TAXATION LAW REVIEW
UST Faculty of Civil Law | A.Y. 2022 – 2023
RECAP
ROADMAP
Gross Income (Section 32)
Less: Allowable Deduction (Section 34)
Taxable Income
Multiply: Tax Rate (Sections 24, 25, 27, and 28)
Tax Due
Less: Tax Credits/Payments
Tax Payable/(Overpayment) (Section 76)
So, our formula is Gross Income under Sec. 32, and you
correlate it with Sec. 33, less Allowable Deductions under
Sec. 34, and you correlate it with Sec. 36, and also
considering our discussion in Capital Assets under Sec.
39, we arrive at our Taxable Income.
Then you multiply it with the particular tax rates, and the
tax rates shall depend on the type of taxpayers. Are we
talking of individuals or corporations, and depending
whether they are resident or non-resident. (We’ll discuss
this later.)
We will arrive then at our tax due. We deduct tax credits or
payments. These are the advanced income tax payments,
to arrive at tax payable or overpayments subject to Sec. 76
of the NIRC.
So, where we are right now? We finished already Gross
Income. So, we will proceed now to the discussion of
Allowable Deductions under Sec. 34.
ALLOWABLE DEDUCTIONS (SEC. 34)
The introductory paragraph of Sec. 34 states:
Except for taxpayers earning compensation income
arising from personal services rendered under an
employer-employee relationship where no
deductions shall be allowed under this Section, in
computing taxable income subject to income tax, there
shall be allowed the following deductions […]
So, Sec. 34, if you are looking at your Tax Code, there are
a number of deductions listed under Sec. 34. So, these are
the deductions that can be offset, or credited, against the
income to arrive at a taxable income. But, the opening
paragraph of Sec. 34 states that these itemized
deductions provided under Sec. 34 are not applicable
to compensation income.
In short, insofar as compensation income is concerned,
there are no allowable deductions. For compensation
income, THERE SHALL BE NO ALLOWABLE
DEDUCTIONS.
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So, the itemized deductions that we will be discussing,
these are deductions against business income or
professional income. But not against compensation
income.
ILLUSTRATIVE CASE: There are deductions indicated in
an employee’s pay slip, like SSS, GSIS, SSS, PAGIBIG,
etc. I would just like to pinpoint that these deductions are
not deductions under Sec. 34. They are exclusions
under Sec. 32(b).
NOTE
Exclusions and deductions are different. Definitely,
when you say exclusion, it is an item of receipt. But
these are not taxable, hence, we carve it out from the
receipt. But deductions are not really items of receipt.
These really are expenses or disbursements which we
could deduct against our income in order to arrive at our
net income, or taxable income. The net effect is
different.
I am pinpointing that because I want to highlight that while
your compensation income has no allowable
deductions under Sec. 34, there may be exclusions
under Sec. 32(b).
ITEMIZED DEDUCTIONS UNDER SEC. 34
1. Trade, Business, or Professional Expenses
2. Expenses allowable to Private Educational
Institutions
3. Interest
4. Taxes, except:
5. Losses actually sustained during the taxable year
and not compensated for by insurance or other
forms of indemnity
6. Bad Debts
7. Depreciation
8. Depletion
9. Charitable and other Contributions
10. Research and Development
11. Pension Trust
You may be wondering. They are called itemized
deductions (in your Syllabus, if you will check, distinguish
itemized deductions vs. optional standard deductions)
because in the tax return, naka-lista sila. You only need to
fill it up.
1. TRADE, BUSINESS OR
PROFESSIONAL EXPENSES
REQUISITES:
a. The expense must be ordinary and necessary.
LJM: This is an important requisite. Kalimutan nyo na ang
lahat, huwag lang ‘yung letter a and letter d.
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UST Faculty of Civil Law | A.Y. 2022 – 2023
b. It must have been paid or incurred during the
taxable year.
LJM: What does it mean? Paid and incurred. When you
say “paid”, binayaran. There was a cash disbursement, a
cash outflow. Incurred, on the other hand, there is already
the expense, the expense already happened but you have
not paid it yet.
The Tax Code provides that the expense may either be
paid or incurred depending on the accounting method of
the taxpayer. So, we have two (2) recognized accounting
methods. We have the (a) cash basis of accounting and
the (b) accrual method.
So, if you are using the cash basis of accounting method,
then you record the expense when paid. When you are
using the accrual method of accounting, then you record
the expense when accrued or when incurred.
c. It must have been paid or incurred in carrying on
the trade or business of the taxpayer.
LJM: This is also related to letter (a) actually. Let us say,
for example, a certain friend of mine who put up his own
law office approached me. Work from home. Mayroon
syang office. But because of the pandemic, most of the
time, he would stay at home where he uses electricity,
internet connections, and other utilities. The question is,
Can he use, the MERALCO bills for example, the wifi
bills, as deductions against the income of his law
office?
The answer is NO. Because they are not purely related
to the business. Eh yung wifi nya dun, baka nga 3 hours
lang sya nagta-trabaho dun. At 7 hours sya nanunuod ng
Blackpink or ng kung ano-ano. Yung electricity bill dun,
baka nga out of the, let’s say, 20k bill, baka 2k lang yung
attributable sa kanya, and then the remaining 18k is
attributable to her sister na hindi nagpapatay ng aircon. So,
these are more of personal expenses that are not directly
related to legal practice. Hence, it cannot be considered as
allowable deduction.
This is what letter (c) means.
d. It must be supported by receipts, records or other
pertinent papers. (CIR v. General Foods, Inc., G.R.
No. 143672, 24 Apr. 2003)
This substantiation requirement must be under the name
of the tax agent.
For example, a lawyer who has his own law office, his law
office is registered as a different taxpayer. So, if the
Meralco bills or the telecom bills are under the name of his
parents, then definitely that cannot be used as supporting
documents. The record for evidence shown must be
likewise under the name of the taxpayer.
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NOTE
In VAT there is a difference in the substantiation
requirement. For an expense to be allowed for income
tax purposes, the requirement is that: there must be
support by receipts, records, or other pertinent papers.
For input VAT to be availed of, to be claimed as a credit,
the requirement is that: the input VAT must be
substantiated by a BIR registered Official Receipt or BIR
registered invoice.
Q: Where lies the difference?
A: Very strict yung sa VAT. Kailangan O.R. or Invoice na
registered with the BIR. Whereas sa income tax, it may be
invoice, O.R., but there may be some pertinent papers.
For example, 2 companies nagkaroon ng case against
each other, then cases were filed in court, but they
eventually settled. One company pays another a
compromise settlement. So, that compromise payment
would be use as a deduction by the paying corporation, but
it cannot be evidenced by an official receipt or invoice. The
compromise settlement, which is approved by the court,
may be supporting documents to substantiate.
LJM: Presently, I am handling this particular case, and I
am applying for a ruling with the BIR. My client is engaged
in agricultural, so bumibili siya ng agricultural products sa
province, and for some sort of minimal conversion na
binebenta sa community. So at the back of purchases,
which amounts to millions of pesos every year, this are
purchases coming from harvest, how do you expect our
farmers to issue Official Receipts or invoice? They are not
required to register. The substantiation that we are
currently arguing with the BIR is requesting for
confirmation but even if certain purchases from the farmers
are not evidenced by Official Receipts or invoice that is
registered with the BIR, they shall be allowed as expense
at least for income tax earners. Definitely, that cannot be a
source of input VAT kasi walang official receipt or invoice.
But at least for income tax purposes, they shall be
deducted.
Q: What do you mean by ordinary and necessary?
A: It would be considered necessary where the
expenditure is appropriate and helpful in the development
of the taxpayer’s business. Meaning to say, it is related to
the business.
Imagine, the business of the taxpayer is manufacturing of
furniture and there was a particular expense for research
and development of a pharmaceutical product, or a
particular drug, how come the taxpayer engage in
manufacturing of furniture will have the research and
development for drug development, it is totally unrelated, it
is not necessary. That won’t be allowed as an expense.
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UST Faculty of Civil Law | A.Y. 2022 – 2023
Q: How about ordinary?
A: Ordinary it promotes a payment which is normal in
relation to the business of the taxpayer and surrounding
circumstances.
LJM: I would like to correlate:
• Necessary to Nature of expense
• Ordinary to Amount of expense
For example, a particular taxpayer has a gross income of
2M every year, pero meron siyang travel and leisure
expense amounting to 10M every year, so definitely the
expense is extraordinary. 2M lang ang kinikita mo, tapos
10M ang expense mo, that would be disallowed. Under
Sec. 34 bribes, kickbacks, and other similar payments, this
are not allowed. They are contrary to public policy and
morals.
2. EXPENSES ALLOWABLE TO PRIVATE
EDUCATIONAL INSTITUTIONS
A private educational institution, may at its option elect
either:
a. To deduct expenditures otherwise considered as
capital outlays of depreciable assets incurred during
the taxable year for the expansion of school facilities;
or
b. To deduct allowance for depreciation
LJM: Before we discuss the two options, I would like to
explain first the concept of Capital Expenditure.
CAPITAL EXPENDITURE / CAPITAL OUTLAY
Q: What do we mean by Capital Expenditure or Capital
Outlays?
A: Capital Outlays or Capital Expenditures (CapEx) are
disbursements of material amount: 1) Material amount and
2) the expected benefit from that is expected to be more
than one (1) year.
So, material amount and benefits expected to be more
than one (1) year.
Q: You purchased a screw. Since the screw is made of
steel or metal or whatsoever, you can use that for more
than 1 year. The expected benefits are more than 1
year. But do we consider that as capital expenditure?
A: No, because the amount is immaterial. So, it should
satisfy the requirements of materiality and the life has to be
more than 1 year.
LJM: Now, ordinarily for CapEx, UST for example,
constructed a building, and the building cost UST P50M.
Ordinarily, the P50M cannot be allowed as an outright
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deduction. What would be allowed as deduction for income
tax purposes is the so-called depreciation.
Q: What do we mean by depreciation?
A: Determine the life of the asset and then you spread the
cost over the life of the asset.
LJM: There are different methods but let me use the most
common and most simple: Straight Line.
P50M = expenditure, assuming that the life of the asset is
10 years. UST expects that this asset, that this building will
last for 10 years, and after 10 years, (kaboom).
I-compute natin: P50M / 10 = P5M. So, every year, year 1,
UST will expense out P5M, year 2, P5M until pagdating ng
year 10, P5M pa rin pero if we sum it up may P50M na.
So, the idea of depreciation is that, the total expense is
spread over the useful life the asset. That’s the so-called
depreciation. For CapEx, that is the normal treatment.
CapEx is not a deduction under Sec. 36 because the
deduction is the depreciation of the CapEx.
But under Sec. 34, for private educational institutions, like
UST, UST has the option:
1. Expense out the P50M outright; or
2. Spread over the P50M in the form of depreciation.
This option is only provided to private educational
institutions.
3. INTEREST
COMMENT: Interest here, there’s an arbitrary rule but we’ll
not deal with this muna. To be honest, the allowable
deductions is not a favorite Bar area. So, let’s not dwell on
the less important provisions.
But the interest presupposes the existence of a debt, an
obligation. So, the TP has the obligation and because of
that obligation, that obligation bears an interest. An interest
incurs. The obligation, however, is very important, or that
the obligation, or the liability, or the loan must be used to
the business.
So, say for example, this particular friend of mine, meron
siyang law office. He procured a personal loan from the
bank. And that loan bears interest.
Q: Can that interest expense be availed as deduction
against the income of the law office?
A: NO. Because the loan, the principal is not related to the
business of the TP.
NOTE
 TAXATION LAW REVIEW
UST Faculty of Civil Law | A.Y. 2022 – 2023
So, again do’n papasok yung ordinary and necessary.
The requirement of ordinary and necessary, that applies
to all itemized expenses. So, it’s not limited to
professional and business. As well as substantiation. So,
remember ordinary and necessary and substantiation,
They apply to all expenses, to all itemized deductions.
4. TAXES
Taxes paid or incurred within the taxable year in
connection with the taxpayer's profession, trade or
business, shall be allowed as deduction, except:
(a) Income tax;
(b) Income taxes imposed by authority of any foreign
country which was availed as tax credits;
(c) Estate and donor's taxes; and
(d) Taxes assessed against local benefits of a kind
tending to increase the value of the property
assessed
INCOME TAX
Q: Why is the income tax cannot be considered as a
deduction?
A: The reason is that, to arrive at your income tax, you
need to know your deductions. So, mag-change ngayon
yung situation.
INCOME TAXES IMPOSED BY AUTHORITY OF ANY
FOREIGN COUNTRY WHICH WAS AVAILED AS TAX
CREDITS
In case of resident citizens and domestic corporations,
they are taxable from within and without. They are liable
for income tax, income earned from within and without PH
sources. So, they will pay income tax in the PH but insofar
as the income earned from outside PH sources, they will
also pay income tax in that outside taxing […] And that is
not a case of direct double taxation. That is allowed. That
is an indirect double taxation, a national double taxation.
That is allowed.
So, a resident citizen with an income in the US will be
paying income tax in the US and will be paying income tax
in the PH. Now, according to the Tax Code, the income tax
made in the is may be availed of as:
1. A deduction; or
2. A tax credit.
LJM: You recall our formula again, gross income –
allowable deduction = taxable income x rate – tax credit
So, dalawa yun ang option mo, the income tax made
abroad, ilagay mo sa taas as dedeuction, or do’n sa baba
as a tax credit.
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That is why, income tax imposed by authority of any foreign
country which was availed as tax credits can no longer be
availed as deduction kasi nasa tax credit na siya. If you
were to ask me, better to avail it as tax credit.
ESTATE AND DONOR'S TAXES
Estate and donor’s tax are not allowable deductions
because the reason is estate and donor’s tax are personal.
Estate Taxes are paid when someone dies. A corporation,
wala naman siyang, I mean, in essence it has perpetual
life. So, estate tax cannot apply to corporations, that is why
it is personal and cannot be claimed as deductions. Same
is true with donor’s tax.
TAXES ASSESSED AGAINST LOCAL BENEFITS OF A
KIND TENDING TO INCREASE THE VALUE OF THE
PROPERTY ASSESSED
EXAMPLE: Special Levy of Real Property
SEC. 240. Special Levy by Local Government Units.
— A province, city or municipality may impose a special
levy on the lands comprised within its territorial
jurisdiction specially benefited by public works projects
or improvements funded by the local government unit
concerned.
LJM: Remember, one of the kinds of RPT is the special
assessment or special levy of real property.
ILLUSTRATION: Road construction and the houses near
the road will increase in value. LGU would assess RPT for
them to reimburse the cost in constructing the road. That
special levy is not an allowable deduction.
5. LOSSES ACTUALLY SUSTAINED DURING THE
TAXABLE YEAR AND NOT COMPENSATED FOR BY
INSURANCE OR OTHER FORMS OF INDEMNITY
▰ Net Operating Loss Carry-over (NOLCO) - the excess
of the allowable deduction over the gross income. It can be
carried forward in the next 3 succeeding taxable years.
Requisite: there must be no substantial change in the
ownership of business or enterprise.
a. Not less than 75% in the nominal value of the
outstanding issued shares, if the business is in the name
of the corporation, is held by or on behalf of the same
persons; or,
b. Not less than 75% of the paid-up capital of the
corporation, if the business is in the name of a corporation,
is held by or on behalf of the same persons.
LJM: This must also be governed by rule on ordinary and
necessary.
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UST Faculty of Civil Law | A.Y. 2022 – 2023
ILLUSTRATION: Manufacturing business of furniture. You
have a warehouse of inventory. It was razed by fire
resulting to substantial losses.
Q: Can these losses which is the value of the raw
materials and finished products in the warehouse be
claimed as allowable deduction?
A: Yes. they are related to the business.
Q: How about if they are compensated by insurance?
If the value of the inventory lost in the warehouse is
100M but you procured a fire insurance and as a result
you were able to claim 80M from the insurance
company. 100M lost but you were paid 80. How much
is your allowable deduction?
A: The allowable deduction is the amount not
compensated by the insurance which is the 20M.
NET OPERATING LOSS CARRY-OVER (NOLCO)
Remember the formula under Section 31, gross income
less allowable deductions, that is taxable income. It will be
taxable income if the gross income is more than your
allowable deductions.
Imagine if the allowable deduction is greater than the gross
income, loss will happen. That is NOLCO.
Assuming for year 1 a particular corporation taxpayer has
a gross income of 1M. If on the same year the allowable
deductions is 1.5M. So you have a loss. That's NOLCO.
Excess of allowable deduction over gross income which is
500k, that is your NOLCO.
Q: What is the treatment of NOLCO?
A: It can be carried over for the next three succeeding
years. Carried over means that it can be used as a
deduction for next years until it is fully exhausted.
If on the following year, the gross income is 1.2M and the
allowable deduction is 1M.
Q: how much is your taxable income?
A: 200k. 1.2M less 1M is 200k. You have NOLCO of 500.
You offset the 200 with your NOLCO against the 200 of
year 2 such that the taxable income in year 2 is zero.
Q: How much NOLCO remains?
A: 300k, you can still use it in year 3 and year 4. NOLCO
can be utilized within 3 succeeding taxable years.
There is a requirement for the utilization of NOLCO - the
75% rule, it means that at least 75% of the owners of the
taxpayer must remain the same. While the 25% of the
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shareholdings may be changed from year to year at least
75% remains the same.
6. BAD DEBTS
Uncollected receivables.
ILLUSTRATION: Your classmate asks you to pay for him.
He will pay tomorrow but will not really pay you. That is a
bad debt. Debt that you cannot collect. The bad debts must
be related to the operations of the taxpayer.
7. DEPRECIATION
8. DEPLETION
It follows the same principle of depreciation. But Depletion
is the term used for intangible assets.
ILLUSTRATION: Term of patent is 20 years. Assuming
that the cost for you to have that patent is 20M. That 20M
will be spread over the span of 20 years. 1M for every year.
It is called depletion not depreciation.
9. CHARITABLE AND OTHER CONTRIBUTIONS
As a general rule, cannot be deducted in full. It is subject
to the 10% and 5% limitation.
(9) Charitable and Other Contributions
a. Contributions or gifts to or for the use of the
Government of the Philippines or any political
subdivision thereof exclusively for public purposes,
or associations organized and operated exclusively
for religious, charitable, scientific, youth and sports
development, or to social welfare institutions, or to
NGOs, where no part of the net income inures to the
benefit of any private stockholder or individual –
allowable deduction cannot exceed 10% in the case
of individual, and 5% in case of corporation, of the
taxpayer's taxable income before deduction for
charitable contributions.
b. Donations to the Government of the Philippines or to
any of its agencies or political subdivisions, including
fully-owned government corporations, exclusively to
finance, to provide for, or to be used in undertaking
priority activities in education, health, youth and sports
development, human settlements, science and culture,
and in economic development according to a National
Priority Plan determined by the National Economic
and Development Authority (NEDA) – contribution
deductible in full.
GR: Whether to public or government or to private it is
subject to limitation.
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UST Faculty of Civil Law | A.Y. 2022 – 2023
In case of a donor, who is an individual 10% of taxable
income.
In case of a donor which is a corporation, 5% of taxable
income. This rule applies even if donation is given to the
government even if it is for public purpose.
c. Donation to qualified and accredited donee institution
– deductible in full provided:
i. Donations must be made in favor of a qualified
and accredited donee institution which is for
charitable, educational, religious or cultural
purpose, accredited by Philippine Counsel of
NGOs Commission (PCNC);
ii. The donor must be engaged in business or
practice of profession;
iii. The donor shall give notice of donation on
every donation (of at least 50, 000) to the BIR
within 30 days after the receipt by the qualified
donee institution of the certificate of donation;
and
iv. The certificate of donation must contain
undertaking that not more than 30% of the
donation shall be used for administrative
purposes.
Q: Is there an instance where the donation to the
government can be utilized 100% deduction without
limitation?
A: Yes. Donations to the Government of the Philippines or
to any of its agencies or political subdivisions, including
fully-owned government corporations, exclusively to
finance, to provide for, or to be used in undertaking
priority activities according to the NEDA plan.
DONATIONS TO PRIVATE INSTITUTIONS
GR: Subject to limitation. (10% and 5%)
Q: Is there an instance where the donation to a private
institution can be utilized 100% deduction without
limitation?
A: Yes. When made to a qualified and accredited donee
institution. Accredited by Philippine Counsel of NGOs
Commission (PCNC). PCNC is a private institution that
accredits foundations and charitable institution. They are
outsourced by the government. It makes sures that these
foundations and charitable institutions are utilizing well the
donations they receive.
NOTE
Important is number i and iv. Donee should be PCNC
accredited and there must be an undertaking that not
more than 30% of the donation shall be used for
administrative purposes.
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If you put up a foundation without getting accreditation from
PCNC and requiring confirmation from the BIR that such is
an accredited donee institution, the donor will not have an
incentive to give donation. This is because if he gives a
donation, he would not be able to claim such a donation as
a deduction. Therefore, in most cases, the donors really
look for PCNC-accredited foundations.
10. RESEARCH AND DEVELOPMENT
Governed by the rule that such should be ordinary and
necessary.
11. PENSION, TRUST
ADDITIONAL REQUIREMENTS FOR DEDUCTABILITY
OF CERTAIN PAYMENTS
SEC. 34. (K) Additional Requirements for
Deductibility of Certain Payments. - Any amount paid
or payable which is otherwise deductible from, or taken
into account in computing gross income or for which
depreciation or amortization may be allowed under this
Section, shall be allowed as a deduction only if it is
shown that the tax required to be deducted and withheld
therefrom has been paid to the Bureau of Internal
Revenue in accordance with this Section 58 and 81 of
this Code.
EXAMPLE: Lessor-lessee transactions. The lessor is the
owner of the property and the income earner. The lessee
is the one that can claim an allowable deduction.
If under the contract, the lessee is supposed to pay
P100,000 per year, instead of paying P100,000 directly,
the lessee will pay only P95,000. The P5,000 deficiency
will be withheld by the lessee and remitted to the BIR. Such
remittance is being made in favor of the lessor, because it
is the lessor who is the income earner. The lessee or the
income payor is merely constituted as a withholding agent,
required by the tax code.
EXAMPLE: Assuming that the lessee, instead of paying
95k to the lessor, pays the whole 100k, the lessor earns
the 100k income. In this situation, however, the lessee
cannot claim the 100k as allowable deduction because if a
particular expense or disbursement or payment is required
by regulation to be subject to withholding, and that
withholding was not observed by the income payor, the
income payor cannot claim the deduction.
You are not expected to know whether a particular
expense is subject to withholding. Such should be
indicated in the bar exam question. RR2-98 - the
implementing rules and regulations of our income tax
provisions.
Q: How much income will the lessor report for income
tax purposes?
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UST Faculty of Civil Law | A.Y. 2022 – 2023
A: It is still P100,000. He did not lose the P5,000. It was
just paid and remitted by the lessee but on behalf of the
lessor.
Q: What then will happen to the 5K?
A: The P5,000 will be considered as tax credit, which is an
advance payment on the income tax liability.
OPTIONAL STANDARD DEDUCTION v.
ITEMIZED STANDARD DEDUCTION
• The default mode is Itemized Standard Deduction.
• You have to elect the option to use either ISD or OSD.
However, if the election was not made, the default is
ISD.
• Such option is being elected during the 1st quarter
filing of return every year.
• Taxpayers, whether individuals or corporations
engaged in business or practice of profession, are
required to file Quarterly and Annual Income Tax
Returns (ITR). The Filing would be Q1, Q2, Q3, and
Annual. Q1-3 would reflect their own quarters, while
Annual would reflect Q1-Q4.
• Such option would be irrevocable for that taxable year
only.
OPTIONAL STANDARD DEDUCTION (OSD)
In lieu of itemized deductions, a taxpayer may avail of OSD
equivalent to:
(a) 40% of gross sales or gross receipts for
individuals; or
(b) 40% of gross income for corporations. (Sec. 34(L),
NIRC)
Unless the 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 when
made in the return shall be irrevocable for the taxable year
for which the return is made.
Q: What is the benefit of OSD?
A: There is no need for substantiation. For itemized
deductions, there must be records,
invoices, official receipts, etc. which should show that a
particular expense is related to the business, ordinary and
necessary, and must be named after the taxpayer.
LJM: OSD is an automatic 40% deduction, so only 60%
will be taxable without need for substantiation.
For individuals, the base would be gross sales or gross
receipts. For corporations, gross income.
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To arrive at gross income (for corporations), the formula is
gross sales or receipts less cost of sales. The cost of sales
must be deducted from the gross sales.
EXAMPLE: Selling price is P1,000. Cost of sale is P600.
The gross income would be P400.
ITEMS NOT DEDUCTIBLE
SEC. 36. Items not Deductible. -(A) General Rule. - 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;
This Subsection shall not apply to intangible drilling and
development costs incurred in petroleum operations
which are deductible under Subsection (G) (1) of
Section 34 of this Code.
(3) Any amount expended in restoring property or in
making good the exhaustion thereof for which an
allowance is or has been made; or
(4) Premiums paid on any life insurance policy covering
the life of any officer or employee, or of any
person financially interested in any trade or business
carried on by the taxpayer, individual or corporate, when
the taxpayer is directly or indirectly a beneficiary under
such policy.
(2) Any amount paid out for new buildings or for permanent
improvements, or betterments made to increase the value
of any property or estate
Q: Why is this not deductible?
A: Because these are capital expenditures. Only the
depreciation will be deducted, except for private
educational institutions.
(3) Any amount expended in restoring property or in
making good the exhaustion thereof for which an
allowance is or has been made
LJM: This is also a capital expenditure.
(4) Premiums paid on any life insurance policy covering the
life of any officer or employee, or of any person financially
interested in any trade or business carried on by the
taxpayer, individual or corporate, when the taxpayer is
directly or indirectly a beneficiary under such policy.
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LJM: Proceeds of life insurance are exclusions from gross
income and are not taxable. When the company receives
the insurance, it is not taxable.
Q: Why is this not deductible?
A: This is because they are not considered as income to
the ones who will receive the life insurance proceeds.
LJM: Proceeds from life insurance are exclusions from
gross income under Sec. 32(B) and therefore not taxable.
The situation here is that the company obtained an
insurance, and the insured is an officer or an important
person in the company. If something happens to the
insured, the proceeds go to the company as
the beneficiary.
Q: Is the premium paid by the company an allowable
deduction?
A: NO. When the company receives the insurance, it is not
taxable. Therefore, to be fair to the government, the
expenses paid as premium should not be allowed as
deductions.
CAPITAL GAINS AND LOSSES
SEC. 39. Capital Gains and Losses -
(A) Definitions. - As used in this Title –
(1) Capital Assets. – The term ‘capital assets’ means
property held by the taxpayer (whether or not connected
with his trade or business), but does not include stock in
trade of the taxpayer or other property of a kind which
would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year or
property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or
business, or property used in the trade or business, of a
character which is subject to the allowance for
depreciation provided in Subsection (F) of Section 34;
or real property used in trade or business of the
taxpayer.
(2) Net Capital Gain. – The term ‘net capital gain’ means
the excess of the gains from sales or exchanges of
capital assets over the losses from such sales or
exchanges.
(3) Net Capital Loss. – The term ‘net capital loss’ means
the excess of the losses from sales or exchanges of
capital assets over the gains from such sales or
exchanges.
Capital Asset v. Ordinary Asset
8
Q: What is the difference between capital asset and
ordinary asset?
A: Ordinary assets include inventory or those held
primarily for sale to customers, as well as those assets
used in trade or business of the taxpayer.
LJM: In Sec. 39, there is a list of (five) ordinary assets.
Sec. 39 described capital assets as assets other than
ordinary assets. As such, any other assets which are not
considered ordinary assets are classified as capital
assets.
To determine capital assets, there are two categories:
(a) Held for sale
(b) Used in business
EXAMPLE: Ayala Land, Inc. is engaged in the real estate
business. ALI holds 50 hectares of land in Laguna which
has not been developed. It is an ordinary asset because
the usual business of ALI is to sell real properties.
LJM: The BIR issued a regulation in 2003 stating that all
real properties of a real estate business shall be
considered as ordinary, regardless of use or utilization.
Basically, the assumption is that if a taxpayer is engaged
in the real estate business, eventually, it will be developed
or clipped.
Q: X, not engaged in real estate, owns a 500 sqm.
parcel of land in his personal capacity. Will be
considered as a capital asset or ordinary asset?
A: It is a capital asset because X normally does not sell
land nor does he use it in business.
Q: What about the UST Main Building?
A: Ordinary asset. While it is not for sale, it is used for
business.
Q: Residential house and lot used by the family of Y.
A: Capital asset.
Q: Why is it important to distinguish ordinary and
capital assets? (This was asked already in the Bar)
A: When we say “ordinary asset”, it may be subject to the
regular tax. For corporation, between the 25% or 20%. For
individual, the schedular/graduated rates. On top of that,
the transaction will be subject to 12% VAT and 1.5% DST.
Whereas if it is a “capital asset”, the liability would be—
e.g., parcel of land (two different tax application)—but if
sale of real property classified as “ordinary asset”, 12%
VAT, 1.5% DST, regular income tax. If real property as
“capital asset”, subject to 6% CGT, no VAT, 1.5% DST.
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exchange of a capital asset held for not more than twelve

LJM: The rate is too high whereas for capital asset it is just (12) months. (Sec. 39(D), NIRC)
6% CGT. In ordinary asset, there is a 12% VAT which is
not present in capital asset. NOTE
The limitation on capital losses apply to both individual
ORDINARY ASSET CAPITAL ASSET and corporate taxpayers. However, the NCLCO, only
1. Schedular rate (Sec. applies to individuals since it excludes corporations.
24 (A), NIRC) 1. 6% CGT
2. 12% VAT 2. 1.5% DST EXAMPLE: There is a net loss of P300 in the earlier capital
3. 1.5% DST asset transactions. The loss can be carried forward next
year, such that if there is a capital gain next year, it can
RULES WHICH ONLY APPLY TO CAPITAL ASSETS offset that capital loss, but to the extent of the gain next
AND NOT TO ORDINARY ASSETS year.

There are certain rules that only apply to capital assets and NCLCO NOLCO
NOT to ordinary assets. There are three of them, but I SOURCE
choose to discuss the two only. Excess of the losses from
sales or exchanges of Excess of allowable
First: Limitation on capital losses capital assets over the deduction over gross
gains from such sales or income
Losses from sales or exchange capital assets shall be exchanges
allowed only to the extent of the gains from such sales or WHO CAN AVAIL
exchanges. (Sec. 39(C), NIRC) Individual and corporate
Individual
taxpayer
EXAMPLE: Assuming we have two capital asset PERIOD OF CARRY-OVER
transactions. Carry-over of operating
loss in three (3)
In the next succeeding
TRANSACTION 1 TRANSACTION 2 succeeding taxable years,
taxable year
Selling price: 1K Selling price: 1K or five (5) years in case of
Cost of asset: 1.5K Cost of asset: 800 mining companies
Net loss: 500 Gain: 200
TAX FREE EXCHANGE TRANSACTION
Q: Can you merge the two, such that loss of 500 and
gain of 200, will result in net loss of 300 which you can
deduct for income tax purposes? SEC. 40. Determination of Amount and Recognition
of Gain or Loss. - (C) Exchange of Property. –
A: No. The loss of P500 will be reduced up to P200 only
because that is the gain in capital assets. What about the (1) General Rule. - Except as herein provided, upon the
P300? It cannot be claimed as deduction. sale or exchange or property, the entire amount of the
gain or loss, as the case may be, shall be recognized.
EXAMPLE: Assuming we have two ordinary asset
transactions. (2) Exception. - No gain or loss shall be recognized on
a corporation or on its stock or securities if such
TRANSACTION 1 TRANSACTION 2 corporation is a party to a reorganization and exchanges
Selling price: 1K Selling price: 1K property in pursuance of a plan of reorganization solely
Cost of asset: 1.5K Cost of asset: 800 for stock or securities in another corporation that is a
Net loss: 500 Gain: 200 party to the reorganization. A reorganization is defined
as:
LJM: The net loss of P500 and gain of P200 will result in
(a) A corporation, which is a party to a merger or
net loss of P300. The P300 can be deducted against other
consolidation, exchanges property solely for stock in a
gross income.
corporation, which is a party to the merger or
consolidation; or
Second: Net Capital Loss Carry-Over (NCLCO)
(b) The acquisition by one corporation, in exchange
If any taxpayer, other than a corporation, sustains in any
solely for all or a part of its voting stock, or in exchange
taxable year a net capital loss, such loss (in an amount not
solely for all or part of the voting stock of a corporation
in excess of the net income for such year) shall be treated
in the succeeding taxable year as a loss from the sale or which is in control of the acquiring corporation, of stock
of another corporation if, immediately after the

9
 TAXATION LAW REVIEW
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acquisition, the acquiring corporation has control of such
other corporation whether or not such acquiring
corporation had control immediately before the
acquisition; or
(c) The acquisition by one corporation, in exchange
solely for all or a part of its voting stock or in exchange
solely for all or part of the voting stock of a corporation
which is in control of the acquiring corporation, of
substantially all of the properties of another corporation.
In determining whether the exchange is solely for stock,
the assumption by the acquiring corporation of a liability
of the others shall be disregarded; or
(d) A recapitalization, which shall mean an arrangement
whereby the stock and bonds of a corporation are
readjusted as to amount, income, or priority or an
agreement of all stockholders and creditors to change
and increase or decrease the capitalization or debts of
the corporation or both; or
(e) A reincorporation, which shall mean the formation of
the same corporate business with the same assets and
the same stockholders surviving under a new charter.
No gain or loss shall also be recognized if property is
transferred to a corporation by a person, alone or
together with others, not exceeding four (4) persons, in
exchange for stock or unit of participation in such a
corporation of which as a result of such exchange the
transferor or transferors, collectively, gains or maintains
control of said corporation: Provided, That stocks issued
for services shall not be considered as issued in return
for property.
Sale or exchanges of property used for business for
shares of stock covered under this Subsection shall not
be subject to value-added tax.
In all of the foregoing instances of exchange of property,
prior Bureau of Internal Revenue confirmation or tax
ruling shall not be required for purposes of availing the
tax exemption.
What is the relation of this tax-free exchange to the
previous topics that we have discussed? This involves an
exchange transaction. And an exchange transaction, you
think of it as a barter. That’s the simple way to remember
this.
ILLUSTRATION: So, A is transferring something to B and
the payment of B is not in cash, but would be in another
form. Payment in kind. So, A is transferring something to
B, and B in turn is transferring something to A. That is a
barter transaction.
As a general rule, an exchange is taxable. As you know
in your Law on Sales, a barter transaction or an exchange
transaction is in reality a sales transaction. Right?
10
So, if A transfers something to B, that is a sales
transaction. And the gain from that transaction shall be
recognized by A as seller. B is also a seller in that
exchange transaction kasi nga barter sya eh. So, if B has
a gain from that exchange, then that gain should likewise
be subject to income tax.
NOTE: In an exchange transaction, the essence of
exchange is a sales transaction. And you know that in a
sale, if there is gain, then it would be taxable.
NOTE
GR: Any gain resulting from an exchange transaction
shall be taxable.
XPN: The exception to the rule is provided under Sec.
40(C). There are two categorizations of exchanges
which are not subject to income tax, viz. –
(1) Reorganization;
(2) Property for share swap (Sec. 40(C)(2), NIRC)
REORGANIZATION
No gain or loss shall be recognized on a corporation or on
its stock or securities if such corporation is a party to a
reorganization and exchanges property in pursuance of a
plan of reorganization solely for stock or securities in
another corporation that is a party to the reorganization.
LJM: There are different forms of reorganizations, as
defined in Sec. 40. Don’t worry, we will deal with
reorganizations. I believe that the coverage of the bar
examinations should be in the second kind of the tax-free
exchange transaction.
An example of reorganization is a merger. If two entities
merge, that is a tax-free exchange transaction. And when
two entities merged, in a way, both of them give something
to one another. However, this is still an exchange
transaction and also an example of reorganization not
subject to income tax.
PROPERTY FOR SHARE SWAP
No gain or loss shall also be recognized if property is
transferred to a corporation by a person, alone or together
with others, not exceeding four (4) persons, in exchange
for stock or unit of participation in such a corporation of
which as a result of such exchange the transferor or
transferors, collectively, gains or maintains control of said
corporation.
LJM: In the early 90s, at least, based on my survey of Bar
questions, early 90s (1991, 1992, 1993) and even, I
supposed, in 2002, if I am not mistaken, there have been
questions asked on this property share swap. But, in my
recollection, there has not been any questions asked in this
topic for the last 10 years. But then, in your Syllabus, it is
 TAXATION LAW REVIEW
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included, the tax-free exchange, particularly the property
for share swap.
REQUISITES OF A PROPERTY FOR SHARE SWAP
TO BE CONSIDERED AS TAX-FREE
a. The transferee is a corporation.
b. The transferee exchanges its shares of stock for
property or properties of the transferor.
c. The transfer is made by a person, acting alone or
together with others, not exceeding four (4)
persons.
d. As a result of the exchange, the transferor, alone or
together with other, not exceeding four (4), gains
control of the transferee.
Re: #3
The qualification “not exceeding four persons” refers to
others. So, the transferor may be up to five persons.
Re: #4
The term “control” is defined as “ownership of stocks in a
corporation possessing at least fifty-one percent (51%)
of the total voting power of all classes of stocks entitled to
vote.
LJM: All of the requisites are important. But the most
important requisite is letter (d). This is a property for share
swap. It means to say that a property is being transferred
in exchange for shares. What again are the requisites.
Number 1, we have the transferor. The transferor may be
an individual, it may be a juridical person. But the limitation
is that it cannot exceed 5. The transferor is transferring
property to the transferee. The transferee is required to be
a corporation, as opposed to the transferor.
So, a transferor transferring a property to the transferee-
corporation, and in consideration for the transfer, the
transferee-corporation issues its own shares of stocks to
the transferor.
And as a result of that exchange, the transferor obtains
control over the transferee. The transferor obtains at least
51% of the voting power of the transferee-corporation. The
Tax Code is very precise, voting power. So, if what was
issued are non-voting preferred stocks, then you should
take it out of the equation in evaluating the 51% threshold.
You have to think what is the reason on why is it taxed?
What is the reason why this is a tax-free exchange?
NOTE
GR: Exchanges or sale transactions in reality and
therefore any resulting exchanges will be taxable.
XPN: Organizations that is specifically defined under the
tax code and the property for share swap.
11
Q: For property for share swap, why are they deemed
as tax-free?
LJM: Ang iniisip ko kasi dito ay lokohan yung transaction
dito. Because we have the transferor transferring the
property to the transferee corporation. After the transfer,
who is the owner of the transferee? Isn’t the transferor
also. So, the transferor transferring property to the
transferee, but after the exchange, essentially it would still
be the transferor who owns effectively or controls the
transferee. It is as if you are just transferring from one
pocket to another.
CLARIFICATION UNDER CREATE
In all foregoing instances of exchange of property, prior
Bureau of Internal Revenue confirmation or tax
ruling shall not be required for purposes of availing
the tax exemption.
This has been the rule ever since. There have been CTA
cases and SC cases which confirms that the only
requisites for property share swap are the four requisites
that we have discussed.
Confirmation or issuance of BIR Ruling is not a requisite.
Before CREATE, it is the usual practice to obtain
confirmation from the BIR because this tax-free exchange
transactions are usually material transactions which
involves a large amount of money.
For good practice and caution against any potential tax
assessment, it has been the practice of many, to seek
confirmation or request ruling from the BIR that their
transaction is really tax-free exchange. Because of this
practice, there was a misconception that a tax ruling or
confirmation from the BIR is a prerequisite for a transaction
to be considered as tax-free.
But even before the enactment of CREATE, the SC has
already clarified that issuance of ruling or confirmation from
the BIR is not a requisite for a transaction to be considered
as tax-free exchange transaction. That ruling is an
amendment to the tax code.
INCOME TAXATION OF RC, NRC, RA, NRA-ETB
INCOME TAXATION OF INDIVIDUALS
The tax rate applicable shall depend on:
1. Type of income
2. Type of taxpayer
CLASSIFICATION OF INCOME TAXPAYERS (ITEC)
1. Individual
2. Trust
3. Estate
4. Corporation
 TAXATION LAW REVIEW
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DIFFERENT KINDS OF TAXPAYERS
1. Resident Citizen – Filipinos residing in the PH
2. Non-Resident Citizen – Filipino citizens not
residing abroad
3. Resident Alien – Foreigners residing in PH
4. Non-Resident Alien Engage in Trade or
Business – Foreigners not residing in the PH but
doing business or engage in active pursuit of
commercial activity in the PH
5. Non-Resident Alien Not Engage in Trade or
Business – Foreigners not residing in the PH and
does not have commercial or business presence in
the PH. Mostly, the income of the NRA-NETB is just
passive income, like dividend income, interest
income on bank deposits or bank substitutes.
TWO GROUPINGS FROM THE CLASSIFICATION:
1st Group: RC, NRC, RA, NRA-ETB
2nd Group: NRA-NETB
LJM: We made these two groupings because the first
grouping involves four different kinds of individual
taxpayers. In general, they are taxed in the same structure.
There are exceptions or minor differences, but we will dwell
with the general income tax treatment.
CLASSIFICATION OF INCOME
1. Passive Income
2. Capital Gains from Sale of Shares of Stock not
traded in the Stock Exchange
3. Capital Gains from Sale of Real Property
4. Other Income
Remember when we described our income tax, the PH
income tax system as semi-schedular and semi-global. It
is semi-schedular because we classify the income as to its
nature and then per classification of income, we apply
different tax rates, like in our case, passive income there
will be a different tax applicable. Capital gains from sale of
shares of stock, another income tax rate applicable.
Income tax for capital gains from sale of real property,
another income tax rate applicable.
Q: Why is it semi-global?
A: Because in a way, we also lump all other income. So,
any income that does not fall under passive income, capital
gains from sale of share of stock, or capital gains from sale
of real property, they will be lumped together, and then
subject to regular income tax for individuals. So, that is an
application of global system as because we no longer
subclassify all other income. We just lump them together
under that category.
So, remember these classifications of income. Because for
you to determine what other income will be subject to
regular income tax, you need to know what the passive
income are. Because it it’s not a passive income, then it
12
may be capital gains from sale for shares of stock. If it’s not
a capital gains from sale for shares of stock, then it may be
capital gains from sale of real property. If it’s still not a
capital gains from sale of real property, then that’s the only
time that you will apply the regular tax for individuals.
A. PASSIVE INCOME (IRPOD)
Q: What’s the general concept of passive income?
A: In finance, when we say passive income, basically, it’s
the money working for you. There is no significant or active
pursuit or an active engagement. It’s basically that you are
just waiting for your income. It’s like when you place a bank
deposit, you do nothing but that bank deposit earns
interest. So, it’s the money working for you. So, that
interest income is a passive income.
Another when you have investment in shares of stocks,
and the issuing corporations issued dividends. So, all you
need to do is invest in shares of stock and then at a certain
period of time, you will receive the dividends without doing
any active engagements,
So, that is passive income as opposed to active income.
There is an active labor before you receive an income, and
the most common example is employment, your
compensation income. If you have no work, or if you did no
work or labor, then you will not receive your salary. So, that
is an active income.
But, the passive income in finance is not really the
passive income contemplated in the tax code.
Because the tax code, limited only what it considers
as passive income. Remember the acronym: IRPOD
(Interests, Royalties, Prizes, Other winnings and
Dividends). These are the only passive income subject to
FWT.
NOTE
• Interests, Royalties, Prizes, Other Winnings - 20%
FWT in general
• Cash/ Property Dividends from domestic
corporations (including share of an individual in the
distributable net income after tax of a partnership,
except a general professional partnership) - 10%
WT (Note: 20% WT if received by NRA-ETB)
So, again, under our semi-schedular system, you classify
the income. And that classification that we are talking now
is passive income.
Q: What is the tax treatment?
A: Final Withholding Tax
FINAL WITHHOLDING TAX
 TAXATION LAW REVIEW
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Final Withholding Tax is a kind of withholding tax which is
prescribed on certain income payments and is not
creditable against the income tax due of the payee on other
income subject to regular rates of tax for the taxable year.
Income Tax withheld constitutes the full and final
payment of the Income Tax due from the payee on the
particular income subjected to final withholding tax.
CREDITABLE WITHHOLDING TAX
We go back to my favorite example: the creditable
withholding tax (CWT). The common distinction that you
should understand is the distinction between FWT and
CWT. We proceed first with CWT with my example
yesterday: lessor – lessee.
Lessor earns income, lessee pays the rent to the lessor.
So, assuming P100K monthly rent. Lessee will remit to
lessor P95K because the P5K is the amount required
under the regulations to be withheld and remitted by the
income payor to the BIR. So instead of the lessee remitting
the whole P100K to the lessor, the lessee will just remit
P95K to the lessor, withhold the P5K and remit that P5K to
the BIR on behalf of the lessor. That P5K is a CWT.
Q: Why is it a CWT?
A: Again, go back to our formula. How much will be the
gross income that will be reported by the lessor? Lessor is
the income earner, so, we’ll prepare his ITR. So, how much
will be the gross income that will be prepared by the
lessor? The P100K rental income shall be include in the
gross income. Then less allowable deductions. Assuming
there are no allowable deductions. So taxable income is
P100K. Multiplied by the tax rate. Assuming that this is an
individual only and the applicable tax rate is 20% assuming
only.
So, P100K x 20% = 20,000 – the tax due. Eh di ba meron
na-withhold na P5K? That P5K will be a tax credit. It will be
a deduction against the tax due, such that P20K tax due
less P5K tax credit in the form of CWT. The lessor needs
to pay additional P15K to the BIR at the end of the year.
So, when we say CWT, this is an advance payment on the
income tax liability accruing on a particular transaction, in
my example, the lease, the rental income. This is just an
advance payment. As you see, the CWT is just P5K, but
the income tax liability for that transaction is actually
higher. It may be P20K or even higher.
NOTE
So, the P5K CWT is just an advance payment of the
income tax liability accruing on a particular transaction.
And that CWT may be considered as tax credit to arrive
at the tax payable to the end of the year.
Now, we compare it with the FWT. The most common is
the interest income on bank deposits. Assuming, your bank
13
deposit earned P100K interest income in 1 year. That
P100K is subject, under our tax code, to 20% FWT not
CWT.
Q: So how much would be the tax liability?
A: P100,000 x 20% = P20,000. So, the bank instead of
crediting into your account P100K, the bank will only credit
to you P80K. Withhold the P20K and remit to the BIR in
behalf of the depositor.
PASSIVE INCOME:
INTERESTS, ROYALTIES, PRIZES AND OTHER
WINNINGS
GR: 20% FWT
XPN: There are exceptions such as royalties on books and
other literary works and musical compositions; certain
interests which are not subject to tax at all, etc.
CASH/PROPERTY DIVIDENDS FROM DOMESTIC
CORPORATIONS
NOTE: Including share of an individual in the distributable
net income after tax of a partnership, except a general
professional partnership.
RULE:
10% FWT
20% FWT if received by NRA-ETB.
Tax Code made reference to cash OR property dividends.
An example of property dividend is the distribution of an
inventory being sold by the issuing corporation.
Meanwhile, another kind of dividend is a stock dividend.
Stock dividends are NOT subject to FWT. Sec. 24 only
provides that cash or property dividends are subject to
FWT. Stock dividends, under the Tax Code, are income
tax-exempt transactions. In stock dividend, the issuing
corporation instead of distributing cash or giving its own
property to the shareholders, issue its own shares of stock
to the shareholders.
Q: Will the stock dividends be subject to FWT as well?
A: No. Section 24 only provides that cash or property
dividends be subject to FWT. Stock dividends under the
Tax Code, is an income tax exempt transaction. It is
exempt from income tax.
NOTE
The dividends should be declared and issued by a
domestic corporation. If the dividends came from a
foreign corporation, it will not be subject to FWT.
 TAXATION LAW REVIEW
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Q: What would be the tax treatment if the dividends
came from a foreign corporation?
A: Apply the semi-schedular and semi-global system. It is
not a passive income because under the tax code, for the
dividend to be considered an income must be from a
domestic corporation. It is not a capital gains from shares
of stocks. It is not capital gains from sale of real property.
It would fall under the fourth category which is "all other
income." In which case, the applicable tax rate would be
the regular income tax for individuals.
LJM: For taxation purposes, a partnership except a
general professional partnership is considered as a
corporation. Any distribution of net income by a partnership
treated as a corporation is considered as dividend
declarations as well. That is why it is also subject to the
same 10% or 20% FWT.
NOTE: State the nature of the income tax. Passive income
is subject to Final Withholding Tax.
B. CAPITAL GAINS FROM SALE OF SHARES OF
STOCKS NOT TRADED IN THE STOCK EXCHANGE
(15% CGT)
The applicable tax rate would be 15% CGT. The tax base
is the net capital gain. Net Capital Gains is the gain or loss
on a transaction.
Net capital gain = Selling Price – Cost
If the shares were sold at 100k but it was originally
acquired at 80k. The Net Capital Gain is 20k. That is the
tax base of the 15% CGT.
15% CGT x the net capital gain = capital gains tax on
shares of stocks
This 15% CGT shall apply only when these requisites
concur:
1. The shares are issued by a domestic corporation; and
2. It must not be a listed in the Philippine Stock
Exchange.
Net capital gains refer to the gain or loss on the transaction.
For example, the shares were originally acquired at
P80,000, but they were sold at P100,000, then the net
capital gain would be P20,000. This is the tax base of the
15% CGT.
Note that the 15% CGT apply only if the aforementioned
requisites concur. If the shares subject of sale are issued
by a foreign corporation, then the semi-schedular/semi-
global concept will be applied and the same will fall under
other income subject to regular income tax for individuals.
14
If shares sold are listed in the Philippine Stock
Exchange:
1. The transaction is exempt from income tax, but
2. Shall be liable for a percentage tax of 6/10 of 1% based
on gross selling price.
LJM: This transaction is NOT subject to CGT, but a
percentage tax which is based not on the net capital gains,
but on the gross selling price.
Percentage tax is different from income tax. Income tax-
wise, the transaction is exempt. However, it does not
necessarily mean that there is no tax liability at all.
Percentage tax applies.
C. CAPITAL GAINS FROM SALE OF
REAL PROPERTY
SEC. 24. Income Tax Rates. – (D) Capital Gains from
Sale of Real Property. –
(1) In General. - The provisions of Section 39(B)
notwithstanding, a final tax of six percent (6%) based on
the gross selling price or current fair market value as
determined in accordance with Section 6(E) of this
Code, whichever is higher, is hereby imposed upon
capital gains presumed to have been realized from the
sale, exchange, or other disposition of real property
located in the Philippines, classified as capital assets,
including pacto de retro sales and other forms of
conditional sales, by individuals, including estates and
trusts: Provided, That the tax liability, if any, on gains
from sales or other dispositions of real property to the
government or any of its political subdivisions or
agencies or to government-owned or controlled
corporations shall be determined either under Section
24 (A) or under this Subsection, at the option of the
taxpayer;
(2) Exception. - The provisions of paragraph (1) of this
Subsection to the contrary notwithstanding, capital
gains presumed to have been realized from the sale or
disposition of their principal residence by natural
persons, the proceeds of which is fully utilized in
acquiring or constructing a new principal residence
within eighteen (18) calendar months from the date of
sale or disposition, shall be exempt from the capital
gains tax imposed under this Subsection: Provided,
That the historical cost or adjusted basis of the real
property sold or disposed shall be carried over to the
new principal residence built or acquired: Provided,
further, That the Commissioner shall have been duly
notified by the taxpayer within thirty (30) days from the
date of sale or disposition through a prescribed return of
his intention to avail of the tax exemption herein
mentioned: Provided, still further, That the said tax
exemption can only be availed of once every ten (10)
years xxx
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Subject to 6% CGT, provided that:
(a) Real property is located in the Philippines; and
(b) Real property must be classified as a capital asset.
LJM: Remember that not all capital asset transactions
are subject to 15% CGT or 6% CGT – only shares of stock
of domestic corporations and real property classified as
capital assets.
Q: What if there are other transactions involving
capital assets not falling within the two
aforementioned transactions?
A: The limitation on capital loss carry-over rule (NCLCO)
rule will be applied, and the same will be subject to regular
income tax as “other income.”
Q: Manny Pacquiao sold a house and lot in California
to a particular buyer. Is it subject to CGT?
A: NO, the real property is not located in the Philippines.
Q: ALI sold its parcels of land in Laguna in favor of a
buyer. Will it be subject to CGT?
A: NO. While the real properties are located in the
Philippines, they are NOT classified as capital assets. Real
properties of entities engaged in real estate business are
always considered as ordinary assets.
ORDINARY ASSETS
Ordinary assets are those for sale or use in the ordinary
course of trade or business. All other assets are capital
assets.
TAX BASE
Tax base is the highest among:
(a) Gross selling price;
(b) Market value per tax declaration; and
(c) Zonal value.
LJM: The Tax Code provides that the tax base shall be the
higher between the GSP and the FMV.
However, under Sec. 60, the Tax Code provides that the
FMV shall be the market value determined by the assessor
which is basically the value in the tax declaration, and the
value determined by the CIR, which is basically the zonal
value. Therefore, it is the highest among the earlier
discussed values.
EXAMPLE: X acquired a real property for P1 million. In dire
need of funds, X sold the same property for P800,000. It
resulted to a loss.
15
Q: Is the transaction still subject to 6% CGT?
A: YES. Even if the transaction resulted to a loss, if it is a
sale of real property in the PH classified as capital asset, it
will still be subject to 6% CGT, because the tax base is the
highest among the gross selling price, the market value per
tax declaration, and the zonal value. This is the doctrine of
presumed gain.
DOCTRINE OF PRESUMED GAIN
In case of a sale of real property located in the Philippines
and held as capital assets, there is no need to prove that
there is income gained before the transaction can be
subjected to income tax.
LJM: The Tax Code assumes that in these kinds of sale
transactions, there is always gain or income.
Q: Would there be an instance when the requisites for
application of 6% CGT are met in sales of real property,
and yet the 6% CGT will not be imposed?
A: YES, in the following instances –
(a) Sold to the government, its political
subdivisions, instrumentalities, or GOCC;
In this case, the individual taxpayer has the
option to either: a) pay the 6% CGT, or b) subject
the income from sale to the schedular income tax
rates.
(b) Sale of principal residence.
This is exempt from CGT, provided:
a. The proceeds are fully utilized to acquire or
construct a new principal residence within 18
calendar months from the date of sale or
disposition of the old principal residence
NOTE: The sale must precede the acquisition or the
construction of the new residence. The old residence must
be let go first before acquiring the new principal residence.
It must also be fully utilized.
EXAMPLE: A sold his existing principal residence for 1
Million and purchased a new principal residence for 3
Million. In that case, the proceeds from the sale of the old
residence was fully utilized to acquire the new principal
residence.
b. BIR is notified of the intention to avail tax
exemption within 30 days from sale of the old
principal residence.
c. 6% CGT is deposited in an escrow account
 TAXATION LAW REVIEW
UST Faculty of Civil Law | A.Y. 2022 – 2023

LJM: A lawyer may earn income from salary. The salary

This is not provided in the Tax Code. This is an additional
requirement under Tax Regulations.
d. Tax exemption must be availed once every 10
years only
The presumption of the Tax Code is that the taxpayer is
not supposed to change her/his residence from time to
time. They limit this privilege of exemption once every 10
years.
earned from a law firm is a compensation income. While
the taxpayer is a professional, this income is still
categorized as a compensation income since he is an
employee of the law firm.
3. Mixed Income Earner - the source of income is
compensation income as an employee and business
or professional income.
COMPENSATION INCOME EARNER

NOTE: The BIR will only confirm whether the sale of the The applicable rate would be the graduated income tax
principal residence will be exempt after the construction of rates or the schedular tax rates.
the new principal residence because it is only then that the
BIR will determine if there is full utilization. SECTION 24 (A)(1)(C) OF THE NIRC AS AMENDED BY
R.A. 10963 SECTION 5 (A)(2)(A):
The BIR will have to wait for 18 months to see if there has
been full utilization of the sale of the old principal TAX SCHEDULE EFFECTIVE JANUARY 1, 2023 AND
residence. ONWARDS
"Not over ₱250,000 0%
LJM: At the onset of the sale of the old principal residence, "Over ₱250,000 but not over 15% of the excess over
the BIR cannot determine yet whether that sale will be ₱400,000 ₱250,000
exempt from CGT. In the meantime, the BIR will require to "Over ₱400,000 but not over ₱22,500 + 20% of the
deposit the 6% CGT in an escrow account. ₱800,000 excess over ₱400,000
"Over ₱800,000 but not over ₱102,500 + 25% of the
ESCROW; DEFINED ₱2,000,000 excess over ₱800,000
"Over ₱2,000,000 but not ₱402,500 + 30% of the
“Escrow” means a scroll, writing or deed, delivered by the over ₱8,000,000 excess over ₱2,000,000
grantor, promisor or obligor into the hands of a third
₱2,202,500 + 35% of the
person, to be held by the latter until the happening of a "Over ₱8,000,000
excess over ₱8,000,000
contingency or performance of a condition, and then by
TAX SCHEDULE EFFECTIVE JANUARY 1, 2023 AND
him delivered to the grantee, promise or obligee.
ONWARDS
"Not over ₱250,000 0%
LJM: It is like a trust account which will be opened with a
bank such as after 18 months, if there is really full utilization "Over ₱250,000 but not over 15% of the excess over
of the proceeds of the old principal residence and the ₱400,000 ₱250,000
transaction is really exempt from CGT, the balance of the "Over ₱400,000 but not over ₱22,500 + 20% of the
escrow account will be returned. Otherwise, after the ₱800,000 excess over ₱400,000
construction of the new principal residence, if the taxpayer "Over ₱800,000 but not over ₱102,500 + 25% of the
is not qualified, then the balance of the escrow account will ₱2,000,000 excess over ₱800,000
be deposited with the BIR. "Over ₱2,000,000 but not ₱402,500 + 30% of the
over ₱8,000,000 excess over ₱2,000,000
CLASSIFICATIONS OF AN INCOME EARNER ₱2,202,500 + 35% of the
"Over ₱8,000,000
excess over ₱8,000,000
1. Purely Compensation Income Earner - the only
source of income is the salary D. OTHER INCOME

LJM: Compensation Income Earner connotes that there SOURCE

INCOME TAX
must be an employer-employee relationship. OF TAX RATE
EARNER BASE
INCOME
2. Purely Self-Employed Individuals and/or Graduated
PURELY
Professionals - the source of income is business Compensa income tax
COMPENSATI Taxable
income or professional income. tion rates (Sec.
ON INCOME income
income 24(2),
EARNER
EXAMPLE: A lawyer who has his own law office. He is not NIRC)
an employee of anyone, as such, the income received from
the client is the professional income.

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UST Faculty of Civil Law | A.Y. 2022 – 2023

250K. Why “in excess of 250K”? Look at Sec. 24(2), the

Graduated first 250K is exempt from income tax.
Taxable
income tax
income
rates Mixed income earner
OR The tax base of 8% is not in excess of 250K. When the
Gross compensation income is taxed at graduated income tax
Sales or rate, it is already subjected to 250K exemption, thus giving
PURELY SELF- Gross
EMPLOYED Business additional 250K exemption would be tantamount to 500K
Receipts total exemption.
INDIVIDUALS income or , and
AND/OR profession other
PROFESSIONA al income CONCLUSION
Non- Examining the diagram, the conclusion is that if the
LS 8% Operatin income is compensation income, the ONLY applicable
g tax rate is the graduated income tax rates and the base
Income shall be taxable income which is the same as gross
in income, at least for compensation income.
excess
of Further, the 8% option introduced under the TRAIN Law
P250,00 shall ONLY be applied to business income or
0 professional income.
(a)
Graduated
Compensa Taxable BASIC CONDITIONS TO AVAIL OF THE 8% INCOME
income tax
tion income TAX RATE OPTION
rates
income
AND
a. Taxpayer must not be a VAT-registered person;
Graduated
Taxable
income tax
income LJM: When you apply for tax registration with BIR you
rates
MIXED OR have two options: be a VAT person or NON VAT
INCOME Gross person.
(b)
EARNER Sales or
Business b. The gross sales/receipts and other income should not
Gross
income or exceed P3 million;
Receipts
profession
al income , and
8% LJM: If will exceed 3M, required to be a VAT person.
other
Non-
Operatin c. The income is not compensation income.
g
Income LJM: For compensation income, the only applicable
tax rate would be graduated income tax rate.
Purely compensation income earner
BENEFITS OF AVAILING OF THE 8% INCOME TAX
The tax base would be the taxable income (Gross income RATE OPTION
– Allowable deductions). Remember when I read
introductory paragraph of Sec. 34—“For compensation a. In lieu of graduated income tax rates; and
income, there are no allowable deductions”. When we b. In lieu of 3% percentage tax under Sec. 116 of the Tax
say taxable income as tax base for compensation income, Code.
it is also the same as the gross income.

Purely self-employed individuals/professionals INCOME TAXATION OF NRA-NETB

If the TP opted to be taxed at graduated income tax rate,
then the tax base shall be taxable income. When we say
taxable income, it is gross income less allowable
deduction. For this type of income earner, there will be
allowable deductions because they are not employees.
If the TP opted to be taxed at 8% then the tax base shall
be GS/GR and other non-operating income in excess of
SEC. 25. Tax on Nonresident Alien Individual. – (B)
Nonresident Alien Individual Not Engaged in Trade
or Business Within the Philippines.- There shall be
levied, collected and paid for each taxable year upon the
entire income received from all sources within the
Philippines by every nonresident alien individual not
engaged in trade or business within the Philippines as

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UST Faculty of Civil Law | A.Y. 2022 – 2023
interest, cash and/or property dividends, rents, salaries,
wages, premiums, annuities, compensation,
remuneration, emoluments, or other fixed or
determinable annual or periodic or casual gains, profits,
and income, and capital gains, a tax equal to twenty-five
percent (25%) of such income. Capital gains realized by
a nonresident alien individual not engaged in trade or
business in the Philippines from the sale of shares of
stock in any domestic corporation and real property shall
be subject to the income tax prescribed under
Subsections (C) and (D) of Section 24.
CLASSIFICATION OF INCOME
1. Capital Gains from Sale of Shares of Stock not
Traded in the Stock Exchange – 15% CGT
2. Capital Gains from Sale of Real Property – 6% CGT
3. Other Income – 25% FWT
If in Group 1, we categorized the income into four, here we
will only categorize income into three. There is no more
distinction on passive income, or the passive income is no
longer included in the classification of income. It only
means the passive income will fall under “other income”
subject to 25% FWT. For other income in this case, the
graduated tax rates will not apply.
INCOME TAXATION OF CORPORATIONS
We covered the income taxation of individuals, namely: the
income taxation for resident citizens, for non-resident
citizens, for resident aliens, non-resident aliens engaged in
trade or business, and non-resident aliens not engaged in
trade or business. Basically, we see a common pattern.
The income taxation of RC, NRC, RA, and NRA-ETB, the
income taxation is usually similar for those individual
taxpayers except for certain transactions. And the taxation
of NRA-NETB is totally different because NRA-NETB is
generally subject to 25% income tax regime. So, 25%
based on gross income and it is a final withholding tax.
Now, we move to the second type, corporation. If you
would still recall, there are four (4) general types or kinds
of income taxpayers. We have: (a) individuals. (b) trusts,
(c) estate, and (d) corporation. Trusts and estates are not
part of the Syllabus.
Corporation, for tax purposes, is a bit different from a
corporation under our Revised Corporation Code (RCC).
Under the RCC, when we say corporation, there is an
entity which is a separate juridical personality and the
entity is owned by stockholders, or it may be a non-stock
corporation wherein the entity is composed by members
and governed by BOT for non-stock and BOD for stock
corporation.
But, for taxation purposes, I would say that a corporation
has a more extensive definition. But before we discuss
what are the inclusions in the corporation under our Tax
18
Code, let us first look at the entities or the vehicles which
are not considered as taxable corporations.
NOT TAXABLE AS TAXABLE CORPORATIONS
The following are not taxable as corporations:
a. General professional partnerships
b. Joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in
petroleum, coal, geothermal, and other energy
operations pursuant to an operating consortium
agreement under a service contract with the
government
c. Co-ownership
ON GENERAL PROFESSIONAL PARTNERSHIPS
When we say general professional partnership, it is a kind
of partnership formed by individuals for the exercise of
common profession. So, not all partnerships are excluded
from the concept of taxable corporations. That’s why, a
while ago, I was saying that corporations for taxation
purposes has a more comprehensive definition because
corporations include partnerships and joint ventures in
general which are classified separately as a different entity
under the RCC. But, while partnerships are considered
corporations for taxation purposes, general professional
partnership is not considered as a corporation. And when
we say GPP, it is a form of partnership formed or organized
by individuals with the objective of exercising common
profession just like law offices, accounting offices,
partnerships formed by architects and engineers.
ON JOINT VENTURE OR CONSORTIUM FORMED FOR
THE PURPOSE OF UNDERTAKING CONSTRUCTION
PROJECTS OR ENGAGING IN PETROLEUM, COAL,
GEOTHERMAL, AND OTHER ENERGY OPERATIONS
PURSUANT TO AN OPERATING CONSORTIUM
AGREEMENT UNDER A SERVICE CONTRACT WITH
THE GOVERNMENT
Just like partnership, just like any kind of partnership, a
joint venture or consortium, as a general rule, is considered
as a taxable corporation. It will only be exempt when such
a joint venture or consortium is formed for the purpose of
undertaking energy operations, and that is pursuant to an
agreement with the government. There must be a serious
agreement with the government.
NOTE
1. If it is a simple joint venture entered into by two
private corporations, then it will be a taxable
corporation.
2. If it is a joint venture entered into with the
government, and the purpose is not for undertaking
an energy project, then that would still be a taxable
corporation.
 TAXATION LAW REVIEW
UST Faculty of Civil Law | A.Y. 2022 – 2023
3. So, to be considered as a non-taxable corporation,
it must be a joint venture with the government, under
a service contract agreement, and the purpose must
be engaging in energy operations and construction
projects.
ON CO-OWNERSHIP
So, you already know the concept of co-ownership under
the Civil Code.
So, these three (3) are considered as non-taxable
corporations. So, they are excluded from the concept of
taxable corporations under the Tax Code.
GPP itself is a passed through entity and is not subject
to income tax.
Q: What do we mean that GPP is a passed through entity?
EXAMPLE: We have ABC Law Offices. The partners are
A, B, and C. The law office generated an income of PHP
300,000.00. Will ABC Law Offices be subject to income
tax? The answer is NO because GPPs are exempt from
income tax, they are not subject to income tax.
But what will happen to the 300K net income? The PHP
300,000.00 net income will be distributed to the partners.
Assuming that the profit and loss ratio distribution is equal.
So, partner A will get PHP 100,000.00, partner B will get
another PHP 100,000.00, and partner C will get another
PHP 100,000.00. So, the share in the net income of the
partnership will be taxable to the individual partners in their
own and separate capacities. And the partners, as you
know, are individuals. And what will apply now will be the
income taxation for the individuals.
So, what will be the taxation then?
Do you still remember the application of the semi-
schedular and semi-global? Is the share in the net income
of a GPP considered as passive income? The answer is
NO because a passive income is limited to IRPOD
(interests, royalties, prices, other winnings, and dividends).
Is it a capital gain in sales of shares? NO. Capital gain of
sales of real property? NO.
So, therefore, the share in the net income of the
partnership will form part of the other income which would
be subject to regular tax. And what is that regular tax? It
may be the schedular rate, or the graduated income tax
rates, or the 8% income tax regime.
That is how the share in the net income of the partnership
will be taxed.
19
Hence, partners of a general professional partnership
shall be liable for income tax only in their separate and
individual capacities.
NOTE: But it does not necessarily mean that the GPP, of
course for your future reference when you have your own
law offices. Yes. The GPP is exempt from income tax,
but it does not necessarily mean that it would not file
an income tax return. It still needs to file an income tax
return showing its gross income and the expenses. But the
tax liability will be 0 because the rate that will be applied
will be 0%.
So, in the examinations, be careful, class. If the question
is “how much is income tax liability, or what is the income
tax liability of a GPP,” the answer is NONE. Because the
GPP in itself is exempt from income tax. It is a passed
through entity. The income just passes through the GPP
going to the partners.
As a rule, co-ownership is tax exempt. It becomes
taxable if it is converted into an unregistered
partnership. (Ona v. CIR, 45 SCRA 74).
LJM: I hope that you still recall your cases in your
partnership law, especially the landmark case of Pascual
v. CIR and Obillos, Jr. v. CIR.
PASCUAL v. CIR
45 SCRA 74
SC: A joint purchase of land, by two, does not constitute a
co-partnership in respect thereto, nor does an agreement
to share profits and losses on the sale of land create a
partnership; the parties are only tenants in common.
Where the transactions are isolated, in the absence of
other circumstances showing a contrary intention, the
case can only give rise to a co-ownership.
LJM: So, if you have A and B, they agreed to purchase a
parcel of land and to share in the total cost of the purchase,
and, say, after 3 years, they flipped the property, meaning
to say, they sell the property. So, assuming, they
purchased the property for PhP 1M. Naghati sila, tig-500K.
And after 3 years, they flip or sell the property and they
were able to sell it at PhP 1.5M. So, they have a gain on
the sale amounting to 500K. Will the co-ownership be
subject to income tax?
The answer is NO because it remains as a co-ownership.
Yan yung sinasabi sa case of Pascual v. CIR. Where the
transactions are isolated, in the absence of other
circumstances showing a contrary intention that can give
rise only give rise to a co-ownership, it will be exempt from
income tax.
It will be a different scenario, like, A and B purchased a
parcel for PhP 1M. And then after 3 years, they flipped the
property and was able to sell it at PhP 1.5 M. And then that
PhP 1.5M was used to purchase another property, and
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they flipped it again after 2 or 3 years, and the proceeds
they used again to purchase another property. So, if that is
the sequence of transactions, you’ll see that it is no longer
isolated, and there is already an intention to profit from an
undertaking. So, the co-ownership will be converted now
into an unregistered partnership. It is unregistered because
the co-owners, who this time are partners, did not obtain a
registration from the SEC.
So, as long as the arrangement remains as that of a co-
ownership, then it will not be subject to income tax. But
once the co-ownership is translated into a partnership,
whether registered or unregistered, it will be subject to
income tax. Because a partnership, as a general rule, is
considered as a corporation.
OBILLOS v. CIR
139 SCRA 436
Co-heirs who own inherited properties which produce
income should not automatically be considered as partners
of an unregistered partnership or corporation subject to
income tax. REASONS: Sharing of gross returns does not
by itself establish a partnership; there must be an
unmistakable intention to form a partnership or joint
venture. There is no contribution or investment of
additional capital to increase or expand the inherited
properties, merely continuing the dedication of the
property to the use to which it had been put by their
forbears.
LJM: Assuming we have A, B, and C. They are the heirs
of their parents. The estate of their parents comprises of
apartment units. And these apartment units, at the time of
death of the parents, were rented out and earned rental
income. Upon the death of the parents, of course, the
properties will be transmitted to theirs, and A, B, and C just
continued the rentals of these properties. So, before the
distribution of the estate, they are co-owners of the
properties inherited from the parents.
Will that co-ownership be considered as a partnership
because they are earning returns, they are earning rental
income?
The answer is NO. The reason is that the mere sharing of
gross returns does not in itself establish a partnership.
There must be an unmistakable intention to form a
partnership or a joint venture. There is no contribution or
investment of additional capital to increase or expand the
inherited properties, merely continuing the dedication of
the property to the use to which it had been put by their
forbears.
If the heirs merely continued the use of the properties, the
co-ownership is not being translated into a partnership.
Kasi by the time they inherited the properties, it is already
rented out, so they just continued it, and it will remain co-
ownership.
20
It would be a different scenario, if out of the rentals
collected from the tenants A, B, and C developed the
apartment units, they constructed additional rooms or
introduced major innovations to the apartment units, and
as a result, they collected higher rentals. So, if that would
be the scenario, that I would say that the co-ownership is
translated into a partnership because you would see there
the intention of A, B, and C to engage in profit
undertakings.
PARTNERSHIP
Two or more persons contribute money, property, or
industry to a common fund, with the intention of earning
profit.
LJM: Without those elements a co-ownership will remain
a co-ownership.
Lessons from the case of Pascual & case of Obillos:
1. Isolated transaction will not translate a co-ownership
into a partnership – like 2 or more persons contributed
money to purchase a property and then after some
time taking the property and earning income
therefrom, and after that wala na, that would be co-
ownership.
2. Continuing the use of the property will not convert co-
ownership into a partnership. If the property is already
being used for profit undertaking activities and the new
co-owners just continue the used of the property, then
there is no partnership created.
Q: What is the treatment?
A: A co-ownership is not treated as a separate taxable
entity. I will not call it an entity because legal is seeking, it
does not have separate juridical personnel. Co-ownership
is a tax-exempt vehicle or arrangement.
Just like GPP, any income that may be generated out of
co-ownership will be taxed to the co-owners in their
separate and individual capacity.
EXAMPLE: If the income earned from keeping the
property which is an isolated transaction is 500k, the 500k
will be divided to the co-owners. The share of each co-
owner is subject to income tax, in his or her separate
individual capacity.
Corporations includes Partnership and Joint venture for
taxation purposes.
XPN:
1. General professional partnerships (GPP)
2. Joint venture or consortium formed for the purpose of
undertaking construction projects or energy related
projects under a service agreement w/ the
government.
 TAXATION LAW REVIEW
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3. Co-ownership
TYPES OF CORPORATIONS
1. Domestic Corporations (DC) - Corporations
incorporated under the PH laws and registered w/ the
SEC.
Foreign Corporation: Foreign corporation
incorporated under the PH laws.
2. Resident Foreign Corporation (RFC) – A type of
foreign corporation doing business in the PH.
Q: How would I know if it is doing business in the PH?
A: You can request from the SEC if the entity has a license
to do business in the PH.
3. Non-Resident Foreign Corporation (NRFC) – A type
of corporation which does not do business in the PH.
Q: What if we have this particular corporation and it
has an active business in the PH but it does not have
license from the SEC, what taxation purposes it would
still be considered as a RFC?
A: RFC is a foreign corporation which does not, with
pursuit of business, in the PH, whether or not it has
licensed to do in the PH.
INCOME TAXATION OF DC
DOMESTIC CORPORATION
DC is subject to income tax, an income earned within and
outside the PH. Just like w/ the individuals, the concept of
semi-schedular and semi-global income tax applies to DC.
CLASSIFICATION OF INCOME
1. Passive Income
2. Capital Gains from Sale of Shares of Stock not
Traded in the Stock Exchange
3. Capital Gains from Sale of Land and/or Building
4. Other Income
If it is not a passive income, not Capital Gains from Sale of
Shares of Stock not Traded in the Stock Exchange, not
Capital Gains from Sale of Land and/or Building, it would
be other income.
PASSIVE INCOME (IRD)
• Interest and Royalties – 20% FWT in general
• Intercorporate Dividends – dividends received from
a domestic corporation shall be exempt from income
tax.
• Foreign-sourced dividends paid to a domestic
corporation, which is originally subject to Regular
Corporate Income Tax (RCIT), shall be exempt from
income tax if the following conditions concur:
a. The domestic corporation holds directly at least
20% of the outstanding shares of the foreign
corporation, and has held the shareholdings for a
minimum of 2 years at the time of the dividends
distribution; and
not b. The dividends must be reinvested in the
business operations of the domestic
corporation in the pH within the next taxable
year from the time the foreign-sourced dividends
were received and shall be limited to funding the
working capital requirements, capital
expenditures, dividend payments, investment in
domestic subsidiaries, and infrastructure projects.
The prices and other winnings that the DC may earned will
not be subject to FWT, it would be subject to the regular
income tax. Because it would be considered as other
income of a corporation.
Passive income is subject to FWT. The condition for it to
be subject to FWT is that the passive income should be
earned within the PH. Even if you have interest or royalties
but it is outside the PH, meaning it is earned from sources
outside the PH, then that interest and royalties earned from
abroad will not be subject to FWT, but it would be subject
to regular corporate income tax.
Interest and royalties are subject to 20% FWT in general
because there are nuisances in a lesser rate of 7.5% rate
would apply in some instance and some insert an
arrangement. Interest may not be subject to FWT at all.
Q: How about the dividends?
A: We have the concept of Intercorporate Dividends and
the CREATE law introduced the concept of Foreign-
sourced dividends.
COMPARE INTERCORPORATE DIVIDENDS TO
DIVIDENDS RECEIVED BY INDIVIDUALS:
• If a RC receives a dividend from a DC, it would be
subject to 10% FWT.
• If DC from another DC, then it is exempt from income
tax.
NOTE
Prior to CREATE Law, dividends received by DC from a
Foreign Corporation is automatically subject to RCIT. It
is not intercorporate in nature. When we say
intercorporate, the one who give dividends must be a
DC, but this time the dividend came from Foreign
Corporation.
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Before CREATE, it is subject to tax. Under CREATE For individual, if there is a machinery immobilized and
Law, it MAY BE exempt because there are certain considered as capital asset, it may be subject to 6%
conditions that must be followed. CGT upon sale.

In the Foreign-sourced dividends, an example of the 1st But for corporations, remember, the 6% CGT shall
Condition: If I am a DC and I received dividends from a apply only to sale of land and/or building which are
foreign corporation, I must be a shareholder of at least 20% considered as capital assets and located in the PH.
of that foreign corporation for at least 2 years prior to the
receipt of the dividends. In the 2nd Condition, there must be OTHER INCOME
an investment.
Q: How about the other income?
NOTE
If any of the conditions cannot be satisfied, then it will be A: If it is not passive income like interests, royalties or
subject to the RCIT. dividends, it’s not capital gains from sale of shares of
stocks, not capital gains from sale of land and/or building.
If it is other income, it will be subject to RCIT or MCIT
CAPITAL GAINS FROM SALE OF SHARES OF STOCK
whichever is higher.
NOT TRADED IN THE STOCK EXCHANGE – 15% CGT
REGULAR CORPORATE INCOME TAX (RCIT)
Before the shares can be subject to 15% CGT, the shares
(Effective from 01 July 2020)
must be that of a DC held as capital asset and not listed in
the stock exchange. The same taxation as that of an
Q: What is RCIT? In some reference material they call it
individual will apply.
Normal Corporate Income Tax. So, RCIT or NCIT, just the
same.
CAPITAL GAINS FROM SALE OF
LAND AND / OR BUILDING – 6% CGT
A: The RCIT before C.R.E.A.T.E, it’s 30%. But effective
July 1, 2020, because of C.R.E.A.T.E, the RCIT shall be
NOTE
either:
No 6% CGT on sale of Land and/or Building.
• 20% of taxable income for domestic corporations
Sale of real properties classified as real properties is
with net taxable income not exceeding Php5 Million
subject to the 6% CGT, regardless of whether the seller
and total assets not exceeding Php100 Million,
is an individual or a juridical entity. However, sale by a
excluding the land where the business office, plant and
corporation of machineries and equipment, though
equipment are situated; or
forming part of capital assets, is not subject to this tax.
Instead, it is subject to the normal corporate-income tax.
LJM: Net income should not exceed Php5M, asset should
(SMI-ED PHILIPPINES TECHNOLOGY INC., vs. CIR,
not exceed Php100M, excluding the land where the
G.R.No. 175410, November 12, 2014, LEONEN, J.)
business office, plant and equipment are situated.
LJM: The 6% CGT is not based on the net gain but based So, the 20% RCIT shall apply to small and medium
on the highest of the: 1) selling price; 2) market value for
enterprises. Maliit yung net income and maliit yung asset.
tax declaration; 3) zonal valuation. The highest of the 3 will
be the basis of the CGT. It is actually the same as that of
NOTE
an individual. The condition is that the land or the building
The tax basis of RCIT is Taxable Income.
must be located in the PH and it must be considered as a
capital asset. Same requisites with that but there is minor
You know how to compute for the taxable income right?
difference, which is the highlighted part.
Gross income – allowable deductions = taxable income.
Remember our formula under Sec. 31.
Under Sec. 24, the 6% CGT for individuals shall apply to
sale of real property. Under the Civil Code the sale of real
So, the basis of RCIT is always taxable income.
property is not limited to sale of land and building because
machineries may be immobilized and be considered as
real property. But for Corporations, the tax code is very Q: Now what if the income and asset threshold were
breached? Then:
specific, the 6% CGT does not apply to all real properties
of the corporation. It would only specifically apply to land
and/or building. • 25% of taxable income for all other domestic
corporations and resident foreign corporations.
NOTE
LJM: Take note:

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RCIT FOR RESIDENT
RCIT FOR DOMESTIC
FOREIGN
CORPORATION
CORPORATION
20% if net income does not
Always 25%.
breach Php5M and assets
must not exceed Php100M
There is NO such thing as
20% for Resident Foreign
These two (2) conditions
Corporation, it’s always
must concur. Otherwise, it
25%.
will be 25%.
So, the 20% lower RCIT is only provided to Domestic
Corporations.
MINIMUM CORPORATE INCOME TAX (MCIT)
(Effective 01 July 2020 until 30 June 2023)
Q: We said that the Other Income will be subject to
RCIT or MCIT whichever is higher. What then is MCIT?
A: Effective from July 1, 2020 until June 30, 2023, so,
limited lang applicability, MCIT Rate for domestic and
resident foreign corporations is reduced from 2% to 1% of
gross income.
LJM: Before C.R.E.A.T.E, the MCIT is 2%. But because of
the provisions of C.R.E.A.T.E, at least from July 1, 2020 to
June 30, 2023, the MCIT was reduced to 1%.
Q: And you may be wondering, why is there a window,
July 1,2020 to June 30, 2023?
A: The intention of the government, or of the Congress is
to provide relief to the TPs hit by the pandemic. Kaya
hanggang June 30, 2023 lamang.
NOTE
While the basis of RCIT is Taxable Income, the basis of
MCIT is gross income.
I hope you saw the difference. The basis of RCIT is
Taxable Income, the basis of MCIT is gross income,
yung nasa taas before deduction or considering the
allowable deductions.
• The MCIT is imposed beginning on the fourth taxable
year immediately following the year in which the
corporation commenced its business operations.
Q: Assuming, I started a business this year, 2023.
What will apply? The higher of the RCIT or the MCIT or
just the RCIT?
A: If I started a business this year, 2023, I will only be
subject to RCIT. I will not be subject to MCIT because the
MCIT is imposed only on the beginning of the fourth
taxable year immediately following the year in which the
corporation commenced its business operations.
23
Q: So, how are you going to apply that?
A: If you commenced business operations this year, 2023,
you start counting next year. Then count four (4), 2024,
2025, 2026, starting 2027, starting the fourth year, you will
already apply MCIT.
So, meaning to say, 2023, right? Start counting by next
year, 2024, 2025, 2026, 2027 will be the application of the
MCIT. So, before 2027, what will apply is the RCIT. It will
not be the higher of the RCIT or MCIT.
That’s the meaning of the MCIT is imposed beginning on
the fourth taxable year immediately following the year in
which the corporation commenced its business operations.
Q: I want you to understand the rationale for MCIT. Is
MCIT a good thing or bad thing for a corporation?
A: MCIT is actually not for the benefit of corporate TPs.
Because the provision of law is that a corporation shall be
subject to the higher, hindi naman the lower eh. The
corporation shall be subject to the higher of the RCIT or the
MCIT.
That means to say that the MCIT provides for the floor,
yung pinakambaabang tax liability of a corporation. So, it’s
not a good thing for corporate TPs because of this MCIT,
there is a floor, there is a minimum tax liability imposed to
the corporations, As I mentioned, this minimum income tax
liability shall be imposed only beginning the fourth taxable
year immediately following the year in which the
corporation commenced its business operations.
• The MCIT covers domestic and resident foreign
corporations which are subject to the RCIT; hence,
corporations which are subject to special corporate
taxes (e.g. proprietary educational institutions and
hospitals, PEZA registered entities) do not fall within
the coverage of the MCIT.
LJM: As I mentioned, the MCIT provision is not only for
domestic corporation, it will apply equally to Resident
foreign corporation. But the applicability is subject only or
is limited only to corporations subject to RCIT.
We have corporations subject to special rates like
proprietary educational institutions and hospitals, PEZA
registered entities. So, these are corporations or entities
with special corporate taxes. So, if the RCIT is not
applicable to these entities, then the MCIT will likewise not
apply. The MCIT shall apply to DC or RFC subject to
RCIT.
RELIEFS AGAINST MCIT
Q: What are the reliefs against MCIT? As I mentioned,
MCIT is not really for the benefit of the TP because
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MCIT imposes a minimum income tax liability. It

imposes a floor. So, what are the reliefs that may be Rule #3: The Carry Forward is limited only to the three
availed against this MCIT? (3) immediately succeeding taxable years.

A: The Secretary of Finance (SoF) is hereby authorized to It can be carried forward only within three immediately
suspend the imposition of the MCIT on any corporation succeeding taxable years.
which suffers losses on account of:
RULES 1 AND 2
Grounds for SoF to suspend the MCIT application:
YR 4 YR 5
1. Prolonged labor dispute GI 1M 2M
2. Force majeure Less: AD (980K) (1.8M)
3. Legitimate business reverses TI 20K 200K
Multiply: RCIT % 25% 25%
LJM: But this is not an automatic suspension of MCIT. You
have to apply with the SoF, and the SoF has to issue a RCIT 5K 50K
ruling that the MCIT application is suspended on account MCIT (2%) 20K 40K
of these three (3) grounds: prolonged labor dispute, force
Tax Due 20K 50K
majeure, or legitimate business reverses.
Less: Excess MCIT Carry-over (15K)
Tax Payable 35K
CARRY FORWARD OF EXCESS MCIT
Excess MCIT (Y4) 15K
Going to the concept of Carry Forward of Excess Minimum Excess MCIT (Y5) -
Tax. We’ve been discussing a lot of carry forwards, so far,
you should have remembered already the concept of The MCIT shall operate only beginning the 4th year. So,
NOLCO (Net Operating Loss Carry Over), NCLCO (Net we start in year 4. Assuming that the Gross income for year
Capital Loss Carry Over) and this time the third carry over 4 is 1M and the allowable deduction is 980k and taxable
rule, actually the fourth because we already had the income is 20k. The RCIT is 25%. Assuming that the
discussion on irrevocability rule, the carry over of excess corporation has a lot of assets, that is why the RCIT is 25%.
tax credit. The fourth carry over rule that I want you to The tax base of RCIT is the taxable income. So 25% of 20k
remember is the Carry Forward of Excess MCIT. is 5k.
CARRY OVER RULES But MCIT is 2% of gross income. Let us just use 2%
1. NOLCO because 1% will expire in June 2023. The tax base of MCIT
2. NCLCO is gross income. So 2% multiply it by 1M is 20k.
3. Irrevocability Rule (Carry over of Tax Credits)
4. Carry Forward of Excess MCIT Q: How much is your tax due?

Q: What is the Carry Forward of Excess MCIT Rule?
A: Under the tax code, any excess of the MCIT over RCIT
shall be carried forward and credited against the NCIT for
the three (3) immediately succeeding taxable years.
THERE ARE THREE (3) RULES:
Rule #1: What you carry forward is the excess of MCIT
over the RCIT
What you carry forward is the excess of MCIT over the
RCIT and not the other way around. If there is excess RCIT
over the MCIT, you do not carry forward the excess RCIT.
Rule #2: The excess MCIT can be credited only against
an NCIT or and RCIT, it can be deducted only against
an RCIT;
The excess MCIT can be deducted only against an RCIT.
Not against another MCIT.
A: Tax due is whichever is higher between RCIT or MCIT.
Since in this case MCIT is higher, we have 20k as tax due.
Presence of MCIT is not an advantage to the taxpayer
because it imposes a minimum income tax liability.
Q: Do we have excess MCIT?
A: Yes. Your MCIT is 20k while RCIT is just 5k. Your
excess of MCIT over 5k of RCIT is 15k RCIT.
NOTE: This is Rule No. 1 - What you carry forward is the
excess MCIT not the excess RCIT.
In year 5, assuming that the gross income is 2M. Allowable
deduction of 1.8M and taxable income is 200k. Compute
RCIT which is based on taxable income. So, 25%
multiplied by 200k, you get RCIT of 50k.
MCIT is 2% but based on gross income. 2M times 2% is
40k.

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Q: How much is your tax due?

A: Tax due is whichever is higher between RCIT or MCIT.
Here, higher is RCIT which is 50k which is now your tax
due.
In year 5 we do not have an excess MCIT because RCIT
is greater than the RCIT. You will not have a generated
excess MCIT for year 5 under Rule 1.
Assuming that these are the computed RCIT and MCIT
from year 4 to year 8. For year 4, RCIT is 5k and MCIT is
20k. Tax due is whichever is higher so 20k. We have an
excess MCIT in year 4 of 15k. For year 5, RCIT is 2.5k
while MCIT is 20k. Tax due is whichever is higher which is
20k.
Q: Can we deduct the excess MCIT from year 4?

Rule 2: The excess MCIT can be applied or deducted
against your RCIT. Here, your 50k tax due in year 5 is
based on your RCIT. You can use your excess MCIT in
Year 4 amounting to 15k be deducted to your tax due in
year 5 because the tax due in year 5 is based on RCIT.
But in the event that the tax due in year 5 is based on MCIT
because it is higher, you cannot deduct the MCIT
generated in year 4 because the excess MCIT can be
deducted only from an RCIT of the succeeding years.
Therefore, your tax payable is 35k.
A: No. Because the 20k tax liability in year 5 is not an RCIT
but another MCIT. Rule No. 2 provides that excess MCIT
can only be credited or deducted over an RCIT. Since in
year 5, 20k is another MCIT, you cannot deduct. In year 5,
you have another 17.5k excess MCIT which you can carry
forward.
For year 6, RCIT is 12.5k and MCIT is 9k. Tax due is
whichever is higher of the two which is is 12.5k.
Q: Can you deduct the excess MCIT of the previous
years?

RULE 3 A: Yes. From year 4 you have 15k which is available for
credit. You get the 12.5k from the 15k. Deduct it from the
YR 4 YR 5 YR 6 YR 7 YR 8 TOT RCIT of 12.5k in year 6. Therefore, tax liability is zero.
GI 1M 1M 450K
Less:
(980K) (990K) (400K) From year 4, you still have 2.5k remaining.
AD
TI 20K 10K 50K For year 7, the RCIT is 5k and MCIT is 10k. Tax due is 10k
Multiply: which is higher between the two. Which is an MCIT, so
25% 25% 25% 25% 25%
RCIT % applying Rule 2, you cannot apply the excess MCIT of the
previous year against another MCIT. So there will be no
RCIT 5K 2.5K 12.5K 5K 250K
deduction. Since MCIT is higher in year 7, you generated
MCIT
20K 20K 9K 10K 40K another MCIT.
(2%)

Tax For year 8, RCIT is 250k and MCIT is 40k. Tax due is 250k
20K 20K 12.5K 10K 250K which is higher of the two.
Due
Less:
Excess Q: Can you deduct an excess MCIT?
MCIT (12.5K) (22.5K)
Carry- A: Yes. Under Rule 2, excess MCIT can be applied over
over RCIT.
Tax
20K - 10K 227.5K
Payable
Q: How much?
Excess
MCIT 15K (12.5K)
2.5K A: In my example you see that excess MCIT is only 22,500.
expired
(Y4) That is the excess of year 5 which is 17,500 and the excess
Excess of year 7 which is 5k. These are the excess MCIT from year
MCIT 17.5K 17.5K 5 to year 7. In year 6 it does not have an excess MCIT.
(Y5)
Excess Q: What happened to the 2.5k excess MCIT in year 4?
MCIT - -

(Y6) A: Applying Rule 3, the excess MCIT can be applied only

Excess in the next 3 succeeding taxable years. The 15k excess
MCIT 5K 5K
MCIT of year 4 can only be applied in year 5, 6, and 7. That
(Y7)
2.5k cannot be applied in year 8 because it has expired
already at the end of year 7.
Rule No. 3: The excess MCIT can be carried forward only
for the next 3 succeeding taxable years.
RULES:

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1. Tax due is based on the higher of RCIT or MCIT. Less than 50%
2. What you carry forward is the excess MCIT not the Leasing 2,000,000 17%
threshold
excess RCIT. NOT THE OTHER WAY AROUND
3. The excess MCIT can be applied or deducted against Conclusion:
your RCIT. Excess MCIT cannot apply on the year it Total
preferential rate
arises. Gross 12,000,000
shall apply
4. The excess MCIT can be carried forward only for the Income
(10%/1%)
next 3 succeeding taxable years.
Q: How do you apply the Predominance Test?
Q: Will there be other instance where all other income
of a domestic corporation will not be subject to the
A: Under the predominance test, you have to get the
RCIT or MCIT?
percentage of the gross income earned from unrelated
activities against the total gross income.
A: Yes. Because there are special corporations that are
subject to special rates. RCIT and MCIT will not apply.
Assuming, you take the case of a Proprietary Educational
Institution, which is not a non-stock, non-profit institution.
PROPRIETARY EDUCATIONAL INSTITUTIONS
AND HOSPITALS
A school earns through tuition fees. And assuming that the
Proprietary Educational Institution, such as UST, has a lot
PROPRIETARY EDUCATIONAL INSTITUTIONS
of concessionaires, the institution may earn income from
AND HOSPITALS
leasing.
Effective from 01 July 2020 until 30 June 2023,
preferential income tax rate is reduced from 10% to 1% Under the First Scenario:
of taxable income.
Gross Income from Tuition Fees - 10,000,000
Predominance test - Preferential income tax rate shall Gross Income from Leasing - 2,000,000
not apply if the gross income from 'unrelated trade,
business, or other activity' exceeds 50% of the total Total Gross Income - 12,000,000
gross income derived by such education institutions or
hospitals from all sources. LJM: You have to get the percentage of gross income from
unrelated activities against the total gross income. And the
Just use 10%. Forget about the 1%. Subject to preferential income from unrelated activities is the income that is not
rate of 10% of taxable income. generated from the primary activity of an educational
institution, in this case, leasing. A school does not exist
NOTE: Non-stock non-profit education institutions under primarily to lease. Thus, the income from leasing is an
the Constitution are exempt from income tax. unrelated activity.
E.g., UST is a non-stock non-profit institution, it will not be Thus, the 2,000,000 gross income from leasing, as against
subject to the preferential rate of 10% because under the the total gross income of 12,000,000, you get the
Constitution it should be exempt from income tax. percentage of 17%.
This 10% should apply to proprietary educational Under the predominance test, if the percentage of gross
institutions which are NOT non-stock non-profit. income from the unrelated activity is less than 50% of the
total gross income, then the institution will be subject to the
The 10% preferential rate should be applied only provided preferential rate, which is 10% or 1%.
the predominance test is met by the proprietary education
institution and hospital. GROSS
INCOME AMOUNT %
Q: What is the predominance test? FROM:
Tuition
A: Preferential income tax rate shall not apply if the gross 10,000,000
Fees
income from 'unrelated trade, business, or other activity'
More than 50%
exceeds 50% of the total gross income derived by such Leasing 12,000,000 55%
threshold
education institutions or hospitals from all sources
Total Conclusion:
GROSS
Gross 22,000,000 RCIT/MCIT
INCOME AMOUNT %
Income shall govern
FROM:
Tuition
10,000,000 Under the Second Scenario:
Fees

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 TAXATION LAW REVIEW
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Gross Income from Tuition Fees - 10,000,000
Gross Income from Leasing - 12,000,000
Total Gross Income - 22,000,000
Thus, the 12,000,000 gross income from leasing, as
against the total gross income of 22,000,000, you get the
percentage of 55%.
Under the predominance test, if the percentage of gross
income from the unrelated activity is more than 50% of the
total gross income, then the preferential rate of 10% will
not apply. Thus, whichever the higher of the RCIT or MCIT
shall govern.
LOGIC BEHIND THE PREDOMINANCE TEST
Regulators, primarily the BIR, are trying to avoid a situation
wherein legally speaking, and per registration with the SEC
and CHED, an institution is a school, but the primary
activity is leasing, not at all school-related.
EXEMPT GOCCs
• Government Service Insurance Svstem (GSIS)
• Social Security System (SSS)
• Home Development Mutual Fund (HDMF)
• Philippine Health Insurance Corporation (PHIC)
• The local water districts
NOTE: PCSO and PAGCOR are excluded from the list of
exempt GOCCs. As a general rule, GOCCs are taxable.
But under Section 27, there is a list of exempt GOCCs,
enumerated above.
PAGCOR v. BIR
G.R. No. 215427, 10 December 2014
FACTS: Sequence of the laws:
1. PAGCOR Charter - Under the PAGCOR charter,
PAGCOR is subject to 5% franchise tax in lieu of all other
taxes. On the basis of this charter, PAGCOR claims that it
is exempt from income tax.
2. 1997 Tax Code - Under the 1997 Tax Code, PAGCOR
was included as an exempt GOCC.
3. R.A. 9337 - Under this amendment of the Tax Code,
PAGCOR was removed in the list of the exempt GOCCs.
The BIR contends that since R.A. 9337 effectively removed
PAGCOR in the list of exempt GOCCs, it is now a taxable
entity. It argued that since R.A. 9337 is a latter law, it
should govern.
PAGCOR contends that it should remain exempt because
its charter is a special law, and the provision of the tax code
27
is a general law. Thus, under the rules of statutory
construction, special law prevails over general law.
ISSUE: Whether or not PAGCOR is subject to income tax.
RULING: YES, but only insofar as PAGCOR’s income
from other related services, and non-gaming operations.
Under P.D. 1869 (PAGCOR's Charter), as amended,
PAGCOR's income is classified into two: (1) income from
its operations conducted under its Franchise, pursuant to
Section 13(2)(b) thereof (income from gaming operations);
and (2) income from its operation of necessary and related
services.
Although PAGCOR is now excluded from the enumeration
of GOCCs exempted from income tax by virtue of Section
1 of R.A. No. 9337, PAGCOR's tax privilege of paying five
percent franchise tax in lieu of all other taxes with respect
to its income from gaming operations under P.D. No. 1869
is not repealed or amended by R.A. No. 9337. Moreover,
since PD No. 1869, as amended, is a special law expressly
providing the tax treatment of PAGCOR's income, it
prevails over R.A. No. 9337, which is a general law.
CASE DISCUSSION
PAGCOR
The Supreme Court has clarified that insofar as the
PAGCOR for gaming operation is concerned, the
PAGCOR charter shall apply. Therefore, it will be exempt
from income tax because PAGCOR is already paying 5%
franchise tax in lieu of other taxes.
Thus, income derived by PAGCOR from its gaming
operations such as the operation and licensing of gambling
casinos, gaming clubs and other similar recreation or
amusement places, gaming pools and related operations
is subject only to 5% franchise tax, in lieu of all other taxes,
including corporate income tax. It is only with respect to
PAGCOR's income from other related services that the
corporate income tax be imposed.
Even if R.A. 9337 is a latter law compared to the PAGCOR
charter, the latter, being a special law, shall govern. Thus,
PAGCOR’s income from its gaming operations shall be
exempt from income tax.
However, with respect to PAGCOR’s other related services
and non-gaming operations, such are not covered by the
PAGCOR charter. What will now apply will be the Tax
Code. Thus, since the Tax Code has already excluded
PAGCOR from the list of GOCCs exempt from income tax,
then PAGCOR’s income from its non-gaming operations
shall be subject to corporate income tax.
BLOOMBERRY RESORTS AND HOTELS v. BIR
G.R. No. 212530, 10 August 2016
 TAXATION LAW REVIEW
UST Faculty of Civil Law | A.Y. 2022 – 2023
ISSUE: Whether or not the licensees and contractors of
PAGCOR are also subject to the privilege of paying 5%
franchise tax in lieu of all other taxes.
RULING: YES.
PAGCOR's tax privilege of paying only the 5% franchise
tax in lieu of all taxes inures to the benefit of third parties
with contractual relationship with it in connection with the
operation of casinos, such as Bloomberry. Section 13 of
PD No. 1869 evidently states that payment of 5% franchise
tax by PAGOR and its contractees and licensees exempts
them from payment of any other taxes, including corporate
income tax. Likewise, PAGCOR's contractees and
licensees shall pay income tax only for income derived
from their "related services."
Therefore, upon payment of 5% franchise tax,
Bloomberry's income tax from its gaming operations of
gambling casinos, gaming clubs and other similar
recreation or amusement places, and gaming pools is not
subject to corporate income tax. Corporate income tax may
only be imposed on income derived by Bloomberry from its
"related services."
CASE DISCUSSION OF BLOOMBERRY
Just like PAGCOR, the income from gaming operations of
the licensees is exempt from corporate income tax
because they already pay 5% franchise tax in lieu of all
other taxes. However, with respect to their other related
services and non-gaming operations, such are still subject
to corporate income tax.
In short, the tax privilege granted to PAGCOR extends to
its licensees and contractors.
INCOME TAXATION OF RFC
RESIDENT FOREIGN CORPORATION (RFC)
RFC is a corporation organized, authorized, or existing
under the laws of any foreign country, engaged in trade or
business within the Philippines. (Sec.28 (A), NIRC)
(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this
Code, a corporation organized, authorized, or existing
under the laws of any foreign country, engaged in trade
or business within the Philippines, shall be subject to an
income tax equivalent to twenty-five percent (25%) of
the taxable income derived in the preceding taxable year
from all sources within the Philippines effective July 1,
2020.
CLASSIFICATIONS OF INCOME
1. Passive Income
2. Capital Gains from Sale of Stocks not traded in the
stock exchange
28
3. Other Income
GR: Foreign corporations are prohibited from owning land
in the Philippines.
PASSIVE INCOME (IR)
1. Interest and Royalties - 20% Final Withholding Tax
(FWT) in general
2. Intercorporate Dividends - dividends received from a
domestic corporation shall be exempt from income tax
If the income was from the domestic corporation, whether
the recipient is a domestic corporation or a resident
foreign corporation, it will be exempt from income tax.
Q: Do we have foreign-sourced dividends? What if a
resident foreign corporation receive dividends from
another foreign corporation, will it be possible to
exempt it from income tax?
A: NO. The concept or exemption of foreign-sourced
dividends is applicable only to domestic corporations. This
provision is not replicated for resident foreign
corporations.
CAPITAL GAINS FROM SALE OF STOCKS NOT
TRADED IN THE STOCK EXCHANGE - 15% CGT
The condition is that the stocks must not be traded in the
stock exchange and must be issued by a domestic
corporation.
OTHER INCOME - RCIT OR MCIT,
WHICHEVER IS HIGHER
1. RCIT for RFC is 25%
2. Same MCIT rule for DCs applies to RFCs
There is no such thing as 20% RCIT for RFC.
AIR CANADA V. CIR
G.R. NO. 169507, JANUARY 11, 2016, J. LEONEN
SC: An offline international carrier with no landing rights in
the Philippines, is not liable to tax on Gross Philippine
Billings under Section 28 (A) (3) of the 1997 National
Internal Revenue Code. Under the foregoing provision, the
tax attaches only when the carriage of persons, excess
baggage, cargo, and mail originated from the Philippines
in a continuous and uninterrupted flight, regardless of
where the passage documents were sold.
This court in South African Airways declared that the
correct interpretation of these provisions is that:
"international air carriers] maintain[ing] flights to and from
the Philippines. . . shall be taxed at the rate of 2 1/2% of its
Gross Philippine Billings: while international air carriers
that do not have flights to and from the Philippines but
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nonetheless earn income from other activities in the provisions of tax treaties entered into by the Philippines
country [like sale of airline tickets] will be taxed at the rate with foreign countries.
of 32% of such [taxable] income."
LMJ: Even if the tax code has delineated the taxation of
LMJ: There are special taxation per resident foreign offline vs. online international carriers, the provisions of the
corporation which are no longer covered, including the Tax Code must yield to the provisions of the Tax Treaties
taxation of off-shore banking units and other RFCs.
SC: A tax treaty is an agreement entered into between
OFFLINE sovereign states "for purposes of eliminating double
INTERNATIONAL
INTERNATIONAL taxation on income and capital, preventing fiscal evasion,
CARRIERS WITH
CARRIERS WITHOUT promoting mutual trade and investment, and according fair
LANDING RIGHTS
LANDING RIGHTS and equitable tax treatment to foreign residents or
Carrier does not land or Carrier lands or takes-off nationals.
take-off from the Philippine from the Philippine
airports. airports. Pacta sunt servanda is a fundamental international law
principle that requires agreeing parties to comply with their
Not subject to Gross Subject to Gross treaty obligations in good faith.
Philippine Billings Philippine Billings
Subject to Regular While petitioner is taxable as a resident foreign corporation
Corporate Income Tax Not Subject to RCIT under Section 28 (A) (1) of the 1997 National Internal
(RCIT) Revenue Code on its taxable income 116 from sale of
airline tickets in the Philippines, it could only be taxed at a
Q: What is Gross Philippine Billings? (2005 BAR) maximum of 1 1/2% of gross revenues, pursuant to Article
VIII of the Republic of the Philippines Canada Tax Treaty
A: It refers to the amount of gross revenue realized from that applies to petitioner as a "foreign corporation
carriage of persons, excess baggage, cargo and mail organized and existing under the laws of Canada[.]"
originating from the Philippines in a continuous and
uninterrupted fight, irrespective or the place or sale or LMJ: Air Canada is an offline international air carrier and
issue and the place of payment of the ticket or passage under the Tax Code, it should be subject to regular
document. (Dimaampao, 2015) corporate income tax rate (RCIT) or minimum corporate
income tax rate (MCIT). The peculiar situation in this case
LMJ: The tax attaches only when the carriage of a is that Canada has a tax treaty with the Philippines, hence
person's excess baggage, cargo and mail originated from Canada can only be subject to 1 and 1/2 of gross revenue
the Philippines in a continuous and uninterrupted flight tax.
regardless of where the passage documents were sold.
GBP is 2.5% percent based on gross receipt. Q: Which would prevail? The NIRC or the Tax Treaty?

Technical Computation for GPB (General Concept) A: By virtue of Pacta Sunt Servanda, the Tax Treaty should
prevail.
This applies if there is a series of flights that a person has
to take in order to arrive in a particular destination. INCOME TAXATION OF NRFC

EXAMPLE: A's destination is in London. The plane will NON-RESIDENT FOREIGN CORPORATION (NFC)
take off from the Philippines then land in Singapore. Then
there will be a connecting flight from Singapore to London. In General, NFCs are subject to 25% FWT.
LMJ: The GPB is equivalent to that portion of the billing CLASSIFICATIONS OF INCOME
attributed from Manila to Singapore and not from Manila to
1. Capital Gains from Sale of Shares of Stock not
London. If there is a series of connecting flights, what will
Traded in the Stock Exchange - 15% CGT
determine the GPB is the portion of the revenue or billing
2. Other income - 25% Final Withholding Tax (FWT)
pertaining to the flight originating from the Philippines to
the next connecting flight.
NOTE: NFCs are not subject to RCIT or MCIT.
NOTE: In this case, 32% is the rate of the former RCIT. It
EXEMPT CORPORATIONS
started with 35%, became 32% but currently, the RCIT is
25%.
SEC. 30. Exemptions from Tax on Corporations. -
The following organizations shall not be taxed under this
SC: However, the application of the provisions of the
Title in respect to income received by them as such:
National Internal Revenue Code must be subject to the

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(A)XXXXX;
(B) XXXXX;
(C) XXXXX;
(D) XXXXX
(E) Nonstock 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;
(F) XXXXX
(G) Civic league or organization not organized for profit
but operated exclusively for the promotion of social
welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
(U) XXXXX; and
(K) XXXXX;
Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and character
of the foregoing organizations from any of their
properties, real or personal, or from any of their activities
conducted for profit regardless of the disposition made
of such income, shall be subject to tax imposed under
this Code.
LMJ: For last minute review in Tax, Section 30 of the NIRC
should be a priority as this is a favorite Bar area among all
provisions in the Tax Code, particularly the last paragraph.
CIR v. St. Luke's Medical Center, Inc.
G.R. No. 203514, February 13, 2017
LJM: This was asked several times already. Is St. Luke’s
subject to income tax? Technically speaking, it will fall
under Sec. 30(E) or (G).
SEC. 30. Exemptions from Tax on Corporations. -
The following organizations shall not be taxed under this
Title in respect to income received by them as such:
xxx
(E) Nonstock 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;
xxx
(G) Civic league or organization not organized for profit
but operated exclusively for the promotion of social
welfare;
xxx
30
Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and character
of the foregoing organizations from any of their
properties, real or personal, or from any of their
activities conducted for profit regardless of the
disposition made of such income, shall be subject
to tax imposed under this Code.
LJM: St. Luke’s is a non-stock non-profit educational
institution. By the nature of its operations, it can be argued
that they can fall under Sec. 30. But it does not mean that
it will be automatically exempt.
SC: The Court finds that St. Luke's is a corporation that is
not 'operated exclusively' for charitable or social
welfare purposes insofar as its revenues from paying
patients are concerned. This ruling is based not only on
a strict interpretation of a provision granting tax exemption,
but also on the clear and plain text of Section 30(E) and
(G). Section 30(E) and (G) of the NIRC requires that an
institution be 'operated exclusively' for charitable or
social welfare purposes to be completely exempt from
income tax. An institution under Section 30(E) or (G)
does not lose its tax exemption if it earns income from
its for-profit activities. Such income from for-profit
activities, under the last paragraph of Section 30, is
merely subject to income tax, previously at the
ordinary corporate rate but now at the preferential 10%
rate pursuant to Section 27(B).
CASE DISCUSSION OF ST. LUKE’S
A corporation will be considered income tax exempt only
under Sec. 30 (E) and (G) if they are organized and
operated exclusively for charitable or social welfare
purposes.
In the case of St. Luke’s, it has charitable works and paying
patients. It is clear that it is not operating exclusively for
charitable or social welfare purposes. But that fact will not
result to income taxation of the total income of St. Lukes.
Under the last paragraph of Sec. 30, the test of taxability is
the source of income. Such that if the income is sourced
from a property or an activity conducted for profit, it will be
subject to income tax.
In St. Luke’s the SC classified the income into two:
1. Income generated from charitable or social welfare
purposes. (EXEMPT)
2. Income from paying patients. (10%
PREFERENTIAL RATE)
Insofar as income from charity is concerned, it will be
exempt from income tax applying Section 30(E) and (G).
But insofar as income from paying patients, according to
last paragraph of Sec. 30, if the income came from a
property or an activity conducted for profit, it will be subject
to income tax, and the tax imposed will be the tax under
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the Code—for St. Luke’s, as a hospital, it is subject to 10%

preferential rate. FORMULA SOURCES

EDUCATIONAL INSTITUTIONS
• Sale of Goods or
CIR v. De La Salle University, Inc. Properties
G.R. Nos. 196596, 198841 & 198941, Nov 9, 2016 Output VAT • Sale of Services and
Use or Lease of
LJM: Asked already a couple of times. Properties

SC: The last paragraph of Section 30 of the Tax Code is

without force and effect with respect to non-stock,
non-profit educational institutions, provided, that the • Purchase of Goods or
non-stock, non-profit educational institutions prove Properties
that its assets and revenues are used actually. directly • Purchase of Services
and exclusively for educational purposes. The tax- Less: Input VAT and Use or Lease of
exemption constitutionally granted to non-stock, non-profit Properties
educational institutions, is not subject to limitations • Importation of Goods
imposed by law. • Transitional Input Tax
• Presumptive Input Tax
CASE DISCUSSION OF DLSU
VAT Payable/Excess Input VAT
Just like UST, De La Salle has income from its
concessionaire activities—may pinapalease na properties
so may rental income. The rental income is an income OUTPUT TAX
derived from an activity conducted for profit.
The term “output tax” means the value-added tax due on
The contention of the BIR is that this rental income should the sale or lease of taxable goods or properties or
be subject to income tax applying the last paragraph of services by any person registered or required to register
Sec. 30 (test of taxability is the source). under Sec. 236 of this Code.

According to DLSU, under the Constitution (test of
taxability is the disposition or use of income), the
revenue of a non-stock non-profit educational institution
actually, directly, and exclusively used for educational
purposes shall be exempt from tax. In effect it is saying that
the test of taxability is not the source, but the test is the
disposition of the use.
Q: Between the Constitution and a provision of law,
which shall prevail?
A: Constitution. According to SC, the last paragraph of
Sec. 30 is without force and effect with respect to non-
stock non-profit educational institution. The test of
taxability with respect to non-stock non-profit educational
institution is the disposition of the income. Legal basis is
the precedence of Constitution over any provision of law.
The SC did not declare the last paragraph of Sec. 30
unconstitutional. It only qualified with respect to non-stock
non-profit educational institution. Insofar as other
corporations are concerned, Sec. 30 last paragraph would
still apply, and the test of taxability would still be the source
of the income.
VALUE ADDED TAX
OVERVIEW
In other words, when you say output VAT, that is the VAT
on the sale transaction, or on the lease transaction. So,
you are looking from the perspective of the seller, or the
lessor, in case of lease.
INPUT TAX
The term “input tax” means the value-added tax due from
or paid by a VAT-registered person in the course of his
trade or business on importation of goods or local
purchase of goods or services, including lease or use
of property, from a VAT-registered person. It shall also
include the transitional input tax determined in accordance
with Sec. 111 of this Code.
By input tax, it means VAT on the purchase. So, if output
is the VAT on the sale, input is the VAT on the purchase.
In every transaction, a sale is a bilateral contract that
involves the seller and the buyer. So, in every sale
transaction, the seller generates output, and the purchaser
generates input. So, you have to look at it from two different
perspectives. Hindi pwedeng may sale ito, and it only has
the output, without input because a sale always involves
the interplay between the seller and the buyer.
For value-added tax (VAT), to arrive at the liability of the
taxpayer to the government, the formula would be:
FORMULA TO GET VAT PAYABLE
Output VAT

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Less: Input VAT
VAT Payable/Excess Input VAT
You will arrive at the VAT payable if the output is more than
the input, or the other way around, if the input is more than
output, that is the excess input VAT.
Q: When you have VAT payable, that means that the
output is more than the input. What will be the course
of action of the taxpayer?
A: Of course, it is to pay the government. You have no
other recourse than to pay the government.
Q: But what if it is an excess input VAT? What will be
the recourse of the taxpayer?
A: It will be to carry over the excess input VAT until it is
fully utilized. There is no prescription. You can carry it over
forever so long as the business exists. Or there is another
alternative to apply for a refund.
NOTE: The refund of the excess input VAT is limited only.
There are requisites that are needed to be observed before
an excess input VAT can be refunded.
ILLUSTRATIVE CASE
Let us assume, we have A and B. A is the seller and B
is the buyer. A sold particular product for PHP 100.00. If
you compute the VAT, that is PHP 100.00 x 12%. So,
there will be a VAT of PHP 12.00.
So, from the perspective of the seller, the seller will be
receiving PHP 112.00 from the buyer. A will receive PHP
112.00 from the buyer. The PHP 12.00 there will be
recorded by the seller as an output VAT, and the PHP
100.00 is the selling price for the product.
Looking from the perspective of B, the buyer, B will
record PHP 12.00 input VAT and then PHP 100.00 will
be the cost of the product purchased.
That is what I am saying a while ago that it is always a
perspective of the seller and the buyer, and it cannot be
from the perspective of the seller alone. Because a sale
involves two parties. It is a bilateral contract. So, there will
always be an output tax and an input tax.
Now, you have to get all your output VAT (from all your
own sale transactions) and deduct all your input VAT (from
all your purchase transactions) to arrive at your VAT
liability.
SOURCES
SOURCES FOR OUTPUT VAT
1. Sale of Goods or Properties
2. Sale of Services and Use or Lease of Properties
32
I want you to notice why I segregated the sources of the
output VAT like this. We can easily merge it as like, the
sources of the output is sale transaction or the lease
transaction. But I did not present it that way. I presented
the sources of the output VAT as the sale of goods or
properties; and the other, sale of services and use or lease
of properties.
SOURCES FOR INPUT VAT
1. Purchase of Goods or Properties
2. Purchase of Services and Use or Lease of
Properties
3. Importation of Goods
4. Transitional Input Tax
5. Presumptive Input Tax
Now, why did I segregate the sale of goods or properties
from sale and use or lease of properties? I could have
simply presented it as sale transaction or lease
transaction. But the reason why it is presented and
classified as such is that because they have different tax
base in the computation of VAT.
For sale of goods or properties, the tax base shall be gross
sales.
For sale of services and use or lease of properties, the tax
base will be gross receipts.
What is the difference?
The gross sales are the selling price whether collected or
not; whereas gross receipts are the portion of the price that
is collected, whether the product or the service has already
been rendered or not.
BASIC CHARACTERISTICS OF VAT
BASIC CHARACTERISTICS OF VAT
a. Tax credit or invoice method;
b. The value-added tax is an indirect tax and the
amount of tax may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties
or services;
c. Excise tax based on consumption – it is a tax on
the privilege of engaging in the business of selling
goods or services, or the importation of goods;
d. Regressive tax – by its very nature, VAT is a
regressive tax.
TAX CREDIT OR INVOICE METHOD
Our VAT system is using the tax credit or invoice method.
And what do you mean by tax credit or invoice method.
Under the tax credit or invoice method, it heavily relies on
invoices. An entity can take credit against or subtract from
the VAT, change on its sales or output, the VAT paid on its
purchases, inputs or imports.
 TAXATION LAW REVIEW
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Meaning to say, by invoice method, or tax credit method,
this is it, eto yun: output less input is your VAT payable.
So, the way you compute your VAT liability is that you
deduct your input from your output.
Q: What is another method that can be used, or what
is the other acceptable method?
A: The other method is the subtraction method. (not
currently used in the Philippines) Here, you compute your
sales, then from your sales, you deduct your purchases,
then the net amount is to be multiplied by 12%, to arrive at
your VAT liability.
But we do not use this in the Philippines. In the Philippines,
what we do is that we get the 12% of sales (our output
VAT), then you get the 12% of purchases (our input VAT),
and then we deduct the input from the output.
THE VALUE-ADDED TAX IS AN INDIRECT TAX, AND
THE AMOUNT OF TAX MAY BE SHIFTED OR PASSED
ON TO THE BUYER, TRANSFEREE OR LESSEE OF
THE GOODS, PROPERTIES OR SERVICES.
ABAKADA Guro Party List v. Ermita
G.R. Nos. 168056, 168207, 168461, 168463 & 168730, 01 Sept. 2005
SC: The VAT is a tax on spending or consumption. It is
levied on the sale, barter, exchange or lease of goods or
properties and services. Being an indirect tax on
expenditure, the seller of goods or services may pass
on the amount of tax paid to the buyer, with the seller
acting merely as a tax collector. The burden of VAT is
intended to fall on the immediate buyers and ultimately, the
end-consumers. In contrast, a direct tax is a tax for which
a taxpayer is directly liable on the transaction or business
it engages in, without transferring the burden to someone
else. Examples are individual and corporate income taxes,
transfer taxes, and residence taxes.
LJM: I would like to refresh on the discussion of incidence
and impact of taxation (part of the BAR syllabus).
Q: What do we mean by incidence or impact? (Lim-Bin)
A:
(a) Liability or impact
(b) Burden or incidence
Liability or impact of taxation, so that is the same thing;
burden or incidence, that is another thing. Minsan kasi
napapaghalo.
Liability refers to the person who is statutorily liable to
pay the tax to the government or to the BIR. So, under
the law, under the regulation, who shall pay the tax or who
shall remit the tax to the BIR or the government. So, that is
the liability or impact of taxation.
33
Burden, or incidence, on the other hand, refers to the party
who actually shoulders the tax.
And the best example to demonstrate these concepts in
taxation is the VAT. In VAT, the liability or impact of
taxation is on the seller because he is the one required to
remit the tax to the BIR, to the government; whereas, the
burden or incidence is on the buyer, because the seller just
passes on the VAT component to the buyer.
Pumunta kayo sa restaurant, pumunta kayo sa any retail
store, tingnan nyo yung resibo, a portion of the cost that
you paid to the retail stores, to the restaurants, VAT. In
short, kayo yung nagshoulder ng VAT at sino yung
talagang nagre-remit, nagbabayad sa BIR, it is really the
seller.
So, when we say that the VAT is an indirect tax, it is
because the liability or impact of taxation is on one
person while the burden or incidence is on the other
person.
As opposed to a direct tax where the liability or impact of
taxation as well as the burden or incidence of taxation fall
on one and the same person. The best example of which
is INCOME TAX where the earner is the one who remits
the tax to the BIR and shoulders the same.
EXCISE TAX BASED ON CONSUMPTION – IT IS A
TAX ON THE PRIVILEGE OF ENGAGING IN THE
BUSINESS OF SELLING GOODS OR SERVICES, OR
THE IMPORTATION OF GOODS.
VAT is a form of a business tax, because it is a tax on
engaging on business.
REGRESSIVE TAX – BY ITS VERY NATURE, VAT IS A
REGRESSIVE TAX.
ABAKADA Guro Party List v. Ermita
G.R. Nos. 168056, 168207, 168461, 168463 & 168730, 01 Sept. 2005
SC: The VAT is an antithesis of progressive taxation.
By its very nature, it is regressive. The principle of
progressive taxation has no relation with the VAT
system inasmuch as the VAT paid by the consumer or
business for every goods brought or services enjoyed
is the same regardless of income. In other words, the
VAT paid eats the same portion of an income, whether big
or small. The disparity lies in the income earned by a
person or profit margin marked by a business, such that
the higher the income or profit margin, the smaller the
portion of the income or profit that is eaten by VAT. A
coverso, the lower the income or profit margin, the bigger
the part that the VAT eats away. At the end of the day, it is
really the lower income group or business with low-profit
margins that is always hardest hit.
Nevertheless, the Constitution does not really prohibit
the imposition of indirect taxes, like the VAT. What is
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simply provided is that Congress shall “evolve a
progressive system of taxation.” The Court stated in
the Tolentino case, thus: The Constitution does not
relaly prohibit the imposition of indirect taxes which,
like the VAT, are regressive. What is simply provided
is that the Congress shall ‘evolve a progressive
system of taxation.’ The constitutional provision has
been interpreted to mean simply that ‘direct taxes are
… to be preferred [and] as much as possible, indirect
taxes should be minimized.” (E. FERNANDO, The
Constitution of the Philippines, 221 [Second ed., 1977])
Indeed, the mandate to Congress is not to prescribe, but
to evolve, a progressive tax system.
PERSONS LIABLE FOR VAT
SEC. 105. Person Liable. – Any person who, in the
course of trade or business, sells, barters,
exchanges, leases goods or properties, renders
services, and any person who imports goods shall be
subject to the value-added tax (VAT) imposed in
Sections 106 to 108 of this Code.
xxx xxx xxx
The phrase “in the course of trade or business”
means the regular conduct or pursuit of a commercial or
an economic activity, including transactions
incidental thereto, by any person regardless of
whether or not the person engaged therein is a non-
stock, non-profit private organization (irrespective of
the disposition of its net income and whether or not it
sells exclusively to members or their guests), or
government entity.
TRANSACTION SUBJECT TO VAT IF:
• Sale of Goods or
Properties; In the ordinary course of
• Sale of Services and trade or business.
Use or Lease of
Properties
Whether or not in the
ordinary course of trade
• Importation of Goods
or business.
REQUISITES FOR IMPOSITION OF VAT
1. There must be a sale, barter, exchange, lease, or
importation;
2. The transaction (sale, barter, exchange, lease
transaction) should be in the ordinary course of
trade or business or at least incidental thereto;
XPN: Importation does not need to be in the
ordinary course of trade or business;
3. The transaction should occur in the PH;
34
4. The transaction should not specifically be exempted
from Sec. 109.
Q: Are the membership fees paid by members to
sports club are subject to VAT?
A:
Association of Non-Profit Clubs, Inc. v. BIR
G.R.No.228539, June 26,2019
As ANPC aptly pointed out, membership fees,
assessment dues, and the like are not subject to VAT
because in collecting such fees, the club is not selling
its service to the members. Conversely, the members
are not buying services from the club when dues are
paid; hence, there is no economic or commercial activity
to speak of as these dues are devoted for the
operations/maintenance of the facilities of the
organization. As such, there could be no "sale, barter or
exchange of goods or properties, or sale of a service" to
speak of, which would then be subject to VAT under the
1997 NIRC.
EXPLANATION
In sports club, there is no selling but only collection of
membership fees. The first requisite for the imposition of
VAT is not present.
BIR v. First E-Bank Tower Condominium Corp.
G.R. Nos. 215801 & 218924. Januray 15, 2020
Are association dues, membership fees, and other
assessments/charges subject to VAT?
When a condominium corporation manages, maintains,
and preserves the common areas in the building, it does
so only for the benefit of the condominium owners. It
cannot be said to be engaged in trade or business,
thus, the collection of association dues, membership
fees, and other assessments/charges is not a result of
the regular conduct or pursuit of a commercial or an
economic activity, or any transactions incidental thereto.
EXPLANATION
In this case, the SC dwell on the 2nd requisite: that the
transaction must be in the ordinary course of trade or
business or incidental thereto. The SC ruled that the
collection of the association dues is not in the ordinary
course of business.
When condominiums or homeowners association
collects condo dues or assoc. dues, they are not really
selling any service, and in the same way the unit owners
do not purchase any service on condominium
corporations or homeowners association.
Q: Why is there no sale transaction?
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A: The dues collected (condo dues or assoc. dues,
membership fees) are funds held in trust. These funds will
be used to defray the expenses to upkeep the common
areas of the condominium corporation, homeowners
association, and in membership clubs.
BOTTOMLINE: Condo Dues, Homeowners Association
due, Membership Fees are not vatable.
REASONS:
1. There is no sale transaction because the funds
collected are merely held in trust for the benefit of the
members, unit owners or homeowners since the funds
will be used to defray the expenses of upkeep.
2. When these fees are being collected, this is not being
collected in the ordinary course of business.
ISSUE: Are association dues, membership fees, and other
assessments/charges subject to income tax?
HELD: Association dues, membership fees, and other
assessments/charges are not subject to income tax
because they do not constitute profit or gain. To
repeat, they are collected purely for the benefit of the
condominium owners and are the incidental
consequence of a condominium.
They represent funds "held in trust" to defray their
operating and general costs and hence, only constitute
infusion of capital.
Only income, be it active or passive, earned by a payor-
corporation can be subject to withholding tax. There being
no income, association dues, membership fees, and other
assessments/charges of a condominium corporation
should not be subject to withholding tax.
CASE DISCUSSION OF FIRST E-BANK
Are association dues, membership fees, and other
assessments/charges subject to income tax?
We discussed that already. Kaya, I think this will be a good
material for the bar examinations. Imagine, if I am the bar
examiner, dalawang questions agad yung matatackle ko
eh and dalawang magkaibang topic pa, isang income tax,
isang VAT.
So, as we discussed, the association due, membership
fees, and other assessments/charges, we can also say,
condominium dues, these are not subject to income tax
because there is no profit earning. There is no income to
speak of. Because the funds collected are held in trust. It’s
not income of the condominium corporation or
homeowners’ association or the membership club.
CIR v. Sony Philippines Inc.
G.R. No. 178697, 17 Nov. 2010
35
ISSUE: Is the subsidy provided to SIS to Sony subject
to VAT?
HELD: The Court does not agree that the subsidy
provided by Sony International Singapore (SIS), an
affiliate company of Sony Philippines, Inc. (Sony)
should be subject to VAT. To begin with, the said subsidy
was an assistance or aid in view of Sony's dire or adverse
economic conditions, and was only "equivalent to the
latter's (Sony's) advertising expenses.
Thus, there must be a sale, barter or exchange of
goods or properties before any VAT may be levied.
Certainly, there was no such sale, barter or exchange
in the subsidy given by SIS to Sony. It was but a dole
out by SIS and not in payment for goods or properties
sold, bartered or exchanged by Sony.
CASE DISCUSSION OF CIR v. SONY
Sony Philippines, Inc. (Sony) is an affiliate company of
Sony International Singapore (SIS). So, they are sister
companies. Now, Sony Philippines Inc. incurred some
expenses. It used these expenses for advertising.
So, we assume a figure for the sake of discussion. Let’s
assume that Sony paid P100,000 of advertising expenses.
This P100K was later on reimbursed by SIS. But this
reimbursement is not actually subject to liquidation.
Because the expenses, the advertising expenses of
P100K, that’s a cost of Sony, but it was shouldered by SIS.
So, again, let’s say the timeline. Sony paid P100K
advertising expense, and then later on, after that SIS
remitted P100K to Sony. So, that’s a subsidy. So, in effect,
parang walang binayaran si Sony.
Now, the BIR saw the inflow of money to Sony. Sabi ni BIR,
may natanggap kang P100K ha. So, the BIR immediately
assumed there is a sale transaction.
Q: Kasi, how can a company generate receipt?
A: No through sale.
So, sabi ni BIR, may natanggap kang P100K, that is
subject to VAT.
Is the subsidy of P100K by SIS to Sony subject to VAT?
The SC said No. The court does not agree that the subsidy
provided by Sony International Singapore (SIS), an affiliate
company of Sony Philippines, Inc. (Sony) should be
subject to VAT.
Why? Because the first requisite of VATability is there
must be a sale, barter or exchange. And a subsidy is just
like a donation. When you subsidize something, it’s like
you’re donating. And a donation is not sale, barter or
exchange. It is not a lease. It is not an importation. Thus,
there must be a sale, barter or exchange of goods or
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properties before any VAT may be levied. Certainly, there
was no such sale, barter or exchange in the subsidy given
by SIS to Sony. It was but a dole out by SIS, which is akin
to donation and not in payment for goods or properties
sold, bartered or exchanged by Sony.
Mindanao II Geothermal Partnership v. CIR
G.R. Nos. 1933901 & 194637, 11 March 2013
ISSUE: Whether or not a sale of a vehicle used in the
business can be subject to VAT.
HELD: Mindanao II asserts that the sale of a fully
depreciated Nissan Patrol is not an incidental transaction
in the course of its business; hence, it is an isolated
transaction that should not have been subject to VAT.
Mindanao Il's sale of the Nissan Patrol is said to be an
isolated transaction. However, it does not follow that an
isolated transaction cannot be an incidental
transaction for purposes of VAT liability. Indeed, a
reading of Section 105 of the 1997 Tax Code would show
that a transaction "in the course of trade or business
includes transactions incidental thereto. Mindanao Il's
business is to convert the steam supplied to it by
PNOC-EDC into electricity and to deliver the electricity
to NPC. In the course of its business, Mindanao II
bought and eventually sold a Nissan Patrol. Prior to
the sale, the Nissan Patrol was part of Mindanao Il's
property, plant, and equipment. Therefore, the sale of
the Nissan Patrol is an incidental transaction made in
the course of Mindanao Il's business which should be
liable for VAT.
CASE DISCUSSION OF MINDANAO II
A 2013 case and I think this was already asked in the bar
examination.
So, the issue in this case is whether or not a sale of a
vehicle used in the business can be subject to VAT.
So, Mindanao II Geothermal here sold its fully depreciated
Nissan Patrol. And, this Nissan Patrol is being used in the
business of Mindanao II Geothermal. Like, if there are
employees who need to visit the offices, the plants of
Mindanao II Geothermal, they use this Nissan Patrol.
Now, on the part of Mindanao II, they argued, of course,
the BOR will always argue that it is VATable. Lagi namang
ganon eh, si BIR will always try to argue for the government
of course, that is their mandate to collect taxes for the
government. And the burden of proof will always be on the
TP. BIR alleged that the transaction is subject to VAT. On
the part of Mindanao II, on the part of the Mindanao II, it
should not be subject to VAT because their ordinary
business is to generate electricity and distribute electricity.
So, that’s their ordinary course of business.
36
And remember our second requisite for VATability, the
sale, barter or exchange must be in the ordinary course of
trade or business. According to Mindanao II, the sale of the
Nissan Patrol is not their ordinary course of business, it is
an isolated transaction.
So, who is correct between BIR and Mindanao II
Geothermal? The SC ruled in favor of the BIR.
Mindanao Il's sale of the Nissan Patrol is said to be an
isolated transaction. So, that’s correct. However, it does
not follow that an isolated transaction cannot be an
incidental transaction for purposes of VAT liability.
And in Section 105, if you can still recall, the provision of
the law states that a transaction "in the course of trade or
business includes transactions incidental thereto. It is not
needed that it is the main business of the TP. It will be
sufficient if the transaction is incidental to the main
business.
So, Mindanao Il's business is to convert the steam supplied
to it by PNOC-EDC into electricity, so power-generation
and to deliver the electricity to NPC, so distribution. Power-
generation and distribution. In the course of its business,
Mindanao II bought and eventually sold a Nissan Patrol.
Prior to the sale, the Nissan Patrol, it was characterized as
part of Mindanao Il's property, plant, and equipment.
Therefore, the sale of the Nissan Patrol is an incidental
transaction made in the course of Mindanao Il's business
which should be liable for VAT.
Q: So, what is the moral lesson of the story, in
Mindanao II Geothermal?
A: So long as the property sold is used in the business,
even if the sale of that property is not the ordinary course
of the business, that sale will be subject to VAT because
Sec. 105 covers transactions incidental to the main
business of the seller.
NOTE
Correlate it with income tax. If the property sold is an
ordinary asset, that is subject to VAT. If the property
sold is a capital asset, that is not subject to VAT.
RECALL: An ordinary asset may be –
1. An asset that one usually sells in the ordinary
course of business; (e.g., cellphones for a person
who normally sells gadgets and phones)
2. Assets used in the ordinary course of trade or
business. (see Mindanao II Geothermal
Partnership v. CIR, supra.)
However, for purposes of answering the Bar exam, the
proper way to answer is that the sale of the asset is subject
to VAT because it is incidental to the ordinary course of
trade or business of the seller.
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CIR vs. Magsaysay Lines
GR No. 146984, July 28, 2006
The issue in this present petition is whether the sale by the
National Development Company (NDC) of five (5) of its
vessels to the private respondents is subject to value-
added tax (VAT) under the National Internal Revenue
Code of 1986 (Tax Code) then prevailing at the time of the
sale.
The involuntary sale of vessels by a taxpayer not engaged
in the sale of vessels pursuant to the government policy of
privatization is NOT subject to VAT because the sale was
not made in the course of trade or business.
CASE DISCUSSION OF MAGSAYSAY
NDC has 5 vessels and they are being leased out. NDC is
a GOCC. The ordinary course of trade or business of NDC
is not the sale of vessels but it leased out these vessels.
Because of the privatization policy of the government, NDC
was forced to sell the 5 vessels and the highest bidder that
won the public bidding was Magsaysay Lines Inc.
It is not even incidental thereto because it was not a
voluntary sale. Without the privatization policy of the
government, perhaps NDC still owns the 5 vessels. It was
an involuntary sale to comply with the policy of the
government, and in no case that involuntary sale will be
interpreted as sale in the ordinary course of trade or
business or incidental thereto.
CIR v. CA, COMASERCO
GR No. 125355, March 30, 2000
Commonwealth Management and Services Corporation
(COMASERCO, for brevity), is an affiliate of Philippine
American Life Insurance Co. (Philamlife), organized by the
letter to perform collection, consultative and other technical
services, including functioning as an internal auditor, of
Philamlife and its other affiliates. The Bureau of Internal
Revenue (BIR) issued an assessment to private
respondent COMASERCO for deficiency value-added tax
(VAT) amounting to P351,851.01, for taxable year 1988.
COMASERCO filed with the Court of Tax Appeals a
petition for review contesting the Commissioner's
assessment. COMASERCO asserted that the services it
rendered to Philamlife and its affiliates, were on a "no-
profit, reimbursement-of-cost-only" basis. In fact, it did not
generate profit but suffered a net loss in the taxable year
1988. COMASERCO averred that since it was not
engaged in business, it was not liable to pay VAT.
The Supreme Court held that contrary to COMASERCO's
contention, Sec. 105 of the NIRC, clarifies that even a non-
stock, non-profit, organization or government entity, is
liable to pay VAT on the sale of goods or services. VAT is
a tax on transactions, imposed at every stage of the
distribution process on the sale, barter, exchange of goods
37
or property, and on the performance of services, even in
the absence of profit attributable thereto.
The Commissioner of Internal Revenue issued BIR Ruling
No. 010-98 12 emphasizing that a domestic corporation
that provided technical, research, management and
technical assistance to its affiliated companies and
received payments on a reimbursement-of-cost basis,
without any intention of realizing profit, was subject to VAT
on services rendered. Hence, it is immaterial whether the
primary purpose of a corporation indicates that it receives
payments for services rendered to its affiliates on a
reimbursement-on-cost basis only, without realizing profit,
for purposes of determining liability for VAT on services
rendered. As long as the entity provides service for a fee,
remuneration or consideration, then the service rendered
is subject to VAT.
CASE DISCUSSION OF COMASERCO
It asserted that it is merely reimbursing the cost. If
COMASERCO rendered technical or administrative
services to Filamlife, and it cost COMASERCO 100k, it will
bill Filamlife exactly 100k. COMASERCO earns nothing
because it only reimburses its cost to Filamlife. That is the
main defense made by COMASERCO, why is it subject to
VAT when it merely reimbursed its costs.
Applying the requisites of VATability:
1. Transaction must be a sale, lease, or importation;
2. It must be in the ordinary course of trade or business or
at least incidental thereto. Except for importation;
3. The transaction should take place in the Philippines; and
4. It should not be VAT exempt.
There is no requirement that there must be a profit
generated. Profit is NOT an element of VATability.
First requisite – present.
Was there a sale, barter, or exchange? Yes. There was
a sale of service because COMASERCO is rendering
technical and administrative service for FILAMLIFE.
Second requisite – present.
Is the transaction in the ordinary course of trade or
business? Yes because COMASERCO was really formed
to undertake this technical and administrative services.
Third requisite – present.
Did the transaction take place in the Philippines? Yes.
Fourth requisite – present.
Is the transaction not exempt under Sec. 109? Yes.
The fact that it doesn't earn profit does not negate the fact
that all the requisites of VATability are satisfied. Hence, it
is subject to VAT. Again, profit is not an element of
VATability. Even a non-stock non-profit organization or a
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government entity may be subject to VAT on its sale of
goods or services.
VAT ON SALE OF GOODS OR PROPERTIES
Q: How to you compute your VAT?
A: From the perspective of the seller, that would be output,
and from the perspective of the buyer, it would be input
VAT. To compute, it would be 12% of the gross selling
price.
RATE AND BASE OF TAX
12% of the gross selling price or gross value in money
of the goods or properties sold, bartered or exchanged,
such tax to be paid by the seller or transferor.
Selling price - consideration of the sale or transaction,
whether paid or not.
Gross Receipt - consideration actually or constructively
received by the seller from the buyer. So, there must be a
receipt already.
Thus, remember that for the sale of goods or properties,
the base is gross selling price, not gross receipt. Gross
receipt will be the tax base when we are talking about sale
of service or use or lease of properties.
SEC. 106 (D). Sales Returns, Allowances and Sales
Discounts. - The value of goods or properties sold and
subsequently returned or for which allowances were
granted by a VAT-registered person may be deducted
from the gross sales or receipts for the quarter in which
a refund is made or a credit memorandum or refund is
issued. Sales discount granted and indicated in the
invoice at the time of sale and the grant of which does
not depend upon the happening of a future event may
be excluded from the gross sales within the same
quarter it was given.
TRANSACTIONS DEEMED SALE
When we say transactions deemed sale, there is really no
sale transaction, but for purposes of computing VAT, they
are treated by the tax code as sale already. The BIR
already imputes VAT liability on the transaction as if a sale
already happened.
SEC. 106. Value-Added Tax on Sale of Goods or
Properties. - (B) Transactions Deemed Sale. –
The following transactions shall be deemed sale:
(1) Transfer, use or consumption not in the course of
business of goods or properties originally intended for
sale or for use in the course of business;
38
EXAMPLE: The Assuming that the regular course of
business of the taxpayer is the selling of mineral water, soft
drinks, etc. Now, the taxpayer had a team-building with the
employees. They made use of their own products during
the team-building. There was no sale, but the products
were used. Thus, in that instance, it will be treated as
transaction deemed sale.
LOGIC: The product was already used. The BIR is treating
it as a sale to avoid tax leakage, basically to collect.
In this transaction, what you use/consume should be a
product that is originally intended for sale, or use in the
course of business, and the consumption is not in the
ordinary course of business.
(2) Distribution or transfer to:
a) Shareholders or investors as share in the profits
of the VAT-registered persons; or
b) Creditors in payment of debt;
EXAMPLE: The ordinary course of business of the seller-
taxpayer is sale of cellphones and other gadgets. The
seller-taxpayer, instead of giving cash or declaring cash
dividends to its shareholders, he instead gives them a
smartphone each. Such is a property dividend.
The distribution of the property dividend will be treated as
transaction deemed sale.
In the same way, if we have a creditor of the taxpayer,
instead of the taxpayer paying the creditor in cash, what he
paid is the product ordinarily intended for sale, that would
be a transaction deemed sale.
(3) Consignment of goods if actual sale is not made
within sixty (60) days following the date such goods
were consigned; and
In a consignment, there are three parties involved: (1) the
consignor, who is the real owner of the goods; (2) the
consignee, who is the agent of the consignor, and who is
the one who sells the goods; (3) the consumer/buyer.
Under a consignment agreement, the consignor transfers
the goods to the consignee, the sales agent. The latter will
then sell it to the buyer for a commission.
According to the Tax Code, even if the actual sale by the
consignee has not taken place, but if 60 days lapsed from
the time the goods were delivered by the consignor to the
consignee, it will be treated already as a deemed sale
transaction.
(4) Retirement from or cessation of business, with
respect to inventories of taxable goods existing as of
such retirement or cessation.
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EXAMPLE: Taxpayer is engaged in the business of selling
of cellphones and other gadgets, and then for one reason
or another, you decide to liquidate your business, by the
time you liquidated your business, there is still 100 units of
cellphones.
The remaining inventory for sale/product originally
intended for sale, at the time of retirement or cessation of
business, will be treated as sold already for purposes of
computing VAT liability.
EXPORT SALE; THERE MUST BE AN ACTUAL
EXPORT SALE
Export sale is a Zero-rated transaction. There must be an
actual shipment or an actual export sale. It is important that
it must be paid in acceptable foreign currency.
If the taxpayer made an export sale and he is paid in peso,
it will not be treated as a Zero-Rated sale. It will be subject
to 12% Regular VAT.

Again, you have to understand the logic behind this. Such
transactions are treated as deemed sale in order for the
government to collect the VAT that should have been paid,
had these products been sold to the public in the ordinary
course of trade or business.
EXPORT SALE
EXAMPLE: When lawyers in firms sell their legal services
by preparing legal opinions and research for clients outside
the country, payments in foreign currency must be
required. It must be paid in the firm's dollar account to be
able to maximize the benefit of Zero-Rated transaction. If
the firm is paid in peso, the firm will be subject to 12%
Regular VAT.

The sale and actual shipment of goods from the Philippines
to a foreign country, paid for in acceptable foreign currency
or its equivalent in goods or services, and accounted for in
accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP). Export sales is subject to zero
percent VAT.
REQUISITES
1. There must be a sale or actual shipment of goods from
the Philippines to a foreign country; or in case of sale
of service, the service must be rendered in favor of a
person not doing business in the Philippines.
EXPORT SALE OF GOODS
There must be a sale or actual shipment of goods to a
foreign country.
EXPORT SALE OF A SERVICE
Service must be rendered in favor of a person not doing
business in the Philippines and the payment must be in
foreign currency account for under the Rules of the Bangko
Sentral ng Pilipinas.
Q: What is the difference between Zero-Rated
Transaction and VAT-Exempt Transaction? Are they
different?

2. The payment shall be in acceptable foreign currency A: Yes, they are different.
accounted for in accordance with the rules and
regulations of the BSP. EFFECTIVELY / ZERO- VAT-EXEMPT
RATED TRANSACTION TRANSACTION
TYPES OF TRANSACTIONS SUBJECT TO VAT No tax will be paid by the No tax will be paid by the
taxpayer because the tax taxpayer because she/he
THREE KINDS OF TRANSACTIONS
1. Regular VAT Transactions - transactions subject rate is set to zero. is tax exempt.
to 12% VAT The excess of their input The excess of their input
2. Zero-Rated or Effectively Zero-Rated tax from their purchases tax from their purchases
Transactions - transactions that are subject to VAT CAN be refunded. CANNOT be refunded.
but the rate is 0%
3. VAT-Exempt Transactions - transactions under CIR V. SEAGATE TECHNOLOGY (PHILIPPINES)
Section 109 G.R. No. 153866, February 11, 2005

NOTE: A transaction deemed sale is also a Regular VAT
Transaction because they are subject to 12% VAT.
Q: Is a ZERO-RATED TRANSACTION similar with VAT-
EXEMPT TRANSACTION?
A: No, they are different. Mathematically, they are the
same as the taxpayer is not required to pay VAT, but they
have different implications.
ZERO-RATED TRANSACTIONS DIFFER FROM
EFFECTIVELY ZERO-RATED TRANSACTIONS AS TO
THEIR SOURCE.
SC: Zero-rated transactions generally refer to the export
sale of goods and supply of services. The tax rate is set at
zero. When applied to the tax base, such rate obviously
results in no tax chargeable against the purchaser. The
seller of such transactions charges no output tax, but can
claim a refund of or a tax credit certificate for the VAT
previously charged by suppliers.

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laws or international
LJM: The formula for computing the VAT liability is output agreements to which the
tax less input tax. In here, the output is zero because the Philippines is a signatory
sale is subject to Zero-Percent VAT. However, there are
effectively subjects such
also purchases which may be subject to input VAT.
transactions to a zero rate
Q: In applying the formula, what will happen to the
excess input tax? Input tax can be refunded

A: The excess input tax can be refunded.
LJM: That is the benefit of having a Zero-Rated
transaction. Conversely, in a VAT-exempt transaction,
there is no VAT liability but the input pertaining to the
purchases cannot be refunded.
SC: Effectively zero-rated transactions. however, refer to
the sale of goods or supply of services to persons or
entities whose exemption under special laws or
international agreements to which the Philippines is a
signatory effectively subjects such transactions to a zero
rate. Again, as applied to the tax base, such rate does not
yield any tax chargeable against the purchaser. The seller
who charges zero output tax on such transactions can also
claim a refund of or a tax credit certificate for the VAT
previously charged by suppliers.
LJM: The reason why it is called "Effectively Zero-Rated"
is that there is really no export but it is already treated as a
Zero-Rated transaction. This happens when the sale is
made in favor of an exempt entity. The buyer in an
Effectively Zero-Rated transaction is an exempt entity. The
buyer may be exempt under the existing tax laws of the
Philippines or by virtue of a tax treaty or international
agreement.
EFFECTIVELY ZERO-RATED CAN ALSO CLAIM TAX
REFUND
The buyer involved in the
sale of goods or supply of
services must be exempt
No such requirement from direct and indirect tax
for it to be considered as
an effectively zero-rated
transaction.
VAT ON SALE OF SERVICES AND USE
OR LEASE OF PROPERTIES
RATE AND BASE OF TAX
12% of gross receipts derived from the sale or exchange
of services, including the use or lease of properties.
The term "gross receipts" means the total amount of
money or its equivalent representing the contract price,
compensation, service fee, rental or royalty, including the
amount charged for materials supplied with the
services and deposits and advanced payments
actually or constructively received during the taxable
quarter for the services performed or to be performed for
another person, excluding value-added tax, except those
amounts earmarked for payment to unrelated third
(3rd) party or received as reimbursement for advance
payment on behalf of another which do not redound to
the benefit of the payor.

LJM: Just like a Zero-Rated Transaction, the input vat DIFFERENCE IN BASE
pertaining to the Effectively Zero-Rated Transactions can
be refunded. Sale of goods/properties Sale of service/lease
Gross sales Gross receipts
NOTE: In an Effectively Zero-Rated Transaction, it is
made in favor of an exempt buyer. The buyer must be By gross receipt, the simple way to explain it is “cash
exempt both from direct tax and indirect tax for the basis”. If the receipt or payment has been actually or
transaction to be considered as Effectively Zero-Rated. constructively received already, even if the services are not
yet rendered, it will already be subject to VAT.
LJM: If the buyer is only exempt from direct tax, and there
was a sale in favor of the buyer, the same will not be LEASE TRANSACTION: ADVANCE RENTAL AND
treated as Effectively Zero-Rated Transaction. SECURITY DEPOSIT

ZERO-RATED EFFECTIVELY ZERO- Q: In a lease transaction, we have rentals. Normally,

TRANSACTION RATED TRANSACTION the lessor would require security deposit and advance
Refers to the sale of goods rentals—would these receipts be subject to VAT?
Refers to the export sale of
or supply of services to
goods and supply of A: As to advance rental, considered as gross receipt
persons or entities whose
services already, hence subject to VAT. It will be utilized eventually
exemption under special

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and will be offset against future lease liability of the
lessee—it will already form part of the gross receipt.
On the other hand, the security deposit will not form part
of the gross receipt. It is intended to be returned to the
lessee at the end of the lease term.
It will be a different story if under the provision of the lease
contract, the security deposit will be applied against
rentals. In that case, the security deposit will form part of
gross receipt upon payment or collection thereof.
CIR v. American Express International, Inc.
G.R. No. 152609, 29 June 2005
The case explains how the credit card system works. The
issuance of a credit card allows the holder thereof to
obtain, on credit, goods and services from certain
establishments. As proof that this credit is extended by the
establishment, a credit card draft is issued. Thereafter, the
company issuing the credit card will pay for the purchases
of the credit card holders by redeeming the drafts. The
obligation to collect from the card holders and to bear the
loss — in case they do not pay — rests on the issuer of the
credit card.
The service provided by respondent in Amex consisted of
gathering the bills and credit card drafts from
establishments located in the Philippines and forwarding
them to its parent company's regional operating centers
outside the country. It facilitated in the Philippines the
collection and payment of receivables belonging to its
Hong Kong-based foreign client.
RECAP: FORMULA
FORMULA SOURCES
Output VAT • Sale of Goods or Properties
• Sale of Services and Use or Lease
of Properties
• Purchase of Goods or Properties
Less: Input • Purchase of Services and Use or
VAT Lease of Properties
• Importation of Goods
• Transitional Input Tax
• Presumptive Input Tax
VAT Payable / Excess Input VAT
Again, the formula that we should consider in arriving at
the VAT liability of a taxpayer: output VAT less input
VAT. Output VAT is the VAT generated from sales
transactions; it is the liability of the seller. Input VAT is the
VAT generated from purchase transactions; it is the VAT
passed on by the seller to the buyer. So, output VAT is
41
from the perspective of the seller while input VAT is from
the perspective of the buyer.
But then, one person can be at times a seller, and at some
other time, he or she may be a buyer. One person may
generate an output VAT and at the same time an input
VAT. So, to arrive at the liability, you have to deduct the
input from the output.
SOURCES OF OUTPUT VAT
1. Sale of goods or properties (Tax base: Gross sales)
2. Sale of services and use or lease of properties (Tax
base: Gross receipt)
NOTE: The fact that the two sources have two different tax
bases is the reason why we need to classify them.
SOURCES OF INPUT VAT
1. Purchase of Goods or Properties
2. Purchase of Services and Use or Lease of Properties
3. Importation of Goods
4. Transitional Input Tax
5. Presumptive Input Tax
RECAP: CATEGORIZATIONS OF TRANSACTIONS
FOR VAT PURPOSES
1. Regular VAT Transactions. This pertains to
transactions subject to 12% VAT. It is regular because
the regular VAT is 12%.
2. Zero-Rated Transactions or the Effectively Zero-
Rated Transactions. Here, the transaction is still
VAT-able but the VAT rate is 0%, in which case, the
output VAT that will be generated from the perspective
of the seller is 0, because any number, when you
multiply by 0, the product is 0. And since the output
VAT from the seller is 0, there is no VAT passed on to
the buyer.
But mind you, in zero-rated transactions or in
effectively zero-rated transactions, they are still VAT-
able transactions. The only difference with regular
VAT transactions is that the rate used is 0%.
3. VAT-exempt transactions. Here, the transaction is
totally not subject to VAT.
Now, you might be wondering, what is the difference
between a zero-rated, on one hand, and a VAT-
exempt transaction, on the other hand?
It is correct that these two transactions do not create
or generate VAT liability, but there is a BIG
DIFFERENCE. Remember this formula: output less
input?
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So, if you are engaged in zero-rated transactions, your
input can be claimed as refund. Kasi wala ka namang
babanggan na output eh. So, definitely you will have
an excess input, and that can be claimed as refund.
Whereas, if that is a VAT-exempt transaction, the input
you shouldered from your purchase transactions
cannot be claimed as refund.
LJM: Remember these three classifications of a sale,
barter, or exchange transaction.
RECAP: VAT ON SALE OF SERVICES AND USE
OR LEASE OF PROPERTIES
LJM: So, as I’ve mentioned, the base is gross receipt. As
opposed to sale of goods and properties, or sale of service
or lease of properties, the tax base is gross receipts.
With regard to the sale of services and use or lease of
properties, let us try to revisit the case of Commissioner of
Internal Revenue v. American Express International, Inc.
(G.R. No. 152609, 29 June 2005).
CASE DISCUSSION
CIR v. AMERICAN EXPRESS INTERNATIONAL
This case explains how a credit card system, or credit card
transaction, works. So, it is actually a tripartite transaction.
We have the credit card user, or the credit card holder; and
then, imagine on the top would be the establishment, or the
commercial establishment, where you swiped your credit
card; and then, to complete the triangle, you have your
credit card issuer.
So, the credit card issuer issues the credit card to the
holder, the holder swipes the credit card in the different
commercial establishments, and then, the commercial
establishments collect from the credit card issuer; and, in
turn, the credit card issuer collects from the holder. So, it
is a tripartite arrangement, a tripartite transaction.
Now, in this case, the credit card issuer is a foreign
company, Amex. But then the holders are in the
Philippines. And since the credit card holders are in the
Philippines, most of the transactions happened as well in
the Philippines. So, they swiped and made a purchase in
the different establishments in the Philippines.
Now, this foreign credit card issuer has a local company,
an affiliate. And the function of that local affiliate, American
Express International, Inc., is to collect the credit card
drafts from the different commercial establishments where
the credit cards were used. So, basically, these card drafts
are the evidence that the credit cards were swiped in the
respective establishments. So, parang ‘yan ‘yung invoice
nila to collect against the credit card issuer abroad; it is
Hong Kong-based, to be particular.
42
So, we have this local affiliate which collects the credit card
drafts, summarizes, and process, and then provides report
to the Hong Kong-based credit card issuer. And for the
services rendered by this local affiliate, it bills the foreign
credit card issuer.
Now, in this particular case, the Supreme Court explained
the Doctrine of Destination Principle and the Cross
Border Doctrine. According to the Supreme Court, our
present VAT system uses the destination principle.
NOTE
As a general rule, the value-added tax (VAT) system
uses the destination principle.
Destination Principle – the goods and services are
taxed only in the country where these are consumed.
Cross Border Doctrine – VAT shall be not imposed to
form part of the cost of the goods destined for
consumption OUTSIDE the territorial border of the
taxing authority.
Thus, exports are xero-rated, while imports are taxed.
The Destination Principle and Cross Border Doctrine
actually complement each other. Under the Destination
Principle, if the consumption is in the Philippines, then it
shall be subject to VAT. Under the Cross Border Doctrine,
if the goods or services are destined for consumption
outside, then it shall not be subject to VAT.
So, what is the consequence then?
The exports are zero-rated, applying the Cross Border
Doctrine; because when you export, the goods are
intended for consumption outside. On the other hand,
imports are taxed, applying the Destination Principle;
because when we import goods, it means that the goods
are destined, or intended to be consumed within our
Philippine territory.
However, our VAT law itself provides for a clear
exception to the Destination Principle, under which
the sale of service performed in the Philippines shall
be zero-rated when rendered to a person engaged in
business conducted outside the Philippines or to a
non-resident person not engaged in business who
is outside the Philippines when the services are
performed, the consideration for which is paid for in
acceptable foreign currency and accounted for in
accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP).
Respondent is a VAT-registered person that facilitates
the collection and payment of receivables belonging to
its non-resident foreign client, for which it gets paid in
acceptable foreign currency inwardly remitted and
accounted for in conformity with BSP rules and
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regulations. Certainly, the service it renders in the
Philippines should be zero-rated.
LJM: Now, this case of Amex provides an exception to the
Destination Principle: that the sale of service in the
Philippines shall be zero-rated when rendered to a
person not engaged in business in the Philippines.
Again, think of the Destination Principle. According to the
Destination Principle, if the goods and services are
consumed or transacted here in the Philippines, then it
shall be subject to VAT.
But in the Amex case, an exception to the Destination
Principle was provided. And that is, if services are
rendered in favor of entities or persons not doing
business in the Philippines.
Typical example would be in this case of Amex. The local
affiliate rendered the services here in the Philippines. They
are the ones who collect the credit card drafts from the
different credit card establishments. They process the
records, summarize them, and turn it over to their foreign
counterparts. So, the services were rendered here in the
Philippines. And they collect fees for that. And yet, even if
the services were transacted and consumed here in the
Philippines, it is treated as a zero-rated transaction.
Q: What are the requisites then before this kind of
transaction can be zero-rated transaction?
A: The requisites are as follows:
1. Services must be performed in the Philippines.
2. It is performed or rendered in favor of a person or entity
not doing business in the Philippines.
3. The transaction is paid in foreign currency, or the
consideration for the services rendered is paid in
foreign currency.
4. The remittance of the money to the Philippines is
accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP).
LJM: I want to impress upon each of you that this is an
exception to the Destination Principle.
Think of the Destination of the Principle: if the goods or
services are consumed or transacted in the Philippines, it
shall be subject to VAT. And when we say subject to VAT,
dapat mayroon kang 12% regular VAT. But this Amex
case provides for the exception. That exception
provides: “The destination principle will not apply in
so far as the services rendered in the PH are
concerned but in favor of entities or persons not doing
business in the PH.”
REMEMBER
Requirements:
1. Services rendered in the PH;
43
2. Rendered in favor of entities or persons not doing
business in the PH;
3. Paid and acceptable in foreign currency; and
4. Remittances accounted for under the rules and
regulations of the BSP.
Q: How would I know if the dollar remittance was
accounted for under the rules and regulations of the
BSP?
A: If the proceeds were remitted to a local bank account,
under the supervision of the BSP or registered with the
BSP, then that would satisfy the 4th requirement.
EXAMPLE: If naka bag lang yung pera at biglang i-
handover lang yun, like yung ini-smuggle lang yung bayad,
that would not satisfy the 4th requirement.
TYPICAL EXAMPLE: Services rendered by law offices. In
our case, we have a lot of foreign clients, and our clients
ask from time-to-time opinion of PH Laws. We do our
research in the PH and we draft our legal opinion in the
PH, and then we send it out to them. Our foreign clients
are not operating in the PH because they are still planning
or considering if it is good to operate business in the PH.
By the time that they requested for our opinion, wala pa
silang operation in the PH. But their dollar payments are
deposited in our local bank account. This is just like the
case of AMEX, who renders services, but those
transactions are subject to zero percent VAT.
Accenture, Inc. v. CIR
G.R. No. 190102, July 11, 2012
The Court held that the recipient of the service must
be doing business Outside the Philippines for the
transaction to qualify for zero-rating under Section 108
(B) of the Tax Code.
Accenture, Inc. (Accenture) is a corporation engaged in the
business of providing management consulting, business
strategies development, and selling and/or licensing of
software.
The evidence presented by Accenture may have
established that its clients are foreign. This fact does not
automatically mean, however, that these clients were
doing business outside the Philippines. Consequently, to
come within the purview of Section 108 (B), it is not
enough that the recipient of the service be proven to
be a foreign corporation; rather, it must be specifically
proven to be a nonresident foreign corporation.
The Official Receipts, Intercompany Payment Requests,
Billing Statements, Memo Invoices-Receivable, Memo
Invoices-Payable, and Bank Statements presented by
Accenture merely substantiated the existence of sales,
receipt of foreign currency payments, and inward
remittance of the proceeds of such sales duly
accounted for in accordance with BSP rules, all of
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these were devoid of any evidence that the clients
were doing business outside of the Philippines.
CASE DISCUSSION
ACCENTURE V. CIR
Accenture is a BPO or like a call center. Accenture for
some of their clients, they imposed a zero percent VAT.
They claimed that it is zero-rated applying to the
destination principle.
When scrutinize as to whether the requisites are complied
with, the BIR found out that these clients of Accenture are
foreign clients and foreign corporations. Based on that
finding, the BIR disallowed the claiming of zero-rated VAT.
According to the BIR, the transaction should not be subject
to zero percent VAT because it is a regular VAT
transaction.
Q: Will the sale of services which happened in the PH,
paid in foreign currency, accounted for under the rules
and regulations of the BSP, but made in favor of
foreign corporations, would it qualify as zero-rated
transaction, applying the case of AMEX?
A: No. We stick with the requirements. The service must
be rendered in favor of entities or persons not doing
business in the PH. The requirement does not state that it
should be rendered in favor of foreign companies or foreign
corporations or foreign persons because foreign
corporations or foreign persons can do business
transaction in the PH. But the requirement of the tax code
to consider zero-rated VAT is that: “It should be rendered
in favor of entities or persons not doing business in the
PH.”
Q: How would you prove that your client is not doing
business in the PH?
A: The primary evidence is a Certification with the SEC
because as a General Rule: Before foreign corporations
can do business in the PH, they shall secure a license to
do business in the PH. You can request for a negative
certification from the SEC, which would state that based on
the records of the SEC, this particular foreign company
does not have license to do business in the PH. But if they
can be established by the BIR that they are operating in a
colorum basis, meaning to say wala silang license pero
nagooperate sila dito, then that would be detrimental to the
case of your clients.
BOTTOMLINE OF AMEX CASE & ACCENTURE CASE:
Zero-Rated Sale of service follows these requirements:
1. Services rendered in the PH;
2. Rendered in favor of entities or persons not doing
business in the PH;
44
Applying the case of Accenture: Services rendered in
favor of foreign corporations or clients will not suffice.
There must be proof that the buyer of service is not
doing business in the PH.
3. Paid and acceptable in foreign currency; and
4. Remittances accounted for under the rules and
regulations of the BSP.
DESTINATION PRINCIPLE
GR: Services rendered inside the PH or goods consumed
in the PH shall be subject to VAT.
XPN: AMEX case.
SALE OF GOODS AND SERVICES TO REGISTERED
BUSINESS ENTERPRISES IN ECOZONES AND
FREEPORTS
Remember that under the cross border doctrine, if the
goods are intended for consumption outside the
Philippines, it shall not be subject to VAT. This is the
reason why export sales are zero-rated.
CONCEPT OF ECOZONE & FREEPORT
The Congress enacted a law creating ecozones. This are
economic hubs. The intention of the law is to develop these
secluded areas and make them economic hubs. An
ecozone or freeport zone provides a lot of fiscal and non-
fiscal incentives, like tax exemptions or reduced tax rates.
Businesses are enticed to operate in an ecozone or
freeport zone to be entitled to the fiscal and non-fiscal
incentives under the law.
For example, the Subic Freeport Zone, there are registered
business which are mostly export-oriented enterprises.
The businesses registered there do exports. Before
CREATE, the ecozones even if they are part
geographically in the PH, but there is a legal fiction created
that they are not part of the PH and regarded as foreign
territories.
Q: What is the consequence of that legal fiction?
A: The consequence of that legal fiction is that, for
example, a seller of goods in Manila and a buyer that is
registered enterprise in Subic Freeport Zone. Imagine,
Manila to Subic it is treated as constructive export. From
the eyes of the law and tax authorities, it is considered as
an export, in which case it is subject to zero percent VAT.
Q: Prior to the CREATE Act, for VAT purposes, what
rule governs the sale of goods and services by a VAT-
registered seller from the customs territory to
enterprises located and registered within the
economic zones (Ecozone) or a Freeport?
A: Before the CREATE Act, Ecozones and Freeport zones
were, by legal fiction, regarded as foreign territories. Thus,
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following the 'cross border doctrine", the sale of goods and
services by a VAT-registered seller to registered
enterprises in these economic and freeport zones were
treated as constructive export subject to zero-percent
(0%)VAT. (RMC No. 024-22)
NOTE
When we say “Customs territory” this is PH territory.
PH territory but not an ecozone or freeport zone.
Q: With the passage of CREATE Act, is the “cross
border” in so far as registered business enterprises in
Ecozones and Freeports still applicable for purposes
of VAT?
A: No. Because the concept of legal fiction was already
removed with the passage of CREATE Act. The “cross
border doctrine” as applied to Ecozones or Freeport zones
has been rendered ineffectual and inoperative for VAT
purposes. The CREAT Act [Section 295(D)] expressly
provides that only those goods and services that are
directly and exclusively used in the registered project or
activity of Registered Business Enterprises (RBEs) qualify
as VAT 0% local purchases. (RMC No. 024-22)
LJM: It means to say that in my example a while ago, seller
in Manila, buyer in Subic Freeport Zone, the sale will not
qualify automatically as 0% VAT because that legal fiction
was removed already and therefore wala ng constructive
export in which case it will be subject to 12% VAT.
Q: But when can the transaction be considered as 0%?
A: Pwede pa rin siyang maging 0%. But according to
CREATE Sec. 295(D), the goods and services supplied or
sold to an entity in the Ecozone or Freeport Zone, it should
be directly and exclusively used in the registered project or
activity of the business enterprise.
LJM: Before you can be registered in an ecozone and
freeport zone, before you can operate there, there are
allowable projects and activities that can be undertaken by
different business enterprises. Most of which are export
related. Export of goods, export of services like BPO
industry.
Example: export of furniture. The exporter is located in the
freeport zone in Subic. We have a seller of woods which
is a raw material to make the furniture which is in Tagaytay
outside the freeport zone. So, seller sold the woods in favor
of this registered enterprise in Subic freeport zone. The
woods were used as raw materials to create the pieces of
furniture, and the pieces of furniture were eventually
exported.
The sale from Tagaytay to Subic Freeport Zone will qualify
as a Zero-Rated Transaction.
Q: Why?
45
A: Because the goods sold were directly and exclusively
used in the registered project or activity of the business
enterprise in the freeport or ecozone.
Q: What is the registered activity?
A: Export of furniture.
Q: In the same example, what if the seller instead of
providing woods or raw materials to manufacture
furniture, ang prinovide niya eh sale of accounting
services? Siya yung accountant. So, the accountant is
another entity, it provides accounting services in favor
of an entity in Subic Freeport Zone. Now, you will ask,
yung accounting services, is it directly attributable to
the product being exported?
A: No. Therefore, that sale of services will qualify as a
regular VAT Transaction, subject to 12%.
NOTE
In sum, before CREATE, there is a legal fiction created
such that, Ecozones and Freeport Zones are treated as
separate foreign territories. Therefore, sale from any
other parts of the PH to an entity within the freeport zone
or ecozones, it will be treated as “constructive export”
subject to 0% VAT.
Q: But is that concept still applicable NOW?
A: NO. That legal fiction has been rendered ineffectual
already or inoperative with the enactment of CREATE.
Under CREATE, sale from the customs territory which is
any other of the PH to an entity registered in an ecozone
or freeport zone, it will qualify only to 0%VAT if the sale
involves goods and services that are directly and
exclusively used in the registered project or activity.
And this registered project or activity, mostly these are
export-based.
Q: What is the treatment on the sale of goods and/or
services by a VAT-registered seller to registered
export enterprises, regardless of the location,
enjoying fiscal incentives under the CREATE Act?
A: Sale of VAT-registered suppliers to registered export
enterprises enjoying fiscal incentives under the CREATE
Act shall be treated as VAT zero-rated, However, it shall
only apply to goods and/or services directly and exclusively
used in the registered project or activity of said registered
export enterprise, for a maximum period of seventeen (17)
years from the date of registration, unless otherwise
extended under the Strategic Investment Priority Plan
(SIPP). (RMC No. 024-22)
LJM: This is what I am saying. The goods and services
supplied should be actually and directly used in the
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UST Faculty of Civil Law | A.Y. 2022 – 2023
registered business activity of the registered enterprise in
the ecozone of freeport zone.
(Not discussed but in Atty. LJM’s presentation)
Q: What is a registered export enterprise?
A: As defined under Section 4(M), Rule I of the CREATE
IRR, an export enterprise refers to any individual,
partnership, corporation, Philippine branch of a foreign
corporation, or other entity organized and existing under
Philippine laws and registered with an IPA to engage in
manufacturing, assembling or processing activity, and
services such as information technology (IT) activities and
business process outsourcing (BPO), and resulting in the
direct exportation, and/or sale of its manufactured,
assembled or processed product or ITIBPO services to
another registered export enterprise that will form part of
the final export product or export service of the latter, of at
least seventy (70%) of its total production or output. (RMC
No. 024-22)
Q: Are the purchases of registered export enterprises
not directly and exclusively used in its registered
project or activity subject to VAT at zero-rate?
A: No. Only the purchases of goods and services that are
directly and exclusively used in the registered project or
activity of the registered export enterprise shall be allowed
for VAT zero-rating. Hence, not all goods coming into, or
services rendered within the Ecozones or Freeport shall be
accorded VAT zero-rating. (RMC No. 024-22)
Q: Are the RBEs not entitled to avail the VAT zero-
rating on their purchases of goods and/or services?
A: Yes. RBEs which are categorized as Domestic Market
Enterprise are not entitled to VAT zero-rating on local
purchases. Sale of goods or services to a registered
domestic market enterprise shall be subject to VAT at 12%.
LJM When you say Domestic Market Enterprise, they are
not engaged in export activates. They may be in the
freeport zone or ecozone, but they sell their services in
other parts of the PH. So, they are not entitled to VAT zero-
rating on local purchases. So, there would be VAT zero-
rating only if the RBE is engaged in export.
Q: We said, that the services and goods must be directly
and exclusively used to the registered project or activity.
What is meant by direct and exclusive use in the
registered project or activity?
A: Direct and exclusive use in the registered project or
activity refers to raw materials, like woods in the
manufacture of furniture, supplies, equipment, goods,
packaging materials, services, including provision of basic
infrastructure, utilities, and maintenance, repair and
overhaul of equipment, and other expenditures directly
attributable to the registered project or activity without
46
which the registered project or activity cannot be carried
out.
LJM: So, in my example, the test is the phrase “without
which the registered project or activity cannot be carried
out”.
Q: In my previous example, do you think a furniture
can be created and exported without woods?
A: NO. Therefore, these woods are clearly directly and
exclusively for the registered business or activity.
Q: How about the accounting services? Can furniture
be created, manufactured and exported without the
accounting services?
A: Definitely. Therefore, the sale of accounting services
cannot be considered for direct and exclusive use of the
registered project or activity.
For this purpose, services for administrative purposes,
such as legal, accounting, and such other similar services,
are not considered expenses directly attributable to and
exclusively used in the registered project or activity. (RMC
No. 024-22)
LJM: Even legal services. Before, when we had clients in
the freeport or ecozone, when we render service applying
the cross-border doctrine, 0% VAT yun. Kasi nga
constrictive export of service yun. Before. But now we no
longer do that. So, we comply with the CREATE Law.
Therefore, when we render services to a RBEs in the
freeport or ecozone, we charge 12% VAT because it is no
longer subject zero-rated VAT.
Therefore, any legal, accounting, and such other similar
services, it shall be subject to 12% VAT.
NOTE
LJM: Let me just qualify. A while ago, we said that cross-
border doctrine is rendered ineffectual and inoperative
insofar as to sale to RBEs within or inside the ecozone
or freeport zone.
But let me clarify that the cross-border doctrine is
still an applicable doctrine. Again, under the cross-
border doctrine, if the goods or services are destined for
consumption outside, it shall be subject to 0% VAT.
So, applying the cross-border doctrine, your export
sales remain subject to 0% VAT. It is still an applicable
doctrine. It’s not repealed by CREATE Law. It is just
rendered ineffectual and inoperative insofar as sale of
services and goods to RBEs within an ecozone or
freeport zone because that legal fiction wherein they are
treated as foreign territories was removed under the
CREATE Law.
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Cross-border doctrine is still an effective doctrine, and
the consequence of which is that export sales are zero-
rated. But the effect of CREATE Law is that, the legal
fiction that the ecozone or freeport zone is treated as a
foreign territory, that was removed already and
therefore, sale of services from customs territory or any
other part of the PH territory to an ecozone entity or
freeport entity, it will be subject as a regular VAT as a
general rule.
Last meeting, we made a distinction between zero-rated
and effectively zero-rated transaction. When we say zero-
rated transaction, this mainly refers to export transactions.
And effectively zero-rated transactions, these are sale of
goods and services in favor of entities exempt under
special tax law or international tax treaty or international
agreements.
Q: Are the sales to entities exempt under special laws
still considered subject to 0% VAT under the CREATE
Act?
A: YES. So, hindi nabago ng CREATE yung effectively
zero-rated transactions. Sales to enterprises covered by
special laws such as renewable energy developers under
R.A. No. 9513 (Renewable Energy Act of 2008,
International Rice Research Institute (IRRI), Asian
Development Bank (ADB), etc. are still subject to VAT at
zero percent rate (0%). (RMC No.024-22)
LJM: So, the concept of effectively zero-rated transactions
was not amended, and was not affected by CREATE.
So, the impact of CREATE is only on the removal of the
legal fiction that the ecozone and freeport zone is a
separate customs territory, and as a consequence, as a
general rule, sale from a customs territory to the RBEs in
the ecozone or freeport zone will be subject to regular VAT.
INCOME EXEMPT TRANSACTIONS
▰Sale of agricultural or aquatic products intended for
human consumption.
▰ Services subject to percentage tax.
▰ Medical, dental, hospital and veterinary services
except those rendered by professionals.
▰ Educational services rendered by private educational
institutions, duly accredited by the Department of
Education, the Commission on Higher Education, the
Technical Education and Skills Development Authority
and those rendered by government educational
institutions.
▰ Services rendered by individuals pursuant to an
employer-employee relationship.
▰ Services of bank, non-bank financial intermediaries
performing quasi-banking functions, and other non-bank
financial intermediaries (e.g. pawnshops).
▰ Sale or lease of goods and services to senior citizens
and persons with disability, as provided under RA Nos.
47
9994 (Expanded Senior Citizen Act of 2010) and 10754
(An act expanding the benefits and privileges of persons
with disability), respectively.
▰ Transfer of property pursuant to Sec. 40 (c)(2) of the
NIRC, as amended.
▰ Sale of or importation of prescription drugs and
medicines for:
(i) Diabetes, high cholesterol, and hypertension
beginning Jan. 1, 2020; and
(ii) Cancer, mental illness, tuberculosis, and kidney
diseases beginning Jan. 1, 2021.
▰ Association dues, membership fees, and other
assessments and charges collected by homeowner's
associations and condominium corporations.
▰ Lease of residential unit with a monthly rental not
exceeding Fifteen thousand pesos (P15,000)
▰ (CC) Sale or lease of goods or properties or the
performance of services other than the transactions
mentioned in paragraphs A to BB or Section 109 (1) of
the Tax Code, as amended, the gross annual sales
and/or receipts do not exceed the amount of Three
million pesos (P3,000,000.00)
▰ See Section 109 of the Tax Code, as amended, for
the complete list of exempt transactions.
LJM: This is the third classification of transaction which are
exempt transactions. Section 109 provides for a list of VAT
exempt transactions from paragraph A to paragraph CC.
1. Sale of agricultural or aquatic products intended for
human consumption.
Q: Is the sale of orchids a VAT exempt transaction?
A: No. Under Sec. 109 (a) the agriculatural product should
be intended for human consumption. Although orchids are
agricultural products, they are not for human consumption.
Hence, not VAT exempt.
2. Services subject to percentage tax.
It is another form of national tax or internal revenue tax.
That it is why it is in the Tax Code.
Q: Can percentage tax and VAT be imposed on the
same transaction?
A: As a general rule, no. When a transaction is subject to
VAT, it will no longer be subject to a percentage tax and
vice-versa. If a transaction is subject to a percentage tax,
it will no longer be subject to VAT.
3. Medical, dental, hospital and veterinary services
except those rendered by professionals.
LJM: If you are confined in a hospital, the hospital will
charge you for the room, the medicine administered,
facilities used, these charges are VAT exempt. Same with
dental and veterinary services. But the professional fees of
 TAXATION LAW REVIEW
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the doctors will bill separately. The fees of these
professionals are subject to VAT. Their fees are
considered as VATable transactions.
4. Educational services rendered by private
educational institutions, duly accredited by the
Department of Education, the Commission on Higher
Education, the Technical Education and Skills
Development Authority and those rendered by
government educational institutions.
LJM: This is the reason why your tuition fees, there is no
additional 12% VAT there because tuition fee is the
consideration for education services and they are VAT
exempt transactions.
5. Services rendered by individuals pursuant to an
employer-employee relationship.
LJM: That is why when you check your payslip or salary,
there is no imposition of 12% VAT. Your compensation is
exempt from VAT under Section 109.
6. Services of bank, non-bank financial intermediaries
performing quasi-banking functions, and other non-
bank financial intermediaries (e.g. pawnshops).
LJM: The reason why they are VAT exempt because these
entities are subject to percentage tax. They are subject to
Gross Receipt Tax which is a form of percentage tax.
7. Sale or lease of goods and services to senior
citizens and persons with disability, as provided under
RA Nos. 9994 (Expanded Senior Citizen Act of 2010)
and 10754 (An act expanding the benefits and
privileges of persons with disability), respectively.
8. Transfer of property pursuant to Sec. 40 (c)(2) of the
NIRC, as amended.
LJM: This is the tax-free exchange. A transferor not
exceeding five (5) transfers his or her properties to a
transferee corporation and in consideration for the transfer,
the transferee corporation issues its own shares of stocks
to the transferors. The result of the transaction is that the
transferors obtained control over the transferee. That is the
tax-free exchange. In that transaction there is a barter and
VAT covers barter "sale, barter, or exchange" so there is
an exchange of property in Section 40(c)(2). Exchange of
property for shares. Even if there is an exchange
transaction it is exempt from VAT because it is expressly
listed in Section 109. The exemption is not limited to
income tax only. VAT is also exempt in a tax-free exchange
transaction.
9. Sale of or importation of prescription drugs and
medicines for:
(i) Diabetes, high cholesterol, and hypertension
beginning Jan. 1, 2020; and
48
(ii) Cancer, mental illness, tuberculosis, and kidney
diseases beginning Jan. 1, 2021.
10. Association dues, membership fees, and other
assessments and charges collected by homeowner's
associations and condominium corporations.
11. Lease of residential unit with a monthly rental not
exceeding Fifteen thousand pesos (P15,000)
Q: A lessor owns a number of residential units and the
units are being leased out to different lessees. The
monthly rent for one residential unit is P10,000 but
because of the number of units being leased out the
annual rental is five (5) million pesos. If you sum up
the lease payments because there are many units. Will
that be exempt from VAT?
A: Yes. What you need to consider is the monthly rent per
unit and not the total. So long as the monthly rent per unit
does not exceed P15,000 regardless of the total it will still
be VAT exempt.
Q: What if the lease involves commercial units. If used
as computer shop or washing or laundry services. If
the monthly rent is P10,000 per month. Will that qualify
for the exemption?
A: No. because the VAT exemption is limited to residential
units.
12. (CC) Sale or lease of goods or properties or the
performance of services other than the transactions
mentioned in paragraphs A to BB or Section 109 (1) of
the Tax Code, as amended, the gross annual sales
and/or receipts do not exceed the amount of Three
million pesos (P3,000,000.00)
LJM: Sec. 109 (a) to (CC) is an inclusive list of VAT
exemptions. These are the only VAT exempt transactions.
But paragraph (CC) provides that even if the transaction
cannot be considered as VAT exempt under paragraph A
to BB, they may still be considered as VAT exempt
provided the gross annual sales and/or receipts do not
exceed Three (3) million pesos. P3,000,000.00 is the VAT
exemption threshold.
In Lease of commercial unit, we know that it is not covered
by the VAT exemption because it is only limited to lease of
residential unit not exceeding P15,000 per month. If you
lease a unit regardless of the monthly lease rate, as a
general rule, it is VATable.
Q: If we assume that the lease per unit is P20,000
monthly. But the lessor has fewer units such that when
he sums up all the receipts from the lease of the
commercial units, his gross recipts from lease is just
P2.5 million. Can that be VAT exempt?
A: Yes. because it is less than 3 million.
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Q: In lease of residential units. The monthly lease is
just 10k but because of the number of units leased out,
the gross annual lease receipt is 5 million pesos. Will
that qualify under VAT exemption?
A: Yes. because paragraph CC only apply if paragraphs A
to BB are not applicable. Here, it falls under the residential
unit since the rate does not exceed 15k.
Q: What are the requisites before paragraph CC can be
invoked to be exempt from VAT?
A:
1. The transaction does not fall under paragraphs A to BB;
2. The gross annual sales and/or receipts should not
exceed 3 million pesos; and
3. The taxpayer should be non-VAT registered.
When you register your business, you will choose if you
want to be VAT or subjec to percentage tax. If you are
subject to percentage tax, then you are a non-VAT person.
If you are subject to VAT, then you are a VAT-registered
person.
In my example in the lease of commercial units, the annual
lease is 2.5 million, that will be VAT exempt only if the
lessor is registered as a non-VAT person.
But if the lessor opted for VAT registration, regardless of
the amount, the transaction will be subject to Value Added
Tax.
LJM: So now we have already discussed different kinds of
transactions: (1) Regular; (2) Zero-Rated; and (3) VAT-
exempt. We have already discussed the different sources
of output VAT: (1) Sale of goods or properties; and (2) sale
of services and use or lease of properties. We are moving
now to the different sources of input VAT.
Q: The sale of goods, service, or lease of properties,
from the perspective of the buyer, that is their source
of input VAT. But what are the other sources of input
VAT?
A: Importation. However, we will not focus on importation.
Instead, we will focus on transitional/presumptive input tax.
TRANSITIONAL / PRESUMPTIVE
INPUT TAX CREDITS
1. TRANSITIONAL INPUT TAX CREDITS
SEC. 111 (A). Transitional Input Tax Credits. - A
person who becomes liable to value. added tax or any
person who elects to be a VAT-registered person shall,
subject to the filing of an inventory according to rules
and regulations prescribed by the Secretary of finance,
upon recommendation of the Commissioner, be allowed
49
input tax on his beginning inventory of goods, materials
and supplies equivalent to two percent (2%) of the value
of such inventory or the actual value-added tax paid on
such goods, materials and supplies, whichever is
higher, which shall be creditable against the output tax.
LJM: What does this mean? Take cue from the term
“transition”. Transitional input tax is a tax imposed on a
transition. Before we dwell on this, I want you to appreciate
that input tax is actually for the benefit of the taxpayer.
Because if you have more input, then you have lesser VAT
liability. So normally, taxpayers would want more input tax.
And so, this grant of additional input tax is for the benefit of
the taxpayer.
Q: What is this “transition” that we are referring to?
A: There is a transition from being a non-VAT person to a
VAT person. So previously, you are not subject to VAT, but
you are now being subject to VAT because you opted for
VAT registration. So, there is a change in registration with
the BIR from a non-VAT person to a VAT person. Because
of that transition, the law allows transitional input tax as
additional incentive or benefit on the part of the person who
transitions.
A: Why is there an incentive?
A: At first, a taxpayer is a non-VAT person. Being a non-
VAT person, he does not remit VAT. Even then, this person
purchased services, goods, from suppliers. In the normal
course of business, he still needs to buy goods, raw
materials, services, etc. These purchases are not exempt
from VAT. He still pays VAT for these, for they are indirect
taxes. So, imagine, this non-VAT person pays VAT for his
purchases, so he has input tax, and yet, he does not have
output because he is a non-VAT person. That cannot be
refunded. So, because of that, when that person transitions
into a VAT person, the law allows some relief.
When you change from non-VAT to VAT, you have to list
your existing inventory of goods, your materials, and
supplies. In all likelihood, this non-VAT person paid already
tax on those supplies. So, you file your inventory with the
BIR, you indicate the value, and then you can claim 2% of
the value as your input tax. But that 2% will be compared
to the actual VAT paid on the beginning inventory. And
whichever is higher, it will be the transitional input tax.
E.g., XYZ, a non-VAT person, opted for VAT registration.
At the time that XYZ shifted to VAT registration, it filed
beginning inventory amounting to 100k. The inventory that
it filed to the BIR complying to Section 111(A) is 100k. So,
compute the transitional input tax.
According to Section 111 (A), the transitional input tax is
the higher of (1) 2% of the value of such inventory or (2)
the actual value-added tax paid on the beginning inventory,
whichever is higher. In the example, 1000k is the inventory,
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multiplied by 2%, which is 2,000. You compare it with the
actual VAT paid. Those purchases of beginning inventory,
some of them may be zero-rated, regular, or VAT exempt.
So, assuming that we computed that the actual VAT paid
on 1000k beginning inventory is 4,000. 4,000 is higher.
Thus, 4,000 will be the transitional input tax.
CASE IN POINT: Fort Bonifacio Case, not yet asked in the
bar.
FORT BONIFACIO DEVELOPMENT CORP. v. CIR
G.R. Nos. 158885 and 170680, 2 April 2009
FACTS: Fort Bonifacio acquired from the government
huge track of land. That track of land is now known as the
Bonifacio Global City (BGC). At the time it was acquired,
sale of real property was not VATable. Imagine, Fort
Bonifacio acquired the land without paying 12% VAT.
After the acquisition, developments started. Then comes
the eVAT law, which increased the VAT rate from 10% to
12%, and expanded the scope of VATable transaction,
including sale of real properties.
Fort Bonifacio then was forced to transition from being a
non-VAT person to a VAT person. When it transitioned, it
claimed transitional input tax. That time, the transitional
input tax was 8% of the value of the beginning inventory.
The BIR disallowed the claim of transitional input tax on the
ground that the beginning inventory which is the track of
land acquired form the government was acquired VAT-
free. There was no VAT actually paid on the beginning
inventory.
RULING: The Supreme Court ruled in favor of Fort
Bonifacio. It said that actual payment of the VAT is not a
requisite for claiming transitional tax credit. The
requirement of the law is 2% of the value of the beginning
inventory, and the actual VAT paid, whichever is higher.
Then, if there is no VAT paid, the 2% value, which was then
8%, was definitely higher.
2. PRESUMPTIVE INPUT TAX CREDITS
SEC. 111 (B). Presumptive Input Tax Credits. -
Persons or firms engaged in the processing of sardines,
mackerel and milk, and in manufacturing refined sugar
and cooking oil, shall be allowed a presumptive input
tax, creditable against the output tax, equivalent to four
percent (4%) of the gross value in money of their
purchases of primary agricultural products which are
used as inputs to their production.
LJM: Presumptive input tax credit is an input tax which is
presumed. When we say input tax, the VAT is passed on
by the seller to the buyer, and the buyer pays on this
additional VAT component. But in this presumptive input
tax, there was no VAT charged to the buyer, and yet, the
50
law presumes that there is. But then, the presumptive input
tax are limited to persons or firms engaged in the
processing of sardines, mackerel, and milk, and in
manufacturing refined sugar and cooking oil.
E.g. Entities that bought tomatoes to be used for the
sardines. The purchase, even if no VAT was passed on by
the farmers to the entities who bought them, it will be
subject to 4% input tax credit.
Q: What is the intent of the law for providing this
additional incentive?
A: Take note of the products involved - sardines, mackerel,
milk, refined sugar, and cooking oil. These are products
that are for the masses. Thus, the government is giving
some sort of relief in the form of presumptive input tax, so
that these manufacturers of these products can at least
lower the price of the products.
LJM: Do you still remember the formula? Output less
input? That is your VAT liability or excess input. So, we
now move on to the last part of our discussion.
EXCESS OUTPUT OR INPUT VAT
SEC. 110. Tax Credits. - (B) Excess Output or Input
Tax - If at the end of any taxable quarter the output tax
exceeds the input tax, the excess shall be paid by the
VAT-registered person.
If the input tax exceeds the output tax, the excess shall
be carried over to the succeeding quarter or quarters.
Provided, however, that any input tax attributable to
zero-rated sales by a VAT-registered person may at his
option be refunded against other internal revenue taxes,
subject to the provisions of Section 112.
Q: What will happen if there is a discrepancy between
output and input?
A: If your output exceeds the input, there is no other
recourse but to pay the excess with the BIR.
Q: What if it is the other way around?
A: If the input tax exceeds the output tax, the first remedy
is to carry over the excess input to the succeeding
quarters. That excess input can be used to credit against
the output of the succeeding quarters. There is no
prescription.
There is an additional remedy provided to the input
attributable to zero-rated transaction. Such transaction
may, at the option of the taxpayer, be refunded.
REMEDIES WHEN INPUT TAX
EXCEEDS OUTPUT TAX
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If the input tax exceeds the output tax, there are two
remedies, viz. –
(a) The excess can be carried over to the succeeding
quarters and can be used to credit against the output
tax of the succeeding quarters. This excess input tax
can be used until it is fully exhausted. There is no
prescription.
(b) The law also provides an additional remedy for input
taxes attributable to zero-rated sales. Input
attributable to zero-rated sales may, at the option of
the taxpayer, be refunded.
LJM: Zero-rated sales generate zero VAT. Therefore,
mathematically speaking, it will always result to excess
input VAT. If the input is directly attributable to the zero-
rated sales, the excess input can be refunded or carried
forward, at the option of the taxpayer.
NOTE: If the excess input is NOT attributable to zero-rated
transactions, the excess input cannot be refunded.
EXAMPLE: X generated low sales, which generated only
P10,000 output tax. It has purchases generated P15,000
input tax. It has therefore an excess input tax of P5,000.
However, the P5,000 is not directly attributable to zero-
rated sales because the sales here are regular VAT
transactions. The remedy of refund is therefore not
available.
The remedy of refund is available only if the excess input
is directly attributable to zero-rated transactions.
Otherwise, the only remedy for the excess input is to carry-
over.
SEC. 112. Refunds or Tax Credits of Input Tax. -
(A) Zero-rated or Effectively Zero-rated Sales. - Any
VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after the
close of the taxable quarter when the sales were made,
apply for the issuance of a tax credit certificate or refund
of creditable input tax due or paid attributable to such
sales, except transitional input tax, to the extent that
such input tax has not been applied against output tax:
Provided, however, That in the case of zero-rated sales
under Section 106(A)(2)(a)(1), (2) and (b) and Section
108 (B)(1) and (2), the acceptable foreign currency
exchange proceeds thereof had been duly accounted
for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP): Provided, further,
That where the taxpayer is engaged in zero-rated or
effectively zero-rated sale and also in taxable or exempt
sale of goods of properties or services, and the amount
of creditable input tax due or paid cannot be directly and
entirely attributed to any one of the transactions, it shall
be allocated proportionately on the basis of the volume
of sales. Provided, Finally, That for a person making
51
sales that are zero-rated under Section 108(B) (6), the
input taxes shall be allocated ratably between his zero-
rated and non- zero-rated sales.
REFUNDS OR TAX CREDITS OF INPUT TAX
Any VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after the
close of the taxable quarter when the sales were made,
apply for the issuance of a tax credit certiNicate or refund
of creditable input tax due or paid attributable to such
sales, except transitional input tax, to the extent that such
input tax has not been applied against output tax[.] (Sec.
112(A), NIRC)
PROCEDURE FOR REFUND OF EXCESS INPUT VAT
ATTRIBUTABLE TO ZERO-RATED SALES
Requisites for claim for refund of unutilized input VAT
LUZON HYDRO CORP v. CIR
G.R. NO. 188260, 13 NOV 2013
SC: A claim for refund or tax credit for unutilized input VAT
may be allowed only if the following requisites concur,
namely:
(a) the taxpayer is VAT-registered;
(b) the taxpayer is engaged in zero-rated or effectively
zero-rated sales;
(c) the input taxes are due or paid;
(d) the input taxes are not transitional input taxes;
(e) the input taxes have not been applied against output
taxes during and in the succeeding quarters;
(f) the input taxes claimed are attributable to zero-rated
or effectively zero-rated sales;
(g) for zero-rated sales under Section 106(A)(2)(1) and
(2); 106(B); and 108(B)(1) and (2), the acceptable
foreign currency exchange proceeds have been duly
accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas;
(h) where there are both zero-rated or effectively zero-
rated sales and taxable or exempt sales, and the input
taxes cannot be directly and entirely attributable to any
of these sales, the input taxes shall be proportionately
allocated on the basis of sales volume; and
(i) the claim is filed within two years after the close of the
taxable quarter when such sales were made.
NOTE: For tax refund application to prosper, there must be
observance of invoicing requirements to prove the input tax
and zero-rated or effectively zero- rated sales to which the
input tax is attributable. (Luzon Hydro Corp. v. CIR)
CASE DISCUSSION
LUZON HYDRO CORP v. CIR
LJM: For Bar exam purposes, the important requisites are
two – first, that there is an excess input tax and second,
 TAXATION LAW REVIEW
UST Faculty of Civil Law | A.Y. 2022 – 2023
that the excess is directly attributable to zero- rated or
effectively zero-rated sales.
Q: How is refund made?
A: The refund claim must be instituted within two years
after the close of the taxable quarter when the related zero-
rated sale transaction occurred.
The administrative claim must be made in two years, and
that two years should be reckoned from the close of the
taxable quarter when the effectively zero-rated sale
transactions occurred.
EXAMPLE: Assuming that the filing is based on calendar
quarters, each quarter is treated as a taxable period for
VAT purposes. X has excess input VAT for the first quarter
of 2020.
Q: When is the deadline for the filing of the
administrative claim?
A: It is two years from the close of the taxable quarter. If
the related zero-rated sale transaction occurred on Q1,
which closes on March 31, 2020, then the two- year period
would be reckoned from such date. Therefore, the deadline
for the filing of the administrative claim is March 31, 2022.
LJM: The BIR requires that the filing of the administrative
claim should include all the supporting documents. It is
unlike a request for reinvestigation wherein the taxpayer
has another 60 days to Nile additional supporting
documents.
For refund of excess input VAT attributable to zero-rated
sales, it is required that when the administrative claim is
filed within the two-year period, the supporting documents
must already be complete. A letter request within the two-
year period is not enough without the filing of all the
supporting documents.
Q: If the administrative claim is filed within the two-
year period, what would be the action of the BIR?
A: The Tax Code, as amended by the TRAIN Law, has
limited the period for the BIR to decide on the
administrative claim for refund to 90 days from 120 days.
This 90 days is counted from the filing of the administrative
claim.
NOTE: The administrative claim would only be considered
as filed when it is supported by complete records. If it is a
mere letter request without records, then the 90 days
would not begin to run yet because the administrative claim
is not yet considered as filed.
JUDICIAL CLAIM
Judicial claim shall be made within thirty (30) days. A
judicial claim is an appeal from the decision of the BIR. As
52
earlier discussed, an appeal has to be made with the CTA
Division.
Q: What is the reckoning point of the thirty-day
period?
A: The reckoning point is –
(a) Upon the receipt of the taxpayer of the unfavorable
decision of the BIR, OR
(b) Upon the lapse of the 90-day period, whichever
comes first.
You have to distinguish this from protest procedure
(judicial/administrative).
In judicial protest, the BIR is given 180 days to decide on
protest, and the protest can be made 30 days from the
lapse of the 180-day period.
But under the Lascona case, the taxpayer can also opt to
wait for the decision of the BIR, even if it is beyond 30 days
from the lapse of the 180-day period and from the receipt
therefrom, file a judicial protest within 30 days.
Q: Is that remedy available in VAT refund claim?
A: No. The reckoning point is receipt or lapse of 90-day
period, whichever comes first.
SUMMARY
• The remedy under Sec. 112(c) is admin claim—to
be filed within 2 years from the close of the taxable
quarter. The BIR will have 90 days to decide on the
admin claim.
• Then, judicial claim—filing of an appeal to the CTA
Division within 30 days from the receipt of the
taxpayer of the unfavorable decision of the BIR, or
the lapse of the 90-day period, whichever comes
first.
NOTE: For refund of excess input VAT to prosper, there
must be observance of invoicing requirements to prove the
input tax and zero-rated or effectively zero-rated sales to
which the input tax is attributable.
You must submit a VAT OR and VAT Invoice.
CIR v. Mindanao II Geothermal Partnership
G.R. No. 191498, 15 Jan 2014
LJM: Take note that when this case was promulgated (as
well as in Aichi and San Roque), the period accorded to
BIR to decide to decide on the admin claim is still 120 days.
This is still a good doctrine but if you will apply it to the Tax
Code as it is now, you just change the 120 to 90.
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RULING: SUMMARY OF RULES ON PRESCRIPTIVE
PERIODS FOR CLAIMING REFUND OR CREDIT OF
INPUT VAT:
A. TWO-YEAR PRESCRIPTIVE PERIOD
1. It is only the administrative claim that must be filed
within the two-year prescriptive period. (Aichi)
LJM: Just the admin claim, not the judicial claim.
Compare this with the refund of other internal revenue
taxes under Sec. 229, wherein both the administrative
and judicial claims must be filed within the two-year
period.
2. The proper reckoning date for the two-year
prescriptive period is the close of the taxable quarter
when the relevant sales were made. (San Roque)
3. The only other rule is the Atlas ruling, which applied
only from 8 June 2007 to 12 September 2008. Atlas
states that the two-year prescriptive period for filing a
claim for tax refund or credit of unutilized input VAT
payments should be counted from the date of filing of
the VAT return and payment of the tax. (San Roque)
(CBK Power Co. Ltd. v. CIR, G.R. No. 202066,
205353, 30 Sept. 2014)
B. 120 + 30 DAY PERIOD
1. The taxpayer can file an appeal in one of two ways: (1)
file the judicial claim within thirty days after the
Commissioner denies the claim within the 120-day
(now 90-day) period, or (2) file the judicial claim within
thirty days from the expiration of the 120-day (90-day)
period if the Commissioner does not act within the 120-
day (90-day) period.
LJM: To simplify, it is 30 days from the receipt of
unfavorable decision or lapse of the 90 days,
whichever comes first.
2. The 30-day period always applies, whether there is a
denial or inaction on the part of the CIR.
3. As a general rule, the 30-day period to appeal is both
mandatory and jurisdictional. (Aichi and San
Roque)
LJM: In one case, the decision of the BIR was
rendered on the 50th day. Then, the taxpayer only filed
an appeal with the CTA on day 130. The appeal is not
filed on time because the reckoning point is whichever
is earlier of the receipt of the unfavorable decision or
the lapse of the period provided for the BIR to decide
(then 120 days).
The allegation kasi of the TP to support the timely filing
of the judicial claim is that when you add 30 to 120 is
53
150, so he has still until day 150 to file an appeal. It
does not work that way. Again, it is whichever is earlier
of the receipt of the unfavorable decision or expiration
of the period provided for the BIR to decide which is
now at 90 days.
This is why you will often see in the different decisions
of the SC that both the 30 and 120 day is mandatory
and jurisdictional.
4. As an exception to the general rule, premature filing is
allowed only if filed between 10 December 2003 and 5
October 2010, when BIR Ruling No. DA-489-03 was
still in force. (San Roque)
LJM: We will no longer discuss the window. Now, it is
no longer applicable.
5. Late filing is absolutely prohibited, even during the time
when BIR Ruling No. DA-489-03 was in force. (San
Roque)
Q: When should you apply the 90-day period?
A:
NOTE
The TRAIN Law reduced the 120-day processing period
of the BIR to 90 days from the date of submission of
the official receipts or invoices and other
documents in support of the application.
However, all claims for refund/tax credit certificate filed
prior to Jan. 1, 2018 will be governed by the one
hundred twenty (120)-day processing period.
(Consolidated VAT Regulations of 2005, as amended)
Be careful. Scrutinize the problem. If the administrative
claim was filed BEFORE Jan. 1, 2018, then the 120-day
period still applies. But if it was filed AFTER Jan. 1, 2018,
then apply the 90-day period.
VAT COMPLIANCE REQUIREMENTS
The admin claim will not be deemed as filed if the claim is
not supported by OR or invoices. The letter request for
refund should already be filed together with this supporting
documents. Take note of the transaction. What you are
refunding is an input VAT and it is a VAT generated on
purchases.
SUBSTANTIATION TAX BASE FOR
TRANSACTION REQUIREMENT VAT
(Sec. 113, NIRC) COMPUTATION
Sale, barter or
exchange for Gross selling
VAT Invoice
goods or price
properties
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UST Faculty of Civil Law | A.Y. 2022 – 2023
Sale, barter or
exchange of
services VAT Official
Gross receipt
Lease of Receipt
goods or
properties
From the perspective of the seller, these are purchases. If
the transaction is purchase of goods or properties, what
must be submitted is a VAT invoice. However, if the
transaction is purchase of services or lease of goods or
properties, what must be submitted is a VAT official
receipt.
Do not interchange these substantiation requirements.
Also, it is required for the taxpayer to establish the
presence of sales. One of the requirements for refund is
that the excess input tax must be directly related to zero-
rated or effectively zero-rated transactions. Therefore, the
supporting documents that will establish that the sales are
zero-rated must be submitted to the BIR.
If the zero-rated sales involve sale of goods or properties,
then a VAT invoice must be provided. But if it involves sale
or lease of services, what one needs to provide is a VAT
official receipt.
INFORMATION CONTAINED IN THE VAT INVOICE OR
VAT OFFICIAL RECEIPT
The following information shall be indicated in the VAT
invoice or VAT official receipt:
1. A statement that the seller is a VAT-registered
person, followed by his Taxpayer's Identification
Number (TIN); and
2. The total amount which the purchaser pays or is
obligated to pay to the seller with the indication that
such amount includes the value-added tax. Provided,
That:
a. The amount of the tax shall be known as a
separate item in the invoice or receipt;
b. If the sale is exempt from value-added tax, the
term “VAT-exempt sale” shall be written or printed
prominently on the invoice or receipt;
c. If the sale is subject to zero percent (0%) value-
added tax, the term “zero-rated sale” shall be
written or printed prominently on the invoice or
receipt.
LJM: In the absence of description that the
transaction is VAT-exempt or zero-rated, it shall be
treated as a regular VAT transaction. If a person is
claiming for refund of input VAT, but he submitted
VAT invoices and VAT official receipts with no
indication that the sales were zero-rated, the law
54
will presume that it is a regular VAT transaction.
Thus, it will not qualify for refund because under
Sec. 112(a), for refund to prosper, the excess input
VAT must be related to effectively zero rated or
zero rated transaction.
d. If the sale involved goods, properties or services
some of which are subject to and some of which
are VAT zero-rated or Vat exempt, the invoice or
receipt shall clearly indicate the break-down of the
sale price between its taxable, exempt and zero-
rated components, and the calculation of the
value-added tax on each portion of the sale shall
be known on the invoice or receipt: Provided, That
the seller may issue separate invoices or receipts
for the taxable, exempt, and zero-rated
components of the sale.
3. The date of transaction, quantity, unit cost and
description of the goods or properties or nature of the
service; and
4. In the case of sales in the amount of One thousand
pesos (P1,000) or more where the sale or transfer is
made to a VAT-registered person, the name, business
style, if any, address and Taxpayer Identification
Number (TIN) of the purchaser, customer or client.
Team Energy Corp v. CIR
G.R. Nos. 197663, 197770, 14 Mar 2018
SC: This Court reiterates that to claim a refund of unutilized
or excess input VAT, purchase of goods or properties must
be supported by VAT invoices, while purchase of services
must be supported by VAT official receipts.
Takenaka Corporation – Philippine Branch v. CIR G.R.
No. 193321, 19 Oct 2016
Q: Are sales invoices sufficient to prove zero-rated
sale of services for purpose of claiming refund of
excess input VAT?
SC: No. Section 113 of the Tax Code of 1997 provides that
a VAT invoice is necessary for every sale, barter or
exchange of goods or properties, while a VAT official
receipt properly pertains to every lease of goods or
properties, as well as to every sale, barter or exchange of
services.
The taxpayer submitted sales invoices, not official
receipts, to support its claim for refund. In light of the
distinction between a receipt and an invoice, the
submissions were inadequate to comply with the
substantiation requirements for administrative claims for
tax refund or tax credit.
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LJM: They cannot be interchanged. When applying for
refund, always provide the correct supporting documents.
Otherwise, the refund will be dismissed.
Eastern Telecommunication Phils. Inc. v. CIR
G.R. No. 183531, 25 Mar 2015
SC: The failure to indicate the words “zero-rated” on the
invoices and receipts issued by a taxpayer would result in
the denial of the claim for refund of excess input VAT by
such taxpayer.
The requirement is reasonable and is in accord with the
efficient collection of VAT from the covered sales of goods
and services. The appearance of the word “zero- rated” on
the face of invoices covering zero-rated sales prevents
buyers from falsely claiming input VAT from their
purchases when no VAT was actually paid. If, absent such
word, a successful claim for input VAT is made, the
government would be refunding money it did not collect.
LJM: If a person is claiming for refund of input VAT, but he
submitted VAT invoices and VAT official receipts with no
indication that the sales were zero-rated, the law will
presume that it is a regular VAT transaction. Under Sec.
112(a), an excess input VAT can be refunded only if it is
attributable to effectively zero rated or zero rated
transaction.
GENERAL PRINCIPLES
POWER OF TAXATION
The power of taxation refers to the power of the
government to raise revenues in order to support its
existence and carry out its government objectives.
LJM: Based on the definition of taxation, we can actually
determine the primary purpose of imposition of taxes.
Q: What are the purposes of taxation?
A: We have primary, and all other else will be secondary.
PRIMARY PURPOSE
The primary purpose of taxation is revenue raising, to
raise revenue, that is to raise funds or properties to enable
the State to promote general welfare and protection of the
people.
All other purposes of taxation are secondary, or non-
revenue purposes.
SECONDARY PURPOSES
1. Regulatory purpose, or sumptuary purpose.
Taxation may be used as an implement of police
power to promote general welfare of the people.
55
2. Compensatory purpose. A progressive system of
taxation prevents the undue concentration of wealth in
the hands of few individuals.
LJM: That’s why in certain Supreme Court cases, the
delineation between police power and power of taxation
was determined on the basis of the purpose such that if the
purpose of a particular measure of the government is to
collect revenue or to raise revenue, then that measure is
said to be an exercise of tax power or taxation power.
Whereas, if the purpose of a particular government act or
measure is to regulate an activity, that is said to be an
exercise of police power, even if revenue is generated
incidentally. So, it depends on the purpose.
THEORY AND BASIS OF TAXATION
THEORY AND BASIS OF TAXATION
1. Necessity theory
2. Lifeblood theory
3. The benefits-protection theory / Doctrine of
Symbiotic Relationship
Q: What is the life-blood doctrine, necessity or
benefits-received principle, and the doctrine symbiotic
relationship? (Note: Asked thrice or twice already in the
Bar Examination.)
LJM: If you will study carefully the definition of life-blood,
necessity theory, or symbiotic relationship theory, you will
actually figure out that they basically say the same thing.
So, these doctrines of taxation say the same thing. But
then, I would suppose that they are coined differently
because they are quoted in different Supreme Court
decisions by different Supreme Court justices.
LIFEBLOOD THEORY
Under the Life-Blood Theory, taxes are the life-blood of the
government for without taxes, the government can
neither exist nor endure.
LJM: I suppose that this definition is something that you
can memorize easily. Life-blood of the government for
without taxes the government can neither exist nor endure.
NECESSITY OR BENEFITS RECEIVED THEORY
Under the Necessity or Benefits-Received Principle, the
power to tax is an attribute of sovereignty, it is a power
emanating from necessity. Because there is necessity,
there is a need to collect revenue from the people and that
revenue is in the form of taxes.
DOCTRINE OF SYMBIOTIC RELATIONSHIP
Under the Doctrine of Symbiotic Relationship, without
taxes, the government will be paralyzed for the lack of the
motive power to activate and operate it. Hence, despite the
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natural reluctance to surrender part of one’s hard-earned

income to taxing authorities, every person who is able must
contribute to share in the running of the government.
LJM: In our Biology class, if you can still remember, we
learned how symbiotic relationship works, like you will give
something to another, and that another will give something
in return. So, the same thing applies in taxation: the
citizens, or the people, pay their taxes to the
government, and the government, in return, accord
them with some protection and benefits. It is a
symbiotic relationship, a give-and-take relationship.
(c) Theoretical justice. It refers to one’s ability to
pay. The tax burden must be in proportion to the
taxpayer’s ability to pay.
LJM: That is the reason why in Sec. 24(a), you see, do you
still remember the income tax rates for individual? As the
income bracket increases, so is the income tax rate. So, it
can range from 20% to 35%. So, those with more income,
they pay more taxes. That is an example of theoretical
justice. More wealth translates to more obligation to the
government.

PRINCIPLE OF A SOUND TAX SYSTEM An example of non-compliance with theoretical justice. Our
VAT system. We discussed that last time. Our VAT system
ELEMENTS OF SOUND TAX SYSTEM is not progressive in nature. It is regressive. But
1. Fiscal adequacy nonetheless, it is valid. So, there is non-compliance with
2. Administrative feasibility the ability to pay theory, or the principle of theoretical
3. Theoretical justice justice, but nonetheless, the tax measure or the VAT law
is still valid.
Q: How will you know whether a tax system is sound?
NOTE: These are not grounds for invalidity or
unconstitutionality; unless there will be other limitations,
A: Remember the acronym, F-A-T.
inherent or constitutional limitations that will be breached
or not complied with.
(a) Fiscal adequacy. The sources of the revenue
must be adequate to meet government
AS DISTINGUISHED WITH OTHER INHERENT
expenditures and their variations.
POWERS OF THE GOVERNMENT
LJM: The revenue must be sufficient enough to pay for all
TAXATION POLICE EMINENT
the government expenses and projects. That’s why it is
POWER DOMAIN
called adequacy.
AS TO THE AUTHORITY WHO EXERCISES THE
(b) Administrative feasibility. The tax system should POWER
be capable of being effectively administered and Exercised by the Exercised by the It is also
enforced with the least convenience to the government or government or exercised by the
taxpayer. political political government or
subdivision, subdivision. political
LJM: By administrative feasibility, it does not necessarily particularly the subdivision, but
mean that there will be totally no inconvenience on the part Congress or the it may be
of the taxpayers. That is impossible. Some examples of legislative body. exercise by
administrative feasibility now, at least now, so the BIR private
allows the payment of taxes via GCash, or other online enterprises
payment platforms, aside from online banking. operating a
public utility.
In one case, the Supreme Court said that, well, one of the AS TO PRIMARY PURPOSE
contentions raised by the petitioner to question the validity To raise revenue To promote To take private
of VAT on toll is the disregard of the principle of general welfare property for
administrative feasibility because it is difficult to collect and regulate public use
taxes on toll. But the SC said that these principles of sound activities
tax system, while every tax measure is expected to comply AS TO PERSONS AFFECTED
with these principles, non-compliance with any of these Community or Community or Owner of the
principles of sound tax system will not make the tax class of class of property
law or ordinance invalid. So, these principles are mere individuals individuals expropriated
guidelines. As much as possible, when the government
enacts particular tax measure, it must be fiscally adequate, AS TO THE AMOUNT OF MONETARY IMPOSITION
there must be observance of theoretical justice and The taxes that The imposition is There is NO
administrative feasibility. But in the event that a particular may be imposed limited to the imposition on the
tax measure would not comply with any of these principles, is not subject to cost of the owner of the
it would not render the tax measure as invalid. regulation (the

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any ceiling, as a cost of license or property should not be payment of just

general rule. the cost of doing expropriated. contrary to compensation.
surveillance). inherent and
BUT the inherent constitutional
and limitations.
constitutional
limitation should LJM: If you want to determine if a particular act of the
be taken into government is an exercise of taxation, police power or
account. eminent domain, you look at the purpose of the
AS TO BENEFITS government act or measure.
Indirect Indirect Direct Benefit.
Benefit. Benefit. Imagine the imposition of the sin taxes (excise tax on
The owner of the cigarettes or alcohol products or luxury vehicles). One of
It is mainly It is mainly property the purposes of the sin tax is to regulate these activities, to
protection protection receives just discourage the public from consuming these unhealthy
accorded to the accorded to the compensation. products. That is to regulate and promote for the general
members of the members of the There is a direct welfare, but the primary purpose really is to raise revenue.
public and public and benefit. That is the reason why the sin taxes are quite high as
maintenance of maintenance of compared to other taxes. One government measure may
healthy healthy touch on police power and taxation power, but you look at
economic economic the primary purpose.
standard of standard of
society. society. MANILA MEMORIAL PARK, INC v. SECRETARY OF
There is no There is no DSWD, G.R. No. 175356, December 03, 2013
direct benefit direct benefit
AS TO THE NON-IMPAIRMENT CLAUSE ISSUE: Whether or not the 20% Senior Citizen’s Discount
Tax laws do not Contracts may Contracts may will be treated as allowable deduction (deduction against
impair contracts, be impaired. be impaired. gross income to arrive to your taxable income) or a tax
unless credit (deduction against the tax due to arrive to your tax
government is a Police power is Eminent domain liability).
party to the SUPERIOR on is SUPERIOR
contract granting the non- on the non- Allowable Tax Credit
exemption for impairment impairment Deduction
considerations. clause. clause. GI 100 100
AD -20 0
GR: a tax TI 80 100
measure should % 25% 25%
not impair TD 20 25
existing TC 0 -20
contracts. TL 20 5
XPN: If the Assumptions:
government is a Gross income – 100
party thereto Senior Citizen discount – 20
Allowable deduction before SC discount – 0
In effect, the Tax rate (%) – 25%
power of Tax credit before SC discount - 0
taxation is
INFERIOR to the
Scenario 1: Allowable Deduction
non-impairment
clause of the
We have a gross income of 100 and if we treat the SC
constitution.
discount as an allowable deduction, will have an allowable
deduction of 20.
AS TO THE TEST OF VALIDITY
The tax measure There must be The taking of the How much is the taxable income? 80
or the particular compliance on property must be
Formula: Gross income + Allowable deduction)
act in the the test of lawful for public
exercise of subject and purpose and
taxation power lawful means. there must be

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Then the percentage is 25%. So, the 25% of 80 would be
20. Since you treated the SC Discount as an allowable
deduction, then your tax credit will be 0.
How much is your liability? 20
Formula: tax deduction – Tax credit
Scenario 2: SC Discount as a Tax Credit
Now, in our second scenario, if you treat the SC Discount
as a tax credit, the liability will be computed this way:
Gross Income 100
Allowable Deduction - 0
Taxable Income 100
Tax Rate x25%
Tax Due 25
Tax Credit -20
Tax Liability 5 is an exercise of the police power, there is no requirement
EXPLANATION:
Your gross income is 100. Since you treat your SC
discount as a tax credit, then you will have no deduction.
So, how much is your taxable income? 100.
Your tax rate is 25%. So, your tax due then 100 x 25%, that
will be 25. And the SC Discount of 20, instead of treating it
as an allowable deduction, you will treat it as tax credit. So,
less 20. So, how much is your tax liability? That will be
5. You see the big difference if you treat it as an allowable
deduction and if you treat it as tax credit?
LJM: Now, the Supreme Court is confronted with this
issue: Should we treat it as an allowable deduction? Or
should we treat it as a tax credit?
To support the position that the SC Discount should be
treated as a tax credit, according to the petitioners in that
case, the imposition of the SC discount is actually an
exercise of the power of eminent domain. There is taking
of private property from the commercial establishments,
and therefore these commercial establishments, they are
forced to give discounts to SCs. In effect, there’s taking of
private property from these owners of commercial
establishments. And since there is taking, there must be
just compensation. So, the provided Php20 (in the
example) SC Discount, that is the property taken from
them, the government should pay them as well Php20 as
just compensation. And the just compensation can be
settled by deducting it against the Tax Due, kasi
narerecover nila in full yung discount given to the SCs. So,
this is the position of the petitioners.
Q: How did the SC treat the SC Discount?
A: According to the SC, the imposition of the SC Discount
is not an exercise of eminent domain. It is an exercise of
police power.
58
LJM: Mind you, this particular question has not yet been
asked in the Bar Examinations. The Manila Memorial Park
case. It actually presented a good doctrine. The distinction
between police power and eminent domain.
So, it’s an exercise of police power. When we say exercise
of police power, promotion of general welfare through
regulation of an activity.
Q: And what is the activity sought to be regulated by
the government in imposing SC Discount?
A: According to the SC, the government is trying to impose
restriction or regulation on the pricing activity of these
commercial establishments. That they cannot just freely
impose whatever prices they like on their goods and
products. So, this is a regulation on the pricing activity.
Therefore, that is an exercise of the police power. And if it
of just compensation.
Such being the case, the SC Discount may not be treated
as tax credit because there is no just compensation
requirement anyway. It will be treated as an allowable
deduction.
LIMITATIONS OF TAXATION
LJM: We mentioned the test of validity of any tax measure,
that is compliance with inherent and constitutional
limitations. And if I will correlate it with local taxation, so for
local taxation, you must watch out for three (3) limitations:
(1) Inherent, (2) Constitutional and (3) Statutory
Limitations. Remember our discussion on Art. 133 of the
LGC, so there are limitations imposed from par. A to par.
O, so those are statutory limitations. But on top of statutory
limitations, there must be no breach as well of the inherent
and constitutional limitations.
INHERENT LIMITATIONS
FIVE INHERENT LIMITATIONS
a Public Purpose
b International Comity
c Non-delegability
d Exemption of government as a general rule
e Situs/Territoriality
#1 – PUBLIC PURPOSE
When we say public purpose, every tax measure should
be for the benefit of the public. So, the government cannot
pass on any tax law that will benefit a particular individual
only. So, it will be for the benefit of the public.
Q: But what do we mean by public purpose?
A: Our jurisprudence did not attempt to provide a specific
or exact definition of public purpose. So, jurisprudence
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provide for broad interpretation of what public purpose is.
It does not only pertain to those purposes which are
traditionally deemed as essentially government functions
such as building roads, and delivering of basic services,
but also includes those purposes engaged to promote
social justice.
So, it’s not limited to public projects when we say public
purpose. But then remember, by public purpose, it doesn’t
necessarily mean that a particular tax measure should
benefit every member of the population. That’s impossible,
benefit for every member of the population. It is sufficient
that the public may be benefited directly or indirectly in
general. But it is not required that every member of the
population should benefit from a particular tax measure.
That is why in one old case, the SC, there was an
imposition of taxes on sugar products and the taxes
collected are earmarked for the development of the sugar
industry, in particular, development of sugar industry. So,
before the SC, that particular law was questioned on the
ground that it does not benefit the public. The SC said no.
Promotion of the sugar industry or coconut industry or
whatever industry we have, that is in effect for public
purpose. So, again public purpose does not necessarily
mean that every member of the population will be befitted
by a particular tax measure.
#2 – INTERNATIONAL COMITY
International Comity is that principle of International Law
relating to rules on international courtesy, etiquette or
goodwill which are in fact or which ought to be observed
by States in their mutual relations. This principle, therefore
limits the authority of the government, the PH government
for example, to effectively impose taxes on sovereign
states, its instrumentalities or property.
Example: The activities, properties, income of foreign
embassies, they are not subject to PH tax because foreign
embassies even if they are geographically located within
our territories, they are extension of their home countries.
In applying the principle of international comity, all
sovereign states are treated as equal. So, we cannot
impose our authority, our taxation power over another
sovereign state.
#3 – NON-DELEGABILITY
Q: What do we mean by non-delegability?
A: Take note that taxing power is by its nature legislative.
It is the legislative body who can create, impose tax, dictate
the manner by which it will be collected, determine the rate,
the ceiling, the kind, subject, object. So, all matters
pertaining to imposition, it is lodged with the legislative
body. By its nature, it is the power of the legislative body to
impose taxes.
Q: Why is this power of taxation non-delegable?
59
A: Because the power of the Congress to impose tax
actually emanates from the people. Their power to impose
is coming from the people. The non-delegability of the
power of taxation is based on the principle that taxes are
grant of the people who are taxed, and that grant must be
made by the immediate representatives of the people.
GENERAL RULE:
What has been delegated can no longer be delegated.
EXCEPTIONS:
1. Section 5, Article 10 of the 1987 Constitution –
Delegation to the Local Government Unit. Each local
government unit shall have the power to create its own
sources of revenues and to levy taxes, fees, and charges
subject to such guidelines and limitations as the Congress
may provide, consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local governments.
NATIONAL TAXATION LOCAL TAXATION
Not inherent in the LGUs.
Inherent in the state. Mere Mere constitutional grant,
existence of the state. it exists because the
Constitution allows it.
2. Section 28, Article 6 of the 1987 Constitution –
Delegation to the President. The Congress may, by law,
authorize the President to fix within specified limits, and
subject to such limitations and restrictions as it may
impose, tariff rates, import and export quotas, tonnage and
wharfage dues, and other duties or imposts within the
framework of the national development program of the
Government.
LJM: The important qualification here is that the power of
the President to fix tariff rates is subject to guidelines as
may be set forth by Congress. Congress may pass tariff
law providing for guidelines setting forth tariff rates.
3. Delegation to specialized administrative agencies -
this refers to the power to fill in the details and manner as
to the enforcement and administration of a law which is
delegated to various specialized administrative agencies
such as the BIR and the Bureau of Customs. What is
delegated here is not the power to impose, the delegation
is limited only to the enforcement and administration of a
law that is passed by Congress.
ABAKADA Guro Party List vs Ermita
(GR No. 168056, September 1, 2005)
ABAKADA questioned the constitutionality of the EVAT law
or the expanded value added tax law. One of the grounds
is there is a provision in the EVAT law that provides for
standby authority of the President to increase the VAT rate
from 10% to 12% upon meeting certain conditions. Certain
 TAXATION LAW REVIEW
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conditions that must be satisfied under the law, if the VAT
collection has the percentage of the gross domestic
product exceeds a certain threshold for the national
government deficit as certain percentage of gross
domestic product exceeds another threshold. There are
technical criteria that must be met before the President can
increase the rate from 10% to 12%. Now, the fact that we
have 12% means that the criteria was met.
ABAKADA alleged that the grant to the President is a
violation of the inherent limitation on the non-delegability.
Q: Are the petitioners correct?
A: The Supreme Court held that there is no invalid
delegation of legislative power. There is simply a
delegation of enforcement and administration because the
law itself spelled out already the parameters that must be
satisfied before the President can increase the rate from
10 to 12%. Those parameters were already indicated in the
law. The President, in compliance with the law merely
established or reviewed whether these parameters has
been complied already. Upon the recommendation of the
Secretary of Finance, the President merely enforced what
the law provides to increase the rate. This is just a
delegation of enforcement or administration. It will not
violate the non-delegability principle if what was delegated
to the executive department is the power to enforce or
administer.
It is a different scenario if the criteria were not satisfied and
despite that the President increased the rate. That would
be a violation of the non-delegability, because in effect the
President exercised taxing power, exercised his discretion
of increasing the rate from 10 to 12%.
Another violation is where the President imposed 15% VAT
rate. where the law only allows up to 12%. The President
already encroached upon the prerogative of the
Legislative.
#4 – EXEMPTION OF GOVERNMENT ENTITIES,
AGENCIES, AND INSTRUMENTALITIES FROM
TAXATION
GR: The government is exempt from tax.
Reason: The government is exempt from tax otherwise we
would be taking money from one pocket and put it in
another (Board of Assessments vs CTA)
XPN: If a particular law provides for taxation of a
government instrumentality or political subdivision or a
GOCC, that law would prevail.
E.g., the lifting of the exemption of PAGCOR and PCSO.
Lifting of exemption of GOCC from local taxes and real
property taxes as provided under the Local Government
Code.
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#5 – SITUS/TERRITORIALITY
Taxation is an act of sovereignty which can only be
exercised within a country's territorial limits.
GR: Taxation power can only be exercised within the
territorial limits of a particular jurisdiction only. This is
based on the theory that taxes are paid for the protection
provided by the taxing authority which could not be
otherwise provided outside the taxing state. Again,
symbiotic relationship rule.
But then, as you know, this particular principle of situs
admits exceptions.
E.g., Your non-resident citizens are in abroad, but then
again, they are taxed on their income received within the
Philippines.
CONSTITUTIONAL LIMITATIONS
DUE PROCESS AND EQUAL PROTECTION
Article III, Section 1, 1987 Constitution - No person
shall be deprived of life, liberty, or property without due
process of law, nor any person be denied of equal
protection of the laws.
As to due process, it may be (1) procedural due process or
(2) substantive due process.
PROCEDURAL DUE PROCESS - the procedures
provided under the constitution and the law that should be
complied with in the enactment of a particular tax measure.
E.g. Any tax bill should originate from the House of
Representatives.
SUBSTANTIVE DUE PROCESS - any tax measure should
not be arbitrary and confiscatory.
E.g. Arbitrariness: The government will pass a law
increasing the tax rate from the now 25% to 40% without
any supporting study. That may be struck down on the
ground of arbitrariness. However, if the government can
back up such increase with a study, then such may not be
struck down.
E.g. Confiscatory: The government increased income tax
rate to 60%. That may be struck down on the ground of
being confiscatory. Imagine, you are already working for 8
hours a day, 24 hours a week, in most cases even more,
and then the government will take more than half of your
income. That is already confiscatory. No amount of study
or rationale can justify that increase. Such is confiscation
already.
As to equal protection, remember the Ormoc case, where
a tax ordinance was imposed, imposing a tax specifically
 TAXATION LAW REVIEW
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on Ormoc sugar, a particular company. The name of the
company was expressly indicated in the tax ordinance.
When the validity of the ordinance was questioned, the
defense raised by the LGU is that, Ormoc, at that time, is
the only sugar mill within their territorial jurisdiction.
ORMOC SUGAR, CO. v. TREASURY OF ORMOC CITY
G.R. No. L-23794, 17 February 1968
FACTS: The Municipal Board of Ormoc City passed
Ordinance No. 4, which imposed municipal tax of one
percent per export sale to USA and other foreign countries
of any and all productions of centrifugal sugar milled at the
Ormoc Sugar Company (OSC).
The latter paid under protest but challenged the
ordinance’s constitutionality on the grounds that it is
violative of equal protection clause and uniformity in
taxation. The CFI upheld the constitutionality of said
ordinance, saying the taxing power of Ormoc City was
broadened by the Local Autonomy Act to include all other
forms of taxes, licenses, or fees not excluded in its charter.
ISSUE: Whether or not the tax ordinance is valid.
RULING: NO, because it violates the equal protection
clause. It has been ruled already that equal protection
applies only to persons or things identically situated and
does not bar a reasonable classification. To justify
compliance with the equal protection clause, the
classification should be reasonable and valid.
The equal protection clause, as well as the principle of
uniformity, do not prohibit different tax treatments for
different classes. So, class 1 may have a different tax
treatment from class 2. But then, under the principle of
equal protection, the law should rest on valid and
reasonable classification.
REQUISITES OF A VALID AND REASONABLE
CLASSIFICATION THAT WILL JUSTIFY EQUAL
PROTECTION
The Classification:
1. Must be based on substantial distinctions
2. Must be germane to the purpose of the law
3. Applies to present and future conditions
4. Applies only to those who belong to the same class
LJM: Meaning to say, and as mentioned under the
principle of uniformity, the different classes may have
different tax treatments.
In the case of Ormoc Suga, the third requisite was not
satisfied. The tax ordinance specifically named Ormoc
Sugar Co. as the subject of taxation. Thus, if ever there
would be additional sugar milling companies in the
territorial jurisdiction of the LGU, technically speaking,
those new sugar mills would not be subject to business tax
because the entity taxed under the said ordinance is
61
specifically Ormoc Sugar. Thus, the classification is not
applicable to present and future conditions.
2017 BAR QUESTION
Heeding the pronouncement of President that the
worsening traffic condition in the Metropolis was a
sign of economic progress, the Congress enacted
RA 10701, an Act Imposing a Transport Tax on
Purchase of Private Vehicles. Under this law, buyers
of private vehicles are required to pay a transport
tax equivalent to 5% of the total purchase price. But,
there were exceptions, such as, the owners of
Public Utility Vehicles (PUVs) and Government
vehicles, are exempted from the transport tax.
Here comes the petitioners, a group of private
vehicle owners, suing on the ground that the law is
unconstitutional for contravening the equal
protection clause of the Constitution. Is the law
valid?
A: Yes. The law is constitutional and valid, because
there is no breach of the equal protection clause. There
is a reasonable and valid classification.
Requisites: The Classification:
1. Must be based on substantial distinctions
2. Must be germane to the purpose of the law
3. Applies to present and future conditions
4. Applies only to those who belong to the same class
In this case, the classification of new owners of private
vehicles as against the owners of PUVs and government
vehicles, have substantial distinctions. The distinction is
very obvious: private, against public utility. Is it germane
to the purpose of the law? Yes. The purpose is to raise
revenue. How about applicability to present and future
conditions? Yes, unlike in the Ormoc case. Lastly, each
private owner is subject to this 5% transport tax. Hence,
the law applies only to those who belong to the same
class.
ORIGIN OF TAX BILLS
Q: What is the provision on the origin of the tax bills?
ARTICLE VI, SECTION 24. All appropriation, revenue or
tariff bills, bills authorizing increase of the public debt, bills
of local application, and private bills shall originate
exclusively in the House of Representatives, but the
Senate may propose or concur with amendments.
LMJ: All appropriation, revenue or tariff bills (A-R-T)
should come from the House of Representatives (HoR).
Even though the bill will originate from the HoR, the Senate
may propose or concur its amendment.
ABAKADA GURO PARTY LIST VS. ERMITA
 TAXATION LAW REVIEW
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G.R. No. 168056 September 1, 2005
In Abakada Guro Party List v. Ermita, the Supreme
Court sustained the constitutionality of R.A. 9337
authorizing the President to increase the VAT rate from
10% to 12% upon recommendation of the Secretary of
Finance on the existence of either of the two conditions.
LMJ: The VAT Bill originated from the HoR. There was the
first reading, second reading and third reading. Upon
approval of the HoR, it will be transmitted to the Senate.
Upon transmission of the HoR version of the VAT Bill, the
Senate revised totally the version of the HoR. They created
a Senate version of the bill. Later on, a Bicameral
Committee was formed and adopted the Senate version.
NOTE: In this case, there is the HoR version but at the time
this version was elevated to the Senate, there was already
a Senate version prepared and pending to be approved.
The argument of the petitioners is that there is a violation
of the Constitution because the law did not originate from
the HoR as what was adopted was the Senate version.
Q: Is the VAT law unconstitutional?
SC: No, it is not unconstitutional. It is not the law – but the
revenue bill – which is required by the Constitution to
"originate exclusively" in the House of Representatives. It
is important to emphasize this, because a bill originating in
the House may undergo such extensive changes in the
Senate that the result may be a rewriting of the whole. . . .
[What] is important to note is that, as a result of the Senate
action, a distinct bill may be produced. To insist that a
revenue statute – and not only the bill which initiated
the legislative process culminating in the enactment of
the law – must substantially be the same as the House
bill would be to deny the Senate’s power not only to
"concur with amendments" but also to "propose
amendments." It would be to violate the coequality of
legislative power of the two houses of Congress and in fact
make the House superior to the Senate.
Given, then, the power of the Senate to propose
amendments, the Senate can propose its own version
even with respect to bills which are required by the
Constitution to originate in the House.
What the Constitution simply means is that the initiative for
filing revenue, tariff or tax bills, bills authorizing an increase
of the public debt, private bills and bills of local application
must come from the House of Representatives on the
theory that, elected as they are from the districts, the
members of the House can be expected to be more
sensitive to the local needs and problems. On the
other hand, the senators, who are elected at large, are
expected to approach the same problems from the
national perspective. Both views are thereby made to
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bear on the enactment of such laws. (Emphasis
supplied)
Since there is no question that the revenue bill exclusively
originated in the House of Representatives, the Senate
was acting within its constitutional power to introduce
amendments to the House bill.
LMJ: It is not the law that should originate from the
HoR. What should originate is just the bill. The
replacement of the HoR version by the Senate version of
the VAT bill is interpreted by the SC as within the power of
the Senate to propose or concur with amendments. Thus,
replacing the HoR version with the Senate version falls
within the power of the Senate to propose or concur with
amendments.
UNIFORMITY AND PROGRESSIVITY OF TAXATION
ARTICLE VI, SECTION 28. (1) The rule of taxation shall
be uniform and equitable. The Congress shall evolve a
progressive system of taxation.
Q: What is uniformity?
A: Uniformity in taxation means that all taxable articles or
kinds of property of the same class shall be taxed at the
same rate. Different articles may be taxed at different
amounts provided that the rate is uniform on the same
class everywhere with all people and at all times.
(Dimaampao, 2018)
LMJ: Uniformity does not necessarily mean that the same
rate will apply to everything or every object. Uniformity
means that each member of the same class should be
taxed alike but different classes may be taxed differently.
This goes hand-in-hand with the provision on Equal
Protection Clause.
Q: What is the principle of progressivity?
A: Taxation is progressive when tax rate increases as the
income of the taxpayer increases. It is based on the
principle that those who are able to pay more should
shoulder the bigger portion of the tax burden.
LMJ: The more able the person is, the more you should
contribute to the government. "[With] more power comes
more responsibility."
EXAMPLE: Graduated income tax.
Q: How about with VAT? If a person earns ₱10,000 a
month, ₱100,000 a month or ₱1,000,000 a month or
more, the VAT rate for all individuals is 12%, does VAT
contravene with the principle of progressivity?
A: Yes, it contravenes and is not in consonance with the
principle of progressivity. In fact the SC in Abakada Guro
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Party vs. Ermita pronounced that VAT is regressive in
nature because it is not based on the ability to pay.
Q: Because of this, is the VAT law invalid or
unconstitutional?
A: No, the constitution does not really prohibit the
imposition of regressive tax. When the constitution said
that it will "evolve a progressive system of taxation," it
means that there should be more direct taxes than indirect
taxes.
SC: The VAT is an antithesis of progressive taxation. By
its very nature, it is regressive. The principle of progressive
taxation has no relation with the VAT system inasmuch as
the VAT paid by the consumer or business for every goods
bought or services enjoyed is the same regardless of
income. In other words, the VAT paid eats the same
portion of an income, whether big or small.
The Constitution does not really prohibit the imposition of
indirect taxes which, like the VAT, are regressive. What it
simply provides is that Congress shall ‘evolve a
progressive system of taxation.’ The constitutional
provision has been interpreted to mean simply that ‘direct
taxes are . . . to be preferred [and] as much as possible,
indirect taxes should be minimized.
TAX EXEMPTION OF PROPERTIES ACTUALLY,
DIRECTLY, AND EXCLUSIVELY USED FOR
RELIGIOUS, CHARITABLE, AND EDUCATIONAL
PURPOSES
ARTICLE VI, SECTION 28. (3) Charitable institutions,
churches and parsonages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational
purposes shall be exempt from taxation.
Q: What is the coverage of exemption under this
provision?
A: The tax exemption is limited to property taxes.
GR: These religious, charitable or educational (RCE)
institutions are subject to income tax because income tax
is not a property tax.
XPN: If there are special laws that provide for exemptions
on income taxes.
LMJ: The condition as discussed under real property tax
(RPT) is that the building must be actually, directly and
exclusively used for the RCE purposes to be exempt from
RPT.
We correlate it with Sec. 4(3), Art. XIV of the Constitution.
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All revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt
from taxes and duties. Upon the dissolution or cessation
of the corporate existence of such institutions, their
assets shall be disposed of in the manner provided by
law.
Proprietary educational institutions, including those
cooperatively owned, may likewise be entitled to such
exemptions, subject to the limitations provided by law,
including restrictions on dividends and provisions for
reinvestment.
As opposed with the exemption provided by the
Constitution to religious, charitable, and educational
institutions—which is as a general rule is limited only to
real property taxes.
The exemption to non-stock non-profit educational
institutions covers BOTH real property taxes and income
taxes. The term used by the Constitution is “all revenues
and assets” so the exemption is not limited to the assets
only, it also covers revenue.
But as we discussed in the case of De La Salle v. CIR,
there must be an important qualification. The revenue and
property must be ADE used for educational purposes.
2017 BAR QUESTION
San Juan University is a non-stock, non-profit
educational institution. It owns a piece of land in
Caloocan City on which its three 2-storey school
buildings stood. Two of the buildings are devoted to
classrooms, laboratories, a canteen, a bookstore and
administrative offices. The third building is reserved as
dormitory for student athletes who are granted
scholarships for a given academic year.
In 2017, San Juan University earned income from tuition
fees and from leasing a portion of its premises to various
concessionaires of food, books, and school supplies.
(a) Can the City Treasurer of Caloocan City collect
real property taxes on the land and building of San
Juan University? Explain your answer. (5%)
Suggested answer: Yes, but only on the leased portion.
Article XIV, Section 4(3) of the I 987 Constitution
provides that the assets of a non-stock, nonprofit
educational institution shall be exempt from taxes and
duties only if the same are used actually, directly, and
exclusively for educational purposes. The test of
exemption from taxation is the use of tile property for
purposes mentioned in the Constitution. The leased
portion of the building may be subject to real property
tax since such lease is for commercial purposes,
thereby, it removes the asset from the property tax
exemption granted under the Constitution (CIR v. De La
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Salle University, lnc., G.R. Nos. 196596, 198841,
1198941, November 9, 2016).
(b) Is the income earned by San Juan University for
the year 2017 subject to income tax? Explain your
answer. (5%)
Suggested answer: No, provided that the revenues are
used actually, directly, and exclusively for educational
purposes as provided under Article XIV, Section 4(3) of
the 1987 Constitution. The requisites for availing the tax
exemption under Article XIV, Section 4 (3) are as
follows: (1) the taxpayer falls under the classification of
non-stock, non-profit educational institution; and (2) the
income it seeks to be exempted from taxation is used
actually, directly and exclusively for educational
purposes; thus, so long as the requisites are met, the
revenues may be exempt from tax (CIR vs. De La Salle
University, Inc., G.R. Nos. 196596, 198841, 198941,
November 9, 2016).
Transcriber’s Note: Suggested answer found online.
LJM’s answer/discussion:
a. Make a qualification. In so far as the buildings and that
portion of the land which are devoted for educational
purposes (classrooms, dormitory of athletes,
administrative offices, libraries, canteen) that will be
treated as for educational purpose and thus not subject
to real property tax.
For the portion of building leased out to private
concessionaires, it is not ADE used for educational
purpose and therefore will be subject to real property
tax.
b. The income came from tuition fees, as well as rental
income from private concessionaires. Are we going to
qualify our answer just like the first answer? No. In the
case of De La Salle, the test of taxability is not the
source but the test is the use or disposition of income.
Therefore, insofar as the income from tuition fees of
students are concerned, they are exempt but the
exemption may also cover the income from
concessionaire activities (rentals). Even if they are
sourced from an activity conducted for profit like rental,
provided that the school can establish that this income
was ADE used for educational purpose, then that
income may still be exempt from income tax.
The pronouncement of the SC in De La Salle case:
The last paragraph of Section 30 of the Tax Code is
without force and effect with respect to non-stock,
non-profit educational institutions, provided, that the
non-stock, non-profit educational institutions prove that
its assets and revenues are used actually. directly and
exclusively for educational purposes. The tax exemption
64
constitutionally granted to non-stock, non-profit
educational institutions, is not subject to limitations
imposed by law.
The last par. of Sec. 30 is deemed inoperative, not
unconstitutional, insofar as non-stock, non-profit
educational institutions are concerned.
GRANT OF TAX EXEMPTIONS
Art. VI, Sec. 28(4). No law granting any tax exemption
shall be passed without the concurrence of a majority of
all the Members of the Congress.
There was this instance where President Ramos passed a
Presidential Proclamation that created a special economic
zone in Camp John Hay. The Presidential Proclamation
extends the usual tax exemption given to economic zones.
It provides for tax exemption, tax reliefs, or tax incentives
to businesses which will register in the ecozone in Camp
John Hay.
Is the Presidential Proclamation valid?
No. The power to grant tax exemption is not lodged with
the executive body. The power of taxation, being legislative
in nature, is on the Congress. Hence, only the Congress
also may provide for tax exemptions.
The grant of Proclamation to Camp John Hay (ecozone) is
void because it transgresses with the power of the
Congress to provide exemption. Under the Constitution,
the exemption can be passed or can be provided only by
concurrence of majority of all the members of the
Congress, voting separately.
NOTE: Voting separately, not jointly. There should be
majority in the House, and majority in the Senate.
VETO POWER OF THE PRESIDENT
Art. VI, Sec. 27(2). The Congress may, by law,
authorize the President to fix within specified limits, and
subject to such limitations and restrictions as it may
impose, tariff rates, import and export quotas, tonnage
and wharfage dues, and other duties or imposts within
the framework of the national development program of
the Government.”
The President shall have the power to veto any particular
item or items in an A.R.T. bill (appropriation, revenue,
tariff). But the veto shall not affect the item/s which he does
not object.
This is a special form of veto called item veto.
Ordinarily, when a President wants to veto a particular bill,
it is all or nothing. But in the case of A.R.T. bill, the
President may veto particular sections/portions of the bill
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without affecting the other portions. That is what happened levied only on person; it is also levied on property; and it is
in Train Law—the President vetoed certain provisions but also levied on activity, exercise of a right or privilege, or in
it was still passed. old terms, it is called excise.

TAX AS DISTINGUISHED FROM OTHER FORMS OF TAX VS. LICENSE

EXACTIONS
TAX LICENSE
When you say exactions, these are collections made by As to nature
government. But before we dwell directly with this License is imposed or
distinction, let us define what tax is. If you would still recall, These are imposed by
collected as an exercise of
we define what taxation is by its purpose; and we said that virtue of the exercise of
police power; whereas
taxation is the power of the State to collect a certain taxation power.
taxes.
amount, or to raise revenue which is the primary purpose As to purpose
in order to defray the necessary expenses. So, that is the Tax is for revenue raising. License is for regulation.
definition of taxation power. We define it by its purpose. As the amount of imposition
As a general rule, there is
How about tax? Tax is described in the case of Republic no limit on the amount
v. Philippine Rabbit Bus Lines, Inc. (G.R. No. L-26862, 30 taxes that may be
Mar. 1970) as an “enforced proportional contributions imposed.
from persons and property levied by the State by License, on the other
virtue of its sovereignty for the support of government Again, as a general rule hand, the license that must
and for all public needs.” subject, of course, to the be collected should be
constitutional and inherent limited to the cost of
Now, if I may emphasize certain portion of that definition, I limitations. But as we regulation, or cost of
would like to discuss the definition or the phrase “enforced mentioned in our licensing.
proportional contribution”. discussion of due process,
any exorbitant amount
“Enforced proportional contributions” may be a ground for
violation of due process.
It is enforced because a particular subject, or a particular So, arbitrary.
taxpayer, may not opt not to pay the tax. So, payment of
tax is not voluntary. If the Tax Law has identified the TAX VS. SPECIAL ASSESSMENT
particular subject of taxation, then that subject, that
taxpayer, must pay the corresponding tax. So, the BIR For some reason, laging kasama, laging may distinction
need not obtain the consent of the taxpayer to pay. between tax and special assessment. But you are familiar
already what special assessment is.
But you may find in some other reference materials that
compliance with tax is voluntary. It means that the Special assessment is also a tax. Tax, we already know
taxpayer, on his own, should file the tax return and to pay the definition in general, this is an enforced proportional
the corresponding taxes. This is voluntary compliance. contribution on person or property, or excises. But one
But it does not necessarily mean that hindi ka nag-file ng form of tax is a local tax, and one form of local tax
tax return mo, na hindi ka na nagbayad ng tax, hindi ka na specifically is special assessment.
hahabulin ni BIR. So, voluntary compliance but the
obligation is enforced, the contribution or the payment of Do you recall in our discussion of real property taxation?
tax is enforced. When the local government unit funded and constructed a
project, and as a result, the nearby real properties increase
So, as long as the Tax Law has identified the particular in value. And the local government can collect another
subject, then that subject, or taxpayer, should pay the form of real property tax called special assessment tax. So,
corresponding tax. special assessment tax is just a form, an example, of tax.
Tax is broader than special assessment.
Also, in that definition, it mentioned also that the tax is
levied on persons and property. TAX VS. DEBT
“Tax levied on persons and property” Taxes are collected by the government in its sovereign
capacity; whereas debt is collected by the creditor, and the
We are familiar with this, and if I may add, aside from creditor may also be the government but that is under the
persons and property, taxes may be levied on activities as contractual capacity.
well, or in old terms, they call it excises. Kaya nga may
tinatawag na excise tax. An excise tax is a tax on an Q: Can taxes and debts be subject of compensation?
activity, a privilege, or an exercise of a right. So, it is not

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A: No.
Now, if this will be asked in the Bar Examination, I want
you to answer the general rule. I understand that there are
certain exceptions like compensation if the local
government is a contractor and at the same time the
contractor owes the local government business tax or local
tax. I understand and I am aware that there are Supreme
Court cases which allowed compensation or set off. But
these are in the cases of local taxes. I want you to answer
the general rule because that can easily be supported by
the general doctrines of taxation particularly the Life Blood
Theory.
Q: Can you offset tax and debts?
A: No. Under the Civil Code, for compensation to take
place, the parties should be creditor and debtors of one
another, which cannot take place in taxes and debt. As we
mentioned, taxes and debt are different. Taxes are
collected by the government in its sovereign capacity. Debt
is collected by the creditor, which is the government, under
its contractual capacity. We cannot say that the two parties
are debtor and creditor of one another and therefore
compensation cannot take place.
KINDS OF TAXES
A. As to object
1) Personal, poll, or capitation tax - a fixed amount
imposed upon all persons of a certain class,
residents within a certain specified territory. The
subject matter of this tax is the person.
Ex: Community Tax or Cedula
2) Property tax - The tax is imposed on property
whether real or personal.
Ex: Real Property tax
3) Privileged or excise tax - It means a charge upon
the performance of an activity, the excercise of a
privilege, or the engaging of an occupation. It is a
tax on an activity or a privilege.
Ex: Income Tax, estate tax, donor’s tax, VAT,
percentage tax
NOTE
Do not be confused with the excise tax for tobacco
products, alcoholic beverages, cosmetic procedures,
luxury vehicles. This is more of property tax and not a
privilege tax.
B. As to the burden or incidence
1) Direct Taxes – This are those exacted from the
very person who as it is intended should pay them.
It is the imposition where taxpayer is directly liable
66
for transactions or business he is engaged in. The
liability and the burden (who shoulders the tax?) is
one and the same person.
Ex: Income Tax
2) Indirect Taxes - wherein the tax liability falls on
one person, but the burden thereof may be shifted
or passed to another.
Q: Why is there two incidences?
A: The burden is being shifted.
Example: VAT and Percentage Tax
C. As to tax rates
1) Specific Tax- which imposes a specific sum by
the head or number or by some standard of weight
or measurement.
Ex: excise tax on cigar or liquors or tobacco
products – there is particular amount per
measurement
2) Ad Valorem
This is a tax based on the value of the property.
Ex: RPT is a particular percentage of the assessed
value of the real property.
Ex: Estate Tax is 6% of the net estate.
There’s a particular value assigned by the Tax
Law, and then we multiply a particular
percentage. That’s ad valorem tax.
3) Mixed Tax
This is a combination of specific and ad valorem
tax.
D. As to scope or authority
1) National Tax - Tax levied by the national
Government. All the taxes in the NIRC are
national tax imposed by the national government
through the BIR (Income Tax, Estate Tax,
Donor’s Tax, VAT, Percentage Taxes, DST and
Excise Tax).
2) Local Tax – These are taxes levied by the local
government. The ones under the LGC. e.g.
business tax, RPT
DOCTRINES IN TAXATION
2023 BAR SYLLABUS
F. Doctrines in Taxation:
1. Construction and Interpretation of Tax Laws, Rules,
and Regulations
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2. Prospectivity of Tax Laws Like for example, alam mo ng construed against the TP
3. Imprescriptibility of Taxes pero bakit siya construed against the TP because the
4. Double Taxation government need revenues in order to defray its expenses
5. Escape from Taxation under the life-blood doctrine. So, that will count as a valid
a) Shifting of Tax Burden explanation and actually that is the real rationale on that
b) Tax Avoidance rule on interpretation.
c) Tax Evasion
6. Exemption from Taxation In a number of SC cases, SC clarified that there at least
7. Equitable Recoupment two conditions that must concur for tax deductions,
8. Prohibition on Compensation and Set-Off refunds or exemptions to prosper:
9. Compromise and Tax Amnesty
1) There must be a law clearly providing for the tax
CONSTRUCTION AND INTERPRETATION OF TAX deduction, refund or exemptions; and
LAWS AND RULES REGULATION
2) The TP must be able to prove by evidence that
LJM: Let me divide my discussion of this topic into three: the deduction, refund or exemption applies to
him/her under the law
1. Interpretation of statute imposing tax
Q: How do we interpret statutes levying or imposing So, the two requirements are law and proof of application.
taxes of duty?
3. Interpretation of Implementing Rules and
A: These shall be construed strictly against the Regulations by administrative agencies
government and in favor of the citizens. The reason being
Q: What about the interpretation of IRR issued by BIR
is, it’s the government or congress who craft these laws.
or BOC?
They are the ones who choose who will be subject to tax,
to a particular tax rate, the coverage of taxation. Therefore,
A: Basic in your statutory construction, an administrative
any ambiguity in the law should not be ruled against the
rule or regulation must conform with, must not contradict,
citizens kasi wala naman silang direct participation in the
must not expand the provision of the enabling law. So, it
passage of the law. So, any statutes levying taxes or duties
cannot go beyond what the law provides. IRR cannot
are to be construed strictly against the government.
modify, expand or subtract from the law which is intended
to implement. Any rule which is not consistent with the
In this first scenario, the question is whether or not a
statute itself is null and void.
particular person will be covered by tax. If the question is,
‘Am I covered by the tax?’ because the law which provides
PROSPECTIVITY OF TAX LAWS
for that imposition is not clear. So, that will be construed
against the government.
Q: Are tax laws prospective or retroactive in nature?
2. Interpretation of deductions, refunds and
A: As a general rule, tax laws are prospective.
exemption

The second scenario, it is very clear that a particular TP
is covered by the tax. He/she is a subject matter of the
taxation. But then, this TP is claiming tax deduction,
refund or tax exemption.
Any laws granting deductions, refunds or tax exemptions,
so, the interpretation shall be, deductions, refunds or
exemptions are construed strictissimi juris against the TP.
So they are strictly construed against the TP and liberally
in favor of the taxing authority.
Q: What is the reason?
A: The underlying reason is the life-blood doctrine.
LJM: I remember the advice of my professor then. If you
cannot find the exact reason or if you do not know how to
justify your answer, you have an idea in your mind, you
have the answer but you do not know the underlying
reason, try to always connect it to the life-blood doctrine.
Remember in the Civil Code, Art. 4: Laws shall have no
retroactive effect unless the contrary is provided. So, the
prospectivity of laws applies to our tax laws as well.
IMPRESCRIPTIBILITY OF TAXES
Q: Are taxes imprescriptible?
A: General rule is that taxes are imprescriptible unless
otherwise there is a law providing for its prescription.
Because of the life-blood doctrine. Under political law,
statutes of limitation as a general rule does not against the
state.
DOUBLE TAXATION
There are two forms of double taxation:
1. Direct Double Taxation or Double Taxation in its
Strict Sense

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2. Indirect Double Taxation or Double Taxation in its
Broad Sense
Direct Double Taxation Indirect Double Taxation
or Double Taxation in its or Double Taxation in its
Strict Sense Broad Sense
Invalid tax measure Valid tax measure
Q: What are the elements of direct double taxation?
A: There are two or more taxes imposed on the same:
i. same subject matter;
ii. same purpose;
iii. same taxing authority;
iv. within the taxing jurisdiction;
v. same taxing period; and
vi. taxes are of the same kind or character.
NOTE: If you remove one element, that will be an indirect
double taxation or double taxation which is valid.
Q: Is double taxation expressly prohibited under the
Constitution?
A: No. there is no constitutional prohibition on double
taxation.
Direct double taxation can be invalidated on the ground of
violation of due process clause because it is confiscatory
in nature already. There is a violation of due process
clause if the tax imposed is arbitrary or confiscatory and
direct double taxation is confiscatory.
ILLUSTRATION: Upon his retirement, Alfredo transferred
his savings derived from his salary as a marketing
assistant to a time deposit with AAB Bank. The bank
regularly deducted 20% final withholding tax on the interest
income from the time deposit. Alfredo contends that the
20% final tax on the interest income constituted double
taxation because his salary had been already subjected to
withholding tax. (2017 bar exam)
Q: Is Alfredo's contention correct?
A: No, there is no double taxation because they are
different kinds of taxes. The first is an income tax on the
salary which is another form of income, salary income or
compensation income. Second, a tax on the interest
income. Different kinds of tax because one is final
withholding tax while the other is a creditable withholding
tax on compensation. They have a different subject. The
subject of the creditable withholding tax is the salary while
the subject of the 20% final withholding tax is the interest
income. There is no direct double taxation.
DIRECT DOUBLE TAXATION
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Under Direct Double Taxation, please read the case of
Nursery Care.
NURSERY CARE CO., et. al. v. ANTHONY ACEVEDO;
and CITY OF MANILA
G.R. No. 180651, July 30, 2014
FACTS: The City of Manila assessed and collected taxes
from the individual petitioners pursuant to Section 15 (Tax
on Wholesalers, Distributors, or Dealers) and Section 17
(Tax on Retailers) of the Revenue Code of Manila.
At the same time, the City of Manila imposed additional
taxes upon the petitioners pursuant to Section 21 of the
Revenue Code of Manila, as amended, as a condition for
the renewal of their respective business licenses for the
year 1999.
SEC. 21. Tax on Business Subject to the Excise,
Value-Added or Percentage Taxes under the NIRC
— On any of the following businesses and articles of
commerce subject to the excise, Value-Added, or
Percentage Taxes under the NIRC, as amended, a tax
of 50% of 1% per annum on the gross sales or receipts
of the preceding calendar year is hereby imposed:
A) On person who sells goods and services in the
course of trade or businesses; x x x
Provided, that all registered businesses in the City of
Manila already paying the aforementioned tax shall be
exempted from payment thereof.
To comply with the City of Manila’s assessment of taxes
under Section 21, the petitioners paid under protest the
amounts corresponding to the first quarter of 1999.
By letter dated March 1, 1999, the petitioners formally
requested the Office of the City Treasurer for the tax credit
or refund of the local business taxes paid under protest.
However, then City Treasurer Anthony Acevedo denied the
request.
On April 8, 1999, the petitioners sought the reconsideration
of the denial of their request. Still, Acevedo did not
reconsider.
Petitioners filed their respective petitions for certiorari in
the RTC in Manila, which held that there is no double
taxation imposed upon the petitioners under Section 15
and 17, on the one hand, and under Section 21, on the
other, of the questioned Ordinance.
The tax imposed under Section 15 and 17, as against that
imposed under Section 21, are levied against different tax
objects or subject matter.
Taxes imposed under Section 15 and 17 is a tax on the
business of wholesalers, distributors, dealers and retailers.
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On the other hand, the tax imposed upon the petitioners
under Section 21 is not a tax against the business of the
petitioners (as wholesalers, distributors, dealers or
retailers) but is rather a tax against consumers or end-
users of the articles sold by petitioners. CA affirmed the
decision of the RTC.
Section 234, the exempt real properties from RPT. In local
tax, go back to business tax, and Section 133 on the
limitations. In VAT, Section 112, 105, and 102. In income
tax, not so much.
ESCAPE FROM TAXATION

ISSUE: Whether or not the collection of taxes under Shifting of Tax Burden
Section 21 of Ordinance No. 7794, as amended,
constitutes double taxation. Q: How is the tax burden being shifted?

RULING: YES. A: A tax can be shifted only if it is an indirect tax. Shifting

of taxes is done by the seller, because they charge the tax
There is double taxation when the same taxpayer is taxed they remit to the BIR to the bills paid by the buyer. This is
twice when he should be taxed only once for the same only applicable in indirect taxes.
purpose by the same taxing authority within the same
jurisdiction during the same taxing period, and the taxes Tax Avoidance and Tax Evasion
are of the same kind or character.
Q: Distinguish Tax Avoidance from Tax Evasion.
Using the aforementioned test, the Court finds that there is
indeed double taxation, because the petitioners are A: Tax Avoidance is sanctioned by law, and Tax Evasion
subjected to the taxes under both Sections 14 and 21 of is not.
the Tax Ordinance.
TAX AVOIDANCE TAX EVASION
(1) On the same subject matter – the privilege of 3 Elements to successfully
doing business in the City of Manila; prosecute a case under
(2) For the same purpose – to make persons Tax Evasion:
conducting business within the City of Manila
contribute to city revenues; 1. Objective – the objective
of the taxpayer is either to
(3) By the same taxing authority – petitioner City of
Measures by which the lessen the tax, or do not
Manila; taxes of the taxpayer can pay the tax at all;
(4) Within the same taxing jurisdiction – within the be minimized using means
territorial jurisdiction of the City of Manila; sanctioned by law. These 2. Taxpayer’s State of
(5) For the same taxing periods – per calendar year; are tax-saving devices Mind – the state of mind
and using the means should be intended,
(6) Of the same kind or character – a local business sanctioned by law. deliberate, willful, and in
tax imposed on gross sales or receipts of the bad faith. Tax Evasion
cannot be accidental.
business.
3. Course of Action – the
Based on the foregoing reasons, petitioners should not course of action or the
have been subjected to taxes under Section 21 of the devise used is unlawful.
Manila Revenue Code for the fourth quarter of 2001,
considering that they had already been paying local EXAMPLE:
business tax under Section 14 of the same ordinance.
TAX AVOIDANCE - The choice between itemized
Accordingly, respondent’s assessment under both
deduction and allowable deduction. A taxpayer may opt to
Sections 14 and 21 had no basis.
be taxed using the itemized deduction or optional standard
deduction. If you are able to pay less tax because you used
Petitioners are indeed liable to pay business taxes to the
the optional standard deduction, then that is a tax
City of Manila; nevertheless, considering that the avoidance. You are merely utilizing the options provided by
former had already paid these taxes under Section 14 of
law.
the Manila Revenue Code, they are exempt from the same
payments under Section 21 of the same code. Hence,
FROM A 2016 BAR QUESTION
payments made under Section 21 must be refunded in
(As simplified by LJM):
favor of petitioners.
EXAMPLE 1: There are three parties involved - A, B, and
LJM: Double Taxation, in general, is a bar area in general
C. A sold the land to B for Php 10M. Less than a week later,
principles. In real property tax, you need to go back to

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B sold the same land to C for Php 500M. Because of the
structure made, the total taxes paid from A to B, and B to
C, we assume, is Php 20M.
The BIR found out that the consideration of A came from
C. It did not come from B despite the fact that the first
transaction is between A to B. However, it was not B who
paid despite being the buyer in the deed of absolute sale.
The one who paid A was C.
The BIR here was able to establish that A received more
than Php10 Million from C. In relation to the timing of the
transactions, during the first week, the first consideration
was transferred from A to B and during the second week,
B has already transferred the next amount to C.
According to the BIR, if that will be a direct sale, from A to
C, the taxes could have been 50 to 60 million which is
substantially more than the taxes paid on the two transfers.
Q: Was there tax evasion?
A: Yes. It is very clear that the intention is to sell the
property from A to C and B merely became a middleman
or intermediary to lessen the taxes and this mechanism is
not sanctioned by law.
Transcriber’s note: Inserted below is the actual bar exam
question and the suggested answer.
2016 BAR QUESTION
Lucky V Corporation (Lucky) owns a 10-storey building
on a 2,000 Sous meter lot in the City of Makati. It sold
the lot and building to Rainiere P80million. One month
after, Rainier sold the lot and building to Health Smoke
Company (HSC) for P200 million. Lucky filed its annual
tax return and declared its gain from the sale of the lot
and building in the amount of P750,000.00.
An investigation conducted by the BIR revealed that two
months prior to the sale of the properties to Rainier,
Lucky received P40 million from HSC and not from
Rainier. Said amount of P40 million was debited by HSC
and reflected in its trial balance as “other inv. — Lucky
Bldg.” The month after, another P40million was reflected
in HSC’s trial balance as “other inv. — Lucky Bldg.” The
BIR concluded that there is tax evasion since the real
buyer of the properties of Lucky is HSC and not Rainier.
It issued an assessment for deficiency income tax in the
amount of P79 million against Lucky. Lucky argues that
it resorted to tax avoidance or a tax saving device, which
is allowed by the NIRC and BIR rules since it paid the
correct taxes based on its sale to Rainier. On the other
hand, Rainier and HSC also paid the prescribed taxes
arising from the sale by Rainier to HSC. Is the BIR
correct in assessing taxes on Lucky? Explain. (5%)
SUGGESTED ANSWER:
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Yes. The sale of the property by Lucky V Corporation
(Lucky) to Rainer and consequently the sale by Rainer
to HSC being prompted more on the mitigation of tax
liabilities than for legitimate business purposes,
therefore, constitutes tax evasion. The real buyer from
Lucky is HBC as evidenced by the direct receipt of
payments by the former from the latter where the latter
recorded “other investments – Lucky Building”. The
scheme of resorting to a two-step transaction in selling
the property to the ultimate buyer in order to escape
paying higher taxes is considered as outside of those
lawful means allowed in mitigating tax liabilities which
makes Lucky, criminally and civilly liable. Hence, the
BIR is correct in assessing taxes on Lucky (CIR v.
Estate of Benigno P. Toda, Jr., G.R. No. 147188,
September 14, 2004, 438 SCRA 290).
TAX FREE EXCHANGE
DEFINITION
Tax-free exchanges refer to those instances enumerated
in Section 40(C)(2) of the NIRC of 1997, as amended, that
are not subject to Income Tax, Capital Gains Tax,
Documentary Stamp Tax and/or Value-added Tax, as the
case may be. (BIR Website)
SECTION 40 (C) (2) Exception. - No gain or loss shall be
recognized on a corporation or on it stocks or securities if
such corporation is a party to a reorganization and
exchanges property in pursuance of a plan of
reorganization solely for stock or securities in another
corporation that is a party to the reorganization.
In a tax free exchange, the transferor or the transferors
who must be individuals not exceeding five transfer their
properties to a corporation and the transferee corporation
issues their shares of stocks as consideration.
And as a result of the transfer, the transferor gains control
over the transferee corporation. This is a tax-free
exchange.
EXAMPLE 2: Mr. A transferred his parcel of land to ABC
Corporation. The latter issued its shares of stocks as
consideration for the land transferred by Mr. A. As a result,
Mr. A was able to gain control over the corporation. But
thereafter, Mr. A sold the shares of stocks of ABC
Corporation to Mr. C and the former paid the
corresponding capital gains tax on sale of shares.
The BIR contended that this is a case of tax evasion
because the real intention of the parties Mr. A and C is
really to sell the parcel of land.
Q: Was there tax evasion?
A: None. It is not a tax evasion because the means used
by the tax payer to lessen the tax is sanctioned by law.
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UST Faculty of Civil Law | A.Y. 2022 – 2023
Tax-free exchange is sanctioned under Section 40-C
Paragraph 2.
Transcriber’s note: Inserted below is the actual bar exam
question and the suggested answer.
2008 BAR QUESTION
Suerte, a Filipino citizen, purchased a lot in Makati City
in 1980 at a price of P1 million. Said property has been
leased to MAS Corporation, a domestic corporation
engaged in manufacturing paper products, owned 99%
by Maria Suerte. In October 2007, EIP Corporation, a
real estate developer, expressed its desire to buy the
Makati property at its fair market value P300 million,
payable as follows : (a) P60 million down payment; and
(b) balance, payable equally in twenty four (24) monthly
consecutive installments. Upon the advice of a tax
lawyer, Maria Suerte exchanged her Makati property for
shares of stock of MAS Corporation. A BIR ruling,
confirming the tax-free exchange of property for shares
of stock, was secured from the BIR National Office and
a Certificate Authorizing Registration was issued by the
Revenue District Officer (RDO) where the property was
located. Subsequently, she sold her entire stock
holdings in MAS Corporation to EIP Corporation for
P300 million. In view of the tax advice, Maria Suerte paid
only the capital gains tax of P29,895,000 ( P100,000 x
5% plus P298,900,00 x 10%), instead of the corporate
income tax of P104,650,00 ( 35% on P299 million gain
from sale of real property). After evaluating the capital
gains tax payment, the RDO wrote a letter to Maria
Suerte, Slating that she committed tax evasion.
Is the contention of the RDO tenable? Or was it tax
avoidance that Maria Suerte had resorted to? Explain.
(6%)
SUGGESTED ANSWER:
The contention of the RDO is not tenable. Maria Suerte
resorted to tax avoidance and not tax evasion. Tax
avoidance is the use of legal means to reduce tax
liability and it is the legal right of a taxpayer to decrease
the amount of what otherwise would be his taxes by
means which the law permits. (Heng Tong Textiles Co.,
Inc. v. Commissioner, 24 SCRA 767 [1968]). There is
nothing illegal about transferring first the property to a
corporation in a tax free exchange and later selling the
shares obtained in the exchange at a lower tax than
what could have been imposed if the property was sold
directly.
LMJ: Even though the objective was to lessen the tax, the
means used was sanctioned by law. Hence, there is no
case of tax evasion.
BIR's New Program: Running Against Fake
Transaction Receipts
71
LMJ: The BIR is adamant on running against fake
transaction receipts. Under Section 24: Allowable
Deductions, the deduction should be properly
substantiated by an invoice, official receipt or other
supporting documents.
Q: What is the effect of deduction for the tax payer?
A: Having deductions is good for the taxpayer because
more deductions mean less taxable income and less
taxes.
LMJ: The BIR uncovered several companies purchasing
fake receipts from fictitious providers without
corresponding purchases. They use these fake receipts to
support their claim for allowable deductions.
Q: Is this a case of tax avoidance or tax evasion?
A: This is clearly a case of tax evasion because the means
or the devise used by the companies is not sanctioned by
law. There is nothing in the Tax Code which would allow
the taxpayer to purchase or to fake a transaction to be able
to claim allowable deductions.
TAX EXEMPTION
DEFINITION
A tax exemption is a grant of immunity from payment of
tax, it is a freedom from charge or burden.
LMJ: Others are subjected to tax but a taxpayer, who may
be a person, class of persons or corporations, is provided
a particular privilege to be immune from the tax.
DOCTRINE OF EQUITABLE RECOUPMENT
Comment: I find this quite amusing lagi na lang nandyan
sa Bar Syllabus, it’s not applicable anyway in our
jurisdiction.
It is a principle which allows taxpayer whose claim for
refund has been barred due to prescription to recover the
said tax by setting off the prescribed refund against the tax
which may be due or collectible from him.
Under this doctrine, the taxpayer is allowed to credit such
refund under his existing tax liability.
SCENARIO: A tax refund claim has prescribed already
but even if it is prescribed or barred by prescription already,
that refund claim may be offset against an existing tax
assessment.
Q: Is the doctrine of equitable recoupment applicable
in our jurisdiction?
A: No. In CIR v. UST (1958), the doctrine was held to be
inapplicable to the Philippines because should it be
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allowed, both the BIR and the TP may be tempted to delay Tax amnesty can be Tax exemption on the
and neglect to pursue their respective claims. applied retroactively, in other hand can be applied
general. prospectively, in general.
PROHIBITION ON COMPENSATION AND SET-OFF
-END-
The particular individual or corporation owes the
government in the form of taxes and the government on
the other hand may have procured the services or
purchased materials from the same individual or corporate
taxpayer. Nonetheless, compensation and set-off
cannot take place. This is because an essential element
of compensation is that the parties must be creditors and
debtors of one another. Taxes are not debts.

COMPROMISE AND TAX AMNESTY

COMPROMISE

A contract whereby parties, making reciprocal

concessions, avoid a litigation or put an end to one already
commenced.

EXAMPLE: Even if the case has already been filed with

the CTA, the parties (BIR and TP) may agree to terminate
the proceedings by entering into compromise agreement.

GROUNDS FOR COMPROMISE

SEC. 204. Compromise the payment of any internal
revenue tax, when:

a) A reasonable doubt as to the validity of the

claim against the taxpayer exists; (minimum
compromise offer = 10% of basic tax
assessed)
b) The financial position of the taxpayer
demonstrates a clear inability to pay the
assessed tax. (minimum compromise offer =
40% of basic tax assessed)

TAX AMNESTY

It is a general pardon or the intentional overlooking by the

State of its authority to impose penalties on persons
otherwise guilty of violating a tax.

It partakes of an absolute waiver by the government of its

right to collect.

TAX AMNESTY VS. TAX EXEMPTION

TAX AMNESTY TAX EXEMPTION

As to scope
Tax Amnesty provides
immunity for criminal, civil Tax exemption only
and administrative liability provides for immunity for
arising from nonpayment civil liability only.
of taxes.
As to application

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