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 TABLE OF CONTENTS
TAXATION LAW 1
I. GENERAL PRINCIPLES OF TAXATION ...........1
A. DEFINITION AND CONCEPT OF
TAXATION .....................................................1
A.1. TAXATION ...........................................1
A.2. TAXES .................................................1
B. UNDERLYING THEORY AND BASIS OF
TAXATION .....................................................1
C. NATURE OF THE POWER OF TAXATION ..1
C.1. SCOPE OF TAXATION......................... 2
C.2. EXTENT OF THE LEGISLATIVE
POWER TO TAX ........................................ 2
D. ESSENTIAL CHARACTERISTICS OF TAX
.................................................................. 3
E. POWER OF TAXATION COMPARED WITH
OTHER POWERS .......................................... 4
F. PURPOSE OF TAXATION .......................... 5
F.1. REVENUE-RAISING ............................ 5
F.2. NON-REVENUE/SPECIAL OR
REGULATORY ........................................... 5
G. PRINCIPLES OF SOUND TAX SYSTEM..... 6
G.1. FISCAL ADEQUACY ............................ 6
G.2. ADMINISTRATIVE FEASIBILITY ......... 6
G.3. THEORETICAL JUSTICE OR EQUALITY
.................................................................. 6
H. THEORY AND BASIS OF TAXATION ......... 6
H.1. LIFEBLOOD THEORY ......................... 6
H.2. NECESSITY THEORY ......................... 6
H.3. BENEFITS-PROTECTION THEORY
(SYMBIOTIC RELATIONSHIP) ................... 6
H.4. JURISDICTION OVER SUBJECT AND
OBJECTS ................................................... 7
I. DOCTRINES IN TAXATION ........................ 7
I.1. PROSPECTIVITY OF TAX LAWS ........... 7
I.2. NON-RETROACTIVITY OF RULINGS
(SEC. 246) ................................................. 7
I.3. IMPRESCRIPTIBILITY .......................... 7
I.4. DOUBLE TAXATION ............................ 8
I.5. ESCAPE FROM TAXATION .................. 9
I.6. EXEMPTION FROM TAXATION ......... 10
I.7. COMPENSATION AND SET-OFF ........12
I.8. COMPROMISE ...................................12
I.9. TAX AMNESTY ...................................12
I.10. CONSTRUCTION AND
INTERPRETATION OF: ............................. 13
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J. SCOPE AND LIMITATION OF TAXATION. 16
J.1. INHERENT LIMITATIONS .................. 16
J.2. CONSTITUTIONAL LIMITATIONS .....20
K. REQUISITES OF A VALID TAX ................ 27
L. TAX AS DISTINGUISHED FROM OTHER
FORMS OF EXACTIONS .............................. 28
L.1. TARIFF .............................................. 28
L.2. TOLL................................................. 28
L.3. LICENSE FEE .................................... 28
L.4. SPECIAL ASSESSMENT ................... 29
L.5. DEBT ................................................ 30
L.6. PENALTY.......................................... 30
M. KINDS OF TAXES ................................... 30
M.1. AS TO OBJECT ................................. 30
M.2. AS TO BURDEN OR INCIDENCE ......31
M.3. AS TO TAX RATES ............................31
M.4. AS TO SCOPE (OR AUTHORITY
IMPOSING THE TAX) ................................ 31
M.5. AS TO GRADUATION ...................... 32
A. INCOME TAX SYSTEMS .......................... 33
A.1. GLOBAL TAX SYSTEM ...................... 33
A.2. SCHEDULAR TAX SYSTEM .............. 33
A.3. SEMI-SCHEDULAR OR SEMI-GLOBAL
TAX SYSTEM ........................................... 33
B. FEATURES OF THE PHILIPPINE INCOME
TAX LAW ..................................................... 33
C. CRITERIA IN IMPOSING PHILIPPINE
INCOME TAX............................................... 34
C.1. CITIZENSHIP OR NATIONALITY
PRINCIPLE .............................................. 34
C.2. RESIDENCE PRINCIPLE ................... 34
C.3. SOURCE OF INCOME PRINCIPLE .... 34
D. TYPES OF PHILIPPINE INCOME TAX...... 34
E.1. INSTANCES WHEREBY SHORT
ACCOUNTING PERIOD ARISES .............. 34
E.2. WHEN CALENDAR YEAR SHALL BE
USED IN COMPUTING TAXABLE INCOME:
................................................................ 35
F. KINDS OF TAXPAYERS ........................... 35
F.1. DEFINITION OF EACH KIND OF
TAXPAYER .............................................. 35
F.2. INDIVIDUAL TAXPAYERS ................ 36
F.3. CORPORATIONS .............................. 36
F.4. PARTNERSHIP ................................. 37
F.5. ESTATES AND TRUSTS ................... 37
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F.6. CO-OWNERSHIP.............................. 37
G. INCOME TAXATION................................ 37
G.1. DEFINITION ...................................... 37
G.2. NATURE .......................................... 37
G.3. GENERAL PRINCIPLES .................... 38
H. INCOME.................................................. 38
H.1. DEFINITION ...................................... 38
H.2. NATURE .......................................... 38
I. GROSS INCOME ...................................... 43
I.1. DEFINITION ....................................... 43
I.2. CONCEPT OF INCOME FROM
WHATEVER SOURCE DERIVED .............. 43
I.3. GROSS INCOME VIS-À-VIS NET
INCOME VIS-À-VIS TAXABLE INCOME ...44
I.4. CLASSIFICATION OF INCOME AS TO
SOURCE ..................................................44
I.5. SOURCES OF INCOME SUBJECT TO
TAX .........................................................44
SOURCE RULES IN DETERMINING INCOME
FROM WITHIN AND WITHOUT ................... 66
SITUS OF INCOME TAXATION ................68
EXCLUSIONS FROM GROSS INCOME ........68
(A) EXCLUSIONS UNDER
CONSTITUTION ...................................... 69
(B) EXCLUSIONS UNDER THE TAX CODE
(SEC. 32, NIRC) ....................................... 69
(C) UNDER SPECIAL LAWS ..................... 72
DEDUCTIONS FROM GROSS INCOME ....... 73
ITEMIZED DEDUCTIONS ........................ 74
EXPENSES .............................................. 74
INTEREST ............................................... 78
TAXES .................................................... 80
LOSSES ................................................... 82
BAD DEBTS.............................................84
DEPRECIATION ......................................85
CHARITABLE AND OTHER
CONTRIBUTIONS....................................86
CONTRIBUTIONS TO PENSION TRUSTS 87
DEDUCTIONS UNDER SPECIAL LAWS ... 87
OPTIONAL STANDARD DEDUCTION .....88
EXEMPT CORPORATIONS ...................... 91
TAXATION OF RESIDENT CITIZENS, NON-
RESIDENT CITIZENS AND RESIDENT ALIENS
.................................................................... 93
TAXATION ON COMPENSATION INCOME . 95
TAXATION OF BUSINESS
INCOME/INCOME FROM PRACTICE OF
PROFESSION ..........................................98
TAXATION OF PASSIVE INCOME............98
TAXATION OF CAPITAL GAINS.............. 101
TAXATION OF NON-RESIDENT ALIENS
ENGAGED IN TRADE OR BUSINESS ........ 105
GENERAL RULES.................................. 105
CASH AND/OR PROPERTY DIVIDENDS
.............................................................. 105
CAPITAL GAINS .................................... 106
NON-RESIDENT ALIENS NOT ENGAGED IN
TRADE OR BUSINESS .............................. 106
INDIVIDUAL TAXPAYERS EXEMPT FROM
INCOME TAX............................................. 107
SENIOR CITIZENS ................................. 107
MINIMUM WAGE EARNERS ................. 107
EXEMPTIONS GRANTED UNDER
INTERNATIONAL AGREEMENTS (SEC.
32(B)) .................................................... 107
TAXATION OF DOMESTIC CORPORATIONS
.................................................................. 107
THE TAX PAYABLE ....................................... 107
REGULAR TAX ...................................... 107
MINIMUM CORPORATE INCOME TAX
(MCIT) ................................................... 108
CORPORATIONS EXEMPT FROM THE
MCIT: (BIPTENG) .................................... 112
ALLOWABLE DEDUCTIONS ...................... 112
ITEMIZED DEDUCTIONS........................ 112
TAXATION OF PASSIVE INCOME .............. 112
PASSIVE INCOME SUBJECT TO TAX...... 112
PASSIVE INCOME NOT SUBJECT TO TAX
............................................................... 113
TAXATION OF CAPITAL GAINS ................. 114
INCOME FROM SALE OF SHARES OF
STOCK.................................................... 114
INCOME FROM THE SALE OF REAL
PROPERTY SITUATED IN THE
PHILIPPINES .......................................... 114
TAX ON PROPRIETARY EDUCATIONAL
INSTITUTIONS AND NON-PROFIT
HOSPITALS................................................ 114
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TAX ON GOVERNMENT-OWNED OR F.1. CONCEPT OF RESIDENCE .............. 139

CONTROLLED CORPORATIONS, AGENCIES F.2. RULE OF RECIPROCITY ................. 139
OR INSTRUMENTALITIES ......................... 114 G. GROSS ESTATE VIS-À-VIS NET ESTATE
FOR GOCCS: .......................................... 114 .................................................................. 140
FOR INSTRUMENTALITIES AND H. DETERMINATION OF GROSS ESTATE
AGENCIES OF GOVERNMENT: .............. 115 AND NET ESTATE (AND COMPOSITION) . 140
TAXATION OF RESIDENT FOREIGN J. ITEMS TO BE INCLUDED IN GROSS
CORPORATIONS ....................................... 115 ESTATE ..................................................... 142
GENERAL RULE ..................................... 115 ITEMS TO BE INCLUDED IN THE GROSS
WITH RESPECT TO THEIR INCOME FROM ESTATE ..................................................... 142
SOURCES WITHIN THE PHILIPPINES .... 116 K. DEDUCTIONS FROM ESTATE .............. 145
MINIMUM CORPORATE INCOME TAX .. 116 K.1 ORDINARY DEDUCTIONS ............... 145
TAX ON CERTAIN INCOME ........................ 116 1.A. EXPENSES, LOSSES,
TAXATION OF NON-RESIDENT FOREIGN INDEBTEDNESS AND TAXES, ETC.
CORPORATIONS ....................................... 118 (ELIT) ................................................ 145
GENERAL RULE ..................................... 118 1. B. PROPERTY PREVIOUSLY
TAX ON CERTAIN INCOME .................... 118 TAXED/PPT (SEC. 86(A)(2)) ............. 150
IMPROPERLY ACCUMULATED EARNINGS ALSO CALLED AS VANISHING
OF CORPORATIONS .............................. 121 DEDUCTIONS ................................... 150
TAX EXEMPT CORPORATIONS .................123 1. C. TRANSFERS FOR PUBLIC
TAXATION OF PARTNERSHIPS .................123 PURPOSE (SEC. 86(A)(3)) ................. 151
CLASSIFICATION OF PARTNERSHIPS FOR 1.D. AMOUNTS RECEIVED BY HEIRS
TAX PURPOSES .....................................123 UNDER RA 4917 ................................ 151
TAXATION OF GENERAL PROFESSIONAL L. EXCLUSIONS FROM ESTATE................ 153
PARTNERSHIPS ................................... 125 M. TAX CREDIT FOR ESTATE TAXES PAID IN
WITHHOLDING TAX.................................. 126 A FOREIGN COUNTRY.............................. 155
CONCEPT .............................................. 126 N. EXEMPTION OF CERTAIN ACQUISITIONS
KINDS .................................................... 127 AND TRANSMISSIONS .............................. 157
WITHHOLDING OF VAT ........................ 128 O. FILING OF NOTICE OF DEATH .............. 157
FILING OF RETURN AND PAYMENT OF P. ESTATE TAX RETURN ........................... 157
TAXES WITHHELD ................................ 128 II. DONOR’S TAX .......................................... 160
FINAL WITHHOLDING TAX AT SOURCE129 A. BASIC PRINCIPLES............................... 160
CREDITABLE WITHHOLDING TAX ......... 131 B. DEFINITION .......................................... 160
TIMING OF WITHHOLDING ....................135 C. NATURE ................................................ 161
D. PURPOSE OR OBJECT .......................... 161
E. REQUISITES OF VALID DONATION ....... 161
TAXATION LAW 2 F. TRANSFERS WHICH MAY BE
I. ESTATE TAX ............................................... 137 CONSTITUTED AS DONATION .................. 161
A. BASIC PRINCIPLES................................ 137 G. TRANSFER FOR LESS THAN ADEQUATE
B. DEFINITION .......................................... 137 AND FULL CONSIDERATION ................... 162
C. NATURE ................................................ 137 H. CLASSIFICATION OF DONOR .............. 162
D. PURPOSE OR OBJECT .......................... 137 I. DETERMINATION OF GROSS GIFT
E. TIME AND TRANSFER OF PROPERTIES (INCLUDING COMPOSITION OF GROSS
.................................................................. 138 GIFT) ......................................................... 163
F. CLASSIFICATION OF DECEDENT ..........139

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J. VALUATION OF GIFTS MADE IN S.3. ALLOCATION OF INPUT TAX ON

PROPERTY ............................................... 164 MIXED TRANSACTIONS ........................197
K. TAX CREDIT FOR DONOR’S TAXES PAID S.4. DETERMINATION OF THE OUTPUT
IN A FOREIGN COUNTRY ......................... 165 TAX AND VAT PAYABLE AND
L. EXEMPTIONS OF GIFTS FROM DONOR’S COMPUTATION OF VAT PAYABLE OR
TAX ........................................................... 166 EXCESS TAX CREDITS ........................... 197
M. PERSON LIABLE .................................. 166 T. SUBSTANTIATION OF INPUT TAX
N. TAX BASIS ............................................. 167 CREDITS ................................................... 198
SUMMARY OF TRANSFER TAXES............ 169 U. REFUND OR TAX CREDIT OF EXCESS
III. VALUE-ADDED TAX (VAT) ........................ 174 INPUT TAX (CF REFUND OF ERRONEOUSLY
A. CONCEPT .............................................. 174 PAID TAXES) .............................................203
B. CONSTITUTIONALITY OF VAT............... 174 V. INVOICING REQUIREMENTS ............... 204
C. CHARACTERISTICS/ELEMENTS OF A W. FILING OF RETURN AND PAYMENT .. 206
VAT-TAXABLE TRANSACTION .................. 174 X. WITHHOLDING OF FINAL VAT ON SALES
D. IMPACT OF TAX V. INCIDENT OF TAX .. 176 TO GOVERNMENT .................................... 207
E. TAX CREDIT METHOD ........................... 176 IV. TAX REMEDIES UNDER THE NIRC.......... 221
F. DESTINATION PRINCIPLE ..................... 177 A. TAXPAYER’S REMEDIES ...................... 221
G. PERSONS LIABLE ................................. 177 A. GOVERNMENT REMEDIES .............. 234
G. VAT ON SALE OF GOODS OR V. ORGANIZATION AND FUNCTION OF THE
PROPERTIES ............................................. 178 BUREAU OF INTERNAL REVENUE .............. 236
I. ZERO-RATED SALES OF GOODS OR POWERS OF THE COMMISSIONER .......... 236
PROPERTIES, AND EFFECTIVELY ZERO- ORGANIZATION AND FUNCTION OF THE
RATED SALES OF GOODS OR PROPERTIES BIR ............................................................ 238
................................................................... 181 VI. TAX REMEDIES UNDER THE NIRC......... 240
J. TRANSACTIONS DEEMED SALE (SEC. 106 VI. ORGANIZATION AND FUNCTION OF THE
(B) ............................................................. 184 BIR ................................................................ 272
K. CHANGE OR CESSATION OF STATUS AS VIII. LOCAL GOVERNMENT CODE OF 1991, AS
VAT-REGISTERED PERSON (SEC 106 C) .. 185 AMENDED .................................................... 276
L. VAT ON IMPORTATION OF GOODS ..... 186 C. TAXING POWERS OF MUNICIPALITIES 282
M. VAT ON SALE OF SERVICE AND USE OR C.1. TAX ON VARIOUS TYPES OF
LEASE OF PROPERTIES ........................... 186 BUSINESSES.........................................282
N. ZERO-RATED SALE OF SERVICES....... 189 C.2 CEILING ON BUSINESS TAX
O. VAT EXEMPT TRANSACTIONS ............ 190 IMPOSSIBLE ON MUNICIPALITIES WITHIN
P. INPUT TAX AND OUTPUT TAX, DEFINED METRO MANILA ...................................284
.................................................................. 195 C.3. TAX ON RETIREMENT ON BUSINESS
Q. SOURCES OF INPUT TAX..................... 195 ..............................................................284
R. PERSONS WHO CAN AVAIL OF INPUT C.4 RULES ON PAYMENT OF BUSINESS
TAX CREDIT .............................................. 196 TAX .......................................................284
S. DETERMINATION OF OUTPUT/INPUT C.5. FEES AND CHARGES FOR
TAX; VAT PAYABLE; EXCESS INPUT TAX REGULATION & LICENSING .................284
CREDITS .................................................... 197 C.6. SITUS OF TAX COLLECTED ...........285
S.1. DETERMINATION OF OUTPUT TAX 197 D. TAXING POWERS OF BARANGAYS .....286
S.2. DETERMINATION OF INPUT TAX E. COMMON REVENUE RAISING POWERS
CREDITABLE .......................................... 197 ..................................................................286
F. COMMUNITY TAX ................................. 287

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COMMON LIMITATIONS ON THE TAXING D. APPRAISAL AND ASSESSMENT OF

POWERS OF LGUS ...................................288 REAL PROPERTY TAX .......................... 293
COLLECTION OF BUSINESS TAX .............289 D.1. DECLARATION OF REAL PROPERTY
TAX PERIOD AND MANNER OF PAYMENT .............................................................. 293
..............................................................289 D.2. LISTING OF REAL PROPERTY IN THE
ACCRUAL OF TAX.................................289 ASSESSMENT ROLLS ...........................294
TIME OF PAYMENT ...............................289 D.3. APPRAISAL AND VALUATION OF
PENALTIES ON UNPAID TAXES, FEES OR REAL PROPERTY ..................................294
CHARGES .............................................289 D.4. ASSESSMENT OF REAL PROPERTY
AUTHORITY OF TREASURER IN ..............................................................295
COLLECTION AND INSPECTION OF I. ASSESSMENT LEVELS .......................295
BOOKS ..................................................289 II. GENERAL REVISIONS OF
TAXPAYER’S REMEDIES ..........................289 ASSESSMENTS AND PROPERTY
PERIODS OF ASSESSMENT AND CLASSIFICATION ..................................295
COLLECTION OF LOCAL TAXES, FEES OR III. DATE OF EFFECTIVITY OF
CHARGES .............................................289 ASSESSMENT OR REASSESSMENT .....295
PROTEST OF ASSESSMENT ................ 290 IV. ASSESSMENT OF PROPERTY SUBJECT
CLAIM FOR REFUND OF TAX CREDIT FOR TO BACK TAXES....................................296
ERRONEOUSLY OR ILLEGALLY V. NOTIFICATION OF NEW OR REVISED
COLLECTED TAX, FEE OR CHARGE .... 290 ASSESSMENT .......................................296
CIVIL REMEDIES BY THE LGU FOR E. COLLECTION OF REAL PROPERTY TAX
COLLECTION OF REVENUES .................. 290 ..............................................................296
LOCAL GOVERNMENT’S LIEN FOR E.1. SPECIAL RULES ON PAYMENT ......296
DELINQUENT TAXES, FEES OR CHARGES I. PAYMENT OF REAL PROPERTY TAX IN
............................................................. 290 INSTALLMENTS ....................................296
CIVIL REMEDIES, IN GENERAL ............ 290 II. INTERESTS ON UNPAID REAL
PROCEDURE FOR ADMINISTRATIVE PROPERTY TAX .................................... 297
ACTION ................................................ 290 III. CONDONATION OF REAL PROPERTY
PROCEDURE FOR JUDICIAL ACTION ... 291 TAX ....................................................... 297
B. REAL PROPERTY TAXATION ............... 291 E.2. REMEDIES OF LGUS FOR
A. FUNDAMENTAL PRINCIPLES (CAPUE) COLLECTION OF REAL PROPERTY TAX
.............................................................. 291 .............................................................. 297
B. NATURE OF REAL PROPERTY TAX .. 291 I. ADMINISTRATIVE .............................. 297
C. IMPOSITION OF REAL PROPERTY TAX II. JUDICIAL ........................................... 297
.............................................................. 292 F. TAXPAYER’S REMEDIES ................... 297
C.1. COVERAGE ..................................... 292 F.1. ADMINISTRATIVE ...........................298
FOR A PROVINCE, OR A CITY OR F.2. JUDICIAL ........................................298
MUNICIPALITY WITHIN METRO MANILA IX. TARIFF AND CUSTOMS CODE OF 1978, AS
.............................................................. 292 AMENDED .................................................... 303
SPECIAL LEVY ON IDLE LANDS............ 292 A. TARIFF AND DUTIES, DEFINED ........... 303
SPECIAL LEVY FOR PUBLIC WORKS .... 292 B. GENERAL RULE: ALL IMPORTED
SPECIAL EDUCATION FUND (SEF) ....... 292 ARTICLES ARE SUBJECT TO DUTY .......... 303
C.2. EXEMPT FROM REAL PROPERTY TAX IMPORTATION BY THE GOVERNMENT
.............................................................. 292 TAXABLE............................................... 303
C. PURPOSE FOR IMPOSITION ................ 303

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D. FLEXIBLE TARIFF CLAUSE ................... 303 CTA EN BANC ....................................... 328

E. REQUIREMENTS OF IMPORTATION ....304 A.2. CRIMINAL CASES .......................... 329
E.1. BEGINNING AND ENDING OF I. EXCLUSIVE ORIGINAL JURISDICTION
IMPORTATION ......................................304 .............................................................. 329
E.2. OBLIGATIONS OF IMPORTER .......304 II. EXCLUSIVE APPELLATE JURISDICTION
I. CARGO MANIFEST.............................304 IN CRIMINAL CASES ............................. 329
II. IMPORT ENTRY.................................305 CTA DIVISION ....................................... 329
III. DECLARATION OF CORRECT WEIGHT CTA EN BANC ....................................... 329
OR VALUE .............................................306 B. JUDICIAL PROCEDURES ...................... 329
IV. LIABILITY FOR PAYMENT OF DUTIES B.1. JUDICIAL ACTION FOR COLLECTION
..............................................................306 OF TAXES.............................................. 329
V. LIQUIDATION OF DUTIES .................306 I. INTERNAL REVENUE TAXES ............. 329
VI. KEEPING OF RECORDS ................... 307 II. LOCAL TAXES ................................... 330
F. IMPORTATION IN VIOLATION OF TCC 308 B.2. CIVIL CASES................................... 330
F.1. SMUGGLING .................................. 308 I. WHO MAY APPEAL, MODE OF APPEAL,
F.2. OTHER FRAUDULENT PRACTICES EFFECT OF APPEAL .............................. 330
............................................................. 308 SUSPENSION OF COLLECTION OF TAX
G. CLASSIFICATION OF GOODS ...............309 .............................................................. 330
G.1. TAXABLE IMPORTATION ...............309 TAKING OF EVIDENCE ........................... 331
G.2. PROHIBITED IMPORTATION .........309 MOTION FOR RECONSIDERATION OR
G.3. CONDITIONALLY-FREE NEW TRIAL ............................................ 331
IMPORTATION ...................................... 310 II. APPEAL TO THE CTA, EN BANC ....... 332
H. CLASSIFICATION OF DUTIES ................316 III. PETITION FOR REVIEW ON
H.1. ORDINARY/REGULAR DUTIES.......316 CERTIORARI TO THE SUPREME COURT
I. AD VALOREM; METHODS OF .............................................................. 332
VALUATION ...........................................316 B.3. CRIMINAL CASES .......................... 333
II. SPECIFIC ............................................319 I. INSTITUTION AND PROSECUTION OF
H.2. SPECIAL DUTIES ............................319 CRIMINAL ACTIONS ............................. 333
I. REMEDIES ..............................................319 INSTITUTION OF CRIMINAL ACTION ... 333
I.1. GOVERNMENT .................................319 PROSECUTION OF CRIMINAL ACTION 333
I. ADMINISTRATIVE/EXTRAJUDICIAL ...319 INSTITUTION ON CIVIL ACTION IN
II. JUDICIAL ............................................321 CRIMINAL ACTION ............................... 333
I.2. TAXPAYER .......................................321 II. APPEAL AND PERIOD TO APPEAL
I. PROTEST ............................................321 CRIMINAL CASES ................................. 333
II. ABANDONMENT ................................ 321 III. PETITION FOR REVIEW ON
III. ABATEMENT AND REFUND ............ 322 CERTIORARI TO THE SUPREME COURT
X. JUDICIAL REMEDIES ................................ 328 .............................................................. 334
A. JURISDICTION OF THE COURT OF TAX C. TAXPAYER’S SUIT IMPUGNING THE
APPEALS .................................................. 328 VALIDITY OF TAX MEASURES OR ACTS OF
A.1. CIVIL TAX CASES ............................ 328 TAXING AUTHORITIES ............................. 334
I. EXCLUSIVE ORIGINAL JURISDICTION C.1. TAXPAYER’S SUIT, DEFINED ......... 334
.............................................................. 328 C.2. DISTINGUISHED FROM CITIZEN’S
II. EXCLUSIVE APPELLATE JURISDICTION SUIT ...................................................... 334
.............................................................. 328
CTA DIVISION ....................................... 328

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C.3. REQUISITES FOR CHALLENGING THE

CONSTITUTIONALITY OF A TAX MEASURE
OR ACT OF TAXING AUTHORITY.......... 334
I. CONCEPT OF LOCUS STANDI AS
APPLIED IN TAXATION ......................... 334
II. DOCTRINE OF TRANSCENDENTAL
IMPORTANCE ....................................... 335
III. RIPENESS FOR JUDICIAL
DETERMINATION ................................. 336

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UP COLLEGE OF LAW TAXATION 1 TAXATION LAW

TAXATION LAW
TAXATION LAW 1
UP COLLEGE OF LAW
I. General Principles of
Taxation
A. DEFINITION AND CONCEPT OF
TAXATION
A.1. TAXATION
(a) is a mode by which governments make
exactions for revenue in order to support
their existence and carry out their legitimate
objectives.
(b) a mode of raising revenue for public
purpose; the exercise of sovereign power to
raise revenue for the expense of the
government;
(c) the process or means by which the
sovereign, through its law-making body,
raises income to defray the necessary
expenses of government; a method of
apportioning the cost of government among
those who in some measure are privileged
to enjoy its benefits and must, therefore,
bear its burdens, (see 51 Am. Jur. 341; 1
Cooley 72-93.)
(d) as a power, it refers to the inherent power of
the state to demand enforced contributions
for public purpose or purposes.
A.2. TAXES
(a) are enforced proportional contributions
from persons and property levied by the
law-making body of the State by virtue of its
sovereignty for the support of the
government and all public needs.
(b) The enforced proportional and pecuniary
contributions from persons and property
levied by the law-making body of the state
having jurisdiction over the subject of the
burden for the support of the government
and public needs.
TAXATION 1 TAXATION LAW
B. UNDERLYING THEORY AND BASIS
OF TAXATION
The power of taxation proceeds upon the
theory that the existence of government is a
necessity; that it cannot continue without
means to pay its expenses; and that for those
means it has the right to compel all citizens
and property within its limits to contribute.
The basis of taxation is found in the reciprocal
duties of protection and support between the
State and its inhabitants. The State receives
taxes that it may be enabled to carry its
mandates into effect and perform the functions
of government and the citizen pays the portion
of taxes demanded in order that he may, by
means thereof, be secured in the enjoyment of
the benefits of an organized society, (see 51
Am. Jur. 42-43.) This is the so-called benefits-
received principle.
C. NATURE OF THE POWER OF
TAXATION
(1) Inherent in sovereignty- The power to tax is
an attribute of sovereignty. It is a power
emanating from necessity. It is a necessary
burden to preserve the State's sovereignty
and a means to give the citizenry an army to
resist an aggression, a navy to defend its
shores from invasion, a corps of civil
servants to serve, public improvement
designed for the enjoyment of the citizenry
and those which come within the State's
territory, and facilities and protection which
a government is supposed to provide (Phil.
Guaranty Co., Inc. v. Commissioner, G.R. No.
L-22074 April 30, 1965). It is
essential to the existence of every
government. It exists apart from
constitutions and without being expressly
conferred by the people (71 Am.Jur.2d 397-
398). Constitutional provisions relating to
the power of taxation do not operate as
grants of the power to the government.
1
UP COLLEGE OF LAW TAXATION 1
They merely constitute limitations upon a
power which would otherwise be practically
without limit. (1 Cooley 150). While the
power to tax is not expressly provided for in
our Constitution, its existence is recognized
by the provisions relating to taxation (infra).
(2) Essentially a legislative function- The power
to tax is peculiarly and exclusively
legislative and cannot be exercised by the
executive or judicial branch of the
government (1 Cooley 160-161). Hence, only
Congress, our national legislative body, can
impose taxes. The levy of a tax, however,
may also be made by a local legislative
body subject to such limitations as may be
provided by law.
(3) Subject to constitutional and inherent
limitations - These limitations are those
provided in the fundamental law or implied
therefrom, while the rest spring from the
nature of the taxing power itself although
they may or may not be provided in the
Constitution.
C.1. SCOPE OF TAXATION
Subject to constitutional and inherent
restrictions, the power of taxation is regarded
as supreme, unlimited and comprehensive.
The principal check on its abuse rests only on
the responsibility of the members of the
legislature to their constituents.
C.2. EXTENT OF THE LEGISLATIVE
POWER TO TAX
Subject to constitutional and inherent
restrictions, the legislature has discretion to
determine the incidence of the power to tax.
(1) The subjects or objects to be taxed— refer
to the coverage and the kind or nature of
the tax. They may be persons, whether
natural or juridical; property, whether real
or personal, tangible or intangible;
2
TAXATION LAW
businesses, transactions, rights, or
privileges. A state is free to select the
subject of taxation and it has been
repeatedly held that that inequalities which
result from a singling out of one particular
class for taxation or exemption infringe no
constitutional limitation so long as such
exemption is reasonable and not arbitrary.
(see Lutz vs. Araneta, 98 Phil. 148; Sison, Jr.
vs. Ancheta, 130 SCRA 654 [1984])
Thus, the power to tax carries with it the
power to grant exemption therefrom.
(2) The purpose or object of the tax so long as it
is a public purpose—The legislative body’s
determination, however, on the question of
what is a public purpose is not conclusive.
The courts can inquire into whether the
purpose is really public or private.
In the final analysis, therefore, the decision
on the question is not a legislative but a
judicial function. But once it is settled that
the purpose is public, the courts can make
no other inquiry into the objective of the
legislature in imposing a tax (see Pascual vs.
Sec. of Public Works, 110 Phil. 331 [1961]), or
the wisdom, advisability, or expediency of
the tax. (Blunt vs. U.S., 255 Fed. 322.)
Judicial action is limited only to a review
where it involves:
(a) The determination of the validity of the
tax in relation to constitutional precepts
or provisions. Thus, a tax may be
declared invalid because it violates the
constitutional requirement of uniformity
and equity in taxation; or
(b) The determination in an appropriate case
of the application of a tax law. (see1
Cooley 165.) Thus, a court may decide
that a tax has been illegally collected
where the taxpayer is entitled to tax
exemption or his liability has already
UP COLLEGE OF LAW TAXATION 1
been extinguished by reason of
prescription.
(3) The amount or rate of the tax.- As a general
rule, the legislature may levy a tax of any
amount or rate it sees fit. If the taxes are
oppressive or unjust, the only remedy is the
ballot box and the election of new
representatives. (see1 Cooley 178-181.)
According to Chief Justice John Marshall,
"the power to tax involves the power to
destroy." (McCulloch vs. Maryland, 17 U.S.
[4 Wheat.] 316-428, 4L. ed. 579.) To say,
however, that the power to tax is the power
to destroy is to describe not the purposes for
which the taxing power may be used but the
extent to which it may be employed in order
to raise revenues. (see1 Cooley 178.) Thus,
even if a tax should destroy a business, such
fact alone could not invalidate the tax. (84
C.J.S. 46.)
Incidentally, our Constitution mandates that
"the rule of taxation shall be uniform and
equitable." In a case, our Supreme Court
said: "The power of taxation is sometimes
called also the power to destroy. Therefore,
it should be exercised with caution to
minimize injury to the proprietary rights of
the taxpayer. It must be exercised fairly,
equally and uniformly, lest the tax collector
kills the 'hen that lays the golden eggs.' And
in order to maintain the general public's
trust and confidence in the government, this
power must be used justly and not
treacherously." (Roxas v. Court of Tax
Appeals, 23 SCRA276, App120, 1968; Philex
Mining Corp. vs. Comm. of Internal Revenue,
97 SCAD 777,294 SCRA 687, Aug. 28,
1998.)
(4) The manner, means, and agencies of
collection of the tax. - These refer to the
administration of the tax or the
3
TAXATION LAW
implementation of tax laws. The legislature
possesses the sole power to prescribe the
mode or method by which the tax shall be
collected, and to designate the officers
through whom its will shall be enforced as
well as the remedies which the State or the
taxpayer may avail in connection therewith.
D. ESSENTIAL CHARACTERISTICS OF TAX
(1) It is an enforced contribution for its
imposition is in no way dependent upon the
will or assent of the person taxed.
(2) It is generally payable in the form of money,
although the law may provide payment in
kind (e.g. backpay certificates under Sec. 2,
R.A. No. 304, as amended);
(3) It is proportionate in character or islaid by
some rule of apportionment which is usually
based on ability to pay;
(4) It is levied on persons, property, rights, acts,
privileges, or transactions.
(5) It is levied by the State which has
jurisdiction or control over the subject to be
taxed.
(6) It is levied by the law-making body of the
State. The power to tax is a legislative
power but is also granted to local
governments, subject to such guidelines
and limitations as law may provided (Sec. 5,
Art. X, Constitution); and;
(7) It is levied for public purpose. Revenues
derived from taxes cannot be used for
purely private purposes or for the exclusive
benefit of private persons. (Gaston v.
Republic Planters Bank, 158 SCRA 626,
March 15, 1988). The “public purpose or
purposes” of the imposition is implied in the
levy of tax. (see Mendoza v. Municipality, 94
Phil. 1047[1954]), A tax levied for a private
purpose constitutes a taking of property
without due process of law.
It is also an important characteristic of most
taxes that they are commonly required to be
paid at regular periods or intervals (see 1
Cooley 64) every year.
UP COLLEGE OF LAW TAXATION 1 TAXATION LAW

E. POWER OF TAXATION COMPARED WITH OTHER POWERS

Taxation Police Power Eminent Domain

1. As to concept Power to enforce Power to make and Power to take private
contribution to raise implement laws for the property for public use
government funds general welfare with just compensation
2. As to scope Plenary, comprehensive Broader in application. Merely a power to take
and supreme General power to make private property for
and implement laws. public use
3. As to authority Exercised only by Exercised only by May be granted to public
government or its government or its service or public utility
political subdivisions political subdivisions companies
4. As to purpose Money is taken to support Property is taken or Private property is taken
the government destroyed to promote for public use
general welfare
5. As to necessity The power to make tax Can be expressly Can be expressly
of delegation laws cannot be delegated delegated to the local delegated to the local
government units by the government units by the
law making body law making body
6. As to person Operates on a community Operates on a community Operates on the
affected or a class of individual or a class of individual particular private
property of an individual
7. As to benefits
Continuous protection Healthy economic Market value of the
and organized society standard of society property expropriated
8. As to amount Generally no limit Cost of regulation, No imposition
of imposition license and other
necessary expenses
9. As to Inseparable for the Protection, safety and Common necessities and
importance existence of a nation – it welfare of society interest of the community
supports police power transcend individual
and eminent domain rights in property
10. As to Subject to Constitutional Relatively free from Superior to and may
relationship to and Inherent limitations. Constitutional override Constitutional
Constitution Inferior to non- limitations. impairment provision
impairment clause. Superior to non- because the welfare of
impairment clause. the State is superior to
any private contract
11. As to Constraints by Limited by the demand Bounded by public
limitation Constitutional and for public interest and purpose and just
Inherent limitations due process compensation

[Valencia and Roxas, Income Taxation 6th Edition (2013-2014), Valencia Educational Supply, pp. 9-10]

4
UP COLLEGE OF LAW TAXATION 1 TAXATION LAW

F. PURPOSE OF TAXATION educational activities (see RA. No. 5447) or

to improve the efficiency of local police
F.1. REVENUE-RAISING forces in the maintenance of peace and
Primary purpose of taxation is to provide funds order through grant of subsidy (see RA.No.
or property with which to promote the general 6141).
welfare and protection it its citizens. (7) Be an implement of the police power to
promote the general welfare.
Fees may be properly regarded as taxes even
though they also serve as an instrument of In Lutz v. Araneta, 78 Phil 148, it has been
regulation... If the purpose is primarily revenue, held that the Sugar Adjustment Act is an
or if revenue is, at least, one of the real and act enacted primarily under the police
substantial purposes, then the exaction is power and designed to obtain a
properly called a tax. [PAL v. Edu, G.R. No. L- readjustment of the benefits derived by
41383 August 15, 1988 people interested in the sugar industry as
well as to rehabilitate and stabilize the
industry which constitutes one of the great
F.2. NON-REVENUE/SPECIAL OR
sources of the country's wealth and,
REGULATORY
therefore, affects a great portion of the
Taxation is often employed as a device for
population of the country.
regulation by means of which certain effects or
conditions envisioned by governments may be
Taxes may be levied with a regulatory
achieved. These regulatory purposes are also
purpose to provide means for rehabilitation
known as Sumptuary. Thus, taxation can:
and stabilization of a threatened industry
(1) Strengthen anemic enterprises or provide
which is imbued with public interest as to be
incentive to greater production through
within the police power of the State. [Caltex
grant of tax exemptions or the creation of
v. COA, G.R. No. 92585 May 8, 1992]
conditions conducive to their growth.
(2) Protect local industries against foreign
As long as a tax is for a public purpose, its
competition by imposing additional taxes
validity is not affected by collateral purposes or
on imported goods, or encourage foreign
motives of the legislature in imposing the levy,
trade by providing tax incentives on
or by the fact that it has a regulatory effect (51
imported goods.
Am. Jur. 381-382.) or it discourages or even
(3) Be a bargaining tool by setting tariff rates
definitely deters the activities taxed. The
first at a relatively high level before trade
principle applies even though the revenue
negotiations are entered into with another
obtained from the tax appears very negligible
country.
or the revenue purpose is only secondary. (see
(4) Halt inflation in periods of prosperity to curb
United States vs. Sanchez, 340 U.S. 42; Tio vs.
spending power; ward off depression in
Videogram Regulatory Board, 151 SCRA 208
periods of slump to expand business.
[1987])
(5) Reduce inequalities in wealth and incomes,
as for instance, the estate, donor's and
income taxes, their payers being the
recipients of unearned wealth or mostly in
the higher income brackets.
(6) Taxes may be levied to promote science and
invention (see RA. No. 5448) or to finance

5
UP COLLEGE OF LAW
G. PRINCIPLES OF SOUND TAX
SYSTEM
G.1. FISCAL ADEQUACY
The sources of tax revenue should coincide
with, and approximate the needs of,
government expenditures. The revenue
should be elastic or capable of expanding or
contracting annually in response to
variations in public expenditures.
G.2. ADMINISTRATIVE FEASIBILITY
Tax laws should be capable of convenient,
just and effective administration. Each tax
should be capable of uniform enforcement
by government officials, convenient as to
the time, place, and manner of payment,
and not unduly burdensome upon, or
discouraging to business activity.
G.3. THEORETICAL JUSTICE OR
EQUALITY
The tax burden should be in proportion to
the taxpayer’s ability to pay. This is the so-
called ability to pay principle. Taxation
should be uniform as well as equitable
Note: The non-observance of the above
principles will not necessarily render the tax
imposed invalid except to the extent those
specific constitutional limitations are violated.
(De Leon)
H. THEORY AND BASIS OF TAXATION
H.1. LIFEBLOOD THEORY
Taxes are the lifeblood of the government and
their prompt and certain availability is an
imperious need. [CIR v. Pineda]
Taxes are the lifeblood of the government and
so should be collected without unnecessary
hindrance... It is said that taxes are what we
pay for civilized society. Without taxes, the
TAXATION 1 TAXATION LAW
government would be paralyzed for lack of the
motive power to activate and operate it [CIR v.
Algue, G.R. No. L-28896, February 17, 1988].
H.2. NECESSITY THEORY
The power of taxation proceeds upon theory
that the existence of government is a necessity;
that is cannot continue without means to pay
its expenses; and that for those means it has
the right to compel all citizens and property
within its limits to contribute.
The power to tax, an inherent prerogative, has
to be availed of to assure the performance of
vital state functions. It is the source of the bulk
of public funds. [Sison v. Ancheta, G.R. No. L-
59431, July 25, 1984]
The obligation to pay taxes rests upon the
necessity of money for the support of the state.
For this reason, no one is allowed to object to
or resist the payment of taxes solely because
no personal benefit to him can be pointed out
[Lorenzo v. Posadas, G.R. No. L-43082, June
18, 1937].
H.3. BENEFITS-PROTECTION THEORY
(SYMBIOTIC RELATIONSHIP)
This principle serves as the basis of taxation
and is founded on the reciprocal duties of
protection and support between the State and
its inhabitants.
Despite the natural reluctance to surrender
part of one's hard earned income to the taxing
authorities, every person who is able to must
contribute his share in the running of the
government. The government for its part is
expected to respond in the form of tangible
and intangible benefits intended to improve
the lives of the people and enhance their moral
and material values. This symbiotic
relationship is the rationale of taxation and
should dispel the erroneous notion that it is an
6
UP COLLEGE OF LAW TAXATION 1
arbitrary method of exaction by those in the
seat of power. [CIR v. Algue]
H.4. JURISDICTION OVER SUBJECT AND
OBJECTS
The limited powers of sovereignty are confined
to objects within the respective spheres of
governmental control. These objects are the
proper subjects or objects of taxation and none
else.
I. DOCTRINES IN TAXATION
I.1. PROSPECTIVITY OF TAX LAWS
General rule: Tax laws are prospective in
operation. Reason: Nature and amount of the
tax could not be foreseen and understood by
the taxpayer at the time the transaction.
Exception: Tax laws may be applied
retroactively provided it is expressly declared
or clearly the legislative intent.(e.g increase
taxes on income already earned)
when retroactive application would be so
harsh and oppressive (Republic v. Fernandez,
G.R. No. L-9141. September 25, 1956).
It is a cardinal rule that laws shall have no
retroactive effect, unless the contrary is
provided (citing Art. 4 of the Civil Code).[Hydro
Resources v.CA]
The language of the statute must clearly
demand or press that it shall have a retroactive
effect.[Lorenzo v.Posadas]
Exception to the exception:
Collection of interest in tax cases is not penal
in nature; it is but a just compensation to the
State. The constitutional prohibition against ex
post facto laws is not applicable to the
collection of interest on back taxes. [Central
Azucarera v.CTA]
7
TAXATION LAW
I.2. NON-RETROACTIVITY OF RULINGS
(SEC. 246)
General rule: Any revocation, modification or
reversal of rules and regulations promulgated
in accordance with Sections 244 and 245 of
the Tax Code and rulings or circulars
promulgated by the CIR, that is prejudicial to
the taxpayer, shall NOT be given retroactive
effect.
Exceptions:
(1) Where the taxpayer deliberately misstates
or omits material facts from his return or
any document required of him by BIR;
(2) Where the facts subsequently gathered by
the BIR are materially different from the
facts on which the ruling is based; OR
(3) Where the taxpayer acted in bad faith. (Sec.
246, NIRC)
I.3. IMPRESCRIPTIBILITY
Unless otherwise provided by the tax itself,
taxes are imprescriptible. (CIR v. Ayala
Securities Corporation)
The law on prescription, being a remedial
measure, should be liberally construed in order
to afford such protection. As a corollary, the
exceptions to the law on prescription should
perforce be strictly construed. [Commissioner v.
C.A., G.R.No. 104171 (1999)]
i. Prescriptions found in statutes
(1) National Internal Revenue Code- statute of
limitations (see Section 203 and 222) in the
assessment and collection of taxes therein
imposed.
(2) Tariff and Customs Code- does not express
any general statute of limitation; it provides,
however, that “when articles have been
entered and passed free of duty or final
adjustments of duties made, with
subsequent delivery, such entry and
passage free of duty or settlements of
UP COLLEGE OF LAW TAXATION 1
duties will, after the expiration of one (1)
year, from the date of the final payment of
duties, in the absence of fraud or protest or
compliance audit pursuant to the provisions
of this Code, be final and conclusive upon
all parties, unless the liquidation of the
import entry was merely tentative.” (Sec.
1603)
(3) Local Government Code- prescribes
prescriptive periods for the assessment (5
years) and collection (5 years) of taxes. (see
Sections 194 and 270, Rep. Act No. 7160).
I.4. DOUBLE TAXATION
Means taxing twice the same taxpayer for the
same tax period upon the same thing or
activity, when it should be taxed but once, for
the same purpose and with the same kind of
character of tax.
i. Strict sense (Direct Duplicate Taxation)
(1) the same property must be taxed twice
when it should be taxed once;
(2) both taxes must be imposed on the same
property or subject matter;
(3) for the same purpose;
(4) by the same State, Government, or taxing
authority;
(5) within the same territory, jurisdiction or
taxing district;
(6) during the same taxing period; and
(7) of the same kind or character of tax.
ii. Broad sense (Indirect Duplicate
Taxation)
There is double taxation in the broad sense or
there is indirect duplicate taxation if any of the
elements for direct duplicate taxation is absent.
It extends to all cases in which there is a
burden of two or more pecuniary impositions.
For example, a tax upon the same property
imposed by two different states.
8
TAXATION LAW
Double taxation, standing alone and not being
forbidden by our fundamental law, is not a
valid defense against the legality of a tax
measure (Pepsi Cola v. Mun. of Tanauan, G.R.
No. L-31156 February 27, 1976). But from it
might emanate such defenses against taxation
as oppressiveness and inequality of the tax.
iii. Constitutionality of double taxation
There is no constitutional prohibition against
double taxation in the Philippines. It is
something not favored, but is permissible,
provided some other constitutional
requirement is not thereby violated.[Villanueva
v. City of Iloilo, G.R. No. L-26521, December
28, 1968]
If the tax law follows the constitutional rule on
uniformity, there can be no valid objection to
taxing the same income, business or property
twice.[China Banking Corp. v. CA, G.R. No.
146749 (2003)]
Double taxation in its narrow sense is
undoubtedly unconstitutional but that in the
broader sense is not necessarily so. (De Leon,
citing 26 R.C.L 264-265).Where double
taxation (in its narrow sense) occurs, the
taxpayer may seek relief under the uniformity
rule or the equal protection guarantee. (De
Leon, citing 84 C.J.S.138).
iv. Modes of eliminating double taxation
(1) Allowing reciprocal exemption either by law
or by treaty;
(2) Allowance of tax credit for foreign taxes
paid
(3) Allowance of deductions such as for foreign
taxes paid, and vanishing deductions in
estate tax
(4) Reduction of Philippine tax rate.
UP COLLEGE OF LAW TAXATION 1
I.5. ESCAPE FROM TAXATION
i. Shifting of tax burden
Shifting - the transfer of the burden of a tax by
the original payer or the one on whom the tax
was assessed or imposed to someone else.
What is transferred is not the payment of the
tax but the burden of the tax.
All indirect taxes may be shifted; direct taxes
cannot be shifted.
Ways of shifting the tax burden
(1) Forward shifting - When the burden of the
tax is transferred from a factor of
production through the factors of
distribution until it finally settles on the
ultimate purchaser or consumer. Example:
VAT, percentage tax
(2) Backward shifting - When the burden of the
tax is transferred from the consumer or
purchaser through the factors of
distribution to the factor of production.
Example: Consumer or purchaser may shift
tax imposed on him to retailer by
purchasing only after the price is reduced,
and from the latter to the wholesaler, and
finally to the manufacturer or producer.
(3) Onward shifting - When the tax is shifted
two or more times either forward or
backward.
Taxes that can be shifted
(1) Value-added Tax
(2) Percentage Tax
(3) Excise Tax
Meaning of impact and incidence of taxation
Impact of taxation is the point on which a tax is
originally imposed. In so far as the law is
concerned, the taxpayer, the subject of tax, is
the person who must pay the tax to the
government.
9
TAXATION LAW
Incidence of taxation is that point on which the
tax burden finally rests or settles down. It takes
place when shifting has been effected from the
statutory taxpayer to another.
Relationship between Impact, Shifting, and
Incidence of a Tax
The impact is the initial phenomenon, the
shifting is the intermediate process, and the
incidence is the result. Impact is the
imposition of the tax; shifting is the transfer of
the tax; while incidence is the setting or
coming to rest of the tax. (e.g impact in a sales
tax is on the seller who shifts the burden to the
customer who finally bears the incidence of the
tax)
Tax avoidance (Tax Minimization)
The exploitation by the taxpayer of legally
permissible alternative tax rates or methods of
assessing taxable property or income in order
to avoid or reduce tax liability. It is politely
called “tax minimization” and is not
punishable by law.
Example: A person refrains from engaging in
some activity or enjoying some privilege in
order to avoid the incidental taxation or to
lower his tax bracket for a taxable year.
ii. Transformation
Transformation – method of escape in taxation
whereby the manufacturer or producer upon
whom the tax has been imposed pays the tax
and endeavors to recoup himself by improving
his process of production thereby turning out
his units of products at a lower cost. The
taxpayer escapes by a transformation of the
tax into a gain through the medium of
production.
iii. Tax evasion (Tax Dodging)
Tax Evasion - is the use by the taxpayer of
illegal or fraudulent means to defeat or lessen
UP COLLEGE OF LAW TAXATION 1
the payment of a tax. It is also known as “tax
dodging.” It is punishable by law.
Example: Deliberate failure to report a taxable
income or property; deliberate reduction of
income that has been received.
Elements of Tax Evasion
(1) The end to be achieved. Example: the
payment of less than that known by the
taxpayer to be legally due, or in paying no
tax when such is due.
(2) An accompanying state of mind described
as being “evil,” “in bad faith,” “willful” or
“deliberate and not accidental.”
(3) A course of action (or failure of action)
which is unlawful.
Since fraud is a state of mind, it need not be
proved by direct evidence but may be inferred
from the circumstances of the case. Thus:
(1) The failure of the taxpayer to declare for
taxation purposes his true and actual
income derived from his business for two
consecutive years has been held as an
indication of his fraudulent intent to cheat
the government of its due taxes. (Republic v.
Gonzales, 13 SCRA 633 [1965]).
(2) The substantial underdeclaration of income
in the income tax returns of the taxpayer for
four (4) consecutive years coupled with his
intentional overstatement of deductions
justifies the finding of fraud. (Perez v. CTA
and Collector, 103 Phil. 1167 [1958]).
I.6. EXEMPTION FROM TAXATION
i. Meaning of exemption from taxation
The grant of immunity to particular persons or
corporations or to person or corporations of a
particular class from a tax which persons and
corporations generally within the same state or
taxing district are obliged to pay. It is an
immunity or privilege; it is freedom from a
financial charge or burden to which others are
10
TAXATION LAW
subjected. It is strictly construed against the
taxpayer.
Taxation is the rule; exemption is the exception.
He who claims exemption must be able to
justify his claim or right thereto, by a grant
expressed in terms “too plain to be mistaken
and too categorical to be misinterpreted.” If
not expressly mentioned in the law, it must at
least be within its purview by clear legislative
intent.
ii. Nature of tax exemption
(1) Mere personal privilege- cannot be
assigned or transferred without the consent
of the Legislature. The legislative consent to
the transfer may be given either in the
original act granting the exemption or in a
subsequent law
(2) General rule: revocable by the government.
Exception: if founded on a contract which is
protected from impairment. But the
contract must contain the essential
elements of other contracts. An exemption
provided for in a franchise, however, may be
repealed or amended pursuant to the
Constitution (see Sec. 11, Art. XII). A
legislative franchise is in the nature of a
contract.
(3) Implies a waiver on the part of the
government of its right to collect taxes due
to it, and, in this sense, is prejudicial
thereto. Hence, it exists only by virtue of an
express grant and must be strictly
construed.
(4) Not necessarily discriminatory, provided it
has reasonable foundation or rational basis.
Where, however, no valid distinction exists,
the exemption may be challenged as
violative of the equal protection guarantee
or the uniformity rule.
UP COLLEGE OF LAW TAXATION 1
iii. Principles of Tax Exemption
(1) They are not presumed [Floro Cement v.
Gorospe]
(2) When granted, they are strictly construed
against the taxpayer [Luzon Stevedoring Co.
v. CTA]
(3) They are higly disfavoured and may almost
be said “to be directly contrary to the
intention of tax laws.” [Manila Electric
Company v. Vera]
[Valencia and Roxas]
iv. Kinds of tax exemption
(1) Express or Affirmative - either entirely or in
part, may be made by provisions of the
Constitution, statutes, treaties, ordinances,
franchises, or contracts.
(2) Implied or Exemption by Omission - when a
tax is levied on certain classes without
mentioning the other classes. Every tax
statute, in a very real sense, makes
exemptions since all those not mentioned
are deemed exempted. The omission may
be either accidental or intentional.
Exemptions are not presumed, but when
public property is involved, exemption is the
rule, and taxation is the exception.
(3) Contractual - The legislature of a State may,
in the absence of special restrictions in its
constitution, make a valid contract with a
corporation in respect to taxation, and that
such contract can be enforced against the
State at the instance of the corporation
[CasanovasHord, G.R. No. 3473, March 22,
1907]. In the real sense of the term and
where the non-impairment clause of the
Constitution can rightly be invoked, this
includes those agreed to by the taxing
authority in contracts, such as those
contained in government bonds or
debentures, lawfully entered into by them
under enabling laws in which the
11
TAXATION LAW
government, acting in its private capacity,
sheds its cloak of authority and waives its
governmental immunity.
These contractual tax exemptions, however,
are not to be confused with tax exemptions
granted under franchises. A franchise
partakes the nature of a grant which is
beyond the purview of the non-impairment
clause of the Constitution. (Manila Electric
Company v. Province of Laguna, G.R.No.
131359, May 5, 1999)
v. Rationale of Tax Exemption
Such exemption will benefit the body of the
people and not particular individuals or private
interest and that the public benefit is sufficient
to offset the monetary loss entailed in the
grant of the exemption.
vi. Grounds for Tax Exemption
(1) It may be based on contract.
(2) It may be based on some ground of public
policy.
(3) It may be created in a treaty on grounds of
reciprocity or to lessen the rigors of
international or multiple taxation.
But equity is NOT a ground for tax exemption.
Exemption from tax is allowable only if there is
a clear provision. While equity cannot be used
as a basis or justification for tax exemption, a
law may validly authorize the condonation of
taxes on equitable considerations.
vii. Revocation of Tax Exemption
General Rule: revocable by the government.
Exception: Contractual tax exemptions may not
be unilaterally so revoked by the taxing
authority without thereby violating the non-
impairment clause of the Constitution.
UP COLLEGE OF LAW TAXATION 1
I.7. COMPENSATION AND SET-OFF
General rule: Internal revenue taxes cannot be
the subject of set-off or compensation
(Republic v. Mambulao Lumber, G.R. No. L-
17725, February 28, 1962).
Reasons:
(1) This would adversely affect the government
revenue system (Philex Mining v. CA G.R.
No. 125704. August 28, 1998).
(2) Government and the taxpayer are not
creditors and debtors of each other. The
payment of taxes is not a contractual
obligation but arises out of a duty to pay.
[Republic v. Mambulao Lumber (1962)]
Exception: If the claims against the
government have been recognized and an
amount has already been appropriated for that
purpose. Where both claims have already
become due and demandable as well as fully
liquidated, compensation takes place by
operation of law under Art. 1200 in relation to
Articles 1279 and 1290 of the NCC, and both
debts are extinguished to the concurrent
amount.[Domingo v. Garlitos, G.R. No. L-
18994, June 29, 1963]
Doctrine of Equitable Recoupment- a claim for
refund barred by prescription may be allowed
to offset unsettled tax liabilities. The doctrine
FINDS NO application in this jurisdiction.
I.8. COMPROMISE
(a) A contract whereby the parties, by making
reciprocal concessions avoid litigation or
put an end to one already commenced. (Art.
2028, Civil Code). It involves a reduction of
the taxpayer’s liability.
(b) Requisites of a tax compromise:
(1) The taxpayer must have a tax liability.
(2) There must be an offer (by the taxpayer
or Commissioner) of an amount to be
paid by the taxpayer.
12
TAXATION LAW
(3) There must be acceptance (by the
Commissioner or the taxpayer, as the
case may be) of the offer in settlement of
the original claim.
(c) Generally, compromises are allowed and
enforceable when the subject matter
thereof is not prohibited from being
compromised and the person entering into
it is duly authorized to do so.
(1) In the National Internal Revenue Code,
the Commissioner of Internal Revenue is
expressly authorized to enter, under
certain conditions, into a compromise of
both the civil and criminal liabilities of
the taxpayer (Sec. 204, NIRC).
(2) The power to compromise in respect of
customs duties is, at best, limited to
cases where potestive authority is
specifically granted such as in the
remission of duties by the Collector of
Customs (Sec. 709, Tariff and Customs
Code) and cases involving imposition of
fines, surcharges and forfeitures which
may be compromised by the
Commissioner subject to the approval of
the Secretary of Finance (Sec. 2316, Tariff
and Customs Code).
(3) No provisions exist under the Local
Government Code, while the tax (not
criminal) liability is not prohibited from
being compromised (see Arts. 2034 and
2035, Civil Code); there is no specific
authority, however, given to any public
official to execute the compromise so as
to render it effective. (Vitug, p. 48)
I.9. TAX AMNESTY
i. Definition
A tax amnesty partakes of an absolute
forgiveness or waiver by the Government of its
right to collect what otherwise would be due it,
and in this sense, prejudicial thereto,
particularly to give tax evaders, who wish to
relent and are willing to reform a chance to do
UP COLLEGE OF LAW TAXATION 1
so and become a part of the new society with a
clean slate.[Republic v. IAC (1991)]
A tax amnesty, much like a tax exemption, is
never favored nor presumed in law. If granted,
the terms of the amnesty, like that of a tax
exemption, must be construed strictly against
the taxpayer and liberally in favor of the taxing
authority. For the right of taxation is inherent
in government. The State cannot strip itself of
the most essential power of taxation by
doubtful words. He who claims an exemption
(or an amnesty) from the common burden
must justify his claim by the clearest grant of
organic or state law. It cannot be allowed to
exist upon a vague implication. If a doubt
arises as to the intent of the legislature, that
doubt must be resolved in favor of the state.
(CIR v. Marubeni Corp.,372 SCRA 576 [2001]).
ii. Distinguished from tax exemption
Tax amnesty is immunity from all criminal and
civil obligations arising from non-payment of
taxes. It is a general pardon given to all
taxpayers. It applies to past tax periods, hence
of retroactive application.(People v.
Castañeda, G.R. No. L-46881, September 15,
1988).
Tax exemption is an immunity from all civil
liability only. It is an immunity or privilege, a
freedom from a charge or burden of which
others are subjected. (Greenfield v. Meer, 77
Phil. 394 [1946]). It is generally prospective in
application.(Dimaampao, 2005, p. 111)
I.10. CONSTRUCTION AND
INTERPRETATION OF:
i. Tax laws
General Rule: Tax laws are construed strictly
against the government and liberally in favor
of the taxpayer. (Manila Railroad Co. v. Coll. of
Customs, 52 Phil. 950 [1929]).
13
TAXATION LAW
No person or property is subject to taxation
unless within the terms or plain import of a
taxing statute. (see72 Am.Jur. 2d 44).
Taxes, being burdens, they are not to be
presumed beyond what the statute expressly
and clearly declares. (Coll. v. La Tondena, 5
SCRA 665 [1962]). Thus, a tax payable by
“individuals” does not apply to “corporations.”
Tax statutes offering rewards are liberally
construed in favor of informers. (Penid v. Virata,
121 SCRA 166 [1983]).
Exceptions:
(1) The rule of strict construction as against the
government is not applicable where the
language of the statute is plain and there is
no doubt as to the legislative intent. (see 51
Am.Jur.368). In such case, the words
employed are to be given their ordinary
meaning. Ex. Word “individual” was
changed by the law to “person”. This clearly
indicates that the tax applies to both
natural and juridical persons, unless
otherwise expressly provided.
(2) The rule does not apply where the taxpayer
claims exemption from the tax.
Tax statutes are to receive a reasonable
construction or interpretation with a view to
carrying out their purpose and intent. They
should not be construed as to permit the
taxpayer easily to evade the payment of tax.
(Carbon Steel Co. v. Lewellyn, 251 U.S. 201).
Thus, the good faith of the taxpayer is not a
sufficient justification for exemption from the
payment of surcharges imposed by the law for
failing to pay tax within the period required by
law.
ii. Tax exemption and exclusion
Tax exemptions must be shown to exist clearly
and categorically, and supported by clear legal
UP COLLEGE OF LAW
provisions. [NPC v. Albay, G.R. No. 87479, June
4, 1990]
General Rule: In the construction of tax
statutes, exemptions are not favored and are
construed strictissimi juris against the
taxpayer. (Republic Flour Mills v. Comm. &
CTA, 31 SCRA 520 [1970]).
(a) NPC v. Albay: Tax exemptions must be
shown to exist clearly and categorically, and
supported by clear legal provisions.
(b) Floro Cement v. Gorospe: Claims for an
exemption must be able to point out some
provision of law creating the right, and
cannot be allowed to exist upon a mere
vague implication or inference.
(c) CIR v. CA: Refunds are in the nature of
exemption, and must be construed strictly
against the grantee/taxpayer.
(d) Comm. V. Kiener Co. Ltd. (65 SCRA 142
[1975]): Taxation is the rule and exemption
the exception, and therefore, he who claims
exemption must be able to justify his claim
or right thereto, by a grant expressed in
terms “too plain to be mistaken and too
categorical to be misinterpreted.”
Exceptions:
(a) When the law itself expressly provides for a
liberal construction, that is, in case of doubt,
it shall be resolved in favor of exemption;
and
(b) When the exemption is in favor of the
government itself or its agencies, or of
religious, charitable, and educational
institutions because the general rule is that
they are exempt from tax.
(c) When the exemption is granted under
special circumstances to special classes of
persons.
(d) If there is an express mention or if the
taxpayer falls within the purview of the
exemption by clear legislative intent, the
rule on strict construction does not apply.
TAXATION 1 TAXATION LAW
(Comm. V. Arnoldus Carpentry Shop, Inc.,
159 SCRA 19 [1988]).
iii. Tax rules and regulations
The Secretary of Finance, upon
recommendation of the CIR, shall promulgate
all needful rules and regulations for the
effective enforcement of the provisions of the
NIRC. (Sec. 244)
It is an elementary rule in administrative law
that administrative regulations and policies
enacted by administrative bodies to interpret
the law which they are entrusted to enforce
have the force of law and entitled to great
respect. They have in their favor a presumption
of legality [Gonzales v. Land Bank, 183 SCRA
520(1990)]
Requisites for validity and effectivity of
regulations
(1) Reasonable
(2) Within the authority conferred
(3) Not contrary to law and the Constitution
(Art. 7, Civil Code)
(4) Must be published
There are two kinds of administrative
issuances: the legislative rules and the
interpretative rules. A legislative rule is in the
nature of subordinate legislation, designed to
implement a primary legislation by providing
the details thereof. An interpretative rule, on
the other hand, is designed to provide
guidelines to the law, which the administrative
agency is in charge of enforcing. An
administrative rule should be published if it
substantially adds to or increases the burden
of those governed. When an administrative
rule is merely interpretative in nature, its
applicability needs nothing further than its
bare issuance for it gives no real consequence
more than what the law itself has already
prescribed. When, upon the other hand, the
administrative rule goes beyond merely
14
UP COLLEGE OF LAW TAXATION 1
providing for the means that can facilitate or
render least cumbersome the implementation
of the law but substantially adds to or
increases the burden of those governed, it
behooves the agency to accord at least to
those directly affected a chance to be heard,
and thereafter to be duly informed, before that
new issuance is given the force and effect of
law. (Commissioner v. Court of Appeals,
G.R.No. 119761 [1996]).
Rep. of the Philippines v. Pilipinas Shell
Petroleum Corporation, G.R. No. 173918, April
8, 2008.
Tax regulations (issued by the CIR/DOF
Secretary) whose purpose is to enforce or
implement existing law must (a) be published
in a newspaper of general circulation (see Art.
2 of the Civil Code), AND (b) filed with UP Law
Center ONAR (per Chapter 2, Book VII of the
Admin Code of 1987 (EO 292) before they can
become effective.
Such rules once established and found to be in
consonance with the general purposes and
objects of the law have the force and effect of
law, and so they must be applied and enforced.
(De Guzman v. Lontok, 68 Phil. 495 [1939]).
They are, therefore, just as binding as if the
regulations had been written in the law itself.
NOTE: Administrative rules and regulations
must always be in harmony with the provisions
of the law. In case of conflict with the law or
the Constitution, the administrative rules and
regulations are null and void. As a matter of
policy, however, courts will declare a
regulation or provision thereof invalid only
when the conflict with the law is clear and
unequivocal.
iv. Administrative interpretations and
opinions
The power to interpret the provisions of the Tax
Code and other tax laws is under the exclusive
15
TAXATION LAW
and original jurisdiction of the Commissioner
of Internal Revenue subject to review by the
Secretary of Finance (Sec. 4, par.1, NIRC).
Revenue regulations are the formal
interpretation of the provisions of the NIRC
and other laws by the Secretary of Finance
upon the recommendation of the
Commissioner of Internal Revenue.
The Commissioner has the sole authority to
issue rulings but he also has the power to
delegate said authority to his subordinates. He
cannot, however, delegate to any of his
subordinate officials the power to issue rulings
of first impression (i.e., question involved is
new and important) or to reverse, revoke or
modify any existing ruling of the BIR (Sec. 7[B],
NIRC).
v. Decisions of the Supreme Court and
Court of Tax Appeals
Decisions of the Supreme Court applying or
interpreting existing tax laws are binding on all
subordinate courts and have the force and
effect of law. As provided for in Article 8 of the
Civil Code, they “form part of the law of the
land”. They constitute evidence of what the
law means. (People v. Licera, 65 SCRA 270
[1975]).
The same is also true with respect to decisions
of the Court of Tax Appeals. However, by the
nature of its jurisdiction, the decisions of this
court are still appealable to the Supreme Court
by a petition for review on certiorari.
vi. Penal provisions of tax laws
Penal provisions of tax laws must be strictly
construed. It is not legitimate to stretch the
language of a rule, however beneficent its
intention, beyond the fair and ordinary
meaning of its language.
UP COLLEGE OF LAW
A penal statute should be construed strictly
against the State and in favor of the accused.
The reason for this principle is the tenderness
of the law for the rights of individuals and the
object is to establish a certain rule by
conformity to which mankind would be safe,
and the discretion of the court limited.(People
v. Purisima, 86 SCRA 524 [1978]).
vii. Non-retroactive application of tax
laws to taxpayers
General rule: Tax laws are prospective in
operation. The reason is that the nature and
amount of the tax could not be foreseen and
understood by the taxpayer at the time the
transaction which the law seeks to tax was
completed.
Exception: Tax laws may be applied
retroactively provided it is expressly declared or
clearly the legislative intent. (Lorenzo v.
Posadas, 64 Phil. 353 [1937]).
Exception to the exception: a tax law should
not be given retroactive application when it
would be so harsh and oppressive for in such
case, the constitutional limitation of due
process would be violated (Republic v.
Fernandez,[1956]).
J. SCOPE AND LIMITATION OF
TAXATION
J.1. INHERENT LIMITATIONS
i. Public Purpose
The proceeds of the tax must be used (a) for
the support of the State or (b) for some
recognized objects of government or directly to
promote the welfare of the community.
Test: whether the statute is designed to
promote the public interest, as opposed to the
furtherance of the advantage of individuals,
TAXATION 1 TAXATION LAW
although each advantage to individuals might
incidentally serve the public. [Pascual v.
Secretary of Public Works (1960)]
The protection and promotion of the sugar
industry is a matter of public concern; the
legislature may determine within reasonable
bounds what is necessary for its protection and
expedient for its promotion. [Lutz v Araneta
(1955)]
The public purpose of a tax may legally exist
even if the motive which impelled the
legislature to impose the tax was to favor one
industry over another. [Tio v. Videogram
(1987)]
Tests in Determining Public Purpose:
(1) Duty Test - Whether the thing to be
furthered by the appropriation of public
revenue is something which is the duty of
the State as a government to provide.
(2) Promotion of General Welfare Test -
Whether the proceeds of the tax will directly
promote the welfare of the community in
equal measure.
(3) Character of the Direct Object of the
Expenditure – it is the essential character of
the direct object of the expenditure which
must determine its validity as justifying a
tax and not the magnitude of the interests
to be affected nor the degree to which the
general advantage of the community, and
thus the public welfare, may be ultimately
benefited by their promotion. Incidental
advantage to the public or to the State,
which results from the promotion of private
enterprises or business, does not justify
their aid with public money. [Pascual v. Sec.
of Public Works, G.R. No. L-10405,
December 29, 1960]
16
UP COLLEGE OF LAW
ii. Inherently Legislative
Stated in another way, taxation may
exceptionally be delegated, subject to such
well-settled limitations as –
(1) The delegation shall not contravene any
constitutional provision or the inherent
limitations of taxation;
(2) The delegation is effected either by the
Constitution or by validly enacted legislative
measures or statute; and
(3) The delegated levy power, except when the
delegation is by an express provision of the
Constitution itself, should only be in favor of
the local legislative body of the local or
municipal government concerned. [Vitug
and Acosta]
General Rule: Delegata potestas non potest
delegari. The power to tax is exclusively vested
in the legislative body and it may not be re-
delegated.
Judge Cooley enunciates the doctrine in the
following oft-quoted language: "One of the
settled maxims in constitutional law is that the
power conferred upon the legislature to make
laws cannot be delegated by that department
to any other body or authority. Where the
sovereign power of the state has located the
authority, there it must remain; and by the
constitutional agency alone the laws must be
made until the Constitution itself is charged.”
[People v. Vera, G.R. No. L-45685, November
16, 1937]
Legislature has the power to determine the:
(1) nature (kind),
(2) object (purpose),
(3) extent (rate),
(4) coverage (subjects) and
(5) situs (place) of taxation.
TAXATION 1 TAXATION LAW
Exceptions
(1) Delegation to local governments - This
exception is in line with the general
principle that the power to create municipal
corporations for purposes of local self-
government carries with it, by necessary
implication, the power to confer the power
to tax on such local governments. (1 Cooley
190). This is logical for after all, municipal
corporations are merely instrumentalities of
the state for the better administration of the
government in respect to matters of local
concern. (Pepsi-Cola Bottling Co. of the Phil.
Inc. v. Mun. of Tanauan, 69 SCRA 460
[1976]). Under the new Constitution,
however, LGUs are now expressly given the
power to create its own sources of revenue
and to levy taxes, fees and charges, subject
to such guidelines and limitations as the
Congress may provide which must be
consistent with the basic policy of local
autonomy. [Art X, Sec 5, 1987 Constitution]
(2) Delegation to the President
(a) to enter into Executive agreements, and
(b) to ratify treaties which grant tax
exemption subject to Senate concurrence.
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. [Art. 6, Sec.
28 (2), 1987 Consti]
(3) Delegation to administrative agencies -
Limited to the administrative
implementation that calls for some degree
of discretionary powers under sufficient
standards expressed by law or implied from
the policy and purposes of the Act.
(a) There are certain aspects of the taxing
process that are not legislative and they
17
UP COLLEGE OF LAW TAXATION 1
may, therefore, be vested in an
administrative body. The powers which
are not legislative include: (1) the power
to value property for purposes of taxation
pursuant to fixed rules; (2) the power to
assess and collect the taxes; and (3) the
power to perform any of the innumerable
details of computation, appraisement,
and adjustment, and the delegation of
such details.
(b) The exercise of the above powers is really
not an exception to the rule as no
delegation of the strictly legislative
power to tax is involved.
(c) The powers which cannot be delegated
include the determination of the subjects
to be taxed, the purpose of the tax, the
amount or rate of the tax, the manner,
means, and agencies of collection, and
the prescribing of the necessary rules
with respect thereto.
iii. Territorial
Rule: A state may not tax property lying
outside its borders or lay an excise or privilege
tax upon the exercise or enjoyment of a right or
privilege derived from the laws of another state
and therein exercise and enjoyed. (51 Am.Jur.
87-88).
Reasons:
(1) Tax laws (and this is true of all laws) do not
operate beyond a country’s territorial limits.
(2) Property which is wholly and exclusively
within the jurisdiction of another state
receives none of the protection for which a
tax is supposed to be a compensation.
Note: Where privity of relationship exists. - It
does not mean, however, that a person outside
18
TAXATION LAW
of state is no longer subject to its taxing
powers. The fundamental basis of the right to
tax is the capacity of the government to
provide benefits and protection to the object of
the tax. A person may be taxed where there is
between him and the taxing state, a privity of
the relationship justifying the levy. Thus, the
citizen’s income may be taxed even if he
resides abroad as the personal (as
distinguished from territorial) jurisdiction of his
government over him remains. In this case, the
basis of the power to tax is not dependent on
the source of the income nor upon the location
of the property nor upon the residence of the
taxpayer but upon his relation as a citizen to
the state. As such citizen, he is entitled,
wherever he may be, inside or outside of his
country, to the protection of his government.
iv. Situs of Taxation
Situs of taxation literally means the place of
taxation. The basic rule is that the state where
the subject to be taxed has a situs may
rightfully levy and collect the tax; and the situs
is necessarily in the state which has jurisdiction
or which exercises dominion over the subject in
question. Within the territorial jurisdiction, the
taxing authority may determine the situs.
Factors that Determine Situs:
(1) Nature of the tax;
(2) Subject matter of the tax (person, property,
act or activity);
(3) Possible protection and benefit that may
accrue both to the government and the
taxpayer;
(4) Citizenship of the taxpayer;
(5) Residence of the taxpayer;
(6) Source of income.
UP COLLEGE OF LAW TAXATION 1 TAXATION LAW

1. Income Tax

Taxpayer Source of Income

Citizenship Residency Within Phils. Without Phils.
Filipino Resident Taxable Taxable
Filipino Non-Resident Taxable Non-Taxable
Alien Resident Taxable Non-Taxable
Alien Non-Resident Taxable Non-Taxable

2. Property Tax 3. Excise Tax

Kind of Property Situs Kind of Excise Tax Situs

Real property Where it is located Income Source of the income,
(lex rei sitae) nationality or
Tangible Personal Where property is residence of taxpayer
property physically located (Sec. 23, NIRC)
Tangible Personal although the owner Donor’s Tax Location of property;
property resides in another nationality or
jurisdiction. residence of taxpayer
Intangible personal Gen Rule: Domicile of Estate Location of property;
property (e.g., credits, the owner. Mobilia nationality or
bills receivables, bank sequuntur personam residence of taxpayer
deposits, bonds, (movables follow the
promissory notes, person) 4. Business Tax
mortgage loans, Kind of Business Tax Situs
judgments and Exceptions: VAT Where transaction is
corporate stocks) (1) When property has made
acquired a Sale of Real Property Where the real
business situs in property is located
another Sale of Personal Where the personal
jurisdiction; or Property property was sold
(2) When the law
provides for the
situs of the subject v. International Comity
of tax (e.g., Sec Comity - respect accorded by nations to each
104, NIRC) other because they are sovereign equals. Thus,
the property or income of a foreign state or
government may not be the subject of taxation
by another state.

Reasons:
(1) In par in parem non habet imperium. As
between equals there is no sovereign
(Doctrine of Sovereign Equality among
states under international law). One state

19
UP COLLEGE OF LAW
cannot exercise its sovereign powers over
another.)
(2) In international law, a foreign government
may not be sued without its consent
useless to impose a tax which could not be
collected.
(3) Usage among states that when a foreign
sovereign enters the territorial jurisdiction
of another, there is an implied
understanding that the former does not
intend to degrade its dignity by placing
itself under the jurisdiction of the other.
(4) Rule in international law that a foreign
government may not be sued without its
consent so that it is useless to assess the tax
anyway since it cannot be collected.
vi. Exemption of Government Entities,
Agencies, and Instrumentalities
If the taxing authority is the National
Government:
General Rule: Agencies and instrumentalities
of the government are exempt from tax.
Note: Unless otherwise provided by law, the
exemption applies only to government entities
through which the government immediately
and directly exercises its sovereign powers.
With respect to government-owned or
controlled corporations performing proprietary
(not governmental) functions, they are
generally subject to tax in the absence of tax
exemption provisions in their charters or the
law creating them.
Reasons for the exemption: (1) To levy a tax
upon public property would render necessary
new taxes on other public property for the
payment of the tax so laid and thus, the
government would be taxing itself to raise
money to pay over for itself. (2) This immunity
also rests upon fundamental principles of
government, being necessary in order that the
functions of government shall not be unduly
TAXATION 1 TAXATION LAW
impeded. (1 Cooley 263). (3) The practical
effect of an exemption running to the benefit of
the government is merely to reduce the
amount of money that has to be handled by
the government in the course of its operations:
For these reasons, provisions granting
exemptions to government agencies may be
construed liberally in favor of non-tax liability
of such agencies. (Maceda v. Macaraig, Jr., 197
SCRA 771 [1991]).
Exception: When it chooses to tax itself.
Nothing can prevent Congress from decreeing
that even instrumentalities or agencies of the
government performing governmental
functions may be subject to tax. (Mactan Cebu
Airport v Marcos, G.R. No. 120082 September
11, 1996) There is no constitutional prohibition
against the government taxing itself. (Coll. v.
Bisaya Land Transportation, 105 Phil. 338
[1959]).
If the taxing authority is the local government
unit: RA 7160 expressly prohibits LGUs from
levying tax on the National Government, its
agencies and instrumentalities and other
LGUs. [Local Government Code, Sec. 133 (o)]
J.2. CONSTITUTIONAL LIMITATIONS
i. Provisions Directly Affecting Taxation
1. Prohibition against imprisonment for non-
payment of poll tax
Art III, Sec 20, 1987 Constitution- No person
shall be imprisoned for debt or non-payment
of a poll tax.
2. Uniformity and equality of taxation
Art VI, Sec 28(1), 1987 Constitution- The rule of
taxation shall be uniform and equitable.
Congress shall evolve a progressive system of
taxation.
(1) Uniformity- All taxable articles or properties
of the same class shall be taxed at the same
20
UP COLLEGE OF LAW TAXATION 1
rate. (City of Baguio v. de Leon, 25 SCRA
938). (1) Uniformity of operation
throughout tax unit - The rule requires the
uniform application and operation, without
discrimination, of the tax in every place
where the subject of it is found. This means,
for example, that a tax for a national
purpose must be uniform and equal
throughout the country and a tax for a
province, city, municipality, or barangay
must be uniform and equal throughout the
province, city, municipality or barangay. (2)
Equality in burden – Uniformity implies
equality in burden, not equality in amount
or equality in its strict and literal meaning.
The reason is simple enough. If legislation
imposes a single tax upon all persons,
properties, or transactions, an inequality
would obviously result considering that not
all persons, properties, and transactions are
identical or similarly situated. Neither does
uniformity demand that taxes shall be
proportional to the relative value or amount
of the subject thereof. Taxes may be
progressive.
(2) Equity – 1) Uniformity in taxation is effected
through the apportionment of the tax
burden among the taxpayers which under
the Constitution must be equitable.
“Equitable” means fair, just, reasonable and
proportionate to the taxpayer’s ability to
pay. Taxation may be uniform but
inequitable where the amount of the tax
imposed is excessive or unreasonable. (2)
The constitutional requirement of equity in
taxation also implies an approach which
employees a reasonable classification of the
entities or individuals who are to be affected
by a tax. Where the “tax differentiation is
not based on material or substantial
differences,” the guarantee of equal
protection of the laws and the uniformity
rule will likewise be infringed.
21
TAXATION LAW
Taxation does not require identity or equality
under all circumstances, or negate the
authority to classify the objects of taxation. –
Classification to be valid, must, be reasonable
and this requirement is not deemed satisfied
unless:
(1) it is based upon substantial distinctions
which make real differences;
(2) these are germane to the purpose of the
legislation or ordinance;
(3) the classification applies, not only to
present conditions, but, also, to future
conditions substantially identical to those of
the present; and
(4) the classification applies equally to all those
who belong to the same class.
(Pepsi-Cola v. Butuan City, 24 SCRA 789)
The progressive system of taxation would
place stress on direct rather than indirect
taxes, on non-essentiality rather than
essentiality to the taxpayer of the object of
taxation, or on the taxpayer’s ability to pay.
Example is that individual income tax system
that imposes rates progressing upwards as the
tax base (taxpayer’s taxable income) increases.
A progressive tax, however, must not be
confused with a progressive system of taxation.
While equal protection refers more to like
treatment of persons in like circumstances,
uniformity and equity refer to the proper
relative treatment for tax purposes of persons
in unlike circumstances.
3. Grant by Congress of authority to the
President to impose tariff rates
Delegation of Tariff powers to the President
under the flexible tariff clause [Art VI, Sec
28(2), 1987 Constitution], which authorizes the
President to modify import duties. (Sec. 401,
Tariff and Customs Code)
UP COLLEGE OF LAW
4. Prohibition against taxation of religious,
charitable entities, and educational entities
Art VI, Sec 28(3), 1987 Constitution:
(e) Charitable institutions, churches and
personages or convents appurtenant
thereto, mosques, non-profit cemeteries,
and all lands, buildings, and improvements,
(f) actually, directly, and exclusively used for
religious, charitable, or educational
purposes shall be exempt from taxation.
(g) The tax exemption under this constitutional
provision covers property taxes only and not
other taxes (Lladoc v. Commissioner, 14
SCRA 292 [1965]).
In general, special assessments are not
covered by the exemption because by nature
they are not classified as taxes. [Apostolic
Prefect v. City Treasurer of Baguio]
To be entitled to the exemption, the petitioner
must prove that:
(1) it is a charitable institution
(2) its real properties are actually, directly and
exclusively used for charitable purposes.
Revenue or income from trade, business or
other activity, the conduct of which is not
related to the exercise or performance of
religious, educational and charitable purposes
or functions shall be subject to internal
revenue taxes when the same is not actually,
directly or exclusively used for the intended
purposes. (BIR Ruling 046-2000)
Test of Use of the property, and not
Exemption the ownership
Actual, direct and exclusive
Nature of Use use for religious, charitable or
educational purposes.
Real property taxes on
Scope of facilities which are
Exemption (1) actual,
(2) incidental to, or
TAXATION 1 TAXATION LAW
(3) reasonably necessary for
the accomplishment of
said purposes such as in
the case of hospitals, a
school for training nurses,
a nurses’ home, property to
provide housing facilities
for interns, resident doctors
and other members of the
hospital staff, and
recreational facilities for
student nurses, interns and
residents, such as athletic
fields. [Abra Valley College
v. Aquino]
TEST: whether an enterprise is charitable or
not: whether it exists to carry out a purpose
recognized in law as charitable or whether it is
maintained for gain, profit, or private
advantage.
A charitable institution does not lose its
character as such and its exemption from taxes
simply because it derives income from paying
patients, whether out-patient, or confined in
the hospital, or receives subsidies from the
government, so long as the money received is
devoted or used altogether to the charitable
object which it is intended to achieve; and no
money inures to the private benefit of the
persons managing or operating the institution.
“Exclusive" - possessed and enjoyed to the
exclusion of others; debarred from
participation or enjoyment; "Exclusively" - "in a
manner to exclude; as enjoying a privilege
exclusively.”
If real property is used for one or more
commercial purposes, it is not exclusively used
for the exempted purposes but is subject to
taxation. The words "dominant use" or
"principal use" cannot be substituted for the
words "used exclusively" without doing
22
UP COLLEGE OF LAW TAXATION 1
violence to the Constitutions and the law.
Solely is synonymous with exclusively. [Lung
Center of the Philippines v. Quezon City
(2004)]
Note: Lung Center did not necessarily overturn
the case of Abra Valley College v. Aquino
(1988). Lung Center just provided a stricter
interpretation. In Abra Valley, the court held:
The primary use of the school lot and building
is the basic and controlling guide, norm and
standard to determine tax exemption, and not
the mere incidental use thereof. Under the
1935 Constitution, the trial court correctly held
that the school building as well as the lot
where it is built, should be taxed, not because
the second floor of the same is being used by
the Director and his family for residential
purposes (incidental to its educational
purpose), but because the first floor thereof is
being used for commercial purposes. However,
since only a portion is used for purposes of
commerce, it is only fair that half of the
assessed tax be returned to the school involved.
5. Prohibition against taxation of non-stock,
non-profit educational institutions
Art XIV, Sec 4, 1987 Constitution
(3) 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.
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.
(4) Subject to conditions prescribed by law, all
grants, endowments, donations, or
contributions used actually, directly, and
exclusively for educational purposes shall be
exempt from tax.
23
TAXATION LAW
This provision covers only non-stock, non-profit
educational institutions
The exemption covers income, property, and
donor’s taxes, custom duties, and other taxes
imposed by either or both the national
government or political subdivisions on all
revenues, assets, property or donations, used
actually, directly and exclusively for
educational purposes. (In the case of religious
and charitable entities and non-profit
cemeteries, the exemption is limited to
property tax.)
The exemption does not cover revenues
derived from, or assets used in, unrelated
activities or enterprise.
Similar tax exemptions may be extended to
proprietary (for profit) educational institutions
by law subject to such limitations as it may
provide, including restrictions on dividends and
provisions for reinvestment. The restrictions
are designed to insure that the tax-exemption
benefits are used for educational purposes.
Lands, buildings, and improvements actually,
directly and exclusively used for educational
purposes are exempt from property tax (Sec.
28[3], Art. VI, 1987 Constitution), whether the
educational institution is proprietary or non-
profit.
Art. VI, sec. 28, par. 3 Art. XIV, sec. 4, par. 3
Charitable institutions, Non-stock, non-
churches and profit educational
parsonages or institutions.
convents appurtenant
thereto, mosques, non-
profit cemeteries, and
all lands, buildings,
and improvements,
actually, directly, and
exclusively used for
religious, charitable, or
UP COLLEGE OF LAW TAXATION 1 TAXATION LAW

educational purposes. (2) The President of the Philippines may, when

Property taxes Income, property, public interest so requires, condone or
and donor’s taxes reduce the real property tax and interest for
and custom duties. any year in any province or city or a
municipality within the Metropolitan Manila
6. Majority vote of Congress for grant of tax Area. (Sec. 277, LGC)
exemption
Art VI, Sec 28, 1987 Constitution. No law 7. Prohibition on use of tax levied for special
granting any tax exemption shall be passed purpose
without the concurrence of a majority of all the All money collected on any tax levied for a
Members of the Congress. special purpose shall be treated as a special
fund and paid out for such purpose only.
Basis: The inherent power of the state to
If the purpose for which a special fund was
impose taxes carries with it the power to grant
created has been fulfilled or abandoned, the
tax exemptions.
balance, if any, shall be transferred to the
general funds of the Government (see Gaston
Exemptions may be created by:
v. Republic Planters Bank, 158 SCRA 626).
(1) The Constitution or
(2) Statute subject to constitutional limitations
8. President’s veto power on appropriation,
revenue, tariff bills
Vote required for the grant of exemption:
Art VI, Sec 27(2), 1987 Constitution. The
Absolute majority of the members of Congress
President shall have the power to veto any
(at least ½ + 1 of ALL the members voting
particular item or items in an appropriation,
separately)
revenue, or tariff bill, but the veto shall not
affect the item or times to which he does not
Vote required for withdrawal of such grant of
object.
exemption: Relative majority is sufficient
(majority of the quorum).
9. Non-impairment of jurisdiction of the
The provision guaranteeing equal protection of
Supreme Court
the laws and that mandating the rule of
Art VIII, Sec 2, 1987 Constitution. The Congress
taxation shall be uniform and equitable
shall have the power to define, prescribe, and
likewise limit, although not expressly, the
apportion the jurisdiction of the various courts
legislative power to grant tax exemption.
but may not deprive the Supreme Court of its
jurisdiction over cases enumerated in Section 5
Grants in the nature of tax exemptions:
hereof.
(1) Tax amnesties
(2) Tax condonations
Art VIII, Sec 5(2(b)), 1987 Constitution. The
(3) Tax refunds
Supreme Court shall have the following
powers:
Note:
(2) Review, revise, modify or affirm on appeal
(1) Local government units may, through
or certiorari, as the laws or the Rules of Court
ordinances duly approved, grant tax
may provide, final judgments and orders of
exemptions, incentives or reliefs under such
lower courts in
terms and conditions as they may deem
(b) all cases involving the legality of any
necessary. (Sec. 192, LGC)
tax, impost, assessment or toll or any

24
UP COLLEGE OF LAW TAXATION 1
penalty imposed in relation thereto.
San Miguel Corp v. Avelino (G.R. No. L-39699
March 14, 1979): Even the legislative body
cannot deprive the SC of its appellate
jurisdiction over all cases coming from inferior
courts where the constitutionality or validity of
an ordinance or the legality of any tax, impost,
assessment, or toll is in question.
Art VI, Sec 30, 1987 Constitution. No law shall
be passed increasing the appellate jurisdiction
of the Supreme Court without its advice and
concurrence.
Scope of Judicial Review in taxation: limited
only to the interpretation and application of
tax laws. Its power does not include inquiry
into the policy of legislation. Neither can it
legitimately question or refuse to sanction the
provisions of any law consistent with the
Constitution. (Bisaya Land Transportation Co v.
Collector, May 29, 1959)
10. Grant of power to the local government
units to create its own sources of revenue
LGUs have power to create its own sources of
revenue and to levy taxes, fees and charges,
subject to such guidelines and limitations as
the Congress may provide which must be
consistent with the basic policy of local
autonomy. [Art X, Sec 5, 1987 Constitution]
11. Flexible tariff clause
Delegation of Tariff powers to the President
under the flexible tariff clause [Art VI, Sec
28(2), 1987 Constitution]
Flexible tariff clause: the authority given to the
President, upon the recommendation of NEDA,
to adjust the tariff rates under Sec. 401 of the
Code in the interest of national economy,
general welfare and/or national security.
25
TAXATION LAW
12. Exemption from real property taxes
Art Vi, Sec 28(3), 1987 Constitution
Charitable institutions, churches and
personages 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.
13. No appropriation or use of public money for
religious purposes
Art Vi, Sec 29, 1987 Constitution
(1) No money shall be paid out of the Treasury
except in pursuance of an appropriation
made by law.
(2) No public money or property shall be
appropriated, applied, paid, or employed,
directly or indirectly, for the use, benefit, or
support of any sect, church, denomination,
sectarian institution, or system of religion,
or of any priest, preacher, minister, other
religious teacher, or dignitary as such,
except when such priest, preacher, minister,
or dignitary is assigned to the armed forces,
or to any penal institution, or government
orphanage or leprosarium.
(3) All money collected on any tax levied for a
special purpose shall be treated as a special
fund and paid out for such purpose only. If
the purpose for which a special fund was
created has been fulfilled or abandoned,
the balance, if any, shall be transferred to
the general funds of the Government
ii. Provisions Indirectly Affecting Taxation
1. Due process
Art III, Sec 1, 1987 Constitution. No person
shall be deprived of life, liberty, or property
without due process of law, nor shall any
person be denied the equal protection of the
laws.
(1) Substantive Due Process – An act is done
under the authority of a valid law or the
Constitution itself.
UP COLLEGE OF LAW TAXATION 1
(2) Procedural Due Process – An act is done
after compliance with fair and reasonable
methods or procedure prescribed by law.
Due Process in Taxation requirements:
(1) public purpose
(2) imposed within taxing authority’s territorial
jurisdiction
(3) assessment or collection is not arbitrary or
oppressive
The due process clause may be invoked where
a taxing statute is so arbitrary that it finds no
support in the Constitution, as where it can be
shown to amount to the confiscation of
property. (Sison v. Ancheta, 130 SCRA 654
[1984]))
Instances of violations of the due process
clause:
(1) If the tax amounts to confiscation of
property;
(2) If the subject of confiscation is outside the
jurisdiction of the taxing authority;
(3) If the tax is imposed for a purpose other
than a public purpose;
(4) If the law which is applied retroactively
imposes just and oppressive taxes.
(5) If the law violates the inherent limitations
on taxation.
2. Equal protection
Art III, Sec 1, 1987 Constitution. No person
shall be deprived of life, liberty, or property
without due process of law, nor shall any
person be denied the equal protection of the
laws.
All persons subject to legislation shall be
treated alike under similar circumstances and
conditions both in the privileges conferred and
liabilities imposed. (1 Cooley 824-825; See
Sison v. Ancheta,1984]).
26
TAXATION LAW
The doctrine does not require that persons or
properties different in fact be treated in laws as
though they were the same. Indeed, to treat
them the same or alike may offend the
Constitution. What the Constitution prohibits is
class legislation which discriminates against
some and favors others. As long as there are
rational or reasonable grounds for so doing,
Congress may, therefore, group the persons or
properties to be taxed and it is sufficient “if all
of the same class are subject to the same rate
and the tax is administered impartially upon
them.” (1 Cooley 608).
The equal protection clause is subject to
reasonable classification. Classification is valid
as long as:
(1) Classification rests on substantial
distinctions which make real differences,
(2) Classification is germane to achieve the
legislative purpose,
(3) The law applies, all things being equal, to
both present and future conditions, and
(4) The classification applies equally well to all
those belonging to the same class.
3. Religious freedom
Art III, Sec 5, 1987 Constitution. No law shall
be made respecting an establishment of
religion, or prohibiting the free exercise
thereof. (Non-establishment clause)
The free exercise and enjoyment of religious
profession and worship, without discrimination
or preference, shall forever be allowed. (Free
exercise clause)
No religious test shall be required for the
exercise of civil and political rights.
The free exercise clause is the basis of tax
exemptions.
The imposition of license fees on the
distribution and sale of bibles and other
religious literature by a non-stock, non-profit
missionary organization not for purposes of
UP COLLEGE OF LAW TAXATION 1
profit amounts to a condition or permit for the
exercise of their right, thus violating the
constitutional guarantee of the free exercise
and enjoyment of religious profession and
worship which carries with it the right to
disseminate religious beliefs and information.
[American Bible Society v. City of Manila, L-
9637 April 30, 1957]It is actually in the nature
of a condition or permit for the exercise of the
right. This is different from a tax in the income
of one who engages in religious activities or a
tax on property used or employed in
connection with those activities. It is one thing
to impose a tax on the income or property of a
preacher. It is quite another thing to exact a tax
for the privilege of delivering a sermon.
(American Bible Society v. City of Manila)
The Constitution, however, does not prohibit
imposing a generally applicable tax on the sale
of religious materials by a religious
organization. (Tolentino v. Secretary of Finance,
235 SCRA 630 [1994])
4. Non-impairment of obligations of contracts
Art III, Sec 10, 1987 Constitution. No law
impairing the obligation of contracts shall be
passed.
The Contract Clause has never been thought as
a limitation on the exercise of the State's
power of taxation save only where a tax
exemption has been granted for a valid
consideration. [Tolentino v. Secretary of
Finance (1994)]
STAGES OR PROCESS OF TAXATION
The exercise of taxation involves three stages,
namely:
(1) LEVY OR IMPOSITION– This process involves
the passage of tax laws or ordinances
through the legislature. The tax laws to be
passed shall determine those to be taxed
(person, property or rights), how much is to
be collected (the rate and the base of tax),
27
TAXATION LAW
and how taxes are to be implemented (the
manner of imposing and collecting tax). It
also involves the granting of tax exemptions,
tax amnesties or tax condonation.
(2) ASSESSMENT AND COLLECTION – This process
involves the act of administration and
implementation of tax laws by the executive
through its administrative agencies such as
the Bureau of Internal Revenue or Bureau of
Customs.
(3) PAYMENT – this process involves the act of
compliance by the taxpayer in contributing
his share to pay the expenses of the
government. Payment of tax also includes
the options, schemes or remedies as may be
legally open or available to the taxpayer.
(4) REFUND – A claim for refund must first be
filed with the Commissioner of Internal
Revenue. A suit or proceeding may be filed
within two years from the date of payment
of the tax or penalty regardless of any
supervening cause that may arise after
payment. The Commissioner may, even
without a written claim therefor, refund or
credit any tax, where on the face of the
return, such payment appears clearly to
have been erroneously paid. [Sec. 229,
NIRC]
K. REQUISITES OF A VALID TAX
(1) For a public purpose
(2) Rule of taxation should be uniform
(3) The person or property taxed is within the
jurisdiction of the taxing authority
(4) Assessment and collection is in consonance
with the due process clause
(5) The tax must not infringe on the inherent
and constitutional limitations of the power
of taxation
UP COLLEGE OF LAW TAXATION 1 TAXATION LAW

L. TAX AS DISTINGUISHED FROM L.3. LICENSE FEE

OTHER FORMS OF EXACTIONS Taxes License and
Regulatory Fee
L.1. TARIFF Imposed under the Levied under the
taxing power of the police power of the
Taxes Tariff state for purposes of state.
revenue.
All embracing term to A kind of tax imposed Forced contributions Exacted primarily to
include various kinds on articles which are for the purpose of regulate certain
of enforced traded internationally maintaining businesses or
contributions upon government occupations.
persons for the functions.
attainment of public Generally, unlimited Should not
purposes as to amount unreasonably exceed
the expenses of
L.2. TOLL issuing the license
and of supervision.
Taxes Toll Imposed on persons, Imposed only on the
property and to right to exercise a
Paid for the support Paid for the use of exercise a privilege. privilege
of the government another’s property. Failure to pay does Failure to pay makes
Demand of Demand of not necessarily make the act or business
sovereignty proprietorship the act or business illegal.
illegal.
Generally, no limit on Amount paid
the amount collected depends upon the
Penalty for non-
as long as it is not cost of construction
payment: surcharges
excessive, or maintenance of the
or imprisonment
unreasonable or public improvement
(except poll tax).
confiscatory used.
Imposed only by the Imposed by the
License or permit fee is a charge imposed
government government or by
under the police power for purposes of
private individuals or
regulation.
entities.
A toll is a sum of money for the use of
License is in the nature of a special privilege, of
something, generally applied to the
a permission or authority to do what is within
consideration which is paid for the use of a
its terms. It makes lawful an act which would
road, bridge or the like, of a public nature. (1
otherwise be unlawful. A license granted by
Cooley 77.)
the State is always revocable. (Gonzalo Sy
The view has been expressed, however,
Trading vs. Central Bank of the Phil., 70 SCRA
that the taking of tolls is only another method
570 [1976])
of taxing the public for the cost of the
construction and repair of the improvement for
the use of which the toll is charged. (71 Am. Jur.
2d 351.)

28
UP COLLEGE OF LAW TAXATION 1 TAXATION LAW

Importance of the distinctions taking into account not only the costs of
(1) It is necessary to determine whether a direct regulation but also its incidental
particular imposition is a tax or a license fee consequences as well.
because some limitations apply only to one
and not to the other, and for the reason that Note: Taxes may also be imposed for
exemption from taxes may not include regulatory purposes. It is called regulatory tax.
exemption from license fee.
(2) The power to regulate as an exercise of Fees may be properly regarded as taxes even
police power does not include the power to though they also served as an instrument of
impose fees for revenue purposes. The regulation. If the purpose is primarily revenue,
amount of tax bears no relation at all to the or if revenue is, at least, one of the real and
probable cost of regulating the activity, substantial purposes, then the exaction is
occupation, or property being taxed. (see properly called a tax.[PAL v. Edu (1988)]
Progressive Development Corp. vs. Quezon
City, 172 SCRA 629 [1989]) L.4. SPECIAL ASSESSMENT
(3) An exaction, however, may be considered
both a tax and a license fee. This is true in Taxes Special Assessment
the case of car registration fees which may
be regarded as taxes even as they also serve Levied not only on Levied only on land.
as an instrument of regulation. If the land.
purpose is primarily revenue, or if revenue, Imposed regardless Imposed because of
is, at least, one of the real and substantial of public an increase in value
purposes, then the exaction is properly improvements of land benefited by
called a tax. (Phil. Airlines, Inc. vs. Edu, 164 public improvement.
SCRA 320 [1988]) Contribution of a Contribution of a
(4) But a tax may have only a regulatory taxpayer for the person for the
purpose. The general rule, however, is that support of the construction of a
the imposition is a tax if its primary purpose government. public improvement
is to generate revenue, and regulation is It has general Exceptional both as
merely incidental; but if regulation is the application both as to to time and locality.
primary purpose, the fact that incidentally time and place.
revenue is also obtained does not make the
imposition a tax. (see Progressive A special assessment is not a personal liability
Development Corp. vs. Quezon City) of the person assessed, i.e., his liability is
limited only to the land involved. It is based
Progressive Development Corp v. QC (1989): To wholly on benefits (not necessity).
be considered a license fee (PRIMARY
PURPOSE TEST): A charge imposed only on property owners
(1) imposition must relate to an occupation or benefited is a special assessment rather than a
activity that so engages the public interest tax notwithstanding that the statute calls it a
in health, morals, safety and development tax. The rule is that an exemption from
as to require regulation for the protection taxation does not include exemption from
and promotion of such public interest; special assessment. But the power to tax
(2) imposition must bear a reasonable relation carries with it the power to levy a special
to the probable expenses of regulation, assessment.

29
UP COLLEGE OF LAW TAXATION 1 TAXATION LAW

L.6. PENALTY
Note: The term "special levy" is the name used
in the present Local Government Code (RA. No. Taxes Penalty
7160). A province, city, or municipality, or the
National Government, may impose a special Violation of tax laws Any sanction imposed
levy on lands especially benefited by public may give rise to as a punishment for
works or improvements financed by it (see Sec. imposition of penalty. violation of law or
240, RA 7160). acts deemed injurious
Generally intended to Designed to regulate
L.5. DEBT raise revenue conduct
May be imposed only May be imposed by
Taxes Debt by the government the government or
private individuals or
Based on laws Generally based on entities
contract, express or Cannot be a subject Can be a subject of
implied. of set off or set off or
Generally cannot be Assignable compensation compensation (see
assigned Art. 1279, Civil Code)
Generally paid in May be paid in kind.
money M. KINDS OF TAXES
Cannot be a subject Can be a subject of
of set off or set off or M.1. AS TO OBJECT
compensation compensation (see (1) Personal, Poll or Capitation Tax – tax of a
Art. 1279, Civil Code) fixed amount imposed on persons residing
A person cannot be Imprisonment is a within a specified territory, whether citizens
imprisoned for non- sanction for non- or not, without regard to their property or
payment of debt payment of tax, the occupation or business in which they
(except when it arises except poll tax. may be engaged (e.g. community (formerly
from a crime), residence) tax). Taxes of a specified amount
Governed by the Governed by the imposed upon each person performing a
special prescriptive ordinary periods of certain act or engaging in a certain business
periods provided for prescription. or profession are not, however, poll taxes.
in the NIRC. (71 Am.Jur.2d 357).
Does not draw Draws interest when (2) Property Tax – tax imposed on property, real
interest except only it is so stipulated or or personal, in proportion to its value or in
when delinquent where there is accordance with some other reasonable
default. method of apportionment (e.g., real estate
Imposed only by Can be imposed by tax). The obligation to pay the tax is
public authority private individual absolute and unavoidable and is not based
upon the voluntary action of the person
A tax is not a debt in the ordinary sense of the assessed.
word. (3) Privilege/Excise Tax – any tax which does
not fall within the classification of a poll tax
or a property tax. Thus, it is said that an
excise tax is a charge imposed upon the

30
UP COLLEGE OF LAW
performance of an act, the enjoyment of a
privilege, or the engaging in an occupation,
profession, or business. The obligation to
pay the tax is based on the voluntary action
of the person taxed in performing the act or
engaging in the activity which is subject to
the excise. The term “excise tax” is
synonymous with “privilege tax” and the
two are often used interchangeably (e.g.,
income tax, value added tax, estate tax,
donor’s tax).
M.2. AS TO BURDEN OR INCIDENCE
(1) Direct Taxes – taxes which are demanded
from persons who also shoulder them; taxes
for which the taxpayer is directly or
primarily liable, or which he cannot shift to
another (eg. Income tax, estate tax, donor’s
tax, community tax)
(2) Indirect Taxes – taxes which are demanded
from one person in the expectation and
intention that he shall indemnify himself at
the expense of another, falling finally upon
the ultimate purchaser or consumer; taxes
levied upon transactions or activities before
the articles subject matter thereof, reach
the consumers who ultimately pay for them
not as taxes but as part of the purchase
price. Thus, the person who absorbs or
bears the burden of the tax is other than the
one on whom it is imposed and required by
law to pay the tax. Practically all business
taxes are indirect (e.g., VAT, percentage tax;
excise taxes on specified goods; customs
duties).
M.3. AS TO TAX RATES
(1) Specific Tax – a tax of a fixed amount
imposed by the head or number or by some
other standard of weight or
measurement. It requires no assessment
(valuation) other than the listing or
classification of the objects to be taxed (e.g.,
taxes on distilled spirits, wines, and
fermented liquors; cigars and cigarettes)
TAXATION 1 TAXATION LAW
(2) Ad Valorem Tax – a tax of a fixed proportion
of the value of the property with respect to
which the tax is assessed. It requires the
intervention of assessors or appraisers to
estimate the value of such property before
the amount due from each taxpayer can be
determined. The phrase “ad valorem”
means literally, “according to value.” (e.g.
real estate tax, excise tax on automobiles,
non-essential goods such as jewelry and
perfumes, customs duties (except on
cinematographic films)).
(3) Mixed
AS TO PURPOSES
(1) General or Fiscal Tax –levied for the general
or ordinary purposes of the Government, i.e.,
to raise revenue for governmental needs
(e.g. income tax, value added tax, and
almost all taxes).
(2) Special/Regulatory/ Sumptuary Tax –levied
for special purposes i.e., to achieve some
social or economic ends irrespective of
whether revenue is actually raised or not
(e.g. protective tariffs or customs duties on
imported goods to enable similar products
manufactured locally to compete with such
imports in the domestic market).
Tariff duties intended mainly as a source of
revenue are relatively low so as not to
discourage imports.
M.4. AS TO SCOPE (OR AUTHORITY
IMPOSING THE TAX)
(1) National – taxes imposed by the national
government (e.g. national internal revenue
taxes, customs duties, and national taxes
imposed by laws).
(2) Municipal or Local – taxes imposed by local
governments (e.g. business taxes that may
be imposed under the Local Government
Code; professional tax).
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UP COLLEGE OF LAW TAXATION 1
M.5. AS TO GRADUATION
(1) Proportionate – The rate of tax is based on a
fixed percentage of the amount of the
property, receipts or other basis to be taxed.
Example: real estate tax, value added tax,
and other percentage taxes.
(2) Progressive – The rate of tax increases as
the tax base or bracket increases.
Example: income tax, estate tax, donor’s tax.
(3) Digressive – A fixed rate is imposed on a
certain amount and diminishes gradually on
sums below it. The tax rate in this case is
arbitrary because the increase in tax rate is
not proportionate to the increase of tax
base.
(4) Regressive – The rate of tax decreases as
the tax base or bracket increases. There is
no regressive tax in the Philippines.
Regressive/Progressive system of taxation
A regressive tax must not be confused with the
regressive system of taxation.
In a society where the majority of the people
have low incomes, regressive taxation system
exists when there are more indirect taxes
imposed than direct taxes. Since the low-
income sector of the population as a whole
buys more consumption goods on which the
indirect taxes are collected, the burden of
indirect taxes rests more on them than on the
more affluent groups. There should be no
objection if indirect taxes are raised on luxury
items consumed mainly by the higher income
groups and reduced on basic commodities
consumed by the lower income segments of
society.
Studies reveal that the progressive elements of
the income and other direct taxes have not
sufficiently offset the regressive effects of the
indirect taxes as a whole.
A progressive tax is, therefore, also different
from a progressive system of taxation.
32
TAXATION LAW
II. National Internal
Revenue Code of 1997 as
amended (NIRC)
Income Taxation
Income Tax is defined as a tax on all yearly
profits arising from property, professions,
trades, or offices, or as a tax on the person’s
income, emoluments, profits and the like
(Fisher v. Trinidad, 43 Phil. 981).
It may be succinctly defined as a tax on
income, whether gross or net, realized in one
taxable year.
Income tax is generally classified as an excise
tax. It is not levied upon persons, property,
funds or profits but upon the right of a person
to receive income or profits.
In the Philippines, income tax is imposed on
the net income of citizens, resident aliens,
domestic corporations, and nonresident aliens
and foreign corporations engaged in trade or
business within the Philippines (Sec. 24 (A),
Sec. 25 (A), Sec. 27 (A), Sec. 28 (A), NIRC). It is
also imposed on the gross income of
nonresident aliens and foreign corporations-
not doing business in the Philippines (Sec. 25
(B), (C), (D), Sec. 28 (B), NIRC). It is further
imposed as a final tax on certain passive
income (interests, royalties, prizes, and other
winnings), cash and property dividends, capital
gains from the sale of domestic shares of stock
and real property classified as capital assets
located in the Philippines (Sec. 24 (B), Sec. 25
(A) (2), (3), Sec. 27 (D), Sec. 28 (A), NIRC).
Income Tax Law aims to mitigate the evils
arising from the inequalities of wealth by a
progressive scheme of taxation which places
the burden of on those best able to pay
UP COLLEGE OF LAW TAXATION 1
(Madrigal v. Rafferty & Concepcion, G.R. No. L-
12287 August 7, 1918).
A. INCOME TAX SYSTEMS
A.1. GLOBAL TAX SYSTEM
Under a global tax system, it did not matter
whether the income received by the taxpayer is
classified as compensation income, business or
professional income, passive investment
income, capital gain, or other income. All items
of gross income, deductions, and personal and
additional exemptions, if any, are reported in
one income tax return, and one set of tax rates
are applied on the tax base.
A.2. SCHEDULAR TAX SYSTEM
Different types of incomes are subject to
different sets of graduated or flat income tax
rates. The applicable tax rate(s) will depend on
the classification of the taxable income and the
basis could be gross income or net
income.Separate income tax returns (or other
types of return applicable) are filed by the
recipient of income for the particular types of
income received.
A.3. SEMI-SCHEDULAR OR SEMI-
GLOBAL TAX SYSTEM
All compensation income, business or
professional income, capital gain and passive
income not subject to final tax, and other
income are added together to arrive at the
gross income, and after deducting the sum of
allowable deductions, the taxable income is
subjected to one set of graduated tax rates or
normal corporate income tax. With respect to
such income the computation is global.
For those other income not mentioned above,
they remain subject to different sets of tax
rates and covered by different returns.
Note: The Philippines, under EO 37 (1986) and
RA 8424 (1998), follows a semi-schedular and
semi-global tax system.
33
TAXATION LAW
B. FEATURES OF THE PHILIPPINE
INCOME TAX LAW
Direct Tax
The tax burden is borne by the income
recipient upon whom the tax is imposed.
Progressive
The tax rate increases as the tax base
increases. It is founded on the ability to pay
principle and is consistent with Sec. 28, Art. VI,
1987 Constitution.
Comprehensive
The Philippines has adopted the most
comprehensive system of imposing income tax
by adopting the citizenship principle, the
residence principle, and the source principle.
Any of the three principles is enough to justify
the imposition of income tax on the income of
a resident citizen and a domestic corporation
that are taxed on a worldwide income.
Semi-Schedular or Semi-Global Tax System
The Philippines follows the semi-schedular or
semi-global system of income taxation,
although certain passive investment incomes
and capital gains from sale of capital assets
(namely: (a) shares of stock of domestic
corporations, and (b) real property) are subject
to final taxes at preferential tax rates.
National Tax
It is imposed and collected by the National
Government throughout the country.
Excise Tax
It is imposed on the right or privilege of a
person to receive or earn income. It is not a
personal tax or a property tax.
UP COLLEGE OF LAW TAXATION 1
C. CRITERIA IN IMPOSING
PHILIPPINE INCOME TAX
C.1. CITIZENSHIP OR NATIONALITY
PRINCIPLE
A citizen of the Philippines is subject to
Philippine income tax
(a) on his worldwide income, if he resides in the
Philippines; or
(b) only on his income from sources within the
Philippines, if he qualifies as a nonresident
citizen.
C.2. RESIDENCE PRINCIPLE
A resident alien is liable to pay Philippine
income tax on his income from sources within
the Philippines but is exempt from tax on his
income from sources outside the Philippines.
C.3. SOURCE OF INCOME PRINCIPLE
An alien is subject to Philippine income tax
because he derives income from sources within
the Philippines. Thus, a non-resident alien or
non-resident foreign corporation is liable to
pay Philippine income tax on income from
sources within the Philippines, such as
dividend interest, rent, or royalty, despite the
fact that he has not set foot in the Philippines.
The income tax law adopts the most
comprehensive tax situs of nationality and
residence of the taxpayer and of the generally
accepted and internationally recognized
income tax base. (Tan v. De Rosario, G.R. No.
109289 October 3, 1994) Resident citizens and
domestic corporations are subjected to income
tax liability on their income from all sources
within and without the Philippines. The law
adopts the source rule with respect to income
received by taxpayers, other than resident
citizens and domestic corporations.
34
TAXATION LAW
D. TYPES OF PHILIPPINE INCOME
TAX
(1) Graduated income tax on individuals
(2) Normal corporate income tax on
corporations
(3) Minimum corporate income tax on
corporations
(4) Special income tax on certain corporations
(5) Capital gains tax on sale or exchange of
shares of stock of a domestic corp.
classified as capital assets
(6) Capital gains tax on sale or exchange of
real property classified as capital asset
(7) Final withholding tax on certain passive
investment income paid to residents
(8) Final withholding tax on income payments
made to non-residents
(9) Fringe benefits tax on fringe benefits of
supervisory or managerial employees
(10) Branch profit remittance tax
(11) Tax on improperly accumulated earnings
of corporations
E. TAXABLE PERIOD
The accounting periods used in determining
the taxable income of taxpayers are:
(a) Calendar Year - Accounting period of 12
months ending on the last day of December
(b) Fiscal Year - Accounting period of 12
months ending on the last day of any month
other than December (Sec. 22(Q), NIRC).
(c) Short Period- Accounting period which
starts after the first month of the tax year or
ends before the last month of the tax year
(less than 12 months).
E.1. INSTANCES WHEREBY SHORT
ACCOUNTING PERIOD ARISES
(a) When a corporation is newly organized.
(b) When a corporation is dissolved.
(c) When a corporation changes accounting
period.
(d) When the taxpayer dies.
UP COLLEGE OF LAW TAXATION 1 TAXATION LAW

"Taxable year" means the calendar year, or the F. KINDS OF TAXPAYERS

fiscal year ending during such calendar year,
upon the basis of which the net income is
computed under Title II (Tax on Income).
Taxable year includes, in the case of return
made for a fractional part of a year under the
provisions of Title II, the period for which such
return is made (Sec. 22 (P), NIRC).
F.1. DEFINITION OF EACH KIND OF
TAXPAYER
Taxpayer - any person subject to tax imposed
by Title II of the Tax Code (Sec. 22(N), NIRC).
Person- means an individual, a trust, estate or
corporation (Sec. 22(A), NIRC).

E.2. WHEN CALENDAR YEAR SHALL BE For income tax purposes, taxpayers are
USED IN COMPUTING TAXABLE INCOME: classified generally as follows:
(a) If the taxpayer's annual accounting period is (1) Individuals;
other than a fiscal year; or (2) Corporations;
(b) If the taxpayer has no annual accounting (3) Partnerships; and
period; or (4) Estates and Trusts.
(c) If the taxpayer does not keep books of
accounts; or
(d) If the taxpayer is an individual (Sec. 43,
NIRC).

Primary Classification Sub-Classification(s)

Citizens of the Residents citizens
Philippines Non-resident citizens
Residents
Engaged in Trade or
Business in the
Aliens Philippines
Individuals Non-residents
Not Engaged in Trade or
Business in the
Philippines

Special Classes of
Minimum Wage Earner
Individuals

Domestic Corporations
Corporations Resident Corporations
Foreign Corporations
Non-resident Corporations
Estates and Trusts
General Business Partnership
Partnerships
General Professional Partnership
Co-ownerships

35
UP COLLEGE OF LAW TAXATION 1
F.2. INDIVIDUAL TAXPAYERS
i. Citizens
(1) Resident Citizens (RC)
(2) Non-resident Citizens (NRC)
(a) Citizen of the Philippines who
establishes to the satisfaction of the
Commissioner the fact of his physical
presence abroad with a definite intention
to reside therein.
(b) Citizen who leaves the Philippines during
the taxable year to reside abroad, either
as an immigrant or for employment on a
permanent basis.
(c) Citizen of the Philippines who works and
derives income from abroad and whose
employment thereat requires him to be
physically present abroad most of the
time during the taxable year (183 DAYS).
(d) Citizen previously considered as non-
resident citizen and who arrives in the
Philippines at any time during the
taxable year to reside permanently in the
Philippines Treated as NRC with
respect to his income derived from
sources abroad until the date of his
arrival in the Philippines
ii. Aliens
(1) Resident Alien
An alien actually present in the Philippines
who is not a mere transient or sojourner is a
resident for income tax purposes.
No/Indefinite Intention = RESIDENT: If he lives
in the Philippines and has no definite intention
as to his stay, he is a resident. A mere floating
intention indefinite as to time, to return to
another country is not sufficient to constitute
him a transient.
Definite Intention = TRANSIENT: One who
comes to the Philippines for a definite purpose,
which in its nature may be promptly
accomplished, is a transient.
36
TAXATION LAW
Exception: Definite Intention but such cannot
be promptly accomplished; If his purpose is of
such nature that an extended stay may be
necessary for its accomplishment, and thus the
alien makes his home temporarily in the
Philippines, then he becomes a resident.
(2) Non-resident Alien
Engaged in trade or business within the
Philippines - If the aggregate period of his stay
in the Philippines is more than 180 days during
any calendar year.
Not engaged in trade or business within the
Philippines - If the aggregate period of his stay
in the Philippines does not exceed 180 days.
iii. Special class of individual employees
Minimum Wage Earner
(a) A worker in the private sector paid the
statutory minimum wage;
(b) An employee in the public sector with
compensation income of not more than the
statutory minimum wage in the non-
agricultural sector where he/she is assigned.
F.3. CORPORATIONS
Includes all types of corporations, partnerships
(no matter how created or organized), joint
stock companies, joint accounts, associations,
or insurance companies, whether or not
registered with the SEC.
Excludes general professional partnerships
(GPP), joint venture or consortium formed for
the purpose of undertaking construction
projects, joint venture or consortium engaging
in petroleum, coal, geothermal and other
energy operations pursuant to an operating or
consortium agreement under a service contract
with the government.
(1) Domestic corporations – A corporation
created and organized under its laws (the
UP COLLEGE OF LAW
law of incorporation test).
(2) Foreign corporations – A corporation which
is not domestic.
(a) Resident foreign corporations – Foreign
corporation engaged in trade or business
within the Philippines.
Doing business – The term implies a
continuity of commercial dealings and
arrangements, and contemplates, to that
extent, the performance of acts or works or
the exercise of some of the functions
normally incident to, and in progressive
prosecution of commercial gain or for the
purpose and object of the business
organization. (RA 7042, Foreign
Investments Act)
In order that a foreign corporation may be
regarded as doing business within a State,
there must be continuity of conduct and
intention to establish a continuous business,
such as the appointment of a local agent,
and not one of a temporary character (CIR v.
BOAC)
(b) Non-resident foreign corporations –
Foreign corporation not engaged in trade or
business within the Philippines
(3) Joint venture and consortium – Essential
factors of a joint venture or consortium:
(a) Each party must make a contribution,
not necessarily of capital but by way of
services, skill, knowledge, material or
money;
(b) Profits must be shared among the
parties;
(c) There must be a joint proprietary interest
and right of mutual control over the
subject matter of the enterprise;
(d) There is a single business transaction.
TAXATION 1 TAXATION LAW
F.4. PARTNERSHIP
The Tax Code mandates that every other type
of business partnership is subject to income
tax in the same manner and at the same rate
as an ordinary corporation.
General Professional Partnerships (GPP)
A general professional partnership is a
partnership formed by persons for the sole
purpose of exercising their common profession,
no part of the income of which is derived from
engaging in any trade or business.
Not considered as a taxable entity for income
tax purposes. The partners themselves are
liable, not the partnership, are liable for the
payment of income tax in their individual
capacities.
F.5. ESTATES AND TRUSTS
Taxable estates and trusts are taxed in the
same manner and on the same basis as an
individual.
F.6. CO-OWNERSHIP
For income tax purposes, the co-owners in a
co-ownership report their share of the income
from the property owned in common by them
in their individual tax returns for the year and
the co-ownership is not considered as a
separate taxable entity or a corporation.
G. INCOME TAXATION
G.1. DEFINITION
Income Tax is defined as a tax on all yearly
profits arising from property, professions,
trades, or offices, or as a tax on the person’s
income, emoluments, profits and the like
(Fisher v. Trinidad).
G.2. NATURE
Income tax is generally classified as an excise
tax. It is not levied upon persons, property,
37
UP COLLEGE OF LAW
funds or profits but upon the right of a person
to receive income or profits.
G.3. GENERAL PRINCIPLES
(a) A resident citizen of the Philippines is
taxable on all income derived from sources
within and without the Philippines;
(b) A nonresident citizen is taxable only on
income derived from sources within the
Philippines;
(c) An individual citizen of the Philippines who
is working and deriving income from abroad
as an overseas contract worker is taxable
only on income derived from sources within
the Philippines:
Provided, That a seaman shall be treated as
an overseas contract worker if he is a:
(1) citizen of the Philippines; and
(2) receives compensation for services
rendered abroad as a member of the
complement of a vessel engaged
exclusively in international trade
(d) An alien individual, whether a resident or
not of the Philippines, is taxable only on
income derived from sources within the
Philippines;
(e) A domestic corporation is taxable on all
income derived from sources within and
without the Philippines; and
(f) A foreign corporation, whether engaged or
not in trade or business in the Philippines, is
taxable only on income derived from
sources within the Philippines. (Sec. 23)
Taxpayer Within Without
Resident Citizen
Non-resident Citizen and X
OCW
Resident and Non-resident X
Alien
Domestic Corporation
Foreign Corporation X be defined as "profits or gains."
TAXATION 1 TAXATION LAW
H. INCOME
H.1. DEFINITION
(a) Income means all wealth which flows to the
taxpayer other than a mere return of capital.
It includes gain derived from the sale or
other disposition of capital assets. Income is
a gain derived from labor or capital, or both
labor and capital; and includes the gain
derived from the sale or exchange of capital
assets.
(b) Conwi v. CTA [G.R. No. 48532 August 31,
1992]: It is an amount of money coming to a
person within a specified time, whether as
payment for services, interest or profit from
investment. Unless otherwise specified. It
means cash or its equivalent. Income can
also be thought of as a flow of the fruits of
one's labor.
(c) Income may be received in the form of cash,
property, service, or a combination of the
three.
H.2. NATURE
Income includes earnings, lawfully or
unlawfully acquired, without consensual
recognition, express or implied, of an
obligation to repay and without restriction as
their disposition. (James v. US, 366 US 213)
i. When Income is Taxable
Existence of taxable income
(1) There is INCOME, gain or profit
(2) RECEIVED or REALIZED during the taxable
year
(3) NOT EXEMPT from income tax
(a) Madrigal vs. Rafferty (1918): "The fact is that
property is a tree, income is the fruit; labor
is a tree, income the fruit; capital is a tree,
income the fruit." A tax on income is not a
tax on property. "Income," as here used, can
38
UP COLLEGE OF LAW
(b) A mere increase in the value of property is
not income, but merely unrealized increase
in capital. (1 Mertens, Sec. 5.06)The
increase in the value of property is also
known as appraisal surplus or revaluation
increment.
ii. When is there INCOME?
When there is a FLOW of wealth other than
mere return of capital during the taxable
period.
Income v. Capital (Madrigal v. Rafferty)
Income Capital
Denotes a flow of Fund or property
wealth during a existing at one
definite period of distinct point in time.
time.
Service of wealth Wealth itself
Subject to tax Return of capital is
not subject to tax
Fruit Tree
iii. Realization of Income
Tests of Realization
Actual vis-à-vis Constructive receipt
(1) Actual receipt – Income is actually reduced
to possession. The realization of gain may
take the form of actual receipt of cash.
(2) Constructive receipt– An income is
considered constructively received when it is
credited to the account of, or segregated in
favour of a person. The person may
withdraw the said account credited in his
favor anytime without any substantial
limitations or conditions upon which
payment or enjoyment is to be made or
exercised. Examples of constructive receipt
of income are:
(a) Interest credited on savings bank deposit
TAXATION 1 TAXATION LAW
(b) Matured interest coupons not yet
collected by the taxpayer
(c) Dividends applied by the corporation
against the indebtedness of a
stockholder
(d) Share in the profit of a partner in a
general professional partnership,
although not yet distributed, is regarded
as constructively received; or
(e) Intended payment deposited in court
(consignation).
The doctrine of constructive receipt is
designed to prevent the taxpayer using the
cash basis from deferring or postponing the
actual receipt of taxable income. Without
the rule, the taxpayer can conveniently
select the year in which he will report the
income. (Dimaampao)
For a taxpayer using the accrual method, the
determinative question is, when do the facts
present themselves in such a manner that the
taxpayer must recognize income or expense?
The accrual of income and expense is
permitted when the all-events test has been
met. This test requires: (1) fixing of a right to
income or liability to pay; and (2) the
availability of the reasonable accurate
determination of such income or liability [CIR
v. Isabela Cultural Corporation].
The “As If” Theory of Constructive Income is
designed to prevent a cash basis taxpayer to
delay reporting of income. It also resumes the
existence of income on transactions
supposedly not subject to tax. [Valencia and
Roxas]
39
UP COLLEGE OF LAW TAXATION 1
iv. Recognition of Income
Methods of accounting in reporting income and
expenses
Cash method vis-à-vis Accrual method–Cash
method generally reports income upon cash
collection and reports expenses upon payment.
If earned from rendering of services, income is
to be reported in the year when collected,
whether earned or unearned. (Sec. 108, NIRC).
Accrual method generally reports income when
earned and reports expense when incurred. If
earned from sale of goods, income is to be
reported in the year of sale, irrespective of
collection. (Sec. 106, NIRC).
Income realized pertains to the accrual basis of
accounting, when recognition of income in the
books is when it is realized and expenses are
recognized when incurred. It is the right to
receive and not the actual receipt that
determines the inclusion of the amount in
gross income
Examples:
(1) Interest or rent income earned but not yet
received
(2) Rent expense accrued but not yet paid
(3) Wages due to workers but remaining
unpaid
Generally, trade and manufacturing
businesses use accrual method while servicing
businesses use cash method. If the service
business opted to report on accrual basis, such
method can only be applied when it comes to
reporting of expense. To prevent tax evasion,
individual taxpayers whose business consists
of the sale of inventories cannot use cash
method. [Valencia and Roxas]
40
TAXATION LAW
Installment method vis-à-vis Deferred method
vis-à-vis Percentage of completion method (in
long- term contracts)
Installment Method is a special method of
accounting whereby income on installment
sales of property during the year is allowed to
be reported in installments in proportion to the
installment payments actually received in that
year, which the gross profit realized or to be
realized when payment is completed, bears to
the total contract price (Sec. 49, NIRC).
Income may be reported on the installment
basis in the following cases:
Sales of personal property by a dealer
A dealer who regularly sells or otherwise
disposes of personal property on the
installment plan
Sales of real property (inventory) and casual
sales of personalty
(1) casual sale or other casual disposition of
personal property (not of a kind which
would be includible in the inventory of the
taxpayer if on hand at the close of the
taxable year) where the selling price >
P1,000 and the initial payments do not
exceed 25% of the selling price, or
(2) sale or other disposition of real property
(inventory), if the initial payments do not
exceed 25% of the selling price. Note: This
sale is subject to creditable withholding tax
and normal tax which is 30% for corporate
taxpayer or 5% to 32% for individual
taxpayer.
Sales of real property considered as capital
asset by individuals
An Individual who sells or disposes of real
property, considered as capital asset, if initial
payments do not exceed 25% of the selling
price, may pay the capital gains tax in
installments (Sec. 49(C), NIRC). Note: This
UP COLLEGE OF LAW TAXATION 1 TAXATION LAW

sale is subject to a capital gains tax of 6% (a) If the initial payments exceed 25% of the
based on the selling price or zonal value, selling price, the gain realized may be
whichever is higher. reported on a deferred payment method.
Note: Initial payments are the total payments (b) The taxable gain or income returnable
received in cash or property (other than during the year of sale is the difference
evidences of indebtedness such as promissory between the selling or contract price and
notes, mortgages given) by the seller upon or the cost of the property, even though the
before the execution of the instrument of sale entire purchase price has not been actually
during the taxable year of the disposition of the received in the year of sale.
real property. Considered as initial payments (c) The obligations of the purchaser received by
are the downpayment and all other payments the vendor are to be considered as
received by the seller during the year of sale, equivalent of cash.
including excess mortgage assumed by the
buyer over the basis or cost of the property sold.
It contemplates at least one other payment in Personal Property Real Property
addition to the initial payment. If the entire
purchase price is to be paid in a lump sum in a Dealer
later year, there being no payment during the Dealer in personal Installment method;
first year, the income may not be returned on property who Provided, initial
the installment basis. regularly sells in payments do not
installment plan: exceed 25% of selling
Installment method price
Selling price is the total amount or price of the
If exceeds 25%--
sale including the cash or property received *held as ordinary Deferred payment
and all notes of the buyer or mortgages assetregardless of method
assumed by him. amount of percentage
of initial payments *held as inventory
Contract price is the amount which the Casual Sale
purchaser contracts to pay the seller in cash. It Installment method;
includes the excess of the mortgages assumed Provided:
over the cost or other basis of the property sold. (1) Selling price
exceeds php1,000
Change from accrual to installment basis (2) Initial payments do
not exceed 25% of
A taxpayer entitled to the benefits of a dealer
selling price
in personal property may elect for any taxable
If either of 2 or both
year to report his taxable income on the conditions not met—
installment basis. In computing his income for Deferred payment
the year of change or any subsequent year, method
amounts actually received during any such
year on account of sales or other dispositions *personal property
of property made in any prior year shall not be not considered
excluded. [see Sec. 49(D), NIRC]. inventory
Sale by Individuals
Deferred Payment Installment method;
Provided, initial
payments do not

41
UP COLLEGE OF LAW
exceed 25% of selling
price
*held as capital asset
Percentage of completion (in long-term
contracts)
Income from long-term construction contracts
refers to the earnings derived from
construction of a building, installation or other
construction contract usually covering a period
in excess of one year. When income is derived
from long-term construction contracts, it is
generally reported on the basis of percentage
of completion made every year that will be
evidence by the certificates of engineers or
architects. The reportable income is calculated
by deducting from the contract price the actual
cost of construction.
In recognizing realized revenue for long-term
construction contracts, accountants usually
follow two methods:
(a) Completed contract method – requires
recognition of revenue only when the
contract is finally completed; and
(b) Percentage of completion method – requires
recognition of income based on the
progress of work.
Long-term contracts are no longer allowed
to be reported based on the completed
contract method basis beginning January 1,
1998 pursuant to RA 8424; hence, all long-
term contracts must be reported using the
percentage of completion method.
Tests in determining whether income is earned
for tax purposes
(1) Realization test – no taxable income until
there is a separation from capital of
something of exchangeable value, thereby
supplying the realization or transmutation
which would result in the receipt of
income (Eisner v Macomber). Thus, stock
TAXATION 1 TAXATION LAW
dividends are not income subject to
income tax on the part of the stockholder
when he merely holds more shares
representing the same equity interest in
the corporation that declared stock
dividends (Fisher v Trinidad).
(2) Claim of right doctrine (or Doctrine of
Ownership, command, or control) – a
taxable gain is conditioned upon the
presence of a claim of right to the alleged
gain and the absence of a definite
unconditional obligation to return or repay
that which would otherwise constitute a
gain. To collect a tax would give the
government an unjustified preference as
to the part of the money that rightfully
and completely belongs to the victim. The
embezzler’s title is void.
(3) Economic benefit test, Doctrine of
Proprietary Interest – any economic
benefit to the employee that increases his
net worth, whatever may have been the
mode by which it is effected, is taxable.
Thus, in stock options, the difference
between the fair market value of the
shares at the time the option is exercised
and the option price constitutes additional
compensation income to the employee at
the time of exercise (not upon the grant or
vesting of the right).
(4) Severance Test - Under the doctrine of
severance test of income, in order that
income may exist, is necessary that there
be a separation from capital of something
of exchangeable value. The income
required a realization of gain.
(5) All Events Test
Under the accrual method of accounting,
expenses are deductible in the taxable
year in which: (1) all events have occurred
which determine the liability; and (2) the
42
UP COLLEGE OF LAW TAXATION 1
amount of liability can be determined with
reasonable accuracy.
“All events test” requires:
(a) Fixing a right to income or liability to
pay; and
(b) The availability of reasonably accurate
determination of such income or
liability.
All of the above tests are followed in the
Philippines for purposes of determining
whether income is received by the taxpayer or
not during the year (Mamalateo).
I. GROSS INCOME
I.1. DEFINITION
Gross Income means the pertinent items of
income referred to in Section 32(A) of the Tax
Code. It includes all income derived from
whatever source (unless exempt from tax by
law), including, but not limited to, the
following items:
(1) Gross income derived from the conduct of
Trade or business or the exercise of a
profession
(2) Rents
(3) Interests
(4) Prizes and winnings
(5) Compensation for services in whatever
form paid, including, but not limited to
fees, salaries, wages, commissions, and
similar items
(6) Annuities
(7) Royalties
(8) Dividends
(9) Gains derived from dealings in property
(10) Pensions
(11) Partner’s distributive share from the net
income of the general professional
partnership (GPP) [Sec 32A, NIRC]
The list here is NOT exclusive
43
TAXATION LAW
The term “gross income” whenever used
without qualification, is comprehensive, as
defined above, and is different from the
limited meaning of gross income for
purposes of minimum corporate income tax
or the gross income tax of corporations.
Gross income includes gross profit from
ordinary business and other income not
subject to passive income tax or final
withholding tax.
Gross income means income, gain, or profit
subject to income tax.
It includes the compensation for personal
services, business income, profits, and
income derived from any source whatever
(whether legal or illegal)
It excludes unless it is exempt from income
tax under the Constitution, tax treaty, or
statute or it is subject to final withholding
income tax in accordance with the semi-
global or semi-schedular tax system
adopted by the Philippines.
It is the difference between gross
sales/revenue and the cost of goods
sold/services. The definition of gross
income is broad and comprehensive to
include proceeds from sales of transport
documents. (Mamalateo)
I.2. CONCEPT OF INCOME FROM
WHATEVER SOURCE DERIVED
“Income derived from whatever source” means
inclusion of all income not expressly exempted
within the class of taxable income under the
laws irrespective of the voluntary or involuntary
action of the taxpayer in producing the gains,
and whether derived from legal or illegal
sources (i.e. gambling, extortion, smuggling,
etc.)
UP COLLEGE OF LAW TAXATION 1
I.3. GROSS INCOME VIS-À-VIS NET
INCOME VIS-À-VIS TAXABLE INCOME
(a) Gross income – means income, gain or
profit subject to tax.
(b) Net income – means gross income less
statutory deductions and/or exemptions
(Sec. 31, NIRC)
(c) Taxable income – means the pertinent items
of gross income specified in the Tax Code,
less the deductions and/or personal and
additional exemptions, if any, authorized for
such types of income by the Tax Code or
other special laws (Sec. 31, NIRC). It is
synonymous to the term “net income”
[Valencia and Roxas]
I.4. CLASSIFICATION OF INCOME AS TO
SOURCE
Source is ascribed to the place wherein the
income is earned. It is governed by the situs of
taxation. This classification of income is
necessary to determine whether such income is
subject to tax or not. Income may be:
(1) Derived entirely from sources within the
Philippines [Sec. 42A, NIRC]. Examples:
compensation for labor or service derived
from Philippine sources; interest on bonds,
notes, deposits and the like earned in the
Philippines; dividends declared by domestic
corporations; rentals and royalties from
property located within the Philippines; and
gains, profits and income from sale of real
property as well as from personal property
in the Philippines. As a rule, incomes earned
within the Philippines are taxable.
(2) Derived entirely from sources without the
Philippines [Sec. 42C, NIRC]. Examples:
compensation for labor or service rendered
by overseas contract workers; interest on
bonds, notes, deposits and the like earned
abroad; dividends declared by nonresident
44
TAXATION LAW
foreign corporation; rental and royalties
from property located outside the
Philippines; and gains, profits and income
from sale of real property as well as from
personal property located outside the
Philippines. As a rule, incomes earned with
the Philippines are taxable.
(3) Derived from sources partly within or partly
without the Philippines. Examples: gains,
profits and income from transportation or
other services rendered partly within and
partly outside, and dividend received by a
resident citizen from a resident foreign
corporation. (Sec. 43(E), NIRC). In general,
when an income is earned partly from
within and partly from without, only income
within is taxable in the Philippines, except if
the taxpayer is a resident citizen or a
domestic corporation. A Filipino citizen or a
domestic corporation whose income is
derived from within and without the
Philippines is generally subject to tax.
I.5. SOURCES OF INCOME SUBJECT TO
TAX
i. Compensation Income
Income arising from an employer-employee
(ER-EE) relationship. It means all
remuneration for services performed by an EE
for his ER, including the cash value of all
remuneration paid in any medium other than
cash [Sec. 78(A)], unless specifically excluded
by the Tax Code.
It includes, but is not limited to, salaries and
wages, honoraria and emoluments, allowances
(e.g., transportation, representation,
entertainment), commissions, fees (including
directors’ fees, if the director is, at the same
time, an employee of the payor-corporation),
tips, taxable bonuses, fringe benefits except
those subject to Fringe Benefit Tax (FBT) under
Section 33 of the Tax Code, and taxable
pensions and retirement pay (e.g. retirement
UP COLLEGE OF LAW TAXATION 1
benefits earned without meeting the
conditions for exemption thereof, such as
retirement of less than 50 years of age.)
General Rule: every form of compensation
income is taxable regardless of how it is
earned, by whom it is paid, the label by which
it is designated, the basis upon which it is
determined, or the form in which it is received.
The basis upon which remuneration is paid is
immaterial. It may be paid on the basis of piece
of work, percentage of profits, hourly, weekly,
monthly, or annually.
Exception: The term wages does NOT include
remuneration paid:
(a) For agricultural labor paid entirely in
products of the farm where the labor is
performed, or
(b) For domestic service in a private home, or
(c) For casual labor not in the course of the
employer's trade or business, or
(d) For services by a citizen or resident of the
Philippines for a foreign government or an
int’l organization. [Sec. 78(A)]
Note: The term “agricultural labor” does not
include services performed in connection with
forestry, lumbering or landscaping.
The term “remuneration for domestic services”
refers to remuneration paid for services of a
household nature performed by an employee
in or about the private home of the person
whom he is employed. The services of
household personnel furnished to an employee
(except rank and file employees) by an
employer shall be subject to the fringe benefits
tax pursuant to Sec. 33 of the Tax Code. A
private home is the fixed place of abode of an
individual or family. If the home is utilized
primarily for the purpose of supplying board or
lodging to the public as a business enterprise,
it ceases to be a private home and
remuneration paid for services performed
45
TAXATION LAW
therein is not exempted. Services of the
household nature in or about a private home
include services rendered by cooks, maids,
butlers, valets, laundresses, gardeners,
chauffeurs of automobiles for family use. The
remuneration paid for the services which are
performed in or about rooming or lodging
houses, boarding houses, clubs, hotels,
hospitals or commercial officer or
establishments is considered as compensation.
Remuneration paid for services performed as a
private secretary, even if they are performed in
the employer’s home is considered as
compensation.
The term “casual labor” includes labor which is
occasional, incidental or regular. “Not in the
course of the employer’s trade or business”
includes labor that does not promote or
advance the trade or business of the employer.
The term “remuneration paid for services
performed as an employee of a foreign
government or an international organization”
includes not only remuneration paid for
services performed by ambassadors, ministers
and other diplomatic officers and employees
but also remuneration paid for services
performed as consular or other officer or
employee of a foreign government or as a non-
diplomatic representative of such government.
Compensation income including overtime pay,
holiday pay, night shift differential pay, and
hazard pay, earned by MINIMUM WAGE
EARNERS (MWE) who has no other returnable
income are NOT taxable and not subject to
withholding tax on wages [RA 9504]. Provided,
however, that an employee shall not enjoy the
privilege of being a MWE and, therefore,
his/her entire earning are not exempt from
income tax and, consequently, from
withholding tax if he receives/earns additional
compensation such as commissions, honoraria,
fringe benefits, benefits in excess of the
UP COLLEGE OF LAW
allowable statutory amount of P30,000,
taxable allowance, and other taxable income
other than the statutory minimum wage
(SMW), holiday pay, overtime pay, hazard pay
and night shift differential pay.
MWEs receiving other income, such as income
from the conduct of trade, business, or practice
of profession, except income subject to final
tax, in addition to compensation income are
not exempted from income tax on their income
earned during the taxable year.
This rule, notwithstanding, the SMW, Holiday
Pay, overtime pay, night differential pay and
hazard pay shall still exempt from withholding
tax.
Forms of compensation and how they are
assessed
(1) Cash – If compensation is paid in cash, the
full amount received is the measure of the
income subject to tax.
(2) Medium other than money – If services are
paid for in a medium other than money (e.g.
shares of stock, bonds, and other forms of
property), the fair market value (FMV) of the
thing taken in payment is the amount to be
included as compensation subject to tax. If
the services are rendered at a stipulated
price, in the absence of evidence to the
contrary, such price will be presumed to be
the FMV of the remuneration received.
(3) Living quarters or meals -
General Rule: The value to the employee of
the living quarters and meals given by the
employer shall be added to his
compensation subject to withholding.
Exception: If living quarters/meals are
furnished to an employee for the
convenience of the employer the value
needed NOT be included as part of
compensation income.
(4) Facilities and privileges of a relatively small
value - Facilities and privileges (such an
TAXATION 1 TAXATION LAW
entertainment, medical services, or so
called “courtesy” discounts on purchases),
otherwise known as “de minimis benefits”
furnished or offered by an employer to his
employees generally, are NOT considered
as compensation subject to income tax and
therefore withholding tax if such facilities
are offered or furnished by the employer
merely as means of promoting the health,
goodwill, contentment, or efficiency of his
employees.
Convenience of the Employer Rule
Allowances in kind furnished to the employee
for and as necessary incident to the
performance of his duties are not taxable
[Valencia and Roxas].
If meals, living quarters, and other facilities
and privileges are furnished to an employee for
the convenience of the employer, and
incidental to the requirement of the
employee’s work or position, the value of that
privilege need not be included as
compensation (Henderson v. Collector)
The amount of “de minimis” benefits
confirming to the ceiling prescribed shall not
be considered in determining the P30,000
ceiling of “other benefits” excluded from gross
income under Section 32 (b)(7)(e) of the Tax
Code, Provided, that the excess of the ‘de
minimis’ benefits over their respective ceilings
prescribed by these regulations shall be
considered as part of “other benefits” and the
employee receiving it will be subject to tax
only on the excess over the P30,000 ceiling,
Provided, further, that MWEs receiving, ‘other
benefits’ exceeding the P30,000 limit shall be
taxable on the excess benefits, as well as on
his salaries, wages, and allowances, just like
an employee receiving compensation income
beyond the SMW. Any amount given by the
employer as benefits to its employees, whether
classified as “de minimis” benefits or fringe
46
UP COLLEGE OF LAW TAXATION 1
benefits, shall constitute as deductible
expense upon such employer. Where
compensation is paid in property other than
money, the employer shall make necessary
arrangements to ensure that the amount of the
tax required to be withheld is available for
payment to the BIR.
Classification of Gross Compensation Income
Basic salary or wage
(a) Salary – earnings received periodically for a
regular work other than manual labor.
Example: monthly salary of an employee
(b) Wages – earnings received usually
according to specified intervals of work, as
by the hour, day, or week. Example: a
carpenter’s wage.
Backwages are subject to income tax and
withholding tax on wages [BIR Ruling No. DA-
073-2008]
Honoraria – payments given in recognition for
services performed for which the established
practice discourages charging a fixed fee.
Example: honorarium of a guest lecturer
Fixed or variable allowances i.e. Transportation,
Representation, and other allowances such as
Cost of Living Allowances (COLA)
General Rule: Fixed or variable transportation,
representation or other allowances that are
received by a public officer or employee of a
private entity, in addition to the regular
compensation fixed for his position or office is
COMPENSATION subject to withholding tax.
(Rev. Regs. 2-98)
Exception: Any amount paid specifically, either
as advances or reimbursements for travelling,
representation and other bona fide ordinary
and necessary expenses incurred or reasonably
expected to be incurred by the employee in the
performance of his duties are NOT
47
TAXATION LAW
COMPENSATION subject to withholding tax,
provided the following conditions are satisfied:
(a) It is for ordinary and necessary traveling and
representation or entertainment expenses
paid or incurred by the employee in the
pursuit of the employer’s trade, business or
profession; and
(b) The employee is required to account or
liquidate for the foregoing expenses.
The excess of actual expenses over
advances made shall constitute taxable
income if such amount is not returned to the
employer. The employee is required to
account/liquidate for the expenses in
accordance with the specific requirements
of substantiation for each category of
expenses pursuant to Section 34 of the Tax
Code.
Note: Reasonable amounts of
reimbursements/advances for traveling and
entertainment expenses which are pre-
computed on a daily basis and are paid to an
employee while he is on an assignment or duty
are NOT subject to withholding tax on wages
and substantiation requirements.
Commission – usually a percentage of total
sales or on certain quota of sales volume
attained as part of incentive such as sales
commission.
Fees – received by an employee for the services
rendered to the employer including a director’s
fee of the company, fees paid to the public
officials such as clerks of court or sheriffs for
services rendered in the performance of their
official duty over and above their regular
salaries.
Tips and Gratuities – those paid directly to the
employee (usually by a customer of the
employer) which are not accounted for by the
employee to the employer. (taxable income but
UP COLLEGE OF LAW TAXATION 1
not subject to withholding tax) [RR NO. 2-98,
Sec. 2.78.1]
Hazard or Emergency Pay – additional
payment received due to the workers’ exposure
to danger or harm while working. It is normally
added to the basic salary together with the
overtime pay and night differential to arrive at
gross salary.
Retirement Pay – a lump sum payment
received by an employee who has served a
company for a considerable period of time and
has decided to withdraw from work into privacy.
[RR 6-82, Sec. 2b]
In general, retirement pay is taxable except in
the following instances:
(1) SSS or GSIS retirement pays.
(2) Retirement pay (R.A. 7641) due to old age
provided the following requirements are
met:
(a) The retirement program is approved by
the BIR Commissioner;
(b) It must be a reasonable benefit plan. (Its
implementation must be fair and
equitable for the benefit of all
employees)
(c) The retiree should have been employed
for 10 years in the said company;
(d) The retiree should have been 50 years
old or above at the time of retirement;
and
(e) It should have been availed of for the first
time.
Separation pay – taxable if VOLUNTARILY
availed of. It shall not be taxable if involuntary
i.e. death, sickness, disability,
reorganization/merger of company and
company at the brink of bankruptcy or for any
cause beyond the control of the said official or
employee.
“For any cause beyond the control.” –
48
TAXATION LAW
(a) Connotes involuntariness on the part of the
official or employee
(b) The separation from the service of the
official or employee must not be asked for
or initiated by him.
(c) The separation was not of his own making.
(d) Such fact shall be duly established by the
employer by competent evidence which
should be attached to the monthly return
for the period in which the amount paid due
to the involuntary separation was made.
(e) Amounts received by reason of involuntary
separation remain EXEMPT from income tax
even if the official or the employee, at the
time of separation, had rendered less than
ten (10) years of service and/or is below fifty
(50) years of age.
(f) Any payment made by an employer to an
employer to an employee on account of
dismissal, constitutes compensation
regardless of whether the employer is
legally bound by contract, statute, or
otherwise, to make such payment.
Pension – a stated allowance paid regularly to
a person on his retirement or to his dependents
on his death, in consideration of past services,
meritorious work, age, loss, or injury. Pension
is taxable unless the law states otherwise, OR
unless the BIR approves the pension plan of a
private company.
Vacation and sick leave – rules in determining
whether money received for vacation and sick
leave is taxable or not:
(a) If paid or availed of as salary of an employee
who is on vacation or on sick leave
notwithstanding his absence from work, it
constitutes TAXABLE compensation income.
[RR 6-82, 2d]
(b) Monetized value of unutilized VACATION
leave credits of ten (10) days or less which
were paid to private employees during the
year, and the monetized value of vacation
and sick leave credits paid to government
UP COLLEGE OF LAW TAXATION 1
officials and employees are NOT subject to
income tax and to the withholding tax.
These are ‘de minimis’ benefits.’ [RR no. 5-
2011, Sec 2.78.1(A)(7)] Note: monetization of
sick leave credits of private employees even
if not exceeding 10 days is not exempt from
income tax and withholding tax on wages.
(c) Terminal leave or money value of
accumulated vacation and sick leave
benefits received by heir upon death of
employee is not taxable.
Thirteenth month pay and other benefits - Not
taxable if the total amount received is P30,000
or less. Any amount exceeding P30,000 is
taxable. [Sec. 32 (7)e, NIRC]
Fringe Benefits and De Minimis
Fringe Benefits – any good, service, or other
benefit furnished or granted by an employer, in
cash or in kind, in addition to basic salaries of
an individual employee [Sec. 33, NIRC]
De Minimis – privileges of relatively small value
as given by the employer to his employees.
Fringe Benefits and De Minimis are not
considered compensation subject to income
tax and withholding tax.
Overtime Pay – premium payment received for
working beyond regular hours of work which is
included in the computation of gross salary of
employee. It constitutes compensation.
Profit Sharing – the proportionate share in the
profits of the business received by the
employee in addition to his wages.
Awards for special services – awards for past
services or suggestions to employers resulting
in the prevention of theft or robbery, etc. are
also compensations.
Beneficial Payments – such as where employer
pays the income tax owed by an employee are
additional compensation income.
49
TAXATION LAW
Other forms of compensation – other forms
received due to services rendered are
compensation paid in kind, e.g., insurance
premium paid by the employer for insurance
coverage where the heirs of the employee are
the beneficiaries is the employee’s income.
Note: Any amount which is required by law to
be deducted by the employer from the
compensation of an employee including the
withheld tax is considered as part of the
employee’s compensation and is deemed to be
paid to the employee as compensation at the
time the deduction is made. (This also applies
to deductions not required by law.)
Withholding Tax on Compensation Income
The income recipient (i.e., EE) is the person
liable to pay the tax on income, yet to improve
the collection of compensation income of EEs,
the State requires the ER to withhold the tax
upon payment of the compensation income.
ii. Fringe Benefits
Special treatment of fringe benefits
Persons liable: The Employer (as a withholding
agent), whether individual, professional
partnership or a corporation, regardless of
whether the corporation is taxable or not, or
the government and its instrumentalities, is
liable to remit the fringe benefit tax to the BIR
once fringe benefit is given to a managerial or
supervisory employee.
The fringe benefit tax (FBT) is a final tax on the
employee’s income to be withheld by the
employer. The withholding and remittance of
FBT shall be made on a calendar quarterly
basis.
Managerial employee: one who is vested with
the powers or prerogatives to lay down and
execute management policies and/or to hire,
UP COLLEGE OF LAW TAXATION 1
transfer, suspend, lay-off, recall, discharge,
assign or discipline employees.
Supervisory employees: those who, in the
interest of the employer, effectively
recommend such managerial actions if the
exercise of such authority is not merely
routinary or clerical in nature but requires the
use of independent judgment.
All employees not falling within any of the
above definitions are considered rank-and-file
employees.
Fringe benefit tax is imposed on fringe benefits
received by supervisory and managerial
employees. The fringe benefits of rank and file
employees are treated as part of compensation
income subject to income tax and withholding
tax on compensation.
Definition
Fringe benefit means any good, service, or
other benefit furnished or granted by an
employer, in cash or in kind, in addition to
basic salaries, to an individual employee
(except rank and file employees) such as, but
not limited to the following:
(1) Housing
(2) Expense Account
(3) Vehicle of any kind
(4) Household personnel, such as maid, driver
and others
(5) Interest on loan at less than market rate to
the extent of the difference between the
market rate and actual rate granted.
(6) Membership fees, dues and other expenses
borne by the employer for the employee in
social and athletic clubs and similar
organizations
(7) Expenses for foreign travel
(8) Holiday and vacation expenses
(9) Educational assistance to the employee or
his dependents; and
50
TAXATION LAW
(10) Life or health insurance and other non-
life insurance premiums or similar amounts
on excess of what the law allows.[Sec.
33(B)]
Tax Rate and Tax Base
(a) Tax base is based on the grossed-up
monetary value (GMV) of fringe benefits.
(b) Rate is generally 32%
(c) GMV represents: (a) the whole amount of
income realized by the employee which
includes the net amount of money or net
monetary value of property that has been
received; and (b) the amount of fringe
benefit tax due from the employee which
has been withheld and paid by the employer
for and in behalf of his employee..
How GMV is determined
GMV is determined by dividing the actual
monetary value of the fringe benefit by 68%
[100% - tax rate of 32%]. For example, the
actual monetary value of the fringe benefit is
P1,000. The GMV is equal to P1,470.59
[P1,000 / 0.68]. The fringe benefit tax,
therefore, is P470.59 [P1470.59 x 32%].
Special Cases:
(a) For fringe benefits received by non-resident
alien not engaged in trade of business in the
Philippines (NRANETB), the tax rate is 25%
of the GMV. The GMV is determined by
dividing the actual monetary value of the
fringe benefit by 75% [100% - 25%].
(b) For fringe benefits received by alien
individuals and Filipino citizens employed
by regional or area headquarters, regional
operating headquarters, offshore banking
units (OBUs), or foreign service contractor
or by a foreign subcontractor engaged in
petroleum operations in the Philippines, or
by any of their Filipino individual employees
who are employed and occupying the same
positions as those occupied by the alien
UP COLLEGE OF LAW TAXATION 1
employees, the tax rate is 15% of the GMV.
The GMV is determined by dividing the
actual monetary value of the fringe benefit
by 85% [100% - 15%].
(c) What is the tax implication if the employer
gives ‘fringe benefits’ to rank-and-file
employees? Fringe benefits given to a rank-
and-file employee are treated as part of his
compensation income subject to normal tax
rate and withholding tax on compensation
income, except de minimis benefits and
benefits provided for the convenience of the
employer.
Payor of Fringe Benefit Tax (FBT): The employer
withholds and pays the FBT but the law allows
him to deduct such tax from his gross income.
Taxable and non-taxable fringe benefits
Fringe Benefits NOT subject to Tax
(1) Fringe benefits not considered as gross
income –
(a) if it is required or necessary to the
business of employer
(b) if it is for the convenience or advantage
of employer
(2) Fringe Benefit that is not taxable under Sec.
32 (B) – Exclusions from Gross Income
(3) Fringe benefits not subject to Fringe Benefit
Tax:
(a) Fringe Benefits which are authorized and
exempted from income tax under the
Code or under special laws;
(b) Contributions of the employer for the
benefit of the employee for retirement,
insurance and hospitalization benefit
plans;
(c) Benefits given to the rank-and-file
employees, whether granted under a
collective bargaining agreement or not;
and
(d) Fringe benefits granted for the
convenience of the employer;
(e) De minimis benefits
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TAXATION LAW
The exemption of any FB from the FBT shall
not be interpreted to mean exemption from
any other income tax imposed under the Tax
Code except if the same is likewise expressly
exempt from any other income tax imposed
under the Tax Code or under any other existing
law. Thus, if the FB is exempted from the FBT,
the same may, however, still form of the
employee’s gross compensation income which
is subject to income tax; hence, likewise
subject to withholding tax on compensation
income payment.
De minimis benefits (exempt from income tax
as well as withholding tax on compensation
income of both managerial and rank and file
EEs) [Revenue Regulation No. 5-2011]:
(a) Monetized unused vacation leave credits of
private employees not exceeding ten (10)
days during the year;
(b) Monetized value of vacation and sick leave
credits paid to government officials and
employees;
(c) Medical cash allowance to dependents of
employees, not exceeding P750 per
employee per semester or P125 per month;
(d) Rice subsidy of P1,500 or one (1) sack of 50
kg. rice per month amounting to not more
than P1,500;
(e) Uniform and Clothing allowance not
exceeding P5,000 per annum (RR 8-2012)
(f) Actual medical assistance, e.g. medical
allowance to cover medical and healthcare
needs, annual medical/executive check-up,
maternity assistance, and routine
consultations, not exceeding P10,000.00
per annum;
(g) Laundry allowance not exceeding P300 per
month;
(h) Employees achievement awards, e.g., for
length of service or safety achievement,
which must be in the form of a tangible
personal property other than cash or gift
certificate, with an annual monetary value
not exceeding P10,000 received by the
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employee under an established written plan ZV = Zonal Value = value of the land or
which does not discriminate in favor of improvement, as declared in the Real Property
highly paid employees; Declaration Form
(i) Gifts given during Christmas and major
anniversary celebrations not exceeding FMV = Fair Market Value = FMV as determined
P5,000 per employee per annum; and by the Commissioner of Internal Revenue
(j) Daily meal allowance for overtime work and
night/graveyard shift not exceeding twenty- Non-taxable housing fringe benefit:
five percent (25%) of the basic minimum (1) Housing privilege of the Armed Forces of
wage on a per region basis; the Philippines (AFP) officials – i.e, those of
the Philippine Army, Philippine Navy, or
All other benefits given by employers which are Philippine Air Force
not included in the above enumeration shall (2) A housing unit, which is situated inside of
NOT be considered as "de minimis" benefits adjacent to the premises of a business or
and hence, shall be subject to withholding tax factory maximum of 50 meters from
on compensation (rank and file employees) perimeter of the business premises
and FBT (managerial/supervisory employees). (3) Temporary housing for an employee who
stays in housing unit for three months or
less
Housing
Fringe Benefit Tax Motor Vehicle
Housing Privilege Base (Monetary Fringe Benefit Tax
Value) Motor Vehicle
Base
(1) LEASE of residential MV= 50% of lease (1) Purchased in the MV= acquisition
property for the payments name of the employee cost
residential use of (2) Cash given to MV= cash received
employees where MV = employee to purchase by employee
monetary value of in his own name
the FB (3) Purchase on MV= acquisition
(2) Assignment of MV= [5% (FMV or installment, in the cost exclusive of
residential property ZV, whichever is name of employee interest
owned by employer for higher) x 50%] (4) Employee shoulders MV= amount
use of employees part of the purchase shouldered by
(3) Purchase of residential MV= 5% x price, ownership in the employer
property in installment acquisition cost name of employee
basis for the use of the exclusive of (5) Employer owns and MV= (AC/5) x 50%
employee interest x 50% maintains a fleet of
(4) Purchase of residential MV= FMV or ZV, motor vehicles for use
property and whichever is of the business and of
ownership is higher employees
transferred in the (6) Employer leases and MV= 50% of rental
name of the employee maintains a fleet for payment
the use of the
business and of
employees

52
UP COLLEGE OF LAW TAXATION 1 TAXATION LAW

Professional Income
Refers to fees received by a professional from Net Capital
the practice of his profession, provided that Taxable Gains (other
Ordinary
there is NO employer-employee relationship Net = + than those
Net Income
between him and his clients. Income subject to final
CGT)
Income from Business
(a) Any income derived from doing business
(b) Doing business: The term implies a
Ordinary Asset Capital Asset
continuity of commercial dealings and
arrangements, and contemplates, to that Gain from sale, exchange or other disposition
extent, the performance of acts or works or Ordinary Gain (part of
Capital Gain
the exercise of some of the functions Gross Income)
normally incident to, and in progressive Loss from sale, exchange, or other disposition
prosecution of, the purpose and object of its Ordinary Loss (part of
organization. Allowable Deductions Capital Loss
from Gross Income)
Income from Dealings in Property Excess of Gains over Losses
Dealings in property such as sales or Part of Gross Income Net Capital Gain
exchanges may result in gain or loss. The kind Excess of Losses over Gains
of property involved (i.e., whether the property Part of Allowable
is a capital asset or an ordinary asset) Deductions from Net Capital Loss
determines the tax implication and income tax Gross Income
treatment, as follows:

Types of Properties
Capital v. Ordinary Asset

Ordinary Assets Capital Assets

(1)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.
(2) Property held by the taxpayer primarily for sale
to customers in the ordinary course of his trade or
business.
(3) Property used in the trade or business of a
character which is subject to the allowance for
depreciation, or
(4) Real property used in the trade or business of
the taxpayer, including property held for rent.
Property held by the taxpayer, whether or not
connected with his trade or business which is
not an ordinary asset.
Generally, they include:
(1) stocks and securities held by taxpayers other
than dealers in securities
(2) real property not used in trade or business,
such as residential house and lot, idle or
vacant land or building
(3)investment property, such as interest in a
partnership, stock investment
(4)Personal or non-business properties, such as
family car, home appliances, jewelry.

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Types of Gains from dealings in property
(1) Ordinary income vis-à-vis Capital gain. –
If the asset involved is classified as ordinary,
the entire amount of the gain from the
transaction shall be included in the
computation of gross income [Sec 32(A)], and
the entire amount of the loss shall be
deductible from gross income. [Sec 34(D)].
(See Allowable Deductions from Gross Income
- Losses)
If the asset involved is a capital asset, the rules
on capital gains and losses apply in the
determination of the amount to be included in
gross income. (See Capital Gains and Losses).
These rules do not apply to: (a) real property
with a capital gains tax (final tax), or (2) shares
of stock of a domestic corporation with a
capital gains tax (final tax). Also, sale of shares
of stock of a domestic corporation, held as
capital assets, through the stock exchange by
either individual or corporate taxpayers, is
subject to ½ of 1% percentage tax based on
gross selling price.
The following percentages of the gain or loss
recognized upon the sale or exchange of a
capital asset shall be taken into account in
computing net capital gain, net capital loss,
and net income:
(a) If the taxpayer is an individual –
100% if the capital asset has been held for
not more than 12 months; and
50% of the capital asset has been held for
more than 12 months
(b) If the taxpayer is a corporation –
100%, regardless of the holding period of
the capital asset (Sec. 39(B), NIRC)
The tax rules for the gains or losses from sales
or exchanges of capital assets over ordinary
assets are as follows:
(1) Net capital gain is added to ordinary gain
but net capital loss is not deductible from
ordinary gain.
TAXATION 1 TAXATION LAW
(2) Net ordinary loss is deductible from
ordinary gain.
(3) Capital losses are deductible only to the
extent of the capital gain.
(4) There is a net capital loss carry-over on the
net capital asset’s loss in a taxable year
which may be deducted as a short-term
capital loss from the net capital gain of the
subsequent taxable year; provided that the
following conditions shall be observed:
(5) The taxpayer is other than a corporation;
(6) The amount of loss does not exceed the
income before exemptions at the year when
the loss was sustained; and
(7) The holding period should not exceed 12
months. (Valencia)
When a capital gain or capital loss is sustained
by a corporation, the following rules shall be
observed:
(1) There is no holding period; hence, there is
no net capital loss carry-over.
(2) Capital gains and losses are recognized to
the extent of their full amount.
(3) Capital losses are deductible only to the
extent of capital gains.
(4) Net capital losses are not deductible from
ordinary gain or income but ordinary losses
are deductible from net capital gains.
Note: For sale, barter, exchange or other forms
of disposition of shares of stock subject to the
5%/10% capital gains tax on the net capital
gain during the taxable year, the capital losses
realized from this type of transaction during
the taxable year are deductible only to the
extent of capital gains from the same type of
transaction during the same period. If the
transferor of the shares is an individual, the
rule on holding period and capital loss carry-
over will not apply, notwithstanding the
provisions of Section 39 of the Tax Code as
amended. (RR 6-2008, c.4)
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(2) Actual gain vis-à-vis Presumed gain
Presumed Gain: In the sale of real property
located in the Philippines, classified as capital
asset, the tax base is the gross selling price or
fair market value, whichever is higher. The law
presumes that the seller makes a gain from
such sale. Thus, whether or not the seller
makes a profit from the sale of real property,
he has to pay 6% capital gains tax. In fact, her
has to pay the tax, even if he incurs an actual
loss from the sale thereof. (Note, however, that
where an individual sells his real property
classified as a capital asset to the government,
he has the option whether to be taxed at the
graduated income tax rates or at 6% capital
gains tax.)
Actual Gain: The tax base in the sale of real
property classified as an ordinary asset is the
actual gain. If the seller incurs a loss from the
sale, such loss may be deducted from his gross
income during the taxable year. The ordinary
gain shall be added to the operating income
and the net taxable income shall be subject to
the graduated rates from 5% to 32% (if an
individual) or to 30% corporate tax or to 2%
MCIT (if a corporation).
Computation of the amount of gain or loss
Amount realized from sale or other
disposition of property
Less: Basis or Adjusted Basis
NET GAIN (LOSS)
Note: Amount realized from sale or other
disposition of property = sum of money
received + fair market value of the property
(other than money) received
Note: When a taxpayer sells a real or personal
property, he should deduct its cost from its
selling price to measure the gain or loss from
the sales transaction (Sec. 40, NIRC).
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TAXATION LAW
(3) Long term capital gain vis-à-vis Short term
capital gain
Long-term capital gain: Capital asset is held for
more than twelve months before it is sold. Only
50% of the gain is recognized.
Short-term capital Gain: Capital asset is held
for less than 12 months. 100% of the gain is
subject to tax.
(4) Net Capital Gain vis-à-vis Net Capital Loss
Net Capital Gain is the excess of the gains over
the losses on sales or exchange of capital
assets during the taxable year.
Net Capital Loss means the excess of the losses
over the gains on sales or exchanges of capital
assets during the taxable year. [Sec. 39A,
NIRC]
(5) Computation of the amount of Gain or Loss
For income tax purposes the following rules
should be observed regarding the cost and
expenses of the capital assets: (1) the costs and
expenses of the acquisition are to be
capitalized, and (2) the expenses of disposition
are to be treated as reduction from the selling
price. (Valencia)
(1) Cost or basis of the property sold: In
computing the gain or loss from the sale or
other disposition of property, the BASIS shall
be as follows:
(a) Property acquired by purchase – its
acquisition cost, i.e., the purchase price plus
expenses of acquisition.
(b) Property which should be included in the
inventory – its latest inventory value [RR-2
sec 136]
(c) Property acquired by devise, bequest or
inheritance – its fair market price or value as
of the date of acquisition (inheritance)
UP COLLEGE OF LAW TAXATION 1
(d) Property acquired by gift or donation – the
basis is the same as it would be in the hands
of the donor or at the last preceding owner
by whom it was not acquired by gift, or the
fair market value at the time the gift was
made, whichever is lower
(e) Property acquired for less than an adequate
consideration in money’s worth – the
amount paid by the transferee for the
property
(2) Cost or basis of the property exchanged in
corporate reorganizations: Sales or exchanges
resulting in non-recognition of gains or losses:
Exchange Solely in Kind -
(1) If in pursuance of a plan of merger or
consolidation, exchanges:
(a) Between the corporations which are
parties to the merger or consolidation
(property solely for stocks);
(b) Between a stockholder of a corporation
party to a merger or consolidation and
the other corporation, which is a party to
the merger or consolidation (stock in a
corporation solely for the stock of
another corporation);
(c) Between a security holder of a
corporation party to a merger or
consolidation and the other corporation,
which is a party to the merger or
consolidation (securities solely for
securities)
(2) Transfer to a controlled corporation – a
person transfers his property to a
corporation in exchange for stocks in such a
corporation, resulting in acquisition of
corporate control by said person, alone or
together with others not exceeding four (4).
Exchange Not Solely in Kind -Gain, but not the
loss, shall be recognized if, in connection with
an exchange described in the above
exceptions:
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TAXATION LAW
(a) An individual, a shareholder, a security
holder or a corporation receives not only
stock or securities permitted to be received
without the recognition of gain or loss, but
also money and/or property.
The gain, if any, but not the loss, shall be
recognized but in an amount not in excess
of the sum of the money and the fair market
value of such other property received.
As to the shareholder, if the money and/or
other property received has the effect of a
distribution of a taxable dividend, there
shall be taxed as dividend to the
shareholder an amount of the gain
recognized not in excess of his
proportionate share of the undistributed
earnings and profits of the corporation.
The remainder, if any, of the gain
recognized shall be treated as a capital gain
(Sec. 40 (C) (3) (a), NIRC).
(b) The transferor corporation receives not only
stock permitted to be received without the
recognition of gain or loss but also money
and/or other property, then -
(i) if the corporation receiving such money
and/or other property distributes it in
pursuance of the plan of merger or
consolidation, no gain to the corporation
shall be recognized from the exchange,
but
(ii) if the corporation receiving such other
property and/or money does not
distribute it in pursuance of the plan of
merger or consolidation, the gain, if any,
but not the loss to the corporation shall
be recognized.
The gain shall be recognized in an
amount not in excess of the sum of such
money and the fair market value of such
UP COLLEGE OF LAW TAXATION 1
other property so received, which is not
distributed (Sec. 40 (C) (3) (b), NIRC).
If an individual, stockholder, security holder or
corporation receives on the exchange not only
stock or securities but also money and/ or
property (boot), the gain but not the loss shall
be recognized, in an amount not exceeding the
sum of the money and fair market value of the
property received.
If the money or other property received has the
effect of a distribution of a taxable dividend,
there shall be taxed as dividend to the
stockholder an amount of the gain recognized
not in excess of his proportionate share of the
undistributed earnings and profits of the
corporation.
The remainder, if any, of the gain recognized
shall be treated as a capital gain.
SUBSTITUTED BASIS OF STOCK OR
SECURITIES RECEIVED BY TRANSFEROR
UPON THE EXCHANGE:
Original basis (cost) of the property, stock or
securities exchanged/transferred
LESS: (a) Money received, if any; and
(b) FMV of the other property received.
Balance
ADD: (a) The amount treated as dividend of the
shareholder; and
(b) The amount of any gain that was
recognized on the exchange.
Basis (Cost) of the stock received
Notes:
(a) The property received as “boot” shall have
as basis its FMV
(b) If as part of the consideration to the
transferor, the transferee of property
assumes a liability of the transferor or
acquires from the latter property subject to
a liability, such assumption or acquisition
(in the amount of liability), shall be treated
57
TAXATION LAW
as money received by the transferor on the
exchange
(c) If the transferor receives several kinds of
stocks or securities, the Commissioner is
authorized to allocate the basis among the
several classes of stocks or securities
received.
SUBSTITUTED BASIS OF PROPERTY
TRANSFERRED:
The basis of the property transferred in the
hands of the transferee shall be the same as it
would be in the hands of the transferor
increased by the amount of the gain
recognized to the transferor on the transfer
[Sec. 40 (C)(5), NIRC].
Recognition of gain or loss in exchange of
property:
General rule: Upon the sale or exchange of
property, the ENTIRE amount of the gain or
loss shall be recognized.
Exceptions: No gain or loss shall be
recognized:
(1) If in pursuance of a plan of merger or
consolidation:
(a) A corporation, which is a party to a
merger or consolidation, exchanges
property solely for stock in a corporation,
which is a party to the merger or
consolidation;
(b) A shareholder exchanges stock in a
corporation, which is a party to a merger
or consolidation, solely for the stock of
another corporation also a party to the
merger or consolidation; or
(c) A security holder of a corporation, which
is a party to the merger or consolidation,
exchanges his securities in such
corporation, solely for stock or securities
in another corporation, a party to the
merger or consolidation.
(2) If property is transferred to a corporation by
a person in exchange for stock or unit of
UP COLLEGE OF LAW TAXATION 1
participation in such a corporation, of which
as a result of such exchange, said person,
alone or together with others not exceeding
4 persons, gains control of the corporation.
- Stocks issued for services shall not be
considered as issued in property.
Meaning of merger, consolidation, control,
securities
(a) Merger and consolidation for tax purposes
shall mean (1) The ordinary merger or
consolidation; or (2) The acquisition by one
corporation of all or substantially all the
properties of another corporation solely for
stock (Sec. 40(C )(6)(b), NIRC).
(b) Requirements to establish merger or
consolidation
(1) Must be undertaken for a bona fide
business purpose and not solely for the
purpose of escaping the burden of
taxation
(2) In determining whether a bona fide
business purpose exists, each and every
step of the transaction shall be
considered and the whole transaction or
series of transaction shall be treated as a
single unit
(3) The property transferred must constitute
a substantial portion of the property of
the transferor (Sec. 40(C)(6)(b), NIRC).
Note: In determining whether the
property transferred constitutes a
substantial portion of the property of the
transferor, the term 'property' shall be
taken to include the cash assets of the
transferor (Sec. 40(C)(b), NIRC).
(c) “Substantially All”: the acquisition by one
corporation of at least 80% of the assets,
including cash, of another corporation,
which has the element of permanence and
not merely momentary holding.
(d) Securities: bonds and debentures but not
"notes" of whatever class or duration (Sec.
40(C)(6)(a), NIRC)
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TAXATION LAW
(e) Control: 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 (Sec.
40(C)(6)(c), NIRC).
(6) Income tax treatment of capital loss
(a) Capital loss limitation rule (applicable to
both corporations and individuals)
General Rule: Losses from sales or exchanges
of capital assets shall be allowed only to the
extent of the gains from such sales or
exchanges (Sec. 39(C), NIRC).
EXCEPTION for Banks and Trust Companies: If
a bank or trust company incorporated under
the laws of the Philippines, a substantial part
of whose business is the receipt of deposits,
sells any bond, debenture, note, certificate or
other evidence of indebtedness issued by any
corporation (including one issued by a
government or political subdivision thereof)
with interest coupons or in registered form, any
loss resulting from such sale shall not be
subject to the foregoing limitation and shall
not be included in determining the
applicability of such limitation to other losses
(Sec. 39(C), NIRC).
(b) Net loss carry-over rule (applicable only to
individuals)
If an individual sustains in any taxable year a
net capital loss, such loss (in an amount not in
excess of the net income for the year) shall be
treated in the succeeding taxable year as a loss
from the sale or exchange of a capital asset
held for not more than 12 months (Sec. 39(D),
NIRC).
UP COLLEGE OF LAW TAXATION 1
(7) Dealings in real property situated in the
Philippines
Persons Liable and Transactions Affected
(a) Individual taxpayers, estates and trusts
(1) Sale or exchange or other disposition of
real property considered as capital
assets.
(2) Includes "pacto de retro sale" and other
conditional sale.
(b) Domestic Corporation
Sale or exchange or disposition of lands
and/or building which are not actually used
in business and are treated as capital asset.
Rate and Basis of Tax
A final withholding tax of 6% is based on the
gross selling price or fair market value or zonal
value whichever is higher.
Note: Gain or loss is immaterial, there being a
conclusive presumption of gain.
(8) Dealings in shares of stock of Philippine
corporations
Persons Liable to the Tax:
(a) Individual taxpayer, whether citizen or alien;
(b) Corporate taxpayer, whether domestic or
foreign; and
(c) Other taxpayers not falling under (a) and (b)
above, such as estate, trust, trust funds and
pension funds, among others.
Persons not liable:
(a) Dealers in securities
(b) Investor in shares of stock in a mutual fund
company
(c) All other persons who are specifically
exempt from national internal revenue
taxes under existing investment incentives
and other special laws.
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TAXATION LAW
Shares listed and traded through the stock
exchange other than sale by a dealer in
securities:
(1) ½ of 1% of the gross selling price of the
stock or gross value in money of the shares
of stock sold, bartered, exchanged or
otherwise disposed which shall be assumed
and paid by the seller or transferor through
the remittance of the stock transaction tax
by the seller or transferor’s broker.
(2) Note: In the nature of percentage tax and
not income tax; exempt from income tax per
Section 127 (d):
“Any gain derived from the sale, barter,
exchange or other disposition of share of
stock under this section shall be exempt
from taxes imposed in Sections 24(C),
27(D)(2), 28(A)(8)(c), and 28(B)(5)(c) of this
Code and from the regular individual or
corporate income tax.”
(3) Note: Percentage tax under Sec. 127 is NOT
DEDUCTIBLE for income tax purposes.
Shares not listed and traded through the stock
exchange
Net capital gains derived during the taxable
year from sale, exchange, or transfer shall be
taxed as follows (on a per transaction basis):
Amount of Capital Tax Rate
Gain
Not over P 100,000 - 5%
On any amount in - 10%
excess of P 100,000
(9) Sale of principal residence
Principal residence: the family home of the
individual taxpayer (RR 14-2000)
Disposition of principal residence (capital
asset) is exempt from Capital Gains Tax,
provided:
(a) Sale or disposition of the old principal
residence;
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(b) By natural persons - citizens or aliens
provided that they are residents taxable
under Sec. 24 of the Code (does not include
an estate or a trust);
(c) The proceeds of which is fully utilized in (a)
acquiring or (b) constructing a new principal
residence within eighteen (18) months from
date of sale or disposition;
(d) Notify the Commissioner within thirty (30)
days from the date of sale or disposition
through a prescribed return of his intention
to avail the tax exemption;
(e) Can only be availed of onlyonce every ten
(10) years;
(f) The historical cost or adjusted basis of his
old principal residence shall be carried over
to the cost basis of his new principal
residence
(g) If there is no full utilization, the portion of
the gains presumed to have been realized
shall be subject to capital gains tax.
(h) Portion of presumed gains subject to CGT:
(Unutilized/GSP) x (higher of GSP or FMV)
Passive Investment Income
Under Sec 24(B), a final tax is imposed upon
gross passive income of citizen and resident
aliens. An income is considered passive if the
taxpayer merely waits for it to be realized.
(a) Interest Income
An earning derived from depositing or lending
of money, goods or credits [Valencia and
Roxas] e.g., interest income from government
securities such as Treasury Bills.
Unless exempted by law, interest income
received by the taxpayer, whether or not
usurious, is subject to income tax.
(b) Dividend Income
A form of earnings derived from the
distribution made by a corporation out of its
earnings or profits and payable to its
stockholders, whether in money or in property.
TAXATION 1 TAXATION LAW
In general, dividends are included in the gross
income of the stockholder, unless they are
exempt from tax or subject to final ax at
preferential rate under the Tax Code.
1. Cash dividend
Dividends are included in the gross income
of the stockholder, unless they are exempt
from tax or subject to tax at preferential
rate under the NIRC. Cash dividend is the
most common form of dividend, valued at
the amount of money received by the
stockholder. Cash dividend and property
dividend are subject to income tax.
2. Stock dividend
Stock dividend is generally exempt from
income tax, EXCEPT:
(a) If a corporation cancels or redeems
stock issued as a dividend at such time
and in such manner as to make the
distribution and cancellation or
redemption, in whole or in part,
essentially equivalent to the
distribution of a taxable dividend, the
amount so distributed in redemption or
cancellation of the stock shall be
considered as taxable income to the
extent that it represents a distribution
of earnings or profits (Sec. 73(B),
NIRC); or
(b) Where there is an option that some
stockholders could take cash or
property dividends instead of stock
dividends; some stockholders
exercised the option to take cash of
property dividends; and the exercise of
option resulted in a change of the
stockholders’ proportionate share in
the outstanding share of the
corporation.
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3. Property dividend
Dividends are included in the gross income
of the stockholder, unless they are exempt
from tax or subject to tax at preferential
rate under the NIRC. Cash dividend and
property dividend are subject to income
tax.
4. Liquidating dividend
Represents distribution of all the property
or assets of a corporation in complete
liquidation or dissolution. It is strictly not
TAXATION 1 TAXATION LAW
dividend income, but rather is treated in
effect, as a sale of shares of stock resulting
in capital gain or loss. The difference
between the cost or other basis of the stock
and the amount received in liquidation of
the stock is a capital gain or a capital loss.
Where property is distributed in
liquidation, the amount received is the
FMV of such property. The income is
subject to ordinary income tax rates and
NOT to the FWT on dividends.
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(c) Royalty Income (3) If the advance payment is, in fact, a

Royalty is a valuable property that can be pre-paid rental, received by the
developed and sold on a regular basis for a lessor under a claim of right and
consideration; in which case, any gain without restriction as to its use,
derived therefrom is considered as an then such payment is income to
active business income subject to the the lessor.
normal corporate tax. (4) Pre-paid rent must be reported in
full in the year of receipt,
Where a person pays royalty to another for regardless of the accounting
the use of its intellectual property, such method used by the lessor.
royalty is generally a passive income of the
owner thereof subject to withholding tax. (1) Lease of personal property
Rental income on the lease of personal
(d) Rental Income property located in the Philippines and
Refers to earnings derived from leasing paid to a non-resident taxpayer shall be
real estate as well as personal property. taxed as follows:
Aside from the regular amount of payment
for using the property, it also includes all Non- Non-
other obligations assumed to be paid by Resident Resident
the lessee to the third party in behalf of the Corporation Alien
lessor (e.g., interest, taxes, loans, Vessel 4.5% 25%
insurance premiums, etc.) [RR 19-86] Aircraft, 7.5% 25%
machineries and
Rent income may be in the following other Equipment
forms: Other assets 30% 25%
(a) Cash, at the stipulated price
(b) Obligations of the lessor to third (2) Lease of real property
persons paid or assumed by the Lessor Tax Rate
lessee in consideration of the contract Citizen Net taxable income
of lease, e.g., real estate tax on the Resident Alien shall be subject to the
property leased assumed by the Non-resident alien graduated income tax
lessee engaged in trade or rates
(c) Advance payment business in the
(1) If the advance payment is actually Philippines
a loan to the lessor, or an option Non-resident alienRental income from
money for the property, or a not engaged in trade real property located
security deposit for the faithful or business in the in the Philippines
performance of certain obligations Philippines shall be subject to
of the lessee, such advance 25% final
payment is not income to the withholding tax
lessor. unless a lower rate is
(2) However, a security deposit that is imposed pursuant to
applied to rental is taxable income an effective tax treaty
to the lessor. Domestic Corporation Net taxable income
Resident Foreign shall be subject to

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Lessor Tax Rate the amount already reported as income on

Corporation 30% corporate account of the erection of such building or
income tax or its improvement. No appreciation in value due to
gross income will be causes other than the premature termination
subject to 2% MCIT of lease shall be included (Sec. 49, Rev. Reg.
Non-resident Foreign Gross rental income No. 2).
Corporation from real property
located in the If the building or other leasehold improvement
Philippines shall be is destroyed before the expiration of the lease,
subject to 30% the lessor is entitled to deduct as a loss for the
corporate income tax, year when such destruction takes place, the
such tax to be amount previously reported as income because
withheld and of the erection of the improvement, less any
remitted by the lessee salvage value, to the extent that such loss was
in the Philippines not compensated by insurance (Sec. 49, Rev.
Reg. No. 2),
(3) Tax treatment of:
(b) VAT added to rental/paid by the lessee
(a) Leasehold improvements by lessee
Rent Income from leasehold If the lessee is VAT-registered, treat VAT paid
improvements: as input VAT;
i. Outright method- lessor shall report as
income FMV of the buildings or If the lessee is not VAT-registered OR not
improvements subject to the lease in liable to VAT, treat VAT paid as additional rent
the year of completion. expense deductible from gross income.
ii. Spread-out method- lessor shall
spread over the remaining term of the (c) Advance Rental/ Long Term Lease
lease the estimated depreciated (book)
value of such buildings or Pre-paid rent must be reported in full in the
improvements at the termination of the year of receipt, regardless of the accounting
lease, and reports as income for each method used by the lessor.
remaining term of the lease an aliquot
part thereof. estimated BV at the iii. Annuities, Proceeds from life insurance
end of the lease contract/ remaining or other types of insurance
lease term = Income per year Annuities are installment payments received
for life insurance sold by insurance companies.
If for any reason than a bona fide purchase
from the lessee by the lessor, the lease is The aleatory contract of life annuity binds the
terminated, so that the lessor comes into debtor to pay an annual pension or income
possession or control of the property prior to during the life of one or more determinate
the time originally fixed, lessor receives persons in consideration of a capital consisting
additional income for the year which the lease of money or other property, whose ownership is
is so terminated to the extent of the value of transferred to him at once with the burden of
such buildings or improvements when he the income. [Art. 2021, New Civil Code]
became entitled to such possession exceeds

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The annuity payments represent a part that is
taxable and not taxable. If part of annuity
payment represents interest, then it is a
taxable income. If the annuity is a return of
premium, it is not taxable.
iv. Prizes and awards
A prize is a reward for a contest or a
competition. It represents remuneration for an
effort reflecting one’s superiority.
Contest prizes and awards received are
generally taxable. Such payment constitutes
gain derived from labor.
The EXCEPTIONS are as follows:
(1) Prizes and awards made primarily in
recognition of religious, charitable,
scientific, educational, artistic, literary or
civic achievements are EXCLUSIONS from
gross income if:
(a) The recipient was selected without any
action on his part to enter a contest or
proceedings; and
(b) The recipient is not required to render
substantial future services as a condition
to receiving the prize or award.
(2) Prizes and awards granted to athletes in
local and international sports competitions
and tournaments held in the Philippines
and abroad and sanctioned by their
national associations shall be EXEMPT from
income tax.
v. Pensions, retirement benefit, or
separation pay
(1) Paid for past employment services
rendered.
(2) A stated allowance paid regularly to a
person on his retirement or to his
dependents on his death, in consideration
of past services, meritorious work, age, loss
or injury. It is generally taxable unless the
law states otherwise. [VALENCIA, Income
Taxation 5th ed. (200/’’9)]
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TAXATION LAW
vi. Income from any source whatever
Inclusion of all income not expressly exempted
within the class of taxable income under the
laws irrespective of the voluntary or involuntary
action of the taxpayer in producing the gains,
and whether derived from legal or illegal
sources
Forgiveness of indebtedness
The cancellation or forgiveness of
indebtedness may have any of three possible
consequences:
(a) It may amount to payment of income. If,
for example, an individual performs
services to or for a creditor, who, in
consideration thereof, cancels the
debt, income in that amount is realized
by the debtor as compensation for
personal services.
(b) It may amount to a gift. If a creditor
wishes merely to benefit the debtor,
and without any consideration
therefore, cancels the debt, the
amount of the debt is a gift to the
debtor and need not be included in the
latter’s report of income.
(c) It may amount to a capital transaction.
If a corporation to which a stockholder
is indebted forgives the debt, the
transaction has the effect of a payment
of dividend.
Tax Benefit Rule
This is a general principle in taxation which
states that is a taxpayer deducted an item on
his income tax return and enjoyed a tax benefit
(reduced his income tax) thereby, and in a
subsequent year recovers all or part of that
item, he will recognize gross income in the year
the deducted item is recovered. The rule has
both an inclusionary and an exclusionary
component, i.e., the recovery is included in the
taxpayer’s gross income to the extent that the
taxpayer obtained a tax benefit from the prior
UP COLLEGE OF LAW TAXATION 1 TAXATION LAW

year’s deduction, and the recovery is excluded
to the extent that the prior year’s deduction did
not provide a tax benefit.
Recovery of accounts previously written-off
Bad debts claimed as a deduction in the
preceding year(s) but subsequently recovered
shall be included as part of the taxpayer’s
gross income in the year of such recovery to the
extent of the income tax benefit of said
deduction. There is an income tax benefit when
the deduction of the bad debt in the prior year
resulted in lesser income and hence tax
savings for the company. (Sec. 4, RR 5-99)

Illustration:
Case A Case B Case C
Year 1
Gross Income 500,000 400,000 500,000
Less: Allowable Deductions (200,000) (480,000) (495,000)
(before write-off of Uncollectible
Accounts/Debts)
Taxable Income (Net Loss) 300,000 (60,000) 5,000
before write-off
Deduction for Accounts (2,000) (2,000) (6,000)
Receivable written off
Taxable Income (Net Loss) after 298,000 (62,000) (1,000)
write-off

Year 2
Recovery of Amounts Written Off 2,000 2,000 6,000

Taxable Income on the Recovery 2,000 - 5,000

In Case A, the entire amount recovered
(P2,000) is included in the computation of
gross income in Year 2 because the taxpayer
benefited by the same extent. Prior to the
write-off, the taxable income was P300,000;
after the write-off, the taxable income was
reduced to P298,000.
In Case C, only P5,000 of the P6,000
recovered would be recognized as gross
income in Year 2. It was only to this extent that
the taxpayer benefited from the write-off. The
taxpayer did not benefit from the extra P1,000
because at this point, the P1,000 was already a
net loss.

In Case B, none of the P2,000 recovered would
be recognized as gross income in Year 2. Note
that even without the write-off, the taxpayer
would not have paid any income tax anyway.
The “taxable income” before the write-off was
actually a net loss.
Receipt of tax refunds or credit
General rule: A refund of a tax related to the
business or the practice of profession, is
taxable income (e.g., refund of fringe benefit
tax) in the year of receipt to the extent of the

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income tax benefit of said deduction (i.e., the
tax benefit rule applies).
Exceptions: However, the following tax refunds
are not to be included in the computation of
gross income:
(1) Philippine income tax, except the fringe
benefit tax
(2) Income tax imposed by authority of any
foreign country, if the taxpayer claimed a
credit for such tax in the year it was paid or
incurred.
(3) Estate and donor’s taxes
(4) Taxes assessed against local benefits of a
kind tending to increase the value of the
property assessed (Special assessments)
(5) Value Added Tax
(6) Fines and penalties due to late payment of
tax
(7) Final taxes
(8) Capital Gains Tax
Note: The enumeration of tax refunds that are
not taxable (income) is derived from an
enumeration of tax payments that are not
deductible from gross income.
If a tax is not an allowable deduction from
gross income when paid (no reduction of
taxable income, hence no tax benefit), the
refund is not taxable.
SOURCE RULES IN DETERMINING
INCOME FROM WITHIN AND
WITHOUT
The following items of gross income shall be
treated as gross income from sources WITHIN
the Philippines:
Interests
Derived from sources within the Philippines,
and interests on bonds, notes or other interest-
bearing obligation of residents.
TAXATION 1 TAXATION LAW
Ultimately, the situs of interest income is the
residence of the debtor.
Dividends
Dividends received:
(1) from a domestic corporation; and
(2) from a foreign corporation, UNLESS
less than 50% of its gross income for the
previous 3-year period was derived from
sources within the Philippines [in which
case it will be treated as income partly
from within and partly from without].
The income which is considered as derived
from within the Philippines is obtained by
using the following formula:
Philippine Gross Income* x Dividend = Income
Within Worldwide Gross Income*
NOTE: * of the corporation giving the dividend
As a rule, the situs of dividend income is the
residence of the corporation declaring the
dividend.
Services
Compensation for labor or personal services
performed in the Philippines: As a rule, the
situs of compensation is the place of
performance of the services.
Rentals and Royalties
From property located in the Philippines or
from any interest in such property, including
rentals or royalties for –
(1) The use of or the right or privilege to use in
the Philippines any copyright, patent, design
or model, plan, secret formula or process,
goodwill, trademark, trade brand or other
like property or right;
(2) The use of, or the right to use in the
Philippines any industrial, commercial or
scientific equipment;
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(3) The supply of scientific, technical, industrial Place of Place of Treatment**

or commercial knowledge or information; PURCHASE SALE
(4) The supply of any assistance that is Philippines Abroad Income from
ancillary and subsidiary to, and is furnished Without
as a means of enabling the application or Abroad Philippines Income from
enjoyment of, any such property or right as Within
is mentioned in (a), any such equipment as ** in other words, the situs of the income from
is mentioned in (b) or any such knowledge the sale of personal property is the place of
or information as is mentioned in (c); sale.
(5) The supply of services by a nonresident
person or his employee in connection with Exceptions:
the use of property or rights belonging to, (1) Gain from the sale of shares of stock in
or the installation or operation of any a domestic corporation
brand, machinery or other apparatus Treated as derived entirely from
purchased from such nonresident person; sources within the Philippines
(6) Technical advice, assistance or services regardless of where the said shares are
rendered in connection with technical sold.
management or administration of any (2) Gains from the sale of (manufactured)
scientific, industrial or commercial personal property:
undertaking, venture, project or scheme; (a) produced (in whole or in part) by
and the taxpayer within and sold
(7) The use of or the right to use: without the Philippines, or
(i) Motion picture films; (b) produced (in whole or in part) by
(ii) Films or video tapes for use in the taxpayer without and sold
connection with television; and within the Philippines
(iii) Tapes for use in connection with Treated as derived partly from sources
radio broadcasting. within and partly from sources without
the Philippines.
As a rule, the situs of rental income is the place
where the property is located. The situs of Place of Place of Treatment
royalty income is where the rights are exercised. PRODUCTION SALE
Philippines Abroad Partly within,
partly without
Sale Of Real Property Abroad Philippines Partly within,
As a rule, the situs of the income from sale of partly without
real property is where the realty is located.
Shares of Stock of Domestic Corporation
Sale Of Personal Property Treated as derived entirely from sources within
General Rule: Gains, profits and income from the Philippines regardless of where the said
the sale of personal property, subject to the shares are sold.
following rules:

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SITUS OF INCOME TAXATION The exclusion of income should not be

confused with the reduction of gross income by
Income Situs the application of allowable deductions. While
exclusions are simply not taken into account in
Interest Residence of the debtor determining gross income, deductions are
Dividends Residence of the corporation subtracted from gross income to arrive at net
Services Place of performance income. [De Leon]
Rentals Location of the property
Royalties Place of exercise Items of Exclusions representing return of
Sale of Real Location of realty capital
Property (a) Amount of capital is generally recovered
Sale of (a) Tangible through deduction of the cost or adjusted
Personal basis of the property sold from the gross
(1) Purchase and sale: selling price or consideration, or through
Location of Sale the deduction from gross income of
(2) Manufactured w/in depreciation relating to the property used
and sold w/o: Partly in trade or business before it is sold.
w/in and partly w/o (b) It may also related to indemnities, such as
(3) Manufactured w/o proceeds of life insurance paid to the
and sold w/in: Partly insured’s beneficiaries and return of
w/in and partly w/o premiums paid by the insurance company
to the insured under a life insurance,
(b) Intangible endowment or annuity contract.
(c) Damages, in certain instances, may also be
General rule: Place of Sale exempt because they represent return of
capital.
Exception: Shares of stock of
domestic corporations: Place Items of Exclusion because it is subject to
of incorporation another internal revenue tax
Shares of Place of incorporation The value of property acquired by gift, bequest,
Stock of devise or descent is exempt from income tax
Domestic on the part of the recipient because the receipt
Corporation of such property is already subject to transfer
taxes (estate tax or donor’s tax)
EXCLUSIONS FROM GROSS INCOME
Items of Exclusions because they are expressly
Exclusions from gross income refer to income
exempt from income tax
received or earned but is not taxable as income
(1) Under the Constitution
because it is exempted by law or by treaty.
(2) Under a tax treaty
Such tax-free income is not to be included in
(3) Under special laws
the income tax return unless information
regarding it is specifically called for. Receipts
Rationale for the exclusions
which are not in fact income are, of course,
The term “exclusions” refers to items that are
excluded from gross income.
not included in the determination of gross
income because:

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(a) They represent return of capital or are not
income, gain or profit;
(b) They are subject to another kind of internal
revenue tax;
(c) They are income, gain or profit expressly
exempt from income tax under the
Constitution, tax treaty, Tax Code, or a
general or special law. [Mamalateo]
Taxpayers who may avail of the exclusions
Exclusion Taxpayer
Return of capital All taxpayers since
there is no income.
Already subject to All taxpayers unless
internal revenue tax provided that income
is to be included.
Express exclusion As expressly provided.
Exclusions distinguished from deductions and
tax credit
Exclusions from gross income refer to flow
of wealth to the taxpayer which are not
treated as part of gross income for
purposes of computing the taxpayer’s
taxable income, due to the following
reasons: (1) it is exempted by the
Constitution or a statute; or (2) it does not
come within the definition of income.
Deductions, on the other hand, are the
amounts which the law allows to be
subtracted from gross income in order to
arrive at net income.
Exclusions pertain to the computation of
gross income, while deductions pertain to
the computation of net income.
Exclusions are something received or
earned by the taxpayer which do not form
part of gross income while deductions are
something spent or paid in earning gross
income.
TAXATION 1 TAXATION LAW
Tax Credit refers to amounts subtracted from
the computed tax in order to arrive at taxes
payable.
(A) EXCLUSIONS UNDER THE
CONSTITUTION
(a) Income derived by the government or its
political subdivisions from the exercise of
any essential governmental function
(b) Also, all assets and revenues of a non-
stock, non-profit private educational
institution used directly, actually and
exclusively for private educational
purposes shall be exempt from taxation.
(B) EXCLUSIONS UNDER THE TAX CODE
(SEC. 32, NIRC)
(a) Proceeds of life insurance policies.—
General rule: The proceeds of life insurance
policies paid to his estate or to any beneficiary
(but not a transferee for a valuable
consideration), directly or in trust, upon the
death of the insured, are excluded from the
gross income of the beneficiary. However, if
such amounts are held by the insurer under an
agreement to pay interest thereon, the interest
payments received by the insured shall be
included in gross income. The interest income
shall be taxed at the graduated income tax
rates.
(b) Return of premium paid.—
General rule: The amount received by the
insured as a return of premiums paid by him
under life insurance, endowment, or annuity
contracts, either during the term or at the
maturity of the term mentioned in the contract
or upon surrender of the contract is a return of
capital and not income.
This refers to the cash surrender value of the
contract.
Exception: If the amounts received by the
insured (when added to the amounts already
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received before the taxable year under such whether by suit or agreement, on account of
contract) exceed the aggregate premiums or such injuries or sickness are excluded from
considerations paid (whether or not paid gross income.
during the taxable year), then the excess shall
be included in gross income. Examples of nontaxable and taxable damages
recoveries are:
(c) Amounts received under life insurance,
endowment or annuity contracts.— Amounts Nontaxable – Taxable –
received (other than amounts paid by reason of compensation for compensation for
the death of the insured and interest payments damages on account damages on account
on such amounts) under a life insurance, of of
endowment or annuity contracts are excluded Personal (physical) Actual damages for
from gross income, but if such amounts (when injuries or sickness loss of anticipated
added to amounts already received before the profits
taxable year under such contract) exceed the
Any other damages .Moral and exemplary
aggregate premiums of considerations paid
recovered on account damages awarded as
(whether or not paid during the taxable year),
of personal injuries or a result of break of
then the excess shall be included in gross
sickness contract
income. However, in the case of a transfer for
valuable consideration, by assignment or Exemplary and moral Interest for non-
otherwise, of a life insurance, endowment , or damages for out-of- taxable damages
annuity contract, or any interest therein, only court settlement, above
the actual value of such consideration and the including attorney’s
amount of the premiums and other sums fees
subsequently paid by the transferee are Alienation of affection, Any damages as
exempt from taxation. or breach of promise compensation for
to marry unrealized income
(d) Value of property acquired by gift, Any amount received
bequest, devise or descent.— Gifts, bequests as a return of capital
and devises (which are subject to estate or gift or reimbursement of
taxes) are excluded from gross income, BUT expenses
not the income from such property. If the
amount received is on account of services
(f) Income exempt under tax treaty.—
rendered, whether constituting a demandable Income of any kind, to the extent required by
debt or not, or the use or opportunity to use of
any treaty obligation binding upon the
capital, the receipt is income (Pirovano v.
Government of the Philippines.
Commissioner G.R. No. L-19865, July 31, 1965).
(g) Retirement benefits, pensions,
(e) Amount received through accident or gratuities, etc..—
health insurance (Compensation for
These are:
damages).— As a rule, amounts received (1) Retirement benefits under RA 7641,
through accident or health insurance or under
RA 4917, and Section 60(B) of the
workmen’s compensation acts, as
NIRC
compensation for personal injuries or sickness, (2) Terminal pay
plus the amount of any damages received,

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(3) Retirement Benefits from foreign
government agencies
(4) Veterans benefits
(5) Benefits under the Social Security Act
(6) GSIS benefits
Retirement benefits received under RA 7641(The
Retirement Pay Law) and those received by
officials and employees of private firms under a
reasonable private benefit plan (RPBP)
maintained by the employer under RA 4917 (now
Section 32(B)(6)(a) of NIRC) are excluded from
gross income subject to income tax.
RA 7641 RPBP
Retiring employee Retiring official or
must be in the service employee must have
of same employer been in the service of
CONTINUOUSLY for the same employer for
at least five (5) years at least ten (10) years.
Retiring employee Retiring official or
must be at least sixty employee must be at
(60) years old but not least fifty (50) years
more than 65 years of old at the time of
age at the time of retirement
retirement
Availed of only once, Retiring employee
and only when there shall not have
is no RPBP previously availed of
the privilege under a
retirement benefit
plan of the same or
another employer
Plan must be
reasonable. Its
implementation must
be fair and equitable
for the benefit of all
employees (e.g. from
president to laborer)
Plan must be
approved by BIR
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TAXATION LAW
A 'reasonable private benefit plan' means a
pension, gratuity, stock bonus or profit-sharing
plan maintained by an employer for the benefit
of some or all of his employees wherein
contributions are made by such employer, or
employees, or both for the purpose of
distributing to such employees the earnings
and principal of the fund thus accumulated by
the trust in accordance with such plan (trust
fund)
Further, it should be provided in the plan that
at no time prior to the satisfaction of all
liabilities with respect to employees under any
trust, shall any part of the corpus or income of
the fund be used for, or be diverted to, any
purpose other than for the exclusive benefit of
his employees.
Terminal pay/Separation pay
Any amount received by an employee or by his
heirs from the employer as a consequence of
separation of such official or employee from
the service of the employer because of death,
sickness, other physical disability or for any
cause beyond the control of the employee. The
phrase “for any cause beyond the control of the
said official or employee” means that the
separation of the employee must be
involuntary and not initiated by him.
The separation must not be of his own making.
Notes:
Sickness must be life-threatening or one
which renders the employee incapable of
working
Retrenchment of the employee due to
unfavorable business conditions or
financial reverses is considered as
involuntary. However, resignation or
availment of an optional early retirement
plan is voluntary and bars a claim under
this provision.
UP COLLEGE OF LAW TAXATION 1
BIR Ruling 143-98: The “terminal leave pay”
(amount paid for the commutation of leave
credits) of retiring government employees
is considered not part of the gross salary,
and is exempt from taxes. The government
recognizes that for most public servants,
retirement pay is always less than
generous if not meager and scrimpy.
Terminal leave payments are given not
only at the same time but also for the same
policy considerations governing retirement
benefits. (Commissioner v. Castaneda, 203
SCRA 72).
Retirement BENEFITS from foreign
government agencies – The social security
benefits, retirement gratuities, pensions
and other similar benefits received by
resident or non-resident citizens or aliens
who come to reside permanently in the
Philippines from foreign government
agencies and other institutions, private or
public;
Payments of VETERANS benefits under U.S.
Veterans Administration – Payments of
benefits due or to become due to any
person residing in the Philippines under
the laws of the United States administered
by the United States Veterans
Administration
Social Security Act benefits – Payments of
benefits received under the Social Security
Act of 1954 (RA 8282), as amended, e.g.,
Maternity Benefits
GSIS benefits – Benefits received from GSIS
under the GSIS Act of 1937, as amended,
and the retirement gratuity received by
government officials and employees are
not taxable. [Sec. 32B6., NIRC; Sec. B1, RR
2-98]
Winnings, prizes and award, including those
in sports competitions.—All prizes and
awards granted to athletes:
(1) in local and intern ational sports
competitions and tournaments
72
TAXATION LAW
whether held in the Philippines or
abroad, AND
(2) sanctioned by their national sports
associations
shall not be included in gross income and
shall be tax exempt. [Sec. 32 B7d, NIRC]
Prizes and awards made primarily in
recognition of charitable, literary,
educational, artistic, religious, scientific, or
civic achievement are not taxable, provided:
(1) Recipient was selected without any
action on his part to enter the contest
or proceeding; and
(2) Recipient is not required to render
substantial future services as a
condition to receiving the prize or
award
(C) UNDER SPECIAL LAWS
Personal Equity and Retirement Account
(1) Under R.A. 6657 (Comprehensive Agrarian
Reform Package Law), gain arising from the
transfer of agricultural property covered by
the law shall be exempt from capital gains
tax.
(2) Under R.A. 6938 (Cooperative Code of the
Philippines), as amended by R.A. 9520,
cooperatives transacting business with
both members and non-members shall not
be subject to tax on their transactions with
members. In relation to this, the
transactions of members with the
cooperative shall not be subject to any
taxes and fees, including but not limited to
final taxes on members' deposits.
(3) Under R.A. 7916 (PEZA Law), as amended,
PEZA-registered enterprises are given
income tax holidays of six or four years
from the date of commercial operations,
depending on whether their activities are
considered pioneer or non-pioneer.
(4) Under R.A. 9178 (Barangay Micro Business
Enterprises Act of 2002), BMBEs shall be
UP COLLEGE OF LAW
exempt from income tax for income arising
from the operation of the enterprise.
DEDUCTIONS FROM GROSS INCOME
Deductions are items or amounts which the law
allows to be deducted from the gross of
income of a taxpayer in order to arrive at
taxable income.
In general, deductions or allowable deductions
are business expenses and losses incurred
which the law allows to reduce gross business
income to arrive at net income subject to tax.
[Sec. 65, Rev. Reg. No. 2]
Deductions are in the nature of an exemption
from taxation; they are strictly construed
against the claimant, who must point to a
specific provision allowing them and who has
the burden of proving that they falls within the
purview of such provision. Thus, all deductions
must be substantiated, except when the law
dispenses with the records, documents or
receipts to support the deductions.
If the exemption is not expressly stated in the
law, the taxpayer must at least be within the
purview of the exemption by clear legislative
intent [Commissioner of Customs v. Philippine
Acetylene Co., G.R. No. L-22443 May 29, 1971]
However, if there is an express mention in the
law or if the taxpayer falls within the purview of
the exemption by clear legislative intent, the
rule on strict construction will not apply.
[Commissioner v. Anoldus Caprentry Shop, G.R.
No. 71122 March 25, 1988]
The purpose of deductions from gross income
is to provide the taxpayer a just and reasonable
tax amount as the basis of income tax. It is
because many taxpayers spend adequate
expenditures in order to obtain a legitimate
income.
TAXATION 1 TAXATION LAW
Types of deductions
There are three (3) types of deductions from
gross income:
(1) itemized deductions in Section 34(A) to (J)
and (M) available to all kinds of taxpayers
engaged in trade or business or practice of
profession in the Philippines;
(2) optional standard deduction in Section
34(L) available only to individual taxpayers
deriving business, professional, capital
gains and passive income not subject to
final tax, or other income; and
(3) the special deductions in Sections 37 and
38 of the NIRC, and in special laws like the
BOI law (E.O. 226).
General rules:
(a) Deductions must be paid or incurred in
connection with the taxpayer’s trade,
business or profession
(b) Deductions must be supported by
adequate receipts or invoices (except
standard deduction)
(c) Additional requirement relating to
withholding
Return of capital (cost of sales or services)
Income tax is levied by law only on income;
hence, the amount representing return of
capital should be deducted from proceeds
from sales of assets and should not be subject
to income tax.
Costs of goods purchased for resale, with
proper adjustment for opening and closing
inventories, are deducted from gross sales in
computing gross income (Sec. 65, Rev. Reg. 2)
(a) Sale of inventory of goods by
manufacturers and dealers of properties:
In sales of goods representing inventory,
the amount received by the seller consists
of return of capital and gain from sale of
goods or properties. That portion of the
receipt representing return of capital is not
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UP COLLEGE OF LAW TAXATION 1
subject to income tax. Accordingly, cost of
goods manufactured and sold (in the case
of manufacturers) and cost of sales (in the
case of dealers) is deducted from gross
sales and is reflected above the gross
income line in a profit and loss statement.
(b) Sale of stock in trade by a real estate
dealer and dealer in securities:
Real estate dealers and dealers in
securities are ordinarily not allowed to
compute the amount representing return
of capital through cost of sales. Rather
they are required to deduct the total cost
specifically identifiable to the real property
or shares of stock sold or exchanged.
(c) Sale of services:
Their entire gross receipts are treated as
part of gross income.
ITEMIZED DEDUCTIONS
These are enumerated in Section 34 of the
NIRC. Additional deductions are granted to
insurance companies in Section 37, while
losses from wash sales of stock or securities by
a dealer in securities are provided for in Section
38 of the NIRC. Other itemized deductions
could be granted under general or special laws,
e.g. additional training expenses are allowed
to enterprises registered with PEZA, BOI, and
SBMA.
Timing of Claiming Deductions
A taxpayer has the right to deduct all
authorized allowances for the taxable year. As
a rule, if he does not within any year deduct
certain of his expenses, losses, interest, taxes
or other charges, he cannot deduct them from
the income of the next of any succeeding year
[Sec. 76, Income Tax Regulations]
EXPENSES
Business expenses deductible from gross
income include the ordinary and necessary
74
TAXATION LAW
expenditures directly connected with or
pertaining to the taxpayer’s trade or business.
The cost of goods purchased for resale, with
proper adjustment for opening and closing
inventories, is deducted from gross sales in
computing gross income.
Includes:
(a) Salaries, wages, and other forms of
compensation for personal services
actually rendered, including the grossed-
up monetary value of fringe benefits
furnished or granted by the employer to
the employee
(b) Travel expenses
(c) Rentals
(d) Entertainment, recreation and amusement
expenses
(e) Other expenses such as repairs or those
incurred by farmers and other persons in
agribusiness
Requisites for deductibility of business
expenses.—
(a) Ordinary AND necessary;
ORDINARY - normal and usual in relation
to the taxpayer's business and surrounding
circumstances; need not be recurring
NECESSARY - appropriate and helpful in
the development of taxpayer's business or
are proper for the purpose of realizing a
profit or minimizing a loss
(b) Paid or incurred during the taxable year;
(c) Others: (not in the SC syllabus)
(1) Paid or incurred in carrying on or which
are directly attributable to the
development, management, operation
and/or conduct of the trade, business
or exercise of profession;
(2) Substantiated by adequate proof –
documented by official receipts or
adequate records, which reflect the
amount of expense deducted and the
connection or relation of the expense
to the business/trade of the taxpayer);
UP COLLEGE OF LAW TAXATION 1
(3) Legitimately paid (not a BRIBE,
kickback, or otherwise contrary to law,
morals, public policy);
(4) If subject to withholding tax, the tax
required to be withheld on the expense
paid or payable is shown to have been
properly withheld and remitted to the
BIR on time;
(5) Amount must be reasonable.
Note: The expenses allowable to a non-
resident alien or a foreign corporation consist
of only such expenses as are incurred in
carrying on any business or trade conducted
within the Philippines exclusively. [Sec. 77 RR
2]
COHAN Rule: This relief will apply if the
taxpayer has shown that it is usual and
necessary in the trade to entertain and to incur
similar kinds of expenditures, there being
evidence to show the amounts spent and the
persons entertained, though not itemized. In
such a situation, deduction of a portion of the
expenses incurred might be allowed even if
there are no receipts or vouchers. Absence of
invoices, receipts or vouchers, particularly lack
of proof of the items constituting the expense
is fatal to the allowance of the deduction
[Gancayco v. Collector, G.R. No. L-13325, April
20, 1961]
Substantiation requirement – Sec. 34(A)(1)(b),
NIRC: No deduction from gross income shall be
allowed unless the taxpayer shall substantiate
with sufficient evidence, such as official
receipts or other adequate records: (1) the
AMOUNT of the expense being deducted, and
(2) the DIRECT CONNECTION or relation of the
expense being deducted to the development,
management, operation and/or conduct of the
trade, business or profession of the taxpayer.
When to ACCRUE expenses: “all–events test”
states that under the accrual method of
75
TAXATION LAW
accounting, expenses are deductible in the
taxable year in which: (1) all events have
occurred which determine the liability; and (2)
the amount of liability can be determined with
reasonable accuracy.
KINDS OF BUSINESS EXPENSES
These are:
(1) Salaries, wages and other forms of
compensation for personal services
actually rendered, including the grossed-
up monetary value of the fringe benefit
subjected to fringe benefit tax which tax
should have been paid (Compensation for
(2) Travelling expenses
(3) Cost of materials
(4) Rentals and/or other payments for use or
possession of property
(5) Repairs and maintenance
(6) Expenses under lease agreements
(7) Expenses for professionals
(8) Entertainment expenses
(9) Political campaign expenses
(10) Training expenses
(11) Others
Salaries, wages and other forms of
compensation for personal services actually
rendered, including the grossed-up monetary
value of the fringe benefit subjected to fringe
benefit tax which tax should have been paid
Given for personal services must be actually
rendered and reasonable.
For income payment to be allowed as
deduction, the withholding tax must have been
paid [RR No. 12-2013].
Bonuses are deductible when:
(a) made in good faith
(b) given as additional compensation for
personal services actually rendered
(c) such payments, when added to the
stipulated salaries, do not exceed a
UP COLLEGE OF LAW TAXATION 1
reasonable compensation for the services
rendered
Traveling expenses
This include transportation expenses and
meals and lodging [Sections 65 and 66, Rev.
Reg. No. 2]
(1) Expenses must be reasonable and
necessary.
(2) Must be incurred or paid “while away from
home”
(3) Tax home is the principal place of business,
when referring to “away from home”
(4) Incurred or paid in the conduct of trade or
business.
Note: However, necessary transportation
expenses of the taxpayer (which are different
from the transportation expenses included in
the term “travel expenses”) in its “tax home”
are deductible. Thus, a taxpayer operating its
business in Manila is allowed transportation
expenses from its office to its customers’ place
of business and back. But the transportation
expenses of an employee from his residence to
its office and back are not deductible as they
are considered personal expenses.
Cost of materials
Deductible only to the amount that they are
actually consumed and used in operation during
the year for which the return is made, provided
that their cost has not been deducted in
determining the net income for any previous
year.
Rentals and/or other payments for use or
possession of property
(1) Required as a condition for continued use or
possession of property.
(2) For purposes of trade business or profession.
(3) Taxpayer has not taken or is not taking title
to the property or has no equity other than
that of lessee, user, or possessor.
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TAXATION LAW
On the accrual basis, rent is deductible as
expense when liability is incurred during the
period of use. On cash basis, rent is deductible
when it is incurred and paid.
If the advance payment is a prepaid rental,
such payment is taxable income to the lessor in
the year when it was received. However, an
advance payment is not deductible expense of
the lessee until the period is used. [Valencia
and Roxas]
Repairs and maintenance
(a) Incidental or ordinary repairs are
deductible. Repairs which neither
materially add to the value of the property
nor appreciably prolong its life, but keep it
in an ordinarily efficient working condition,
may be deducted as expenses, provided
the plant or property account is not
increased by the amount of such
expenditure. The life of the asset referred
to is the probable, normal, useful life for
the purpose of the allowance for the return
of the capital investment – not what the
life that would have been if no repairs had
been made after the property was
damaged by a casualty. Since the repairs
prolonged the lives of the said vessels of
petitioners, the disallowance must be
sustained. [Visayan Transportation Co. v.
CTA, CTA Case No. 1119, Sept. 30, 1964]
(b) Extraordinary repairs are not deductible –
they are capital expenditures
(1) Repairs which add material value to
the property or appreciably prolong its
life
(2) Repairs in the nature of replacement,
to the extent that they arrest
deterioration and appreciably prolong
the life of the property, should be
charged against the depreciation
reserves if such account is kept. [Sec.
68, Rev. Regs. 2]
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All maintenance expenses on account of non-
depreciable vehicles for taxation purposes are
disallowed in its entirely. [RR No. 12-2012]
Expenses under lease agreements
Requisites for deductibility:
(1) Required as a condition for continued use
or possession;
(2) For purposes of the trade, business or
possession;
(3) Taxpayer has not taken or is not taking title
to the property or has no equity other than
that of lessee, user, or possessor.
Expenses for professionals
Deductible in the year the professional services
are rendered, not in the year they are billed,
provided that the “all events” is present.
“All events test” requires:
(a) Fixing a right to income or liability to pay;
and
(b) The availability of reasonably accurate
determination of such income or liability.
The “all-events test” does not demand that the
amount of income or liability be known
absolutely; it only requires that a taxpayer has
at its disposal the information necessary to
compute the amount with reasonable accuracy,
which implies something less than an exact or
completely accurate amount. [Commissioner v.
Isabela Cultural Corporation, GR. 172231, Feb. 12,
2007]
A professional may claim as deductions the
cost of supplies used by him in the practice of
his profession, expenses paid in the operation
and repair of transportation equipment used in
making professional calls, dues to professional
societies and subscriptions to professional
journals. [Mamalateo]
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TAXATION LAW
Entertainment/Representation expenses
These are entertainment, amusement and
recreation (EAR) expenses incurred or paid
during the year that are directly connected to
the development, management and operation
of the trade, business or profession of the
taxpayer.
Requisites for deductibility:
(a) Reasonable in amount.
(b) Paid or incurred during the taxable period.
(c) Directly connected to the development,
management, and operation of the trade,
business or profession of the taxpayer, or
that are directly related to or in furtherance
of the conduct thereof.
(d) Not to exceed such ceiling as the Secretary
of Finance prescribe (under RR 10-02, in
no case to exceed 0.50% of net sales for
sellers of goods or properties or 1% of net
revenues for sellers of services, including
taxpayers engaged in the exercise of
profession and use or lease of properties)
(e) Not incurred for purposes contrary to law,
morals, public policy or public order.
(f) Must be substantiated with sufficient
evidence such as receipts and/or adequate
records.
Exclusions from EAR expenses:
(1) Expenses which are treated as
compensation or fringe benefits for
services rendered under an employer-
employee relationship
(2) Expenses for charitable or fund raising
events
(3) Expenses for bona fide business meeting of
stockholders, partners or directors
(4) Expenses for attending or sponsoring an
employee to a business league or
professional organization meeting
(5) Expenses for events organized for
promotion marketing and advertising,
including concerts, conferences, seminars,
UP COLLEGE OF LAW TAXATION 1
workshops, conventions and other similar
events; and
(6) Other expenses of a similar nature.
Political campaign expenses
Amount expended for political campaign
purposes or payments to campaign funds are
NOT deductible either as business expenses or
as contribution [CTA Case No. 695, April 30,
1969, citing Mertens]
Training expenses
Under Section 30 of the Tax Code, as
implemented by Sec. 20 of the Revenue
Regulations No. 2, organization and pre-
operating expenses of a corporation (including
training expenses) are considered as capital
expenditures and are therefore, not deductible
in the year they are paid or incurred. But
taxpayers who incur these expenses and
subsequently enter the trade or business to
which the expenditures relate can elect to
amortize these expenditures over a period not
less than sixty (60) months. [BIR Ruling 102-97,
Sept. 29, 1997]
This rule, however, does not apply to a
situation where an existing corporation incurs
these same expenditures for the purpose of
expanding its business in a new line of trade,
venture or activity.
Others
(a) Expenses Allowable to Private Educational
Institutions:
(b) In addition to the expenses allowable as
deductions under the NIRC, a private
proprietary educational institution may at
its OPTION, elect either:
(a) To deduct expenditures
otherwise considered as capital outlays
or depreciable assets incurred during the
taxable year for the expansion of school
facilities, OR
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TAXATION LAW
(b) To deduct allowances for
depreciation thereof.
Thus, where the expansion expense has been
claimed as a deduction, no further claims for
yearly depreciation of the school facilities are
allowed.
Advertising Expenses
The media advertising expenses which were
found to be inordinately large and thus, not
ordinary, and which were incurred in order to
protect the taxpayer’s brand franchise which is
analogous to the maintenance of goodwill or
title to one’s property, are not ordinary and
necessary expenses but are capital
expenditures, which should be spread out over
a reasonable period of time. [CIR v. General
Foods Phils. Inc, GR No. 143672, April 24, 2003]
INTEREST
Requisites for deductibility.—
(1) There is an indebtedness.
(2) The indebtedness is that of the taxpayer
(3) The indebtedness is connected with the
taxpayer‘s trade, profession, or business.
(4) The interest must be legally due.
(5) The interest must be stipulated in writing.
(6) The taxpayer is LIABLE to pay interest on
the indebtedness.
(7) The indebtedness must have been paid or
accrued during the taxable year.
(8) The interest payment arrangement must
not be between related taxpayers
(9) The interest must not be incurred to
finance petroleum operations.
(10) In case of interest incurred to acquire
property used in trade, business or exercise
of profession, the same was not treated as
a capital expenditure,
Limitation: The taxpayer's allowable deduction
for interest expense shall be reduced by an
amount equal to 33% of the interest income
subjected to final tax (see chapter on taxation
UP COLLEGE OF LAW TAXATION 1
of passive income for interest income); effective
January 1, 2009.
Non-deductible interest expense.—
(a) Interest paid in advance by the taxpayer
who reports income on cash basis shall
only be allowed as deduction in the year
the indebtedness is paid.
(b) If the indebtedness is payable in periodic
amortizations, only the amount of interest
which corresponds to the amount of the
principal amortized or paid during the year
shall be allowed as deduction in such
taxable year.
(c) Interest payments made between related
taxpayers.
(d) Interest on indebtedness incurred to
finance petroleum exploration.
Related Taxpayers
(a) Between members of the family, i.e.
brothers and sisters (whether by the whole
or half-blood), spouse, ancestor, and lineal
descendants; or
(b) Except in case of distributions in
liquidation, between an individual and a
corporation, where the individual owns
directly or indirectly more than 50% of the
outstanding stock of the corporation
(c) Except in the case of distributions in
liquidation, between two corporations
where:
(1) Either one is a personal holding
company of a foreign personal holding
company with respect to the taxable
year preceding the date of the sale of
exchange; and
(2) More than 50% of the outstanding
stock of each is owned, directly or
indirectly, by or for the same individual;
or
(d) Between parties to a trust –
(1) Grantor and Fiduciary; or
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TAXATION LAW
(2) Fiduciary of a trust and fiduciary of
another trust if the same person is a
grantor with respect to each trust; or
(3) Fiduciary and Beneficiary
INTEREST SUBJECT TO SPECIAL RULES.
Interest paid in advance
(1) No deduction shall be allowed if within the
taxable year an individual taxpayer
reporting income on cash basis incurs an
indebtedness on which an interest is paid
in advance through discount or otherwise.
(2) But the deduction shall be allowed in the
year the indebtedness is paid
Interest periodically amortized
If the indebtedness is payable in periodic
amortizations, the amount of interest which
corresponds to the amount of the principal
amortized or paid during the year shall be
allowed as deduction in such taxable year
Interest expense incurred to acquire property
for use in trade/business/profession
At the option of the taxpayer, interest expense
on a capital expenditure may be allowed as:
(1) A deduction in full in the year when
incurred;
(2) A capital expenditure for which the
taxpayer may claim only as a deduction
the periodic amortization of such
expenditure.
Should the taxpayer elect to deduct the
interest payments against its gross income, the
taxpayer cannot at the same time capitalize the
interest payments. In other words, the taxpayer
is not entitled to both the deduction from gross
income and the adjusted (increased) basis for
determining gain or loss and the allowable
depreciation charge. [Paper Industries Corp. v.
Commissioner, 250 SCRA 434]
UP COLLEGE OF LAW TAXATION 1
Reduction of interest expense/interest arbitrage
The taxpayer's allowable deduction for interest
expense shall be reduced by an amount equal
to 33% of the interest income subjected to final
tax; effective January 1, 2009. [RA 9337]
This limitation is apparently intended to
counter the tax arbitrage scheme where a
taxpayer obtains an interest-bearing loan and
places the proceeds of such loan in
investments that yield interest income subject
to preferential tax rate of 20% final
withholding tax. [Valencia and Roxas]
TAXES
Taxes Proper: Refers to national and local
taxes;
Requisites for deductibility.—
Such tax must be:
(a) Paid or incurred within the taxable year;
(b) Paid or incurred in connection with the
taxpayer‘s trade, profession or business;
(c) Imposed directly on the taxpayer.
(d) Not specifically excluded by law from being
deducted from the taxpayer‘s gross income.
Non-deductible taxes.—
General Rule: All taxes, national or local, paid
or incurred during the taxable year in
connection with the taxpayer's profession,
trade or business, are deductible from gross
income
Exceptions:
(1) Philippine income tax, except Fringe
Benefit Taxes;
(2) Income tax imposed by authority of any
foreign country, if taxpayer avails of the
Foreign Tax Credit (FTC)
Exception to exception: When the taxpayer
does NOT signify his desire to avail of the
tax credit for taxes of foreign countries, the
amount may be allowed as a deduction
from gross income of citizens and domestic
80
TAXATION LAW
corporations subject to the limitations set
forth by law.
(3) Estate and donor‘s taxes
(4) Percentage tax on stock transaction;
(5) Taxes assessed against local benefits of a
kind tending to increase the value of the
property assessed (Special Assessments)
(6) Value Added Tax
(7) Fines and penalties
(8) Final taxes
(9) Capital Gains Tax
(10) Import duties
(11) Business taxes
(12) Occupation taxes
(13) Privilege and license taxes
(14) Excise taxes
(15) Documentary stamp taxes
(16) Automobile registration fees
(17) Real property taxes
(18) Electric energy consumption tax under BP
36
Treatments of surcharges/interests/fines for
delinquency.—
The amount of deductible taxes is limited to
the basic tax and shall not include the amount
for any surcharge or penalty on delinquent
taxes. However, interest on delinquent taxes,
although not deductible as tax, can be
deducted as interest expense at its full amount.
[CIR v Palanca, 18 SCRA 496]
Although interest payment for delinquent
taxes is not deductible as tax, the taxpayer is
not precluded thereby from claiming said
interest payment as deduction as such. [CIR v.
Vda. de Prieto, 1960]
Treatment of special assessment.—
Special assessments and other taxes assessed
against local benefits of a kind tending to
increase the value of the property assessed are
non-deductible from gross income.
UP COLLEGE OF LAW TAXATION 1 TAXATION LAW

Tax credit vis-à-vis deduction.— (1) Non-resident citizens

Tax credit – amount allowed by law to reduce (2) Aliens, whether resident or non-resident
the Philippine income tax due, subject to (3) Foreign corporations, whether resident on
limitations, on account of taxes paid or accrued non-resident
to a foreign country
Note: Tax credits for foreign taxes are allowed
only for income derived from sources outside
Tax Credit Tax Deduction the Philippines. The above taxpayers are not
entitled to tax credit; they are taxable only on
Taxes are deductible Taxes are deductible income derived from Philippine sources.
from the Phil. Income from gross income in
tax itself computing the Limitations on Tax Credit.—
taxable income (1) [Per Country Limit] The amount of tax
Effect: Reduces Effect: Reduces credit shall not exceed the same
Philippine income tax taxable income upon proportion of the tax against which such
liability which the tax liability credit is taken, which the taxpayer's
is calculated taxable income from sources within such
Sources: Only foreign Sources: Deductible country bears to his entire taxable income
income taxes may be taxes (e.g. business for the same taxable year; and
claimed as credits tax, excise tax) (2) [Worldwide Limit] The total amount of the
against Philippine credit shall not exceed the same
income tax. proportion of the tax against which such
credit is taken, which the taxpayer's
An amount subtracted from an individual's or taxable income from sources without the
entity's tax liability to arrive at the total tax Philippines taxable bears to his entire
liability. A tax credit reduces the taxpayer's taxable income for the same taxable year.
liability, compared to a deduction which Formula:
reduces taxable income upon which the tax Limit #1
liability is calculated. A credit differs from Taxable Limit on
deduction to the extent that the former is Income Per amount
subtracted from the tax while the latter is Foreign of tax
Phil.
subtracted from income before the tax is Country x = credit
Income Tax
computed. [CIR v. Bicolandia Drug Corp. G.R. Worldwide (Per
No. 148083, July 21, 2006] Taxable Country
Income Limit)
The following may claim tax credits:
(1) Resident citizens Limit #2
(2) Domestic corporations, which include all Taxable Limit on
partnerships except general professional Income For amount
partnerships all Foreign of tax
Phil.
(3) Members of general professional Countries x = credit
Income Tax
partnerships Worldwide (World
(4) Beneficiaries of estates or trusts Taxable Wide
Income Limit)
The following may NOT claim tax credits:

81
UP COLLEGE OF LAW TAXATION 1
Note: Computation of FTC: Limit #2 applies
where taxes are paid to two or more foreign
countries. Allowable tax credit is the lower
between the tax credit computed under Limit
#1 and that computed under Limit#2.
FTC Limitations – lowest of the 3:
(1) Actual FTC
(2) For taxes paid to one foreign country
(3) For taxes paid to 2 or more foreign
countries
LOSSES
Requisites for deductibility.—
(1) Loss must be that of the taxpayer (e.g.,
losses of the parent corp. cannot be
deducted by its subsidiary);
(2) Actually sustained and charged off within
the taxable year;
(3) Incurred in trade, business or profession;
(4) Of property connected with the trade,
business, or profession, if the loss arises
from fires, storms, shipwreck or other
casualties, or from robbery, theft, or
embezzlement;
(5) Sustained in a closed and completed
transaction;
(6) Not compensated for by insurance or other
form of indemnity;
(7) Not claimed as a deduction for estate tax
purposes;
(8) In case of casualty loss, filing of notice of
loss with the BIR within 45 days from the
date of the event that gave rise to the
casualty; and
(9) The taxpayer must prove the elements of
the loss claimed, such as the actual nature
and occurrence of the event and amount of
the loss.
In case a non-depreciable vehicle is sold at a
loss, the loss incurred from the sale of non-
depreciable vehicle is not allowed as a
deduction. [RR No. 2-2013]
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TAXATION LAW
No loss is recognized in the following.—
(a) Merger, consolidation, or control securities
(where no gains are recognized either);
(b) Exchanges not solely in kind;
(c) Related taxpayers (see above – (c) Interest
expense incurred to acquire property for
use in trade/business/profession)
(d) Wash sales;
(e) Illegal transactions
Other types of losses.—
Capital losses
(1) Incurred in the sale or exchange of capital
assets (allowable only to the extent of
capital gains, except for banks and trust
companies under conditions in Sec. 39 of
NIRC where loss from such sale is not
subject to the foregoing limitation);
(2) Resulting from securities becoming
worthless and which are capital assets
(considered loss from sale or exchange) on
last day of the taxable year;
(3) Losses from short sales of property;
(4) Losses due to failure to exercise privileges
or options to buy or sell property.
Securities becoming worthless
(a) Loss in shrinkage in value of stock through
fluctuation in the market is not deductible
from gross income. (To be deductible, the
loss must be actually suffered when the
stock is disposed of.)
(b) Exception: If the stock of the corporation
becomes worthless, the cost or other basis
may be deducted by its owner in the
taxable year in which the stock became
worthless, provided a satisfactory showing
of its worthlessness be made, as in the
case of bad debts.
Losses on wash sales of stocks or securities
Wash Sale - a sale or other disposition of stock
or securities where substantially identical
securities (substantially the same as those
disposed of) are acquired or purchased (or
UP COLLEGE OF LAW TAXATION 1
there was an option to acquire, and the
acquisition or option should be by purchase or
exchange upon which gain or loss is
recognized under the income tax law) within a
61-day period, beginning 30 days before the
sale and ending 30 days after the sale
General rule: Not deductible from gross income
Exception: If by a dealer in securities in the
course of ordinary business, it is deductible.
Wagering losses
Losses from wagering (gambling) are
deductible only to the extent of gains from
such transactions. A wager is made when the
outcome depends upon CHANCE.
NOLCO (Net Operating Loss Carry Over)
Net operating loss (NOL)is the excess of
allowable deductions over gross income for
any taxable year immediately preceding the
current taxable year.
NOLCO: The NOL of the business or enterprise
which had not been previously offset as
deduction from gross income shall be carried
over as a deduction from gross incomefor the
next three (3) consecutive taxable years
immediately following the year of such loss,
provided however, that any net loss incurred in
a taxable year during which the taxpayer was
exempt from income tax shall not be allowed
as a deduction. [Sec. 34(3)(D), NIRC]
Exception: Mines other than oil and gas wells,
where a net operating loss without the benefit
of incentives provided for under EO No. 226
(Omnibus Investments Code) incurred in any of
the first ten (10) years of operation may be
carried over as a deduction from taxable
income for the next five (5) years immediately
following the year of such loss.
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TAXATION LAW
Requisites for NOLCO:
(1) The taxpayer was not exempt from income
tax the year the loss was incurred;
(2) There has been no substantial change in
the ownership of the business or enterprise
wherein:
(a) AT LEAST 75% of nominal value of
outstanding issued shares is held by or
on behalf of the same persons; or
(b) AT LEAST 75% of the paid up capital of
the corporation is held by or on behalf
of the same persons.
Taxpayers Entitled to NOLCO
(1) Individuals engaged in trade or business or
in the exercise of his profession (including
estates and trusts);
Note: An individual who avails of 40% OSD
shall not simultaneously claim deduction
of NOLCO. However, the three-year
reglementary period shall continue to run
during such period notwithstanding the
fact that the aforesaid taxpayer availed of
OSD during the said period.
(2) Domestic and resident foreign
corporations subject to the normal income
tax (e.g., manufacturers and traders) or
preferential tax rates under the Code (e.g.,
private educational institutions, hospitals,
and regional operating headquarters) or
under special laws (e.g., PEZA-registered
companies)
Note: Domestic and resident foreign
corporations taxed during the taxable year
with Minimum Corporate
Income Tax cannot enjoy the benefit of NOLCO.
However, the three-year period for the expiry of
he NOLCO is not interrupted by the fact that
the corporation is subject to MCIT during such
three-year period.
UP COLLEGE OF LAW TAXATION 1
Other Losses:
(1) Abandonment lossesin petroleum
operation and producing well.
(2) Losses due to voluntary removal of
buildingincident to renewal or
replacements are deductible from gross
income.
(3) Loss of useful value of capital assetsdue to
charges in business conditions is
deductible only to the extent of actual loss
sustained (after adjustment for
improvement, depreciation and salvage
value)
(4) Losses from sales or exchanges of property
between related taxpayersare not
recognized, but the gains are taxable.
Losses of farmers incurred in the operation of
farm business are deductible.
BAD DEBTS
Debts resulting from the worthlessness or
uncollectibility, in whole or in part, of amounts
due the taxpayer actually ascertained to be
worthless and the corresponding receivable
should have been written off or charged off
within the taxable year.
Requisites for deductibility.—
(1) Valid and legally demandable debt due to
the taxpayer
(2) Debt is connected with the taxpayer's trade,
business or practice of profession;
(3) Debt was not sustained in a transaction
entered into between related parties;
(4) Actually ascertained to be worthless and
uncollectible as of the end of the taxable
year (taxpayer had determined with
reasonably degree of certainty that the
claim could not be collected despite the
fact that the creditor took reasonable steps
to collect); and
(5) Actually charged off the books of accounts
of the taxpayer as of the end of the taxable
year
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TAXATION LAW
General rule: Taxpayer must ascertain and
demonstrate with reasonable certainty the
uncollectibility of debt
Exceptions:
(1) Banks as creditors – BSP Monetary Board
shall ascertain the worthlessness and
uncollectibility of the debt and shall
approve the writing off
(2) Receivables from an insurance or surety
company (as debtor) may be written off as
bad debts only when such company is
declared closed due to insolvency or
similar reason
The taxpayer must show that the debt is
indeed uncollectible even in the future. He
must prove that he exerted diligent efforts to
collect:
(1) Sending of statement of accounts
(2) Collection letters
(3) Giving the account to a lawyer for
collection
(4) Filing the case in court [Phil. Refining Corp.
v. CA, G.R. No. 118794, May 8, 1996]
In ascertaining the debt to be worthless, it is
not enough that the taxpayer acted in good
faith. He must show that he had reasonably
investigated the relevant facts from which it
became evident, in the exercise of sound,
objective business judgment, that there
remained no practical, but only a vague
prospect that the debt would be paid [Collector
v. Goodrich, 1967]
Rev. Reg. No. 5-1999:
“Actually ascertained to be worthless” –
(1) Determination of worthlessness must
depend upon the particular facts and
circumstances of the case. A taxpayer
may not postpone a bad debt deduction
on the basis of a mere hope of ultimate
collection or because of a continuance of
UP COLLEGE OF LAW TAXATION 1 TAXATION LAW

attempts to collect, where there is no

showing that the surrounding Requisites for Deductibility. –
circumstances differ from those relating to (1) It must be reasonable.
other notes which were charged off in a (2) It must be charged off during the year.
prior year (3) The asset must be used in profession, trade
(2) Accounts receivable may be written off as or business.
bad debts even without conclusive (4) The asset must have a limited useful life.
evidence that they had definitely become (5) The depreciable asset must be located in
worthless when: the Philippines if the taxpayer is a
(a) the amount is insignificant; and nonresident alien or a foreign corporation.
(b) collection through court action may [Valencia and Roxas]
be more costly to the taxpayer
No depreciation shall be allowed for yachts,
“Actually charged off from the taxpayer’s book helicopters, airplanes and/or aircrafts, and
of accounts” land vehicles which exceed the threshold
Receivable which has actually become amount of P2,400,000, unless the taxpayer’s
worthless at the end of the taxable year has main line of business is transport operations or
been cancelled and written off. Mere recording lease of transportation equipment and the
in the books of account of estimated vehicles purchased are used in the operations.
uncollectible accounts does not constitute a [RR No. 12-2012]
write-off.
Methods of computing depreciation
Effect of recovery of bad debts.— allowance.—
Tax Benefit Rule on Bad Debts (1) Straight-line cost- salvage value
Bad debts claimed as deduction in the estimated life
preceding year(s) but subsequently recovered (2) Declining balance (cost – depreciation)
shall be included as part of the taxpayer‘s x Rate
gross income in the year of such recovery the estimated life
extent of the income tax benefit of said (3) Sum-of-the-year- nth period x cost-
deduction. Also called the equitable doctrine digit (SYD) salvage
of tax benefit. SYD
(1) Allowance must be reasonable (4) Any other method
(2) Charged off during the taxable year which may be
from the taxpayer‘s books of accounts. prescribed by the
(3) Does not exceed the acquisition cost of Secretary of
the property. Finance upon the
recommendation of
DEPRECIATION the CIR
An annual reasonable allowance to reduce the
wasteful value of the tangible fixed assets
resulting from wear and tear and normal
obsolescence

For intangible assets, the annual allowance to

rduce their useful value is called amortization.

85
UP COLLEGE OF LAW TAXATION 1
CHARITABLE AND OTHER
CONTRIBUTIONS
Requisites for deductibility.—
(1) Actually PAID or made to the ENTITIES or
institutions specified by law;
(2) Made within the TAXABLE year.
(3) It must be EVIDENCED by adequate
receipts or records.
(4) For Contributions Other than Money: The
amount shall be BASED on the acquisition
cost of the property (i.e., not the fair
market value at the time of the
contribution).
(5) For Contributions subject to the statutory
limitation: It must NOT EXCEED 10%
(individual) or 5% (corporation) of the
taxpayer‘s taxable income before
charitable contributions
Amount that may be deducted.—
Kinds of Contributions:
(1) Contributions deductible in full;
(2) Contributions subject to the statutory limit.
Contributions Deductible in Full:
(1) Donations to the Government of the
Philippines, or to any of its agencies, or
political subdivisions, including fully owned
government corporations –
(a) Exclusively to finance, provide for, or to
be used in undertaking priority activities
in
1. Education
2. Health
3. Youth and sports development
4. Human settlements
5. Science and culture, and
6. Economic development
(b) in accordance with a National Priority
Plan determined by NEDA (otherwise,
subject to statutory limit)
(2) Donations to Certain Foreign Institutions or
International Organizations which are fully
deductible in compliance with agreements,
86
TAXATION LAW
treaties or commitments entered into by
the Government of the Philippines and the
foreign institutions or international
organizations or in pursuance of special
laws
(3) Donations to Accredited Non-government
Organizations subject to conditions set forth
in RR No. 13-98 – NGO means a non-stock
non-profit domestic corporation or
organization:
(a) Organized and operated exclusively
for:
i. scientific,
ii. research,
iii. educational,
iv. character-building and youth
and sports development,
v. health,
vi. social welfare,
vii. cultural or
viii. charitable purposes, or
ix. a combination thereof,
(b) No part of the net income of which
inures to the benefit of any private
individual
(c) Directly utilizes contributions for the
active conduct of the activities
constituting the purpose or function for
which it is organized, not later than
15th day of the month following the
close of its taxable year in which
contributions are received, unless an
extended period is granted by the
Secretary of Finance, upon
recommendation of the CIR
(d) Administrative expense ,on an annual
basis, must not exceed 30% of total
expenses for the taxable year
(e) Upon dissolution, its assets would be
distributed to another accredited NGO
organized for a similar purpose or
purposes, OR to the State for public
purpose, OR would be distributed by a
competent court of justice to another
accredited NGO to be used in such
UP COLLEGE OF LAW TAXATION 1
manner as in the judgment of said
court shall best accomplish the general
purpose for which the dissolved
organization was organized.
Contributions subject to the Statutory Limit
These contributions are not deductible in full
as specified by the law or such deduction has
not met the requirements to be deducted in
full.
Those made to:
(1) Government or any of its agencies or
political subdivisions exclusively for public
purposes (contributions for non-priority
activities)
(2) Accredited domestic corporation or
associations organized exclusively for
i. Religious
ii. Charitable
iii. Scientific
iv. youth and sports development
v. cultural
vi. educational purposes or
vii. rehabilitation of veterans
(3) Social welfare institutions
(4) Non-government organizations: No part of
the net income of which inures to the
benefit of any private stockholder or
individual
Statutory Limit:
(a) 10% in the case of an individual (individual
donor), and
(b) 5% in the case of a corporation (corporate
donor), of the taxpayer's/donor’s income
derived from trade, business or profession
computed before the deduction for
contributions and donations
The amount deductible is the actual
contribution or the statutory limit computed,
whichever is lower
87
TAXATION LAW
CONTRIBUTIONS TO PENSION TRUSTS
Contribution to a pension trust may be claimed
as deduction as follows:
(a) Amount contributed for the present/normal
service cost – 100% deductible
(b) Amount contributed for the past service
cost – 1/10 of the amount contributed is
deductible in year the contribution is made,
the remaining balance will be amortized
equally over nine consecutive years
General Rule: An employer establishing or
maintaining a pension trust to provide for the
payment of reasonable pensions to his
employees shall be allowed as a deduction, a
reasonable amount transferred or paid into
such trust in excess of the contributions to such
trust made during the taxable year.
Requisites for deductibility of payments to
pension trusts.—
(a) There must be a pension or retirement plan
established to provide for the payment of
reasonable pensions to employees;
(b) The pension plan is reasonable and
actuarially sound;
(c) It must be funded by the employer;
(d) The amount contributed must no longer be
subject to the employer’s control or
disposition; and
(e) The payment has not theretofore been
allowed before as a deduction.
DEDUCTIONS UNDER SPECIAL LAWS
(1) Special deductions for productivity bonus
and manpower training under the
Productivity Incentives Act of 1990
(2) Deductions for training expenses of
qualified jewelry enterprises (Jewelry
Industry Development Act of 1998)
(3) Deductions under the Adopt-a-School Act
of 1998
(4) Deductions under the Expanded Senior
Citizens Act of 2003. [Domondon]
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OPTIONAL STANDARD DEDUCTION
Individuals, except non-resident aliens
(a) May be taken by an individual in lieu of
itemized deductions except those earning
purely compensation income.
(b) If an individual opted to use OSD, he is no
longer allowed to deduct cost of sales or
cost of services.
(c) Amount: 40% of gross sales or gross
receipts (under RA 9504, effective July 6,
2008)
Requisites:
(1) Taxpayer is a citizen or resident alien;
(2) Taxpayer’s income is not entirely from
compensation;
(3) Taxpayer signifies in his return his intention
to elect this deduction; otherwise he is
considered as having availed of the
itemized deductions.
(4) Election is irrevocable for the year in which
made; however, he can change to itemized
deductions in succeeding years.
Corporations, except non-resident foreign
corporations
The option to elect Optional Standard
Deduction granted is now granted to
corporations (domestic and resident foreign
corporations) by virtue of RA 9504.
(a) The OSD is 40% of its gross income.
(b) The domestic and resident foreign
corporation shall keep such records
pertaining to his gross income as defined
in Section 32 of the NIRC during the
taxable year, as may be required by the
rules and regulations promulgated by the
Secretary of Finance upon
recommendation of the CIR.
(c) Corporations availing of OSD are still
required to submit their financial
statements when they file their annual ITR
and to keep such records pertaining to its
gross income. (RR 2-2010).
TAXATION 1 TAXATION LAW
PARTNERSHIPS
(1) General Co-Partnership
For purposes of taxation, the Code
considers general co-partnerships as
corporations. Hence, rules on OSD for
corporations are applicable to general co-
partnerships.
(2) General Professional Partnerships (GPP)
(a) If the GPP availed of itemized
deductions, the partners are not
allowed to claim the OSD from their
share in the net income because the
OSD is a proxy for all the items of
deductions allowed in arriving at
taxable income. This means that the
OSD is in lieu of the items of
deductions claimed by the GPP and the
items of deduction claimed by the
partners.
(b) If the GPP avails of OSD in computing
its net income, the partners comprising
it can no longer claim further
deduction from their share in the said
net income for the following reasons:
(i.) The partners’ distributive share in
the GPP is treated as his gross
income not his gross sales/receipts
and the 40% OSD allowed to
individuals is specifically mandated
to be deducted not from his gross
income but from his gross
sales/receipts; and,
(ii.) The OSD being in lieu of the
itemized deductions allowed in
computing taxable income as
defined under Section 32 of the Tax
Code, it will answer for both the
items of deduction allowed to the
GPP and its partners.
(c) Since one-layer of income tax is
imposed on the income of the GPP and
the individual partners where the law
had placed the statutory incidence of
the tax in the hands of the latter, the
88
UP COLLEGE OF LAW TAXATION 1
type of deduction chosen by the GPP
must be the same type of deduction
that can be availed of by the partners.
Accordingly, if the GPP claims itemized
deductions, all items of deduction
allowed under Sec. 34 can be claimed
both at the level of the GPP and at the
level of the partner in order to
determine the taxable income. On the
other hand, should the GPP opt to
claim the OSD, the individual partners
are deemed to have availed also of the
OSD because the OSD is in lieu of the
itemized deductions that can be
claimed in computing taxable income.
(d) If the partner also derives other gross
income from trade, business or
practice of profession apart and
distinct from his share in the net
income of the GPP, the deduction that
he can claim from his other gross
income would follow the same
deduction availed of from his
partnership income as explained in the
foregoing rules. Provided, however,
that if the GPP opts for the OSD, the
individual partner may still claim 40%
of its gross income from trade,
business or practice of profession but
not to include his share from the net
income of the GPP. (RR 2-2010)
PERSONAL AND ADDITIONAL EXEMPTION
(R.A. NO. 9504, MINIMUM WAGE EARNER
LAW)
Basic personal exemptions
According to RA 9504 (effective July 6, 2008)
basic personal exemption is Fifty thousand
pesos (P50,000) for each individual taxpayer,
regardless of status, i.e., whether single,
married or head of the family.
But note Sec 35(A) of NIRC – In the case of
married individuals where only one of the
89
TAXATION LAW
spouses is deriving gross income, only such
spouse shall be allowed the personal
exemption.
Additional exemptions for taxpayer with
dependents
(1) An individual, whether single or married,
shall be allowed an additional exemption
of P25,000 for each qualified dependent
child (QDC), provided that the total
number of dependents for which additional
exemptions may be claimed shall not
exceed 4 dependents (depends on the
number of qualified dependent children)
(a) Married Individuals: Additional
exemptions for QDC are claimed by
only one spouse.
Generally, the spouse who is the gross
compensation earner is the claimant of
the additional exemptions.
(b) Where the husband and wife are both
compensation income earners: the
husband is the proper claimant of the
additional exemptions EXCEPT if there
is an express waiver by the husband in
favor of his wife, as embodied in the
application for registration (BIR Form
No. 1902) or in the Certificate of
Update of Exemption and of
Employer’s and Employee’s
Information (BIR Form No. 2305),
whichever is applicable.
(c) When the spouses have business and/or
professional income only: either may
claim the additional exemptions at the
end of the year.
(d) The employed spouse shall be
automatically entitled to claim the
additional exemptions for children in
the following instances:
(i) spouse is unemployed
(ii) spouse is a non-resident citizen
deriving income from foreign
sources
UP COLLEGE OF LAW TAXATION 1
(e) Legally separated spouses: Additional
exemptions can be claimed by the
spouse with custody of the child or
children (but the total amount for the
spouses shall not exceed the maximum
of four). [Sec 35(B), NIRC]
(f) If the taxpayer should have additional
dependents during the taxable year, he
may claim the corresponding additional
exemption, as the case may be, in full for
such year.
(2) Who is a dependent for purposes of
additional exemptions?
(i) A taxpayer’s child, whether
legitimate, illegitimate or legally
adopted child
(ii) chiefly dependent for support upon
on the taxpayer
(iii) living with the taxpayer
(iv) not more than 21 years old,
unmarried and not gainfully
employed or
(v) regardless of age, is incapable of
self-support because of mental or
physical defect. [Sec 35(B), NIRC]
Note: Only children (not parents) may be
considered “dependent” for purposes of
additional exemptions.
The definition of the term “dependent”
under Section 35(B) of the NIRC now
includes a “Foster Child” or a child placed
under planned temporary substitute
parental care by a Foster Parent or a Foster
Family. [RMC No. 41-20i3, Jan. 23, 2013]
(3) Who may claim personal exemptions?
(a) Citizens (whether resident or non-
resident) and resident aliens
(b) Non-resident aliens engaged in trade or
business are entitled personal
exemptions subject to reciprocity. (See
below)
90
TAXATION LAW
Status-at-the-end-of-the-year rule
Change of Status [Sec 35(C), NIRC]
(1) If taxpayer marries during taxable year,
taxpayer may claim the corresponding BPE
in full for such year (i.e., no need to pro-
rate the exemption).
(2) If taxpayer should have additional
dependent(s) during taxable year, taxpayer
may claim corresponding AE in full for such
year.
(3) If taxpayer dies during taxable year, his
estate may claim BPE and AE as if he died
at the close of such year.
(4) If during the taxable year
(a) spouse dies; or
(b) any of the dependents dies or marries,
turns 21 years old or becomes gainfully
employed, taxpayer may still claim
same exemptions as if the spouse or
any of the dependents died, or married,
turned 21 years old or became gainfully
employed at the close of such year.
Note: When it comes to change of status, the
status beneficial to the taxpayer is used for
purposes of claiming deductions as long as the
taxpayer achieved such status at any time
during the taxable period.
Exemptions claimed by non-resident aliens
Non-resident aliens engaged in trade or
business are entitled personal exemptions
subject to reciprocity.
It means that NRAETB shall be allowed a
personal exemption only if the income tax law
in his country grants allowance for personal
exemptions to the citizens and residents of the
Philippines as stipulated in the reciprocity tax
treaty with the Philippine Government.
Limit of PE Allowed to NRAETB: An amount
equal to the exemptions allowed by the non-
resident alien’s country to Filipino citizens not
residing therein but deriving income therefrom,
UP COLLEGE OF LAW TAXATION 1
but not to exceed the amount fixed by NIRC.(In
other words, whichever is lower)
Items not deductible.—
General rule: In determining deductions, one of
the general rules (see above) is that deductions
must be paid or incurred in connection with the
taxpayer’s trade, business or profession.
Capital expenditures (e.g. acquisition cost of a
building) are also not deductible, because
these are not expenses, but form part of assets.
In computing taxable net income, no deduction
shall be allowed in respect to:
(1) Personal, living or family expenses (note:
they are not deductible from compensation
and business/professional income under
Section 24(A), NIRC)
(2) Any amount paid out for new buildings or
for permanent improvements (capital
expenditures), or betterments made to
increase the value of any property or estate
(3) Any amount expended in restoring property
(major repairs) or in making good the
exhaustion thereof for which an allowance
[for depreciation or depletion] is or has
been made
(4) Premiums paid on any life insurance policy
covering the life of any officer, employee, or
any person financially interested in the trade
or business carried on by the taxpayer,
individual or corporate, when the taxpayer
is directly or indirectly a beneficiary under
such policy
(5) Interest expense and bad debts between
related parties [See Sec. 36(B), NIRC)]
(6) Losses from sales or exchanges of property
between related taxpayers.
(7) Non-deductible interest – should the
taxpayer elect to deduct interest payments
against its gross income, he cannot at the
same time capitalize such interest and
claim depreciation on the undepreciated
cost which includes the interest. [PICOP v.
91
TAXATION LAW
Commissioner, G.R. No. 106949-50, Dec. 1,
1995]
(8) Non –deductible taxes
(9) Non-deductible losses
(10) Losses on Wash Sales (except if by dealer in
securities in ordinary course of
EXEMPT CORPORATIONS
These are:
(1) Proprietary Educational Institutions
and hospitals
(2) Government owned and controlled
corporations
(3) Others
Corporations & associations enumerated under
Section 30 of the 1997 NIRC, as amended,
including those which have been issued tax
exemption rulings/certificates prior to June 30,
2012, shall file their respective Applications for
Tax Exemption/Revalidation with the Revenue
District Office (“RDO”) where they are
registered. If a corporation or association
which has been issued a Tax Exemption Ruling
fails to file its annual information return, it
shall automatically lose its income tax-exempt
status beginning the taxable year for which it
failed to file an annual information return, in
addition to the sanctions imposed under
Section 250 of the NIRC, as amended. [RMO
No. 20-2013]
PROPRIETARY EDUCATIONAL INSTITUTIONS
AND HOSPITALS
By way of exception, proprietary educational
institutions and hospitals are liable for net
income at a rate of only ten percent (10%).
All hospitals and non-stock, non-profit
organizations operating hospitals which were
issued tax exempt rulings prior to November 1,
2012 shall submit a Request for Revalidation
of their tax exemption. [Revenue Memorandum
Circular No. 4-2013]
UP COLLEGE OF LAW TAXATION 1
(See Tax on Domestic Corporations, Tax on
Proprietary Educational Institutions and
Hospitals)
GOVERNMENT OWNED AND CONTROLLED
CORPORATIONS
All corporations, agencies, or instrumentalities
owned or controlled by the Government are
subject to income tax, except:
(1) GSIS
(2) SSS
(3) PHIC
(4) Local water districts (LWDs)
(5) PCSO
(See Tax on Domestic Corporations, Tax on
Government-Owned or Controlled
Corporations, Agencies or Instrumentalities)
OTHERS
The following organizations shall not be taxed
in respect to income received by them as such:
(1) Labor, agricultural or horticultural
organization not organized principally for
profit
(2) Mutual savings bank not having a capital
stock represented by shares, and
cooperative bank without capital stock
organized and operated for mutual
purposes and without profit
(3) A Beneficiary society, order or association,
operating for the exclusive benefit of the
members such as a fraternal organization
operating under the lodge system, or
mutual aid association or a non-stock
corporation organized by employees
providing for the payment of life, sickness,
accident, or other benefits exclusively to
the members of such society, order, or
association, or non-stock corporation or
their dependents
(4) CEMETERY company owned and operated
exclusively for the benefit of its members
(5) Non-stock corporation or association
organized and operated exclusively for
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TAXATION LAW
religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset
shall belong to or inure to the benefit of
any member, organizer, officer or any
specific person
(6) Business league chamber of commerce, or
board of trade, not organized for profit and
no part of the net income of which inures to
the benefit of any private stock-holder, or
individual
(7) Civic league or organization not organized
for profit but operated exclusively for the
promotion of social welfare
(8) A non-stock and non-profit Educational
institution
(9) Government Educational institution
(10) Farmers' or other mutual typhoon or fire
insurance company, mutual ditch or
irrigation company, mutual or cooperative
telephone company, or like organization of a
purely local character, the income of which
consists solely of assessments, dues, and
fees collected from members for the sole
purpose of meeting its expenses and
(11) Farmers', fruit growers', or like association
organized and operated as a Sales agent
for the purpose of marketing the products
of its members and turning back to them
the proceeds of sales, less the necessary
selling expenses on the basis of the
quantity of produce finished by them;
Note:
Notwithstanding the exemptions, income
of whatever kind and character of the
enumerated 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.
RA 9178 Act to Promote the Establishment
of Barangay Micro Business Enterprises
(BMBEs) implemented by DO 17-04, April 20,
2004
UP COLLEGE OF LAW TAXATION 1 TAXATION LAW

(1) BMBEs shall be exempt from income
tax for income arising from the
operations of the enterprise.
(2) BMBE is any business entity or
enterprise engaged in the production,
processing or manufacturing of
products or commodities, including
agro-processing trading and services,
whose total assets including those
arising from loans but exclusive of land
on which the particular business
entity’s office, plant and equipment are
situated, shall not be more than P3M.
Recreational Clubs - RMC 35-2012 (August
3, 2012) clarifies taxability of clubs
organized exclusively for pleasure,
recreation and other non-profit purposes
(recreational clubs). Income from whatever
sources including but not limited to
membership fees, assessment dues, rental
income, and service fees are subject to
income tax and VAT.

TAXATION OF RESIDENT CITIZENS, NON-RESIDENT CITIZENS AND RESIDENT

ALIENS

Summary Table for Taxation of Individuals (all individual taxpayers, including non-resident aliens)

Basic Personal Additional Personal

Classification Taxable Income Tax Rates
Exemption Exemption
Income from
sources within and
Resident Citizen Allowed Allowed 5%-32%
outside the
Philippines
Income from
Non-Resident Citizen sources within the Allowed Allowed 5%-32%
Philippines
Income from
Resident Alien sources within the Allowed Allowed 5%-32%
Philippines
Lower amount
between PE allowed
Non-resident Alien Income from to Filipinos in the
No specific
Engaged in Trade or sources within the foreign country 5%-32%
provision
Business Philippines where he resides vs.
PE in the
Philippines
Non-resident Alien Not Income from
Engaged in Trade or sources within the Not allowed Not allowed 25%
Business Philippines

93
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GENERAL RULE THAT RESIDENT CITIZENS
ARE TAXABLE ON INCOME FROM ALL
SOURCES WITHIN AND WITHOUT THE
PHILIPPINES
General rule: A Filipino resident citizen is
taxable on income from all sources (within and
without the Philippines)
(1) Non-resident citizens: A non-resident
citizen is taxable only on income derived
from sources within the Philippines.
A non-resident citizen is a Filipino citizen
who:
(1) Establishes to the satisfaction of the
CIR the fact of his physical presence
abroad with a definite intention to
reside therein
(2) Leaves the Philippines during the
taxable year to reside abroad (as
immigrant or for employment on a
permanent basis)
(3) Works and derives income from abroad
and whose employment requires him
to be present abroad most of the time
during the taxable year
(4) Has been previously considered as a
non-resident and arrives in the
Philippines at any time during the
taxable year to reside here
permanently (only with respect to his
income from sources abroad until the
date of his arrival in the country)
(2) Other considerations:
(1) A Filipino citizen working and deriving
abroad as an Overseas Contract
Worker is taxable only on income from
sources WITHIN the Philippines.
(i.) OCW refers to Filipino citizens in
foreign countries, who are
physically present in a foreign
country as a consequence of their
employment in that country. Their
salaries and wages are paid by an
94
TAXATION LAW
employer abroad and is not borne
by an entity or person in the
Philippines. They must be duly
registered with the Philippine
Overseas Employment
Administration (POEA) with valid
Overseas Employment Certificate
(OEC).
(ii.) An OCW’s income arising out of
his overseas employment is
exempt from income tax.
(2) A resident alien or non-resident alien is
taxable only on income from sources
WITHIN the Philippines.
(i.) A resident alien is an individual
whose residence is in the
Philippines and who is not a
Filipino citizen.
(ii.) A non-resident alien is an
individual whose residence and
citizenship is not in the Philippines.
(a) An alien actually present in
the Philippine who is not a
mere transient or sojourner
is a resident of the
Philippines for purposes of
the income tax.
(b) Whether he is a transient
or not is determined by his
intentions with regard to
the length and nature of
his stay. A mere floating
intention indefinite as to
time, to return to another
country is not sufficient to
constitute him a transient.
(c) If he lives in the Philippines
and has no definite
intention to stay, he is a
resident.
(d) One who comes to the
Philippines for a definite
purpose which, in its
UP COLLEGE OF LAW TAXATION 1
nature, may be promptly
accomplished is a transient.
(e) But if his purpose is of such
a nature that an extended
stay may be necessary for
its accomplishment, and to
that end the alien makes
his home temporarily in the
Philippines, he becomes a
resident, though it may be
his intention at all times to
return to his domicile
abroad when the purpose
of which he came has been
consummated or
abandoned. [Sec. 5, RR No.
2]
(iii.) In general, a non-resident alien
individual who shall come to
the Philippines and stay
therein for an aggregate period
of more than 180 days during
any calendar year shall be
deemed a non-resident alien
doing business in the
Philippines.
Intended Stay in the
Philippines:
i. Up to 180 days –
NRANETB
ii. More than 180 days up
to 2 years – NRAETB
iii. Greater than 2 years –
Resident alien
TAXATION ON COMPENSATION
INCOME
Income arising from an ER-EE relationship. It
means all remuneration for services performed
by an EE for his ER, including the cash value of
all remuneration paid in any medium other
than cash. [Sec. 78(A)] It includes, but is not
limited to salaries and wages, commissions,
tips, allowances, bonuses, Fringe Benefits of
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TAXATION LAW
rank and file EEs and other forms of
compensation.
INCLUSIONS
(1) Monetary compensation– If compensation
is paid in cash, the full amount received is
the measure of the income subject to tax.
(a) Regular salary/wage
(i) Salary – earnings received
periodically for a regular work
other than manual labor, such as
monthly salary of an employee
(ii) Wages – all remuneration (other
than fees paid to a public official)
for services performed by an
employee for his employer,
including the cash value of all
remuneration paid in any medium
other than cash. [Sec. 78A, NIRC]
(b) Separation pay/retirement benefit not
otherwise exempt
(i) Retirement pay – a lump sum
payment received by an employee
who has served a company for a
considerable period of time and
has decided to withdraw from work
into privacy. [RR 6-82, Sec. 2b]
General rule: Retirement pay is
taxable
Exceptions:
(1) SSS or GSIS retirement pays.
(2) Retirement pay (R.A. 7641) due
to old age provided the
following requirements are
met:
(1) The retirement program is
approved by the BIR
Commissioner;
(2) It must be a reasonable
benefit plan. (fair and
equitable)
(3) The retiree should have
been employed for 10
years in the said company;
UP COLLEGE OF LAW TAXATION 1
(4) The retiree should have
been 50 years old or above
at the time of retirement;
and
(5) It should have been
availed of for the first time.
(ii) Separation pay – taxable if
voluntarily availed of. It shall not
be taxable if involuntary i.e. Death,
sickness, disability, reorganization
/merger of company and company
at the brink of bankruptcy or for
any cause beyond the control of
the said official or employee
(3) Bonuses, 13th month pay, and other
benefits not exempt
(i) Tips and Gratuities – those paid
directly to the employee (usually by
a customer of the employer) which
are not accounted for by the
employee to the employer. (taxable
income but not subject to
withholding tax) [RR NO. 2-98, Sec.
2.78.1]
(ii) Thirteenth month pay and other
benefits - Not taxable if the total
amount received is P30,000 or less.
Any amount exceeding P30,000 is
taxable. [Sec. 32 (7)e, NIRC]
(iii) Overtime Pay – premium payment
received for working beyond
regular hours of work which is
included in the computation of
gross salary of employee. It
constitutes compensation.
(4) Directors’ fees
Fees – received by an employee for the
services rendered to the employer
including a director’s fee of the
company, fees paid to the public
officials such as clerks of court or
sheriffs for services rendered in the
performance of their official duty over
and above their regular salaries.
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TAXATION LAW
(2) Nonmonetary compensation - If services
are paid for in a medium other than money,
the fair market value of the thing taken in
payment is the measure of the income
subject to tax.
(a) Fringe benefit not subject to tax
(See Chapter on Gross Income for the
discussion of Taxable and Non-taxable
fringe benefits)
If the recipient of the fringe benefits is a rank
and file employee, and the said fringe benefit
is not tax-exempt, then the value of such fringe
benefit shall be considered as part of the
compensation income of such employee
subject to tax payable by the employee.
[Domondon]
EXCLUSIONS
(1) Fringe benefit subject to tax
(See Chapter on Gross Income for the
discussion of Taxable and Non-taxable
fringe benefits)
Where the recipient of the fringe benefit is not
a rank and file employee, and the said benefit
is not tax-exempt, then the same shall not be
included in the compensation income of such
employee subject to tax. The fringe benefit
[tax] is instead levied upon the employer, who
is required to pay. [Domondon]
Convenience of the ER Rule
If meals, living quarters, and other facilities
and privileges are furnished to an employee for
the convenience of the employer, and
incidental to the requirement of the
employee’s work or position, the value of that
privilege need not be included as
compensation [Henderson v. Collector (1961)]
(2) De minimis benefits
(a) Facilities or privileges of relatively small
value furnished by an employer to his
employees and are as a means of
UP COLLEGE OF LAW TAXATION 1
promoting the health, goodwill,
contentment, or efficiency of his
employees.
(b) These are exempt from fringe benefit
tax and compensation income tax.
(3) Bonuses, 13th month pay and other
benefits and payments specifically
excluded from taxable compensation
income
(a) Gross benefits received by employees
of public and private entities provided
that the total exclusion shall not
exceed P30,000 (amounts in excess
are considered compensation income)
(b) Benefits include:
(i) Benefits received by government
employees under RA 6686
(ii) Benefits received by employees
pursuant to PD 851 (13th Month
Pay Decree)
(iii) Benefits received by employees not
covered by PD 851 as amended by
Memorandum Order No. 28; and,
(iv) Other benefits such as productivity
incentives and Christmas bonus
DEDUCTIONS
(1) Personal exemptions and additional
exemptions (See the Chapter on Deductions
for the full discussion of Personal and
additional exemptions)
(a) Basic Personal Exemptions
According to RA 9504 (effective July 6,
2008) basic personal exemption is
Fifty thousand pesos (P50,000) for
each individual taxpayer, regardless
whether single, married or head of the
family.
(b) Additional Exemptions (AE)- depends
on the number of qualified dependent
children
Amount allowed as a deduction
P25,000 per dependent child, but not
to exceed four children [RA 9504]
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TAXATION LAW
(2) Health and hospitalization insurance
(a) Premium Paid on Health or
Hospitalization Insurance [Sec.34 (M)]
(b) Amount of premium paid on health
and/or hospitalization by an individual
taxpayer (head of family or married),
for himself and members of his family
during the taxable year.
Requisites for Deductibility
(1) Insurance must have actually been taken
(2) The amount of premium deductible does
not exceed P2,400 per family or P200 per
month whichever is lower during the
taxable year.
(3) That said family has a gross income of not
more than P250,000 for the calendar year.
(4) In case of married individual, only the
spouse claiming additional exemption
shall be entitled to this deduction.
Note: The spouse claiming the additional
exemptions for qualified dependent children
shall be the same spouse to claim the
deductions for premium payments.
The following may avail of the deduction
(1) Individual taxpayers earning purely
compensation income during the year.
(2) Individual taxpayer earning business
income or in practice of his profession.
TAXATION OF COMPENSATION INCOME OF A
MINIMUM WAGE EARNER
Statutory minimum wage – earner shall refer to
rate fixed by the Regional Tripartite Wage and
Productivity Board, as defined by the Bureau of
Labor and Employment Statistics (BLES) of the
Department of Labor and Employment. [Sec.22
GG, as amended by RA 9504]
Minimum wage earner – shall refer to a worker
in the private sector paid the statutory
UP COLLEGE OF LAW TAXATION 1
minimum wage, or to an employee in the
public sector with compensation income of not
more than the statutory minimum wage in the
non-agricultural sector where he/she is
assigned. [Sec.22 HH, as amended by RA 9504]
The minimum wage shall be exempt from the
payment of income tax on their taxable income:
Provided, further, That the holiday pay,
overtime pay, night shift differential pay and
hazard pay received by such minimum wage
earners shall likewise be exempt from income
tax
Income also subject to tax exemption: holiday
pay, overtime pay, night shift differential, and
hazard pay
Compensation income including overtime pay,
holiday pay and hazard pay, earned by
minimum wage earners who has no other
returnable income are NOT taxable and not
subject to withholding tax on wages [RA 9504]
TAXATION OF BUSINESS
INCOME/INCOME FROM PRACTICE OF
PROFESSION
All income obtained from doing business
and/or engaging in the practice of a profession
shall be included in the computation of taxable
income. (5-32% For citizens, resident aliens &
NRA Engaged in trade or business; 25% in case
of NRANETB)
TAXATION OF PASSIVE INCOME
PASSIVE INCOME SUBJECT TO FINAL TAX
“Final tax” means tax withheld from source,
and the amount received by the income earner
is net of the tax already. The tax withheld by
the income payor is remitted by him to the BIR.
The income having been tax-paid already, it
need not be included in the income tax return
at the end of the year. These passive income
items are as follows:
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TAXATION LAW
(1) Interest income
(2) Royalties
(3) Dividends from domestic corporations
(4) Prizes and other winnings
Interest income
(a) on any currency bank deposit, yield or any
other monetary benefit from deposit
substitutes, trust funds and similar
arrangements - 20% final tax
(b) under the expanded foreign currency
deposit system (EFCDS) - 7.5% final tax for
residents, exempt if non-residents
(c) Treatment of income from long-term
deposits
On long-term deposit or investment
certificates (LTDIC) in banks (e.g., savings,
common or individual trust funds, deposit
substitutes, investment management
accounts and other investments, which
have maturity of 5 years or more) – exempt
Should LTDIC holder pre-terminate LTDIC
before the 5th year, a final tax shall be
imposed on the entire income based on the
remaining maturity:
4 years to less than 5 years 5%
3 years to less than 4 years 12%
less than 3 years 20%
Royalties
(See summary table)
Dividends from domestic corporation
(a) cash and/or property dividends actually or
constructively received by an individual
from
(1) a domestic corporation
(2) a joint stock company
(3) insurance or mutual fund companies
(4) regional operating headquarters of
multinational companies
UP COLLEGE OF LAW TAXATION 1
(b) share of an individual in the distributable
net income after tax of a partnership
(except a general professional partnership)
of which he is a partner
(c) share of an individual member or co-
venturer in the net income after tax of an
association, a joint account, or a joint
venture or consortium taxable as a
corporation
(d) RATE:
(1) 10%for residents (RC, RA) and non
resident citizens (NRC);
(2) 20% for NRAETB(non-resident aliens
engaged in trade or business)
(e) A stock dividend representing the transfer
of surplus to capital account shall not be
subject to tax.
(f) However, if a corporation cancels or
redeems stock issued as a dividend at such
time and in such manner as to make the
distribution and cancellation or
redemption, in whole or in part, essentially
equivalent to the distribution of a taxable
dividend, the amount so distributed in
redemption or cancellation of the stock
shall be considered as taxable income to
99
TAXATION LAW
the extent that it represents a distribution
of earnings or profits. [Sec. 73B, NIRC]
(1) In other words, stock dividends are
generally not subject to tax as long
as there are no options in lieu of
the shares of stock.
(2) On the other hand, a stock dividend
constitutes income if it gives the
shareholder an interest different
from that which his former
stockholdings represented.
PRIZES AND OTHER WINNINGS
(1) Winnings, except Philippine Charity
sweepstakes / lotto winnings – 20%
(2) Prizes exceeding P10,000 – 20%
Prize, differentiated from winnings
A prize is the result of an effort made (e.g.,
prize in a beauty contest), while winnings are
the result of a transaction where the outcome
depends upon chance (e.g., betting).
UP COLLEGE OF LAW TAXATION 1 TAXATION LAW

Summary Table of Rates

NOTE: Bar Syllabus 2015 EXCLUDES NRA-NETB
Section 24(B). Final Tax Rates on Certain Passive Income from Philippine sources

Citizens,
INTEREST, ROYALTIES, PRIZES AND OTHER WINNINGS NRAETB NRANETB
Residents
(a) Interest from any currency bank deposit 20% 20% 25%
(b) Yield or any other monetary benefit from deposit
20% 20% 25%
substitute
(c) Yield or any other monetary benefit from trust funds and
20% 20% 25%
similar arrangements
(d) Royalties, in general (other than royalties described in
20% 20% 25%
letter “e”)
(e) Royalties on books as well as other literary works and
10% 10% 25%
musical compositions
(f) Prizes exceeding P10,000 20% 20% 25%
(g) Other winnings (other than Philippine Charity
20% 20% 25%
Sweepstakes and Lotto winnings)
(h) Interest incomes received from a depositary bank under 7 1/2%
expanded foreign currency deposit system Note: NRC
– Exempt Exempt Exempt
(RR 1-
2011)
(i) Interest income from long-term deposit or investment Exempt Exempt 25%
evidenced by certificates prescribed by BSP. If
preterminatedbefore fifth year, a final tax shall be
imposed based on remaining maturity:
(1) 4 years to less than 5 years 5% 5% 25%
(2) 3 years to less than 4 years 12% 12% 25%
(3) Less than 3 years 20% 20% 25%
Citizens,
CASH AND/OR PROPERTY DIVIDENDS NRAETB NRANETB
Residents
Cash and/or property dividends actually or constructively
received from a domestic corp. or from a joint stock co.,
insurance or mutual fund companies and regional operating
10% 20% 25%
headquarters of multinational companies (beginning January
1, 2000)
Share of an individual in the distributable net income after tax
of a PARTNERSHIP (other than a general professional
10% 20% 25%
partnership) (beginning January 1, 2000)
Share of an individual in the net income after tax of an
ASSOCIATION, a JOINT ACCOUNT, or a JOINT VENTURE or
CONSORTIUM taxable as a corporation, of which he is a 10% 20% 25%
member or a co-venturer (beginning January 1, 2000)

100
UP COLLEGE OF LAW
(a) For interest from foreign currency loans
granted by FCDUs to residents other than
Offshore Banking Units (OBUs) or other
depository banks under the expanded
system – tax rate is 10% if payors are
RESIDENTS, whether individuals or
corporations.
(b) For interest from foreign currency loans
granted by OBUs to residents other than
OBUs or local commercial banks, including
branches of foreign banks that may be
authorized by the BSP to transact business
with OBUs - tax rate is 10% if payors are
RESIDENTS, whether individuals or
corporations.
(c) Gross income from all sources within the
Philippines derived by non-resident
cinematographic film owners, lessors or
distributors – tax rate is 25% if payee is: (a)
non-resident alien individual, or (b) non-
resident foreign corporation. The term
“cinematographic films” includes motion
picture films, films, tapes, discs and other
such similar or related products.
(d) Informer’s reward given to persons who
voluntarily provide definite and sworn
information that lead to or was
instrumental in the discovery of fraud or
violation of the provisions of the NIRC or
special laws being administered by the BIR
and resulted in the actual recovery or
collection of revenues, surcharges and fees
and/or the conviction of the guilty party or
parties, and/or the imposition of any fine
or penalty or the actual collection of a
compromise amount, in case of amicable
settlement, shall be subject to income tax,
collected as a final withholding tax, at the
rate of 10%, pursuant to Sec. 282 of the
NIRC [RR 16-2010]
TAXATION 1 TAXATION LAW
PASSIVE INCOME NOT SUBJECT TO TAX
Interest income from long-term deposit or
investment in the form of savings, common or
individual trust funds, deposit substitutes,
investment management accounts and other
investments evidenced by certificates in such
form prescribed by the BSP shall be exempt
from tax
But should the holder of the certificate pre-
terminate the deposit or investment before the
5th year, a final tax shall be imposed on the
entire income and shall be deducted and
withheld by the depository bank from the
proceeds of the long-term deposit or
investment certificate based on the remaining
maturity thereof:
(1) Four (4) years to less than five (5) years -
5%;
(2) Three (3) years to less than four (4) years -
12%; and
(3) Less than three (3) years - 20%.
Any income of nonresidents, whether
individuals or corporations, from transactions
with depository banks under the expanded
system shall be exempt from income tax.
TAXATION OF CAPITAL GAINS
INCOME FROM SALE OF SHARES OF STOCK
OF A PHILIPPINE CORPORATION
Shares traded and listed in the stock exchange
– exempt
The transaction is exempt from income tax
regardless of the nature of business of the
seller or transferor. However, it is subject to the
one-half of one percent (1/2 of 1%) stock
transaction tax imposed under Sec. 127(A) of
the Tax Code based on the gross selling price
or gross value in money of the shares of stock
sold or transferred.
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Shares not listed and traded in the stock
exchange – subject to final tax
On sale, barter, exchange or other disposition
of shares of stockof a domestic corporation not
listed and traded through a local stock
exchange, held as a capital asset:
On the net capital gain:
Not over P100,000 = Final Tax of 5%
On any amount in excess of P100,000 = plus
Final Tax of 10% on the excess
Key Definitions
(a) Net capital gain: selling price less cost
(b) Selling price: consideration on the sale OR
fair market value of the shares of stock at
the time of the sale, whichever is higher
(c) Cost: original purchase price
INCOME FROM THE SALE OF REAL PROPERTY
SITUATED IN THE PHILIPPINES
What property covered
Property located in the PH classified as capital
assets
What transactions covered
Sales, exchanges, or other disposition of real
property (classified as capital assets), including
pacto de retro sales and other forms of
conditional sales of the following: citizens,
resident aliens, NRAETB, NRANETB, domestic
corporations.
Tax rate
General rule: 6% of—whichever is higher
(a) Gross selling price, or
(b) Fair market value (determined in
accordance with Sec. 6(E)).
Except
(1) In case of sales made to the government,
any of its political subdivisions or agencies,
or to GOCCs, it can be taxed either:
(a) Under Sec. 24(C)(1) – 6% CGT, or
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TAXATION LAW
(b) Under Sec. 24(A), at the option of the
taxpayer.
(2) In case of the sale of or disposition of their
principal residence by natural persons
(a) Requirements:
(1) Sale or disposition by a natural
person of his principal residence,
(2) The proceeds of which is fully
utilized in acquiring/constructing a
new principal residence,
(3) Such acquisition/construction
taking place within 18 calendar
months from the date of sale or
disposition,
(4) The taxpayer notifies the
Commissioner within 30 days from
the sale/disposition through a
prescribed return of his intention to
avail of the exemption,
(5) The tax exemption can only be
availed of once every 10 years.
(b) Tax treatment: Exempt from capital
gains tax (CGT). If there is no full
utilization of the proceeds of sale or
disposition, the portion of the gain
presumed to have been realized from
the sale or disposition shall be subject
to CGT.
(c) How taxable portion and tax
determined:
𝐻𝐼𝐺𝐻𝐸𝑅 𝑜𝑓 𝐺𝑟𝑜𝑠𝑠 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒
𝑜𝑟 𝑥[ ]
𝐹𝑀𝑉 @ 𝑠𝑎𝑙𝑒
(1) 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.
(2) Computation for the basis of new
principal residence:
XXX
Historical cost of old principal
residence
Add: Additional cost to acquire XXX
UP COLLEGE OF LAW TAXATION 1 TAXATION LAW

new principal residence* (2) At 30% corporate income tax, if the seller
Adjusted cost bases of the new XXX is a corporation.
principal residence Rule: Capital gain/loss is recognized in full.

*Additional cost to acquire new
principal residence:
Cost to acquire new principal XXX
residence
Less: Gross selling price of old (XXX)
principal residence
Additional cost to acquire new XXX
principal residence
INCOME FROM THE SALE, EXCHANGE, OR
OTHER DISPOSITION OF OTHER CAPITAL
ASSETS
Other properties shall be subject to income
tax—
(1) At the graduated income tax rates, if the
seller is an individual;
(a) Long-term capital gains: only 50% is
recognized.
(b) Short-term capital asset transactions:
100% subject to tax. (Sec. 39(B))
Determination of whether short- or long-
term: If held for <12 mos, then short-term.
Otherwise, long-term.
Capital assets shall refer to all real properties
held by a taxpayer, whether or not connected
with his trade or business, and which are not
included among the real properties considered
as ordinary assets under Section 39(A)(1) of the
NIRC.
Ordinary assets shall refer to all real properties
specifically excluded from the definition of
capital assets under Section 39(A)(1) of the
NIRC, namely:
(1) Stock in trade of a taxpayer or other real
property of a kind which would properly be
included in the inventory of the taxpayer if
on hand at the close of the taxable year; or
(2) Real property held by the taxpayer
primarily for sale to customers in the
ordinary course of his trade or business; or
(3) Real property used in trade or business (i.e.,
buildings and/or improvements) of a
character which is subject to the allowance
for depreciation provided for under Sec.
34(F) of the Code; or
(4) Real property used in trade or business of
the taxpayer.

Summary Tables of Rates excess of

(Tables include NRAETB and NRANETB) P100,000

Section 24(C).Capital Gains Tax from Sale of Section 24(D).Capital Gains Tax from Sale of
Shares of Stock of a domestic corporation NOT Real Property Classified as Capital Asset
TRADED in the Stock Exchange RES/CIT NRAETB NRANETB
RES/CIT NRAETB NRANETB Tax base:
Tax base: Gross
Net Capital selling price
Gain or current
Tax rate: 5% 5% 5% fair market
Not over 10% 10% 10% value,
P100,000 whichever
is higher
Amount in Tax rate: 6% 6% 6%

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Resident Non-Resident
CITIZEN ALIEN CITIZEN NRAETB NRANETB
Category of Income Within the Within the Within the Within the
All sources
Philippines Philippines Philippines Philippines
(1) Compensation / Business /
Based on Taxable (i.e, Net) Income
Profession
Schedular Income Tax Rates (Sec. 24, NIRC)
(2)
(i.e, 5% to 32%)
(3) Prizes of P10,000 or less
(4) Interest from any currency bank
deposit , etc., Royalties (other
than from books, literary works Gross Income Within the Philippines (GIW) – 20%
and musical compositions), Final Withholding Tax
Winnings / Prizes (except prizes
P10,000 and below)
(5) Royalties from books, literary
GIW – 10% Final Withholding Tax
works, musical compositions GIW – 25%
(6) Interest from long-term deposit EXEMPT; However:
or investment certificates, which In case of pre-termination, with remaining maturity
have a maturity of 5 years or of:
more 4 years to less than 5 years – 5% on entire income
3 years to less than 4 years – 12% on entire income
less than 3 years – 20% on entire income
(7) Cash / Property Dividends from a
domestic corporation, etc., OR
share in the distributable net
GIW – 10% Final Withholding Tax GIW- 20%
income after tax of a partnership
(except a general professional
partnership), etc.
(8) Interest (Expanded Foreign GIW – 7.5% Final
EXEMPT
Currency Deposit System) Withholding Tax
(9) Winnings on Philippine
EXEMPT
Sweepstakes / Lotto
(10) Capital Gains on Sale of Shares Net Capital Gains within:
of Domestic Corp. (not traded in Not Over P100,000 – 5% Final Tax
a domestic stock exchange) Amount in Excess of P100,000 – plus 10% Final Tax on the excess
(11) Capital Gains on Sale of Real Gross Selling Price or FMV, whichever is higher –
Property in the Philippines 6% Final Withholding Tax
(12) Sale of Shares of Domestic Corp. ½ of 1% of the Selling Price (Stock Transaction Tax)
(traded in a domestic stock Note: Stock Transaction Tax is not an income tax, but a business
exchange) (percentage) tax
(13) Sale of Real Property located
Abroad Schedular Income Tax Rates (Sec. 24 , NIRC)
(14) Sale of Shares of Foreign Corp (i.e, 5% to 32%)
(15) Passive Income from Abroad

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Computations
Pure Compensation Income TAXATION OF NON-RESIDENT
ALIENS ENGAGED IN TRADE OR
Gross Compensation Income xx
Less: Personal & Additional Exemptions BUSINESS
and hospitalization/health insurance (See above summary tables)
premium xx
Taxable Income xx GENERAL RULES
x Rate
Income Tax xx
Subject to an income tax in the same manner
Less: Creditable Withholding Tax on as an individual citizen and a resident alien
Compensation Income xx individual on taxable income from all sources
Tax Payable xx within the Philippines

Mixed-Income (i.e., compensation income and Nonresident alien doing business in the
business income/income from the practice of Philippines: a non-resident alien individual who
profession) shall come to the Philippines and stay therein
for an aggregate period of more than 180 days
Gross Compensation Income Xx during any calendar year
Less: Personal & Additional Exemptions
and hospitalization/health insurance
premium Xx CASH AND/OR PROPERTY DIVIDENDS
Taxable Compensation Income Xx The following shall be subject to an income tax
ADD: Gross Business Income &/or of twenty percent (20%) on the total amount
Income from Practice of Profession Xx
thereof:
Less: Allowable Deduction (itemized
or optional deduction) Xx
(a) Cash and/or property dividends from:
Taxable Income Xx (1) A domestic corporation;
x Rate (2) A joint stock company;
Income Tax Xx (3) An insurance or mutual fund company;
Less: Creditable Withholding Tax on (4) A regional operating headquarter of
Compensation Income/Other Allowable
Tax Credit Xx
multinational company;
Tax Payable Xx (5) The share of a nonresident alien
individual in the distributable net
Pure Business/Professional Income income after tax of a partnership
(except a general professional
Gross Business Income &/ partnership) of which he is a partner;
or Income from Practice of Profession Xx (6) The share of a nonresident alien
Less: Allowable Deduction individual in the net income after tax of
(itemized or optional deduction) xx an association, a joint account, or a
Personal & Additional Exemptions
and hospitalization/health insurance
joint venture taxable as a corporation
premium xx of which he is a member or a co-
Total Taxable Income Xx venturer;
x Rate (b) Interests
Income Tax Xx (c) Royalties (in any form); and
Less: Creditable Withholding Tax on
(d) Prizes (except prizes amounting to Ten
Compensation Income/Other Allowable
Tax Credit Xx thousand pesos (P10,000) or less which
Tax Payable Xx shall be subject to graduated tax) and

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UP COLLEGE OF LAW TAXATION 1
other winnings (except Philippine Charity
Sweepstakes and Lotto winnings);
EXCEPT:
(1) The following Royalties shall be subject to
a final tax of ten percent (10%) on the total
amount thereof:
(a) On books as well as other literary
works; and
(b) On musical compositions
(2) Cinematographic films and similar works
shall be subject to twenty-five percent
(25%) of the gross income
(3) Interest income from long-term deposit or
investment in the form of savings, common
or individual trust funds, deposit
substitutes, investment management
accounts and other investments evidenced
by certificates in such form prescribed by
the Bangko Sentral ng Pilipinas (BSP) shall
be exempt from the tax
But should the holder of the certificate pre-
terminate the deposit or investment before the
fifth (5th) year, a final tax shall be imposed on
the entire income and shall be deducted and
withheld by the depository bank from the
proceeds of the long-term deposit or
investment certificate based on the remaining
maturity thereof:
(i) Four (4) years to less than five (5) years -
5%;
(ii) Three (3) years to less than four (4) years -
12%; and
(iii) Less than three (3) years - 20%.
CAPITAL GAINS
Capital gains realized from sale, barter or
exchange of shares of stock in domestic
corporations not traded through the local stock
exchange, and real properties shall be subject
to the similar tax prescribed on citizens and
resident aliens.
(a) Sale, barter or exchange of Shares of stock
in domestic corporation not traded –
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TAXATION LAW
(1) Net over P100,000 – 5% of net capital
gains realized
(2) On any amount in excess of P100,000
– 10% of net capital gains realized
(b) Sale, barter or exchange of real properties
– 6% of gross selling price or current FMV
whichever is higher
NON-RESIDENT ALIENS NOT
ENGAGED IN TRADE OR BUSINESS
(1) Alien individuals employed by:
(a) Regional or Area Headquarters
(RAHQ) and Regional Operating
Headquarters (ROHQ) established in
the Philippines by multinational
companies
Multinational company, defined a
foreign firm or entity engaged in
international trade with affiliates or
subsidiaries or branch offices in the
Asia-Pacific Region and other foreign
markets
(b) Offshore Banking Units established in
the Philippines
(2) Alien individuals who are permanent
residents of a foreign country but who are
employed and assigned in the Philippines
by a foreign service contractor or by a
foreign service subcontractor engaged in
petroleum operations in the Philippines
Tax Rate and Base - 15% of gross income
received as salaries, wages, annuities,
compensation, remuneration and other
emoluments, such as honoraria and
allowances.
The same tax treatment shall apply to Filipinos
employed and occupying the same positions as
those of aliens employed by these
multinational companies, offshore banking
UP COLLEGE OF LAW TAXATION 1
units and petroleum service contractors and
subcontractors.
Note that the coverage of the special
classification (and the corresponding tax rate)
is limited to income received as wages. Hence,
any income earned from all other sources within
the Philippines by the alien employees shall be
subject to the pertinent income tax (example:
sale of real property in the Philippines is
subject to 6% capital gain tax, imposed on the
gross selling price or fair market value of the
property at the time of the sale, whichever is
higher)
INDIVIDUAL TAXPAYERS EXEMPT
FROM INCOME TAX
Individual Taxpayers exempt from income tax
are:
(1) Senior Citizens
(2) Minimum wage earners
(3) Exemptions granted under international
agreements
All individuals and entities claiming exemption
from imposition of taxes on income and,
consequently, from withholding taxes are
required to provide a copy of a valid, current
and subsisting tax exemption certificate or
ruling, as per existing administrative issuances
and any issuance that may be issued from time
to time, before payment of the related income.
The tax exemption certificate or ruling must
explicitly recognize the grant of tax exemption,
as well as the corresponding exemption from
imposition of withholding tax. Failure on the
part of the taxpayer to present the said tax
exemption certificate or ruling as herein
required shall subject him to the payment of
appropriate withholding taxes due on the
transaction. [RMC No. 8=2014]
SENIOR CITIZENS
Who covered: any resident citizen—
(a) At least 60 years old, and
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TAXATION LAW
(b) Who are considered minimum wage
earners under RA 9504 (Sec. 4 (b) RA 7432,
as amended by RA 9994) and/or the
aggregate amount of gross income earned
by the senior citizen during the taxable
year does not exceed the amount of his
personal exemptions (BPE and APE).
MINIMUM WAGE EARNERS
Rule: they shall be exempt from payment of
income tax on their taxable income
Limit: however, if he receives “other benefits”
in excess of the allowable statutory amount of
P30,000, then he shall be taxable on the
exceeds benefits as well as his salaries, wages,
and allowances, just like an employee
receiving compensation income beyond the
statutory minimum wage.
EXEMPTIONS GRANTED UNDER
INTERNATIONAL AGREEMENTS (SEC.
32(B))
See RMC No, 31-2013, April 12, 2013 – taxation
of compensation income of Philippine
nationals and alien individuals employed by
foreign governments/embassies/diplomatic
missions and international organizations
situated in the Philippines
TAXATION OF DOMESTIC
CORPORATIONS
TAX PAYABLE
Taxes payable are:
(1) Regular tax
(2) Minimum Corporate Income Tax
REGULAR TAX
Normal Corporate Income Tax Rate: 30% of
Taxable Income (effective January 1, 2009)
Gross Income XXX
Less: Allowable Deductions XXX
Taxable Income XXX
UP COLLEGE OF LAW
MINIMUM CORPORATE INCOME TAX
(MCIT)
(1) Applies to domestic corporations and RFCs
whenever such corporations have zero or
negative taxable income or whenever the
MCIT is greater than the normal income
tax due from such corporations.
(2) Imposed upon any domestic corporation
beginning the fourth taxable year in which
such corporation commenced its business
operations. For purposes of the MCIT, the
taxable year in which business operations
commenced shall be the year when the
corporation registers with the BIR (not in
which the corporation started commercial
operations).
(3) Tax rate: 2% of the Gross Income
Imposition of MCIT
Gross Sales XXX
Less: Sales Returns XXX
Sales Discounts & XXX
Allowances XXX XXX
Cost of Goods Sold
MCIT GI XXX
COMPUTATION OF GROSS INCOME.—
The term “Gross Income” shall be equivalent
to gross sales less sales returns, discounts and
allowances and cost of goods sold. “Cost of
goods sold” shall include all business
expenses directly incurred to produce the
merchandise to bring them to their present
location and use.
If apart from deriving income from core
business activities there are other items of
gross income realized or earned by the
taxpayer which are subject to the normal
corporate income tax, they must be included as
part of gross income for computing MCIT. [Sec.
27 (E), NIRC; RR 12-2007]
TAXATION 1 TAXATION LAW
This means that the term “gross income” will
also include all items of gross income
enumerated under Section 32(A) of the NIRC,
except: (a) income exempt from income tax,
and (b) income subjected to FWT.
The computation by type of business.—
Merchandising/Manufacturing Service Concerns
Concerns
Net Sales P Gross
xxx receipts/revenue
P xxx
Less: Cost of Sales Less: Direct cost
xxx of services
xxx
Gross Income P Gross income
xxx P xxx
“Net Sales” is gross sales less sales returns,
discounts and allowances.
“Direct cost of services” includes salaries of
personnel rendering the services, expenses on
the facilities directly utilized, cost of supplies,
and the like. “Direct costs and expenses” shall
only pertain to those costs exclusively and
directly incurred in relation to the revenue
realized by the sellers of services. These refer
to costs which are considered indispensable to
the earning of the revenue such that without
such costs, no revenue can be generated.
Pointers.—
MCIT is in the nature of a tax credit, not an
allowable deduction. Its purpose is to prevent
corporations from escaping being taxed by
including frivolous expenses in their statement
of income.
Is the Minimum Corporate Income Tax (MCIT) an
addition to the regular or normal income tax?
No, the MCIT is not an additional tax. The MCIT
is compared with the regular income tax, which
is due from a corporation. If the regular income
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UP COLLEGE OF LAW TAXATION 1
is higher than the MCIT, then the corporation
does not pay the MCIT.
Who are covered by MCIT?
The MCIT covers domestic and resident foreign
corporations which are subject to the regular
income tax. The term “regular income tax”
refers to the regular income tax rates under the
Tax Code. Thus, corporations which are subject
to a special corporate tax system do not fall
within the coverage of the MCIT.
These special corporations are:
(1) Corporations that are subject to ten percent
(10%) preferential tax rate: Proprietary
educational institutions, nonprofit
hospitals, Offshore Banking Units (OBUs)
on their income from foreign currency
transactions which has been subjected to a
final income tax at 10% of such income,
and depository banks under the expanded
foreign currency deposit system on their
income from foreign currency transactions
which has subjected to final income tax at
10%; RFCs engaged in business as
Regional Operating Headquarters
(2) Firms under special income tax regime
such as those under the PEZA law [RA
7916], the Bases Conversion Development
Act [RA 7227] and forms enjoying Income
Tax Holiday (ITH) under EO No. 226;
(3) International carriers subject to tax at 2
½% of their gross Philippine billings;
Note: For domestic corporations whose
operations or activities are partly covered by
the regular income tax and partly covered
under a special income tax system, the MCIT
shall apply on operations covered by the
regular corporate income tax system.
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TAXATION LAW
MCIT gross income differentiated from the
normal tax gross income
The latter would include other incidental
income items, such as rent income, interest,
gain on sale of assets, certain tax refunds, etc.
What amount of income tax is paid by the
corporation to the BIR?
Whichever is higher between the normal tax
and the minimum corporate income tax
Illustration:
E Co., a domestic trading corporation, in its
fourth year of operations had a gross profit
from sales of P300,000 and net taxable
income of P100,000. How much was the
income tax paid by the corporation for the
year?
MCIT (P300,000 x 2%) P6,000
Normal income tax
(P100,000 x 30%) P30,000
Income Tax to be paid for the year
(whichever is higher) P30,000
Quarterly MCIT Computation.—
The computation and the payment of MCIT
shall likewise apply at the time of filing the
quarterly corporate income tax. In the
computation of the tax due for the taxable
quarter, if the quarterly MCIT is higher than the
quarterly normal income tax, the tax due to be
paid for such taxable quarter at the time of
filing the quarterly corporate income tax return
shall be the MCIT.
Items allowed to be credited against quarterly
MCIT due: (a) CWT, (b) Quarterly income tax
payments under the normal income tax; and
(c) MCIT paid in the previous taxable quarter(s).
Excess MCIT from the previous taxable year/s
shall not be allowed to be credited against the
quarterly MCIT tax due.
UP COLLEGE OF LAW TAXATION 1 TAXATION LAW

Annual Income Tax Computation.— Excess MCIT from the previous taxable year/s
The final comparison between the normal shall not be allowed to be credited against the
income tax payable and the MCIT shall be annual MCIT due as the same can only be
made at the end of the taxable year. The applied against normal income tax.
payable or excess payment in the Annual Manner of Filing and Payment.—
Income Tax Return shall be computed taking The MCIT shall be paid in the same manner
into consideration corporate income tax prescribed for the payment of the normal
payment made at the time of filing of quarterly corporate income tax which is on a quarterly
corporate income tax returns whether this be and on a yearly basis.
MCIT or normal income tax.
CARRY FORWARD OF EXCESS MINIMUM TAX
In the computation of annual income tax due, Any excess of the minimum corporate income
if the normal income tax due is higher than the tax over the normal income tax shall be carried
computed annual MCIT, the following shall be forward on an annual basis. The excess can be
allowed to be credited against the annual credited against the normal income tax in the
income tax: (a) quarterly MCIT payments, (b) nextthree (3) succeeding taxable years. [Sec.
quarterly normal income tax payments, (c) 27(E)(2)] In the year to which carried forward,
excess MCIT in the prior year/s (subject to the the normal tax should be higher than the MCIT.
prescriptive period allowed for its creditability),
(d) CWTs in the current year, (d) excess CWTs Illustration.—
in the prior year. A domestic corporation had the following data
on computations of the normal tax (NT) and
If in the computation of annual income tax due, the minimum corporate income tax (MCIT) for
the computed annual MCIT due is higher than five years.
the annual normal income tax due, the
following may be credited against the annual
income tax: (a) quarterly MCIT payments of Yr 4 Yr 5 Yr 6 Yr 7 Yr 8
current taxable quarter, (b) quarterly normal MCIT 80K 50K 30K 40K 35K
income tax payments in current year, (c) CWTs NT 20K 30K 40K 20K 70K
in the current year, (d) excess CWTs in the prior
year. The excess MCIT over NT carry-forward is
shown as follows:

110
UP COLLEGE OF LAW TAXATION 1 TAXATION LAW

Year 4 Year 5 Year 6 Year 7 Year 8

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

NT is higher n/a n/a 40,000 n/a 70,000

Less: MCIT
> (40,000)* >
carry-fwd (20,000)
>
(20,000)
From Year 4

From Year 5

From Year 7

Tax Due 80,000 50,000 - 40,000 30,000

Arrow pointing downward means that the (3) Legitimate business reverses (substantial
normal tax is higher so that there can be an losses due to fire, robbery, theft or other
excess MCIT carry-forward against it. economic reasons).

*Cannot carry forward an amount higher than OPTIONAL GROSS INCOME TAX (OGIT).—
the NT, hence the excess of 60K from Year 4 Section 27 (A) of the NIRC provides for an
was reduced to 40K. The unused P20,000 optional gross income tax of 15% based on
cannot be used in Year 8 because Year 8 was gross income. The President, upon the
beyond three years from Year 4. recommendation of the Secretary of Finance,
may, effective January 1, 2000, allow domestic
RELIEF FROM THE MCIT UNDER CERTAIN corporations the option to be taxed at fifteen
CONDITIONS (SEC. 27 (E), NIRC) percent (15%) of gross income as defined
The Secretary of Finance, upon the therein, after the following conditions have
recommendation of the Commissioner, may been satisfied:
suspend the imposition of the MCIT upon
submission of proof by the applicant- Tax effort ratio 20% of GNP
corporation that the corporation sustained Ratio of Income Tax collection 40%
substantial losses on account of the following to total tax revenues
(LMB): VAT tax effort 4% of GNP
(1) Prolonged labor dispute (losses from a Ratio of Consolidated Public 0.90%
strike staged by employees that lasts for Sector Financial Position
more than 6 months and caused the (CPSFP) to GNP
temporary shutdown of operations), or Ratio of the Corporation’s Does not
(2) Force majeure (acts of God and other Cost of Sales to Gross Sales exceed 55%
calamity; includes armed conflicts like war
or insurgency), or

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Gross Sales XXX
Less: Sales Returns XXX
SalesDiscounts& XXX
Allowances XXX XXX
Cost of Goods Sold
GI XXX
The election of the gross income tax option by
the corporation shall be irrevocable for three
(3) consecutive taxable years during which the
corporation is qualified under the scheme.
For purposes of gross income tax, gross
income should be the same as gross income
for purposes of MCIT in cases of trading,
merchandising and manufacturing concern
business. However, for service enterprises,
gross income means gross receipts less sales
returns, discounts, allowances and cost of
services.
Note: At present, the OGIT has not been
implemented in the Philippines.
CORPORATIONS EXEMPT FROM THE
MCIT: (BIPTENG)
(1) Banks and other non-bank financial
intermediaries;
(2) Insurance companies;
(3) Publicly-held corporations;
(4) Taxable partnerships;
(5) General professional partnerships;
(6) Non- taxable joint ventures; and
(7) Enterprises that are registered:
(a) with the Philippine Economic Zone
Authority (PEZA) under R.A. 7916;
(b) pursuant to the Bases Conversion and
Development Act of 1992 under R.A.
7227; and
(c) under special economic zones declared
by law which enjoy payment of special
tax rate on their registered operations
or activities in lieu of other taxes,
national or local.
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TAXATION LAW
Note: Words in regular letters are found in Sec.
29(B)(2) of the NIRC. Words in italics are
additions made by the revenue regulation to
consolidate Sec. 29 with other pertinent laws.
APPLICABILITY OF THE MCIT WHERE A
CORPORATION IS GOVERNED BOTH UNDER
THE REGULAR TAX SYSTEM AND A SPECIAL
INCOME TAX SYSTEM
For corporations whose operations or activities
are partly covered by the regular income tax
and partly covered under special income tax
system, the MCIT shall apply on operations by
the regular income tax system
ALLOWABLE DEDUCTIONS
ITEMIZED DEDUCTIONS
(1) Bad debts
(2) Expenses
(3) Losses
(4) Taxes
(5) Depreciation
(6) Interest
(7) Depletion of oil and gas wells and mines
(8) Charitable and other contributions
(9) Research and development
(10) Pension trusts
Optional standard deduction
Before RA 9504, effective July 6, 2009, OSD
only applied to individuals except non-resident
aliens.
But by virtue of RA 9504, it now also applies to
corporations, except non-resident foreign
corporation.
Moreover, the rate was increased from 10% to
40%.
TAXATION OF PASSIVE INCOME
PASSIVE INCOME SUBJECT TO TAX
UP COLLEGE OF LAW TAXATION 1
Note: (1) and (5) below are more appropriate for
the next section. The SC Syllabus, however,
included both in this section
Passive income subject to tax:
(1) Interest from deposits and yield or any
other monetary benefit from deposit
substitutes and from trust funds and
similar arrangements and royalties
(2) Capital gains from the sale of shares of
stock not traded in the stock exchange
(3) Income derived from depository bank
under the expanded foreign currency
deposit system
(4) Inter-corporate dividends
(5) Capital gains realized from the sale,
exchange, or of lands and/or
buildings
Interest from deposits and yield or any other
monetary benefit from deposit substitutes and
from trust funds and similar arrangements and
royalties
On any currency bank deposit, yield or any
other monetary benefit from deposit
substitutes, trust funds and similar
arrangements - 20%
Capital gains from the sale of shares of stock
not traded in the stock exchange
On sale, barter, exchange or other disposition
of shares of stockof a domestic corporation not
listed and traded through a local stock
exchange, held as a capital asset:
On the net capital gain:
(1) First P100,000: Final Tax of 5%
(2) On any amount in excess of P100,000:
plus 10% Final tax on the excess
Income derived from depository bank under the
expanded foreign currency deposit system
Under the expanded foreign currency deposit
system (EFCDS) - 7.5%
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TAXATION LAW
Inter-corporate dividends
Dividends received from another domestic
corporation - exempt
Capital gains realized from the sale, exchange,
or disposition of lands and/or buildings
On the sale, exchange or disposition of lands
and/or buildings which are not actually used in
the business of a corporation and are treated
as capital assets On the gross selling price,
or the current fair market value at the time of
the sale, whichever is higher, a final tax of 6%
Note: Tax treatment is the same as that of
individuals.
The capital gains tax is applied on the gross
selling price, or the current fair market value at
the time of the sale, whichever is higher. Any
gain or loss on the sale is immaterial because
there is a conclusive presumption by law that
the sale resulted in a gain.
PASSIVE INCOME NOT SUBJECT TO TAX
(1) Income derived by a depository bank under
the expanded foreign currency deposit
system from foreign currency transactions
with nonresidents, offshore banking units
in the Philippines, local commercial banks,
including branches of foreign banks that
may be authorized by the Bangko Sentral
ng Pilipinas (BSP) to transact business
with foreign currency depository system
units and other depository banks under the
expanded foreign currency deposit system
shall be exempt from
incomeexemptfromincome tax
Except: net income from transactions
specified by the Secretary of Finance upon
recommendation by the Monetary Board
BUT: Interest income from foreign currency
loans granted by such depository banks
under said expanded foreign currency
UP COLLEGE OF LAW
deposit system to residents, other than
offshore banking units in the Philippines,
shall be subject to a final tax at the rate of
10%.
(2) Any income of nonresidents, whether
individuals or corporations, from
transactions with depository banks under
the expanded system shall be exempt
fromexemptfrom income tax.
TAXATION OF CAPITAL GAINS
INCOME FROM SALE OF SHARES OF
STOCK
On sale, barter, exchange or other disposition
of shares of stockof a domestic corporation not
listed and traded through a local stock
exchange, held as a capital asset:
On the net capital gain:
(1) First P100,000: Final Tax of 5%
(2) On any amount in excess of P100,000:
plus 10% Final tax on the excess
INCOME FROM THE SALE OF REAL
PROPERTY SITUATED IN THE
PHILIPPINES
Philippine & (iii) Income from the sale, exchange,
or other disposition of other capital assets
On the sale, exchange or disposition of lands
and/or buildings which are not actually used in
the business of a corporation and are treated
as capital assets On the gross selling price,
or the current fair market value at the time of
the sale, whichever is higher, a final tax of 6%
Note: Tax treatment is the same as that of
individuals.
The capital gains tax is applied on the gross
selling price, or the current fair market value at
the time of the sale, whichever is higher. Any
gain or loss on the sale is immaterial because
TAXATION 1 TAXATION LAW
there is a conclusive presumption by law that
the sale resulted in a gain.
TAX ON PROPRIETARY
EDUCATIONAL INSTITUTIONS AND
NON-PROFIT HOSPITALS
Tax Rate and Base – 10% on net income
(except on income subject to capital gains tax
and passive income subject to final tax) within
and without the Philippines
Caveat: If gross income from unrelated trade or
business or other activity exceeds 50% of total
gross income derived from all sources, the tax
rate of 30% shall be imposed on the entire
taxable income.
Unrelated trade, business or other activity – any
trade, business or other activity, the conduct of
which is not substantially related to the
exercise or performance by such educational
institution or hospital of its primary purpose or
function.
Proprietary educational institution – any private
school maintained and administered by private
individuals or groups with an issued permit to
operate from the DECS, CHED or TESDA. [Sec.
27(B), NIRC]
TAX ON GOVERNMENT-OWNED OR
CONTROLLED CORPORATIONS,
AGENCIES OR INSTRUMENTALITIES
FOR GOCCS:
General rule: GOCCs are taxable as any other
corporation engaged in similar business,
industry or activity, except:
(1) Government Service Insurance System
(GSIS)
(2) Social Security System (SSS)
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UP COLLEGE OF LAW TAXATION 1
(3) Philippine Health Insurance Corporation
(PHIC)
(4) Local water districts (LWDs)
(5) Philippine Charity Sweepstakes Office
(PCSO)
[Sec. 27(C), NIRC]
FOR INSTRUMENTALITIES AND
AGENCIES OF GOVERNMENT:
General rule: The government is exempt from
tax.
Exception: When it chooses to tax itself.
Nothing can prevent Congress from decreeing
that even instrumentalities or agencies of the
government performing governmental
functions may be subject to tax. Where it is
done precisely to fulfilfulfill a constitutional
mandate and national policy, no one can doubt
its wisdom. [Mactan Cebu Airport v Marcos,
1996]
If the taxing authority is the local gov’t unit
RA 7160 expressly prohibits LGUs from levying
tax on the Nat’l Gov’t, its agencies and
instrumentalities and other LGUs.
TAXATION OF RESIDENT FOREIGN
CORPORATIONS
GENERAL RULE
A resident foreign corporation is a corporation
organized under the laws of a foreign country,
which is engaged in trade or business in the
Philippines.
(a) A Philippine branch of a foreign
corporation duly licensed by the SEC is
considered a resident foreign corporation.
Thus, only the income of the Philippine
branch from sources within the Philippines
is subject to Philippine income tax.
(b) Marubeni v. Commissioner: As general rule,
the head office of a foreign corporation is
the same juridical entity as its branch in
the Philippines following the single entity
115
TAXATION LAW
concept. Thus, the income from sources
within the Phils. of the foreign head office
shall thus be taxable to the Philippine
branch.
But, when the head office of a foreign
corporation independently and directly
invested in a domestic corporation without the
funds passing through its Philippine branch,
the taxpayer, with respect to the tax on dividend
income, would be the non-resident foreign
corporation itself and the dividend income shall
be subject to the tax similarly imposed on non-
resident foreign corporations.
Definition of “doing business” under the Foreign
Investment Act of 1991
The phrase "doing business" shall include
soliciting orders, service contracts, opening
offices, whether called "liaison" offices or
branches; appointing representatives or
distributors domiciled in the Philippines or who
in any calendar year stay in the country for a
period or periods totaling one hundred eighty
[180] days or more; participating in the
management, supervision or control of any
domestic business, firm, entity or corporation
in the Philippines; and any other act or acts
that imply a continuity of commercial dealings
or arrangements and contemplate to that
extent the performance of acts or works, or the
exercise of some of the functions normally
incident to, and in progressive prosecution of
commercial gain or of the purpose and object
of the business organization: Provided,
however, That the phrase "doing business"
shall not be deemed to include mere
investment as a shareholder by a foreign entity
in domestic corporations duly registered to do
business, and/or the exercise of rights as such
investor; nor having a nominee director or
officer to represent its interests in such
corporation; nor appointing a representative or
distributor domiciled in the Philippines which
UP COLLEGE OF LAW TAXATION 1
transacts business in its own name and for its
own account; [Sec. 3 (d)]
WITH RESPECT TO THEIR INCOME FROM
SOURCES WITHIN THE PHILIPPINES
Resident foreign corporations are subject to
any or some of the following:
(1) Capital Gains Tax
(2) Final Tax on Passive Income
(3) Normal Tax [OR] Minimum Corporate
Income Tax (MCIT) [OR] Gross Income Tax
(GIT)
(4) Branch Profit Remittance Tax
MINIMUM CORPORATE INCOME TAX
The discussion with respect to this topic
(income subject to normal tax, MCIT, or GIT)
under the subheading of domestic
corporations is equally applicable to resident
foreign corporations, both as to concepts and
computations, except that RFCs are taxed only
on income from sources within the Philippines.
(a) Normal Corporate Income Tax Rate 30%
of net taxable income from sources within
the Philippines [RA 9337]
(b) Minimum Corporate Income Tax
(MCIT) 2% of MCIT Gross Income from
sources within the Philippines. The MCIT is
imposed on RFCs underRFCsunder the
same conditions as domestic corporations.
[Sec. 28(A)(2)]
(c) Gross Income Tax (GIT) The President,
upon the recommendation of the Secretary
of Finance, may allow resident foreign
corporations the option to be taxed at
fifteen percent (15%) of gross income within
the Philippines, under the same conditions
as domestic corporations. [Sec. 28(A)(1)]
TAX ON CERTAIN INCOME
INTEREST FROM DEPOSITS AND YIELD OR
ANY OTHER MONETARY BENEFIT FROM
DEPOSIT SUBSTITUTES, TRUST FUNDS AND
SIMILAR ARRANGEMENTS AND ROYALTIES
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TAXATION LAW
On any currency bank deposit, yield or any
other monetary benefit from deposit
substitutes, trust funds and similar
arrangements – Final tax of 20%
INCOME DERIVED FROM A DEPOSITORY
BANK UNDER THE EXPANDED FOREIGN
CURRENCY DEPOSIT SYSTEM
Under the expanded foreign currency deposit
system (EFCDS) – Final tax of 7.5%
CAPITAL GAIN FROM SALE OF SHARES OF
STOCK NOT TRADED IN THE STOCK
EXCHANGE
On sale, barter, exchange or other disposition
of shares of stock ofstockof a domestic
corporation not listed and traded through a
local stock exchange, held as a capital asset:
On the net capital gain:
(a) First P100,000: Final Tax of 5%
(b) On any amount in excess of P100,000:
plus 10% Final tax on the excess
INTERCORPORATE DIVIDENDS
Dividends received from a domestic
corporation liable to tax under the NIRC-
exempt
Exclude:
(1) International carrier
(2) Offshore banking units
(3) Branch profits remittances
(4) Regional or area headquarters and
regional operating headquarters of
multination companies
(Note: Expressly excluded as indicated in the SC
Syllabus. The following discussion is for
information purposes)
INTERNATIONAL CARRIER
Tax Rate and Base – 2.5% on Gross Philippine
Billings (GPB)
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What is GPB.—
In the case of International Air Carriers, GPB
refers to the amount of:
(a) gross revenue derived from carriage of
persons, excess baggage, cargo and mail
originating from the Philippines in a
continuous and uninterrupted flight,
irrespective of the place of sale or issue
and the place of payment of the ticket or
passage document
(b) gross revenue from tickets revalidated,
exchanged and/or indorsed to another
international airline if the passenger
boards a plane in a port or point in the
Philippines
(c) for flights which originate from the
Philippines, but transshipment of
passenger takes place at any port outside
the Philippines on another airline, the
gross revenue consisting of only the aliquot
portion of the cost of the ticket
corresponding to the leg flown from the
Philippines to the point of transhipment
transshipment [RR 15-2002]
Air Canada vs. CIR (CTA Case No. 6572):
(a) A foreign airline company selling tickets in
the Philippines through their local agents
shall be considered as resident foreign
corporation engaged in trade or business
in the country.
(b) The absence of flight operations within the
Philippine territory cannot alter the fact
that the income received was derived from
activities within the Philippines.
(c) The test of taxability is the source, and the
source is that activity which produced the
income.
In the case of International Shipping, GPB
means:
Gross revenue whether for passenger, cargo or
mail originating from the Philippines up to
final destination, regardless of the place of
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TAXATION LAW
sale or payments of the passage or freight
documents.
OFFSHORE BANKING UNITS
Coverage of the Rule.—
Only income derived by offshore banking units
from foreign currency transactions with:
(1) non-residents,
(2) other offshore banking units
(3) local commercial banks including branches
of foreign banks that may be authorized by
the Bangko Sentral ng Pilipinas (BSP) to
transact business with offshore banking
units
Tax Rate.—
Exempt from all taxes, except net income from
such transactions as may be specified by the
Secretary of Finance, upon recommendation by
the Monetary Board to be subject to the
regular income tax payable by banks
Exception: Interest income derived from foreign
currency loans granted to residents other than
offshore banking units or local commercial
banks, including local branches of foreign
banks that may be authorized by the BSP to
transact business with offshore banking units,
shall be subject only to a final tax at the rate of
10%.
BRANCH PROFITS REMITTANCES
Taxable transaction – any profit remitted by a
branch of a multinational corporation to its
head office
Tax Rate and Base – 15% final tax based on the
total profits applied or earmarked for
remittance without any deduction for the tax
component. The 15% final tax should
excluding: (a) profits on activities which are
registered with the Philippine Economic Zone
Authority (PEZA) and (b) passive income gains
and profits received not directly connected
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with the conduct of its trade or business in the
Philippines.
Income not treated as branch profits unless
effectively connected with the conduct of trade
or business in the Philippines:
(1) Interests, dividends, rents, royalties
remuneration for technical services
(2) salaries, wages premiums, annuities,
emoluments
(3) other fixed or determinable annual,
periodic or casual gains, profits, income
(4) capital gains received during each taxable
year from all sources within the Philippines
(2) business planning and coordination
(3) sourcing and procurement of raw
materials and components
(4) corporate finance advisory services
(5) marketing control and sales promotion
(6) training and personnel management
(7) logistic services
(8) research and development services
and product development
(9) technical support and maintenance
(10) data processing and communications,
and
(11) business development.

Notes: TAXATION OF NON-RESIDENT

(1) imposed whether the head office of the FOREIGN CORPORATIONS
foreign corporation is located in a tax
treaty country, in a tax haven or other non-
GENERAL RULE
treaty country.
Except as otherwise provided, the tax is 30% of
(2) imposed only on the profits remitted by a
the gross income (except certain passive
Philippine branch to the head office of a
income)received during each taxable year from
foreign corporation.
all sources within the Philippines, such as
interests (except interests on foreign loans,
REGIONAL OR AREA HEADQUARTERS AND
dividends, rents, royalties, salaries, premiums
REGIONAL OPERATING HEADQUARTERS OF
(except reinsurance premiums), annuities,
MULTINATIONAL COMPANIES
emoluments or other fixed or determinable
Regional or area headquarters: not subject to
annual, periodic or casual gains, profits and
income tax
income, and capital gains EXCEPT capital
gains on the sale of shares of stock (not listed
Regional or area headquarters – a branch
and traded through a local stock exchange), of
established in the Philippines by multinational
a domestic corporation which are subject to
companies and which headquarters do not
the tax rates prescribed for individuals and
earn or derive income from the Philippines and
resident foreign corporations.
which act as supervisory, communications and
coordinating center for their affiliates,
TAX ON CERTAIN INCOME
subsidiaries, or branches in the Asia-Pacific
Region and other foreign markets.
INTEREST ON FOREIGN LOANS
(1) on foreign loans contracted on or after
Regional operating headquarters
August 1, 1986 – 20%
(a) 10% of their taxable income
(2) under the expanded foreign currency
(b) a branch established in the Philippines by
deposit system (EFCDS) - exempt
multinational companies which are
engaged in any of the following services:
INTERCORPORATE DIVIDENDS
(1) general administration and planning

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(a) Intercorporate Dividend – 15%, as long as
the country in which the nonresident
foreign corporation is domiciled allows a
tax credit for taxes “deemed paid” in the
Philippines equivalent to at least 15%
(b) 15% represents the difference between the
regular income tax of 30% on corporations
and the 15% tax on dividends (“tax sparing
credit”)
(c) If the country within which the NRFC is
domiciled does NOT allow a tax credit, a
final withholding tax at the rate of30% is
imposed on the dividends received from a
domestic corporation.
CAPITAL GAINS FROM SALE OF SHARES OF
STOCK NOT TRADED IN THE STOCK
EXCHANGE
On sale, barter, exchange or other disposition
of real property or on shares of stock of a
domestic corporation not listed and traded
through a local stock exchange, held as a
capital asset:
ON THE NET CAPITAL GAIN:
(a) First P100,000 Final Tax of 5%
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TAXATION LAW
(b) On any amount in excess of P100,000
plus Final Tax of 10% on the excess
Exclude:
(1) Film rentals and other payments to non-
resident cinematographic film owner,
lessor or distributor
Final tax of 25% of gross income from all
sources within the Philippines
(2) Rental, lease and charter fees payable to
non-resident owner or lessor of vessels
chartered by Philippine nationals
Final tax of 4.5% of gross rentals, lease or
charter fees from leases or charters to
Filipino citizens or corporations, as
approved by the Maritime Authority
(3) Rentals, charter and other fees payable to
non-resident owner or lessor of aircraft
machineries and other equipment
Final tax of 7.5% of gross rentals or fees
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Summary of Tax Bases and Rates of Special Corporations (Quick Glance)

Tax
Type of Corporation Tax Base
Rate
Domestic Corporations
Proprietary Educational Institutions and Hospitals
Taxable Income from all sources 10%
(Non-profit)
Depository Banks (Foreign Currency Deposit Units)
(1) With respect to income derived under the Exempt (except that net income
expanded foreign currency deposit system from from such transactions is subject -
certain foreign currency transactions to the regular income tax payable
(2) With respect to interest income from foreign by banks)
currency loans to residents other than offshore
units in the Philippines or other depository banks Amount of interest income 10%
under the expanded system
Resident Foreign Corporations
International Carriers Gross Philippine Billings 2.5%
Offshore Banking Units
(1) With respect to income derived by offshore Exempt (except that net income
banking units from certain foreign currency from such transactions is subject -
transactions to the regular income tax payable
(2) With respect to interest income derived from by banks)
foreign currency loans granted to residents other
than offshore banking units or local commercial Amount of interest income 10%
banks
Resident Depository Bank (Foreign Currency Deposit
Units) Exempt (except that net income
(1) With respect to income derived under the from such transactions is subject -
expanded foreign currency deposit system from to the regular income tax payable
certain foreign currency transactions by banks)
(2) With respect to interest income from foreign
currency loans to residents other than offshore
Amount of interest income 10%
units in the Philippines or other depository banks
under the expanded system
Regional or Area Headquarters Exempt -
Regional Operating Headquarters of Multinational Taxable Income from within the
10%
Companies Philippines
Non-resident Foreign Corporations [EXCLUDED]
Non-resident cinematographic film owners, lessors or Gross Income from the
25%
distributors Philippines
Non-resident Owner or Lessor of Vessels Chartered by Gross Rentals, Lease and Charter
4.5%
Philippine Nationals Fees from the Philippines
Non-resident Owner or Lessor of Aircraft, Machineries Gross Rentals, Charges and Fees
7.5%
and Other Equipment from the Philippines

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IMPROPERLY ACCUMULATED
EARNINGS OF CORPORATIONS
See: Sec. 29, as implemented by RR 2-2001
which prescribes rules governing the
imposition of IAET
Rule: There is imposed for each taxable year, in
addition to other taxes, a tax equal to 10% of
the improperly accumulated taxable income of
domestic and closely-held corporations formed
or availed of for the purpose of avoiding the
income tax with respect to its shareholders or
the shareholders of any other corporation, by
permitting the earnings and profits of the
corporation to accumulate instead of dividing
them among or distributing them to the
shareholders.
Rationale: It is a tax in the nature of a penalty
to the corporation for the improper
accumulation of its earnings, and a deterrent
to the avoidance of tax upon shareholders who
are supposed to pay dividends tax on the
earnings distributed to them. The touchstone
of the liability is the purpose behind the
accumulation of the income and not the
consequences of the accumulation.
Exception: The use of undistributed earnings
and profits for the reasonable needs of the
business would not generally make the
accumulated or undistributed earnings subject
to the tax.
WHAT IS MEANT BY “REASONABLE NEEDS OF
THE BUSINESS” IS DETERMINED BY THE
IMMEDIACY TEST
Immediacy Test
It states that the “reasonable needs of the
business” are the
(1) immediate needs of the business; and
(2) reasonably anticipated needs.
TAXATION 1 TAXATION LAW
How to prove the “reasonable needs of the
business”
The corporation should prove that there is
(1) an immediate need for the accumulation of
the earnings and profits; or
(2) a direct correlation of anticipated needs to
such accumulation of profits.
Composition
The following constitute accumulation of
earnings for the reasonable needs of the
business:
(1) Allowance for the increase in the
accumulation of earnings up to 100% of
the paid-up capital of the corporation as of
Balance Sheet date,
(2) inclusive of accumulations taken from
other years;
(3) Earnings reserved for definite corporate
Expansion projects or programs requiring
considerable capital expenditure as
approved by the Board of Directors or
equivalent body;
(4) Earnings reserved for Building, Plant or
Equipment Acquisition as approved by the
Board of Directors or equivalent body;
(5) Earnings reserved for compliance with any
Loan Covenant or pre-existing obligation
established under a legitimate business
agreement;
(6) Earnings required by Law or applicable
regulations to be retained by the
corporation or in respect of which there is
legal prohibition against its distribution;
(7) In the case of subsidiaries of foreign
corporations in the Philippines, all
undistributed earnings intended or
reserved for Investments within the
Philippines as can be proven by corporate
records and/or relevant documentary
evidence.
Covered Corporations
Only domestic corporations classified as closely-
held corporations are liable for IAET.
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Closely-held corporations are those:
(1) at least 50% in value of the outstanding
capital stock; or
(2) at least 50% of the total combined voting
power of all classes of stock entitled to
vote
(3) is owned directly or indirectly by or for not
more than 20 individuals. Domestic
corporations not falling under the
aforesaid definition are, therefore, publicly-
held corporations.
To determine whether the corporation is
closely held corporation, insofar as such
determination is based on stock ownership, the
following rules shall be applied:
(1) Stock Not Owned by Individuals. - Stock
owned directly or indirectly by or for a
corporation, partnership, estate or trust
shall be considered as being owned
proportionately by its shareholders,
partners or beneficiaries.
(2) Family and Partnership Ownership. - An
individual shall be considered as owning
the stock owned, directly or indirectly, by or
for his family, or by or for his partner.
For purposes of this paragraph, the ‘family
of an individual’ includes his brothers or
sisters (whether by whole or half-blood),
spouse, ancestors and lineal descendants.
(3) Option to Acquire Stocks. - If any person
has an option to acquire stock, such stock
shall be considered as owned by such
person.
For purposes of this paragraph, an option
to acquire such an option and each one of
a series of option shall be considered as an
option to acquire such stock.
(4) Constructive Ownership as Actual
Ownership. - Stock constructively owned by
TAXATION 1 TAXATION LAW
reason of the application of (a) or (c) shall,
for purposes of applying (1) or (2), be
treated as actually owned by such person.
But stock constructively owned by the
individual by reason of the application of
(b) shall NOT be treated as owned by him
for purposes of again applying such
paragraph in order to make another the
constructive owner of such stock.
BIR RULING 025-02
The ownership of a domestic corporation for
purposes of determining whether it is a closely
held corporation or a publicly held corporation
is ultimately traced to the individual
shareholders of the parent company.
Where at least 50% of the outstanding capital
stock or at least 50% of the total combined
voting power of all classes of stock entitled to
vote in a corporation is owned directly or
indirectly by at least 21 or more individuals, the
corporation is considered as a publicly-held
corporation, thus, exempt from IAET.
DETERMINATION OF REASONABLE NEEDS OF
THE BUSINESS:
An accumulation of earnings or profits
(including undistributed earnings or profits of
prior years) is unreasonable if it is not
necessary for the purpose of the business,
considering all the circumstances of the case.
To determine the “reasonable needs” of the
business in order to justify an accumulation of
earnings, the Regulations adhere to the so-
called “Immediacy Test” under American
jurisprudence as adopted in this jurisdiction.
Accordingly, the term “reasonable needs of the
business” means the immediate needs of the
business, including reasonably anticipated
needs. In either case, the corporation should
be able to prove: (a) an immediate need for the
accumulation of the earnings and profits, or (b)
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the direct correlation of anticipated needs to
such accumulation of profits. Otherwise, such
accumulation would be deemed to be not for
the reasonable needs of the business, and the
penalty tax would apply.
TAX EXEMPT CORPORATIONS
(1) Government educational institutions.
(2) Non-stock and non-profit educational
institutions.
(3) Nonprofit labor, agricultural or
horticultural organizations
(4) Associations of farmers, fruit growers, and
the like whose primary function is to
market the product of their members
(5) Organizations with a purely local operation
whose income is derived only from
assessment, duties and fees collected from
their members to meet operational
expenses such as fire insurance company,
farmers’ or other mutual typhoon
associations, mutual ditch or irrigation
company and mutual or cooperative
telephone company
(6) Non-stock corporation or association
organized and operated exclusively for
religious, charitable, scientific, athletic, or
cultural purposes or for the rehabilitation
of veterans, provided that no individual
person owns its assets or no individual
person receives benefit on its earnings
(7) Non-stock/ non-profit mutual savings
bank or non-stock/ non-profit cooperative
bank
(8) Non-profit civic league or organization
operating exclusively for the promotion of
social welfare
(9) Cemetery company owned and operated
exclusively for the benefit of its members
(10) Non-profit business league, chamber of
commerce, or board of trade
(11) Associations, orders, beneficiary societies
operating for the exclusive benefits of their
members. [Sec.30, NIRC]
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TAXATION LAW
NPC in general is subject to income tax;
PAGCOR is not subject to income tax [RA
9337]
QUALIFICATION FOR TAX EXEMPTION UNDER
SECTION 30 OF THE 1997 NIRC:
(1) It must be a non-stock corporation or
association organized and operated
exclusively for religious, charitable,
scientific, athletic or cultural purposes, or
for the rehabilitation of veterans.
(2) It should meet the following tests:
(a) Organizational Test – requires that the
corporation or association’s
constitutive documents exclusively
limit its purposes to one or more of
those described in paragraph (E) of
Section 30 of the 1997 NIRC.
(b) Operational Test – mandates that the
regular activities of the corporation or
association be exclusively devoted to
the accomplishment of the purposes
specified in paragraph (E) of Section
30 of the 1997 NIRC, as amended. A
corporation or association fails to meet
this test if a substantial part of its
operations may be considered
“activities conducted for profit”.
(3) All the net income or assets of the
corporation or association must be devoted
to its purpose/s and no part of its net
income or asset accrues to or benefits any
member or specified person.
(4) It must not be a branch of a foreign non-
stock, non-profit corporation.
[RMO No. 20-2013]
TAXATION OF PARTNERSHIPS
CLASSIFICATION OF PARTNERSHIPS
FOR TAX PURPOSES
(1) General Professional Partnerships (GPP)–
partnerships formed by persons for the
sole purpose of exercising their common
profession, no part of the income of which
UP COLLEGE OF LAW TAXATION 1
is derived from engaging in any trade or
business. A GPP is exempt from income
tax. It is, however, required to file a tax
return for its income for the purpose of
furnishing information as to the share in
the gains or profits that each partner shall
include in his individual tax return.
(2) Other Partnerships (or General Co-
partnerships) – partnerships wherein all or
part of their income is derived from the
conduct of trade or business. An ordinary
business partnership is considered as a
corporation and is thus subject to
corporate tax of 30%.
Other Partnerships (or general co-partnerships)
Rules:
(1) The partnership is subject to the same rules
on corporations (capital gains tax, final tax
on passive income, normal tax, minimum
corporate income tax [MCIT] and gross
income tax [GIT]), but is not subject to the
improperly accumulated earnings tax [IAET].
The partnership must file quarterly and
year-end income tax returns.
(2) The taxable income of the partnership, less
the normal corporate income tax (30%)
thereon, is the distributable net income of
the partnership.
The share of a partner in the partnership’s
distributable net income of a year shall be
deemed to have been actually or constructively
received by the partners in the same taxable
year and shall be taxed to them in their
individual capacity, whether actually
distributed or not. [Sec. 73(D)] Such share will
be subjected to a final tax of 10% to be
withheld by the partnership. [Sec. 24(B)(2)]
CO-OWNERSHIP
There is co-ownership
(1) When two or more heirs inherit and
undivided property from a decedent.
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TAXATION LAW
(2) When a donor makes a gift of an undivided
property in favor of two or more donees.
When Co-ownership is not subject to tax
When the co-ownership’s activities are limited
merely to the preservation of the co-owned
property and to the collection of the income
from the property. The income derived by a co-
owner from the property shall be reported in
his individual tax return regardless of whether
such income is actually or constructively
received.
When Co-ownership is subject to tax
The following circumstances would render a
co-ownership subject to a corporate income
tax: (a) When a co-ownership is formed or
established voluntarily, or upon agreement of
the parties; (b) When the individual co-owner
reinvested his share, and (c) When the
inherited property remained undivided for
more than ten years, and no attempt was ever
made to divide to same among the co-heirs,
nor was the property under administration
proceedings nor held in trust, the property
should be considered as owned by an
unregistered partnership.
Automatically converted into an unregistered
partnership the moment the said common
properties and/or the incomes derived from
them are used as a common fund with intent to
produce profits for the heirs in proportion to
their respective shares in the inheritance as
determined in a project partition either duly
executed in an extrajudicial settlement or
approved by the court in the corresponding
testate or intestate proceeding. [Ona v. CIR,
May, 25 1972]
JOINT VENTURE AND CONSORTIUM
To constitute a” joint venture,” certain factors
are essential. Each party to the venture must
make a contribution, not necessarily of capital,
but by way of services, skill, knowledge,
UP COLLEGE OF LAW TAXATION 1
material or money,; profits must be shared
among the parties; there must be a joint
proprietary interest and right of mutual control
over the subject matter of the enterprise; and
usually, there is single business transaction.
An unincorporated joint venture is taxed likes a
corporation. The share of the joint venture
partners will no longer be taxable to them
because they partake of dividends if paid to a
domestic or resident corporation. However, an
unincorporated joint venture formed for the
purpose of undertaking a construction project
or engaging in petroleum operations pursuant
to the consortium agreement with the
Philippine Government is not subject to the
corporate income tax. Only the joint venture
partners will be taxed on their respective
shares in the income of the joint ventures.
Two elements necessary to exempt a joint
venture or consortium from tax
(1) The joint venture must be an
unincorporated entity formed by two or
more persons
(2) The joint venture was formed for the
purpose of undertaking a construction
project, or engaging in the petroleum and
other energy operations with operating
contract with the government.
TAXATION OF GENERAL PROFESSIONAL
PARTNERSHIPS
RULES
(1) A GPP is a partnership formed by persons
for the purpose of exercising their common
profession, no part of the income of which
is derived from engaging in trade or
business. A GPP as such shall not be subject
to the income tax. It is not a taxable entity
for income tax purposes.
(2) The partners shall only be liable for income
tax only in their separate and individual
capacities.
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TAXATION LAW
(3) For purposes of computing the distributive
share of the partners, the net income of the
GPP shall be computed in the same
manner as a corporation.
(4) Each partner shall report as gross income
his distributive share, actually or
constructively received, in the net income of
the partnership.
(5) The distributive share of a partner (actual or
constructive) shall be subject to a
creditable withholding income tax of 10% if
the amount share is not more than
P720,000 and 15% if the amount of the
share is more than P720,000. [RR 2- 1998]
(6) If the partnership sustains a net operating
loss, the partners shall be entitled to
deduct their respective shares in the net
operating loss from their individual gross
income.
GPP IS NOT A TAXABLE ENTITY
The GPP is deemed to be no more than a mere
mechanism or a flow-through entity in the
generation of income by, and the ultimate
mechanism distribution of such income to the
individual partners. [Tan v. Commissioner (Oct.
3, 1994)]
But the partnership itself is required to file
income tax returns for the purpose of
furnishing information as to the share in the
gains or profits which each partner shall
include in his individual return. [RR 2- 1998]
The share of an individual partner in the net
profit of a general professional partnership is
deemed to have been actually or constructively
received by the partner in the same taxable year
in which such partnership net income was
earned, and shall be taxed to them in their
individual capacities, whether actually
distributed or not, at the graduated income tax
ranging from 5% to 32%.
Thus, the principle of constructive receipt of
income or profit is being applied to
UP COLLEGE OF LAW TAXATION 1
undistributed profits of GPPs. The payment [to
the partners] of such tax-paid profits in
another year should no longer be liable to
income tax. [Mamalateo]
WITHHOLDING TAX
CONCEPT
Withholding tax is a method of collecting
income tax in advance from the taxable income
of the recipient of income. It is a systematic
way of collecting taxes at source, an
indispensable method of collecting taxes to
ensure adequate revenue for the government.
The withholding of income tax on
compensation income, on certain income
payments made to resident taxpayers, and on
income payments made to non-resident
taxpayers is very important for all taxpayers,
because the obligation to withhold and remit
the tax is mandatory and prescribed by law.
In the operation of the withholding tax system,
the payee is the taxpayer, the person on whom
the tax is imposed, while the payor, a separate
entity, acts no more than an agent of the
government for the collection of the tax in
order to ensure its payment. The amount
thereby used to settle the tax liability is
deemed sourced from the proceeds
constitutive of the tax base. In an ad valorem
tax, the tax paid or withheld is not deducted
from the tax base, except when the law clearly
spells out in defining the tax base.
The duty to withhold is different from the duty
to pay income tax. The revenue officers
generally disallow the expenses claimed as
deduction from gross income, if no withholding
of tax as required by law or the regulations was
withheld and remitted to the BIR within the
prescribed dates.
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TAXATION LAW
In addition, the withholding tax that should
have been withheld and remitted to the BIR as
well as the penalties for non-, late or erroneous
payment of the withholding tax such as
surcharges and deficiency interest are
assessed by the BIR. [Mamalateo]
WITHHOLDING AGENT
Any person or entity who is required to deduct
and remit the taxes withheld to the
government.
(a) In general, any juridical person, whether or
not engaged in trade or business;
(b) An individual, with respect to payments
made in connection with his trade or
business. However, insofar as taxable sale,
exchange or transfer of real property is
concerned, individual buyers who are not
engaged in trade or business are also
constituted as withholding agents. In any
case, no Certificate Authorizing
Registration (CAR)/Tax Clearance
Certificate (TCL) shall be issued to the
buyer unless the withholding tax due on
the sale, transfer or exchange of real
property has been duly paid; ac. All
government offices, including GOCCs, as
well as local government units.
All income payments which are required to be
subjected to withholding tax shall be subject to
the corresponding withholding tax rate to be
withheld by the person having control over the
payment and who, at the same time, claims
the expenses. [RR 30-2003]
Duties and Obligations of the Withholding
Agent
(1) To Register - withholding agent is required
to register within ten (10) days after
acquiring such status with the Revenue
District office having jurisdiction where the
business is located
(2) To Deduct and Withhold - withholding
agent is required to deduct tax from all
UP COLLEGE OF LAW TAXATION 1
money payments subject to withholding
tax
(3) To Remit the Tax Withheld - withholding
agent is required to remit tax withheld at
the time prescribed by law and regulations
(4) To File Annual Return - withholding agent
is required to file the corresponding
Annual Information Return at the time
prescribed by law and regulations
(5) To Issue Withholding Tax Certificates -
withholding agent shall furnish
Withholding Tax Certificates to recipient of
income payments subject to withholding
(Available, BIR Website)
(6) To submit an alphabetical list of
employees and list of payees on income
payments subject to creditable and final
withholding taxes which are required to be
attached as integral part of the Annual
Information Returns (BIR Form No. 1604-
CF/1604-E) and Monthly Remittance
Returns (BIR Form No. 1601-C, etc.). [RR
No. 1-2014, as clarified by RMC No. 5-
2014]
(7) For hospitals and clinics, to submit the
names and addresses of medical
practitioners in the following classifications,
every 15th day after the end of each
calendar quarter, to the Collection Division
of the Revenue Region for non-large
taxpayers and at the Large Taxpayers
Document Processing and Quality
Assurance Division (LTDP&QAD) in the
National Office or Large Taxpayers District
Office (LTDO) in the Region for large
taxpayers, where such hospital or clinic is
registered, using the prescribed format.
[RR No. 14-2013]
(8) In cases covered by substituted filing, to
furnish each employee with the original
copy of Certificate of Compensation/Tax
Withheld (BIR Form No. 2316) and submit
to the BIR the duplicate copy not later than
February 28 following the close of the
calendar year.
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Withholding agents shall require all
individuals and entities claiming exemption
from imposition of taxes on income and,
consequently, from withholding taxes to
provide a copy of a valid, current and
subsisting tax exemption certificate or ruling,
as per existing administrative issuances and
any issuance that may be issued from time to
time, before payment of the related income.
The withholding agent’s failure to withhold
notwithstanding the lack of tax exemption
certificate or ruling shall cause the imposition
of penalties under Section 251 and other
pertinent Sections of the 1997 Tax Code. [RMC
No. 8-2014]
KINDS
WITHHOLDING OF FINAL TAX OF CERTAIN
INCOMES
Subject to rules and regulations the Secretary
of Finance may promulgate, upon the
recommendation of the Commissioner,
requiring the filing of income tax return by
certain income payees, the tax imposed or
prescribed by specific section of the NIRC on
specified items of income shall be withheld by
payor-corporation and/or person and paid in
the same manner and subject to the same
conditions as provided in Section 58 of the
NIRC.
WITHHOLDING OF CREDITABLE TAX AT
SOURCE
The Secretary of Finance may, upon the
recommendation of the Commissioner, require
the withholding of a tax on the items of income
payable to natural or juridical persons, residing
in the Philippines, by payor-
corporation/persons as provided for by law, at
the rate of not less than one percent (1%) but
not more than thirty-two percent(32%), which
shall be credited against the income tax
liability of the taxpayer for the taxable year.
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Withholding of creditable tax (RR 2-98)
(a) Under the creditable withholding tax
system, taxes withheld on certain income
payments are intended to equal or at least
approximate the tax due of the payee on
said income.
(b) The income recipient is still required to file
an income tax return, to report the income
and/or pay the difference between the tax
withheld and the tax due on the income.
(c) Taxes withheld on income payments
covered by the expanded withholding tax
and compensation income are creditable in
nature.
WITHHOLDING OF VAT
(1) On gross payments for the purchase of
goods
(2) On gross payments for the purchase of
services
(3) Payments made to government public
works contractors
(4) Payments for lease or use of property or
property rights to non-resident owners
FILING OF RETURN AND PAYMENT OF
TAXES WITHHELD
WHERE TO FILE AND PAY:
(1) Authorized agent bank;
(2) Collection Agent;
(3) the duly authorized Treasurer of the city or
municipality where the employer has his
legal residence or principal place of
business, or in case the employer is a
corporation, where the principal office is
located; or
(4) As Commissioner otherwise permits.
PERIOD FOR FILING AND PAYMENT:
(a) The return shall be filed and the payment
made within twenty-five (25) days from the
close of each calendar quarter.
(b) The Commissioner may, with the approval
of the Secretary of Finance, require the
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TAXATION LAW
employers to pay or deposit the taxes
deducted and withheld at more frequent
intervals, in cases where such requirement
is deemed necessary to protect the interest
of the Government.
TAXES AS SPECIAL FUND IN TRUST
The taxes deducted and withheld by employers
shall be held in a special fund in trust for the
Government until the same are paid to the said
collecting officers.
RETURN AND PAYMENT IN CASE OF
GOVERNMENT EMPLOYEES
If the employer is the Government of the
Philippines or any political subdivision, agency
or instrumentality thereof, the return of the
amount deducted and withheld upon any wage
shall be made by the officer or employee
having control of the payment of such wage, or
by any officer or employee duly designated for
the purpose.
STATEMENTS AND RETURNS
Every employer required to deduct and
withhold a tax shall:
(1) Furnish to each such employee in respect
of his employment a written statement
confirming the wages paid by the employer
to such employee during the calendar year,
and the amount of tax deducted and
withheld and such other information as the
Commissioner may prescribe
(a) During the calendar year, on or before
January thirty-first (31st) of the
succeeding yea; or
(b) If his employment is terminated before
the close of such calendar year, on the
same day of which the last payment of
wages is made
(2) Submit to the Commissioner an annual
information return on or before January
thirty-first (31st) of the succeeding year
containing:
(a) A list of employees;
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(b) The total amount of compensation tax under Sec. 25(A)(1) of the Tax
income of each employee; Code
(c) The total amount of taxes withheld (d) Winnings (except from Philippine
therefrom during the year, Charity Sweepstake Office and
accompanied by copies of the written Lotto)
statements furnished to employees, (e) Interest income on foreign currency
and such other information as may be deposit
deemed necessary. (f) Interest income from long term
deposit
The Commissioner may grant to any employer (g) Cash and/or property dividends
a reasonable extension of time to furnish and (h) Capital Gains presumed to have
submit the statements and returns required. been realized from the sale,
exchange or other disposition of
FINAL WITHHOLDING TAX AT SOURCE real property
Under the final withholding tax system, the (2) Income Payments to a Non-Resident Alien
amount of income tax withheld by the Engaged in Trade or Business in the
withholding agent is constituted as a full and Philippines
final payment of the income tax due from (a) On Certain Passive Income
payee on the said income (e.g., interest on (i) cash and/or property dividend
deposits, royalties, etc.). The liability for (ii) share in the distributable net
payment of the tax rests primarily on the payor income of a partnership
as a withholding agent. Thus, in case of the (iii) Interest on any bank deposits
withholding agent’s failure to withhold the tax (iv) Royalties
or in case of under-withholding, the deficiency (v) Prizes (except prizes
tax shall be collected from him. The payee is amounting to P10,000 or less
not required to file an income tax return for the which is subject to tax under
particular income, nor is he liable for the Sec. 25(A)(1) of the Tax Code.
payment of the tax. [Sec. 2.57, RR No. 2-98] (vi) Winnings (except from
Philippine Charity Sweepstake
The finality of the withholding tax is limited Office and Lotto)
only to the payee’s income tax liability on the (b) Interest on Long Term Deposits
particular income. It does not extend to the (c) Capital Gains presumed to have been
payee’s other tax liability on said income, such realized from the sale, exchange or
as when the said income is further subject to a other disposition of real property
percentage tax, such as gross receipts tax in (3) Income Derived from All Sources Within
the case of a bank. the Philippines by a Non-Resident Alien
Individual Not Engaged in Trade or
INCOME PAYMENTS SUBJECT TO FINAL Business
WITHHOLDING TAX: (a) On gross amount of income derived
(1) Income Payments to a Citizen or to a from all sources within the Philippines
Resident Alien Individual (b) On Capital Gains presumed to have
(a) Interest on any peso bank deposit been realized from the sale, exchange
(b) Royalties or disposition of real property located
(c) Prizes (except prizes amounting to in the Philippines
P10,000 or less which is subject to

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(4) Income Derived by Alien Individual
Employed by a Regional or Area
Headquarters and Regional Operating
Headquarters of Multinational Companies
(5) Income Derived by Alien Individual
Employed by Offshore Banking Unit
(6) Income of Aliens Employed by Foreign
Petroleum Service Contractors and
Subcontractors
(7) Income Payment to a Domestic
Corporation
(a) Interest from any currency bank
deposits and yield or any other
monetary benefit from deposit
substitutes and from trust fund and
similar arrangements derived from
sources within the Philippines
(b) Royalties derived from sources within
the Philippines
(c) Interest income derived from a
depository bank under the Expanded
Foreign Currency Deposit (FCDU)
System
(d) Income derived by a depository bank
under the FCDU from foreign
transactions with local commercial
banks
(e) On 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 based on the gross
selling price or fair market value as
determined in accordance with Sec.
6(E) of the NIRC, whichever is higher
(8) Income Payments to a Resident Foreign
Corporation
(a) Offshore Banking Units
(b) Tax on branch Profit Remittances
(c) Interest on any currency bank deposits
and yield or any other monetary benefit
from deposit substitute and from trust
funds and similar arrangements and
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TAXATION LAW
royalties derived from sources within
the Philippines
(d) Interest income on FCDU
(e) Income derived by a depository bank
under the expanded foreign currency
deposits system from foreign currency
transactions with local commercial
banks
(9) Income Derived from all Sources Within
the Philippines by a Non-Resident Foreign
Corporation
(a) Gross income from all sources within
the Philippines such as interest,
dividends, rents, royalties, salaries,
premiums (except re-insurance
premiums), annuities, emoluments or
other fixed determinable annual,
periodic or casual gains, profits and
income or capital gains
(b) Gross income from all sources within
the Philippines derived by a non-
resident cinematographic film owner,
lessor and distributor
(c) On the gross rentals, lease and charter
fees derived by a non-resident owner or
lessor of vessels from leases or
charters to Filipino citizens or
corporations as approved by the
Maritime Industry Authority
(d) On the gross rentals, charter and other
fees derived by a non-resident lessor of
aircraft, machineries and other
equipment
(e) Interest on foreign loans contracted on
or after August 1, 1986
(10) Fringe Benefits Granted to the Employee
(except Rank and File)
Goods, services or other benefits furnished
or granted in cash or in kind by an
employer to an individual employee
(except rank and file) such as but not
limited to the following:
(a) Housing
(b) Vehicle of any kind
UP COLLEGE OF LAW TAXATION 1
(c) Interest on loans
(d) Expenses for foreign travel
(e) Holiday and vacation expenses
(f) Educational assistance to employees
or his dependents
(g) Membership fees, dues and other
expense in social and athletic clubs or
other similar organizations – Health
insurance
(h) Informers Reward
CREDITABLE WITHHOLDING TAX
Taxes withheld on certain income payments
are intended to equal or at least approximate
the tax due of the payee on the income. The
income recipient is still required to file his
income tax return as prescribed in Section 51 of
the NIRC, wither to report the income and/or
pay the difference between the tax withheld
and the tax due on the income.
EXPANDED WITHHOLDING TAX
A kind of withholding tax which is prescribed
on certain income payments and is creditable
against the income tax due of the payee for the
taxable quarter/year in which the particular
income was earned.
An income payment is subject to the expanded
withholding tax if the following conditions
concur:
An expense is paid or payable by the taxpayer,
which is income to the recipient thereof subject
to income tax;
(a) The income is fixed or determinable at
the time of payment;
(b) The income is one of the income
payments listed in the regulations that
is subject to withholding tax;
(c) The income recipient is a resident of
the Philippines liable to income tax;
and
(d) The payor-withholding agent is also a
resident of the Philippines.
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TAXATION LAW
Income payments subject to Expanded
Withholding Tax:
(1) Professional fees / talent fees for services
rendered by the following individuals:
(a) Those individually engaged in the
practice of profession or callings
(b) Professional entertainers such as but
not limited to actors and actresses,
singers and emcees
(c) Professional athletes including
basketball players, pelotaris and
jockeys
(d) Directors involved in movies, stage,
radio, television and musical directors
(e) Insurance agents and insurance
adjusters
(f) Management and technical
consultants
(g) Bookkeeping agents and agencies
(h) Other recipient of talent fees
(i) Fees of directors who are not
employees of the company paying such
fees whose duties are confined to
attendance art and participation in the
meetings of the Board of Directors
(2) Professional fees, talent fees, etc for
services of taxable juridical persons
(3) Rental of real property used in business
(4) Rental of personal properties in excess of P
10,000 annually
(5) Rental of poles, satellites and transmission
facilities
(6) Rental of billboards
(7) Cinematographic film rentals and other
payments
(8) Income payments to certain contractors
(a) General engineering contractors
(b) General building contractors
(c) Specialty contractors
(d) Other contractors like:
(i) Transportation contractors which
include common carriers for the
carriage of goods and
merchandise of whatever kind by
land, air or water, where the gross
UP COLLEGE OF LAW TAXATION 1 TAXATION LAW

payments by the payor to the (xv) TV and radio station operators on

same payee amounts to at least sale of TV and radio airtime, and
two thousand pesos (P2,000) per (xvi) TV and radio blocktimers on sale
month, regardless of the number of TV and radio commercial spots
of shipments during the month (xvii) Persons engaged in the sale of
(ii) Filling, demolition and salvage computer services, computer
work contractors and operators of programmers, software
mine drilling apparatus developer/designer, etc.
(iii) Operators of dockyards (9) Income distribution to the beneficiaries of
(iv) Persons engaged in the estates and trusts
installation of water system, and (10) Gross commission or service fees of
gas or electric light, hear or power customs, insurance, stock, real estate,
(v) Operators of stevedoring, immigration and commercial brokers and
warehousing or forwarding fees of agents of professional entertainers
establishments (11) Commission, rebates, discounts and other
(vi) Printers, bookbinders, similar considerations paid/granted to
lithographers and publishers, independent and exclusive distributors,
except those principally engaged medical/technical and sales
in the publication or printing of representatives and marketing agents and
any newspaper, magazine, review sub-agents of multi level marketing
or bulletin which appears at companies
regular intervals, with fixed prices (12) Income payments to partners of general
for subscription and sale professional partnerships
(vii) Advertising agencies, exclusive of (13) Payments made to medical practitioners
payments to media through a duly registered professional
(viii) Independent producers of partnership
television, radio and stage (14) Payments for medical/dental/veterinary
performances or shows services thru hospitals/clinics/health
(ix) Independent producers of maintenance organizations, including
"jingles" direct payments to service providers
(x) Labor recruiting agencies (15) Gross selling price or total amount of
(xi) Persons engaged in the consideration or its equivalent paid to the
installation of elevators, central air seller/owner for the sale, exchange or
conditioning units, computer transfer of real property
machines and other equipment (16) Additional income payments to
and machineries and the government personnel from importers,
maintenance services thereon shipping and airline companies or their
(xii) Messengerial, janitorial, security, agents
private detective and other (17) Certain income payments made by credit
business agencies card companies
(xiii) Persons engaged in landscaping (18) Income payments made by the top 10,000
services private corporations to their purchase of
(xiv) Persons engaged in the collection goods and services from their
and disposal of garbage local/resident suppliers other than those
covered by other rates of withholding

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(19) Income payments by government offices
on their purchase of goods and services,
from local/resident suppliers
(20) Tolling fees paid to refineries
(21) Payments made by pre-need companies to
funeral parlors
(22) Payments made to embalmers by
funeral parlors
(23)Income payments made to suppliers of
agricultural products
(24) Income payments on purchases of
mineral, mineral products and quarry
resources
Income payments to RESPs (i.e., real estate
consultants, real estate appraisers and real
estate brokers) who passed the licensure
examination given by the Real Estate Service
under the Professional Regulations
Commission (PRC) are classified as
professional fees subject to 10%/15% EWT.
On the other hand, income payments to RESPs
(i.e., real estate consultants, real estate
appraisers and real estate brokers) who failed
or did not take up the licensure examination
given by the Real Estate Service under the PRC
are classified as commission/brokerage fees
subject to 10% EWT. [RR No. 10-2013]
It shall be the duty and responsibility of the
hospitals, clinics, HMOs and similar
establishments to withhold and remit taxes
due on the professional fees of their respective
accredited medical practitioners, paid by
patients who were admitted and confined to
such hospitals and clinics. [RR No. 14-2013]
The withholding tax on professional fees paid
to medical practitioners shall not apply
whenever there is proof that no professional
fee has in fact been charged by the medical
practitioner and paid by his patient, as shown
in a sworn declaration jointly executed by the
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TAXATION LAW
medical practitioner and his patient. [RR No.
14-2013]
WITHHOLDING TAX ON COMPENSATION
The tax withheld from income payments to
individuals arising from an employer-
employee relationship.
Compensation is any remuneration received for
services performed by an employee from his
employer under an employee-employer
relationship.
The different kinds of compensation are:
(1) Regular compensation - includes basic
salary, fixed allowances for representation,
transportation and others paid to an
employee
(2) Supplemental compensation - includes
payments to an employee in addition to
the regular compensation such as but not
limited to the following:
(a) Overtime Pay
(b) Fees, including director's fees
(c) Commission
(d) Profit Sharing
(e) Monetized Vacation and Sick Leave
(f) Fringe benefits received by rank & file
employees
(g) Hazard Pay
(h) Taxable 13th month pay and other
benefits
(i) Other remunerations received from an
employee-employer relationship
Exemptions from Withholding tax on
compensation:
Remuneration as an incident of employment
(a) Retirement benefits received under RA
7641 (Retirement Pay Law) and those
received by officials and employees of
private firms, under a reasonable private
benefit plan.
UP COLLEGE OF LAW TAXATION 1
(b) Any amount received by an official or
employee or by his heirs from the employer
due to death, sickness or other physical
disability or for any cause beyond the
control of the said official or employee
such as retrenchment, redundancy or
cessation of business
(c) Social security benefits, retirement
gratuities, pensions and other similar
benefits
(d) Payment of benefits due or to become due
to any person residing in the Philippines
under the law of the US administered US
Veterans Administration
(e) Payment of benefits made under the SSS
Act of 1954, as amended
(f) Benefits received from the GSIS Act of 1937,
as amended, and the retirement gratuity
received by the government employee
(g) Remuneration paid for agricultural labor
(h) Remuneration for domestic services
(i) Remuneration for casual labor not in the
course of an employer's trade or business
(j) Compensation for services by a citizen or
resident of the Philippines for a foreign
government or an international
organization
(k) Payment for damages – actual, moral,
exemplary damages received by an
employee or his heirs pursuant to a final
judgment or compromise agreement
arising out of or related to an employer-
employee relationship.
(l) Proceeds of Life Insurance – the proceeds
of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured,
whether in a single sum or otherwise;
provided however, that interest payments
agreed under the policy for the amounts
which are held by the insured under such
an agreement shall be INCLUDED in the
gross income.
(m) Amount received by the insured as a return
of premium
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TAXATION LAW
(n) Compensation for injuries or sickness –
amounts received through accident or
health insurance or under Workmen’s
Compensation Acts, as compensation for
personal injuries or sickness, plus the
amount of any damages received whether
by suit or agreement on account of such
injuries or sickness.
(o) Income exempt under Treaty
(p) Thirteenth (13th) month pay and other
benefits (not to exceed P 30,000)
(i) Mandatory 1 month basic salary
received after the twelfth *12th) month
pay
(ii) Other benefits such as Christmas
bonus, productivity incentives, loyalty
award, gift in cash or in kind and other
benefits of similar nature actually
received by officials and employees of
both government and private offices
including the Additional Compensation
Allowance (ACA) granted and paid to
all officials and employees of the
Nations Government (NGAs) including
State Universities and Colleges (SUCs),
Government-Owned-or-Controlled
Corporations (GOCCs), Government
Financial Institutions (GFIs) and Local
Government Units (LGUs)
(a) De minimis benefits, given in
excess of the ceilings prescribed in
regulations, shall be taxable to the
recipient –employee only if such
excess is beyond the P30,000
threshold.
(q) GSIS, SSS, Medicare and other
contributions – GSIS, SSS, Medicare and
Pag-Ibig contributions, and union dues of
individual employees
(r) Compensation income of MWEs who work
in the private sector and being paid the
statutory minimum wage (SMW), as fixed
by Regional Tripartitie Wage and
Productivity Board (RTWPB)/National
Wages and Productivity Commission
UP COLLEGE OF LAW TAXATION 1
(NWPC), applicable to the place where
he/she is assigned
(s) Compensation income of employees in the
public sector with compensation income of
not more than the SMW in the non-
agricultural sector, as fixed by
RTWPB/NWPC, applicable to the place
where he/she is assigned.
TIMING OF WITHHOLDING
The obligation of the payor to deduct and
withhold the tax arises at the time an income
payment is paid or payable, or the income
payment is accrued or recorded as an expense
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TAXATION LAW
or asset, whichever is applicable, in the payor’s
books, whichever comes first. The term
“payable” refers to the date the obligation
becomes due, demandable or legally
enforceable.
Where income is not yet paid or payable but
the same has been recorded as an expense or
asset, whichever is applicable, in the payor’s
books, the obligation to withhold shall arise in
the last month of the return period in which the
same is claimed as an expense or amortized
for tax purposes. [Mamalateo]
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I. ESTATE TAX
A. BASIC PRINCIPLES
“...death is the generating source from which
the taxing power takes its being, and that it is
the power to transmit or the transmission from
the dead to the living on which the tax is more
immediately based. Hence it accrues as of the
death of the decedent by operation of law.”
Lorenzo v Posadas (1937)
(1) Inheritance tax accrues at the time of the
decedent’s death, but the obligation to pay
the same is different and is fixed by law.
The tax is measured by the value of the
property AT THE TIME OF DEATH.
(2) Inheritance tax is measured (i.e. tax base)
by the value at that time of such property
as passes to him (i.e. death). Subsequent
appreciation or depreciation is immaterial;
(3) Inheritance taxation is governed by the
statute in force at the time of the death of
the decedent Tax laws cannot be given
retroactive effect unless they explicitly
provide for it.
(Note that inheritance taxes are no longer
imposed under the NIRC. Only estate taxes are
imposed.)
B. DEFINITION
ESTATE TAX is tax on the (i) right to transmit
property at death and on certain transfers by
the decedent during his lifetime OR (ii) those
which are made by the law equivalent of
testamentary dispositions. There must be a
transfer of ownership or quantifiable interest
or economic benefits from the decedent to the
living person.
C. NATURE
Estate tax is not a direct tax on property.
Neither is it a capitation tax; that is, the tax is
TAXATION 2 TAXATION LAW 2
laid neither on the property nor on the
transferor or the transferee. In other words, it is
an excise or privilege tax imposed on the right
to succeed to, receive, or take property by or
under a will or the intestacy law, or deed, grant,
or gift to become operative at or after death.
(Lorenzo v Posadas)
D. PURPOSE OR OBJECT
Purpose: To tax the shifting of economic
benefits and enjoyment of property from the
dead to the living.
Taxable objects/subjects:
(1) Right/privilege of the deceased person to
transmit his/her estate to his/her lawful
heirs and beneficiaries at the time of death;
(2) on certain transfers, during his lifetime,
which are made by law as equivalent to
testamentary disposition.
4 Justification Theories for the Imposition of
Estate Tax
(1) Benefit received theory– The State collects
the tax because of the services it renders in
the distribution of the estate of the
decedent, either by law or in accordance
with his will.
(2) Privilege theory or state partnership theory –
Succession to the property of a deceased
person is not a right but a privilege granted
by the State and consequently, the
legislature can constitutionally burden
such succession with a tax. The State
collects the tax because of the protection it
provides in the acquisition of large estates.
Hence, the State is a “silent or passive
partner” in the accumulation of said large
property.
(3) Ability to pay theory – Receipt of
inheritance, which is in the nature of
unearned wealth or windfall, places assets
into the hands of the heirs and
beneficiaries. This creates an ability to pay
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UP COLLEGE OF LAW TAXATION 2
the tax and thus contributes to
government income.
(4) Redistribution of wealth theory – Receipt of
inheritance is a contributing factor to the
inequalities in wealth and income. The
imposition of estate tax reduces the
property received by the successor, which
helps promote a more equitable
distribution of wealth in society. The tax
base is the value of the property and the
progressive scheme of taxation is precisely
motivated by the desire to mitigate the
evils of inheritance in the present form. The
taxes paid by rich people are programmed
for disbursement by Congress for the
benefit of the poor in terms on social
services, education, health, etc.
E. TIME AND TRANSFER OF
PROPERTIES
Decedent’s interest is to its extent at the time
of his death. (Sec. 85(A))
Estate taxation is governed by the statute in
force at the time of death of the decedent.
Estate tax accrues as of the death of the
decedent and the accrual of the tax is distinct
from the obligation to pay the same. Upon the
death of the decedent, succession takes place
and the right of the State to tax the privilege to
transmit the estate vests instantly upon death.
(Sec. 3, RR 2-2003)
Despite the transfer of properties and rights at
the time of death, the executor or
administrator shall not deliver a distributive
share to any party interested in the estate,
unless there is a certification from CIR that
estate tax has been paid. (Sec94)
Time of death governs:
(1) The determination of the extent of the
decedent’s interest for computing his gross
estate.
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TAXATION LAW 2
(2) The statute that governs estate taxation.
(3) The accrual of the estate tax.
Art. 777, Civil Code. The rights to the
succession are transmitted from the moment
of the death of the decedent.
Sec. 3, RR 2-2003. THE LAW THAT GOVERNS
THE IMPOSITION OF ESTATE TAX. It is a well-
settled rule that estate taxation is governed by
the statute in force at the time of death of the
decedent. The estate tax accrues as of the
death of the decedent and the accrual of the
tax is distinct from the obligation to pay the
same. Upon the death of the decedent,
succession takes place and the right of the
State to tax the privilege to transmit the estate
vests instantly upon death.
Taxable Transfers
Taxable transfers are complete when the
transferor divested himself of all economic
beneficial interest in himself or his estate.
(1) Transfers Mortis Causa – Gratuitous
transfers that take effect after death, either
testate or intestate. A donation which
purports to be one inter vivos but withholds
from the donee the right to dispose of the
donated property during the donor's
lifetime is in truth one mortis causa. In a
donation mortis causa "the right of
disposition is not transferred to the donee
while the donor is still alive." The requisites
of a testamentary disposition should be
fulfilled.
Characteristics: (Maglasang v Heirs of
Cabatingan, 2002)
(i) It conveys no title or ownership to the
transferee before the death of the
transferor; or what amounts to the
same thing, that the transferor should
retain the ownership (full or naked)
and control of the property while alive;
(ii) That before his death, the transfer
should be revocable by the transferor
at will, ad nutum; but revocability may
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be provided for indirectly by means of a
reserved power in the donor to dispose
of the properties conveyed;
(iii) That the transfer should be void if the
transferor should survive the transferee.
Donation Mortis Causa is subject to Estate Tax.
(2) Transfers Inter Vivos Gratuitous transfers
that take effect after death, either testate
or intestate. (See Donor’s Tax for
requisites)
General Rule: Donation Inter Vivos are
subject to Donor’s Tax.
Exceptions: (subject to estate tax) when
inter vivos is treated by law as substitutes
for testamentary dispositions (i.e.,
transfers which are inter vivos in form but
mortis causa in substance)i.e. transfers in
contemplation of death [Sec. 85(B), NIRC]
(a) Transfer with retention or reservation
of certain rights [Sec. 85(B), NIRC]
(b) Revocable transfers [Sec. 85(C), NIRC]
(c) Transfers of property arising under
general power of appointment [Sec.
85(D), NIRC]
(d) Transfers for insufficient consideration
[Sec. 85(G), NIRC]
Note: see further discussion in the valuation of
Gross Estate
F. CLASSIFICATION OF DECEDENT
Estate Tax applies only to individuals. The decedent
may be classified into:
(1) Citizen (RC/NRC)
(2) Resident alien (RA); or
(3) Non-resident alien (NRA).
F.1. CONCEPT OF RESIDENCE
Residence and domicile are used
interchangeably without distinction. For
purposes of estate taxation, “residence” refers
to the permanent home, the place to which
TAXATION 2 TAXATION LAW 2
whenever absent, one intends to return
(animus revertendi), and depends on facts and
circumstances, in the sense that they disclose
intent. It is therefore, not necessarily the actual
place of residence. (Corre v Tan Corre, 1956)
Situs of Intangible Personal Properties
General Rule: Mobilia Sequuntur Personam
Principle: Taxation of intangible personal
properties (such as credits, bills, bank deposits
promissory notes, and corporate stocks)
follows the residence/domicile of owner
thereof. Situs is the domicile or residence of
the owner. (Collector v Fisher)
Exceptions:
(1) When it is inconsistent with express
provisions of law
(2) When justice does not demand that it
should be, as where the property in
fact has a situs elsewhere
Intangible Properties which are considered
situated in the Philippines (Sec 104)
(1) Franchise which must be exercised in
the Philippines
(2) Shares, obligations or bonds issued by
any corporation or sociedad anonima
organized or constituted in the
Philippines in accordance with its laws
(3) Shares, obligations or bonds issued by
any foreign corporation 85% of the
business of which is located in the
Philippines
(4) Shares, obligations or bonds issued by
any foreign corporation if such shares,
obligations or bonds have acquired a
business situs in the Philippines
(5) Shares or rights in any partnership,
business or industry established in the
Philippines
F.2. RULE OF RECIPROCITY
There is reciprocity if the foreign country of
which the decedent was a citizen and resident
at the time of his death:
(a) Did not impose a transfer tax of any
character, in respect of intangible personal
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property of citizens of the Philippines not
residing in that foreign country; OR
(b) Allowed a similar exemption from transfer
tax in respect of intangible personal
property owned by citizens of the
Philippines not residing in that country
If there is reciprocity, the intangible personal
property of an NRA shall not be included in his
gross estate. If there is no reciprocity, such
intangible personal property will be included.

G. GROSS ESTATE VIS-À-VIS NET ESTATE

Gross Estate Net Estate

Value at the time of death of all the decedent’s
property wherever situated
HOWEVER, in the case of a NRA at the time of his
death, only that part of the entire gross estate
which is situated in the Philippines shall be
included in his taxable estate. [Sec 85, NIRC]
Value of the estate after all deductions have been
made against the gross estate; subject to the
graduated tax rates. [Sec. 6, RR 2-2003]
This is the TAX BASE.

Formula for Estate Tax (see Annex A for expanded formulae)

Gross Estate (Sec. 85)
Less: Deductions (Sec. 86)
-------------------------------------------------------
Net estate before share of surviving spouse (if married)
Less: Net share of the surviving spouse in the conjugal property (Sec. 86(C))
-------------------------------------------------------
= Net taxable estate
Multiply by: Tax rate (Sec. 84)
-------------------------------------------------------
= Estate Tax Due
Less: Tax Credit, if any (Sec. 86(E), or 110 (B))
-------------------------------------------------------
= Estate Tax Due, if any

H. DETERMINATION OF GROSS ESTATE AND NET ESTATE (AND COMPOSITION)

Summary of the Composition of the Gross Estate and Exclusions, Deductions therefrom
RC/NRC/RA NRA
Composition and Determination of GROSS Estate
The value at the time of his death of all the The value at the time of his death of all the
deceased’s: deceased’s:
a. Real property wherever situated a. Real property located in the Phil.
b. Tangible personal property wherever b. Tangible personal property located in the
situated, and Phil., and
c. Intangible personal property wherever c. Intangible personal property with a situs in
situated the Phil. (subject to the rule of reciprocity)

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RC/NRC/RA NRA
Note: If there is reciprocity, intangible assets are
excluded from gross estate
Exclusions from GROSS Estate(Sec 85H and Sec 87)
a. GSIS proceeds/ benefits
b. Accruals from SSS
c. Proceeds of life insurance where the beneficiary is irrevocably appointed
d. Proceeds of life insurance under a group insurance taken by employer
e. War damage payments and Benefits received from US Veterans Administration
f. Transfer by way of bona fide sales
g. Transfer of property to the National Government or to any of its political subdivisions
h. Separate property of the surviving spouse
i. Merger of usufruct in the owner of the naked title
j. Properties held in trust by the decedent. Transmission of inheritance or legacy by fiduciary
heir or legatee to the fideicommissay
k. Transmission from the first heir, legatee, or done in favour of another beneficiary, in
accordance with the desire of their predecessor
l. Acquisition and/or transfer expressly declared as not taxable
m. Bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions
Deductions from GROSS estate to arrive at the NET estate
Ordinary deductions Ordinary deductions1
(1) Expenses, losses, indebtedness, taxes. (ELIT) (1) Proportionate deductions for expenses, losses,
(a) Funeral expenses indebtedness, taxes. (ELIT)2
(b) Judicial expenses (a) Funeral expenses
(c) Claims against the estate (b) Judicial expenses
(d) Claims against insolvent persons (c) Claims against the estate
(e) Unpaid mortgage and debt (d) Claims against insolvent persons
(f) Taxes (e) Unpaid mortgage and debt
(g) Losses (f) Taxes
(2) Vanishing deductions (g) Losses
(3) Transfers for public use (2) Vanishing deductions
(4) Amounts received under R.A. 4917 (3) Transfers for public use
No Amounts received under R.A. 4917
Special deductions No special deductions
(a) Family home Share in conjugal property
(b) Standard deduction
(c) Medical expenses
Share in conjugal property

1 No deduction shall be allowed for NRA, if the executor, administrator, or anyone of the heirs, DID NOT include in the return required to be
filed under Section 90 of the Code the value at the time of the decedent’s death of that part of his gross estate NOT situated in the
Philippines. [Sec. 86 (D), NIRC; Sec 7, RR 2-2003]
2
Formula for Proportionate Deductions of NRA: Allowable Deduction = 𝑥 ELIT

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Valuation of Gross Estate (Sec 88)
General Rule: Gross Estate = FMV at the time
of the decedent’s death
Real Property
(1) Appraised value, whichever is higher
between:
(a) FMV, as determined by the
Commissioner (zonal value) or
(b) FMV, as shown in the schedule of
values fixed by the Provincial or City
Assessor.
If there is no zonal value, the taxable
base is the FMV that appears in the
latest tax declaration.
(2) If there is an improvement, the value of
improvement is the construction cost per
building permit or the fair market value per
latest tax declaration.
Personal Property
(1) FMV at the time of death. If none,
acquisition cost for recently acquired
properties or the current market price for
the previously acquired properties. (Sec
40(B)
(2) Stocks, bonds, and other securities.
(a) If listed and traded stocks = value is
the mean between the highest and
lowest quoted selling prices at the date
of death; if none, nearest the date of
death (Sec 5 RR02-2003)
(b) If unlisted stocks = (ordinary common
shares) book value at time of death or
(preferred shares) par value
NB: Bonds, mortgages, and Certificates of
Stocks are taxable at the place where they
are physically located.
(3) Proceeds of Life Insurance with Revocable
Beneficiary: face value of policy (not cash
surrender value)
Right to Usufruct use or habitation, and annuity
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TAXATION LAW 2
(1) Probable life of the beneficiary in
accordance with the latest basic standard
mortality table shall be taken into account.
J. ITEMS TO BE INCLUDED IN GROSS
ESTATE
Items to be included in the Gross Estate
[Sec. 85, NIRC]
(1) Property owned by the decedent actually
and physically present in his estate at the
time of his death;
(2) Decedent’s interest;
(3) Properties not physically in the estate, such
as:
(a) Transfers in contemplation of death
[Sec. 85(B), NIRC];
(b) Transfers with retention or reservation
of certain rights [Sec. 85(B), NIRC];
(c) Revocable transfers [Sec. 85(C), NIRC];
(d) Property passing under general power
of appointment [Sec. 85(D), NIRC];
(e) Transfers for insufficient consideration
[Sec. 85(G), NIRC];
(f) Proceeds of life insurance [Sec. 85(E),
NIRC];
(g) Claims against insolvent persons; and
(h) Capital of the surviving spouse [Sec.
85(H), NIRC].
Property Owned Actually and Physically
This includes properties and interest in
properties possessed such as land, buildings,
shares of stock, vehicles, bank deposits, etc.
The decedent is actually and physically in
possession of.
Decedent’s interest (Sec. 85(A))
This includes any interest having value or
capable of being valued which is owned by the
decedent existing at the time of death, such as
dividend declared on or before death, but is
received by the estate after death, partnership
profits which have accrued before his death,
but received after death. This also includes
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those transferred by the decedent at the time
of his death.
Note: When decedent had relinquished his
interest BEFORE his death, he could not be
deemed to have transmitted interest in such
property at his death.
Transfers in Contemplation of Death (Sec.
85(B))
The term “in contemplation of death”, as used
in estate taxation, does not refer to the general
expectation of death. The words mean that it is
the thought of death, as a controlling motive,
which induces the disposition of the property
for the purpose of avoiding the tax. The
decedent’s motive is a question of fact. Thus,
the imminence of death may afford convincing
evidence of the impelling cause of transfer.
However, it is a contemplation of death and
not necessarily contemplation of imminent
death to which the statute refers. These
transfers should be without or with insufficient
considerations.
The law does not specify the number of years
prior to a decedent’s death within which a
transfer can be considered in contemplation of
death. (De leon)
Transfers with retention or reservation of
certain rights
These are transfers with retention or
reservation of certain rights that result to the
incapacity of transferee to freely enjoy and
dispose of the property until the transferor’s
death, and the transfer may be regarded as
having been intended to take effect in
possession or enjoyment at the transferor’s
death. These does not include bona fide sale
for an adequate and full consideration.
Revocable Transfers (Sec. 85(C))
General Rule: A transfer is a revocable transfer
where:
(1) There is a transfer by trust or otherwise,
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TAXATION LAW 2
(2) The enjoyment thereof was subject at the
date of his death to any change through
the exercise of a power (in whatever
capacity exercisable) by:
(a) The decedent alone;
(b) The decedent in conjunction with any
other person without regard to when or
from what source the decedent
acquired such power, to alter, amend,
revoke, or terminate; or
(c) Where any such power is relinquished
in contemplation of the decedent
death.
Exception: Bona fide sale for an adequate
and full consideration in money or money’s
worth
Note: The power to alter, amend or revoke
shall be considered to exist on the date of the
decedent’s death EVEN THOUGH:
(a) The exercise of the power is subject to a
precedent giving of notice, or
(b) The alteration, amendment or revocation
takes effect only on the expiration of a
stated period after the exercise of the
power, whether or not on or before the
date of the decedent’s death notice has
been given or the power has been
exercised.
If notice has not been given or the power has
not been exercised before the date of his death,
such notice shall be considered to have been
given, or the power exercised, on the date of
his death.
Transfer of property under general power of
appointment (Sec. 85(D))
Power of Appointment – the right to designate
the person or property who shall enjoy and
possess certain property from the estate of a
prior decedent. (Domondon)
(i) General Power of Appointment: when it
gives to the decedent the power to appoint
any person he pleases including himself.
UP COLLEGE OF LAW TAXATION 2
The decedent holds the appointed property
with all the attributes of ownership. He had
a power exercisable in favor of himself, his
creditors or creditors of his estate (AmJur)
(ii) Special Power of Appointment: when the
decedent can appoint only among a
designated class of persons other than
himself, his estate, the creditors of his
estate, or if it the power of appointment
expressly not exercisable in favor of the
decedent, his estate, his creditors, or
creditors of his estate.
General Rule: Property over which the
decedent held a power of appointment is
excluded in his gross estate
Exception: (included, if) the power of
appointment is GENERAL. Among those to be
included in the gross estate is property arising
under a general power of appointment
exercised by the decedent:
(1) By will; or
(2) By deed executed in contemplation of or
intended to take effect in possession or
enjoyment at or after his death; or
(3) By deed under which he has retained for
his life or any period not ascertainable
without reference to his death or for any
period which does not in fact end before
his death –
(a) The possession or enjoyment of, or the
right to the income from the property;
or
(b) The right either alone or in conjunction
with any person, to designate the
persons who shall enjoy or possess the
property or the income therefrom.
Transfers for insufficient consideration (Sec.
85(G))
Transfers, trusts, interests, rights, or powers
(denominated as transfer in contemplation of
death, revocable transfer and property passing
under general power of appointment) made,
created, exercised or relinquished for a
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TAXATION LAW 2
consideration in money or money’s worth, but
is NOT a bona fide sale for an adequate and
full consideration in money or money’s worth.
The value to be included in the gross estate is
the excess of the fair market value of the
property at the time of the decedent’s death
over the consideration received.
Example:
Case A: If bona fide sale – no value shall be
included in the gross estate
Case B: If not a bona fide sale - the excess of
the fair market value at the time of death over
the value of the consideration received by the
decedent shall form part of his gross estate.
Case C: If inter vivos transfer is proven
fictitious/simulated – total value of the
property at the time of death included in the
gross estate.
Case Case Case
Over
A B C
FMV, transfer 2,000 1,500 2,500
FMV, death 2,500 2,000 2,000
Consideration received 2,000 800 0
Value included in the 0 1,200 2,000
Gross Estate
The transfer for insufficient consideration must
fall under any of the following:
(1) Transfer in contemplation of death;
(2) Revocable transfer, or
(3) Property passing under a GPA.
- Otherwise, the tax imposed is donor’s tax.
Proceeds of life insurance (Sec. 85(E))
Inclusion of proceeds of life insurance to the
gross estate depends on i) designated
beneficiary; ii) revocability of the insurance; iii)
period and source of funds used in premiums.
UP COLLEGE OF LAW TAXATION 2
When taxable (included in the Gross Estate)
Proceeds of life insurance taken out by the
decedent on his own life shall be included in
the gross estate in the following cases:
(1) Beneficiary is the estate of the deceased,
his executor or administrator, irrespective
of whether or not the insured retained the
power of revocation; or
(2) Beneficiary is other than the decedent’s
estate, executor or administrator, when
designation of beneficiary is not expressly
made irrevocable.
Note: Under the Insurance Code of 1978, if not
clear or silent, the designation of the
beneficiary is presumed to be revocable; hence,
includible in the decedent’s gross estate.
When not taxable
(1) Accident insurance proceeds as the Tax
Code specifically mentions only life
insurance policies
(2) Proceeds of a group insurance policy taken
out by a company for its employees
(3) Amount receivable by any beneficiary
irrevocably designated in the policy of
insurance by the insured. The transfer is
absolute and the insured did not retain any
legal interest in the insurance
(4) Proceeds of insurance policies issued by
the GSIS to government officials and
should be proven. As a rule, regardless of the
amount the debtor is unable to pay, the full
amount of the claim against the insolvent
person should be included in the gross estate
of the decedent. The portion of the claim
which is not collectible should be allowed as a
deduction from the gross estate.
Capital of the Surviving Spouse[Sec.85(H),
NIRC]
It is NOT part of the gross estate of the
deceased spouse. (See Exclusions)
K. DEDUCTIONS FROM ESTATE
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TAXATION LAW 2
employees , which are exempt from all
taxes; (PD 1146)
(5) Benefits accruing under the SSS law (RA
1161)
(6) Proceeds of life insurance payable to heirs
of deceased members of military personnel
(RA 360)
To determine the conjugal or separate character
of proceeds, the following factors are considered:
(1) Policy was taken before marriage – Source
of funds determines ownership of the
proceeds of life insurance
(2) Policy was taken during marriage
(a) Beneficiary is estate of the insured –
Proceeds are presumed conjugal;
hence, one-half share of the surviving
spouse is not taxable
(b) Beneficiary is third person – Proceeds
are payable to beneficiary even in
premiums were paid out of the
conjugal
Claims Against Insolvent Persons
For estate tax purposes, an insolvent is a
person whose properties are not sufficient to
satisfy, whether fully or partially, his debts. A
judicial declaration of insolvency is not
required but the incapacity of the debtor
Deductions and/or losses already deducted
from gross income can no longer be deducted
from gross estate. Further, deductions should
not be compensated for any insurance or
extrajudicial settlement. Otherwise, they are
not valid deductions.
K.1 ORDINARY DEDUCTIONS
1.A. EXPENSES, LOSSES,
INDEBTEDNESS AND TAXES, ETC. (ELIT)
i. Funeral Expenses (Sec. 86 (A)(1)(a))
Actual funeral expenses shall mean (i) those
which are actually incurred (ii) in connection
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with, and before the interment or burial of the
deceased and (iii) must be paid out of the
estate and not by another person or out of
contributions from friends and relatives. These
must be (iv) duly supported by receipts or
invoices or other evidence to show that they
were actually incurred. They include:
(a) The mourning apparel of the surviving
spouse and unmarried minor children of
the deceased bought and used on the
occasion of the burial;
(b) Expenses for the deceased’s wake,
including food and drinks;
(c) Publication charges for death notices;
(d) Telecommunication expenses incurred in
informing relatives of the deceased;
(e) Cost of burial plot, tombstones, monument
or mausoleum but not their upkeep. In
case the deceased owns a family estate or
several burial lots, only the value
corresponding to the plot where he is
buried is deductible;
(f) Interment and/or cremation fees and
charges; and
(g) All other expenses incurred for the
performance of the rites and ceremonies
incident to interment.
Limitation: Allowable deduction is not to
exceed P200,000 and whichever is lower of:
(a) The actual funeral expenses (whether or
not paid) up to the time of interment, or
(b) An amount equal to 5% of the gross
estate.
The unpaid portion of the funeral expenses
incurred which is in excess of the P200,000
threshold is NOT allowed to be claimed as a
deduction under “claims against the estate”.
(Sec. 6(A)(1), RR 02-200)
Not included are: (i) Expenses incurred after
the interment, such as for prayers, masses,
entertainment, or the like are not deductible.
(ii) Any portion of the funeral and burial
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TAXATION LAW 2
expenses borne or defrayed by relatives and
friends of the deceased are not deductible. (iii)
Medical expenses as of the last illness will not
form part of funeral expenses but should be
claimed as medical expenses. (Sec. 6, RR 2-
2003)
Illustrations
(a) If five percent (5%) of the gross estate is
P220,000 and the amount actually
incurred is P215,000, the maximum
amount that may be deducted is only
P200,000;
(b) If five percent (5%) of the gross estate is P
100,000 and the total amount incurred is
P150,000 where P20,000 thereof is still
unpaid, the only amount that can be
claimed as deduction for funeral expenses
is P100,000. The entire P50,000 excess
amount consisting of P30,000 paid
amount and P20,000 unpaid amount can
no longer be claimed as FUNERAL
EXPENSES. Neither can the P20,000
unpaid portion be deducted from the gross
estate as CLAIMS AGAINST THE ESTATE.
ii. Judicial Expenses of Testamentary and
Intestate Proceedings (Sec. 86 (A)(1)(b))
Expenses allowed as deduction under this
category are (i) those incurred in the inventory-
taking of assets comprising the gross estate,
their administration, the payment of debts of
the estate, as well as the distribution of the
estate among the heirs. In short, these
deductible items are expenses (ii) incurred
during the settlement of the estate but not
beyond the last day prescribed by law, or the
extension thereof, for the filing of the estate
tax return. (Sec. 86 (A)(2), RR 2-2003). These
expenses must be (iii) for the benefit of the
estate, and (iv) substantiated by recipts OR if
unpaid, should be supported by a sworn
statement of account issued and signed by the
creditor.
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Judicial expenses may include:
(1) Fees of executor or administrator
(2) Attorney’s fees (Commissioner v CA (2000)
(3) Court fees
(4) Accountant’s fees
(5) Appraiser’s fees
(6) Clerk hire
(7) Costs of preserving and distributing the
estate
(8) Costs of storing or maintaining property of
the estate
(9) Brokerage fees for selling property of the
estate
Not deductible
(a) Compensation paid to a trustee of the
decedent’s estate for his services rendered
for the purpose of managing the
decedent’s real estate for the benefit of the
testamentary heirs (Lorenzo v. Posadas)
(b) Expenses incurred by the presumptive heir
and that of her witnesses for appearance
at the trial to oppose the probate of a will.
(c) Attorney’s fees incident to litigation
incurred by the heirs in asserting their
respective rights, or claims as to who are
entitled to the estate left by the deceased.
(d) Premiums paid by the administrator on his
bond, being exclusively used for his
account, since the giving of the bond is in
the nature of a qualification for the office
and not necessary in the settlement of his
estate.
iii. Claims Against the Estate (Sec. 86 (A)(1)(c))
The word “claims” is generally construed to
mean (i) debts or demands of a pecuniary
nature (ii) which could have been enforced
against the deceased in his lifetime and could
have been reduced to simple money
judgements. These are liabilities of the estate
or indebtedness of such (iii) arising out of:
contract, tort, or operation of law. (Dizon v CTA,
2008)
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Requisites for Deductibility of Claims Against
the Estate:
(a) The liability represents a personal
obligation of the deceased existing at the
time of his death except unpaid obligations
incurred incident to his death such as
unpaid funeral expenses (i.e., expenses
incurred up to the time of internment) and
unpaid medical expenses which are
classified under a different category of
deductions.
(b) The liability was contracted in good faith
and for adequate and full consideration in
money or money’s worth
(c) The claim must be a debt or claim which is
valid in law and enforceable in court;
(d) The indebtedness must not have been
condoned by the creditor or the action to
collect from the decedent must not have
prescribed.
(e) They must be reasonably certain in amount,
and substantiated.
Substantiation Requirements
In case of simple loan (including advances):
(1) The debt instrument must be duly
notarized at the time the indebtedness was
incurred, such as promissory note or
contract of loan, except for loans granted
by financial institutions where notarization
is not part of the business practice/policy
of the financial institution-lender.
(2) Duly notarized Certification from the
creditor as to the unpaid balance of the
debt, including interest as of the time of
death
- If the creditor is a corporation, the sworn
certification should be signed by the
President, or Vice-President, or other
principal officer of the corporation.
- If the creditor is a partnership, the sworn
certification should be signed by any of the
general partners.
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- In case the creditor is a bank or other
financial institutions, the Certification shall
be executed by the branch manager of the
bank/financial institution which monitors
and manages the loan of the decedent-
debtor.
- If the creditor is an individual, the sworn
certification should be signed by him. In
any of these cases, the one who should
certify must not be a relative of the
borrower within the fourth civil degree,
either by consanguinity or affinity, except
when the requirement below is complied
with.
When the lender, or the
President/Vice-president/principal
officer of the creditor-corporation, or
the general partner of the creditor-
partnership is a relative of the debtor in
the degree mentioned above, a copy of
the promissory note or other evidence
of the indebtedness must be filed with
the RDO having jurisdiction over the
borrower within 15 days from the
execution thereof.
(3) Proof of financial capacity of the creditor to
lend the amount at the time the loan was
granted, as well as its latest audited
balance sheet with a detailed schedule of
its receivable showing the unpaid balance
of the decedent-debtor
- In case the creditor is an individual
who is no longer required to file
income tax returns with the Bureau, a
duly notarized declaration by the
creditor of his capacity to lend at the
time when the loan was granted
without prejudice to verification that
may be made by the BIR to
substantiate such declaration of the
creditor. If the creditor is a non-
resident, the executor/ administrator
or any of the legal heirs must submit a
duly notarized declaration by the
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TAXATION LAW 2
creditor of his capacity to lend at the
time when the loan was granted,
authenticated or certified to as such by
the tax authority of the country where
the non-resident creditor is a resident;
(4) A statement under oath executed by the
administrator or executor of the estate
reflecting the disposition of the proceeds of
the loan if it was contracted within 3 years
prior to the death of the decedent.
If the unpaid obligation arose from purchase of
goods or services:
(1) Pertinent documents evidencing the
purchase of goods or service, such as sales
invoice/delivery receipt (for sale of goods),
or contract for the services agreed to be
rendered (for sale of services), as duly
acknowledged, executed and signed by
decedent-debtor and creditor, and
statement of account given by the creditor
as duly received by the decedent-debtor
(2) Duly notarized certification from the
creditor as to the unpaid balance of the
debt, including interest as of the time of
death.
(3) Certified true copy of the latest audited
balance sheet of the creditor with a
detailed schedule of its receivable showing
the unpaid balance of the decedent-debtor.
Moreover, a certified true copy of the
updated latest subsidiary ledger/records of
the debtor-decedent, should likewise be
submitted.
Where the settlement is made through the
Court in a testate or intestate proceeding,
pertinent documents filed with the Court
evidencing the claims against the estate,
and the Court Order approving the said
claims, if already issued, in addition to the
UP COLLEGE OF LAW TAXATION 2
documents mentioned in the preceding
paragraphs.
iv. Claims Against Insolvent Persons (Sec. 86
(A)(1)(d))
These are claims of the estate (i) against
insolvent persons (ii) which are not collectible.
To be deductible from the gross estate:
Additional Requirements:
(a) The incapacity of the debtor to pay his
obligation should be proven, although a
judicial declaration of insolvency is not
required;
(b) The full amount owed by the insolvent
must first be included in the decedent’s
gross estate; and
(c) If the insolvent could only pay a partial
amount, the full amount owed shall be
included in the gross estate, and the
amount uncollectible shall be allowed as a
deduction.
v. Unpaid Mortgages, Losses and Taxes (Sec.
86(A)(1)(e))
Unpaid Mortgages
Requisites for Deductibility [Sec. 6-A5(a), RR 2-
2003]
(a) The value of the decedent’s interest therein,
undiminished by such mortgage or
indebtedness, is included in the value of
the gross estates.
(b) The mortgages were contracted bona fide
and for an adequate and full consideration
in money or money’s worth.
In case the loan of the decedent is only an
accommodation loan where the loan proceeds
went to another person, the value of the
unpaid loan must be included as a receivable
of the estate. If there is a legal impediment to
recognize the same as a receivable of the
estate, the said unpaid obligation shall not be
allowed as a deduction. In all instances, the
mortgaged property, to the extent of the
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TAXATION LAW 2
decedent’s interest therein, should always
form part of the taxable gross estate. (RR 2-
2003)
Unpaid Taxes
Requisites for Deductibility
(a) Taxes which have accrued as of or before
the death of the decedent (if it was
incurred after, it is chargeable to the
income of the estate), and
(b) Unpaid as of the time of his death,
regardless of whether or not it was
incurred in connection with trade or
business
Not included:
(a) Income tax upon income received after
death, or
(b) Property taxes not accrued before his
death, or
(c) The estate tax due from the transmission
of his estate
Casualty Losses
Requisites for Deductibility
(a) Incurred during the settlement of the
estate
(b) Arising from fires, storms, shipwreck, or
other casualties from robbery, theft, or
embezzlement
(c) Not compensated by insurance or
otherwise
(d) At the filing of the estate tax return, such
losses have not been claimed as a
deduction for income tax purposes in an
income tax return
(e) Incurred not later than the last day for the
payment of the estate tax as prescribed by
law.
Casualty loss can be allowed as deduction in
one instance only, either for income tax
purposes or estate tax purposes. (Sec. 6(A)(5)),
Rev. Reg 2-2003)
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NOTE: See Formula for computing Ordinary
Deductions of NRA above.
1. B. PROPERTY PREVIOUSLY
TAXED/PPT (SEC. 86(A)(2))
ALSO CALLED AS VANISHING
DEDUCTIONS
This is an amount allowed to reduce the
taxable estate of a decedent where property:
(1) Received by him from a prior decedent by
gift, bequest, device, or inheritance
(2) Transferred to him by gift, has been the
object of previous transfer transaction
Conditions
(1) There must be 2 deceased persons and the
first one is the donor
(2) The second decedent dies within 5 years
after the death of a prior decedent, or in
case of gift, the decedent-donee dies
within the same period after the date of the
gift.
Requisites
(1) Death – The present decedent died within
5 years from the date of the prior decedent
OR date of gift.
(2) Identity of the property– The property with
respect to which deduction is sought can
be identified as the one who received from
prior decedent, or from the donor, or as the
property acquired in exchange for the
original property so received.
(3) Inclusion of the property – The property
must have formed part of the gross estate
situated in the Philippines of the prior
decedent, or have been included in the
total amount of the gifts of the donor made
within 5 years prior to the present
decedent’s death.
(4) Previous taxation of property – The estate
tax on the prior succession, or the donor’s
tax on the gift must have been finally
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TAXATION LAW 2
determined and paid by the prior decedent
or by the donor, as the case may be.
(5) No previous vanishing deduction on the
property – No such deduction on the
property, or the property given in exchange
therefor, was allowed in determining the
value of the net estate of the prior
decedent. This is intended to preclude the
application of the vanishing deduction on
the same property more than once.
Limitations
(1) Value of property – The deduction is
limited by the value of property previously
taxed or the aggregate value of such
property if more than one item, as finally
determined for the purpose of the prior
estate tax (or gift tax) or the value of such
property in present decedent’s gross estate,
whichever is lower.
(2) Deduction for mortgage or lien – The initial
value (in number 1 above) shall be reduced
by the total amount paid, if any, by the
present decedent on any mortgage or
other lien on the property where a
deduction was allowed, by reason of the
payment, of such mortgage or other lien
from the gross estate of the prior decedent,
or gift or donor, in determining the estate
tax of the prior decedent or the donor’s tax.
(3) Deductions for expenses, etc. – The value
as reduced in #2 shall be further reduced
by an amount which bears the same ratio
to the amounts allowed as deductions for:
(a) Expenses, losses, indebtedness, and
taxes (ordinary deductions), and
(b) Transfers for public use as the amount
otherwise deductible for property
previously taxed bears to the value of
the decedent’s gross estate; and
(4) Percentage of deductions – The vanishing
deduction shall be the value (final basis) in
#3 multiplied by the ff. percentages:
VD If received by inheritance or gift
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Rate
100% Within one (1) year prior to the death of
the present decedent
80% More than one year but not more than
two years prior to the death of the
decedent
60% More than two years but not more than
three years
40% More than three years but not more
than four years prior to the death of
the decedent
20% More than four years but not more
than five years prior to the death of the
decedent
FORMULA FOR VANISHING DEDUCTIONS:
(please take note of the limitations above)
Value Taken of Property
Less: Mortgage debt paid, if any
= Initial Basis
Less: Proportionate Deduction**
= Final Basis
Multiplied by Deduction Rate
VANISHING DEDUCTION
**Proportionate Deduction
𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝑩𝒂𝒔𝒊𝒔
𝒙 (𝑬𝑳𝑰𝑻 + 𝑻𝑷𝑼)
𝑽𝒂𝒍𝒖𝒆 𝒐𝒇 𝑮𝑬 𝒐𝒇 𝒑𝒓𝒆𝒔𝒆𝒏𝒕 𝒅𝒆𝒄𝒆𝒅𝒆𝒏𝒕
Note: Amount of Vanishing Deductions is NOT
subtracted from the value of the CPG to
determine the share of surviving spouse. It is
deducted from the exclusive property of the
decedent.
1. C. TRANSFERS FOR PUBLIC PURPOSE
(SEC. 86(A)(3))
These are (i) dispositions in a last will and
testament or transfers to take effect after
death (ii) in favor of the Government of the
Republic of the Philippines, or any political
TAXATION 2 TAXATION LAW 2
subdivision thereof, for exclusively public
purposes. The whole amount of all the
bequests, legacies, devises, or transfers to or
for the use of shall be deductible from gross
estate, (iii) provided such amount or value had
been included in the computation of the gross
estate. Thus, there is no limitation for the
amount to be deducted.
1.D. AMOUNTS RECEIVED BY HEIRS
UNDER RA 4917
(An Act Providing that Retirement Benefits of
Employees of Private Firms shall not be subject
to attachment, levy, execution, or any tax
whatsoever. (Sec. 86(A)(7))
Any amount received by the heirs from the
decedent’s employer as a consequence of the
death of the decedent-employee in accordance
with RA 4917, provided that such amount is
included in the gross estate of the decedent.
These include:
(1) Retirement benefits from private firms with
private benefit plan, if the retiring
employee is 50 years old or older. This can
only be once availed.
(2) Benefits granted in case of separation
beyond the control of the employee.
RA 4917 provides that retirement benefits of
private employees shall not be subject to
attachment, levy execution or any tax.
SPECIAL DEDUCTIONS
(A) Family Home (Sec. 86(A)(4))
It is the dwelling house, including the land on
which it is situated, where the husband and
wife, or a head of the family, and members of
their family reside, as certified to by the
Barangay Captain of the locality. It is deemed
constituted on the house and lot from the time
it is actually occupied as the family residence
and considered as such for as long as any of its
beneficiaries actually resides therein. (Arts. 152
and 153, Family Code)
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Temporary absence from the constituted

family home due to travel or studies or work Beneficiaries of a Family Home
abroad, etc. does not interrupt actual (1) The husband and wife, or an unmarried
occupancy. The family home is generally person who is the head of a family; and
characterized by permanency, that is, the place (2) Their parents, ascendants, descendants,
to which, whenever absent for business or brothers and sisters, whether the
pleasure, one still intends to return. (Sec. 6(D), relationship be legitimate or illegitimate,
RR 2-2003) who are living in the family home and who
depend upon the head of the family for
It must be part of the ACP or CPG, or the legal support.
exclusive properties of either spouse. It may
also be constituted by an unmarried head of a Limitation: P 1,000,000.00
family on his or her own property. (Sec. 6(D),
(B) Standard Deduction (Sec. 86(A)(5), Sec.
RR 2-2003 citing Art. 156, FC). For purposes of
6(E), RR 2-2003)
availing this deduction, a person may constitute
An amount equivalent to one million pesos
only one family home. Sec. 6(D), RR 2-2003
(P1,000,000) shall be deducted from the gross
citing Art. 161, FC.
estate without need of substantiation.
Requisites for Deductibility (Sec. 6(D)(b), RR 2-
(C) Medical Expenses (Sec. 86(A)(6), NIRC; Sec.
2003)
6(F), RR 2-2003)
(1) The family home must be the actual
All medical expenses (cost of medicine,
residential home of the decedent and his
hospital bills, doctors’ fees, etc.) incurred
family at the time of his death, as certified
(whether paid or unpaid).
by the barangay captain of the locality.
(2) The total value of the family home must be
Requisites for Deductibility
included as part of the gross estate of the
1. The expenses were incurred by the decedent
decedent
within 1 year prior to his death
(3) Allowable deduction must be in an amount
2. The expenses are duly substantiated with
equivalent to the current FMV of the family
receipts and other documents in support
home as declared or included in the gross
thereof
estate, or the extent of the decedent’s
interest (whether conjugal/community or
Limitation Provided, that in no case shall the
exclusive property), whichever is lower, but
deductible medical expenses exceed Five
in no case shall the deduction exceed
Hundred Thousand Pesos (P500,000).
P1,000,000.
(4) The decedent was married or if single, was
Not allowed as deduction: (i) Any amount of
a head of the family.
medical expenses incurred within one year
(5) Along with the decedent, any of the
from death in excess of P500,000 shall no
beneficiaries must be dwelling in the
longer be allowed as a deduction under this
family home.
subsection. Neither can (ii) any unpaid amount
(6) The family home as well as the land on
thereof in excess of the P500,000 threshold
which it stands must be owned by the
nor (iii) any unpaid amount for medical
decedent. Therefore, the FMV of the family
expenses incurred prior to the one-year period
home should have been included in the
from date of death be allowed to be deducted
computation of the decedent’s gross estate.

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from the gross estate under “Claims against
the estate”. (RR 2-2003, Sec. 6-F)
NET SHARE OF THE SURVIVING spouse in the
conjugal partnership property (Sec. 86(C),
NIRC; Sec. 6(H), RR 2-2003)
The amount deductible is the net share of the
surviving spouse in the conjugal partnership
property. The net share is equivalent to ½ of
50% of the conjugal property after deducting
the obligations chargeable to such property.
The share of the surviving spouse must be
removed to ensure that only the decedent’s
Exclusive Property of Each Spouse
If ACP governs property relations
The community of property shall consist of all the
property owned by the spouses at the time of the
celebration of the marriage or acquired thereafter.
(Art. 91 Family Code)
(1) The following are excluded from the
community property:
(a) Property acquired by gratuitous title by
either spouse, and the fruits as well as the agreed in marriage settlements. (Art. 106, Family
income thereof, if any, unless it is
expressly provided by the donor, testator,
or grantor that they shall form part of the (1) The following are exclusive property of each
community property.
(b) Property for personal and exclusive use of
either spouse; however, jewelry shall form
part of the community property.
(c) Property acquired before the marriage by
either spouse who has legitimate
descendants from a former marriage, and
the fruits as well as the income, if any, of
such property. (Art. 92 Family Code)
(2) Property acquired during the marriage is
presumed to belong to the community, unless
it is proved that it is one of those excluded
therefrom.
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TAXATION LAW 2
interest in the estate is taxed. Net share of the
surviving spouse is neither an ordinary nor a
special deduction.
L. EXCLUSIONS FROM ESTATE
Capital of the Surviving Spouse (Sec. 85(H))
Capital: property of the spouses brought into
marriage. Strictly speaking, capital under the
Civil Law refers to the property brought by the
husband to the marriage while that brought
into the marriage by the wife known is as
paraphernal property. (Domondon)
If CPG governs property relations
The husband and wife place in a common fund
the proceeds, products, fruits, and income from
their separate properties and those acquired by
either or both spouses through their efforts or by
chance, and, upon dissolution of the marriage or
of the partnership, the net gains or benefits
obtained by either or both spouses shall be
divided equally between them, unless otherwise
Code)
spouse:
(a) That which is brought to the marriage as
his or her own
(b) That which each acquires DURING the
marriage by gratuitous title
(c) That which is acquired by right of
redemption, by barter or by exchange with
property belonging to only one of the
spouses
(d) That which is purchased with exclusive
money of the wife or the husband (Art.
109, Family Code)
(2) Property bought on instalments paid partly
from exclusive funds of either or both spouses
and partly from conjugal funds belong to the
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buyer or buyers if full ownership was vested

BEFORE the marriage subject to
reimbursement advanced by the conjugal
partnership or by either or both spouses. (Art.
118, Family Code)
(3) Whenever an amount or credit payable within
a period of time belongs to one of the
spouses, the sums collated during the
marriage in partial payments or by
instalments on the principal are considered
the exclusive property of the spouse. However,
interest falling due during the marriage on the
principal belong to the conjugal partnership.
(4) All property acquired during the marriage
whether the acquisition appears to have been
made, contracted or registered in the name of
one or both spouses,, is presumed to belong
to the conjugal partnership, unless it is proved
that it pertains exclusively to the husband or
to the wife.
If separation of property governs property relations
Separation of property may refer to present or future property or both. It may be total or partial. In the
latter case, the property not agreed upon as separate shall pertain to the absolute community. (Art.
144, Family Code)

To each spouse shall belong all earnings from his or her profession, business or industry, and all
fruits, natural, industrial, or civil, due or received during the marriage from his or her separate
property. (Art. 145, Family Code)

Exemptions:
(1) Where net estate does not exceed P200,000. (Sec. 84)
(2) The following transmissions shall not be taxed:
(a) Merger of the usufruct in the owner of the naked title
(b) Transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the
fideicomissary
(c) The transmission from the first heir, legatee, or done in favor of another beneficiary in
accordance with the desire of the predecessor
(d) All bequests, devises, legacies, or transfers to social welfare, cultural and charitable
institutions, no part of the net income of which inures to the benefit of any individual, and
provided that not more than 30% of the said bequests, etc shall be used by such institution
for administration purposes.

Note: Effectivity of Family Code (Aug 3, 1988)

Exemptions under special laws

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(1) Benefits received by members from the GSIS and the SSS by reason of death
(2) Amounts received from the Philippines and US governments for damages suffered during the last
war.
(3) Benefits received by beneficiaries residing in the Philippines under laws administered by the US
Veteran Administration
(4) Bequests, legacies, or donations mortis causa to social welfare, cultural, or charitable
organizations. Bequests to be used actually, directly and exclusively for educational purposes are
also exempt from tax.
(5) Grants and donations to the Intramuros Administration

M. TAX CREDIT FOR ESTATE TAXES PAID IN A FOREIGN COUNTRY

It is a remedy against international double
taxation. To minimize the onerous effect of
taxing the same property twice, tax credit
against Philippine estate tax is allowed for
estate taxes paid to foreign countries.
Who may claim: RC/NRC/RA. Only the estate
of a decedent who was a citizen or a resident of
the Philippines at the time of his death can
claim tax credit for any estate tax paid to a
foreign country.

General Rule
The estate tax imposed by the NIRC shall be
credited with the amounts of any estate tax
imposed by the authority of a foreign country.

Limitations on Credit
A. For Estate Taxes paid to one foreign country (Specific Country Limitation)
The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion
of the tax against which such credit is taken, which the decedent's net estate situated within such
country taxable under the tax code bears to his entire net estate.

( )
𝑇𝑎𝑥 𝐶𝑟𝑒𝑑𝑖𝑡 𝐿𝑖𝑚𝑖𝑡 = 𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥

B. For estate taxes paid to 2 or more foreign countries (Global Limitation)

The total amount of the credit shall not exceed the same proportion of the tax against which such
credit is taken, which the decedent's net estate situated outside the Philippines taxable under the tax
code bears to his entire net estate.

( )
𝑇𝑎𝑥 𝐶𝑟𝑒𝑑𝑖𝑡 𝐿𝑖𝑚𝑖𝑡 = 𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥

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Compare the tax credit allowed under Limitation A and Limitation B. The lower of the two amounts is
the final allowable tax credit. In this case, the amount computed under Limitation A (4,400) is lower,
thus it becomes the final allowable tax credit.

If there is only one foreign country involved, both Limitations will yield the same answer.

The resulting amount will be compared to the actual tax paid to the foreign country. The lower
amount will be the final allowable tax credit.

Illustration:

Net Estate – Philippines (reduced by all allowable P1,050,000

deductions, except standard deduction)
Country G Net Estate 300,000
Country H Net Estate 150,000
Tax paid/incurred:
Philippines 15,000
Country G 5,000
Country H 1,400
Net Estate – Philippines (reduced by all allowable P1,050,000
deductions, except standard deduction)

Net taxable estate is P500,000 (1,050,000 + 300,000 + 150,000 – 1,000,000 standard deduction).
The Philippine estate tax on P500,000 is P15,000

Solution – Limitation A
(1) Apply Formula A. The result after applying the formula above is compared to the tax actually paid
for each foreign country.
(2) The lower of the two amounts for each foreign country will be added to get the total tax credit
allowed under Limitation A.

Amount Allowed (whichever is

lower)
Country G
3,000
(300/1500 x 15,000) 3,000
Actually paid to Country G 5,000
Country H
1,500
(150/1500 x 15,000) 1,400
Actually paid to Country H 1,400
Tax credit allowed under Limitation A P 4,400

Solution – Limitation B:

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(1) Apply Formula B. The result after applying the formula above is compared to the tax actually paid
in total to foreign countries.
(2) The lower of the two amounts will be added to get the total tax credit allowed under Limitation B.

Amount Allowed (Lower)

450/1500 x 15,000 4,500

Total foreign income taxes

6,400
paid
Tax credit allowed under Limitation A P 4,400

N. EXEMPTION OF CERTAIN
ACQUISITIONS AND
TRANSMISSIONS
(1) Merger of usufruct in the owner of the
naked title
(2) Transmission or delivery of the inheritance
or legacy by the fiduciary heir (1st heir) to
the fideicomissary (2ndheir). Pending
transmission of the property, the fiduciary
is entitled to all the rights of a usufructuary,
although the fideicomissary is entitled to
all the rights of a naked owner.
(3) Transmission from the first heir, legatee or
done in favour of another beneficiary, in
accordance with the desire of the
predecessor.
(4) All bequests, devises, legacies or transfers
to social welfare, cultural and charitable
institutions, no part of the net income of
which inures to the benefit of any
individual; provided, however, that not
more than 30% of said bequest, devises,
legacies or transfers shall be used by such
institutions for administration purposes.
O. FILING OF NOTICE OF DEATH
(Section 89)
Notice of Death
When needed: (i) in all cases of transfers
subject to tax or (ii) where, though exempt
from tax, the value of the gross estate exceeds
P20,000.
Period of sending notice: A written Notice of
Death must be given to the BIR.
(a) Within 2 months after the death of the
decedent or
(b) Within 2 months after the executor or
administrator or executor qualifies as such.
Who will file: executor, administrator, or any of
the legal heirs, as the case may be.
P. ESTATE TAX RETURN
(Section 90 – 91)
When Required (Copies in duplicate)
(1) When the estate is subject to estate tax,
OR
(2) When, though exempt from tax, the gross
value of the estate exceeds Two hundred
thousand pesos (P200,000), OR
(3) Regardless of the gross value of the estate,
when the said estate consists of registered
or registrable property such as real
property, motor vehicle, shares of stock or
other similar property for which a
clearance from the Bureau of Internal
Revenue is required as a condition
precedent for the transfer of ownership
thereof in the name of the transferee.

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Contents
The executor, or the administrator, or any of
the legal heirs, as the case may be, shall file a
return under oath in duplicate, setting forth:
(1) The value of the gross estate of the
decedent at the time of his death, or in
case of a nonresident, not a citizen of the
Philippines, of that part of his gross estate
situated in the Philippines;
(2) The deductions allowed from gross estate
in determining the net taxable estate; and
(3) Such part of such information as may at
the time be ascertainable and such
supplemental data as may be necessary to
establish the correct taxes.
(4) For estate tax returns showing a gross
value exceeding P2,000,000 - there must
be a statement duly certified to by a
Certified Public Accountant containing the
following:
(a) Itemized assets of the decedent with
their corresponding gross value at the
time of his death, or in the case of a
non-resident, not a citizen of the
Philippines, of that part of his gross
estate situated in the Philippines;
(b) Itemized deductions from gross estate
allowed in Section 86; and
(c) The amount of tax due whether paid or
still due and outstanding.
Period for Filing
General Rule: Filed within 6 months from the
decedent's death.
Exception: The Commissioner shall have
authority to grant, in meritorious cases, a
reasonable extension not exceeding 30 days
for filing the return.
Who will file: executor, administrator, or any of
the legal heirs, as the case may be, under oath.
If there is no executor or administrator
appointed, qualified, and acting within the
Philippines, any person in actual or
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TAXATION LAW 2
constructive possession of any property of the
decedent may file this return.
Where to file the estate tax return and pay the
tax due (Sec. 9, RR 2-2003)
Resident Citizen (RC and RA)
The executor or administrator shall register the
estate of the decedent and secure a new TIN
from the RDO where the decedent was
domiciled at the time of his death and shall file
the estate tax return and pay the
corresponding estate tax with:
(1) An authorized agent bank (AAB), or
(2) Revenue District Officer (RDO), or
(3) Collection Officer,
(4) Duly authorized Treasurer of the city or
municipality in which the decedent was
domiciled at the time of his death, or
Non-resident decedent (NRA/NRC) with
executor or administrator in the Philippines
The estate tax return shall be filed with and
the TIN for the estate shall be secured from the
RDO where such executor or administrator is
registered.
If the executor or administrator is not
registered, the estate tax return shall be filed
with and the TIN for the estate shall be secured
from the RDO having jurisdiction over the
executor or administrator’s legal residence.
Non-resident decedent does not have an
executor or administrator in the Philippines
The estate tax return shall be filed with and
the TIN for the estate shall be secured from the
Office of the Commissioner through RDO 39
QC.
The foregoing provisions notwithstanding,
the Commissioner of Internal Revenue may
continue to exercise his power to allow a
different venue/place in the filing of tax
returns.
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Payment: Pay as you file
At the time the return is filed by the executor,
administrator or the heirs.
The executor or administrator means the
executor or administrator of the decedent, or if
there is none appointed, qualified, and acting
within the Philippines, then any person in
actual or constructive possession of any
property of the decedent. The estate tax shall
be paid by the executor or administrator before
the delivery of the distributive share in the
inheritance to any heir or beneficiary.
Exception: In meritorious cases, the
Commissioner grant reasonable extension not
exceeding 30 days from filing.
Extension of Payment (Sec. 9(E), RR 2-2003)
The Commissioner may allow an extension of
payment, if he finds that the payment on the
due date of the estate tax or of any part thereof
would impose undue hardship upon the estate
or any of the heirs:
(1) Extension not to exceed 5 years, in case the
estate is settled judicially, or
(2) 2 years in case the estate is settled
extrajudicially.
Where the taxes are assessed by reason of
negligence, intentional disregard of rules and
regulations, or fraud on the part of the
taxpayer, no extension will be granted by the
Commissioner.
If extension granted, the Commissioner may
require the executor, or administrator, or
beneficiary, as the case may be, to furnish a
bond in such amount, not exceeding double
the amount of the tax and with such sureties as
the Commissioner deems necessary,
conditioned upon the payment of the said tax
in accordance with the terms of the extension.
Effects of granting an extension
(1) Payment of the amount in respect of which
the extension is granted on or before the
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TAXATION LAW 2
date of the expiration of the period of the
extension
(2) Suspension of the running of statute of
limitations for deficiency assessment for
the period of any extension
(3) Any amount paid after the statutory due
date of the tax, but within the extension
period, shall be subject to interest but not
to surcharge.
Can estate tax be paid in installments? Yes!
In case the available cash of the estate is not
sufficient to pay its total estate tax liability, the
estate may be allowed to pay the tax by
installment and a clearance shall be released
only with respect to the property the
corresponding/computed tax on which has
been paid. (Sec. 9(F), RR 2-2003)
Who are liable for the payment of estate taxes
Primarily, the estate, through the executor or
administrator.
(1) Payment shall be made before the delivery
of the distributive share in the inheritance
to any heir or beneficiary.
(2) If there are two or more executors or
administrators, all of them are severally
liable for the payment of the tax.
(3) The estate tax clearance issued by the
Commissioner or the RDO having
jurisdiction over the estate, will serve as
the authority to distribute the remaining
properties/share in the inheritance to the
heir or beneficiary.
Subsidiarily, heirs or beneficiaries, for the
payment of that portion of the estate which his
distributive share bears to the value of the total
net estate.
The extent of his liability, however, shall in
no case exceed the value of his share in the
inheritance.
Claims for taxes, whether assessed before
or after the death of the deceased, can be
collected from the heirs even after the
distribution of the properties of the decedent,
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xxx. The heirs shall be liable therefor, in
proportion to their share in the inheritance.
Marcos v. CA (1997)
Note: When there is income tax deficiency of
the estate and the estate has been distributed
to the heirs, the remedies are:
Tax Rates:
If the Net Estate is
Over But not Over The Tax Shall be
P 200,000.00 Exempt
P 200,000.00 500,000.00 0 5%
500,000.00 2,000,000.00 P 15,000.00
2,000,000.00 5,000,000.00 135,000.00
5,000,000.00 10,000,000.00 465,000.00
10,000,000.00 1,215,000.00
Exempt: If net taxable estate ≤ 200,000
II. DONOR’S TAX
A. BASIC PRINCIPLES
The donor’s tax is imposed on donations inter
vivos or those made between living persons to
take effect during the lifetime of the donor. It
supplements the estate tax by preventing the
avoidance of the latter through the device of
donating the property during the lifetime of the
deceased.
It shall not apply unless and until there is a
completed gift. The transfer of property by gift
is perfected from the moment the donor knows
of the acceptance by the donee; it is completed
by delivery, either actually or constructively, of
the donated property, to the donee. Thus, the
law in force at the time of the
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TAXATION LAW 2
(1) Sue all the heirs and collect from each of
them the amount of tax proportionate to
the inheritance received
(2) By virtue of a lien created under Sec 219,
sue only one heir and subject the property
he received from the estate to the payment
of estate tax. Such heir may go against the
other heirs.
Plus Of the Excess Over
P 200,000.00
8% 500,000.00
11 % 2,000,000.00
15 % 5,000,000.00
20 % 10,000,000.00
perfection/completion of the donation shall
govern the imposition of the donor’s tax. (Sec.
11, RR 2-2003)
B. DEFINITION
A donor’s tax is levied, assessed, collected and
paid upon the transfer by any person, resident
or nonresident, of the property by gift. (Sec.
98(A), NIRC). It shall apply whether the
transfer is in trust or otherwise, whether the
gift is direct or indirect, and whether the
property is real or personal, tangible or
intangible. [Sec. 98(B), NIRC]
It is the tax on donations. Thus, it is a tax on (i)
an act of the donor disposing gratuitously of a
thing/right in favour of a done located within
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the Philippines, and on (ii) sales/exchanges of
properties, other than real property (defined in
Sec 24D) classified as capital asset within the
Philippines, for less than adequate and full
consideration in money or money’s worth.
C. NATURE
Donor’s tax is not a property tax but a tax
imposed on the transfer of property by way of
gift inter vivos. [Sec 11, RR 2-2003 citing Lladoc
v. CIR (1965)]
D. PURPOSE OR OBJECT
(1) To supplement estate tax;
(2) To prevent avoidance of income tax
through the device of splitting income
among numerous donees, who are usually
members of a family or into many trusts,
with the donor thereby escaping the effect
of the progressive rates of income tax.
Taxable transaction/object/event
: gratuitous transfer of property between two
or more persons who are living at the time of
the transfer, whether the transfer is in trust or
otherwise, whether the gift is direct or indirect
and whether the property is real or personal,
tangible or intangible
NB: If donor is RC/NRC/RA = liable for donor’s
tax REGARDLESS of where the gift was made
or where property is located
NRA = liable for donor’s tax only if the property
donated is w/in the Phil.
E. REQUISITES OF VALID DONATION
(Art 725, NCC)
Requisites of a VALID and COMPLETE donation
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TAXATION LAW 2
(1) Donative intent of the donor3
(2) Capacity of the donor
(3) Delivery of the donated property
(4) Acceptance of the donee
(5) Donation must be in the proper form
(a) Movable: orally or in writing if value is
equal to or less than P5,000.
Otherwise, it shall be in writing.
(b) Immovable: must be made in a public
document.
In order that the donation of an immovable
may be valid, it must be made in a public
document specifying therein the property
donated. The acceptance may be made in the
same Deed of Donation or in a separate public
document, but it shall not take effect unless it
is done during the lifetime of the donor. If the
acceptance is made in a separate instrument,
the donor shall be notified thereof in an
authentic form, and this step shall be noted in
both instruments. (Sec. 11, RR 2-2003)
A gift that is incomplete because of reserved
powers becomes complete when either:
(a) the donor renounces the power OR
(b) his right to exercise the reserved power
ceases because of the happening of
some event or contingency or the
fulfillment of some condition, other
than because of the donor’s death.
[Sec. 11, RR 2-2003]
F. TRANSFERS WHICH MAY BE
CONSTITUTED AS DONATION
(1) Sale, exchange or transfer of property for
insufficient consideration
(2) Condonation or remission of debt where
the debtor did not render service in favor of
the creditor
3Note: The transfers which may be constituted as
donation is exempt from the donative intent
requirement.
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Condonation or remission of debt is
defined as an act of liberality, by virtue of
which, without receiving any equivalent,
the creditor renounces the enforcement of
the obligation, which is extinguished in its
entirety or in that part or aspect of the
same to which the remission refers. It is an
essential characteristic of remission that it
be gratuitous, that there is no equivalent
received for the benefit given; once such
equivalent exists, the nature of the act
changes. It may become dation in payment
when the creditor receives a thing different
from that stipulated; or novation, when the
object or principal conditions of the
obligation should be changed; or
compromise, when the matter renounced
is in litigation or dispute and in exchange
of some concession which the creditor
receives. (Dizon v CTA, 2008)
(3) Renunciation in favor of other heirs (Sec 11,
RR 2-2003)
(a) Renunciation by the surviving spouse of
their share in the ACP/CPG after the
dissolution of the marriage in favor of
heirs of the deceased spouse or any
other person/s
(b) Renunciation by an heir, specifically
and categorically in favor of identified
heir/s to the exclusion or disadvantage
of the other co-heirs in the hereditary
estate
However, general renunciation by
an heir, including the surviving spouse,
of their share in the hereditary estate
left by the decedent is NOT subject to
DT
G. TRANSFER FOR LESS THAN
ADEQUATE AND FULL
CONSIDERATION
In order for the rule to apply, there must be 1) a
transfer of property, other than real property
classified as a capital asset and subject to
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TAXATION LAW 2
capital gains tax under Sec. 24 (D) and 2) the
transfer was for less than an adequate and full
consideration in money or money’s worth.
In this case, the amount by which the fair
market value of the property exceed the value
of the consideration shall be considered a gift.
H. CLASSIFICATION OF DONOR
Donor’s Tax applies to individuals and
corporations (in their secondary purpose). They
may be classified into:
(a) Residents (RC/RA/DC/RFC)
(b) Non-Residents (NRC/NRA/NRFC)
Such classification is important in determining
the deductions from the gross gift of the donor,
and in filing the return.
Situs of Intangible Personal Properties
General Rule: Mobilia Sequuntur Personam
Principle: Taxation of intangible personal
properties (such as credits, bills, bank deposits
promissory notes, and corporate stocks)
follows the residence/domicile of owner
thereof. Situs is the domicile or residence of
the owner. (Collector v Fisher)
Exceptions:
(1) When it is inconsistent with express
provisions of law
(2) When justice does not demand that it
should be, as where the property in fact
has a situs elsewhere
Intangible Properties which are considered
situated in the Philippines (Sec 104)
(1) Franchise which must be exercised in the
Philippines
(2) Shares, obligations or bonds issued by any
corporation or sociedad anonima organized
or constituted in the Philippines in
accordance with its laws
(3) Shares, obligations or bonds issued by any
foreign corporation 85% of the business of
which is located in the Philippines
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(4) Shares, obligations or bonds issued by any
foreign corporation if such shares,
obligations or bonds have acquired a
business situs in the Philippines
(5) Shares or rights in any partnership,
business or industry established in the
Philippines
Rule of Reciprocity
There is reciprocity if the foreign country of
which the decedent was a citizen and resident
at the time of his death:
(1) Did not impose a transfer tax of any
character, in respect of intangible personal
property of citizens of the Philippines not
residing in that foreign country; OR
(2) Allowed a similar exemption from transfer
tax in respect of intangible personal
property owned by citizens of the
Philippines not residing in that country
If there is reciprocity, the intangible personal
property of an NRA shall not be included in his
gross estate. If there is no reciprocity, such
intangible personal property will be included.

I. DETERMINATION OF GROSS GIFT (INCLUDING COMPOSITION OF GROSS GIFT)

Resident Nonresident
Composition and Determination of GROSS Estate
Gifts made by donor who is either a resident or Gifts made by donor who is non-resident alien at
citizen at the time of the donation: the time of the donation:
(a) Real property wherever situated (a) Real property located in the Phil.
(b) Tangible personal property wherever situated, (b) Tangible personal property located in the
and Phil., and
(c) Intangible personal property wherever (c) Intangible personal property with a situs in
situated the Phil. (subject to the rule of reciprocity)

Note: If there is reciprocity, intangible assets are

excluded from gross gifts
Deductions and Exemptions from GROSS gift to arrive at NET Gifts

163
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Resident
Deductions (These are exempt donations but are Deductions (These are exempt donations but are
deductible from, and not treated as exclusions deductible from, and not treated as exclusions
from the gross gift) from the gross gift)
(1) Dowries or donations made:
(a) On account of marriage
(b) Before its celebration or within one year
thereafter
(c) By parents to each of their legitimate,
recognized natural, or adopted children
(d) To the extent of the first P10,000
(2) Gifts made to or for the use of the National
Government or any entity created by any of its
agencies which is not conducted for profit, or
to any political subdivision of the said
Government.
(3) Gifts in favor of an educational and/or
charitable, religious, cultural or social welfare
corporation, institution, accredited
nongovernment organization, trust or
philanthropic organization or research
institution or organization, Provided not more
than 30% of said gifts will be used by such
donee for administration purposes.
Common Exemptions
(1) Encumbrances on the property donated if
assumed by the donee in the deed of
donation.
(2) Donations made to entities exempted under
special laws
Note:
NOT SUBJECT TO DONOR’S TAX
(1) Contributions to candidate or political
party for campaign purposes duly reported
to COMELEC
(2) Gift to Parish Priest or Church (applies only
to real property tax)
(3) Onerous Donations or Donations in
exchange for goods/services (since they
are subject to income tax)
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TAXATION LAW 2
Nonresident
(1) Gifts made to or for the use of the National
Government or any entity created by any of its
agencies which is not conducted for profit, or
to any political subdivision of the said
Government.
(2) Gifts in favor of an educational and/or
charitable, religious, cultural or social welfare
corporation, institution, accredited
nongovernment organization, trust or
philanthropic organization or research
institution or organization, provided not more
than 30% of said gifts will be used by such
donee for administration purposes.
Common Exemptions
(1) Encumbrances on the property donated if
assumed by the donee in the deed of
donation.
(2) 2. Donations made to entities exempted under
special laws.
SUBJECT TO DONOR’S TAX
Gratuitous Donations to Homeowners’
Association
J. VALUATION OF GIFTS MADE IN
PROPERTY
Taxable Base:
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Net gifts i.e. net economic benefit from the
transfer that accrues to the done AT THE TIME
OF DONATION
(1) If gift is personal property = FMV at the
time of donation
(2) If gift is real property = whichever is
HIGHER
(a) FMV as determined by the
Commissioner of Internal Revenue
(Zonal Value) or
(b) FMV in the latest schedule of values
fixed by the provincial and city assessor
(MV per Tax Declaration)
NOTE: Real property
considered as capital assets under the
Tax Code are excepted from this rule
because the taxable value taken into
account in the computation of tax is
the higher of either the zonal value or
the assessor’s value; not the
consideration. Therefore, the
insufficiency and inadequacy of the
consideration paid would not affect the
computation of the tax due and
payable [Sec. 100 in relation to Sec.
24(d), NIRC]
Under Section 24(d), the fair
market value itself, if higher than the
gross selling price, is the basis for
computing the capital gains tax
imposed upon the sale of such capital
assets.
Thus, what the seller avoids in
the payment of the donor’s tax, it pays
for in the capital gains tax.
(3) If there is an improvement = construction
cost (based on the building permit and/or
occupancy permit ) + 10% per year after the
year of construction; or the FMV based on
the latest tax declaration.
(4) If unlisted stocks = Adjusted Net Asset
Method shall be used whereby all assets
and liabilities are adjusted to fair market
values. The net of adjusted asset minus the
adjusted liability value is the indicated
value of the equity.
Note:
Where property is transferred for less than an
adequate and full consideration in money or
money’s worth, then the amount by which the
FMV of the property at the time of the
execution of the Contract to Sell or execution
of the Deed of Sale which is not preceded by a
Contract to Sell exceeded the value of the
agreed or actual consideration or selling price
shall be deemed a gift, and shall be included in
computing the amount of gifts made during
the calendar year. [Sec. 11, RR 2-2003]
However, where the consideration is fictitious,
the entire value of the property shall be subject
to donor’s tax.

K. TAX CREDIT FOR DONOR’S TAXES PAID IN A FOREIGN COUNTRY

Who may claim the tax credit

(1) Resident citizen
(2) Non-resident citizen
(3) Resident alien

1. Per Country Limit

𝐷𝑒𝑐𝑒𝑑𝑒𝑛𝑡 𝑠 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 (𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦)

𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐷𝑜𝑛𝑜𝑟′𝑠 𝑇𝑎𝑥
𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐺𝑖𝑓𝑡

165
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2. Worldwide Limit

𝐷𝑒𝑐𝑒𝑑𝑒𝑛𝑡 𝑠 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 (𝐴𝑙𝑙 𝐶𝑜𝑢𝑛𝑡𝑟𝑖𝑒𝑠)

𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐷𝑜𝑛𝑜𝑟′𝑠 𝑇𝑎𝑥
𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐺𝑖𝑓𝑡

L. EXEMPTIONS OF GIFTS FROM personal, tangible or intangible. (Sec. 98,

DONOR’S TAX NIRC)
(See table above)
DONOR’S TAX RETURN
(1) Encumbrances on the property donated if
When Required (Copies in duplicate):
assumed by the donee in the deed of
When there is a transfer by gift.
donation.
(2) Donations made to entities exempted
NOTE: Separate return is filed for each gift
under special laws.
made on different dates during the year
(a) Aquaculture Department of the
reflecting therein any previous net gifts made
Southeast Asian Fisheries
in the same calendar year. In case of donation
Development Center of the Philippines
to relatives, only one return shall be filed for
(b) Development Academy of the
several gifts by the donor to the different
Philippines
donees on the same date. If the gift involves
(c) Integrated Bar of the Philippines
CPG, each spouse shall file separate return wrt
(d) International Rice Research Institute
his/her respective share in the CPG.
(e) National Museum
(f) National Library
Contents
(g) National Social Action Council
(1) Each gift made during the calendar year
(h) Ramon Magsaysay Foundation
which is to be included in computing net
(i) Philippine Inventor’s Commission
gifts;
(j) Philippine American Cultural
(2) The deductions claimed and allowable;
Foundation
(3) Any previous net gifts made during the
(k) Task Force on Human Settlement on
same calendar year;
the donation of equipment, materials
(4) The name of the donee;
and services
(5) Relationship of the donor to the donee;
(6) Such further information as the
M. PERSON LIABLE Commissioner may require.
(see Classification of Donor)
Period for Filing
General Rule: The return must be filed within
Every person, whether natural or juridical,
30 days after the date when the gift was made
resident or non-resident, who transfers or
or completed. The tax due thereon shall be
causes to transfer property by gift, whether in
paid at the same time that the return is filed.
trust or otherwise, whether the gift is direct or
indirect and whether the property is real or

166
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Who will file: Any person who made a gift, such
must be filed under oath.
Where to file the donor’s tax return and pay the
tax due (Sec. 9, RR 2-2003)
Resident
Unless the Commissioner permits otherwise,
the return shall be filed and tax paid to:
(1) To Authorized Agent Bank (AAB) or the
Revenue District Officer having jurisdiction
over the place of the domicile of the donor
at the time of the transfer.
(2) If no AAB = to the Revenue Collection
Officer or duly Authorized City or Municipal
Treasurer where the donor was domiciled
at the time of the transfer,
(3) if no legal residence in Phil or NRA = with
Revenue District No. 39 - South Quezon
City or with the Philippine Embassy or
Consulate in the country where donor is
domiciled at the time of the transfer.
Non-residents
(1) The Philippine Embassy or Consulate in
the country where he is domiciled at the
time of the transfer, or
(2) Directly with the Office of the
Commissioner.
Payment: Pay as you file.
Who are liable for the payment of donor’s tax
Every person, whether natural or juridical,
resident or non-resident, who transfers or
causes to transfer property by gift, whether in
trust or otherwise, whether the gift is direct or
indirect and whether the property is real or
personal, tangible or intangible. (Sec. 98,
NIRC)
N. TAX BASIS
The tax for each calendar year shall be
computed on the basis of the total net gifts
made during the calendar. (Sec. 99, NIRC)
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TAXATION LAW 2
“Net Gifts”
(a) The net economic benefit from the transfer
that accrues to the donee.
(b) Accordingly, if a mortgaged property is
transferred as a gift, but imposing upon
the donee the obligation to pay the
mortgage liability, then the net gift is
measured by deducting from the fair
market value of the property the amount of
the mortgage assumed. (Sec. 11, RR 2-
2003)
General Formula
Gross Gifts
Less: Deductions from gross gifts
-----------------------------------------------------
Net gifts
Multiply by: Tax rate
-----------------------------------------------------
= Estate Tax Due
Less: Tax Credit, if any
-----------------------------------------------------
= Donor’s Tax Due, if any
If there are several gifts during the year
Gross Gifts made on a certain date
Less: Deductions from gross gifts
-----------------------------------------------------
Net gifts made on a certain date
Add: Prior Net gifts during the year
-----------------------------------------------------
=Aggregate Net Gifts
Multiply by: Tax rate
-----------------------------------------------------
= Donor’s Tax on Aggregate Net Gifts
Less: Donor’s Tax Paid on Prior Net Gifts
-----------------------------------------------------
Donor’s Tax Due on the Net Gifts to Date
Less: Tax Credit, if any
-----------------------------------------------------
= Donor’s Tax Due, if any
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Tax Rate
(1) IF NOT A STRANGER

Of the Excess
Net Gift Over But not Over The Tax Shall be Plus
Over
100,000.00 Exempt
100,000.00 200,000.00 0 2% 100,000.00
200,000.00 500,000.00 P 2,000.00 4% 200,000.00
500,000.00 1,000,000.00 14,000.00 6% 500,000.00
1,000,000.00 3,000,000.00 44,000.00 8% 1,000,000.00
3,000,000.00 5,000,000.00 204,000.00 10% 3,000,000.00
5,000,000.00 10,000,000.00 404,000.00 12% 5,000,000.00
10,000,000.00 and over 1,004,000.00 15% 10,000,000.00

(2) IF A STRANGER: 30%

(1) Rate applicable shall be based on the law prevailing at the time of donation.
(2) When the gifts are made during the same calendar year but on different dates, the donor's tax
shall be computed based on the total net gifts during the year.
Donation made to a stranger is subject to 30% of the net gift. A stranger is a person who is not a:
Brother, sister (whether by whole or half blood), spouse, ancestor and lineal descendants; or
Relative by consanguinity in the collateral line within the fourth degree of relationship.

Exempt: If gift/donation ≤ 100,000

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SUMMARY OF TRANSFER TAXES

TRANSFER TAXES
Estate Tax Donor’s Tax
Time for filing a return and payment of tax
FILED: within six (6) months from the decedent's death. NOTE: separate return is filed for each gift made on
E: not exceeding 30 days (in meritorious cases) different dates during the year reflecting therein any
previous net gifts made in the same calendar year.
NB: Written notice of death to CIR w/in 2 mos. After
death FILED: within thirty (30) days after the gift (donation) is
made
PAID: before the delivery of the distributive share in the
inheritance to any heir or beneficiary; upon filing of In case of donation to relatives, only one return shall be
return. filed for several gifts by the donor to the different donees
E: extension (when payment on the due date would on the same date.
impose undue hardship) not to exceed
1. 5 years, in case the estate is settled through the courts; If the gift involves CPG, each spouse shall file separate
or return wrt his/her respective share in the CPG.
2. 2 years in case the estate is settled extra-judicially.

NB: when extension is granted, a bond may be required

by CIR ≤ 2x amount of tax
Where to file and to whom paid
General Rule: to the Authorized Agent Bank (AAB),
Revenue Collection Officer (RCO) or duly authorized
Treasurer of the city or municipality in the Revenue
District Office having jurisdiction over the place of
domicile of the decedent at the time of his death
Exception: If NRA/NRC,
If w/ Aor, Eor in Phil = to the AAB of the RDO where such
Aor,Eor is registered/domiciled, if not yet registered with
the BIR.
If w/o Aor,Eor in Phil = to AAB under the jurisdiction of
RDO No. 39
Resident
GR: to AAB of the RDO having jurisdiction over the place of
the domicile of the donor at the time of the transfer.
Exception:
(1) If no AAB = to the RCO or duly Authorized City or
Municipal Treasurer where the donor was domiciled at
the time of the transfer,
(2) If no legal residence in Phil or NRA = with Revenue
District No. 39 - South Quezon City or with the
Philippine Embassy or Consulate in the country where
donor is domiciled at the time of the transfer.

Non-resident
(1) The Philippine Embassy or Consulate in the country
where he is domiciled at the time of the transfer, or
(2) Directly with the Office of the Commissioner.

Who should file

(1) The Eor/Aor or any of the legal heirs of the decedent, Any person, natural or juridical, resident or non-resident,
whether resident or non-resident of the Philippines, who transfers or causes to transfer property by gift,
under any of the following situations: whether in trust or otherwise, whether the gift is direct or
(a) In all cases of transfers subject to estate tax; indirect and whether the property is real or personal,
(b) Where though exempt from estate tax, the gross tangible or intangible.
value of the estate exceeds two hundred
thousand (P200,000) pesos; or
(c) Regardless of the gross value of the estate, where
the said estate consists of registered or

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registrable property such as real property, motor

vehicle, shares of stock or other similar property
for which a clearance from the BIR is required as a
condition precedent for the transfer of ownership
therof in the name of the transferee; or
(2) If there is no executor or administrator appointed,
qualified, and acting within the Philippines, then any
person in actual or constructive possession of any
property of the decedent.

NB: Eor/Aor has the primary obligation to pay the estate

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

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ESTATE TAX FORMULAE

EXCLUSIVE COMMUNITY TOTAL
Gross Estate4
Add:
Taxable Transfers & Others
Revocable Transfers/Donation Mortis Causa
Transfers in contemplation of death
Property passing under GPoA
Transfers for insufficient consideration5
Decedent’s Interest Accrued6
Proceeds of Life Insurance w/ Value Taken of Property
revocable beneficiary7 Less: Mortgage debt paid, if any
Family Home
Claims against an Insolvent Person8 Initial Basis
Amount received by heirs Less: Proportionate Deduction

Less: (Ordinary Deductions) Final Basis

7 ELIT9 Multiplied by Deduction Rate
Vanishing Deductions
Transfers for Public Use VANISHING DEDUCTION
Retirement Benefits received by heirs
**Proportionate Deduction
𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝑩𝒂𝒔𝒊𝒔
Net Estate = 𝒙 (𝑬𝑳𝑰𝑻 + 𝑻𝑷𝑼)
𝑽𝒂𝒍𝒖𝒆 𝒐𝒇 𝑮𝑬 𝒐𝒇 𝒑𝒓𝒆𝒔𝒆𝒏𝒕 𝒅𝒆𝒄𝒆𝒅𝒆𝒏𝒕
Less: (Special Deductions10)
Standard Deduction
Family Home
Medical Expenses
If only 1 country is involved: (whichever is lower)
Amounts received by heirs

Net Taxable Estate (before share of surviving spouse) Estate Tax Credit = 𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥
Less: Share of Surviving Spouse
OR actual estate tax paid to foreign country
Net Taxable Estate
Multiply by Tax Rate If two or more countries are involved: (whichever is lower)

Estate Tax Due Estate Tax Credit = 𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥

Less: Tax Credit11, if any

ESTATE TAX DUE OR 𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥

OR actual estate tax paid to foreign country

4
DO NOT INCLUDE: EXEMPTIONs
5 Amount included in the GE = FMV at the time of death – consideration amount
6
Accrued before his death but only received after his death, e.g. dividends declared on/before, and received after death; partnership’s profit
earned on/before and received after, accrued interest and rents on/before and collected after death
7 Beneficiary must be the estate of the decedent, Eor/Aor or a third person. If premiums are paid using conjugal funds, part of conjugal
funds.
8 Full amount of the receivable. However, the uncollectible amount may be deducted from GE under ELIT.
9 If NRA, Allowable Deduction wrt ELIT = 𝑥 𝐸𝐿𝐼𝑇
10
These are not allowable deductions when TP is NRA.
11
Applies only to RC/NRC/RA

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DONOR’S TAX

ON FIRST DONATION

Gross Gift xxx

Less: Deductions (those not beneficial
to the done e.g. mortgage) xxx

Net Gift xxx

Less: Exemptions, if applicable xxx

Net Taxable Gift xxx

Multiply by Tax Rate xx%

Donor’s Tax Due xxx

Less: Tax Credit12, if any xxx If only 1 country is involved: (whichever is lower)
DONOR’S TAX DUE xxx
Tax Credit = 𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐷𝑜𝑛𝑜𝑟 𝑠 𝑇𝑎𝑥
/ /
ON SUBSEQUENT DONATIONS w/in the same calendar year
If two or more countries are involved: (whichever is lower)
Gross Gift xxx
Less: Deductions (those not beneficial Tax Credit =
to the done e.g. mortgage) xxx
𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐷𝑜𝑛𝑜𝑟′𝑠 𝑇𝑎𝑥
/ /
Net Gift xxx
Less: Exemptions, if applicable xxx OR
/
𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐷𝑜𝑛𝑜𝑟 𝑠 𝑇𝑎𝑥
/ /
Net Taxable Gift xxx
Add: All previous net gifts during the year xxx
Aggregate Net Gifts xxx OR actual donor’s tax paid to foreign country
Multiply by Tax Rate xx%

Donor’s Tax on Aggregate Net Gifts xxx

Less: Donor’s tax on previous net gifts during the year xxx

Donor’s Tax Due xxx

Less: Tax Credit13, if any xxx
DONOR’S TAX DUE xxx

12
Applies only to RC/NRC/RA
13
Applies only to RC/NRC/RA

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ESTATE TAX

DEATH GR: w/in 6m after death

E: extension of 30d ESTATE TAX
CANCEL TIN
RETURN +
PAYMENT
(NB: Date of
Transfer
payment may
Prepare the LIST of assets properties to
be extended,
NOTICE OF DEATH to RDO Get TIN for ESTATE and liabilities and their 5yrs or 2yrs), if the heirs
by Eor/Aor supporting documents estate exceeds
200,000php

DONOR’S TAX

Full Exemption NO TAX RETURN

NECESSARY
COMPLETION/ Exempt
PERFECTION OF
DONATION Partial Exemption
w/in 30d after
gift was made DONOR’S TAX No Notice of
RETURN + PAYMENT Donation
(NB: Date of payment Necessary
may be extended ≤ 6
Liable months)

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III. Value-Added Tax
(VAT)
A. CONCEPT
VAT is a consumption tax imposed at every
stage of distribution process on (i) the sale,
barter, exchange, or lease of goods or
properties and (ii) rendition of services in the
course of trade or business, or the (iii)
importation of goods, whether such imported
goods are for use in business or non-business
purposes. (Sec. 4.105-2, RR 16-2005)
The taxpayer (seller) determines his tax liability
by computing the tax on the gross selling price
or gross receipt (output tax), and subtracting or
crediting the earlier VAT on the purchase or
importation of goods or on the purchase of
service (input tax) against the tax due on his
own sale
B. CONSTITUTIONALITY OF VAT
ABAKADA Guro Party List, et. al. v Ermita
(2005):
(a) The validity of raising the VAT rate from
10% to 12% by the President was upheld by
SC.
(b) With respect to Sec. 8, amending Sec. 110
(A), which provides for 60-month
amortization of the input tax on capital
goods purchased: It is not oppressive,
arbitrary, and confiscatory. The taxpayer is
not permanently deprived of his privilege
to credit the input tax. For whatever is the
purpose, it involves executive economic
policy and legislative wisdom in which the
Court cannot intervene.
(c) The tax law is uniform: it provides a
standard rate of 0% or 10% (or 12% now)
on all goods or services. The law does not
make any distinction as to the type of
industry or trade that will bear the 70%
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TAXATION LAW 2
limitation on the creditable input tax, 5-
year amortization of input tax on purchase
of capital goods, or the 5% final
withholding tax by the government.
(d) It is equitable: The law is equipped with a
threshold margin (P1.5M). Also, basic
marine and agricultural products in their
original state are still not subject to tax.
Congress also provided for mitigating
measures to cushion the impact of the
imposition of the tax on those previously
exempt. Excise taxes on petroleum
products and natural gas were reduced.
Percentage tax on domestic carriers was
removed. Power producers are now
exempt from paying franchise tax.
(e) VAT, by its very nature, is regressive. BUT
the Constitution does not really prohibit the
imposition of indirect taxes (which is
essentially regressive).
(f) What it simply provides is that Congress
shall “evolve a progressive system of
taxation”.
(g) In Tolentino v. Sec. of Finance (1995), the
Court said that direct taxes are to be
preferred, and as much as possible,
indirect taxes should be minimized… but
not avoided entirely because it is difficult, if
not impossible, to avoid them.
Tolentino v. Secretary of Finance (1995):
(a) Regressivity is not a negative standard
for courts to enforce.
What Congress is required by the
Constitution to do is to “evolve a
progressive system of taxation.”
This provision is placed in the
Consti as moral incentives to
legislation, not as judicially
enforceable rights.
(b) The regressive effects are corrected by
the zero rating of certain transactions
and through the exemptions
C. CHARACTERISTICS/ELEMENTS OF
A VAT-TAXABLE TRANSACTION
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the regulations of the Bangko Sentral ng

General Characteristics/Nature:
(1) Privilege/Percentage Tax – imposed by
law directly not on the thing or service but
on the ACT (sale, barter, exchange, lease,
importation, or perfrormance of service)
(2) Ad Valorem Tax –the amount is based on
the gross selling price or gross value in
money of the goods or service, including
the use or lease or properties.
(3) Indirect Tax – it may be shifted or passed
on to the buyers, transferee, or lessee of
the goods, properties or services as part of
the purchase price.
(4) Excise Tax - a tax on the privilege of
engaging in the business of selling goods
or services, or in the importation of goods
but unlike excise, it is not applied only to a
few selected goods
General Features:
(1) VAT uses the Tax Credit Method
(2) All goods, properties and services (except
exempt) including goods subject to excise
taxes, and use or lease of properties,
whether real or presonal, are subject to tax
at all levels of distribution.
(3) Although tax is levied at all stages, the
total value of the goods is subject to tax
only once.
(4) VAT, as a general rule, follow the
destination principle (goods and services
are taxed only in the country where they
are consumed). Therefore, no VAT shall be
imposed to form part of the cost of goods
destined for consumption outside the
territorial border of the taxing authority.
Pilipinas
Transactions Covered and their elements
(summary):
General Requirements
(1) Done in the course of trade or business
(ICT/B) w/n profit-oriented: rule of
regularity + incidental thereto (inc isolated)
Exception:
(a) NRC/NRA who perform services in Phil,
even if no regularity
(b) Importation of Goods may be for
business or non-business use
(2) Gross sales or receipts for the past 12
months or the next 12 months >
1,919,500php
(3) OR there are reasonable grounds to
believe that gross sales or receipts for the
past 12 months or the next 12 months will
exceed 1,919,500php.
Taxable Transactions and Specific Requirements
(1) Sale, Barter, Exchange or Lease (SBEL) of
Goods or Properties14
Goods/Personal Properties
(i) Actual/deemed sale for a valuable
consideration
(ii) for use or consumption in the Phil
(regardless of the payment
arrangements)
(iii) not exempt from VAT (NIRC, special
law, special agreement)

EXCEPTIONS:
(a) The service is performed in the Philippines;
(b) The service falls under any of the
categories provided in Section 102(b) of the
Tax Code; and
(c) It is paid for in acceptable foreign currency
that is accounted for in accordance with
14 Sec 106

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D. IMPACT OF TAX V. INCIDENT OF

Real Properties (RP) 15:
TAX
(i) Seller (w/n natural) executes contract
to SBE of RP
Impact Incidence
(ii) RP is in the Phil The impact of The incidence of tax is
(iii) Seller is engaged in sale or exchange taxation is on the on the one who bears
of RP or real estate (dealer, developer, statutory taxpayer, the burden of taxation
lessor) the one from whom
(iv) RP is held primarily for sale/lease the government
ICT/B or an ordinary asset used in T/B collects.
as an incident to his vatable activity Seller/Importer – Buyer/Final
Seller/Importer is the Consumer – the
(NOT a capital asset) one who collects the buyers is the one who
(v) Not exempt from VAT (NIRC, special tax and pays to the bears the burden of
law, special agreement) government the taxation.

Sale of Services16 E. TAX CREDIT METHOD

(i) for a valuable consideration
(actually/constructively received) A VAT-registered person is entitled to credit
(ii) performed ICTB in the Phil. input taxes evidenced by VAT invoice or official
(iii) not exempt from VAT (NIRC, special receipt against the output tax payable. The tax
law, special agreement) credit method refers to the manner by which
(iv) person rendering service is VAT-liable the value added tax of a taxpayer is computed.
(v) no ee-er relationship The input taxes shifted by the sellers to the
buyer are credited against the buyer’s output
(1) Importation of Goods taxes when he sells the taxable goods,
properties or services.
The transfer must be made in the Philippines.
If the title to the goods were transferred Under this method, the tax is computed by
outside the Philippines, then the same is not determining the difference between the output
subject to VAT. tax on his sales and the input tax on the
purchases of goods, services, capital goods,
15 supplies, and materials.
Casual Sale Subject to CGT (6%)
(Capital Assets) Input tax – the VAT due on or paid by a VAT-
Regular Sales
(Ordinary registered person on importation of goods or
Assets) local purchases of goods, properties, or
Commercial Subject to 12% VAT
Property services, including lease or use of properties, in
(Sale/Lease) the course of his trade or business.
Residential If monthly rental ≤ 12,800 = VAT and OPT-
Units exempt
(Lease) If monthly rental > 12,800 but aggregate
annual rentals ≤1,919,500 = subject to OPT
Output tax – the VAT due on the sale or lease
If monthly rental > 12,800 and aggregate of taxable goods or properties or services by
annual rentals > 1,919,500 = subject to VAT
Residential If SP > 1,919,500.00 = subject to VAT any person registered or required to register
Lot IF SP ≤ 1,919,500.00 = VAT-exempt under Section 236 of the Code.
Residential If SP > 3,199,200.00 = subject to VAT If at the end of any taxable month or
House and IF SP ≤ 3,199,200.00 = VAT-exempt
Lot quarter:
16
Sec 108

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(a) The output tax exceeds the input tax, the
excess shall be paid by the VAT-registered
person
(b) The input tax exceeds the output tax, the
excess shall be carried over to the
succeeding quarter or quarters
F. DESTINATION PRINCIPLE
This provides that the destination of goods
determines the taxation or exemption from
VAT.
CIR v. American Express International (2005):
As a general rule, goods and services are taxed
only in the country where they are consumed.
(Deoferio Jr. and Mamalateo. The Value Added
Tax in the Philippines, p. 43)
Corollarily, the Cross Border Doctrine
mandates that no VAT shall be imposed to
form part of the cost of the goods destined for
consumption outside the territorial border of
the taxing authority.
Atlas Consolidated Mining & Dev. Corp. v. CIR
(2007): Hence, actual export of goods and
services from the Philippines to a foreign
country must be free of VAT, while those
destined for use or consumption within the
Philippines shall be imposed with 12% VAT.
[Deoferio Jr. and Mamalateo, p. 422]
CIR v. American Express (2005):
The court enumerated the exceptions to the
destination principle.
As a general rule, the value-added tax (VAT)
system uses the destination principle.
However, our VAT law itself provides for a
clear exception, under which the supply of
service shall be zero-rated when the following
requirements are met:
(1) The service is performed in the
Philippines;
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TAXATION LAW 2
(2) the service falls under any of the
categories provided in Section 102(b) of
the Tax Code; and
(3) it is paid for in acceptable foreign
currency that is accounted for in
accordance with the regulations of the
BSP.
G. PERSONS LIABLE
Transactions subject to VAT:
(1) Sale, Barter or Exchage of Goods or
Properties
(2) Sale of Services, including Lease or use of
Properties
(3) Importation of Goods.
Persons Liable:
Any persons who sells, barters, exchanges, or
leases goods or properties, or who renders
services, in the course of trade or buesiness,
and any person who imports goods, whether or
not in the course of business, is liable to pay
either VAT or 3% percentage tax.
The term “person” refers to any individual,
trust, estate, partnership, corporation, joint
venture, cooperative or association (Sec. 4.105-
1, RR 16-2005).
The following are liable to pay VAT:
(1) Any person who sell, barters, exchange or
leases goods or properties
If real property: persons engaged in
real estate business:
(i) Any person who SBE of real
properties ICT/B
(ii) Real estate lessors/ sub-lessors
(iii) NRA/NRC lessors when RP is in
Phil
(iv) non-stock, non-profit corp
engaged in SBE of real properties
ICT/B, regardless of disposition of
income
(v) Gov’t inc GOCCs in SBEL of RP
ICT/B
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(1) Who renders services
(2) Who imports goods
If importer is tax-exempt/VAT-exempt
AND goods are subsequently SBE to non-
exempt persons, purchasers/recipients will
be deemed the importer
If the Philippine branch of an NRFC
“imported”, first local buyer will be
deemed the importer
Additional Requirements to be subject to VAT:
(1) As regards person who sells, barters or
exchanges goods or properties, or sale of
services, is required to register for VAT
when: (i)such act is done in the course of
trade or business, and (ii) if his gross sales
or receipts for the past 12 months or the
next 12 months exceed P1,919,500;
(2) As regards person who imports, it is not
necessary that such importation is made in
the course of trade or business.
(3) Any person who elects to register for VAT
(cf Optional VAT Registration)
Persons NOT LIABLE to pay VAT:
(1) Any person whose gross sales or receipts
are less than P,1919,500 AND is not VAT
registered. (subject to OPT)
(2) Is exempt under Section 109;
(3) Marginal income earners are not subject to
business taxes because they are not
considered as engaged in trade or business.
A marginal income earner is an individual
deriving gross sales or receipts of not
exceeding P100,000 during any 12-month
period (Rev. Reg. 11-2000)
General Rule: VAT and Percentage Tax cannot
be charged together. It’s either the transaction
is under VAT or Other Percentage Tax.
Exception: When one erroneously declares
himself to VAT registered.
G. VAT ON SALE OF GOODS OR
PROPERTIES
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TAXATION LAW 2
Rate: 12% VAT beginning 1 February 2006
[RMC No. 7-06]
Transactions: Every sale, barter or exchange, or
transactions “deemed sale” of taxable goods or
properties (RR 16-2005)
Basis: Gross selling price or gross value in
money of the goods or properties sold,
bartered or exchanged.
Who Pays: Paid by SELLER/TRANSFEROR.
(Sec. 106, NIRC)
Goods or properties – all tangible and
intangible objects which are capable of
pecuniary estimation, including:
(1) Real properties held primarily for sale to
customers or held for lease in the ordinary
course of trade or business;
(2) The right or the privilege to use patent,
copyright, design, or model, plan, secret
formula or process, goodwill, trademark,
trade brand or other like property or right;
(3) The right or the privilege to use in the
Philippines of any industrial, commercial or
scientific equipment;
(4) The right or the privilege to use motion
picture films, films tapes and discs;
(5) Radio, television, satellite transmission
and cable television time.
Requirements
(1) Done in the course of trade or business
(w/n profit-oriented): rule of regularity +
incidental thereto (including isolated
transactions)
(2) Gross sales or receipts for the past 12
months or the next 12 months >
1,919,500php
OR there are reasonable grounds to
believe that gross sales or receipts for the
past 12 months or the next 12 months will
exceed 1,919,500php.
(3) Additional Requirements depending on the
nature of property:
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Goods/Personal Properties or not it sells exclusively to members or their

(i) Actual/deemed sale for a valuable
consideration
(ii) for use or consumption in the Phil
(regardless of the payment arrangements)
(iii) not exempt from VAT (NIRC, special law,
special agreement)
Real Properties (RP) 17:
(i) Seller (w/n natural) executes contract to
SBE of RP
(ii) RP is in the Phil
(iii) Seller is engaged in sale or exchange of RP
or real estate (dealer, developer, lessor)
(iv) RP is held primarily for sale/lease ICT/B or
an ordinary asset used in T/B as an
incident to his vatable activity (NOT a
capital asset)
(v) not exempt from VAT (NIRC, special law,
special agreement)
“In the course of trade or business”
Rule of Regularity: 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 nonstock,
nonprofit private organization (irrespective of
the disposition of its net income and whether
17
Casual Sale Subject to CGT (6%)
(Capital Assets)
Regular Sales
(Ordinary
Assets)
Commercial Subject to 12% VAT
Property
(Sale/Lease)
Residential If monthly rental ≤ 12,800 = VAT and OPT-
Units exempt
(Lease) If monthly rental > 12,800 but aggregate
annual rentals ≤1,919,500 = subject to OPT
If monthly rental > 12,800 and aggregate
annual rentals > 1,919,500 = subject to VAT
Residential If SP > 1,919,500.00 = subject to VAT
Lot IF SP ≤ 1,919,500.00 = VAT-exempt
Residential If SP > 3,199,200.00 = subject to VAT
guests), or government entity.
Exception:
(1) Non-resident persons who perform
services in the Philippines are deemed to
be making sales in the course of trade or
business, even if the performance of
services is not regular. (Sec. 105, NIRC; RR
16-2005)
(2) Importation of Goods, may be for business
or non-business use.
CIR v CA (2002): “In the course of trade or
business” requires the regular conduct or
pursuit of a commercial or economic activity,
regardless of WON it is profit-oriented.
Gross (Sales) Selling Price (GSP): total amount
of money or its equivalent which the purchaser
pays or is obligated to pay to the seller in
consideration of the sale, barter or exchange of
the goods or properties, excluding the VAT.
The excise tax, if any, on such goods or
properties shall form part of the gross selling
price.
General Rule: GSP is the total amount of
money paid in consideration of SBEL
Excludes: VAT, sales discounts 18 and,
allowances and returns
Includes: Excise tax paid, initial payments19,
interests and penalties (if instalment),
commission income (if exported), purchase
price, charges for packing, delivery and
insurance
If goods/personal properties,
GSP = amount paid in consideration
IF DEEMED SALE: FMV at the time of
the transaction
18 It should be determined at the time of the sale, indicated in
the invoice and granting does not depend on the happening of a
future event
19 Initial payments does not include the amount of mortgage on

House and IF SP ≤ 3,199,200.00 = VAT-exempt RP sold (except excess when mortgage exceeds the cost of the
Lot property), notes and other evidence on=f indebtedness issued by
the purchaser at the time of the sale

179
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW 2

NB: in retirement/cessation, inventory consideration, the additional VAT shall

(raw materials, finished goods, be paid accordingly (RMC 03-96)
machinery, equipment, furniture, IF DEFERRED21
fixture), tax base = whichever is lower, GSP = entire selling price or
i. acquisition cost zonal/FMV, whichever is higher
ii. current market price of goods Thus, subsequent receipt of unpaid
If real property, balance is NOT subject to VAT
GSP = amount higher:
i. consideration stated in the sales Note: CIR has the power to determine
document the appropriate tax base in 1) SBE in
ii. FMV, whichever is higher of: deemed sales and 2) when GSP is
i. Zonal value: FMV as determined unreasonably lower than AMV22
by CIR
AS REGARDS SALE OF REAL PROPERTY
ii. Real Property Tax Value: FMV as
Taxable:
determined by provincial & city
(1) On installment plan
assessors
(2) Pre-selling by real estate dealers
IF ON INSTALLMENT (RR16-2005)20:
(3) Sale of residential lot >P1,919,500 ; or
GSP = down payments received +
house and lot/other residential dwelling
interests + penalties + other charges –
>P3,199,200
amount of mortgage (paid)
(4) Lease of residential units (rental per unit >
Note:
12,800/mont
If zonal/FMV, tax base = h OR total
rental from
U
ALL
p 𝐴𝑐𝑡𝑢𝑎𝑙 𝐶𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑡𝑖𝑜𝑛 (𝑒𝑥𝑐𝑙𝑢𝑠𝑖𝑣𝑒 𝑉𝐴𝑇) 𝑥 𝑧𝑜𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑟 𝐹𝑀𝑉, ℎ𝑖𝑔ℎ𝑒𝑟
units>P1,919,
o 𝐴𝑔𝑟𝑒𝑒𝑑 𝐶𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑡𝑖𝑜𝑛 (𝑒𝑥𝑐𝑙𝑢𝑠𝑖𝑣𝑒 𝑉𝐴𝑇)
500/year)
n

full collection, if a difference is

uncovered because the zonal value or
market value at the date of sale is
higher than the total receipts or
collections based on the agreed
20
Considered instalment when the initial payment is less than
or equal to 25% of GSP. Taxable only on the payment actually or
constructively received.
Initial payments – payment/payments which the seller receives
before or upon execution of the instrument of sale and payments
which he expects or is scheduled to receive in cash or property
during the year when the sale or disposition of the real property
was made.
constructively received during the year of sale.
property sold (except as to the excess when such mortgage
exceeds the cost or other basis of the property to the seller) and
notes or other evidence of indebtedness issued by the purchaser
to the seller at the time of the sale.
Not taxable: (Sec. 109 (P)(Q)(V))
(1) Not primarily held for sale or lease in the
course of trade or business OR those held
for sale or lease in the course of trade or
business BUT does not exceed P 1,919,000.
(2) Low cost or socialized housing
(3) Residential lot when value does not exceed
P1,919,500
(4) House and lot/other residential dwelling <
P3,199,200
21
Considered deferred payment when the initial payment is
more than 25% of GSP. Treated as cash sale and the entire
selling price is taxable on the month of sale
22 GSP is unreasonably lower than the actual market value if it is
lower than 30% of AMV of the same goods of the same quantity
or quality sold in the immediate locality or the nearest date of
sale.

180
UP COLLEGE OF LAW
(5) Lease (rental per unit < 12,800/month and
total rental from all units < P1,919,500/
year)
(6) Transmission to a trustee (Except:
transmission is deemed sale transaction)
General Rule: Transmission of property
to a trustee shall NOT be subject to VAT if
the property is to be merely held in trust for
the trustor and/or beneficiary.
Exception: However, if the property
transferred is originally intended for sale,
lease or use in the ordinary course of trade
or business AND the transfer constitutes a
completed gift, the transfer is subject to
VAT as a deemed sale transaction. The
transfer is a completed gift if the transferor
divests himself absolutely of control over
the property, i.e., irrevocable transfer of
corpus and/or irrevocable designation of
beneficiary.
(7) Transfer to corporation in exchange of
shares of stocks (see Sec. 40, NIRC for Tax-
free exchange)
(8) Advance payment by the lessee
(9) Security deposits for lease agreements.23
Allowable Deductions from Gross Selling Price
The following are deductible from the gross
selling price:
(1) Sales returns and allowances – the selling
price of the goods or properties returned
and not sold necessarily reduces the gross
sales on which the rate is applied.
(a) Sales returns and allowances for which
a proper credit/refund was made
during the month or quarter to the
buyer for sales previously recorded as
table sales are allowed as a deduction
in the period when they are made.
Excess may be carried over to the
succeeding period.
23 Pleasetake note of the difference between security deposits
and those applied to rent.
TAXATION 2 TAXATION LAW 2
(b) 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 is issued.
(2) Sales Discounts – bona fide or regular
discounts given to purchasers, which are
ascertainable and definitely agreed upon
between the vendor and the vendee at the
time of sale are deductible from the GSP.
(a) If given after the sale or are in the
nature of a rebate or partial remission
of indebtedness, they will not be
allowed as a deduction from the GSP.
(b) Furthermore the discuont must be
expressly indicated in the sales invoice
and the amount forming part of the
gross sales duly recorded in the books
fo accounts.
(c) Credits for allowances to cover roll
back in prices and other adjustments
are not deductible.
I. ZERO-RATED SALES OF GOODS OR
PROPERTIES, AND EFFECTIVELY
ZERO-RATED SALES OF GOODS OR
PROPERTIES
Rate: 0% VAT
Transactions: Every sale, barter or exchange, or
transactions “deemed sale” of taxable goods or
properties (RR 16-2005)
Zero-Rated Sales on Goods or Property (RR 16-
2005)
A zero-rated sale of goods or properties by a
VAT-registered person is a taxable transaction
for VAT purposes, but shall not result in any
output tax. However, the input tax on
purchases of goods, properties or services,
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UP COLLEGE OF LAW TAXATION 2
related to such zero-rated sale, shall be
available as tax credit or refund.
(1) Export Sales
(2) Foreign Currency Denominated Sales
(3) Sales of Goods or Property to perons or
entites who are tax-exempt/Effectively
Zero-Rated Sales
Export Sales [Sec. 106(A)(2)(a), NIRC]
(6) Those considered export sales under the
(1) The (i) sale and actual shipment of goods
from the Philippines to a foreign country
AND (ii) paid for in acceptable foreign
currency or its equivalent in goods or
services, AND (iii) accounted for in
accordance with the rules and regulations
of the BSP
(2) 2.(i) Sale of raw materials or packaging
materials to a nonresident buyer (ii) for
delivery to a resident local export-oriented
enterprise (iii) to be used in manufacturing,
processing, packing or repacking in the
Philippines of the said buyer's goods AND
(iv) paid for in acceptable foreign currency
AND (v) accounted for in accordance with
the rules and regulations of the BSP.
(3) (i) Sale of raw materials or packaging
materials (ii) to export-oriented enterprise
(iii) whose export sales exceed seventy
percent (70%) of total annual production.
(a) Any enterprise whose export sales
exceed 70% of the total annual
production of the preceding taxable
year shall be considered an export-
oriented enterprise upon accreditation
under the rules & regulations of Export
Development Act, RA 7844 (RR 7-95)
(4) Sale of gold to the Bangko Sentral ng
Pilipinas (BSP)
(5) The sale of goods, supplies, equipment
and fuel to persons engaged in
international shipping or international air
transport operations (RA 9337)
(a) Limited to goods, supplies, equipment
and fuel pertaining to or attributable to
182
TAXATION LAW 2
the transport of goods and passengers
from a port in the Phil. directly to a
foreign port without docking or
stopping at any other port in the Phil.
(b) If any portion of such fuel, goods, or
supplies is used for purposes other
than that mentioned, such portion of
fuel, goods, and supplies shall be
subject to 12% VAT. (RR 16-2005)
Omnibus Investment Code of 1987, and
other special laws (ex. Bases Conversion &
Development Act of 1992)
Under Omnibus Investment Code (EO 226):
Considered Export Sales
(1) Phil. port FOB value of export products
exported directly by a registered export
producer; OR
(2) Net selling price of export products
sold by a registered export producer to
another export producer, or to an
export trader that subsequently
exports the same (only when actually
exported by the latter) evidenced by
landing certificates.
Constructive Exports (without actual
exportation):
(1) Sales to bonded manufacturing
warehouses of export-oriented
manufacturers;
(2) Sales to export processing zones (RA
7916);
(3) Sales to registered export traders
operating bonded trading warehouses
supplying raw materials in the
manufacture of export products (RA
7227)
(4) Sales to diplomatic missions and other
agencies and/or instrumentalities
granted tax immunities, of locally
manufactured, assembled or repacked
products, whether paid for in foreign
currency or not.
UP COLLEGE OF LAW
(5) Sales by a VAT-registered supplier to a
manufacturer/producer whose
products are 100% exported are
considered export sales. A certification
to this effect must be issued by the
Board of Investment which shall be
good for 1 year unless subsequently re-
issued. (RR 16-2005)
Export sales of registered export
traders shall include commission
income, and that exportation of goods
on consignment shall not be deemed
export sales until the export products
consigned are in fact sold by the
consignee.
Foreign Currency Denominated Sale (FCDS)
(1) (i) Sale to a nonresident of goods (except
those mentioned in Sections 149 and 150
i.e.automobiles and non-essential goods
like jewelry, perfume, and yachts), (ii)
assembled or manufactured in the
Philippines (iii) for delivery to a resident in
the Philippines (iv) paid for in acceptable
foreign currency AND (v) accounted for in
accordance with the rules and regulations
of the BSP.
(2) (i) Sales of locally manufactured or
assembled goods (ii) for household and
personal use (iii) to Filipinos abroad and
other non-residents of the Philippines as
well as returning Overseas Filipinos under
the Internal Export Program of the
government (iv) paid for in convertible
foreign currency AND (v) accounted for in
accordance with the rules and regulations
of the BSP shall also be considered export
sales. (RR 16-2005)
Effectively Zero-Rated Sales
(1) Sales to persons or entities whose
exemption under special laws or
international agreements to which the
Philippines is a signatory effectively
subjects such sales to zero rate.
TAXATION 2 TAXATION LAW 2
(2) (i) The local sale of goods and properties
(ii) by a VAT-registered person (iii) to a
person or entity who was granted indirect
tax exemption under special laws or
international agreement. (RR 16-2005)
ECOZONES
shall be managed and
operated by the PEZA as separate customs
territory. (Sec. 8, RA 7916 “Special Economic
Zone Act of 1995”). Consequently, sales made
by a person in the customs territory to a PEZA-
registered entity are considered exports to a
foreign country and thus, zero-rated.
Conversely, sales by a PEZA-registered entity
to a person in the customs territory are
deemed imports from a foreign country.
Tax treatment of sales to & by PEZA-registered
enterprise within & without the ecozone [rmc 74-
99]:
(1) Any sale of goods, property or services
made by a VAT registered supplier from
the Customs Territory** to any registered
enterprise operating in the ecozone,
REGARDLESS of the class or type of the
latter’s PEZA registration, is actually
qualified and thus LEGALLY ENTITLED TO
THE 0% VAT.
**“Customs Territory” shall mean the
national territory of the Philippines outside
of the proclaimed boundaries of the
ECOZONES except those areas specifically
declared by other laws and/or presidential
proclamations to have the status of special
economic zones and/or free ports. [Sec.
2(g), Rule 1, Part I, RA 7916-IRR]
(2) By a VAT-Exempt Supplier from the
Customs Territory to a PEZA registered
enterprise
Sale of goods, property and services by
VAT-Exempt supplier from the Customs
Territory to a PEZA registered enterprise
183
UP COLLEGE OF LAW TAXATION 2
shall be treated EXEMPT FROM VAT,
regardless of whether or not the PEZA
registered buyer is subject to taxes under
the NIRC or enjoying the 5% special tax
regime.
(3) By a PEZA Registered Enterprise
(a) Sale of Goods by a PEZA registered
enterprise to a buyer from the Customs
Territory (ie domestic sales) -- this case
shall be treated as a technical
IMPORTATION made by the buyer.
Such buyer shall be treated as an
IMPORTER thereof and shall be
imposed with the corresponding VAT.
(b) Sale of Services by a PEZA registered
enterprise to a buyer from the Customs
Territory – this is NOT embraced by the
5% special tax regime, hence, such
seller shall be SUBJECT TO 12% VAT.
(c) Sale of Goods by a PEZA registered
enterprise to Another PEZA registered
enterprise (ie Intra-ECOZONE Sales of
Goods) – this shall be EXEMPT from
VAT.
(4) Sale of Services by ECOZONE enterprise,
to Another ECOZONE enterprise (Intra-
ECOZONE enterprise Sale of Service)
(a) if PEZA registered seller is subject to
5% special tax regime - EXEMPT from
VAT
(b) if PEZA registered seller is subject to
taxes under NIRC (ie not subject to 5%
special tax regime) – subject to 0%
VAT pursuant to “cross border doctrine”
J. TRANSACTIONS DEEMED SALE
(SEC. 106 (B)
Rate: 12% VAT
Basis: Market value of the goods deemed sold
as of the time of the occurrence of the
transactionsor as the Commissioner shall
prescribe. In the case of retirement/cessation
of business, the tax base shall be the
acquisition cost or the current market price of
184
TAXATION LAW 2
the goods or properties, whichever is lower. In
the case of a sale where the gross selling price is
unreasonably lower than the fair market value,
the actual market value shall be the tax base.
The gross selling price is unreasonably lower
than the actual market value if it is lower by
more than 30% of the actual market value of
the same goods of the same quantity and
quality sold in the immediate locality on or
nearest the date of sale. (RR 16-2005)
Transactions 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.
(2) Distribution or transfer to shareholders,
investors or creditors
(a) Shareholders or investors as share in
the profits of the VAT-registered
persons;
(b) Creditors in payment of debt;
(3) Consignment of goods if actual sale is not
made within 60 days following the date
such goods were consigned
(4) Retirement from or cessation of business,
with respect to inventories of taxable
goods existing as of such retirement or
cessation
Not in the course of business of goods or
properties originally intended for sale or for use
in the course of business
cf Sec 40 (C) (2) regarding capital assets
Example: when a VAT-registered person
withdraws goods from his business for his
personal use. (RR 16-2005)
Distribution or transfer to shareholders,
investors or creditors
As regards distribution to shareholders or
investors as share in the profits of the VAT-
registered persons, property dividends which
constitute stocks in trade or properties
primarily held for sale or lease declared out of
UP COLLEGE OF LAW TAXATION 2
retained earnings on or after Jan. 1, 1996 and
distributed by the company to its shareholders
shall be subject to VAT based on the zonal
value or FMV at the time of the distribution,
whichever is applicable. (RR 16-2005)
Consignment of goods
Consigned goods returned by the consignee
within the 60-day period are not deemed sold.
(RR 16-2005)
Retirement from or cessation of business
With respect to ALL goods on hand, whether
capital goods, stock-in-trade, supplies or
materials, as of the date of such retirement or
cessation, whether or not the business is
continued by the new owner or successor ARE
CONSIDERED DEEMED SALES
Examples: change of ownership of the business
(e.g. when a sole proprietorship incorporates,
or the proprietor sells his entire business) and
dissolution of a partnership and creation of a
new partnership which takes over the business.
(RR 16-2005)
K. CHANGE OR CESSATION OF
STATUS AS VAT-REGISTERED
PERSON (SEC 106 C)
Rate: 12% VAT
Basis: the acquisition cost or the current
market price of the goods or properties,
whichever is LOWER.
VAT shall apply to goods disposed of or
existing as of a certain date if under the
circumstances to be prescribed in rules and
regulations to be promulgated by the
Secretary of Finance, upon recommendation of
the Commissioner, the status of a person as a
VAT-registered person changes or is
terminated.
185
TAXATION LAW 2
Subject to output VAT (RR 16-2005 sec. 4.106
(b))
12%VAT is applicable to goods/properties
originally intended for sale or use in business
and capital goods which are existing as of the
occurrence of the following:
(1) Change of business activity from VAT
taxable status to VAT-exempt status
Example: A VAT-registered person
engaged in a taxable activity like
wholesaler or retailer who decides to
discontinue such activity and engages
instead in life insurance business or in any
other business not subject to VAT.
(2) Approval of request for cancellation of a
registration due to reversion to exempt
status
(3) Approval of request for cancellation of
registration due to desire to revert to
exempt status after lapse of 3 consecutive
years from the time of registration by a
person who voluntarily registered despite
being exempt under Sec. 109 (2)
(4) Approval of request for cancellation of
registration of one who commenced
business with the expectation of gross
sales/receipts exceeding P1,919,500 (per
RR 16-2011) but who failed to exceed this
amount during the first 12 months of
operation
Not Subject to Output Vat – goods or properties
existing as of the occurrence of the following:
(1) Change of control of a corporation by the
acquisition of the controlling interest of
such corporation by another stockholder
(individual or corporate) or group of
stockholders.
Note: Exchange of goods or properties
including the real estate properties used in
business or held for sale or for lease by the
transferor, for shares of stocks, whether
resulting in corporate control or not, is
SUBJECT TO VAT (RR 10-11)
UP COLLEGE OF LAW TAXATION 2
(2) Change in the trade or corporate name of
the business
(3) Merger or consolidation of corporations.
The unused input tax of the dissolved
corporation, as of the date of merger or
consolidation, shall be absorbed the
surviving or new corporation.
Note: The INPUT VAT of the dissolved
corporation will be absorbed by the
surviving corporation
(4) Inventory used for promotions and Office
Supplies
L. VAT ON IMPORTATION OF GOODS
Rate: 12% VAT
Basis: total value used by the Bureau of
Customs in determining tariff and customs
duties, plus customs duties, excise taxes, if
any, and other charges (such as postage,
commission).
Where the customs duties are determined on
the basis of the quantity or volume of the
goods, the value-added tax shall be based on
the landed cost plus excise taxes, if any.
Landed Cost = invoice amount + customs
duties + freight + insurance + other charges +
excise tax (if any)
Who Pays: IMPORTER prior to the release of
such goods from customs custody (Sec. 107
(A), NIRC)
Importer: any person who brings goods into the
Philippines, whether or not made in the course
of his trade or business, including non-exempt
persons or entities who acquire tax-free
imported goods from exempt persons, entities
or agencies (RR 16-2005)
Importation of goods BEGINS when the
carrying vessel/aircraft enters the Philippine
jurisdiction with an intention to unload its
cargoes. It ENDS when there is already
paymentof duties/taxes/other charges and
issuance of permit to withdraw.
186
TAXATION LAW 2
Note: Importation of goods to bonded
warehouse for processing is not importation.
Importation connotes permanency and gain.
Thus, if goods are only for exhibit, such goods
are VAT-exempt.
Customs duty – amount of customs duty
legally due and paid by the importer. Therefore,
if importer is entitled to 90% customs duty
exemption, the 10% duty paid should be the
base in computation of the VAT.
Other similar chargers – specific charges which
an importer has to pay.
(a) Other taxes (special import tax)
(b) Bank charges
(c) Arrastre charges
(d) Wharfage dues
(e) Brokerage fees
(f) All other charges or expenses
Landed Cost - invoice amount including costs
of loading, shipping and unloading, customs
duties, freight, insurance, other charges, excise
tax (if any)
Expenses incurred after the release of
the goods such as those incurred in
delivering goods do not form part of the
landed cost.
Transfer of goods by tax exempt persons:
(1) If importer is tax-exempt, the subsequent
purchasers, transferees or recipients of
such imported goods shall be considered
as importers who shall be liable for the tax
on importation.
(2) The tax due on such importation shall
constitute a lien on the goods superior to
all charges or liens on the goods,
irrespective of the possessor thereof. (as
amended by RA 9337)
M. VAT ON SALE OF SERVICE AND
USE OR LEASE OF PROPERTIES
[Sec 108]
UP COLLEGE OF LAW
Rate: 12%
Basis: Gross receipts derived from the sale or
exchange of services, including the use or lease
of properties.
Gross Receipts - the total amount of money or
its equivalent representing the contract price,
compensation, service fee, rental or royalty,
including the amount charged for materials
supplied with the services and deposits and
advanced payments actually or constructively
received during the taxable quarter for the
services performed or to be performed for
another person, excluding VAT. (Sec. 108 (A),
NIRC)
“Constructive receipt” occurs when the money
consideration or its equivalent is placed at the
control of the person who rendered the service
without restrictions by the payor.
(a) Deposit in banks which are made available
to the seller of services without restrictions
(b) Issuance by the debtor of a notice to offset
any debt or obligation and acceptance
thereof by the seller as payment for
services rendered
(c) Transfer of the amounts retained by the
contractee to the account of the contractor.
(RR 16-2005)
Requisites for taxability
(1) The service must be performed or is to be
performed (which may be performed by a
subcontractor) in the course of trade or
business in the Philippines;
(2) For a valuable consideration actually or
constructively received; and
(3) The service is not exempt under the Tax
Code, special law or international
agreement
(4) Person selling or rendering service is liable
to VAT
“Sale/Exchange of Services”: means the
performance of all kinds of services in the
Philippines for others for a fee, remuneration
TAXATION 2 TAXATION LAW 2
or consideration.” (Sec 108, Diaz v Secretary of
Finance, 2011). It includes:
(1) Construction and service contractors
(2) Stock, real estate, commercial, customs
and immigration brokers
(3) Lessors of property, whether personal or
real24
(4) Persons engaged in warehousing service.
(5) Lessors or distributors of cinematographic
films
(6) Persons engaged in milling, processing,
manufacturing or repacking goods for
others are subject to VAT,
EXCEPT palay into rice, corn into corn
grits, and sugarcane into raw sugar (not
subject to VAT)
(7) Proprietors, operators, or keepers of hotels,
motels, rest houses, pension houses, inns,
resorts, theaters, and movie houses
(8) Proprietors or operators of restaurants,
refreshment parlors, cafes and other
eating places, including clubs and caterers
(9) Dealers in securities including pre-need
companies
“Gross receipts” means gross selling
price less cost of the securities sold. RR 7-
95:
(10) Lending investors: All persons OTHER than
banks, non-bank financial intermediaries,
finance companies and other financial
intermediaries NOT performing quasi-
banking functions who make a practice of
lending money for themselves or others at
interest.
(11) Transportation contractors on their
transport of goods or cargoes, including
persons who transport goods or cargoes
for hire and other domestic common
24
SUBJECT TO VAT NOT SUBJECT TO VAT
Pre-Paid Rental
Loan to the lessor from the lessee
Option money for the property
Security deposit when applied
to the rental
Security deposit to insure the
faithful performance of certain
obligations of the lessee to the
lessor
187
UP COLLEGE OF LAW TAXATION 2
carriers by land relative to their transport
of goods or cargoes
(12) Common carriers by air and sea relative to
their transport of passengers, goods or
cargoes from one place in the Philippines
to another place in the Philippines
(13) Sales of electricity by generation,
transmission, and/or distribution
companies
EXCEPT sale of power or fuel
generated through renewable sources of
energy, such as, but not limited to,
biomass, solar, wind hydropower,
geothermal, ocean energy, and other
emerging energy sources using
technologies such as fuel cells and
hydrogen fuels, which shall be subject to
0% rate of VAT (zero-rated).
(14) Franchise grantees of electric utilities,
telephone and telegraph, radio and/or
television broadcasting and all other
franchise grantees (including PAGCOR and
its licensees/franchisees)
EXCEPT franchise grantees of radio
and/or television broadcasting whose
annual gross receipts of the preceding year
do not exceed Ten Million Pesos
(P10,000,000.00) (which shall be subject
to 3% franchise tax under Sec. 119, subject
to optional registration), and franchise
grantees of gas and water utilities (under
Sec. 109, subject to 2% franchise tax)
With respect to franchise grantees of
telephone and telegraph services, amounts
received for overseas dispatch, message, or
conversation originating from the
Philippines are subject to the percentage
tax under Sec. 120 and hence exempt from
VAT
(15) Non-life insurance companies including
surety, fidelity, indemnity and bonding
companies;
EXCEPT crop insurance, life and
disability insurance, and health and
accident insurance
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Insurance and reinsurance
commissions, as opposed to premiums,
whether life or non-life, are subject to VAT
while non-life insurance premiums are
subject to VAT.
(16) Similar services regardless of whether or
not the performance thereof calls for the
exercise or use of the physical or mental
faculties
“Lease of Properties“: subject to the VAT
imposed irrespective of the place where the
contract of lease or licensing agreement was
executed if the property is leased or used in the
Philippines.
(1) The lease or the use of or the right or
privilege to use any copyright, patent,
design or model, plan secret
(2) formula or process, goodwill, trademark,
trade brand or other like property or right
(3) The lease of the use of, or the right to use
of any industrial, commercial or scientific
equipment
(4) The supply of scientific, technical,
industrial or commercial knowledge or
information
(5) The supply of any assistance that is
ancillary and subsidiary to and is furnished
as a means of enabling the application or
enjoyment of any such property, or right as
is mentioned in #2 or any such knowledge
or information as is mentioned in #3
(6) The supply of services by a nonresident
person or his employee in connection with
the use of property or rights belonging to,
or the installation or operation of any
brand, machinery or other apparatus
purchased from such nonresident person
(7) The supply of technical advice, assistance
or services rendered in connection with
technical management or administration
of any scientific, industrial or commercial
undertaking, venture, project or scheme
(8) The lease of motion picture films, films,
tapes and discs
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(9) The lease or the use of or the right to use
radio, television, satellite transmission and
cable television time
Additional services subject to VAT:
(1) Services performed in the exercise or
practice of profession or calling by
individuals subject to professional tax
under the LGC, and professional services
rendered by general professional
partnerships (GPPs);
(2) Services performed by actors/actresses,
talents, singers, emcees, radio/television
broadcasters, choreographers,
musical/radio/movie/television/stage
directors, and professional athletes;
(3) Services rendered by customs, real estate,
stock, immigration and commercial
brokers;
(4) Services rendered by doctors, and lawyers.
(5) Association dues or membership fees and
other assessment or charges for the
beneficial services of the homeowner’s
association (RMC No. 9-2013)
(6) Lease/use of sports facilities and
equipment (RA 6847)
The performance of the services should not be
in pursuit of an employer-employee
relationship between the service-provider and
the service-recipient.
N. ZERO-RATED SALE OF SERVICES
A zero-rated sale by a VAT-registered person is
a taxable transaction for VAT purposes, but
shall not result in any output tax. However, the
input tax on purchases of goods, properties or
services related to such zero-rated sale shall
be available as tax credit or refund.
The following services performed in the
Philippines by VAT-registered persons are
effectively 0% VAT sales of services:
(1) Processing, manufacturing or repacking
goods for other persons doing business
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TAXATION LAW 2
outside the Philippines which goods are
subsequently exported, where the services
are paid for in acceptable foreign currency
AND accounted for in accordance with the
rules and regulations of the BSP
(2) Services other than those mentioned in the
preceding paragraph rendered to a person
engaged in business conducted outside the
Philippines or a nonresident person not
engaged in business who is outside the
Philippines when the services are
performed, the consideration for which is
paid for in acceptable foreign currency
AND accounted for in accordance with the
rules and regulations of the BSP
The services referring to ‘processing,
manufacturing, repacking’ and ‘services
other than those in (1)’ both require
(i) payment in foreign currency;
(ii) inward remittance;
(iii) accounted for by the BSP;
(iv) AND that the service recipient is
doing business outside the
Philippines.
If this is not the case, taxpayers can
circumvent just by stipulating payment in
foreign currency. (CIR v. Burmeister)
(3) Services rendered to persons or entities
whose exemption under special laws or
international agreements to which the
Philippines is a signatory effectively
subjects the supply of such services to zero
percent (0%) rate (as amended by RA
9337)
(4) Services rendered to persons engaged in
international shipping or international air
transport operations, including leases of
property for use thereof [as amended by
RA 9337];
Provided, however, that the services
referred to herein shall not pertain to those
made to common carriers by air and sea
relative to their transport of passengers,
goods or cargoes from one place in the Phil.
UP COLLEGE OF LAW TAXATION 2
to another place in the Phil. (the same
being subject to 12% VAT under Sec. 108)
(5) Services performed by subcontractors
and/or contractors in processing,
converting, or manufacturing goods for an
enterprise whose export sales exceed
seventy percent (70%) of total annual
production.
(6) Transport of passengers and cargo by air
or sea vessels from the Philippines to a
foreign country (as added by RA 9337) and;
(7) Sale of power or fuel generated through
renewable sources of energy such as, but
not limited to, biomass, solar, wind,
hydropower, geothermal, ocean energy,
and other emerging energy sources using
technologies such as fuel cells and
hydrogen fuels. (as added by RA 9337)
Zero-rating shall apply strictly to the
sale of power or fuel generated through
renewable sources of energy, and shall not
extend to the sale of services related to the
maintenance or operation of plants
generating said power.
Effectively zero-rated sale of service – a local
sale of services by a VAT-registered person to a
person or entity granted indirect tax exemption
under special laws or international agreement.
The taxpayer must seek prior approval or
prior confirmation from the appropriate
offices of the BIR so that a transaction is
qualified for effective zero-rating except in
export sales and foreign denominated
sales.
RR 4-2007 removed the distinction
between automatic and effectively zero-
rated transactions found in prior Revenue
Regulations (inc. RR 16-2005) with respect
to prior application from the BIR.
O. VAT EXEMPT TRANSACTIONS
Vat Exempt Transactions, in general
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TAXATION LAW 2
(a) Sale of goods or properties and/or services
and the use or lease of properties that is
NOT subject to VAT (output tax) and the
seller is not allowed any tax credit of VAT
(input tax) on purchases.
(b) The person making the exempt sale of
goods, properties or services shall not bill
any output tax to his customers. (RR 16-
2005)
(c) But, the VAT-registered person may elect
that the exemption not apply to its sale of
goods or properties or services; provided
that the election made shall be irrevocable
for a period of three (3) years from the
quarter the election was made (Sec. 109(2),
NIRC).
Exempt Transactions Enumerated
(1) Sale/import of agricultural, marine food
products in original state; of livestock and
poultry; breeding stock and genetic
materials
Original state even if they have
undergone the simple processes of
preparation or preservation for the
market, such as freezing, drying,
salting, broiling, roasting, smoking or
stripping. Also includes preservation
using advanced technological means
of packaging, such as shrink wrapping
in plastics, vacuum packing, tetra-pack,
and other similar packaging methods
(RR 16-2005)
Polished and/or husked rice, corn grits,
raw cane sugar and molasses, ordinary
salt, AND COPRA shall be considered
in their original state
Livestock or poultry do not include
fighting cocks, race horses, zoo
animals and other animals generally
considered as pets.
(2) Sale/ import of fertilizers; seeds, seedlings
and fingerlings; fish, prawn, livestock and
poultry feeds (including ingredients)
UP COLLEGE OF LAW TAXATION 2
(3) Import of personal and household effects
of Phil resident returning from abroad and
nonresident citizens coming to resettle in
the Philippines
(4) Import of professional instruments and
implements, wearing apparel, domestic
animals, and personal household effects
belonging to persons coming to settle in
the Philippines, for their own use and not
for sale, barter or exchange
Does not include vehicles, vessels,
aircrafts, machineries, and other goods
for use in manufacturing in commercial
quantities)
(5) Services subject to percentage tax
(6) Services by agricultural contract growers
and milling for others of palay into rice,
corn into grits and sugar cane into raw
sugar
(7) Medical, dental, hospital and veterinary
services except those rendered by
professionals:
Laboratory services are exempted. If
the hospital or clinic operates a
pharmacy or drug store, the sale of
drugs and medicine is subject to VAT.
[RR 16-2005]
(8) Educational services rendered by private
educational institutions, duly accredited by
DEPED, CHED, TESDA, and those rendered
by government educational institutions;
“Educational services” does not
include seminars, in-service training,
review classes and other similar
services rendered by persons who are
not accredited by the DepED, CHED,
and/or TESDA. [RR 16-2005]
(9) Services rendered by individuals pursuant
to an employer-employee relationship
(10) Services rendered by regional or area
headquarters established in the
Philippines by multinational corporations
which act as supervisory, communications
and coordinating centers for their affiliates,
subsidiaries or branches in the Asia-Pacific
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TAXATION LAW 2
Region and do not earn or derive income
from the Philippines
(11) Transactions which are exempt under
international agreements to which the
Philippines is a signatory or under special
laws, except those under PD No. 529
[Petroleum Exploration Concessionaires
under the Petroleum Act of 1949]
(12) Sales by agricultural cooperatives duly
registered with the Cooperative
Development Authority to their members
as well as sale of their produce to non-
members. Exemption includes importation
of direct farm inputs, machineries and
equipment, including spare parts thereof,
to be used directly and exclusively in the
production and/or processing of their
produce.
Sale by agricultural cooperatives to
non-members can only be exempted
from VAT if the producer of the
agricultural products sold is the
cooperative itself. If the cooperative is
not the producer (e.g., trader), then
only those sales to its members shall
be exempted from VAT. [RR 16-2005]
(13) Gross receipts from lending activities by
credit or multi-purpose cooperatives duly
registered with the Cooperative
Development Authority
(14) Sales by non-agricultural, non- electric and
non-credit cooperatives duly registered
with the Cooperative Development
Authority are exempt BUT their
importation of machineries and equipment,
including spare parts thereof, to be used by
them are SUBJECT to VAT.
(15) Export sales by persons who are not VAT-
registered
(16) Sale of real properties – the ff. sales are
exempt:
(a) Sale of real properties NOT primarily
held for sale to customers or held for
lease in the ordinary course of trade or
business.
UP COLLEGE OF LAW TAXATION 2
However, even if the real property
is not primarily held for sale to
customers or held for lease in the
ordinary course of trade or
business but the same is used in
the trade or business of the seller,
the sale thereof shall be subject to
VAT being a transaction incidental
to the taxpayer’s main business.
[RR 4-2007]
(b) Sale of real properties utilized for low-
cost housing as defined by RA No.
7279, otherwise known as the "Urban
Development and Housing Act of
1992" and other related laws, such as
RA No. 7835 and RA No. 8763.
“Low-cost housing" refers to
housing projects intended for
homeless low-income family
beneficiaries, undertaken by the
Government or private developers,
which may either be a subdivision
or a condominium registered and
licensed by the Housing and Land
Use Regulatory Board/Housing
(HLURB) under
BP Blg. 220, PD No. 957 or any
other similar law, wherein the unit
selling price is within the selling
price ceiling per unit of
P750,000.00 under RA No. 7279,
and other laws, such as RA No.
7835 and RA No. 8763.
(c) Sale of real properties utilized for
socialized housing as defined under RA
No. 7279, and other related laws, such
as RA No. 7835 and RA No. 8763,
wherein the price ceiling per unit is
P225,000.00 or as may from time to
time be determined by the HUDCC and
the NEDA and other related laws.
ZZZZZ"Socialized housing" refers
to housing programs and projects
covering houses and lots or home
lots only undertaken by the
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Government or the private sector
for the underprivileged and
homeless citizens which shall
include sites and services
development, long-term financing,
liberated terms on interest
payments, and such other benefits
in accordance with the provisions
of RA No. 7279 and RA No. 7835
and RA No. 8763.
"Socialized housing" shall also
refer to projects intended for the
underprivileged and homeless
wherein the housing package
selling price is within the lowest
interest rates under the Unified
Home Lending Program (UHLP) or
any equivalent housing program of
the Government, the private sector
or non-government organizations.
(d) Sale of residential lot valued at
P1,919,500 and below, or house & lot
and other residential dwellings valued
at P3,199,200 and below
If two or more adjacent residential
lots are sold or disposed in favor of
one buyer, for the purpose of
utilizing the lots as one residential
lot, the sale shall be exempt from
VAT only if the aggregate value of
the lots does not exceed
P1,919,500. [RR 13-2012]
Adjacent residential lots, although
covered by separate titles and/or
separate tax declarations, when
sold or disposed to one and the
same buyer, whether covered by
one or separate Deed of
Conveyance, shall be presumed as
a sale of one residential lot. [RR
16-2005]
Sale, transfer or disposal within a
12-month period of 2 or more
adjacent residential lots, house
and lots or other residential
UP COLLEGE OF LAW TAXATION 2
dwellings to one buyer, whether
from the same or from different
sellers shall be considered one
single transaction. Hence, the sale
of the adjacent lots shall be subject
to VAT if the aggregate value
exceeds P1,919,500 for residential
lots and P3,199,200 for residential
house lots or residential dwellings,
notwithstanding that the value of
the individual properties do not
exceed the VAT exemption
thresholds.
Sale/purchase of parking lots shall
not be considered a sale of
residential lot/dwelling. Hence, it
shall be subject to VAT regardless
of its selling price. [RR 13-2012]
(17) Lease of residential units with a monthly
rental per unit not exceeding P12,800,
regardless of the amount of aggregate
rentals received by the lessor during the
year.
Lease of residential units where the
monthly rental per unit exceeds
P12,800 but the aggregate of such
rentals of the lessor during the year do
not exceed One Million Five Hundred
Pesos P1,919,500 shall likewise be
exempt from VAT, however, the same
shall be subjected to three percent
(3%) percentage tax.
In cases where a lessor has several
residential units for lease, some are
leased out for a monthly rental per unit
of not exceeding P12,800 while others
are leased out for more than P12,800
per unit, his tax liability will be as
follows:
(a) The gross receipts from rentals
not exceeding P12,800 per month
per unit shall be exempt from VAT
regardless of the aggregate
annual gross receipts.
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TAXATION LAW 2
(b) The gross receipts from rentals
exceeding P12,800 per month per
unit shall be subject to VAT IF the
aggregate annual gross receipts
from said units only (not including
the gross receipts from units
leased for not more than
P12,800 ) exceeds P1,919,500 .
Otherwise, the gross receipts will
be subject to the 3% tax imposed
under Section 116 of the Tax Code.
The term 'residential units' shall refer
to apartments and houses & lots used
for residential purposes, and buildings
or parts or units thereof used solely as
dwelling places (e.g., dormitories,
rooms and bed spaces) except motels,
motel rooms, hotels and hotel rooms.
The term 'unit' shall mean an
apartment unit in the case of
apartments, house in the case of
residential houses; per person in the
case of dormitories, boarding houses
and bed spaces; and per room in case
of rooms for rent. [RR 16-2005]
(18) Sale, importation, printing or publication
of books and any newspaper, magazine
review or bulletin which appears at regular
intervals with fixed prices for subscription
and sale and which is not devoted
principally to the publication of paid
advertisements;
(19) Transport of passengers by international
carriers (Added by RA 10378)
(20) Sale, importation or lease of passenger or
cargo vessels and aircraft, including
engine, equipment and spare parts
thereof for domestic or international
transport operations [added by RA 9337];
The exemption from VAT on the
importation and local purchase of
passenger and/or cargo vessels shall
be limited to those of 150 tons and
above, including engine and spare
parts of said vessels;
UP COLLEGE OF LAW TAXATION 2
Provided, further, that the vessels to be
imported shall comply with the age
limit requirement, at the time of
acquisition counted from the date of
the vessel's original commissioning, as
follows:
o for passenger and/or cargo vessels,
the age limit is 15 years old,
o for tankers, the age limit is 10 years
old, and
o for high-speed passenger crafts,
the age limit is 5 years old [RR 16-
2005]
(21) Importation of fuel, goods, and supplies by
persons engaged in international shipping
or air transport operations; [added by RA
9337]
The said fuel, goods and supplies shall
be used exclusively or shall pertain to
the transport of goods and/or
passenger from a port in the
Philippines directly to a foreign port
without stopping at any other port in
the Philippines;
If any portion of such fuel, goods or
supplies is used for purposes other
than that mentioned in this paragraph,
such portion of fuel, goods and
supplies shall be subject to 12% VAT
starting Feb. 1, 2006. [RR 16-2005]
(22) Services of banks, non-bank financial
intermediaries performing quasi-banking
functions and other non-bank financial
intermediaries; and
(23) Sale or lease of goods or properties or the
performance of services other than the
transactions mentioned in the preceding
paragraphs, the gross annual sales and/or
receipts do not exceed the amount of
P1,919,500
For purposes of the threshold of
P1,919,500, the husband and the wife
shall be considered separate taxpayers.
However, the aggregation rule for each
taxpayer shall apply.
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For instance, if a professional, aside
from the practice of his profession, also
derives revenue from other lines of
business which are otherwise subject
to VAT, the same shall be combined for
purposes of determining whether the
threshold has been exceeded.
The VAT-exempt sales shall NOT be
included in determining the threshold.
[RR 16-2005]
Other Services Exempt from VAT – such
services are those subject to percentage tax
(infra)
(1) Services rendered by domestic common
carriers by land for the transport of
passengers and keepers of garages;
(2) Services rendered by international
air/shipping carriers;
(3) Services rendered by franchise grantees of
radio and/or television broadcasting
whose annual gross receipts of the
preceding year do not exceed P10,000,000
and by franchise grantees of gas and water
utilities;
(4) Services rendered for overseas dispatch,
message, by franchise grantees or
conversation originating from the
Philippines;
(5) Services by any person, company or
corporation (except purely cooperative
(6) companies or associations) doing life
insurance business of any sort in the
Philippines;
(7) Services rendered by fire, marine or
miscellaneous insurance agents of foreign
insurance companies;
(8) Services rendered by proprietors, lessees or
operators of cockpits, cabarets, night or
day clubs, boxing exhibitions, professional
basketball games, jai-alai and race tracks;
and
(9) Receipts on sale, barter for exchange of
shares of stock listed and traded through
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the local stock exchange or through initial
public offering.
P. INPUT TAX AND OUTPUT TAX,
DEFINED
Output tax – the VAT due on the sale or lease
of taxable goods or properties or services by
any person registered or required to register
under Section 236 of the Code. (Sec 110 A)
Input tax – the VAT due on or paid by a VAT-
registered person on importation of goods or
local purchases of goods, properties, or
services, including lease or use of properties, in
the course of his trade or business.
(1) It includes the transitional input tax and
the presumptive input tax as determined in
accordance with Section 111 of the Code.
(2) It includes input taxes which can be
directly attributed to transactions subject
to the VAT plus a ratable portion of any
input tax which cannot be directly
attributed to either the taxable or exempt
activity.
(3) Input tax must be evidenced by a VAT
invoice or official receipt issued by a VAT-
registered person in accordance with Secs.
113 and 237 of the Code. [RR 16-2005]
Q. SOURCES OF INPUT TAX
(1) Purchase or importation of goods
(evidenced by VAT invoice/receipt)
(a) For sale; or
(b) For conversion into or intended to form
part of a finished product for sale
including packaging materials; or
(c) For use as supplies in the course of
business; or
(d) For use as materials supplied in the
sale of service; or
(e) For use in trade or business for which
deduction for depreciation or
amortization is allowed under the Code.
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TAXATION LAW 2
(2) Purchase of real properties for which VAT
has actually been paid
(3) Purchase of services in which VAT has
actually been paid
(4) Transactions deemed sale
(5) Presumptive Input Tax
(6) Transitional Input Tax
Presumptive Input Tax (Sec. 111(B))
Persons or firms engaged in the processing of
sardines, mackerel and milk, and in
manufacturing refined sugar and cooking oil
and packed noodle based instant meals, 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.
“Processing” means pasteurization, canning
and activities which through physical or
chemical process alter the exterior texture or
form or inner substance of a product in such
manner as to prepare it for special use to which
it could not have been put in its original form
or condition.
Claiming of input Tax on motor vehicles
subject to the ff conditions:
(1) Purchase of vehicle must be substantiated
with official receipts and other records;
(2) Taxpayer has to prove the direct
connection of the motor vehicle to the
business;
(3) Only one vehicle for land transport is
allowed for the use of an official/employee
with value not exceeding P2.4 million;
(4) No depreciation shall be allowed for yachts,
helicopters, airplanes
Transitional Input Tax (Sec 111)
Who may avail: (i) By a person who becomes
VAT-liable for the 1st time, or (ii) any person
who elects to be a VAT-registered person
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Rate: 2% Input VAT of the value of the
beginning inventory on hand or actual VAT
paid on such, goods, materials and supplies,
whichever is HIGHER, which amount shall be
creditable against the output tax of VAT-
registered person.
Tax base: The value allowed for income tax
purposes on inventories shall be the basis for
the computation of the 2% transitional input
tax, EXCLUDING goods that are exempt from
VAT under Sec. 109 of the Tax Code. (RR 16-
2005)
Note: A real estate dealer is entitled to claim
transitional input VAT based on the value of
the entire (including the value of the land and
the improvements thereon) real property sold
regardless of whether there was in fact actual
payment of VAT on the purchase of the real
property. At the time the purchase was made,
there was still no VAT imposed. (Fort Bonifacio
Development Corp. v. CIR)
R. PERSONS WHO CAN AVAIL OF
INPUT TAX CREDIT
Input tax on domestic purchase or importation
of goods or properties shall be creditable:
(1) To the purchaser upon consummation of
sale and on importation of goods or
properties; and
(2) To the importer upon payment of the VAT
prior to the release of the goods from the
custody of the Bureau of Customs.
(a) The input tax on goods purchased or
imported in a calendar month for use
in trade or business for which
deduction for depreciation is allowed
under the Code, shall be spread evenly
over the month of acquisition and the
fifty-nine (59) succeeding months if the
aggregate acquisition cost for such
goods, excluding the VAT component
thereof, exceeds One million pesos
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(P1,000,000). If the aggregate
acquisition cost does not exceed
P1,000,000, the total input taxes will
be allowable as credit against output
tax in the month of acquisition.25
(b) However, if the estimated useful life of
the capital good is less than five (5)
years, as used for depreciation
purposes, then the input VAT shall be
spread over such a shorter period
(3) To the purchaser of services or the lessee or
licensee upon payment of the
compensation, rental, royalty or fee.
Input tax on purchase of services, lease or use
of properties shall be creditable:
(1) To the purchaser upon payment of the
compensation, royalty or fee
(2) To lessee or licensee upon payment of the
compensation, royalty or fee
Transitional tax
The following persons shall be allowed INPUT
TAX in his beginning inventory of goods,
materials and supplies an equivalent to TWO
PERCENT (2%) of the value of such inventory;
OR the actual VAT paid on such goods,
materials and supplies, whichever is HIGHER,
which shall be creditable against the OUTPUT
TAX.
(1) Any person liable for VAT or
(2) who elects to be a VAT-registered person
Presumptive input tax
There shall be allowed a presumptive input tax,
creditable against the output tax, equivalent to
4% of the gross value in money of their
purchases of primary agricultural products
which are used as inputs to their production.
Persons or firms engaged in the
processing of sardines, mackerel and milk,
and in manufacturing refined sugar and
cooking oil and packed noodle based
instant meals
25 Please refer below for the example.
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S. DETERMINATION OF
OUTPUT/INPUT TAX; VAT PAYABLE;
EXCESS INPUT TAX CREDITS
Output VAT – Input VAT = VAT Payable
S.1. DETERMINATION OF OUTPUT TAX
(RR 16-2005)
Output VAT in a sale of goods/properties shall
be computed by multiplying the total amount
indicated in the invoice or receipt by 12%.
𝑂𝑈𝑇𝑃𝑈𝑇 𝑉𝐴𝑇
= 𝐺𝑟𝑜𝑠𝑠 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 𝑥 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑉𝐴𝑇 (𝑜𝑟 12%)
Output VAT in a sale of services shall be
computed by multiplying the total amount
indicated in the invoice or receipt by 12%.
𝑂𝑈𝑇𝑃𝑈𝑇 𝑉𝐴𝑇
= 𝐺𝑟𝑜𝑠𝑠 𝑅𝑒𝑐𝑒𝑖𝑝𝑡𝑠 𝑥 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑉𝐴𝑇 (𝑜𝑟 12%)
S.2. DETERMINATION OF INPUT TAX
CREDITABLE
(1) The sum of the excess input tax carried
over from the preceding month or quarter
and the input tax creditable to a VAT-
registered person during the taxable
month or quarter shall be reduced by the
amount of claim for refund or tax credit for
value-added tax and other adjustments,
such as purchase returns or allowances
and input tax attributable to exempt sale.
(2) The claim for tax credit referred to includes
not only those filed with the BIR but also
those filed with other government agencies,
such as the Board of Investments the
Bureau of Customs.
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S.3. ALLOCATION OF INPUT TAX ON
MIXED TRANSACTIONS26
There are four possible transactions a VAT-
registered person may enter into: (i) VAT
taxable, (ii) VAT-exempt, (iii) zero-rated VAT
and (iv) sale to governments.
A VAT-registered person who is also engaged
in transactions not subject to VAT shall be
allowed to recognize input tax credit on
transactions subject to VAT as follows:
(1) All the input taxes that can be directly
attributed to transactions subject to VAT
may be recognized for input tax credit.
Input taxes that can be directly
attributable to VAT taxable sales of goods
and services to the Government or any of
its political subdivisions, instrumentalities
or agencies, including GOCCs shall not be
credited against output taxes arising from
sales to non-Government entities
(2) If any input tax cannot be directly
attributed to either a VAT taxable or VAT-
exempt transaction, the input tax shall be
pro-rated to the VAT taxable and VAT-
exempt transactions and ONLY the ratable
portion pertaining to transactions subject
to VAT may be recognized for input tax
credit.
S.4. DETERMINATION OF THE OUTPUT
TAX AND VAT PAYABLE AND
COMPUTATION OF VAT PAYABLE OR
EXCESS TAX CREDITS
If at the end of any taxable month or quarter:
The output tax exceeds the input tax, the
excess shall be paid by the VAT-registered
person
The input tax exceeds the output tax, the
excess shall be carried over to the
succeeding quarter or quarters
26 Please refer below for the example
UP COLLEGE OF LAW
Illustration:
For a given taxable quarter ABC Corp. has
output VAT of 100 and input VAT of 80. Since
output tax exceeds the input tax for such
taxable quarter, all of the input tax may be
utilized to offset against the output tax. Thus,
the net VAT payable is 100 minus 80 = 20.
If the input tax inclusive of input tax carried over
from the previous quarter exceeds the output
tax, the input tax inclusive of input tax carried
over from the previous quarter that may be
credited in every quarter shall not exceed
seventy percent (70%) of the output tax;
Provided, That, the excess input tax 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 or applied for a tax credit certificate
which may be used in the payment of internal
revenue taxes, subject to the limitations as
may be provided for by law, as well as, other
implementing rules.
Illustration:
For a given taxable quarter XYZ Corp. has
output VAT of 100 and input VAT of 110. Since
input tax exceeds the output tax for such
taxable quarter, the 70% limitation is imposed
to compute the amount of input tax which may
be utilized. The total allowable input tax which
may be utilized is 70 (70% of the output tax).
Thus, the net VAT payable is 100 less 70 = 30.
The unutilized input tax amounting to 40 is
carried over to the succeeding month.
In all cases where the basis for computing the
output tax is either the gross selling price or
the gross receipts, but the amount of VAT is
erroneously billed in the invoice, the total
invoice amount shall be presumed to be
comprised of the gross selling price/gross
receipts plus the correct amount of VAT. Hence,
the output tax shall be computed by
TAXATION 2 TAXATION LAW 2
multiplying the total invoice amount by a
fraction using the rate of VAT as numerator
and one hundred percent (100%) plus rate of
VAT as the denominator. Accordingly, the
input tax that can be claimed by the buyer
shall be the corrected amount of VAT
computed in accordance with the formula
herein prescribed.
There shall be allowed as a deduction from the
output tax the amount of input tax deductible
to arrive at VAT payable on the monthly VAT
declaration and the quarterly VAT returns.
T. SUBSTANTIATION OF INPUT TAX
CREDITS
(1) INPUT TAXES must be substantiated and
supported by the following documents,
and must be reported in the information
returns required to be submitted to the
Bureau:
(a) For the importation of goods = Import
entry or other equivalent document
showing actual payment of VAT on the
imported goods.
(b) For the domestic purchase of goods
and properties = Invoice showing the
information required under Secs. 113
(Invoicing and Accounting
Requirements for VAT-Registered
Persons) and 237 (Issuance of Receipts
or Sales or Commercial Invoices) of the
Tax Code.
(c) For the purchase of real property =
public instrument i.e., deed of absolute
sale, deed of conditional sale,
contract/agreement to sell, etc.,
together with VAT invoice issued by the
seller.
(d) For the purchase of services = official
receipt showing the information
required under Secs. 113 and 237 of the
Tax Code.
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A cash register machine tape issued
to a registered buyer shall constitute
valid proof of substantiation of tax
credit only if it shows the information
required under Secs. 113 and 237 of the
Tax Code.
(2) TRANSITIONAL INPUT TAX shall be
supported by an inventory of goods as
shown in a detailed list to be submitted to
the BIR.
(3) Input tax on "deemed sale" transactions
shall be substantiated with the invoice
required.
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TAXATION LAW 2
(4) Input tax from payments made to non-
residents (such as for services, rentals and
royalties) shall be supported by a copy of
the Monthly Remittance Return of Value
Added Tax Withheld (BIR Form 1600) filed
by the resident payor in behalf of the non-
resident evidencing remittance of VAT due
which was withheld by the payor.
(5) Advance VAT on sugar shall be supported
by the Payment Order showing payment of
the advance VAT.
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Example regarding the input tax on goods where deduction for depreciation is allowed from RR 16-
2005

Illustration: LBH Corporation sold capital goods on installment on October 1, 2005. It is agreed
that the selling price, including the VAT, shall be payable in five (5) equal monthly installments. The
data pertinent to the sold assets are as follows:
Selling Price
Passed-on VAT
Original Cost of Asset - P 5,000,000.00 (exclusive of VAT)
Accumulated Depreciation - 500,000.00
- 3,000,000.00
at the time of sale - 1,000,000.00
Unutilized Input Tax (Sold Asset) - 100,000.00

Accounting:

SELLER BUYER
Oct. 1, 2005 Oct. 1, 2005
Cash P 1,100,000.00 Asset P 5,000,000.00
Installment Receivable 4,400,000.00 Input Tax 500,000.00
Accumulated Depreciation 1,000,000.00
Output Tax 500,000.00 Cash 1,100,000.00
Asset 3,000,000.00 Installment Payable 4,400,000.00
Gain on sale of asset 3,000,000.00

To Record VAT Liability: ------------

Output Tax 500,000.00
Input Tax 100,000.00
VAT Payable 400,000.00

Periodic Receipt of Installment: Periodic Subsequent Payment:

Cash 1,100,000.00 Installment Payable 1,100,000.00
Installment Receivable 1,100,000.00 Cash 1,100,000.00

* The input tax of P 500,000.00 on the bought capital goods worth P 5,000,000.00 shall be
spread evenly over a period of 60 months starting the month of purchase.

If the depreciable capital good is sold/transferred within a period of five (5) years or prior to the
exhaustion of the amortizable input tax thereon, the entire unamortized input tax on the capital
goods sold/transferred can be claimed as input tax credit during the month/quarter when the sale
or transfer was made but subject to the limitation prescribed under Sec. 4.110-7 of these Regulations.

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Example regarding the allocation of input tax on mixed transactions from RR 16-2005
Illustration: ERA Corporation has the following sales during the month:
Sale to private entities subject to 10% - P100,000.00
Sale to private entities subject to 0% - 100,000.00
Sale of exempt goods - 100,000.00
Sale to gov’t. subjected to
5% final VAT Withholding
Total sales for the month - 100,000.00
- P400,000.00

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

Input tax on taxable goods (10%) - P5,000.00
Input tax on zero-rated sales - 3,000.00
Input tax on sale of exempt goods - 2,000.00
Input tax on sale to government - 4,000.00
Input tax on depreciable capital good
not attributable to any specific activity - P20,000.00
(monthly amortization for 60 months)

A. The creditable input tax for the month shall be computed as follows:

Input tax on sale subject to 10% - P 5,000.00

Input tax on zero-rated sale 3,000.00
Ratable portion of the input tax not directly attributable to any activity:

Taxable sales (0% and 12%) X Amount of input tax not directly attributable
Total Sales

P100,000.00 X P20,000.00 - P5,000.00

400,000.00

Total input tax attributable to sales - P9,000.00

to government

B. The input tax attributable to sales to government for the month shall be computed as follows:

Input tax on sale to gov’t. - P 4,000.00

Ratable portion of the input tax not directly attributable to any activity:

Taxable sales to the government X Amount of input tax not directly attributable
Total Sales

P100,000.00 X P20,000.00 - P5,000.00

400,000.00

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Total input tax attributable to sales - P 9,000.00

to government

C. The input tax attributable to VAT-exempt sales for the month shall be computed as
follows:

Input tax on VAT-exempt sales - P 2,000.00

Ratable portion of the input tax not directly attributable to any activity:

VAT-exempt sales X Amount of input tax not directly attributable

Total Sales

P100,000.00 X P20,000.00 - P 5,000.00

400,000.00

Total input tax attributable to - P 7,000.00

VAT-exempt sales

The table below shows a summary of the foregoing transactions of ERA Corporation:
Excess
Input VAT not Credit- Unrecove
Input
Output directly able Net VAT rable
VAT for VAT for
VAT Attributable Input Payable
carry- refund
to any Activity VAT VAT
over/
Sale Subject to 10%
VAT 10,000 5,000 5,000 10,000 10,000 0 0 0 0
Sale Subject to 0%
VAT 0 3,000 5,000 8,000 8,000 0 0 8,000 0
Sale of Exempt
Goods 0 2,000 5,000 7,000 0 0 0 0 7,000*
Sale to Government
subject to 5% Final
withholding VAT
* These amounts 10,000 4,000 for input5,000
are not available tax credit9,000 5,000
but may 5,000*** as cost0or expense.
be**recognized 0 **4,000*
Standard input VAT of 5% on sales to Government as provided in SEC. 4.114-2(a)
*** Withheld by Government entity as Final Withholding VAT

The input tax attributable to VAT-exempt sales shall not be allowed as credit against the output
tax but should be treated as part of cost or expense.

Notwithstanding the foregoing provisions, for persons engaged in both zero-rated sales under Sec.
108(B)(6) of the Tax Code and non-zero rated sales, the aggregate input taxes shall be allocated
ratably between the zero-rated sale and non-zero-rated sale.

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U. REFUND OR TAX CREDIT OF or sea vessels from the Philippines to a

EXCESS INPUT TAX (CF REFUND OF foreign country, the input taxes shall be
allocated ratably between his zero-rated
ERRONEOUSLY PAID TAXES)
sales and non-zero-rated sales (sales
subject to regular rate, subject to final
Who may claim for refund/apply for issuance of
VAT withholding and VAT-exempt sales).
tax credit certificate
(RR 16-2005)
(1) Zero-Rated Sales (Sec. 112(A), NIRC)
(a) Any VAT-registered person, whose sales
Requirements:(Summary)
are zero-rated or effectively zero-rated
(i) The claimant should be a VAT-
may apply for the issuance of a tax
registered person
credit certificate/refund of creditable
(ii) There should be an application
input tax due or paid attributable to
filed with the BIR or DOF center, as
such sales, EXCEPT transitional input
the case may be, within 2yrs after
tax, to the extent that such input tax has
close of taxable quarter.
not been applied against output tax,
(iii) The claimed input tax must not
within two (2) years after the close of the
have been applied to any output
taxable quarter when the sales were
tax during the period covered and
made. The input tax that may be subject
subsequent periods covered by the
of the claim shall exclude the portion of
claim.
input tax that has been applied against
(iv) The claimed input tax must have
the output tax.
been deducted from the VAT
(b) The acceptable foreign currency
quarterly return.
exchange proceeds must have been duly
(v) The claimed input tax are directly
accounted for in accordance with the
attributable to 0%-rated
rules and regulations of the Bangko
transactions.
Sentral ng Pilipinas (BSP) in the case of
(vi) Acceptable foreign currency
zero-rated transactions paid for in
exchange proceeds must have
acceptable foreign currency and
been duly accounted for
requiring that such be accounted for in
(vii) Claimed input tax must be duly
accordance with BSP rules & regulations
supported by VAT invoices/receipts.
(Secs. 106(A)(2)(a)(1) and (2), and Sec.
(viii) VAT returns for the succeeding
106(A)(2)(b) and Sec. 108(B)(1) and (2),
quarters must have been
NIRC).
submitted.
(c) Where the taxpayer is engaged in zero-
rated or effectively zero-rated sale and (2) Cancellation of VAT Registration.
also in taxable or exempt sale of goods (a) A person whose registration has been
of properties or services, and the cancelled due to (i) retirement from or
amount of creditable input tax due or cessation of business, or due to
paid cannot be directly and entirely changes in or (ii) cessation of status
attributed to any one of the transactions, under Section 106(C) of the Code may,
it shall be allocated proportionately on within two (2) years from the date of
the basis of the volume of sales. cancellation, apply for the issuance of
(d) In the case of a person engaged in the a tax credit certificate for any unused
transport of passenger and cargo by air

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input tax which may be used in
payment of his other internal revenue
taxes.
(b) He shall be entitled to a refund if he
has no internal revenue tax liabilities
against which the tax credit certificate
may be utilized.
Period to file claim/apply for issuance of tax
credit certificate
This period must be distinguished from normal
tax refunds for erroneous payments where an
administrative claim and judicial claim may be
made together, and the reckoning point of the
2 years is from the date of the erroneous
payment.
(1) Application for issuance of tax credit
certificate or refund of creditable input tax
(except transitional input tax)
w/in 2 years after the close of the
taxable quarter when the sale was
made.
If the VAT registration has been
cancelled due to retirement or
cessation of business, or change of
status, the 2 year period shall be after
the date of cancellation
(2) Administrative Claim
The CIR shall grant the tax
credit/refund within 120 days from the
date of submission of complete
documents in support of the
application
“Complete Documents” is determined
by taxpayer himself.
Taxpayer may only resort to a Judicial
Claim either after the end of the 120
day period or after a decision is made
by the Commission, whichever comes
first.
(3) Judicial Claim
In case of denial of the application or
the expiry of the 120 days, the taxpayer
may appeal to the CTA within 30 days
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TAXATION LAW 2
from the receipt of said denial or
inaction.
Manner of giving refund
Revenue Memorandum Circular no.
57-2013 (August 23, 2013): Unutilized
creditable input taxes attributed to zero-rated
sales can only be recovered through the
application for refund or tax credit. There is no
other mode of recovering unapplied input
taxes aside from an application for refund or
tax credit. The Memorandum Circular also
instructed the disallowance of unutilized
creditable input taxes attributable to VAT zero-
rated sales that is claimed as a deduction for
income tax purposes.
Refunds shall be made upon warrants drawn
by the Commissioner or by his duly authorized
representative without the necessity of being
countersigned by the Chairman, Commission
on Audit, the provisions of the Administrative
Code of 1987 notwithstanding: provided that
refunds shall be subject to post audit by the
Commission on Audit. (Sec. 112(D), NIRC)
Destination principle or cross-border doctrine
(see above)
V. INVOICING REQUIREMENTS
(Sec 113)
Invoicing requirements in general
A VAT-registered person shall issue:
(1) A VAT invoice for every sale, barter or
exchange of goods or properties; and
(2) A VAT official receipt for every lease of
goods or properties, and for every sale,
barter or exchange of services
Only VAT-registered persons are required to
print their TIN followed by the word “VAT” in
their invoice or ORs. Said documents shall be
considered as a “VAT Invoice” or VAT official
receipt. All purchases covered by
invoices/receipts other than VAT Invoice/VAT
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW 2

OR shall not give rise to any input tax. [RR 16-
05]
Note: VAT component of all transactions shall
be separately indicated in the VAT invoice or
receipt. (RR 18-2011)
Information Contained in the VAT Invoice or
VAT Official Receipt:
(1) A statement that the seller is a VAT-
registered person, followed by his
taxpayer's identification number (TIN);
(2) The total amount which the purchaser pays
or is obligated to pay to the seller with the
indication that such amount includes the
VAT:
(a) The amount of the tax shall be shown
as a separate item in the
invoice/receipt;
(b) If the sale is exempt from VAT, the
term "VAT-exempt sale" shall be
written or printed prominently on the
invoice or receipt;
(c) If the sale is subject to zero percent
(0%) value-added tax, the term "zero-
rated sale" shall be written or printed
prominently on the invoice or receipt;
(d) If the sale involves goods, properties or
services some of which are subject to
and some of which are VAT zero-rated
or VAT-exempt, the invoice or receipt
shall clearly indicate the breakdown of
the sale price between its taxable,
exempt and zero-rated components,
and the calculation of the value-added
tax on each portion of the sale shall be
shown on the invoice or receipt. The
seller has the option to 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.
(5) Name of buyer and seller

Invoicing Requirements and Recording in Deemed Sale Transactions

Transaction Invoicing Requirement

Transfer, use or consumption not in the Memorandum entry in the subsidiary sales journal to
course of business of goods or properties record withdrawal of goods for personal use
originally intended for sale or for use in the
course of business
Distribution or transfer to
Invoice, at the time of the transaction, which should
shareholders/investors or creditors include all the info prescribed above; data in the
invoice shall be duly recorded in the subsidiary sales
journal
Consignment of goods if actual sale is not Invoice, at the time of the transaction, which should
made within 60 days include all the info prescribed above; data in the
invoice shall be duly recorded in the subsidiary sales
journal

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Retirement from or cessation of business An inventory shall be prepared and submitted to the
with respect to all goods on hand
RDO who has jurisdiction over the taxpayer’s principal
place of business not later than 30 days after
retirement or cessation from business. An invoice shall
be prepared for the entire inventory, which shall be the
basis of the entry into the subsidiary sales journal. The
invoice need not
enumerate the specific items appearing in the
inventory regarding the description of the goods. If the
business is to be continued by the new owners or
successors, the entire amount of output tax on the
amount deemed sold shall be allowed as input taxes.

Consequences of issuing erroneous vat invoice
or vat official receipt
Issuance of a VAT Invoice or VAT Receipt by a
non-VAT person
If a person who is not a VAT-registered
person issues an invoice or receipt showing his
Taxpayer Identification Number (TIN), followed
by the word "VAT", the erroneous issuance
shall result to the ff:
(1) The non-VAT person shall be liable to:
Percentage taxes applicable to his
transactions;
VAT due on transactions under Section
106 or 108 of the Code, without the
benefit of any input tax credit; and
A 50% surcharge under Section 248
(B) of the code;
(2) The VAT shall, if the other requisite
information required is shown on the
invoice/receipt, be recognized as an input
tax credit to the purchaser.
Issuance of a VAT Invoice or VAT Receipt on an
Exempt Transaction by a VAT-registered Person
If a VAT-registered person issues a VAT
invoice or VAT official receipt for a VAT-exempt
transaction, but fails to display prominently on
the invoice or receipt the term "VAT-exempt
Sale:
(1) the transaction shall become taxable and
the
(2) issuer shall be liable to pay VAT thereon.
(3) The purchaser shall be entitled to claim an
input tax credit on his purchase. [RR 16-
05]
W. FILING OF RETURN AND
PAYMENT
(Sec 114)
VAT returns - VAT paid on a monthly basis.
Payments in the monthly VAT declarations
shall be credited in the quarterly VAT return to
arrive at the net VAT payable or excess input
tax/over-payment as of the end of a quarter.
(1) Filed by person liable to pay the VAT
(2) Quarterly return of the amount of his gross
sales or receipts within twenty-five (25)
days after the close of each taxable quarter
prescribed for each taxpayer.
(3) The monthly VAT Declarations of taxpayers
whether large or non-large shall be filed
and the taxes paid not later than the 20th
day following the end of each month.
Note: VAT paid on a monthly basis. Payments in the
monthly VAT declarations shall be credited in the
quarterly VAT return to arrive at the net VAT payable or
excess input tax/over-payment as of the end of a
quarter.

Administrative and Penal Provisions (Sec 115)

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(1) Suspension of business operations. In
addition to other administrative and penal
sanctions provided for in the Tax Code and
implementing regulations, the
Commissioner of Internal Revenue or his
duly authorized representative may order
suspension or closure of a business
establishment for a period of not less than
five (5) days for any of the following
violations:
(a) Failure to issue receipts and invoices.
(b) Failure to file VAT return as required
under the provisions of Sec. 114 of the
Tax Code.
(c) Understatement of taxable sales or
receipts by 30% or more of his correct
taxable sales or receipt for the taxable
quarter.
(d) Failure of any person to register as
required under the provisions of Sec.
236 of the Tax Code.
(2) Surcharge, interest and other penalties.
The interest on unpaid amount of tax, civil
penalties and criminal penalties imposed
in Title XI of the Tax Code shall also apply
to violations of the provisions of Title IV of
the Tax Code (VAT).
X. WITHHOLDING OF FINAL VAT ON
SALES TO GOVERNMENT
(RR 16-2005)
General Rule: Withholding tax does not apply
on transactions subject to VAT. The exceptions
are:
(1) Gross payments by the government shall
be subject to the 5% final withholding tax;
(2) Gross payments by resident VAT-taxpayers
to non-resident foreign persons of rentals,
royalties, reinsurance premiums, and
services done in the Philippines—12% (Sec.
114(c), NIRC)
* Beginning Nov. 1, 2005, when R.A. 9337
became effective, all sales of goods, properties,
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TAXATION LAW 2
or services to the government shall be subject
to the 5% final withholding tax. The
government shall, before making payment on
account of each purchase of goods and/or
services taxed at 12% VAT (Sec. 106 and 108)
deduct and withhold a final VAT due at the
rate of 5% of the gross payment thereof.
(Mamalateo, Reviewer on Taxation, 2008)
Sales to Government
(1) The Government or any of its political
subdivisions, instrumentalities or agencies,
including GOCCs shall, before making
payment on account of each purchase of
goods and services which are subject to the
VAT (Secs.
(2) 106 and 108, NIRC), deduct and withhold a
final VAT due at the rate of five percent
(5%) of the gross payment thereof.
The payment for lease or use of
properties or property rights to nonresident
owners shall be subject to 12% withholding
tax at the time of payment.
(a) The payor or person in control of the
payment is considered as the
withholding agent.
(b) The VAT withheld shall be remitted
within ten (10) days following the end
of the month the withholding was
made.
The 5% final VAT shall represent the
net VAT payable of the seller. The
remaining 7% effectively accounts for the
standard input VAT, in lieu of the actual
input VAT directly attributable or ratably
apportioned to such sales.
(This means that where the 5% final
VAT applies, the basic formula of output
tax less input tax does not apply.)
Should actual input VAT exceed 7% of
the gross payments, the excess may
form part of the sellers’ expense or cost.
On the other hand, if actual input VAT
is less than 7% of gross payment, the
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difference must be closed to expense

or cost, in effect reducing it.

The 5% final VAT shall represent the net VAT

payable of the seller. The remaining 7%
effectively accounts for the standard input VAT,
in lieu of the actual input VAT directly
attributable or ratably apportioned to such
sales.
(This means that where the 5% final VAT applies,
the basic formula of output tax less input tax
does not apply.)
(1) Should actual input VAT exceed 7% of the
gross payments, the excess may form part
of the sellers’ expense or cost.
(2) On the other hand, if actual input VAT is
less than 7% of gross payment, the
difference must be closed to expense or
cost, in effect reducing it.

However, 12% final VAT shall be withheld with

respect to the following:
(1) Lease or use of properties or property
rights owned by non-residents;
(2) Services rendered to local insurance
companies, with respect to reinsurance
premiums payable to non-residents; and;
Other services rendered in the Philippines by
non-residents.

VAT FORMULA (IN GENERAL)

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

Less: Sales Returns and Allowances xxx

Sales Discounts xxx xxx

Total Sales (Taxable Base) xxx

Multiplied by 12% 12%
Output VAT on sales or gross recipts xxx
Less: Input VAT on purchases and services xxx
Transitional Input VAT, if applicable xxx
Presumptive Input VAT, if applicable xxx
Input VAT Carry-over from previous period xxx
Creditable VAT withheld xxx xxx
Net VAT payable (refundable) xxx

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MONTHLY RETURN
Gross Sales/Receipts for the Month xxx
Multiplied by VAT rate 12%
Output VAT xxx
Less Input Taxes:
Transitional/Presumptive Input Tax xxx
On taxable goods/services xxx xxx
Net VAT Payable xxx
Add Penalties:
Surcharge xxx
Interest xxx
Compromise xxx xxx
Total Amount Payable xxx

INVOLVING GOVERNMENT
When Actual Input VAT > Standard Input VAT: excess forms part of seller’s expense/cost
When Actual Input VAT < Standard Input VAT: difference is treated as taxable other income

Sales xxx
Output VAT (Sales x 12%) xxx
Purchases xxx
Input VAT (Purchases x 12%) xxx

OUTPUT VAT Payable:

Output VAT xxx
Less: Actual Input VAT xxx
Standard Input VAT (Sales x 7%) xxx xxx
Cost of sale/Expense (Income and expense summary) xxx
Net VAT Payable xxx
Less: Creditable Withholding Tax (Sales x 5%) xxx
Output VAT Payable xxx

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Quick Notes on VAT

Transactions subject to VAT

General Requirements
(1) Done in the course of trade or business (w/n profit-oriented): rule of regularity + incidental thereto
(inc isolated)
EXCEPTION:
(a) NRC/NRA who perform services in Phil, even if no regularity
(b) Importation of Goods may be for business or non-business use
(2) Gross sales or receipts for the past 12 months or the next 12 months > 1,919,500php
OR there are reasonable grounds to believe

Taxable Transactions and Specific Requirements

(1) SBEL of Goods or Properties27
Goods/Personal Properties
(i) Actual/deemed sale (4) for a valuable consideration
(ii) for use or consumption in the Phil (regardless of the payment arrangements)
(iii) not exempt from VAT (NIRC, special law, special agreement)

Real Properties28:
(i) Seller (w/n natural) executes contract to SBE of RP
(ii) RP is in the Phil
(iii) Seller is engaged in sale or exchange of RP or real estate (dealer, developer, lessor)
(iv) RP is held primarily for sale/lease ICT/B or an ordinary asset used in T/B as an incident to
his vatable activity (NOT a capital asset)
not exempt from VAT (NIRC, special law, special agreement)

(2) S of Services29
(i) for a valuable consideration (actually/constructively received)
(ii) performed ICTB in the Phil.
(iii) not exempt from VAT (NIRC, special law, special agreement)
(iv) person rendering service is VAT-liable
(v) no ee-er relationship
(3) I of Goods

27 Sec 106
28

Casual Sale (Capital Assets) Subject to CGT (6%)

Regular Sales (Ordinary Assets)
Commercial Property
(Sale/Lease)
Residential Units (Lease)
Residential Lot
Residential House and Lot
Subject to 12% VAT
If monthly rental ≤ 12,800 = VAT and OPT-exempt
If monthly rental > 12,800 but aggregate annual rentals ≤1,919,500 = subject to OPT
If monthly rental > 12,800 and aggregate annual rentals > 1,919,500 = subject to VAT
If SP > 1,919,500.00 = subject to VAT
IF SP ≤ 1,919,500.00 = VAT-exempt
If SP > 3,199,200.00 = subject to VAT
IF SP ≤ 3,199,200.00 = VAT-exempt

29
Sec 108

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Persons Liable to pay VAT

(1) any person who SBEL goods or properties
if real property: persons engaged in real estate business:
(i) Any person who SBE of real properties ICT/B
(ii) Real estate lessors/ sub-lessors
(iii) NRA/NRC lessors when RP is in Phil
(iv) non-stock, non-profit corp engaged in SBE of real properties ICT/B, regardless of
disposition of income
(v) Gov’t inc GOCCs in SBEL of RP ICT/B
(2) who renders services
(3) who imports goods
if importer is tax-exempt/VAT-exempt AND goods are subsequently SBE to non-exempt
persons, purchasers/recipients = importer
if the Philippine branch of an NRFC “imported”, first local buyer = importer

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Tax Bases of VAT

(1) Gross (Sales) Selling Price: total amount of money paid in consideration of SBEL
excludes: VAT, sales discounts30 and, allowances and returns (2)
includes: Excise tax paid, initial payments31, interests and penalties (if instalment), commission
income (if exported), purchase price, charges for packing, delivery and insurance
o If goods/personal properties,
GSP = amount paid in consideration
IF DEEMED SALE: FMV at the time of the transaction
NB: in retirement/cessation, inventory (raw materials, finished goods, machinery,
equipment, furniture, fixture), tax base = whichever is lower,
(i) acquisition cost
(ii) current market price of goods
o If real property,
GSP = amount higher:
i. consideration stated in the sales document
ii. FMV, whichever is higher of
NB:
Zonal value: FMV as determined by CIR
Deferred Payments (initial > 25% Real Property Tax Value: FMV as determined by provincial & city
GSP)
Instalment Plan (initial ≤ 25% GSP)
assessors

o IF ON INSTALLMENT:
GSP = down payments received + interests + penalties + other charges – amount of
mortgage (paid)
NB: If zonal/FMV, tax base =
𝐴𝑐𝑡𝑢𝑎𝑙 𝐶𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑡𝑖𝑜𝑛 (𝑒𝑥𝑐𝑙𝑢𝑠𝑖𝑣𝑒 𝑉𝐴𝑇)
𝑥 𝑧𝑜𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑟 𝐹𝑀𝑉, ℎ𝑖𝑔ℎ𝑒𝑟
𝐴𝑔𝑟𝑒𝑒𝑑 𝐶𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑡𝑖𝑜𝑛 (𝑒𝑥𝑐𝑙𝑢𝑠𝑖𝑣𝑒 𝑉𝐴𝑇)

Upon full collection, if a difference is uncovered because the zonal value or market
value at the date of sale is higher than the total receipts or collections based on the agreed
consideration, the additional VAT shall be paid accordingly (RMC 03-96)

o IF DEFERRED
GSP = entire selling price or zonal/FMV, whichever is higher
NB: CIR has the power to determine the appropriate tax base in 1) SBE in deemed
sales and 2) when GSP is unreasonably lower than AMV32

(2) Gross Value in money of goods

(3) Gross Receipts derived from transaction: total amount of money/equivalent = contract price +
compensation + service fee + rental fee + royalties + amount charged for materials supplied with
the services + deposits and advanced payments actually or constructively received + costs items of

30 It should be determined at the time of the sale, indicated in the invoice and granting does not depend on the happening of a future event
31Initial payments does not include the amount of mortgage on RP sold (except excess when mortgage exceeds the cost of the property),
notes and other evidence on=f indebtedness issued by the purchaser at the time of the sale
32 GSP is unreasonably lower than the actual market value if it is lower than 30% of AMV of the same goods of the same quantity or quality
sold in the immediate locality or the nearest date of sale.

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construction projects – (VAT + amounts earmarked for payments to unrelated 3rd party + amounts
received as reimbursement + monies/receipts held in trust w/c do not redound to the benefit of
taxpayer + universal charge passed on and collected by distribution companies and electric coop (if
sale of electricity) + receivables + local taxes)

IF DEALER IN SECURITIES: gross selling price – cost of securities sold

(4) Total Value/Landed Cost (determined on the basis of quantity/volume of goods)

Total Value used by Customs: tariff and customs duties + custom duties +excise tax + charges
Landed Cost: invoice amount inc. cost of loading, shipping, unloading, + custom duties +
freight + insurance + other charges +excise tax – expenses incurred after release of goods (e.g.
cost of delivery)
Customs duty: amount of customs duty legally due and paid by the importer
Charges: special import tax,foreign marginal fees, bank and arrastre charges, wharfage
dues, broker fees, other charges paid to complete importation

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Rates of VAT
(A) Output Tax (Sale/Barter/Exchange/Lease)
(1) 12% standard rate: applied directly to TB
(2) 0%: applied directly to TB
(B) Input Tax (Purchase from VAT-registered businesses/Importation of goods)
(1) 12% standard rate: applied directly to TB
(2) 0%: applied directly to TB
(3) 2% transitional VAT (: applied to the (inventory on hand) value of goods (exc. VAT-exempt
good) existing at the date a person commences business and/or becomes liable to VAT) or
12% actual input tax rate, higher
(4) 4% presumptive input tax rate: applies to purchases of VAT-exempt goods used as inputs by a
VAT-registered person in manufacturing or processing certain food products
(5) 7% FWT (standard input VAT, when government), 5% withholding

Creditable Input VAT Requirements

(1) Proper documentation
(2) No double input tax credit is allowed.
Input VAT on a particular purchase transaction can be claimed once only upon consummation
of the sale of goods and based on the entire GSP (whether paid on cash, credit or instalment)
(3) Ignore erroneous VAT rate. The correct rate of input VAT can still be claimed.
(4) Transactions should have been made with VAT-registered persons.
(5) IF MIXED TRANSACTIONS and input VAT cannot be directly attributable::

Formula Input Tax Treatment

( )
Untraceable Input VAT x Creditable Input VAT

( )
Untraceable Input VAT x Input VAT Credit, eligible for tax refund or TCC

( )
Untraceable Input VAT x Cost of Sales or Operating Expense

( ) Compare to Standard Input VAT (Creditable against

Untraceable Input VAT x Standard input VAT)

NB: Creditable Input VAT is

(1) increased by any input VAT carried over from the preceding month or quarter
(2) decreased by
(i) amount of the claim for refund or tax credit for VAT filed during the same period
(ii) input tax attributable to exempt sales and unauthorized input tax attributable of depreciable
capital goods
(iii) amount of input VAT wrt uncollected portion of instalment receivable in instalment sales

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VAT-EXEMPT and 0% VAT

VAT-Exempt 0% VAT
Non-VAT taxable transaction Taxable transaction
Taxpayer is relieved from payment of VAT for
w/c he is directly liable
NO output and input VAT No output VAT, but input VAT is available as
Optional VAT Registration tax credit or refund
Partial relief
Only removes VAT at the exempt stage Total relief
All VAT is removed at whatever stage

SALE OF SERVICES
VAT-Exempt 0% VAT
NB: There are 31 VAT-exempt sales of (1) Processing, manufacturing, repacking goods to
services (Sec 109 and special laws) non-resident (5)
(2) Processing, manufacturing, repacking goods to
(1) wrt lease of property =exempt export-oriented (3)
if advance payment = loan, option (3) Services other than processing, manufacturing,
money, security deposit repacking (4)
NB: if security deposit is applied to (4) Services to exempted persons (3): effectively 0-
rental = VAT rate
(2) wrt persons engaged in milling, (5) Sale of power/fuel-generated through renewable
processing, manufacturing or repacking resources (3)
goods = exempt (6) Services rendered to int’l shipping/air transport
if palay rice; corn corn grits; (2)
sugar cane raw sugar (7) Transport of passengers and cargo by air from Phil
(3) wrt franchise grantees of electric utilities, to Foreign (3)
telephone and telegraph, radio and/or (8) Transactions of VAT-reg person to foreign
television broadcasting = exempt embassies (2)
if annual gross receipts <= 10M;
franchise grantees of gas and
water utilities;
of telephone & telegraph
services, amounts received
for overseas dispatch from
Phil.
(4) wrt PREMIUMS of non-life insurance
companies = exempt
if life and disability insurance;
crop insurance;
health and accident insurance

(included are only those with exceptions) Exceptions to the Exemptions (Subject to VAT)
(5) sale/import of agricultural & marine food (1) wrt livestock and poultry DOES NOT INCLUDE
products in their original state; livestock fighting cocks, race horses, zoo animals and pets
and poultry (used/yield for human (2) DOES NOT INCLUDE vehicles, vessels, aircrafts,
consumption); breeding stock and machineries, and other goods for use in
genetic materials manufacturing in commercial quantities
(6) import of professional instruments, (3) DOES NOT INCLUDE those under Petroleum
implements, wearing apparel, domestic Exploration Concessionaires under Petroleum Act
animals, and personal household effects of 1949

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(7) Transactions exempt pursuant to special (4) Wrt sale by agricultural coops to non-members, if
laws seller is the member = VAT
(8) Cooperatives Wrt sale by non-agri, non-electric and non-credit,
(9) Residential lots ≥ 1,919,500 & lot & importation of machineries and equipment = VAT
dwellings ≥ 3,199,200 (5) DOES NOT INCLUDE parking lot
(10) lease of residential units, (6) If any portion of such goods are used for purposes
if ≤ 12,800/unit/month (regardless of other than those stated = VAT
aggregate amount);
if ≥ 12,800/unit/month (AND
aggregate amount is ≥ 1,919,500)
(11) importation of fuels, goods, supplies by
international shipping or air transport

Importation of Services

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SALE OF GOODS
VAT-Exempt 0% VAT
Real Property Actual Export Sales (3)
(i) Not primarily held ICT/B
(ii) Low-cost or socialized housing Deemed Export Sales
(iii) Residential lot <= 1,919,500 (i) Internal or constructive export sales
(iv) House and/or other residential dwellings <= (a) Raw/Packaging materials to non-resident buyer
3,199,200 (5)
(v) Lease (12,800/unit/year or total (b) Raw/Packaging materials to export-oriented (3)
1,919,500/year) (c) Phil. Port FOB value of export products (2)33
(vi) Transmission to a trustee (d) Net selling price of export products (4)34
E: if transmission is deemed sale (e) sales to bonded manufacturing warehouses (2)35
(vii) Transfer to corporation in exchange of SoS (f) sales to export processing zones36
(viii) Advance payments/Security Deposits in (g) sales to enterprises duly accredited by Subic Bay
lease Metropolitan Authority (2)
E: if applied to the rent (h) sales to registered export traders (3)
(i) sales to diplomatic missions etc. (2)
As regards ecozones and PEZA-registered (j) sale by VAT-supplier to manufacturer/producer
entities whose products are 100% exported (3)
(i) Made by VAT-exempt supplier from customs (ii) Sale of gold to BSP
territory to any registered enterprise inside (iii) Sale of goods/supplies/equipment/fuel to persons
ecozone engaged in int’l shipping/air transport (4)
(ii) Intra-ecozone enterprise sale of service, if (iv) Docking/Undocking services to foreign vessels
PEZA registered seller is subject to 5%
special tax regime Foreign currency denominated goods
(iii) Intra-ecozone sales of goods (i) To a NRC/NRA of goods (5)
(ii) To a NRC/NRA of goods locally manufactured for
household and personal use (2)
E: automobiles and non-essential goods

Effectively-zero rated sales (3)

(i) Made by VAT registered supplier from customs
territory to any registered enterprise inside ecozone
(ii) Intra-ecozone enterprise sale of service, if PEZA
registered seller is subject to NIRC taxes

33 Under Omnibus Investment Code (EO226)

34
Ibid
35
RA7227
36
RA 7916

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Taxable Activity/Property TR Tax Base Tax Payable

Actual SBE of Goods or Properties Gross Selling Price
Goods/ Personal Properties = amt. paid to the seller
Real Properties 12% = consideration/FMV, higher
IF sale is on instalment plan
AND ZV/FMV > SP = 𝑥 𝑧𝑜𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑟 𝐹𝑀𝑉 (𝑒𝑥𝑒𝑐𝑢𝑡𝑖𝑜𝑛)
(excluding VAT) VAT Payable paid
Deemed Sale Transactions by
Not ICB/T, but originally seller/transferor
intended for sale/use ICB/T FMV (at the time of transaction)
Transfer to SH in share of profit E: if FMV is unreasonably lower (by more than 30% of AMV) = AMV or
or Cr in payment of debt 12% determined by CIR
Consignment after 60d
Retirement/Cessation of
AC or current market price, lower
business
VAT Payable paid
Sale of Services 12 % Gross receipts derived
by performer
Importation of Goods Total Value used by BOC VAT paid by
In general =tariff & custom duties + custom duties + excise tax + charges importer PRIOR tp
12% the release of
When custom duties are based goods in Customs
= landed cost + excise tax
on quantity or volume custody

(1) Once registered as a VAT person, the taxpayer shall be liable to output tax and be entitled to input
tax credit beginning on the first day of the month following registration.
(2) The cancellation for registration will be effective from the first day of the following month the
cancellation was approved.
(3) What is the treatment for Withholding of VAT on Government Money Payments?
The government or any of its political subdivisions, instrumentalities or agencies, including
government-owned or controlled corporations (GOCCs) shall, before making payment on
account of each purchase of goods and/or services taxed at twelve percent (12%) VAT
pursuant to Sections 106 and 108 of the Tax Code, deduct and withhold a Final VAT due at the
rate of five percent (5%) of the gross payment.
The five percent (5%) final VAT withholding rate shall represent the net VAT payable of the
seller. The remaining seven percent (7%) effectively accounts for the standard input VAT for
sales of goods or services to government or any of its political subdivisions, instrumentalities
or agencies including GOCCs in lieu of the actual input VAT directly attributable or ratably
apportioned to such sales. Should actual input VAT attributable to sales to government
exceeds seven percent (7%) of gross payments, the excess may form part of the sellers'
expense or cost. On the other hand, if actual input VAT attributable to sale to government is
less than seven percent (7%) of gross payment, the difference must be closed to expense or
cost.
The government or any of its political subdivisions, instrumentalities or agencies including
GOCCs, as well as private corporation, individuals, estates and trusts, whether large or non-
large taxpayers, shall withhold twelve percent (12%) VAT with respect to the following
payments:
(i) Lease or use of properties or property rights owned by non-residents; and
(ii) Other services rendered in the Philippines by non-residents.

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Before start of business or VAT-registered
VAT-Exempt Person within 10d before the
Person
(cannot be cancelled w/in beginning of taxable quarter
VAT AND NON-VAT REGISTRATION (w/ TIN)
3years; franchise of
radios/tv broadcasting,
Compliance activities after registration:
irrevocable) Optional Registration Registration Fee (500php) to
1. Registration of books of accounts (3) of the
authorized bank agent, Certificate of business/occupation/calling including practice
RDOfficer, Rev Collection Registration of profession, before using the same.
Before start of business Officer, authorized
and every year
Register to 2. Registration of sales invoices and official
thereafter (on/before RDO for every city/municipal treasurer receipts (If there are transactions not subject to
Jan 31) separate and VAT, registration of non-VAT invoices or non-
distinct EXEMPT from 500php VAT official receipts)
Person 1. if aggregate gross APPROVE 3. Annual Registration: Pay registration fee for
establishment
every place of business that generates sales
Liable for sales/receipts ≤ 100,000;
after updating the registration records.
VAT 2. cooperative; 4. Filing of the Monthly VAT Declaration and
3. individuals earning pure Quarterly VAT Return to be submitted to
Did not register: compensation income; RTO/LTDO
Still liable for VAT 4. overseas workers DENY
No input credit
CANCELLATION/UPDATE OF VAT REGISTRATION
(registration of a taxpayer of a franchise grantee of radio and/or tv
broadcasting whose gross annual receipts≤ 10,000,000 =
irrevocable)

Before start of business or Certificate of Non-VAT Cancellation/Update Minor change in

within 10d before the
necessitating cancellation original registration
beginning of taxable quarter
APPROVE w/in 15d
w/in 25d from
Registration Fee (500php) to from
cancellation
Register to authorized bank agent, change
RDO for every RDOfficer, Rev Collection Filing of Short Period Return
Officer, authorized (for the remaining period Notice of Change (f
separate and
city/municipal treasurer that he was VAT-reg) change of address)
distinct DENY
establishment
EXEMPT from 500php
if aggregate gross Instances when a taxpayer may
sales/receipts ≤ 100,000; CANCEL his registration:
1. When TP’s gross sales/receipts for the following 12 months ≤ 1,919,500
cooperative; individuals 2. When TP has ceased to carry on his T/B and does not expect to recommence within 12m
earning pure compensation 3. In case of a single proprietorship, a change of ownership
income; overseas workers 4. Dissolution of a partnership or corporation
5. Merger/consolidation wrt dissolved corporations
6. Person who registered prior to planned business commencement but failed to actually start
business

UPDATE his registration:

RE applications for VAT zero-rating: Taxpayers shall file their application directly with the
Audit Information, Tax Exemption and Incentives Division (AITEID) under the Assessment
Service, or with the LTAID I and II, BIR National Office, as the case may be.
1. When TP’s business has become exempt
219 2. When there is a change of the nature of business (from vatable to exempt)
3. When TP a tax-exempt individual who applied for optional registration and cancelled his
registration after 3yrs.
4. When TP is a VAT-registered person whose gross sales/receipts for 3 consecutive years ≤ 1,919,500
 UP COLLEGE OF LAW TAXATION 2 TAXATION LAW 2

VAT REFUND OR VAT CREDIT CERTIFICATE

VAT- registered
cancelling their
w/in 2 years after close registration (regardless of
of the taxable quarter the source of input tax)
when sales are made
Input Tax wrt Zero-rated and Application for w/in 2 years after
Effectively zero-rated Sales refund or TCC to close of the
Direct Tax CIR + taxable quarter
Credit supporting docs when sales are
VAT-registered made
Taxpayer Presumptive Input Tax
w/in 120 days
Transitional Input Tax w/in 120 days
Carry-over from
If VAT-exempt Actual Input Tax not related from submission
Tax Credit
changes his to zero-rated sales submission
status to VAT-
registered = GRANTED
transitional
VAT-exempt Transactions DENIED INACTION
input tax

w/in 30 days w/in 30 days

Non-VAT Apply against from receipt from expiration
Taxpayer OUTPUT VAT of denial of 120-days

Appeal to CTA ISSUANCE

Related INPUT VAT shall

NO INPUT TAX be treated as a cost of
sale or operating
expense

DENIED GRANTED

Related INPUT VAT Related OUTPUT

shall be treated as VAT shall be treated
cost of purchases as an operating Tax Credit Tax Refund
expense Certificate
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IV. Tax remedies under of filing after it was due,

whichever is LATER
the NIRC (ii) Return filed was false or
fraudulent – 10 years from date
of discovery of fraud or falsity
A. TAXPAYER’S REMEDIES
No return filed – 10 years from date of discovery
(1) ADMINISTRATIVE (BIR) of omission
(a) Before payment Criminal offense
(i) Filing a petition or reconsideration o 5 years from date of commission,
or reinvestigation; and and if not known then, from
(ii) Entering into a compromise discovery and the institution of
(b) After payment judicial proceedings for its
(i) Filing a claim for refund; and investigation and punishment.
(ii) Filing a claim for tax credit
Assessment
(1) JUDICIAL (CTA/RTC)
(a) Civil action (i) Concept of assessment
(i) Appeal to the CTA Assess means to impose a tax; to
(ii) Action to contest forfeiture of charge with a tax; to declare a tax to be
chattel; and payable; to apportion a tax to be paid or
(iii) Action for damages contributed, to fix a rate; to fix or settle a sum
(b) Criminal action to be paid by way of tax; to set, fix or charge a
(i) Filing a criminal complaint against certain sum to each taxpayer; to settle
erring BIR officials and employees determine or fix the amount of tax to be paid
(84 C.J.S 74-750)
Periods: An assessment is the notice to the
Assessment effect that the amount therein stated is due
o Return was filed from a taxpayer as a tax with a demand for
(i) Not false or fraudulent – 3 payment of the same within a stated period of
years from date of filing of the time. (Commissioner v. CTA, 27 SCRA 1159)
return OR date legally due or
actual date of filing after it wad A. Requisites for valid assessment
due, whichever is LATER
(ii) False or fraudulent - 10 (a) The taxpayer shall be informed in writing
years from date the fraud or of the law and the facts on which the
falsity was discovered assessment is made (Sec. 228, NIRC)
o No return filed – 10 years from the (b) An assessment contains not only a
discovery of omission computation of tax liabilities, but also a
Collection demand for payment within a prescribed
o Assessment made – 3 years from period (CIR v. PASCOR)
date of finality of assessment (c) An assessment must be served on and
o No assessment received by the taxpayer (CIR v. PASCOR)
(i) With return filed which is
B. Constructive methods of income
not false or fraudulent – 3
determination
years from date of filing of the
C. Inventory method for income determination
return OR date or actual date
D. Jeopardy assessment

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UP COLLEGE OF LAW TAXATION 2
E. Tax delinquency and tax deficiency
(ii) Power of the Commissioner to make
assessments and prescribe additional
requirements for tax administration and
enforcement
(a) Power of the Commissioner to obtain
information, and to summon/examine,
and take testimony of persons
(b)
(iii) When assessment is made
Prescriptive period for assessment (Sec. 203,
NIRC)
General Rule: 3 years
If the taxpayer filed a return: internal
revenue taxes shall be assessed within
three years after the last day prescribed by
law for the filing of the return.
If a return is filed beyond the period
prescribed by law: the three-year period
shall be counted from the day the return
was filed.
Exception: (i) False return, (ii) Fraudulent
return with intent to evade tax, (iii) Failure to
file a return (Sec. 222, NIRC)
NB: Waiver
The taxpayer and the Commissioner may agree
in writing, before the expiration of the time
prescribed in Sec. 203, to extend the period of
assessment (Sec. 222(b), NIRC)
(1) The waiver of prescription must be
executed properly, otherwise, invalid and
results to prescription of the right to
assess/collect. (Philippine Journalists Inc.
vs. CIR, December 16, 2004)
(2) Requirements for a valid waiver under
RMO 20-90: i) definite agreed date, ii) date
of acceptance indicated, and iii) taxpayer
must be furnished with a copy of the waiver.
(a) Prescriptive period for assessment
(1) False, fraudulent, and non-filing of returns
(b) Suspension of running of statute of
limitations
222
TAXATION LAW
(1) Period during which the commissioner is
Prohibited from making the assessment or
beginning distraint or levy or a proceeding
in court, and for sixty (60) days thereafter
(2) When the taxpayer requests for a
Reinvestigation which is granted by the
Commissioner
(3) When the taxpayer Cannot be located in
the Address given by him in the return filed
upon which a tax is being assessed or
collected, BUT if the taxpayer informs the
Commissioner of any change in address,
the running of the statute of limitations
shall not be suspended
(4) When the warrant of distraint or levy is
duly served upon the taxpayer, his
authorized representative, or a member of
his household with sufficient discretion,
and No Property is located
(5) When the taxpayer is Out of the Philippines
(iv) General provisions on additions to the tax
(a) Civil penalties
(b) Interest
(c) Compromise penalties
(v) Assessment process
(a) Tax audit
(b) Notice of informal conference
(c) Issuance of preliminary assessment
notice
(d) Notice of informal conference
(e) Issuance of preliminary assessment
notice
(f) Exceptions to issuance of
preliminary assessment notice
(g) Reply to preliminary assessment
notice
(h) Issuance of formal letter of demand
and assessment notice/final
assessment notice
(i) Disputed assessment
(j) Administrative decision on a
disputed assessment
(vi) Protesting assessment
UP COLLEGE OF LAW TAXATION 2
(a) Protest of assessment by taxpayer
(1) Protested assessment
(2) When to file a protest
(3) Forms of protest
(4) Content and validity of
protest
(b) Submission of documents within 60
days from filing of protest
(c) Effect of failure to protest
(d) Period provided for the protest to
be acted upon
(vii) Rendition of decision by Commissioner
(a) Denial of protest
(1) Commissioner’s actions equivalent to denial
of protest
(a) Filing of criminal action against taxpayer
(b) Issuing a warrant of distraint and levy
(2) Inaction by Commissioner
(viii) Remedies of taxpayer to action by
Commissioner
(a) In case of denial of protest
(b) In case of inaction by Commissioner within
180 days from submission of documents
(c) Effect of failure to appeal
Assessment Process
[Sec. 228, NIRC; RR 12-99; RR 18-13]
(1) Tax Audit - a tax audit, revenue officers
examine the books of account and other
accounting records of taxpayers to
determine the correct tax liability. This is
through the issuance of a Letter of
Authority.
Letter of Authority: An official document
that empowers a Revenue Officer to
examine and scrutinize a taxpayer’s books
of accounts and other accounting records,
in order to determine the taxpayer’s correct
internal revenue tax liabilities.
Cases which need not be covered by a
valid LA: Cases involving civil/criminal tax
fraud which fall under the jurisdiction of
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TAXATION LAW
the tax fraud division of the Enforcement
Services, and Policy cases under audit by
the special teams in national offices
(2) Issuance of Preliminary Assessment Notice
(PAN) - The Assessment Division issues
PAN if it determines that there exists
sufficient basis to assess the taxpayer for
any deficiency tax. It shall show in detail
the facts and the law on which the
proposed assessment is based.
(3) Reply to PAN
Taxpayer is given time to respond: 15 days
from date of receipt of PAN
(i) If he/she fails to respond: taxpayer is
considered in default; a formal letter of
demand and assessment notice shall
be issued to the taxpayer
(ii) If he/she responds: a FAN/FLD shall
be issued within 15 days from
filing/submission of the taxpayer’s
response, calling for payment of the
taxpayer’s deficiency tax liability,
inclusive of the applicable penalties.
The notice for informal conference and the
PAN shall not be required in any of the ff
cases, in which case, issuance of the
Formal Assessment Notice (FAN) shall be
sufficient:
(a) The finding for any deficiency tax is the
result of mathematical error in the
computation of the tax as appearing
on the face of the return; or
(b) A discrepancy has been determined
between the tax withheld and the
amount actually remitted by the
withholding agent; or
(c) A taxpayer who opted to claim a refund
or tax credit of excess creditable
withholding tax for a taxable period
was determined to have carried over
and automatically applied the same
amount claimed against the estimated
tax liabilities for the taxable quarter or
UP COLLEGE OF LAW TAXATION 2
quarters of the succeeding taxable
year; or
(d) The excise tax due on excisable articles
has not been paid; or
(e) An article locally purchased or
imported by an exempt person, such as,
but not limited to, vehicles, capital
equipment, machineries and spare
(2) parts, has been sold, traded or
transferred to a non-exempt person.
(4) Issuance of formal letter of demand and
final assessment notice (FAN/FLD)
A Final Assessment Notice (FAN) is a
declaration of deficiency taxes issued
to a taxpayer who:
o fails to respond to a pre-
assessment notice within the
prescribed period of time, or
o whose reply to the PAN was found
to be without merit.
o Sec 228: The taxpayer shall be
informed in writing of the law and
the facts on which the assessment
is made; otherwise the assessment
shall be void
o An assessment contains not only a
computation of tax liabilities, but
also a demand for payment within
a prescribed period.
(5) Disputed Assessment
The taxpayer or his duly authorized
representative may protest
administratively against the formal letter
of demand and assessment notice within
thirty days (30) from date of receipt. The
taxpayer protesting an assessment may
file a written request for reconsideration or
reinvestigation
RECONSIDERATION – refers to a plea
of re-evaluation of the assessment on
the basis of existing records without
need of additional evidence. It may
involve both question of fact or of law
or both
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TAXATION LAW
REINVESTIGATION – refers to a plea of
re-evaluation of an assessment on the
basis of newly-discovered evidence
that a taxpayer intends to present in
the reinvestigation. It may also involve
a question of fact or law or both.
Failure to file a protest against
FLD/FAN within 30 days, the
assessment shall become final,
executory and demandable
Protesting Assessment
Protest of assessment by taxpayer
Made within thirty (30) days from receipt of
the assessment.
Protest is either a request for
reconsideration or a request for
reinvestigation, or both
The protests shall state: (Failure to state
shall render protest null and void)
(1) Nature of protest, whether
Reconsideration or reinvestigation,
specifying new or additional evidence if
request for reinvestigation
(2) Date of the assessment notice
(3) Applicable law, rules and regulations,
or jurisprudence on which his protest is
based.
In case of request for reinvestigation,
submission of documents within 60 days from
filing of protest
Within sixty (60) days from filing of the
protest, all relevant supporting
documents must be submitted,
otherwise the assessment shall
become final.
“Relevant supporting documents” –
documents necessary to support the
legal and factual bases in disputing a
tax assessment as determined by the
taxpayer
“Assessment shall become final” –
taxpayer is barred from disputing the
correctness of the issue assessment by
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introduction of newly discovered or
additional evidence, and the FDDA
shall consequently be denied.
Only applies to request for
reinvestigation
(6) Administrative decision on a disputed
assessment - The power to decide disputed
assessments, refunds of internal revenue
taxes, fees or other charges, penalties
imposed in relation thereto, or other
matters is vested in the Commissioner,
subject to the exclusive appellate
jurisdiction of the Court of Tax Appeals.
Commissioner may either grant the
appeal, deny the appeal or not act
upon the protest.
(a) Denial
Rendition of Decision by Commissioner
CIR’s actions deemed equivalent to denial of
protest:
Filing of collection suit against
taxpayer (CIR v. Union Shipping)
Issuing a warrant of distraint and levy
(Commissioner v. Algue)
Where there is a request for
reconsideration, final demand letter
from BIR (CIR v. Isabela Cultural Corp)
Notice of delinquency (CIR v. Ayala
Securities)
Inaction by Commissioner - If the
protest is not acted upon within one
hundred eighty (180) days from
submission of documents, the inaction
by the Commissioner is considered as a
denial of protest.
Remedies of Taxpayer to Action by
Commissioner: In case of denial of protest
If the protest is denied, in whole or in
part, by the Commissioner’s duly
authorized representative, the taxpayer
may either:
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TAXATION LAW
(a) Appeal to the CTA within 30 days
from the date of receipt of the
decision
(b) Elevate his protest through request
for reconsideration to the
If the Commissioner denies the protest
filed by the taxpayer, the latter may
appeal to the CTA within 30 days from
receipt of the decision denying the
protest. A motion for reconsideration of
the Commissioner’s denial of the
protests shall not toll the 30 day period
to appeal to the CTA.
(b) Inaction
Remedies of Taxpayer to Action by
Commissioner: In case of inaction within 180
days from submission of documents
If the protest is not acted upon by the
Commissioner’s duly authorized
representative within 180 days from filing
of the protest or from submission of
required documents, the taxpayer may
either:
(a) Appeal to the CTA within 30 days
after the expiration of the 180 days,
(b) Await the final decision of the
Commissioner’s duly authorized
representative.
If the Commissioner did not act upon the
petition within 180 days from the time the
documents were submitted, the taxpayer
may either:
(a) Appeal to the CTA within thirty days
from the lapse of the 180-day period
OR
(b) Wait until the Commissioner decides
before he elevates the case to the
CTA.
(7) Issuance of a Final Decision on a disputed
assessment (FDDA) – The decision of the
Commissioner or his duly authorized
representatives shall state:
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(a) Facts, the applicable law, rules and
regulations or jurisprudence on which
such decision is based,
(b) That the same is his final decision
(8) Raising the issue to the CTA
Remedy if the taxpayer is not satisfied with the
CTA Division’s ruling:
FIRST, he may file a motion for
reconsideration before the same Division of
the CTA within fifteen (15) days from notice
thereof. (Sec. 11, RA 1125 as amended by
RA 9282 [2004])
THEN, a party adversely affected by a
resolution of a Division of the CTA on a
motion for reconsideration may file a
petition for review with the CTA en banc.
(Sec. 18, RA 1125 as amended by RA 9282
[2004])
Remedy if the taxpayer is not satisfied with the
decision of the CTA en banc:
A party adversely affected by a decision or
ruling of the CTA en banc may file with the
Supreme Court a verified petition for
review on certiorari pursuant to Rule 45 of
the 1997 Rules of Court. (Sec. 19, RA 1125
as amended by RA 9282 [2004])
Modes of Service - The notices to the taxpayer
required may be served by the Commissioner
or his duly authorized representative through
the following modes:
(1) PERSONAL SERVICE – the notice shall be
served through personal service by
delivering personally a copy thereof to the
party at his registered or known address or
wherever he may be found. A known
address shall mean a place other than the
registered address where business
activities of the party are conducted or his
place of residence.
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TAXATION LAW
In case personal service is not practicable,
the notice shall be served by substituted
service or by mail.
(2) SUBSTITUTED SERVICE – substituted
service can be resorted to when the party is
not present at the registered or known
address under the following
circumstances:
May be left at the party’s registered
address, with his clerk or with a person
having charge thereof.
May be left in place where business
activities of the party are conducted
with his clerk or person having charge
thereof.
May be left in the place of residence
with a person of legal age residing
therein.
If no person is found, the revenue
officers concerned shall bring a
barangay official and 2 disinterested
witnesses to the address so that they
may personally observe and attest to
such absence. The notice shall then be
given to said barangay official.
Should party be present but refuses to
receive the notice, the revenue officers
shall bring a barangay official and 2
disinterested witnesses in the presence
of the party so that they may
personally observe and attest such act
of refusal. The notice shall then be left
with the barangay official.
(3) SERVICE BY MAIL – Service by mail is done
by sending a copy of the notice by
registered mail to the registered or known
address of the party with instruction to the
Postmaster to return the mail to the sender
after 10 days if undelivered. A copy of the
notice may also be sent thorugh reputable
professional courier service. If no registry or
reputable professional courier service is
available, service may be done by ordinary
mail
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Collection
When the government may avail of the
remedies of collection
General Rule: When the assessment shall have
become final, executory and demandable.
Exception: In case of false or fraudulent return
with intent to evade tax or of failure to file a
return, a proceeding in court for collection may
be filed without assessment within 10 years
from discovery of falsity, fraud or omission.
(Sec. 222(a), NIRC)
Injunction not available
No court may grant injunction to restrain the
collection of any national internal revenue tax,
fee or charge. (Sec. 218, NIRC)
Exception:
When the all of the following conditions
concur:
(1) It is an appeal to the CTA from a decision
of the CIR, or Commissioner of Customs or
the RTC, provincial, city or municipal
treasurer or the Secretary of Finance, the
case may be, AND
(2) In the opinion of the Court of Tax Appeals,
the collection may jeopardize the interest
of the Government and/or the taxpayer.
(Sec. 11, R.A. 1125 as amended by R.A.
9282)
Requisite before availing of injunction
(1) Taxpayer has to deposit the amount
claimed; OR
(2) File an injunction bond with the Court for
not more double the amount (R.A. 1125)
Waiver of prescriptive period
If tax was assessed within the different period
agreed upon by the Commissioner and the
taxpayer, it may be collected by distraint or
levy or by a proceeding in court within the
period agreed upon in writing before the
expiration of the 5-yr period.(Sec. 222d, NIRC)
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TAXATION LAW
Distraint of Personal Property
Distraint – remedy enforced on the goods,
chattels, or effects, and other personal
property of whatever character including
stocks and other securities, debts, credits,
bank accounts, and interest in and rights to
personal property (Sec. 205(a), NIRC)
Kinds of Distraint:
(1) Constructive Distraint
(2) Actual Distraint
Constructive Distraint – may be placed by the
Commissioner on any taxpayer to safeguard
the interest of the Government (Sec. 206,
NIRC). Delinquency of the taxpayer is not
necessary.
Grounds for Constructive Distraint:
When in the opinion of the Commissioner,
(1) the taxpayer is retiring from any business
subject to tax; or
(2) the taxpayer is intending to leave the
Philippines; or
(3) the taxpayer is intending to remove his
property from the Philippines or to hide or
conceal his property; or
(4) the taxpayer is planning to perform any act
tending to obstruct the proceedings for
collecting the tax due or which may be due
from him (Sec. 206, NIRC)
How constructive distraint is effected:
(1) Signing of receipt by the taxpayer
By requiring the taxpayer or any person
having possession or control of such
property to sign a receipt covering the
property distrained and obligate himself to
preserve the same intact and unaltered
and not to dispose of the same in any
manner whatever, without the express
authority of the Commissioner
(2) If the taxpayer refuses to sign the receipt:
signing of receipt by revenue officer in the
presence of two witnesses
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In case the taxpayer or the person having
the possession and control of the property
refuses or fails to sign the receipt, the
revenue officer effecting the constructive
distraint shall proceed to prepare a list of
such property and, in the presence of two
(2) witnesses, leave a copy thereof in the
premises where the property distrained is
located (Sec. 206, NIRC)
Note: In constructive distraint, the property
is not actually confiscated or seized by the
revenue officer.
Actual distraint - placed on a person who owes
any delinquent tax or delinquent revenue (see
Sec. 207, NIRC); involves actual seizure of the
property
Garnishment – taking of personal properties,
usually cash or sums of money, owned by a
delinquent taxpayer which is in the possession
of a third party
Distraint of intangible properties (Sec. 208,
NIRC)
(1) Stocks and other securities: by serving a
copy of the warrants of distraint on the
taxpayer, AND upon the president,
manager, treasurer or other responsible
officer of the corporation, company or
association which issued the stocks or
securities.
(2) Debts and credits: by leaving with the
person owing the debts or having in his
possession or under his control such
credits, or with his agent, a copy of the
warrant of distraint. The person owing the
debts shall then pay the Commissioner
instead of his creditor (taxpayer) on the
strength of such warrant.
(3) Bank accounts: by serving a warrant of
garnishment upon the taxpayer AND upon
the president, manager, treasurer or other
responsible officer of the bank. The bank
shall then turn over to the Commissioner
so much of the bank accounts as may be
sufficient to satisfy the claim of the
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TAXATION LAW
Government. (NOTE: distraint of bank
accounts is called GARNISHMENT)
Summary remedy of distraint of personal
property
(1) Purchase by the government at sale upon
distraint
(2) Report of sale to the Bureau of Internal
Revenue (BIR)
(3) Constructive distraint to protect the
interest of the government
Procedure for Actual Distraint
(1) Commencement of Distraint Proceedings
Who issues the warrant of distraint:
(a) Commissioner or his duly authorized
representative – where the amount
involved is more than P1M
(b) Revenue District Officer – where the
amount involved is P1M or less (Sec.
207(A), NIRC)
(2) Service of Warrant of Distraint
How actual distraint is effected:
The proper officer shall seize and distraint
any goods, chattels, or effects, and the
personal property, including stocks and
other securities, debts, credits, bank
accounts and interests in and rights to
personal property of the taxpayer in
sufficient quantity to satisfy the tax,
expenses of distraint and the cost of the
subsequent sale. (Sec. 207(A), NIRC)
(3) Report on the Distraint
A report shall be submitted by the
distraining officer to the Revenue District
Officer, and to the Revenue Regional
Director.
(4) Power of the CIR or proper officer to lift the
order of distraint
The taxpayer may request that the warrant
be lifted. The commissioner may, in his
discretion, allow the lifting of the order of
distraint. He may ask for a bond as a
UP COLLEGE OF LAW TAXATION 2
condition for the cancellation of the
warrant. (Sec. 207(A), NIRC)
(5) Notice of Sale of Distrained Properties
The Revenue District Officer or his duly
authorized representative (not the
officer who served the warrant), shall
cause a notification of the public sale
to be posted in not less than two (2)
public places in the municipality or city
(one of which is the Office of the
Mayor) where the distraint was made.
The notice shall specify the time and
place of the sale. The time of sale shall
not be less than twenty (20) days after
notice to the owner and the publication
or posting of such notice. (Sec. 209,
NIRC)
(6) Sale at Public Auction
(a) At the time of the public sale, the
revenue officer shall sell the goods,
chattels, or effects, or other personal
property, including stocks and other
securities so distrained at a PUBLIC
AUCTION, to the HIGHEST BIDDER for
CASH or with the approval of the
Commissioner, through a DULY
LICENSED COMMODITY or STOCK
EXCHANGES.
(b) Any residue over and above what is
required to pay the entire claim,
including expenses of sale and
distraint, shall be RETURNED to the
owner of the property sold. Expenses
shall be limited to actual expenses of
SEIZURE and PRESERVATION of the
property pending the sale, no charge
shall be imposed for the services of the
local internal revenue officer or his
deputy. (Sec. 209, NIRC)
(c) If the proceeds from the sale of the
distrained properties are not sufficient
to satisfy the tax delinquency, the
Commissioner or his duly authorized
representative shall within thirty (30)
days after execution of the distraint,
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TAXATION LAW
proceed with the levy on the taxpayer’s
real property. (Sec. 207(B), NIRC)
(7) Release of the Properties from Distraint
If at any time prior to the consummation of
the sale all proper charges are paid to the
officer conducting the sale, the goods or
effects distrained shall be restored to the
owner. (Sec. 210, NIRC)
(8) Purchase by the government at sale upon
distraint
If the amount offered by the highest bidder
is not equal to the amount of the tax or is
very much less than the actual market
value of the articles offered for sale, the
Commissioner or his deputy may purchase
the same in behalf of the National
Government for the amount of taxes,
penalties and costs due. The property so
purchased may be resold by the
Commissioner or his deputy. (Sec. 212,
NIRC)
(9) Report of sale to BIR
Within two (2) days after the sale, the
officer making the same shall make a
report of his proceedings in writing to the
Commissioner and shall himself preserve a
copy of such report as an official record.
(Sec. 211, NIRC)
Summary remedy of levy on real property
(1) Release of the Properties from Distraint
If at any time prior to the consummation of
the sale all proper charges are paid to the
officer conducting the sale, the goods or
effects distrained shall be restored to the
owner. (Sec. 210, NIRC)
(2) Purchase by the government at sale upon
distraint
If the amount offered by the highest bidder
is not equal to the amount of the tax or is
very much less than the actual market
value of the articles offered for sale, the
UP COLLEGE OF LAW
Commissioner or his deputy may purchase
the same in behalf of the National
Government for the amount of taxes,
penalties and costs due. The property so
purchased may be resold by the
Commissioner or his deputy. (Sec. 212,
NIRC)
(3) Report of sale to BIR
Within two (2) days after the sale, the
officer making the same shall make a
report of his proceedings in writing to the
Commissioner and shall himself preserve a
copy of such report as an official record.
(Sec. 211, NIRC)
(4) Forfeiture in Favor of the Government
If there is no bidder for the real property
OR if the highest bid is not sufficient to pay
the taxes, penalties and costs, the IR
Officer conducting the sale shall declare
the property FORFEITED to the
GOVERNMENT in satisfaction of the claim.
(Sec. 215, NIRC)
(5) Redemption of Property Sold
At any time before the day fixed for the
sale, the taxpayer may discontinue all
proceeding by paying the taxes,
penalties and interest. (Sec. 213, NIRC)
Within one (1) year from the date of
sale, the taxpayer or anyone for him,
may pay to the Revenue District Officer
the total amount of the following:
public taxes + penalties + interest from
the date of delinquency to the date of
sale + interest on said purchase price
at the rate of fifteen percent (15%) per
annum from the date of sale to the
date of redemption. (Sec. 214, NIRC)
Note: If the property was forfeited in favor of
the government, the redemption price shall
include only the taxes, penalties and interest
plus costs of sale (no interest on purchase
price since the Government did not “purchase”
the property anyway, it was forfeited)
TAXATION 2 TAXATION LAW
Note: The taxpayer-owner shall not be
deprived of possession of the said property and
shall be entitled to rents and other income
until the expiration of the period for
redemption (Sec. 214, NIRC)
(6) Final Deed of Purchaser
After the period of redemption, a final deed of
sale is issued in favor of the purchaser.
Forfeiture to government for want of bidder
Forfeiture to Government for Want of Bidder
Forfeiture implies a divestiture of property
without compensation in consequence of a
default or offense. The effect of forfeiture is to
transfer the title of the specific thing from the
owner to the government. (De Leon, NIRC
Annotated, p. 412)
Instances when forfeiture is appropriate
(1) All chattels, machinery, and removable
fixtures of any sort used in the unlicensed
production of articles (Sec. 268, NIRC)
(2) Dies and other equipment used for the
printing or making of any internal revenue
stamp, label or tag which is in imitation of
or purports to be a lawful stamp, label or
tag. (Sec. 268, NIRC)
(3) Liquor or tobacco shipped under a false
name or brand (Sec. 262, NIRC)
Remedy of enforcement of forfeitures
(1) Forfeiture of chattels and removable
fixtures: enforced by the seizure, sale or
destruction of the specific forfeited
property.
(2) Forfeiture of real property: enforced by a
judgment of condemnation and sale in a
legal action or proceeding civil or criminal
as the case may require (Sec. 224, NIRC)
When property to be sold or destroyed
(1) Forfeited chattels and removable fixtures:
sold in the same manner and under the
same conditions as the public notice and
230
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the time and manner of sale as are
prescribed for sales of personal property
distrained for the non-payment of taxes
(2) Distilled spirits, liquors, cigars, cigarettes,
other manufactured products of tobacco
and all apparatus used in or about the
illicit production of such articles: destroyed
by the order of the Commissioner when
the sale or use would be injurious to
public health pr prejudicial to the
enforcement of the law
(3) All other articles subject to excise tax
manufactured or removed in violation of
the Code, dies for the printing or making of
internal revenue stamps and labels: sold
or destroyed in the discretion of the
Commissioner
(4) Forfeited property shall not be destroyed
until at least 20 days after seizure. (Sec.
225, NIRC)
Resale of real estate taken for taxes (RR No.
22-2002)
(1) All acquired/forfeited properties
transferred in the name of the Republic of
the Philippines, having passed the one-
year redemption period, shall be converted
into cash from the date of acquisition or
forfeiture.
(2) The sale of acquired/forfeited real
properties shall be by sealed bids in a
public auction to be witnessed by a
representative of the COA.
(3) The Notice of Sale of the acquired real
properties shall be published once a week
for two (2) consecutive weeks in a
newspaper of general circulation in the
Philippines which must be completed at
least 20 days prior to the date of such
public auction.
(4) Unless the Commissioner of Internal
Revenue provides otherwise, the Minimum
Bid Price/Floor Price shall be the latest fair
market value as determined by the
Commissioner or the fair market value
shown in the latest tax declaration issued
by the provincial, city or municipal assessor,
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TAXATION LAW
whichever is higher, pursuant to Sec. 6(E)
of the Tax Code.
(5) Anyone could bid except foreign nationals,
corporate or otherwise, and those qualified
under existing laws, rules and regulations,
including employees of the Bureau of
Internal Revenue.
(6) Bidders shall be required to post a bond in
cash or manager’s check in an amount
representing 10% of the minimum bid price
at least one day before the scheduled
public auction.
(7) Unless the Commissioner allows extension
of time to pay, in meritorious cases, the
winning bidder shall pay the full amount of
his bid cash or manager’s check within two
days after receipt of notice of award.
(8) All taxes and expenses relative to the
issuance of title shall be borne by the
winning bidder.
(9) The winning bidder shall be responsible at
his own expense for the ejectment of
squatters and/or occupants, if any, of the
auctioned property.
(10) Negotiated or private sale shall be resorted
to as a consequence of failed public
bidding for two consecutive times.
(11) Negotiated or private sale shall in all cases
be approved by the Secretary of Finance.
(12) Public auction sale shall be approved by
the Commissioner or his authorized
representative.
(13) The Government reserves the right to reject
or cancel any or all bids.
Disposition of funds recovered in legal
proceedings or obtained from forfeiture
All judgments and monies recovered and
received for taxes, costs, forfeitures, fines and
penalties shall be paid to the Commissioner or
his authorized deputies as the taxes
themselves are required to be paid, and except
as specially provided, shall be accounted for
and dealt within the same way. (Sec. 226,
NIRC)
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Further distraint or levy
The remedy by distraint of personal property
and levy on realty may be repeated if necessary
until the full amount due, including all
expenses, is collected. (Sec. 217, NIRC)
Tax lien
Tax liens
(1) When a taxpayer neglects or refuses to pay
his internal revenue tax liability after
demand, the amount so demanded shall
be a lien in favor of the government from
the time the assessment was made by the
CIR until paid with interest, penalties, and
costs that may accrue in addition thereto
upon ALL PROPERTY AND RIGHTS TO
PROPERTY BELONGING to the taxpayer.
(2) HOWEVER, the lien shall not be valid
against any mortgagee, purchaser or
judgment creditor until NOTICE of such
lien shall be filed by the Commissioner in
the Office of the Register of Deeds of the
province or city where the property of the
taxpayer is situated or located. (Sec. 219,
NIRC)
Seizure under forfeiture vs. Seizure to enforce a
tax lien
In the former all the proceeds derived from the
sale of the thing forfeited are turned over to
the Collector of Internal Revenue; in the latter,
the residue of such proceeds over and above
what is required to pay the tax sought to be
realized, including expenses, is returned to the
owner of the property. (BPI v. Trinidad)
Compromise
Authority of the Commissioner to compromise
and abate taxes
Compromise – to reduce the amount of tax
payable
Grounds for a compromise
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TAXATION LAW
The Commissioner may compromise the
payment of any internal revenue tax in the
following cases:
(1) A REASONABLE DOUBT as to the validity
of the claim against the taxpayer exists; or
(2) The financial position of the taxpayer
demonstrates a clear inability to pay the
assessed tax. (FINANCIAL INCAPACITY)
Limits of the Commissioner’s power to
compromise:
(1) For cases of financial incapacity: a
minimum compromise rate equivalent to
ten percent (10%) of the basic assessed tax
(2) For other cases: a minimum compromise
rate equivalent to forty percent (40%) of
the basic assessed tax
Note: When the basic tax involved exceeds One
Million Pesos (P1,000,000), or where the
settlement offered is less than the prescribed
minimum rates, the compromise must be
approved by the Evaluation Board (composed
of the Commissioner and 4 deputy
commissioners)
Abatement - to cancel the entire amount of tax
payable
When the Commissioner may abate or cancel a
tax liability:
(1) The tax or any portion thereof appears to
be UNJUSTLY or EXCESSIVELY
ASSESSED; or
(2) The ADMINISTRATION and COLLECTION
COSTS do not justify the collection of the
amount due. (e.g. when the costs of
collection are greater than the amount of
tax due)
UP LAW BOC TAXATION LAW 2 XXX

JUDICIAL REMEDIES
Suit to recover tax based on false or fraudulent
A. Civil Action returns
A proceeding in court for the collection of the
Two ways by which civil liability is enforced: tax assessed may be filed without assessment
(1) By filing a civil case for the collection of at any time within ten (10) years after the
sum of money with the proper regular discovery of the falsity, fraud or omission.
court; and Provided, that in a fraud assessment which has
(2) By filing an answer to the petition for become final and executor, the fact of fraud
review filed by the taxpayer with the Court shall be judicially taken cognizance of in the
of Tax Appeals. (Mamalateo, 2008) civil or criminal action for the collection thereof.
(Sec. 222, NIRC)
B. Criminal Action
False Return v. Fraudulent Return
Any person convicted of a crime under the
A false returns is due to mistakes, carelessness
Code shall:
or ignorance and a fraudulent return is filed
(1) Be liable for the payment of the tax, and
with intent to evade taxes.
(2) Be subject to the penalties imposed under
the Code. (Sec. 253(A), NIRC)
The fraud contemplated by law is actual and
not constructive, and must amount to
Form and Mode of Proceeding:
intentional wrongdoing with the sole object of
Civil and criminal action and proceedings
avoiding the tax. (Aznar v. CTA, 1974)
instituted in behalf of the Government under
the authority of this Code or other law enforced
Payment of tax not defense
by the BIR:
Payment of the tax due after a case has been
(1) Shall be BROUGHT IN THE NAME OF THE
filed shall not constitute a valid defense in any
GOVERNMENT of the Philippines; and
prosecution for violation of the provisions
(2) Shall be CONDUCTED BY LEGAL
under the Code. (Sec. 253(A), NIRC)
OFFICERS OF THE BIR
(3) Shall be filed in court with the approval of
Liability of person who aids or abets:
the Commissioner. (Sec. 220, NIRC)
Any person who wilfully aids or abets in the
commission of a crime penalized under the
Criminal action as a collection remedy
Code or who causes the commission of any
The judgment in the criminal case shall impose
such offense by another shall be liable in the
the penalty; and order payment of the taxes
same manner as the principal. (Sec. 253(B),
subject of the criminal case as finally decided
NIRC)
by the Commissioner. (Sec. 205, NIRC)
Refund
Assessment not necessary before filing a
criminal charge for tax evasion
Grounds and requisites for refund
An assessment is not necessary before a
criminal charge can be filed. The criminal
Requirements for refund as laid down by cases
charge need only be proved by a prima facie
(a) Necessity of written claim for refund
showing of a wilful attempt to file taxes, such
(b) Claim containing a categorical demand
as failure to file a required tax return. (CIR v.
for reimbursement
Pascor Realty, June 29, 1999)

233
UP LAW BOC
(c) Filing of administrative claim for
refund and the suit/proceeding before
the CTA within 2 years from date of
payment regardless of any supervening
cause
Legal basis of tax refunds
Statutory basis for tax refund under the tax
code
(a) Scope of claims for refund
(b) Necessity of proof for claim or refund
(c) Burden of proof for claim of refund
(d) Nature of erroneously-paid
tax/illegally assessed collected
(e) Tax refund vis-à-vis tax credit
(f) Essential requisites for claim of refund
Who may claim/apply for tax refund/tax credit
(a) Taxpayer/withholding agents of non-
resident foreign corporation
Prescriptive period for recovery of
erroneously or illegally collected
Other consideration affecting tax refunds
A. GOVERNMENT REMEDIES
(1) Administrative remedies
(a) Tax lien
(b) Levy and sale of real property
(c) Forfeiture of real property to the
government for want of bidder
(d) Further distraint and levy
(e) Suspension of business operation
(f) Non-availability of injunction to
restrain collection of tax
(2) Judicial remedies
Administrative
1. Distraint of Personal Property including
garnishment deposit
2. Summary remedy of levy on real property
TAXATION LAW 2 XXX
3. Forfeiture to the government for want of
bidder
4. Further Distraint or Levy
5. Tax Lien
6. Compromise and Abatement
7. Penalties and Fines
Judicial
1. Civil
2. Criminal
3. Statutory offenses and penalties
Civil Penalties
1. Surcharge
2. Interest
CIVIL PENALTIES
Surcharge
Surcharge – penalty imposed in addition to the
tax required to be paid (Sec. 248(A), NIRC)
tax
Rates of Surcharge (25% or 50%)
25% of the amount due in the following cases:
(1) Failure to file any return and pay the
tax due on the date prescribed; or
(2) Filing a return with an internal revenue
officer other than those with whom the
return is required to be filed unless the
Commissioner authorizes otherwise; or
(3) Failure to pay the deficiency tax within
the time prescribed for its payment in
the notice of assessment; or
(4) Failure to pay the full or part of the
amount of tax due on or before the
date prescribed for its payment (Sec.
246 (A), NIRC)
50% of the tax or of the deficiency tax in the
following cases:
(1) Willful neglect to file the return within
the period prescribed; or
(2) A false or fraudulent return is willfully
made (Sec. 248(B), NIRC)
234
UP LAW BOC TAXATION LAW 2
Prima facie evidence of a false or fraudulent
return: Substantial underdeclaration of taxable
sales, receipts or income, or a substantial
overstatement of deductions. Failure to report
sales, receipts or income in an amount
exceeding thirty percent (30%) of that declared
per return, and a claim ofdeductions in an
amount exceeding (30%) of actual deductions,
shall render the taxpayer liable for substantial
underdeclaration or for overstatement. (Sec.
248(B), NIRC)
Interest
In General
20% per annum on the unpaid amount of tax,
interest at the rate of twenty percent (20%) per
annum from the date prescribed for payment
until the amount is fully paid. (Sec. 249(A),
NIRC)
Deficiency Interest
20% per annum on any deficiency in the tax
due from the date prescribed for its payment
until the full payment thereof. (Sec. 249(B),
NIRC)
Delinquency interest
20% per annum on the unpaid amount in case
of failure to pay:
(a) The amount of the tax due on any return
required to be filed; or
(b) The amount of the tax due for which no
return is required; or
(c) A deficiency tax, or any surcharge or
interest thereon on the due date appearing
in the letter of demand and assessment
notice (Sec. 249(C), NIRC)
Interest on extended payment
20% per annum on the tax or deficiency tax or
any part thereof unpaid from the date of notice
and demand until it is paid if any person
required to pay the tax is:
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(a) Qualified and elects to pay the tax on
installment but fails to pay the tax or any
installment or any part of such amount or
installment or before the date prescribed
for its payment; or
(b) Where the Commissioner has authorized
an extension of time within which to pay a
tax or a deficiency tax or any part thereof
(249(D), NIRC)
Compromise and Abatement of Taxes
(see discussion under Remedies of the Taxpayer)
Cases which may be compromised: (Sec. 2, R.R.
30-2002)
(1) Delinquent accounts
(2) Cases under administrative protest after
issuance of the Final Assessment Notice to
the taxpayer which are still pending in the
Regional Offices, Revenue District Offices,
Legal Service, Large Taxpayer Service
(LTS), Collection Service, Enforcement
Service and other offices in the National
Office
(3) Civil tax cases being disputed before the
courts
(4) Collection cases filed in courts
(5) Criminal violations, other than those
already filed in court or those involving
criminal tax fraud
Cases which cannot be compromised: (Sec. 2,
R.R. 30-2002)
(1) Withholding tax cases, unless the
applicant-taxpayer invokes provisions of
law that cast doubt on the taxpayer's
obligation to withhold
(2) Criminal tax fraud cases confirmed as such
by the CIR or his duly authorized
representative
(3) Criminal violations already filed in court
(4) Delinquent accounts with duly approved
schedule of installment payments
(5) Cases where final reports of reinvestigation
ore reconsideration have been issued
UP LAW BOC TAXATION LAW 2
resulting to reduction in the original
assessment and the taxpayer is agreeable
to such decision by signing the required
agreement form for the purpose. On the
other hand, other protested cases shall be
handled by the Regional Evaluation Board
(REB) or the National Evaluation Board
(NEB) on a case to case basis
(6) Cases which become final and executory
after final judgment of a court, where
compromise is requested on the ground of
doubtful validity of the assessment; and
(7) Estate tax cases where compromise is
requested on the ground of financial
incapacity of the taxpayer
V. Organization and
Function of the Bureau
of Internal Revenue
POWERS OF THE COMMISSIONER
(A) To make assessments and prescribe
additional requirements for tax
administration and enforcement (Sec. 6,
NIRC)
(1) Examination of Returns and
Determination of Tax Due
(a) After a return has been filed, the
CIR may authorize the examination
of any taxpayer and the
assessment of the correct amount
of tax.
(b) Failure to file a return shall not
prevent the CIR from authorizing
the examination.
(2) Best evidence obtainable
The CIR shall assess the proper tax on
the best evidence obtainable when:
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XXX
The taxpayer fails to submit the
required returns, statements
reports and other documents
There is a reason to believe that
any such report is false, incomplete
or erroneous
(3) Conduct inventory-taking, survaillance
and to prescribe presumptive gross
sales and receipts
Inventory-taking – at any time
during the taxable year, for the
purpose of determining the correct
tax liabilities.
Surveillance – done if there is
reason to believe that the taxpayer
is not declaring his correct income,
sales or receipts for tax purposes.
Prescribe presumptive gross sales
and receipts if:
o It is found that the
taxpayer has failed to issue
receipts and invoices, or
o When there is reason to
believe that the books of
accounts or other records
do not correctly reflect the
declarations made by the
taxpayer
(4) Terminate Taxable Period
Terminating taxable period and
ordering the immediate payment of the
tax for the terminated period and any
remaining tax that is unpaid, when the
taxpayer is:
Retiring from business subject to
tax, or
Intending to leave the Philippines
or to remove his property
therefrom or to hide or conceal his
property;
Performing any act tending to
obstruct the proceedings for the
collection of the tax for the past or
current quarter or year or to render
the same totally or partially
UP LAW BOC TAXATION LAW 2
ineffective unless such proceedings
are begun immediately
(5) Prescribe Real Property Values
Dividing the Philippines into
different zones or areas, and
determining the FMV of real
properties in each zone or area,
upon consultation with competent
appraisers from private and public
sectors.
For the purpose of computing any
internal revenue tax, the value of
the property shall be WHICHEVER
IS HIGHER OF:
o The FMV as determined by
the Commissioner, or
o The FMV as shown in the
schedule of values of the
provincial and city
assessors
(6) Inquire into Bank Deposit Accounts
Notwithstanding any contrary
provision of R.A. 1405 (Bank Secrecy
Law) and other general or special laws,
the Commissioner is authorized to
inquire into bank deposits of:
A decedent to determine his gross
estate, and
Any taxpayer who has filed an
application for compromise of tax
liability by reason of financial
incapacity: the taxpayer must
waive in writing his privilege under
R.A. 1405 and other relevant laws,
before the Commissioner may
inquire into his bank accounts.
(7) Accredit and register Tax Agents
Accrediting and registering tax agents
(may be individuals or general
professional partnerships) based on
the following criteria:
Professional competence
Integrity
Moral fitness
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(8) Prescribe additional procedural or
documentary requirements
In relation to the manner of
compliance of any requirement in
connection with the submission or
preparation of financial statements
accompanying the tax returns.
(B) To obtain information and to summon,
examine, and take testimony of persons
(Sec. 5, NIRC)
(1) Examine Returns and Determine Tax
due
Authorizing the examination of any
taxpayer and the assessment of the
correct amount of tax, WON a return
has been filed by such taxpayer.
(2) Access Letter
Obtaining on a regular basis, from
any person other than the person
whose tax liability is subject to
audit or investigation, or from any
office or officer of the national and
local governments, government
agencies or instrumentalities,
including BSP and GOCCs;
Any information such as, but not
limited to, costs and volumes of
production, receipts or sales and
gross incomes of taxpayers, and
the names addresses, and
financial statements of
corporations, mutual fund
companies, insurance companies
etc.
(C) Interpret Tax Laws and to Decide Tax cases
(1) Shall be under the exclusive and
original jurisdiction of the
Commissioner, subject to review by the
Secretary of Finance.
(2) A ruling by the BIR Commissioner shall
be presumed valid unless modified,
reversed or superseded by the
Secretary of Finance.
UP LAW BOC TAXATION LAW 2
(3) A taxpayer who receives an adverse
ruling from the Commissioner may,
within thirty (30) days from the date of (c)
receipt of such ruling, seek its review
by the Secretary of Finance, either by
himself/itself or though his/its duly
authorized representative.
(4) A reversal or modification of the BIR (d)
ruling shall terminate its effectivity
upon
(9) The receipt by the taxpayer or the BIR (e)
of written notice of reversal or
modification, whichever came earlier.
**The Secretary of Finance may now also
review the rulings MOTU PROPRIO. (DOF
ORDER 7-02)
ORGANIZATION AND FUNCTION OF
THE BIR (f)
RULE-MAKING AUTHORITY OF THE
SECRETARY OF FINANCE
AUTHORITY OF SECRETARY OF FINANCE TO
PROMULGATE RULES AND REGULATIONS
(Sec. 244, NIRC)
The Secretary of Finance, upon
recommendation of the Commissioner, shall
promulgate all needful rules and regulations
for effective enforcement of the provisions of
the Code.
SPECIFIC PROVISIONS TO BE CONTAINED IN (g)
RULES AND REGULATIONS (Sec. 245, NIRC)
(a) The time and manner in which Revenue
Regional Director shall canvass their
respective Revenue Regions for the
purpose of discovering persons and
property liable to national internal revenue
taxes, and the manner in which their lists
and records of taxable persons and taxable
objects shall be made and kept;
(b) The forms of labels, brands or marks to be
required on goods subject to an excise tax,
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and the manner in which the labelling,
branding or marking shall be effected;
The conditions under which and the
manner in which goods intended for export,
which if not exported would be subject to
an excise tax, shall be labelled, branded or
marked;
The conditions to be observed by revenue
officers respecting the institutions and
conduct of legal actions and proceedings;
The conditions under which goods
intended for storage in bonded
warehouses shall be conveyed thither, their
manner of storage and the method of
keeping the entries and records in
connection therewith, also the books to be
kept by Revenue Inspectors and the reports
to be made by them in connection with
their supervision of such houses;
The conditions under which denatured
alcohol may be removed and dealt in, the
character and quantity of the denaturing
material to be used, the manner in which
the process of denaturing shall be effected,
so as to render the alcohol suitably
denatured and unfit for oral intake, the
bonds to be given, the books and records
to be kept, the entries to be made therein,
the reports to be made to the
Commissioner, and the signs to be
displayed in the business ort by the person
for whom such denaturing is done or by
whom, such alcohol is dealt in;
The manner in which revenue shall be
collected and paid, the instrument,
document or object to which revenue
stamps shall be affixed, the mode of
cancellation of the same, the manner in
which the proper books, records, invoices
and other papers shall be kept and entries
therein made by the person subject to the
tax, as well as the manner in which
licenses and stamps shall be gathered up
and returned after serving their purposes;
UP LAW BOC TAXATION LAW 2
(h) The conditions to be observed by revenue
officers respecting the enforcement of Title
III imposing a tax on estate of a decedent,
and other transfers mortis causa, as well as
on gifts and such other rules and
regulations which the Commissioner may
consider suitable for the enforcement of
the said Title III;
(i) The manner in which tax returns,
information and reports shall be prepared
and reported and the tax collected and
paid, as well as the conditions under which
evidence of payment shall be furnished the
taxpayer, and the preparation and
publication of tax statistics;
(j) The manner in which internal revenue
taxes, such as income tax, including
withholding tax, estate and donor's taxes,
value-added tax, other percentage taxes,
excise taxes and documentary stamp taxes
shall be paid through the collection officers
of the Bureau of Internal Revenue or
through duly authorized agent banks
which are hereby deputized to receive
payments of such taxes and the returns,
papers and statements that may be filed
by the taxpayers in connection with the
payment of the tax:
Provided, however, That notwithstanding
the other provisions of this Code
prescribing the place of filing of returns
and payment of taxes, the Commissioner
may, by rules and regulations, require that
the tax returns, papers and statements
that may be filed by the taxpayers in
connection with the payment of the tax.
Provided, however, That notwithstanding
the other provisions of this Code
prescribing the place of filing of returns
and payment of taxes, the Commissioner
may, by rules and regulations require that
the tax returns, papers and statements and
taxes of large taxpayers be filed and paid,
239
XXX
respectively, through collection officers or
through duly authorized agent banks:
Provided, further, That the Commissioner
can exercise this power within six (6) years
from the approval of Republic Act No.
7646 or the completion of its
comprehensive computerization program,
whichever comes earlier:
Provided, finally, That separate venues for
the Luzon, Visayas and Mindanao areas
may be designated for the filing of tax
returns and payment of taxes by said large
taxpayers.
For the purpose of this Section, 'large taxpayer'
means a taxpayer who satisfies any of the
following criteria:
(1) Value-Added Tax (VAT) - Business
establishment with VAT paid or payable of
at least P100,000 for any quarter of the
preceding taxable year;
(2) Excise tax - Business establishment with
excise tax paid or payable of at least
P1,000,000 for the preceding taxable year;
(3) Corporate Income Tax - Business
establishment with annual income tax paid
or payable of at least P1,000,000 for the
preceding taxable year; and
(4) Withholding tax - Business establishment
with withholding tax payment or
remittance of at least P1,000,000 for the
preceding taxable year.
Provided, however, That the Secretary of
Finance, upon recommendation of the
Commissioner, may modify or add to the above
criteria for determining a large taxpayer after
considering such factors as inflation, volume of
business, wage and employment levels, and
similar economic factors.
The penalties prescribed under Section 248
shall be imposed on any violation of the rules
and regulations issued by the Secretary of
UP LAW BOC TAXATION LAW 2
Finance, upon recommendation of the
Commissioner, prescribing the place of filing of
returns and payments of taxes by large
taxpayers.
NON-RETROACTIVITY OF RULINGS (Sec. 246,
NIRC)
General Rule: No retroactive application if the
revocation, modification or reversal of rules
and regulations, rulings or circulars will be
prejudicial to the taxpayers
Exceptions:
(a) Where the taxpayer deliberately misstates
or omits material facts from his return or
any document required of him by the BIR;
(b) Where the facts subsequently gathered by
the BIR are materially different from the
facts on which the ruling is based; or
(c) Where the taxpayer acted in bad faith.
POWER OF THE COMMISSIONER TO
SUSPEND THE BUSINESS OPERATION OF A
TAXPAYER (Sec 115, NIRC)
The Commissioner or his authorized
representative is empowered to suspend the
business operations and temporarily close the
business establishment of any person for any
of the following violations:
(a) IN THE CASE OF A VAT-REGISTERED
PERSON. -
(i) Failure to issue receipts or invoices;
(ii) Failure to file a value-added tax return
as required under Section 114; or
(iii) Understatement of taxable sales or
receipts by thirty percent (30%) or
more of his correct taxable sales or
receipts for the taxable quarter.
(b) FAILURE OF ANY PERSON TO REGISTER
AS REQUIRED UNDER SECTION 236. -
The temporary closure of the establishment
shall be for the duration of not less than five
(5) days and shall be lifted only upon
compliance with whatever requirements
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XXX
prescribed by the Commissioner in the closure
order
VI. Tax Remedies under
the NIRC
Remedies: method by which a cause of action
can be enforced by law or equity. It is a
procedure which may be availed of by a person
as a means to obtain the relief desired
In tax, these remedies may be availed of if the
taxpayer overpaid, or if the taxpayer paid the
wrong king of tax, or did not pay.
TAXPAYER’S REMEDIES
1. ADMINISTRATIVE (BIR)
(a) Before payment
(i) Filing a petition or reconsideration
or reinvestigation; and
(ii) Entering into a compromise
(b) After payment
(iii) Filing a claim for refund; and
(iv) Filing a claim for tax credit
2. JUDICIAL (CTA/RTC)
(a) Civil action
(i) Appeal to the CTA
(ii) Action to contest forfeiture of
chattel; and
(iii) Action for damages
(b) Criminal action
(iv) Filing a criminal complaint against
erring BIR officials and employees
Note: Petition for declaratory Relief is not
under the jurisdiction of the CTA.
UP LAW BOC TAXATION LAW 2
Assessment
Concept of assessment
Assess means to impose a tax; to charge with a
tax; to declare a tax to be payable; to
apportion a tax to be paid or contributed, to fix
a rate; to fix or settle a sum to be paid by way
of tax; to set, fix or charge a certain sum to
each taxpayer; to settle determine or fix the
amount of tax to be paid (84 C.J.S 74-750)
An assessment is the notice to the effect that
the amount therein stated is due from a
taxpayer as a tax with a demand for payment
of the same within a stated period of time.
(Commissioner v. CTA, 27 SCRA 1159)
Requisites for valid assessment:
(1) The taxpayer shall be informed in writing
of the law and the facts on which the
assessment is made (Sec. 228, NIRC)
(2) An assessment contains not only a
computation of tax liabilities, but also a
demand for payment within a prescribed
period (CIR v. PASCOR)
(3) An assessment must be served on and
received by the taxpayer (CIR v. PASCOR)
Note: The presumption of the correctedness of
assessment CANNOT be made to rest on
another presumption e.g. presumption of
regularity of performance of official functions.
Constructive methods of income determination
(a) Rely upon circumstantial evidence of
determining the correct income or
transaction of a taxpayer (Indirect Method)
(b) Expenditure Method: It proceeds on the
theory that where the amount of money
which a taxpayer spends during a given
year exceeds his reported income, and the
source of such money is otherwise
unexplained, it may be inferred that such
expenditures represent unreported income.
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(c) Percentage Method: This method is a
computation whereby determinations are
made by the use of percentages or ratios
considered typical of the business under
investigation. By reference to similar
business or situations, percentage
computations are secured to determine
sales, gross profit or even net profit.
(d) Unit and Value Method: The determination
of gross receipts may be computed by
applying price and profit figures to the
known ascertainable quality of business
done by taxpayer
Inventory method for income determination
(Net Worth Method)
Holland v. US: In a typical net worth
prosecution, the Government, having
concluded that the taxpayer's records are
inadequate as a basis for determining income
tax liability, attempts to establish an "opening
net worth" or total net value of the taxpayer's
assets at the beginning of a given year. It then
proves increases in the taxpayer's net worth for
each succeeding year during the period under
examination, and calculates the difference
between the adjusted net values of the
taxpayer's assets at the beginning and end of
each of the years involved. The taxpayer's
nondeductible expenditures, including living
expenses, are added to these increases, and if
the resulting figure for any year is substantially
greater than the taxable income reported by
the taxpayer for that year, the Government
claims the excess represents unreported
taxable income.
Formula
Increase in Net worth
Add: Non-deductible Item
Less: Non-taxable income or receipts
subjected to final tax transfer taxes
Taxable Net Income
Less: Personal and additional exemptions
NET INCOME SUBJECT TO TAX
UP LAW BOC TAXATION LAW 2 XXX

collection to ordinary protest may be

Jeopardy Assessment courts is the proper subject to Motion to
A tax assessment made by an authorized remedy. Dissmiss
Revenue Officer (RO) without the benefit of SUBJECT to SUBJECT to
complete or partial audit, in light of the RO’s administrative administrative
belief that the assessment and collection of penalties of: penalties of:
the deficiency tax will be jeopardized by delay 1. 25% surcharge 1. interest
caused by the taxpayer’s failure to: i) comply 2. interest 2. compromise
with audit and investigation requirements to 3. compromise penalty
present his books of accounts and/or pertinent penalty
records or ii.) substantiate all or any of the Mamalateo: Reviewer on Taxation (2014) p559
deductions, exemptions or credits claimed in
his return. Deficiency – amount still due and collectible
from a taxpayer upon audit or investigation. A
It is usually issued when statutory prescriptive deficiency tax has to go through the process of
periods for the assessment or collection of filing the protest against the assessment by
taxes are about to lapse due principally to the the by the taxpayer and denial of such protest
taxpayer’s fault. by the BIR. (Mamalateo, 2008)

Tax Delinquency v. Tax Deficiency Delinquency – failure of the taxpayer to pay the
Tax Delinquency Tax Deficiency tax due on the date fixed by law or indicated in
It is when: It is when: the assessment notice or letter of demand.
Self-assessed The amount of tax
taxpayer filed his tax imposed by law is Powers of the Commissioner:
return but did not pay greater than the
or only partially paid amount shown in the (A) To make assessments and prescribe
the tax tax return additional requirements for tax
Deficiency Tax If no amount is shown administration and enforcement (Sec. 6,
assessed by the BIR in the return, or if NIRC)
became final and there is no return, (1) Examination of Returns and
executory amount by which the Determination of Tax Due
tax as determined by (b) After a return has been filed, the
the CIR exceeds the CIR may authorize the examination
amount previously of any taxpayer and the
assessed as a assessment of the correct amount
deficiency of tax.
CAN be collected CANNOT be (c) Failure to file a return shall not
IMMEDIATELY immediately prevent the CIR from authorizing
through collected. CAN be the examination.
1. Administrative collected only AFTER (2) Best evidence obtainable
Actions (warrant of the process of protest The CIR shall assess the proper tax on
distraint or levy) the best evidence obtainable when:
2. Judicial Actions Thus, a civil action for The taxpayer fails to submit the
collection to ordinary required returns, statements
Thus, civil action for courts pending reports and other documents

242
UP LAW BOC TAXATION LAW 2
There is a reason to believe that
any such report is false, incomplete
or erroneous
(3) Conduct inventory-taking, survaillance
and to prescribe presumptive gross
sales and receipts
Inventory-taking – at any time
during the taxable year, for the
purpose of determining the correct
tax liabilities.
Surveillance – done if there is
reason to believe that the taxpayer
is not declaring his correct income,
sales or receipts for tax purposes.
Prescribe presumptive gross sales
and receipts if:
o It is found that the
taxpayer has failed to issue
receipts and invoices, or
o When there is reason to
believe that the books of
accounts or other records
do not correctly reflect the
declarations made by the
taxpayer
(4) Terminate Taxable Period
Terminating taxable period and
ordering the immediate payment of the
tax for the terminated period and any
remaining tax that is unpaid, when the
taxpayer is:
Retiring from business subject to
tax, or
Intending to leave the Philippines
or to remove his property
therefrom or to hide or conceal his
property;
Performing any act tending to
obstruct the proceedings for the
collection of the tax for the past or
current quarter or year or to render
the same totally or partially
ineffective unless such proceedings
are begun immediately
(5) Prescribe Real Property Values
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Dividing the Philippines into
different zones or areas, and
determining the FMV of real
properties in each zone or area,
upon consultation with competent
appraisers from private and public
sectors.
For the purpose of computing any
internal revenue tax, the value of
the property shall be WHICHEVER
IS HIGHER OF:
o The FMV as determined by
the Commissioner, or
o The FMV as shown in the
schedule of values of the
provincial and city
assessors
(6) Inquire into Bank Deposit Accounts
Notwithstanding any contrary
provision of R.A. 1405 (Bank Secrecy
Law) and other general or special laws,
the Commissioner is authorized to
inquire into bank deposits of:
A decedent to determine his gross
estate, and
Any taxpayer who has filed an
application for compromise of tax
liability by reason of financial
incapacity: the taxpayer must
waive in writing his privilege under
R.A. 1405 and other relevant laws,
before the Commissioner may
inquire into his bank accounts.
(7) Accredit and register Tax Agents
Accrediting and registering tax agents
(may be individuals or general
professional partnerships) based on
the following criteria:
Professional competence
Integrity
Moral fitness
(8) Prescribe additional procedural or
documentary requirements (Sec. 6(H),
NIRC)
UP LAW BOC TAXATION LAW 2
In relation to the manner of
compliance of any requirement in
connection with the submission or
preparation of financial statements
accompanying the tax returns.
(B) To obtain information and to summon,
examine, and take testimony of persons
(Sec. 5, NIRC)
(a) Authorizing the examination of any
taxpayer and the assessment of
the correct amount of tax, WON a
return has been filed by such
taxpayer.
Note: Any return filed with the Commissioner
shall not be withdrawn, BUT the taxpayer may
MODIFY, CHANGE or AMEND such return
within three (3) years from the date of filing,
provided that no notice for audit or
investigation of such return has been actually
served on the taxpayer.
(b) Access Letter (Sec. 5(B), NIRC)
Obtaining on a regular basis, from
any person other than the person
whose tax liability is subject to
audit or investigation, or from any
office or officer of the national and
local governments, government
agencies or instrumentalities,
including BSP and GOCCs;
Any information such as, but not
limited to, costs and volumes of
production, receipts or sales and
gross incomes of taxpayers, and
the names addresses, and
financial statements
corporations, mutual fund
companies, insurance companies
etc.
Note: This is known as the Third
Party Information Rule.
XXX
(C) Interpret Tax Laws and to Decide Tax cases
(Sec. 4, NIRC; RMC 44-01)
(1) Shall be under the exclusive and
original jurisdiction of the
Commissioner, subject to review by
the Secretary of Finance.
(2) A ruling by the BIR Commissioner
shall be presumed valid unless
modified, reversed or superseded by
the Secretary of Finance.
(3) A taxpayer who receives an adverse
ruling from the Commissioner may,
within thirty (30) days from the date of
receipt of such ruling, seek its review
by the Secretary of Finance, either by
himself/itself or though his/its duly
authorized representative.
(4) A reversal or modification of the BIR
ruling shall terminate its effectivity
upon
(5) The receipt by the taxpayer or the BIR
of written notice of reversal or
modification, whichever came earlier.
Note: DOF Order 7-02 added that the
Secretary of Finance may review the rulings
MOTU PROPRIO.
When Assessment is Made
Prescriptive period for assessment (Sec. 203,
NIRC)
If the taxpayer filed a return: internal revenue
taxes shall be assessed (FAN) within three
years after the last day prescribed by law for
the filing of the return.
of
If a return is filed beyond the period prescribed
by law: the three-year period shall be counted
from the day the return was filed.
Exception:
(1) False return;
(2) Fraudulent return with intent to evade tax;
244
UP LAW BOC TAXATION LAW 2
(3) Failure to file a return (Sec. 222, NIRC)
These exceptions have a prescriptive
period of 10 years from the discovery of the
fraudulent act or discovery of omission.
Waiver of Period for Assessment
The taxpayer and the Commissioner may agree
in writing, before the expiration of the time
prescribed in Sec. 203, to extend the period of
assessment (Sec. 222(b), NIRC)
The waiver of prescription must be executed
properly, otherwise, invalid and results to
prescription of the right to assess/collect.
(Philippine Journalists Inc. vs. CIR, December 16,
2004)
Requirements for a valid waiver under RMO 20-
90:
(1) definite agreed date,
(2) date of acceptance indicated, and
(3) taxpayer must be furnished with a copy of
the waiver.
Suspension of running of statute of limitations
(Sec. 223, NIRC) (P-CORN)
Period during which the commissioner is
Prohibited from making the assessment or
beginning distraint or levy or a proceeding in
court, and for sixty (60) days thereafter.
When the taxpayer requests for a
Reinvestigation which is granted by the
Commissioner
RR 12-85 (Difference between Reconsideration
&Reinvestigation)
Reconsideration – refers to a plea of re-
evaluation of the assessment on the basis of
existing records without need of additional
evidence. It may involve both question of fact
or of law or both
Reinvestigation – refers to a plea of re-
evaluation of an assessment on the basis of
245
XXX
newly-discovered evidence that a taxpayer
intends to present in the reinvestigation. It
may also involve a question of fact or law or
both.
Note: A request for reconsideration does not
toll the running of the prescription period for
the collection of an assessed tax. (Phil Global
Communication v. CIR)
When the taxpayer cannot be located in the
address given by him in the return filed upon
which a tax is being assessed or collected, BUT
if the taxpayer informs the Commissioner of
any change in address, the running of the
statute of limitations shall not be suspended.
When the warrant of distraint or levy is duly
served upon the taxpayer, his authorized
representative, or a member of his household
with sufficient discretion, and No Property is
located.
When the taxpayer is Out of the Philippines
General Provisions on Additions to the Tax
(A) Civil penalties (Sec. 248, NIRC)
Surcharge
A civil penalty imposed by law as an addition
to the basic tax required to be paid. A
surcharge added to the main tax is subject to
interest.
Rates of Surcharge:
There shall be imposed a penalty equivalent to
twenty-five percent (25%) of the amount due,
in the following cases:
(1) FAILURE TO FILE ANY RETURN and PAY
THE TAX DUE THEREON on the date
prescribed; or
(2) Filing a return with an internal revenue
officer than those with whom the return is
UP LAW BOC TAXATION LAW 2
required to be filed (except when
authorized by the Commissioner); or
(3) FAILURE TO PAY THE DEFICIENCY TAX
within the time prescribed for its payment
(4) FAILURE TO PAY THE FULL OR PART of
the amount of tax shown on any return
required to be filed, or the full amount of
tax due for which no return is required to
be filed, on or before the date prescribed
for its payment.
The penalty shall be fifty percent (50%) of the
tax or of the deficiency tax, in the following
cases:
(1) WILLFUL NEGLECT to FILE THE RETURN
within the period prescribed
(2) A FALSE OR FRAUDULENT RETURN is
wilfully made
(3) Prima-facie evidence of false or fraudulent
return:
(i) substantial under declaration of
taxable sales, receipts or income
(failure to report sales, receipts or
income in an amount exceeding 30%
of that declared per return) or
(ii) ii)substantial overstatement of
deductions (a claim of deduction in an
amount exceeding 30% of actual
deductions)
Section 5 of RR 12-99 is hereby amended by
modifying Section 5.5 thereof which provides
for modes of procedures in computing for the
tax and/or applicable surcharge. In cases of
late payment of a deficiency tax assessed, the
taxpayer shall be liable for the delinquency
interest (no longer civil penalties under RR 12-
99) provided under Section 249 (C)(3) of the
1997 National Internal Revenue Code, as
amended. (RR 18-2013)
(B) Interest (Sec 249, NIRC)
In General
246
XXX
20% per annum on any unpaid amount of tax,
from the date prescribed for payment until the
amount is fully paid.
Deficiency Interest – the interest due on any
amount of tax due or installment thereof which
is not paid on or before the date prescribed for
its payment (Mamalateo, 2008)
Delinquency Interest- the interest required to
be paid in case of failure to pay:
(1) the amount of tax due on any return
required to be filed, or
(2) amount of tax due for which no return is
required, or
(3) a deficiency tax, or any surcharge or
interest thereon on the due date appearing
in the notice and demand of the
Commissioner, there shall be assessed and
collected on the unpaid amount, interest at
the rate prescribed until the amount is fully
paid, which interest shall form part of the
tax.
The delinquency interest is in addition to the
interest in the FAN as a result of failure to pay
the deficiency tax assessed within the time
prescribed for its payment.
(First Lepanto Taisho Insurance Corp. v. CIR,
2013)
(c) Compromise penalties
Compromise penalty v. Compromise
Compromise penalty – an amount of money
paid by a taxpayer to compromise a tax
violation that he has committed, which may be
the subject of criminal prosecution. The basis
of the amount paid is the gross sales or
receipts during the year or the tax due.
Compromise – an amount of money paid by the
taxpayer to settle his civil liability for tax
assessed by the government. The basis of the
UP LAW BOC TAXATION LAW 2
amount paid is the basic tax assessed.
(Mamalateo, 2008)
Assessment Process[Sec. 228, NIRC; RR 12-99]
(1) First Step: Tax Audit
In a tax audit, revenue officers examine the
books of account and other accounting records
of taxpayers to determine the correct tax
liability. This is through the issuance of a Letter
of Authority.
Letter of Authority: An official document that
empowers a Revenue Officer to examine and
scrutinize a taxpayer’s books of accounts and
other accounting records, in order to determine
the taxpayer’s correct internal revenue tax
liabilities.
Cases which need not be covered by a valid LA:
(a) Cases involving civil/criminal tax fraud
which fall under the jurisdiction of the tax
fraud division of the Enforcement Services,
and
(b) Policy cases under audit by the special
teams in national offices
Section 3 of RR 12-99 is hereby amended by
deleting Section 3.1.1 thereof which provides
for the preparation of a Notice of Informal
Conference, thereby renumbering other
provisions thereof, and prescribing other
provisions for the assessment of tax liabilities
(RR No. 18-2013). Thus, there is no Informal
Conference needed in an assessment process.
(2) Second Step: Issuance of Preliminary
Assessment Notice (PAN) (Sec. 228, NIRC;
RR18-2013)
If after review and evaluation by the
Commissioner or his duly authorized
representative, it is determined that there
exists sufficient basis to assess the taxpayer for
any deficiency tax or taxes, the said Office shall
247
XXX
issue to the taxpayer the PAN for the proposed
assessment.
The PAN shall show in detail the facts and the
law, rules and regulations, or jurisprudence on
which the proposed assessment is based.
(3) Third Step: Reply to PAN
Taxpayer is given time to respond: 15 days from
date of receipt of PAN
If he/she fails to respond: taxpayer is
considered in default; a formal letter of
demand and assessment notice shall be issued
to the taxpayer
The regulations use the term “reply” to
distinguish the written objection(s) against a
FAN issued by the BIR, where the generic term
“protest” or the specific term “request for
reconsideration” or “request for reinvestigation”
is utilized.
The PAN shall not be required in any of the ff
cases, in which case, issuance of the Formal
Assessment Notice (FAN) shall be sufficient:
(a) The finding for any deficiency tax is the
result of MATHEMATICAL ERROR in the
computation of the tax as appearing on the
face of the return; or
(b) A DISCREPANCY has been determined
between the TAX WITHHELD and the
amount ACTUALLY REMITTED by the
withholding agent; or
(c) A taxpayer who opted to claim a refund or
tax credit of excess creditable withholding
tax for a taxable period was determined to
have carried over and automatically
applied the same amount claimed against
the estimated tax liabilities for the taxable
quarter or quarters of the succeeding
taxable year; or
(d) The EXCISE TAX due on excisable articles
has not been paid; or
UP LAW BOC TAXATION LAW 2
(e) An article locally purchased or imported by
an exempt person, such as, but not limited
to, vehicles, capital equipment,
machineries and spare parts, has been sold,
traded or transferred to a non-exempt
person. (Sec. 228, NIRC)
In the above-cited cases, a FLD/FAN shall be
issued outright.
(4) Fourth Step: Issuance of formal letter of
demand and final assessment notice
A Final Assessment Notice (FAN) is a
declaration of deficiency taxes issued to a
taxpayer who:
fails to respond to a pre-assessment notice
within the prescribed period of time, or
whose reply to the PAN was found to be
without merit.
Sec 228: The taxpayer shall be informed in
writing of the law and the facts on which the
assessment is made; otherwise the assessment
shall be void
An assessment contains not only a
computation of tax liabilities, but also a
demand for payment within a prescribed
period.
Effects of Issuance of FAN and LD
(1) Creation of Tax Liabilities
(2) Taxpayer does not have to pay deficiency
tax assessment yet BUT 20% deficiency
interest per annum starts
(3) Business of the taxpayer does not become
illegal by reason of non-payment. (as
opposed too non-payment of local
business deficient taxes, where the
business becomes illegal)
(5) Fifth Step: Disputed Assessment
The taxpayer or his duly authorized
representative may protest administratively
248
XXX
against the formal letter of demand and
assessment notice within thirty days (30) from
date of receipt. The taxpayer may either file a
reconsideration or reinvestigation.
Note: Failure to file protest within 30 days
shall make the assessment become final,
executor and demandable.
Protesting Assessment [Sec 228, NIRC; RR 12-
99]
(a) Protest of assessment by taxpayer
Made within thirty (30) days from receipt of the
assessment.
Protest is either a request for reconsideration
or a request for reinvestigation, or both
A protest is considered validly made if it
satisfies the following conditions:
(1) it is made in writing, and addressed to the
Commissioner of Internal Revenue,
(2) it contains the information required by the
rule,
(3) It states the FACTS, applicable LAW,
RULES and REGULATIONS or
JURISPRUDENCE on which his protest is
based, otherwise the protest shall be
considered void and without force and
effect and
(4) It is filed within the period prescribed by
law
(b) In case of a request for reinvestigation,
submission of documents within 60 days
from filing of protest
Within sixty (60) days from filing of the protest,
all relevant supporting documents must be
submitted, otherwise the assessment shall
become final. (Sec. 228) This will toll the
prescriptive period for assessment or collection.
UP LAW BOC TAXATION LAW 2
In case of a request for reconsideration, no
additional documents need be submitted.
Further, the prescriptive period will not be
suspended. (See the difference between the
two above)
(c) Effect of failure to protest: the assessment
shall become final, executory and
demandable.
(d) Period provided for protest to be acted
upon: Protest should be acted upon within
180 days from submission of documents.
(6) Sixth Step: Administrative decision on a
disputed assessment
The power to decide disputed assessments,
refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto,
or other matters is vested in the Commissioner,
subject to the exclusive appellate jurisdiction
of the Court of Tax Appeals. The CIR may deny,
approve or not act upon the protest.
Denial
The CIR must state the facts and laws upon
which such protest was denied. Denial may be
made by the CIR or any of his authorized
representatives.
Rendition of Decision by Commissioner
CIR’s actions deemed equivalent to denial of
protest:
(a) Filing of collection suit against taxpayer
(CIR v. Union Shipping)
(b) Issuing a warrant of distraint and levy
(Commissioner v. Algue)
(c) Where there is a request for
reconsideration, final demand letter from
BIR (CIR v. Isabela Cultural Corp)
(d) Notice of delinquency (CIR v. Ayala
Securities)
(e) Inaction by Commissioner - If the protest is
not acted upon within one hundred eighty
(180) days from submission of documents,
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XXX
the inaction by the Commissioner is
considered as a denial of protest.
(f) Referral of case for collection.
Remedies of Taxpayer to Action by
Commissioner
(a) In case of denial of protest
If the CIR or his authorized agent DENIES THE
PROTEST filed by the taxpayer, the latter may
either
(1) appeal to the CTA within 30 days from
receipt of the decision denying the protest
(Sec. 228, NIRC)
The 30-day period starts when the
taxpayer receives the decision of the
Commissioner denying the protest.
The decision of the Commissioner must
categorically state that his action on
the disputed assessment is final,
otherwise period to appeal will not
commence to run. (Advertising
Associates Vs. CA)
(2) File a motion for reconsideration to CIR, if
decided by CIR; OR elevate his protest
through a request for reconsideration to
the CIR, if the denial is made by the
authorized representative. within 30 days
from receipt of the decision denying the
protest
Note that a Motion for Reconsideration on the
CIR’s denial of the protest or administrative
appeal shall not toll the 30-day period to
appeal to the CTA (RR 18-2013)
Note: A Division of the CTA shall hear the
appeal. (Sec. 11, RA 1125 as amended by RA
9282 [2004])
(b) In case of inaction by Commissioner within
180 days from submission of documents
If the Commissioner or his duly authorized
representative did NOT ACT UPON THE
UP LAW BOC TAXATION LAW 2
PROTEST within 180 days from the time the
documents were submitted, the taxpayer may
either:
(a) Appeal to the CTA within (30) thirty days
from the lapse of the 180-day period OR
(b) Wait until the Commissioner or his duly
authorized representative decides before
he elevates the case to the CTA.
RCBC v. CIR (2007): In case the Commissioner
failed to act on the disputed assessment within
the 180-day period from date of submission of
documents, a taxpayer can either:
(a) file a petition for review with the Court of
Tax Appeals within 30 days after the
expiration of the 180-day period; OR
(b) await the final decision of the Commissioner
on the disputed assessments and appeal
such final decision to the Court of Tax
Appeals within 30 days after receipt of a
copy of such decision.
However, these options are mutually exclusive,
and resort to one bars the application of the
other.
Remedy if the taxpayer is not satisfied with the
CTA Division’s ruling:
FIRST, he may file a motion for reconsideration
before the same Division of the CTA within
fifteen (15) days from notice thereof. (Sec. 11,
RA 1125 as amended by RA 9282 [2004])
THEN, a party adversely affected by a
resolution of a Division of the CTA on a motion
for reconsideration may file a petition for
review with the CTA en banc. (Sec. 18, RA 1125
as amended by RA 9282 [2004])
Remedy if the taxpayer is not satisfied with the
decision of the CTA en banc:
A party adversely affected by a decision or
ruling of the CTA en banc may file with the
Supreme Court a verified petition for review on
certiorari pursuant to Rule 45 of the 1997
250
XXX
Rules of Court. (Sec. 19, RA 1125 as amended
by RA 9282 [2004])
(c) Effect of failure to appeal
If the taxpayer fails to file an appeal, the
assessment shall become final, executory and
demandable.
Collection
Requisites
When the government may avail of the
remedies of collection:
General Rule: When the assessment shall have
become final, executory and demandable.
Exception: In case of false or fraudulent return
with intent to evade tax or of failure to file a
return, a proceeding in court for collection may
be filed without assessment within 10 years
from discovery of falsity, fraud or omission.
(Sec. 222(a), NIRC)
Injunction not available
No court may grant injunction to restrain the
collection of any national internal revenue tax,
fee or charge. (Sec. 218, NIRC)
Exception:
When the all of the following conditions
concur:
(a) It is an appeal to the CTA from a decision
of the CIR, or Commissioner of Customs or
the RTC, provincial, city or municipal
treasurer or the Secretary of Finance, the
case may be, AND
(b) In the opinion of the Court of Tax Appeals,
the collection may jeopardize the interest
of the Government and/or the taxpayer.
(Sec. 11, R.A. 1125 as amended by R.A.
9282)
Requisite before availing of injunction
(a) Taxpayer has to deposit the amount
claimed; OR
(b) File an injunction bond with the Court for
not more double the amount (R.A. 1125)
UP LAW BOC TAXATION LAW 2 XXX

Prescriptive periods
Where return filed was NOT Where no return filed, or the
false or fraudulent: return was false or fraudulent:
Collection with prior should be made within 5 years should be made within 5 years
assessment from the date of assessment of from the date of assessment
the tax. (Sec. 203 in relation to (based on Sec. 222(c), NIRC)
Sec. 222, NIRC)

by distraint or levy, or by by distraint or levy, or by judicial

judicial proceedings
Collection without prior should be made within 3 years
assessment from the date of filing of return
or date return is due, whichever
is LATER (based on Sec. 203,
NIRC)
proceedings
should be made within ten years
after the discovery of the falsity,
fraud or omission to file a return.
by judicial proceedings

by judicial proceedings

Waiver of prescriptive period stocks and other securities, debts, credits,

If tax was assessed within the different period
agreed upon by the Commissioner and the
taxpayer, it may be collected by distraint or
levy or by a proceeding in court within the
period agreed upon in writing before the
expiration of the 5-yr period.(Sec. 222d, NIRC)
Remedies of the Government in Collection
bank accounts, and interest in and rights to
personal property (Sec. 205(a), NIRC). When
the distraint proceedings validly begins, the
prescription of collection is suspended.
Kinds of Distraint:
(1) Constructive Distraint
(2) Actual Distraint

Administrative Constructive Distraint – may be placed by the

Distraint of Personal Property including Commissioner on any taxpayer to safeguard
garnishment deposit the interest of the Government (Sec. 206,
Summary remedy of levy on real property NIRC). Delinquency of the taxpayer is not
Forfeiture to the government for want of necessary.
bidder
Further Distraint or Levy Grounds for Constructive Distraint:
Tax Lien When in the opinion of the Commissioner,
Compromise and Abatement (a) the taxpayer is retiring from any business
Penalties and Fines subject to tax; or
(b) the taxpayer is intending to leave the
Judicial Philippines; or
Civil (c) the taxpayer is intending to remove his
Distraint
Criminalof Personal Property property from the Philippines or to hide or
Distraint – remedy enforced on the goods, conceal his property; or
chattels, or effects, and other personal (d) the taxpayer is planning to perform any act
property of whatever character including tending to obstruct the proceedings for

251
UP LAW BOC TAXATION LAW 2
collecting the tax due or which may be due
from him (Sec. 206, NIRC)
How constructive distraint is effected:
(1) Signing of receipt by the taxpayer
By requiring the taxpayer or any person having
possession or control of such property to sign a
receipt covering the property distrained and
obligate himself to preserve the same intact
and unaltered and not to dispose of the same
in any manner whatever, without the express
authority of the Commissioner
(2) If the taxpayer refuses to sign the receipt:
signing of receipt by revenue officer in the
presence of two witnesses
In case the taxpayer or the person having the
possession and control of the property refuses
or fails to sign the receipt, the revenue officer
effecting the constructive distraint shall
proceed to prepare a list of such property and,
in the presence of two (2) witnesses, leave a
copy thereof in the premises where the
property distrained is located (Sec. 206, NIRC)
Note: In constructive distraint, the property is
not actually confiscated or seized by the
revenue officer.
Actual distraint – placed on a person who owes
any delinquent tax or delinquent revenue (see
Sec. 207, NIRC); involves actual seizure of the
property. In his kind of distraint, taxpayer
should have already been delinquent.
Garnishment – taking of personal properties,
usually cash or sums of money, owned by a
delinquent taxpayer which is in the possession
of a third party
Distraint of intangible properties (Sec. 208,
NIRC)
Stocks and other securities: by serving a copy
of the warrants of distraint on the taxpayer,
AND upon the president, manager, treasurer
or other responsible officer of the corporation,
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company or association which issued the
stocks or securities.
Debts and credits: by leaving with the person
owing the debts or having in his possession or
under his control such credits, or with his agent,
a copy of the warrant of distraint. The person
owing the debts shall then pay the
Commissioner instead of his creditor (taxpayer)
on the strength of such warrant.
Bank accounts: by serving a warrant of
garnishment upon the taxpayer AND upon the
president, manager, treasurer or other
responsible officer of the bank. The bank shall
then turn over to the Commissioner so much of
the bank accounts as may be sufficient to
satisfy the claim of the Government.
(NOTE:distraint of bank accounts is called
GARNISHMENT)
Procedure for Actual Distraint
(A) Commencement of Distraint Proceedings
Who issues the warrant of distraint:
Commissioner or his duly authorized
representative – where the amount involved is
more than P1M
Revenue District Officer – where the amount
involved is P1M or less (Sec. 207(A), NIRC)
(B) Service of Warrant of Distraint
How actual distraint is effected:
The proper officer shall seize and distraint any
goods, chattels, or effects, and the personal
property, including stocks and other securities,
debts, credits, bank accounts and interests in
and rights to personal property of the taxpayer
in sufficient quantity to satisfy the tax,
expenses of distraint and the cost of the
subsequent sale. (Sec. 207(A), NIRC)
(C) Report on the Distraint
A report shall be submitted by the distraining
officer to the Revenue District Officer, and to
the Revenue Regional Director.
UP LAW BOC TAXATION LAW 2
(D) Power of the CIR or proper officer to lift the
order of distraint
The taxpayer may request that the warrant be
lifted. The commissioner may, in his discretion,
allow the lifting of the order of distraint. He
may ask for a bond as a condition for the
cancellation of the warrant. (Sec. 207(A),
NIRC)
(E) Notice of Sale of Distrained Properties
The Revenue District Officer or his duly
authorized representative (not the officer who
served the warrant), shall cause a notification
of the public sale to be posted in not less than
two (2) public places in the municipality or city
(one of which is the Office of the Mayor) where
the distraint was made.
The notice shall specify the time and place of
the sale. The time of sale shall not be less
than twenty (20) days after notice to the owner
and the publication or posting of such notice.
(Sec. 209, NIRC)
(F) Sale at Public Action
At the time of the public sale, the revenue
officer shall sell the goods, chattels, or effects,
or other personal property, including stocks
and other securities so distrainedat a PUBLIC
AUCTION, to the HIGHEST BIDDER for CASH
or with the approval of the Commissioner,
through a DULY LICENSED COMMODITY or
STOCK EXCHANGES.
Any residue over and above what is required to
pay the entire claim, including expenses of sale
and distraint, shall be RETURNED to the
owner of the property sold. Expenses shall be
limited to actual expenses of SEIZURE and
PRESERVATION of the property pending the
sale, no charge shall be imposed for the
services of the local internal revenue officer or
his deputy. (Sec. 209, NIRC)
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If the proceeds from the sale of the distrained
properties are not sufficient to satisfy the tax
delinquency, the Commissioner or his duly
authorized representative shall within thirty
(30) days after execution of the distraint,
proceed with the levy on the taxpayer’s real
property. (Sec. 207(B), NIRC)
(G) Release of the Properties from Distraint
If at any time prior to the consummation of the
sale all proper charges are paid to the officer
conducting the sale, the goods or effects
distrained shall be restored to the owner. (Sec.
210, NIRC)
(H) Purchase by the government at sale upon
distraint
If the amount offered by the highest bidder is
not equal to the amount of the tax or is very
much less than the actual market value of the
articles offered for sale, the Commissioner or
his deputy may purchase the same in behalf of
the National Government for the amount of
taxes, penalties and costs due. The property
so purchased may be resold by the
Commissioner or his deputy. (Sec. 212, NIRC)
(I) Report of sale to BIR
Within two (2) days after the sale, the officer
making the same shall make a report of his
proceedings in writing to the Commissioner
and shall himself preserve a copy of such
report as an official record. (Sec. 211, NIRC)
Summary Remedy of Levy on Real Property
Levy– seizure of real property, an interest in or
rights to such property in order to enforce the
payment of taxes. (Sec. 205, NIRC) The real
property under levy shall be sold in a public
sale, if the taxes involved are not voluntarily
paid following such levy.
When levy may be effected: after the expiration
of time required to pay the delinquent tax, real
property may be levied upon, before,
UP LAW BOC TAXATION LAW 2
simultaneously or after the distraint of
personal property belonging to the delinquent.
(Sec. 207(B), NIRC)
In case the warrant of levy is NOT issued before
or simultaneously with the warrant of distraint
on the personal property AND the personal
property of the taxpayer is not sufficient to
satisfy his tax delinquency: the CIR or his duly
authorized representative shall within 30 days
after execution of the distraint, proceed with
the levy on the taxpayer’s real property. (Sec.
207(B), NIRC)
Procedure for Levy
(A) Issuance of Warrant of Levy
The IR officer designated by the Commissioner
or his duly authorized representative shall
prepare a DULY AUTHENTICATED
CERTIFICATE showing the name of the
taxpayer and the amounts of tax and penalty
due from him.
This certificate shall operate with the force of
LEGAL EXECUTION throughout the Philippines.
The certificate shall contain a description of
the property upon which levy is made. (Sec.
207(B), NIRC)
(B) Service of the Warrant
Levy shall be effected by writing upon said
certificate a description of the property upon
which levy is made.
At the same time, written notice of the levy
shall be mailed to or served upon the Register
of Deeds of the province or city where the
property is located and upon the taxpayer (If he
is absent from the Philippines: to his agent or
manager of business in respect to which the
liability arose or to the occupant of the
property in question). (Sec. 207(B), NIRC)
(C) Advertisement of the Sale
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Within twenty (20) days after the levy, the
officer conducting the proceedings shall
proceed to advertise for SALE the property or a
portion as may be necessary to satisfy the
claim and costs of sale. Such advertisement
shall cover a period of at least thirty (30) days.
The notice shall be posted at the main
entrance of the city or municipal all AND in a
public and conspicuous place in the barrio or
district where the real property lies. The notice
must also be published in a newspaper of
general circulation in the place where the
property is located, once a week for three (3)
weeks.
CONTENTS of notice: statement of amount of
taxes, and penalties due, time and place of
sale, name of taxpayer, short description of
property. (Sec. 213, NIRC)
(D) Sale
The sale shall be held either at the main
entrance of the municipal or city hall or on the
premises to be sold. Property will be awarded
to the highest bidder. In case the proceeds of
the sale exceeds the claim and costs of sale,
the excess shall be turned over to the owner of
the property. (Sec. 213, NIRC)
(E) Forfeiture in Favor of the Government
If there is no bidder for the real property OR if
the highest bid is not sufficient to pay the taxes,
penalties and costs, the IR Officer conducting
the sale shall declare the property FORFEITED
to the GOVERNMENT in satisfaction of the
claim. (Sec. 215, NIRC)
(F) Redemption of Property Sold
At any time before the day fixed for the sale,
the taxpayer may discontinue all proceeding by
paying the taxes, penalties and interest. (Sec.
213, NIRC)
Within one (1) year from the date of sale, the
taxpayer or anyone for him, may pay to the
UP LAW BOC TAXATION LAW 2
Revenue District Officer the total amount of
the following: public taxes + penalties +
interest from the date of delinquency to the
date of sale + interest on said purchase price at
the rate of fifteen percent (15%) per annum
from the date of sale to the date of redemption.
(Sec. 214, NIRC)
Note: If the property was forfeited in favor of
the government, the redemption price shall
include only the taxes, penalties and interest
plus costs of sale – no interest on purchase
price since the Government did not “purchase”
the property anyway, it was forfeited)
Note: The taxpayer-owner shall not be
deprived of possession of the said property and
shall be entitled to rents and other income
until the expiration of the period for
redemption (Sec. 214, NIRC)
(G) Final Deed of Purchaser
After the period of redemption, a final deed of
sale is issued in favor of the purchaser.
Forfeiture to Government for Want of Bidder
Forfeiture implies a divestiture of property
without compensation in consequence of a
default or offense. The effect of forfeiture is to
transfer the title of the specific thing from the
owner to the government. (De Leon, NIRC
Annotated, p. 412)
Instances when forfeiture is appropriate
(1) All chattels, machinery, and removable
fixtures of any sort used in the unlicensed
production of articles (Sec. 268, NIRC)
(2) Dies and other equipment used for the
printing or making of any internal revenue
stamp, label or tag which is in imitation of
or purports to be a lawful stamp, label or
tag. (Sec. 268, NIRC)
(3) Liquor or tobacco shipped under a false
name or brand (Sec. 262, NIRC)
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XXX
Remedy of enforcement of forfeitures
Forfeiture of chattels and removable fixtures:
enforced by the seizure, sale or destruction of
the specific forfeited property.
Forfeiture of real property: enforced by a
judgment of condemnation and sale in a legal
action or proceeding civil or criminal as the
case may require (Sec. 224, NIRC)
When property to be sold or destroyed
Forfeited chattels and removable fixtures – sold
in the same manner and under the same
conditions as the public notice and the time
and manner of sale as are prescribed for sales
of personal property distrained for the non-
payment of taxes
Distilled spirits, liquors, cigars, cigarettes,
other manufactured products of tobacco and
all apparatus used in or about the illicit
production of such articles – destroyed by the
order of the Commissioner when the sale or
use would be injurious to public health pr
prejudicial to the enforcement of the law
All other articles subject to excise tax
manufactured or removed in violation of the
Code, dies for the printing or making of
internal revenue stamps and labels – sold or
destroyed in the discretion of the
Commissioner
Forfeited property shall not be destroyed until
at least 20 days after seizure. (Sec. 225, NIRC)
Resale of real estate taken for taxes(RR No. 22-
2002)
All acquired/forfeited properties transferred in
the name of the Republic of the Philippines,
having passed the one-year redemption period,
shall be converted into cash from the date of
acquisition or forfeiture.
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The sale of acquired/forfeited real properties
shall be by sealed bids in a public auction to be
witnessed by a representative of the COA.
The Notice of Sale of the acquired real
properties shall be published once a week for
two (2) consecutive weeks in a newspaper of
general circulation in the Philippines which
must be completed at least 20 days prior to
the date of such public auction.
Unless the Commissioner of Internal Revenue
provides otherwise, the Minimum Bid
Price/Floor Price shall be the latest fair market
value as determined by the Commissioner or
the fair market value shown in the latest tax
declaration issued by the provincial, city or
municipal assessor, whichever is higher,
pursuant to Sec. 6(E) of the Tax Code.
Anyone could bid except foreign nationals,
corporate or otherwise, and those qualified
under existing laws, rules and regulations,
including employees of the Bureau of Internal
Revenue.
Bidders shall be required to post a bond in
cash or manager’s check in an amount
representing 10% of the minimum bid price at
least one day before the scheduled public
auction.
Unless the Commissioner allows extension of
time to pay, in meritorious cases, the winning
bidder shall pay the full amount of his bid cash
or manager’s check within two days after
receipt of notice of award.
All taxes and expenses relative to the issuance
of title shall be borne by the winning bidder.
The winning bidder shall be responsible at his
own expense for the ejectment of squatters
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XXX
and/or occupants, if any, of the auctioned
property.
Negotiated or private sale shall be resorted to
as a consequence of failed public bidding for
two consecutive times.
Negotiated or private sale shall in all cases be
approved by the Secretary of Finance.
Public auction sale shall be approved by the
Commissioner or his authorized representative.
The Government reserves the right to reject or
cancel any or all bids.
Disposition of funds recovered in legal
proceedings or obtained from forfeiture
All judgments and monies recovered and
received for taxes, costs, forfeitures, fines and
penalties shall be paid to the Commissioner or
his authorized deputies as the taxes
themselves are required to be paid, and except
as specially provided, shall be accounted for
and dealt within the same way. (Sec. 226,
NIRC)
Further distraint or levy
The remedy by distraint of personal property
and levy on realty may be repeated if necessary
until the full amount due, including all
expenses, is collected. (Sec. 217, NIRC)
Tax lien
Tax Lien is a legal claim or charge on the
property, real or personal, as security for the
payment of same debt or obligation. It
attaches from the time the tax became due
and payable.
When a taxpayer neglects or refuses to pay his
internal revenue tax liability after demand, the
amount so demanded shall be a lien in favor of
the government from the time the assessment
was made by the CIR until paid with interest,
UP LAW BOC TAXATION LAW 2
penalties, and costs that may accrue in
addition thereto upon ALL PROPERTY AND
RIGHTS TO PROPERTY BELONGING to the
taxpayer.
HOWEVER, the lien shall not be valid against
any mortgagee, purchaser or judgment
creditor until NOTICE of such lien shall be filed
by the Commissioner in the Office of the
Register of Deeds of the province or city where
the property of the taxpayer is situated or
located. (Sec. 219, NIRC)
Seizure under forfeiture vs. Seizure to enforce a
tax lien
In the former all the proceeds derived from the
sale of the thing forfeited are turned over to
the Collector of Internal Revenue; in the latter,
the residue of such proceeds over and above
what is required to pay the tax sought to be
realized, including expenses, is returned to the
owner of the property. (BPI v. Trinidad)
Compromise
Authority of the Commissioner to compromise
and abate taxes
Compromise – to reduce the amount of tax
payable (This should not be taken similarly
with compromise penalty.)
The CIR has authority to compromise and
abate tax. However, the CIR is not authorized
to accept anything less than what is
adjudicated in favor of the Government.
It should be noted that there should be
consent of BOTH the taxpayer and the CIR,
otherwise it will be void.
Grounds for a compromise:
The Commissioner may compromise the
payment of any internal revenue tax in the
following cases:
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XXX
(1) A REASONABLE DOUBT as to the validity
of the claim against the taxpayer exists; or
(2) The financial position of the taxpayer
demonstrates a clear inability to pay the
assessed tax. (FINANCIAL INCAPACITY)
Limits of the Commissioner’s power to
compromise:
For cases of financial incapacity: a minimum
compromise rate equivalent to ten percent
(10%) of the basic assessed tax
For other cases: a minimum compromise rate
equivalent to forty percent (40%) of the basic
assessed tax
Note: When the basic tax involved exceeds
One Million Pesos (P1,000,000), or where the
settlement offered is less than the prescribed
minimum rates, the compromise must be
approved by the Evaluation Board (composed
of the Commissioner and 4 deputy
commissioners)
All criminal cases may be compromised
except:
(a) those already filed in court and
(b) those involving fraud.
The taxpayer’s offer to compromise shall not be
considered until (RR 9 – 2013)
(a) He waives in writing his privilege under RA
1405 or other special laws
(b) He gave authority to CIR to inquire into his
bank accounts
(c) There is payment of compromise offer.
Abatement – to cancel the entire amount of tax
payable
UP LAW BOC TAXATION LAW 2
When the Commissioner may abate or cancel a
tax liability:
(1) The tax or any portion thereof appears to
be UNJUSTLY or EXCESSIVELY
ASSESSED; or
(2) The ADMINISTRATION and COLLECTION
COSTS do not justify the collection of the
amount due. (e.g. when the costs of
collection are greater than the amount of
tax due)
CIVIL AND CRIMINAL ACTIONS
Form and Mode of Proceeding:
Civil and criminal action and proceedings
instituted in behalf of the Government under
the authority of this Code or other law enforced
by the BIR:
(a) shall be BROUGHT IN THE NAME OF THE
GOVERNMENT of the Philippines; and
(b) shall be CONDUCTED BY LEGAL
OFFICERS OF THE BIR
(c) shall be filed in court with the approval of
the Commissioner. (Sec. 220, NIRC)
Criminal action as a collection remedy:
The judgment in the criminal case shall impose
the penalty; and order payment of the taxes
subject of the criminal case as finally decided
by the Commissioner. (Sec. 205, NIRC)
Assessment not necessary before filing a
criminal charge for tax evasion
An assessment is not necessary before a
criminal charge can be filed. The criminal
charge need only be proved by a prima facie
showing of a wilful attempt to file taxes, such
as failure to file a required tax return. (CIR v.
Pascor Realty, June 29, 1999)
Suit to recover tax based on false or fraudulent
returns
A proceeding in court for the collection of the
tax assessed may be filed without assessment
at any time within ten (10) years after the
258
XXX
discovery of the falsity, fraud or omission.
Provided, that in a fraud assessment which has
become final and executor, the fact of fraud
shall be judicially taken cognizance of in the
civil or criminal action for the collection thereof.
(Sec. 222, NIRC)
False Return v. Fraudulent Return
A false returns is due to mistakes, carelessness
or ignorance and a fraudulent return is filed
with intent to evade taxes.
The fraud contemplated by law is actual and
not constructive, and must amount to
intentional wrongdoing with the sole object of
avoiding the tax. (Aznar v. CTA, 1974)
Payment of tax is not a valid defense. (Sec
253A)
Refund
Nature of a claim for refund: It partakes of the
nature of an exemption and is strictly
construed against the claimant. The burden of
proof is on the taxpayer claiming the refund
that he is entitled to the same. (CIR v. Tokyo
Shipping, 1995)
Grounds for Refund:
(1) Tax erroneously or illegally assessed or
collected (Sec. 229, NIRC)
(2) Penalty claimed to have collected without
authority (Sec. 229, NIRC)
(3) Any sum alleged to have been excessively
or in any manner wrongfully collected (Sec.
229, NIRC)
(4) Value of internal revenue Stamps when
they are returned in good condition by the
purchaser (Sec. 204, NIRC)
(5) Unused stamps that have been rendered
unfit for use (Commissioner may redeem,
change or refund their value upon proof of
destruction) (Sec. 204, NIRC)
UP LAW BOC TAXATION LAW 2
Requirements for refund as laid down by cases:
(1) Necessity of written claim for refund
(2) Claim containing a categorical demand for
reimbursement
(3) Filing of administrative claim for refund
and the suit/proceeding before the CTA
within 2 years from date of payment
regardless of any supervening cause
General Rule: The taxpayer must file a written
claim for refund stating a categorical demand
for reimbursement before the Commissioner
within two years from the date of payment.
(Sec. 229, NIRC)
When it comes to recovery of unutilized input
VAT, Section 112, and not Section 229 of the
1997 Tax Code, is the governing law. Second,
prior to 8 June 2007, the applicable rule is
neither Atlas nor Mirant, but Section 112(A).
The Atlas doctrine, which held that claims for
refund or credit of input VAT must comply with
the two-year prescriptive period under Section
229, should be effective only from its
promulgation on 8 June 2007 until its
abandonment on 12 September 2008 in Mirant.
(CIR v. San Roque)
Exceptions to requirement of a written claim:
When on the face of the return upon which
payment was made, such payment appears
clearly to have been erroneously paid (e.g.
mathematical errors), the Commissioner may
refund or credit the tax even without a written
claim therefore. (Sec. 229, NIRC)
A return filed showing an overpayment shall be
considered as a written claim for credit or
refund. (Sec. 204(C), NIRC)
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Note: Under Sec. 229, there is no exception to
the 2-year prescriptive period.
Legal Basis of Tax Refunds
Tax refunds are based on the principle of
quasi-contract or solutio indebiti and the
pertinent laws governing this principle are
found in Art. 2142 and Art. 2154 of the NCC.
When money is paid to another under the
influence of a mistake of fact, on the mistaken
supposition of the existence of a specific fact,
where it would not have been known that the
fact was otherwise, it may be recovered. The
ground upon which the right of recovery rests
is that money paid through misapprehension
of facts belongs in equity and in good
conscience to the person who paid it.
The government comes within the scope of
solutio indebiti principle, where that:
“enshrined in the basic legal principles is the
time honoured doctrine that no person shall
unjustly enrich himself at the expense of
another. It goes without saying that the
Government is not exempt from the
application of this doctrine.
Statutory Basis for Tax Refund
Scope of Claims for Refund (Sec. 204, NIRC)
The Commissioner may:
(a) Credit or refund taxes erroneously or
illegally received or penalties imposed
without authority;
(b) Refund the value of internal revenue
stamps when they are returned in good
condition by the purchaser; and
(c) In the Commissioner’s discretion, redeem
or change unused stamps that have been
rendered unfit for use and refund their
value upon proof of destruction.
UP LAW BOC TAXATION LAW 2
Necessity of Proof for Claim or Refund
No credit or refund of taxes or penalties shall
be allowed unless the taxpayer files in writing
with the Commissioner a claim for credit or
refund within two (2) years after the payment
of the tax or penalty. (Sec. 204, NIRC)
A return filed showing an overpayment shall be
considered as a written claim for credit or
refund.(Sec. 204, NIRC)
Burden of Proof for Claim of Refund
Tax refunds, like tax exemptions, are construed
strictly against the taxpayer and liberally in
favor of the taxing authority. (United Airlines,
Inc. v. CIR, G.R. No. 178788, Sept. 29, 2010)
Nature of erroneously paid tax/illegally
assessed collected
Taxes are erroneously paid when a taxpayer
pays under a mistake of fact, such as, he is not
aware of an existing exemption in his favor at
the time that payment is made. Taxes are
illegally collected when payments are made
under duress.
Tax refund vis-à-vis tax credit
REFUND takes place when there is actual
reimbursement while TAX CREDIT takes place
upon the issuance of a tax certificate or tax
credit memo, which can be applied against any
sum that may be due and collected from the
taxpayer.
Essential requisites for claim of refund
(Comm. v. CA and Citytrust, cited in United
Airlines Inc. v. CIR, 2010): The grant of a refund
is founded on the assumption that the tax
return is valid, that is, the facts stated therein
are true and correct. The deficiency
assessment, although not yet final, created a
doubt as to and constitutes a challenge
against the truth and accuracy of the facts
stated in said return which, by itself and
without unquestionable evidence, cannot be
260
XXX
the basis for the grant of the refund…To grant
the refund without determination of the proper
assessment and the tax due would inevitably
result in multiplicity of proceedings or suits. If
the deficiency assessment should
subsequently be upheld, the Government will
be forced to institute anew a proceeding for
the recovery of erroneously refunded taxes
which recourse must be filed within the
prescriptive period of ten years after discovery
of the falsity, fraud or omission in the false or
fraudulent return involved.
Who may claim/apply for tax refund/tax credit
The proper person to claim refund or tax credit
is the person on whom the tax is imposed by
the statute.
Taxpayer/withholding agents of non-resident
foreign corporation - the withholding agent is
directly and independently liable for the
correct amount of tax that should be withheld
and for deficiency assessments, surcharges
and penalties.
Prescriptive Period for Recovery of Tax
Erroneously or Illegally Collected
Two-year period when counted:
From the date that tax was paid.
How date of payment determined:
If the income tax is withheld at source –
payment is at the end of the taxable year.
If the income is paid on a quarterly basis –
payment is from the time of filing the final
adjustment return.
CIR vs. TMX Sales (January 16, 1992): When a
tax is paid in installments, the prescriptive
period should be counted from the date of final
payment or the last installment. This rule
proceeds from the theory that there is no
payment until the entire tax liability is
completely paid. Installments should be
UP LAW BOC TAXATION LAW 2
treated as advances or portions of the annual
tax due.
Other Consideration Affecting Tax Refunds
Remedy of the taxpayer upon denial or inaction
on the claim for refund:
(a) CIR denies claim - appeal to the CTA
within thirty (30) days from the receipt of
the Commissioner’s decision and within
two years from the date of payment.
(b) CIR does not act on the claim and the 2-
year period is about to lapse - file a claim
before the CTA before the 2-year period
lapses. Otherwise, he may no longer file a
claim before the CTA in case the
Commissioner renders an adverse decision
beyond the 2-year period. (Revised Rules
of the CTA, as amended)
Period for claiming refund once granted:
Within five years from the date such warrant or
check was mailed or delivered, otherwise it
shall be forfeited in favor of the government
and the amount thereof shall revert to the
general fund. (Sec. 230, NIRC)
Period for using the Tax Credit Certificate (TCC):
Tax credit certificates (TCCs) can be applied
against all internal revenue taxes, excluding
withholding tax. TCCs which remain unutilized
after five years from the date of issue shall be
considered as invalid, unless revalidated. If
not revalidated, the amount covered by the
TCC shall revert to the general fund. (Sec. 230,
NIRC)
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GOVERNMENT REMEDIES
Administrative remedies
Tax lien
Levy and sale of real property
Forfeiture of real property to the
government for want of bidder
Further distraint and levy
Suspension of business operation
Non-availability of injunction to restrain
collection of tax
The Commissioner or his authorized
representative is empowered to suspend the
business operations and temporarily close the
business establishment of any person for any
of the following violations:
In the case of a VAT-registered Person-
(a) Failure to issue receipts or invoices; or
(b) Failure to file a value-added tax return as
required under Section 114; or
(c) Understatement of taxable sales or
receipts by thirty percent (30%) or more of
his correct taxable sales or receipts for the
taxable quarter.
Failure of any Person to Register as Required
under Section 236.
The temporary closure of the establishment
shall be for the duration of not less than five
(5) days and shall be lifted only upon
compliance with whatever requirements
prescribed by the Commissioner in the closure
order. (Sec. 115, NIRC)
Non-availability of injunction to restrain
collection of tax
No court shall have the authority to grant an
injunction to restrain the collection of any
national internal revenue tax, fee or charge
imposed by the National Internal Revenue
Code. (Sec. 218, NIRC)
UP LAW BOC TAXATION LAW 2 XXX

Judicial remedies
(a) Civil Action Offender Penalty
(b) Criminal Action
A public officer or the maximum penalty
Form and Mode of Proceeding (supra) employee prescribed for the
offense shall be imposed
Civil Action on him
Two ways by which civil liability is enforced: shall be dismissed from
by filing a civil case for the collection of sum of public office, and
money with the proper regular court; and perpetually disqualified
by filing an answer to the petition for review from holding any public
filed by the taxpayer with the Court of Tax office, to vote, and to
Appeals.(Mamalateo, 2008) participate in any
election
Criminal Action CPA his license shall be
Any person convicted of a crime under the automatically revoked or
Code shall: cancelled once he is
(a) be liable for the payment of the tax, and convicted
(b) be subject to the penalties imposed under Corporations, imposed on the partner,
the Code. (Sec. 253(A), NIRC) associations, president, general
partnerships etc. manager, branch
Payment of tax not defense: manager, treasurer,
Payment of the tax due after a case has been officer-in-charge and
filed shall not constitute a valid defense in any employees responsible
prosecution for violation of the provisions for the violation (Sec.
under the Code. (Sec. 253(A), NIRC) 253, NIRC)

Liability of person who aids or abets: Minimum amount of fine:

Any person who wilfully aids or abets in the
commission of a crime penalized under the
Code or who causes the commission of any
such offense by another shall be liable in the
same manner as the principal. (Sec. 253(B),
NIRC)
The fines imposed for any violation of the Code
shall not be lower than the fines imposed
herein or twice the amount of taxes, interests
and surcharges due from the taxpayer,
whichever is higher. (Sec. 253, NIRC)
Prescriptive period for criminal action:
All violations of any provision of the Code shall
prescribe after five (5) years. (Sec. 281, NIRC)

Offender Penalty

Not a citizen of he shall be deported

the Philippines immediately after Criminal Offenses
serving the sentence

262
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Offense Who is liable Penalty

Willful attempt to evade or Any person who willfully Fine: P30,000 -

defeat tax. (Sec. 254) attempts in any manner to P100,000
evade or defeat any tax or the AND
payment thereof. Imprisonment: 2-4 years
Plus other penalties
Failure to File Return, Supply Any person required to pay any Fine: P10,000 or more
Correct and Accurate tax, make a return, keep any AND
Information, Pay Tax, Withhold record, or supply correct and Imprisonment:1-10 years
and Remit Tax and Refund accurate information Plus other penalties
Excess Taxes Withheld on
Compensation (Sec. 255) Any person who attempts to Fine - P10,000 - P20,000
make it appear for any reason AND
that he or another has in fact Imprisonment: 1-3 years
filed a return or statement, or Plus other penalties
actually files a return or
statement and subsequently
withdraws the same return or
statement
Making false entries, records, Any financial officer or Fine - P50,000 -
or reports, or using falsified or Independent CPA engaged to P100,000
fake accountable forms (Sec. examine and audit books of AND
257) accounts of taxpayers under Imprisonment: 2-6 years
Sec.232 (A) and any person
under his direction.
Unlawful pursuit of business Any person who carries on any Fine: P5,000 - P20,000
(Sec. 258) business for which in annual AND
registration fee is imposed Imprisonment: 6 months-
without paying the tax as 2 years
required by law.
A person engaged in the Fine: P30,000 - P50,000
business of distilling, rectifying, AND
repacking, compounding or Imprisonment: 1-2 years
manufacturing any article
subject to excise tax.
Illegal Collection of Foreign Any person who knowingly Fine: P20,000 - P50,000;
Payments (Sec. 259) undertakes the collection of AND
foreign payments under Sec. 67 Imprisonment: 1-2 years
without a license or without
complying with the
implementing rules and
regulations.
Unlawful Possession of Any person, manufacturer or Fine: P20,000 -

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Offense Who is liable Penalty

Cigarette Paper in Bobbins or importer of cigar or cigarettes P100,000; AND

Rolls, Etc. (Sec. 260) Imprisonment - 6 years 1
day - 12 years
Unlawful Use of Denatured Any person who for the purpose Fine: P20,000 -
Alcohol (Sec. 261) of manufacturing any beverage, P100,000; AND
uses denatured alcohol or Imprisonment - 6 years 1
alcohol specially denatured to day - 12 years
be used for motive power or
withdrawn under bond for
industrial uses or alcohol
knowingly misrepresented to be
denatured to be unfit for oral
intake or who knowingly sells or
offers for sale such preparations
containing as an ingredient
such alcohol.

Any person who unlawfully

recovers or attempt to recover
by distillation or other process
any denatured alcohol or who
knowingly sells or offers for
sale, conceals or otherwise
disposes of alcohol as
recovered or redistilled
Shipment or Removal of Any person who ships, Fine: P20,000 – P
Liquor/Tobacco Products transports or removes 100,000; AND
under False Name or Brand or Imprisonment: 6 years 1
as an Imitation of any Existing day - 12 years
or Known Product Name or
Brand (Sec. 262)
Unlawful Possession or Any person who owns or is
Removal of Articles Subject to found in possession of these
Excise Tax W/o Payment of the articles
Tax (Sec. 263) Where: Fine: P1,000 - P2,000
Value of goods < P1,000 AND
Imprisonment: 60-100
days

Value of goods < P50,000 but Fine: P10,000-P20,000

>P1000 AND
Imprisonment: 2-4 years

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Offense Who is liable Penalty

Value of goods < P150,000, Fine: P30,000 - P60,000

but >P50,000 AND
Imprisonment: 4-6 years

Value of goods > P150,000 Fine: P50,000 -

P100,000
AND
Imprisonment: 10-12 years
Failure or Refusal to Issue Any person who, being required Fine: P 1,000 - P50,000
Receipts or Sales or under Section 237 to issue AND
Commercial Invoices, receipts or sales or commercial Imprisonment: 2- 4 years
Violations Related to the invoices
Printing of Such Receipts or
Invoices and Other Violations
(Sec. 264)
Offenses Relating to Stamps Fine: P20,000 - P50,000
(Sec. 265) AND
Imprisonment: 4-8 years
Failure to Obey Summons (Sec. Any person who being duly Fine: P 5,000 - 10,000;
266) summoned to appear to testify, AND
or to appear and produce books Imprisonment:1-2 years
of accounts, records,
memoranda or other papers, or
to furnish information as
required under the pertinent
provisions of this Code.
Declaration under Penalties of Any person who willfully files a Penalty for Perjury under
Perjury (Sec. 267) declaration, return or statement the Revised Penal Code
containing information which is
not true and correct as to every
material matter
Misdeclaration or Any manufacturer subject to Summary cancellation or
Misrepresentation of excise tax withdrawal of the permit
Manufacturers Subject to to engage in business as a
Excise Tax (Sec. 268) manufacturer of articles
subject to excise tax
Use of Property in Unlicensed Any person who conducts an Forfeiture of property
Business or Use of Dies for unlicensed business or uses used
Printing False Stamps, Etc. dies for printing false stamps
(Sec. 268)
Illegal Storage or Removal of Any person subject to excise tax Forfeiture of goods

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Offense Who is liable Penalty

Goods (Sec. 268) who fails to store the goods in

proper place, or removes goods
without payment of excise tax
Penalty for Second and Maximum of the penalty
Subsequent Offenses (Sec. prescribed for the offense
274)
Violation of Other Provisions of
Any person who violates any Fine: P1000 or less
the Tax Code or Rules or provision of this Code or any OR
Regulations in General (Sec. rule or regulation promulgated Imprisonment: 6 months
275) by the Department of Finance or less
for which no specific penalty is OR Both
provided by law
Penalty for Selling, Any taxpayer, whose property Fine: at least P5,000
Transferring, Encumbering or has been placed under AND
in any way disposing of constructive distraint at least twice the value of
property Placed under the property
Constructive Distraint (Sec. OR
276) Imprisonment: 2 years 1
day - 4 years
OR Both
Failure to Surrender Property Any person having in his Fine: P 5,000 or more
Placed under Distraint and possession or under his control OR
Levy (Sec. 277) any property or rights to Imprisonment: 6 months 1
property, upon which a warrant day - 2 years,
of constructive distraint or OR Both
actual distraint and levy has
been issued
Procuring Unlawful Divulgence Any person procures an officer Fine: not more than P
of Trade Secrets (Sec. 278) or employee of the BIR to 2,000
divulge any confidential OR
information regarding the Imprisonment: 6 months -
business, income or inheritance 5 years
of any taxpayer, knowledge of OR Both
which was acquired by him in
the discharge of his official
duties, and which it is unlawful
for him to reveal, and any
person who publishes or prints
in any manner whatever, not
provided by law, any income,
profit, loss or expenditure
appearing in any income tax

266
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Offense
return
Penalties Imposed on Public Officers(Sec. 269,
NIRC)
The law imposes a fine of not less than
P50,000 nor more than P100,000 or
imprisonment for not less than 10 years nor
more than fifteen years on every official, agent
or employee of the BIR or of any agency or
employee of the Government charged with the
enforcement of the Tax Code, who shall:
(CONED- FRAP)
(a) Extort or willfully oppress under color of
law;
(b) knowingly Demand other or greater sums
than are authorized by law or receive any
fee, compensation or reward, except as by
law prescribed, for the performance of any
duty;
(c) willfully Neglect to give receipts, as by law
required, for any sums collected in the
performance of duty, or who willfully
neglect to perform any of the duties
enjoined by law;
(d) Conspire or collude with another or others
to defraud the revenues or otherwise
violate the law;
(e) willfully make Opportunity for any person
to defraud the revenues, or who do or omit
to do any act with intent to enable any
other person to defraud the revenues;
(f) negligently or by design Permit the
violation of the law by any other person;
(g) make or sign any False certificate or return
in any case where the law requires the
making by them of such entry, certificate or
return;
(h) having knowledge or information of a
violation of any provision of the Code or of
any fraud committed on the revenues
collectible by the BIR, fail to Report such
XXX
Who is liable Penalty
knowledge or information to their superior
officer, or to report as otherwise required
by law; or
(i) without the authority of law, demand or
Accept or attempt to collect, directly or
indirectly, as payment or otherwise, any
sum of money or other thing of value for
the compromise, adjustment or settlement
of any charge or complaint for any violation
or alleged violation of law.
Informer’s Reward[Sec. 282, NIRC]
To whom given:
Persons instrumental in the discovery of
violations of the NIRC and in discovery and
seizure of smuggled goods.
Amount of reward:
10% of the revenues, surcharges or fees
recovered and/or fine/penalty imposed, or
P1,000,000, whichever is LOWER.
The same amount shall be given if the offender
offered to compromise and such offer has been
accepted and collected by the Commissioner.
If no revenue, surcharge or fees be actually
collected, such person is not entitled to a
reward.
For discovery and seizure of SMUGGLED
GOODS: The cash reward is 10% of the FMV of
the smuggled and confiscated goods, or
P1,000,000, whichever is LOWER.
STATUTORY OFFENSES AND PENALTIES
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Civil Penalties
(a) Surcharge
(b) Interest
Surcharge
Surcharge - penalty imposed in addition to the
tax required to be paid (Sec. 248(A), NIRC)
Rates of Surcharge (25% or 50%)
25% of the amount due in the following cases:
(a) Failure to file any return and pay the tax
due on the date prescribed; or
(b) Filing a return with an internal revenue
officer other than those with whom the
return is required to be filed unless the
Commissioner authorizes otherwise; or
(c) Failure to pay the deficiency tax within the
time prescribed for its payment in the
notice of assessment; or
(d) Failure to pay the full or part of the amount
of tax due on or before the date prescribed
for its payment (Sec. 246 (A), NIRC)
50% of the tax or of the deficiency tax in the
following cases:
(a) Willful neglect to file the return within the
period prescribed; or
(b) A false or fraudulent return is willfully
made (Sec. 248(B), NIRC)
Prima facie evidence of a false or fraudulent
return: Substantial underdeclaration of taxable
sales, receipts or income, or a substantial
overstatement of deductions. Failure to report
sales, receipts or income in an amount
exceeding thirty percent (30%) of that declared
per return, and a claim of deductions in an
amount exceeding (30%) of actual deductions,
shall render the taxpayer liable for substantial
underdeclaration or for overstatement. (Sec.
248(B), NIRC)
Interest
268
XXX
In General
20% per annum on the unpaid amount of tax,
interest at the rate of twenty percent (20%) per
annum from the date prescribed for payment
until the amount is fully paid. (Sec. 249(A),
NIRC)
Deficiency Interest
20% per annum on any deficiency in the tax
due from the date prescribed for its payment
until the full payment thereof. (Sec. 249(B),
NIRC)
Delinquency interest
20% per annum on the unpaid amount in case
of failure to pay:
(a) The amount of the tax due on any return
required to be filed; or
(b) The amount of the tax due for which no
return is required; or
(c) A deficiency tax, or any surcharge or
interest thereon on the due date appearing
in the letter of demand and assessment
notice (Sec. 249(C), NIRC)
Interest on extended payment
20% per annum on the tax or deficiency tax or
any part thereof unpaid from the date of notice
and demand until it is paid if any person
required to pay the tax is:
(a) Qualified and elects to pay the tax on
installment but fails to pay the tax or any
installment or any part of such amount or
installment or before the date prescribed for
its payment; or
(b) Where the Commissioner has authorized an
extension of time within which to pay a tax
or a deficiency tax or any part thereof
(249(D), NIRC)
COMPROMISE AND ABATEMENT OF TAXES
(see discussion under Remedies of the
Taxpayer)
UP LAW BOC TAXATION LAW 2
Cases which may be compromised: (Sec. 2, R.R.
30-2002)
(1) Delinquent accounts
(2) Cases under administrative protest after
issuance of the Final Assessment Notice to
the taxpayer which are still pending in the
Regional Offices, Revenue District Offices,
Legal Service, Large Taxpayer Service
(LTS), Collection Service, Enforcement
Service and other offices in the National
Office
(3) Civil tax cases being disputed before the
courts
(4) Collection cases filed in courts
(5) Criminal violations, other than those
already filed in court or those involving
criminal tax fraud
Cases which cannot be compromised: (Sec. 2,
R.R. 30-2002)
(1) Withholding tax cases, unless the
applicant-taxpayer invokes provisions of
law that cast doubt on the taxpayer's
obligation to withhold
(2) Criminal tax fraud cases confirmed as such
by the CIR or his duly authorized
representative
269
XXX
(3) Criminal violations already filed in court
(4) Delinquent accounts with duly approved
schedule of installment payments
(5) Cases where final reports of reinvestigation
ore reconsideration have been issued
resulting to reduction in the original
assessment and the taxpayer is agreeable
to such decision by signing the required
agreement form for the purpose. On the
other hand, other protested cases shall be
handled by the Regional Evaluation Board
(REB) or the National Evaluation Board
(NEB) on a case to case basis
(6) Cases which become final and executory
after final judgment of a court, where
compromise is requested on the ground of
doubtful validity of the assessment; and
(7) Estate tax cases where compromise is
requested on the ground of financial
incapacity of the taxpayer
UP LAW BOC TAXATION LAW 2 XXX

Flowchart I: Taxpayer’s Remedies from Tax Assessment-NIRC

START

Commissioner or Revenue Officer (RO)

RO sends notice Taxpayer
Regional Director conducts Audit w/in 120
of informal responds w/in 15
Issues Letter of days. If 120 days lapse
conference days
Authority (LA) LA is revalidated,

Regional
Send Formal Letter Assessment
Is response w/n Taxpayer
of demand and Final NO to Division issues a
15 days? Is it responds w/in
Assessment Notice either Preliminary
meritorious? 15 days
(FAN) is issued Assessment Notice
(PAN)
Yes to ASSESSMENT
both ENDS

File protest w/n 30 Protest made w/in

days from receipt of 30 days?
YES to Commissioner decides on
assessment. Submit Supporting papers
both protest within 180 days
supporting papers wi/in submitted w/in 60
60 days from protest days?

Assessment becomes
NO to
Final, Warrant of Distraint
either
& Levy Issued

Decision Commissioner
YES favorable to YES decides w/n
taxpayer? 180 days?

ASSESSMENT
ENDS NO NO

Appeal to the Court of Tax Appeal to the Court of Tax

appeals within 30 days OR file Appeals w/in 30 days after
motion for reconsideration lapse of 180 days OR wait for
within 30 days. MR tolls 30 a decision by the BIR
day period to appeal to CTA (Lascona Land oil vs. CIR)

If MR is denied, appeal to
the CTA within remainder
of the 30 days

Assessment
CTA decides on Appeal made becomes Final,
YES NO
the appeal on time? Warrant of Distraint
& Levy Issued

If CTA decision is unfavorable to

taxpayer, file MR with CTA Appeal to
END
Division w/in 15 days. Appeal to Supreme Court
CTA en banc if MR denied.

270
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Flowchart II: Procedures for Distraint and Levy-NIRC
START
Person owing any
delinquent tax to
fails to pay w/in
the time required
RDO posts notice in at least 2 public
places in the municipality/city where
the distraint is made. One place of
posting must be at the mayor’s office.
Time of sale shall not be less than 20
days after the notice (Sec. 209)
Goods shall be restored to owner,
if charges are paid (Sec. 210)
W/in 5 days after sale,
distraining officer shall enter
return of proceedings in the
records of RCO, RDO and
RRD (Sec. 213)
Real property may be levied
on before, simultaneously, or
after the distraint of personal
property (207 (B))
W/n 10 days after receipt of the
warrant, levying officer shall
report to the Commissioner who
shall have the authority to lift the
warrant of levy (Sec. 207 B)
W/n 1 year from forfeiture,
the taxpayer, may redeem
said property by paying full
amount of the taxes and
charges (Sec. 215)
The Commissioner may,
after 20 days notice, sell
property at public auction
or at private sale with
approval of the SoF.
Proceeds shall be
deposited with the National
Treasury (Sec. 216)
TAXATION LAW 2 XXX
RCO - Revenue Collection Officer RDO - Revenue District officer
RRD - Revenue Regional Director LGU- Local Government Unit
Commissioner seizes sufficient
Delinquent tax personal property to satisfy the
Yes
more than 1M? tax, charge & expenses of seizure
(Sec. 207 (A))
RDO seizes sufficient
personal property to satisfy
No
the tax, charges & expenses
Property may be resold and
of seizure (Sec. 207 (A))
the net proceeds shall be
remitted to the National
Treasury as internal revenue.
Distraining Officer accounts for (Sec. 212)
the goods distrained (Sec. 208)
Bid less than
Officer Commissioner may purchase
amount of tax/
conducts Yes property for the National
FMV of goods
public auction Government (Sec. 212)
distrained?
No, bid just right
W/in 2 days after Excess of proceeds over the Officer sells the goods to the
the sale, officer entire claim, shall be returned highest bidder for cash or
shall report to the to the owner. No charge shall with the Commissioner’s
Commissioner. be imposed for the services of approval, through commodity/
(Sec. 211) the officer (Sec. 209) stock exchanges. (Sec. 209)
Internal revenue officer,
Levy shall be affected by writing upon said certificate a
designated by the Commissioner,
description of the property. Notice of the levy shall be
shall prepare a certificate with the
served upon the Register of Deeds of LGU where the
force of a nationwide legal
property is located and upon the owner (Sec. 207 B)
execution (Sec. 207 B)
W/n 20 days after levy, officer shall post
notice at the main entrance of the Sale shall be held at the
municipal/city hall & in public place in the main entrance of the
barrio/district where the real estate lies for municipal/city hall, or on the
at least 30 days by AND publish it once a premises of the levied
week for 3 weeks. Owner may prevent property. (Sec. 213)
sale by paying all charges (Sec. 213)
W/n 2 days, he shall make a return
Officer conducting the
of the forfeiture. Register of Deeds, No bidder or
sale shall forfeit the
upon registration of forfeiture shall Yes highest bid
property to the
transfer title to the Government w/o insufficient?
Government (Sec. 215)
court order. (Sec. 215)
No, bid ok
W/n 1 year from sale, the W/n 5 days after the sale, Excess of proceeds
owner may redeem, by paying levying officer shall enter of the sale over claim
to the RDO the amount of the return of the proceedings and cost of sale shall
taxes, penalties, and interest upon the records of the RCO, be turned over to the
thereon from the date of RDO and RRD (Sec. 213) owner (Sec. 213)
delinquency to the date of sale,
and 15% per annum interest on
purchase price from the date
Owner shall not be
of purchase to the date of Levy and distraint
deprived of the
redemption. (Sec. 214) may be repeated until
possession and shall
the full amount due,
be entitled to the
and all expenses are
fruits until 1 year
collected. (Sec. 217)
expires (Sec. 214)
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VI. Organization and
Function of the BIR
RULE-MAKING AUTHORITY OF THE
SECRETARY OF FINANCE
Authority of secretary of finance to promulgate
rules and regulations(Sec. 244, NIRC)
The Secretary of Finance, upon
recommendation of the Commissioner, shall
promulgate all needful rules and regulations
for effective enforcement of the provisions of
the Code.
Specific provisions to be contained in rules and
regulations(Sec. 245, NIRC)
(a) The time and manner in which Revenue
Regional Director shall canvass their
respective Revenue Regions for the
purpose of discovering persons and
property liable to national internal revenue
taxes, and the manner in which their lists
and records of taxable persons and taxable
objects shall be made and kept;
(b) The forms of labels, brands or marks to be
required on goods subject to an excise tax,
and the manner in which the labelling,
branding or marking shall be effected;
(c) The conditions under which and the
manner in which goods intended for export,
which if not exported would be subject to
an excise tax, shall be labelled, branded or
marked;
(d) The conditions to be observed by revenue
officers respecting the institutions and
conduct of legal actions and proceedings;
(e) The conditions under which goods
intended for storage in bonded
warehouses shall be conveyed thither, their
272
XXX
manner of storage and the method of
keeping the entries and records in
connection therewith, also the books to be
kept by Revenue Inspectors and the reports
to be made by them in connection with
their supervision of such houses;
(f) The conditions under which denatured
alcohol may be removed and dealt in, the
character and quantity of the denaturing
material to be used, the manner in which
the process of denaturing shall be effected,
so as to render the alcohol suitably
denatured and unfit for oral intake, the
bonds to be given, the books and records
to be kept, the entries to be made therein,
the reports to be made to the
Commissioner, and the signs to be
displayed in the business ort by the person
for whom such denaturing is done or by
whom, such alcohol is dealt in;
(g) The manner in which revenue shall be
collected and paid, the instrument,
document or object to which revenue
stamps shall be affixed, the mode of
cancellation of the same, the manner in
which the proper books, records, invoices
and other papers shall be kept and entries
therein made by the person subject to the
tax, as well as the manner in which
licenses and stamps shall be gathered up
and returned after serving their purposes;
(h) The conditions to be observed by revenue
officers respecting the enforcement of Title
III imposing a tax on estate of a decedent,
and other transfers mortis causa, as well as
on gifts and such other rules and
regulations which the Commissioner may
consider suitable for the enforcement of
the said Title III;
UP LAW BOC TAXATION LAW 2
(i) The manner in which tax returns,
information and reports shall be prepared
and reported and the tax collected and
paid, as well as the conditions under which
evidence of payment shall be furnished the
taxpayer, and the preparation and
publication of tax statistics;
(j) The manner in which internal revenue
taxes, such as income tax, including
withholding tax, estate and donor's taxes,
value-added tax, other percentage taxes,
excise taxes and documentary stamp taxes
shall be paid through the collection officers
of the Bureau of Internal Revenue or
through duly authorized agent banks
which are hereby deputized to receive
payments of such taxes and the returns,
papers and statements that may be filed
by the taxpayers in connection with the
payment of the tax:
Provided, however, That notwithstanding the
other provisions of this Code prescribing the
place of filing of returns and payment of taxes,
the Commissioner may, by rules and
regulations, require that the tax returns,
papers and statements that may be filed by the
taxpayers in connection with the payment of
the tax.
Provided, however, That notwithstanding the
other provisions of this Code prescribing the
place of filing of returns and payment of taxes,
the Commissioner may, by rules and
regulations require that the tax returns, papers
and statements and taxes of large taxpayers
be filed and paid, respectively, through
collection officers or through duly authorized
agent banks:
Provided, further, That the Commissioner can
exercise this power within six (6) years from the
approval of Republic Act No. 7646 or the
completion of its comprehensive
273
XXX
computerization program, whichever comes
earlier:
Provided, finally, That separate venues for the
Luzon, Visayas and Mindanao areas may be
designated for the filing of tax returns and
payment of taxes by said large taxpayers.
For the purpose of this Section, 'large taxpayer'
means a taxpayer who satisfies any of the
following criteria:
(a) Value-Added Tax (VAT) - Business
establishment with VAT paid or payable of
at least P100,000 for any quarter of the
preceding taxable year;
(b) Excise tax - Business establishment with
excise tax paid or payable of at least
P1,000,000 for the preceding taxable year;
(c) Corporate Income Tax - Business
establishment with annual income tax paid
or payable of at least P1,000,000 for the
preceding taxable year; and
(d) Withholding tax - Business establishment
with withholding tax payment or
remittance of at least P1,000,000 for the
preceding taxable year.
Provided, however, That the Secretary of
Finance, upon recommendation of the
Commissioner, may modify or add to the above
criteria for determining a large taxpayer after
considering such factors as inflation, volume of
business, wage and employment levels, and
similar economic factors.
The penalties prescribed under Section 248
shall be imposed on any violation of the rules
and regulations issued by the Secretary of
Finance, upon recommendation of the
Commissioner, prescribing the place of filing of
returns and payments of taxes by large
taxpayers.
UP LAW BOC TAXATION LAW 2
Non-retroactivity of rulings (Sec. 246, NIRC)
General Rule:No retroactive application if the
revocation, modification or reversal of rules
and regulations, rulings or circulars will be
prejudicial to the taxpayers
Exceptions:
Where the taxpayer deliberately misstates or
omits material facts from his return or any
document required of him by the BIR;
Where the facts subsequently gathered by the
BIR are materially different from the facts on
which the ruling is based; or
Where the taxpayer acted in bad faith.
POWER OF THE COMMISSIONER TO
SUSPEND THE BUSINESS OPERATION OF A
TAXPAYER(Sec 115, NIRC)
The Commissioner or his authorized
representative is empowered to suspend the
274
XXX
business operations and temporarily close the
business establishment of any person for any
of the following violations:
In the case of a vat-registered person -
(a) Failure to issue receipts or invoices;
(b) Failure to file a value-added tax return as
required under Section 114; or
(c) Understatement of taxable sales or
receipts by thirty percent (30%) or more of
his correct taxable sales or receipts for the
taxable quarter.
Failure of any person to register as required
under section 236.-
The temporary closure of the establishment
shall be for the duration of not less than five
(5) days and shall be lifted only upon
compliance with whatever requirements
prescribed by the Commissioner in the closure
order.
UP LAW BOC TAXATION LAW 2 XXX

275
UP LAW BOC TAXATION LAW 2 XXX

VIII. LOCAL Authority to prescribe penalties for tax

GOVERNMENT CODE violations
The sanggunian may impose
OF 1991, AS AMENDED (1) a surcharge not exceeding twenty-five
percent (25%) of the amount of taxes, fees
or charges not paid on time and
LOCAL GOVERNMENT TAXATION
(2) an interest at the rate not exceeding two
percent (2%) per month of the unpaid
Fundamental principles (UEPIP)
taxes, fees or charges including surcharges,
Taxation shall be uniform in each local
until such amount is fully paid but in no
government unit;
case shall the total interest on the unpaid
Taxes, fees, charges and other impositions
amount or portion thereof exceed thirty-six
shall: (EPUC)
(36) months. (Sec. 168, LGC)
(1) be equitable and based as far as
practicable on the taxpayer's ability to pay;
Authority to grant local tax exemptions
(2) be levied and collected only for public
LGUs may, through ordinances duly approved,
purposes;
grant tax exemptions, incentives or reliefs
(3) not be unjust, excessive, oppressive, or
under such terms and conditions as they may
confiscatory;
deem necessary. (Sec. 192, LGC)
(4) not be contrary to law, public policy,
national economic policy, or in the restraint
Withdrawal of exemptions
of trade;
Unless otherwise provided, tax exemptions or
The collection of local taxes, fees, charges and
incentives granted to, or presently enjoyed by
other impositions shall not be let to any private
all persons, whether natural or judicial,
person;
including government-owned or controlled
The revenue collected shall inure solely to the
corporations, except local water districts,
benefit of, the local government unit levying
cooperatives duly registered under R.A. No.
the tax, fee, charge or other imposition unless
6938, non-stock and non-profit hospitals and
otherwise specifically provided herein; and,
education institutions, are withdrawn upon the
effectivity of the Code. (Sec. 193, LGC)
Each local government unit shall, as far as
practicable, evolve a Progressive system of
Authority to adjust local tax rates
taxation. (SEC. 130, LGC)
LGUs shall have the authority to adjust the tax
rates as prescribed not oftener than once every
Nature and Source of Taxing Power
five (5) years, but in no case shall the
Grant of local taxing power under the Local
adjustment exceed ten percent (10%) of the
Government Code
rates fixed by the Code. (Sec. 191, LGC)
Each LGU shall exercise its power to
create its own sources of revenue levy taxes,
Residual taxing power of local governments
fees, and charges.
LGU may exercise the power to levy taxes or
Both are subject to the provisions in
charges on ANY base or subject
the LGC and consistent with local autonomy
Taxes, fees and charges levied accrue
exclusively to the local government units. (Sec.
129, LGC)

276
UP LAW BOC TAXATION LAW 2 XXX

Required: in a newspaper of local circulation. In provinces,

Not otherwise specifically enumerated in the
LGC or taxed under NIRC or other applicable
laws
Not unjust, excessive, oppressive, confiscatory
or contrary to declared national policy
cities and municipalities where there are no
newspapers of local circulation, it must be
posted in at least two (2) conspicuous and
publicly accessible places. (Sec. 188, LGC)
Scope of Taxing Power

Pursuant to an ordinance enacted with public LGU Scope of Taxing Power

hearing conducted for the purpose. (Sec. 186,
LGC) Provinces May levy only:
(Sec. 134, Transfer of Real Property
Authority to issue local tax ordinances LGC) Ownership
The power to impose a tax, fee, or charge, or to Business of Printing and
generate revenue under this Code shall be Publication
exercised by the sanggunian of the local Franchise Tax
government unit concerned through an Tax on Sand, Gravel and Other
appropriate ordinance. (Sec. 132, LGC) Quarry Resources
Professional Tax
Local Taxing Authority Amusement Tax
Power to create revenues exercised thru LGUs Annual Fixed Tax for every
Each LGU shall exercise its power to create its delivery truck or van
power to create its own sources of revenue and Municipalitie May levy taxes, fees and
to levy taxes, fees and charges. (Sec. 128, LGC) s charges not otherwise levied
by provinces (Sec. 142, LGC)
Exercised by the Sanggunian concerned Cities May levy taxes, fees and
through an appropriate ordinance. (Sec. 132, charges which the province or
LGC) municipality may impose (Sec.
151, LGC)
Ordinances may be vetoed by local chief Barangays May levy only:
executives of the LGUs, except the Punong Taxes on stores or retailers
Barangay, on the ground that it is ultra vires or Service fees or charges
prejudicial to public welfare. His reasons shall Barangay clearance
be stated in writing. (Sec. 55 (a) and (b), LGC) Other fees and charges (Sec.
152, LGC)
Procedure for approval and effectivity of tax
ordinances But all LGUs may also impose reasonable
A public hearing must be conducted prior to service fees, rates for operation of public
the enactment of a tax ordinance. (Sec. 187, utilities, andtoll fees and charges. (See letter e
LGC) below) (Sec. 153-155, LGC)

Within ten (10) days after the approval of the

ordinance, certified true copies of all tax
ordinances or revenue measures shall be
published in full for three (3) consecutive days

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Specific taxing power of local government unit (LGUs)

Power Province Municipality City Barangay

Tax on Transfer of Real Property (135) (151)

Tax on Business of Printing and
(136)
Publication
Franchise tax (137)
Tax on sand, gravel and other quarry
(138)
resources
Professional tax (139)
Amusement tax (140)
Annual Fixed Tax For Every Delivery
Truck or Van of Manufacturers or
(141)
Producers, Wholesalers of, Dealers, or
Retailers in, Certain Products
Tax on Business (143)
Fees and charges on
regulation/licensing of business and (147)
occupation
Fees for Sealing and Licensing of
(148)
Weights and Measures
Fishery Rentals, Fees and Charges (149)
Community Tax
Tax on Gross Sales or Receipts of
(152a)
Small-Scale Stores/Retailers
Service Fees on the use of Barangay-
(152b)
owned properties
Barangay Clearance (152c)
Other Fees and Charges (on
commercial breeding of fighting
cocks, cockfights, cockpits; places of (152d)
recreation which charge admission
fees; outside ads)
Service Fees and Charges (153)
Public Utility Charges (154)
Toll Fees or Charges (155)
Real Property Tax
(within Metro Manila)

Taxing powers of provinces

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Tax Imposed Rate/Amount Base Exemptions Others

Tax on Transfer of Not more Total acquisition Sale, transfer, or Evidence of payment of
Real Property. than 50% of price or fair other disposition of tax is to be required by
Imposed on the sale, 1% market value, real property Register of Deeds as a
donation, barter, or whichever is pursuant to R.A. requisite to registration;
any other mode of higher 6657 and by the provincial
transfer of ownership (Comprehensive assessor as a condition
or title to real Agrarian Reform for cancellation of old
property (Sec 135m Law) tax declaration.
LGC)
Tax must be paid 60
days from the date of
execution of deed or
from the date of
decedent's death.
Tax on Business of Not Gross annual Receipts from
Printing and exceeding receipts for the printing and/or
Publication (Sec 136, 50% of 1% preceding publishing of
LGC) calendar year books and other
Imposed on the reading materials
business of persons prescribed by the
engaged in printing, DECS as school
and/or publication of texts or references
books, cards, posters,
leaflets, handbills,
certificates, receipts,
pamphlets, and
others of similar
nature
Capital In the succeeding
Newly started Not investment calendar year,
business exceeding regardless of when
1/20 of 1% business started
operating, tax shall be
based on gross receipts
for preceding calendar
year, or any fraction
thereof.

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Tax Imposed Rate/Amount Base Exemptions Others

Franchise Tax (Sec

137, LGC) Not Gross annual
Notwithstanding any exceeding receipts for the
exemption granted by 50% of 1% preceding
any law or any other calendar year
special law, tax may based on the
be imposed on incoming
business enjoying a receipt, or
franchise realized, within
its territorial
jurisdiction
Newly-started In the succeeding
business Not more calendar year,
than 1/20 of Capital regardless of when
1% investment business started
operating, tax shall be
based on gross receipts
for preceding calendar
year, or any fraction
thereof.
Tax on Sand, Gravel Not more Fair market Permit to extract sand,
and Other Quarry than 10% value in the gravel and other quarry
Resources. Levied on locality per resources to be issued
ordinary stones, cubic meter of exclusively by the
gravel, earth and resources provincial governor
other quarry referred to in pursuant to an
resources as defined Column 1 Ordinance by the
in the NIRC, extracted Sangguniang
from public lands or Panlalawigan
from the beds of seas,
lakes, rivers, streams, Distribution of proceeds:
creeks, and other Province - 30%
public waters within Component City/
its territorial Municipality where
jurisdiction (Sec 138, resources were
LGC) extracted - 30%
Barangay where
resources were
extracted - 40%

Professional Tax. Such amount Such Professionals To be paid to the

Provinces may levy as the reasonable exclusively province where the

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Tax Imposed Rate/Amount Base Exemptions Others

annual professional Sangguniang classification by employed by the profession is practiced,

tax on each person Panlalawiga the government or where a principal
engaged in the n may Sangguniang office is maintained.
exercise of a determine, in Panlalawigan
profession requiring no case to A person who pays for
government exceed professional tax may
examination (Sec 139, P300.00 practice his profession
LGC) anywhere in the country
without being subjected
to similar taxes.

Employers shall require

payment of professional
tax as a condition for
employment.

Payable annually, on or
before Jan 31.
Amusement Tax. Not more Gross receipts Holding of operas, In case of theaters or
Collected from than 10% from admission concerts, dramas, cinemas, tax shall first
proprietors, lessees, (amended by fees recitals, painting, be deducted and
or operators of RA 9640, and art exhibitions, withheld by their
theaters, cinemas, 2009) flower shows, proprietors, lessees and
concert halls, musical programs, operators
circuses, boxing literary and
stadia, and other oratorical
places of amusement presentations Proceeds to be shared
(Sec 140, LGC) equally by the province
Exception to and municipality where
exemption: Pop, amusement places are
rock, or similar located.
concerts

Annual Fixed Tax For Amount not Every truck, van, Manufacturers,
Every Delivery Truck exceeding vehicle producers, wholesalers,
or Van of P500 dealers and retailers
Manufacturers or referred to in column 1
Producers, shall be exempt from tax
Wholesalers of, on peddlers
Dealers, or Retailers
in, Certain Products.
Imposed on vehicles

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Tax Imposed Rate/Amount Base Exemptions Others

used for the delivery

of distilled spirits,
fermented liquors,
soft drinks, cigars and
cigarettes, and other
products as may be
determined by the
sanggunian, to sales
outlets, or consumers
in the province,
whether directly or
indirectly (Sec 141,
LGC)

Taxing powers of cities

The City may levy taxes, fees, charges which the province or municipality may impose.

Those levied and collected by highly urbanized and independent component cities shall accrue to
them and distributed in accordance with the provisions of LGC.

Rates on levy made by the city may exceed the maximum rates allowed for the province or
municipality by not more than 50%

Exception: Rates of professional and amusement taxes. (Sec. 151, LGC)

C. TAXING POWERS OF MUNICIPALITIES

C.1. TAX ON VARIOUS TYPES OF BUSINESSES
[Sec. 143, LGC]
Rate/Amount and Base Other Information
Manufacturers, assemblers, In accordance with the schedule
repackers, processors, brewers, in Section 143 [a], NIRC
distillers, rectifiers, and
compounders of liquors, distilled
spirits, and wines or
manufacturers of any article of
commerce of whatever kind or
nature
Wholesalers, distributors, or Schedule in Article 143 [b], NIRC
dealers in any article of
commerce of whatever kind or

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Rate/Amount and Base Other Information

nature
Exporters and on manufacturers, Not exceeding 1/2 of rates
millers, producers, wholesalers, prescribed in the schedule in Sec
distributor, dealers or retailers of 143, NIRC
essential commodities
enumerated below: [RWC-
CLAPS]
(1) Rice and corn
(2) Wheat and or cassava flour,
meat, dairy products, locally
manufactured, processed or
preserved food, sugar, salt,
and other agricultural,
marine, and fresh water
products, whether in original
state or not
(3) Cooking oil and cooking gas
(4) Cement
(5) Laundry soap, detergents,
and medicine
(6) Agricultural implements.
equipment and post-harvest
facilities, fertilizers,
pesticides, insecticides,
herbicides and other farm
inputs;
(7) Poultry feeds and other
animal feeds;
(8) School supplies
Retailers Gross sales or receipts for the Barangays have the exclusive
preceding calendar year of: power to tax gross receipts
400k or less: 2% per annum amounting to:
more than 400k: 1% per annum 50k or less: in cities
30k or less: in municipalities
[Sec. 143 [d], Sec. 152, LGC]
Contractors and other In accordance with the schedule
independent contractors in Sec. 143 [e]
Banks and other financial Not exceeding fifty percent 50%
institutions of 1% on the gross receipts of the
preceding calendar year from
interest, commissions and
discounts from lending activities,
income from financial leasing,
dividends, rentals on property

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Rate/Amount and Base
and profit from exchange or sale
of property, insurance premium.
Peddlers engaged in the sale of Not exceeding P50.00 per
any merchandise or article of peddler annually.
commerce
Any business which the
sanggunian concerned may
deem proper to tax
C.2 CEILING ON BUSINESS TAX
IMPOSSIBLE ON MUNICIPALITIES
WITHIN METRO MANILA
Such municipalities may not 50% more than
the maximum rates prescribed in Sec 143. [Sec.
144, LGC]
C.3. TAX ON RETIREMENT ON BUSINESS
Upon termination of a business subject to tax
under Sec.143 a sworn statement of its gross
sales or receipts for the current year shall be
submitted. If the tax paid is less than the tax
due, the difference shall be paid before the
business is considered officially retired. [Sec.
145, LGC]
C.4 RULES ON PAYMENT OF BUSINESS
TAX
(1) Taxes in Sec. 143 shall be paid for every
separate or distinct establishment or place
where business subject to tax is conducted.
(2) One line of business is not exempted by
being conducted with some other
businesses for which such tax has been
paid
(3) The tax on a business must be paid by the
person conducting it.
(4) If a person operates 2 or more businesses
mentioned in Sec 143 which are taxed;
computation shall be based on:
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TAXATION LAW
Other Information
Catch-all provision.
If on any business subject to
excise, value-added or
percentage tax is subject to tax
not exceeding two percent [2%]
of gross sales or receipts of the
preceding calendar year
(a) combined total gross sales/receipts IF
subject to the same tax rate
(b) separate reports on gross
sales/receipts if subject to different tax
rates
Yamane vs. Lepanto Condo Corp. (Oct. 23,
1995): Condominium corporations are not
business entities, and are thus not subject to
local business tax. Even though the
corporation is empowered to levy assessments
or dues from the unit owners, these amounts
are not intended for the incurrence of profit by
the corporation, but to shoulder the multitude
of necessary expenses for maintenance of the
condominium.
Ericsson Telecoms vs. City of Pasig. (Nov. 2007):
Business tax must be based on gross receipts,
it being different from gross revenue. The right
to receive income, and not the actual receipt
determines when to include the amount in
gross income.
C.5. FEES AND CHARGES FOR
REGULATION & LICENSING
General rule: As a condition to the conduct of
business or profession, the municipality may
impose reasonable fees and charges not yet
imposed by the province, commensurate with
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the cost of regulation, inspection and licensing.
[Sec.147, LGC]
Exception: Professional tax in Sec. 139
Specific rules:
(1) Municipality has power to impose
reasonable rates for sealing and licensing
of weights and measures [Sec. 148, LGC]
(2) The Municipality has exclusive authority to
grant fishery privileges in municipal waters.
The sangguniang bayan may:
(a) Grant fishery privileges to erect fish
corrals, oysters, mussels or other
aquatic beds or bangus fry areas,
within a definite zone of the municipal
waters, as
(b) Grant marginal fishermen the privilege
to gather, take or catch bangus fry,
prawn fry or kawag-kawag or fry of
other species and fish from the
municipal waters by nets, traps or
other fishing gears free of rental, fee,
charge or imposition.
(c) Issue licenses for the operation of
fishing vessels of three [3] tons or less
(3) The Sanggunian may penalize the use of
explosives, noxious or poisonous
substances, electricity, muro-ami, and
other deleterious methods of fishing and
prescribe a criminal penalty therefor [Sec.
149, LGC]
C.6. SITUS OF TAX COLLECTED
According to Sec. 150 of the LGC,situs shall be
determined by the ff. rules:
RULE 1: In case of persons
maintaining/operating a branch or sales outlet
making the sale or transaction, the tax shall be
recorded in said branch or sales outlet and
paid to the municipality/city where the branch
or sales outlet is located.
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TAXATION LAW
RULE 2: Where there is NO branch or sales
outlet in the city/municipality where the sale is
made, sale shall be recorded in the principal
office and the tax shall be paid to such
city/municipality.
RULE 3: In the case of manufacturers,
contractors, producers, and exporters having
factories, project offices, plants, and
plantations, proceeds shall be allocated as
follows:
(1) 30% of sales recorded in the principal
office shall be made taxable by the
city/municipality where the principal office
is located
(2) 70% shall be taxable by the
city/municipality where the factory, project
office, plant, or plantation is located
Illustration of Rules 1 to 3:
A company has a principal office in
Mandaluyong, while its sales office and factory
are in Sta Rosa:
(1) sales made in Sta Rosa, will be recorded in
Sta Rosa
(2) sales made in Los Baños, Calamba or
Cabuyao [i.e. delivered to customers
located in those places], will be recorded in
Mandaluyong
(3) aside from sales made in Sta Rosa, Sta
Rosa also gets 70% of sales recorded in
Mandaluyong, pursuant to Rule 3
RULE 4: In case the plantation is located in a
place other than the place where the factory is
located, the 70% in Rule 3 will be divided as
follows:
60% to the city/municipality where the factory
is located
40% to the city/municipality where the
plantation is located
RULE 5: In case of 2 or more factories,
plantations, etc. in different localities, the 70%
shall be prorated among the localities where
the factories, plantations, etc. are located in
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proportion to their respective volume of
production.
Illustration:
A company has a principal office in Valenzuela
and has its factory in Bulacan. It also has
branches selling merchandise in Muntinlupa,
Bacolod, Cebu.
(1) sales made in Muntinlupa, Bacolod and
Cebu will go to the said cities
(2) sales in all other places which do not have
a sales branch shall be distributed as
follows: 30% to Valenzuela and 70% to
Bulacan
Excise Tax: Allied Thread Co., Inc. v. City Mayor
of Manila [1984] Tax is imposed on the
performance of an act or occupation,
enjoyment of a privilege. The power to levy
such tax depends on the place in which the act
is performed or the occupation is engaged in;
not upon the location of the office.
Sales Tax: Shell Co., Inc. v. Municipality of
Sipocot, Camarines Sur [1959]
It is the place of the consummation of the sale,
associated with the delivery of the things which
are the subject matter of the contract that
determines the situs of the contract for
purposes of taxation, and not merely the place
of the perfection of the contract.
D. TAXING POWERS OF BARANGAYS
The following shall exclusively accrue to the
barangays:
(1) Taxes on Stores or Retailers with Fixed
Business Establishments.
(a) Rate: not greater than one percent (1%)
(b) Base:
(i) Cities: gross sales or receipts of the
preceding calendar year of
P50,000.00 or less
(ii) Municipalities: gross sales or
receipts of P30,000.00 or less
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TAXATION LAW
(2) Service Fees or Charges. For services
rendered in connection with the
regulations or the use of barangay-owned
properties or facilities such as palay, copra,
or tobacco dryers.
(3) Barangay Clearance. A city or municipality
cannot issue a permit for business without
a clearance from the barangay concerned.
The sangguniang barangay may impose a
reasonable fee on the clearance.
(4) Other Charges Allowed.
(a) charges on commercial breeding of
fighting cocks, cockfights and cockpits;
(b) charges on places of recreation which
charge admission fees; and
(c) charges on billboards, signboards,
neon signs, and outdoor
advertisements. [Sec. 152, LGC]
E. COMMON REVENUE RAISING
POWERS
(1) Service fees and charges
LGUs may impose and collect such
reasonable fees and charges for services
rendered. [Sec. 153, LGC]
(2) Public utility charges
LGUs may fix the rates for the operation of
public utilities owned, operated and
maintained by them within their
jurisdiction. [Sec. 154, LGC]
(3) Toll fees or charges
(a) The sanggunian may prescribe the
terms and conditions and fix the rates
for the imposition of toll fees or
charges for the use of any public road,
pier, or wharf, waterway, bridge, ferry
or telecommunication system funded
and constructed by the local
government unit concerned.
(b) The sanggunian may also discontinue
the collection of the tolls when public
safety and welfare requires.
(c) No toll fees or charges shall be
collected from:
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(i) Officers and enlisted men of the (iii) Physically-handicapped

AFP and members of the PNP on (iv) Disabled citizens who are sixty-five
mission (65) years or older. [Sec. 155, LGC]
(ii) Post office personnel delivering
mail

F. COMMUNITY TAX
Who may levy Cities or municipalities
[Sec. 156, LGC]
(1) Individuals who are:
(a) Inhabitants of the Philippines
(b) Eighteen years of age or over
(c) Either:
(i) Regularly employed on a wage or salary basis for at least 30
consecutive working days during any calendar year
(ii) Engaged in business or occupation
(iii) Owns real property with an aggregate assessed value of P1,000 or
more
Persons Liable (iv) Is required by law to file an income tax return
[Sec. 157 &158, (2) Juridical Persons
LGC] (a) Every corporation no matter how created or organized,
(b) Whether domestic or resident foreign,
(c) Engaged in or doing business in the Philippines
(1) Individuals
(a) Annual community tax of P5.00 PLUS annual additional tax of P1.00 per
P1,000.00 of income regardless whether from business, exercise of
profession or property
(b) Never to exceed P5000
(c) Husband and wife shall pay a basic tax of P5.00 each PLUS additional
tax based on total property owned by them and the total gross receipts or
earnings derived therefrom
(2) Juridical Persons
(a) Annual community tax of P500.00 PLUS annual additional tax of not
more than P10,000.00 according to the ff. schedule:
(i) P2.00 for every P5,000 worth of real property in the Philippines
owned during the preceding year based
Rates [Sec. 157 (ii) P2.00 for every P5,000.00 of gross receipts derived from business in
&158, LGC] the Philippines during the preceding year.
(b) Dividends received by a corporation from another corporation shall be
deemed part of the gross receipts or earnings for purposes of computing
additional tax.
Persons Exempt (1) Diplomatic and consular representatives
[Sec. 159, LGC] (2) Transient visitors who stay in the Philippines for not more than 3 months

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Place of Payment Where individual resides, or where the principal office of the juridical entity is
[Sec. 160, LGC] located.
Time of Payment Accrues on the 1st day of January of each year to be paid not later than the last
[Sec 161, LGC] day of February of each year
Penalty If unpaid within the prescribed period, an interest of 24% shall be added per
annum from the due date until payment. [Sec. 161, LGC]

Presentation of Community Tax Certificate is
necessary when an individual subject to
community tax:
(1) Acknowledges any document before a
notary public
(2) takes the oath of office upon election or
appointment to any position in the
government service
(3) receives any license, certificate, or permit
from any public authority
(4) pays any tax or fee
(5) receives any money from any public fund
(6) transacts other official business
(7) receives any salary or wage from any
person or commission
Presentation of certificate is not needed in the
registration of a voter. [Sec. 163, LGC]
The city or municipal treasurer shall deputize
the barangay treasurers to collect, provided
the latter be bonded.
If: actually and directly collected by the city or
municipal treasurer, community tax accrues
entirely to the general fund. If: collected
through the barangay treasurers, apportioned
equally. [Sec. 164, LGC]
COMMON LIMITATIONS ON THE
TAXING POWERS OF LGUS
Unless otherwise provided, the following
cannot be levied by the local governments:
[IDEC-GAPEP-GRR-ECN]:
(1) Income tax, except when levied on banks
and other financial institutions;
(2) Documentary stamp tax;
(3) Estate tax, inheritance, gifts, legacies and
other acquisitions mortis causa, except as
otherwise provided;
(4) Customs duties, registration fees of vessel
and wharfage on wharves, tonnage dues,
and all other kinds of customs fees,
charges and dues except wharfage on
wharves constructed and maintained by
the LGU concerned;
(5) Taxes, fees or charges on Goods carried
into or out of, or passing through, the
territorial jurisdictions of local government
units in the guise of charges for wharfage,
tolls for bridges or otherwise, or other
taxes, fees, or otherwise
(6) Taxes, fees or charges on Agricultural and
aquatic products when sold by marginal
farmers or fishermen;
(7) Taxes on business enterprises certified to
by the Board of Investments as Pioneer or
non-pioneer for a period of 6 and 4 years,
respectively from the date of registration;
(8) Excise taxes on articles enumerated under
the NIRC, as amended, and taxes, fees or
charges on petroleum products;
(9) Percentage or VAT on sales, barters or
exchanges or similar transactions on goods
or services except as otherwise provided
herein;
(10) Taxes on the Gross receipts of
transportation contractors and persons
engaged in the transportation of
passengers or freight by hire and common
carriers by air, land or water, except as
provided in the Code;
(11) Taxes on premiums paid by way or
Reinsurance or retrocession;

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(12) Taxes, fees or charges for the Registration
of motor vehicles and for the issuance of all
kinds of licenses or permits for the driving
thereof, except tricycles;
(13) Taxes, fees, or other charges on Philippine
products actually Exported, except as
otherwise provided;
(14) Taxes, fees, or charges, on Countryside and
Barangay Business Enterprises and
cooperatives duly registered under the
Cooperative Code of the Philippines; and
(15) Taxes, fees or charges of any kind on the
National Government, its agencies and
instrumentalities, and local government
units. [Sec. 133, LGC]
COLLECTION OF BUSINESS TAX
TAX PERIOD AND MANNER OF
PAYMENT
Based on calendar year, unless otherwise
provided.
May be paid annually or in quarterly
instalments. [Sec. 165, LGC]
ACCRUAL OF TAX
General rule: Accrues on the first day of
January of each year
Except: New taxes, fees or charges, or changes
in the rates thereof which shall accrue on the
first day of the quarter next following the
effectivity of the ordinance imposing such new
levies or rates. [Sec. 166, LGC]
TIME OF PAYMENT
Within the 20 days of January or of each
subsequent quarter. [i.e., Jan 20, Apr 20, July
20, and Oct 20]. It may be extended by the
sanggunian for justifiable reasons, without
surcharges or penalties. Extension cannot
exceed 6 months. [Sec. 167, LGC]
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TAXATION LAW
PENALTIES ON UNPAID TAXES, FEES OR
CHARGES
(1) Surcharge not exceeding 25% on taxes,
fees or charges NOT paid on time; and
(2) Interest not exceeding 2% per month of the
unpaid taxes, fees or charges including
surcharges, until the amount is fully paid
(3) In no case shall the total interest exceed 36
months. [Sec. 168, LGC]
AUTHORITY OF TREASURER IN
COLLECTION AND INSPECTION OF
BOOKS
All local taxes, fees and charges shall be
collected by the local treasurer or their duly
authorized deputies [Sec. 170, LGC]
The local treasurer may, by himself or through
his deputies duly authorized in writing,
examine the books, accounts, and other
pertinent records of any person subject to local
taxes, fees and charges in order to ascertain,
assess and collect the correct amount of the
tax, fee or charge.
Examination must be done during business
hours, only once for every tax period and shall
be certified to by the examining official. [Sec.
171, LGC]
TAXPAYER’S REMEDIES
PERIODS OF ASSESSMENT AND
COLLECTION OF LOCAL TAXES, FEES OR
CHARGES
Assessment: Within 5 years from the date they
become due
In case of Fraud or Intent to Evade Tax: Within
10 years from discovery of fraud or intent to
evade payment. [Sec. 194, LGC]
Collection: 5 years from the date of assessment
by administrative or judicial action.
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Instances When Running of Prescription
Periods is Suspended
(1) When the treasurer is legally prevented
from making the assessment or collection
(2) When taxpayer requests for reinvestigation
and executes a waiver in writing before
lapse of the period for assessment or
collection.
(3) When the taxpayer is out of the country or
otherwise cannot be located [Sec. 194 (d),
LGC]
PROTEST OF ASSESSMENT
Within sixty (60) days from the receipt of the
notice of assessment, the taxpayer may file a
written protest with the local treasurer
contesting the assessment; otherwise it shall
become final and executory. [Sec. 195, LGC]
CLAIM FOR REFUND OF TAX CREDIT
FOR ERRONEOUSLY OR ILLEGALLY
COLLECTED TAX, FEE OR CHARGE
Requires a written claim for refund or credit to
be filed with local treasurer before protest is
entertained.
Must be brought within 2 years from payment
of tax or from the date the taxpayer became
entitled to refund or credit [Sec. 196, LGC]
CIVIL REMEDIES BY THE LGU FOR
COLLECTION OF REVENUES
LOCAL GOVERNMENT’S LIEN FOR
DELINQUENT TAXES, FEES OR CHARGES
Non-payment of a tax, fee or charge creates a
lien superior to all liens or encumbrances in
favor of any other person, enforceable by
administrative or judicial action
The lien may only be extinguished upon full
payment of the delinquent local taxes, fees,
and charges including related surcharges and
interests. [Sec. 173, LGC]
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TAXATION LAW
CIVIL REMEDIES, IN GENERAL
(1) Administrative action
(2) Judicial action
PROCEDURE FOR ADMINISTRATIVE
ACTION
Distraint of personal property
Personal properties subject to distraint: goods,
chattels or effects and other personal property
of whatever character, including stocks and
other securities, debts, credits, bank accounts,
and interest in and rights to personal property
Procedure: [Sec. 175, LGC]
(1) Seizure of personal property
(2) Accounting of distrained goods
(3) Publication of time and place of sale and
the articles distrained
(4) Release of distrained property upon
payment prior to sale
(5) Procedure of sale
(6) Disposition of proceeds
Levy of real property
Levy upon real property and interest in or rights
to real property
Procedure [Sec. 176, LGC]
(1) Preparation of a duly authenticated
certificate by the LGU Treasurer effecting
the levy on the real property
(2) Service of written notice of levy to the
assessor and Register of Deeds
(3) Annotation of the levy on the tax
declaration and the certificate of title
(4) Advertisement and Sale [Sec. 178, LGC]
Further distraint or levy
The remedies by distraint or levy may be
repeated if necessary until the full amount due,
including all expenses, is collected [Sec. 184,
LGC]
UP COLLEGE OF LAW TAXATION 2
Exemption of personal property from distraint
or levy (ToB-CUPLA)
(1) Tools and implements necessarily used by
the taxpayer in his trade or employment
(2) One horse, cow, carabao, or other Beast of
burden, such as the delinquent taxpayer
may select and necessarily used by him in
his ordinary occupation
(3) his necessary Clothing, and that of all his
family
(4) household furniture and Utensils necessary
for housekeeping and used for that
purpose by the delinquent taxpayer, such
as he may select, of a value not exceeding
P10,000
(5) Provisions, including crops, actually
provided for individual or family use
sufficient for 4 months
(6) the professional Libraries of doctors,
engineers, one fishing boat and net, not
exceeding the total value of P10,000 by
the lawful use of which a fisherman earns
his livelihood
(7) any material or Article forming part of a
house or improvement of any real property
Penalty on local treasurer for failure to issue
and execute warrant of distraint or levy
Automatically dismissed from the service after
due notice and hearing [Sec. 177, LGC]
PROCEDURE FOR JUDICIAL ACTION
The local government may institute an
ordinary civil action with regular courts of
proper jurisdiction for the collection of
delinquent taxes, fees, charges or other
revenues.
The civil action shall be filed by the local
treasurer. [Sec. 183, LGC]
Valley Trading Co. vs. CFI of Isabela, (1989);
Angeles City v. Angeles City Electric Corporation,
(2010): LGC does not contain a provision
prohibiting courts from enjoining the collection
291
TAXATION LAW
of local taxes. Such lapse may have allowed
preliminary injunction under Rule 58, ROC
where local taxes are involved.
B. REAL PROPERTY TAXATION
A. FUNDAMENTAL PRINCIPLES (CAPUE)
(1) Current fair market value is the basis for
assessment
All real property, whether taxable or
exempt, shall be appraised at the
CURRENT AND FAIR MARKET VALUE
prevailing in the locality where the
property is situated. [Sec. 201, LGC]
(2) Actual use shall be the basis of
classification for assessment
(a) Real property shall be classified,
valued and assessed on the basis of its
actual use regardless of where located,
whoever owns it, and whoever uses it.
(b) Actual Use- refers to the purpose for
which the property is principally or
predominantly utilized by the person in
possession thereof [Sec. 199 (b), LGC]
(c) MCIAA v. Marcos [G.R. No. 120082,
Sept. 11, 1996]: “Usage means direct,
immediate and actual application of
the property
(3) Private persons cannot be left to the
appraisal, assessment, levy and collection
of real property tax.
(4) uniform classification within each local
government unit shall be observed.
(5) equitable appraisal and assessment is
required. [Sec. 197, LGC]
B. NATURE OF REAL PROPERTY TAX
(1) It is a direct tax on the ownership or use of
real property
(2) It is an ad valorem tax. Value is the tax
base.
(3) It is proportionate because the tax is
calculated on the basis of a certain
percentage of the value assessed.
UP COLLEGE OF LAW TAXATION 2
(4) It creates a single, indivisible obligation
(5) It attaches on the property [i.e., a lien] and
is enforceable against it.
(6) With respect to LGUs, it is levied thru a
delegated power
C. IMPOSITION OF REAL PROPERTY TAX
C.1. COVERAGE
FOR A PROVINCE, OR A CITY OR
MUNICIPALITY WITHIN METRO MANILA
(1) Land
(2) Building
(3) Machinery
(4) Other improvements not specifically
exempted [Sec. 232, LGC]
The rate shall be as follows:
Province: not exceeding one percent (1%) of the
assessed value of real property; and
City or municipality within Metro Manila: not
exceeding two percent (2%) of the assessed
value of real property. [Sec. 233, LGC]
SPECIAL LEVY ON IDLE LANDS
A province, or city or municipality within Metro
Manila may levy an annual tax on idle lands at
the rate not exceeding five percent [5%] of the
assessed value of the property in addition to
the basic tax
Lands covered
(1) Agricultural Lands
More than one hectare in area suitable for
cultivation, dairying, inland fishery, and
other agricultural uses, one-half of which
remain uncultivated or unimproved
(2) Other than Agricultural
More than one thousand square meters in
area one half of which remain unutilized or
unimproved [Sec. 236 and 237, LGC]
Exempt Idle Lands
Lands exempt by reason of force majeure, civil
disturbance, natural calamity or any cause or
circumstance which physically or legally
292
TAXATION LAW
prevents improving, utilizing or cultivating the
same. [Sec. 238, LGC]
SPECIAL LEVY FOR PUBLIC WORKS
A tax ordinance shall describe with reasonable
accuracy the nature, extent and location of the
public works to be undertaken, the estimated
cost, the metes and bounds by monuments
and lines and the number of annual
installments which should not be less than 5
nor more than 10 years.
The sanggunian may fix different rates for
different parts or sections thereof, depending
on whether such land is more or less benefited
by the proposed work. [Sec. 241, LGC]
SPECIAL EDUCATION FUND (SEF)
A province, or city or municipality within Metro
Manila may levy and collect an annual tax of
one percent (1%) on the assessed value of real
property which shall be in addition to the basic
real property tax.
C.2. EXEMPT FROM REAL PROPERTY
TAX
(1) Owned by the Republic of the Philippines
or any of its political subdivisions except
when beneficial use is granted for a
consideration or to a taxable person.
(2) Charitable institutions, churches,
parsonages, or convents appurtenant
thereto, mosques, non-profit or religious
cemeteries, and all lands, buildings, and
improvements actually, directly and
exclusively used for religious, charitable, or
educational purposes.
(3) Machinery and equipment actually, directly
and exclusively used by local Water utilities
and GOCCs engaged in the supply and
distribution of water and/or generation
and transmission of electric power.
(4) Real property owned by duly registered
cooperatives as provided for under
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

Republic Act No. 6938 [Cooperative Code Provision

SC Ruling
of the Philippines]. involved
(5) Machinery and equipment used for LGC. in Sec 234 (a).
pollution control and Environmental Properties
protection. [Sec. 234, LGC] exempt from
RPT: real
Provincial Assessor of Marinduque v. CA [G.R. properties
No. 170532, Apr. 30, 2009]:A claim for owned by the
exemption under Sec. 234 (e) should be Republic or
supported by evidence that the property any of its
sought to be exempt is actually, directly and political
exclusively used for pollution control and subdivisions…
environmental protection. Manila Sec 133 (o), MIAA falls
Airport LGC under the
Proof of Exemption Authority term
(1) Documentary evidence such as affidavits, vs. CA Sec 234 (a), “instrumentality”
by-laws, contract, articles of incorporation (2006) LGC outside the
(2) Given to local assessor scope of LGS’s
(3) Within 30 days from date of declaration local taxing
(4) Failure to file, will be listed as in powers under
Assessment Rolls as taxable Sec 133[o].

GOCCs
Philippine Ports Authority vs. City of Iloilo [G.R. Charitable Institutions
No. 109791, July 14, 2003]: GOCCs are not Lung Center of the Philippines vs. Quezon City
covered by the exemption since the exemption [G.R. No. 144104, June 29, 2004]: A charitable
only refers to instrumentalities without institution doesn't lose its character and its
personalities distinct from the government. exemption simply because it derives income
from paying patients so long as the money
Mactan Airport v. MIAA cases received is devoted to the charitable object it
Provision was intended to achieve, and no money inures
SC Ruling
involved to the benefit of persons managing the
Mactan Sec 133 (o), Airport institution.
Airport LGC. LGUs Authority is a
Authority not allowed to GOCC, not Property leased to private entities is not
vs. levy… [o] exempt from exempt from RPT, as it is not actually, directly
Marcos taxes/fees/ch RPT. and exclusively used for charitable purposes.
(1996) arges of any Legislature in Portions of the land occupied by the hospital
kind on the amending the and portions used for its patients, whether
national gov’t, law paying or non-paying, are exempt from real
its agencies, specifically property taxes.
instrumentalit deleted
ies and LGUs. GOCCS from D. APPRAISAL AND ASSESSMENT OF
the REAL PROPERTY TAX
Sec 234 (a), enumeration D.1. DECLARATION OF REAL PROPERTY

293
UP COLLEGE OF LAW TAXATION 2
Declaration by the Owner or Administrator
Prepare a sworn statement declaring the true
value of the property which shall be the current
and fair market value of the property.
It must contain a sufficient description of the
property to enable the assessor or his deputy
to identify the same for assessment purposes
The declaration must be filed with the assessor
once every three (3) years during the period
from January 1 to June 30. [Sec. 202, LGC]
Declaration by Any Person Acquiring Real
Property or Making Improvements
The sworn statement declaring the true value
of the property must be filed to the provincial,
city or municipal assessor within sixty [60] days
after the acquisition or upon completion or
occupancy of the improvement, whichever
comesealier. [Sec. 203, LGC]
Declaration by the Provincial or City or
Municipal Assessor
When the person required to file the sworn
declaration refuses or fails to make sich
declaration, the provincial, city or municipal
assessor shall declare the property in the name
of the defaulting owner.
Notice of Transfer of Real Property
Any person who shall transfer real property
ownership to another shall notify the provincial,
city or municipal assessor within sixty [60] days
from the date of such transfer.
The notification shall include:
(1) Mode of transfer,
(2) Description of the property alienated, and
(3) Name and address of the transferee [Sec.
208, LGC]
D.2. LISTING OF REAL PROPERTY IN THE
ASSESSMENT ROLLS
294
TAXATION LAW
The local assessor must maintain an
assessment roll wherein all real property,
whether taxable or exempt, located within the
territorial jurisdiction of the LGU, is listed.
Real property in general—
Shall be listed, valued and assessed in the
name of the owner or administrator, or anyone
having legal interest in the property.
For undivided real property—
May be in the name of the estate or of the heirs
and devisees, or in the name of one or more co-
owners
Real property of a corporation, partnership or
association—
Same manner as an individual
Real property owned by the Republic of the
Philippines, its instrumentalities, political
subdivision, the beneficial use has been
granted to a taxable person—
In the name of the possessor, grantee or of the
public entity if such property has been
acquired or held for resale or lease. [Sec. 205,
LGC]
D.3. APPRAISAL AND VALUATION OF
REAL PROPERTY
Land
The assessor of the province, city or
municipality or his deputy may summon the
owners or persons having legal interest therein
and witnesses, administer oaths, and take
deposition concerning the property, its
ownership, amount nature, and value. [Sec. 213,
LGC]
Before any general revision of property
assessment is made, there shall be prepared a
schedule of FMV by the provincial, city or
municipal assessors; which shall be published
in a newspaper of general circulation or in the
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

absence thereof, shall be posted in the Allowance percent (5%) of its original
provincial capital, city or municipal hall and in cost or replacement cost,
two other conspicuous public places therein. for each year of use
[Sec. 212, LGC] The remaining value shall
be fixed at not less than
Classes of real property twenty percent (20%) of
(1) Residential such original,
(2) Agricultural replacement or
(3) Commercial reproduction cost for so
(4) Industrial long as the machinery is
(5) Mineral useful and in operation.
(6) Timberland [Sec. 225, LGC]
(7) Special – all lands, buildings and other
improvements actually, directly and D.4. ASSESSMENT OF REAL PROPERTY
exclusively used for hospitals, cultural, or I. ASSESSMENT LEVELS
scientific purposes, and those owned and Assessment level – is the percentage applied
used by local water districts, and GOCCs to the fair market value to determine the
rendering essential public services in the taxable value of the property [Sec. 199(g), LGC]
supply and distribution of water and/or Assessment levels shall be fixed by
generation and transmission of electric ordinances of the sanggunian at rates not
power [Sec. 216, LGC] exceeding those prescribed in Sec. 218

Machinery II. GENERAL REVISIONS OF

Brand New The FMV is the acquisition ASSESSMENTS AND PROPERTY
cost
CLASSIFICATION
If the machinery is
The local assessor shall undertake a general
imported, the acquisition
revision of real property assessments every 3
cost includes freight,
years. [Sec. 219, LGC]
insurance, bank and other
charges, brokerage,
III. DATE OF EFFECTIVITY OF
arrastre and handling,
duties and taxes, plus cost
ASSESSMENT OR REASSESSMENT
of inland transportation, General rule: All assessments or
handling, and installation reassessments made after the first day of
charges at the present January of any year shall take effect on the first
site. [Sec. 224, LGC] day of January of any year
All other FMV is determined by
Exceptions: reassessments due to
Cases dividing the remaining
(1) partial or total destruction
economic life of the
(2) major change in actual use;
machinery by its
(3) great and sudden inflation or deflation of
estimated economic life
real property values;
and multiplied by the
(4) gross illegality of the assessment when
replacement/reproduction
made; or
cost. [Sec. 224, LGC]
(5) any other abnormal cause shall be made
Depreciation Rate—not exceeding five
within ninety (90) days from the date of

295
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

any cause and shall take effect at the of general circulation in

beginning of the quarter next following the the locality once a week
reassessment. [Sec. 221, LGC] for two consecutive
weeks. [Sec. 249, LGC]
IV. ASSESSMENT OF PROPERTY Within five years from the
SUBJECT TO BACK TAXES date they become due
Property declared for the first time: assessed Prescriptive
for taxes for the period during which it would Periods for Within ten years from
have been liable but in no case for more than Collection discovery of fraud, in case
ten [10] years prior to the date of initial there is fraud or intent to
assessment [Sec. 222, LGC] evade
Local treasurer is legally
V. NOTIFICATION OF NEW OR REVISED prevented to collect tax.
ASSESSMENT The owner or property
When real property is assessed for the first Instances for requests for
time or when an existing assessment is Suspension reinvestigation and writes
increased or decreased, the local assessor of a waiver before expiration
shall within thirty [30] days give written notice Prescriptive of period to collect.
of the new or revised assessment to the person Period The owner of property is
in whose name the property is being declared. out of the country or
cannot be located [Sec.
Notice may be given personally or by 270, LGC]
registered mail or through the assistance of The local treasurer.
the punong barangay to the last known Collecting He may deputize the
address of the person to be served. [Sec. 223, Authority barangay treasurer to
LGC] collect all taxes upon
filing of a bond. [Sec. 247,
E. COLLECTION OF REAL PROPERTY TAX LGC]
Real property tax for any E.1. SPECIAL RULES ON PAYMENT
Date of year shall accrue on the I. PAYMENT OF REAL PROPERTY TAX IN
Accrual first day of January. [Sec. INSTALLMENTS
246, LGC] Payment of real property tax and the
On or before the 31st of additional tax for the Special Education Fund,
January or on any date without interest, may be made in four [4] equal
prescribed, the local instalments:
treasurer shall post the 1st : March 31st
notice of the dates when 2nd : June 30th
Notice for the tax may be paid 3rd : September 30th
Collection without interest at a 4th : December 31st
conspicuous and publicly
accessible place at the This shall not apply to special levies which
city or municipal hall. shall be governed by ordinance of the
sanggunian concerned.
The notice shall also be
published in a newspaper

296
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Payments of real property taxes shall first be
applied to prior years delinquencies, interests
and penalties, if any, and only after the
delinquencies are settled may tax payments be
credited for the current period. [Sec. 250, LGC]
II. INTERESTS ON UNPAID REAL
PROPERTY TAX
In case of failure to pay the basic real property
tax or any other tax when due shall subject the
taxpayer to the payment of interest at the rate
of two percent per month on the unpaid
amount or a fraction thereof until the
delinquent tax shall have been fully paid. But
the total interest on the unpaid tax shall not
exceed thirty-six months. [Sec. 255, LGC]
III. CONDONATION OF REAL PROPERTY
TAX
By SANGGUNIAN: in case of general failure of
crops or substantial decrease in the price of
agricultural or agri-based products or calamity
in any LGU [Sec. 276, LGC]
By the PRESIDENT of the Philippines: when
public interest so requires [Sec. 277, LGC]
E.2. REMEDIES OF LGUS FOR
COLLECTION OF REAL PROPERTY TAX
I. ADMINISTRATIVE
Local Government’s Lien—
The basic real property tax shall constitute a
lien on the property subject to tax, superior to
all liens, charges or encumbrances in favour of
any person, irrespective of the owner or
possessor thereof, enforceable by
administrative or judicial action and may only
be extinguished upon payment of the tax and
the related interests and expenses. [Sec. 257,
LGC]
Levy
Upon the failure to pay the tax when due, the
local treasurer shall issue a warrant levying the
real property subject to tax. The warrant shall
297
TAXATION LAW
include a duly authenticated certificate
showing the name of the owner or person
having legal interest therein, description of the
property, amount of the tax due and interest
thereon.
Warrant must be mailed or served to owner
or person having legal interest in the property
Written notice of levy must be mailed or served
to the assessor and the Register of Deeds
where the property is located
The Register of Deeds must annotate the
levy on the tax declaration and certificate of
title [Sec. 258, LGC]
Failure to issue or execute the warrant of
levy within one year from the time the tax
becomes delinquent or within thirty days from
the date of the issuance thereof shall be
dismissed from service [Sec. 259, LGC]
Purchase by LGU for Want of Bidder
There is no bidder; or
When The highest bid is for an amount
Available insufficient to pay the real
property tax and the related
interest and costs of sale
The local treasurer conducting
the sale shall purchase the
Duty of the property in behalf of the LGU to
Local satisfy the claim and within two
Treasurer years thereafter shall make a
report of his proceedings.
Within one year from the date of
Redemption forfeiture
Period
II. JUDICIAL
The LGU may enforce the collection by civil
action in any court of competent jurisdiction.
Must be filed by local treasurer within 5 to 10
years. [Sec. 266 in relation to Sec. 270, LGC]
F. TAXPAYER’S REMEDIES
UP COLLEGE OF LAW TAXATION 2
F.1. ADMINISTRATIVE
Protest
Appeal to the Local Board of Assessment
Appeals (LBAA)
(1) Appeal must be filed within 60 days from
the date of receipt of the written notice of
assessment
(2) By filing a petition under oath in the form
prescribed for the purpose
(3) Copies of tax declarations and other
affidavits or documents must be submitted
[Sec. 226, LGC]
The LBAA shall decide the appeal within 120
days from the date of receipt of such appeal
The LBAA shall have the power to summon
witnesses, administer oaths, conduct ocular
inspection, take depositions, and issue
subpoena duces tecum and/or subpoena
The LBAA must furnish the appellant a copy of
the decision of the board. [Sec. 229, LGC]
Fels Energy v. Province of Batangas [G.R. No.
168557, Feb. 16, 2007]: Under Section 226 of
R.A. No 7160, the last action of the local
assessor on a particular assessment shall be
the notice of assessment; it is this last action
which gives the owner of the property the right
to appeal to the LBAA. The procedure likewise
does not permit the property owner the remedy
of filing a motion for reconsideration before the
local assessor.
Victorias Milling v. CTA [G.R. No. L-24213, Mar.
13, 1968]: The failure to appeal within the
statutory period renders the assessment final
and unappealable.
Appeal to the Central Board of Assessment
Appeals (CBAA)
Appeal must be filed within 30 days from the
receipt of the decision of LBAA [Sec. 229, LGC]
298
TAXATION LAW
Effect of payment of tax
Appeal on assessments of real property shall
not suspend the collection of the
corresponding realty taxes on the property
involved as assessed by the provincial or city
assessor without prejudice to the subsequent
readjustment depending upon the final
outcome of the appeal. [Sec. 231, LGC]
Payment of real property under protest
Protest must be filed with the local treasurer.
No protest shall be entertained unless the
tax is first paid. The protest must be in writing
and filed within 30 days from payment of the
tax to the local treasurer.
Meralco v. Nelia Barlis [G.R. No. 114231, May 18,
2001]: The trial court has no jurisdiction to
issue a writ of prohibition which seeks to set
aside the warrant of garnishment over
petitioner’s bank deposit in satisfaction of real
property taxes without paying first under
protest the tax assessed and without
exhausting available administrative remedies.
The local treasurer shall decide the protest
within 60 days from receipt.
Appeal to the CTA En Banc
Appeal must be filed through a petition for
review within 30 days from the receipt of the
decision of CBAA [Sec. 11, R.A. 1125 as
amended]
Appeal to the SC
Appeal must be filed within 15 days from
receipt of decision of the CTA [Rule 45, Rules of
Court]
F.2. JUDICIAL
Question on the legality of a tax ordinance
Any question on the constitutionality or legality
of a tax ordinance may be raised on appeal
within 30 days from effectivity to the Secretary
of Justice who shall render a decision within 60
days from the date of receipt of the appeal.
UP COLLEGE OF LAW TAXATION 2
The appeal shall not have the effect of
suspending the effectivity of the tax ordinance
and the accrual and payment of the tax.
Within 30 days after receipt of the decision or
the lapse of the sixty-day period without the
Secretary of Justice acting upon the appeal,
the aggrieved party may file appropriate
proceedings with a court of competent
jurisdiction. [Sec. 187, LGC]
299
TAXATION LAW
Assailing the validity of a tax sale
No court shall entertain any action assailing
the validity of any sale at public auction until
the taxpayer shall have deposited with the
court the amount for which the real property
was sold, together with interest of two percent
per month from the date of sale to the time of
the institution of the action. [Sec. 267, LGC]
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

Flowchart V: Procedure for Assessment of Land Value for Real Property Tax
Purposes-Local Gov’t Code
For purposes of this flowchart owner means owner or administrator of real property or any person having legal interest thereto

Owner declares real
property once every 3
START
years (sec. 202) w/n
Jan 1 to June 30
Assessor prepares
Assessor declares
assessment rolls
real property if owner/
wherein real property
administrator fails to
shall be listed, valued
do so (sec. 204)
and assessed (sec. 205)

Submit documents
Owner may claim
supporting exemption w/ Is real property
for tax exemption Yes
in 30 days from tax exempt?
Required (sec. 206)
declaration (sec. 206)
Documents
submitted w/in
30 days? Property shall be
Property dropped from
Yes proven as tax Yes
assessment roll
No exempt? (sec. 206)
Property shall be
listed as taxable in
No
the assessment
roll (sec. 206) END

Within 30 days from

assessment, assessor
sends notice to owner
(sec. 223)
Owner may protest
assessment within 60
days from receipt of notice
to the Local Board of
Assessment Appeals
(LBAA) (Sec. 226)
No
If LBAA rejects protest, owner
LBAA must decide
may appeal to the Central
within 120 days
Board of Assessment Appeals
from receipt of
(CBAA) w/in 30 days from
appeal (sec. 229)
receipt of notice (Sec. 229)

If CBAA rejects protest,

Appeal to the owner may appeal to
END Supreme Court w/ the CTA en banc within
in 15 days 30 days from receipt of
decision

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Flowchart VI: Taxpayer’s Remedies Involving Collection of Real Property

Tax-Loc Gov’t Code
For purposes of this flowchart owner means owner or administrator of real property or any person having legal interest thereto

LT- Local Treasurer

LGU - Local Government Unit
LBAA- Local Board of Assessment Appeals
CBAA- Central Board of Assessment Appeals
START CTA- Court of Tax Appeals

LT posts notice of deadline for

Owner pays the tax.
Assessor submits payment at a conspicuous place at LT collects the tax
Written protest must be
assessment roll to the LGU hall OR publish the same starting Jan 1 of
filed with the local
local treasurer in a newspaper of general the calendar year.
treasurer w/in 30 days
(sec. 248) circulation in the LGU 1x a week for (Sec. 257)
from payment. (sec. 252)
2 consecutive weeks (sec. 249)

Amount of tax
LT must decide w/
protested shall be
LT grants LT decides w/in in 60 days from
refunded or Yes Yes
protest? 60 days? receipt of protest
applied as tax
(sec. 252)
credit (Sec. 252)

No

Refund or tax credit must Taxpayer may appeal within within 60

No days from receipt of notice (or expiration
be claimed with the local
treasurer w/in 2 years from of 60 days) to the LBAA (Sec. 226)
the date taxpayer is entitled
to such (sec. 253) LBAA must decide
within 120 days
from receipt of
appeal (sec. 229)
LT acts on claim
LT grants
for refund/tax Taxpayer happy.
Yes refund/tax Yes END
credit w/in 60
credit?
days?

If LBAA rejects protest/

No
Taxpayer may appeal
w/in 60 days from
No receipt of notice (or
expiration of 60 days)
to LBAA (Sec. 226)
END
refund, owner may
appeal to the CBAA w/
in 30 days from receipt
of notice (Sec. 229)
If CBAA rejects protest/
Appeal to the refund, owner may appeal to
Supreme Court w/ the CTA en banc within 30
in 15 days days from receipt of decision
(Rule 43, ROC)

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Flowchart VII: Procedure for Levy for Purposes of Satisfying Real
Property Taxes-Local Gov’t Code
START
Tax constitutes a lien on the
property superior to all liens
& may only be extinguished
upon payment of the tax and
charges. (sec. 257)
Before the date of sale,
the owner may stay the
proceedings by paying the
delinquent tax, interest &
the expenses of sale.
Sale is held:
1. at the main entrance
of the LGU building, OR
2. on the property to be
sold, OR at
3. any other place
specified in the notice
Is there a
bidder?
Yes
Bidder pays & 30 days
after the sale, the LT
shall report the sale to
the sanggunian
LT shall deliver to
purchaser certificate
of sale
Proceeds of sale in
excess of delinquent
tax, interest & conveyance to the
expenses of sale
remitted to the owner
(sec. 260)
TAXATION 2 TAXATION LAW
For purposes of this flowchart owner means owner or administrator of real property or any
person having legal interest thereto
Warrant of Levy issued
by the Local Treasurer Warrant is mailed
Time for payment
(LT), which has the force to or served upon
of real property
of legal execution in the the delinquent
taxes expires
LGU concerned. (sec. owner (sec. 258)
258)
30 days from service of warrant, local
treasurer shall advertise sale of the
property by:
1. posting notice at main entrance of written notice of the levy &
LGU hall/bldg and in a conspicuous the warrant is mailed/served
place in the barangay where prope is upon the assessor and the
located AND Registrar of Deeds of the
2. by publication once a week for 2 LGU (sec. 258)
weeks (sec. 260) (Note: In cases of
levy for unpaid local taxes publication
is once a week for 3 weeks)
LT shall purchase the property in behalf of
the LGU (sec. 263) (Note: in cases of levy
No for unpaid local taxes, LT may purchase if
there is no bidder or if the highest bid is
insufficient-sec. 181)
w/in 1 year from sale, owner may
Registrar of Deeds shall transfer the
redeem upon payment of the
title of the forfeited property to the LGU
1. delinquent tax,
w/o need of a court order (sec. 263)
2. interest due,
3. expenses of sale (from date of
delinquency to date of sale) and
4. add’l interest of 2% per month on W/n 1 year from forfeiture, the
the purchase price from date of sale owner, may redeem the property by
to date of redemption. (sec. 261) paying to the local treasurer the full
Delinquent owner retains amount of the tax and the related
possession and right to the fruits interest and the costs of sale
(sec. 261) otherwise the ownership shall be
vested on the local government unit
concerned. (sec. 263)
LT returns to the
Sanggunian concerned
purchaser/bidder the
may, by ordinance sell
price paid + interest
and dispose of the real
of 2% per month
property acquired under
(sec. 261)
the preceding section at
public auction. (sec. 264)
If property is not
redeemed, the local Levy may be repeated
treasurer shall until the full amount due,
execute a deed of including all expenses, is
collected. (sec. 265)
purchaser (sec. 262)
END
302
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IX. Tariff and Customs
Code of 1978, as
Amended
A. TARIFF AND DUTIES, DEFINED
Tariff
Taxes or list of articles liable to duties
A list or schedule of articles on which a duty is
imposed upon the importation into the country,
with the rates at which they are severally taxed.
And derivatively, the system of imposing duties
or taxes on the importation of foreign
merchandise
Custom duties – taxes on the importation or
exportation of commodities. Tariff or tax
assessed upon the merchandise imported from
or exported to a foreign country
Export tariff – levied, assessed and collected
an export duty on the gross FOB value at the
time of shipment based on the prevailing rate
on traditional export products, such as certain
wood products, mineral products, plant and
vegetable products [Sec. 514, TCC]
Note: export tariff had been abolished except
upon logs [Sec. 1, EO 26].
Import tariff – articles, when imported from
any foreign country, shall be subject to duty
upon each importation, even though previously
exported from the Philippines, except as
otherwise specifically provided under the Code
or special laws [Sec. 100, TCC]
B. GENERAL RULE: ALL IMPORTED
ARTICLES ARE SUBJECT TO DUTY
IMPORTATION BY THE GOVERNMENT
TAXABLE.
All articles, when imported from any foreign
country into the Philippines, shall be subject to
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TAXATION LAW
duty upon each importation, even though
previously exported from the Philippines,
except as otherwise specifically provided [Sec.
100, TCC]
Articles – goods, wares, merchandise and in
general anything that may be made subject of
importation or exportation [Sec. 3574, TCC]
U.S. Dollars, having ceased to be legal tender
in the Philippines, fall within the meaning of
the term merchandise [Bastida v,
Commissioner of Customs, G.R. No. L-20411,
October 24, 1970]
C. PURPOSE FOR IMPOSITION
For the protection of consumers and
manufacturers, as well as Phil. products from
undue competition posed by foreign-made
products.
D. FLEXIBLE TARIFF CLAUSE
Constitutional Basis: Sec. 28[2], Art. VI, 1987
Constitution. The Congress may, by law,
authorize the President to fix with specified
limits, and subject to such limitations and
restrictions, as it may impose, tariff rates,
import and export quotas, tonnage and
wharfage duties, and other duties or imposts
within the framework of the national
development program of the Government.
The flexible tariff clause refers to the authority
given to the President, upon the
recommendation of NEDA, to adjust the tariff
rates in the interest of national economy,
general welfare and/or national security [Sec.
401, TCC]
The President is empowered to:
(1) increase, reduce or remove existing rates
[increase in the rate cannot exceed 100%
ad valorem], including authority to modify
the form of duty
(2) establish import quota or ban import of
any commodity
UP COLLEGE OF LAW TAXATION 2
(3) impose an additional duty not exceeding
10% ad valorem
Procedure:
(1) Tariff Commission shall conduct an
investigation and hold public hearings
wherein interested parties shall be
afforded reasonable opportunity to be
present, produce evidence, and be heard. It
shall also hear the views and
recommendations of any government
office, agency or instrumentality concerned.
(2) Commission shall be submit their findings
and recommendations to the NEDA within
30 days after the termination of the public
hearings
(3) NEDA recommends the same to the
President
(4) Order issued by the President shall take
effect 30 days after promulgation
Note: Only number 3 is required in cases of
imposition of additional duty not exceeding
10% ad valorem
E. REQUIREMENTS OF
IMPORTATION
E.1. BEGINNING AND ENDING OF
IMPORTATION
Importation begins when the carrying vessel or
aircraft enters the jurisdiction of the
Philippines with intention to unload therein
[Sec. 1202, TCC]
Importation is deemed terminated upon
payment of duties, taxes and other charges
due upon the articles, or secured to be paid, at
a port of entry AND the legal permit for
withdrawal shall have been granted, or in case
said articles are free of duties, taxes and other
charges, until they have legally left the
jurisdiction of the customs. [Sec. 1202, TCC]
Note: The payment of the duties, taxes, fees
and other charges must be in full. [Papa v.
Mago, G.R. No. L-27360, February 28, 1968]
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TAXATION LAW
E.2. OBLIGATIONS OF IMPORTER
I. CARGO MANIFEST
Every vessel from foreign port must have on
board a complete manifest of all the cargo
All the cargo intended to be landed at a port in
the Philippines must be described in separate
manifests for each port of call
The manifest shall include:
(1) Port of departure
(2) Port of delivery
(3) Marks, numbers, quantity and description
of the packages
(4) Names of the consignees
General rule: It cannot be changed or altered
after entry of vessel.
Exception:
Amendment by the master, consignee or agent
attached to the original manifest
CANNOT amend the manifest after the invoice
and/or entry covering the importation have
been received and recorded in the office of the
appraiser
EXCEPT:
Obvious clerical error or any other discrepancy
is committed in the preparation
Without fraudulent intent
Discovery would not have been made until
after examination of the importation is
completed
It must be translated into the official language,
if written in another language
Master shall deliver and mail the cargo
manifest to (endorsed by boarding officer):
(1) Chairman
(2) COA
(3) Collector (Present original)
UP COLLEGE OF LAW TAXATION 2
II. IMPORT ENTRY
Imported articles must be entered in the
customhouse at the port of entry within fifteen
days from date of discharge of the last
package from the vessel either
(1) by the importer, being holder of the bill of
lading
(2) by any other holder of the bill of lading in
due course,
(3) by a customs broker acting under authority
from a holder of the bill, or
(4) by a person duly empowered to act as
agent or attorney-in-fact for such holder.
The Collector may grant an extension of not
more than fifteen days. [Sec. 1301, TCC]
All imported articles, except importation
admitted free of duty, shall be subject to a
formal or informal entry.
Kinds of Import Entry
(1) Formal Entry
(2) Informal Entry
Content and Form of Import Entry
Content [Sec. 1304]
(1) That the entry delivered to the Collector
contains a full account of the value or price
articles, including subject of the entry;
(2) That the invoice and entry contain a just
and faithful account of the value or price of
said articles including and specifying the
value of all containers or coverings, and
that nothing has been omitted, therefrom
or concealed whereby the government of
the Republic of the Philippines be
defrauded of any part of the duties lawfully
due on the articles;
(3) That, to the best of the declarant's
information and belief, all the invoke and
bills of lading to the articles are the only
ones in existence relating to the
importation in question and that they are
305
TAXATION LAW
in the state in which they were actually
received by him;
(4) That, to the best of the declarant's
information and belief, the entries, invoices
and bill of and the declaration thereon
under penalties of falsification of perjury
are in all respects genuine and true, and
were made by the person by whom the
same purpose to have been made.
Form
(1) signed by the importer, consignee or
holder of the bill, by or for whom the entry
is effected [Sec. 1305]
(2) in the required number of copies in such
form as prescribed by regulations; and
(3) shall contain the names of the importing
vessel or aircraft, port of departure and
date of a the number and mark of
packages, or the quantity, if in bulk, the
nature and correct commodity description
of the articles contained therein, and its
value as set forth in a proper invoice to be
presented in duplicate the entry [Sec. 1306]
Articles to be cleared on informal entry
[Sec. 1302]
(1) Articles of a commercial nature intended
for sale, barter or hire, the dutiable value of
which is P2000 or less, and
(2) Personal and household effects or articles,
regardless of value, imported in
passenger's baggage mail, or otherwise,
for personal use, may be cleared on an
informal entry whenever duty, tax or other
charges are collectible.
The Collector may, upon instruction of the
Secretary of Finance, when he deems it
necessary for the protection of the revenue,
require a formal entry regardless of value.
Types of Formal Entry
[Sec. 1302, as amended]
A formal entry may be:
UP COLLEGE OF LAW TAXATION 2
(1) for immediate consumption, or
(2) under irrevocable domestic letter of credit,
bank guarantee or bond for:
(a) placing the article in customs bonded
warehouse;
(b) Constructive warehousing and
immediate transportation to other
ports of the Philippines upon proper
examination and appraisal; or
(c) Constructive warehousing and
immediate exportation.
Note: Import entries under irrevocable
domestic letter of credit, bank guarantee or
bond shall be subject to the provisions of Title
V, Book 11 of this Code. All importations
entered under formal entry shall be covered by
a letter of credit or any other verifiable
document evidencing payment. [R.A. 9135,
April 27, 2001]
III. DECLARATION OF CORRECT WEIGHT
OR VALUE
Classification
When article not specifically classified in the
Code, the interested party, importer or foreign
exporter may submit a sample with full
description of component materials in a
written request.
Value
Upon written application, Collector shall
furnish importer within 30 days the latest
information as to the DV of articles to be
imported.
Importer must present all pertinent papers and
documents, act in good faith and unable to
obtain information due to unusual conditions
Information given is not an appraisal nor is it
binding upon the Collector’s right of appraisal.
The declaration, ascertainment or verification
of the correct weight of the cargo at the port of
loading is the duty or obligation of the master,
306
TAXATION LAW
pilot, owner, officer or employee of the vessel.
If he omits or disregards this duty and a
punishable discrepancy between the declared
weight and actual weight of the cargo exists,
the inevitable conclusion is that he is negligent
or careless. Similarly, if in the exercise or
performance of this duty, he is negligent or
careless resulting in the commission of
excessive discrepancy in the weight of the
ship's cargo penalized under the law,
carelessness or incompetency is, nonetheless,
imputable to him.
IV. LIABILITY FOR PAYMENT OF DUTIES
[Sec. 1204, TCC]
General rule: the liability for duties, taxes, fees
and other charges attaching on importation
constitutes a personal debt due from the
importer to the government; it constitutes a
lien upon the articles imported which may be
enforced while such articles are in custody or
subject to the control of the government.
How to discharge: Discharged only by payment
in full of all duties, taxes, fees and other
charges legally accruing
Exception: Relieved by laws or regulations
V. LIQUIDATION OF DUTIES
When made: Upon approval by the Collector of
the returns of the appraiser and reports of the
weights, gauge or quantity [Sec. 1601, TCC]
How: the liquidation shall be made on the face
of the entry showing the particulars thereof,
initiated by the liquidating clerk, approved by
the chief liquidator, and recorded in the record
of liquidations. [Sec. 1601, TCC]
Additional Process: A daily record of all entries
liquidated shall be posted in the public
corridor of the customhouse, stating the name
of the vessel or aircraft, the port from which
she arrived, the date of her arrival, the name of
UP COLLEGE OF LAW TAXATION 2
the importer, and the serial number and date
of the entry. A daily record must also be kept
by the Collector of all additional duties, taxes
and other charges found upon liquidation, and
notice shall promptly be sent to the interested
parties. [Sec. 1601, TCC]
Tentative and Final Liquidation
Tentative Liquidation
[Sec. 1602, TCC]
When liquidation shall be deemed to be
tentative: If to determine the exact amount due
under the law in whole or in part some future
action is required [only as to item/s affected]
Effect: shall to that extent be subject to future
and final readjustment and settlement; entry
in such case shall be stamped "Tentative
liquidation"
Final Liquidation
[Sec. 1603, TCC as amended by RA 9135]
When liquidation is final and conclusive upon
all the parties: when articles have been entered
and passed free of duty or final adjustment of
duties made, after the expiration of 3 years
from the date of the final payment of duties.
Exceptions:
(1) Fraud
(2) Protest
(3) Compliance audit pursuant to the
provisions of the Code
Note: Exceptions do not apply in case of
tentative liquidation
Fractions in the Liquidation — a fraction of a
peso less than fifty centavos shall be
disregarded, and a fraction of a peso
amounting to fifty centavos or more shall be
considered as one peso. In case of
overpayment or underpayment of duties, taxes,
surcharges, wharfage and/or other charges
paid on entries, where the amount involved is
307
TAXATION LAW
less than five pesos, no refund or collection
shall be made. [Sec. 1604, TCC]
Other Notes:
Readjustment of Appraisal, Classification or
Return
[Sec. 1407, TCC]
Prescriptive Period for Appraisal, Classification
or Return
General rule: Appraisal, classification or return
as finally passed upon and approved or
modified by the Collector shall not be altered
or modified in any manner.
Exceptions:
(1) Within one year after payment of the duties,
upon statement of error in conformity with
seventeen hundred and seven hereof,
approved by the Collector
(2) Within fifteen days after such payment
upon request for reappraisal and/or
reclassification addressed to the
Commissioner by the Collector, if the
appraisal and/or classification is deemed
to be low
(3) Upon request for reappraisal and/or
reclassification, in the form of a timely
protest addressed to the Collector by the
interested party if the latter should be
dissatisfied with the appraisal or return
(4) Upon demand by the Commissioner of
Customs after the completion of
compliance audit pursuant to the
provisions of this Code." [R.A. 9135, April 27,
2001]
VI. KEEPING OF RECORDS
All importers are required to keep at their
principal place of business, in the manner
prescribed by regulations to be issued by the
Commissioner of Customs and for a period of 3
years from the date of importation, all records
of their importations and/or books of accounts,
business and computer systems and all
customs commercial data including payment
UP COLLEGE OF LAW TAXATION 2
records relevant to the verification of the
accuracy of the transactions value declared by
the importer/customs brokers on the import
duty
All brokers are required to keep at their
principal place of business for a period of 3
years from date of importation copies
Custom officer authorized by BOC may enter
during office hours any premises or place
where the records are kept to conduct an audit
examination, inspection, verification or
investigation
The officer may make copies or take
extracts from any of such documents
Certified copy may be evidence admissible
in all courts as if original.
F. IMPORTATION IN VIOLATION OF TCC
F.1. SMUGGLING
In order to prevent smuggling and to secure
the collection of the legal duties, taxes and
other charges, the customs service shall
exercise surveillance over the coast, beginning
when a vessel or aircraft enters Philippine
territory and concluding when the article
imported therein has been legally passed
through the customhouse. [Sec. 2202]
Smuggling – any person who shall fraudulently
import or bring into the Philippines, or assist in
so doing, any article, contrary to law, or shall
receive, conceal, buy, sell, or in any manner
facilitate the transportation, concealment, or
sale of such article after importation, knowing
the same to have been imported contrary to
law; includes the exportation of articles in a
manner contrary to law. [Sec. 3519, TCC]
Penalties for Unlawful Importation:
Person found guilty of smuggling shall be
punished by a fine of not less than six hundred
pesos nor more than five thousand pesos and
imprisonment for not less than six months nor
308
TAXATION LAW
more than two years and, if the offender is an
alien, he shall be deported after serving the
sentence.
When the defendant is shown to have or to
have had possession of the article in question,
such possession shall be deemed sufficient
evidence to authorize conviction, unless the
defendant shall explain the possession to the
satisfaction of the court. [Sec. 3601, TCC]
F.2. OTHER FRAUDULENT PRACTICES
(1) Various Practices against Customs
Revenue: Any person who
(1) makes or attempts to make any entry
of imported or exported article by
means of any false or fraudulent
invoice, declaration, affidavit, letter,
paper, or
(2) by means of any false statement,
written or verbal, or by means of any
false or fraudulent practice whatsoever,
or
(3) shall be guilty of any willful act or
omission by means of whereof the
Government might be deprived of the
lawful duties, taxes and other charges,
or any portion thereof, accruing from
the article or any portion thereof,
embraced or referred to in such invoice,
declaration, affidavit, letter, paper, or
statement, or affected by such act or
omission [Sec. 3602, TCC]
(2) Failure to Report Fraud: Any master, pilot
in command or other officer, owner or
agent of any vessel or aircraft trading with
or within the Philippines and any employee
of the Bureau of Customs, who, having
cognizance of any fraud upon the customs
revenue, shall fail to report all information
relative thereto to the Collector, as
required by law [Sec. 3603, TCC]
(1) Concealment or Destruction of Evidence of
Fraud: Any person who willfully conceals or
destroys, any invoice, book or paper
UP COLLEGE OF LAW TAXATION 2
relating to any article liable to duty, after
an inspection thereof has been demanded
by the Collector of any Collection district,
or at any time conceals or destroys any
such invoice, book or paper for the purpose
of suppressing any evidence of fraud
therein contained [Sec. 3605, TCC]
(2) Affixing Seals: Any person who shall
willfully break or destroy any seal placed
by a customs official upon any car, or other
conveyance by land, sea or air, or any
compartment thereof [Sec. 3606, TCC]
(3) Removal, Breakage, Alteration of Marks:
Any person who alters, defaces or
obliterates any distinctive mark placed by a
customs official on any package of
warehoused articles [Sec. 3607, TCC]
(4) Removing Goods from Customs Custody:
Any importer or owner of warehoused
articles, or person in his employ, who by
contrivance, fraudulently opens the
warehouse, or gains access to the articles,
except in the presence of the proper official
of the customs acting in the execution of
his duty [Sec. 3608, TCC]
(5) Failure to Keep Importation Records and
Give Full Access to Customs Officers: Any
person who shall fraudulently remove
warehoused articles from any public or
private warehouse or shall fraudulently
conceal such articles in any such
warehouse, or shall aid or abet any such
removal or concealment [Sec. 3609, TCC]
G. CLASSIFICATION OF GOODS
G.1. TAXABLE IMPORTATION
All articles, when imported from any foreign
country into the Philippines, shall be subject to
duty upon each importation, even though
previously exported from the Philippines,
except as otherwise specifically provided for in
this Code or in other laws. [Sec. 100, TCC]
G.2. PROHIBITED IMPORTATION
[Sec. 101, TCC] (POPP-LAW-DING)
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TAXATION LAW
(1) Dynamite, gunpowder, ammunitions and
other explosives, firearm and weapons of
war, and detached parts thereof, except
when authorized by law.
(2) Written or printed article in any form
containing:
(a) any matter advocating or inciting
treason, rebellion, insurrection or
sedition against the Government of the
Philippines
(b) forcible resistance to any law of the
Philippines
(c) containing any threat to take the life of
or inflict bodily harm upon any person
in the Philippines.
(3) Written or printed articles, photographs,
engravings, lithographs, objects, paintings,
drawings or other representation of an
obscene or immoral character.
(4) Articles, instruments, drugs and
substances designed, intended or adapted
for preventing human conception or
producing unlawful abortion, or any
printed matter which advertises or
describes or gives directly or indirectly
information where, how or by whom
human conception is prevented or
unlawful abortion produced.
(5) Roulette wheels, gambling outfits, loaded
dice, marked cards, machines, apparatus
or mechanical devices used in gambling, or
in the distribution of money, cigars,
cigarettes or other articles when such
distribution is dependent upon chance,
including jackpot and pinball machines or
similar contrivances.
(6) Lottery and sweepstakes tickets,
advertisements thereof and lists of
drawings therein.
Except those authorized by the Philippine
Government
(7) Any article manufactured in whole or in
part of gold silver or other precious metal,
or alloys thereof, the stamps brands or
UP COLLEGE OF LAW TAXATION 2
marks of which do not indicate the actual
fineness or quality of said metals or alloys.
(8) Any adulterated or misbranded article of
food or any adulterated or misbranded
drug in violation of the provisions of the
"Food and Drugs Act."
(9) Marijuana, opium poppies, coca leaves, or
any other narcotics or synthetic drugs
which are or may hereafter be declared
habit forming by the President of the
Philippines, any compound, manufactured
salt, derivative, or preparation thereof,
Except when imported by the Government
of the Philippines or any person duly
authorized by the Collector of Internal
Revenue for medicinal purposes only
(10) Opium pipes and parts thereof, of
whatever material.
(11) All other articles the importation of which
is prohibited by law.
G.3. CONDITIONALLY-FREE IMPORTATION
[Sec. 105, TCC]
The following articles shall be exempt from the
payment of import duties upon compliance
with the formalities prescribed in, or with, the
regulations which shall be promulgated by the
Commissioner of Customs with the approval of
the Secretary of Finance:
(1) Aquatic products (e.g., fishes, crustaceans,
mollusks, marine animals, seaweeds, fish
oil, roe), caught or gathered by fishing
vessels of Philippine registry: Provided,
That they are imported in such vessels or in
crafts attached thereto: And provided,
further, That they have not been landed in
any foreign territory or, if so landed, they
have been landed solely for transshipment
without having been advanced in
condition;
(2) Equipment for use in the salvage of vessels
or aircrafts, not available locally, upon
identification and the giving of a bond in
an amount equal to one and one-half
times the ascertained duties, taxes and
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TAXATION LAW
other charges thereon, conditioned for the
exportation thereof or payment of the
corresponding duties, taxes and other
charges within six [6] months from the
date of acceptance of the import entry:
Provided, That the Collector of Customs
may extend the time for exportation or
payment of duties, taxes and other charges
for a term not exceeding six [6] months
from the expiration of the original period;
(3) Cost of repairs, excluding the value of the
article used, made in foreign countries
upon vessels or aircraft documented,
registered or licensed in the Philippines,
upon proof satisfactory to the Collector of
Customs [1] that adequate facilities for
such repairs are not afforded in the
Philippines, or [2] that such vessels or
aircrafts, while in the regular course of her
voyage or flight was compelled by stress of
weather or other casualty to put into a
foreign port to make such repairs in order
to secure the safety, seaworthiness or
airworthiness of the vessel or aircraft to
enable her to reach her port of destination;
(4) Articles brought into the Philippines for
repair, processing or reconditioning to be
re-exported upon completion of the repair,
processing or reconditioning: Provided,
That the Collector of Customs shall require
the giving of a bond in an amount equal to
one and one-half times the ascertained
duties, taxes and other charges thereon,
conditioned for the exportation thereof or
payment of the corresponding duties, taxes
and other charges within six [6] months
from the date of acceptance of the import
entry;
(5) Medals, badges, cups and other small
articles bestowed as trophies or prizes, or
those received or accepted as honorary
distinction;
(6) Personal and household effects belonging
to residents of the Philippines returning
from abroad including jewelry, precious
UP COLLEGE OF LAW TAXATION 2
stones and other articles of luxury which
were formally declared and listed before
departure and identified under oath before
the Collector of Customs when exported
from the Philippines by such returning
residents upon their departure therefrom
and during their stay abroad; personal and
household effects including wearing
apparel, articles of personal adornment
[except luxury items], toilet articles,
portable appliances and instruments and
similar personal effects, excluding vehicles,
watercrafts, aircrafts, and animals
purchased in foreign countries by residents
of the Philippines which were necessary,
appropriate and normally used for the
comfort and convenience in their journey
and during their stay abroad upon proof
satisfactory to the Collector of Customs
that same have been in their use abroad
for more than six [6] months and
accompanying them on their return, or
arriving within a reasonable time which,
barring unforeseen circumstances, in no
case shall exceed ninety days before or
after the owners' return: Provided, That the
personal and household effects shall
neither be in commercial quantities nor
intended for barter, sale or hire and that
the total dutiable value of which shall not
exceed two thousand pesos [P2,000.00]:
Provided further, That the returning
residents have not previously received the
benefit under this section within one year
from and after the last exemption granted:
Provided furthermore, That a fifty [50] per
cent ad valorem duty across the board
shall be levied and collected on the
personal and household effects [except
luxury items] in excess of two thousand
pesos: And provided, finally, That the
personal and household effects [except
luxury items] of a returning resident who
has not stayed abroad for six months shall
be subject to fifty per cent ad valorem duty
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across the board, the total dutiable value
of which does not exceed two thousand
pesos; any excess shall be subject to the
corresponding duty provided in this Code;
(7) Wearing apparel, articles of personal
adornment, toilet articles, portable tools
and instruments, theatrical costumes and
similar effects accompanying travelers, or
tourists. or arriving within a reasonable
time before and after their arrival in the
Philippines, which are necessary and
appropriate for the wear and use of such
persons according to the nature of the
journey, their comfort and convenience:
Provided, That this exemption shall not
apply to articles intended for other persons
or for barter, sale or hire: Provided, further,
That the Collector of Customs may, in his
discretion, require either a written
commitment or a bond in an amount equal
to one and one-half times the ascertained
duties, taxes and other charges
conditioned for the exportation thereof or
payment of the corresponding duties, taxes
and other charges within three [3] months
from the date of acceptance of the import
entry: And Provided finally, That the
Collector of Customs may extend the time
for exportation or payment of duties, taxes
and other charges for a term not exceeding
three months from the expiration of the
original period;
(8) Personal and household effects and
vehicles belonging to foreign consultants
and experts hired by, and/or rendering
service to, the government, and their staff
or personnel and families, accompanying
them or arriving within a reasonable time
before or after their arrival in the
Philippines, in quantities and of the kind
necessary and suitable to the profession,
rank or position of the person importing
them, for their own use and not for barter,
sale or hire provided that, the Collector of
Customs may in his discretion require
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either a written commitment or a bond in
an amount equal to one and one-half
times the ascertained duties, taxes and
other charges upon the articles classified
under this subsection; conditioned for the
exportation thereof or payment of the
corresponding duties, taxes and other
charges within six [6] months after the
expiration of their term or contract; And
Provided, finally, That the Collector of
Customs may extend the time for
exportation or payment of duties, taxes
and other charges for term not exceeding
six [6] months from the expiration of the
original period;
(9) Professional instruments and implements,
tools of trade, occupation or employment,
wearing apparel, domestic animals, and
personal and household effects belonging
to persons coming to settle in the
Philippines or Filipinos and/or their
families and descendants who are now
residents or citizens of other countries,
such parties hereinafter referred to as
Overseas Filipinos, in quantities and of the
class suitable to the profession, rank or
position of the persons importing them, for
their own use and not for barter or sale,
accompanying such persons, or arriving
within a reasonable time, in the discretion
of the Collector of Customs, before or after
the arrival of their owners, which shall not
be later than February 28, 1979 upon the
production of evidence satisfactory to the
Collector of Customs that such persons are
actually coming to settle in the Philippines,
that change of residence was bona fide
and that the privilege of free entry was
never granted to them before or that such
person qualifies under the provisions of
Letters of Instructions 105, 163 and 210,
and that the articles are brought from their
former place of abode, shall be exempt
from the payment of customs duties and
taxes: Provided, That vehicles, vessels,
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aircrafts, machineries and other similar
articles for use in manufacture, shall not be
classified hereunder;
(10) Articles used exclusively for public
entertainment, and for display in public
expositions, or for exhibition or
competition for prizes, and devices for
projecting pictures and parts and
appurtenances thereof, upon identification,
examination, and appraisal and the giving
of a bond in an amount equal to one and
one-half times the ascertained duties,
taxes and other charges thereon,
conditioned for exportation thereof or
payment of the corresponding duties, taxes
and other charges within six [6] months
from the date of acceptance of the import
entry; Provided, That the Collector of
Customs may extend the time for
exportation or payment of duties, taxes
and other charges for a term not exceeding
six [6] months from the expiration of the
original period; and technical and scientific
films when imported by technical, cultural
and scientific institutions, and not to be
exhibited for profit: Provided, further, That
if any of the said films is exhibited for profit,
the proceeds therefrom shall be subject to
confiscation, in addition to the penalty
provided under Section Thirty-six hundred
and ten as amended, of this Code;
(11) Articles brought by foreign film producers
directly and exclusively used for making or
recording motion picture films on location
in the Philippines, upon their identification,
examination and appraisal and the giving
of a bond in an amount equal to one and
one-half times the ascertained duties,
taxes and other charges thereon,
conditioned for exportation thereof or
payment of the corresponding duties, taxes
and other charges within six [6] months
from the date of acceptance of the import
entry, unless extended by the Collector of
Customs for another six [6] months;
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photographic and cinematographic films,
undeveloped, exposed outside the
Philippines by resident Filipino citizens or
by producing companies of Philippine
registry where the principal actors and
artists employed for the production are
Filipinos, upon affidavit by the importer
and identification that such exposed films
are the same films previously exported
from the Philippines. As used in this
paragraph, the terms "actors" and "artists"
include the persons operating the
photographic cameras or other
photographic and sound recording
apparatus by which the film is made;
(12) Importations for the official use of foreign
embassies, legations, and other agencies
of foreign governments: Provided, That
those foreign countries accord like
privileges to corresponding agencies of the
Philippines;
(13) Articles imported for the personal or family
use of the members and attaches of
foreign embassies, legations, consular
officers and other representatives of
foreign governments: Provided, That such
privilege shall be accorded under special
agreements between the Philippines and
the countries which they represent: And
Provided, further, That the privilege may
be granted only upon specific instructions
of the Secretary of Finance in each instance
which will be issued only upon request of
the Department of Foreign Affairs;
(14) Imported articles donated to, or for the
account of, any duly registered relief
organization, not operated for profit, for
free distribution among the needy, upon
certification by the Department of Social
Services and Development or the
Department of Education, Culture and
Sports, as the case may be;
(15) Containers, holders and other similar
receptacles of any material including kraft
paper bags for locally manufactured
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cement for export, including corrugated
boxes for bananas, mangoes, pineapples
and other fresh fruits for export, except
other containers made of paper,
paperboard and textile fabrics, which are
of such character as to be readily
identifiable and/or reusable for shipment
or transportation of goods shall be
delivered to the importer thereof upon
identification, examination and appraisal
and the giving of a bond in an amount
equal to one and one-half times the
ascertained duties, taxes and other
charges within six months from the date of
acceptance of the import entry;
(16) Supplies which are necessary for the
reasonable requirements of the vessel or
aircraft in her voyage or flight outside the
Philippines, including articles transferred
from a bonded warehouse in any collection
district to any vessel or aircraft engaged in
foreign trade, for use or consumption of
the passengers or its crew on board such
vessel or aircrafts as sea or air stores; or
articles purchased abroad for sale on
board a vessel or aircraft as saloon stores
or air store supplies: Provided, That any
surplus or excess of such vessel or aircraft
supplies arriving from foreign ports or
airports shall be dutiable;
(17) Articles and salvage from vessels
recovered after a period of two years from
the date of filing the marine protest or the
time when the vessel was wrecked or
abandoned, or parts of a foreign vessel or
her equipment, wrecked, abandoned in
Philippine waters or elsewhere: Provided,
That articles and salvage recovered within
the said period of two years shall be
dutiable;
(18) Coffins or urns containing human remains,
bones or ashes, used personal and
household effects [not merchandise] of the
deceased person, except vehicles, the
value of which does not exceed ten
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thousand pesos, upon identification as
such;
(19) Samples of the kind, in such quantity and
of such dimension or construction as to
render them unsalable or of no appreciable
commercial value; models not adapted for
practical use; and samples of medicines,
properly marked "sample-sale punishable
by law," for the purpose of introducing a
new article in the Philippine market and
imported only once in a quantity sufficient
for such purpose by a person duly
registered and identified to be engaged in
that trade: Provided, That importations
under this subsection shall be previously
authorized by the Secretary of Finance:
Provided, however, That importation of
sample medicine shall be previously
authorized by the Secretary of Health that
such samples are new medicines not
available in the Philippines: Provided,
finally, That samples not previously
authorized and/or properly marked in
accordance with this section shall be levied
the corresponding tariff duty.
(20) Commercial samples, except those
that are not readily and easily identifiable
[e.g., precious and semi-precious stones,
cut or uncut, and jewelry set with precious
stones], the value of any single importation
of which does not exceed ten thousand
pesos [P10,000.00] upon the giving of a
bond in an amount equal to twice the
ascertained duties, taxes and other
charges thereon, conditioned for the
exportation of said samples within six [6]
months from the date of the acceptance of
the import entry or in default thereof, the
payment of the corresponding duties, taxes
and other charges. If the value of any
single consignment of such commercial
samples exceeds ten thousand pesos
[P10,000.00],the importer thereof may
select any portion of same not exceeding in
value of ten thousand pesos [P10,000.00]
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TAXATION LAW
for entry under the provision of this
subsection, and the excess of the
consignment may be entered in bond, or
for consumption, as the importer may
elect;
(21) Animals (except race horses), and plants
for scientific, experimental, propagation,
botanical, breeding, zoological and
national defense purposes: Provided, That
no live trees, shoots, plants, moss, and
bulbs, tubers and seeds for propagation
purposes may be imported under this
section, except by order of the Government
or other duly authorized institutions:
Provided, further, That the free entry of
animals for breeding purposes shall be
restricted to animals of recognized breed,
duly registered in the book of record
established for that breed, certified as such
by the Bureau of Animal Industry: Provided,
furthermore, That certificate of such record,
and pedigree of such animal duly
authenticated by the proper custodian of
such book of record, shall be produced and
submitted to the Collector of Customs,
together with affidavit of the owner or
importer, that such animal is the animal
described in said certificate of record and
pedigree: And Provided, finally, That the
animals and plants are certified by the
National Economic and Development
Authority as necessary for economic
development;
(22) Economic, technical, vocational,
scientific, philosophical, historical, and
cultural books and/or publications:
Provided, That those which may have
already been imported but pending release
by the Bureau of Customs at the effectivity
of this Decree may still enjoy the privilege
herein provided upon certification by the
Department of Education, Culture and
Sports that such imported books and/or
publications are for economic, technical,
vocational, scientific, philosophical,
UP COLLEGE OF LAW TAXATION 2
historical or cultural purposes or that the
same are educational, scientific or cultural
materials covered by the International
Agreement on Importation of Educational
Scientific and Cultural Materials signed by
the President of the Philippines on August
2, 1952, or other agreements binding upon
the Philippines.
(23)Educational, scientific and cultural
materials covered by international
agreements or commitments binding upon
the Philippine Government so certified by
the Department of Education, Culture and
Sports.
(24) Bibles, missals, prayer books, Koran,
Ahadith and other religious books of
similar nature and extracts therefrom,
hymnal and hymns for religious uses;
(25) Philippine articles previously exported
from the Philippines and returned without
having been advanced in value or
improved in condition by any process of
manufacture or other means, and upon
which no drawback or bounty has been
allowed, including instruments and
implements, tools of trade, machinery and
equipment, used abroad by Filipino
citizens in the pursuit of their business,
occupation or profession; and foreign
articles previously imported when returned
after having been exported and loaned for
use temporarily abroad solely for
exhibition, testing and experimentation, for
scientific or educational purposes; and
foreign containers previously imported
which have been used in packing exported
Philippine articles and returned empty if
imported by or for the account of the
person or institution who exported them
from the Philippines and not for sale,
barter or hire subject to identification:
Provided, That any Philippine article falling
under this subsection upon which
drawback or bounty has been allowed shall,
upon re-importation thereof, be subject to
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TAXATION LAW
a duty under this subsection equal to the
amount of such drawback or bounty.
(26) Aircraft, equipment and machinery,
spare parts commissary and catering
supplies, aviation gas, fuel and oil, whether
crude or refined, and such other articles or
supplies imported by and for the use of
scheduled airlines operating under
Congressional franchise: Provided, That
such articles or supplies are not locally
available in reasonable quantity, quality
and price and are necessary or incidental
for the proper operation of the scheduled
airline importing the same;
(27) Machineries, equipment, tools for
production, plants to convert mineral ores
into saleable form, spare parts, supplies,
materials, accessories, explosives,
chemicals, and transportation and
communication facilities imported by and
for the use of new mines and old mines
which resume operations, when certified to
as such by the Secretary of Agriculture and
Natural Resources upon the
recommendation of the Director of Mines,
for a period ending five [5] years from the
first date of actual commercial production
of saleable mineral products: Provided,
That such articles are not locally available
in reasonable quantity, quality and price
and are necessary or incidental in the
proper operation of the mine; and aircrafts
imported by agro-industrial companies to
be used by them in their agriculture and
industrial operations or activities, spare
parts and accessories thereof;
(28) Spare parts of vessels or aircraft of
foreign registry engaged in foreign trade
when brought into the Philippine
exclusively as replacements or for the
emergency repair thereof, upon proof
satisfactory to the Collector of Customs
that such spare parts shall be utilized to
secure the safety, seaworthiness or
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airworthiness of the vessel or aircraft, to
enable it to continue its voyage or flight;
(29) Articles of easy identification exported
from the Philippines for repair and
subsequently reimported upon proof
satisfactory to the Collector of Customs
that such articles are not capable of being
repaired locally: Provided, That the cost of
the repairs made to any such article shall
pay a rate of duty of thirty per cent ad
valorem;
(30) Trailer chassis when imported by
shipping companies for their exclusive use
in handling containerized cargo, upon
posting a bond in an amount equal to one
and one-half times the ascertained duties,
taxes and other charges due thereon to
cover a period of one year from the date of
acceptance of the entry, which period for
meritorious reasons may be extended by
the Commissioner of Customs from year to
year, subject to the following conditions:
(a) That they shall be properly identified
and registered with the Land
Transportation Commission;
(b) That they shall be subject to customs
supervision fee to be fixed by the
Collector of Customs and subject to the
approval of the Commissioner of
Customs;
(c) That they shall be deposited in the
Customs zone when not in use; and
(d) That upon the expiration of the period
prescribed above, duties and taxes
shall be paid, unless otherwise re-
exported
H. CLASSIFICATION OF DUTIES
H.1. ORDINARY/REGULAR DUTIES
Ordinary or regular duties refer to those that,
as a matter of course, are imposed on dutiable
articles [Sec. 104, TCC]
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TAXATION LAW
I. AD VALOREM; METHODS OF
VALUATION
The tax rates are based on
(1) the cost (FMV) or price of the imported
articles, in wholesale quantities in the
principal market of the exporting country
or the country of origin, including expenses
connected with the importation, such as
insurance, freight, packaging, loading and
unloading charges, but excluding internal
excise taxes to be remitted or rebated; or
(2) In case such value is not ascertainable, the
reports of the Revenue or commercial
attaches; or
(3) If still not ascertainable, the domestic
wholesale market price in the ordinary
course of trade less import duty and not
more than 25% for expenses and profits.
[Sec. 201, TCC]
Note:
General rule: The following methods are
sequentially applied
Exception: [CAO 4-2004] Methods 4 and 5 may
be reversed at the request of the importer,
subject to the approval of the Commissioner.
Ground to refuse the request: if the
Commissioner deems that he will experience
real difficulties in determining the dutiable
value using Method 5
Basis for all Methods of Valuation
[Sec. 201, TCC and CAO 4-2004]
Transaction value – Price actually paid or
payable for goods when sold for export to
Philippines
commissions & brokerage fees
cost of containers
cost of packing (labor, materials)
assists (value of goods and services supplied
by the buyer free of charge or at a reduced
price for use in connection with the production
and sale for export of the good)
UP COLLEGE OF LAW TAXATION 2
royalties & license fees
value of any part of the proceeds of
subsequent resale, disposal or use of imported
goods that accrue directly or indirectly to seller
cost of transport
loading, unloading, handling
insurance
Dutiable Value (DV) must not include:
(1) charges for construction, erection,
assembly maintenance or technical
assistance undertaken after importation
(2) cost of transport after importation
(3) duties and taxes of Phil
(4) other permissible deduction under WTO
Valuation Agreement
ALL the following conditions must be satisfied
so the TV shall be the DV (CREPD):
(1) sale for export to Phil
(2) no restrictions as to the disposition or use
of goods by buyer except:
(3) those imposed by law or Phil authorities
(4) limit the geographical area where goods
may be resold
(5) do not substantially affect the value of the
goods
(6) not be subject to some condition or
consideration for which value cannot be
determined
(7) no part of the proceeds of any subsequent
disposal shall accrue to the seller
(8) buyer and seller are not related or if they
are, relationship did not affect the price
Deemed related if:
(1) They are officers or directors of one
another’s business;
(2) They are legally recognized partners in
business;
(3) There exists in an er-ee relationship
between them;
(4) Any person directly or indirectly owns,
controls or holds 5% or more of the
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TAXATION LAW
outstanding voting stock or shares of
bother seller and buyer;
(5) One of them directly or indirectly controls
the other;
(6) Both of them are directly or indirectly
controlled by a 3rd person;
(7) Together they directly or indirectly control
a 3rd person; or
(8) Related by affinity or consanguinity up to
4th civil degree.
If related, use of TV acceptable if:
(1) circumstances surrounding transaction
show that relationship did not
influence the price
(2) TV closely approximates:
(3) TV of unrelated buyers of identical or
similar goods
(4) Deductive value of identical or similar
goods determined according to
method #4
(5) Computed value of identical or similar
goods determined according to
method #5
Transaction Value of Identical Goods
The DV shall be the transaction value of
identical goods sold for export to the Phil and
exported at or about the same time as the
goods being valued. Identical goods must be
same commercial level and substantially same
quantity as the goods being valued.
Identical goods
(1) Same in all respects (physical
characteristics, quality and reputation)
(2) Produced in the same country as the goods
being valued
(3) Produced by producer of the goods being
valued
Excludes: imported goods for which
engineering, development, artwork, design
work, plans and sketches is undertaken in
the Phil and provided by the buyer to the
UP COLLEGE OF LAW TAXATION 2
producer free of charge or at a reduced
rate
When no identical goods produced by the same
person: Identical goods produced by different
producer in the same country
If NO identical goods at same commercial level
and same quantity,
(1) TV of identical goods at a different
commercial level and different quantity
may be utilized
(2) TV shall be adjusted upward or downward
to account for the difference
Transaction value of similar goods
The DV shall be the transaction value of similar
goods sold for export to the Phil and exported
at or about the same time as the goods being
valued.
Similar goods must be same commercial level
and substantially same quantity as the goods
being valued.
Similar goods
(1) like characteristics and like component
materials
(2) capable of performing same functions
(3) commercially interchangeable
(4) produced in same country
(5) produced by same producer
Excludes: imported goods for which
engineering, development, artwork, design
work, plans and sketches is undertaken in
the Phil and provided by the buyer to the
producer free of charge or at a reduced
rate
When no similar goods produced by the same
person: similar goods produced by different
producer in the same country
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If NO similar goods at same commercial level
and same quantity,
(1) TV of similar goods at a different
commercial level and different quantity
may be utilized
(2) TV shall be adjusted upward or
downward to account for the difference
Deductive value
DV is determined on the basis of sales in the
Phil of goods being valued of identical or
similar imported goods less certain expenses
resulting from importation and sale of goods.
Deductive Value is determined by making a
deduction from the established price per unit
for the aggregate of the ff. elements:
(a) Commissions or
(b) additions made in connection with profit
and general expenses and
(c) transport, insurance and associated costs
(d) customs duties and other national taxes
PRICE
Less: COMMISSIONS/ADDITIONS
Less: COSTS
Less: DUTIES and TAXES
DEDUCTIVE VALUE
The sales must meet the following conditions:
(1) sold in the Phil in the same condition as
imported
(2) sales taken place at or about the same
time of importation of good being valued
If no sale took place at or about the time of
importation, use sales at the earliest date after
importation (of the similar or identical
good])but before expiration of 90 days
If no sale meet the above conditions, importer
may choose the use of sales of goods being
valued after further processing
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“At or about the same time” Legal Weight – weight at the time of their sale
45 days prior to and 45 days following the to the public in usual retail quantities
importation Net Weight – only the actual weight at the time
Computed value of importation excluding the weight of the
DV is determined on the basis of cost of immediate and all other containers
production + profit + general expenses
reflected in sales from exporting country to the H.2. SPECIAL DUTIES
Phil of goods of same class or kind These are additional import duties imposed on
specific kinds of imported articles [See Table of
DV is calculated by: Special Duties]
Determining aggregate of relevant costs,
charges and expenses or value of I. REMEDIES
(1) materials and I.1. GOVERNMENT
(2) production or processing costs
I. ADMINISTRATIVE/EXTRAJUDICIAL
Costs* containers, packing, assists,
Search, seizure, forfeiture, arrest
engineering, artwork, plans and sketches
Enforcement of Tax Lien
undertaken in Phil and charged to producer
Tax Lien – attaches upon the articles imported
profits and general expenses
which may be enforced while such are in
cost of transport, insurance and charges to the
custody or subject to the control of the
port or place of importation
government [Sec. 1204]
*Note: these additional costs are added only if
Sec. 1508.
not included in the determination of the
When an importer has an outstanding and
aggregate of relevant costs, charges and
demandable account with the Bureau of
expenses or value of materials and production.
Customs,
Collector shall hold the delivery of the article.
Fallback value
Upon notice, he may sell such importation or a
If DV cannot be determined using any of the
portion of it to satisfy the obligation.
above methods, use other reasonable means
Importer may settle his obligation anytime
consistent with principles and general
before the sale.
provisions of General Agreements on Tariffs
and Trade [GATT]
Seizure and Forfeiture
[Sec. 2205]
II. SPECIFIC
Who may effect:
[Sec. 202, TCC]
(1) Customs official;
Rates are based on units of weight number or
(2) Fisheries Commissions;
measurement
(3) Philippine Coast Guard

Kinds of weight:
Note: Person who is exercising such an
Gross Weight – weight of same, together with
authority has the duty to make known his
the weight of all containers, packages, holders
official character, upon being questioned
and packings, of any kind, in which said articles
at the time of the exercise. If his authority
are contained, held or packed at the time of
came from a special authorization, he has
importation
the duty to exhibit the written authority
upon demand.

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What is seized:
To make seizure of any vessel, aircraft, cargo,
animal or any movable property when the
same is subject to forfeiture or liable for any
fine under the tariff and customs law
Where authority may be exercised:
At any place within the jurisdiction of the
Bureau of Customs
Other Rights/Authority of the Official effecting
the search and seizure
(1) Authority to require assistance of any
police officer if necessary [Sec. 2207]
(2) At any time, right to enter, pass through or
search any inclosure or warehouse, or
other building, not being a dwelling house
[Sec. 2208]
(3) Right to enter and search a dwelling house,
upon warrant issued by the Judge of the
Court, or any responsible officer as may be
authorized [Sec. 2209]
(4) Right to Search Vessels or Aircrafts and
Persons or Articles Conveyed [Sec. 2210]
(5) Right to Search Vehicles, Beasts and
Persons when he has reasonable cause to
suspect the presence therein of dutiable or
prohibited article introduced into the
Philippines contrary to law [Sec. 2211]
(6) Search of Persons Arriving From Foreign
Countries [Sec. 2212]
Administrative Proceedings [Secs 2301 – 2316]
Procedure for Seizure:
Collector shall issue a warrant for the
detention of the property
Cash bond
If the importer wishes to secure release of
article for legitimate use
(1) amount fixed by Collector
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TAXATION LAW
(2) appraised value of article and/or fine,
expenses, costs
Note: Article will not be released if:
(1) there is prima facie evidence of fraud in the
importation
(2) article is prohibited by law
Report to Commissioner and Chairman of
Commission of Audit
Written notice to owner or importer. He shall
he given opportunity to be heard
Notification to an unknown owner
(1) posting for 15 days in the public corridor of
customhouse
(2) publication in newspaper
(3) other means Collector considers desirable
Collector shall make a list and particular
description and classification of the seized
property, appraisal based on local wholesale
values by
(1) at least 2 appraising officials
(2) absent such, 2 competent disinterested
citizens
If within 15 days from notification, no owner or
agent is found or appears before Collector,
then the property would be forfeited to
Government and sold at auction
Settlement
[Sec. 2307]
While case is pending, Collector may accept
settlement of any seizure case
(1) Upon approval of Commissioner
(2) Payment of fine (25% to 80% of the landed
cost of the article)
In case of forfeiture, should pay the domestic
market value of the seized article
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When settlement not allowed
(1) Fraud in importation
(2) Importation prohibited by law
(3) Release would be contrary to law
Compromise
[Sec. 2316, TCC]
Commissioner may compromise any case
subject to approval by Secretary of Finance
II. JUDICIAL
Requisites for filing of criminal/civil case
[Sec, 2401, TCC]:
(1) Brought in the name of the government of
the Phil
(2) Conducted by Customs officers
(3) With approval from the Commissioner
Rules on appeal including jurisdiction
The party aggrieved by a ruling of the
Commissioner in any matter brought before
him upon protest or by his action or ruling in
any case of seizure may appeal to the Court of
Tax Appeals, in the manner and within the
period prescribed by law and regulations.
Unless an appeal is made to the Court of Tax
Appeals in the manner and within the period
prescribed by laws and regulations, the action
or ruling of the Commissioner shall be final
and conclusive. [Sec. 2402, TCC]
I.2. TAXPAYER
I. PROTEST
When made: at the time payment of the
amount claimed to be due is made within 15
days thereafter [Sec. 2308]
Form
(1) Must be in writing
(2) Must point out the particular decision or
ruling of the Collector of Customs to which
exception is taken or objection made
(3) Must state the grounds relied upon for
relief [Sec. 2310, TCC]
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TAXATION LAW
Scope
Limited to the subject matter of a single
adjustment (refers to the entire content of one
liquidation including duties, fees, surcharges
and fines) or other independent transaction
Other requirements:
(1) Payment of the amount due and the
corresponding docket fee shall be made
before protest [Sec. 2308]
(2) Upon demand of Collector, the importer
shall furnish samples of the articles which
are the subject of the protest
Effect of Failure to Protest
Failure renders the action of the Collector final
and conclusive except for manifest error
Review of Commissioner
[Sec. 2313]
A person aggrieved by the decision or Collector
in any matter presented upon protest or by his
action in any case of seizure may, within days
after notification on writing by the Collector of
his actions or decisions, file a written notice to
the Collector with a copy furnished to the
Commissioner of his intention to appeal the
action or decision of the Collector to the
Commissioner
Automatic Review
Happens in case a decision is made adverse to
the Government
II. ABANDONMENT
When article deemed abandoned
(1) owner, importer or consignee expressly
signifies in writing to Collector his intention
to abandon
(2) after due notice, fails to file an entry within
30 days from date of discharge of last
package from vessel or aircraft
(3) after filing entry, fails to claim his
importation 15 days from date of posting of
UP COLLEGE OF LAW TAXATION 2
the notice to claim such importation [Sec.
1801, TCC]
Effect
[Sec. 1802, TCC]
(1) deemed to have renounced his interest and
property rights
(2) ipso facto deemed property of the
Government
If the abandoned articles are transferred to a
customs bonded warehouse, the operator shall
be liable for the payment of duties and taxes in
the case of loss of the stored abandoned
imported articles [R.V. Marzan v. CA, GR No.
128064, March 4, 2004]
Liability of Official for Failure to Report
Abandonment
Any official or employee who:
(1) had knowledge of the existence of
abandoned article
(2) custody or charge of such article
fails to report within 24 hours from time article
deemed abandoned shall be punished
according to sec. 3604 (fine: P5000 –
P50,000; imprisonment: 1 yr – 10 yrs,
perpetual disqualification to hold public office,
vote and participate in election)
III. ABATEMENT AND REFUND
When available
(1) Abatement for Damage incurred during
Voyage [Sec. 1701]
(2) Abatement or Refund for the following:
(3) Missing Packages [Sec. 1702]
(4) Deficiency of Contents in Packages [Sec.
1703]
(5) Articles Lost or Destroyed after Arrival [Sec.
1704]
(6) Dead or Injured animals [Sec. 1705]
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TAXATION LAW
Refund in case of excess payments due to:
(1) manifest clerical error made in invoice or
entry
(2) error in return of weight, measure and
gauge (certified, under penalties of
falsification or perjury, by examining
official)
(3) error in the distribution of charges on
invoices [which does not involve any
question of law and certified, under
penalties of falsification or perjury, by
examining official] [Sec. 1707]
Conditions for refund of excess payments
(1) errors discovered before payment or
discovered within 1 year after the final
liquidation
(2) written request and notice from importer
or statement of error certified by the
Collector
How claimed
(1) Claim made in writing
(2) Collector shall verify with the records in his
office
(3) Certify claim to Commissioner with his
recommendation and necessary papers
(4) Commissioner shall then cause the claim
to be paid if found correct
If the result of the refund would result to a
corresponding refund of the internal revenue
taxes on the same importation, Collector shall
certify to Commissioner who shall cause the
said excess to be paid, refunded or credited in
favor of the importer
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Flowchart IX: Remedies from Seizure and Forfeiture Cases-Tariffs and

Customs Code

START

Collector seizes goods

Importer may secure
Collector determines and reports it to the
release of goods by Collector conducts
probable cause Commissioner and to
(illegal importation) filing of cash bond hearing
COA. Owner is notified
(Sec. 2301)
of seizure

Collector’s Amount
decision favorable Automatic review* by Customs
Yes involved less Yes
to taxpayer/ Commisioner (Sec. 2313)
than 5M?
adverse to gov’t?

Is
Does
No Commissioner’s
commissioner
Yes decision favorable
decide w/in 30
Taxpayer appeals to taxpayer/
days?
to Customs adverse to gov’t?
Commissioner 15
days from receipt No
of notice
Inaction construed as affirmation
of Collector’s decision
Does
Commissioner
Yes No, amount is at least
decide w/n 30
Is 5M
days?
Commissioner’s Yes
Automatic Review* by
decision
the Secretary of
favorable to Yes
Finance (SOF) (Sec.
taxpayer/
2313, CMO 3-2002)
adverse to
gov’t?

Is SOF’s
decision Does SOF
No favorable to Yes decide within
No No taxpayer/adverse 30 days?
to gov’t?

No
Yes
Inaction construed as
affirmation of
Decision becomes
commissioner’s decision No
END final &
(or of collector’s decision Appeal
unappealable
in case of inaction by to CTA
commissioner)
Appeal to the
Inaction construed
Court of Tax
as affirmation of
Appeals within 30
Collector’s
days from notice
decision
of decision

Appeal to CTA en
MR within 15 days
banc 15 days from Appeal to the
from receipt of END
receipt of decision Supreme Court
decision
denying MR

*Automatic review is intended to protect the interest of the Government. W/o auto review, the Commissioner and SoF would not know
about the decision laid down by the Collector favoring the taxpayer. Automatic review is necessary because nobody is expected to appeal
the decision of the Collector which is favorable to the taxpayer & adverse to the Government. (Yaokasin v. Commissioner 180 SCTA 591

323
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TABLE OF SPECIAL DUTIES: When Imposed

Anti-Dumping Countervailing
[Sec. 301, TCC [Sec. 302 as Marking Discriminatory
Safeguard [RA 8800]
as amended by amended by [Sec. 303] [Sec. 304]
RA 8752] RA 8751]
Where a Whenever any If at the time Whenever the [Sec 5] [Sec 21] Special
product or product, of President finds General Safeguard
commodity is commodity or importation that the public Safeguard Measure for
imported in article of any article [or interest will be Measure: Agricultural
the Philippines commerce is its container served Whenever Products:
at an export granted if the article thereby, there is a Imposed upon
price less than directly or cannot be additional positive final agricultural
the normal indirectly by marked], is customs duty determination products,
value in the the not marked in shall be of the consistent with
ordinary government in in any official imposed upon Commission Phil
course of trade the country of language of articles wholly that a product international
for the like origin or the or in part the is being treaty
product or exportation, Philippines growth or imported into obligations, if
article destines any kind or and in a product of, or the country in its:
for form of conspicuous imported in a increased (a) Cumulative
consumption specific place as vessel of, any quantities, import
in the subsidy upon legibly, foreign whether volume in a
exporting the indelibly and country absolute or given year
country or production, permanently whenever he relative to the exceeds its
materially manufacture as the nature shall find as a domestic trigger
regarding or exportation of the article fact that such production, as volume
establishment of such (or country — to be a subject to
of a domestic product, container). substantial the
industry commodity or This is used (1) Imposes, cause of conditions
producing the article, and the to prevent directly or serious injury under Sec.
like product importation of deception of indirectly, or threat 23, RA
[Sec. 3, RA such consumers. upon any Phil thereof to the 8800, or
8752] subsidized product domestic but not
product, has unreasonable industry; currently;
caused or charge, however, in and
threatens to exaction, the case of (b) Actual CIF
cause material regulation or non- import
injury to a limitation agricultural price is less
domestic which is not products, the than its
industry or has equally Secretary of trigger
materially enforced upon Agriculture price
retarded the the like shall first subject to
growth or articles of establish that conditions
prevents the other foreign the application under Sec.
establishment countries; or of such 24, RA

324
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

Anti-Dumping Countervailing
[Sec. 301, TCC [Sec. 302 as Marking Discriminatory
Safeguard [RA 8800]
as amended by amended by [Sec. 303] [Sec. 304]
RA 8752] RA 8751]
of a domestic safeguard 8800
industry (2) measures will
Discriminates be in the
in fact against public interest
the commerce
of the
Philippines, as
to place the
commerce of
the Philippines
at a
disadvantage
compared with
the commerce
of any foreign
country.

325
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TABLE OF SPECIAL DUTIES: Imposing Authority and Amount

Anti-
Dumping Countervailing
[Sec. 301, [Sec. 302 as Marking Discriminatory
Safeguard [RA 8800]
TCC as amended by RA [Sec. 303] [Sec. 304]
amended by 8751]
RA 8752]
Secretary of Trade and Commissioner President For non- Secretary of
Industry - non-agricultural of Customs [through a agricultural Agriculture
products proclamation] products:
Secretary of Agriculture - Secretary of
agricultural products Trade and
Tariff Commission - decides Industry
whether or not to impose anti- For
dumping/countervailing duty agricultural
products:
Secretary of
Agriculture

Anti- Equivalent to 5% ad valorem Not exceeding tariff increase, For a]:

Dumping the subsidy of the articles 100% ad either ad
Duty = valorem upon valorem or appropriately
Normal the articles specific, or set to a level
Value - both, to be not exceeding
Export Price paid through one-third of
a cash bond the applicable
set at a level out-quota
sufficient to customs duty
redress or on the
prevent injury agricultural
to the product under
domestic consideration
industry [Sec. in the year
8, RA 8800] when it is
imposed

For b],
compute as
follows:
0 - if price
difference is at
most 10% of
the trigger
price
30% of the

326
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

Anti-
Dumping Countervailing
[Sec. 301, [Sec. 302 as Marking Discriminatory
Safeguard [RA 8800]
TCC as amended by RA [Sec. 303] [Sec. 304]
amended by 8751]
RA 8752]
amount by
which the price
difference
exceeds 10% of
the trigger
price
50% - if it
exceeds 40%
but less than
60%
70% - if it
exceeds 60 but
at most 75%
90% - if it
exceeds 75%
obliterated, destroyed or permanently
Notes: concealed
Exceptions to the Marking of Articles (in the
following situations, the containers shall be (8) An ultimate purchaser, by reason of the
the one subject to marking): character of such article or by reason of the
(1) Article is incapable of being marked circumstance of its importation, must
(2) Article cannot be marked prior to shipment necessarily know the country of origin of
to the Philippines without injury such article even though it is not marked to
(3) Article cannot be marked prior to shipment indicate its origin
to the Philippines, except at an expense (9) Article was produced more than twenty
economically prohibitive of its importation years prior to its importation into the
(4) Marking of a container of such article will Philippines
reasonably indicate the origin of such (10) Article cannot be marked after importation
article except at an expense which is economically
(5) Article is a crude substance prohibitive, and the failure to mark the
(6) Article is imported for use by the importer article before importation was not due to
and not intended for sale in its imported or any purpose of the importer, producer,
any other form seller or shipper to avoid compliance with
(7) Article is to be processed in the Philippines this section
by the importer or for his account
otherwise than for the purpose of
concealing the origin of such article and in
such manner that any mark contemplated
by this section would necessarily be

327
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X. Judicial Remedies (3) Decisions of the Commissioner of Customs

in cases involving liability for customs
duties, fees or other money charges,
A. JURISDICTION OF THE seizure, detention or release of property
COURT OF TAX APPEALS affected, fines, forfeitures or other
B. penalties in relation thereto, or other
A.1. CIVIL TAX CASES matters arising under the Customs Law or
I. EXCLUSIVE ORIGINAL JURISDICTION other laws administered by the Bureau of
Tax collection cases involving final and Customs;
executory assessments for taxes, fees, charges (4) Decisions of the Secretary of Finance on
and penalties, where the principal amount of customs cases elevated to him
taxes and fees, exclusive of charges and automatically for review from decisions of
penalties, claimed is one million pesos or more. the Commissioner of Customs which are
adverse to the Government under Section
2315 of the Tariff and Customs Code;
II. EXCLUSIVE APPELLATE JURISDICTION
(5) Decisions of the Secretary of Trade and
CTA DIVISION
Industry, in the case of non-agricultural
(1) Decisions and Inaction of the
product, commodity or article, and the
Commissioner of Internal Revenue in cases
Secretary of Agriculture in the case of
involving disputed assessments, refunds of
agricultural product, commodity or article,
internal revenue taxes, fees or other
involving dumping and countervailing
charges, penalties in relation thereto, or
duties under Section 301 and 302,
other matters arising under the National
respectively, of the Tariff and Customs
Internal Revenue or other laws
Code, and safeguard measures under
administered by the Bureau of Internal
Republic Act No. 8800, where either party
Revenue;
may appeal the decision to impose or not
Inaction of the Commissioner shall be
to impose said duties. [Sec. 7, RA No. 1125
deemed a denial in which the taxpayer may
as amended]
appeal.
Inaction does not necessarily constitute
CTA EN BANC
a formal decision and the taxpayer may opt
(1) Decisions or resolutions on motions for
to await the final decision of the
reconsideration or new trial of the Court in
Commissioner by constitute a formal
Divisions in the exercise of its exclusive
decision and the taxpayer may opt to await
appellate jurisdiction over:
the final decision of the Commissioner
(2) Cases arising from administrative agencies
beyond the 180 days and may appeal such
– Bureau of Internal Revenue, Bureau of
final decision.
Customs, Department of Finance,
For claim for refund, the taxpayer must
Department of Trade and Industry,
file a petition for review with the CTA prior
Department of Agriculture;
to the expiration of the two year
(3) Local tax cases decided by the Regional
prescriptive period.
Trial Courts in the exercise of their original
(2) Decisions, orders or resolutions of the RTC
jurisdiction; and
in local tax cases and in tax collection
(4) Tax collection cases decided by the
cases originally decided or resolved by
Regional Trial Courts in the exercise of
them in their original jurisdiction.
their original jurisdiction involving final

328
UP COLLEGE OF LAW
and executory assessments for taxes, fees,
charges and penalties, where the principal
amount of taxes and penalties claimed is
less than one million pesos;
(5) Decisions, resolutions or orders of the
Regional Trial Courts in local tax cases and
in tax collection cases decided or resolved
by them in the exercise of their appellate
jurisdiction;
(6) Decisions, resolutions or orders on motions
for reconsideration or new trial of the Court
in Division in the exercise of its exclusive
original jurisdiction over tax collection
cases;
(7) Decisions of the Central Board of
Assessment Appeals (CBAA) in the
exercise of its appellate jurisdiction over
cases involving the assessment and
taxation of real property originally decided
by the provincial or city board of
assessment appeals;
A.2. CRIMINAL CASES
[Sec. 7, RA 1125 as amended]
I. EXCLUSIVE ORIGINAL JURISDICTION
All criminal offenses arising from violations of
the National Internal Revenue Code or Tariff
and Customs Code and other laws
administered by the Bureau of Internal
Revenue or the Bureau of Customs. Principal
amount of taxes and fees, exclusive of charges
and penalties, claimed is more than or equal to
One million pesos (P1,000,000.00).
The filing of the criminal action being deemed
to necessarily carry with it the filing of the civil
action, and no right to reserve the filling of
such civil action separately from the criminal
action will be recognized.
TAXATION 2 TAXATION LAW
II. EXCLUSIVE APPELLATE JURISDICTION
IN CRIMINAL CASES
CTA DIVISION
(1) Over appeals from the judgments,
resolutions or orders of the Regional Trial
Courts in tax cases originally decided by
them, in their respected territorial
jurisdiction.
(2) Over petitions for review of the judgments,
resolutions or orders of the Regional Trial
Courts in the exercise of their appellate
jurisdiction over tax cases originally
decided by the Metropolitan Trial Courts,
Municipal Trial Courts and Municipal
Circuit Trial Courts in their respective
jurisdiction.
CTA EN BANC
(1) Decisions, resolutions or orders on motions
for reconsideration or new trial of the Court
in Division in the exercise of its exclusive
original jurisdiction over cases involving
criminal offenses arising from violations of
the National Internal Revenue Code or the
Tariff and Customs Code and other laws
administered by the Bureau of Internal
Revenue or Bureau of Customs;
(2) Decisions, resolutions or orders on motions
for reconsideration or new trial of the Court
in Division in the exercise of its exclusive
appellate jurisdiction over criminal
offenses mentioned in the preceding
subparagraph; and
(3) Decisions, resolutions or orders of the
Regional trial Courts in the exercise of their
appellate jurisdiction over criminal
offenses mentioned in subparagraph [f].
B. JUDICIAL PROCEDURES
B.1. JUDICIAL ACTION FOR COLLECTION
OF TAXES
I. INTERNAL REVENUE TAXES
The remedies for the collection of internal
revenue taxes, fees or charges, and any
329
UP COLLEGE OF LAW TAXATION 2
increment thereto resulting from delinquency
can be through the institution of a civil or
criminal action. [Sec. 205, NIRC]
Note: Please refer to Taxpayer’s Remedies (B.
Collection)
When this remedy is resorted to:
The tax assessment becomes final and
executory because of the failure to appeal.
Even pending decision of the administrative
protest [CIR v. Union Shipping, 1990]
II. LOCAL TAXES
The LGU concerned may enforce the collection
of delinquent taxes, fees, charges or other
revenues by civil action in any court of
competent jurisdiction. The civil action shall be
filed by the local treasurer. [Sec. 183, LGC]
MTC/RTC depending on jurisdictional threshold
amount.
Prescriptive period
Local taxes, fees, or charges may be collected
within 5 years from the date of assessment by
administrative or judicial action.
No judicial or administrative action for
collection can be instituted after lapse of the
period for assessment except when there is
fraud or intent to evade tax. [Sec. 194 LGC]
The running of the periods of prescription shall
be suspended for the time during which:
(1) The treasurer is legally prevented from
making the assessment of collection;
(2) The taxpayer requests for a reinvestigation
and executes a waiver in writing before
expiration of the period within which to
assess or collect; and
(3) The taxpayer is out of the country or
otherwise cannot be located. [Sec. 194,
LGC]
330
TAXATION LAW
B.2. CIVIL CASES
I. WHO MAY APPEAL, MODE OF APPEAL,
EFFECT OF APPEAL
Appeal to CTA Division
(1) A party aggrieved or adversely affected by
the decision or ruling or inaction of
(a) The Commissioner of Internal
Revenue;
(b) The Commissioner of Customs;
(c) The Secretary of Finance;
(d) The Secretary of Trade and Industry;
(e) The Secretary of Agriculture; or
(f) The RTC exercising original jurisdiction
(2) may appeal within 30 days from the receipt
of the copy of the decision or ruling, or the
expiration of the period fixed by law for the
Commissioner to decide, to the Court of
Tax Appeals Division.
Mode of Appeal: Rule 42
Aggrieved party may file a motion for
reconsideration or new trial within 15 days from
receipt of the copy of the decision.
Appeal to CTA en Banc
A party adversely affected by a decision or
resolution of a Division of the Court on a
motion for reconsideration or new trial may
appeal within 15 days from receipt of the copy
of the decision.
Mode of Appeal: Rule 43
A party adversely affected by a decision or
ruling of the Central Board of Assessment
Appeals and the Regional Trial Court in the
exercise of their appellate jurisdiction may
appeal within 30 days from the receipt of the
copy of the decision.
SUSPENSION OF COLLECTION OF TAX
General rule: No appeal taken to the Court
shall suspend the payment, levy, distraint, or
sale of any property of the taxpayer for the
satisfaction of his tax liability as provided
under existing laws.
UP COLLEGE OF LAW TAXATION 2
Exception: Where the collection of the amount
of the taxpayer’s liability, sought by means of a
demand for payment, by levy, distraint or sale
of any property of the taxpayer, or by whatever
means, as provided under existing laws, may
jeopardize the interest of the Government or
the taxpayer, an interested party may file a
motion for the suspension of the collection of
the tax liability
Injunction not available to restrain collection
No court shall have authority to grant an
injunction to restrain the collection of any
national internal revenue tax, fee or charge
imposed by the Code. [Sec. 217, NIRC]
Note: The Local Government Code does not
have a provision prohibiting injunction in the
collection of tax.
TAKING OF EVIDENCE
The Court may receive evidence in the
following cases:
(1) In all cases falling within the original
jurisdiction of the Court in Division
pursuant to Section 3, Rule 4 of these
Rules; and
(2) In appeals in both civil and criminal cases
where the Court grants a new trial
pursuant to Section 2, Rule 53 and Section
12, Rule 124 of the Rules of Court. [Sec. 2,
Rule 12, A.M. No. 05-11-07]
Taking of evidence by:
Justice—
The Court may, motu proprio or upon proper
motion, direct that a case, or any issue therein,
be assigned to one of its members for the
taking of evidence, when the determination of
a question of fact arises at any stage of the
proceedings, or when the taking of an account
is necessary, or when the determination of an
issue of fact requires the examination of a long
331
TAXATION LAW
account. The hearing before such justice shall
proceed in all respects as though the same had
been made before the Court.
Upon the completion of such hearing, the
justice concerned shall promptly submit to the
Court a written report thereon, stating therein
his findings and conclusions. Thereafter, the
Court shall render its decision on the case,
adopting, modifying, or rejecting the report in
whole or in part, or, the Court may, in its
discretion, recommit it to the justice with
instructions, or receive further evidence. [Sec.
12, RA No. 1125, as amended; also Sec. 3, Rule 12,
A.M. No. 05-11-07]
Court Official –
In default or ex parte hearings, or in any case
where the parties agree in writing, the Court
may delegate the reception of evidence to the
Clerk of Court, the Division Clerks of Court,
their assistants who are members of the
Philippine bar, or any Court attorney. The
reception of documentary evidence by a Court
official shall be for the sole purpose of marking,
comparison with the original, and
identification by witnesses of such
documentary evidence. The Court official shall
have no power to rule on objections to any
question or to the admission of exhibits, which
objections shall be resolved by the Court upon
submission of his report and the transcripts
within ten days from termination of the hearing.
[Sec. 4, Rule 12, A.M. No. 05-11-07]
MOTION FOR RECONSIDERATION OR
NEW TRIAL
[Rule 15, A.M. No. 05-11-07]
Who: Any aggrieved party may seek a
reconsideration or new trial of any decision,
resolution or order of the Court.
May be opposed by: The adverse party may file
an opposition to the motion for reconsideration
or new trial within ten days after his receipt of
UP COLLEGE OF LAW TAXATION 2
a copy of the motion for reconsideration or new
trial of a decision, resolution or order of the
Court.
When: He shall file a motion for
reconsideration or new trial within fifteen days
from the date he received notice of the decision,
resolution or order of the Court in question.
The Court shall resolve the motion for
reconsideration or new trial within three
months from the time it is deemed submitted
for resolution.
How: The motion shall be in writing stating its
grounds, a written notice of which shall be
served by the movant on the adverse party.
A motion for new trial shall be proved in the
manner provided for proof of motions. A
motion for the cause mentioned in
subparagraph [a] of the preceding section
shall be supported by affidavits of merits which
may be rebutted by counter-affidavits. A
motion for the cause mentioned in
subparagraph (b) of the preceding section
shall be supported by affidavits of the
witnesses by whom such evidence is expected
to be given, or by duly authenticated
documents which are proposed to be
introduced in evidence.
A motion for reconsideration or new trial that
does not comply with the foregoing provisions
shall be deemed pro forma, which shall not toll
the reglementary period for appeal.
Effect: The filing of a motion for
reconsideration or new trial shall suspend the
running of the period within which an appeal
may be perfected.
Grounds: A motion for new trial may be based
on one or more of the following causes
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TAXATION LAW
materially affecting the substantial rights of
the movant:
(1) Fraud, accident, mistake or excusable
negligence which ordinary prudence could
not have guarded against and by reason of
which such aggrieved party has probably
been impaired in his rights; or
(2) Newly discovered evidence, which he could
not, with reasonable diligence, have
discovered and produced at the trial and,
which, if presented, would probably alter
the result.
A motion for new trial shall include all grounds
then available and those not included shall be
deemed waived.
Restrictions: No party shall be allowed to file a
second motion for reconsideration of a decision,
final resolution or order; or for new trial.
II. APPEAL TO THE CTA, EN BANC
No civil proceeding involving matter arising
under the National Internal Revenue Code, the
Tariff and Customs Code or the Local
Government Code shall be maintained, except
as herein provided, until and unless an appeal
has been previously filed with the CTA and
disposed of in accordance with the provisions
of this Act.
A party adversely affected by a resolution of a
Division of the CTA on a motion for
reconsideration or new trial, may file a petition
for review with the CTA en banc. [Sec. 18, RA
No. 1125 as amended]
III. PETITION FOR REVIEW ON
CERTIORARI TO THE SUPREME COURT
[Rule 16, A.M. No. 05-11-07]
A party adversely affected by a decision or
ruling of the Court en banc may appeal by
filing with the Supreme Court a verified
petition for review on certiorari within fifteen
days from receipt of a copy of the decision or
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

resolution, as provided in Rule 45 of the Rules INSTITUTION ON CIVIL ACTION IN

of Court. If such party has filed a motion for CRIMINAL ACTION
reconsideration or for new trial, the period In cases within the jurisdiction of the Court, the
herein fixed shall run from the party’s receipt criminal action and the corresponding civil
of a copy of the resolution denying the motion action for the recovery of civil liability for taxes
for reconsideration or for new trial. and penalties shall be deemed jointly
instituted in the same proceeding. The filing of
The motion for reconsideration or for new trial the criminal action shall necessarily carry with
filed before the Court shall be deemed it the filing of the civil action. No right to
abandoned if, during its pendency, the movant reserve the filing of such civil action separately
shall appeal to the Supreme Court. from the criminal action shall be allowed or
recognized.
B.3. CRIMINAL CASES
I. INSTITUTION AND PROSECUTION OF II. APPEAL AND PERIOD TO APPEAL
CRIMINAL ACTIONS CRIMINAL CASES
INSTITUTION OF CRIMINAL ACTION Period to Mode of
Deciding Body
Instituted by the filing an information in the Appeal Appeal
name of the People of the Philippines Regional 15 days from Appeal
Trial Court in receipt of pursuant to
Those involving violations of the NIRC and the exercise decision Sec. 3[a] and
other laws enforced by the BIR: Must be of its original 6, Rule 122 of
approved by the Commissioner of Internal jurisdiction the Rules of
Revenue [to CTA Court
Division]
Those involving violations of the tariff and CTA Division 15 days from Petition for
Customs Code and other laws enforced by the [to CTA En receipt of review as
Bureau of Customs: Must be approved by the Banc] decision provided in
Commissioner of Customs Rule 43 of the
May be Rules of
Institution shall interrupt the running of the extended for Court
period of prescription good cause
for not more The Court en
PROSECUTION OF CRIMINAL ACTION than 15 days banc shall act
Conducted and prosecuted under the direction on the
and control of the public prosecutor appeal.
Regional Trial 15 days from Petition for
Those involving violations of the NIRC and Courts in the receipt of review as
other laws enforced by the BIR or violations of exercise of decision provided in
the tariff and Customs Code and other laws their Rule 43 of the
enforced by the Bureau of Customs - The appellate Rules of
prosecution may be conducted by their jurisdiction Court
respective duly deputized legal officers. [To CTA
division]

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Solicitor General as counsel for the People and
government officials sued in their official
capacity
The Solicitor General shall represent the
People of the Philippines and government
officials sued in their official capacity in all
cases brought to the Court in the exercise of its
appellate jurisdiction. He may deputize the
legal officers of the Bureau of Internal Revenue
in cases brought under the National Internal
Revenue Code or other laws enforced by the
Bureau of Internal Revenue, or the legal
officers of the Bureau of Customs in cases
brought under the Tariff and Customs Code of
the Philippines or other laws enforced by the
Bureau of Customs, to appear in behalf of the
officials of said agencies sued in their official
capacity: Provided, however, such duly
deputized legal officers shall remain at all
times under the direct control and supervision
of the Solicitor General.
III. PETITION FOR REVIEW ON
CERTIORARI TO THE SUPREME COURT
A party adversely affected by a decision or
ruling of the CTA en banc may file with the
Supreme Court a verified petition for review on
certiorari pursuant to Rule 45 of the 1997
Rules of Civil Procedure. [Sec. 19, R.A. No. 1125
as amended]
C. TAXPAYER’S SUIT IMPUGNING
THE VALIDITY OF TAX MEASURES OR
ACTS OF TAXING AUTHORITIES
C.1. TAXPAYER’S SUIT, DEFINED
Taxpayer’s suit – refers to a case where the act
complained of directly involves the illegal
disbursement of public funds derived from
taxation. [Kilosbayan v. Guingona, Jr. (1994)]
C.2. DISTINGUISHED FROM CITIZEN’S
SUIT
The plaintiff in a taxpayer's suit is in a different
category from the plaintiff in a citizen's suit. In
TAXATION 2 TAXATION LAW
the former, the plaintiff is affected by the
expenditure of public funds, while in the latter,
he is but the mere instrument of the public
concern. [De Castro v. Judicial and Bar Council
(2010)]
C.3. REQUISITES FOR CHALLENGING
THE CONSTITUTIONALITY OF A TAX
MEASURE OR ACT OF TAXING
AUTHORITY
I. CONCEPT OF LOCUS STANDI AS
APPLIED IN TAXATION
The doctrine of locus standi is the right of
appearance in a court of justice. The doctrine
requires a litigant to have a material interest in
the outcome of a case. In private suits, locus
standi requires a litigant to be a "real party in
interest," which is defined as "the party who
stands to be benefited or injured by the
judgment in the suit or the party entitled to the
avails of the suit."
In public suits, this Court recognizes the
difficulty of applying the doctrine especially
when plaintiff asserts a public right on behalf
of the general public because of conflicting
public policy issues. On one end, there is the
right of the ordinary citizen to petition the
courts to be freed from unlawful government
intrusion and illegal official action. At the other
end, there is the public policy precluding
excessive judicial interference in official acts,
which may unnecessarily hinder the delivery of
basic public services.
The Court has adopted the "direct injury test"
to determine locus standi in public suits. In
People v. Vera, it was held that a person who
impugns the validity of a statute must have "a
personal and substantial interest in the case
such that he has sustained, or will sustain
direct injury as a result." The "direct injury test"
in public suits is similar to the "real party in
interest" rule for private suits under Section 2,
Rule 3 of the 1997 Rules of Civil Procedure.
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UP COLLEGE OF LAW TAXATION 2
[Planter’s Products, Inc. v. Fertiphil
Corporation, G.R. No. 166006, March 14,
2008]
As applied to taxation:
It is well-stated that the validity of a statute
may be contested only by one who will sustain
a direct injury in consequence of its
enforcement. Yet, there are many decisions
nullifying, at the instance of taxpayers, laws
providing for the disbursement of public funds,
upon the theory that "the expenditure of public
funds by an officer of the State for the purpose
of administering an unconstitutional act
constitutes a misapplication of such funds,"
which may be enjoined at the request of a
taxpayer. [Pascual v. Secretary of Public Works
(1960)]
A taxpayer is allowed to sue where there is a
claim that public funds are illegally disbursed,
or that the public money is being deflected to
any improper purpose, or that there is wastage
of public funds through the enforcement of an
invalid or unconstitutional law. A person suing
as a taxpayer, however, must show that the act
complained of directly involves the illegal
disbursement of public funds derived from
taxation. He must also prove that he has
sufficient interest in preventing the illegal
expenditure of money raised by taxation and
that he will sustain a direct injury because of
the enforcement of the questioned statute or
contract. In other words, for a taxpayer’s suit to
prosper, two requisites must be met:
(1) public funds derived from taxation are
disbursed by a political subdivision or
instrumentality and in doing so, a law is
violated or some irregularity is committed and
(2) the petitioner is directly affected by the
alleged act. [Mamba v. Lara, G.R. No. 165109,
Dec. 14, 2009]
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TAXATION LAW
II. DOCTRINE OF TRANSCENDENTAL
IMPORTANCE
Recognizing that a strict application of the
"direct injury" test may hamper public interest,
this Court relaxed the requirement in cases of
"transcendental importance" or with "far
reaching implications." Being a mere
procedural technicality, it has also been held
that locus standi may be waived in the public
interest. [Ibid]
Planters Products, Inc. v. Fertiphil Corp.: Even
assuming arguendo that there is no direct
injury, We find that the liberal policy
consistently adopted by this Court on locus
standi must apply. The issues raised by
Fertiphil are of paramount public importance.
It involves not only the constitutionality of a tax
law but, more importantly, the use of taxes for
public purpose. Former President Marcos
issued LOI No. 1465 with the intention of
rehabilitating an ailing private company. This
is clear from the text of the LOI. PPI is
expressly named in the LOI as the direct
beneficiary of the levy. Worse, the levy was
made dependent and conditional upon PPI
becoming financially viable. The LOI provided
that "the capital contribution shall be collected
until adequate capital is raised to make PPI
viable."
The constitutionality of the levy is already in
doubt on a plain reading of the statute. It is
Our constitutional duty to squarely resolve the
issue as the final arbiter of all justiciable
controversies. The doctrine of standing, being
a mere procedural technicality, should be
waived, if at all, to adequately thresh out an
important constitutional issue.
UP COLLEGE OF LAW TAXATION 2
III. RIPENESS FOR JUDICIAL
DETERMINATION
“Ripeness for judicial determination” means
that litigation is inevitable or there is no
adequate relief available in any other form or
proceeding.
CJH Development Corp. v. BIR [GR No. 172457,
Dec. 24, 2008]: However, CJH is not left
without recourse. The Tariff and Customs Code
provides for the administrative and judicial
remedies available to a taxpayer who is
minded to contest an assessment, subject of
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TAXATION LAW
course to certain reglementary periods. The
TCC provides that a protest can be raised
provided that payment first be made of the
amount due. The decision of the Collector can
be reviewed by the Commissioner of Customs
who can approve, modify or reverse the
decision or action of the Collector. If the party
is not satisfied with the ruling of the
Commissioner, he may file the necessary
appeal to the Court of Tax Appeals. Afterwards,
the decision of the Court of Tax Appeals can be
appealed to this Court.