly-held corporations
2. Banks and other non-bank financial intermediaries
3. Insurance companies
4. GPPs
5. Non-taxable joint ventures
6. Enterprises registered under SEZ
Improperly accumulated taxable income
a. Taxable income adjusted by:
1. Income exempt from tax
2. Income excluded from gross income
3. Income subject to final tax
4. Amount of NOLCO deducted
b. And reduced by sum of:
1. Dividends actually or constructively paid
2. Income tax paid for the taxable year
3. Amount reserved for reasonable needs of business
Evidence of purpose to avoid income tax
a. Prima facie evidence – fact that corporation is a mere holding
company or investment company shall be prima facie evidence of
purpose to avoid tax
b. Evidence determinative of purpose – Fact that earnings or profits
are permitted to accumulate beyond reasonable needs of
business, unless the corporation, by clear preponderance of
evidence shall prove the contrary
Additional instances:
1. Investment of substantial earnings in unrelated business or
in stock or securities of an unrelated business
2. Investment in bonds and other long term securities
3. Accumulation of earnings in excess of 100% of paid up
capital
Reasonable needs of business
Includes the reasonably anticipated needs of the business
Examples:
1. Allowance for the increase of accumulated earnings up to
100% of the paid-up capital
2. Earnings reserved for building, plant or equipment
acquisitions
3. Earnings reserved for compliance with any loan or obligation
established under a legitimate business agreement
4. In case of subsidiaries of foreign corporations in the
Philippines, all undistributed earnings intended or reserved
for investments in the Philippines.
5. Earnings required by law to be retained
6. Anticipated losses or reserves in business
7. When there is legal prohibition for its distribution
Immediacy test
Reasonable needs of business are construed to mean the
immediate needs of business, including reasonably anticipated
needs. Corporation should be able to prove immediate need for
the accumulation of earnings and profits, or the direct correlation
of anticipated needs to such accumulation of profits.
Exemptions from tax on corporations
The following organizations shall not be taxed under this Title
(MEANING EXEMPT FROM NIT) in respect to income received by them
AS SUCH:
1. Labor, agricultural or horticultural organization not organized
principally for profit;
2. Mutual savings bank not having a capital stock represented by
shares, and cooperative bank without capital stock organized and
operated for mutual purposes and without profit;
3. 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 mutual aid association or a
non- stock corporation organized by employees providing for the
payment of life, sickness, accident, or other benefits exclusively
to the members of such society, order, or association, or non-
stock corporation or their dependents;
4. Cemetery company owned and operated exclusively for the
benefit of its members;
5. Non-stock corporation 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;
6. Business league chamber of commerce, or board of trade, not
organized for profit and no part of the net income of which inures
to the benefit of any private stockholder, or individual;
7. Civic league or organization not organized for profit but operated
exclusively for the promotion of social welfare;
8. A non-stock and non-profit educational institution;
TN: Declared unconstitutional
9. Government educational institution;
10. Farmers' 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, and fees collected from members for the sole purpose of
meeting its expenses; and
11. Farmers', fruit growers', or like association organized and
operated as a sales agent for the purpose of marketing 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;
Notwithstanding the provisions in the preceding paragraphs, income of
whatever kind and character of the foregoing organizations from any
of their properties, real or personal, or from any of their activities
conducted for profit regardless of the disposition made of such income,
shall be subject to tax imposed under this Code.
Page | 23
Two tests to determine entitlement of tax exemption
1. Organizational test – requires that the corporation or association‟s
constitutive documents exclusively limit its primary purpose to
those described in Sec. 30
2. Operational test – requires that the regular activities of
corporation or association be exclusively devoted to
accomplishment of purpose specified in Sec. 30. Corporation or
association fails to meet this test if substantial part of its
operation are considered activities conducted for profit.
Tax on other business entities
a. General partnerships – partnership organized for the purpose of
engaging in trade or business
- Taxed like a corporation, whether or not registered with SEC
as a partnership
b. General professional partnerships – partnership formed by
persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from
engaging in any trade or business
- Not subject to income tax but the persons engaging in
business as partners in a GPP shall be liable for income tax
only in their separate and individual capacities
c. Co-ownerships – not subject to income tax
d. Joint ventures and consortia – Taxable as corporation
XPTN: Joint venture or consortium formed for the purpose of (1)
undertaking construction projects or (2) engaging in petroleum,
coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract with
the government
Filing of returns and payment
Self-employment income, whether it constitutes the sole
source of his income or in combination with salaries, wages,
and other fixed or determinable income, shall make and file
a declaration of his estimated income for the current taxable
year on or before May 15 of same taxable year.
Amount of estimated income shall be paid in 4 installments:
1st installment – paid at the time of declaration
2nd installment – August 15
3rd installment – November 15
4th installment – on or before May 15 of following calendar
year when final adjusted ITR is due to be filed
b. Corporation
1. 3 Quarterly returns on a cumulative basis – 60 days from
end of quarter
2. 1 Final consolidated return filed on:
a. Calendar year – on or before April 15th
b. Fiscal year – on or before 15th day of the 4th month
following the close of fiscal year
Substituted filing
Individual TP receiving purely compensation income, regardless of
amount, from only one employer in the Philippines for the calendar
year, the income tax of which has been withheld correctly by said
employer (tax due=tax withheld) shall not be required to file an annual
ITR. Certificate of withholding filed by respective employers, duly
stamped „received‟ by BIR, shall be tantamount to the substituted filing
of ITR by said employees.
Failure to file returns

Individual returns Withholding taxes

1. RC Method of collecting income tax in advance from taxable income of the
2. NRC – income within recipient of income
3. RA – income within
4. NRA – income within Withholding agent
One who has control, custody, or receipt of the funds that is subject to
XPTN: income tax and to be withheld and remitted to the BIR. He holds the
1. Individual whose taxable income does not exceed P250,000, amount withheld from the income of another person in trust for the
provided that a citizen of the Philippines and any alien engaged in government until paid.
business or practice of profession within the Philippines shall file
and ITR, regardless of the amount of gross income Obligation to withhold is compulsory as it makes such withholding
2. Individual with respect to pure compensation income derived agent personally liable for payment of the tax. Such liability is direct
from sources within the Philippines, the income tax on which has and independent from liability of the income recipient.
been correctly withheld (substituted filing)
XPTN to XPTN: Individual deriving compensation concurrently Persons required by law to withhold
from two or more employers at any time during the taxable year 1. Agents or employees of withholding agents
shall file ITR 2. Persons having control of the payment and claiming the expense
3. Individual whose sole income has been subjected to FWT 3. Payor having control of the payment where payment is made
4. Minimum wage earner through brokers
5. Individual exempted from income tax
Final withholding tax Creditable withholding tax
Corporation returns Amount of income tax withheld is Taxes withheld on certain income
Every corporation subject to tax shall render quarterly ITR and final constituted as a full and final payments are intended to equal
and or adjustment return payment of the income tax due or at least approximate the tax
Return shall be filed by president, VP or other principal officer, and from the payee on the said due of the payee on said income
shall be sworn to by such officer and treasurer or assistant treasurer income
Liability for payment of the tax Payee of income is required to
Period within which to file income tax return rests primarily on the payor as a report the income and/or pay the
a. Individuals withholding agent difference between the tax
1. Compensation Income Earner – on or before April 15th of the withheld and the tax due on the
following year income. The payee also has the
2. Capital Gains Tax right to ask for a refund if the tax
a. Sale of shares of stock not traded thru local stock withheld is more than the tax due
exchange Payee is not required to file an Income recipient is still required
(i) ITR – within 30 days after each transaction income tax return for the to file an income tax return
(ii) Final consolidated return – on or before April 15 of particular income
each year covering all stock transactions of
preceding taxable year
b. Sale of real property – within 30 days following each
sale or other disposition
3. SEP/SEI/MIE –

Page | 24
 TRANSFER TAXES
3. Revocable transfers
1. Estate Tax Transfer where the transferor has reserved his right to alter,
2. Donor‟s Tax amend or revoke such transfer, regardless of whether the power
3. Value-Added Tax (VAT) is actually exercised or not during his lifetime and whether the
power should be exercised by him alone or in conjunction with
Transfer tax – imposed upon the privilege granted by the state to the someone else. To the extent of any interest therein, it forms part
TP so that he may transfer properties, real or personal, without of the gross estate of the decedent.
consideration TN: There is no absolute transfer of ownership.
- Excise or privilege taxes that are imposed on the act of
passing ownership of property and not taxes on the property 4. Property passing under GPA
transferred
General power of appointment – donor gives the donee the
ESTATE TAX power to appoint any person as successor to enjoy the property
Special power of appointment – donor gives the donee the power
6% tax based on the value of the net estate shall be levied, assessed, to appoint a person within a limited group to succeed in the
collected and paid upon the transfer of the net estate of every enjoyment of the property
decedent, whether resident or non-resident, to his/her heirs
GPA SPA
Subject of estate tax: Transfer of net estate of every decedent, Ownership transmitted to
resident or non-resident Ownership still with donor
donee
Law governing imposition of estate tax: Statute in force at the
Property forms part of Property does not form
time of death of decedent
donee‟s estate part of donee‟s estate
When it accrues: Upon the death of decedent
TN: Donee is the decedent
Classification of decedent
5. Transfers for insufficient consideration
Located within Located outside Transfers that are not bona fide sales of property for an adequate
RC Taxable Taxable and full consideration in money or money‟s worth
NRC Taxable Taxable
Excess of the FMV at the time of the death over the value of the
RA Taxable Taxable consideration received by the decedent shall form part of his
NRA Taxable* Not taxable gross estate. (FMV – consideration = Value included in the GE)
*For intangible personal property found within the Philippines, it will be
To determine if consideration is sufficient or insufficient, compare
subject to the rule of reciprocity.
the FMV and consideration at the time of transfer. If insufficient,
There is reciprocity if the foreign country of which the decedent was a
the value shall be the difference between the FMV at the time
citizen or resident at the time of his death:
death (not transfer) and the consideration received.
1. Did not impose an estate tax; or
2. Allowed a similar exemption from estate tax with respect to
IMPT: Rule applies only to –
intangible personal property owned by Filipino citizens not
a. Transfer in contemplation of death
residing in that foreign country
b. Revocable transfer
TN: This table also applies to Donor‟s Tax
c. Property passing under GPA
Determination of gross and net estate
6. Proceeds of a life insurance
Gross estate – value at the time of decedent‟s death of all property,
Insurance under policies taken out by the decedent upon his own
real or personal, tangible or intangible, wherever situated
life shall form part of the gross estate if the beneficiary is:
In case of NRA, only part of the entire gross estate which is situated in
a. The estate of the deceased, his executor or administrator,
the Philippines shall be included in his taxable estate
irrespective of whether the insured retained the power of
Net estate – value of gross estate less ordinary and special deductions
revocation (regardless is designation is revocable or not)
b. Any beneficiary (third person) designated in the policy as
Taxable Transfers
revocable (has to be revocable)
1. Transfer in contemplation of death
o If irrevocable, not part of GE
2. Revocable transfer
3. Property passing under general power of appointment
7. Prior interests
Transfer in contemplation of death, revocable transfer, and
Inclusions
proceeds of life insurance shall apply to the transfers, trusts,
1. Decedent’s interest at the time of death
estates, interests, rights, powers and relinquishment of powers,
Includes any interest having value or capable of being valued,
whether made, created, arising, existing, exercised or
transferred by the decedent at his death
relinquished before or after effectivity of NIRC.
2. Transfers in contemplation of death
8. Capital of surviving spouse (capital of decedent-spouse is
Considered one when the impelling motive or reason for the
the one included in the GE)
transfer is the thought of death, regardless of whether the
Common properties of the spouses shall be included in
transferor is near the possibility of death or not
determining the gross estate of the decedent-spouse but ½ shall
later on be deducted which consists of the capital of surviving
Manifestations:
spouse.
a. Age and state of health of decedent at the time of gift,
especially where he was aware of a serious illness
Deductions and exclusions from estate
b. 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 mind, and a long interval RC, NRC, RA NRA
suggests the opposite. But there is not exact length of time 1. Standard deduction – P5M 1. Standard deduction – P500k
c. Concurrent making of a will or making a will within a short 2. Claims against estate 2. Claims against estate*
time after the transfer 3. Claims against insolvent 3. Claims against insolvent

Page | 25
 persons persons*
4. Unpaid mortgages 4. Unpaid mortgages* Where decedent is not the debtor
5. Taxes 5. Taxes* If loan is merely an accommodation loan, where the proceeds of loan
6. Losses 6. Losses* went to another person, the value of the unpaid loan must be included
7. Property previously taxed 7. Property previously taxed in the receivable of the estate.
8. Transfers for public use 8. Transfers for public use
9. Share in the conjugal 9. Share in the conjugal E. Unpaid taxes
property property
10. Family home Requisites for deductibility
11. Amount received by heirs 1. Accrued prior to decedent‟s death
under RA No. 4917 2. Unpaid as of the time of death
*Proportion of deductions which the value of such part bears to the
value of his entire gross estate wherever situated Taxes not to be deducted
a. Income tax on income received after death
Resident (RC, NRC, RA) b. Property taxes not accrued before death
c. Estate tax
A. Standard deduction – P5M
F. Losses
B. Claims against estate
Debts or demands of a pecuniary nature which could have been Requisites for deductibility
enforced against the deceased in his lifetime and could have been 1. Losses were incurred during the settlement of the estate, not
reduced to simple money judgments later than the last day for the payment of estate tax (within 1
Decedent is the debtor year + 30 days if extended)
2. Losses arose from acts of God, such as fires, storms, shipwreck or
Requisites for deductibility other casualties, or from acts of man, such as robbery, theft or
1. Must be a personal obligation of the deceased existing at the time embezzlement
of his death 3. Losses are not compensated by insurance or otherwise
2. Liability must have been contracted in good faith and for 4. Losses are not claimed as a deduction for income tax purposes in
adequate and full consideration in money or money‟s worth an ITR of the estate subject to income tax
3. Claim must be a debt or claim which is valid in law and
enforceable in court G. Property previously taxed (Vanishing deduction)
4. Indebtedness not condoned by the creditor or the action to
collect from decedent must not have prescribed Requisites for deductibility
1. Death – present decedent dies within 5 years from date of death
Rules: of prior decedent or date of gift
a. If claim arose out of debt instrument, debt instrument must be 2. Identity of the property – property with respect to which
notarized. If not arising from debt instrument, requirement does deduction is sought can be identified as the one received from
not apply. the prior decedent or the donor, or as the property acquired in
b. If loan was contracted within 3 years before the death of exchange for the original property so received
decedent, the administrator or executor must submit a statement 3. Location of the property – property on which vanishing deduction
showing the disposition of the proceeds of the loan. is claimed must be located in the Philippines
c. No need to include in the gross estate before deducting 4. Previous taxation of the property – donor‟s tax on the gift or
estate tax on the prior succession must have been finally
C. Claims against insolvent persons determined and paid by donor or the prior decedent, as the case
Decedent is the creditor may be
5. Inclusion of the property – property must have formed part of the
Requisites for deductibility gross estate situated in the Philippines of the prior decedent, or
1. Full amount owed by the insolvent must first be included in the must have been included in the total amount of the gifts of the
decedent‟s gross estate donor made within 5 years prior to the present decedent‟s death
2. Insolvent could only pay a partial amount, the full amount owed 6. No previous vanishing deduction on the property, or the property
shall be included in the gross estate, and the amount exchanged therefor was allowed in determining the value of the
uncollectible shall be allowed as a deduction net estate of the prior decedent.
3. Incapacity of the debtor to pay his obligation should be proven,
although a judicial declaration of insolvency is not required How to compute:
1. Get the basis. Either the value of the property in the prior
To prove insolvency estate/value used for donor‟s tax purposes OR the value of the
a. Present the audited financial statements of the debtor showing property in the present case, whichever is lower
that his liabilities are higher than his assets 2. Step 1 value will be reduced by any payment made by the
b. Petition in court for the debtor to be declared insolvent present decedent on any mortgage or lien on the property (when
TN: Insolvency must be at the time of death. If debtor was solvent at such mortgage/lien was used as a deduction on prior decedent‟s
the time and only became insolvent thereafter, it is considered a post- estate, or gift of the donor)
death development. It can be claimed as bad debts under estate 3. Step 2 value shall be further reduced by
income tax.
Step 2 value x Claims against estate
D. Unpaid mortgages Gross estate Claims against insolvent persons
Decedent is mortgagor Unpaid mortgages
Unpaid taxes
Requisites for deductibility Losses
1. Property encumbered by such mortgage or indebtedness must be Transfers for public use
included in the GE at its FMV
2. Deduction shall be limited to the extent that they were contracted 4. Remaining balance shall be multiplied by corresponding
bona fide and for an adequate and full consideration in money or percentage:
money‟s worth, if such unpaid mortgages or indebtedness were
founded upon a promise or an agreement % If received by inheritance or gift
Page | 26
 100 Within 1 year prior to death of decedent Net estate per country
x Philippine estate tax payable
80 More than 1 year but not more than 2 years Global net estate
60 More than 2 years but not more than 3 years
40 More than 3 years but not more than 4 years 2. Total amount of credit shall not exceed the same proportion of
20 More than 4 years but not more than 5 years the tax against which such credit is taken, which the decedent‟s
net estate situated outside the Philippines taxable under estate
H. Transfers for public use tax bears to his entire net estate. (Global Limitation)
Amount of all bequests, legacies, devises, or transfers to or for Formula:
the use of the Government or any political subdivision thereof, for Total foreign net estate
x Philippine estate tax payable
exclusively public purposes. Global net estate

I. Share in the conjugal property Amount of tax credit: Whichever is lower between:
Net share of surviving spouse in conjugal partnership property as 1. Actual estate tax paid abroad
diminished by the obligations properly chargeable to such 2. Per country limitation
property shall be deducted from net estate of decedent 3. Global limitation

J. Family home Exemption of certain acquisitions and transmissions

Amount equivalent to the current FMV of decedent‟s family home,
provided that if the said current FMV exceeds P10M, the excess
shall be subject to estate tax
K. Amount received by heirs under RA No. 4917
Any amount received by heirs from decedent‟s employee as a
consequence of the death of decedent-employee in accordance
with RA 4917, provided that such amount is included in the gross
estate of the decedent
Resident (NRA)
A. Standard deduction – P500,000
Under NIRC
1. Merger of usufruct in the owner of the naked title
2. Transmission or delivery of the inheritance or legacy by the
fiduciary heir or legatee to the fideicommissary
3. Transmission from the first heir, legatee or donee in favor of
another beneficiary, in accordance with the desire of the
predecessor
4. All bequests, devises, legacies or transfers to special welfare,
cultural and charitable institutions, no part of the net income of
which inures to the benefit of any individual, provided that not
more than 30% of said bequests, devises, legacies or transfers
shall be used by such institutions for administration purposes

B. Claims against estate Under Special Laws

C. Claims against insolvent persons 1. Proceeds of life insurance benefits received by members of GSIS
D. Unpaid mortgages 2. Benefits received by members from SSS by reason of death
E. Taxes 3. Amounts received from the Philippine and the US Government
F. Losses from the damages suffered during the last war
For B-F – That proportion of the deductions which the value of 4. Benefits received by beneficiaries residing in the Philippines under
such part bears to the value of his entire gross estate wherever laws administered by US Veterans Administration
situated
Other exemptions
Gross estate, Philippines x Claims against estate 1. Bequests to be used actually, directly and exclusively for
Gross estate, World Claims against insolvent persons educational purposes
Unpaid mortgages 2. Proceeds of life insurance, provided that the beneficiary is a 3rd
Taxes person designated as irrevocable
Losses 3. Transfer for sufficient or adequate consideration
4. Properties held in trust by the decedent
G. Property previously taxed 5. Separate property of the surviving spouse
Same requirements and process as the one for RC, NRC, and RA 6. Exemptions under reciprocity clauses
Except that the deduction allowable shall be reduced by an
amount which bears the same ration to the amounts allowed as Estate Tax Return
deductions for (1) Claims against estate, (2) Claims against Estate tax returns showing a gross value exceeding P5M shall be
insolvent persons, (3) Unpaid mortgages, (4) Taxes, (5) Losses as supported with a statement duly certified to by CPA
the amount otherwise deductible under PPT bears to the value of
that part of decedent‟s gross estate which at the time of his death TN: No more need to file notice of death within 2 months after
is situated in the Philippines decedent‟s death.

H. Transfers for public use Period for filing estate tax returns
Same with RC, NRC, RA Estate tax return shall be filed within 1 year from decedent‟s death

I. Share in the conjugal property Payment on Installment Basis

Same with RC, NRC, RA In case available cash is insufficient to pay estate tax due. Payment
shall be allowed within 2 years from statutory date for its payment
Estate Tax Credit without civil penalty and interest.
Tax imposed shall be credited with the amounts of any estate tax
imposed by authority of foreign country
TN: Available to RC, NRC, and RA only DONOR’S TAX

Limitations
1. Amount of credit in respect to the tax paid to any country shall
not exceed the same proportion of the tax against which such
credit is taken, which the decedent‟s net estate situated within
such country taxable under estate tax bears to his entire net
estate. (Per Country limitation)
Formula:
Excise tax imposed on privilege to transfer property by way of gift inter
vivos based on pure act of liberality without any or less than adequate
consideration and without any legal compulsion to give.
TN: Governed by statute in force at the time of the transfer
Tax Rate
Total gifts not exceeding P250,000 – Exempt
Page | 27
In excess of P250,000 – 6% on the basis of total gifts in excess of
P250,000
When imposed
Upon transfer by any person, resident or non-resident, of any property
by gift
There must be a completed gift
a. Perfected – from moment the donor knows of the acceptance by
donee
b. Completed – by delivery, either actually or constructively of the
donated property
Requisites of a valid donation
1. Capacity of donor
All persons who may contract or dispose of their property may
make a donation
Donor‟s capacity shall be determined as of the time of the making
of the donation
2. Intent to donate or donative intent
This is necessary only in case of a direct gift. If gift is indirectly
taking place by way of sale, exchange or other transfer of
property as contemplated in cases of transfers for less than
adequate and full consideration, donative intent Is not always
essential to constitute a gift
3. Delivery, whether actual or constructive
There is delivery if the subject matter is within the dominion and
control of the donee
4. Acceptance by donee
5. Form prescribed by law
6. Decrease in the patrimony of the donor
7. Increase in the patrimony of the donee
Transfers which may be constituted as donation
a. Transfer of property for insufficient consideration
Where property is transferred for less than an adequate and full
consideration in money or money‟s worth, the amount by which
FMV exceeded the value of the consideration shall, for purposes
of donor‟s tax, be deemed a gift and included in the amount of
gifts made during the calendar year
XPTN: Transfers of real property considered as capital assets
which is subject to CGT.
b. Condonation/remission of debt where the debtor did not render
service in favor of creditor
Constitute a donation to the extent of the fair value of debt
condoned or remitted
c. Bona fide arms-length transfers
Sale, exchange, or other transfer of property made in the
ordinary course of business (transaction which is bona fide, at
arm‟s length, and free from any donative intent), will be
considered as made for an adequate and full consideration in
money or money‟s worth
Determination of gross gift
Gross gifts include real and personal property, whether tangible or
intangible, or mixed, wherever situated.
For NRA, his real and personal property so transferred but which are
situated outside the Philippines shall not be included as gross gift
Exemption of gifts from donor’s tax
A. Resident (RC, NRC, RA)
1. Gifts made to or for the use of the National Government or any
entity created by any of its agencies which is not conducted for
profit, or to any political subdivision of the said Government
2. Gifts in favor of an educational and/or charitable, religious,
cultural or social welfare corporation, institution, accredited
NGO*, trust or philanthropic organization or research institution
or organization, provided that not more than 30% of said gifts
shall be used by such donee for administration purposes.
*The only difference between resident and non-resident
Non-profit educational and/or charitable corporation,
institution, accredited NGO, trust or philanthropic
organization and/or research institution or organizations
For purposes of exemption, it shall refer to school, college or
university and/or charitable corporation, accredited NGO, trust or
philanthropic organization and/or research institution or
organization, incorporated as a non-stock entity, paying no
dividends, governed by trustees who receive no compensation,
and devoting all its income, whether students‟ fees or gifts,
donation, subsidies or other forms of philanthropy, to the
accomplishment and promotion of purposes enumerated in its
Articles of Incorporation.
B. Non-resident (NRA)
1. Gifts made to or for the use of National Government or any entity
created by any of its agencies which is not conducted for profit,
or to any political subdivision of said Government
2. Gifts in favor of an educational and/or charitable, religious,
cultural or social welfare corporation, institution, foundation, trust
or philanthropic organization or research institution or
organization, provided that not more than 30% of said gifts shall
be used by such donee for administration purposes
VALUE-ADDED TAX (VAT)
An indirect tax assessed, levied, and collected on (1) every importation
of goods, whether or not in the course of trade or business, or (2)
imposed on each sale, barter, exchange or lease of goods or properties
or on each rendition of services in the course of trade or business as
they pass along the production and distribution chain, the tax being
limited only to the value added to such goods, properties or services
by the seller, transferor or lessor
Persons liable
1. Sells, barters, exchanges, leases goods or properties in the course
of trade or business
2. Sells services in the course of trade or business
XPTN to (1) and (2):
Sale or lease of goods or properties or the performance of
services other than the transactions mentioned in the preceding
paragraphs, the gross annual sales and/or receipts do not exceed
the amount of P3M (part of exempt transactions)
3. Imports goods, WON in the course of trade or business
In the course of trade or business
Means regular conduct or pursuit of a commercial or an economic
activity, including transactions incidental thereto, by any person
regardless of whether or not the person engaged therein is a non-
stock, non-profit private organization (irrespective of disposition of its
net income and whether or not it sells exclusively to members or their
guests), or government entity
Regular conduct – requires repetition and continuity of action
XPTN: Non-resident foreign person – services in Philippines are
considered in the course of trade or business, even if not regular
VATable Transactions
Transactions which are subject to VAT either at the rate of 12% or 0%
and the seller shall be entitled to tax credit for the VAT paid on
purchases and leases of goods, properties, and services
Elements of VATable transactions
Transaction is subject to 12% VAT if following elements are present:
1. Must be done in the ordinary course of trade or business
2. Must be sale, barter, exchange, lease of goods or properties, or
rendering of service in the Philippines
3. Not VAT-Exempt or VAT Zero-rated
TN: Importations are subject to VAT, WON in the course of t/b
Impact of tax Incidence of tax
Point on which tax is originally Point on which the tax burden
imposed finally rests or settles down and
Impact is on seller in most cases, the incidence is on
the final consumer
Page | 28
Destination Principle 2. Effectively zero-rated – refers to the local sale of goods and
Exempts from VAT goods, properties, or services destined for properties by VAT-registered person or a person or entity who
consumption outside country was granted direct and indirect tax exemption under special laws
or international agreements
Cross-border principle
Does not subject to VAT goods, properties or services beyond the Zero-rated Effectively zero-rated
territorial borders of the Philippines Generally refers to the export sale Refers to sale of goods or supply
TN: Cross-border doctrine does not necessitate actual consumption of of goods and supply of services of services to persons or entities
goods, properties or services outside the Philippines. CBD has whose exemption under special
something to do with territorial borders while Destination principle laws or international agreements
involves consumption of goods. to which the Philippines is a
signatory effectively subjects
XPTN to Destination principle such transactions to a zero rate
1. Service is performed in the Philippines; Tax rate is set at zero. When As applied to the tax base, such
2. Service falls under any Sec. 108(B) of Tax Code (Zero-rated); and applied to tax base, such rate rate does not yield any tax
3. Paid in acceptable foreign currency that is accounted for in obviously results in no tax chargeable against the purchaser
accordance with the regulations of BSP chargeable against the purchaser
Seller of such transactions Seller who charges zero output
Ecozones charges no output tax, but can tax on such transactions can also
While it is geographically within the Philippines, it is deemed a claim a refund of or a tax credit claim a refund of or a tax credit
separate customs territory and is regarded in law as foreign soil. Since certificate for the VAT previously certificate for the VAT previously
they are considered foreign territories, sales of suppliers from outside charged by suppliers charged by suppliers
the ecozone to this separate customs territory are deemed as exports Intended to be enjoyed by the Intended to benefit the purchaser
and treated as export sales seller who is directly and legally who, not being directly and
liable for the VAT, making such legally liable for the payment of
VAT on sale of goods or properties seller internationally competitive the VAT, will ultimately bear the
by allowing the refund or credit of burden of the tax shifted by the
There shall be levied, assessed and collected on every sale, barter or input taxes that are attributable suppliers
exchange of goods or properties, a VAT equivalent to 12% of GSP or to export sales
gross value in money of goods or properties sold, bartered or
exchanged, such tax to the be paid by seller or transferor. Requisites to be entitled to refund or issuance of tax credit
certificate for input VAT due or paid attributable to zero-rated
Goods or properties or effectively zero-rated sales
All tangible and intangible objects which are capable of pecuniary 1. There must be zero-rated or effectively zero-rated sales
estimation 2. Input taxes were incurred or paid
3. Such input taxes are directly attributable to zero-rated or
Transactions deemed sale subject to VAT effectively zero-rated sales
1. Transfer, use or consumption not in the course of business of 4. Input taxes were not applied against any output VAT liability
goods or properties originally intended for sale or for use in the 5. Claim for refund was filed within the two-year prescriptive period
course of business
2. Distribution or transfer to: Zero-rated sale of goods or properties
a. Shareholders or investors as share in the profits of the VAT- Export sales:
registered persons 1. Sale and actual shipment of goods from the Philippines to a
b. Creditors in payment of debt foreign country, irrespective of any shipping arrangement that
3. Consignment of goods if actual sale is not made within 60 days may be agreed upon which may influence or determine the
following the date such goods were consigned transfer of ownership of the goods so exported and paid for in
4. Retirement from or cessation of business, with respect to acceptable foreign currency or its equivalent in goods or services,
inventories of taxable goods existing as of such retirement or and accounted for in accordance with the rules and regulations of
cessation BSP
2. Sale and delivery of goods to:
Zero-rated transactions (i) Registered enterprises within a separate customs territory as
Sales by VAT-registered persons which are subject to 0% rate, provided under special laws
meaning the tax burden is not passed on to the purchaser. Zero-rated (ii) Registered enterprises within tourism enterprise zones as
sale by a VAT-registered person, which is a taxable transaction for VAT declared by Tourism Infrastructure and Enterprise Zone
purposes, shall not result in any output tax. However, the input tax on Authority (TIEZA) subject to provisions of Tourism Act of
his purchases of goods, properties or services related to such zero- 2009
rated sale shall be available as tax credit or refund. 3. Sale of raw materials or packaging materials to a non-resident
buyer for delivery to a resident local export-oriented enterprise to
Zero-rated VAT-Exempt be used in manufacturing, processing, packing or repacking in the
It is a taxable transaction but Not subject to the output tax Philippines of the said buyer‟s goods and paid for in acceptable
does not result in an output tax foreign currency and accounted for in accordance with the rules
Input VAT on the purchases of a Seller in an exempt transaction is and regulations of BSP
VAT-registered person with zero- not entitled to any input tax on 4. Sale of raw materials or packaging materials to export-oriented
rated sales may be allowed as tax his purchases despite the enterprise whose export sales exceed 70% of total annual
credits or refunded issuance of VAT invoice or receipt production
Persons engaged in transactions Registration is optional for VAT- 5. Those considered export sales under EO No. 226, otherwise
which are zero-rated, being exempt persons known as Omnibus Investment Code of 1987, and other special
subject to VAT, are required to laws
register 6. Sale of goods, supplies, equipment and fuel to persons engaged
in international shipping or international air transport operations:
Two types of zero-rated transactions Provided, that the goods, supplies, equipment and fuel shall be
1. Automatically zero-rated – refers to export sale of goods and used for international shipping or air transport operations.
properties and supply of services by VAT-registered person

Page | 29
 Provided, that subparagraphs (3), (4), and (5) hereof shall be
subject to 12% VAT and no longer be considered export sales
subject to 0% VAT rate upon satisfaction of following conditions:
(i) The successful establishment and implementation of an
enhanced VAT refund system that grants refunds of
creditable input tax within 90 days from the filing of the VAT
refund application with the Bureau: Provided, that, to
determine the effectivity of item no. 1, all applications filed
from Jan. 1, 2018 shall be processed and must be decided
within 90 days from filing of the VAT refund application
Under Revenue Regulations:
The 90-day period to process and decide shall start from the
filing of the application/claim for refund up to the release of
the payment of VAT refund. Provided, that, the
claim/application is considered to have been filed only upon
submission of the official receipts or invoices and other
documents in support of the application as prescribed under
pertinent revenue issuances.
(ii) All pending VAT refund claims as of December 31, 2017 shall
be fully paid in cash December 31, 2019.
Provided, that the Department of Finance shall establish a VAT
refund center in BIR and in BOC that will handle the processing
and granting of cash refunds of creditable input tax.
An amount equivalent to 5% of total VAT collection of BIR and
BOC from the immediately preceding year shall be automatically
appropriated annually and shall be treated as a special account in
the General Fund or as trust receipts for the purpose of funding
claims for VAT refund: Provided, That any unused fund, at the
end of the year shall revert to the General Fund.
Provided, further, that the BIR and BOC shall be required to
submit to the Congressional Oversight Committee on the
Comprehensive Tax Reform Program (COCCTRP) a quarterly
report of all pending claims for refund and any unused fund.
Effectively zero-rated sale
Sales to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory
effectively subjects such sales to zero rate.
VAT on Sale of Services and Use or Lease of Properties
There shall be levied, assessed and collected a VAT equivalent to 12%
of gross receipts derived from the sale or exchange of services,
including the use or lease of properties
Sale or exchange of services
Performance of all kinds of services in the Philippines for others for a
fee, remuneration or consideration
Zero-rated sale of services
The following services performed in the Philippines by VAT-registered
persons shall be subject to 0% rate:
1. Processing, manufacturing or repacking goods for other persons
doing business outside the Philippines which goods are
subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance with
the rules and regulations of BSP
2. Services other than those mentioned in the preceding paragraph,
rendered to a person engaged in business conducted outside the
Philippines or to a non-resident person not engaged in business
who is outside the Philippines when the services are performed,
the consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and
regulations of BSP
3. Services rendered to persons or entities whose exemption under
special laws and international agreements to which the Philippines
is a signatory effectively subjects the supply of such services to
0% rate
4. Services rendered to persons engaged in international shipping or
international air transport operations, including leases of property
for use thereof: Provided, that these services shall be exclusively
for international shipping or air transport operations
5. Services performed by subcontractors and/or contractors in
processing, converting, or manufacturing goods for an enterprise
whose export sales exceed 70% of total annual production
6. Transport of passengers and cargo by domestic air or sea vessels
from the Philippines to a foreign country
7. Sale of power or fuel generated through renewable sources of
energy such as, but not limited to, biomass, solar, wind,
hydropower, geothermal, ocean energy, and other emerging
energy sources using technologies such as fuel cells and
hydrogen fuels
8. Services rendered to:
(i) Registered enterprises within a separate customs territory as
provided under special law; and
(ii) Registered enterprises within tourism enterprise zones as
declared by TIEZA subject to the provisions under Tourism
Act of 2009
Provided, that subparagraphs (B)(1) and (B)(5) hereof shall be subject
to the 12% VAT and no longer be subject to 0% VAT rate upon
satisfaction of the following conditions:
(i) The successful establishment and implementation of an enhanced
VAT refund system that grants refunds of creditable input tax
within 90 days from the filing of the VAT refund application with
the Bureau: Provided, that to determine the effectivity of item no.
1, all applications filed from January 1, 2018 shall be processed
and must be decided within 90 days from filing of the VAT refund
application; and
Revenue Regulations: Same content as that of export sales
(ii) All pending VAT refund claims as of December 31, 2017 shall be
fully paid in cash by December 31, 2019.
Provided, that the Department of Finance shall establish a VAT refund
center in the BIR and in the BOC that will handle the processing and
granting of cash refunds of creditable input tax.
An amount equivalent to 5% of the total VAT collection of BIR and
BOC from the immediately preceding year shall be automatically
appropriated annually and shall be treated as a special account in the
General Fund or as trust receipts for the purpose of funding claims for
VAT Refund: Provided, that any unused fund, at the end of the year
shall revert to the General Fund.
Provided, further, that the BIR and BOC shall be required to submit to
the COCCTRP a quarterly report of all pending claims for refund and
any unused fund.
VAT on Importation of Goods
There shall be levied, assessed and collected on every importation of
goods a VAT equivalent to 12% based on the total value used by BOC
in determining tariff and customs duties, plus customs duties, excise
taxes, if any, and other charges, such tax to be paid by importer prior
to the release of such goods from customs custody
Where customs duties are determined on the basis of quantity or
volume of the goods, VAT shall be based on the landed cost plus
excise taxes, if any.
Imposition of VAT on transfer of goods by tax exempt persons
In case of tax-free importation of goods into Philippines by persons,
entities or agencies exempt from tax where such goods are
subsequently sold, transferred or exchanged in the Philippines to non-
exempt persons or entities, the purchasers, transferees or recipients
shall be considered the importers thereof, who shall be liable for any
internal revenue tax on such importation.
Tax due on such importation shall constitute a lien on the goods
superior to all charges or liens on the goods, irrespective of possessor
thereof.
Page | 30
Technical importation
Subsequent sale, transfer or exchange of imported goods by VAT-
exempt persons to non-exempt persons or entities
VAT-exempt transactions
Subject to the provisions of Subsection (2) hereof, the following
transactions shall be exempt from the VAT:
1. Sale or importation of agricultural and marine food products in
their original state, livestock and poultry of a kind generally used
as, or yielding or producing foods for human consumption; and
breeding stock and genetic materials therefor.
Products classified under this paragraph shall be considered in
their original state even if they have undergone the simple
processes of preparation or preservation for the market, such as
freezing, drying, salting, broiling, roasting, smoking, or stripping.
Polished and/or husked rice, corn grits, raw cane sugar and
molasses, ordinary salt and copra shall be considered in their
original state
2. Sale or importation of fertilizers; seeds, seedlings and fingerlings;
fish, prawn, livestock and poultry feeds, including ingredients,
whether locally produced or imported, used in the manufacture of
finished feeds (except specialty feeds for race horses, fighting
cocks, aquarium fish, zoo animals and other animals generally
considered as pets
3. Importation of personal and household effects belonging to the
residents of the Philippines returning from abroad and non-
resident citizens coming to resettle in the Philippines: Provided,
that such goods are exempt from customs duties under the Tariff
and Customs Code of the Philippines
4. Importation of professional instruments and implements, tools of
trade, occupation or employment, wearing apparel, domestic
animals, and personal and household effects belonging to persons
coming to settle in the Philippines or Filipinos or their families and
descendants who are now residents or citizens of other countries,
such parties hereinafter referred to as overseas Filipinos, in
quantities and of the class suitable to the profession, rank or
position of the persons importing said items, for their own use
and not for barter or sale, accompanying such persons, or
arriving within a reasonable time: Provided, that the BOC may,
upon the production of satisfactory evidence that such persons
are actually coming to settle in the Philippines and that the goods
are brought from their former place of abode, exempt such goods
from payment of duties and taxes: Provided, further, That
vehicles, vessels, aircrafts, machineries and other similar goods
for use in manufacture, shall not fall within this classification and
shall therefore be subject to duties, taxes and other charges
5. Services subject to other percentage taxes (OPT)
6. Services by agricultural contract growers and milling for others of
palay into rice, corn into grit and sugar cane into raw sugar
7. Medical, dental, hospital and veterinary services except those
rendered by professionals
8. Educational services rendered by private educational institutions,
duly accredited by the DepEd, CHED, TESDA and those rendered
by government educational institutions
9. Services rendered by individuals pursuant to an employer-
employee relationship
10. Services rendered by regional or area headquarters established in
the Philippines by multinational corporations which act as
supervisory, communications and coordinating centers for their
affiliates, subsidiaries or branches in the Asia-Pacific Region and
do not earn or derive income from the Philippines
11. Transactions which are exempt under international agreements to
which the Philippines is a signatory or under special laws, except
those under PD No. 529
12. Sales by agricultural cooperatives duly registered with the CDA to
their members as well as sale of their produce, whether in its
original state or processed form, to non-members; their
importation of direct farm inputs, machineries and equipment,
including spare parts thereof, to be used directly and exclusively
in the production and/or processing of their produce
13. Gross receipts from lending activities by credit or multi-purpose
cooperatives duly registered with CDA
14. Sales by non-agricultural, non-electric and non-credit
cooperatives duly registered with CDA: Provided, that the share
capital contribution of each member does not exceed P15,000
and regardless of the aggregate capital and net surplus ratably
distributed among the members
15. Export sales by persons who are not VAT-registered
16. Sale of real properties not primarily held for sale to customers or
held for lease in the ordinary course of trade or business or real
property utilized for low-cost and socialized housing as defined by
Urban Development and Housing Act of 1992 (RA No. 7279), and
other related laws, residential lot valued at P1.5M and below,
house and lot, and other residential dwellings valued at P2.5M
and below: Provided, that beginning January 1, 2021, VAT
exemption shall only apply to sale of real properties not primarily
held for sale to customers or held for lease in the ordinary course
of trade or business, sale of real property utilized for socialized
housing as defined in RA No. 7279, sale of house and lot, and
other residential dwellings with selling price of not more than
P2M: Provided, further, that every 3 years thereafter, the amount
herein stated shall be adjusted to its present value using the
Consumer Price Index, as published by PSA
17. Lease of residential unit with a monthly rental not exceeding
P15,000
18. Sale, importation, printing or publication of books and any
newspaper, magazine, review or bulletin which appears at regular
intervals with fixed prices or subscription and sale and which is
not devoted principally to the publication of paid advertisements
19. Transport of passengers by international carriers
20. Sale, importation or lease of passenger or cargo vessels and
aircraft, including engine, equipment and spare parts thereof for
domestic or international transport operations
21. Importation of fuel, goods and supplies by persons engaged in
international shipping or air transport operations: Provided, that
the fuel, goods, and supplies shall be used for international
shipping or air transport operations
22. Services of bank, non-bank financial intermediaries performing
quasi-banking functions, and other non-bank financial
intermediaries
23. Sale or lease of goods and services to senior citizens and persons
with disability, as provided under Expanded Senior Citizens Act of
2010 and Act Expanding the Benefits and Privileges of PWD,
respectively
24. Transfer of property pursuant to Sec. 40(C)(2) – Tax-free
exchanges
25. Association dues, membership fees, and other assessments and
charges collected by homeowners associations and condominium
corporations
26. Sale of gold to BSP
27. Sale of drugs and medicines prescribed for diabetes, high
cholesterol, and hypertension beginning Jan. 1, 2019
28. Sale or lease of goods or properties or the performance of
services other than the transactions mentioned in the preceding
parargraphs, the gross annual sales and/or receipts do not
exceed the amount of P3M.
TN: Any person exempted under this and who is not a VAT-
registered person shall pay a tax equivalent to 3% of his gross
quarterly sales or receipts.
Rule:
a. Exceeds P3M – subject to VAT
b. Does not exceed P3M – Exempt from VAT but subject to 3%
OPT
XPTN:
1. Cooperatives
2. Self-employed individuals and professionals availing of
8% tax on gross sales and/or receipts and other non-
operating income (who do reach the P3M VAT
threshold)
Input and output tax
Page | 31
Input tax
Represents the actual payments, costs and expenses incurred by a
VAT-registered taxpayer in connection with his purchase of goods and
services
VAT paid by a VAT-registered person/entity in the course of his trade
or business on the importation of goods or local purchases of goods or
services from a VAT-registered person
Output tax
VAT on the sale of taxable goods or services by any person registered
or required to register under the Tax Code
Tax refund or tax credit
Any VAT-registered person, whose sales are zero-rated or effectively
zero-rated may, within 2 years after the close of the taxable quarter
when the sales were made, apply for the issuance of a tax credit
certificate or refunds of creditable input tax due or paid attributable to
such sales, except transitional input tax, to the extent that such input
tax has not been applied against output tax.
This also applies to those whose registration was cancelled due to
retirement from or cessation of business, or due to changes in or
cessation of status of VAT-registered person – within 2 years from
date of cancellation
CIR shall grant a refund of creditable input taxes within 90 days from
the date of submission of official receipts or invoices and other
documents in support of the application. Should CIR find that the
grand of refund is not proper, he must state in writing the legal and
factual basis for denial.
 Under Revenue Regulations:
 The 90-day period to process and decide shall start from the filing
of the claim up to the release of the payment of the VAT refund.
 The claim/application is considered to have been filed only upon
submission of the official receipts or invoices and other
documents in support of the application as prescribed under
pertinent revenue issuances.
In case of full or partial denial of the claim for tax refund, taxpayer
affected may, within 30 days from receipt of decision denying the
claim, appeal decision with CTA.
Failure on the part of any official, agent, or employee of BIR to act on
application (inaction) within 90 days shall be punishable under Sec.
269 (Violations committed by government enforcement officers).
 In the event that the 90-day period has lapsed without having the
refund released to the taxpayer-claimant, the VAT refund claim
may still continue to be processed administratively. But the BIR
official, agent, or employee who was found to have deliberately
caused the delay in processing of VAT refund claim may be
subjected to penalties imposed under said section.
Summary of periods
a. 2 years after close of taxable quarter when sales were made –
apply for issuance of TCC or refund with BIR
b. 90 days from submission of official receipts or invoices and other
documents in support of the application – CIR to grant or deny
the claim/application
IMPT: If there is inaction, BIR employee may be liable for
violation of Tax Code. But claim may still continue to be
processed administratively.
c. 30 days from receipt of CIR decision – appeal to CTA
San Roque doctrine
Without a decision or an inaction deemed a denial of the CIR within
the 90-day period (new period), the CTA has no jurisdiction over a
petition for review.
Enhanced VAT refund system
VAT Refund Centers
Requires establishment of refund centers in the BIR and BOC and the
earmarking of 5% of the total VAT collection for the purpose of
funding claims for VAT refund
Filing of returns
Every person liable to pay VAT shall file a quarterly return of the
amount of his gross sales or receipts within 25 days following the close
of each taxable quarter prescribed for each taxpayer.
Taxable quarter
Quarter that is synchronized with the income tax quarter of the
taxpayer (i.e., calendar quarter or fiscal quarter)
Payment
VAT-registered persons shall pay VAT on a monthly basis
However, effective Jan. 1, 2023, the filing and payment shall be done
within 25 days following the close of each taxable quarter.
Amended returns
Return may be amended within 3 years from the date of filing of
original return provided that no notice of investigation has actually
been received by the taxpayer.
TAX REMEDIES UNDER THE NIRC
Two Kinds of Assessment
1. Self-assessment – TP computes his own liability, files his return,
and pays the tax based on his computation
2. Deficiency assessment – Occurs upon discovery of BIR that the
self-assessment was either deficient, or when no return was
made by TP
Valid assessment
Must be in writing and must inform TP of the law and the facts on
which the assessment is made; otherwise, assessment is void
Letter of Authority (LoA)
An official document given to the Revenue Officer which empowers
him to examine and scrutinize a taxpayer‟s books of accounts and
other accounting records, in order to determine the taxpayer‟s correct
internal revenue tax liabilities
Power to issue assessment is with CIR. However, he can authorize any
revenue officer to conduct an examination or assessment through a
Letter of Authority.
LoA must be served within 30 days from its issuance.
Mandatory statutory requirement
No assessments can be issued or no assessment functions or
proceedings can be done without the prior approval and authorization
of the CIT or his duly authorized representative, through a LoA. Any
tax assessment issued without a LoA is a violation of TP‟s right to due
process and is therefore inescapably void
Letter Notice (LN) is entirely different and serves a different purpose
than a LoA. It is not found in NIRC and not an authority to conduct
audit or examination of TP leading to issuance of deficiency
assessments. Due process demands that after LN has served its
purpose, revenue officer should have properly secured a LoA before
proceeding with further examination and assessment of TP.
“Unverified prior years” is invalid
LoA must cover a taxable period not exceeding one taxable year. If
BIR intends to audit a taxpayer for more than one taxable year, it
should indicate the specific years.
Tax Audit of Taxpayer
Revenue officer has 120 days from date of receipt of LoA to conduct
the audit and submit the required report of investigation
a. If he finds no deficiency – audit ends
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b. If there is deficiency – Revenue Officer submits his report to the Period of Limitation upon Assessment and Collection
RDO and the case is endorsed to the RRO or CIR Internal revenue taxes shall be assessed within 3 years after the last
day prescribed by law for the filing of the return or from last day for
Notice for Informal Conference filing the return (Return filed before last day prescribed by law for
Revenue Officer who audited TP‟s records shall state in his report filing thereof shall be considered as filed on such last day).
whether or not TP agrees with his findings that the TP is liable for After expiration of such period, no proceeding in court without
deficiency tax. If TP is not amenable, TP shall be informed, in writing, assessment for the collection of such taxes shall be begun
by RDO or by Special Investigation Division (in case of Revenue In case where return is filed beyond prescribed period, the 3-year
Regional Offices), or by Chief of Division (in case of BIR National period shall be counted from the day the return was filed.
Office) of the discrepancies in TP‟s payment of his internal revenue
taxes, for the purpose of Informal Conference, in order to afford TP XPTNS: Tax may be assessed or a proceeding in court for the
with an opportunity to present his side. collection of such tax may be filed with without assessment
1. False or fraudulent return with intent to evade tax
Informal Conference shall in no case extend beyond 30 days from - Within 10 years after discovery of falsity/fraud
receipt of notice for informal conference. If it is found that TP is still - False return: Merely implies deviation from truth; usually due
liable for deficiency taxes after presenting his side, TP is not amenable, to mistake, carelessness or ignorance
RDO shall endorse the case within 7 days from conclusion of Informal - Fraudulent return: Implies intentional or deceitful entry with
Conference to the Assessment Division of RRO or to CIR or his duly intent to evade taxes due
authorized representative for issuance of deficiency tax assessment. 2. Failure to file return
- Within 10 years after discovery of omission
Failure on the part of Revenue Officers to comply with the periods 3. Waiver of statute of limitations in writing, which must be made
shall be meted with penalty. before expiration of 3-year period of assessment of taxes
- Period agreed upon in the waiver; may be extended by
GR: For income tax purposes, TP‟s books of accounts shall be subsequent written agreements made before the expiration
subjected to examination and inspection only once for a taxable year of the period previously agreed upon
XPTNS:
1. CIR determines that fraud, irregularities, or mistakes were Guidelines for execution of waivers
committed by TP  Since TP is the applicant and the executor of the extension of the
2. TP himself requests a reinvestigation or re-examination of his period of limitation for its benefit in order to submit the required
books of accounts documents and accounting records, the TP is charged with the
3. To verify compliance with withholding and other internal revenue burden of ensuring that the waivers of statute of limitation are
taxes validly executed by its authorized representative
4. To verify CGT liabilities of TP  Authority of TP representative who participated in the conduct of
5. CIR exercise power to obtain information relative to the audit or investigation shall not be thereafter contested to
examination of other TPs invalidate the waiver
 Waiver may or may not be notarized. It is sufficient that the
Preliminary Assessment Notice (PAN) waiver is in writing
A form of informal conference with the TP and allows BIR to open his  Considering that the waiver is a voluntary act of TP, the waiver
books of account. TP‟s refusal to open books of account will cause the shall take legal effect and be binding on the TP upon its execution
BIR to issue a jeopardy assessment. FAN is later issued.  TP‟s duty to submit waiver to the CIR or officials previously
designated in existing issuances or the concerned revenue district
a. BIR finds no sufficient basis to assess the TP – case is dismissed officer or group supervisor as designated in the
b. There is sufficient basis – PAN is issued, showing in detail the LoA/Memorandum of Assignment who shall then indicate
facts and the law, rules and regulations or jurisprudence on which acceptance by signing the same
the proposed assessment is based  Waiver shall be executed and duly accepted prior to the
expiration of the period to assess or to collect
Reply to PAN  TP has the duty to retain a copy of the accepted waiver
a. TP to respond to PAN within 15 days from date of receipt of PAN  Two material dates that need to be present on the waiver
b. TP responds that he disagrees with findings, FLD/FAN shall be 1. Date of execution by TP or authorized representative
issued within 15 days from filing/submission of TP‟s response, 2. Expiry date of period the TP waives the statute of limitations
calling for payment of TP‟s deficiency tax liability, inclusive of  Before expiration of period set on previously executed waiver, the
applicable penalties period earlier set may be extended by subsequent written waiver
c. No reply, he is considered in default and a Formal Letter of
Demand and Final Assessment Notice (FLD/FAN) shall be issued Requirement of a waiver of statute of limitations
calling for the payment of taxpayer‟s deficiency tax liability, 1. Waiver should be executed before expiration of period to assess
inclusive of applicable penalties or collect taxes
2. Signed by TP with date of execution
Deficiency assessment Jeopardy assessment 3. Signed by BIR with date of acceptance
Assessment made by BIR after Tax assessment which was TN: Both execution and acceptance must be prior to expiration
the conduct of an investigation or assessed without the benefit of a 4. 3 original copies for TP, BIR, and records
audit when it finds that the tax complete or partial audit by an 5. Expiry date of period agreed upon after 3-year period
return filed by TP contains an authorized revenue officer who
under-declaration of income or has reason to believe that the When PAN is not required
when the TP does not at all file a assessment and collection of a 1. Assessment is purely mathematical error
tax return deficiency tax will be jeopardized When the finding for any deficiency tax is the result of
by delay because of TP‟s failure mathematical error in the computation of the tax as appearing on
to comply with audit and the face of the return
investigation requirements to 2. Discrepancy between tax withheld and remitted
present his books of accounts When discrepancy has been determined between the tax withheld
and/or pertinent records or and the amount actually remitted by the withholding agent
substantiate all or any of the 3. Claim for refund is filed when it was previously carried over
deductions, exemptions, or Taxpayer who opted to claim a refund or tax credit of excess
credits claimed in his return creditable withholding tax for a taxable period was determined to
have carried over and automatically applied the same amount
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 claimed against the estimated tax liabilities for the taxable
quarter/s of the succeeding taxable year Deficiency interest Delinquency interest
4. When the excise tax due on excisable articles has not been paid Any deficiency in the tax due shall There shall be assessed and
5. Goods imported by tax-exempt entity are sold to a taxable entity be subject to prescribed interest collected on unpaid amount,
When an article locally purchased or imported by an exempt which shall be assessed and interest at the rate prescribed
person, such as, but not limited to, vehicles, capital equipment, collected from (1) date prescribed until amount is fully paid, which
machineries and spare parts, has been sold, traded or transferred for its payment until the full interest shall form part of the tax
to non-exempt persons payment, or (2) upon issuance of in case TP fails to pay:
a notice of demand by CIR, 1. Amount of tax due on any
Suspension of running of statute of limitations whichever comes earlier return required to be filed
1. During which the Commissioner is prohibited from making the Deficiency: 2. Amount of tax due for which
assessment or beginning distraint or levy or a proceeding in court a. Amount by which the tax no return is required
and for 60 days thereafter imposed exceeds amount 3. Deficiency tax, or any
2. When taxpayer requests for reinvestigation which is granted by shown as tax by TP upon his surcharge or interest on the
the Commissioner return due date appearing in the
- Only collection is suspended b. If no amount shown or no notice and demand of the
3. When taxpayer cannot be located in the address given by him in return made, amount by CIR
the return filed upon which a tax is being assessed or collected which tax exceeds amounts
- If taxpayer informs Commissioner of any change in address, previously assessed or
the running of Statute of Limitations will not be suspended collected without
4. When the warrant of distraint or levy is duly served upon assessment as deficiency
taxpayer, his authorized representative, or a member of his
household with sufficient discretion, and no property could be 3. Compromise penalty
located See Compromise and abatement
- Only collection is suspended
5. When taxpayer is out of the Philippines Protest
6. Those under the CTA law TP may protest administratively by filing a request for reconsideration
or reinvestigation within 30 days from receipt of FLD/FAN
Formal Letter of Demand and Final Assessment Notice a. Request for reconsideration – refers to a plea of re-evaluation of
(FLD/FAN) an assessment on the basis of existing records without need of
Issued by CIR or his duly authorized representative which calls for additional evidence. It may involve both question of fact or of law
payment of TP‟s deficiency tax liability, inclusive of the applicable or both
penalties, and shall state the facts, the law, rules and regulations, or b. Request for reinvestigation – refers to a plea of re-evaluation of
jurisprudence on which the assessment is based; otherwise, an assessment on the basis of newly discovered or additional
assessment will be void evidence that a TP intends to present in the reinvestigation. It
- This is not only a procedural requirement but a substantive may also involve a question of fact or of law or both.
requirement which determines TP‟s ability to protest TP shall submit all relevant supporting documents in support of
his protest within 60 days from date of filing of his letter of
Civil penalties protest, otherwise, assessment shall become final.
Relevant supporting documents – refer to documents necessary
1. Surcharge to support the legal and factual bases in disputing a tax
a. 25% of the amount due in following cases: assessment as determined by TP. 60-day period for submission of
1. Failure to file return and pay tax due all relevant supporting documents shall not apply to requests for
2. Filing a return with an internal revenue officer other than reconsideration.
those with whom the return is required to be filed (improper
venue) GR: No prior payment of assessed internal revenue tax is required
XPTN: Unless otherwise authorized by Commissioner when protested or disputed
3. Failure to pay deficiency tax within the time prescribed for XPTNS:
its payment in the notice of assessment 1. If there are several issues involved in the FLD/FAN but TP only
4. Failure to pay the full or part of amount of tax shown on any disputes or protests against the validity of some of the issues
return required to be filed or the full amount of tax due for raised
which no return is required to be filed, on or before the date 2. If there are several issues involved in the disputed assessment
prescribed for its payment and TP fails to state the facts, the applicable law, rules and
b. 50% of the tax (or of deficiency tax if any payment has been regulations, or jurisprudence in support of his protest against
made on the basis of such return before discovery of falsity of some of several issues on which the assessment is based
fraud)
1. Willful neglect to file return within the period prescribed Effect it TP does not file a valid protest
2. False or fraudulent return is willfully made Assessment shall become final, executory and demandable
Prima facie evidence: Substantial under-declaration of
taxable sales, receipts or income, or a substantial over- Final Decision on Disputed Assessment (FDDA)
statement of deductions as determined by Commissioner States the facts, applicable law, rules and regulations, or jurisprudence
o TP is rendered liable for this if there is failure to on which such decision is based, otherwise, the decision shall be void,
report sales, receipts or income in an amount and that the same is his final decision
exceeding 30% of that declared per return and a
claim of deductions in an amount exceeding 30% CIR has 180 days from date of filing of protest in case of
of actual deductions reconsideration or within 180 days from date of submission by TP of
required documents in support of his protest in case of request for
2. Interest investigation.
There shall be assessed and collected on any unpaid amount of
tax, interest at the rate of double the legal interest rate for loans Appeals
or forbearance of any money in the absence of an express See diagram in codals
stipulation as set by BSP from the date prescribed for payment TN: MR or MNT with CTA Division within 15 days from receipt of
until the amount is fully paid, provided that in no case shall the decision is necessary. TP cannot appeal directly to CTA en banc
deficiency and delinquency interest be imposed simultaneously without this.
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 Recovery of tax erroneously or illegally collected
Collection
Grounds for refund or credit
Delinquency tax Deficiency tax 1. Tax erroneously or illegally assessed or collected
Can be immediately collected Can be collected also through 2. Penalty claimed to have been collected without authority
administratively through issuance administrative and/or judicial 3. Any sum alleged to have been excessively or in any manner
of a warrant of distraint or levy remedies but has to go through wrongfully collected
and/or through judicial action the process of filing the protest
by TP against the assessment and Requirements for tax credit or refund
the denial of such protest by the 1. Written claim for credit/refund filed with CIR, whether or not tax
CIR has been paid under protest
XPTNS:
Prescriptive periods a. When on the face of the return upon which payment was
Assessment Collection made, such payment appears clearly to have been
Return is filed on or 3 years from due 5 years from receipt erroneously paid, CIR may refund or credit tax even without
before due date date of assessment claim
Return is filed after 3 years from actual 5 years from receipt b. Return filed showing an overpayment shall be considered as
due date filing of assessment a written claim for credit or refund (204(C))
Fraudulent filing of 10 years from 5 years from receipt 2. Filed within 2 years after actual payment of tax or penalty,
return discovery of of assessment regardless of existence of any supervening cause after payment
fraud/bad faith TN: Both claim for refund AND appeal to CTA must be done
Non-filing 10 years from 5 years from receipt within 2-year period (different from refund of input tax on zero-
rated sales)
discovery of non- of assessment
filing
Proper party to file claim for refund or tax credit
No assessment is issued by BIR 10 years from
Withholding agent – directly and independently liable for the correct
BIR may opt not to issue assessment when: discovery of filing of
amount of tax that should be withheld; also liable for deficiency
1. Return is filed fraudulently fraudulent return or
assessments, surcharges and penalties
2. No return is filed non-filing
GOVERNMENT REMEDIES
Compromise and abatement of taxes
Administrative remedies
Compromise – an agreement whereby the parties, by making
1. Tax lien – legal claim or charge on property, real or personal,
reciprocal concessions, avoid litigation or put an end to one already
established by law as security in default of payment of tax
commenced
- Claim of government predicated on a tax lien is superior to
the claim of a private litigant predicated on a judgment.
GR: CIR is the only official vested with power and discretion to
2. Distraint of personal property or levy of real property or
compromise civil and criminal cases arising from violations of Tax
garnishment of bank deposits
Code.
XPTN: Regional Evaluation Board may enter into a compromise on:
Two kinds of distraint
1. Assessment issued by Regional Officers involving basic deficiency
a. Actual distraint – delinquent TP
taxes of P500,000 or less
b. Constructive distraint
2. Minor criminal violations, discovered by regional and district
1. TP is retiring from any business subject to tax
2. TP is intending to leave the Philippines
Instances which require approval of Evaluation Board
3. TP is intending to remove his property therefrom
1. Basic tax involved exceeds P1M
4. TP is intending to hide or conceal his property
2. Settlement offered is less than prescribed minimum rates
5. TP is intending to perform any act tending to obstruct
TN: Evaluation Board is composed of CIR and 4 Deputy
the proceedings for collecting the tax due or which may
Commissioners
be due from him
GR: Criminal violations of Tax Code can be compromised
Requisites for valid distraint and levy
XPTN:
1. TP must be delinquent
1. Those already filed in court and
2. There must be a subsequent demand for its payment
2. Those involving fraud
3. TP must fail to pay the delinquent tax at the time required
4. Period within which to collect the tax has not yet prescribed
Grounds for compromise
1. Doubtful validity of assessment – reasonable doubt as to validity
Procedure for actual distraint
of claim against TP exists
1. Commencement of distraint proceedings
2. Financial incapacity – Financial position of TP demonstrates a
2. Service of warrant of distraint
clear inability to pay assessed tax
3. Notice of sale of distrained property
4. Release of distrained property, prior to sale
Compromise penalty
5. Sale of property distrained
a. Minimum of 10% of basic assessed tax – in case of financial
6. Purchase by Government at sale upon distraint
incapacity
b. Minimum of 40% of basic assessed tax – other cases
Procedure for levy of real property
1. Commencement of levy proceedings
Abatement – diminution or decrease in the amount of tax imposed
2. Service of warrant of levy
such that to abate is to nullify or reduce in value or amount
3. Advertisement for sale
No mutual concession unlike compromise
4. Public sale of property under levy
5. Redemption of property sold
Grounds for abatement
6. Forfeiture to Government for want of bidder
1. Assessment is excessive or erroneous
7. Resale of real estate taken for taxes
2. Administration and collection costs involved do not justify the
8. Further distraint and levy
collection of amount due

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3. Sale of property 1. Taxes
4. Forfeiture 2. Service fees or charges
5. Compromise and abatement (already discussed) 3. Barangay clearance
6. Penalties and fines 4. Other fees and charges
7. Suspension of business – CIR or his authorized representative a. On commercial breeding of fighting cocks, cockfights, and
may suspend the business operation and temporarily close the cockpits
business of a VAT-registered person for understatement of b. On places of recreation which charge admission fees
taxable sales or receipts by 30% or more of his correct taxable c. On billboards, signboards, neon signs, and outdoor
sales or receipts for taxable quarter advertisments
- Suspension is for a period not less than 5 days and shall be
lifted only upon compliance of requirements imposed by CIR Common limitations on the taxing powers of LGUs
in collection order Exercise of taxing powers of provinces, cities, municipalities, and
barangays shall not extend to the levy of following:
Judicial remedies 1. Income tax, except when levied on banks and other financial
a. Civil action institutions
b. Criminal action 2. DST
See table 3. Taxes on estates, inheritance, gifts, legacies, and other
acquisitions mortis causa, except as otherwise provided herein
4. Customs duties, registration fees of vessel and wharfage on
LOCAL TAXATION wharves, tonnage dues, and all other kinds of customs fees,
(Local Government Code of 1991 [RA 7160], as amended) charges, and dues, except wharfage on wharves constructed and
maintained by LGU concerned
LOCAL GOVERNMENT TAXATION 5. Taxes, fees, and charges and other impositions upon goods
carried into or out of, or passing through, the territorial
Fundamental principles jurisdictions of LGUs in the guise of charges for wharfage, tolls for
1. Taxation shall be uniform in each LGU bridges or otherwise, or other taxes, fees, or charges in any form
2. Taxes, fees, charges, and other impositions shall whatsoever upon such goods or merchandise
a. Be equitable and based as far as practicable on the TP‟s 6. Taxes, fees, or charges on agricultural and aquatic products when
ability to pay sold by marginal farmers or fishermen
b. Be levied and collected only for public purposes 7. Taxes on business enterprises certified to by BOI as pioneer or
c. Not be unjust, excessive, oppressive, or confiscatory non-pioneer for a period of 6 and 4 years, respectively, from the
d. Not be contrary to law, public policy, national economic date of registration
policy, or in restraint of trade 8. Excise taxes on articles enumerated under NIRC and taxes, fees,
3. Collection of local taxes, fees, charges and other impositions shall or charges on petroleum products
in no case be let to any private person 9. Percentage or VAT on sales, barters, or exchanges or similar
4. Revenue collected shall inure solely to the benefit of, and be transactions on goods or services, except as otherwise provided
subject to the disposition by, the LGU levying the tax, fee, herein
charge, or other imposition unless otherwise specifically provided 10. Taxes on the gross receipts of transportation contractors and
herein persons engaged in transportation of passengers or freight by
5. Each LGU shall, as far as practicable, evolve a progressive system hire and common carriers by air, land, or water, except as
of taxation provided in this Code
11. Taxes on premiums paid by way of reinsurance or retrocession
Specific taxing powers of Local Government Units (exclude 12. Taxes, fees, or charges for the registration of motor vehicles and
rates) for the issuance of all kinds of licenses or permits for the driving
thereof, except tricycles
Common revenue-raising powers of LGUs 13. Taxes, fees, or other charges on Philippine products actually
1. Service fees and charges exported, except as otherwise herein
2. Public utility charges 14. Taxes, fees, or charges on Countryside Barangay Business
3. Toll fees or charges Enterprises and cooperatives
15. Taxes, fees, or charges of any kind on the national government,
Provinces its agencies, instrumentalities and LGUs, except when beneficial
1. Tax on transfer of real property ownership use is granted to taxable person (RPT)
2. Tax on business of printing and publication
3. Franchise tax Procedure for approval and effectivity of tax ordinances
4. Tax on sand, gravel, and other quarry resources
5. Professional tax Requirement for enactment
6. Amusement tax 1. Public hearings
7. Annual fixed tax for every delivery truck or van of manufacturers 2. Publication/Posting
or producers, wholesalers of, dealers, or retailers in, certain Within 10 days after approval, tax ordinances shall be published
products in full for 3 consecutive days in a newspaper of local circulation
XPTN: If there are no newspapers of local circulation, same be
Municipalities posted in at least 2 conspicuous and publicly accessible places
1. Tax on business
2. Fees and charges on business and occupation and, except as Periods of assessment and collection of local taxes, fees, or
reserved to province, on the practice of any profession or calling charges
3. Fees for sealing and licensing of weights and measures a. Assessment
4. Fishery rentals, fees, and charges 1. Within 5 years from date they became due
5. Community tax 2. Within 10 years from time of discovery, in case of fraud or
intent to evade payment
Cities b. Collection
Taxes, fees, and charges which province or municipality may impose Within 5 years from date of assessment by administrative or
Community tax judicial action

Barangays
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Suspension of running of periods
1. Treasurer is legally prevented from making the assessment of
collection
2. TP requests for a reinvestigation and executes a waiver in writing
before expiration of the period within which to assess or collect
3. TP is out of the country or otherwise cannot be located
Taxpayer’s remedies
Before assessment
1. Question newly enacted ordinances
a. Constitutionality
b. Legality
 Any question on constitutionality or legality of tax ordinances
or revenue measures may be raised on appeal within 30
days from effectivity to Secretary of Justice who shall render
a decision within 60 days from date of receipt of appeal
 Appeal shall not have the effect of suspending the effectivity
of the ordinance and the accrual and payment of the tax,
fee, or charge levied therein
 Within 30 days after receipt of decision or lapse of 60-day
period without the Secretary of Justice acting upon the
appeal, aggrieved party may file appropriate proceedings
with a court of competent jurisdiction
TN: When disputing ordinance, appeal to DOJ is mandatory
XPTN: Pure question of law
2. Declaratory relief
After assessment
3. Protest against an assessment
See Diagram
4. Claim for refund or tax credit for erroneously or illegally collected
taxes, fees, or charges
1. Written claim filed with local treasurer
2. Filed within 2 years from date of payment or from date
when TP is entitled to a refund or credit
5. Redemption of property sold
Remedies of the LGUs for collection of revenues
a. Administrative action
1. Local government‟s lien – superior to all liens, charges or
encumbrances in favor of any person, enforceable by
appropriate administrative or judicial action
2. Distraint of personal property
3. Levy of real property
4. Compromise
b. Judicial action
Civil action for collection – must be filed by local treasurer within
5 years from assessment
TN: Either of the remedies or all may be pursued concurrently or
simultaneously at the discretion of LGU
REAL PROPERTY TAXATION
Fundamental principles
1. Real property shall be appraised at its current and fair market
value
2. Real property shall be classified for assessment purposes on the
basis of its actual use
3. Real property shall be assessed on the basis of a uniform
classification within each LGU
4. Appraisal, assessment, levy, and collection of RPT shall not be let
to any private person
5. Appraisal and assessment of real property shall be equitable
Exemption from real property taxes
1. Real property owned by Republic or any of its political
subdivisions
XPTN: When beneficial use has been granted, for consideration or
otherwise, to a taxable person
2. Charitable institutions, churches, parsonages or convents
appurtenant thereto, mosques, non-profit or religious cemeteries,
and all lands, buildings, and improvements actually, directly, and
exclusively used for religious, charitable, or educational purposes
3. All machineries and equipment that are actually, directly, and
exclusively used by local water districts and government-owned
or –controlled corporations engaged in the supply and distribution
of water and/or generation and transmission of electric power
4. All real property owned by duly registered cooperatives
5. Machinery and equipment used for pollution control and
environmental protection
LGUs with power to levy RPT
1. Provinces
2. Cities
3. Municipalities within Metro Manila
Date of accrual
a. Real property – accrue on the 1st day of January
b. Special levy – accrue on the 1st day of the quarter next following
the effectivity of the ordinance imposing such levy
Collection of taxes
Collection of RPT with interest and related expenses and enforcement
of remedies shall be the responsibility of city or municipal treasurer.
The latter may deputize barangay treasurer to collect all taxes in real
property located in the barangay, provided that the barangay treasurer
is properly bonded for the purpose and the premium on the bond shall
be paid by city or municipal government
Periods within which to collect real property taxes
a. Within 5 years from date they become due
No action for the collection, whether administrative or judicial,
shall be instituted after the expiration of such period.
b. Within 10 years from the discovery of fraud or intent to evade
payment – in case of fraud or intent to evade payment of tax
Suspension of period of prescription
1. Local treasurer is legally prevented from collecting tax
2. Owner of the property or the person having legal interest therein
requests for reinvestigation and executes a waiver in writing
before the expiration of the period within which to collect
3. Owner of the property or the person having legal interest therein
is out of the country or otherwise cannot be located
TN: Almost same with local taxation
Taxpayer’s remedies
Contesting an assessment/Payment under protest
 No protest shall be entertained unless TP first pays the tax.
 There shall be annotated on the tax receipts the words, “paid
under protest.”
 The protest in writing must be filed within 30 days from payment
of tax to the provincial, city, or municipal treasurer, in the case of
municipality within Metro Manila, who shall decide the protest
within 60 days from receipt.
 Tax or portion of it paid under protest shall be held in trust by
treasurer
 In the event that the protest is finally decided in favor of TP, the
amount or portion of tax protested shall be refunded to the
protestant, or applied as tax credit against his existing or future
tax liability.
 In the event that the protest is denied or upon the lapse of 60-
day period, TP may avail of remedies under Assessment Appeals
Repayment of excessive Collections
 When assessment is found to be illegal or erroneous and tax is
accordingly reduced or adjusted, TP may file a written claim for
refund or credit for taxes and interests with treasurer within 2
years from date the TP is entitled to such reduction or
adjustment.
 Treasurer shall decide the claim within 60 days from receipt
thereof. In case claim is denied, TP may avail of remedies under
Assessment Appeals
Contesting a valuation of real property
 Any owner or person having legal interest in the property who is
not satisfied with the action of the assessor in the assessment of
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 his property may, within 60 days from date of receipt of written
notice of assessment, appeal to Local Board of Assessment
Appeals (LBAA) by filing a petition under oath with copies of tax
declarations and affidavits or documents.
 LBAA shall decide within 120 days from date of receipt of appeal.
 Unsatisfied, owner or person with legal interest in the property
may, within 30 days after receipt of decision of LBAA, appeal to
CBAA. Decision of CBAA shall be final and executory. Hence,
appeal directly to CTA en banc.
Remedies of LGUs for collection of real property taxes
a. Administrative action
1. Local government‟s lien
2. Levy on real property
3. Sale of real property
b. Judicial action
Civil action for collection – must be filed by local treasurer within
5/10 years
JUDICIAL REMEDIES
(RA 1125, as amended, and the Revised Rules of the CTA)
CTA EN BANC
Exclusive appellate jurisdiction
1. Decisions or resolutions on MR or MNT of CTA Division in the
exercise of its exclusive appellate jurisdiction over:
a. Cases arising from administrative agencies – BIR, BOC, DOF,
DTI, DA
b. Local tax cases decided by RTC in the exercise of their
original jurisdiction
c. Tax collection cases decided by RTC in the exercise of their
original jurisdiction involving final and executory
assessments for taxes, fees, charges and penalties, where
the principal amount of taxes and penalties claimed is less
than P1M
2. Decisions, resolutions or orders of RTC in local tax cases decided
or resolved by them in the exercise of their appellate jurisdiction
3. Decisions, resolutions or orders of RTC in tax collection cases
decided or resolved by them in the exercise of their appellate
jurisdiction
4. Decisions, resolutions or orders on MR or MNT of CTA Division in
the exercise of its exclusive original jurisdiction over tax collection
cases
5. Decisions of CBAA in the exercise of its appellate jurisdiction over
cases involving the assessment and taxation of real property
originally decided by the provincial or city board of assessment
appeals
6. Decisions, resolutions or orders on MR or MNT of CTA Division in
the exercise of its exclusive original jurisdiction over cases
involving criminal offenses arising from violations of NIRC or TCC
and other laws administered by BIR or BOC
7. Decisions, resolutions or orders on MR or MNT of CTA Division in
the exercise of its exclusive appellate jurisdiction over criminal
offenses mentioned in the preceding paragraph
8. Decisions, resolutions or orders of RTC in the exercise of their
appellate jurisdiction over criminal offenses mentioned in
subparagraph (f)
CTA DIVISION
Exclusive original over or appellate jurisdiction to review by
appeal
1. Decisions of CIR in cases involving disputed assessments, refunds
of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the NIRC or other
laws administered by BIR
2. Inaction by CIR in cases involving disputed assessments, refunds
of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the NIRC or other
laws administered by BIR, where NIRC or other applicable law
provides a specific period for action: Provided, that in case of
disputed assessments, the inaction of the CIR within the 180-day
period under Section 228 of NIRC shall be deemed a denial for
purposes of allowing the TP to appeal his case to the Court and
does not necessarily constitute a formal decision of CIR on the
tax case; Provided, further, that should TP opt to await the final
decision of CIR on disputed assessments beyond the 180-day
period abovementioned, the TP may appeal such final decision to
Court under Section 3(a), Rule 8 of the Rules; and Provided, still
further, that in the case of claims for refund of taxes erroneously
or illegally collected, the TP must file a petition for review with
the Court prior to the expiration of 2-year period under Sec. 229
of NIRC
3. Decisions, resolutions or orders of the RTC in local tax cases
decided or resolved by them in the exercise of their original
jurisdiction
4. Decisions of Commissioner of Customs in cases involving liability
for customs duties, fees or other money charges, seizure,
detention or release of property affected, fines, forfeitures or
other penalties in relation thereto, or other matters arising under
the Customs Law or other laws administered by BOC
5. Decisions of Secretary of Finance on customs cases elevated to
him automatically for review from decisions of the Commissioner
of Customs adverse to the Government under TCC
6. Decisions of Secretary of Trade and Industry, in the case of non-
agricultural product, commodity or article, and the Secretary of
Agriculture, in the case of agricultural product, commodity or
article, involving dumping and countervailing duties under TCC
and safeguard measures under RA No. 8800, where either party
may appeal the decision to impose or not to impose said duties
Exclusive jurisdiction over cases involving criminal offenses
1. Original jurisdiction over all criminal offenses arising from
violations of the NIRC or TCC and other laws administered by BIR
or BOC, where the principal amount of taxes and fees, exclusive
of charges and penalties, claimed is P1M or more
2. Appellate jurisdiction over appeals from judgments, resolutions or
orders of RTC in their original jurisdiction in criminal offenses
arising from violations of NIRC or TCC and other laws
administered by BIR or BOC, where the principal amount of taxes
and fees, exclusive of charges and penalties, claimed is less than
P1M or where there is no specified amount claimed
Exclusive jurisdiction over tax collection cases
1. Original jurisdiction in tax collection cases involving final and
executory assessments for taxes, fees, charges and penalties,
where the principal amount of taxes and fees, exclusive of
charges and penalties, claimed is P1M or more
2. Appellate jurisdiction over appeals from the judgments,
resolutions or orders of the RTC in tax collection cases originally
decided by them within their respective territorial jurisdiction.
Procedures
See Table/Diagram
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