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THE ATENEO CENTRAL BAR OPERATIONS 2020-2021

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Ad maiorem Dei gloriam.

 GRACE ANN Q. BAJO
TIMOTHY JACOB J. PALAFOX
20 21 C H AI R PE R S O N S

KATHLEEN KAE Z. ENDOZO MEG V. BUENSALIDO

ARISTEO RAPHAEL T. MARBELLA III MARIE KAYLA C. GALIT
20 21 AD MI NI ST R A TI V E CO M MI T TE E HE A D S 20 21 A C AD E MI C C O M MI T TE E HE AD S

CARLOS ROSAURO N. MANALO

MA. CRISTINA ASUNCION
20 21 A C AD E MI C C O M MI T TE E U N D E R ST U D I E S

DEAN LILY K. GRUBA

ATTY. IGNATIUS MICHAEL D. INGLES
ATTY. TERENCE CONRAD H. BELLO
ATTY. MICHAEL DANA N. MONTERO
20 21 T AX ATI ON L A W F A CU L TY A D V I S E R S

IRIS GIZELLE S. AGUS JILL EILEEN P. CABAIS

PIA JUSTINE S. RODULFO LILY AMELIA JOY M. LOFRANCO
KAYE GEOZEN T. EBUENGAN AINA RAE L. CORTEZ
20 21 T AX ATI ON L A W SU BJE CT HE AD S 20 21 T AX ATI ON L A W U ND E R S TU D I E S
 JONATHAN DF. TORRES
GAEL PAULINE R. MORALES
RIA ALEXANDRA D. CASTILLO
NICOLE ANN C. PAGLICAWAN
JULIANNE BEATRICE N. ROSARIO
20 21 C R E ATI V E S

JOSEPH BILL P. QUINTOS STEFI MONIKA S. SUERO

SAMANTHA J. MAGAOAY KATHLEEN C. ROMINA
FREEDOM JUSTIN B. HERNANDEZ SERMAE ANGELA G. PASCUAL
20 21 TE C H NI CA L 2 02 1 FI N AN CE

AINA RAE L. CORTEZ CHRISTIAN GIO R. SENARLO

LUMINA ALINEA O. AQUINO MAEDEN M. BORCELANGO
ANNA MARIE GRACE M. ANTONIO IMI LIZA B. ESPINA
MARY STEPHANIE CABRERA CRUZ FRANCIS SABIN BELTRAN
CLARISSE MAE D. ZAPLAN ANTHONY JEFFERSON Y. JULIO
20 21 S PE CI AL P R OJ E C TS 20 21 LO GI STI C S

DONN MARIE ISABELLE BALINA MELISSA GABRIELLE P. REMULLA

ALISHA BEATRICE A. VERGARA GRACIELLA RACHEL D. ROBLES
PRISHA LEIGH D. CRUZ DANELLA DIANE D. DIMAPILIS
ALITHEA C. SORIANO REYNALDO M. REVECHE
AARON C. CHENG CZAREANA JOUSCH T. PARRA
20 21 M AR K E TI N G 20 21 PU BLI C R E L A TI ON S
 JUSTIN LUIGI V. HERNANDEZ
20 2 0 C HAI R P E R SO N

YVES PETER CARLO D. MEDINA THERESE ANNE C. ESPINOSA

KATRINA ISABELLE G. PIMENTEL HAZEL VIANCA I. ORTEGA
GENICA GALE F. LAHOZ VINCE ZYRENCE T. BARLONGAY
20 2 0 AD MI NI S TR ATI V E CO M MI T TE E HE A D S 20 2 0 HO TE L C O M MI TTE E HE A D S

EUNICE A. MALAYO MEG V. BUENSALIDO

FRANCES CHRISTINE P. SAYSON MARIE KAYLA C. GALIT
20 2 0 A CAD E MI C CO M MI T TE E HE AD S 2 02 0 A CA D E M I C CO M MIT T E E U N D E R S T U DI E S

ATTY. IGNATIUS MICHAEL D. INGLES

ATTY. TERENCE CONRAD H. BELLO
ATTY. MICHAEL DANA N. MONTERO

20 2 0 T AX ATI O N L A W F A CU L TY A D V I S E R S

KEVIN JOHN B. LUMBRE IRIS GIZELLE S. AGUS

JOANNA PAULINE T. BITOIN PIA JUSTINE S. RODULFO
CATHERINE JOY T. LIM KAYE GEOZEN T. EBUENGAN

20 2 0 T AX ATI O N L A W SU BJE CT HE AD S 20 2 0 T AX ATI O N L A W U ND E R S TU D I E S

SHANEENA KUMAR SAAB CORPUS GERARD ERA

JULIA HANNA SORIANO MAIS ZABALA ANNA THERESSE VILLAMIN
STEFI SUERO ZYRA KEE DAVE UMERAN
XANDER BLANCO
20 2 0 T AX ATI O N L A W V OLU NTE E R S
ATENEO CENTRAL
BAR OPERATIONS 2020/21 TAXATION LAW

TABLE OF CONTENTS

I. GENERAL PRINCIPLES __________________________________________________________________________ 2

A. CONCEPT AND PURPOSE OF TAXATION ________________________________________________________ 3
1. DEFINITION _______________________________________________________________________________ 3
2. PURPOSE _________________________________________________________________________________ 3
3. DISTINGUISH: TAX AND OTHER FORMS OF EXACTIONS _________________________________________ 4
B. DISTINGUISH: POWER OF TAXATION, POLICE POWER, AND EMINENT DOMAIN ______________________ 6
C. THEORY AND BASIS OF TAXATION_____________________________________________________________ 6
1. LIFEBLOOD THEORY _______________________________________________________________________ 6
2. NECESSITY THEORY _______________________________________________________________________ 6
3. BENEFITS-RECEIVED THEORY (SYMBIOTIC RELATIONSHIP THEORY) _____________________________ 7
D. JURISDICTION OVER SUBJECTS AND OBJECTS _________________________________________________ 7
E. PRINCIPLES OF A SOUND TAX SYSTEM _________________________________________________________ 7
1. FISCAL ADEQUACY_________________________________________________________________________ 7
2. THEORETICAL JUSTICE _____________________________________________________________________ 7
3. ADMINISTRATIVE FEASIBILITY _______________________________________________________________ 7
F. INHERENT AND CONSTITUTIONAL LIMITATIONS ON TAXATION ____________________________________ 7
G. STAGES OR ASPECTS OF TAXATION __________________________________________________________ 13
DEFINITION, NATURE, AND CHARACTERISTICS OF TAXES _________________________________________ 13
SOURCES OF TAX LAWS _____________________________________________________________________ 13
H. REQUISITES OF A VALID TAX_________________________________________________________________ 13
I. KINDS OF TAXES ____________________________________________________________________________ 13
J. GENERAL CONCEPTS IN TAXATION ___________________________________________________________ 14
1. PROSPECTIVITY OF TAX LAWS _____________________________________________________________ 14
2. IMPRESCRIPTIBILITY ______________________________________________________________________ 15
3. SITUS OF TAXATION _______________________________________________________________________ 15
4. DOUBLE TAXATION________________________________________________________________________ 16
A. DIRECT DOUBLE TAXATION (STRICT SENSE) _______________________________________________ 16
B. INDIRECT DOUBLE TAXATION (BROAD SENSE) _____________________________________________ 16
C. TAX TREATIES AS RELIEF FROM DOUBLE TAXATION ________________________________________ 17
5. ESCAPE FROM TAXATION __________________________________________________________________ 17
A. SHIFTING OF TAX BURDEN ______________________________________________________________ 17
B. DISTINGUISH: TAX AVOIDANCE AND TAX EVASION __________________________________________ 17
6. EXEMPTION FROM TAXATION ______________________________________________________________ 18
7. EQUITABLE RECOUPMENT _________________________________________________________________ 19
8. PROHIBITION ON COMPENSATION AND SET-OFF ______________________________________________ 19
9. COMPROMISE ____________________________________________________________________________ 20
10. TAX AMNESTY ___________________________________________________________________________ 20
K. CONSTRUCTION AND INTERPRETATION OF TAX LAWS, RULES AND REGULATIONS_________________ 23
II. NATIONAL TAXATION __________________________________________________________________________ 26
A. TAXING AUTHORITY ________________________________________________________________________ 28
1. JURISDICTION, POWER, AND FUNCTIONS OF THE COMMISSIONER OF INTERNAL REVENUE ________ 28
2. RULE-MAKING AUTHORITY OF THE SECRETARY OF FINANCE ___________________________________ 31
B. INCOME TAX _______________________________________________________________________________ 33
1. DEFINITION, NATURE, AND GENERAL PRINCIPLES ____________________________________________ 33
A. INCOME TAX SYSTEMS __________________________________________________________________ 33
B. FEATURES OF THE PHILIPPINE INCOME TAX LAW ___________________________________________ 33

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C. CRITERIA IN IMPOSING PHILIPPINE INCOME TAX ___________________________________________ 34

D. GENERAL PRINCIPLES OF INCOME TAXATION ______________________________________________ 34
E. TYPES OF PHILIPPINE INCOME TAXES ____________________________________________________ 34
F. KINDS OF TAXPAYERS __________________________________________________________________ 34
G. TAXABLE PERIOD ______________________________________________________________________ 40
2. CONCEPT OF INCOME _____________________________________________________________________ 41
A. DEFINITION ____________________________________________________________________________ 41
B. WHEN INCOME IS TAXABLE ______________________________________________________________ 41
C. TESTS IN DETERMINING WHETHER INCOME IS EARNED FOR TAX PURPOSES __________________ 42
D. METHODS OF ACCOUNTING _____________________________________________________________ 43
E. SITUS OF INCOME ______________________________________________________________________ 43
3. GROSS INCOME __________________________________________________________________________ 46
A. DEFINITIONS ___________________________________________________________________________ 46
B. DISTINGUISH: GROSS INCOME, NET INCOME, AND TAXABLE INCOME _________________________ 47
C. SOURCES OF INCOME SUBJECT TO TAX __________________________________________________ 48
D. EXCLUSIONS __________________________________________________________________________ 60
4. DEDUCTIONS FROM GROSS INCOME ________________________________________________________ 63
A. GENERAL RULE ________________________________________________________________________ 63
B. CONCEPT OF RETURN OF CAPITAL _______________________________________________________ 63
C. DISTINGUISH: ITEMIZED DEDUCTION V. OPTIONAL STANDARD DEDUCTION ____________________ 63
E. ITEMS NOT DEDUCTIBLE ________________________________________________________________ 75
5. INCOME TAX ON INDIVIDUALS ______________________________________________________________ 76
A. INCOME TAX ON RESIDENT CITIZENS, NON-RESIDENT CITIZENS AND RESIDENT ALIENS_________ 76
B. INCOME TAX ON NON-RESIDENT ALIENS ENGAGED IN TRADE OR BUSINESS (NRA-ETB)_________ 81
C. INCOME TAX ON NON-RESIDENT ALIENS NOT ENGAGED IN TRADE OR BUSINESS (NRA-NETB) ___ 82
D. ALIENS EMPLOYED BY REGIONAL HEADQUARTERS, REGIONAL OPERATING HEADQUARTERS,
OFFSHORE BANKING UNITS, AND PETROLEUM SERVICE CONTRACTORS ________________________ 82
E. INDIVIDUAL TAXPAYERS EXEMPT FROM INCOME TAX _______________________________________ 83
6. INCOME TAX ON CORPORATIONS ___________________________________________________________ 84
A. DOMESTIC CORPORATIONS _____________________________________________________________ 84
B. RESIDENT FOREIGN CORPORATION ______________________________________________________ 93
C. INCOME TAX ON NON-RESIDENT FOREIGN CORPORATIONS (NRFC) __________________________ 97
D. CORPORATIONS EXEMPT FROM INCOME TAX ______________________________________________ 98
E. TAX ON OTHER BUSINESS ENTITIES: GENERAL PARTNERSHIPS, GENERAL PROFESSIONAL
PARTNERSHIPS, CO-OWNERSHIPS, JOINT VENTURES AND CONSORTIA _________________________ 99
7. FILING OF RETURNS AND PAYMENT ________________________________________________________ 100
A. INDIVIDUAL RETURN ___________________________________________________________________ 100
B. CORPORATE RETURNS ________________________________________________________________ 102
C. RETURN ON CAPITAL GAINS REALIZED FROM SALE OF SHARES OF STOCK AND REAL ESTATE __ 103
8. WITHHOLDING TAX _______________________________________________________________________ 103
A. CONCEPT OF WITHHOLDING TAXES _____________________________________________________ 103
B. FINAL WITHHOLDING TAX _______________________________________________________________ 103
C. CREDITABLE WITHHOLDING TAX ________________________________________________________ 104
D. FRINGE BENEFIT TAX __________________________________________________________________ 105
E. DUTIES OF A WITHHOLDING AGENT ______________________________________________________ 106
C. ESTATE TAX ______________________________________________________________________________ 106
1. BASIC PRINCIPLES, CONCEPT, AND DEFINITION _____________________________________________ 107
2. CLASSIFICATION OF DECEDENT ___________________________________________________________ 108
3. COMPOSITION OF GROSS ESTATE _________________________________________________________ 109
A. ITEMS TO BE INCLUDED IN THE GROSS ESTATE ___________________________________________ 110
B. ALLOWABLE DEDUCTIONS FROM GROSS ESTATE _________________________________________ 111
C. EXCLUSIONS FROM GROSS ESTATE AND EXEMPTIONS OF CERTAIN ACQUISITIONS AND
TRANSMISSIONS ________________________________________________________________________ 115
D. TAX CREDIT FOR ESTATE TAXES PAID TO A FOREIGN COUNTRY ____________________________ 115
E. FILING OF ESTATE TAX RETURNS AND PAYMENT OF ESTATE TAX ___________________________ 116

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D. DONOR’S TAX _____________________________________________________________________________ 116

1. BASIC PRINCIPLES, CONCEPT, AND DEFINITION _____________________________________________ 116
2. REQUISITES OF A VALID DONATION ________________________________________________________ 117
3. TRANSFERS WHICH MAY BE CONSIDERED DONATION ________________________________________ 118
A. TRANSFER FOR LESS THAN AN ADEQUATE CONSIDERATION _______________________________ 118
B. CONDONATION OR REMISSION OF DEBT _________________________________________________ 118
C. RENUNCIATION OF INHERITANCE _______________________________________________________ 118
4. CLASSIFICATION OF DONORS _____________________________________________________________ 119
5. DETERMINATION OF GROSS GIFT __________________________________________________________ 119
A. COMPOSITION OF GROSS GIFT__________________________________________________________ 119
B. VALUATION OF GIFTS MADE IN PROPERTY _______________________________________________ 119
C. EXEMPTION OF CERTAIN GIFTS _________________________________________________________ 119
6. TAX CREDIT FOR DONOR’S TAXES PAID TO A FOREIGN COUNTRY _____________________________ 120
7. FILING OF RETURN AND PAYMENT _________________________________________________________ 121
E. VALUE-ADDED TAX ________________________________________________________________________ 121
1. NATURE AND CHARACTERISTICS OF VALUE-ADDED TAX ______________________________________ 121
2. PERSONS LIABLE TO VALUE-ADDED TAX____________________________________________________ 123
3. IMPOSITION OF VALUE-ADDED TAX ________________________________________________________ 123
A. ON SALE OF GOODS OR PROPERTIES ____________________________________________________ 123
B. ON IMPORTATION OF GOODS ___________________________________________________________ 126
C. ON SALE OF SERVICES AND USE OR LEASE OF PROPERTIES _______________________________ 126
4. ZERO-RATED AND EFFECTIVELY ZERO-RATED SALES OF GOODS OR PROPERTIES AND SERVICES 130
5. VAT-EXEMPT TRANSACTIONS _____________________________________________________________ 133
6. INPUT AND OUTPUT TAX __________________________________________________________________ 138
7. REFUND OR TAX CREDIT OF EXCESS INPUT TAX; PROCEDURE ________________________________ 140
8. COMPLIANCE REQUIREMENTS ____________________________________________________________ 143
A. REGISTRATION ________________________________________________________________________ 143
B. INVOICING REQUIREMENTS_____________________________________________________________ 143
C. FILING OF RETURN AND PAYMENT_______________________________________________________ 144
D. WITHHOLDING OF FINAL VAT ON SALES TO GOVERNMENT _________________________________ 144
E. ADMINISTRATIVE AND PENAL SANCTIONS ________________________________________________ 145
F. PERCENTAGE TAXES: CONCEPT AND NATURE ________________________________________________ 145
G. EXCISE TAX: CONCEPT AND NATURE ________________________________________________________ 145
H. DOCUMENTARY STAMP TAX: CONCEPT AND NATURE __________________________________________ 145
I. TAX REMEDIES UNDER THE NIRC_____________________________________________________________ 146
1. ASSESMENT OF INTERNAL REVENUE TAXES ________________________________________________ 146
A. PROCEDURAL DUE PROCESS IN TAX ASSESSMENTS ______________________________________ 146
B. REQUISITES FOR VALID ASSESSMENT ___________________________________________________ 150
C. TAX DELINQUENCY AND TAX DEFICIENCY ________________________________________________ 151
D. PRESCRIPTIVE PERIOD ASSESSMENT ___________________________________________________ 152
2. TAXPAYER’S REMEDIES __________________________________________________________________ 156
A. PROTESTING AN ASSESSMENT _________________________________________________________ 156
B. RECOVERY OF TAX ERRONEOUSLY OR ILLEGALLY COLLECTED _____________________________ 162
C. POWER OF COMMISSIONER OF INTERNAL REVENUE TO COMPROMISE ______________________ 165
D. NON-RETROACTIVITY OF RULINGS ______________________________________________________ 168
3. GOVERNMENT REMEDIES_________________________________________________________________ 168
4. CIVIL PENALTIES_________________________________________________________________________ 175
A. NEW RULE ON DELINQUENCY INTEREST AND DEFICIENCY INTEREST ________________________ 175
B. SURCHARGE __________________________________________________________________________ 176
C. COMPROMISE PENALTIES ______________________________________________________________ 176
D. FRAUD PENALTY ______________________________________________________________________ 176
III. LOCAL TAXATION ___________________________________________________________________________ 180
A. LOCAL GOVERNMENT TAXATION ____________________________________________________________ 181

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1. FUNDAMENTAL PRINCIPLES _______________________________________________________________ 181

2. NATURE AND SOURCE OF TAXING POWER __________________________________________________ 181
A. GRANT OF LOCAL TAXING POWER UNDER THE LOCAL GOVERNMENT CODE __________________ 181
A. AUTHORITY TO PRESCRIBE PENALTIES FOR TAX VIOLATIONS AND LIMITATIONS THEREON _____ 181
C. AUTHORITY TO GRANT LOCAL TAX EXEMPTIONS __________________________________________ 181
D. WITHDRAWAL OF EXEMPTIONS _________________________________________________________ 181
E. AUTHORITY TO ADJUST LOCAL TAX RATE ________________________________________________ 182
F. RESIDUAL TAXING POWER OF LOCAL GOVERNMENTS _____________________________________ 182
3. SCOPE OF TAXING POWER ________________________________________________________________ 183
4. SPECIFIC TAXING POWER OF LGUS ________________________________________________________ 184
5. COMMON REVENUE-RAISING POWERS OF LGUS _____________________________________________ 191
6. COMMUNITY TAX ________________________________________________________________________ 191
7. COMMON LIMITATIONS ON THE TAXING POWERS OF LGUS ___________________________________ 192
8. REQUIREMENTS OF A VALID TAX ORDINANCE _______________________________________________ 193
9. TAXPAYER’S REMEDIES __________________________________________________________________ 194
A. PROTEST OF ASSESSMENT _____________________________________________________________ 194
B. CLAIM FOR REFUND OR TAX CREDIT FOR ERRONEOUSLY OR ILLEGALLY COLLECTED TAX, FEE OR
CHARGE ________________________________________________________________________________ 195
C. ACTION BEFORE THE SECRETARY OF JUSTICE ___________________________________________ 196
10. ASSESSMENT AND COLLECTION OF LOCAL TAXES __________________________________________ 198
A. REMEDIES OF THE LOCAL GOVERNMENT UNITS ___________________________________________ 198
B. PRESCRIPTIVE PERIOD ________________________________________________________________ 201
B. REAL PROPERTY TAXATION ________________________________________________________________ 204
1. FUNDAMENTAL PRINCIPLES _______________________________________________________________ 204
2. NATURE OF REAL PROPERTY TAX _________________________________________________________ 204
3. IMPOSITION OF REAL PROPERTY TAX ______________________________________________________ 204
A. POWER TO LEVY REAL PROPERTY TAX __________________________________________________ 204
B. EXEMPTION FROM REAL PROPERTY TAX _________________________________________________ 205
4. APPRAISAL AND ASSESSMENT OF REAL PROPERTY TAX _____________________________________ 208
A. CLASSES OF REAL PROPERTY __________________________________________________________ 208
B. ASSESSMENT BASED ON ACTUAL USE ___________________________________________________ 210
5. COLLECTION ____________________________________________________________________________ 211
A. DATE OF ACCRUAL ____________________________________________________________________ 211
B. PERIODS TO COLLECT _________________________________________________________________ 211
C. REMEDIES OF LOCAL GOVERNMENT UNITS _______________________________________________ 215
6. TAXPAYER’S REMEDIES __________________________________________________________________ 217
A. CONTESTING AN ASSESSMENT _________________________________________________________ 217
B. CONTESTING A VALUATION OF REAL PROPERTY __________________________________________ 218
C. COMPROMISING RPT ASSESSMENT _____________________________________________________ 220
IV. JUDICIAL REMEDIES _________________________________________________________________________ 226
A. JURISDICTION OF THE COURT OF TAX APPEALS ______________________________________________ 227
1. EXCLUSIVE ORIGINAL AND APPELLATE JURISDICTION OVER CIVIL CASES ______________________ 227
2. EXCLUSIVE ORIGINAL AND APPELLATE JURISDICTION OVER CRIMINAL CASES __________________ 229
B. JUDICIAL PROCEDURES ____________________________________________________________________ 229
1. FILING OF AN ACTION FOR COLLECTION OF TAXES __________________________________________ 229
A. INTERNAL REVENUE TAXES ____________________________________________________________ 229
B. LOCAL TAXES _________________________________________________________________________ 229
2. CIVIL CASES ____________________________________________________________________________ 230
A. WHO MAY APPEAL, MODE OF APPEAL, AND EFFECT OF APPEAL _____________________________ 230
B. SUSPENSION OF COLLECTION OF TAXES _________________________________________________ 230
C. INJUNCTION NOT AVAILABLE TO RESTRAIN COLLECTION ___________________________________ 231
4. APPEAL TO THE CTA EN BANC _____________________________________________________________ 232
5. PETITION FOR REVIEW ON CERTIORARI TO THE SUPREME COURT _____________________________ 232
ANNEX A: REMEDIES UNDER THE NIRC ___________________________________________________________ 235

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A. ASSESSMENT AND COLLECTION: THE RETURN WAS NOT FALSE OR FRAUDULENT ________________ 235
B. ASSESSMENT AND COLLECTION: THE RETURN WAS FALSE OR FRAUDULENT ____________________ 235
C. REMEDY WHEN AN ASSESSMENT WHERE THE BIR DID NOT DECIDE WITHIN 180 DAYS _____________ 237
D. REMEDY WHEN AN ASSESSMENT WHERE THE BIR DECIDED WITHIN 180 DAYS ____________________ 238
E. REFUND OF TAX ERRONEOUSLY OR ILLEGALLY COLLECTED (SECTION 204/229) – CASE 1 _________ 239
F. REFUND OF TAX ERRONEOUSLY OR ILLEGALLY COLLECTED (SECTION 204/229) – CASE 2 _________ 239
G. REFUND OF UNUTILIZED INPUT VAT (SECTION 112, AS AMENDED BY TRAIN; SAN ROQUE) __________ 240
H. REFUND OF UNUTILIZED INPUT VAT (SECTION 112, MIRANT AND SAN ROQUE) – JUDICIAL APPEAL
FALLS BEYOND THE 2-YEAR PERIOD ___________________________________________________________ 241
I. REFUND OF UNUTILIZED INPUT VAT (SECTION 112, MIRANT AND SAN ROQUE) – JUDICIAL APPEAL FALLS
WITHIN THE 2-YEAR PERIOD___________________________________________________________________ 241
ANNEX B: REMEDIES UNDER THE LGC ____________________________________________________________ 242
A. LOCAL GOVERNMENT REMEDIES ____________________________________________________________ 242
B. REAL PROPERTY TAXATION ________________________________________________________________ 243
D. THE PROCESS OF APPEAL TO THE CTA ______________________________________________________ 247
E. THE PROCESS OF APPEAL TO THE CTA: CRIMINAL CASES _____________________________________ 248
F. MODES OF APPEAL: CRIMINAL ______________________________________________________________ 249
G. MODES OF APPEAL: CIVIL __________________________________________________________________ 250
H. CHIEF OFFICIALS OF THE BIR _______________________________________________________________ 250
I. POWERS AND DUTIES OF THE BIR AND THE CIR ________________________________________________ 251

v
 GENERAL
PRINCIPLES
Taxation Law
ATENEO CENTRAL
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9. Compromise
I. GENERAL PRINCIPLES 10. Tax amnesty

TOPIC OUTLINE UNDER THE SYLLABUS:

K. CONSTRUCTION AND INTERPRETATION OF
I. GENERAL PRINCIPLES TAX LAWS, RULES AND REGULATIONS
A. CONCEPT AND PURPOSE OF TAXATION
1. Definition
2. Purpose
3. Distinguish: tax and other forms of exactions

B. DISTINGUISH: POWER OF TAXATION, POLICE

POWER, AND EMINENT DOMAIN

C. THEORY AND BASIS OF TAXATION

1. Lifeblood theory
2. Necessity theory
3. Benefits-received theory

D. JURISDICTION OVER SUBJECT AND

OBJECTS

E. PRINCIPLES OF A SOUND TAX SYSTEM

1. Fiscal adequacy
2. Theoretical justice
3. Administrative feasibility

F. INHERENT AND CONSTITUTIONAL

LIMITATIONS ON TAXATION

G. STAGES OR ASPECTS OF TAXATION

H. REQUISITES OF A VALID TAX

I. KINDS OF TAXES

J. GENERAL CONCEPTS IN TAXATION

1. Prospectivity of tax laws
2. Imprescriptibility
3. Situs of taxation
4. Double taxation
a. Strict sense
b. Broad sense
c. Tax treaties as relief from double
taxation
5. Escape from taxation
a. Shifting of tax burden
b. Distinguish: tax avoidance and tax
evasion
6. Exemption from taxation
7. Equitable recoupment
8. Prohibition on compensation and set-off

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A. CONCEPT AND PURPOSE OF TAXATION Example:

a. Regulation of activities - Taxation could be a tool to
1. DEFINITION implement the State’s police power, such as
imposing a tax on sale, lease or disposition of
Taxation is the power inherent in every sovereign State to
videograms primarily to answer the need the
impose a charge or burden upon persons, properties, or
regulate the video industry due in part to rampant
rights to raise revenues for the use and support of the
film piracy, violation of intellectual property rights
government to enable it to discharge its appropriate
and proliferation of pornography. (Tio v. Videogram
functions.
Regulatory Board, G.R. No. 75967, 1987).

Power by which an independent State, through its

b. Promotion of general welfare - Taxation is done not
lawmaking body, raises and accumulates revenue from its
merely to raise revenues to support the government,
inhabitants to pay the necessary expenses of the
but also to provide means for the rehabilitation and
government. (51 Am. Jur. 341)
stabilization of a threatened industry (like coco levy
funds), which is so affected with public interest.
Merely a way or mode of apportioning the cost of
(PCGG v. Cojuangco, G.R. No. 147062-64, 2001).
government among those who in some measures are
(Lutz v. Araneta, G.R. No. L-7859, 1955 tax was
privileged to enjoy its benefits and must bear its burdens.
imposed for the protection and promotion of sugar
(71 Am. Jur. 2d 342)
industry, the Court held that its promotion, protection
and advancement, redounds greatly to the general
Described as a destructive power which interferes with the
welfare, hence valid.)
personal and property rights of the people and takes from
them a portion of their property for the support of the
Nature and Characteristics of Taxation
government. (Paseo Realty & Development Corporation v.
CA, G.R. No. 119286, 2004) In Sison v. Ancheta, (G.R. No.
Nature
L-59431, 1984) however, the SC acknowledged that the
1. The power of taxation is inherent in sovereignty as an
due process clause may be invoked where a taxing statute
incident or attribute thereof, being essential to the
is so arbitrary that it finds no support in the Constitution,
existence of independent government. It exists apart
such as when the tax imposition amounts to a confiscation
from the Constitution and is not being expressly
of property.
conferred by the people.

Three Elements of Taxation:

2. It is legislative in character. It is generally not
1. It is an enforced proportional contribution from persons
delegated to the executive or administrative
and properties;
departments.
2. It is imposed by the State by virtue of its sovereignty;
3. It is levied for the support of the government. (PCGG v.
Exceptions where delegation is allowed:
Cojuangco, G.R. No. 147062-64, 2001)
● To Local Government Units (LGUs) with respect to
2. PURPOSE matters of local concern. (SecS. 5 & 20, Art. X,
Constitution);
Purpose of Taxation ● When it is allowed by the Constitution (Sec. 28(2),
Art. VI, Constitution); and
1. Primary or Revenue-Raising Purpose:
● When the delegation relates merely to an
Taxation is the power by which the sovereign raises
administrative implementation that may call for
revenue to defray the necessary expenses of government.
some degree of discretionary powers under a set
of sufficient standards expressed by law (Pelaez v.
Taxes provide the funds or property with which to promote
Auditor General, G.R. No. L-23825, 1965), or
the general welfare and protection of the whole citizenry.
implied from the policy and purpose of the law
(Maceda v. Macaraig, G.R. No. 88291, 1993).
2. Secondary or Non-Revenue/Special or Regulatory
or Sumptuary Purpose:
3. It is subject to constitutional and inherent limitations.
Taxation is also used for regulatory purposes. It is used to
attain non-revenue objectives and pursue policy decisions.

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Characteristics
1. It must be used for public purpose. A tax shall be
considered to have been utilized for public purpose if
the welfare of the nation or the greater portion of its
population has benefited from it. (Gomez v. Palomar,
G.R. No. L-23645, 1968; Phil Guaranty Co., Inc. v. CIR,
G.R. No. L-22074, 1965).
2. It is the strongest of all the inherent powers of the
government. (Sison v. Ancheta, G.R. No. L-59431,
1. Customs Duty/Tariff
1984) However, this does not mean that it is superior
to the other inherent powers of the government.
The legislature also grants legislative tax exemptions or
condonations, and specifies or provides for the
administrative as well as the judicial remedies that
either the government or the taxpayer can avail. (Petron
v. Tiangco, G.R. No. 158881, 2008)
3. DISTINGUISH: TAX AND OTHER FORMS OF
EXACTIONS
TAX CUSTOMS DUTY

3. It is territorial in operations. The power to tax can only Coverage More Importation or
be exercised within the territorial jurisdiction of a taxing comprehensive export of goods
authority (51 Am. Jur. 88), except when it is subject to than customs
international comity or there exists privity of relationship duty
between the taxing State and the object of tax. Hence,
Object Persons, prop, Goods imported or
in Mitsubishi Corporation v. CIR (G.R. No. 175772,
etc. exported
2017), it was held that the income tax and branch profit
remittance tax paid by Mistubishi was erroneously
collected considering that the obligation to pay the 2. Toll
same had already been assumed by the Philippine TAX TOLL
Government by virtue of its Exchange of Notes with the
Japanese Government. Kind of Demand of Demand of
demand sovereignty ownership
4. It is comprehensive as it covers persons, things or
property, privilege, occupation, profession or business, Purpose Support of Collection for the
and transactions or activities. government use of property

Amount No limit – Fair return of the

5. It is generally pecuniary in nature (i.e., payable in depends on cost of the
money). However, a law may prescribe other form or need of the property or
kind of payment such as back pay certificate. (Tirona v. government improvement
The City Treasurer of Manila, G.R. No. L-24607, 1968)

6. It is plenary in nature. As a general rule, the scope of 3. License Fee

the legislative power to tax is unlimited and plenary. TAX LICENSE FEE
Acknowledging in its very nature no limits, the principal
check against its abuse is to be found only in the Source of Exercise of Emanate from the
responsibility of the legislature. (Creba Inc. v. Romulo, authority Taxing power police power of the
G.R. No. 160756, March 9, 2010) State

Purpose Raise revenue Regulation

The legislature, therefore, basically determines:
1. The subjects (persons, property, occupation, Object Persons, Right to exercise a
exercises, or privileges to be taxed); property and privilege
2. Method of collection; privilege
3. Purpose for which the tax shall be levied;
4. Apportionment of tax (whether for general Amount No limit Only necessary to
application or limited to a particular locality); carry out
5. Amount or rate; regulation
6. Kind of tax to be collected; and
7. Situs of taxation.

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Distinction lies in the primary purpose: 4. Special Assessment

● The primary purpose of license fees is for regulation
TAX SPECIAL
and the excess of the amount collected, from the cost
ASSESSMENT
to carry out the regulation, should be minimal and
incidental. Imposed Persons, Only on land
● Tax’s primary purpose, or at least one of the real and on properties, etc.
substantial purposes, is to raise revenue.
● If amount is too high for regulation and/or the amount Why For public Public
levied is not related to costs of regulation, it would be imposed purpose improvement that
a tax. regardless benefits the land
● Purpose of distinction: limitations and exemptions who/what will
apply only to one and not to the other (ex. Exemption benefit
from taxation does not include exemption from fees).
Purpose To support the Contribution to
general cost of public
A non-stock not-for-profit educational institution, which is
purposes of improvement
exempt from taxes, is not exempt from payment of
government
Building Permit Fee and Local Clearance Fee as the said
charges are regulatory fees and not taxes. (Angeles When Regular exaction Exceptional as to
University v. City of Angeles, G.R. No. 189999, June 27, imposed time and locality
2012)
Basis Necessity Benefits obtained
Royalty fees are regulatory fees. Clark Special Economic
Zone (“CSEZ”) imposes payments on the movement of 5. Debt
petroleum fuel to and from the economic zone.
Specifically, CSEZ provides for the payment of TAX SPECIAL
accreditation fees, annual inspection fees, royalty fees ASSESSMENT
and gate pass fees. Chevron is a domestic company
Source Law; legal Based on contract
located within the economic zone. CSEZ billed Chevron
obligation
for royalty fees at 0.50/liter. (Chevron Philippines v.
BCDA, G.R. No. 173863, September 15, 2010) Nature Personal Assignable

The imposition of capital contribution component of P10 Right to Generally not May be the subject
per bag was an exercise by the State of its taxation set-off subject to of compensation/
power. While it is true that the power of taxation can be compensation/ set-off
used as an implement of police power, the primary set-off
purpose of the levy is revenue generation. If the purpose
Effect Imprisonment is No imprisonment
is primarily revenue, or if revenue is, at least, one of the
sanction for non- for non-payment
real and substantial purposes, then the exaction is
payment
properly called a tax. (Planters Products, Inc. v. Fertiphil
Corp., G.R. No. 166006, 2008)

There is no logic or justification in exacting employment

permit fee from aliens. The imposition is not regulatory
but a revenue measure. It follows then that the permit fee
is essentially a tax for the purpose of raising money under
the guise of regulation. (Villegas v. Hiu Tsai, L-29646,
1978)

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B. DISTINGUISH: POWER OF TAXATION, POLICE

POLICE EMINENT
POWER, AND EMINENT DOMAIN TAX
POWER DOMAIN

POLICE EMINENT may be subject excises that

TAX thereto may be subject
POWER DOMAIN
thereto
Concept
Superiority of Contracts
Power to enforce Power to make Power to take
contribution to and implement private property Contracts may be Contracts may
raise funds for laws for the for public use impaired unless be impaired
Government general Welfare with just (a) government is
Compensation party to contract
granting
Scope exemption; or (b)
involves franchise
Plenary, Broader in Merely a power
comprehensive application; to “take” private Benefits Received
General power property for
to make and public use Protection and No direct or Just
implement laws general benefits immediate compensation
from the benefit but only equivalent to fair
Exercising Authority government such as may market value of
arise from the the property
National and National May be granted
maintenance of
Local Government or to public service
a healthy
Governments political companies or
economic
subdivisions public utilities
standard of
Purpose society

Raise revenues Exercised to The taking of Relationship to Constitution

promote public property for
Subject to certain Subjected to Subject to certain
welfare through public use
constitutional certain constitutional
regulation
limitations constitutional limitations
Amount of Imposition limitations

No limit Limited to the No limit imposed, C. THEORY AND BASIS OF TAXATION

cost of but the amount
regulation, should be based 1. LIFEBLOOD THEORY
issuance of on the fair market
license, or value of the Taxes are the lifeblood of the Government. Without
surveillance property revenue raised from taxation, the government will not
survive, resulting in detriment to society. Without taxes, the
Effect government would be paralyzed for lack of motive power
to activate and operate it. (Commissioner v. Algue, G.R.
Becomes part of Restraint on the Transfer of right
No. L-28896, 1988)
public fund injurious use of to the property
property 2. NECESSITY THEORY
Persons Affected The power of taxation proceeds upon the theory that the
Applies to all Applies to all Only particular existence of government is a necessity; that it cannot
persons, property, persons, property is continue without means to pay its expenses; and that for
and excises that property, and covered those means, it has the right to compel all citizens and
property within its limits to contribute.
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3. BENEFITS-RECEIVED THEORY (SYMBIOTIC
RELATIONSHIP THEORY)
The basis of taxation is found in the reciprocal duties of
protection and support between the state and its
inhabitants. In return for this contribution, the taxpayer
receives the general advantages and protection which the
government affords the taxpayer and his property
D. JURISDICTION OVER SUBJECTS AND OBJECTS
The person or property taxed must be within the competent
authority’s taxing jurisdiction. Tax is based on the situs or
source/territoriality (location of economic activity, location
of property, source of income), citizenship, and residence.
E. PRINCIPLES OF A SOUND TAX SYSTEM
1. FISCAL ADEQUACY
The sources of tax revenue should coincide with and
approximate the needs of government expenditures and
their variations. (Chavez v. Ongpin, G.R. No. 76778, 1990)
2. THEORETICAL JUSTICE
The tax system should be fair to the average taxpayer and
be based upon the ability to pay.
The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation.
(Sec. 28(1), Art. VI, Constitution)
3. ADMINISTRATIVE FEASIBILITY
The tax system should be capable of being properly and
efficiently administered by the government and enforced
with the least inconvenience to the taxpayer.
Example: Creditable withholding tax which is a system of
advance collection of payee’s income tax liability.
Non-observance of the canon of administrative feasibility
will not render a tax imposition invalid “except to the extent
that specific constitutional or statutory limitations are
impaired.” (Diaz v. Secretary of Finance, G.R. No. 193007,
2011, which dealt with the inconvenience of imposing VAT
on toll fees)
NOTE: Non-observance of these principles will not
automatically render a tax law unconstitutional or invalid. A
tax law will continue to be valid even if it does not observe
TAXATION LAW
the principles of fiscal adequacy and administrative
feasibility since the Constitution does not expressly require
so. However, a tax law may be held unconstitutional if it
runs afoul of the principle of theoretical justice since the
Constitution expressly requires that tax laws should be
uniform and equitable.
F. INHERENT AND CONSTITUTIONAL LIMITATIONS
ON TAXATION
The power of taxation is the strongest of all the powers of
the government. Nevertheless, effective limitations
thereon may be imposed by the people through the
Constitution. Accordingly, no matter how broad and
encompassing the power of taxation, it is still subject to
inherent and constitutional limitations.
1. Inherent Limitations
a. Public Purpose
Test: Whether the proceeds will be used for something
which is the duty of the State to provide.
The public purpose of the tax law must exist at the time of
its enactment. The money raised by taxation can be
expended only for public purposes and not for the
advantage of private individuals. Therefore, since the
appropriation sought a private purpose, it is null and void.
(Pascual v. Secretary of Public Works, G.R. No. L-10405,
1960)
The term "public use" has acquired a more comprehensive
coverage. To the literal import of the term signifying strict
use or employment by the public has been added the
broader notion of indirect public benefit or
advantage. (Sumulong v. Guerrero, G.R. No. L-48685,
1987)
b. Inherently Legislative
Power of taxation cannot be delegated – this contemplates
the power to determine kind, object, extent, amount,
coverage, and situs of tax. It must be distinguished from
power to assess and collect which is exercised by the
Executive through the BIR.
However, it may be exceptionally delegated when:
1. The delegation shall not contravene any constitutional
provision or inherent limitations of taxation;
2. It is effected either by the Constitution or by validly
enacted legislative measures or statute; and
3. Except when expressly provided by the Constitution, it
should only be in favour of the local legislative body of
the local or municipal government concerned.
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General rule – The power to tax is exclusively vested in
the legislative body, hence, it cannot be delegated.
(Delegata potestas non potest delegari)
Exceptions:
1. Delegation to local governments
It is in line with the principle that the power to create
municipal corporations for purposes of local self-
government carries with it the power to confer the
power to tax on such local governments.
2. Delegation to the President
Certain aspects of the taxing process that are not
legislative in character may be vested to him, e.g.
delegation of tariff powers by Congress to the
President under the flexible tariff clause (Sec. 28(2),
Art. VI, Constitution), and delegation of emergency
powers (Sec. 23(2), Art. VI, Constitution)
In the case of Abakada Guro v. Executive Secretary
Ermita, (G.R. No. 168056, 2005) the Court held that
the Congress does not abdicate its functions or
unduly delegate its power when it describes what job
must be done, who must do it, and what is the scope
of his authority. There is no undue delegation of
legislative power but only of the discretion as to the
execution of a law.
3. Delegation to administrative agencies
Administrative agencies are authorized to fix within
specified limits, tariff rates, import or export quotas,
tonnage and wharfage dues and other duties or
imposts.
c. Territorial (see discussions on situs of taxation below)
d. International Comity
A state must recognize the generally accepted tenets of
international law, they must accord each other as
sovereign equals. This limits the authority of a government
to effectively impose taxes on a sovereign state and its
instrumentalities, as well as on its property held, and
activities undertaken, in that capacity. (Vitug) For
example, a property of a foreign State or government may
not be taxed by another State.
A state that has contracted valid international obligations
is bound to make in its legislations those modifications that
ensure granting of reliefs under tax treaties. (Deutsche
Bank v. CIR, G.R. No. 188550, 2010)
TAXATION LAW
e. Exemption of Government Entities, Agencies, and
Instrumentalities
Rationale: If the government taxes itself or if Local
Government Units tax the national government, it would be
akin to taking money from one pocket to the other.
Entities or agencies exercising sovereign functions (acta
jure imperii) are tax exempt, unless expressly taxed,
agencies performing proprietary functions are subject to
tax unless expressly exempted.
Government owned and controlled corporation performing
proprietary functions are subject to taxes, except those
exempted under Section 27(C) of RA 8424 as amended by
RA 9337 and RA 10963, namely:
1. GSIS
2. SSS
3. PHIC
4. the local water districts
The amendment reduced the list of exempt entities by
excluding therein the Philippine Amusement and Gaming
Corporation.
Instrumentality of the National Government is exempt from
real property tax. (MIAA v. CA G.R. No. 155650, 2006)
However, an instrumentality of the National Government
can be subject to tax if there is a statutory authority to do
so and if there is no express provision against such act.
Chief Justice Hilario Davide, Jr. in the case of MCIAA v.
Marcos (G.R. No. 120082, 1996) has stated that “nothing
can prevent Congress from decreeing that even
instrumentalities or agencies of the government
performing governmental functions may be subject to tax.”
2. Constitutional Limitations
a. Provisions directly affecting Taxation:
i. Prohibition against imprisonment for non-payment
of poll tax (Sec. 20, Art. III, Constitution)
However, the taxpayer can still be made to pay fines and
penalties for non-payment.
Poll tax: cedula/residence tax (but in the US, it usually
means the payment of tax to exercise the right of suffrage.)
Taxpayer may be imprisoned for non-payment of other
kinds of taxes where the law so expressly provides.
ii. Uniformity and equality of taxation (Sec. 28 (1), Art
VI, Constitution)
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Uniformity: all articles or properties of the same class Who What How
taxed at the same rate (Eastern Theatrical Co. v. Alfonso, Assets Exempt from RPT as
G.R. No. L-1104, 1949) long as they are used
ADE for educational
Equality: apportionment must be more or less just in the purposes. Id.
light of taxpayer’s ability to shoulder tax burden Revenues Exempt from income
tax if they are
The equal protection clause refers to like treatment in like organized and
circumstances. operated exclusively
for charitable
The uniformity and equality clause refers to the proper purposes and no part
relative treatment for tax purposes of persons in like of its net income or
circumstances. Section 28 (1), Art. VI provides that asset inures to the
Congress shall evolve a progressive system of taxation. benefit of any
Hence, the Constitution does not really prohibit a member, organizer,
regressive system of taxation. A progressive system of etc. (Sec. 30[E],
taxation means that as resources of the taxpayer become NIRC)
higher, the tax rate likewise increases. It is based on the
ability to pay. Non-stock
Income from real or
non-profit
personal properties or
iii. Grant by Congress of authority to the President to hospitals
from activities
impose tariff rates (flexible tariff clause) (Sec. 28 (2), conducted for profit,
Art. VI, Constitution) regardless of the
• Includes import and export quotas, tonnage and disposition made of
wharfage dues aside from tariff rates such income, shall be
• Delegated by the Congress subject to income tax.
• Through a law; the Tariff and Customs Code has (Sec. 30, last par.,
provided for what has been termed as the “flexible NIRC)
tariff clause” authorizing the President to modify Assets Exempt from RPT as
import duties (Sec. 401, TCC) long as they are used
• Subject to Congressional limits and restrictions ADE for charitable
Within the framework of national development purposes. (Sec. 28[3],
program Art. VI, Constitution)
Revenues Exempt provided that
iv. Prohibition against taxation of religious, is organized and
charitable and educational entities/Exemption from operated exclusively
real property taxes (Sec. 28 [3], Art. VI, Constitution) for charitable
purposes and no part
Exemption under Sec. 28(3), Art. VI pertains only to real of its net income or
property tax (RPT). asset inures to the
Other non- benefit of any
Summary stock non- member, organizer,
Who What How profit etc. (Sec. 30[E],
Revenues Exempt as long as it is charitable NIRC).
used actually, directly institutions
and exclusively (ADE) Income from real or
Non-stock personal properties or
for educational
non-profit from activities
purposes, regardless
educational conducted for profit,
of its source. (Sec.
institutions regardless of the
4[3], Art. XIV,
Constitution; DLSU v. disposition made of
CIR, 2016) such income, shall be
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Who What How RPT exemption covers charitable institutions, churches,

subject to income tax. and parsonages or convents appurtenant thereto,
(Sec. 30, last par., mosques and non-profit cemeteries and all lands, buildings
NIRC) and improvements actually, directly and exclusively
Assets Exempt as long as the used for charitable, religious and educational purposes
property is it ADE
used for charitable Definition of Terms:
purposes. (Sec. 28[3], • Charitable institution – essentially provide for free
Art. VI, Constitution) goods and services to the public (to an indefinite
Revenues Exempt from income number of persons) which would otherwise falls on the
tax if they are shoulders of the government. (CIR. v. St. Luke’s, G.R.
organized and No. 203514, 2017)
operated exclusively • Exclusive - is defined as possessed and enjoyed to
for charitable the exclusion of others; debarred from participation or
purposes and no part enjoyment; and 'exclusively' is defined, 'in a manner
of its net income or to exclude; as enjoying a privilege exclusively.' . . The
asset inures to the words ‘dominant use’ or ‘principal use’ cannot be
benefit of any equated with ‘used exclusively’ (CIR v. St. Luke’s,
member, organizer, G.R. No. 203514, 2017)
etc. (Sec. 30[E],
NIRC). As for the income tax exemption of charitable institutions
under the NIRC, a charitable institution does not lose its
If the non-profit character as such and its exemption from taxes simply
hospital/education because it derives income from paying patients, whether
institution earns outpatient, or confined in the hospital, or receives
income from its for- subsidies from the government, so long as the money
profit activities, it will received is devoted or used altogether to the charitable
Propriety retain its tax object which it is intended to achieve; and no money inures
non-profit exemption for its to the private benefit of the persons managing or operating
hospital and charitable activities, the institution (CIR v. St. Luke’s, G.R. No. 203514, 2017)
educational but the income from
institutions for-profit activities will v. Prohibition against taxation of non-stock, non-
be subject to the profit [educational] institutions (Sec. 4[3&4], Art.
preferential rate of XIV, Constitution)
10% under Section 27 Test: How both the revenues and assets will be used.
(B), NIRC, provided
that its gross income Exempts from taxes all revenues and assets of non-stock,
from unrelated trade, non-profit educational institutions actually, directly and
business or activity exclusively used for educational purposes
does not exceed 50%
of its total gross Exemption covers income, real estate tax, donor’s tax, and
income. customs duties (distinguished from the previous provision,
(Sec. 28[3], Art. VI, Constitution), which pertains only to
Assets Exempt as long as the real property tax exemption granted to real properties that
are used for religious, charitable, or educational purposes)
property is ADE used
for educational or
Income is exempt provided it is used for maintenance or
charitable purposes.
(Sec. 28[3], Art. VI, improvement of institution (indispensable or essential).
Constitution) The exemption is strictly personal (i.e., non-transferable)

Distinguish tax treatment of:

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• Proprietary educational institutions (Preferential tax
rate of 10%); and
• Government educational institutions (Tax-exempt,
e.g., UP)
vi. Majority vote of Congress for grant of tax
exemption (Sec. 28 [4], Art. VI, Constitution)
• Includes amnesties, condonations and refunds
• Involves majority of all members voting separately
• Relative majority (majority of quorum) is sufficient
to withdraw exemption
vii. Prohibition on use of tax levied for special
purpose (Sec. 29 [3], Art. VI, Constitution)
Revenues derived for a special fund shall be administered
for the purpose intended only.
Once the purpose is achieved, the balance, if any, is to be
transferred to the general funds of the government.
viii. President’s veto power on appropriation, revenue,
and tariff bills (Sec. 27 [2], Art. VI, Constitution)
The President shall have the power to veto any particular
item or items in an appropriation, revenue, or tariff bill, but
the veto shall not affect the item or items to which he does
not object.
ix. Grant of power to the local government units to
create its own sources of revenue (Sec. 5, Art. X,
Constitution)
Each local government unit shall have the power to create
its own sources of revenues and to levy taxes, fees and
charges subject to such guidelines and limitations as the
Congress may provide, consistent with the basic policy of
local autonomy. Such taxes, fees, and charges shall
accrue exclusively to the local governments.
x. Flexible tariff clause (Sec. 28 [2], Art. VI, Constitution)
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.
xi. No appropriation or use of public money for
religious purposes (Sec. 29 [2], Art. VI, Constitution)
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
TAXATION LAW
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.
xii. Tax bills should originate exclusively in the
House of Representatives (Sec. 24, Art. VI,
Constitution)
All appropriation, revenue or tariff bills, bills authorizing
increase of the public debt, bills of local application, and
private bills shall originate exclusively in the House of
Representatives, but the Senate may propose or concur
with amendments.
xiii. Judicial power to review legality of tax (Sec. 5 (2b),
Art. VIII, Constitution)
The Supreme Court shall have the power to Review,
revise, reverse, modify, or affirm on appeal or certiorari, as
the law or the Rules of Court may provide, final judgments
and orders of lower courts in all cases involving the legality
of any tax, impost, assessment, or toll, or any penalty
imposed in relation thereto.
b. Provisions indirectly affecting Taxation:
i. Due process (Sec. 1, Art. III, Constitution)
SUBSTANTIVE PROCEDURAL
Should not be harsh, No arbitrariness in
oppressive or assessment and
confiscatory collection
(reasonableness)
By authority of valid law Right to notice and
hearing
Must be for a public
purpose
Imposed within
territorial jurisdiction
It can also be invoked by the government. (Province of
Abra v. Hernando, G.R. No. L-49336, 1981)
No state may tax anything not within its jurisdiction without
violating the due process clause; the taxing power of a
state does not extend beyond its territorial limits, but within
such it may tax persons, property, income, or business
(Manila Gas v. Collector, G.R. No. L-24780, 1936)
ii. Equal protection (Sec. 1, Art. III, Constitution)
All persons subject to legislation shall be treated alike,
under like circumstances and conditions both in privileges
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conferred and liabilities imposed. (Sison, Jr. v. Ancheta,
G.R. No. L-59431, 1984)
No violation of equal protection when there is proper
classification made
The classification to be valid must:
1. Rest on substantial distinctions;
2. Be germane to the purpose of the law;
3. Not be limited to existing conditions only; and
4. Apply equally to all members of the same class.
Examples:
The sales tax is applied similarly on all goods and services
sold to the public, which are not exempt, at the constant
rate of 0% or 10%. (Kapatiran ng mga Naglilingkod sa
Pamahalaan ng Pilipinas, Inc. v. Tan, G.R. No. 81311,
1988).
The phrase "except customs brokers" is not meant to
discriminate against customs brokers. It was inserted in
Sec. 103(r) to complement the provisions of Sec. 102 of
the Code which makes the services of customs brokers
subject to the payment of the VAT and to distinguish
customs brokers from other professionals who are subject
to the payment of an occupation tax under the Local Tax
Code. (Kapatiran ng mga Naglilingkod sa Pamahalaan ng
Pilipinas, Inc. v. Tan, G.R. No. 81311, 1988).
The equal protection clause recognizes a valid
classification, that is, a classification that has a reasonable
foundation or rational basis and not arbitrary. Both the BIR
and the BOC are bureaus under the DOF. They principally
perform the special function of being the instrumentalities
through which the State exercises one of its great inherent
functions — taxation. Indubitably, such substantial
distinction is germane and intimately related to the purpose
of the law. Hence, the classification and treatment
accorded to the BIR and the BOC under RA No. 9335 fully
satisfy the demands of equal protection. (Bureau of
Customs Employees’ Association vs. Teves, G.R. No.
181704, 201)
Exception:
Equal protection is not violated if a law or ordinance
imposes tax on a named occupation, so long as it is not
limited to a certain person or a certain group only. The fact
that there is no other person in the locality with the same
designation does not make the ordinance discriminatory,
because it will be applicable to any person or firm who
exercises such occupation. (Shell v. Vano, G.R. No. L-
6093, 1954)
TAXATION LAW
iii. Religious freedom (Sec. 5, Art III, Constitution)
The constitutional guaranty of the free exercise and
enjoyment of religious profession and worship carries with
it the right to disseminate religious information. (American
Bible Society v. City of Manila, G.R. No. L-9637, 1957)
Activities that are simply and purely for propagation of faith
are exempt.
Tax is unconstitutional if it operates as a prior restraint on
exercise of religion or favors a certain religion (non-
establishment of religion).
Income of religious organizations from any activity
conducted for profit or from any of their property, real or
personal, regardless of disposition of such income, is
taxable.
iv. Non-impairment of obligations of contracts (Sec.
10, Art. III, Constitution)
Applies only when government is party to the contract
granting exemption
Exception: In case of franchise tax. The Constitution
provides that franchise is subject to amendment, alteration,
or repeal by Congress.
Contractual tax exemptions, in the real sense of the term
and where the non-impairment clause of the Constitution
can rightly be invoked, are those agreed to by the taxing
authority in contracts, such as those contained in
government bonds or debentures, lawfully entered into by
them under enabling laws in which the government, acting
in its private capacity, sheds its cloak of authority and
waives its governmental immunity. These contractual tax
exemptions, however, are not to be confused with tax
exemptions granted under franchises. A franchise
partakes the nature of a grant which is beyond the purview
of the non-impairment clause of the Constitution.
(MERALCO v. Province of Laguna, G.R. No. 131359,
1999)
Example where impairment applies:
The provision "shall be in lieu of all taxes of every name
and nature" in the franchise, this Court pointed out that
such exemption is part of the inducement for the
acceptance of the franchise and the rendition of public
service by the grantee. As a charter is in the nature of a
private contract, the imposition of another franchise tax on
the corporation by the local authority would constitute an
impairment of the contract between the government and
the corporation. (Province of Misamis Oriental v. Cagayan
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Electric Power and Light Co., Inc., G.R. No. L-45355,
1990)
G. STAGES OR ASPECTS OF TAXATION
1. Levy
Enactment of a law by Congress, imposing a tax.
2. Assessment and Collection
Act of administration and implementation of the tax law by
the executive department through the administrative
agencies.
3. Payment
Act of compliance by the taxpayer, including such options,
schemes or remedies as may be legally available to him
General rule: no court shall have the authority to grant an
injunction to restrain the collection of any national internal
revenue tax, fee or charge. (Sec. 218)
Exception: an injunction may be issued by the CTA to
restrain the collection of taxes “when, in the opinion of the
Court, the collection may jeopardize the interest of the
Government and/or the taxpayer, the Court at any stage of
the proceeding may suspend the said collection and
require the taxpayer either to deposit the amount claimed
or to file a surety bond for not more than double the amount
with the Court.” (Sec. 11, RA 9282, as amended)
The prohibition on the issuance of a writ of injunction to
enjoin the collection of taxes is applied only to national
internal revenue taxes, not to local taxes. However, the
Supreme Court noted that such injunctions enjoining the
collection of local taxes are frowned upon. (Angeles City v.
Angeles Electric Corporation, G.R. No. 166134, 2010)
4. Refund
Recovery of any tax alleged to have been erroneously or
illegally assessed or collected, or of any penalty claimed
to have been collected without authority, or of any sum
alleged to have been excessively, or in any manner
wrongfully, collected
DEFINITION, NATURE, AND CHARACTERISTICS OF
TAXES
A burden, charge, exaction, imposition or contribution
assessed in accordance with some reasonable rule of
apportionment by authority of the sovereign State upon the
persons or properties within its jurisdiction, to provide
public revenues for the support of the government, the
TAXATION LAW
administration of the law, or the payment of public
expenses. (71 Am. Jur. 2d 343-346)
Taxes operate in invitum (against a person’s will or
consent; by force of law irrespective of assent) and are in
no way dependent upon the will or contractual assent,
express or implied, of the person taxed.
Taxes are:
1. Enforced,
2. Proportional, and
3. Pecuniary contributions
4. From persons and property
5. Levied by the law-making body of
6. The state having jurisdiction over the subject of the
burden
7. For the support of the government and all public
needs.(PCGG v. COCOFED, G.R. No. 147062-64,
2001)
Taxes are not political in nature and as such were
continued in force during the period of enemy occupation
and in effect were actually enforced by the occupation
government. (Hilado v. Collector of Internal Revenue, G.R.
No. L-9408, 1956)
SOURCES OF TAX LAWS
1. Constitution;
2. Legislations or statutes, executive orders, local
ordinances, tax treaties;
3. Administrative issuances by the DOF, BIR or BOC;
4. Rulings issued by the BIR, opinions of the DOJ
5. Judicial decisions by the Supreme Court
H. REQUISITES OF A VALID TAX
Requisites:
1. Must be for a public purpose;
2. Should be uniform and equitable;
3. Either the person or property taxed is within the
jurisdiction of the taxing authority;
4. Complies with the requirements of due process; and
5. Does not infringe any constitutional or inherent
limitations.
I. KINDS OF TAXES
1. As to subject matter or object
a. Personal, Capitation, or Poll Tax
1. Fixed amount
2. Individuals residing within specified territory
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3. Without regard to their property, occupation or
business
Example: Community Tax (Cedula)
b. Property Tax
4. Imposed on property, real or personal
5. In proportion to its value or other reasonable
method of apportionment
Example: Real estate tax
c. Excise/Privilege tax
6. Imposed upon the performance of an act, the
enjoyment of a privilege or the engagement in an
occupation, profession or business
7. This is different from the excise tax of Title VI of
the NIRC
Example: Income tax, VAT, estate tax, donor’s tax
2. As to who bears the burden or incidence
a. Direct
8. imposed on the person who also bears the burden
thereof
Example: income tax, community tax, estate tax
b. Indirect
9. imposed on the taxpayer who shifts the burden of
the tax to another (Maceda v. Macaraig, Jr., 1991)
Example: VAT, specific tax, percentage tax,
customs duties
General Rule: The proper party to seek a refund is
the statutory taxpayer. (Silkair v. CIR, G.R. No.
173594, 2008)
Exception: if the law confers exemption from both
direct or indirect taxes, claimant is entitled to a refund
even if claimant is not the statutory taxpayer but only
bears the economic burden of the tax. (Philippine
Airlines v. CIR, G.R. No. 198759, 2013)
3. As to tax rates or determination of amount
a. Specific
10. tax imposed and based on a physical unit of
measurement, as by head, number, weight, length
or volume
Example: Tax on distilled spirits, fermented
liquors, cigars
b. Ad Valorem
11. tax of a fixed proportion of the value of property
with respect to which the tax is assessed; requires
intervention of assessor.
TAXATION LAW
Example: Real estate tax, excise tax on cars, non-
essential goods
c. Mixed
4. As to purposes
a. General, fiscal or revenue
12. imposed for the general purpose of supporting the
government
Example: Income tax, percentage tax
b. Special or regulatory
13. imposed for a special purpose, to achieve some
social or economic objectives
Example: Protective tariffs or customs duties
5. As to scope or authority to impose
a. National
14. imposed by the national government
Example: National internal revenue taxes, custom
duties
b. Municipal or local
15. imposed by the municipal corporations or local
governments
Example: Real estate tax, occupation tax
6. As to graduation of rate (three systems of taxation)
a. Progressive or graduated
16. tax rate increases as the tax base or bracket
increases
Example: Income tax, estate tax, donor’s tax
b. Regressive
17. tax rate decreases as the tax base increases
c. Proportionate or Flat
18. based on a fixed percentage of the amount of the
property, income or other basis to be taxed
Example: Real estate tax, VAT, percentage tax
d. Mixed
19. the tax rates are partly progressive and partly
regressive.
J. GENERAL CONCEPTS IN TAXATION
1. PROSPECTIVITY OF TAX LAWS
This principle provides that a tax law must only be
applicable and operative prospectively.
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Taxes may be imposed retroactively by law, but unless so
expressed by such law, these taxes must only be imposed
prospectively. (Hydro Resources v. CA, G.R. No. 80276,
1990)
Ex post facto is not applicable for tax purposes. However,
when it comes to civil penalties like fines and forfeiture
(except interest), tax laws may provide and allow its
application retroactively, unless it produces harsh and
oppressive consequences which violate the taxpayer’s
constitutional rights regarding equity and due process.
(Fernandez v. Fernandez, G.R. No. L-9141, 1956; CIR v.
Filipinas Compañas de Seguros, G.R. No. 14880, 1960)
2. IMPRESCRIPTIBILITY
Although the NIRC provides for the limitation in the
assessment and collection of taxes imposed, such will only
be applicable to those taxes where a tax return is required.
The prescriptive period shall start from the time the
taxpayer files the tax return and declares his liability.
(Bisaya Land Transportation Co. v. Collector of Internal
Revenue, G.R. Nos. L-12100 & L-11812, 1959).
Unless otherwise provided by the tax law itself, taxes in
general are imprescriptible. (CIR v. Ayala Securities
Corporation, G.R. No. L-29485, 1976)
The law on prescription being a remedial measure should
be interpreted liberally in favor of the taxpayer in order to
protect the taxpayer. (Republic v. Ablaza, G.R. No. L-
14519, 1960)
3. SITUS OF TAXATION
Situs is the place of taxation; power to tax is limited to the
territorial jurisdiction of the taxing state. It is the place or
authority that has the right to impose and collect
taxes. (CIR v. Marubeni Corp. GR No. 137377, December
18, 2001)
Exception: where privity of relationship exists, the State
can exercise its taxing powers over its citizen outside its
territory.
a. Situs of Income Tax
Factors that determine the situs of income tax (Sec. 23,
NIRC):
1. Nationality
2. Residency
3. Source of Income
i.
TAXATION LAW
ii. From sources within the Philippines:
(a) Interests on bonds, notes or other interest-bearing
obligations of residents of the Philippines
(residence of debtor rule).
(b) Dividends from a domestic corporation. From a
foreign corporation, if at least 50% of the foreign
corporation’s gross income for a three-year base
period is derived from Philippine sources.
(c) Compensation for services performed within the
Philippines.
(d) Rentals and royalties from properties located in the
Philippines or any interest in such property
including rentals or royalties for the use of or for the
privilege of using within the Philippines, patents,
copyrights and other like properties.
(e) Sale of real property located in the Philippines.
(f) Sale of personal property –
i. By the producer or manufacturer: sale of
personal property produced by the taxpayer
within and sold without the Philippines, or
produced without and sold within the
Philippines, shall be treated as derived from
sources within and partly from sources without
the Philippines. Conversely, sale of personal
property produced within and sold within the
Philippines, or produced without and sold
without the Philippines, shall be treated as
derived from sources entirely within the
Philippines and entirely without the Philippines,
respectively.
ii. By a taxpayer other than the producer of
manufacturer: gains, profit, and income derived
from the purchase within and its sale without
the Philippines, or from the purchase without
and its sale within shall be treated as derived
entirely from sources within the country in
which the personal property is sold.
Exception: Gains from the sale of shares of stock in a
domestic corporation shall be treated as derived entirely
from sources within the Philippines regardless where the
said shares are sold.
iii. From sources without the Philippines:
(a) Interest other than those derived from sources within
the Philippines.
(b) Dividends other than those derived from sources
within the Philippines.
(c) Compensation for services performed without the
Philippines.
(d) Rentals and royalties from property located without
the Philippines or from any interest in such property
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including rentals or royalties for the use of or for the a. Direct Double Taxation (Strict sense)
privilege of using without the Philippines, patents,
copyrights and other like properties. The same property is taxed twice when it should be taxed
only once.
iv. Income partly within and partly without the
Philippines: Both taxes must be imposed:
Items other than those specified above in (1) and (2) shall i. On the same property or subject matter;
be treated as derived partly from sources within and partly ii. For the same purpose;
from sources without the Philippines. iii. By the same taxing authority;
iv. Within the same jurisdiction or taxing district and
b. Situs of Property Taxes during the same period; and
Real Property Personal Property v. They must be of the same kind or character of tax.
(Villanueva v. City of Iloilo, G.R. No. L-26521, 1968)
Tangible Intangible
Location of the
Location of the Domicile of the b. Indirect Double taxation (Broad sense)
Property
Property Owner
It means indirect duplicate taxation. It extends to all cases
c. Situs of Excise Tax in which there are two or more pecuniary impositions. The
TAX SITUS Constitution does not prohibit the imposition of double
Estate Tax Domicile of the decedent at the time taxation in the broad sense.
of his death
Constitutionality of Double Taxation
Donor’s Tax Domicile of the donor at the time of
the transfer The SC held that there is no constitutional prohibition
against double taxation in the Philippines. (Villanueva v.
City of Iloilo, G.R. No. L-26521, 1968) Therefore, it may not
SUMMARY be a valid defense against the validity of a tax measure.
OBJECT SITUS RULE (Pepsi-Cola v. Tanauan, G.R. No. L-31156, 1976) What is
prohibited is direct double taxation.
Person Residence,
Domicile, There is no double taxation in the following cases:
Citizenship ● By taxing corporate income and stockholders’
dividends from the same corporation;
Real Property Location of the property
● Tax imposed by the State and the local government
Tangible Personal Physical location although the upon the same occupation, calling or activity;
Property owner resides in another ● Real estate tax and income tax collected on the same
jurisdiction real estate property leased for earning purposes
(Villanueva v. City of Iloilo, G.R. No. L-26521, 1968);
Royalties Where the use of or right to use and
is exercised. ● Taxes are imposed on taxpayer’s final product and the
storage of raw materials used in the production of the
Income Citizenship
final product (Procter and Gamble Philippines v.
Residence
Municipality of Jagna, G.R. No. L-24265, 1979).
Source of Income

Transfer of Citizenship Example:

property Residence Spouses are American citizens residing in the Philippines,
Location of Property hence, they pay income taxes in the Philippines and
federal income taxes in the US. The Court held that double
Business or Where the taxation becomes obnoxious only where the taxpayer is
Occupation act/business/occupation is taxed twice for the benefit of the same governmental entity.
performed/exercised In this case, while the taxpayers would have to pay two
taxes on the same income, the Philippine government only
receives the proceeds of one tax. (Commissioner v.
4. DOUBLE TAXATION Lednickey, G.R. No. L-18169, 1964)
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c. Tax treaties as relief from double taxation
Modes of eliminating Double Taxation
i. Provide for exemptions or allowance of deduction or tax
credit for foreign taxes;
ii. Enter into treaties with other states (e.g., former Phil-
Am Military Bases Agreements as to income tax); or
iii. Apply the principle of reciprocity.
In the case of CIR v S.C. Johnson & Sons, Inc., (G.R. No.
127105, 1999), International Juridical Double Taxation is
defined as an imposition of comparable taxes in two or
more States on the same taxpayer in respect of the same
subject matter and for identical periods. In order to
eliminate double taxation, a tax treaty is entered into by the
two contracting States. The apparent rationale for doing
away with double taxation is to encourage the free flow of
goods and services and the movement of capital,
technology and persons between countries, conditions
deemed vital in creating robust and dynamic economies.
5. ESCAPE FROM TAXATION
a. Shifting of tax burden
The imposition of tax is transferred from the statutory
taxpayer to another without violating the law.
Ways of shifting the tax burden (FBO):
● Forward shifting: The transfer of burden from the
producer to distributor until it finally reaches the
ultimate purchaser or consumer
● Backward shifting: The reverse of forward shifting,
e.g. the manufacturer has agreed to buy the
supplier’s product only if the price is reduced by the
amount of tax
● Onward shifting: The tax burden is shifted twice or
more either forward or backward
Taxes that can be shifted
1. VAT
2. Percentage tax
3. Excise tax on excisable articles
4. Ad valorem taxes that oil companies pay to BIR
upon removal of petroleum products from its
refinery
Meaning of impact and incidence of taxation
TAXATION LAW
● Impact of Taxation – point on which the tax is
originally imposed or the one on whom the tax is
formally assessed.
● Incidence of Taxation – point on which the tax
burden finally rests or settles down.
Example: VAT is originally assessed against the seller
who is required to pay the said tax, but the burden is
actually shifted or passed on to the buyer.
It is important to know where the impact of taxation lies
(i.e. who the statutory taxpayer is) because it will generally
determine:
1. The proper party to claim a refund of erroneously
imposed indirect taxes; and
2. Whether the indirect taxes can be passed on to an
exempt buyer.
b. Distinguish: tax avoidance and tax evasion
Tax avoidance – also called tax minimization, is a tax
saving device that is legally permissible
The Court held that tax avoidance is the use of a tax saving
device within the means sanctioned by law. Any tax
avoidance scheme should be used by the taxpayer in good
faith and at arm’s length (CIR v Estate of Benigno Toda Jr.,
G.R. 147188, 2004)
When a merger or reincorporation is undertaken for a bona
fide purpose and not solely for the purpose of escaping the
burden of taxation, it is not evasion. The questioned
merger involved a pooling of resources aimed at the
continuation and expansion of business and so came
under the intendment of the NIRC exempting from the
capital gains tax exchanges of property effected under
lawful corporate combinations. (Commissioner v. Rufino,
G.R. No. L-33665-68, 1987)
Tax evasion – connotes fraud through the use of
pretenses and forbidden devices to lessen or defeat taxes;
must be willful and intentional
It connotes the integration of three factors:
1. End to be achieved, i.e., the payment of less than
that known by the taxpayer to be legally due, or the
non-payment of tax when it is shown that a tax is due;
2. Accompanying state of mind which is described as
being "evil," in "bad faith," "willful," or "deliberate and
not accidental"; and
3. Course of action or failure of action, which is
unlawful. (Toda, Jr. v. CA, G.R. No. 78583, 1990).
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People v. Kintanar People v. Santos

TAX TAX AVOIDANCE intentional violation of a and accurate information
EVASION known legal duty, and bad must be fully established
Other Tax Dodging Tax Minimization faith or bad purpose need as a positive act or state of
Name not be shown mind. It cannot be
Means Use Illegal Use legal means presumed nor attributed to
means mere inadvertent or
Penalty Punishable by Not punishable by negligent acts.
law law Involves non-filing of Involves failure to supply
Object To escape To minimize Income Tax Return. correct and accurate
payment of payment of taxes information. Mere
taxes The elements of a understatement of a tax is
violation of Section 255 of not itself proof of fraud for
Willful Blindness Doctrine the NIRC for failure to the purpose of tax
An individual or corporation can no longer say that the make or file a return are: evasion.
errors on their tax returns are not their responsibility or that
it is the fault of the accountant they hired. 1. The accused is a person The elements of a
required to make or file a violation of Section 255 of
An act is willful if it is “voluntary, conscious and intentional.” return; for failure to supply correct
Bad motive or intent to defraud need not be shown. The 2. The accused failed to and accurate information
only thing that needs to be shown is that the taxpayer is make or file the return at are:
aware of his/her obligation to file annual income tax returns the time required by law;
but “she nevertheless, voluntarily, knowingly and 3. The failure to make or 1. That a person is
intentionally failed to file the required returns.” (People v. file the return was willful. required to supply correct
Kintanar, CTA E.B. No. 006, 2010, affirmed by the SC in and accurate information;
2012) 2. That there is failure to
supply correct and
However, in the case of People v. Judy Ann Santos (CTA accurate information at the
Case No. 012, 2013), affirmed by the SC in 2013, the CTA time or times required by
Division acquitted Santos although the BIR asserted the law or rules and
same arguments it made in the Kintanar case. Santos was regulations; and
charged with failure to supply correct and accurate 3. That such failure to
information in her ITR. She claimed that by virtue of trust, supply correct and
respect and confidence, she entrusted her finances to her accurate information is
manager since she was a child. Here, the CTA Division done willfully.
found that the element of willfulness and motive to commit
fraud were wanting and that Santos was merely negligent. 6. EXEMPTION FROM TAXATION
Unlike Santos, who did not know any better, Kintanar was
Tax Exemption
an experienced businesswoman who ought to have known
The grant of immunity to particular persons or corporations
and understood all the matters concerning her business,
or to persons or corporations of a particular class from a
including knowledge and awareness of her tax obligations
tax which persons and corporations generally within the
concerning her business and should have ensured the
same state or taxing district are obliged to pay. It is an
correct filing of her returns.
immunity or privilege; it is freedom from a financial charge
or burden to which others are subjected. (Greenfield v.
People v. Kintanar People v. Santos Meer, G.R. No. 156, 1946)
Tax evasion connotes the integration of the three
factors. Nature of Tax Exemption
All elements are present Lacks the element of Exemption from taxes is personal in nature and covers only
willfulness taxes for which the taxpayer-grantee is directly liable. In
“Willful" in tax crimes The element of willful any case, it cannot be transferred or assigned by the
means voluntary, failure to supply correct person to whom it is given without the consent of the State.

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Tax exemptions are strictly construed against the taxpayer
because such provisions are highly disfavored and may
almost be said to be odious to the law. (Manila Electric
Company v. Vera, G.R. No. L-29987, 1975)
Exemptions are not presumed, but when public property is
involved, exemption is the rule, and taxation, the
exception.
General Rule: Exemptions are not presumed.
Exception: When public property is involved (i.e.,
exemption is the rule, and taxation, the exception)
There can be no simultaneous exemptions under two laws,
one partial and the other total.
Kinds of Tax Exemption
a. Express (or affirmative) – when certain persons,
property or transactions are, by express provision,
exempted from all or certain taxes, either entirely or in
part.
Examples of Statutory Tax Exemptions:
i. Intercorporate dividends by a domestic
corporation from another domestic corporation1
ii. Section 105 of the Tariff and Customs Code
iii. Section 234 of the Local Government Code
iv. Other special laws such as Omnibus Investment
Code of 1987 and Philippine Overseas Shipping
Act
b. Implied (or by omission) – when a tax is levied on
certain classes of person, properties or transactions
without mentioning the other classes. Every tax statute
makes exemptions since all those not mentioned are
deemed exempted. The omission may either be
accidental or intentional.
c. Contractual – those lawfully entered into by the
government in contracts under existing laws. These
exemptions must not be confused with the tax
exemptions granted under franchises, which are not
contracts within the context of non-impairment clause
of the Constitution. (Cagayan Electic Co. v. CIR, G.R.
No. L-60126, 1985)
The mere undertaking of NPC under the Agreement,
that it shall be responsible for the payment of all real
1
SEC. 27 (D) (4) Intercorporate Dividends. - Dividends received by a
domestic corporation from another domestic corporation shall not be
subject to tax.
TAXATION LAW
estate taxes and assessments, does not justify the
exemption of FELS – a private company. The privilege
granted to NPC cannot be extended to FELS. (Fels
Enegry, Inc. v. Province of Batangas, G.R. Nos. 168557
& 170628, 2007)
Rationale/grounds for exemption
A presumption that the public interest will be subserved by
the exemption allowed. Grant of exemption rests upon that
such will benefit the body of the people and not upon any
idea of lessening the burden of the individual owners of
property.
Purpose is some public benefit or interest, which the law-
making body considers sufficient to offset the monetary
loss entailed in the grant of exemptions.
Created in a treaty on grounds of reciprocity or to lessen
the rigors of the international double or multiple taxation.
Equity is not a ground for tax exemption.
Revocation of tax exemption
Tax exemption is generally revocable. The congressional
power to grant an exemption necessarily carries with it the
consequent power to revoke the same.
In order to be irrevocable, the tax exemption must be
founded on a contract or granted by the Constitution.
By way of exception, a contractual tax exemption obtained
from the State for a valid and material consideration of a
mutual nature cannot be revoked without impairing the
obligation of contracts under the Constitution. (Mactan
Cebu Int’l Airport Authority v. Marcos, G.R. No. 120082,
1996; MERALCO v. Province of Laguna, G.R. No. 131359,
1999)
7. EQUITABLE RECOUPMENT
When a taxpayer is entitled to a claim for refund but he was
not able to file a written claim within the prescribed time,
the taxpayer is allowed to credit the amount for refund
against his existing liability. This is not allowed in the
Philippines and is applied in common law countries.
8. PROHIBITION ON COMPENSATION AND SET-OFF
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Taxes are not subject to set-off or legal compensation 2. Collector of Customs with respect to customs duties
because the government and the taxpayer are not mutual limited to cases where the legitimate authority is
creditor and debtor of each other. (Republic v. Mambulao specifically granted such as in the remission of duties
Lumber Co., G.R. No. L-17725, 1962; Caltex Phils. v. (Sec. 709, Tariffs and Customs Code); and
COA, G.R. No. 92585, 1992) 3. Customs Commissioner, subject to the approval of the
Secretary of Finance, in cases involving the imposition
Taxes are not subject to set-off or compensation for the of fines, surcharges, and forfeitures (Sec. 2316, Tariffs
following reasons: and Customs Code).
1. Taxes are of distinct kind, essence and nature, and
these impositions cannot be classed in merely the 10. TAX AMNESTY
same category as ordinary obligations;
It is the general or intentional overlooking by the State of
2. The applicable laws and principles governing each are
its authority to impose penalties on persons otherwise
peculiar, not necessarily common, to each other; and
guilty of evasion or violation of a revenue or tax law. It
3. Public policy is better subserved if the integrity and
partakes of an absolute forgiveness or waiver of the
independence of taxes are maintained. (Republic v.
Government of its right to collect. It is a way to give tax
Mambulao Lumber Co., G.R. No. L-17725, 1962)
evaders who wish to relent and are willing to reform a
chance to do so.
A person cannot refuse to pay tax on the basis that the
government owes him an amount equal to or greater than
It refers to the articulation of the absolute waiver by a
the tax being collected. The collection of a tax cannot await
sovereign of its right to collect taxes and power to impose
the results of a lawsuit against the government. (Philex
penalties on persons or entities guilty of violating a tax law.
Mining Corp. v. CIR, G.R. No. 125704, 1998; Francia v.
Tax amnesty aims to grant a general reprieve to tax
Intermediate Appellate Court, G.R. No. L-67649, 1988)
evaders who wish to come clean by giving them an
opportunity to straighten out their records. Amnesty
In several cases, as an exception to offsetting, the Court
taxpayers may immediately enjoy the privileges and
have allowed the determination of the taxpayer’s liability in
immunities under a Tax Amnesty Law, provided they fulfill
a refund case, thereby allowing the offsetting taxes. In
the suspensive conditions imposed therein. (CS Garment,
these cases, offsetting was allowed because the
Inc. v. CIR, G.R. No. 182399, 2014)
determination of the taxpayer’s liability is intertwined with
the resolution for the claim of refund.
A tax amnesty, much like a tax exemption, is never favored
or presumed in law. The grant of a tax amnesty, similar to
In the case of TPC, where in it filed a claim for refund or
a tax exemption, must be construed strictly against the
credit under Sec. 112 of the NIRC while the issue to be
taxpayer and liberally in favor of the taxing authority. (Asia
resolved is whether TPC is entitled of its unutilized input
International Auctioneers v. CIR, G.R. No. 179115, 2012)
VAT, the offsetting was not allowed. The Court held that,
since it is not a claim for refund under Section 229 of the
Distinguished from tax exemption
NIRC, the correctness of TPC's VAT returns is not an
issue. Hence, the determination of the taxpayer’s liability AMNESTY EXEMPTION
was not related with the resolution of the claim for refund Scope of Immune from the Immunity from civil
or credit offsetting was also not an issue. (CIR v. Toledo immunity payments of liability only.
Power Company, G.R. No. 196415, 2015) taxes, as well as
additions thereto,
9. COMPROMISE and the
appurtenant civil,
Generally allowed and enforceable when the subject criminal or
matter thereof is not prohibited from being compromised administrative
and the person entering such compromise is duly penalties under
authorized to do so the NIRC (Rule V,
Sec 10(1))
The law allows the following persons to do compromise on To whom General pardon To persons
behalf of the government: granted given to all exempted by law.
1. BIR Commissioner as expressly authorized by the taxpayers.
NIRC subject to certain conditions;
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AMNESTY EXEMPTION Not every action filed by a taxpayer can qualify to

A freedom from a challenge the legality of official acts done by the
charge or burden government. A taxpayer's suit can prosper only if the
to which others are governmental acts being questioned involve
subjected. disbursement of public funds upon the theory that the
Application Applies only to Generally expenditure of public funds by an officer of the state
past tax periods prospective in for the purpose of administering an unconstitutional
hence, application. act constitutes a misapplication of such funds, which
retroactive may be enjoined at the request of a taxpayer. (Dean
application. Jose Joya v. PCGG, G.R. No. 96541, 1993)
Presence of Yes, there is None, because
Actual revenue loss there was no A taxpayer’s suit is properly brought only when there is an
Revenue since there was actual taxes due as exercise of the spending or taxing power of Congress.
Loss actually taxes the person or (Automotive Industry Workers Alliance v. Romulo, G.R.
due but collection transaction is No. 157509, 2005).
was waived by protected by tax
the government. exemption There is no need to show proof of direct injury as a result
of the action; it is sufficient for the petitioner to have a
“Shall cover all general interest common to all members of the public
national internal (Maceda v. Macaraig, G.R. No. 88291, 1991)
revenue taxes for
the taxable year As distinguished from a citizen’s suit
2005 and prior Taxpayers are allowed to sue, for example, where there is
years” (Rule II, a claim of illegal disbursement of public funds or where a
Sec 3) tax measure is assailed as unconstitutional. Voters are
allowed to question the validity of election laws because of
When enjoyment of the immunities and privileges their obvious interest in the validity of such laws.
begins: Concerned citizens can bring suits if the constitutional
Neither the 2007 Tax Amnesty Law nor Department of question they raise is of "transcendental importance" which
Finance (DOF) Order No. 29-07 (IRR of the Tax Amnesty must be settled early. Legislators are allowed to sue to
Law) imposes a waiting period of one year before the question the validity of any official action which they claim
applicant can enjoy the benefits of the Tax Amnesty Law. infringes their prerogatives qua legislators. (KILOSBAYAN
v. Morato, G.R. No. 118910, 1995)
It can be surmised from the provisions of the law that the
law intended the immediate enjoyment of the immunities Taxpayers claim of illegal disbursement of public
and privileges of tax amnesty upon fulfilment of the (taxpayer’s funds or where a tax measure is assailed
requirements. suit) as unconstitutional
Citizens if the constitutional question they raise is
The one-year period referred to in the law should thus be (citizen’s of "transcendental importance" which
considered only as a prescriptive period within which third suit) must be settled early.
parties (i.e., "parties other than the BIR or its agents") can Voters validity of election laws because of their
question the SALN – not as a waiting period during which obvious interest in the validity of such
the BIR may contest the SALN and the taxpayer prevented laws.
from enjoying the immunities and privileges under the law. legislators validity of any official action which they
(CS Garment, Inc. v. CIR, G.R. No. 182399, 2014) claim infringes their prerogatives as
legislators.

Case law in most jurisdictions now allows both "citizen"

Other Doctrines (Not included in the Syllabus) and "taxpayer" standing in public actions. (De Castro v.
JBC, G.R. No. 191002, 2010)
1. Taxpayer’s Suit
Nature and Concept The distinction was first laid down in Beauchamp v. Silk:
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● The plaintiff in a taxpayer’s suit is in a different
category from the plaintiff in a citizen's suit.
● In 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.
● As held by the New York Supreme Court in People ex
rel Case v. Collins: In matter of mere public right, the
people are the real parties. It is at least the right, if not
the duty, of every citizen to interfere and see that a
public offense be properly pursued and punished, and
that a public grievance be remedied.
● With respect to taxpayer's suits, the right of a citizen
and a taxpayer to maintain an action in courts to
restrain the unlawful use of public funds to his injury
cannot be denied (Terr v. Jordan)
Requisites of a taxpayer’s suit challenging the
constitutionality of a tax measure or act of a taxing
authority; concept of locus standi, doctrine of
transcendental importance and ripeness for judicial
determination
a. Requisites of a taxpayer’s suit challenging the
constitutionality of a tax measure or act of a taxing
authority
To constitute a taxpayer's suit, two requisites must be
met, namely, that:
● Public funds are disbursed by a political subdivision or
instrumentality and in doing so, a law is violated or
some irregularity is committed, and
● Petitioner is directly affected by the alleged ultra vires
act. (Anti-Graft League v. San Juan, G.R. No. 97787,
1996)
b. Concept of Locus Standi
Another requisite rooted in the very nature of judicial power
is locus standi or standing to sue. Thus, generally, a party
will be allowed to litigate only when he can demonstrate
that:
1. He has personally suffered some actual or threatened
injury because of the allegedly illegal conduct of the
government;
2. The injury is fairly traceable to the challenged action;
and
3. The injury is likely to be redressed by the remedy
being sought (Oliver Lozano v. Speaker Nograles,
G.R. No. 187883, 2009)
c. Doctrine of Transcendental Importance
Determinants whether or not a matter is of transcendental
importance:
TAXATION LAW
1. The character of the funds or other assets involved in
the case;
2. The presence of a clear case of disregard of a
constitutional or statutory prohibition by the public
respondent agency or instrumentality of the
government; and
3. The lack of any other party with a more direct and
specific interest in the questions being raised. (CREBA
v. ERC and Meralco, G.R. No. 174697, 2010); citing
(Senate of the Philippines v. Ermita, G.R. No. 169777
2006,); and (Francisco v. Nagmamalasakit na mga
Manggagawang Pilipino, Inc., G.R. No. 160261,
2003,), citing (Kilosbayan v. Guingona, G.R. No.
113375, 1994,)
d. Ripeness for judicial determination
An aspect of the "case-or-controversy" requirement is the
requisite of "ripeness." The question before the court must
be ripe for adjudication, for example, that the government
act being challenged must have an adverse effect on the
person challenging it. (PACU v. Secretary of Education, 97
Phi. 806, 1955)
The case must fall within the purview of an actual
controversy that is ripe for judicial determination. The
apprehension of the respondent that it could be rendered
technically insolvent through the imposition of the
iniquitous taxes was merely a speculation or conjecture. It
is arguing based on probabilities, not actualities. The Court
ruled that the action was prematurely filed, for a justiciable
controversy refers to an existing case or controversy that
is appropriate or ripe for judicial determination, not one that
is conjectural or merely anticipatory. (Commissioner of
Internal Revenue v. Standard Insurance Co., Inc., G.R. No.
219340, 2018)
Another approach is the evaluation of the twofold aspect
of ripeness:
1. The fitness of the issues for judicial decision; and
2. The hardship to the parties entailed by withholding
court consideration.
In our jurisdiction, the issue of ripeness is generally treated
in terms of actual injury to the plaintiff. Hence, a question
is ripe for adjudication when the act being challenged has
had a direct adverse effect on the individual challenging it.
(Oliver Lozano v. Speaker Nograles, G.R. No. 187883,
2009)
2. The Power to Tax and the Power to Destroy
Justice Marshall in McCulloch v. Maryland (4 Wheat, 316
4 L ed. 579, 607) said that the power to tax involves the
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power to destroy. Taxation is a destructive power which
interferes with the personal and property right of the people
and takes from them a portion of their property for the
support of the government.
On the other hand, Justice Holmes in Penhandle Oil Co. v.
Mississippi (277 U.S. 218) declared that “the power to tax
is not the power to destroy while this court sits.”
If the power to tax is used to implement the State’s police
power to discourage and ultimately prohibit certain
activities inimical to the public welfare, this is permissible
as a power to destroy. If the power to tax is solely for the
purpose of general welfare, or raising revenue, it can not
be used to destroy nor to confiscate. In this sense, this can
be attacked on the basis of constitutionality or a valid
exercise of legislative power.
Hence, in Roxas v. CTA, (G.R. L-25043, 1968), the
Supreme Court said: “The power to tax is sometimes called
the power to destroy. Therefore, it should be exercised with
caution to minimize injury to the proprietary rights of a
taxpayer.”
K. CONSTRUCTION AND INTERPRETATION OF TAX
LAWS, RULES AND REGULATIONS
a) Tax Laws
General rule: Tax laws are construed liberally in favor of
the government and strictly against the taxing authority.
In case of doubt, tax statutes are construed strictly against
the government and liberally in favor of the taxpayer (CIR
v. CA, G.R. No. 107135, 1999)
Taxes, being burdens, are not to be presumed beyond
what the statute expressly and clearly declare.
Tax statutes offering rewards are liberally construed in
favor of informers.
Exception: Where the language of the tax statute is plain
and there is no doubt as to the legislative intent. In such
case, the words employed are to be given their ordinary
meaning.
b) Tax Exemptions and Exclusions
General rule: Exemptions are not favored and are
construed strictissimi juris against the taxpayer.
An exemption from the common burden cannot be
permitted to exist upon vague implication or inference.
TAXATION LAW
Taxation is the rule while exemption is the exception.
Therefore, whoever 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 by law, it must at least be within
its purview by clear legislative intent.
Claims for refund partake of the nature of tax exemptions
and will not be allowed unless granted in the most explicit
and categorical language.
Exceptions:
1. When the law itself expressly provides for a liberal
construction, that is, in case of doubt, it shall be
resolved in favor of exemption.
2. When the exemption is in favor of the government itself
or its agencies because the general rule is that they
are exempt from tax
3. When the exemption refers to religious, charitable and
educational institutions
4. When there is an express mention or when the
taxpayer falls within the purview of the exemption by
clear legislative intent, the rule on strict construction
does not apply.
c) Tax Rules and Regulations
The construction placed by the office charged with
implementing and enforcing the provisions of the NIRC
should be given controlling weight unless such
interpretation is clearly erroneous.
Taxpayers cannot be deprived of their entitlement to the
benefit of a treaty for failure to strictly comply with an
administrative issuance requiring the prior application for
tax treaty relief. At most, the application for a tax treaty
relief from the BIR should merely operate to confirm the
entitlement of the taxpayer to the relief. The denial of a tax
relief based on a tax treaty due to the failure of a taxpayer
to comply with a RMO would impair the value of the tax
treaty and the State’s duty to comply in good faith with the
tax treaty. (Deutsche Bank AG Manila v. CIR, G.R. No.
188550, 2013)
Non-retroactivity of Rulings (Sec. 246) - Any revocation,
modification or reversal of any of the rules and regulations
promulgated in accordance with the preceding Sections or
any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if
the revocation, modification or reversal will be prejudicial
to the taxpayers, except in the following cases:
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(a) Where the taxpayer deliberately misstates or omits
material facts from his return or any document
required of him by the Bureau of Internal Revenue;
(b) Where the facts subsequently gathered by the
Bureau of Internal Revenue are materially different
from the facts on which the ruling is based; or
(c) Where the taxpayer acted in bad faith.
Strict construction so as not to extend the plain terms
thereof that might create offenses by mere implication not
so intended by the legislative body. (People v. Martin, G.R.
No. L-38019, 1980)
———— end of topic ————

d) Penal Provisions of Tax Laws

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II. NATIONAL TAXATION b. Distinguish: gross income, net income,

and taxable income
TOPIC OUTLINE UNDER THE SYLLABUS: c. Sources of income subject to tax
i. Compensation income
II. NATIONAL TAXATION ii. Fringe benefits
A. TAXING AUTHORITY iii. Professional income
1. Jurisdiction, power, and functions of the iv. Income from business
Commissioner of Internal Revenue v. Income from dealings in property
2. Rule-making authority of the Secretary of (a) Distinguish ordinary asset
Finance and capital asset
(b) Types of gains
B. INCOME TAX (c) Special rules pertaining to
1. Definition, nature, and general principles income or loss from dealings
a. Income tax systems in property classified as
i. Global capital asset (loss limitation
ii. Schedular rule, loss carry-over rule,
iii. Others holding period rule)
b. Features of the Philippine income tax (d) Tax-free exchanges
law vi. Passive investment income
c. Criteria in imposing Philippine income (a) Interest
tax (b) Dividend
i. Citizenship (c) Royalty income
ii. Residence (d) Rental income
iii. Source vii. Annuities and proceeds from life
d. General principles of income taxation insurance or other types of
e. Types of Philippine income taxes insurance
f. Kinds of taxpayers viii. Prizes and awards
g. Taxable period ix. Pension, retirement benefit, or
2. Concept of income separation pay
a. Definition x. Income from any source
b. When income is taxable (a) Condonation of indebtedness
i. Existence of income (b) Recovery of accounts
ii. 1i. Realization of income previously written off
iii. Recognition of income (c) Receipt of tax refunds or
c. Tests in determining whether income is credit
earned for tax purposes d. Exclusions
i. Realization test i. Rationale
ii. Claim of right doctrine or doctrine ii. Taxpayers who may avail
of ownership, command or control iii. Distinguish: exclusions,
iii. Economic benefit test or doctrine deductions, and tax credits
of proprietary interest iv. Exclusions under the Constitution
iv. Severance test 4. Deductions
d. Methods of accounting a. General rule
i. Distinguish: cash and accrual b. Concept of return of capital
method c. Distinguish: itemized deductions and
ii. Special method: installment, optional standard deduction
deferred payment, percentage of d. Requirements for deductible items
completion (in long-term e. Items not deductible
contracts) 5. Income tax on individuals
e. Situs of Income a. Resident citizens, non-resident
3. Gross income citizens, and resident aliens
a. Definition i. Coverage

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ii. Taxation on compensation iv. Foreign currency deposit units

income b. Resident foreign corporations
(a) Inclusions i. Taxation - in general
(b) Exclusions (a) Regular Corporate Income
iii. Taxation of business Tax (RCIT)
income/income from practice of (b) Minimum Corporate Income
profession Tax (MCIT)
(a) Schedular (c) Branch Profits Remittance
(b) 8% option Tax (BPRT)
iv. Taxation of partners in a general (d) Taxation of passive income
professional partnership (e) Taxation of capital gains
v. Taxation of passive income ii. Resident foreign corporations
vi. Taxation of capital gains subject to preferential tax rates
(a) Income from sale of shares of (a) International carriers
stock of a Philippine (b) Foreign currency deposit
corporation units and offshore banking
(b) Income from sale of real units
property situated in the (c) Regional or area
Philippines headquarters and regional
(c) Income from sale, exchange, operating
and other disposition of other headquarters
capital assets c. Non-resident foreign corporations
b. Non-resident aliens engaged in trade (NRFC)
or business i. Taxation of NRFC in general
c. Non-resident aliens not engaged in ii. NRFCs subject to preferential tax
trade or business rates
d. Aliens employed by regional d. Corporations exempt from income tax
headquarters, regional operating e. Tax on other business entities: general
headquarters, offshore banking units, partnerships, general professional
and petroleum service contractors partnerships, co-ownerships, joint
e. Individual taxpayers exempt from ventures, and consortia
income tax 7. Filing of returns and payment
i. Minimum wage earner a. Individual return
ii. Exemptions granted under i. Who are required to file;
international agreements exceptions
6. Income tax on corporations ii. Substituted filing
a. Domestic corporations iii. When and where to file
i. Taxation - in general
b. Corporate returns
(a) Regular Corporate Income
i. Quarterly income tax
Tax (RCIT)
ii. Final adjustment return
(b) Minimum Corporate Income
iii. When and where to file
Tax (MCIT)
iv. Return of corporations
(c) Taxation of passive income
contemplating dissolution or
(d) Taxation of capital gains
reorganization
(e) Improperly accumulated
earnings tax c. Return on capital gains realized from
ii. Proprietary educational sale of shares of stock and real estate
institutions and non-profit 8. Withholding tax
hospitals a. Concept
iii. Government-owned or b. Final withholding tax
controlled corporations, agencies, c. Creditable withholding tax
instrumentalities i. Expanded withholding tax
ii. Withholding tax on compensation
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d. Fringe benefits tax
e. Duties of a withholding agent
2
SEC. 2. Powers and Duties of the Bureau of Internal Revenue - The
Bureau of Internal Revenue shall be under the supervision and control of
the Department of Finance and its powers and duties shall comprehend
the assessment and collection of all national internal revenue taxes, fees,
and charges, and the enforcement of all forfeitures, penalties, and fines
connected therewith, including the execution of judgments in all cases
decided in its favor by the Court of Tax Appeals and the ordinary courts.
The Bureau shall give effect to and administer the supervisory and police
powers conferred to it by this Code or other laws.
3
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to
Decide Tax Cases - The power to interpret the provisions of this Code
and other tax laws shall be under the exclusive and original jurisdiction of
the Commissioner, subject to review by the Secretary of Finance.
The power to decide disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties imposed in relation thereto, or
other matters arising under this Code or other laws or portions thereof
administered by the Bureau of Internal Revenue is vested in the
Commissioner, subject to the exclusive appellate jurisdiction of the Court
of Tax Appeals.
4
SEC. 5 Power of the Commissioner to Obtain Information, and to
Summon, Examine, and Take Testimony of Persons - In ascertaining
the correctness of any return, or in making a return when none has been
made, or in determining the liability of any person for any internal revenue
tax, or in collecting any such liability, or in evaluating tax compliance, the
Commissioner is authorized:
(A) To examine any book, paper, record, or other data which may be
relevant or material to such inquiry;
(B) To obtain on a regular basis from any person other than the person
whose internal revenue tax liability is subject to audit or investigation, or
from any office or officer of the national and local governments,
government agencies and instrumentalities, including the Bangko Sentral
ng Pilipinas and government-owned or -controlled corporations, any
TAXATION LAW
A. TAXING AUTHORITY
1. JURISDICTION, POWER, AND FUNCTIONS OF THE
COMMISSIONER OF INTERNAL REVENUE
a. Powers and duties of the BIR: (Sec. 2)2
1. To assess and collect national internal revenue taxes,
fees and charges;
2. To enforce all forfeiture, penalties, and fines
connected with the assessment and collection of
taxes, fees and charges;
3. To execute judgment in all cases decided in its favor
by the CTA and the ordinary courts; and
4. To effect and administer the supervisory and police
powers conferred upon it by the NIRC and other
special laws.
b. Powers of the Commissioner of Internal Revenue
(CIR)
1. Power to interpret tax laws and decide tax cases (Sec.
4)3
2. Power to obtain information and to summon/examine
and take testimony of persons (Sec. 5)4
information such as, but not limited to, costs and volume of production,
receipts or sales and gross incomes of taxpayers, and the names,
addresses, and financial statements of corporations, mutual fund
companies, insurance companies, regional operating headquarters of
multinational companies, joint accounts, associations, joint ventures of
consortia and registered partnerships, and their members;
PROVIDED, THAT THE COOPERATIVE DEVELOPMENT AUTHORITY
SHALL SUBMIT TO THE BUREAU A TAX INCENTIVE REPORT,
WHICH SHALL INCLUDE INFORMATION ON THE INCOME TAX,
VALUE ADDED TAX AN OTHER TAX INCENTIVES AVAILED OF BY
COOPERATIVES REGISTERED AND ENJOYING INCENTIVES
UNDER REPUBLIC ACT NO. 6938, AS AMENDED: PROVIDED
FURTHER, THAT THE INFORMATION SUBMITTED BY
COOPERATIVES DEVELOPMENT AUTHORITY TO THE BUREAU
SHALL BE INCLUDED IN THE DATABASE CREATED UNER
REPUBLIC ACT NO. 10708, OTHERWISE KNOWN ASTHE TAX
INCENTIVES MANAGEMENT AND TRANSPARENCY ACT (TIMTA). As
amended by RA 10963 (TRAIN LAW)
(C) To summon the person liable for tax or required to file a return, or any
officer or employee of such person, or any person having possession,
custody, or care of the books of accounts and other accounting records
containing entries relating to the business of the person liable for tax, or
any other person, to appear before the Commissioner or his duly
authorized representative at a time and place specified in the summons
and to produce such books, papers, records, or other data, and to give
testimony;
(D) To take such testimony of the person concerned, under oath, as may
be relevant or material to such inquiry; and
(E) To cause revenue officers and employees to make a canvass from
time to time of any revenue district or region and inquire after and
concerning all persons therein who may be liable to pay any internal
revenue tax, and all persons owning or having the care, management or
possession of any object with respect to which a tax is imposed.
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3. Power to make assessments and prescribe additional
requirements for tax administration and enforcement
(Sec. 6)5
The provisions of the foregoing paragraphs notwithstanding, nothing in
this Section shall be construed as granting the Commissioner the
authority to inquire into bank deposits other than as provided for in
Section 6(F) of this Code.
5
SEC. 6. Power of the Commissioner to Make assessments and
Prescribe additional Requirements for Tax Administration and
Enforcement. - (A) Examination of Returns and Determination of Tax
Due - After a return has been filed as required under the provisions of this
Code, the Commissioner or his duly authorized representative may
authorize the examination of any taxpayer and the assessment of the
correct amount of tax: NOTWITHSTANDING ANY LAW REQUIRING
THE PRIOR AUTHORIZATION OF ANY GOVERNMENT AGENCY OR
INSTRUMENTALITY: Provided, however; That failure to file a return shall
not prevent the Commissioner from authorizing the examination of any
taxpayer.
Any return, statement of declaration filed in any office authorized to
receive the same shall not be withdrawn:
Provided, That within three (3) years from the date of such filing, the same
may be modified, changed, or amended:
Provided, further, That no notice for audit or investigation of such return,
statement or declaration has in the meantime been actually served upon
the taxpayer.
(B) Failure to Submit Required Returns, Statements, Reports and other
Documents - When a report required by law as a basis for the assessment
of any national internal revenue tax shall not be forthcoming within the
time fixed by laws or rules and regulations or when there is reason to
believe that any such report is false, incomplete or erroneous, the
Commissioner shall assess the proper tax on the best evidence
obtainable.
In case a person fails to file a required return or other document at the
time prescribed by law, or willfully or otherwise files a false or fraudulent
return or other document, the Commissioner shall make or amend the
return from his own knowledge and from such information as he can
obtain through testimony or otherwise, which shall be prima facie correct
and sufficient for all legal purposes.
(C) Authority to Conduct Inventory-taking, surveillance and to Prescribe
Presumptive Gross Sales and Receipts - The Commissioner may, at any
time during the taxable year, order inventory-taking of goods of any
taxpayer as a basis for determining his internal revenue tax liabilities, or
may place the business operations of any person, natural or juridical,
under observation or surveillance if there is reason to believe that such
person is not declaring his correct income, sales or receipts for internal
revenue tax purposes.
The findings may be used as the basis for assessing the taxes for the
other months or quarters of the same or different taxable years and such
assessment shall be deemed prima facie correct.
When it is found that a person has failed to issue receipts and invoices in
violation of the requirements of Sections 113 and 237 of this Code, or
when there is reason to believe that the books of accounts or other
records do not correctly reflect the declarations made or to be made in a
return required to be filed under the provisions of this Code, the
Commissioner, after taking into account the sales, receipts, income or
other taxable base of other persons engaged in similar businesses under
similar situations or circumstances or after considering other relevant
information may prescribe a minimum amount of such gross receipts,
sales and taxable base, and such amount so prescribed shall be prima
TAXATION LAW
Power to interpret the NIRC and other tax laws
facie correct for purposes of determining the internal revenue tax liabilities
of such person.
(D) Authority to Terminate Taxable Period - When it shall come to the
knowledge of the Commissioner that a taxpayer is retiring from business
subject to tax, or is intending to leave the Philippines or to remove his
property therefrom or to hide or conceal his property, or is 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 partly
ineffective unless such proceedings are begun immediately, the
Commissioner shall declare the tax period of such taxpayer terminated at
any time and shall send the taxpayer a notice of such decision, together
with a request for the immediate payment of the tax for the period so
declared terminated and the tax for the preceding year or quarter, or such
portion thereof as may be unpaid, and said taxes shall be due and
payable immediately and shall be subject to all the penalties hereafter
prescribed, unless paid within the time fixed in the demand made by the
Commissioner.
(E) Authority of the Commissioner to Prescribe Real Property Values -
The Commissioner is hereby authorized to divide the Philippines into
different zones or areas and shall, upon mandatory consultation with
competent appraisers both from the private and public sectors, and with
prior notice to affected taxpayers, determine the fair market value of
real properties located in each zone or area, subject to automatic
adjustment once every three (3) years through rules and regulations
issued by the Secretary of Finance based on the current Philippine
valuation standards: provided, that no adjustment of zonal valuation
shall be valid unless published in a newspaper of general circulation
in the province, city, or municipality concerned, or in the absencde
thereof, shall be posted in the provincial capitol, city or municipal
hall and in two (2) other conspicuous public placed therein;
provided, further, that the basis of any valuation, including the
records of consultations ddone, shall be public records open to the
inquiry of any taxpayer.
For purposes of computing any internal revenue tax, the value of the
property shall be, whichever is the higher of:
(1) the fair market value as determined by the Commissioner, or
(2) The fair market value as shown in the schedule of values of the
Provincial and City Assessors. as amended by R.A. No. 10963
(F) Authority of the Commissioner to inquire into Bank Deposit Accounts
- Notwithstanding any contrary provision of Republic Act No. 1405 and
other general or special laws, the Commissioner is hereby authorized to
inquire into the bank deposits of:
(1) A decedent to determine his gross estate; and
(2) any taxpayer who has filed an application for compromise of his tax
liability under Sec. 204 (A) (2) of this Code by reason of financial
incapacity to pay his tax liability.
In case a taxpayer files an application to compromise the payment of his
tax liabilities on his claim that his financial position demonstrates a clear
inability to pay the tax assessed, his application shall not be considered
unless and until he waives in writing his privilege under Republic Act No.
1405 or under other general or special laws, and such waiver shall
constitute the authority of the Commissioner to inquire into the bank
deposits of the taxpayer.
(G) Authority to Accredit and Register Tax Agents - The Commissioner
shall accredit and register, based on their professional competence,
integrity and moral fitness, individuals and general professional
partnerships and their representatives who prepare and file tax returns,
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Under the exclusive and original jurisdiction of the CIR,
subject to review by the Secretary of Finance (Sec. 4)6
Under RMC No. 37-07, the authority of the CIR to sign
rulings granting and/or confirming tax incentives, and tax
treaty relief through the ruling process is now delegated to
the Deputy Commissioner of the Legal and Inspection
Group and to the Assistant Commissioner of the Legal
Service Group.
However, the CIR is empowered, motu propio, to reverse,
modify or alter any such ruling issued by the Deputy
Commissioner of the Legal and Inspection Group or the
Assistant Commissioner of the Legal Service Group,
subject to the non-retroactivity rule.
All rulings of first impression shall be signed by the CIR.
Power to decide tax cases
Includes the power to decide:
4. Disputed assessments;
5. Refunds of internal revenue taxes, fees or other
charges;
6. Penalties imposed in relation to the above; and
7. Other matters arising under the NIRC.
Note: Decisions (quasi-judicial, such as decisions on
assessment, refunds, and other matters) of the CIR are
subject to the exclusive appellate jurisdiction of the CTA.
Note: Those decided by the CIR/ other officers in the
exercise of their interpretative (quasi-legislative) powers
are appealable before the Secretary of Finance. The
decision then, of the Secretary, should it remain
unfavorable, could fall under “other matters” and shall now
be appealable before the CTA.
Power of the CIR to suspend the business operation of
statements, reports, protests, and other papers with or who appear
before, the Bureau for taxpayers.
Within one hundred twenty (120) days from January 1, 1998, the
Commissioner shall create national and regional accreditation boards, the
members of which shall serve for three (3) years, and shall designate from
among the senior officials of the Bureau, one (1) chairman and two (2)
members for each board, subject to such rules and regulations as the
Secretary of Finance shall promulgate upon the recommendation of the
Commissioner.
Individuals and general professional partnerships and their
representatives who are denied accreditation by the Commissioner
and/or the national and regional accreditation boards may appeal such
denial to the Secretary of Finance, who shall rule on the appeal within
sixty (60) days from receipt of such appeal.
TAXATION LAW
a taxpayer - See discussion under Remedies
Other powers of the CIR:
1. Power to Prescribe Real Property Values
● Authorized to divide the Philippines into different
zones or areas
● Mandatory consultation with competent appraisers
both from public and private sectors
● With prior notice to affected taxpayers
● The fair market value is subject to automatic
adjustment once every three years
● No adjustments in zonal valuation is valid unless
published in a newspaper of general circulation in
the province, city or municipality, or in the absence
thereof, shall be posted in the provincial capitol,
city or municipality and in two (2) other
conspicuous public places.
● The basis of any valuation, including the records
of consultations done, shall be public records open
to inquiry of any taxpayer.
2. Power to Inquire into Bank Deposits
The Commissioner is authorized to inquire into the
bank deposits and other related information held by
financial institution of:
● A decedent to determine his gross estate
● Any taxpayer who has filed an application for
compromise of his tax liability under Section
204(A)(2) of this Code by reason of financial
incapacity to pay his tax liability.
⮚ In case a taxpayer In case a taxpayer files an
application to compromise the payment of his
tax liabilities on his claim that his financial
position demonstrates a clear inability to pay
the tax assessed, his application shall not be
considered unless and until he waives in
writing his privilege under Republic Act No.
1405 or under other general or special laws,
Failure of the Secretary of Finance to rule on the Appeal within the
prescribed period shall be deemed as approval of the application for
accreditation of the appellant.
(H) Authority of the Commissioner to Prescribe Additional Procedural or
Documentary Requirements - The Commissioner may prescribe the
manner of compliance with any documentary or procedural requirement
in connection with the submission or preparation of financial statements
accompanying the tax returns.
6
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to
Decide Tax Cases - The power to interpret the provisions of this Code
and other tax laws shall be under the exclusive and original jurisdiction of
the Commissioner, subject to review by the Secretary of Finance.
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and such waiver shall constitute the authority
of the Commissioner to inquire into the bank
deposits of the taxpayer.
Revenue Issuances
Those issuances officially released by the CIR.
Different kinds of revenue issuances:
1. Revenue Regulations (RRs) - formal interpretations
of the NIRC signed by the Secretary of Finance upon
the recommendation of the CIR; have the force and
effect of law and can only be repealed, modified or
amended by another regulation or law; specify,
prescribe or define rules and regulations for effective
enforcement of the provisions of the NIRC and related
statutes
2. Revenue Memorandum Orders (RMOs) - directives
outlining procedures which are necessary to carry out
programs or to achieve policy goals and objectives
3. Revenue Memorandum Rulings (RMRs) -rulings
affecting certain significant tax matters affecting
groups of taxpayers or an industry that are issue
without any request by the taxpayers, for the guidance
and compliance of the revenue personnel
4. Revenue Memorandum Circular (RMCs) - issued to
amplify the rules, precedents, laws and other orders
issued by agencies other than the BIR, for the
guidance and compliance of the revenue personnel
5. Revenue Bulletins (RBs) - periodic issuances,
notices and official announcements of the CIR that
consolidate the BIR’s position on certain specific
issues of law or administration in relation to the
provisions of the NIRC, relevant tax laws and other
issuances for the guidance of the public
6. Rulings - less formal interpretations by the CIR or his
authorized representatives involving tax provisions
and regulations; include:
a. BIR Rulings;
b. VAT Rulings;
c. Rulings issued by International Tax Affairs Division
(ITAD); and
d. Rulings issued thru delegated authorities or
unnumbered rulings
2. RULE-MAKING AUTHORITY OF THE SECRETARY
OF FINANCE
a) Authority of the Secretary of Finance to promulgate
rules and regulations7
7
SEC. 244 Authority of Secretary of Finance to Promulgate Rules and
Regulations. - The Secretary of Finance, upon recommendation of the
TAXATION LAW
The Secretary of Finance, upon recommendation of the
CIR, shall promulgate all needful rules and regulations for
the effective enforcement of the provisions of this Code.
(Sec. 244)
The power of the Secretary of Finance to review
rulings issued by the CIR, which includes the power to
reverse, revise or modify, is limited only to rulings that are
adverse to the taxpayers.
Kinds of administrative issuances:
1. Legislative rules; and
Legislative rules - in the nature of subordinate
legislation, designed to implement a primary legislation
by providing details thereof; generally required that
before a legislative rule is adopted there must be
hearing
2. Interpretative rules.
Interpretative rules - designed to provide guidelines
to the law that the administrative agency is in charge of
enforcing
In order to place Champion, Hope and More cigarettes
within the scope of RA 7654 and subject them to an
increased tax rate, RMC 37-93 was issued. In so doing the
BIR did not simply interpret the law; verily it legislated
under its quasi-legislative authority. The due observance
of the requirement of notice, of hearing and of publication
should not have been ignored. The Supreme Court
eventually found that the hastily promulgated RMC 37-93
fell short of a valid and effective administrative issuance.
(CIR v. CA, G.R. No. 119761, 1996)
Administrative rules and regulations are intended to carry
out, neither to supplant nor to modify, the law. (CIR v CA,
ROH x Auto Products Phil, Inc. and CTA, GR No. 108358,
1995) It is applied prospectively. (ABS-CBN v. CTA, G.R.
No. 52306, 1981)
While a government is not bound by the error of its agents
issuing ruling, in the interest of justice and fairplay, such
may not be given retroactive effect. Hence, a VAT ruling
subsequently issued to correct a prior one cannot be
applied retroactively when taxpayers have already relied
on the said erroneous ruling. (CIR v. Benguet Corporation,
G.R. Nos. 134587 & 134588, 2005)
Commissioner, shall promulgate all needful rules and regulations for the
effective enforcement of the provisions of this Code.
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b) Specific provisions to be contained in rules and
regulations.
Sec. 245 of the NIRC itemizes such provisions. 8
Sources of internal revenue taxes
5. Income tax– tax imposed on the net or the gross
income realized in a taxable year (CIR v. Solidbank
Corporation, G.R. No. 148191, 2003)
2. Estate tax – tax that is levied, assessed, collected,
and paid upon the transfer of estate of a decedent
to his heirs9
3. Donor’s tax–tax imposed on the gratuitous
transfer of property between two or more persons
who are living at the time of the transfer 10
4. Percentage tax– tax measured by a certain
percentage of the gross selling price or gross
value in money of goods sold, bartered or
imported, or of the gross receipts or earnings
derived by any person engaged in the sale of
services (CIR v. Solidbank Corporation, G.R. No.
148191, 2003)
8
SEC. 245 Specific Provisions to be Contained in Rules and
Regulations. - The rules and regulations of the BIR shall, among other
things, contain provisions specifying, prescribing or defining:
● The time and manner in which Revenue Regional Director shall
canvass their respective Revenue Regions to discover of
persons and property liable to national internal revenue taxes;
● The forms of labels, brands or marks to be required on goods
subject to an excise tax, and the manner of labelling;
● The condition that in which goods intended for export, are not
et exported would be subject to excise tax.
● Conditions under which goods intended for storage in bonded
warehouse be stored and record keeping thereof;
● 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;
● The manner in which revenue shall be collected and paid, the
revenue stamps be affixed and the mode of cancellation of the
same;
● The manner in which the proper books and records be kept;
● 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
TAXATION LAW
5. Excise tax–tax applicable to certain specified or
selected goods or articles manufactured or
produced in the Philippines for domestic sale or
consumption or for any other disposition and to
things imported into the Philippines (Silkair v. CIR,
G.R. No. 184398, 2010)
6. Value-added tax–is a uniform 12% tax levied on
every importation of goods, whether or not in the
course of trade or business, or imposed on each
sale, barter, exchange or lease of goods or
properties or on each rendition of services in the
course of trade or business as they pass along the
production and distribution chain, the tax being
limited only to the value added to such goods,
properties or services by the seller, transferor or
lessor; an indirect tax that may be shifted or
passed on to the buyer, transferee or lessee of the
goods, properties or services (CIR v. Seagate
Technology, G.R. No. 153866, 2005)
six (6) years from the approval of Republic Act No. 7646 or the completion
of its comprehensive computerization program, whichever comes earlier:
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 One hundred thousand pesos (P100,000) for any
quarter of the preceding taxable year;
(2) Excise Tax. - Business establishment with excise tax paid or payable
of at least One million pesos (P1,000,000) for the preceding taxable year;
(3) Corporate Income Tax. - Business establishment with annual income
tax paid or payable of at least One million pesos (P1,000,000) for the
preceding taxable year; and
(4) Withholding Tax. - Business establishment with withholding tax
payment or remittance of at least One million pesos (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.
9
SEC. 84. Rates of Estate Tax. - There shall be levied, assessed,
collected and paid upon the transfer of the net estate as determined in
accordance with Sections 85 and 86 of every decedent, whether resident
or nonresident of the Philippines, a tax based on the value of such net
estate, as computed in accordance with the following schedule: xxx
10
SEC. 98. Imposition of Tax. - (A) There shall be levied, assessed,
collected and paid upon the transfer by any person, resident or
nonresident, of the property by gift, a tax, computed as provided in
Section 99.
(B) The tax 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.
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7. Documentary stamp tax – tax levied on the exercise Note: Philippine income taxation is a combination of both
by persons of certain privileges conferred by law for systems but is more schedular for individuals while more
the creation, revision, or termination of specific legal global for corporations.
relationships through the execution of specific
instruments (Philippine Home Assurance Corporation
GLOBAL SYSTEM SCHEDULAR SYSTEM
v. CA, G.R. No. 119446, 1999)
A system which imposes A system which imposes
B. INCOME TAX income tax upon the total various types of tax on
income of the taxpayer income producing activities
A tax on all yearly profits arising from property,
professions, trades, or offices, or as a tax on a person’s Emphasizes the burden Emphasizes on revenue
income, emoluments, profits and the like. Income tax is a allocation aspects and administrative aspects
direct tax.
Most equitable in Because of its multiple
1. DEFINITION, NATURE, AND GENERAL distributing tax burden, as rates, the tax burden of a
PRINCIPLES burden of an individual is person does not respond to
closely related to his his income but rather fall
a. Income Tax Systems
resources and his ability to fortuitously on the type of
i. Global pay his income
The total allowable deductions are deducted from the
Administration is not quite Administration is simple
gross income to arrive at the net taxable income subject
as easy as schedular being confined to each
to the relevant income tax rate.
because one has to transaction or activity
consider all income from
All items of gross income and deductions are reported
whatever sources
in one income tax return and a single tax is imposed on
all income received or earned by a person irrespective
of the activities which produced the income (i.e. Note: Another way of differentiating global and schedular
compensation income, net income from business, trade is that under the global system, there is no need for
or profession.) classification as all taxpayers are subjected to a single
rate, while under the schedular system, there are different
ii. Schedular categories of taxable income.
Different types of income are subjected to different sets
of graduated or flat income tax rates. The applicable tax Global treatment is usually applied to corporations, as
rates will depend on the classification of the taxable corporations are taxed at a single rate, regardless of the
income and the basis could be gross income or net tax base; while the schedular system is usually applied to
income (i.e. capital gains tax). individuals as they are subjected to different tax rates
based on their tax bracket.
iii. Others
b. Features of the Philippine Income Tax Law
Semi-Schedular or Semi-Global Tax System – The
compensation income, business or professional
i. Direct tax – Tax burden is borne by the income
income, capital gain and passive income not subject to
recipient upon whom the tax is imposed.
final tax, and other income are added together to arrive
ii. Progressive tax – Tax rate increases as the tax
at the gross income and after deducting the sum of
base increases; direct taxes are to be preferred and
allowable deductions, the taxable income is subjected
as much as possible, indirect taxes should be
to the relevant income tax rate.
minimized. (Tolentino v. Secretary of Finance, G.R.
No. 115455, 1995)
With respect to the income, the computation of income
is global while the schedular tax system applied to the iii. Comprehensive system – Adopts the citizenship
capital gains and passive income subject to final tax at principle, residence principle, and the source
preferential tax rates. principle.
iv. Semi-schedular or semi-global tax system –
Certain passive incomes and capital gains are
subject to final taxes at preferential rates while all
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other incomes are added together to arrive at the

gross income. After deducting the sum of allowable
Taxpayer Income Income
deductions, the taxable income is subjected to one
within without
set of graduated tax rates for an individual or normal
corporate income tax rate for corporations. Individual

c. Criteria in imposing Philippine Income Tax Resident Citizen Taxable Taxable

i. Citizenship – A citizen taxpayer is subject to income Resident Alien and Taxable Exempt
tax: (a) on his worldwide income if he resides in the OCW
Philippines; or (b) only on his income from sources
within the Philippines, if he qualifies as a non-resident Resident and Taxable Exempt
Nonresident Alien
citizen.
Corporation
ii. Residence – A resident alien is liable to pay income
tax on his income from sources within the Philippines Domestic Taxable Taxable
but exempt from tax on his income from sources
outside the Philippines. Foreign Taxable Exempt

iii. Source – A non-resident alien could be subject to e. Types of Philippine Income Taxes
Philippine income tax if he derives income from
1. Net Income Tax/Taxable Income (GI – Deductions)
sources within the Philippines such as dividend,
2. Gross Income Tax
interest, rent or royalty.
3. Final Income Tax (on passive income and capital
d. General principles of income taxation gains)
4. Fringe Benefits Tax (amount of benefits to
Except when otherwise provided in this Code: (NIRC, managerial and supervisory employee paid by
Sect. 23) employer; employee is taxed but burden is on
i. A citizen of the Philippines residing therein is taxable employer)
on all income derived from sources within and 5. Capital Gains Tax (real property and shares of stock
without the Philippines; not traded in stock market)
ii. A non-resident citizen is taxable only on income 6. Corporate Income Tax
derived from sources within the Philippines; 7. Minimum Corporate Income Tax (2% of gross
iii. An individual citizen of the Philippines who is income)
working and deriving income from abroad as an 8. Improperly Accumulated Earnings Tax (IAET)
overseas contract worker (OCW) is taxable only on 9. Branch Profit Remittance Tax
income derived from sources within the Philippines:
Provided, That a seaman who is a citizen of the f. Kinds of Taxpayers
Philippines and who receives compensation for
1. Individual Taxpayers
services rendered abroad as a member of the
complement of a vessel engaged exclusively in
i. Citizens
international trade shall be treated as an overseas
(a) Resident Citizen (RC) – citizen of the Philippines
contract worker;
residing therein is taxable on all income derived from
iv. An alien individual, whether a resident or not of the
sources within and without the Philippines.
Philippines, is taxable only on income derived from
sources within the Philippines;
v. A domestic corporation is taxable on all income
derived from sources within and without the
Philippines; and
vi. 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.

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(b) Nonresident Citizen 11 (NRC) – citizen of the
Philippines who is taxable only on his income from
sources within the Philippines if he:
● Establishes the fact of his physical presence
abroad with a definite intention to reside therein.
● Leaves the Philippines during the taxable year to
reside abroad, as immigrant or for employment on
a permanent basis.
● Works & derives income from abroad & whose
employment requires him to be physically present
abroad most of the time (i.e. not less than 183
days) during the taxable year.
● Was previously considered as nonresident citizen
& arrives in the Philippines at any time during the
taxable year to reside permanently in the
Philippines.
Examples of non-resident citizens:
● Immigrant – one who leaves the Philippines to
reside abroad as an immigrant for which a foreign
visa has been secured
● Permanent employee abroad – one who leaves
the Philippines and works abroad on a more or
less permanent basis
Note:
The taxpayer shall submit proof to the CIR to show his
intention of leaving the Philippines to reside permanently
abroad or to return to and reside in the Philippines as the
case may be.
Non-resident citizens who are exempt from tax with
respect to income derived from sources outside the
Philippines shall no longer be required to file information
returns from sources outside the Philippines beginning
2001. (Rev. Regs. 05-01; BIR Ruling No. DA-261-05)
(c) Contract Worker or Overseas Contract worker
(OCW) – one who leaves the Philippines on account of
a contract of employment which is renewed from time
to time under such circumstance as to require him to
be physically present abroad most of the time.
11
SEC. 22.(E). The term “nonresident citizen” means:
(1) 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.
(2) A citizen of the Philippines who leaves the Philippines during the
taxable year to reside abroad, either as an immigrant or for employment
on a permanent basis.
(3) A 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.
TAXATION LAW
Under SEC. 23.(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 who is a citizen
of the 24 National Tax Research Center Philippines
and who receives compensation for services
rendered abroad as a member of the complement of
a vessel engaged exclusively in international trade
shall be treated as an overseas contract worker;
Note:
For OCWs, the time spent abroad is not material for tax
exemption purposes. All that is required is for the worker’s
employment contract to pass through and be registered
with the POEA. (BIR Ruling No. 33-00; BIR Ruling No. DA-
428-04)
An OCW is a Filipino citizen who:
● Holds a job outside the Philippines,
● Is physically present in that foreign country where the
job is,
● Is registered with the POEA,
● Has a valid overseas employment certificate, and
● His/her salaries and wages are paid by an employer
abroad and are not borne by any entity or person in the
Philippines. (Rev. Regs. 01-11)
ii. Aliens
(a) Resident Alien 12 (RA) – an individual whose
residence is within the Philippines and who is not a
citizen thereof is taxable only on income derived from
sources within the Philippines.
Under SEC. 23.(D) An alien individual, whether a
resident or not of the Philippines, is taxable only on
income derived from sources within the Philippines;
One who comes to the Philippines for a definite
purpose which in its nature would require an extended
(4) A citizen who has been previously considered as nonresident citizen
and who arrives in the Philippines at any time during the taxable year to
reside permanently in the Philippines shall likewise be treated as a
nonresident citizen for the taxable year in which he arrives in the
Philippines with respect to his income derived from sources abroad until
the date of his arrival in the Philippines.
(5) The taxpayer shall submit proof to the Commissioner to show his
intention of leaving the Philippines to reside permanently abroad or to
return to and reside in the Philippines as the case may be for purpose of
this Section.
12
SEC. 22 (F). The term 'resident alien' means an individual whose
residence is within the Philippines and who is not a citizen thereof.
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stay, and makes his home temporarily in the country,
becomes a resident alien. The length of stay is
indicative of intention.
An alien actually present in the Philippines who is not
a mere transient or sojourner is a resident of the
Philippines for purposes of the income tax. 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.
If he lives in the Philippines and has no definite
intention as to his stay, he is a resident. One who
comes to the Philippines for a definite purpose which
in its nature may be promptly accomplished is a
transient.
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 for which he came has been
consummated or abandoned.
Loss of residence by alien:
● An alien who has acquired residence in the
Philippines retains his status until he abandons the
same and actually departs from the Philippines.
13
SEC. 22.(G) The term “nonresident alien” means an individual whose
residence is not within the Philippines and who is not a citizen thereof.
14
SEC. 25.(A)(1) In General. – A nonresident alien individual engaged in
trade or business in the Philippines shall be subject to an income tax in
the same manner as an individual citizen and a resident alien individual,
on taxable income received from all sources within the Philippines. A
nonresident alien individual who shall come to the Philippines and stay
therein for an aggregate period of more than one hundred eighty (180)
days during any calendar year shall be deemed a ‘nonresident alien doing
business in the Philippines,’ Section 22(G) of this Code notwithstanding.
15
SEC. 22.(H) The term ‘minimum wage earner’ shall refer to a worker
in the private sector paid the statutory minimum wage, or to an employee
in the public sector with compensation income of not more than the
statutory minimum wage in the non-agricultural sector where he/she is
assigned.
16
SEC. 24. Income Tax Rates. –
(A) Rates of Income Tax on Individual Citizen and Individual Resident
Alien of the Philippines.
(2) Rates of Tax on Taxable Income of Individuals. The tax shall be
computed in accordance with and at the rates established in the following
schedule:
(a) Tax Schedule Effective January 1, 2018 until December 31, 2022:
TAXATION LAW
● A mere intention to change his residence does not
change his status. An alien who has acquired a
residence is taxable as a resident for the
remainder of his stay in the Philippines. (Rev.
Regs. 02-40, Sec. 6)
(b) Nonresident Alien 13 (NRA) – an individual whose
residence is not within the Philippines and who is not
a citizen thereof but doing business therein is taxable
only on income from sources within.
(1) Engaged in trade or business (NRA-ETB) – an
alien who comes and stays in the Philippines for
an aggregate period of more than 180 days during
any calendar year
(2) Not engaged in trade or business (NRA-NETB)
– an alien whose stay in the Philippines is 180
days or less14
iii. Special Class of Individual Employees
(a) Minimum Wage Earner
A worker in the private sector paid the statutory minimum
wage, or 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; 15
His earnings (i.e. SMW, holiday, overtime, night-shift
differential and hazard pay) are exempt from income tax
pursuant to the provisions of the NIRC and other laws,
general or special. 16
Not over P250,000
0%
Over P250,000 but not over P400,000
20% of the excess over P250,000
Over P400,000 but not over P800,000
P30,000 + 25% of the
excess over P400,000
Over P800,000 but not over P2,000,000
P130,000 + 30% of the excess over P800,00
Over P2,000,000 but not over P8,000,000 P490,000 + 32% of the excess
over P2,000,000
Over P8,000,000 P2,410,000 + 35% of the excess over P8,000,000
Tax Schedule Effective January 1, 2023 and onwards:
Not over P250,000 0%
Over P250,000 but not over P400,000 15% of the excess over P250,000
Over P400,000 but not over P800,000 P22,500 + 20% of the excess over
P400,000
Over P800,000 but not over P2,000,000 P102,500 + 25% of the excess
over P800,00
Over P2,000,000 but not over P8,000,000 P402,00 + 30% of the excess
over P2,000,000
Over P8,000,000 P2,202,500 + 35% of the excess over P8,000,000
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(a) Aliens employed by regional or area headquarters Nonresident

and regional operating headquarters of Alien engaged
multinational companies in the Philippines. Within the
in trade or Taxable Income
Philippines
business (more
The preferential tax rate of 15% is no longer applicable, than 180 days)
without prejudice to preferential rates under existing tax
treaties.
Nonresident
(b) Aliens employed by offshore banking units. Alien not
engaged in Within the
Gross Income
His gross income is no longer subject to the preferential trade or Philippines
tax rate of 15%, without prejudice to preferential rates business (180
under existing tax treaties. days or less)

(c) Aliens employed by petroleum contractors and

subcontractors. 1. Corporations

His gross income is no longer subject to the preferential A corporation shall include partnerships, no matter how
tax rate of 15%, without prejudice to preferential rates created or organized. It includes joint stock companies,
under existing tax treaties. joint accounts, associations, and insurance companies.

But does not include, for the purpose of imposing the 30%
TAXABLE ON regular corporate income tax (RCIT):
TAXPAYER TAX BASE
INCOME 1. General professional partnerships; and
2. Joint venture or consortium formed for the purpose of
Within and
Resident undertaking construction projects or engaging in
Taxable Income without the
Citizen petroleum, coal, geothermal and other energy
Philippines
operations pursuant to an operating or consortium
Nonresident Within the agreement under a service contract with the
Taxable Income
Citizen Philippines government.17

Within the Kinds of Corporations

Resident Alien Taxable Income
Philippines (i) Domestic Corporation (DC) – created or organized in
the Philippines or under its laws and is liable for
income derived from sources within and without 18
(ii) Foreign Corporation19 (FC) – organized and existing
under the laws of a foreign country, which includes:

For married individuals, the husband and wife, subject to the provision of
Section 51 (D) hereof, shall compute separately their individual income
tax based on their respective total taxable income:
Provided, that if any income cannot be definitely attributed to or identified
as income exclusively earned or realized by either of the spouses, the
same shall be divided equally between the spouses for the purpose of
determining their respective taxable income.
17
SEC. 22.(B) – The term “corporation” shall include partnerships, no
matter how created or organized, joint-stock companies, joint accounts
(cuentas en participacion), associations, or insurance companies, but
does not include general professional partnerships and a joint venture or
consortium formed for the purpose of undertaking construction projects
or engaging in petroleum, coal, geothermal and other energy operations
pursuant to an operating consortium agreement under a service contract
with the Government.

Provided, That minimum wage earners as defined in Section 22 (HH)
of this Code 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.
“General professional partnerships” are partnerships formed by persons
for the sole purpose of exercising their common profession, no part of the
income of which is derived from engaging in any trade or business.
18
SEC. 22.(C) – The term “domestic,” when applied to a corporation,
means created or organized in the Philippines or under its laws.
19
SEC. 22.(D) – The term “foreign,” when applied to a corporation, means
a corporation which is not domestic.
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Kinds of foreign corporations
(i) Resident foreign corporation 20 (RFC) – foreign
corporation engaged in trade or business within the
Philippines and is liable from sources within.
There is no specific criterion as to what constitutes
“doing” or “engaging in” or “transacting” business.
Each case must be judged in the light of its peculiar
circumstances.
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.
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. British
Overseas Airways Corp, GR No. L-65773-74, 1987.)
Q: A, a foreign corporation organized and existing
under the foreign law, was granted an authority to
operate by the Civil Aeronautics Board (CAB). It
doesn’t have flight originating from or coming to
the Philippines and does not operate any airplane.
As an offline carrier, A through B, its general sales
agent in the PH, sells passage documents and files
its income tax returns on Gross Philippine Billings.
A then filed a written claim for refund of alleged
erroneous paid income taxes before the BIR
contending that by the appointment of B, it cannot
be considered as having a “permanent
establishment” in the Philippines given the nature
of its operation. 1) Is A a resident foreign
corporation? 2) What constitutes doing business
in order to classify a corporation as a resident
foreign corporation?
Suggested Answer:
1) Yes, A is a resident foreign corporation for
income tax purposes. The Implementing Rules and
20
SEC.22.(H) - The term “resident foreign corporation” applies to a foreign
corporation engaged in trade or business within the Philippines.
21
SEC. 22.(I). - The term “nonresident foreign corporation” applies to a
foreign corporation not engaged in trade or business within the
Philippines.
TAXATION LAW
Regulations of Republic Act No. 7042 (Foreign
Investments Act) clarifies that "doing business"
includes "appointing representatives or
distributors, operating under full control of the
foreign corporation, 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." In this case, through B, A is
able to engage in an economic activity in the
Philippines – B performs acts, or exercises
functions that are incidental and beneficial to the
purpose of A's business, and enters into any
contract on behalf of A, with the express written
consent and according to the standards required
by the latter. Moreover, A was issued by the CAB
an authority to operate as an offline carrier in the
Philippines for a period of five years. A is,
therefore, a resident foreign corporation. Its
income from sale of airline tickets, through B, is
income realized from the pursuit of its business
activities in the Philippines. (Air Canada v. CIR, GR
No. 169507, 2016
2) Doing business constitutes any act that implies
continuity of commercial dealings or
arrangements or the exercise of functions
normally incidental to and in the progressive
prosecution of commercial gain or for the purpose
of the business. (Sec. 3 (d), Foreign Investment
Act; Air Canada v. CIR, GR No. 169507, 2016)
(ii) Nonresident foreign corporation – foreign
21
corporation not engaged in trade or business within the
Philippines
Joint Venture and Consortium
Joint venture is a commercial undertaking by two or more
persons, differing from a partnership that it relates to the
disposition of a single lot of goods or the completion of a
single project.
Consortium is an association, typically of several
business companies.
2. Partnerships
Taxed as a corporation 22 Includes unregistered joint
ventures and business partnerships
22
SEC. 22.(B) – The term “corporation” shall include partnerships,
no matter how created or organized, joint-stock companies, joint accounts
(cuentas en participacion), associations, or insurance companies, but
does not include general professional partnerships and a joint venture or
consortium formed for the purpose of undertaking construction projects
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Will form part of partner’s Partner’s distributive

Exception: that joint ventures are not taxable as gross income in the ITR share in the net income is
corporations when the purpose is for: subject to the graduated subject to a final tax of
income tax rates 10% 25 (resident citizens,
● Undertaking construction projects; or
nonresident citizens,
● Engaging in petroleum, coal, and other energy
Will be subjected to a OCWs, or resident aliens)
operation under a service contract with the
creditable withholding tax of or 20% 26 (NRAETB)
government.
15% (if income payments
exceed P720,000 for the
Partners in a business partnership are considered
current year) or 10% (if
stockholders. Their distributive shares are taxed as
income payments do not
dividends, and thus subject to final income tax on their
exceed P720,000 for the
gross distributive share.
current year) to be withheld
and paid by the partnership
3. General Professional Partnerships
to the BIR24
Established solely for purpose of exercising common With regard to partner’s share in net loss of the
profession and no part of income derived from engaging in partnership
trade or business.
May be claimed as a Not deductible since
As an entity, it is not subject to income tax. deductible expense in his subject to final tax
personal income tax return
Partners are liable for income tax on their distributive share
(computed by dividing net income of GPP).23 Each partner
shall report his distributive share as part of his gross With regard to how the partnership is taxed
income.
Still required to file an Deemed and treated as
Individual partners are subject to regular income tax rate annual information return corporations subject to the
on their taxable income on their incomes and corporate income tax rate
expenses for the purpose
of ascertaining the
NON-TAXABLE TAXABLE BUSINESS
partners’ taxable shares
PARTNERSHIP PARTNERSHIP

With regard to DISTRIBUTIVE SHARE: 4. Estate and Trusts

a. Distributive share is a partner’s computed and
ascertained share in the net profits of the
partnership,
b. Whether actually distributed to the partners or
not
Estate – property, rights, and obligations of a person which
are not extinguished by his death and those that accrue
thereto

or engaging in petroleum, coal, geothermal and other energy operations
pursuant to an operating consortium agreement under a service contract
with the Government. “General professional partnerships” are
partnerships formed by persons for the sole purpose of exercising their
common profession, no part of the income of which is derived from
engaging in any trade or business.
23
SEC. 26. Persons engaging in business as partners in a general
professional partnership shall be liable for income tax only in their
separate and individual capacities
25
SEC. 24.(B2) Cash and/or Property Dividends. – A final tax at the rate
of ten percent (10%) shall be imposed upon the cash and/or property
dividends actually or constructively received by an individual from a
domestic corporation or from a joint stock company, insurance or mutual
fund companies and regional operating headquarters of multinational
companies, or on the 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, or on the 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 member or co-venturer
26
SEC. 24.(B2) Cash and/or Property Dividends. – A final tax at the rate
of ten percent (10%) shall be imposed upon the cash and/or property
dividends actually or constructively received by an individual from a
domestic corporation or from a joint stock company, insurance or mutual
fund companies and regional operating headquarters of multinational
companies, or on the 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, or on the 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 member
or co-venturer
24
Revenue Regulation No. 11-2018
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Trust – arrangement created by agreement under which Same basis as an

title to property is passed to another for conservation or individual (depending on
investment with the income and the corpus/principal Estate and Taxable
classification of
distributed in accordance with the directions of the creator; Trust Income
decedent, if estate;
to be taxable as a separate entity, grantor must have trustor, if trust)
absolutely and irrevocably given up control and benefit
over the trust Domestic Taxable Within and without the
Corporation Income Philippines
5. Co-ownership
Exists whenever the ownership of an undivided thing or Resident
Taxable
right belongs to different persons; for income tax purposes, Foreign Within the Philippines
Income
the individual co-owners are liable for the taxes due on Corporation
their respective shares and the co-ownership itself is not Non-Resident
considered as a separate taxable entity Gross
Foreign Within the Philippines
Income
Corporation
There is co-ownership in the following instances:
● Two or more heirs inherit an undivided property from a
g. Taxable Period
decedent; or
● A donor makes a gift of an undivided property in favor General Rule: The accounting period of a taxpayer is a
of two or more donees. period of twelve (12) months.

It is not taxable when the activities are limited merely to (1) Calendar Year – accounting period from January 1 to
preservation of the co-owned property but the co-owners December 31 which is allowed if the:
are liable for income tax in their separate and individual ● Taxpayer is an individual
capacities. ● Taxpayer is a partnership
o Under Section 52(B) of the NIRC, 27 in relation
It is taxable when the income of the co-ownership is to Section 22(B), 28 a “corporation” includes a
invested by the co-owners in business creating a “partnership – no matter how created or
partnership. organized.”
● Accounting period is other than a fiscal year
TAX ● Taxpayer has no accounting period
TAXPAYER TAXABLE ON INCOME
BASE ● Taxpayer does not keep books
● Taxpayer is an estate or trust
GPP itself is not taxable,
General however, individual (2) Fiscal Year 29 – Accounting period of twelve (12)
Not
Professional partners will be taxed months ending on the last day of any month other than
Taxable
Partnership depending on December which is allowed only for corporations.
classification
(3) Short Period 30 – A taxpayer may have a taxable
period of less than twelve (12) months when:

27
SEC. 52.(B) Taxable Year of Corporation. – A corporation may employ
either calendar year or fiscal year as a basis for filing its annual income
tax return: Provided, That the corporation shall not change the accounting
period employed without prior approval from the Commissioner in
accordance with the provisions of Section 47 of this Code.
28
SEC. 22.(B) The term “corporation” shall include partnerships, no matter
how created or organized, joint-stock companies, joint accounts (cuentas
en participacion), associations, or insurance companies, but does not
include general professional partnerships and a joint venture or
consortium formed for the purpose of undertaking construction projects
or engaging in petroleum, coal, geothermal and other energy operations
pursuant to an operating or consortium agreement under a service
contract with the Government. “General professional partnerships” are
partnerships formed by persons for the sole purpose of exercising their
common profession, no part of the income of which is derived from
engaging in any trade or business.
29
SEC. 22.(Q). - The term “fiscal year” means an accounting period of
twelve (12) months ending on the last day of any month other than
December.
30
SEC. 47. Final or Adjustment Returns for a Period of Less than
Twelve (12) Months. –
(A) Returns for Short Period Resulting from Change of Accounting Period.
– If a taxpayer, other than an individual, with the approval of the
Commissioner, changes the basis of computing net income from fiscal
year to calendar year, a separate final or adjustment return shall be made
for the period between the close of the last fiscal year for which return
was made and the following December 31. If the change is from calendar
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1. Taxpayer dies
2. Corporation is newly organized
3. Corporation changes its accounting period
4. Corporation is dissolved
2. CONCEPT OF INCOME
a. Definition
Income, in the broad sense, means all wealth, which flows
into the taxpayer other than as a mere return of capital. It
includes the forms of income specifically described as
gains and profits, including gains derived from the sale or
other disposition of capital assets. (Rev. Regs. Sec. 36)
The essential difference between capital and income is
that capital is a fund; income is a flow. A fund of property
existing at an instant of time is called capital. A flow of
services rendered by that capital by the payment of money
from it or any other benefit rendered by a fund of capital in
relation to such fund through a period of time is called an
income. Capital is wealth, while income is the service of
wealth.
Property is a tree, income is the fruit; labor is a tree, income
is the fruit; capital is a tree, income is the fruit.
“Income,” as here used, can be defined as “profits or
gains.” (Madrigal v. Rafferty, G.R. No. L-12287, 1918)
Distinguished from revenue and capital
1. Income refers to net profit, i.e. what remains after
expenses and taxes are subtracted from revenue.
Income is gain derived and severed from capital.
2. Revenue is the total amount of money the business
receives from its customers for its products and
services. It is the total inflow of money or goods to a
person without taking into consideration the costs
incurred in generating the said revenue. Revenue
means income derived from whatever source,
including compensation for services; the conduct of
trade or business or the exercise of a profession;
dealings in property; interests; rents; royalties;
dividends; annuities; prizes and winnings; pensions;
and a partner's distributive share in the net income of
a general professional partnership, among others.
year to fiscal year, a separate final or adjustment return shall be made for
the period between the close of the last calendar year for which return
was made and the date designated as the close of the fiscal year. If the
change is from one fiscal year to another fiscal year, a separate final or
TAXATION LAW
3. Capital is a fund or property existing at one distinct
point in time while income denotes a flow of wealth
during a definite period of time. It is the wealth in the
form of money or other assets contributed for a
particular purpose such as starting a company or
investing. It is the source of the flow of the fund or
revenue. Being the source of revenue, it is not
taxable.
The Supreme Court, in a recent case, nullified BIR
Revenue Memorandum Circular No. 65-2012 which
subjects Association Dues paid by condominium unit
owners to VAT, and held that these dues do not
represent income, as defined in Sec. 32 (a) of the NIRC.
They do not arise from transactions involving sale,
barter, or exchange of goods or property, nor
generated by the performance of services. Rather, they
form part of a pool from which a condominium
corporation must draw funds in order to bear the costs
for maintenance, repair, improvement, reconstruction
expenses and other administrative expenses, hence,
not subject to VAT. (Bureau of Internal Revenue v. First
E-Bank Tower Condominium Corp., G.R. Nos. 215801 &
218924, 2020)
Similarly, in another case, the Court held that RMC No.
35-2012 erroneously foisted a sweeping interpretation
that membership fees and assessment dues are
sources of income of recreational clubs from which
income tax liability may accrue. Income as contrasted
with capital or property is to be the test. Considering
that membership fees, assessment dues, and other
fees of similar nature only constitute contributions to
and/or replenishment of the funds for the maintenance
and operations of the facilities offered by recreational
clubs to their exclusive members, they are considered
capital and therefore not subject to tax. They represent
funds "held in trust" by these clubs to defray their
operating and general costs and hence, only
constitute infusion of capital. (Association of Non-Profit
Clubs, Inc. v. Bureau of Internal Revenue, G.R. No. 228539,
2019)
b. When Income is Taxable
i. Existence of income
For a taxable income to exist, gain or profit is necessary.
Before a condonation or forgiveness of debt will give rise
adjustment return shall be made for the period between the close of the
former fiscal year and the date designated as the close of the new fiscal
year.
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to a taxable income, there must be an increase in the
assets of the debtor thereby enriching the latter. The
condonation of debt will not be subject to income tax if it
does not result in the reduction of the taxable income of the
debtor or the debtor is in a capital deficit position after the
condonation. (BIR Ruling No. DA-(C-335)815-09)
used by the taxpayer. The NIRC, in turn, recognizes
certain principal accounting methods in recognizing
income or revenue. (Vitug and Acosta)
c. Tests in Determining whether Income is Earned for
Tax Purposes

i. Realization test
ii. Realization of income
While not new in Philippine jurisprudence, courts have not
Test of Realization: Under the Realization Principle,
fully adopted the doctrine. (See discussion on “Tests of
revenue is generally recognized when both of the following
Realization”)
conditions are met:
1. The earning is complete or virtually complete; and
ii. Claim of right doctrine or doctrine of ownership,
2. An exchange has taken place.
command or control
The “Claim-of-Right” Doctrine provides that if a taxpayer
This principle requires that revenues must be earned
receives earnings under a claim of right and without
before they are received. Amounts received in advance are
restriction as to its disposition, he has received income
not treated as revenue of the period in which they are
even though one may claim he is not entitled to the money.
received, but as revenue of the future period or periods in
Should it later appear that the taxpayer was not entitled to
which they are earned. These amounts are carried as
keep the money, the taxpayer would be entitled to a
unearned revenue, that is, liabilities to transfer goods or
deduction in the year of repayment. (BIR Ruling No. DA-
render services in the future — until the earning process is
(C-168)519-08 citing the US case of North American Oil
complete. (Manila Mandarin Hotels v. Commissioner, CTA
Consolidated v. Burnet)
Case No. 5046, 1997)

iii. Economic benefit test or doctrine of proprietary

Actual v. Constructive Receipt
interest
4. Actual Receipt occurs when there is a physical
The Economic Benefit Theory provides that anything,
transfer of the money consideration or its equivalent
which benefits a person materially or economically in
to a person.
whatever way, is taxable under the law. (BIR Ruling No.
5. Constructive Receipt occurs when the money
123-97)
consideration or its equivalent, is placed at the control
of the person who rendered the service without
As a general rule, in this jurisdiction, mere increase in the
restrictions by the payor.
value of property without actual realization, either through
sale or other disposition, is not taxable, the only exception
being that even without sale or other disposition, if by
Examples:
reason of appraisal, the cost basis of property is increased
● Deposits in banks which are made available to the
and the resultant basis is used as the new tax base for
seller of service without restrictions;
purposes of computing the allowable depreciation
● Issuance by the payor of a notice to offset any debt or
expense, the net difference between the original cost basis
obligation and acceptance thereof by the seller as
and new basis due to appraisal is taxable under the
payment for services rendered; and
economic-benefit principle. (BIR Ruling No. 029-98)
● Transfer of amounts retained by the payor for the
account of the seller. (Rev. Regs.16-05, Sec. 4.108-4)
iv. Severance test
Under the Severance Theory Test, income is recognized
iii. Recognition of income
when there is a separation of something which is of
Receipt of income for purposes of taxation may be actual
exchangeable value. (Eisner v. Macomber, 252 U.S. 189,
or constructive. (CIR v. BPI, G.R. No. 147375, 2006)
1920)
The law thus recognizes “income” as taxable even in the
absence of actual/physical receipt. In fact, Sec. 4(e) of RR The annual increase in value of an asset is not taxable
No. 12-80 (on final tax) provides that income could be income because such increase has not yet been realized.
recognized by the taxpayer either at the time of its actual The increase in value i.e., the gain, could only be taxed
receipt or its accrual, depending on the accounting method when a disposition of the property occurred which was of
such a nature as to constitute a realization of such gain,
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that is, a severance of the gain from the original capital
invested in the property. The same conclusion obtains as
to losses. The annual decline in the value of property is not
normally allowable as a deduction. Hence, to be allowable,
the loss must be realized. (BIR Ruling No. 206-90 citing
Surre Warren, Federal Income Taxation)
d. Methods of Accounting
i. Distinguish: cash and accrual method
The accrual method relies upon the taxpayer’s right to
receive amounts or its obligation to pay them, in opposition
to actual receipt or payment, which characterizes the cash
method of accounting. Amounts of income accrue where
the right to receive them become fixed, where there is
created an enforceable liability. Similarly, liabilities are
accrued when fixed and determinable in amount, without
regard to indeterminacy merely of time of payment. (CIR v.
Isabela Cultural Corporation, G.R. No. 172231, 2007)
ii. Special method: installment, deferred payment,
percentage of completion (in long-term contracts)
6. Installment method – a proportionate income is
recognized when an installment payment is actually
received. 31
7. Deferred payment method – used when there is an
agreement between the contracting parties allowing
the borrower to take possession of the goods and start
making payments until later date.
31
Section 49 Installment Basis. –
(A) Sales of Dealers in Personal Property. – Under rules and regulations
prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, a person who regularly sells or otherwise disposes of
personal property on the installment plan may return as income therefrom
in any taxable year that proportion of the National Tax Research Center
101 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.
(B) Sales of Realty and Casual Sales of Personality. – In the case (1) of
a casual sale or other casual disposition of personal property (other than
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), for a price exceeding
One thousand pesos (PhP1,000), or (2) of a sale or other disposition of
real property, if in either case the initial payments do not exceed twenty-
five percent (25%) of the selling price, the income may, under the rules
and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, be returned on the basis and in
the manner above prescribed in this Section. As used in this Section, the
term ‘initial payments’ means the payments received in cash or property
other than evidences of indebtedness of the purchaser during the taxable
period in which the sale or other disposition is made.
(C) Sales of Real Property Considered as Capital Asset by Individuals. –
An individual who sells or disposes of real property, considered as capital
asset, and is otherwise qualified to report the gain therefrom under
Subsection (B) may pay the capital gains tax in installments under rules
TAXATION LAW
8. Percentage of Completion (in long-term contracts)
– reporting of income and expenses on a period-by-
period basis, as determined by the percentage of the
contract that has been fulfilled. The percentage of
completion is determined by comparing total actual
cost incurred to the estimated total cost of completion.
32
e. Situs of Income
Factors that determine the situs of income tax (Sec. 23)
1. Nationality
2. Residency
3. Source of Income
Rules on source of income in determining whether
income is from sources within or without the
Philippines
INCOME TEST OF SOURCE OF INCOME
Interest Residence of Debtor
Dividends a) From domestic corporation –
income within
b) From foreign corporation:
Income within if more than
50% of the gross income of
and regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
(D) Change from Accrual to Installment Basis. – If a taxpayer entitled to
the benefits of Subsection (A) elects for any taxable year to report his
taxable income on the installment basis, then in computing his income for
the year of change or any subsequent year, amounts actually received
during any such year on account of sales or other dispositions of property
made in any prior year shall not be excluded.
32
Section 48. Accounting for Long-term Contracts. –
Income from long-term contracts shall be reported for tax purposes in the
manner as provided in this Section. As used herein, the term ‘long-term
contracts’ means building, installation or construction contracts covering
a period in excess of one (1) year. Persons whose gross income is
derived in whole or in part from such contracts shall report such income
upon the basis of percentage of completion. The return should be
accompanied by a return certificate of architects or engineers showing
the percentage of completion during the taxable year of the entire work
performed under contract. There should be deducted from such gross
income all expenditures made during the taxable year on account of the
contract, account being taken of the material and supplies on hand at the
beginning and end of the taxable period for use in connection with the
work under the contract but not yet so applied. If upon completion of a
contract, it is found that the taxable net income arising thereunder has not
been clearly reflected for any year or years, the Commissioner may permit
or require an amended return.
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INCOME TEST OF SOURCE OF INCOME
such foreign corporation for the
3-yr. period ending with the
close of the taxable year prior
to the declaration of dividends
(or for such part of such period
as the corporation has been in
existence) was derived from
sources within the Philippines
Extent:
Phil. GI × Dividend = Income
within Total GI
Income without, if less than 50%
of the gross income of such
foreign corporation for the 3-yr.
period ending with the close of the
taxable year prior to the
declaration of dividends was
derived from sources within the
Philippines. Therefore, nothing of
such dividends forms part of
income within.
Rentals Location of the property/interest in
such property
Royalties Place of use or location of
intangibles (such as patents,
trademarks, etc.) giving rise to
royalties
Gain on sale of Location of property
real property
Gain on sale of Place of sale
personal
property other
than shares of
stock in a The purpose of the clause in a tax treaty is to grant to the
domestic
corporation
purchased in one
country and sold
in another
Gain on sale of Philippines regardless of where
shares of stock in sold
a domestic
corporation
TAXATION LAW
Note:
Royalties (from property or use of property located in
Philippines), include:
1) Use of the right/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) Use of/the right to use in the Philippines any industrial,
commercial or scientific equipment
3) Supply of scientific, technical, industrial or commercial
knowledge or information
4) 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/right in 1. above, such equipment in 2. above
or knowledge/info in 3. above
5) Supply of services by a nonresident person/his
employees in connection with the use of
property/rights belonging to, or the installation or
operation of any brand, machinery or other apparatus
purchased from such non-resident person
6) Technical advice, assistance or services rendered in
connection with technical mgmt./admin. of any
scientific, industrial or commercial undertaking,
venture or project
7) The use of or the right to use:
● Motion picture films
● Films or video tapes for use in connection with TV
● Tapes for use in connection with radio
broadcasting
Most-favored nation clause
Royalty income paid by a domestic corporation to a non-
resident foreign corporation which is a resident of a
Contracting State with which the Philippines has an
effective tax treaty is generally subject to 15% final
withholding tax, but the rate may be reduced to 10% for
certain royalty payments or under the most-favored nation
clause of the tax treaty, such as the Philippines-US Tax
Treaty.
other Contracting State a tax treatment that is no less
favorable than that which is granted to the “most favored”
among other countries.
It means each party to the treaty pledges that any tax
concession given to any other treaty country will also be
extended to the other party to the treaty; that is, it will not
grant more favorable terms to other treaty countries
without granting the same concession to the treaty partner
involved.
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(1) Income from sources within the Philippines
General Formula:
Gross Income
(within the Philippines)
(–) Deductions
(attributable to GI within)
Taxable Income
“Attributable” means that the expense can be identified as
the expense that generated the income.
Example: ABC Corp. manufactures clothes and sells them
in the Philippines. It also sells shoes in the US. The cost of
manufacturing the clothes is attributable to the income
generated from selling the clothes. Since the income from
the sale of clothes is income within, then the expense for
manufacturing them must be deducted from gross income
within. However, the cost of selling the shoes may not be
deducted from income within since it is not attributable to
income within. Rather, it is specifically attributable to
income without.
Gross income from sources within the Philippines
1. Interest derived from sources within the Philippines.
2. Dividends from domestic and foreign corporations (if
50% or more of the gross income of the foreign
corporation [for the past 3 years] was derived from
sources within the Philippines.)
3. Compensation for services performed within the
Philippines.
4. Rentals and royalties from properties located in the
Philippines or any interest in such property including
rentals or royalties for the use of or for the privilege of
using within the Philippines, patents, copyrights and
other like properties.
5. Sale of real property located in the Philippines.
6. Sale of personal property
General Rule: Gains, profit, and income derived from
the purchase within and its sale without the
Philippines, or from the purchase without and its sale
within shall be treated as derived entirely from
sources within the country in which the personal
property is sold.
Exception: gains from the sale of shares of stock in a
domestic corporation shall be treated as derived
entirely from sources within the Philippines regardless
where the said shares are sold.
TAXATION LAW
Deductions:
Expenses, losses and other deductions properly allocated
thereto and a ratable part of expenses, interests, losses
and other deductions effectively connected with the
business conducted exclusively within the Philippines
which cannot definitely be allocated to some items or class
of gross income
Allowed only if fully substantiated by all
information/documents necessary for their computation
Exceptions – No deduction for interest paid/incurred
abroad shall be allowed unless:
1. Indebtedness was actually incurred
2. Indebtedness must be that of the taxpayer
3. Interest must be legally due and stipulated in writing
4. Interest must be paid or incurred during the taxable
year
5. Indebtedness must be in connection with the conduct
or operation of trade/business in the Philippines
(2) Income from sources without the Philippines
General Formula:
Gross Income
(without the Philippines)
(–) Deductions
(attributable to GI without)
Taxable Income
Gross income from sources without the Philippines
1. Interests (other than those derived from sources within
the Philippines)
2. Dividends (other than those derived from sources
within the Philippines)
3. Compensation for labor or personal services
performed without the Philippines
4. Rentals or royalties from property located without the
Philippines or from any interest in such property
including rentals/royalties for the use of or for the
privilege of using without the Philippines, patents,
copyrights, secret processes & formulas, goodwill,
trademarks, trade brands, franchises & other like
properties
5. Gains, profits & income from the sale of real property
located without the Philippines
Note: The foregoing enumeration is merely the reverse of
the enumeration of gross income from sources within the
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Philippines. Hence, so long as you know which income is Purchased within and Income without
considered as income within, all else are income without. sold without

Deductions: Purchased within and Income within

Expenses, losses and other deductions properly sold within
apportioned/allocated thereto and a ratable part of
expenses, interests, losses and other deductions which Taxpayer sells it abroad Income partly within, partly
cannot definitely be allocated to some items or class of through a sales office without
gross income within the Philippines

(3) Income partly within and partly without the As for unallocated expenses, meaning those which are not
Philippines entirely attributable to either income within or without, such
Items other than those specified above in (1) and (2) shall expenses shall be allocated using the following formula:
be allocated or apportioned to sources within or without the
Philippines.
Income
without Deductions
Covered are: Unallocated
× = from income
1. Income from services rendered partly within and partly Worldwide expense
without
without; income
2. Income from sale of personal property produced (in
whole or in part) within and sold without the
Philippines; and Income
3. Income from sale of personal property produced (in Deductions
within Unallocated
whole or in part) without and sold within the × = from income
Worldwide expense
Philippines. within
income

PERSONAL INCOME 3. GROSS INCOME

PROPERTY
General Formula:
Manufacturing Business
Inclusions, income listed under Sect.
Produced here and sold Income partly within, partly 32(A)
without without
(–) Exclusions under sect. 32 (B)
Produced here and sold Income within
here Adjusted Gross Income (subject to
deductions)
Produced abroad and Income partly within, partly
sold here without a. Definitions
Trading Business Inclusions 33
Purchased without and Income within All income derived from whatever source, including (but
sold within not limited to the following items) (GRIP CARD GPP):

SEC. 32. Gross Income. –

33
(3) Gains derived from dealings in property;
(4) Interests;
(A) General Definition. – Except when other-wise provided in this Title, (5) Rents;
gross income means all income derived from whatever source, including (6) Royalties;
(but not limited to) the following items: (7) Dividends;
(8) Annuities;
(1) Compensation for services in whatever form paid, including, but not (9) Prizes and winnings;
limited to fees, salaries, wages, commissions, and similar items; (10) Pensions; and
(2) Gross income derived from the conduct of trade or business or the (11) Partner's distributive share from the net income of the general
exercise of a profession; professional partnership.
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1. Gross income derived from the conduct of trade or (of a stockholder is equivalent to
business or the exercise of a profession dividend distribution)
2. Rent Income
3. Interest Income Forgiveness of indebtedness Taxable
4. Prizes & winnings (in exchange of a service performed)
5. Compensation for services in whatever form paid,
including, but not limited to fees, salaries, wages, Forgiveness of indebtedness Taxable
commissions & similar items (gratuitously without any consideration) (Donor’s Tax)
6. Annuities Income derived from illegal business Taxable
7. Royalties (gain)
8. Dividend Income
9. Gains derived from dealings in property Recovery of lost earnings Taxable
10. Pensions
11. Partner’s distributive share from the net income of the
The transfer of land made by a person to another in
GPP (distributive share from ordinary partnerships is payment of services rendered in the form of attorney’s fees
taxable as dividends; in this case, the ordinary shall be considered as part of the gross income of the latter
partnership has already been subject to ordinary valued at either the fair market value or the zonal valuation,
corporate income tax) whichever is higher, in the taxable year received. (BIR
Ruling No. 017-03)
Example of transactions that may or may not result in
taxable income: Doctrine of Involuntary Conversion of Property
This is a doctrine enunciated in the US case of Herder v.
TRANSACTION TAXABLE? Helvering and was adopted by the BIR in several of its
rulings. (106 F.2d 153)
Recovery of damages that merely Not taxable
restores the taxpayer to his previous (akin to non- This doctrine states that if property (as a result of its
position prior to an act that caused the taxable return destruction, in whole or in part, theft or seizure, or an
damages (compensation for injury; from of capital) exercise of the power of requisition or condemnation or the
tortious acts) (Raytheon v. CIR, 144 threat or imminence thereof) is compulsorily or involuntarily
F2nd 110, 1944) converted into property similar to the property so
converted, or into money, which is forthwith in good faith
Recovery of damages pertaining to Taxable expended in the acquisition of other property, or in the
recovery or return of loss income or establishment of a replacement fund, no gain or loss shall
profit be recognized. If any part of the money is not so expended,
the gain shall be recognized, but in an amount not in
Recovery of items previously deducted Taxable
excess of the money so expended
from gross income (tax benefit rule)
b. Distinguish: Gross Income, Net Income, and
Forgiveness of indebtedness Not Taxable
Taxable Income
(taxpayer before and after the
forgiveness is still insolvent. In this case Gross Income is described as income from whatever
there is no increase in the debtor’s net source, including compensation for services; the conduct
worth, hence, there is no economic of trade or business or the exercise of profession; dealings
gain) in property; interests; rents; royalties; dividends; annuities;
Forgiveness of indebtedness Taxable prizes and winnings; pensions; and a partner's distributive
(if insolvent taxpayer becomes solvent share in the net income of a general professional
after the forgiveness of debt. In this partnership. (NIRC, Sec. 32 as cited in CIR v. PAL, Inc.,
case there is increase in the debtor’s net G.R. No. 180066, 2009)
worth, hence, there is economic gain)
Net Income means gross income less statutory
Forgiveness of indebtedness Taxable deductions. It is referred to as “Taxable Income” under the
NIRC.

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Taxable Income means the pertinent items of gross Act No. 9480. The exception of issues and cases which
income specified in this Code, less deductions, if any, were ruled by any court, even without finality, in favor of
authorized for such types of income by this Code or other the BIR prior to amnesty availment of the taxpayer under
special laws. (Sec. 31) BIR Revenue Memorandum Circular No. 19-2008 is invalid
for going beyond the scope of the provisions of the 2007
c. Sources of income Subject to Tax Tax Amnesty Law. Neither the law nor the implementing
rules state that a court ruling that has not attained finality
i. Compensation income
would preclude the availment of the benefits of the Tax
In general, the term “compensation” means all
Amnesty Law. Both R.A. 9480 and DOF Order No. 29-07
remuneration for services performed by an employee for
are precise in declaring that tax cases subject of final and
his employer under an employer-employee relationship,
executory judgment by the courts are the ones excepted
unless specifically excluded by the NIRC.
form the benefits of the law. The BIR’s inclusion of issues
Compensation Income Earners - individuals whose source
and cases which were ruled by any court, even without
of income is purely derived from an employer-employee
finality, in favor of the BIR prior to amnesty availment of the
relationship. (Rev. Regs. 08-18, Sec.2(a))
taxpayer as one of the exceptions is misplaced. Only cases
that involve final and executory judgment are excluded
Q: Bank A is a foreign banking corporation incorporated in
from the tax amnesty program as explicitly provided under
the Netherlands duly authorized by the Bangko Sentral ng
Section 8 of Republic Act No. 9480. Therefore, as long as
Pilipinas to operate as a branch with full banking in the
Bank A complies with the requirements set forth under
Philippines. On January 3, 2000, the bank received a Final
Republic Act No. 9480, it may avail itself of the tax
Assessment Notice containing the Details of Assessment
amnesty. (ING Bank N.V. v. Commissioner of Internal
and 13 Assessment Notices issued by the Enforcement
Revenue, G.R. No. 167679, 2015)
Service of the Bureau of Internal revenue through its
Assistant Commissioner Percival T. Salazar. The notice
2) Yes. Under the National Internal Revenue Code, every
covered the deficiency tax assessments for taxable years
form of compensation - all remunerations paid for services
1996 and 1997. Bank A paid the assessments except 10
performed by an employee for his or her employer,
deficiency tax assessments in the total amount of
whether paid in cash or in kind, for personal services is
P672,576,939.18. While the case was pending before the
subject to income tax and, consequently, to withholding
court, Bank A filed a Manifestation and Motion stating that
tax. The contention that the bonus accruals in 1996 and
it availed itself of the government’s tax amnesty under
1997 were not yet subject to withholding tax because such
republic Act No. 9480 with respect to its deficiency
were actually distributed only in the succeeding years of
documentary stamp tax and deficiency onshore tax
their accrual is untenable. The tax on compensation
liabilities. Commissioner of Internal revenue countered that
income is withheld at source under the creditable
BIR Revenue Memorandum Circular No. 19-2008
withholding tax system wherein the tax withheld is intended
specifically excludes cases which were ruled by any court
to equal or at least approximate the tax due of the payee
in favor of the BIR prior to amnesty availment of the
on the said income. It was designed to enable (a) the
taxpayer from the coverage of the tax amnesty under
individual taxpayer to meet his or her income tax liability on
Republic Act No. 9480. Furthermore, Bank A claims that it
compensation earned; and (b) the government to collect at
is not liable for withholding taxes on bonuses accruing to
source the appropriate taxes on compensation. Taxes
its officers and employees during taxable years 1996 and
withheld are creditable in nature. Thus, the employee is still
1997 maintaining the position that the liability of the
required to file an income tax return to report the income
employer to withhold the tax does not arise until such
and/or pay the difference between the tax withheld and the
bonus is actually distributed. 1) May the Bank validly avail
tax due on the income. For over withholding, the employee
itself of the tax amnesty granted by Republic No. 9480? 2)
is refunded. Therefore, absolute or exact accuracy in the
If the supposed bonuses were not distributed to the officers
determination of the amount of the compensation income
and employees in 1996 and 1997 but were distributed in
is not a prerequisite for the employer's withholding
the succeeding year when the amounts of the bonuses
obligation to arise. Section 34(K) of the 1997 National
were finally determined, is the Bank liable for deficiency
Internal Revenue Code expressly requires, as a condition
withholding tax on accrued bonuses for the taxable years?
for deductibility of an expense, that the tax required to be
withheld on the amount paid or payable is shown to have
Suggested Answer:
been remitted to the Bureau of Internal Revenue by the
1) Yes. Taxpayers with pending tax cases may avail
taxpayer constituted as a withholding agent of the
themselves of the tax amnesty program under Republic
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government. The provision of Section 79 of the 1997
National Internal Revenue Code regarding withholding on
wages must be read and construed in harmony with
Section 34 (K) of the 1997 National Internal Revenue Code
on deductions from gross income. Reading together the
two provisions, we hold that the obligation of the
payor/employer to deduct and withhold the related
withholding tax arises at the time the income was paid or
accrued or recorded as an expense in the
payor's/employer's books, whichever comes first.
Petitioner ING Bank accrued or recorded the bonuses as
deductible expense in its books. Therefore, its obligation to
withhold the related withholding tax due from the
deductions for accrued bonuses arose at the time of
accrual and not at the time of actual payment. (ING Bank
N.V. v. Commissioner of Internal Revenue, G.R. No.
167679, 2015)
ii. Fringe benefits
Definition
Any good, service or other benefit furnished or granted in
cash or in kind by an employer to an individual employee
(except rank and file employees) such as, but not limited
to the following:
a. Housing
b. Expense account
c. Vehicle of any kind
d. Household personnel (such as maid, driver and
others)
e. Interest on loan at less than market rate to the extent
of the difference between the market rate and actual
rate
f. Membership fees, dues and other expenses borne by
the employer for the employee in social & athletic
clubs or other similar organizations
g. Expenses for foreign travel
h. Holiday and vacation expenses
i. Educational assistance to the employee or his
dependents
j. Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the
law allows
Special treatment of fringe benefits
Effective January 1, 2018 and onwards, a final tax of thirty-
five percent (35%) is hereby imposed on the grossed-up
monetary value of fringe benefit furnished/granted to the
employee by the employer, whether an individual or
corporation.
TAXATION LAW
Fringe benefit is an income of the employee subject to
Fringe Benefit Tax (FBT) but is payable by the employer.
Employer can deduct FBT from its taxable income.
Fringe benefits are only for corporate
officers/management. For rank and file, it is called an
“allowance.” Allowances (benefits to rank and file) are not
subject to FBT but are rather treated as compensation
subject to the regular income tax.
Taxable and non-taxable fringe benefits
Fringe benefits not subject to FBT:
1. Fringe benefit authorized and exempted from tax
under special laws;
2. Contributions of employer for the benefit of the
employee to retirement, insurance and hospitalizations
benefit plan;
3. Benefits given to the rank and file employees, whether
granted under a CBA or not;
4. Benefits received by virtue of a CBA and productivity
incentive schemes provided that the total annual
monetary value received from both combined do not
exceed P10,000 per employee per taxable year; (Rev.
Regs. 01-15)
5. De minimis benefits;
6. If the grant of fringe benefits to the employee is
required by the nature of, or necessary to the trade,
business or profession of the employer; or
7. If the grant of the fringe benefit is for the convenience
or advantage of the employer.
De Minimis Benefits:
1. Monetized unused vacation leave credits of private
employees not exceeding 10 days during the year;
2. Monetized value of vacation and sick leave credits paid
to government officials and employees;
3. Medical cash allowance to dependents of employees
not exceeding P1,500 per employee per semester or
P 250 per month; (Rev. Regs. 11-18)
4. Rice subsidy of P 2,000 or 1 sack of 50 kg rice
amounting to not more than P 2,000 per month; (Rev.
Regs. 11-18)
5. Uniform and clothing allowance not exceeding P6,000
per year; (Rev. Regs. 11-18)
6. Actual yearly medical benefits not exceeding P10,000;
7. Laundry allowance of P300 per month;
8. Employee achievement awards, for length of service
or safety achievement in the form of tangible personal
property other than cash or gift certificate, with an
annual monetary value not exceeding P10,000
received by the employee under an established written
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plan which does not discriminate in favor of highly paid
employees;
9. Gifts given during Christmas and major anniversary
celebrations not exceeding P5,000 per employee per
annum;
10. Daily meal allowance for overtime work and
night/graveyard shift not exceeding 25% of the basic
minimum wage on a per region basis; and
11. Benefits received by virtue of a CBA and productivity
incentive schemes provided that the total annual
monetary value received from both combined do not
exceed P10,000 per employee per taxable year; (Rev.
Regs. 01-15)
Convenience of the Employer Rule
When a fringe benefit is given solely for the convenience
of the employer, the fringe benefit is exempt from FBT
because the employee does not recognize income from
the benefit.
Example: Expenditure on housing of engineer within
factory premises is not subject to FBT
General Rule: If housing is located outside, it is subject to
FBT.
Exception: If the nature of the employer’s business is
hazardous to health of employee, housing can be located
outside the factory without being subject to FBT.
Example: If employee is given housing allowance in cash,
this will constitute compensation of the employee (income
from whatever source). However, if it qualifies as a fringe
benefit, then it will be subject to FBT and the burden is
shifted to employer.
iii. Professional income
Income earned from the practice of profession provided
there is no employer-employee relationship between him
and his clients.
Profession is primarily any endeavor or work requiring
specialized training in the field of learning, art, or science
engaged in as a means of livelihood or profit of an
individual or group of individuals.
34
SEC. 39.(A)(1) Capital Assets. – The term “capital assets” means
property held by the taxpayer (whether or not connected with his trade or
business), but does not include stock in trade of the taxpayer or other
property of a kind which would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year, or property held by
TAXATION LAW
Professional- a person formally certified by a professional
body belonging to a specific profession b1, virtue of having
competence a required examination or course of studies
and/or practice, whose competence can usually be
measured against an established set of standards. It also
refers to a person who engages in some art or sport for
money, as a means of livelihood, rather than as a hobby.
(Rev. Regs. 08-18, Sec. 2 (n) 2nd par)
iv. Income from business
In the case of manufacturing, merchandising, or mining
business, “gross income” means the total sales, less cost
of goods sold, plus any income from investments and from
incidental or outside operations or sources. In determining
gross income, deductions should not be made for
depreciation, depletion, selling expenses or losses, or for
items not ordinarily used in computing the cost of goods
sold.
In the case of sellers of services, gross income is
computed by deducting “cost of services” which pertains to
all direct costs and expenses exclusively and directly
incurred in relation to the revenue realized by such sellers.
These refer to costs which are considered indispensable
to the earning of the revenue such that without such costs,
no revenue can be generated. (Rev. Regs. 24-08)
v. Income from dealings in property
(a) Distinguish ordinary asset and capital asset
Ordinary asset34 – assets that are used primarily in the
ordinary course of trade or business, such as:
1. Stock in trade of taxpayer
2. Property which would properly be included in an
inventory of the taxpayer, if on hand
3. Merchandise inventory
4. Depreciable assets used in the trade/business
5. Real property used in trade/business
Capital assets – properties of a taxpayer other than
ordinary assets, such as:
1. Stock and securities held by taxpayers other than
dealers in securities
2. Interest in partnership and joint venture
3. Goodwill
4. Real property not used in trade or business like
residential house and lot
the taxpayer primarily for sale to customers in the ordinary course of his
trade or business, or property used in the trade or business, of a character
which is subject to the allowance for depreciation provided in Subsection
(F) of Section 34; or real property used in trade or business of the
taxpayer.
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5. Investment property In case of a corporation, the holding period is not

applicable. The capital gain and loss are to be reported in
(b) Types of gains the full amount regardless of the number of years the
Ordinary gain is derived from the sale or exchange of capital asset is held.
ordinary assets including gains from performance of
services and business; included in the gross income. Net capital gain v. Net capital loss
NET CAPITAL GAIN NET CAPITAL LOSS
Ordinary loss is the excess of business expenses and MEANING
losses over the business income of the taxpayer derived the excess of the gains the excess of the losses
from the sale or exchange of ordinary assets; deductible from sales or exchanges from sales or exchanges
from gross income. of capital assets over the of capital assets over the
losses from such sales or gains from such sales or
Capital gain is the excess of value received over the exchanges exchanges (Sec. 39
determined cost from the sale or exchange of capital asset. (A)(3))
The following are the rules on the taxability of capital gains: EFFECT TO ORDINARY GAIN
● Sale of unlisted shares of stock in a domestic Added to ordinary gain Not deductible from
corporation – subject to CGT ordinary gain
● Gain derived from sale of real property in the
Philippines – subject to CGT Basis for determining gain (loss) from sale/disposition
● Other capital assets: excess of the gains from sales or of property
exchanges of other capital assets over the losses from
such sales or exchanges; included in the gross income MODE OF BASIS FOR DETERMINING
ACQUISITION GAIN/LOSS FROM
Capital loss is the excess of the losses from sales or SALE/DISPOSITION OF
exchanges of other capital assets over the gains from such PROPERTY
sales or exchanges; deductible only from capital gains.
Purchase Cost of property acquired on/after
3/1/1913
Actual gain v. Presumed gain
Actual gain is the amount realized from the sale of the Inheritance Fair market value as of the date of
asset in excess of the cost to the taxpayer. acquisition (at the time of death)

Presumed gain is the presumption of the law of the Gift The cost to the donor or to the
existence of a gain from sale of real property which previous owner who did not acquire
subjects the said sale to CGT of 6% based on the selling it by gift; BUT, if such basis > FMV
price or FMV, whichever is HIGHER. Acquisition cost is not at the time of the gift, the basis shall
taken in to account. be such FMV for the purpose of
determining the loss
Long-term capital gain v. Short-term capital gain35
Acquired for less Amount paid by the transferee
In case of individuals, the percentages of gain or loss to be
than adequate
taken into account shall be:
consideration
● 100% if the capital asset has been held for 12 months
or less; and
● 50% if the capital asset has been held for more than Property Basis of stock or securities received
12 months acquired where by transferor:
gain or loss is
not recognized Same as the basis of property,

35
SEC. 39.(B) Percentage Taken into Account. – In the case of a
taxpayer, other than a corporation, only the following percentages of the (1) One hundred percent (100%) if the capital asset has been held for not
gain or loss recognized upon the sale or exchange of a capital asset shall more than twelve (12) months; and
be taken into account in computing net capital gain, net capital loss, and (2) Fifty percent (50%) if the capital asset has been held for more than
net income: twelve (12) months;
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(tax-free stock/ securities exchanged
exchanges) (1) increased by:
● dividends
● amount of any gain recognized
by the exchange
(2) decreased by:
• money received
• fair market value of the other
property received
• liability assumed by the
transferee
Basis of the property transferred in
the hands of the transferee:
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.
(c) Special rules pertaining to income or loss from dealings
in property classified as capital asset (loss limitation rule,
loss carry-over rule, holding period rule)
vi. Income from dealings in real property classified as
capital assets situated in the Philippines
General rule
Involves the sale or other disposition of real property
classified as capital asset located in the Philippines by a
non-dealer in real estate
If the sale is made by a dealer in securities or if the real
property is an ordinary asset, the resulting gain or loss will
be considered in the computation of ordinary income.
36
SEC. 24.(D) Capital Gains from Sale of Real Property. –
(1) In General. – The provisions of Section 39(B) notwithstanding, a final
tax of six percent (6%) based on the gross selling price or current fair
market value as determined in accordance with Section 6(E) of this Code,
whichever is higher, is hereby imposed upon capital gains presumed to
have been realized from the sale, exchange, or other disposition of real
property located in the Philippines, classified as capital assets, including
pacto de retro sales and other forms of conditional sales, by individuals,
including estates and trusts: Provided, That the tax liability, if any, on
gains from sales or other dispositions of real property to the government
or any of its political subdivisions or agencies or to government-owned or
-controlled corporations shall be determined either under Section 24(A)
or under this Subsection, at the option of the taxpayer;
37
SEC. 24.(D) Capital Gains from Sale of Real Property. –
(2) Exception. – The provisions of paragraph (1) of this Subsection to the
contrary notwithstanding, capital gains presumed to have been realized
from the sale or disposition of their principal residence by natural persons,
TAXATION LAW
Tax Rate: 6%
Tax Base: The HIGHER between
● Gross selling price;
● Prescribed zonal value of real properties as
determined by the CIR; or
● Fair market value as determined by the provincial and
city assessors.
Note:
Gain or loss from the sale of a capital asset is immaterial
since there is a conclusive presumption of gain.
An individual taxpayer has the option to treat the capital
gain as subject to 6% CGT or 20-35% graduated tax IF the
buyer of the real property is the Government or any of its
political subdivisions or GOCCs. 36
Exception
Capital gains presumed to have been realized from the
sale or disposition of their principal residence by natural
persons, the proceeds of which is fully utilized in acquiring
or constructing a new principal residence within eighteen
(18) calendar months from the date of sale or disposition,
may be exempt from the capital gains tax, subject to
certain conditions.
Requisites:37
1. Sale or disposition of the old actual principal residence;
2. By a citizen or resident alien;
3. Proceeds of which are utilized in acquiring or
constructing a new principal residence within 18
calendar months from date of sale or disposition;
4. Notice to the CIR within 30 days from the date of sale
or disposition through a prescribed return of his
intention to avail tax exemption;
5. Can be availed of only once every 10 years;
the proceeds of which is fully utilized in acquiring or constructing a new
principal residence within eighteen (18) calendar months from the date of
sale or disposition, shall be exempt from the capital gains tax imposed
under this Subsection: Provided, That the historical cost or adjusted basis
of the real property sold or disposed shall be carried over to the new
principal residence built or acquired: Provided, further, That the
Commissioner shall have been duly notified by the taxpayer within thirty
(30) days from the date of sale or disposition through a prescribed return
of his intention to avail of the tax exemption herein mentioned: Provided,
still further, That the said tax exemption can only be availed of once every
ten (10) years: Provided, finally, that if there is no full utilization of the
proceeds of sale or disposition, the portion of the gain presumed to have
been realized from the sale or disposition shall be subject to capital gains
tax. For this purpose, the gross selling price or fair market value at the
time of sale, whichever is higher, shall be multiplied by a fraction which
the unutilized amount bears to the gross selling price in order to determine
the taxable portion and the tax prescribed under paragraph (1) of this
Subsection shall be imposed thereon.
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6. The historical cost or adjusted basis of his old principal
residence shall be carried over to the cost basis of his
new principal residence;
7. If there is no full utilization, the portion of the gains
presumed to have been realized shall be subject to
capital gains tax; and
8. The 6% capital gains tax due shall be deposited with
an authorized agent bank subject to release upon
certification by the RDO that the proceeds of the sale
have been utilized.
The date of sale or disposition of a property refers to the
date of notarization of the document evidencing the
transfer of said property. (Rev. Regs. 13-99, as
amended by Rev. Regs. 14-00)
Dealings in shares of stock of Philippine corporations
(a) Listed and traded in the stock exchange (Stock
Transaction Tax)38
Tax Rate — six-tenths of one percent (6/10 of 1%)
Tax Base — Gross selling price 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. (RMC No. 21-08)
(b) Not listed and not traded in the stock exchange
(Capital Gains Tax)
Tax Rate — final tax at the rate of fifteen percent
(15%)
Tax Base – net capital gains realized during the
taxable year from the sale, barter, exchange or
disposition of shares of stock not listed and not traded
in the stock exchange.
Net Capital Loss Carry-over
Corporations cannot carry over a net capital loss. 39
If any taxpayer, other than corporations, sustained a net
capital loss in any taxable year, such loss is treated in the
succeeding taxable year as a loss from the sale/exchange
38
SEC. 127.(A) Tax on Sale, Barter or Exchange of Shares of Stock Listed
and Traded through the Local Stock Exchange. – There shall be levied,
assessed and collected on every sale, barter, exchange or other
disposition of shares of stock listed and traded through the local stock
exchange other than the sale by a dealer in securities, a tax at the rate of
six-tenths of one percent (6/10 of 1%) of the gross selling price or gross
TAXATION LAW
of a capital asset held for not more than 12 months (100%
deduction)
Such net capital loss that should be carried over should not
exceed the net income for the year Incurred (prior year’s
net income)
Example:
Net income in 2011 = P6,000
Net capital loss in 2011 = P10,000
Amount deductible in 2012 is P6,000 only since it should
not exceed the net income of the taxable year where the
loss was incurred. Note that the allowable capital loss to
be deducted in 2012 (i.e. P6,000) is only to the extent of
the capital gain for 2012.
Net income should be understood as TAXABLE income
according E.O. 37.
Summary of Rules with regard to NOLCO
1. Allowed to any taxpayers, other than corporations;
2. The net loss can be carried over only to the extent of
net income for the year sustained (loss limitation rule);
3. The net loss carry-over is deductible only for the
succeeding year (loss carry-over rule);
4. Capital asset must be held for not more than 12
months (holding period rule);
5. Do not apply to sale or disposition of the following
capital assets:
a. shares of stock of a domestic corporation not
traded through the local stock exchange; and
b. real property held as capital assets.
(d) Tax-free exchanges
Tax-free exchanges refer to those instances enumerated
in Section 40(C)(2) of the NIRC that are not subject to
Income Tax, Capital Gains Tax, Documentary Stamp Tax
and/or Value-added Tax, as the case may be.
In general, there are two kinds of tax-free exchange: (1)
transfer to a controlled corporation; and, (2) merger or
consolidation.
value in money of the shares of stock sold, bartered, exchanged
otherwise disposed which shall be paid by the seller or transferor.
39
SEC. 39.(D) Net Capital Loss Carry-over. – If any taxpayer, other than
a corporation, sustains in any taxable year a net capital loss, such loss
(in an amount not in excess of the net income for such 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 twelve (12) months.
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a. Transfer to a controlled corporation 5. Prizes (except if P10,000 or less, 20%

No gain or loss shall be recognized if property is which shall be subjected to
transferred to a corporation by a person in exchange for graduated income tax rates)
stock or unit of participation in such corporation of which
as a result of such exchange said person, alone or together 6. Winnings (except Philippine 20%
with others, not exceeding four persons, gains control of Charity Sweepstakes and Lotto
said corporation. winnings amounting to P10,000 or
less, which shall be exempt)
b. Merger or Consolidation
No gain or loss shall be recognized if in pursuance of a 7. Dividend from a domestic 10%
plan of merger or consolidation --- corporation, or from a joint stock
a. a corporation, which is a party to a merger or company, insurance or mutual [20% for NRA-
consolidation, exchanges property solely for stock in a fund company, and regional ETB]
corporation, which is a party to the merger or operating headquarters of
consolidation; or multinational company or share in
b. a shareholder exchanges stock in a corporation, which the distributive net income after
is a party to the merger or consolidation, solely for the tax of a partnership (except GPP),
stock of another corporation also a party to the merger joint stock or joint venture or
or consolidation; or consortium taxable as a
c. a security holder of a corporation, which is a party to corporation
the merger or consolidation, exchanges his securities Note: Dividends from foreign
in such corporation, solely for stock or securities in corporation
another corporation, a party to the merger or ● Citizens – computed under
consolidation. Sec. 24(a) tax table
● Resident aliens – not taxable
vi. Passive investment income (income derived from abroad)
As a rule, passive income subjected to final tax is no 8. Interest on long-term deposit or Exempt
longer included in the computation of the annual investment in banks (with maturity
taxable income. of 5 years or more)

TAX RATE ON CERTAIN PASSIVE FINAL TAX

INCOME ON CITIZENS AND
RESIDENT ALIENS
1. Interest under the expanded 15%
foreign currency deposit system
[NRC: Exempt]
[NRA-ETB: Exempt]
2. Royalty from books, literary 10%
works, and musical compositions
3. Royalty other than above
TAX RATE ON INTEREST FINAL TAX
INCOME FROM FOREIGN
CURRENCY DEPOSIT [RR NO.
10-98]
1. Interest income actually 15%
received by a resident citizen or
resident alien from FCD
2. If deposited by an OCW or Exempt
20% seaman or nonresident citizen

4. Interest on any current bank 20% 3. If in a bank account in the joint 50% exempt
deposit, yield or other monetary names of an OCW and spouse
benefits from deposit substitute, (resident) 50% FWT of 15%
trust fund and similar
arrangement

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4. Interest income actually 15% Less than 3 years 20%

received by a domestic
corporation or resident foreign For NRA-NETB – 25%
corporation from FCD “Deposit substitutes” are defined as an alternative form of
obtaining funds from the public (meaning borrowing from
20 or more lenders at any one time) other than deposits. 40
(a) Interest
Earned on currency bank deposits and yield or any other Tax treatment of interest income derived from government
monetary benefit from deposit substitutes and from trust debt instruments and securities: Government debt
funds and similar arrangement instruments and securities to be considered as deposit
substitutes must still follow the 20-lender rule as defined in
Rate of Final Tax Section 22(Y) of the NIRC. (Rev. Regs. 14-12, Sec. 2)
RC, NRC, RA, NRA-ETB 20%
Interest income derived from deposit substitutes is subject
NRA-NETB 25% to 20% FWT, while that derived from any other debt
instruments not within the coverage of deposit substitutes
Interest income received by an individual (except a is subject to 20% CWT. (Rev. Regs. 14-12, Secs. 2 and 7)
nonresident individual) from a depositary bank under the
expanded foreign currency deposit system Q: The Bureau of Treasury issued P35 billion worth of 10-
year zero-coupon treasury bonds denominated as Poverty
Rate of Final Tax – Exempt Eradication and Alleviation Certificates (PEACe Bonds) to
Interest income from long term deposit or investment in the A Corp at P10.2 billion. Then, A Corp (as underwriter) on
form of savings, common or individual trust fund, deposit behalf of B Corp sold and distributed the PEACe Bonds to
substitutes, investment management accounts and other undisclosed investors at P11.996 billion. The
investments evidenced by certification in such form Commissioner of Internal Revenue issued BIR Ruling No.
prescribed by the BSP. 370-2011 declaring that the PEACe bonds being deposit
substitutes are subject to the 20% final withholding tax.
Should the holder of the certificate pre-terminate the Pursuant to this ruling, the Secretary of Finance directed
deposit or investment before the fifth (5th) year, a final tax the Bureau of Treasury to withhold a 20% final tax from the
shall be imposed on the entire income and shall be face value of the PEACe Bonds upon their payment at
deducted and withheld by the depository bank from the maturity. Petitioners contend that there is only one lender
proceeds of the long-term deposit or investment certificate to whom the BTr issued the government bonds.
based on the remaining maturity thereof. Respondents theorize that the word “any” indicates that the
period contemplated is the entire term of the bond and not
Final Tax for Long-Term Deposits: merely the point of origination or issuance such that if the
For RC, NRC, RA, NRA-ETB debt instruments “were subsequently sold in secondary
Time of Pre-Termination Tax markets and so on, in such a way that 20 or more buyers
eventually own the instruments, then it becomes
Held for 5 years or more Exempt indubitable that funds would be obtained from the “public.”
Are PEACe Bonds considered as “deposit substitutes” and
4 years to less than 5 years 5%
thus subject to 20% final withholding tax?
3 years to less than 4 years 12%
Suggested Answer: No. Under the 1997 National Internal

40
SEC. 22 (Y). The term 'deposit substitutes' shall mean an alternative
from of obtaining funds from the public (the term 'public' means borrowing
from twenty (20) or more individual or corporate lenders at any one time)
other than deposits, through the issuance, endorsement, or acceptance
of debt instruments for the borrowers own account, for the purpose of
relending or purchasing of receivables and other obligations, or financing
their own needs or the needs of their agent or dealer. These instruments
may include, but need not be limited to bankers' acceptances, promissory
notes, repurchase agreements, including reverse repurchase
agreements entered into by and between the Bangko Sentral ng Pilipinas
(BSP) and any authorized agent bank, certificates of assignment or
participation and similar instruments with recourse:
Provided, however, That debt instruments issued for interbank call loans
with maturity of not more than five (5) days to cover deficiency in reserves
against deposit liabilities, including those between or among banks and
quasi-banks, shall not be considered as deposit substitute debt
instruments.
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Revenue Code, a final withholding tax at the rate of 20% is
imposed on interest on any currency bank deposit and
yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements.
Congress specifically defined "public" to mean "twenty (20)
or more individual or corporate lenders at any one time."
Hence, the number of lenders is determinative of whether
a debt instrument should be considered a deposit
substitute and consequently subject to the 20% final
withholding tax. From the point of view of the financial
market, the phrase “at any one time” for purposes of
determining the “20 or more lenders” would mean every
transaction executed in the primary OR secondary market
in connection with the purchase or sale of securities. In this
case, the BIR asserted that government securities are
always deposit substitutes irrespective of the number of
lenders, but the SC ruled that government securities must
comply with the “20 or more” rule. Petitioners argued that
the “20 or more” rule is relevant only at the point of
origination (i.e., issuance), but the SC said that the “20 or
more” rule is relevant “at any one time”. In the end, the SC
held that the PEACe Bonds are not subject to the 20%
FWT, not because they are not deposit substitutes, but
because at the moment it cannot be determined as to how
many investors the PEACe Bonds were sold to by A Corp.
(Banco De Oro v Republic, G.R. No. 198756, 2015.)
(b) Dividend
Any distribution made by a corporation to its shareholders
out of its earnings or profits and payable to its
shareholders, whether in money or in other property.
Stock dividends represent the transfer of surplus to capital
account and shall not be subject to tax.
However, if a corporation cancels or redeems stock issued
as 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 shall be considered as taxable income to the
extent that it represents a distribution of earnings or profits.
General Rule: Cash and property dividends are taxable.
Stock dividends are not taxable.
Property dividends:
41
SEC.28(B5) - Intercorporate Dividends. – A final withholding tax at the
rate of fifteen percent (15%) is hereby imposed on the amount of cash
and/or property dividends received from a domestic corporation, which
shall be collected and paid as provided in Section 57(A) of this Code,
TAXATION LAW
● These are considered income in the amount of the
full market value as when received by the
stockholder.
● If it was paid in stock of another corporation, it is
not considered a stock dividend. It is still
considered property dividend.
Liquidating dividends: taxable
● When a corporation distributes all its properties or
assets in complete liquidation, the gain realized is
taxable.
● Computation:
o When a corporation distributes all of its assets
in complete dissolution and liquidation, there
is no dividend income to the shareholder.
Instead, there is a sale or exchange of
property. (Rev. Regs. 02-40, Sec. 256)
o When a corporation is dissolved and in
process of complete liquidation and its
shareholders surrendered their stock to it and
paid the sums in question to them in
exchange, a transaction took place, which
was no different in its essence from a sale of
the same stock to a third party. (Wise v. Meer,
G.R. No. 48231, 1947)
▪ The gain is a capital gain, but subject
to ordinary/regular income tax (Sec. 9,
Rev. Regs. 6-2008)
Individuals Rate of Final Tax:
Taxpayer Tax Rate
RC, NRC, RA 10%
NRA-ETB 20%
NRA-NETB 25%
Tax Treatment on Corporations of income derived
from dividends:
(a) If the dividends are from a domestic corporation:
Domestic and resident foreign corporations are tax-
exempt as they are treated as inter-corporate
dividends.
For non-resident foreign corporations, the dividend is
subject to:
(1) Tax treaty rate, if applicable
(2) 15% if no tax treaty but satisfies the tax-sparing
provision41
subject to the condition that the country in which the non-resident foreign
corporation is domiciled, shall allow a credit against the tax due from the
non-resident foreign corporation taxes deemed to have been paid in the
Philippines equivalent to twenty percent (20%), which represents the
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(3) 30% if no tax treaty and does not comply with rental income therefrom shall be considered as business
the tax-sparing provision income which shall be included in the computation of the
year-end gross income of the lessor, and not as a passive
(b) If the dividends are from a foreign corporation: investment income subject to withholding tax
The income shall form part of the gross income of the
corporation but the situs of the income becomes Improvements made by lessees are taxable as income on
material except for a domestic corporation which is the part of the lessor provided that such buildings or
taxed on worldwide income. improvements are not subject to the removal by the lessee.
The lessor may either:
(b) Royalty income ● Report the improvements as income at the time when
A payment or a portion of proceeds paid to the owner of a such improvements are completed based on their fair
right for the use of such right market value [outright method]; or
● Spread over the life of the lease the estimated
From books, literary works and musical sources: depreciated value of the improvements at the
RC, NRC, RA, NRA-ETB 10% termination of the lease and report as income for each
year of the lease an aliquot part thereof [spread-out
NRA-NETB 25% method] (Rev. Regs. 02-40, Sec. 49)
Other royalties:
The US Supreme Court in Helvering V. Bruun (309 US
RC, NRC, RA, NRA-ETB 20%
461, 1940) stated that it is not necessary for recognition of
NRA-NETB 25% taxable gain that the lessor be able to sever the
improvement begetting the gain from his original capital.
(d) Rental income
Any additional amount paid, directly or indirectly, by the
Amount or compensation paid for the use or enjoyment of
lessee in consideration for the lease is considered rental.
a thing or a right and implies a fixed sum or property
Therefore, taxes paid by the lessee on leased property are
amounting to a fixed sum to be paid at a stated time for the
part of rental income of the landlord.
use of property
Prepaid or advance rental is taxable income to the lessor
Lease of personal property
in the year received, if so received under a claim-of-right
Rental income on the lease of personal property located in
and without restriction as to its use, and regardless of the
the Philippines and paid to a nonresident taxpayer shall be
method of accounting employed. Security deposit applied
taxed as follows:
to the rental of the terminal month or period of contract
must be recognized as income at the time it is applied.
NRFC (RA NO. NRA
9337, Sec. 2) Note: If the security deposit merely serves to ensure
compliance with the contract (security deposit with
Vessel 4.5% 25% acceleration clause), it is not income to the lessor until the
lessee violates any provision of the contract.
Aircraft, 7.5% 25%
machineries, and
Tax treatment of:
other equipment
● Income from Leasehold Improvements
Other assets 32% 25% When the lessee erected or built permanent improvements
on the leased property, which will become the property of
the lessor upon the expiration of the lease, the value of the
Lease of real property
improvements should be reported as income of the lessor
The lease of real property shall be considered as conduct
either through the outright method or the spread-out
of trade or business on the part of the lessor; hence, the
method.

difference between the regular income tax of thirty-five percent (35%) and against the tax due shall be equivalent to fifteen percent (15%), which
the fifteen percent (15%) tax on dividends as provided in this represents the difference between the regular income tax of thirty percent
subparagraph: Provided, That effective January 1, 2009, the credit (30%) and the fifteen percent (15%) tax on dividends;
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● Proceeds of life insurance policies paid to the

● Advance payment/long-term lease heirs/beneficiaries upon the death of the insured; (See
If the advance payment is a prepaid rental without Sec. 32(B)(1))
restriction as to use, the entire amount is taxable in the ● If such amounts are held by the insurer under an
year it is received. agreement to pay interest, the interest payments shall
be included in the gross income
If the advance payment is a security deposit which restricts Note: The insured must die to avail of total exemption.
the lessor as to its use, such amount shall be taxable only If he survives, there/s only partial exemption to the
at the time it is applied. extent that the proceeds constitute return of capital
(total amount of premiums previously paid).
If the advance payment is a loan deposit, or option money
for the property or a security deposit to ensure the faithful viii. Prizes and awards
performance of certain obligations of the lessee, such Amount in cash or in kind received by chance or through
amount shall not be taxable to the lessor unless the lessee luck is generally taxable, unless otherwise provided by law.
violates the terms of the contract.
If the prizes are derived from sources within:
RC, NRC, RA, Net taxable income shall be subject P10,000 OR MORE THAN
NRA-ETB to the graduated income tax rates. TAX-PAYER
LESS P10,000
NRA-NETB Rental income from real property
located in the Philippines shall be RC, NRC, RA,
20-35% 20%
subject to 25% final withholding tax NRA-ETB
unless a lower rate is imposed
pursuant to an effective tax treaty. NRA-NETB 25% 25%
DC, RFC Net taxable income shall be subject
Corporation 30% 30%
to 30% corporate income tax or its
gross income will be subject to 2%
MCIT. PCSO AND LOTTO
NRFC Gross rental income from real WINNINGS
property located in the Philippines
shall be subject to 30% corporate P10,000 OR MORE THAN
TAX-PAYER
income tax, such tax to be withheld LESS P10,000
and remitted by the lessee in the
Philippines. RC, NRC, RA,
Exempt 20%
NRA-ETB
vii. Annuities and proceeds from life insurance or NRA-NETB Exempt 25%
other types of insurance
Annuity – installment payments of income or pension by Corporation Exempt 30%
insurance companies during the life of a person or for a
guaranteed fixed period of time, whichever is longer. If the prizes are derived from sources without – the said
Amounts excluded from gross income: amount is included in the gross income for taxpayers who
● Amount received by insured as return of premium are taxable within and without the Philippines.
received either during the term or at the maturity of the
terms or upon surrender of the contract; Prizes and awards made primarily in recognition of
Note: If such amounts are held by the insurer under an religious, charitable, scientific, educational, artistic, literary
agreement to pay interest, the interest payments shall or civic achievement are excluded from the gross
be included in the gross income. income42, but only if:

42
SEC. 32 (B) (7) (C) Prizes and Awards. - Prizes and awards made
primarily in recognition of religious, charitable, scientific, educational,
artistic, literary, or civic achievement but only if:
(i) The recipient was selected without any action on his part to enter the
contest or proceeding; and
(ii) The recipient is not required to render substantial future services as a
condition to receiving the prize or award.
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● Recipient was selected without any action on his part;
and
● Recipient not required to render substantial future
services as a condition of receiving the prize/award.
Example: Nobel prize
Construed strictly; must be given in 1 of 7 given categories,
which do not include athletic achievements
Contemplates a rational selection process; cannot just be
randomly selected
Prizes/awards in a sports competition sanctioned by
national sports associations whether held in the Philippines
or abroad are also excluded from the gross income 43
Contemplates a particular competition, not a cumulative
achievement (e.g. Sportsman of the year award does not
qualify for exemption)
ix. Pension, retirement benefit, or separation pay
Lump sum payment or on a staggered basis in
consideration of services rendered given after an individual
reaches the age of retirement
Amounts excluded from gross income:
1. Retirement benefits received under RA 7641 (Labor
Code of the Philippines)
2. Retirement benefits received under a reasonable
private benefit plan44
3. Amount received as a consequence of separation for
any cause beyond control (death, sickness or other
physical disability)
4. Benefits received from a foreign government by
resident or nonresident citizens or aliens who reside
permanently in the Philippines
5. Veterans benefits
6. Benefits under SSS
7. Benefits received from GSIS
x. Income from any source
43
SEC. 32 (B) (7) (d) Prizes and Awards in sports Competition. - All
prizes and awards granted to athletes in local and international sports
competitions and tournaments whether held in the Philippines or abroad
and sanctioned by their national sports associations.
44
SEC. 32(B)(6)Retirement Benefits, Pensions, Gratuities, etc.-
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 officials or employees, wherein contributions are made by
such employer for the officials or employees, or both, for the purpose of
distributing to such officials and employees the earnings and principal of
the fund thus accumulated, and wherein its is provided in said plan that
TAXATION LAW
(a) Condonation of indebtedness
Pertains to forgiveness of indebtedness
A GIFT – if the forgiveness of the debt is Not
without any consideration whatsoever Taxable
A CAPITAL TRANSACTION – if the Taxable
forgiveness of a stockholder is equivalent
to dividend distribution
A TAXABLE INCOME – in exchange of a Taxable
service performed
(b) Recovery of accounts previously written off
Recovery of bad debts previously allowed as deduction in
the preceding years shall be included as part of gross
income in the year of recovery to the extent of the income
tax benefit of such deduction (tax benefit rule) 45
(c) Receipt of tax refunds or credit
Taxes, when refunded or credited, shall be included as part
of gross income in the year of receipt to the extent of
income tax benefit of said deduction.46
The following are non-taxable tax refunds (i.e., non-
deductible taxes):
● In general, Philippine income tax
● Final taxes, being in the nature of income tax
● Income tax imposed by authority of any foreign country
(except when the taxpayer signifies his desire to avail
of the tax credit for taxes of foreign countries)
● Estate and donor’s taxes
● Taxes assessed against local benefits of a kind
tending to increase the value of the property assessed
● Special assessments
(d) Income from any source whatever
Concept of income from whatever source derived
at no time shall any part of the corpus or income of the fund be used for,
or be diverted to, any purpose other than for t
45
SEC. 34 (E) (1) In General. - Debts due to the taxpayer actually
ascertained to be worthless and charged off within the taxable year
except those not connected with profession, trade or business and those
sustained in a transaction entered into between parties mentioned under
Section 36 (B) of this Code: Provided, That recovery of bad debts
previously allowed as deduction in the preceding years shall be included
as part of the gross income in the year of recovery to the extent of the
income tax benefit of said deduction.
46
SEC. 34 (C) (1) (d). Taxes assessed against local benefits of a kind
tending to increase the value of the property assessed.
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“Income from whatever sources derived” means d. Exclusions

inclusion of all income not expressly exempted within the
class of taxable income under the laws irrespective of the i. Rationale
voluntary or involuntary action of the taxpayer in producing These are items not included in the determination of gross
the gains, and whether derived from legal or illegal income either because:
sources. ● They represent return of capital or are not income, gain
or profit;
● They are subject to another kind of internal revenue
EXAMPLES OF INCOME EXAMPLES OF INCOME
tax; or
FROM LEGAL FROM ILLEGAL
● They are income, gain or profit that is expressly
SOURCES SOURCES
exempt from income tax.
Employee’s salary, bonus, Gambling, kidnapping,
and commissions/ rebates extortion, smuggling, ii. Taxpayers who may avail
embezzlement All taxpayers may avail of exclusions from gross income.

iii. Distinguish: exclusions, deductions, and tax

This includes:
credits
● Income derived from illegal sources
Exclusion: not included in the computation of gross
Rationale:
income; income received or earned but is not taxable as
1. Shouldn’t give tax benefit to thieves when taxing
income because of exemption by virtue of a law or treaty.
law-abiding citizens.
2. Enforcement of non-tax criminal issues
Deduction: these are included in the gross income but are
later deducted to compute the net income or taxable
An unlawful gain, as well as a lawful one, constitutes
income.
taxable income when its recipient has such control
over it that, as a practical matter, he derives readily
Tax Credit: these refers to taxes paid beforehand but later
realizable economic value from it. Hence, money
claimed as tax credits, hence, is deducted from the tax
obtained by extortion is income taxable to the
liability of the taxpayer.
extortioner only when he personally benefitted from
the funds. (Hobson v. Commisioner, U.S.14850-89,
iv. Exclusions
1992)
(a) Under the Constitution
Income derived by the Government or its political
It is well settled that profits or gains earned illegally
subdivision, including government instrumentalities, from
constitute gross income. (James v. United
the exercise of any essential government function
States 366 U.S. 213 1961)
(b) Under the Tax Code
However, in circumstances where misappropriations
i. Proceeds of life insurance policies47
do not enrich or benefit the misappropriator, and there
Proceeds of life insurance policies paid to the
is a consensual recognition of an obligation to repay
heirs/beneficiaries upon the death of the insured.
the funds, income does not arise. (Beasley v.
Commissioner, U.s. 3729-85, 1989)
Insured must die to avail of total exemption. If he survives,
there’s only partial exemption to the extent that the
● Compensation for damages if it represents payment
proceeds constitute return of capital (total amount of
for loss of expected profits
premiums previously paid.)
● Those received by mistake (Javier v. CA, G.R. 78953,
1991)
However, if such amounts are held by the insurer under an
agreement to pay interest, the interest payments shall be
included in the gross income.

47
SEC. 32 (B) (1) Life Insurance. - The proceeds of life insurance policies under an agreement to pay interest thereon, the interest payments shall
paid to the heirs or beneficiaries upon the death of the insured, whether be included in gross income.
in a single sum or otherwise, but if such amounts are held by the insurer
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ii. Amount received by insured as return of
premium48
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 are excluded from gross income.
iii. Amounts received under life insurance,
endowment or annuity contracts 49
Under life insurance, endowment, or annuity contracts,
amounts received either during the term or at the maturity
of the terms or upon surrender of the contract are excluded
from gross income.
iv. Value of property acquired by gifts, bequest,
devise or descent50
To be excluded from gross income, must be characterized
by disinterested generosity and pure liberality.
However, income from such property shall be included in
gross income.
Difficult to establish gift situations if there is an employer-
employee relationship; a bonus/assistance in recognition
of service rendered is not exempt.
If given under a) constraining force of any moral or legal
duty, or b) from the incentive of an anticipated benefit of an
economic nature; or c) where it is a return for services
rendered, proceeds cannot qualify as a gift.
48
SEC. 32 (B) (2) Amount Received by Insured as Return of Premium.
- 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.
49
SEC. 32 (B) (2) Amount Received by Insured as Return of Premium.
- 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.
50
SEC. 32 (B) (3) Gifts, Bequests, and Devises. - The value of property
acquired by gift, bequest, devise, or descent: Provided, however, That
income from such property, as well as gift, bequest, devise or descent of
income from any property, in cases of transfers of divided interest, shall
be included in gross income.
51
SEC. 32 (B) (4) 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 amounts of any damages received, whether by suit or
agreement, on account of such injuries or sickness.
52
SEC. 32 (B) (5) Income Exempt under Treaty. - Income of any kind,
to the extent required by any treaty obligation binding upon the
Government of the Philippines.
TAXATION LAW
Most critical is the giver’s intention or motive.
Can be a gift if given on account of filial relationship.
v. Amount received through accident or health
insurance plus damages received51
Received through Accident/Health Insurance or
Workmen’s Compensation Act, as compensation for
personal injuries/sickness + amount of damages received
on account of such injuries/sickness.
Damages will be exempt only if they arise together with
personal injury; however, if damages only amount to return
of capital, it is exempt (e.g. damages from car accident
exempt only if claim includes compensation for personal
injury; if no personal injury, damages for car wreckage will
only be exempt to the extent of the amount of the actual
damage as return of capital.)
Must be physical injury, not injury to rights.
vi. Income exempt under treaty
To the extent required by any treaty obligation binding
upon the Philippine government 52.
vii. Retirement benefits, pensions, gratuities 53
Retirement benefits received under RA 7641 (amending
the Labor Code) and those received in accordance with a
reasonable private benefit plan.
“Under RA 7641”
Conditions:
(a) At least 60 years old;
53
SEC. 32 (B) (6) (a) Retirement Benefits, Pensions, Gratuities, etc. -
(a) Retirement benefits received under Republic Act No. 7641 and those
received by officials and employees of private firms, whether individual or
corporate, in accordance with a reasonable private benefit plan
maintained by the employer: Provided, That the retiring official or
employee has been in the service of the same employer for at least ten
(10) years and is not less than fifty (50) years of age at the time of his
retirement:
Provided, further, That the benefits granted under this subparagraph shall
be availed of by an official or employee only once.
For purposes of this Subsection, the term '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 officials or employees,
wherein contributions are made by such employer for the officials or
employees, or both, for the purpose of distributing to such officials and
employees the earnings and principal of the fund thus accumulated, and
wherein its is provided in said plan that at no time shall any part of the
corpus or income of the fund be used for, or be diverted to, any purpose
other than for the exclusive benefit of the said officials and employees.
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(b) 5 years of service at time of retirement; and
(c) Retirement upon reaching the retirement age
established in the CBA or other applicable employment
contract
Availed if there is no reasonable private benefit plan.
Limited exemption: ½ month salary for every year of
service; in a reasonable private benefit plan, all is
excludable.
“Reasonable private benefit plan”
Conditions:
(a) At least 50 years old; and
(b) In the service of same employer for at least 10 years at
time of retirement
Must be approved by the BIR
A pension, gratuity, stock bonus or profit-sharing plan
maintained by an employer for the benefit of some or all of
his officials/employees, wherein contributions are made by
such employer for the officials/employees, or both, for the
purpose of distributing to such officials & employees the
earnings & principal of the fund thus accumulated; no part
of the income shall be used for/be diverted to any purpose
other than for the exclusive benefit of the said officials &
employees.
Service must be continuous.
Can be availed of only once (once one has availed of
RPBP, he cannot avail of another RPBP); however, he can
avail of exemption under another ground such as SSS or
GSIS benefits.
The phrase “shall not have availed of the privilege under a
retirement benefit plan of the same or another employer”
found in Sec. 32(B)(6)(a) of the NIRC means that the
retiring official must not have previously received
retirement benefits from the same or another employer
54
SEC. 32 (B) (6) (b). Any amount received by an official or employee or
by his heirs from the employer as a consequence of separation of such
official or employee from the service of the employer because of death
sickness or other physical disability or for any cause beyond the control
of the said official or employee.
55
SEC. 32 (B) (6) (c). The provisions of any existing law to the contrary
notwithstanding, social security benefits, retirement gratuities, pensions
and other similar benefits received by resident or non-resident citizens of
the Philippines or aliens who come to reside permanently in the
Philippines from foreign government agencies and other institutions,
private or public.
TAXATION LAW
who has a qualified retirement benefit plan. (BIR Ruling
No. 125-98)
viii. Amount received as a consequence of separation
for any cause beyond control of employee (death,
sickness or other physical disability)54
Sickness must be job threatening and must render
taxpayer incapable of working (excludes STD.)
Benefits from separation due to retrenchment come under
exemption (no choice/option); but if the employee avails of
an optional early retirement plan, he cannot reason that he
was separated for reasons beyond his control, therefore,
he cannot claim exemption of the benefits on this ground
but he can claim under other grounds such as RPBP or RA
7641.
The terminal leave pay of government employees whose
employment is coterminous is exempt since it falls within
the meaning of the phrase “for any cause beyond the
control of the said official or employee” found in Sec.
32(B)(6)(b) of the NIRC. (BIR Ruling No. 143-98)
ix. Benefits received from a foreign government by
residents or nonresident citizens or aliens who
reside permanently in the Philippines 55
x. Veterans benefits56
xi. Benefits under SSS57
xii. Benefits received from GSIS58
xiii. Income Derived by the Government or its Political
Subdivisions59
xiv. Winnings, prizes and awards
Prizes and awards in sports competition sanctioned by
national sports associations whether held in Philippines or
abroad.
56
SEC. 32 (B) (6) (d). Payments of benefits due or to become due to any
person residing in the Philippines under the laws of the United States
administered by the United States Veterans Administration.
57
SEC. 32 (B) (6) (e). Benefits received from or enjoyed under the Social
Security System in accordance with the provisions of Republic Act No.
8282. Benefits received from or enjoyed under the Social Security System
in accordance with the provisions of Republic Act No. 8282.
58
SEC. 32 (B) (6) (f). Benefits received from the GSIS under Republic Act
No. 8291, including retirement gratuity received by government officials
and employees.
59
SEC. 32 (B) (7) (b). Income derived from any public utility or from the
exercise of any essential governmental function accruing to the
Government of the Philippines or to any political subdivision thereof.
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Contemplates a particular competition, not a cumulative
achievement.
“Prizes and awards”
1. In recognition of religious, charitable, scientific,
educational, artistic, literary or civic achievement, but
only if:
● Recipient was selected without any action on his
part; and
● Recipient not required to render substantial future
services as a condition of receiving the
prize/award
(c) Under Special laws
RA No. 9505: Personal Equity and Retirement Account
(PERA) Act of 2008 (Rev. Regs. 17-11)
PERA shall refer to an employee-contributor’s voluntary
retirement account established from the contributor’s own
contributions and/or his employer’s contributions, for the
purpose of being invested solely in qualified/eligible PERA
investment products.
PERA contributions from the employer to the employee’s
PERA are excluded from the employee’s gross income. On
the other hand, the employer can claim the actual amount
of his contribution as a deduction from his gross income,
but only to the extent of his contribution that would
complete the maximum allowable PERA contribution of the
employee.
4. DEDUCTIONS FROM GROSS INCOME
a. General Rule
To be deductible as a business expense:
1. The expense must be ordinary and necessary;
2. It must be paid or incurred within the taxable year;
3. It must be paid or incurred in carrying on a trade or
business; (business test) and
4. It must be substantially proven by evidence or
records (Esso Standard Eastern, Inc. v. CIR, G.R.
No. L-28508-9, 1989)
Note: Any income payment which is otherwise deductible
under the NIRC shall be allowed as a deduction from the
payor's gross income only if it is shown that the income tax
required to be withheld has been paid to the BIR.60
60
SEC. 34 (K) Additional Requirements for Deductibility of Certain
Payments. - Any amount paid or payable which is otherwise deductible
from, or taken into account in computing gross income or for which
depreciation or amortization may be allowed under this Section, shall be
TAXATION LAW
The “all events test” is used to determine when an accrual
of income or expense is permitted for claiming deductions.
It 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.
Under this test, the amount of deduction need not be
determined exactly as long as the same may be
determined with reasonable accuracy. The term
“reasonable accuracy” clearly implies something less than
an exact or completely accurate amount. (CIR v. Isabela
Cultural Corporation, G.R. No. 172231, 2007)
b. Concept of Return of Capital
Sale of inventory of goods by manufacturers and
dealers of properties – The portion of the receipt
representing the cost of goods manufactured and sold
(manufacturers) and cost of sales (dealers) are deducted
from the gross sales.
Sale of stock in trade by a real estate dealer and dealer
in securities – Generally, the return of capital is not
allowed to be deducted from the gross sales. Taxpayers
are required to deduct the total cost specifically identifiable
to the real property or shares of stock sold or exchanged.
Sale of services – Generally, the return of capital is not
allowed to be deducted from the gross sales. Thus, the
entire gross receipts are treated as part of income.
c. Distinguish: Itemized Deduction v. Optional
Standard Deduction
Kinds of deductions:
1. Itemized deductions
2. Optional standard deduction (OSD)
3. Special deductions
(1) ITEMIZED DEDUCTIONS (BELT DID CPR)
1. Bad debts
2. Business Expenses
3. Losses
4. Taxes
5. Depreciation
6. Interest
allowed as a deduction only if it is shown that the tax required to be
deducted and withheld therefrom has been paid to the Bureau of Internal
Revenue in accordance with this Section 58 and 81 of this Code.
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7. Depletion of oil & gas wells & mines
8. Charitable & other contributions
9. Pension trusts
10. Research & development
Bad Debts
Bad debts are debts due to the taxpayer actually
ascertained to be worthless and charged off during the
year may be claimed as a deduction.
Requisites for deductibility:
1. There must be an existing indebtedness due to the
taxpayer which must be valid and legally
demandable;
2. It must be connected with the taxpayer’s trade,
business or practice of profession;
3. It must not be sustained in a transaction entered
into between related parties;
4. It must actually be charged off in the books of
accounts of the taxpayer as of the end of the
taxable year;
5. It must actually be ascertained to be worthless and
uncollectible as of the end of the taxable year
(Rev. Regs. 05-99, as amended by Rev. Regs.
25-02)
6. The bad debt must not be one contracted with a
related party
Bad debts arising from transactions between related
parties are NOT deductible.
a. Between members of a family (includes only
brothers & sisters, spouse, ancestors, & lineal
descendants)
b. Between an individual & a corporation, more than
50% in value of outstanding stock is owned by
such individual (except in case of distributions in
liquidation)
c. Between 2 corporations more than 50% in value of
outstanding stock owned by same individual, if
either one is a personal holding company or a
foreign holding company during the taxable year
preceding the date of sale/exchange
d. Between grantor & fiduciary of any trust
e. Between fiduciary of a trust & the fiduciary of
another if same person is a grantor to each trust
f. Between fiduciary & a beneficiary of a trust
61
SEC. 34 (A) Ordinary and Necessary Trade, Business or
Professional Expenses. –
(a) In General. - There shall be allowed as deduction from gross income
all the ordinary and necessary expenses paid or incurred during the
TAXATION LAW
Effects of recovery of bad debts
Tax Benefit Rule - Recovery of bad debts previously
allowed as deduction in the preceding years shall be
included as part of gross income in the year of recovery to
the extent of the income tax benefit of such deduction.
(Rev. Regs. 05-99, Sec. 4)
Example. A taxpayer incurred P50,000 bad debt expense
in 2018 out of which P20,000 was recovered in 2020. The
P20,000 will be reverted back to gross income in 2020.
Thus, taxable income shall be P150,000
2018 2019 2020
NI before bad debt P100,000 P60,000 P130,000
expense
(bad debt (50,000) - 20,000
expense)/ recovery
NI after BD P50,000 P60,000 P150,000
expense
Ascertainment of worthlessness
(Collector v. Goodrich, G.R. No. L-22265, 1967):
Taxpayer did in fact ascertain the debt to be worthless in
the year for which the deduction was sought.
Worthlessness is not determined by an inflexible formula
or slide rule calculation but upon the exercise of sound
business judgment.
The determination of worthlessness must depend upon the
particular facts and circumstances of the case. It must be
uncollectible even in the future.
That in so doing, he acted in good faith. Good faith does
not require that the taxpayer be an incorrigible optimist but
on the other hand, he may not be unduly pessimistic.
Business Expenses
Requisites for deductibility61
1. Must be ordinary and necessary.
2. Must have been paid or incurred during the taxable
year.
3. Must have been paid or incurred in carrying on the
trade or business of the taxpayer.
4. Must be supported by receipts, records or other
pertinent papers. (CIR v. General Foods Phils.
G.R. No. 143672, 2003)
taxable year in carrying on or which are directly attributable to, the
development, management, operation and/or conduct of the trade,
business or exercise of a profession xxx
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Expenses to be deductible:
• Amount must be reasonable
• It must be substantiated
• It is not contrary to law, public policy or morals
• Tax required to be withheld must have been paid to
the BIR
Substantiation requirements
Sufficient evidence (i.e. official receipts, financial
statements or other adequate records) to substantiate:
• Amount of expense deducted; and
• Direct connection/relation of the expense to the
development, management operation and/or conduct
of the trade, business or profession of the taxpayer.
Classification of Expenses:
a. Ordinary expense – normal or usual in relation to
the taxpayer’s business and the surrounding
circumstances.
b. Necessary expense – appropriate and helpful in
the development of taxpayer’s business and is
intended to minimize losses or to increase profits;
day-to-day expense.
Note: While illegal income will form part of the
income of the taxpayer, expenses which constitute
bribe, kickback, and other similar payment, being
against law and public policy are not deductible from
gross income.
c. Business expense – expenditure related to the
business that is deductible in the year incurred.
d. Capital expense – expenditure that improves or
adds to the value of the taxpayer’s property or
equipment; not immediately deductible, i.e.,
deductible over time, taking into account
depreciation.
e. Private educational institutions - in addition to the
expenses ordinarily allowed as deductions, a private
educational institution has the option to either (Sec.
34 (A)(2)):
1. Deduct outright those otherwise considered as
capital outlays of depreciable assets for the
expansion of school facilities; or
2. Capitalize asset & deduct allowance for
depreciation
TAXATION LAW
Advertising expense
There is yet to be a clear-cut criterion or a fixed test for
determining the reasonableness of an advertising
expense. There being no hard and fast rule, the right to a
deduction depends on a number of factors such as but not
limited to: the type and size of business in which the
taxpayer is engaged; the volume and amount of its net
earnings; the nature of the expenditure itself; the intention
of the taxpayer; and the general economic conditions. (CIR
v. General Foods Phils. G.R. No. 143672, 2003)
Salaries, wages & other forms of compensation for
personal services actually rendered (including
grossed-up monetary value of fringe benefit); but the
final tax should have been paid
Must be reasonable. Must be for the personal services
actually rendered.
Travel expenses, here and abroad, in pursuit of trade,
business/profession
Travel expenses include transportation expenses, meals
and lodging incurred solely on business. If undertaken for
other than business purposes, not deductible. (Rev. Regs.
02-40, Sec. 66)
Cost of materials
Taxpayers should include in expenses the charges for
materials and supplies only to the amount that they are
actually consumed and used in operation during the year
for which the return is made, provided that the cost of such
materials and supplies has not been deducted in
determining the net income for any previous year. (Rev.
Regs. 02-40, Sec. 67)
If the materials or supplies are used directly or indirectly in
the production of the product, the related cost shall form
part of the cost of the product and will be deductible as
such when the product is sold.
Rentals and/or other payments as lessee, user or
possessor
On accrual basis, rent is deductible as expense when
liability is incurred during the period of use. On cash basis,
rent is deductible when incurred and paid.
An advance payment is not deductible expense on the part
of the lessee until the same is used for the relevant period,
although the lessor may be required to report the amount
when received.
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Expenses under lease agreements
Lessor
All ordinary and necessary expenses paid or incurred
during the taxable year which are attributable to earning
the lease income are deductible.
Lessee
All expenses which under the terms of the agreement the
lessee is required to pay to the lessor are allowable
deductions.
If the payments are so arranged as to constitute advance
rentals, the same shall be duly apportioned over the lease
term. In computing the term of the lease, all options to
renew shall be taken into consideration if there is a
reasonable expectation that such options will be exercised.
(Rev. Regs. 19-86, Sec. 3)
Repairs and maintenance
Incidental (minor) repairs are deductible from gross
income. They do not materially add to the value of the
property nor appreciably prolong its life but keep it in an
ordinarily efficient operating condition.
Major repairs (replacement) are not deductible from gross
income. They prolong the life of the asset and thus should
be capitalized.
Expenses for professionals
Amounts expended for books, furniture, and professional
instruments and equipment, the useful life of which is short,
may be deducted.
However, amounts expended for books, furniture, and
professional instruments and equipment of a permanent
character are not allowable as deductions.
Entertainment, amusement & recreation expenses
directly connected to the development, management &
operation & conduct of trade, business/ profession
Subject to a limit of:
a. For taxpayers engaged in sale of goods/properties –
one half of one percent (0.50%) of net sales (gross
sales less sales returns/allowances/discounts)
b. For taxpayers engaged in sale of services, exercise of
profession – one percent (1%) of net revenues (gross
revenue less discounts)
c. Engaged in both sale of goods/properties and
services – determined based on apportionment
formula taking into consideration net sales/revenue to
total net sales/revenue, in which case shall not
TAXATION LAW
exceed maximum ceiling prescribed above. (Rev.
Regs. 10-02, Sec. 5)
Requisites for deductibility:
1. Must be paid or incurred during the taxable year
2. Must be directly connected to the development,
management and operation of trade, or business,
profession of the taxpayer
3. Not contrary to law, morals, good customs, public
policy or public order
4. Must not have been paid, directly or indirectly, to any
person as a bribe, kickback or other similar payment;
5. Must be duly substantiated by adequate proof; and
6. Appropriate amount of withholding tax, if applicable,
should have been withheld and paid to the BIR. (Rev.
Regs. 10-02)
Political campaign expenses
As a rule, campaign contributions are not included in the
taxable income of the candidate to whom they were given.
Unutilized campaign funds shall be subject to income tax.
Any candidate (winner or loser) must file with the
COMELEC his/her statement of expenditures. If not,
he/she will be precluded from using such expenditures as
deductions from his/her campaign contributions. As such,
the entire amount of such contributions will be directly
subject to income tax. (Rev. Regs. 07-11, Sec. 2)
Training expenses
Ordinary and necessary expenses for education and
training actually incurred by the taxpayer during the taxable
year may be deductible.
Incentive Scheme –
An additional deduction from taxable income of one-half of
the value of labor training expenses incurred for
developing or upgrading the productivity and efficiency of
unskilled labor or for management development programs
shall be granted to the taxpayer, provided:
• Such training program is approved by the National
Manpower and Youth Council; and
• Such deduction shall not exceed 10 percent of direct
labor wage (Sec. 10, IRR of the Labor Code, Book II,
Rule III)
Allowable training expenses
The training expenses shall be in the form of personal
services, travelling expenses, equipment, training tools,
training supplies and materials, and a reasonable amount
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for contingencies. (Sec. 8, IRR of the Labor Code, Book II,
Rule III)
Non-applicability of incentive scheme
Training programs undertaken by training institutions
and/or associations operating for profit shall not qualify
under this incentive scheme. (Sec. 10, IRR of the Labor
Code, Book II, Rule III)
Losses
i. Requisites for deductibility of ordinary loss:
1. Must be of the taxpayer;
2. Actually sustained during the taxable year;
3. Not compensated for by insurance or other forms
of indemnity;
4. Incurred in trade, business or profession OR
property connected with trade, business or
profession lost through fires, storm, shipwreck,
other casualties, robbery, theft or embezzlement;
5. Evidenced by a completed transaction;
6. Not claimed as a deduction for estate tax
purposes; and
7. Notice of loss must be filed with the BIR within 30
days but not more than 45 days from the date of
discovery of the casualty or robbery, theft or
embezzlement
The taxpayer’s failure to record in his books the alleged
loss proves that the loss had not been suffered, hence, not
deductible. (City Lumber v. Domingo, G.R. No. L-18611,
1964)
Note: A declaration of loss should be filed with the BIR
within 45 days after the occurrence of the casualty,
robbery, etc. Failure to submit the declaration within the
prescribed time will result in the disallowance of the loss.
However, the mere filing of the declaration of loss does not
automatically entitle the taxpayer to deduct the alleged loss
from gross income. (Rev. Regs. 12-77, as amended by
Rev. Regs. 10-79)
The amount of loss deductible is limited to the difference
between the value of the property immediately preceding
the loss and its value immediately thereafter but shall not
exceed an amount equal of the cost or other adjusted basis
of the property, or depreciated cost reduced by any
insurance or other compensation received.
62
SEC. 22 (T). The term “securities" means shares of stock in a
corporation and rights to subscribe for or to receive such shares. The term
includes bonds, debentures, notes or certificates, or other evidence of
TAXATION LAW
Losses are deductible only by the person sustaining them.
They are purely personal and cannot be used as
deductions by another.
In Tambunting Pawnshop v. CIR, the Supreme Court
disallowed claims for deductions due to losses for failure
to substantiate the losses. As to the auction sale, the
taxpayer merely relied on entries made in its books. As to
the losses due to fire, the taxpayer failed to submit a Sworn
Declaration of Loss, which is required 45 days from the
discovery of the loss.
Other types of losses
(a) Capital losses – deductions allowed only to the extent
of the gains from pertinent sales or exchanges of
capital assets
• Losses from sale or exchange of capital assets
• Losses resulting from securities becoming
worthless and which are capital assets
• Losses from short sales of property
• Losses due to failure to exercise privilege or option
to buy or sell property
(b) Securities becoming worthless
Loss resulting from securities 62 becoming worthless shall
be considered loss from the sale or exchange of capital
asset.
Such loss shall be computed on the last day of the taxable
year.
General Rule: securities becoming worthless are
deductible
Exemption: not deductible in case of banks or trust
companies incorporated under the laws of the Philippines,
a substantial part of whose business is the receipt of
deposits. (Rev. Regs. 05-99, Sec. 5)
Losses from wash sales of stock or securities
Wash sale is a sale or other disposition of stock or
securities where substantially identical securities are
acquired or purchased within a 61-day period, beginning
30 days before the sale and ending 30 days after the sale.
General rule: not deductible
indebtedness, issued by any corporation, including those issued by a
government or political subdivision thereof, with interest coupons or in
registered form.
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Exception: unless claim is made by a dealer in
stock/securities and made in ordinary course of business
Wagering losses
Allowed only to the extent of the gains from such losses
Net operating loss carry-over (NOLCO)
Net operating loss refers to the excess of allowable
deductions over gross income of the business for any
taxable year, which has not been previously offset as
deduction from gross income. The net operating loss of a
business shall be carried over as a deduction from gross
income for the next 3 consecutive taxable years
immediately following the year of such loss.
The 3-year period shall continue to run notwithstanding
that the corporation paid its taxes under MCIT, or that the
individual availed of the Optional Standard Deduction.
For mines, other than oil & gas wells, if loss is incurred in
any of the first 10 years of operation, it may be carried over
for the next 5 years.
Requirements:
1. The taxpayer was not exempt from income tax in the
year of such net operating loss;
2. The loss was not incurred in a taxable year during
which the taxpayer was exempt from income tax, and
3. There has been no substantial change in the
ownership of the business or enterprise.
A merged with B, with A as the surviving corporation. A
cannot claim B’s prior losses as deductions (PICOP v. CA,
G.R. Nos. 106949-50 & 106984-85, 1995).
IF the separate corporations are not dissolved but are
merely integrated for a legitimate business purpose, then
the NOLCO of each separate corporation is preserved
after the proposed share swap. This is because there is no
substantial change in the ownership of the business. (BIR
Ruling No. 30-00).
Taxes
The term “taxes” refers to national and local taxes
Deductible Taxes – 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.
Requisites for deductibility:
1. It must be paid or incurred within the taxable year;
2. It must be paid or incurred in connection with the
taxpayer’s trade, profession or business;
3. It must be imposed directly on the taxpayer; and
4. It must not be specifically excluded by law from
being deducted from the taxpayer’s gross income
Examples:
1. Percentage tax
2. Excise tax
3. Documentary Stamp tax
4. Occupational tax
5. License tax
6. Fringe Benefit tax
7. Local taxes except special assessment
8. Community tax
9. Municipal tax (Banggawan)

There is no substantial change in the ownership of the Non-Deductible Taxes:

business when: 1. Philippine income tax
(ii) Not<75% in nominal value of outstanding issued b. Final income tax
shares is held by same persons c. Capital gains tax
(iii) Not<75% of paid up capital of corp. is held by same d. Regular income tax
persons 2. Income taxes imposed by authority of any foreign
country except when the taxpayer does not signify
Note: No actual change in ownership occurs: in his return his desire to claim it as tax credit;
1. in case the transfer involves change from direct 3. Estate and donor’s taxes
ownership to indirect ownership, or 4. Special assessments, i.e., taxes assessed against
2. merger of the subsidiary into the parent company. local benefits of a kind tending to increase the value
of the property assessed
If several corporations enter an agreement to integrate 5. VAT
their respective businesses, can each of the corporations
continue to carry-over their respective net operating
losses?

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Treatments of surcharges/ interests/ fines for
delinquency
Interest on taxes - incurred or paid by a taxpayer on all
unpaid business-related taxes; fully deductible from gross
income and shall not be subject to the 33%-limitation on
deduction of interest expense. (Sec. 3, RA No. 9337)
Surcharges – non-deductible (Rev. Regs. 02-40, Sec. 80)
Penalties or fines incident to delinquency – non-
deductible (Rev. Regs. 02-40, Sec. 80)
Treatment of Special Assessments
General rule: Special assessments are not deductible,
even though an incidental benefit may inure to the public
welfare.
Exception: When assessments are made for the purpose
of maintenance or repair of local benefits, the taxpayer
may deduct assessments paid as an expense incurred in
business, if the payment of such assessments is
necessary to the conduct of his business. (Rev. Regs. 02-
40, Section 83)
Tax Credit v. Deduction
Tax deduction is treated as a tax-deductible expense that
is subtracted from the gross income and results in a lower
taxable income. It is an amount that is allowed by law to
reduce the income prior to the application of the tax rate to
compute the amount of tax which is due. Being a tax
deduction, the discount does not reduce taxes owed on a
peso for peso basis but merely offers a fractional
reductions in taxes owed. On the other hand, a tax credit
is a peso-for-peso deduction from a taxpayer’s tax liability
due to the government. (Carlos Superdrug Corp. v. DSWD,
GR No. 166494, 2007)
Taxes, when refunded or credited, shall be included as part
of gross income in the year of receipt to the extent of
income tax benefit of said deduction (tax benefit rule).
For NRA-ETB and RFC, taxes paid or incurred are allowed
as deductions only if and to the extent that they are
connected from income within the Philippines. (Rev. Regs.
02-40, Sec. 80)
Exception to the rule that only such persons on whom
the tax is imposed by law can claim deduction thereof
- Taxes of shareholder upon his interest as such and paid
by the corporation without reimbursement from him can be
claimed by the corporation as deduction.
TAXATION LAW
Exception to the exception - A corporation paying the tax
for the holder of its bonds or other obligations containing a
tax-free covenant clause cannot claim deduction for such
taxes paid by it pursuant to such covenant.
Tax Sparing Rule – a right of an income taxpayer to
deduct from income tax payable the foreign income tax he
has paid to his foreign country subject to certain limitations.
Who can claim taxes as allowable deductions
1. Citizen
2. Domestic Corporation
3. Member of GPP
4. Beneficiary of an estate or trust
Who cannot claim taxes as allowable deductions
1. Alien individual (except resident aliens deriving
income from within & without the Philippines, if there
is reciprocity)
2. Foreign corporation
Substantiation Requirements for Tax Credit
The tax credit shall be allowed only if the taxpayer
establishes to the satisfaction of the CIR the following:
1. The total amount of income derived from sources
without the Philippines;
2. The amount of income derived from each country, the
tax paid or incurred to which is claimed as a credit
under said paragraph, such amount to be determined
under rules and regulations prescribed by the
Secretary of Finance; and
3. All other information necessary for the verification and
computation of such credits
What amount may be taken as tax credit:
The amount of tax credit allowed is equivalent to the tax
paid or incurred to a foreign country during the taxable year
but not to exceed the following limits:
Per country limitation – Amount of credit to tax
paid/incurred to any country shall not exceed same
proportion of the tax against which such credit is taken
Country TI per country Philippine
Limit = (outside) x Income Tax
TI from all sources
Global limitation – Total amount of credit shall not exceed
same proportion of tax against which such credit is taken
Global Total TI from outside Philippine
= x
Limit TI from all sources Income Tax
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Note: Allowable tax credit shall be the LOWER of the Depreciation

actual tax paid to the foreign country, per country limitation Refers to the gradual diminution in the service or useful
and global limitation. value of tangible property due from exhaustion, wear and
tear and normal obsolescence; also applies to amortization
When credit for taxes may be taken: of intangible assets, the use of which in trade or business
The credit for taxes provided by Section 34(C)(3) to (7) of is of limited duration.
the NIRC may ordinarily be taken either in the return for the
year in which the taxes accrued or on which the taxes were Requisites for deductibility:
paid, dependent upon whether the accounts of the 1. The allowance for depreciation must be reasonable;
taxpayer are kept and his returns filed upon the accrual 2. It must be for property used for employment in trade or
basis or upon cash receipts and disbursements basis. business or out of its not being used temporarily during
the year;
Example: 3. The allowance must be charged off; and
ACTUAL 4. Schedule on the allowance must be attached to the
PHIL INC.
PARTIC- NET FOREIGN return
TAX DUE
ULARS INC. TAX PAID IN
AT 30%
PHP Requisites for deductibility on depreciation of land,
Country A 50,000 18,000 vehicles capitalized by the taxpayer:
Country B 40,000 11,000 1. The taxpayer must substantiate the purchase of
Phil-source 110,000 vehicle with sufficient evidence;
income 2. Only one vehicle for land transport is allowed for the
use of an official or employee, the value of which
Total NI 200,000 29,000 60,000 should not exceed P2.4 million;
3. No depreciation shall be allowed for yachts,
A. PER COUNTRY LIMITATION helicopters, airplanes and/or aircrafts, and land
Country A: [(50,000/200,000 x 60,000)] = 15,000 vehicles which exceed the above threshold amount,
Country B: [(40,000/200,000 x 60,000)] = 12,000 unless the taxpayer’s main line of business is transport
** maximum tax credit limit operations or lease of transportation equipment and
the vehicles purchased are used in said operations;
B. GLOBAL LIMITATION 4. All maintenance expenses on account of non-
[(90,000/200,000x60,000)] = 27,700 depreciable vehicles for taxation purposes are
disallowed in their entirety; and
Computation of allowable tax credit 5. The input taxes on the purchase of non-depreciable
Tax Due on P200,000 60,000 vehicles and all input taxes on maintenance expenses
incurred thereon are likewise disallowed for taxation
Less: Allowable Foreign Tax Credit purposes. (Rev. Regs. 12-12, Sec. 3, as clarified by
RMC No. 02-13)
Country A P15,000
Country B 11,000 26,000 Note: Depreciation is deductible by NRA-ETB or NRC only
Tax Still Due P34,000 when such property is located in the Philippines.

** Cannot exceed maximum tax credit limit
NOTE: For limitation A, Country A, 15K is lower than
the actual; Country B, 11K (actual) is the lower
amount; get the total of all per country amounts. For
limitation B, 27.7K is lower than the total of the actual
amount. Comparing the total of limitation, A v. B, the
former is the lower amount so that is the allowable tax
credit.
The BIR and the taxpayer may agree in writing on the
useful life of the property to be depreciated. The agreed
rate may be modified if justified by facts or circumstances.
The change shall not be effective before the taxable year
on which notice in writing by registered mail is served by
the party initiating.

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Interest
Requisites for deductibility: (PLITI - CRWDIT)
1. There must be an Indebtedness;
2. There should be an interest expense paid or
Incurred upon such indebtedness;
3. Indebtedness must be that of the Taxpayer;
4. Indebtedness must be Connected with the
taxpayer’s trade, business or exercise of profession;
5. Interest expense must have been paid or Incurred
during the taxable year;
6. Interest must have been stipulated in Writing;
7. Interest must be legally Due;
8. Interest payment arrangement must not be between
Related taxpayers;
9. 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; and
11.The interest is not expressly disallowed by Law to
be deducted from gross income of the taxpayer
(Rev. Regs. No. 13-00)
General Rule on Deduction of Interest Expense 63
The amount of interest expense paid or incurred within a
taxable year of indebtedness in connection with the
taxpayer’s trade, business, or exercise of profession shall
be allowed as a deduction from the taxpayer’s gross
income.
Limitation on Deduction of Interest Expense
A taxpayer’s otherwise allowable deduction for interest
expense shall be reduced by 33% effective 1 January 2009
of the interest income subjected to final tax. (Sec. 34
(B)(1))
Example: Year 2012
Interest expense P 2,000
Interest income 1,500
63
SEC. 34 (B) Interest. -
(1) In General. - The amount of interest paid or incurred within a taxable
year on indebtedness in connection with the taxpayer's profession, trade
or business shall be allowed as deduction from gross income: Provided,
however, That the taxpayer's otherwise allowable deduction for interest
expense shall be reduced by an amount equal to the following
percentages of the interest income subjected to final tax: Forty-one
percent (41%) beginning January 1, 1998; Thirty-nine percent (39%)
beginning January 1, 1999; and Thirty-eight percent (38%) beginning
January 1, 2000;
(2) Exceptions. - No deduction shall be allowed in respect of interest
under the succeeding subparagraphs: (a) If within the taxable year an
individual taxpayer reporting income on the cash basis incurs an
TAXATION LAW
Deductible interest expense [P2,000- P 1,505
(1,500 x 33%)]
The objective of the limitation is to discourage tax arbitrage
on back-to-back loans, the proceeds of which are invested
in income earning interest that is subject to 20% final tax.
Tax Arbitrage - a method of borrowing without entering
into a debtor/creditor relationship, often to resolve
financing and exchange control problems; in tax cases,
back-to-back loan is used to take advantage of the lower
rate of tax on interest income and a higher rate of tax on
interest expense deduction.
Deductible Interest Expense
Interest on taxes (discussed in the succeeding page), such
as those paid for deficiency or delinquency, since taxes are
considered indebtedness (provided that the tax is a
deductible tax); however, fines, penalties, and surcharges
on account of taxes are not deductible; interest on unpaid
business tax shall not be subjected to the limitation on
deduction of 33%.
Interest paid by a corporation on scrip dividends. (Rev.
Regs. 02-40, Sec. 78)
Interest on deposits paid by authorized banks of the BSP
to depositors, if it is shown that the tax on such interest was
withheld.
Interest paid by a corporate taxpayer which is liable on a
mortgage upon real property of which the said corporation
is the legal or equitable owner, even though it is not directly
liable for the indebtedness. (Rev. Regs. 02-40, Sec. 78)
Non-deductible interest expense
No deduction shall be allowed in respect to the ff:
a. If within the taxable year an individual taxpayer
reporting income on the cash basis incurs an
indebtedness on which an interest is paid in advance
through discount or otherwise. Provided, that such
indebtedness on which an interest is paid in advance through discount or
otherwise: Provided, That such interest shall be allowed a a deduction in
the year the indebtedness is paid: Provided, further, That 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; (b) If both the
taxpayer and the person to whom the payment has been made or is to be
made are persons specified under Section 36 (B); or (c)If the
indebtedness is incurred to finance petroleum exploration.
(3) Optional Treatment of Interest Expense. - At the option of the
taxpayer, interest incurred to acquire property used in trade business or
exercise of a profession may be allowed as a deduction or treated as a
capital expenditure.
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interest shall be allowed as a deduction in the year
that the indebtedness is paid. Provided, further, that 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 a deduction in such taxable
year;
b. If both the taxpayer and the person to whom the
payment has been made or is to be made are:
o Between members of a family (includes only
brothers & sisters, spouse, ancestors, & lineal
descendants);
o Between an individual & a corporation, more
than 50% in value of outstanding stock is
owned by such individual (except in case of
distributions in liquidation);
o Between 2 corporations more than 50% in
value of outstanding stock owned by the same
individual, if either one is a personal holding
company or a foreign holding company during
the taxable year preceding the date of
sale/exchange (except in case of distributions
in liquidation);
o Between grantor & fiduciary of any trust;
o Between fiduciary of a trust & the fiduciary of
another if same person is a grantor to each
trust;
o Between fiduciary & a beneficiary of a trust
(Sec. 34(B)(2))
c. If the indebtedness is incurred to finance
petroleum exploration;
d. Interest on preferred stock which in reality is
dividend
e. Interest on unpaid salaries and bonuses
f. Interest calculated for cost keeping on account of
capital or surplus invested in business which
does not represent charges arising under
interest-bearing obligation
g. Interest paid when there is no stipulation for the
payment thereof
Interest subject to special rules ( Sec. 34(B))
a) Interest paid in advance
b) Interest periodically amortized
c) Interest incurred to acquire property used in trade or
business
d) Reduction of interest expense/interest arbitrage
Optional Treatment of Interest Expense
At the option of the taxpayer, interest incurred to acquire
property used in trade or business or exercise of
profession may be allowed as (Sec. 34 (B)(3)):
TAXATION LAW
a. Expense (outright deduction) or
b. Capital expenditure (subject to amortization)
Depletion
Depletion expense is a provision for the periodic return of
capital investments in wasting assets such as minerals,
gas, and oil.
A reasonable allowance for depletion or amortization
computed in accordance with the cost-depletion method
shall be granted. Provided, That when the allowance for
depletion shall equal the capital invested no further
allowance shall be granted: Provided, further, That after
production in commercial quantities has commenced,
certain intangible exploration and development drilling
costs: (a) shall be deductible in the year incurred if such
expenditures are incurred for non-producing wells and/or
mines, or (b) shall be deductible in full in the year paid or
incurred or at the election of the taxpayer, may be
capitalized and amortized if such expenditures incurred are
for producing wells and/or mines in the same contract area.
(Sec. 34(G))
Charitable & Other Contributions
Requisites for Deductibility (contributions subject to
limitations):
1. Contributions or gifts must be actually paid or made
within the taxable year;
2. To or for the use of the government or its agencies
or any political subdivision, exclusively for public
purpose; or
3. To accredited domestic corporations or associations
organized and operated exclusively for:
• Religious
• Charitable
• Scientific
• Youth & sports development
• Cultural or educational purposes
• Rehabilitation of veterans
• Social welfare institutions
• NGOs
No part of net income inures to the benefit of any private
stockholder or individual in excess of the following
limitation:
a. For individual: not more than 10% of taxable
income before deducting the charitable
contributions.
b. For corporation: not more than 5% of taxable
income before deducting the charitable
contributions.
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Amount that may be deducted
Valuation
The amount of any charitable contribution of property other
than money shall be based on the acquisition cost of said
property.
Contributions subject to limitations
(see requisites for deductibility)
Contributions deductible in full
• Donations to the government – to finance, to provide
for, or to be used in undertaking priority activities in
education, health, youth & sports development, human
settlements science & culture & in economic
development according to National Priority Plan
determined by NEDA
If not in accordance with annual priority plan, donation
is subject to 10% / 5% limitation
• Donations to certain foreign institutions or international
organizations – in compliance with agreements,
treaties, or commitments entered into by Philippine
government and foreign institutions/international
organizations or in pursuance to special laws
• Donations to accredited NGOs – Organized &
operated exclusively for scientific, educational,
character-building & youth & sports development,
health, social welfare, cultural or charitable purposes
or combination thereof (no part of net income inures to
the benefit of any private individual)
Must be utilized not later than the 15th day of the 3rd
month after the close of the taxable year, directly for
the active conduct of activities constituting the purpose
of the organization, unless period is extended.
The level of administrative expense must conform with
the rules and regulations prescribed by the Secretary
of Finance but should not be greater than 30% of total
expenses.
Upon dissolution, assets would be distributed to another
nonprofit domestic corporation organized for similar
purpose or to the state for public purpose or to another
64
SEC. 34 (J) Pension Trusts. - 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 (in addition to the
contributions to such trust during the taxable year to cover the pension
liability accruing during the year, allowed as a deduction under
TAXATION LAW
organization to be used in the same purpose as the
dissolved corporation.
Pension Trusts (Past Service Cost)64
Pension Trust Contributions – a deduction applicable
only to the employer on account of his contributions to a
private pension plan for the benefit of his employees;
purely business in character.
Normal Cost – the contributions during the taxable year to
cover the pension liability accruing during such taxable
year; allowed as a deduction under Sec. 34(A)(1) of the
NIRC as “expenses in general.”
Past Service Cost – amount in excess of the above
contribution (covering pension liability pertaining to old
employees which accrued during the years previous to the
establishment of the pension trust); allowed as deduction
only if all of the requisites below concur.
Requisites for deductibility of past service cost:
1. The employer must have established a pension or
retirement plan to provide for the payment of
reasonable pensions to his employees;
2. The pension plan is reasonable and actuarially sound;
3. The pension plan must be funded by the employer;
4. The amount contributed must no longer be subject to
the control and disposition of the employer;
5. The payment has not yet been allowed as a deduction;
and
6. The deduction is apportioned in equal parts over a
period of 10 consecutive years beginning with the year
in which the transfer of payment is made.
Nothing precludes the employer from making property
contributions (other than monetary contributions) to the
pension plan for as long as no part of the corpus or income
of the fund shall be used for, or be diverted to, any purpose
other than for the exclusive benefit of the employees. The
transfer of property to the pension plan is neither a sale nor
a donation. (BIR Ruling No. DA-486-04)
Summary rules on retirement benefits plan/pension
trust:
1. Exempt from income tax – employees’ trust under Sec.
60(B) of the NIRC
Subsection (A) (1) of this Section a reasonable amount transferred or paid
into such trust during the taxable year in excess of such contributions, but
only if such amount (1) has not theretofore been allowed as a deduction,
and (2) is apportioned in equal parts over a period of ten (10) consecutive
years beginning with the year in which the transfer or payment is made.
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2. Exclusion from gross income – amount received by under Section 27(C)] and other special
the employee from the fund upon compliance with certain laws, with no other taxable income;
conditions under Sec. 32(B)(6) of the NIRC 2. Those with income subject to
3. Deduction from gross income special/preferential tax rates; and
If Normal Cost: as an expense under Section 34(A) of 3. Those with income subject to income tax
the NIRC. rate under Section 27(A) and 28(A)(1) of
If Past Service Cost: as a pension trust under Sec. the Tax Code, as amended, and also with
34(J) of the NIRC income subject to special/preferential tax
rates.
(2) OPTIONAL STANDARD DEDUCTION (OSD) (Sec. 34 b. Individual taxpayers who are not entitled to
(L)) avail of the OSD and thus use only the itemized
a. Individual other than a nonresident alien - may elect deduction method are as follows:
a standard deduction of 40% of his gross sales or 1. Those exempt under the Tax Code, as
gross receipts. amended, and other special laws with no
b. Corporation other than non-resident foreign other taxable income [e.g. Barangay Micro
corporations- may elect a standard deduction of 40% Business Enterprise (BMBE)];
of its gross income as defined in Section 32 of the 2. Those with income subject to
NIRC. special/preferential tax rates; and
c. General professional partnerships - GPP and the 3. Those with income subject to income tax
partners comprising such partnership may avail of the rate under Section 24 of the Tax Code, as
OSD only once, either by the GPP or the partners amended, and also with income subject to
comprising the partnership. special/preferential tax rates.

Note: No deductions shall be allowed to individual Illustration 1 (Rev. Regs. 08-18, Sec. 8)
taxpayers earning compensation income arising from Ms. RPSV is an independent contractor who offers
personal services rendered under an employee-employer architectural and engineering services. Her total gross
relationship and those who opted to be taxed a 8% income receipts amounted to P4,250,000 for taxable year 2018.
tax rate on their income from business/practice of Her recorded cost of service and operating expense were
profession. (Rev. Regs. 08-18, Sec. 8) P2,150,000 and P1,000,000, respectively. She opted to
avail of the 40% OSD.
There is no need to substantiate OSD. Unless the taxpayer
signifies in his first quarter return his intention to elect the Gross receipts P 4,250,000
OSD, he shall be considered as having availed himself of Multiply: OSD rate 40%
the deductions in Secs. 34(A) to (K) of the NIRC as Deductible OSD P 1,700,000
amended by TRAIN Law. Such election when made in the Gross receipts P 4,250,000
return shall be irrevocable for the taxable year for which Less: OSD (1,700,000)
the return is made. (Sec. 34(L)) Net taxable income P 2,550,000

Summary: Who can claim OSD? Illustration 2 (RR 08-18 Sec. 8)

All taxpayers who are subject to tax on taxable net income The gross sales of GEAL Corporation for 2018 amounted
(RC, NRC, RA, DC, RFC) can claim except the following: to P6,000,000 with cost of sales amounting to P4,000,000.
1. Those not subject to income tax in the Philippines It incurred operating expense amounting to P1,000,000,
a. NRA whether or not engaged in trade or and on the filing of its first quarter ITR, it signified its
business in the Philippines intention to avail of the OSD.
b. NRFC
2. Taxpayers mandated to use itemized deductions Gross sales P 6,000,000
under RR 2-2014, Sec.5: Less: Cost of sales (4,000,000)
a. Corporations, partnerships and other non- Gross Income P 2,000,000
individuals: Less: OSD (2,000,000 x 40%) (800,000)
1. Those exempt under the Tax Code, as Taxable Income P 1,200,000
amended [Section 30 and those exempted Multiply: Corporate tax 30%
Tax Due P 360,000
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(3) DEDUCTIONS UNDER SPECIAL LAWS
RA 10028: expenses incurred by a private health and non-
health facility to comply with the Breast Milk Act is
deductible up to TWICE of the actual amount incurred
(RMC No. 47-10)
RA 8502: additional deduction of 50% of expenses
incurred in training schemes in the jewelry industry
approved by the appropriate agency (RMC No. 33-04)
RA 8525: additional deduction equivalent to 50% of
expenses incurred in joining the Adopt-a-School program
(Rev. Regs. 10-03aa)
RA 9999: for free legal assistance, taxpayers can deduct
the amount that could have been collected from the client,
or up to 10% of gross income derived from the actual
performance of legal services, whichever is LOWER
RA 7277: private entities that employ disabled persons are
entitled to an additional deduction equivalent to 25% of the
total amount paid as salaries and wages to disabled
persons; private entities that improved or modify their
physical facilities in order to provide reasonable
accommodation for disabled persons shall also be entitled
to an additional deduction from their net taxable income,
equivalent to 50% of the direct costs of the improvements
or modifications.
The following are individual taxpayers who are mandated
to use only the itemized deductions:
(a) Those exempt under the NIRC and other special laws,
with no other taxable income (e.g. Barangay Micro
Business Enterprise [BMBE]);
(b) Those with income subject to special/preferential tax
rates; and
(c) Those with income partially subject to income tax rate
under Sec. 24 of the NIRC and partially subject to
special/preferential tax rates. (Rev. Regs. 02-14, Sec.
5)
Personal and Additional Exemptions
[Repealed by RA 10963 or TRAIN]
e. Items Not Deductible
General Rule – An expense will be allowed as a deduction
only if the tax required to be deducted and withheld
therefrom has been remitted to the BIR;
In computing net income, no deduction shall in any case
be allowed in respect to the ff (Sec. 36):
1. Personal, living or family expenses;
TAXATION LAW
2. Amounts paid out for new buildings or for permanent
improvements, or betterments made to increase the
value of any property or estate (not applicable to
intangible drilling and development costs incurred in
petroleum operation);
3. Any amount expended in restoring property or in
making good the exhaustion thereof for which an
allowance is or has been made;
4. Premiums paid on any life insurance policy covering
the life of any officer or employee, or any person
financially interested in trade or business carried on by
the taxpayer, individual or corporate, when the
taxpayer is directly or indirectly a beneficiary under
such policy;
5. Losses from sales or exchanges of property indirectly
or directly
• Between members of a family. For purposes of this
paragraph, the family of an individual shall include
only his brothers and sisters (whether by the whole
or half-blood), spouse, ancestors, and lineal
descendants; or
• Except in the case of distributions in liquidation,
between an individual and corporation more than
fifty percent (50%) in value of the outstanding
stock of which is owned, directly or indirectly, by or
for such individual; or
• Except in the case of distributions in liquidation,
between two corporations more than fifty percent
(50%) in value of the outstanding stock of which is
owned, directly or indirectly, by or for the same
individual if either one of such corporations, with
respect to the taxable year of the corporation
preceding the date of the sale of exchange was
under the law applicable to such taxable year, a
personal holding company or a foreign personal
holding company;
• Between grantor & fiduciary of any trust;
• Between the fiduciary of and the fiduciary of a trust
and the fiduciary of another trust if the same
person is a grantor with respect to each trust; or
• Between a fiduciary of a trust and beneficiary of
such trust.
6. Non-deductible interest, such as:
• Interest on preferred stock, which in reality is
dividend;
• Interest on unpaid salaries and bonuses;
• Interest calculated for cost keeping;
• Interest paid where parties did not agree in writing
to pay interest;
• Interest paid on indebtedness between two
taxpayers;
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• Interest on indebtedness paid in advance and the TAXABLE ON

TAXPAYER TAX BASE
taxpayer reports income on cash basis; INCOME
7. Interest expense, bad debts, and losses from sales of Resident or Taxable Within the Philippines
property between related parties; Non-resident Income
8. Non-deductible taxes, such as: Alien
• Income tax provided under the NIRC;
• Income taxes imposed by foreign authority, except The tax shall be computed in the following tax rates 65 :
when the taxpayer did not signify in his return that (Sec. 24 (A)(2))
he will avail of the tax credit;
• Estate tax and donor’s taxes; Tax Schedule Effective January 1, 2018 until December
• Special assessments – taxes levied against any 31, 2022:
local upgrades which potentially benefit/increase Not over P250,000 0%
the value of the property assessed; Over P250,000 but not 20% of the excess over
• Stock Transaction Tax over P400,000 P250,000
• Final Taxes Over P400,000 but not P30,000 + 25% of the
• Presumed Capital Gains Tax over P800,000 excess over P400,000
• VAT Over P800,000 but not P130,000 + 30% of the
9. Non-deductible losses, such as over P2,000,000 excess over P800,00
• Losses not incurred in trade, profession or Over P2,000,000 but not P490,000 + 32% of the
business or in any transaction entered into profit; over P8,000,000 excess over P2,000,000
• Losses from sales or exchanges of property P2,410,000 + 35% of the
entered into between related taxpayers (not Over P8,000,000 excess over P8,000,000
deductible as provided under Section 36 of the
NIRC but the gains are taxable; Effective January 1, 2023 and onwards:
• Losses from exchanges of property in a corporate Not over P250,000 0%
readjustment;
Over P250,000 but not 15% of the excess over
• Losses from illegal transactions; over P400,000 P250,000
• Loss on voluntary removal of building on land Over P400,000 but not P22,500 + 20% of the
purchased with a view to erect another building over P800,000 excess over P400,000
(such shall form part of the cost of the new building Over P800,000 but not P102,500 + 25% of the
to be erected). (Tabag) over P2,000,000 excess over P800,00
10. Losses from wash sales of stock or securities (Sec. 38)
Over P2,000,000 but not P402,00 + 30% of the
over P8,000,000 excess over P2,000,000
5. INCOME TAX ON INDIVIDUALS P2,202,500 + 35% of the
Over P8,000,000 excess over P8,000,000
a. Income Tax on Resident Citizens, Non-resident
Citizens and Resident Aliens ii. Taxation on compensation income
Compensation Income Earner- individuals whose source
i. Coverage – Income from all sources within and of income is purely derived from an employer-employee
without the Philippines; exceptions relationship.

TAXABLE ON Individuals earning purely compensation income shall be

TAXPAYER TAX BASE
INCOME taxed based on the graduated tax rates. Taxable income
Resident Taxable Within and without is the gross compensation income less non-taxable
Citizen Income the Philippines income/benefits such as but not limited to the 13th month
Non-resident Taxable Within the Philippines pay and other benefits (subject to limitations), de minimis
Citizen Income benefits, and employee’s share in the SSS, GSIS, PHIC,
Pag-IBIG, and union dues (Rev. Regs. 08-18 Sec. 3).

65
SEC. 24 (A)(2).
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Gross compensation income xx
NO deductions allowed - 1. Holiday pay
Taxable Income xx
Inclusion and Exclusion
In general, the term “compensation” means all
remuneration for services performed by an employee for
his employer under an employer-employee relationship,
unless specifically excluded by the NIRC.
Types of Employees as to Taxability
1. Minimum wage earners- exempt from income tax on
compensation
2. Regular employees- subject to regular progressive
income tax
3. Mixed earners
(a) Inclusions – monetary and non-monetary
compensation
Monetary benefits
• Salaries, wages, emoluments and honoraria,
allowances, commissions (e.g. transportation,
representation, entertainment and the like);
• Fees including director's fees, if the director is, at the
same time, an employee of the employer/corporation;
• Taxable pensions and retirement pay; and
• Other income of a similar nature
Non-monetary benefits
• Taxable bonuses and fringe benefits, except those
which are subject to the Fringe Benefit Tax (FBT)
under Sec. 33 of the NIRC
(b) Exclusions/ Non-taxable Compensation
a. Mandatory deductions- include employees’
mandatory contribution to GSIS, SSS, PhilHealth,
HDMF, union dues
b. Exempt benefits
i. Renumeration received as incidents of
employment
1. Exempt retirement benefits under RA 7641
2. Exempt termination benefits
3. Benefits from United States Veterans
Administration
4. Social Security, retirement gratuities,
pensions, similar benefits from foreign
government agencies
5. Benefits from SSS
6. Benefits from GSIS
ii. De minimis benefits
iii. 13th month pay and other benefits not exceeding
P90,000
TAXATION LAW
iv. Certain benefits of MWEs
2. Hazard pay
3. Overtime pay
4. Night shift differential pay
iii. Taxation on business income/income from practice
of profession
Income from business
In the case of manufacturing, merchandising, or mining
business, “gross income” means the total sales, less cost
of goods sold, plus any income from investments and from
incidental or outside operations or sources.
In determining gross income, deductions should not be
made for depreciation, depletion, selling expenses or
losses, or for items not ordinarily used in computing the
cost of goods sold.
In the case of sellers of services, gross income is
computed by deducting “cost of services” which pertains to
all direct costs and expenses exclusively and directly
incurred in relation to the revenue realized by such sellers.
These refer to costs which are considered indispensable
to the earning of the revenue such that without such costs,
no revenue can be generated. (Rev. Regs. 24-08)
Professional income
Income earned from the practice of profession provided
there is no employer-employee relationship between him
and his clients.
Profession is primarily any endeavor or work requiring
specialized training in the field of learning, art, or science
engaged in as a means of livelihood or profit of an
individual or group of individuals.
(a) Schedular
Income that are subjected to different sets of graduated or
flat income tax rates.
(b) Optional 8% income tax
Self-employed individuals and/or professionals whose
gross sales/gross receipts and other non-operating income
does not exceed the VAT threshold of P3,000,000 shall
have the option to avail of an eight percent (8%) tax on
gross sales or gross receipts and other non-operating
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income in excess of P250,000 in lieu of the graduated
income tax rates and percentage tax. 66
Mixed Income Earner – an individual earning both
compensation income from employment and income from
business, practice of profession and/or sources aside from
employment shall be subject to the following tax rates:
a. Compensation income – graduated rates under
Sec. 24(A)(2) of NIRC as amended; and
b. Income from business or practice of profession
• If Total Gross Sales and/or Gross Receipts and
Other Non-Operating Income does not exceed
VAT threshold (P3,000,000), the individual has
the option to be taxed at:
i. Graduated rates; OR
ii. 8% income tax on gross sales or
gross receipts and other non-
operating income in excess of
P250,000.
• Exceeds P3,000,000 – graduated rates67
Note: Unless the taxpayer signifies the intention to elect
the 8% income tax rate in the 1st quarter percentage and/or
ITR, or on the initial quarter return of the taxable year after
the commencement of a new business/practice of
profession, the taxpayer shall be considered as having
availed of the graduated rates. Such election, shall be
irrevocable and no amendment of option shall be made for
the said taxable year.
The option to be taxed at 8% income tax rate is not
available to a VAT-registered taxpayer, regardless of the
amount of gross sales/receipts, and to a taxpayer who is
subject to Other Percentage Tax, except those subject
under Sec. 116. Likewise, partners of a General
Professional Partnership (GPP) by virtue of their
distributive share from GPP which is already net of cost
and expenses cannot avail of the 8% income tax rate
option.
A taxpayer shall automatically be subject to the graduated
rates even if the flat 8% income tax rate option is initially
selected, when taxpayer’s gross sales/receipts and other
non-operating income exceeded the VAT threshold during
the taxable year. (Rev. Regs. 08-18 Sec. 3)
Illustration 1 (Rev. Regs. 08-18)
Ms. EBQ operates a convenience store while she offers
bookkeeping services to her client. In 2018, her gross
66
SEC. 24 (A)(2)(b).
TAXATION LAW
sales amounted to P800,000, in addition to her receipts
from bookkeeping services of P300,000. She signified her
intention to be taxed at 8% income tax rate in her 1st
quarter return.
Gross sales- convenience store P 800,000
Gross receipts- bookkeeping 300,000
Total Sales/Receipts P 1,100,000
Less: Amount allowed as deduction (250,000)
under Sec. 24(A)(2)(b)
Taxable income P 850,000
Multiply: Tax rate 8%
Tax Due P 68,000
iv. Taxation of partners in general professional
partnership (GPP)
A general professional partnership shall not be subject to
the income tax. Persons engaging in business as partners
in a general professional partnership shall be liable for
income tax only in their separate and individual capacities.
Each partner shall report as gross income his distributive
share, actually or constructively received, in the net income
of the partnership. (Sec. 26)
The partners shall be liable to pay income tax on their
separate and individual capacities for their respective
distributive share in the net income of the GPP. The GPP
is not a taxable entity for income tax purposes since it is
only acting as a "pass-through” entity where its income is
ultimately taxed to the partners comprising it.
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. As such, a GPP may
claim either:
a. itemized deductions allowed under Section 34 of the
Code or
b. Optional standard deduction allowed to corporations
in claiming the deductions in an amount not exceeding
forty percent (40%) of its gross income (Rev. Regs.
08-18, Sec. 8).
In computing taxable income defined under Section 31 of
the Tax code, as amended, the following may be allowed
as deductions:
a. itemized expenses which are ordinary and
necessary, incurred or paid for the practice of
Profession; OR
67
SEC. 24 (A)(2)(c).
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b. Optional Standard Deduction (OSD).

The share in the net income of the partnership, actually or

constructively received, shall be reported as taxable
income of each partner. The partners comprising the GPP
can no longer claim further deduction from their distributive
share in the net income of the GPP and are not allowed to
avail of the 8% income tax rate option since their
distributive share from the GPP is already net of cost and
expenses. If the partner also derives other income from
trade, business or practice of profession apart and distinct
from the share in the net income of the GPP, the deduction
that can be claimed from the other income would either be
the itemized deductions or OSD. (Rev. Regs. 08-18, Sec.
8).

Illustration 1 (Rev. Regs. 08-18, Sec. 8)

Mr. JMLH is a partner of AMBS & Co., a general
professional partnership, and owns 25% interest. The
gross receipts of AMBS & Co. amounted to P10,000,000
for taxable year 2018. The recorded cost of services and
operating expenses were P2,750,000 and P1,500,000,
respectively.

Gross receipts P10,000,000

Less: Cost of Services (2,750,000)
Gross Income P7,250,000
Less: OSD (P7,250,000 x 40%) (2,900,000)
Net Income for distribution to partners P4,350,000
% of ownership 25%
Share in distributive profit of JMHL P1,087,500

Income tax liability of Mr. JMLH:

On P800,000 P130,000
On excess (P1,087,500- 800,000) x 30% 86,250
Income Tax Due P216,250

Note: Individual partner is not allowed to claim further

deduction from his distributive share since this is already
net of cost and expenses. Also, the taxpayer is not allowed
to avail of the 8% income tax rate option.

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v. Taxation of passive income

Passive income subject to final tax
PASSIVE INCOME RESIDENT CITIZEN NRC RA NRA-ETB NRA-NETB
within PH Without PH Sources within PH
Interest income from
currency bank deposit
and yield or any other 20% 20% to 35% 20% 20% 20% 25%
monetary benefit from graduated
deposit substitutes and rate
from trust funds and
similar arrangements
Royalties on books,
literary works, and 10% 10% 10% 10% 25%
musical compositions
Royalties from
cinematographic films 20% 20% 20% 25% 25%
and similar works
Other passive royalties 20% 20% 20% 20% 25%
Prizes and other
winnings amounting to 20% 20% 20% 20% 25%
more than P10,000
Prizes and other 20% to 35% 20% to 35% 20% to 35% 25%
winnings amounting to 20% to 35% graduated rate graduated graduated
P10,000 and below graduated rate rate rate
PSCO and Lotto Exempt Exempt Exempt Exempt 25%
winning P10,000
pesos or less
PSCO and Lotto
winning exceeding 20% 20% 20% 20% 25%
P10,000
Interest Income from Exempt Exempt Exempt Exempt 25%
Long-Term Deposit or
investment (held for 5
years or more)

In case of pre-
termination, if held for:
4 to less than 5 years 5% 5% 5% 5% 25%
3 to less than 4 years 12% 12% 12% 12% 25%
Less than 3 years 20% 20% 20% 20% 25%
Interest income from
depositary bank under 15% Exempt 15% Exempt Exempt
EFCDU
Cash and/or Property
Dividends from 10% 10% 10% 20% 25%
domestic corporation
Cash and/or Property 20% to 35% 20% to 35% 20% to 35% 20% to 35%
Dividends from foreign graduated rate graduated rate graduated graduated 25%
corporation rate rate

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vi. Taxation of capital gains Engaged in trade or business (ETB) – an alien who
General Rule: Capital gains are subject to regular income comes and stays in the Philippines for an aggregate period
tax of more than 180 days during any calendar year
Exception:
GAINS ON DEALINGS IN NRA-ETB shall be subject to an income tax in the same
TAX RATE
CAPITAL ASSETS manner as an in the same manner as an individual citizen
Net capital gains from sale, barter, 15% on net and a resident alien individual, on taxable income received
exchange, or other disposition of capital gain from all sources within the Philippines.69
shares of stock in a domestic (Sec. 24 (C))
corporation NOT traded in the stock Note: An alien who has acquired residence in the
exchange Philippines retains his status as a resident until he
Sale, barter, exchange or other abandons the same and actually departs from the
disposition of shares of stocks listed Philippines. An intention to change his residence does not
and traded in the Local Stock change his status as a resident to that of a nonresident
Exchange (Stock Transaction Tax) alien (Rev. Regs. 02-40, Sec. 6).

Selling price or gross value in 0.6% As for the capital gains, the following are the tax rate
money (Sec. 127 (A)) applicable:
Sale, exchange, or other disposition TAX RATES of NRA-ETB ON CAPITAL GAINS
of real property situated in the Capital gain from sale of
Philippines classified as capital shares of stock of a 15% on net capital gain
asset domestic corporation NOT (Sec. 25 (A)(3) with
traded through a local reference to Sec. 24 (C))
Tax base is higher of: 6% on capital stock exchange
1. Gross selling price or gains (Sec. 24 Sale, barter, exchange or 0.6% of selling price or
2. FMV (D)) other disposition of gross value in money
Income from the sale, exchange or Graduated shares of stocks listed and (Sec. 127 (A))
other disposition of other capital Income Tax Rate traded in the Local Stock
assets Exchange (Stock
Transaction Tax)
b. Income tax on Non-resident Aliens Engaged in
Trade or Business (NRA-ETB)
Sale of real property in the 6% of gross selling price,
Philippines held as a OR current market value
TAXABLE capital asset at the time of sale,
TAXPAYER TAX BASE
ON INCOME whichever is higher. (Sec.
25 (A)(3) with reference to
Non-resident Alien
Sec. 24 (D))
engaged in trade or Taxable Within the
business (more than Income Philippines
180 days) General rules:
i. A nonresident alien individual who shall come to the
Philippines and stay therein for an aggregate period of
Nonresident Alien 68 (NRA) – an individual whose more than 180 days during any calendar year
residence is not within the Philippines and who is not a ii. Shall be taxed on income earned within the
citizen thereof but doing business therein is taxable only
Philippines, in the same manner as an individual
on income from sources within.
citizen or a resident alien.
iii. Except: a cinematographic film owner who shall be
taxed at 25% on his gross income

68 69
SEC. 22 (G). The term 'non-resident alien' means an individual whose SEC. 25 (A).
residence is not within the Philippines and who is not a citizen thereof.
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iv. The term “trade or business” includes the performance
of the functions of public office but does not include
performance of services by the taxpayer as an
employee. (Sec. 22 (CC))
c. Income Tax on Non-Resident Aliens Not Engaged
in Trade or Business (NRA-NETB)
TAX TAXABLE ON
TAXPAYER
BASE INCOME
Nonresident Alien not
engaged in trade or Gross Within the
business (180 days or Income Philippines
less)
NRA-NETB includes:
a. Aliens who come to the Philippines for a definite
purpose which in its nature may be promptly
accomplished
b. Aliens who shall come to the Philippines and stay
therein for an aggregate period of not more than
180 days during the year. (Banggawan)
General rules:
a. NRA-NETBs are taxed 25% of the their entire
income within the Philippines.70
b. They are not entitled to any deductions.
c. Capital gains tax liabilities are the same with NRA-
ETB.
d. Aliens Employed by Regional Headquarters,
Regional Operating Headquarters, Offshore Banking
Units, and Petroleum Service Contractors
Regional or area headquarters (RHQ) – a branch
established in the Philippines by multinational companies
and which headquarters do not earn or derive income from
the Philippines and which act as supervisory,
communications and coordinating center for their affiliates,
subsidiaries, or branches in the Asia-Pacific Region and
other foreign markets.
70
SEC. 25 (B) Nonresident Alien Individual Not Engaged in Trade or
Business Within the Philippines. – There shall be levied, collected and
paid for each taxable year upon the entire income received from all
sources within the Philippines by every nonresident alien individual not
engaged in trade or business within the Philippines as interest, cash,
and/or property dividends, rents, salaries, wages, premiums, annuities,
compensation, remuneration, emoluments, or other fixed or determinable
TAXATION LAW
Regional operating headquarters (ROHQ)- a branch
established in the Philippines by multinational companies
which are engaged in any of the following services: general
administration and planning; business planning and
coordination; sourcing and procurement of raw materials
and components; corporate finance advisory services;
marketing control and sales promotion; training and
personnel management; logistic services; research and
development services and product development; technical
support and maintenance; data processing and
communications; and business development.
The preferential tax treatment shall not be applicable to
RHQs, ROHQs, OBUs or petroleum service contractors
and subcontractors registering with the Securities and
Exchange Commission (SEC) after January 1, 2018.
They shall be subject to the regular income tax rates.
(Rev. Regs. 08-18, Sec. 4(C); Sec. 25(F))
Note: RHQ and ROHQ are exempt from all kinds of local
taxes, fees or charges imposed by a LGU, except real
property tax on land improvement and equipment.
Preferential Tax Rate imposed on the following:
Alien individual employed by RHQ and ROHQ of
Multinational Companies, and Offshore Banking Unit
(OBU)
15% of gross income from salaries, wages, annuities,
compensation, remuneration and other emoluments, such
as honoraria and allowances from such regional or area
headquarters and regional operating headquarters.
Provided that the same tax treatment shall apply to
Filipinos employed and occupying the same position as
those of aliens employed by these multinational
companies. (Sec. 25(C) and (D))
Alien Individual Employed by Petroleum Service
Contractor and Subcontractor
An alien individual who is a permanent resident of a foreign
country but who is employed and assigned in the
Philippines by a foreign service contractor or by a foreign
service subcontractor engaged in petroleum operations in
the Philippines shall be liable to a tax of fifteen percent
(15%) of the salaries, wages, annuities, compensation,
annual or periodic or casual gains, profits, and income, and capital gains,
a tax equal to twenty-five (25%) of such income. Capital gains realized
by a nonresident alien individual not engaged in trade or business in the
Philippines from the sale of shares of stock in any domestic corporation
and real property shall be subject to the income tax prescribed under
Subsections (c) and (d) of Section 24.
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remuneration and other emoluments, such as honoraria
and allowances, received from such contractor or
subcontractor: Provided that the same tax treatment shall
apply to a Filipino employed and occupying the same
position as an alien employed by petroleum service
contractor and subcontractor. (Sec. 25(E))
Note: The aforementioned 15% preferential income tax
rate for employees of regional or area headquarters and
regional operating headquarters of multinational
companies, offshore banking units and petroleum service
contractor and subcontractors shall no longer be
applicable without prejudice to the application of
preferential tax rates under existing international tax
treaties, if warranted. Thus, these employees shall be
subject to the regular income tax rate under Sec'
24(A)(2)(a) of the Tax Code, as amended. (Rev. Regs. 08-
18, Sec. 4(C), citing the veto message of the President)
Note: Any income earned from all other sources within
the Philippines by the alien employees employed by RHQ,
ROHQ, OBU, and Petroleum Service Contractors and
Subcontractors shall likewise be subject to regular
income tax rates.
e. Individual Taxpayers Exempt from Income Tax
1. Minimum wage earners
2. Exemptions granted under international
agreement
3. Senior citizens
i. Minimum wage earners (MWE)
shall refer to a worker in the private sector paid the
statutory minimum wage, or to an employee in the public
sector with compensation income of not more than the
statutory minimum wage in the non-agricultural sector
where he/she is assigned. (Sec. 22(HH))
Definition of statutory minimum wage (SMW)
Refers to the rate fixed by the Regional Tripartite Wage
and Productivity Board (RTWPB), as defined by the
Bureau of Labor and Employment Statistics (BLES) of the
Department of Labor and Employment (DOLE); the
RTWPB of each region shall determine the wage rates in
the different regions based on established criteria and shall
be the basis of exemption from income tax for this purpose.
Compensation income of MWEs shall be exempt from
income tax and consequently from withholding tax on
compensation if they work:
a. In the private sector and being paid the SMW; or
TAXATION LAW
b. In the public sector and being paid compensation
of not more than the SMW in the non-agricultural
sector
Other income of MWEs which are tax-exempt (Sec.
24(2)(A)):
a. Holiday pay
b. Overtime pay
c. Night shift differential pay and
d. Hazard pay
Additional compensation such as commissions, honoraria,
fringe benefits, benefits in excess of the allowable statutory
amount of ₱90,000.00, taxable allowances, and other
taxable income given to an MWE by the same employer
other than those which are expressly exempt from income
tax shall be subject to withholding tax (Rev. Regs. 02-98,
Sec. 2.7.81 as amended by R.A. No. 9504)
Note: MWEs do not lose their tax-exempt status even
though they have received other benefits in excess of the
statutory limit of P30,000. (Soriano v. Secretary of Finance,
G.R. No. 184450, 2017)
MWEs receiving other income from other sources in
addition to compensation income, such as income from
other concurrent employers, from the conduct of trade,
business, or practice of profession, except income subject
to final tax, are subject to income tax only to the extent of
income other than SMW, holiday pay, overtime pay, night
shift differential pay, and hazard pay earned during the
taxable year (Rev. Regs. 02-98, Sec. 2. 7.8 as amended
by R.A. No. 9504).
Basis of computation of minimum wage rates (Rev.
Regs. 02-98, Sec. 2.78.5 as amended by Rev. Regs. 10-
08, Sec. 2)
The basis of the computation of the minimum wage rates
prescribed by law shall be the normal working time of eight
(8) hours a day.
The computation of wages shall be in accordance with the
Collective Bargaining Agreement (CBA), if any, or the
provisions of the Labor Code as implemented. Unless
otherwise amended or repealed by subsequent pertinent
laws, rules and regulations, the holiday pay, overtime pay,
night shift differential and hazard pay shall be understood
to be computed based on such agreement or labor law
provisions.
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ii. In the determination of the minimum wage on a monthly
basis, the withholding agent shall be guided by the
prevailing minimum wage as reflected in the latest
Matrix of Wage Order and its own policy on whether
employees are (a) not considered paid on Saturdays
and Sundays or rest days, (b) not considered paid on
Sundays or rest days, (c) considered paid on rest days,
special days and regular holidays, or (d) required to
work everyday including Sundays or rest days, special
days and regular holidays. The resulting number of
days in the above enumerated categories are referred
to as the factor or number of working/paid days in a
year. Exemptions granted under international
agreements71
Employee benefits of non-Filipino nationals and/or non-
permanent residents of the Philippines from foreign
governments, embassies or diplomatic missions, and
internationals organizations in the Philippines are exempt
from income tax.
• If the aggregate amount of gross income earned by the
SC during the taxable year does not exceed the
amount of basic and additional exemptions, he shall be
exempt from payment of income tax and filing of an
ITR.
Note: The income tax exemptions granted, as stated
above, to SCs does not extend to income subject to final
tax (e.g., interest income from bank deposits, dividends,
capital gains tax) (Expanded Senior Citizens Act of 2003;
Rev. Regs. 07-10)
Compliance Requirements for Income Tax Exemption:
(i) Must first be qualified as such by the CIR or the RDO
by submitting a certified true copy of his OSCA ID; and
(ii) Must file a sworn statement on or before January 31 of
every year that his annual taxable income does not
exceed the poverty level.
6. INCOME TAX ON CORPORATIONS

Filipino employees of foreign governments, international a. Domestic Corporations

missions and organizations are taxable as rule except only
i. Taxation in General
to employee of the following organizations:
Corporation (Sec. 22(B))
a. United Nations
Includes: partnerships, no matter how created or
b. World Health Organization
organized, joint-stock companies, joint accounts,
c. Food and Agriculture Organization
association, or insurance companies,
d. United Nations Development Organization
e. Specialized Agencies of the United Nations
Does not include: general professional partnerships and
f. International Organization for Migration
a joint venture or consortium formed for the purpose of
g. International Seabed Authority (Banggawan)
undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations
pursuant to an operating consortium agreement under a
iii. Senior citizens (SC)
service contract with the Government.
1. Any resident of the Philippines; and
2. At least 60 years old.
Domestic corporation - a corporation created or
organized in the Philippines under its law
General Rule: Qualified Senior Citizens (SC) deriving
income during the taxable year, whether from
Optional Tax Scheme for Domestic Corporations
compensation or otherwise, are required to file their
Domestic corporations may opt to be taxed at either:
income tax returns and pay the tax as they file the return.
• Corporate gross income tax – The President, upon
recommendation of the Sec. of Finance, may allow
Exceptions:
domestic corporations the option to be taxed at 15% of
• If income is in the nature of compensation income and
gross income after conditions have been satisfied.
the SC qualifies as a MWE, he shall be exempt from
• Regular corporate income tax (RCIT) subject to
income tax on said compensation income, subject to
minimum corporate income tax
the rules of RA 9504 and RR No. 10-08.

71
SEC. 32 (B) (5) Income Exempt under Treaty. - Income of any kind,
to the extent required by any treaty obligation binding upon the
Government of the Philippines.
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Corporate tax scheme on regular corporations
Domestic Corporation • Gross income tax; OR
• RCIT subject to MCIT
Resident Corporation RCIT subject to MCIT
(a) Regular Corporate Income Tax (RCIT)
RCIT applies to all corporations in general. It covers all
taxable income of corporations that are not subject to final
tax or capital gains tax.
The regular domestic tax rates are:
YEAR APPLICABLE TAX RATE
2009 onwards 30%
2006-2008 35%
Before 2006 32%
Allowable deductions
(ii) Itemized deductions
Pertains to the items in Sec. 34 of the NIRC as discussed
under Deductions from Gross Income
When itemized deductions is mandatory
The following are corporations, partnerships and other
non-individuals that are mandated to use the itemized
deductions:
a. Those exempt under the NIRC (i.e., exempt
corporations under Sec. 30 and GOCCs under Sec.
27(C)] and other special laws, with no other taxable
income;
b. Those with income subject to special/preferential tax
rates; and
c. Those with income partially subject to income tax rate
under Secs. 27(A) and 28(A)(1) of the NIRC and
partially subject to special/preferential tax rates. (Rev.
Regs. 02-14, Sec. 5)
(iii) Optional Standard Deduction (OSD)
In lieu of the itemized deductions, a corporation may elect
to a standard deduction (OSD) in an amount not exceeding
forty percent (40%) of gross income of corporations.
A taxpayer who elected to avail of the OSD shall signify in
his/its first quarter return such intention. Otherwise, he/it
72
SEC. 27(E) (1) Imposition of Tax. - A minimum corporate income tax
of two percent (2%) of the gross income as of the end of the taxable year,
as defined herein, is hereby imposed on a corporation taxable under this
Title, beginning on the fourth taxable year immediately following the year
TAXATION LAW
shall be considered as having availed himself of the
itemized deductions.
Once the election to avail the OSD is signified in the return,
it shall be irrevocable for the taxable year for which the
return is made.
Who can claim OSD?
All corporations who are subject to tax on taxable net
income can claim except the following:
1. NRFC
2. Taxpayers mandated to use itemized deductions
(b) Minimum Corporate Income Tax (MCIT)
The MCIT is applicable to every corporation taxable to the
30% regular corporate income tax including non-profit,
exempt, and special corporations with respect to their
taxable income subject to the regular corporate income
tax, but not to the income subject to special tax rates.
(Banggawan)
Imposition of MCIT
Computed as 2% of gross income subject to regular
income tax (GI)72
The MCIT is not a tax on capital. It is imposed on gross
income which is arrived at by deducting the capital spent
by a corporation in the sale of its goods, i.e., the cost of
goods and other direct expenses from gross
sales. Clearly, the capital is not being taxed. Thus, MCIT
is constitutional. (Chamber of Real Estate and Builders’
Associations, Inc. v. Romulo, G.R. No. 160756, 2010)
When applicable: Beginning on the 4th taxable year from
the year in which such corporation commenced its
business operation, i.e. the year when corporation
registers with the BIR, regardless of whether the
corporation is using calendar or fiscal year. Thus, a
corporation which started operations on any day in 2012
will be covered by the MCIT in 2016.
When imposed: When the corporation has either (Rev.
Regs. 12-07):
1. Zero or negative taxable income or
2. when 2% of the corporation’s gross income is
greater than 30% of its taxable income (MCIT
> RCIT)
in which such corporation commenced its business operations, when the
minimum income tax is greater than the tax computed under Subsection
(A) of this Section for the taxable year.
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The MCIT will be imposed on X Corp starting taxable year

When computed/paid: At the time of filing of quarterly 2013.
corporate income tax as prescribed under Secs. 75 and 77
of the NIRC. (Rev. Regs. 12-07) B. Computation of RCIT (PHP)
2014 2015 2016
Rationale: Designed to prevent corporations from
escaping tax by including frivolous expenses in their Gross Sales 3,000,000 4,000,000 5,000,000
statement of income (e.g., over-statement of depreciation
Cost of
expense). (1,500,000) (2,000,000) (2,500,000)
Goods Sold
Concept of Gross income for MCIT purposes Gross Income 1,500,000 2,000,000 2,500,000
For corporations involved in
a. sale of goods- Gross sales less sales returns, Operating
(1,450,000) (1,900,000) (2,100,000)
discounts, allowances, and cost of goods sold Expenses
b. sale of service- Gross receipts less sales returns,
Net Taxable
allowances, discounts, and cost of services. P 50,000 P100,000 P400,000
Income
Cost of goods sold shall mean all business RCIT Rate 30% 30% 30%
expenses directly incurred to produce the
merchandise to bring them to their present location RCIT P 15,000 P30,000 P120,000
and use.
Computation of MCIT
Cost of services shall mean all direct costs and
2015 2016
expenses necessarily incurred to provide the services
required by the customers and clients. Gross Income P 2,000,000 P 2,500,000

Excess MCIT Carry-over MCIT Rate 2% 2%

Excess of MCIT over the RCIT shall be carried forward and
MCIT P 40,000 P 50,000
credited against RCIT tax due in the immediately
succeeding three (3) years.
Note: The MCIT is not applicable in 2014 since it has not
Rules for MCIT carry-over yet reached the “fourth taxable year” requirement.
1. Excess MCIT can be used as tax credit against
RCIT if RCIT is greater than MCIT. Excess MCIT Determination of Tax Due and Payable
cannot be deducted against MCIT tax due. 2014 2015 2016
2. Unused MCIT at the end of the 3-year period shall
expire and will no longer be used. RCIT 15,000 30,000 120,000

Relief from MCIT MCIT - 40,000 50,000

Upon recommendation of the CIR, MCIT may be MCIT excess - 10,000 -
suspended by the Sec. of Finance upon submission of (MCIT- RCIT)
proof that the corporation sustained losses on account of:
a. Prolonged labor dispute Note: The 10,000 excess will only be carried over the
b. Force majeure following year.
c. Legitimate business reverses
2014 2015 2016
Illustrations Higher of MCIT 15,000 40,000 120,000
A. The following dates are available for X Corp: and RCIT
• SEC Registration - December 17, 2010 MCIT excess - - (10,000)
• BIR Registration - January 4, 2010 Tax Due 15,000 40,000 110,000
• Start of operations - January 1, 2012

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Corporations Exempt from MCIT

a. Resident foreign corporations engaged in business as
international carriers
b. Resident foreign corporations engaged in business as
offshore banking units
c. Resident foreign corporations engaged in business as
regional operating headquarters
d. Firms that are taxed under a special income tax
regime (like those under PEZA or other economic
zones)
e. Proprietary educational institutions
f. Non-profit hospitals
g. Depositary banks under the FCDU/EFCDU
h. Real Estate Investment Trusts (REITs)
i. Nonresident foreign corporations

Applicability of the MCIT where a corporation is

governed both under the regular tax system and a
special income tax system
In the case of a domestic corporation whose operations or
activities are partly covered by the regular income tax
system and partly covered under a special income tax
system, the MCIT shall apply on operations covered by the
regular income tax system. For example, if a BOI-
registered enterprise has a “registered” and an
“unregistered” activity, the MCIT shall apply to the
unregistered activity. (Rev. Regs. 09-98)

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(c) Taxation of Passive Income

TAX BASE TAX RATES

DC RFC NRFC

Interest from Deposits and Yield or any other Monetary

Benefit from Deposit Substitutes, Trust Funds and 20% 20% 30%
Similar Arrangements and Royalties

Interest income on foreign currency deposit system 15% 7.5% Exempt

Interest income earned from EFCDU 10% 10% Exempt

Royalties of all types within the Philippines 20% 20% 30%

From outside the Philippines 30% Exempt Exempt

Dividend Income from: 15% (IF subject to tax

h. Domestic corporation Exempt Exempt sparring rule; otherwise 30%)

30% Final tax

i. Foreign corporations RCIT RCIT

(d) Taxation of Capital Gains

TAX BASE DC RFC NRFC

Capital Gains from sale, barter, exchange, or other

disposition of shares of stock

NOT traded in the Stock Exchange 15% 5% of net capital 5% of net capital
gains if not over gains if not over
Listed and traded through the local stock exchange 6/10 of 1% of the P100,000 P100,000
gross selling price of
gross value of the 10% if in excess 10% if in excess of
shares of stock of P100,000 P100,000

Capital gains on sale or exchange of lands and/or

buildings located in the Philippines 6% RCIT RCIT
Selling Price or FMV whichever is HIGHER

Q: The Bureau of Treasury (BoT) issued P35 billion worth
of 10-year zero-coupon treasury bonds (PEACe Bonds) to
A Corp at P10.2 billion. Then, A Corp (as underwriter) on
behalf of B Corp sold and distributed the PEACe Bonds to
undisclosed investors. The CIR issued a ruling declaring
that the PEACe bonds being deposit substitutes are
subject to the 20% final withholding tax. Thus, the Bo
withheld 20% final tax from the face value of the PEACe
Bonds. Petitioners contend that there is only one lender to
whom the BTr issued the government bonds. Respondents
theorize that the word “any” indicates that the period
contemplated is the entire term of the bond and not merely
the point of origination or issuance such that if the debt
instruments “were subsequently sold in secondary markets
and so on, in such a way that 20 or more buyers eventually
own the instruments, then it becomes indubitable that

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funds would be obtained from the “public.” Are PEACe
Bonds considered as “deposit substitutes” and thus subject
to 20% final withholding tax?
Suggested Answer: Suggested Answer: No. Under the
1997 National Internal Revenue Code, a final withholding
tax at the rate of 20% is imposed on interest on any
currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds and
similar arrangements. Congress specifically defined
"public" to mean "twenty (20) or more individual or
corporate lenders at any one time." Hence, the number of
lenders is determinative of whether a debt instrument
should be considered a deposit substitute and
consequently subject to the 20% final withholding tax.
From the point of view of the financial market, the phrase
“at any one time” for purposes of determining the “20 or
more lenders” would mean every transaction executed in
the primary OR secondary market in connection with the
purchase or sale of securities. In this case, the BIR
asserted that government securities are always deposit
substitutes irrespective of the number of lenders, but the
SC ruled that government securities must comply with the
“20 or more” rule. Petitioners argued that the “20 or more”
rule is relevant only at the point of origination (i.e.,
issuance), but the SC said that the “20 or more” rule is
relevant “at any one time”. In the end, the SC held that the
PEACe Bonds are not subject to the 20% FWT, not
because they are not deposit substitutes, but because at
the moment it cannot be determined as to how many
investors the PEACe Bonds were sold to by A Corp.
(Banco De Oro v Republic, G.R. No. 198756, 2015.)
Q: In 2001, A, with the assistance of its financial advisors,
B Bank et al, requested an approval for the issuance of
Bureau of Treasury of 10-yaer zero-coupon Treasury
Certificates (T-notes). The T-notes would be purchased for
a special purpose on behalf of A, repackaged and sold at
a premium to investors as the PEACE Bonds and the net
proceeds from the sale of the bonds will be used to endow
a permanent fund (the Hanapbuhay Fund) to finance
activities of NGOs in the country. Bureau of Treasury
issued the Auction Guidelines which provides that the
Bonds to be auctioned are not subject to 20% withholding
tax as the issue will be limited to a maximum of 19 lenders
in the primary market based on the 2001 BIR Ruling. B
Bank was appointed as the Issue Manager and Lead
Underwriter for the offering of the PEACE Bonds.
However, BIR issued 2 conflicting BIR Rulings in 2011, (1)
declaring the PEACe Bonds, being deposit substitutes,
were subject to 20% final withholding tax, and the Bureau
of Treasury shall withhold 20% final tax from the face value
TAXATION LAW
of the PEACe Bonds, (2) clarifying that the final withholding
tax due on the discount or interest earned on the PEACe
Bonds should “be imposed and withheld not only on the
primary holders (A and B Bank) but also on all subsequent
holders of the Bonds. What is the proper interpretation of
the 20-lender rule under Section22 (Y) of NIRC,
particularly in relation to issuance of government debt
instruments
Suggested Answer: The definition of deposit substitutes
in Section 22 (Y) specifically defined "public" to mean
"twenty (20) or more individual or corporate lenders at any
one time." The qualifying phrase for public introduced by
the National Internal Revenue Code shows that a change
in the meaning of the provision was intended, and this
Court should construe the provision as to give effect to the
amendment. Hence, in light of Section 22 (Y), the
reckoning of whether there are 20 or more individuals or
corporate lenders is crucial in determining the tax
treatment of the yield from the debt instrument. In other
words, if there are 20 or more lenders, the debt instrument
is considered a deposit substitute and subject to 20% final
withholding tax. (Banco de Oro v. Republic, G.R. No.
198756, 2016)
Q: Is the sale or transfer of bonds in the secondary market
exempt from income tax?
Suggested Answer: Yes. The 20% final withholding tax
imposed on interest income or yield from deposit substitute
does not apply to the gains derived from trading,
retirement, or redemption of the instrument. It must be
stressed that interest income, derived by individuals from
long-term deposits or placements made with banks in the
form of deposit substitutes, is exempt from income tax.
Consequently, it is likewise exempt from the final
withholding tax under Sections 24 (B) (1) and 25 (A) (2) of
the National Internal Revenue Code.
Thus, trading gains, or gains realized from the sale or
transfer of bonds (i.e., those with a maturity of more than
five years) in the secondary market, are exempt from
income tax. These "gains" refer to the difference between
the selling price of the bonds in the secondary market and
the price at which the bonds were purchased by the seller.
For discounted instruments such as the zero-coupon
bonds, the trading gain is the excess of the selling price
over the book value or accreted value (original issue price
plus accumulated discount from the time of purchase up to
the time of sale) of the instruments. (Banco de Oro v.
Republic, G.R. No. 198756, 2016)
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Q: Who has the primary responsibility to withhold the 20%
final withholding tax on the interest earned from the
Bonds?
Suggested Answer: The successful Government
Securities Eligible Dealers-bidder, as agent of the Bureau
of Treasury, has the primary responsibility to withhold the
20% final withholding tax on the interest valued at present
value, when its sale and distribution of the government
securities constitutes a deposit substitute transaction. The
20% final tax is deducted by the buyer from the discount of
the bonds and included in the remittance of the purchase
price. (Banco de Oro v. Republic, G.R. No. 198756, 2016)
(e) Improperly Accumulated Earnings Tax (IAET)
IAET is a 10% penalty tax imposed on the improper
accumulation of corporate earnings beyond the needs of
the business.
Scope
The IAET covers improperly accumulated earnings or
profits of domestic corporations only, whether special or
regular domestic corporations.
Tax base (Rev. Regs. 02-01, Sec. 5)
For corporations found subject to IAET, the "Improperly
Accumulated Taxable Income" for a particular year is first
determined by adding to that year’s taxable income the
following:
a. income exempt from tax
b. income excluded from gross income
c. income subject to final tax and
d. the amount of net operating loss carry-over
(NOLCO) deducted and
Taxable income shall be reduced by
- income tax paid/payable for the taxable year
- dividends actually or constructively paid
- amount reserved for reasonable needs of the
business
Rationale: If the earnings and profits were distributed, the
shareholders would then be liable for income tax. If the
distribution were not made to them, they would incur no tax
in respect of the undistributed earnings and profits of the
corporation. 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. (Rev. Regs. 02-01, Sec. 2)
TAXATION LAW
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 immediate needs of the business,
including reasonably anticipated needs (e.g., expansion).
The following constitute accumulation of earnings for the
reasonable needs of the business: (Rev. Regs. 02-01, Sec.
3) (ILL ABE)
(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, inclusive of
accumulations taken from other years;
(2) Earnings reserved for definite corporate
Expansion projects or programs requiring
considerable capital expenditure as approved by
the Board of Directors or equivalent body;
(3) Earnings reserved for Building, plant, or
equipment acquisition as approved by the Board
of Directors or equivalent body;
(4) Earnings reserved for compliance with any Loan
covenant or pre-existing obligation established
under a legitimate business agreement;
(5) 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; and
(6) 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: (Rev. Regs. 02-01, Sec. 4)
(1) Only closely-held domestic corporations are
liable for IAET.
(2) Closely-held corporations are those:
- At least 50% in value of the outstanding capital
stock; or
- At least 50% of the total combined voting power of
all classes of stock entitled to vote;
- is owned directly or indirectly by or for not more than
20 individuals.
- Domestic corporations not falling under the
aforesaid definition are, therefore, publicly-held
corporations.
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Exempt corporations
The IAET shall not apply to the following corporations:
(BIG-PEN-T)
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 RA 7916;
b. pursuant to the Bases Conversion and
Development Act of 1992 under RA 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.
Period for payment of dividend or IAET: (Rev. Regs. 02-
01, Sec. 6)
The dividends must be declared and paid or issued not
later than 1 year following the close of the taxable year.
Otherwise, the IAET, if any, should be paid within 15 days
thereafter.
Determination of purpose to avoid income tax (Rev.
Regs. 02-01, Sec. 7)
The fact that a corporation is a mere holding company or
investment company shall be prima facie evidence of a
purpose to avoid the tax upon its shareholders or
members.
A “holding or investment company” is a corporation having
practically no activities except holding property, and
collecting the income therefrom or investing the same, and
where the earnings or profits of a corporation are permitted
to accumulate beyond the reasonable needs of the
business.
Prima facie instances of accumulation of profits
beyond the reasonable needs of a business and
indicative of purpose to avoid income tax upon
shareholders
a. Investment of substantial earnings and profits of the
corporation in unrelated business or in stock or
securities of unrelated business;
b. Investment in bonds and other long-term securities;
and
c. Accumulation of earnings in excess of 100% of paid-
up capital, not otherwise intended for the reasonable
needs of the business.
TAXATION LAW
- The controlling intention of the taxpayer is that
which is manifested at the time of accumulation.
d. Ideally, the working capital should be equal to the
current liabilities and there must be 2 units of current
assets for every unit of current liability (“2 to 1” rule). A
2:1 Debt-to-Equity ratio (i.e., current assets over
current liabilities) is indicative of the liquidity of a
corporation, and further accumulation would expose it
to the IAET (Cyanamid Phils. v. CA, G.R. No. 108067,
2000).
ii. Proprietary educational institutions and non-profit
hospitals (Sec. 27(B))
Proprietary Non-Profit Educational Institution – any
non-profit private school maintained & administered by
private individuals or groups with an issued permit to
operate from DepEd, CHED, or TESDA; “proprietary” and
“non-profit” must concur.
Taxable at 10% on taxable income, except on certain
passive income (which shall be subject to final tax)
Predominance Test: If the gross income from unrelated
trade/business/other activity exceeds 50% of the total
gross income from all sources, entire taxable income shall
be subject to RCIT of 30%
“Unrelated trade, business or other activity” means 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 from its primary
purpose or function.
TAX RATE BASIS
10% on On related trade, business or
taxable activity (except passive income)
income
30% of IF total gross income from
entire unrelated trade, business, or
taxable activity exceed 50% of total
income income
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Illustration (Banggawan): “Non-profit” means that no net income or asset accrues to

A private educational institution reported the following or benefits any member or specific person, with all the net
during the year income or asset devoted to the institution’s purposes and
all its activities conducted not for profit. (CIR v. St. Luke’s
Related Unrelated Medical, G.R. No. 195909, 2012)
Total
activities activities
Summary of Tax Rules
Gross Income P 700,000 P 500,000 P1,200,000 Owner Educational Hospital
Institution
Less: (400,000) (100,000) (500,000)
Private 10% of taxable 30% of taxable
deductions
income income
Net Income P300,000 P400,000 P700,000 Non-profit Exempt 10% of taxable
income
Government Exempt Exempt

The gross income from related activities (P700k/1.2m=

58%) passes the predominance test. The income tax due iii. Government-owned or controlled corporations,
shall be computed as follows agencies, instrumentalities (Sec. 27(C))

Taxable net income P700,000

TAX RATE BASIS
Multiply: tax rate 10%
30% (2009 onwards) Same tax rate upon their
Income tax due P70,000 taxable income in a similar
business, industry, or activity
As distinguished from proprietary educational institution, a
non-stock non-profit educational institution is exempt
General Rule: GOCCs, agencies, or instrumentalities
from tax on all revenues and assets used actually, directly
owned or controlled by the government are taxable and
and exclusively for educational purposes. Income from
shall pay the same rate upon their taxable income upon
cafeterias, canteens, and bookstores are also exempt if
corporations or associations engaged in similar business,
they are owned and operated by the educational institution
industry or activity. (Ingles)
and are located within school premises. (RMC 76-03)

Note: Assets used actually, directly, and exclusively Exceptions:

for educational purposes are exempt. (a) GSIS
(b) SSS
Sec. 27(B) of the NIRC does not remove the income tax (c) PHIC
exemption of proprietary non-profit hospitals under Sec. (d) PCSO
30(E) and (G). Sec. 27(B) on one hand, and Sec. 30(E) (e) the local water districts
and (G) on the other hand, can be construed together
without the removal of such tax exemption. iv. Foreign currency deposit units

Sec. 27(B) of the NIRC imposes a 10% preferential tax rate
on the income of (1) proprietary non-profit educational
institutions, and (2) proprietary non-profit hospitals. The
only qualifications for hospitals are that they must be
proprietary and non-profit.
Foreign currency deposit units (FCDUs) and Expanded
FCDUs (EFCDUs) refer to a unit or department of a local
bank or a local branch of a foreign bank authorized by the
BSP to engage in foreign currency denominated
transactions pursuant tot R.A. No. 6426, as amended

“Proprietary” means private, following the definition of a Distinction of FCDU, OBU, and EFCDU (Banggawan)
“proprietary educational institution” as “any private school FCDUs are limited to short-term foreign currency
maintained and administered by private individuals or transactions while EFCDUs are allowed both short-term
groups” with a government permit. and longer-term foreign currency-denominated
transactions

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An FCDU is a division of a domestic bank. An OBU is.a
division of a foreign bank which is authorized to conduct
foreign currency denominated transactions. An EFCDU
may be a division of.a domestic bank or a resident foreign
bank authorized to conduct banking under the expanded
foreign currency deposit system.
Tax on EFCDUs and OBUs
The income of depositary banks under the Expanded
Foreign Currency Deposit System from foreign currency
transactions with
A. Non-residents- exempt from tax
B. Residents
a. Banks under the foreign currency deposit
system such as OBUs, local commercial
banks and branches of foreign banks
authorized by the BSP to transact business
with FCDUs – exempt from income tax
b. Other residents
i. Interest income- 10% final tax
ii. Other income, such as commissions and
gains, RCIT
Tax on income of depositors under the EFCDs
Any income of nonresidents from transactions with
depositary banks under the expanded system shall be
exempt from income tax. Interest income of resident from
depositary bank under FCDS/EFCDS is subject to 7.5%
final tax.
b. Resident Foreign Corporation
Taxation – in general
Resident Foreign Corporation – applies to a foreign
corporation engaged in trade or business within the
Philippines. (Sec. 22(H))
“Doing business” shall include soliciting orders, service
contracts, opening offices, whether liaison offices or
branches; appointing representatives or distributors,
operating under full control of the foreign corporation,
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 (Sec. 1(f), Foreign
Investment Act IRR).
TAXATION LAW
General Rule: same rules as domestic corporations for
regular income.
Q: A is a “foreign corporation organized and existing under
the laws of Canada. On April 2000, it was granted an
authority to operate as an offline carrier by Civil
Aeronautics Board. As an off-line carrier, A does not have
flights originating from or coming to the Philippines and
does not operate any airplane in the Philippines. A
engaged the services of B as its general sales agent in PH.
B sells A’s passage documents in the Philippines. A,
through B, filed quarterly and annual income tax returns
and paid the income tax on Gross Philippine Billings.
Subsequently, A filed a written claim for refund of alleged
erroneous paid income taxes before the BIR. CTA denied
the refund since it found that A was engaged in business
in the Philippines through a local agent that sells airline
tickets on its behalf, hence it should be taxes as a resident
foreign corporation. A contends that by the appointment of
B as its general sales agent, petitioner cannot be
considered to have a "permanent establishment" in the
Philippines. Is A a resident foreign corporation?
Suggested Answer: Yes. A, an offline carrier, is a resident
foreign corporation for income tax purposes. A falls within
the definition of resident foreign corporation. A is
undoubtedly "doing business" or "engaged in trade or
business" in the Philippines. IRR of Foreign Investments
Act clarifies that "doing business" includes "appointing
representatives or distributors, operating under full control
of the foreign corporation, 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[.]"
Here, B performs acts or works or exercises functions that
are incidental and beneficial to the purpose of petitioner's
business. The activities of B bring direct receipts or profits
to petitioner. There is nothing on record to show that B
solicited orders alone and for its own account and without
interference from, let alone direction of, petitioner. On the
contrary, B cannot "enter into any contract on behalf of A
without the express written consent of the latter, and it
must perform its functions according to the standards
required by petitioner. Through B, A is able to engage in
an economic activity in the Philippines. Moreover, was
issued by the Civil Aeronautics Board an authority to
operate as an offline carrier in the Philippines for a period
of five years. A is, therefore, a resident foreign corporation
that is taxable on its income derived from sources within
the Philippines. Petitioner's income from sale of airline
tickets, through B, is income realized from the pursuit of its
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business activities in the Philippines. (Air Canada v. CIR, The term “effectively connected with the conduct of
GR No. 169507, 2016) taxpayer’s trade, or business: does not necessarily mean
that the income must be derived from the actual operation
Q: What constitutes doing business in order to classify a of the taxpayer-corporation’s trade or business, it is
corporation as a resident foreign corporation? sufficient that the income arises from the business activity
in which the corporation is engaged. (RMC No. 55-80)
Suggested Answer: Doing business constitutes any act
that implies continuity of commercial dealings or Scope
arrangements or the exercise of functions normally BPRT covers the remittance of all resident foreign
incidental to and in the progressive prosecution of corporations including ROHQs of multinational companies,
commercial gain or for the purpose of the business. (Sec. FCDUs or OBUs of foreign banks, and international
3 (d), Foreign Investment Act; Air Canada v. CIR, GR No. carriers, except PEZA-registered entities.
169507, 2016)
Remittance form prior year earnings is still taxable
a. Regular Corporate Income Tax The NIRC used the phrase “any profit remitted” without
A corporation organized, authorized, or existing under the limiting the same to current year profit remittance. The
laws of any foreign country, engaged in trade or business BPRT therefore is understood to apply to remittance of
within the Philippines, shall be subject to an income tax prior year earnings. (Banggawan)
equivalent to thirty percent (30%). (Sec. 28(A))
Illustration
Domestic Corporation • Gross income tax; OR A resident foreign corporation earning purely active income
• RCIT subject to MCIT reported the following since it started operation in 2019:
Resident Corporation RCIT subject to MCIT
2019 2020
b. Minimum Corporate Income tax Profit after tax 200,000 150,000
A minimum corporate income tax of two percent (2%) of Remittance 80,000 270,000
gross income shall be imposed on a resident foreign
corporation. (Sec. 28(A)) BPRT due for 2019
Remittance 80,000
(see discussion on MCIT on domestic corporations) BPRT rate 15%
BPRT due P12,000
c. Branch Profits Remittance Tax (BPRT)
Any profit remitted by a branch to its head office shall be BPRT due for 2020
subject to a tax of 15% which shall be based on the total 2020 profit P 150,000
profits applied or earmarked for remittance without any 2019 unremitted profit balance (200,000- 120,000
deductions for the tax component (except those activities 80,000)
which are registered with PEZA) (Sec. 28(A)(5)). Total remittance P 270,000
BPRT rate 15%
The 15% branch profit remittance tax is a final tax which is BPRT due P 40,500
required to be withheld at source by the branch of a foreign
corporation. d. Taxation on passive income

Interest, dividends, rents, royalties, remuneration for Tax Base Final Tax
technical services, salaries, wages, premiums, annuities, Interest under the EFCDS 7.5%
emoluments or other fixed or determinable annual, periodic Royalty of all types within the Philippines 20%
or casual gains, profits, income, and capital gains received
by a foreign corporation during each taxable year from all From abroad Exempt
sources within the Philippines shall not be treated as Interest on any current bank deposit, 20%
branch profit unless the same are effectively connected yield or other monetary benefits from
with the conduct of the taxpayer’s trade or business in the deposit substitute, trust fund and similar
Philippines. (Sec. 28(A)(5)) arrangement
Dividend from domestic corporations Exempt
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(Ingles) from activities within the Philippines. The test of taxability

is the source and the source is that activity which produced
e. Taxation on capital gains the income. (Air Canada v. CIR, CTA No. 6572, 2004)

Sale of shares of stock of a “Continuous and uninterrupted flight or voyage”

domestic corporation NOT traded
through a local stock exchange
held as a capital asset
Capital gains not over P100,000 5% of net capital
gains
Excess of P100,000 10% of net capital
gains
Sale of real property in the Regular corporate
Philippines income tax rate
(Ingles)
Resident Foreign Corporations Subject to
Preferential Tax Rates
o International Carriers
shall refer to a foreign airline corporation doing
business in the Philippines having been granted
landing rights in any Philippine port to perform
international air transportation services/activities or
flight operations anywhere in the world (Rev. Regs.
15-02, Sec. 2).
Tax rates
General rule: 2 ½ % of Gross Philippine Billings
Exception: Preferential rate or exemption on the basis of
reciprocity tax treaty
Gross Philippine Billings (GPB) (Section 28 (A)(3))
1. International air carrier – Its Gross Philippine
Billings from carriage of persons, excess baggage,
cargo and mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the
place of issue and the place of payment of the ticket
or passage document
2. International shipping - Gross Philippine Billings
means gross revenue whether for passenger, cargo
or mail originating from the Philippines up to final
destination, regardless of place of sale or payments
of the passage or freight documents.
A foreign airline selling tickets in the Philippines through
their local agent shall be considered as Resident Foreign
Corp engaged in trade or business in the Philippines. The
absence of flight operations within the Philippines cannot
change the fact that the income is considered as derived
shall refer to a flight in the carrier of the same airline
company from the moment a passenger, excess baggage,
cargo, and/or mail is lifted from the Philippines up to the
point of final destination of the passenger, excess
baggage, cargo and/or mail. The flight is not considered
continuous and uninterrupted if transshipment of
passenger, excess baggage, cargo and/or mail takes place
at any port outside the Philippines on another aircraft
belonging to a different airline company. (Rev. Regs.15-
02, Sec. 2(h))
Rule on revalidated, exchanged, or endorsed tickets
Tickets revalidated, exchanged, or endorsed to another
international airline form part of the GPB of the carrying
airline if the passenger boards a plane in a port or point in
the Philippines.
Note: Exclusions from GPB: passengers qualifying
under the free mileage program; refunded tickets
Rules on transshipments or interrupted flights or
voyages
A flight which originates from the Philippines but
transshipment of passenger takes place at any port outside
PH on another airline, only aliquot portion of the cost of the
ticket corresponding to the leg flown from the PH to point
of transshipment shall form part of the GPB.
The 48-hour rule on transient passengers
Flights or voyages of passengers, mails, or excess
baggage commencing from foreign countries will be
interconnected in the Philippines for continuance of the
flight or voyage to a foreign destinations by the same
international carrier shall NOT be considered originating
from the Philippines if the actual departure is made within
48 hours from embarkation in the country, except only
when delayed by force majeure. As such, the portion of the
ticket pertaining to the outgoing flight or voyage shall be
excluded from the Gross Philippine Billings.
However, if continuation of the flight or voyage to a foreign
destination is made by another airline company or sea
carrier, the cost of the outgoing flight or voyage shall be
included in the Gross Philippine Billings of that airline or
carrier regardless of the intervening period of time between
arrival and departure from the Philippines.

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Off-line international carriers
refer to flight operations carried out or maintained by an
international air carrier between ports or points outside the
territorial jurisdiction of the Philippines, without touching a
port or point situated in the Philippines, except when in
distress or due to force majeure. (Rev. Regs. 15-02, Sec.
2(d)
An off-line airline having a branch office or a sales agent in
the Philippines which sells passage documents for
compensation or commission to cover off-line flights of its
principal or head office, or for other airlines covering flights
originating from Philippine ports or off-line flights, is not
considered engaged in business as an international air
carrier in the Philippines and is, therefore, not subject to
Gross Philippine Billings Tax nor to the three percent (3%)
common carrier’s tax. (Rev. Regs. 15-02, Sec. 3)
o Foreign Currency Deposit Unit and Offshore
Banking Unit
Off-shore Banking Units (OBU)
A branch, subsidiary, or affiliate of a foreign banking
corporation which is duly authorized by the Central Bank
of the Philippines to transact offshore banking business in
the Philippines (Sec. 1(b), PD 1034)
General rule: Income derived by OBUs from foreign
currency transactions with nonresidents, other OBUs, local
commercial banks shall be exempt from all taxes
Exception: net income from such transactions as maybe
authorized by the Secretary of Finance shall be subject to
regular income tax, provided that any income derived from
foreign currency loans granted to residents other than
OBUs or local commercial banks shall be subject to final
tax of 10%.
Resident depository banks (foreign currency deposit
units)
With non-residents, OBUs, local banks and other
depositary banks under the expanded foreign currency
deposits system shall be exempt from all taxes, except net
income from such transactions as maybe authorized by the
Secretary of Finance shall be subject to regular income
tax, provided that any income derived from foreign
currency loans granted to residents other than OBUs or
local commercial banks shall be subject to final tax of 10%
73
SEC. 22 (DD).
TAXATION LAW
The following are included in computing the gross onshore
income of OBUs and FCDUs (Ingles):
o Gross interest income arising from foreign
currency loans and advances and investments
with residents
o Fees, commissions, and other charges which
are integral parts of the income from foreign
currency loan transactions are EXEMPT. They
are not to be included in computing the final tax.
(Rev. Regs. 14-1977).
Interest income from FCD Tax Rate
Interest income actually received 7.5% final
by a resident citizen or alien from withholding tax
FCD
If it was deposited by an OCW or Exempt
seaman or nonresident citizen
If it was a bank account in the joint 50% exempt/ 50%
names of an OCV and his spouse final withholding
who is a resident tax of 7.5%
Interest income actually received
by a domestic corporation or 7.5% final
resident foreign corporation from withholding tax
FCD
(Ingles)
o Regional or Area Headquarters and Regional
Operating Headquarters
Regional or Area Headquarters (RAH or RHQ) - shall not
be subject to income tax. Regional or area headquarters
shall mean a branch established in the Philippines by
multinational companies and which headquarters do not
earn or derive income from the Philippines and which act
as supervisory, communications and coordinating center
for their affiliates, subsidiaries, or branches in the Asia-
Pacific Region and other foreign markets.73
Tax rate: EXEMPT from income tax
Regional Operating Headquarters (ROHQ) - shall pay a
tax of 10%. Regional Operating Headquarters shall mean
a branch established in the Philippines by multinational
companies which are engaged in the following services:
general administration and planning; business planning
and coordination; sourcing and procurement of raw
materials and components; corporate finance advisory
services; marketing control and sales promotion; training
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and personnel management; logistic services; research be subject to a tax of seven and one-half percent (7 1/2%)
and development services and product development; of gross rentals or fees
technical support and maintenance; data processing and
communication and business development.74 Tax on Certain Incomes Received by a NRFC

Tax rate: 10% of taxable income within the Philippines 1. Interest on Foreign Loans
A final tax at the rate of 20% is imposed on the amount of
Note: RHQ and ROHQ are exempt from all kinds of local interest on foreign loans contracted on or after August 1,
taxes, fees or charges imposed by the LGU, except real 1986. However, said income may be exempt from income
property tax on land improvement and equipment. tax or partially exempt pursuant to a treaty obligation to
which the Philippine government is bound.
c. Income Tax on Non-Resident Foreign Corporations
(NRFC) 2. Intercorporate Dividends
A final tax at the rate of 15% is imposed on the amount of
i. Taxation of NRFC in general
cash and/or property dividends received from a domestic
Non-Resident Foreign Corporation refers to a foreign
corporation, subject to the reciprocity rule.
corporation not engaged in trade or business within the
Philippines. (Sec. 22(I))
Reciprocity Rule: The country in which the non-resident
foreign corporation is domiciled shall allow a credit against
A foreign corporation not engaged in trade or business in
the tax due from the nonresident foreign corporation taxes
the Philippines shall pay a tax equal to 30% of the gross
deemed to have been paid in the Philippines equivalent to
income received from all sources within the Philippines
15% of the dividends.
such as interests, dividends, rents, royalties, salaries,
premiums (except reinsurance premiums), annuities,
3. Capital Gains from Sale of Shares of Stock not
emoluments or other fixed or determinable annual, periodic
Traded in the Stock Exchange
or casual gains, profits and income, and capital gains,
A final tax at the rates prescribed below is hereby imposed
except capital gains from sale of shares of stock not traded
upon the net capital gains realized during the taxable year
in the stock exchange.
from the sale, barter, exchange or other disposition of
shares of stock in a domestic corporation, except shares
Note: Special corporations are subject to a different tax
sold, or disposed of through the stock exchange:
rate

Not over P 100,000 5%

ii. NRFC subject to preferential tax rates
On any amount in excess of P 100,000 10%
Nonresident Cinematographic Film Owner, Lessor or
Distributor Summary of tax rates on special corporations (Ingles)
twenty-five percent (25%) of its gross income from all SPECIAL CORPORATIONS
sources within the Philippines. Tax Rate Tax Base
Nonresident owner of 4.5% Gross rentals,
Nonresident Owner or Lessor of Vessels Chartered by lessor of vessel lease and
Philippine Nationals charter fees from
four and one-half percent (4 1/2%) of gross rentals, lease or the Philippines
charter fees from leases or charters to Filipino citizens or Nonresident 25% Gross income
corporations, as approved by the Maritime Industry cinematographic film from the
Authority. owner, lessor, or Philippines
distributor
Nonresident Owner or Lessor of Aircraft, Machineries Nonresident lessor of 7.5% Gross rentals,
and Other Equipment aircraft, machinery and charges and
Rentals, charters and other fees derived by a nonresident other equipment other fees from
lessor of aircraft, machineries and other equipment shall

74
SEC. 22 (EE).
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Philippines members for the sole purpose of meeting its expenses;

Sources and
Proprietary educational 10% Taxable income 11. Farmers', fruit growers', or like association organized
institution and non- from all sources and operated as a sales agent for the purpose of
profit hospital marketing the products of its members and turning back
Resident international 2.5% Gross Philippine to them the proceeds of sales, less the necessary
carrier Billings selling expenses on the basis of the quantity of produce
Regional operating Philippine finished by them;
headquarters of 10% taxable income
multinational Note: The income of whatever kind and character of the
corporation foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit
d. Corporations Exempt from Income Tax regardless of the disposition made of such income, shall
be subject to tax.
The following organizations shall not be taxed under this
Title in respect to income received by them as such:
Requisites for example of non-stock, non-profit
corporations (Banggawan)
1. Labor, agricultural or horticultural organization not
1. It must be a non-stock corporation or association
organized principally for profit;
organized and operated exclusively for religious,
2. Mutual savings bank not having a capital stock
charitable, scientific, athletic, or cultural purposes, or
represented by shares, and cooperative bank without
for rehabilitations of veterans.
capital stock organized and operated for mutual
2. It should meet the following tests:
purposes and without profit;
a. Organizational test- its constitutive documents
3. A beneficiary society, order or association, operating for
exclusively limits its purpose to one or more of the
the exclusive benefit of the members such as a fraternal
following: religious, charitable, scientific, athletic, or
organization operating under the lodge system, or
cultural purposes, or for rehabilitations of veterans.
mutual aid association or a nonstock corporation
b. Operational test: The regular activities of the
organized by employees providing for the payment of
corporation or association must be exclusively
life, sickness, accident, or other benefits exclusively to
devoted to the accomplishment of the
the members of such society, order, or association, or
aforementioned purposes. A corporation fails this
nonstock corporation or their dependents;
test if a substantial part of its operations is
4. Cemetery company owned and operated exclusively for
considered “activities conducted for profit”
the benefit of its members;
3. All net income or assets of the corporation or
5. Nonstock corporation or association organized and
association must be devoted to its purpose and no part
operated exclusively for religious, charitable, scientific,
of its net income or asset accrues to or benefits any
athletic, or cultural purposes, or for the rehabilitation of
member or specific person.
veterans, no part of its net income or asset shall belong
4. It must not be a branch of a foreign non-stock, non-
to or inure to the benefit of any member, organizer,
profit corporation.
officer or any specific person;
6. Business league chamber of commerce, or board of
Note: A non-profit organization is still allowed to
trade, not organized for profit and no part of the net
engage in activities conducted for profit without losing
income of which inures to the benefit of any private
its tax exemption but the consequence is being subject
stock-holder, or individual;
to tax only on income conducted for profit, regardless
7. Civic league or organization not organized for profit but
of the disposition made of such income.
operated exclusively for the promotion of social welfare;
8. A nonstock and nonprofit educational institution;
Collector v. V.G. Sinco (GR No. L-9276, 1956)
9. Government educational institution;
• Payment by a non-profit educational institution for
10. Farmers' or other mutual typhoon or fire insurance
services rendered (e.g., payment to teachers and
company, mutual ditch or irrigation company, mutual or
service providers) is not distribution of profit
cooperative telephone company, or like organization of
• Charging of tuition does not make school profit-making
a purely local character, the income of which consists
enterprise
solely of assessments, dues, and fees collected from

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• While acquisition of additional facilities, such as
buildings and equipment, may redound to the benefit
of the institution, it does not necessarily follow that the
same will redound to the benefit of its shareholder (on
the ground that assets will be distributed to
shareholders upon dissolution)
The phrase “any of their activities conducted from
profit” does not qualify the word “properties” ̈This makes
income from property of the organization taxable,
regardless of how that income is used – whether for profit
or for lofty non- profit purposes (CIR v. YMCA, G.R. No.
124043, 1998).
Imposition of 10% income tax on proprietary, non- profit
hospitals did not remove exemption of non-stock
corporation organized and operated exclusively for
charitable or social welfare purposes. Moreover, revenues
from paying patients are income received from es from
paying patients are income received- profit hospital. (CIR
v. St. Luke’s Medical Center G.R. No. 195509, 2012)
e. Tax on other Business Entities: General
Partnerships, General Professional Partnerships, Co-
ownerships, Joint Ventures and Consortia
General Partnership - A partnership wherein part or all of
its income is derived from the conduct of trade or business
Guidelines on the tax liability of a general
partnership:
• For taxation purposes, the general partnership is
considered as a corporation liable to pay the RCIT.
• A general partnership is also subject to MCIT.
• The profit distribution to the partners is treated as
distribution subject to a final tax of 10% since the
partners are considered as stockholders.
General Professional Partnerships (GPP) - A GPP is
one formed by two or several persons for the sole purpose
of exercising their common profession of which no part of
income is derived from engaging in any trade or business.
The GPP is not a taxable entity for income tax purposes
since it is only acting as a "pass-through" entity where its
income is ultimately distributed/taxed to the partners
comprising it. (Rev. Regs. No. 02-10)
Income payments made to a GPP in consideration of its
professional services are not subject to
income/withholding tax. GPPs are not required to secure a
tax exemption certificate or ruling to prove the same. (RMC
No. 60-14)
TAXATION LAW
It is the partners that declare their distributive share in the
profits of the GPP and pay income tax thereon.
In case of income payments made periodically or at the
end of the taxable year by a GPP to the partners, such as
drawings, advances, sharings, allowances, stipends and
the like, are subject to 15% CWT if such payments to the
partner for the current year exceeds PhP 720,000, and
10% CWT if otherwise. (RMC No. 03-12)
Guidelines on the tax liability of a GPP:
Who is Liable
A GPP, as an entity, shall not be subject to income tax.
The partners in a GPP shall be liable for income tax in their
separate and individual capacities.
Note: Each partner shall report his distributive share,
actually or constructively received, in the net income of the
partnership as gross income. The share of the partner shall
be subject to 15% CWT if such distribution to the partner
for the current year exceeds PhP 720,000, and 10% CWT
if otherwise.
How computed:
For purposes of computing the distributive share of the
partners, the net income of the partnership shall be
computed in the same manner as a corporation.
All expenses, which are ordinary and necessary, incurred
or paid for the practice of profession, are allowed as
deductions.
Since the taxable income is in the hands of the partner,
apart from the expenses claimed by the GPP in
determining its net income, the individual partner can still
claim deductions incurred or paid by him that contributed
to the earning of the income taxable to him.
If the GPP availed of the itemized deductions, the partners
may still claim itemized deductions from their distributive
share. However, they cannot claim the same expenses
already claimed by the GPP.
If the GPP availed of itemized deductions, the partners are
not allowed to claim the OSD from their distributive share
because the OSD is a proxy for all the items of deductions
allowed in arriving at taxable income.
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If the GPP availed of OSD, the partners can NO longer
claim further deductions from their distributive share. (Rev.
Regs. 02-10)
Compliance requirements
Every GPP shall file a return of its income and shall set
forth the following:
- The items of gross income and allowable deductions;
and
- The names, TIN, addresses and shares of each of the
partners.
7. FILING OF RETURNS AND PAYMENT
a. Individual Return
i. Who are the individuals required to file an income tax
return?75 (RNB-A2)
1. Resident Citizens
2. Non-resident Citizens for the income earned within
the Philippines
3. Non-resident alien engaged in trade or business
or in the exercise of profession in the Philippines
4. Resident Aliens for income earned within the
Philippines
5. Employees deriving compensation income
concurrently from two (2) or more employers
during the taxable year
NOTE: A citizen of the Philippines and any alien individual
engaged in business or practice of profession within the
Philippines shall file an income tax return, regardless of the
amount of gross income. (Sec. 51 (A) (2) (a))
Who are the individuals NOT required to file an income
tax return? (250W-FEM)
1. An individual whose taxable income does not exceed
two hundred fifty thousand pesos (P250,000) under
Section 24(A)(2)(a). (Sec. 51 (A) (2))
2. An individual whose income tax has been correctly
withheld by his employer, provided that such individual has
only one employer for the taxable year — the Certi cate of
Withholding led by the respective employers, duly stamped
"Received" by the Bureau, shall be tantamount to the
substituted filing of income tax returns by said employees;
(Rev. Regs. 8-2018)
75
Sec. 51
TAXATION LAW
3. An individual whose sole income has been subjected to
final withholding tax pursuant to Section 57(A) of this
Code. (Sec. 51 (A) (2))
4. An individual who is exempt from income tax pursuant
to the provisions of this Code and other laws, general or
special. (Sec. 51 (A) (2))
5. A minimum wage earner as defined in these regulations
— The Certificate of Withholding led by the respective
employers, duly stamped "Received" by the Bureau, shall
be tantamount to the substituted ling of income tax returns
by said employees. (Rev. Regs. 08-18)
ii. Substituted Filing
Individual taxpayers receiving purely compensation
income, regardless of amount, from only one employer in
the Philippines for the calendar year, the income tax of
which has been withheld correctly by the said employer
(tax due equals tax withheld) shall not be required to file an
annual income tax return. The certificate of withholding
filed by the respective employers, duly stamped 'received'
by the BIR, shall be tantamount to the substituted filing of
income tax returns by said employees. (Sec. 51-A)
Who are not qualified for Substituted Filing?
The following individuals, however, are not qualified for
substituted filing and therefore, still required to file Income
Tax Return in accordance with existing regulations:
(A) Individuals deriving compensation from two or more
employers concurrently or successively at any time during
the taxable year.
(B) Employees deriving compensation income, regardless
of the amount, whether from a single or several employers
during the calendar year, the income tax of which has not
been withheld correctly (i.e., tax due is not equal to the tax
withheld) resulting to collectible or refundable return.
(C) Individuals deriving other non-business, non-
professional-related income in addition to compensation
income not otherwise subject to a final tax.
(D) Individuals receiving purely compensation income from
a single employer, although the income tax of which has
been correctly withheld, but whose spouse falls under
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Section 2.83.4(A), 2.83.4(B) and 2.83.4(C) of these
regulations.
(E) Non-resident aliens engaged in trade or business in the
Philippines deriving purely compensation income, or
compensation income and other non-business, non-
professional-related income. (Rev. Regs. 11-18)
iii. When and Where to file
Where should an individual file his/her Income Tax
Return?
Except in cases where the Commissioner otherwise
permits, the return shall be filed with an authorized agent
bank, Revenue District Officer, Collection Agent or duly
authorized Treasurer of the city or municipality in which
such person has his legal residence or principal place of
business in the Philippines, or if there be no legal
residence or place of business in the Philippines, with the
Office of the Commissioner. (Sec. 51 (B))
When should an individual file his/her Income Tax
Return?
The return of any individual specified above shall be filed
on or before the fifteenth (15th) day of April of each year
covering income for the preceding taxable year. (Sec. 51
(C)(1))
Q: Are individuals required to submit quarterly
returns?
Suggested Answer: In the Revenue Regulations,
individuals engaged in business/practice of
profession, regardless of amount of sales/receipts, are
required to file quarterly income tax return on or before
May 15, August 15 and November 15 for the first, second
and third quarters of the current year, respectively
pursuant to Section 74 (A) of the Tax Code, as amended;
and to file an annual income tax return, not later than the
fifteenth (15th) day of the fourth month following the close
of the calendar year or April 15 as provided under Section
51 (C) (1) of the Tax Code, as amended. (Rev. Regs. 08-
18)
Q: How about for individuals subject to tax on capital
gains?
Suggested Answer:
76
Sec. 3, Rev. Regs. 08-18
TAXATION LAW
(a) From the sale or exchange of shares of stock not traded
thru a local stock exchange as prescribed under Section
24(C) shall file a return within thirty (30) days after each
transaction and a final consolidated return on or before
April 15 of each year covering all stock transactions of the
preceding taxable year; and
(b) From the sale or disposition of real property under
Section 24(D) shall file a return within thirty (30) days
following each sale or other disposition. (Sec. 51 (C)(2))
For Husband and Wife
Married individuals, whether citizens, resident or
nonresident aliens, who do not derive income purely
from compensation, shall file a return for the taxable year
to include the income of both spouses, but where it is
impracticable for the spouses to file one return, each
spouse may file a separate return of income but the returns
so filed shall be consolidated by the Bureau for purposes
of verification for the taxable year. (Sec. 51 (D))
In the regulations, under Individuals Earning Purely
Compensation Income 76 husband and wife shall
compute their individual income tax separately based on
their respective taxable income; if any income cannot be
definitely attributed to or identified as income exclusively
earned or realized by either of the spouses, the same shall
be divided equally between the spouses for the purpose of
determining their respective taxable income. (Rev. Regs.
08-18)
For Income of Parents and Unmarried Minors
The income of unmarried minors derived from property
received from a living parent shall be included in the return
of the parent, except (1) when the donor's tax has been
paid on such property, or (2) when the transfer of such
property is exempt from donor's tax. (Sec. 51 (E))
Q: What if the taxpayer is unable to make his or her
own return, due to disability?
Suggested Answer:If the taxpayer is unable to make his
own return, the return may be made by his duly authorized
agent or representative or by the guardian or other person
charged with the care of his person or property, the
principal and his representative or guardian assuming the
responsibility of making the return and incurring penalties
provided for erroneous, false or fraudulent returns. (Sec.
51(F))
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and shall be paid not later than sixty (60) days from the
Signature Presumed Correct close of each of the first three (3) quarters of the taxable
The fact that an individual's name is signed to a filed return year, whether calendar or fiscal year. (Sec. 75)
shall be prima facie evidence for all purposes that the
return was actually signed by him. (Sec. 51(G)) ii. Final Adjustment Return
Every corporation liable to tax under Section 27 shall file a
b. Corporate Returns final adjustment return covering the total taxable income
for the preceding calendar or fiscal year. If the sum of the
Which corporations are required to file an Income Tax
quarterly tax payments made during the said taxable year
Return?
is not equal to the total tax due on the entire taxable income
Every corporation subject to the tax herein imposed,
of that year, the corporation shall either:
except foreign corporations not engaged in trade or
"(A) Pay the balance of tax still due; or
business in the Philippines, shall render, in duplicate, a
"(B) Carry-over the excess credit; or
true and accurate quarterly income tax return and final or
"(C) Be credited or refunded with the excess amount paid,
adjustment return in accordance with the provisions of
as the case may be.
Chapter XII of this Title. (Sec. 52 (A))
In case the corporation is entitled to a tax credit or refund
Who shall file for the corporation?
of the excess estimated quarterly income taxes paid, the
The income tax return shall consist of a maximum of four
excess amount shown on its final adjustment return may
(4) pages in paper form or electronic form, be filed by the
be carried over and credited against the estimated
president, vice-president or other principal officer, shall be
quarterly income tax liabilities for the taxable quarters of
sworn to by such officer and by the treasurer or assistant
the succeeding taxable years. Once the option to carry-
treasurer. (Sec. 52 (A))
over and apply the excess quarterly income tax against
income tax due for the taxable quarters of the succeeding
Contents of the Corporate Income Tax Return
taxable years has been made, such option shall be
1. Corporate profile and information;
considered irrevocable for that taxable period and no
2. Gross sales, receipts or income from services rendered,
application for cash refund or issuance of a tax credit
or conduct of trade or business, except income subject to
certificate shall be allowed therefor. (Sec. 76)
final tax as provided under this Code;
3. Allowable deductions under this Code;
iii. When and Where to File
4. Taxable income as defined in Section 31 of this Code;
Place of Filing
and
Except as the Commissioner otherwise permits, the
5. Income tax due and payable.
quarterly income tax declaration required in Section 75 and
the final adjustment return required in Section 76 shall be
Provided, That the foregoing provisions shall not affect the
filed with the authorized agent banks or Revenue District
implementation of Republic Act No. 10708 or TIMTA.
Officer or Collection Agent or duly authorized Treasurer of
the city or municipality having jurisdiction over the location
Taxable Year of a Corporation
of the principal office of the corporation filing the return or
A corporation may employ either calendar year or fiscal
place where its main books of accounts and other data
year as a basis for filing its annual income tax return:
from which the return is prepared are kept. (Sec. 77 (A))
Provided, That the corporation shall not change the
accounting period employed without prior approval from
Time of Filing
the Commissioner in accordance with the provisions of
The corporate quarterly declaration shall be filed within
Section 47. (Sec. 52 (B))
sixty (60) days following the close of each of the first three
(3) quarters of the taxable year. The final adjustment
i. Quarterly Income Tax
return shall be filed on or before the fifteenth (15th) day of
Every corporation shall file in duplicate a quarterly
April, or on or before the fifteenth (15th) day of the fourth
summary declaration of its gross income and deductions
(4th) month following the close of the fiscal year, as the
on a cumulative basis for the preceding quarter or quarters
case may be. (Sec. 77 (B))
upon which the income tax, as provided in Title II of this
Code, shall be levied, collected and paid. The tax so
computed shall be decreased by the amount of tax
previously paid or assessed during the preceding quarters
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Time of Payment
The income tax due on the corporate quarterly returns and
the final adjustment income tax returns computed in
accordance with Sections 75 and 76 shall be paid at the
time the declaration or return is filed in a manner
prescribed by the Commissioner.
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. (Bank of America v.
Commissioner, G.R. No. 103092, 1994)

iv. Return of Corporations Contemplating Timing of Withholding

Dissolution or Reorganization Withholding tax shall be deducted and withheld by the
Every corporation shall, within thirty (30) days after the withholding agent when the income payment is paid or
adoption by the corporation of a resolution or plan for its payable or accrued or the income payment is accrued or
dissolution, or for the liquidation of the whole or any part of recorded as an expense or asset, whichever is earlier.
its capital stock, including a corporation which has been
notified of possible involuntary dissolution by the Securities
and Exchange Commission, or for its reorganization, b. Final Withholding Tax
render a correct return to the Commissioner, verified under
(Rev. Regs. 02-98, Sec. 2.57)
oath, setting forth the terms of such resolution or plan and
The amount of income tax withheld by the withholding
such other information as the Secretary of Finance, upon
agent is constituted as a full and final payment of the
recommendation of the Commissioner, shall, by rules and
income tax due from the payee on the said income.
regulations, prescribe.

The liability for payment of the tax rests primarily on the

"The dissolving or reorganizing corporation shall, prior to
payor as a withholding agent. Thus, in case of his failure to
the issuance by the Securities and Exchange Commission
withhold the tax or in case of under withholding, the
of the Certificate of Dissolution or Reorganization, as may
deficiency tax shall be collected from the payor/withholding
be defined by rules and regulations prescribed by the
agent.
Secretary of Finance, upon recommendation of the
Commissioner, secure a certificate of tax clearance from
The payee is not required to file an income tax return for
the Bureau of Internal Revenue which certificate shall be
the particular income. Note, however, that individual and
submitted to the Securities and Exchange Commission.
corporate taxpayers will now be required to declare in the
(Sec. 52 (C)).
ITR items which have been subjected to final tax.
c. Return on Capital Gains Realized from Sale of
Shares of Stock and Real Estate The finality of the withholding tax is limited only to the
payee’s income tax liability on the particular income. It
Every corporation deriving capital gains from the sale or does not extend to the payee's other tax liability on said
exchange of shares of stock not traded thru a local stock income, e.g., percentage tax.
exchange as prescribed under Sections 24(C), 25(A)(3),
27(E)(2), 28(A)(8)(c) and 28(B)(5)(c) shall file a return Formula:
within thirty (30) days after each transaction and a final Gross Income subject to Final Tax P xxx
consolidated return of all transactions during the taxable
year on or before the fifteenth (15th) day of the fourth (4th)
month following the close of the taxable year. (Sec. 52 (D)) Multiply by: Final Tax Rate xx

8. WITHHOLDING TAX
Final Tax P xxx
(Rev. Regs. 02-98, as amended by Rev. Regs. 11-2018
and 14-2018)
Note: Deductions and/or personal exemptions are not
a. Concept of Withholding Taxes allowed.

Withholding tax is a method of collecting income tax in

advance from the taxable income of the recipient of
income.

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c. Creditable Withholding Tax
(Rev. Regs.02-98, Sec. 2.57)
Under the creditable withholding tax system, taxes
withheld on certain income payments are intended to equal
or at least approximate the tax due of the payee on said
income. The income recipient is still required to file an
income tax return to report the income and/or pay the
difference between the tax withheld and the tax due on the
income. Taxes withheld on income payments covered by
the expanded withholding tax and compensation income
are creditable in nature.
A CWT is considered a prepayment or an advance
payment of eventual income taxes due at the end of the
taxable year
Taxes withheld on certain income payments are intended
to equal or at least approximate the tax due of the payee
on said income.
The payor endorses the pertinent Certificate of Creditable
Tax Withheld at Source to the payee for use by the payee
against his tax liability at the end of a taxable year.
The following are creditable withholding taxes:
a. Expanded Withholding Tax (EWT) on certain income
payments
b. Withholding Tax on Compensation
c. Withholding Tax on money payments to the
government
i. Expanded withholding tax
Expanded withholding tax will apply:
- Expense is paid by the taxpayer, which is income to
the recipient thereof subject to income tax;
- Income is fixed or determinable at the time of payment
- Income is one of the income payments listen in the
regulations; and
- Income recipient is a resident of the Philippines liable
to income tax
o If recipient is a non-resident taxpayer, then the
income payment is subject to FWT, not
creditable
- Payor-withholding agent is also a resident of the
Philippines (Ingles)
ii. Withholding tax on compensation
The withholding of tax on compensation income is a
method of collecting the income tax at source upon receipt
of the income. It applies to all employed individuals
whether citizens or aliens, deriving income from
TAXATION LAW
compensation for services rendered in the Philippines. The
employer is constituted as the withholding agent. (Rev.
Regs. 02-98, Sec. 2.78)
If the employee has other items of income that are subject
to regular income tax such as income from business or
professions, income from other employment or casual
income, he must file a consolidated income tax return to
include such items of income for the entire taxable year.
The withholding on compensation is credited against the
total tax due in the consolidated income tax return.
(Banggawan)
Liability for Tax (Sec. 80)
(A) Employer. - The employer shall be liable for the
withholding and remittance of the correct amount of tax
required to be deducted and withheld under this Chapter.
If the employer fails to withhold and remit the correct
amount of tax as required to be withheld, such tax shall be
collected from the employer together with the penalties or
additions to the tax otherwise applicable in respect to
such failure to withhold and remit.
(B) Employee. - Where an employee fails or refuses to file
the withholding exemption certificate or willfully supplies
false or inaccurate information thereunder, the tax
otherwise required to be withheld by the employer shall be
collected from him including penalties or additions to the
tax from the due date of remittance until the date of
payment. On the other hand, excess taxes withheld made
by the employer due to:
(1) Failure or refusal to file the withholding exemption
certificate; or
(2) False and inaccurate information shall not be
refunded to the employee but shall be forfeited in favor
of the Government.
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. (Sec. 82)
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Q: Bank A filed for a tax refund or credit representing

FINAL WITHHOLDING CREDITABLE
excess creditable withholding taxes. This was granted by
TAX WITHHOLDING TAX
the CTA upon appeal by Bank A due to the inaction by BIR.
Amount of Tax Collected Such grant is being assailed by BIR saying that A failed to
prove that creditable withholding taxes are duly supported
Full and final payment of Intended to equal or at by valid certificates of creditable tax withheld at source;
the income due from the least approximate the tax that A failed to prove actual remittance of alleged withheld
payee on the said income due from the said payee taxes to BIR; and that A failed to discharge burden of
on the said income proving its entitlement to a refund. A claims that it complied
with all requirements of judicial claim for refund of
Who is Primarily Liable
unutilized creditable withholding taxes and that proof of
Liability rests primarily on Liability rests primarily on actual remittance of withheld taxes to the BIR is the
the withholding agent the taxpayer responsibility of the payor of withholding agent not the
payee
Need to File a Return
Suggested Answer: Yes. It is not necessary for the
Payee is not required to Income recipient is still
person who executed and prepared the certificate of
file an income tax return required to file an income
creditable tax withheld at source to be presented and to
for the particular income tax return and/or pay the
testify personally to prove the authenticity of the
difference between the
certificates. [Commissioner of Internal Revenue v.
tax withheld and the tax
Philippine National Bank, G.R. No. 180290, September 29,
due on the income.
2014] Document must emanate from the payer itself and
Coverage not merely from the payee it must indicate the name of the
payor, the income payment basis of the tax withheld, the
All income subject to Those income payments amount of tax withheld and the nature of the tax paid.
final taxes (i.e. passive covered by EWT (Rev. (Commissioner of Internal Revenue v. Philippine National
income, gross income of Regs. 02-98) Bank, G.R. No. 180290, 2014 citing Banco Filipino Savings
NRA-NETB) and Mortgage Bank v. Court of Appeals, G.R. No. 155682,
Fringe benefit Examples: 2007)
Informer’s reward to Professional fees, talent
persons instrumental to fees, income payments Q: Is proof of remittance necessary for refund?
the discovery of to partners of GPP
violations of the NIRC Suggested Answer: Proof of actual remittance is not a
and the discovery and condition to claim for a refund of unutilized tax credits.
seizure of smuggled Under Sections 57 and 58 of the 1997 National Internal
goods Revenue Code, as amended, it is the payor-withholding
agent, and not the payee-refund claimant such as
d. Fringe Benefit Tax respondent, who is vested with the responsibility of
withholding and remitting income taxes. (Commissioner of
A final withholding tax is imposed on the grossed-up Internal Revenue v. Philippine National Bank, G.R. No.
monetary value of fringe benefit furnished, granted or 180290, 2014)
paid by the employer to the non-rank and file
employees except when: (1) the fringe benefit is Q: Corp A claims refund for final taxes withheld on its
required by the nature of or necessary to the trade, interest income from its peso and dollar deposits with
business or profession of the employer; or (2) when Agent Banks. Corp A asserts that it is entitled to a refund
the fringe benefit is for the convenience or advantage of the withheld taxes because it is exempted from paying
of the employer. the tax on interest income under its franchise, P.D. No.
1590. The CIR refused to grant the claim, arguing that
The tax imposed under Sec. 33 of the NIRC shall be Corp A failed to prove the remittance of the withheld taxes
treated as a final income tax on the employee, which to the BIR. Is Corp A required to prove the remittance to
shall be withheld and paid by the employer on a the BIR of the final withholding tax on its interest from
calendar quarterly basis. currency bank deposits to be entitled to tax refund?

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Suggested Answer: No. Remittance need not be proven.
Corp A needs only to prove that taxes were withheld from
its interest income. Certificates of Final Taxes Withheld
issued by the Agent Banks are sufficient evidence to
establish the withholding of the taxes. Corp A is not
responsible for the remittance of tax to the BIR. The taxes
on interest income from bank deposits are in the nature of
a withholding tax. Thus, the party liable for remitting the
amounts withheld is the withholding agent of the BIR. In
the case at bar, Corp A is the income earner and the payee
of the final withholding tax, and the Agent Banks are the
withholding agents who are the payors responsible for the
deduction and remittance of the tax. Considering that these
Certificates were presented, the burden of proof shifts to
the Commissioner, who needs to establish that they were
incomplete, false, or issued irregularly. However, the
Commissioner did no such thing. Thus, these Certificates
are sufficient evidence to establish the withholding of the
taxes. The taxes withheld from Corp A are considered its
full and final payment of taxes. Necessarily, when taxes
were withheld and deducted from its income, Corp A is
deemed to have paid them. Considering that PAL is
exempted from paying the withholding tax as shown in its
franchise, P.D. No. 1590, it is rightfully entitled to a refund.
(Philippine Airlines v Commissioner of Internal Revenue,
G.R. Nos. 206079-80, 2018.)
e. Duties of a withholding agent
Withholding Agent (WA)
A separate entity acting no more than an agent of the
government for the collection of tax in order to ensure its
payments.
He is merely a tax collector, not a taxpayer. If a withholding
agent was assessed for deficiency withholding tax under
the NIRC as such, it is being held liable in its capacity as a
withholding agent and not in its personality as a taxpayer.
(CIR v. CA, 242 SCRA 289, 1995)
The following persons are constituted as withholding
agents:
1. Juridical persons, whether or not engaged in trade or
business
2. Individuals, with respect to payments made in
connection with his trade or business
77
SEC. 251.Failure of a Withholding Agent to Collect and Remit Tax.
- Any person required to withhold, account for, and remit any tax imposed
by this Code or who willfully fails to withhold such tax, or account for and
remit such tax, or aids or abets in any manner to evade any such tax or
TAXATION LAW
3. Individual buyers with regard to taxable sale,
exchange, or transfer of real property, although not
engaged in trade or business
Returns and Payments of Taxes Withheld at Source
Taxes deducted and withheld by withholding agents shall
be covered by a return and paid to, except in cases where
the CIR otherwise permits, an authorized agent bank,
RDO, Collection Agent, or duly authorized Treasurer of the
city or municipality where the withholding agent has his/its
legal residence or principal place of business.
The taxes deducted and withheld by the withholding agent
shall be held as a special fund in trust for the government
until paid to the collecting officers.
Note: The payment of taxes is simultaneous with the filing
of the returns (pay-as-you-file) except in cases of Large
and Non-Large Taxpayers who file through the Electronic
Filing and Payment System (EFPS).
Consequences for Failure to Withhold
Liable for surcharge or penalties
Liable upon conviction to a penalty equal to the total
amount of the tax not withheld or not accounted for and
remitted.77
Any income payment which is otherwise deductible from
the WA/payor’s gross income will not be allowed if it is
shown that the income tax required to be withheld is not
paid to the BIR. (Rev. Regs. 02-98, Sec. 2.58.5)
No deduction will also be allowed notwithstanding
payments of withholding tax at the time of the audit
investigation or reinvestigation/ reconsideration in
cases where the withholding of tax was not timely made.
(Rev. Regs. 02-98, Sec. 2.58.5, as amended by Rev. Reg.
No. 12-13)
C. ESTATE TAX
Transfer taxes in general
A transfer tax is a tax imposed on the privilege of
transferring properties, real or personal, without
consideration.
the payment thereof, shall, in addition to other penalties provided for
under this Chapter, be liable upon conviction to a penalty equal to the
total amount of the tax not withheld, or not accounted for and remitted
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Nature of a transfer tax ESTATE TAX DONOR’S TAX

A transfer tax is an excise tax or privilege tax that is Sec. 90[C])
imposed on the act of passing ownership of property, and Time of payment at the Time of payment at the
is not a tax on the property transferred. time the return is filed by time the return is filed –
the executor, that is, within 30 days after
Kinds of transfer tax: administrator, or the heirs the date the gift is made
5. Estate tax is a tax that is levied, assessed, collected, – that is, within 1 year from (NIRC, Sec. 103[B])
and paid upon the transfer of the net estate of a death (NIRC, Sec. 91[A])
decedent to his or her heirs. Extension for time of
6. Donor’s tax is an excise tax levied, collected, and paid Extension for time of payment not allowed
upon (1) the privilege of transferring property payment is allowed (NIRC,
gratuitously by way of gift inter vivos by any person, Sec. 91[B])
resident or non- resident and (2) transfers for less than
adequate consideration. Transfer taxes distinguished from business taxes
Transfer taxes are taxes imposed on the privilege of
Differences between estate tax and donor’s tax transferring properties, real or personal, without
consideration. On the other hand, business taxes are
ESTATE TAX DONOR’S TAX imposed upon a person, who is engaged in trade or
Tax on privilege to transfer Tax on privilege to transfer business or in the exercise of profession, including but not
property upon one’s death property during one’s limited to value-added tax, other percentages taxes, excise
lifetime taxes and documentary stamp.
Individuals are liable Individuals and
1. BASIC PRINCIPLES, CONCEPT, AND DEFINITION
corporations are liable
Imposed on donations Imposed on donations Accrual of estate tax – because succession takes place
mortis causa inter vivos and the right of the state to impose estate tax accrues upon
Computed on the basis of Computed on the basis of the death of the decedent, the tax should be measured by
the net estate transferred net gifts given during a the value of the estate as it stood at the time of the
at the time of death of the calendar year. decedent’s death, regardless of any subsequent
decedent. contingency affecting value or any subsequent increase or
decrease in value.
Tax rate is 6% on net Tax rate is 6% of total gifts (Lorenzo v Posadas, G.R. No. L-43082, 1937)
estate in excess of Php 250,000.
Amount exempt: None Amount exempt: Up to The accrual of the tax is distinct from the obligation to pay
Php 250,000 per year the same. Upon the death of the decedent, succession
Deductions allowed Deductions come in the takes place and the right of the State to tax the privilege to
(NIRC, Sec. 86) form of “exemptions” transmit the estate vests instantly upon death.
under NIRC, Sec 101.
Requirement of filing a Requirement of filing a An excise tax is imposed upon the privilege to transmit
return: return: property at the time of death. The tax should not be
1. Transfers subject to construed as a direct tax on the property of the decedent
estate tax All transfers by gift except although the tax is based thereon.
2. Estate consists of those which, under NIRC,
registrable property Sec. 101, are exempt from Estate tax is the tax on the right to transmit property at
regardless of the value of tax death and on certain transfers by the decedent during his
the gross estate lifetime, which is made by the law equivalent of
File return within 1 year File return within 30 days testamentary dispositions.
from death (NIRC, Sec. after the date the gift is
90[B]) made (NIRC, Sec. 103[B]) The estate tax applies to: a) citizens of the Philippines; b)
residents of the Philippines; and c) non-resident aliens with
Extension allowed: not No extension allowed properties in the Philippines.
exceeding 30 days in
meritorious cases (NIRC,
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Purpose or object of Estate tax
Benefits-received theory – The tax is in return for the
services rendered by the State in the distribution of the
estate of the decedent and for the benefits that accrue to
the estate and the heirs.
State-partnership relationship theory – The tax is the
share of the State as a passive and silent partner in the
accumulation of property.
Ability to pay theory – The tax is based on the act that
the receipt of inheritance creates the ability to pay and
contribute to governmental income.
Redistribution of wealth theory – The tax is imposed to
help reduce undue consideration of wealth in society to
which the receipt of inheritance tax is a contributing factor.
Date-of-Death Valuation Rule - The properties and rights
are transferred to the successors at the time of death. (Civil
Code, art. 777)
The value of an estate of a decedent is based on its value
at the time of his death regardless of any post-death
development affecting its value (Dizon v. CTA, G.R. No.
140944, 2008)
Actual claims of decedent’s creditors may be fully
allowed as deductions from his gross estate despite
the fact that the said claims were reduced or condoned
through compromise agreements entered into by the
Estate with its creditors, based on the following
grounds:
1. There is no law which disregards the date-of-death
valuation principle and particularly provides that post-
death developments must be considered in determining
the net value of the estate; and
2. Claims as generally construed under Rules on Special
Proceedings refer to debts or demands of a pecuniary
nature which could have been enforced against the
deceased in his lifetime, or liability contracted by the
deceased before his death. (Dizon v. CTA and CIR, G.R.
No. 140944, 2008)
The right to transmit accrues at the time of the death of the
decedent. (Lorenzo v. Posadas, G.R. No. L-43082, 1937)
However, the Register of Deeds shall not transfer the title
to the properties without the Certificate of Authority to
TAXATION LAW
Register (CAR) issued by the RDO evidencing the filing
and payment of the estate tax. (RR No. 24-02)
Governing law
Estate taxation is governed by the law in force at the time
of death of the decedent. (RR No. 2-2003, Sec. 3)
Decedent’s residence
For estate tax purposes, residence refers to the
permanent home, the place to which whenever absent, for
business or pleasure, one intends to return, and depends
on facts and circumstances, in the sense that they disclose
intent. (Corre v. Tan Corre, G.R. No. L-10128, 1956)
Estate tax planning
It is a device to achieve a transfer of properties from the
testator to the heirs at the least tax as possible.
Estate tax planning has somehow diminished in value due
to TRAIN imposing the same tax rate on both the estate
and donor’s taxes.
The legal right of a taxpayer to decrease the amount of
what otherwise could be his taxes or altogether avoid
them, by means which the law permits, cannot be doubted
(Delpher Trades Corp v. IAC, G.R. No. L-69259, 1988)
2. CLASSIFICATION OF DECEDENT
a. Residents and citizens
The gross estate of a decedent shall comprise of all the
properties, real or personal, tangible or intangible,
wherever situated and any interest therein at the time of
his death, including revocable transfers and transfers for
insufficient consideration.
b. Non-resident aliens
The gross estate of a decedent shall comprise only of the
properties situated in the Philippines, provided that with
respect to intangible personal property, its inclusion in the
gross estate is subject to the rule of reciprocity.
Compared with the classification of taxpayers regarding
income taxation, decedent aliens who are residents and
decedent citizens who are non-residents are taxed on a
worldwide basis when it comes to estate taxation.
Note: The rule of reciprocity provides that only intangible
personal property located in the Philippines shall be
taxable unless exempted on the basis of the following:
a. The foreign country where the resident alien was a
citizen at the time of his death did not impose estate
tax in respect of intangible personal property of citizens
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of the Philippines not residing in that foreign country;
or
b. If the laws of the foreign country of which the decedent
was a citizen and resident at the time of his death
allows a similar exemption from estate taxes of every
character or description in respect of intangible
personal property owned by citizens of the Philippines
not residing in that foreign country. (Sacdalan-
Casasola, NIRC Annotated Volume 2, 698, 2013)
3. COMPOSITION OF GROSS ESTATE
Valuation78
The properties comprising the gross estate shall be valued
according to their fair market value as of the time of
decedent's death.
If the property is a personal property, it is valued based on
its FMV at the time of death.
If the property is a real property, the appraised value
thereof as of the time of death shall be, whichever is the
higher of —
(1) The fair market value as determined by the
Commissioner, or
(2) The fair market value as shown in the schedule of
values fixed by the provincial and city assessors,
whichever is higher.
For purposes of prescribing real property values, the
Commissioner is authorized to divide the Philippines into
different zones or areas and shall, upon consultation with
competent appraisers, both from the private and public
sectors, determine the fair market value of real properties
located in each zone or area.
Valuation for specific properties
Shares of stocks
In the case of shares of stocks, the fair market value shall
depend on whether the shares are listed or unlisted in the
stock exchanges. Unlisted common shares are valued
based on their book value while unlisted preferred shares
are valued at par value. In determining the book value of
common shares, appraisal surplus shall not be considered
as well as the value assigned to preferred shares, if there
are any. On this note, the valuation of unlisted shares shall
78 Rev. Regs. 12-2018
TAXATION LAW
be exempt from the provisions of Rev. Regs. 06-13, as
amended.
For shares which are listed in the stock exchanges, the fair
market value shall be the arithmetic mean between the
highest and lowest quotation at a date nearest the date of
death, if none is available on the date of death itself.
Units of participation/ membership
The fair market value of units of participation in any
association, recreation or amusement club (such as golf,
polo, or similar clubs), shall be the bid price nearest the
date of death published in any newspaper or publication of
general circulation.
Right to usufruct
To determine the value of the right to usufruct, use or
habitation, as well as that of annuity, there shall be taken
into account the probable life of the beneficiary in
accordance with the latest basic standard mortality table,
to be approved by the Secretary of Finance, upon
recommendation of the Insurance Commissioner.
Special rules on intangible properties
The following intangible personal properties are
considered with situs in the Philippines:
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; and
5. Shares, rights in any partnership business or industry
established in the Philippines.
Intangible personal properties shall not form part of the
gross estate for purposes of Philippine estate tax if:
i. The decedent, at that time of his death, was a
citizen and resident of a foreign country; and
ii. (a) The foreign country, at the time of his death,
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did not impose a transfer tax or death tax of any
character in respect of the intangible personal
property of citizens of the Philippines not residing
in that foreign country; or
(b) The law of the foreign country of which the
decedent was a citizen and resident at the time of
his death allows a similar exemption from transfer
tax or death tax of every character in respect of the
intangible personal property owned by citizens of
the Philippines not residing in that foreign country.
Gross estate and net estate
If the decedent is a citizen, or a resident alien – Net
estate is equal to gross estate less ordinary and special
deductions and exclusions allowed by law (Rev. Regs. 12-
18, Sec. 6)
If the decedent is a non-resident alien – Net estate is
equal to gross estate less ordinary deductions and
exclusions allowed by law (Rev. Regs. 12-18, Sec. 7)
Estate Tax Formula:
xx
Gross Estate (Sec. 85, NIRC)
Less:
(1) Deduction (Sec. 86, NIRC) xx
(2) Net share of the surviving
xx
spouse
Net Taxable Estate xx
Multiply by: Tax Rate (Sec. 84,
6%
NIRC)
Estate Tax Due xx
Less: Tax Credit (if any) (Sec. 86 [E]
xx
or 110 [B], NIRC)
Estate Tax Due (if any) xx
a. Items To Be Included In The Gross Estate
Properties physically in the estate
i. Property in which decedent had an interest (Sec. 85
(A))
ii. Proceeds of life insurance (unless designation of
beneficiary is irrevocable) (Sec. 85 (E))
Properties no longer physically in the estate
iii. Transfers in contemplation of death (Sec. 85 (B))
iv. Transfers taking effect at death (Sec. 85(B))
v. Transfers with retained interest (Sec. 85(B))
vi. Revocable transfers (Sec. 85 (C))
TAXATION LAW
vii. Property passing under general power of appointment
(Sec. 85 (D))
viii. Transfers for insufficient consideration (Sec. 85 (G))
Note: Paragraphs iii-v are all subsumed under Transfers
in Contemplation of Death
i. Decedent’s interest
To the extent of the interest therein of the decedent at the
time of his death
Example: Real and personal properties owned by the
decedent. In case the property (e.g., lot) is owned in
common with other persons, the gross estate shall include
only the value of the decedent’s share in said property and
not the value of the whole property.
ii. Proceeds of life insurance
Form part of the gross estate only when:
(1) The beneficiary is the estate, executor or
administrator, whether the designation is revocable
or irrevocable; or
(2) The beneficiary is other than the estate, executor or
administrator and the designation is revocable.
iii. Transfers in contemplation of death
Transfer was motivated by the thought of death.
What are some factors to look at to deduce that the
transfer is motivated by the thought of death?
- Age
- Health
- Length of time between transfer and death
- Concurrent making of a will
(Atty. Bello)
These factors are merely indicators and not determinative
of concluding whether the transfer was indeed in
contemplation of death.
What are some factors that will make one deduce that
the transfer is not in contemplation of death?
- Transfer was to reduce annual income tax liability
- Relief from burden of property management
- Protect family from hazards of business operations
- Other valid reasons motivated by business
(Atty. Bello)
iv. Transfers taking effect at death
In this transfer, what is retained relates to possession or
enjoyment of property. If such possession or enjoyment
can already be obtained by the transferee while the
transferor is still alive, such property can be excluded from
the gross estate of the decedent-transferor.
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Example: Joint survivorship accounts
v. Transfers with retained interest
In this transfer, the transferor retains possession or
enjoyment, the right to the income over the property, the
right to designate who shall possessor enjoy the property,
and the right to designate who shall enjoy the income.
Example: Decedent donated a painting to a Museum but
reserved the right to keep it for life.
vi. Revocable transfers
Transfers made by the decedent by trust or otherwise,
where the enjoyment was subject at the date of his death
to any change through the exercise of a power by the
decedent alone or in conjunction with any other person, to
alter, amend, revoke, or terminate, or where any such
power is relinquished in contemplation of the decedent’s
death.
The power to alter, amend or revoke shall be considered
to exist at the date of the decedent’s death even if:
i. The exercise is subject to the requirement of giving
prior notice; or
ii. The alteration, amendment or revocation takes
effect only on the expiration of a stated period after
the exercise of the power.
Example: A creates a trust, the income from which is
payable to B for life, with remainder to C. However, A also
reserves the right to take back the property altogether
provided that the same shall take effect only upon the
lapse of 1 year counted from the time the revocation is
made.
Exception
However, these transfers do not include bona fide sales for
an adequate and full consideration in money or money’s
worth.
vii. Property passing under general power of
appointment
GPA is the power to designate, without restrictions, the
persons who shall receive, succeed to, possess or enjoy
the property or its income received from the estate of a
prior decedent.
The GPA is exercised by:
i. Will;
79 Rev. Regs. 12-18
TAXATION LAW
ii. Deed executed in contemplation of death; or
iii. Deed under which he has retained for his life or for
any period which does not in fact end before his
death:
The possession or enjoyment of, or the right to the
income from, the property or
The right, either alone or in conjunction with any person to
designate the persons who shall possess or enjoy the
property or the income therefrom EXCEPT bona fide
sales for an adequate and full consideration in money or
money’s worth.
viii. Transfers for insufficient consideration
The amount to be included in the gross estate is the excess
of the FMV at the time of death over the value of the
consideration received.
Example: X’s property has a historical cost of P100,000.
Such property, which is classified as not a real property
treated as capital asset, is now worth P500,000. Prior to
his death, X sold the property but only for P150,000. In
such a case, P50,000 (150,000 – 100,000) will be
considered as income subject to income tax, while
P350,000 (500,000 – 150,000) will be included in the gross
estate, subject to estate tax.
b. Allowable Deductions From Gross Estate
For Residents and Citizens79
1. Standard deduction — a deduction in the amount of
Five Million Pesos (P5,000,000) shall be allowed without
need of substantiation. The full amount of P5,000,000 shall
be allowed as deduction for the benefit of the decedent.
The presentation of such deduction in the computation of
the net taxable estate of the decedent is properly illustrated
in these Regulations.
2. Claims against the estate — the word "claims" is
generally construed to mean debts or demands of a
pecuniary nature which could have been enforced against
the deceased in his lifetime and could have been reduced
to simple money judgements. Claims against the estate or
indebtedness in respect of property may arise out of: (1)
Contract; (2) Tort; or (3) Operation of Law.
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Requisites to deduct claims against the estate
a. The liability represents a personal obligation of the
deceased existing at the time of his death;
b. The liability was contracted in good faith and for
adequate and full consideration in money or money's
worth;
c. The claim must be a debt or claim which is valid in law
and enforceable in court;
d. The indebtedness must not have been condoned by the
creditor or the action to collect from the decedent must not
have prescribed.
Substantiation requirements
a. In case the claim is a simple loan against the estate
1. The debt instrument must be duly notarized at the time
the indebtedness was incurred, except for loans
granted by financial institutions where notarization is
not part of the business practice/policy 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.
In any case, 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.
3. When the lender 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
fifteen days from the execution thereof.
4. Proof of capacity of the lender or creditor to lend.
5. A statement under oath executed by the administrator
or executor of the estate showing the disposition of
proceeds of loan from the executor or administrator if
loan was contracted three (3) years before the death.
b. In case the claim is an unpaid obligation arising
from purchase of goods or services
1. Pertinent documents evidencing the purchase of goods
or service.
TAXATION LAW
2. Duly notarized Certification from the creditor as to the
unpaid balance of the debt, including interest as of
the time of death
3. When the lender 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 fifteen days from the execution thereof.
4. 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.
c. Claims arising from testate or intestate proceeding
1. Where the settlement is made through the Court in a
testate or intestate proceeding, pertinent documents
filed with the Court evidencing the claims against the
estate, and the Court Order approving the said claims,
if already issued, in addition to the documents
mentioned in the preceding paragraphs.
d. Claims of the deceased against insolvent persons
as defined under R.A. 10142 (FRIA) and other existing
laws, where the value of the decedent's interest therein
is included in the value of the gross estate.
e. Unpaid mortgages, taxes, and casualty losses
1. Unpaid mortgages upon, or any indebtedness in
respect to, property where the value of the decedent's
interest therein, undiminished by such mortgage or
indebtedness, is included in the value of the gross
estate. The deduction herein allowed in the case of
claims against the estate, unpaid mortgages or any
indebtedness shall, when founded upon a promise or
agreement, be limited to the extent that they were
contracted bona fide and for an adequate and full
consideration in money or money's worth.
In case unpaid mortgage payable is being claimed by
the estate, verification must be made as to who was the
beneficiary of the loan proceeds, subject to the
following rules:
Accommodation loan Value of unpaid loan
(value went to must be included as
another person) receivable of the
estate
If there is legal Unpaid obligation
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impediment to shall not be allowed prior decedent, or from the donor, or something
recognize as deduction from acquired in exchange therefore; and
gross estate 6. No vanishing deduction on the property was allowable
to the estate of the prior decedent
2. Taxes which have accrued as of the death of the
decedent which were unpaid as of the time of death, Valuation of deduction (Ingles, 2018 & Sec. 86(A)(5),
except income tax upon income received after death, or NIRC)
property taxes not accrued before his death, or the First: The basis of the deduction will either be the value of
estate tax due from the transmission of his estate. the property in the prior estate/value used for donor’s tax
purposes OR the value of the property in the present
3. Losses incurred during the settlement of the estate estate, whichever is LOWER.
arising from fires, storms, shipwreck, or other
casualties, or from robbery, theft or embezzlement, Second: This shall be reduced by any payment made by
when such losses are not compensated for by the present decedent on any mortgage or lien on the
insurance or otherwise, and if at the time of the filing of property that was used as a deduction on the prior
the return such losses have not been claimed as a decedent’s estate/gift.
deduction for income tax purposes in an income tax
return, and provided that such losses were incurred not Third: the reduced value shall be further reduced by any
later than the last day for the payment of the estate tax expenses, losses, indebtedness, taxes and transfers for
as prescribed in Subsection (A) of Section 91 shall be public use to get the “net base amount”:
considered as deduction.
Reduced Expenses, losses,
Value x indebtedness, taxes and
In all instances, the mortgaged property, to the extent of
Gross Estate transfers for public use
the decedent's interest therein, should always form part of
the gross taxable estate.
Fourth: multiply the net base amount to the percentage
applicable below to get the deductible value:
f. Vanishing deductions (property previously taxed)
No. of years from receipt % of the
Vanishing deductions are deductions allowed for of the property from a value to be
properties which were already subjected to transfer taxes prior decedent or donor deducted
(i.e., estate and donor’s tax).
Within 1 year prior to death 100%
of the decedent
The purpose is to minimize the effect of double taxation
within a short period of time since the same property will More than one year but not 80%
be again subjected to tax in the form of estate tax. These more than 2 years
are allowed provided the corresponding donor’s or estate More than 2 years but not 60%
tax in the previous transfers have been paid. more than 3 years
More than 3 years but not 40%
Requisites for Deductibility: more than 4 years
1. The present decedent died within 5 years from receipt More than 4 years but not 20%
of the property from a prior decedent or donor; more than 5 years
2. The property on which vanishing deduction is being
claimed must be located in the Philippines;
3. The property must have formed part of the taxable Examples:
estate of the prior decedent, or of the taxable gift of the On January 15, 2000, A donated to B two properties, one
donor; located in the Philippines, and the other located in Japan.
4. The estate tax on the prior succession or the donor’s B died on July 30, 2006. Vanishing deduction is not
tax on the gift must have been finally determined and allowed for the property located in the Philippines because
paid; 5 years have already lapsed. Vanishing deduction cannot
5. The property on which vanishing deduction is being also be claimed for the property in Japan because such
taken must be identified as the one received from the deductions apply only to properties located within the
Philippines.
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C inherited the property in Japan from B’s estate. C died
on February 15, 2009. Vanishing deduction is still not
allowed because the property is located in Japan.
D inherited B’s property which is located in the Philippines.
D died on March 30, 2010. Vanishing deduction amounting
to 40% of the value of the property shall be allowed since
the prior decedent B died more than 3 years but less than
4 years.
E inherited the property from D, but E died on April 15,
2014. Vanishing deduction is not allowed because such
deduction was already availed of by D’s estate.
g. Transfers for public use
Requisites for Deductibility:
1. The disposition is in the last will and testament;
2. To take effect after death;
3. In favor of the Government or any political subdivision
thereof;
4. Exclusively for public purpose; and
5. The value of property given is included in the gross
estate.
The transfer also contemplates bequests, devices, or
transfers to social welfare, cultural and charitable
institutions.
h. The family home
Family home 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 by Barangay Captain of the locality.
The family home is deemed constituted on the house and
lot from the time it is actually occupied as a family
residence and is considered as such for as long as any of
its beneficiaries actually resides therein.
Actual occupancy of the house or house and lot as the
family residence shall not be considered interrupted or
abandoned in such cases as the temporary absence from
the constituted family home due to travel or studies or work
abroad, etc.
The family home is generally characterized by
permanency, that is, the place to which, whenever absent
for business or pleasure, one still intends to return.
TAXATION LAW
Conditions for Deductibility:
1. The family home must be the actual residential home
of the decedent and his family at the time of his death,
as certified by the Barangay Captain of the locality
where the family home is situated;
2. The total value of the family home must be included as
part of the gross estate of the decedent; and
3. Allowable deduction must be in an amount equivalent
to the current FMV of the family home as declared or
included in the gross estate, or the extent of the
decedent’s interest (whether conjugal/community or
exclusive property), whichever is lower, but not
exceeding P10,000,000.
Note: The family home must be part of the properties of
the absolute community, or of the conjugal partnership, or
of the exclusive properties of either spouse, depending
upon the classification of the property (family home) and
the property relations prevailing on the properties of the
husband and wife. It may also be constituted by an
unmarried head of a family on his or her own property.
For purposes of availing of a family home deduction to the
extent allowable, a person may constitute only one family
home.
i. Amount received by heirs under Republic Act No. 4917
Any amount received by the heirs from the decedent's
employer as a consequence of the death of the decedent-
employee in accordance with Republic Act No. 4917 is
allowed as a deduction provided that the amount of the
separation benefit is included as part of the gross estate of
the decedent.
j. Net share of the surviving spouse in the Conjugal
Property
The net share of the surviving spouse in the conjugal
partnership property as diminished by the obligations
properly chargeable to such property shall, for the purpose
of this Section, be deducted from the net estate of the
decedent.
For Non-resident Aliens
a. Standard deduction
A deduction in the amount of Five Hundred Thousand
Pesos (P500,000) shall be allowed without need of
substantiation. The full amount of P500,000 shall be
allowed as deduction for the benefit of the decedent.
b. Losses and indebtedness
The proportion of the total losses and indebtedness which
the value of such part bears to the value of his entire gross
estate wherever situated. Losses and indebtedness shall
include the following:
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- Claims against the estate. foreign country. Thus, nonresident alien estates are not
- Claims of the deceased against insolvent persons entitled to avail of the tax credit.
where the value of the interest therein is included in the
value of the gross estate. What amount of tax credit may be claimed
- Unpaid mortgages, taxes and casualty losses. The estate tax imposed by the Philippines shall be credited
with the amounts of any estate tax imposed by the
The allowable deduction shall be computed using the
following formula: authority of a foreign country, subject to the following
limitations:
Ph gross x Item = Allowa
estate______ b’s ble Per country limitation – net estate within a foreign
Worldwidegross amou deducti country
estate nt on
Net estate,
foreign Max
c. Property previously taxed Phil. Estate
X = amt. of
d. Transfers for public use Net estate, Tax
credit
e. Net share of the surviving spouse in the conjugal world
property or community property
Global limitation
Unless otherwise provided in this section, the rules for the
availment of deductions in the preceding section shall
apply. Total Net
estate, Max
Note: For the estate of a non-resident alien to be allowed outside Phil. Estate
X = amt. of
deductions, the executor, administrator or heir must Tax
Net estate, credit
include in the return to be filed, the value of the gross
estate not situated in the Philippines world

c. Exclusions from Gross Estate and Exemptions of
Certain Acquisitions and Transmissions
The following are excluded from the gross estate of the
decedent:
• Proceeds from life insurance where the beneficiary is
other than the estate, executor or administrator AND
the designation is irrevocable;
• SSS death benefits;
• Properties held in trust by the decedent;
• Benefits received by beneficiaries residing in the
Philippines under laws administered by the US
Veterans Administration; and
• Separate or exclusive properties of the surviving
spouse.
d. Tax Credit for Estate Taxes Paid to a Foreign
Country
Estate tax credit is a remedy against international double
taxation to minimize the onerous effect of taxing the same
property twice.
Who may avail of estate tax credit
Only the estate of a citizen or a resident at the time of the
death can claim tax credit for any estate taxes paid to a
The final allowable amount shall be the LOWER AMOUNT
between the country and global limitation amounts.
Exemption of certain acquisitions and transmissions
(Sec. 84 & 87)
The following are acquisitions and transfers expressly
declared as exempt from estate tax:
a. Merger of 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 fideicommissary
The substitution must not go beyond one degree from the
heir originally instituted.
The fiduciary or first heir must be both living at the time of
the testator’s death.
Example
A dies and leaves in his will a lot to his brother B who is
entrusted with the obligation to transfer the lot to C, a son
of A, when C reaches legal age. B is the fiduciary heir and
C is the fideicommissary. The transfer from A to B is
subject to estate tax. But the transmission or delivery to C
upon reaching legal age shall be exempt from estate tax.
c. Transmission from the first heir, legatee or donee in

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favor of another beneficiary, in accordance with the
desire of the predecessor
d. 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 not more than 30% of the transfers
shall be used by such institutions for administration
purposes.
e. Filing of Estate Tax Returns and Payment of Estate
Tax
An estate tax return is required to be filed when the estate
is:
a. Subject to estate tax;
b. Regardless of amount of the gross estate, where the
said gross estate consists of registered or registrable
property such as motor vehicle or shares of stock, or
other similar property for which clearance from the BIR
is required as a condition precedent for the transfer of
ownership thereof in the name of the transferee. (RMC
No. 34-2013)
Time of Filing of Estate Tax Return
It must be made within one (1) year after the death of the
decedent. However, the Commissioner may, in meritorious
cases, grant an extension not exceeding thirty (30) days.
Time of Payment of Estate Tax
The estate tax shall be paid at the time the return is filed
by the executor, administrator or the heirs. However, when
the Commissioner finds that the payment of the estate tax
or of any part thereof would impose undue hardship upon
the estate or any of the heirs, he may extend the time for
payment of such tax or any part thereof not to exceed five
(5) years in case the estate is settled through the courts,
or two (2) years in case it is settled extra-judicially.
Payment by Installment
In case the available cash of the estate is insufficient to pay
the total estate tax due, payment by installment shall be
allowed within two (2) years from the statutory date for its
payment without penalty and interest.
Place of Filing and Payment
The heirs/ authorized representative/ administrator/
executor shall file the estate tax return and pay the
corresponding estate tax with the Authorized Agent Bank
(AAB), Revenue Collection Officer (RCO) or duly
authorized Treasurer of the city or municipality in the RDO
having jurisdiction over the place of domicile of the
decedent at the time of his death.
TAXATION LAW
In case of a non-resident decedent, with executor or
administrator in the Philippines, the estate tax return shall
be filed with the AAB of the RDO where such
executor/administrator is registered or is domiciled, if not
yet registered with the BIR.
For non-resident decedent with no executor or
administrator in the Philippines, the estate tax return shall
be filed with the AAB under the jurisdiction of RDO No. 39–
South Quezon City. (RMC No. 34-2013).
Rule on Withdrawal of Bank Deposits
If a bank has knowledge of the death of a person, who
maintained a bank deposit account alone, or jointly with
another, it shall ALLOW any withdrawal from the said
deposit account, SUBJECT TO A FINAL
WITHHOLDING TAX OF SIX PERCENT (6%) For this
purpose, all withdrawal slips shall contain a statement to
the effect that all of the joint depositors are still living at the
time of withdrawal by any one of the joint depositors and
such statement shall be under oath by the said depositors.
(Sec 97) Read also RR 12---2018
If a bank has knowledge of the death of a person, who
maintained a bank deposit account alone, or jointly with
another, it shall not allow any withdrawal from the said
deposit account unless the Commissioner had certified
that the taxes imposed thereon by this Title have been
paid; Provided, however, That the administrator of the
estate or any one (1) of the heirs of the decedent may,
upon authorization by the Commissioner, withdraw an
amount not exceeding Twenty thousand pesos (P20,000)
without the said certification. (Polido v. CA, G.R. No.
170632, 2007)
D. DONOR’S TAX
1. BASIC PRINCIPLES, CONCEPT, AND DEFINITION
Donor’s tax is a tax on the privilege of transmitting one’s
property or property rights to another or others without
adequate and full valuable consideration; an act of
liberality. (Tuazon v. CIR, G.R. No. L-30403, 1969)
It is an excise tax imposed on the exercise of donor’s right
during his lifetime to transfer property to others in the form
of gift.
The subject of donor’s tax is a gift or donation. A gift or
donation is an act of liberality whereby a person disposes
gratuitously of a thing or right in favor of another who
accepts it. (Art. 725, Civil Code)
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Inheritance tax is imposed upon the gift inter- vivos that
plaintiff received from the donor if this was really an
advancement upon the inheritance to which one would be
entitled upon the death of the latter. (Dison v. Posadas,
G.R. No. L-36770, 1932)
Note: In Dison v. Posadas, the SC made a distinction
regarding inter vivos transfers to forced heirs and to
voluntary heirs. For forced heirs, the transfer was an
advancement upon the inheritance which the donee would
be entitled to receive upon the death of the donor and,
therefore, it is subject to estate tax. Transfers to voluntary
heirs, on the other hand, was subjected to donor’s tax.
The purpose of donor’s tax is to complement estate tax by
preventing tax-free depletion of the transferor’s estate
during his lifetime.
Illustration
In the 1940s, Enrico Pirovano was President and General
Manager of de la Rama Steamship Co. The corporation
insured the life of Pirovano with various insurance
companies designating itself as the beneficiaries of said
policies. When Pirovano died, the corporation received a
certain sum as proceeds of the life insurance policies.
Such amount was later donated by the corporation to
Pirovano’s minor children. The Court held that a donation
made by a corporation to the heirs of a deceased officer
out of gratitude for his past services is subject to the
donees’ gift tax. (Pirovano v. CIR, G.R. No. L-19865, 1965)
It also serves 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.
2. REQUISITES OF A VALID DONATION
Generally, the following are the requisites for a valid
donation (C-I-D-A):
a. Capacity of the donor;
b. Intent to donate;
c. Delivery of the subject gift, whether actual or
constructive; and
d. Acceptance by the done.
Essential Characteristics of True Donations (Inter vivos)
(a) consent, subject matter, cause (as in other contracts)
(b) the necessary form (including delivery in some cases)
(c) consent or acceptance by donee during donor’s lifetime
(d) irrevocability (except for legal causes)
TAXATION LAW
(e) intent to benefit the donee (animus donandi) —
“liberality” being emphasized more than “gratuitousness.”
(NOTE: While commodatum is gratuitous, it is not
considered a donation)
(f) resultant decrease in the assets or patrimony of the
donor. (NOTE: The mere giving of a mortgage as security
is not a donation, for the assets of the mortgagor are not
really diminished. (Castan) (Paras)
For donation of movable properties
The donation of a movable may be made orally or in
writing.
An oral donation requires the simultaneous delivery of the
thing or of the document representing the right donated.
If the value of the personal property donated exceeds five
thousand pesos, the donation and the acceptance shall be
made in writing. Otherwise, the donation shall be void. (Art.
748, Civil Code)
For donation of immovable properties
In order that the donation of an immovable may be valid, it
must be made in a public document, specifying therein the
property donated and the value of the charges which the
donee must satisfy.
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. (Art. 749, Civil
Code, as copied in Rev. Regs. 12-18)
Law governing imposition of a Donor’s Tax
The donor's tax is not a property tax, but is a tax imposed
on the transfer of property by way of gift inter vivos. (Lladoc
vs. Commissioner of Internal Revenue,L-19201, 1965)
The donor's tax shall not apply unless and until there is a
completed gift. The transfer of property by gift is perfected
from the moment the donor knows of the acceptance by
the donee; it is completed by the delivery, either actually or
constructively, of the donated property to the donee. Thus,
the law in force at the time of the perfection/completion of
the donation shall govern the imposition of the donor's tax.
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
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an authentic form, and this step shall be noted in both exchange, or other transfer of property made in the
instruments. ordinary course of business (a transaction which is a bona
fide, at arm’s length, and free from any donative intent), will
A gift that is incomplete because of reserved powers, be considered as made for an adequate and full
becomes complete when either: (1) the donor renounces consideration in money or money’s worth.
the power; or (2) his right to exercise the reserved power
ceases because of the happening of some event or
contingency or the fulfilment of some condition, other than Note: In the case of real properties considered as capital
because of the donor's death. assets, the difference between the FMV and the actual
value received in transfers for less than the adequate or
The law in force at the time of the completion of the full consideration shall NOT be subject to donor’s tax.
donation shall govern the imposition of donor's tax.
The rationale is that under Sec. 24(d) of the NIRC, the FMV
For purposes of the donor's tax, "NET GIFT" shall mean itself, if higher than the gross selling price, is the base for
the net economic benefit from the transfer that accrues to the computation of capital gains tax. In essence, what the
the donee. Accordingly, if a mortgaged property is seller avoids in the payment of donor’s tax, it pays with the
transferred as a gift, but imposing upon the donee the
capital gains tax.
obligation to pay the mortgage liability, then the net gift is
measured by deducting from the fair market value of the
b. Condonation or Remission of Debt
property the amount of mortgage assumed. (Rev. Regs.
12-18) If a creditor merely desires to benefit a debtor and without
3. TRANSFERS WHICH MAY BE CONSIDERED any consideration therefore cancels the debt, the amount
DONATION of the debt is a gift from the creditor to the debtor and need
not be included in the latter's gross income.
a. Transfer for less than an Adequate Consideration
c. Renunciation of Inheritance
Where property, other than a real property that has been
subjected to the final capital gains tax, is transferred for SUBJECT TO NOT SUBJECT TO
less than an adequate and full consideration in money or DONOR’S TAX DONOR’S TAX
money's worth, then the amount by which the fair market Renunciation by the General renunciation by an
value of the property at the time of the execution of the surviving spouse of heir, including the surviving
Contract to Sell or execution of the Deed of Sale which is his/her share in the spouse, of his/her share in
not preceded by a Contract to Sell exceeded the value of conjugal partnership the hereditary estate left
the agreed or actual consideration or selling price shall be or absolute community by the decedent is not
deemed a gift, and shall be included in computing the after the dissolution of subject to donor's tax,
amount of gifts made during the calendar year. (Rev. Regs. the marriage in favor of UNLESS specifically and
12-18) the heirs of the categorically done in favor
deceased spouse or of identified heir/s to the
The absence of donative intent, if that be the case, does any other person/s exclusion or disadvantage
not exempt the sales of stock transaction from donor's tax of the other co-heirs in the
since Sec. 100 of the NIRC categorically states that the hereditary estate.
amount by which the fair market value of the property (Rev. Regs. 12-18)
exceeded the value of the consideration shall be deemed
BIR Ruling No. 089-2011 addressed the issue of whether
a gift. Thus, even if there is no actual donation, the
a general renunciation made by the sole heir of the
difference in price is considered a donation by fiction of
decedent, which made the four grandchildren the heirs
law. (Philam v. Secretary of Finance, G.R. No. 210987,
next in line as the direct heirs, created a taxable event for
2014)
which donor’s tax should be paid. The BIR ruled that in the
transaction above, there was no donation to speak of.
The amount by which the book value of shares, not listed
Hence, no donor’s tax could be assessed on the
and traded in the stock exchange, exceeds the value of the
transaction.
consideration shall be deemed a gift. (Philam v. Secretary
of Finance, G.R. No. 210987, 2014)
Note: The rule is different when the renunciation is specific
as the same attracts donor’s tax.
Note: The Philam case should be read with the proviso
inserted in Article 100 (TRAIN amendment), that a sale, The following are other transfers which may be considered
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as donations:
a. Transfers made in trust for another person; and
b. Renunciation by the surviving spouse of his/her
share in the conjugal partnership or absolute
community after the dissolution of the marriage in
favor of the heirs of the deceased spouse or any
other person.
4. CLASSIFICATION OF DONORS
a. Resident citizen
b. Non-resident citizen
c. Resident alien
d. Non-resident alien
5. DETERMINATION OF GROSS GIFT
Gross gift refers to all property, real or personal, tangible
or intangible, that is given by the donor to the donee by
way of gift, without the benefit of any deductions.
a. Composition of Gross Gift
For resident citizen / non-resident citizen / resident
alien:
a. Real property within and without the Philippines;
b. Tangible personal property within and without the
Philippines; and
c. Intangible personal property within and without the
Philippines.
For Non-resident alien:
a. Real property within the Philippines;
b. Tangible personal property within the Philippines;
and
c. Intangible personal property within the Philippines.
Special Rules on Intangible Properties
The following intangible personal properties are
considered with situs in the Philippines: (Sec. 104)
o Franchise, which must be exercised in the Philippines;
o Shares, obligations or bonds issued by any
corporation or sociedad anonima organized or
constituted in the Philippines in accordance with its
laws;
o Shares, obligations or bonds issued by any foreign
corporation, 85% of the business of which is located in
the Philippines;
o Shares, obligations or bonds issued by any foreign
corporation, if such shares, obligations or bonds have
acquired a business situs in the Philippines; and
o Shares, rights in any partnership business or industry
established in the Philippines.
TAXATION LAW
Reciprocity Clause (Sec. 104)
Intangible personal properties shall not form part of the
gross gift for purposes of Philippine donor’s tax if:
a. The donor at the time of the donation was a citizen and
resident of a foreign country; and
b. (i) The foreign country, at the time of the donation, did
not impose a donor’s tax in respect of the intangible
personal property of citizens of the Philippines not
residing in that foreign country; or
(ii) The law of the foreign country of which the donor
was a citizen and resident at the time of the donation:
1. Allows a similar exemption from donor’s tax;
2. In respect of the intangible personal property
owned by citizens of the Philippines not residing in
that foreign country.
b. Valuation of gifts made in property
Personal property – It is the FMV at the time of donation.
Real Property - It is the FMV as determined by the CIR or
the FMV in the latest schedule of values of the
city/provincial assessor, whichever is HIGHER.
c. Exemption of certain gifts
The exemptions are not to be treated as exclusions from
the gross gifts of the donor. They partake of the nature of
deductions and are therefore, deductible from the gross gift
in order to arrive at the net taxable gift.
Made by a Resident
a. Gifts made to the Government or any entity created by
any of its agencies which is not conducted for profit, or
to any political subdivision of the Government
b. Gifts in favor of a nonprofit educational and/or
charitable, religious, cultural or social welfare
corporation, institution accredited non-government
organization, trust or philanthropic organization or
research institution or organization; provided that not
more than 30% shall be used by such donee for
administration purposes.
Note: Non-profit Educational and/or Charitable
Corporations are corporations incorporated as a non-stock
entity paying no dividends, governed by trustees who
receive no compensation, and devoting all their income to
the accomplishment and promotion of the purposes
enumerated in their respective Articles of Incorporation.
There are other donations exempt from donor’s tax based
on the law supporting the said donee institution such as
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donations made to foster care institutions, University of the
Philippines, National Book Development Trust Fund, etc.
c. Encumbrances on the property donated if assumed by
the donee in the deed of donation
d. Donations made to entities as exempted under special
laws (e.g. IBP, IRRI, National Museum, National
Library)
e. Donations not exceeding P250,000 per year (Sec.
99[A])
f. Amount specifically provided by the donor as a
Diminution of the property donated.
g. Athlete’s Prizes and Awards (RA 7549)
Benefit to donor engaged in business in case donee is
accredited by the Philippine Council for NGO
Certification (PCNC)
1. Donation is exempt from donor’s tax; and
2. Donor may claim donation as deduction (as business
expense), provided that:
a. Donor gives a Notice of Donation on every
donation worth at least P50,000 to the Revenue
District Office which has jurisdiction over his place
of business within 30 days after receipt of the
qualified donee institution’s duly issued Certificate
of Donation, which shall be attached to the said
Notice of Donation; and
b. The Certificate of Donation states that not more
than 30% of the said donation/gifts for the taxable
year shall be used by such qualified donee
institution for administration purposes pursuant to
the provisions of Sec. 101(A)(3) and (B)(2) of the
NIRC. (Rev. Regs. 02-03)
Contents of Certificate of Donation
The Certificate of Donation must indicate/contain (1) donee
certification, and (2) donor’s certificate of values. (RMC No.
86-14)
Tax Treatment of Campaign Contributions and
Expenditures
Contributions in cash or in kind to any candidate or political
party or coalition of parties for campaign purposes,
provided that such are duly reported to the Commission on
Elections, are exempt from donor’s tax. (Rev. Regs. 08-09)
In terms of income tax, the campaign contributions shall
not be included in the candidate’s taxable income, as long
as it is used in the campaign. However, unutilized/excess
campaign funds must be included in a candidate’s taxable
income. (Rev. Regs. 07-11)
TAXATION LAW
Any candidate who fails to file with the COMELEC the
appropriate Statement of Expenditures required under the
Omnibus Election Code shall be automatically precluded
from claiming such expenditures as deductions from
his/her campaign contributions. Thus, the entire amount
received as campaign contribution shall be subject to
income tax.
Made by a Nonresident Alien
a. Gifts made to the Government or any entity created by
any of its agencies which is not conducted for profit, or
to any political subdivision of the Government;
b. Gifts in favor of an educational and/or charitable,
religious, cultural or social welfare corporation,
institution, foundation, trust or philanthropic
organization or research institution or organization;
provided that not more than 30% shall be used by such
donee for administration purposes
6. TAX CREDIT FOR DONOR’S TAXES PAID TO A
FOREIGN COUNTRY
Who may avail tax credits
Only resident or citizen donors are entitled to claim taxes
paid to a foreign country.
What amount of tax credit may be claimed
The donor’s tax imposed by the Philippines shall be
credited with the amounts of any tax imposed by the
authority of a foreign country, subject to the following
limitations:
Limitation A (per country):
Net gifts, foreign country x Phil. Donor’s
Net gifts, world Tax
Limitation B (by total):
Net gifts, ALL
x Phil. Donor’s
foreign countries
Tax
Net gifts, world
The final allowable amount shall be the lower amount
between the two limits computed above.
Sample computation of Donor’s Tax
On the 1st donation of the year:
Gross Gift xx
Less: Deductions xx
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Net Gift xx (5) Such further information as may be required by rules

Multiply by: Tax Rate
Donor’s Tax
On subsequent donation/s during the year:
Gross Gift
Less: Deductions
Net Gift
Add: Prior net gift/s
Aggregate Net Gifts
Multiply by: Tax Rate
Total Donor’s Tax for the year
Less: Prior donor’s tax paid
Donor’s Tax to be paid on this date
and regulations made pursuant to law. (Sec. 103 (A))
6% Time and Place of Filing and Payment
XX The return of the donor required in this Section shall be
filed within thirty (30) days after the date the gift is made
and the tax due thereon shall be paid at the time of filing.
Except in cases where the Commissioner otherwise
xx permits, the return shall be filed and the tax paid to an
authorized agent bank, the Revenue District Officer,
xx
Revenue Collection Officer or duly authorized Treasurer of
xx the city or municipality where the donor was domiciled at
the time of the transfer, or if there be no legal residence in
xx
the Philippines, with the Office of the Commissioner. In the
xx case of gifts made by a nonresident, the return may be filed
with the Philippine Embassy or Consulate in the country
6%
where he is domiciled at the time of the transfer, or directly
xx with the Office of the Commissioner. (Sec. 103 (B))
xx
xx E. VALUE-ADDED TAX

1. NATURE AND CHARACTERISTICS OF VALUE-

The computation of donor’s tax is on a cumulative basis ADDED TAX
over a period of one calendar year. The purpose of this
aggregation rule is to deter gift-splitting such as when a Concept
donor makes separate gifts such that the amount of each Value-Added Tax (VAT) is a tax on consumption levied on
gift is below the threshold of taxable gifts. the sale, barter, exchange or lease of goods or properties
and services in the Philippines and on importation of goods
Note, however, that the aggregation rule applies only to into the Philippines.
gifts that are made within the same calendar year. If one
gift is given in one calendar year and the other gift was Seller is the one statutorily liable for the payment of the tax
given the following calendar year even if donations are only but the amount of the tax may be shifted or passed on to
several days apart, there is no legal justification for treating the buyer, transferee or lessee of the goods, properties or
the two gifts effected in two separate calendar years as services.
one gift. (Sacdalan-Casasola)
Donor’s Tax Rates
In the case of importation, the importer is the one liable for
The tax rate for each calendar year shall be 6% computed
the VAT.
on the basis of the total net gifts in excess of Two hundred
fifty thousand pesos (P250,000) exempt gift made during
the calendar year. Characteristics of a VAT-Taxable transaction
(Mamalateo)
7. FILING OF RETURN AND PAYMENT a. It is a tax on the value added of a taxpayer.
A. B. C. D. E. F.
Any individual who makes any transfer by gift (except
those which, under Section 101, are exempt from the tax Taxpa Sale Valu Output Input VAT
provided for in this Chapter) shall, for the purpose of the yer s e Tax tax Payable
said tax, make a return under oath in duplicate. The return Price adde (Column (Column
shall set forth: d B D less
multiplie Column
(1) Each gift made during the calendar year which is to be d by E)
included in computing net gifts; 12%)
(2) The deductions claimed and allowable;
(3) Any previous net gifts made during the same calendar Conce 10 10 1.2 - 1.2
year; ssionai
(4) The name of the donee; and re;

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Sale 25 15 3 1.2 1.8 The incidence of the tax, on the other hand, is on the final
to: consumer where the tax comes to rest. VAT is an indirect
Manuf tax which may be shifted or passed on to the buyer,
acturer transferee or lessee of goods, properties or services.
; (Sacdalan-Casasola)
Subse 40 15 4.8 3 1.8
quent VAT is an indirect tax levied on goods and services; not on
sale to: persons, and ultimately paid by consumers in the form of
Whole higher prices.
saler;
Subse 50 10 6 4.8 1.2 Tax Credit Method
Under such method that relies on invoices, an entity can
quent
credit against or subtract from the VAT charged on its sales
sale to:
or outputs the VAT paid on its purchases, inputs and
Retaile
r; imports.

Final sale to enduser: purchase price (50) + 6.00

VAT (6) = 56
(Illustrative Table from Atty. Bello)
b. It is a transparent form of sales tax meaning that the
amount of tax is segregated to be apparent to/seen by
the taxpayer.
c. It is a broad-based tax on consumption of goods,
properties, or services in the Philippines as it applies to
all stages of manufacture, production, and distribution
of goods and services.
d. It is an indirect tax.
e. The Philippines adopted the “separate indication of tax
method”.
f. There is no cascading in the value added tax system and
is thus not considered a tax on tax.
Elements of a VAT-taxable transaction (PSBPE): (Sec.
105)
a. It Involves any Person;
b. There must be a Sale (unless the same is a “deemed
sale” transaction), barter, exchange, lease of goods or
properties, or rendering of service;
c. It must be done in the ordinary course of trade or
Business;
d. The transaction is done in the Philippines.
e. It must neither be VAT-Exempt or VAT zero-rated.
Impact and incidence of tax
The impact of VAT is on the seller because it is the one
who is statutorily liable for the payment of the tax.
However, in the case of importation, the importer is the one
liable for VAT.
If at the end of a taxable quarter the output taxes charged
by a seller are equal to the input taxes passed on by the
suppliers, no payment is required. However, when the
output taxes exceed the input taxes, the excess thereof
has to be paid.
If, on the other hand, the input taxes exceed the output
taxes, the excess shall be carried over to the succeeding
quarter or quarters.
Should the excess input taxes result from zero-rated or
effectively zero-rated transaction, any excess over the
output taxes shall instead be refunded to the taxpayer or
credited against other internal revenue taxes. (CIR v.
Seagate Technology Philippines, G.R. No. 153866, 2005)
Destination Principle and Cross-border Doctrine
Destination Principle: VAT is imposed in the country in
which the products or services are actually consumed or
used (i.e., exports exempt, imports taxable).
Actual shipment of the goods from the Philippines to a
foreign country is a precondition of an export sale following
the destination principle being adhered to by our VAT
system.
Origin Principle: only national taxpayers would be
exposed to the tax, without distinguishing between
transactions “consumed” locally or abroad (i.e., Exports
taxable, imports exempt; Situs: country of production)
Cross-border Doctrine: No VAT shall be imposed to form
part of the cost of goods sold destined for consumption
outside of the territorial border of the taxing authority.

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(CIR v. AMEX, G.R. No. 152609, 2005)
General Rule: The VAT system uses the destination
principle as a basis for the jurisdictional reach of the tax.
Goods and services are taxed only in the country where
they are consumed.
Exception: The supply of service shall be zero-rated when
the following requirements are met:
a. The service is performed in the Philippines;
Note: The services should be rendered to a person or
entity who is doing business outside the Philippines. (CIR
v. Burmeister, G.R. No. 153205, 2007)
b. The service falls under any of the categories provided in
Section 108(B) of the Tax Code; and
c. It is paid for in acceptable foreign currency that is
accounted for in accordance with BSP rules.
2. PERSONS LIABLE TO VALUE-ADDED TAX
Any person who, in the course of trade or business 80
iii. Sells, barters, or exchanges goods or properties
(seller or transferor);
iv. Leases goods or properties (lessor); OR
v. Renders services (service provider);
80
SEC. 105 Persons Liable. - Any person who, in the course of
trade or business, sells barters, exchanges, leases goods or
properties, renders services, and any person who imports goods
shall be subject to the value-added tax (VAT) imposed in Sections
106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may
be shifted or passed on to the buyer, transferee or lessee of the
goods, properties or services. This rule shall likewise apply to
existing contracts of sale or lease of goods, properties or services
at the time of the effectivity of Republic Act No. 7716.
The phrase 'in the course of trade or business' means the regular
conduct or pursuit of a commercial or an economic activity,
including transactions incidental thereto, by any person
regardless of whether or not the person engaged therein is a
nonstock, nonprofit private organization (irrespective of the
disposition of its net income and whether or not it sells exclusively
to members or their guests), or government entity.
The rule of regularity, to the contrary notwithstanding, services as
defined in this Code rendered in the Philippines by nonresident
foreign persons shall be considered as being course of trade or
business
TAXATION LAW
b. Any person, whether or not made in the course of trade
or business, imports goods (importer)81;
c. Any non-resident persons who perform services in the
Philippines as they are deemed to be making sales in the
course of trade or business, even if the performance of
their services is not regular; or
d. Any person who issues VAT-registered Invoices and/or
Official Receipts even if their transaction is not subject to
VAT.
3. IMPOSITION OF VALUE-ADDED TAX
a. On sale of goods or properties
Sec. 106
There shall be levied, assessed and collected on every
sale, barter or exchange of goods or properties, a value-
added tax equivalent to twelve percent (12%) of the gross
selling price or gross value in money of the goods or
properties sold, bartered or exchanged, such tax to be paid
by the seller or transferor.
Coverage of Section 106
1. Sale of goods and/ or properties
2. Zero-rated sale of goods
3. Transactions deemed sale
4. Changes in or cessation of status as a VAT-
registered person
When is VAT due on sale of goods or properties?
81SEC.
107 Value-Added Tax on Importation of Goods.
(A) In General. - There shall be levied, assessed and collected
on every importation of goods a value-added tax equivalent to
twelve percent (12%) based on the 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 tax to be paid
by the importer prior to the release of such goods from customs
custody: Provided, That 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
(B) Transfer of Goods by Tax-exempt Persons. - In the case
of tax-free importation of goods into the Philippines by persons,
entities or agencies exempt from tax where such goods are
subsequently sold, transferred or exchanged in the Philippines to
non-exempt persons or entities, the purchasers, transferees or
recipients shall be considered the importers thereof, who shall be
liable for any internal revenue tax on such importation. 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.
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VAT accrues upon consummation of the sale, regardless
of the terms of payment between the contracting parties
(implicit in the definition of “gross selling price,” which
includes money or money equivalent which the purchaser
is “obligated to pay”); unlike sale of services wherein
VAT accrues only upon payment of consideration
(when the gross receipts are “actually or constructively
received” by the seller).
Meaning of “Goods and Properties”
The term "goods or properties" refers to all tangible and
intangible objects which are capable of pecuniary
estimation and shall include, among others:
(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 any industrial
commercial or scientific equipment;
(4) The right or the privilege to use motion picture films,
films, tapes and discs; and
(5) Radio, television, satellite transmission and cable
television time. (Rev. Regs. 16-05)
Meaning of “Gross Selling Price”
The term "gross selling price" means the 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
VAT. The excise tax, if any, on such goods or properties
shall form part of the gross selling price. (Rev. Regs. 04-
07)
Gross selling price in sale, barter, or exchange of real
properties subject to VAT
In the case of sale, barter or exchange of real property
subject to VAT, gross selling price shall mean the
consideration stated in the sales document or the fair
market value whichever is higher. If the VAT is not billed
separately in the document of sale, the selling price or the
consideration stated therein shall be deemed to be
inclusive of VAT.
The term 'fair market value' shall mean whichever is
higher of: 1) the fair market value as determined by the
Commissioner/zonal value, or 2) the fair market value as
shown in schedule of values of the Provincial and City
Assessors (real property tax declaration). However, in the
absence of zonal value/fair market value as determined by
the Commissioner, gross selling price refers to the market
value shown in the latest real property tax declaration or
the consideration, whichever is higher.
If the gross selling price is based on the zonal value or
market value of the property, the zonal or market value
TAXATION LAW
shall be deemed exclusive of VAT. Thus, the zonal
value/market value, net of the output VAT, should still be
higher than the consideration in the document of sale,
exclusive of the VAT (Rev. Regs. 04-07)
Gross selling price if sale of real property is on an
installment plan where the zonal value/ fair market
value is higher than the consideration/ selling price
If the sale of real property is on installment plan where the
zonal value/fair market value is higher than the
consideration/selling price, exclusive of the VAT, the VAT
shall be based on the ratio of actual collection of the
consideration, exclusive of the VAT, against the agreed
consideration, exclusive of the VAT, appearing in the
Contract to Sell/Contract of Sale applied to the zonal
value/fair market value of the property at the time of the
execution of the Contract to Sell/Contract of Sale at the
inception of the contract. Thus, since the output VAT is
based on the market value of the property which is higher
than the consideration/selling price in the sales document,
exclusive of the VAT, the input VAT that can be claimed by
the buyer shall be the separately-billed output VAT in the
sales document issued by the seller. Therefore, the output
VAT which is based on the market value must be billed
separately by the seller in the sales document with specific
mention that the VAT billed separately is based on the
market value of the property. (Rev. Regs. 04-07)
Illustration:
ABC Corporation sold a parcel of land to XYZ Company on
July 2, 2006 for P1,000,000.00, plus the output VAT, with
a monthly installment payment of P10,000.00, plus the
output VAT. The zonal value of the subject property at the
time of sale amounted to P1,500,000.00. Compute for the
output tax due on the installment payment.
Formula:
Actual collection (exclusive of the
VAT)
x Zonal value
X=
————————————————
Agreed consideration (exclusive of
the VAT)
Then, multiply X by 12%.
Hence:
P10,000.00 x P1,500,000.00
P1,000,000.00
= P15,000.00 x 12% = P1,800.00
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Selling price is the amount of consideration in a contract of
sale between the buyer and seller or the total price of the
sale which may include cash or property and evidence of
indebtedness issued by the buyer, excluding the VAT.
IT IS ESSENTIAL THAT THERE IS A SALE OF GOODS
OR SERVICES
Reimbursements received by a mall owner for advances it
had made for the payment of electric, water, and telephone
bills and for the janitorial services provided were held to be
not subject to VAT since the taxpayer was not engaged in
the business of providing electricity, water, security, and
janitorial services to the lessees. It is not the taxpayer who
directly supplied the goods and services to the lessees.
(Tourist Trade & Travel Corp. v. CIR, G.R. No. 164365,
2007)
Sale of Real Properties
Sale of real properties held primarily for sale to customers
OR held for lease in the ordinary course of trade or
business of the seller OR real properties used in trade or
business shall be subject to VAT.
Sale of real properties may either be on an installment
basis or a deferred-payment basis.
a. Sale of real property on installment plan:
Sale of real property by a real-estate dealer, the initial
payments of which in the year of sale do not exceed 25%
of the GSP. In this case, the VAT shall be collected on
the installment payments.
Initial payments covers any down payment made and
includes all payments actually or constructively received
during the year of sale.
It excludes amount of mortgage on the real property sold
except when such mortgage exceeds the cost or other
basis of the property to the seller, in which case the excess
shall be considered part of the initial payments.
It also excludes notes or other evidence of indebtedness
issued by the purchaser to the seller at the time of the sale.
b. Sale on a deferred-payment basis:
The transaction shall be treated as cash sale which makes
the entire selling price taxable in the month of sale
(sale of real property where the initial payment exceeds
25% of the GSP).
TAXATION LAW
The real estate dealer shall be subject to VAT on the
installment payments, including interest and penalties,
actually and/or constructively received by the seller.
Correspondingly, the buyer can claim the input tax in the
same period that the seller recognized the output tax.
“Real estate dealer” includes any person engaged in the
business of buying, developing, selling, exchanging real
properties as principal and holding himself out as a full or
part-time dealer in real estate.
Sale of residential lot with gross selling price exceeding P
1.9195M, residential house and lot or other dwellings with
gross selling price exceeding P 3.1992M, where the
instrument (whether the instrument is nominated as a deed
of absolute sale, deed of conditional sale, or otherwise) is
executed on or after November 1, 2005 shall be subject to
12% VAT. (Rev. Regs. 16-11)
Note that as provided by TRAIN, beginning January 1,
2021, the VAT exemption shall only apply to sale of house
and lot, and other residential dwellings with selling price of
not more than Two million pesos (P 2,000,000).
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. However, if the property
transferred is one for sale, lease or use in the ordinary
course of trade or business and the transfer constitutes a
complete gift, the transfer is subject to VAT as a deemed
sale transaction.
Transactions Deemed Sale
The law deems the enumerated transactions below like an
actual sale, and hence subject to VAT on sale of goods or
properties.
The following transactions shall be "deemed sale"
pursuant to Sec. 106 (B) of the Tax Code:
(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. Transfer of goods or
properties not in the course of business can take place
when VAT-registered person withdraws goods from his
business for his personal use;
(2) Distribution or transfer to:
i. Shareholders or investors share in the profits of VAT-
registered person;
Property dividends which constitute stocks in trade or
properties primarily held for sale or lease declared out
of retained earnings and distributed by the company to
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its shareholders shall be subject to VAT based on the
zonal value or fair market value at the time of
distribution, whichever is applicable.
ii. Creditors in payment of debt or obligation.
(3) Consignment of goods if actual sale is not made within
60 days following the date such goods were consigned.
Consigned goods returned by the consignee within the 60-
day period are not deemed sold;
(4) 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. The following circumstances
shall, among others, give rise to transactions "deemed
sale" for purposes of this Section;
i. Change of ownership of the business. There is a
change in the ownership of the business when a single
proprietorship incorporates; or the proprietor of a single
proprietorship sells his entire business.
ii. Dissolution of a partnership and creation of a new
partnership which takes over the business. (Rev. Regs.
16-05)
Change or Cessation of Status as a VAT-registered
Person
The VAT provided for in Sec. 106 of the Tax Code shall
apply to goods or properties originally intended for sale or
use in business, and capital goods which are existing as of
the occurrence of the following:
(1) Change of business activity from VAT taxable status to
VAT-exempt status.
An example is 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 a request for cancellation of registration
due to reversion to exempt status.
(3) Approval of a request for cancellation of registration
due to a desire to revert to exempt status after the lapse of
three (3) consecutive years from the time of registration by
a person who voluntarily registered despite being exempt
under Sec. 109 (2) of the Tax Code.
(4) Approval of a request for cancellation of registration of
one who commenced business with the expectation of
gross sales or receipts exceeding P 3,000,000 but who
TAXATION LAW
failed to exceed this amount during the first twelve months
of operation. (Rev. Regs. 16-05 as amended by TRAIN)
b. On Importation of Goods
12% VAT shall be levied, assessed and collected on every
importation of goods based on the following:
a. total value used by the Bureau of Customs (BOC) in
determining tariff and customs duties; plus
b. customs duties;
c. excise taxes, if any; and
d. other charges.
Such tax shall be paid prior to the release of such goods
from customs custody.
If the customs duties are determined on the basis of
quantity or volume of the goods, the 12% VAT shall be
based on the landed cost plus excise taxes, if any.
No VAT shall be collected on importation of goods which
are specifically exempted under Sec. 109 (1) of the Tax
Code. (Rev. Regs. 16-05)
Who is liable for VAT on importation?
See discussion on Persons Liable
Transfer of goods by tax exempt persons
In the case of tax-free importation of goods into the
Philippines by persons, entities or agencies exempt from
tax where such goods are subsequently sold, transferred
or exchanged in the Philippines to non-exempt persons or
entities:
The purchasers, transferees or recipients shall be
considered the importers thereof, who shall be liable for
any internal revenue tax on such importation.
The tax due on such importation shall constitute a lien on
the goods, superior to all charges/or liens, irrespective of
the possessor of said goods. (Rev. Regs. 16-05)
c. On Sale of Services and Use or Lease of Properties
Sale or exchange of services, as well as the use or lease
of properties, as defined in Sec. 108(A) of the Tax Code
shall be subject to VAT, equivalent to twelve percent (12%)
of the gross receipts.
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Gross Receipts
'Gross receipts' refers to 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
applied as payments for services rendered and advance
payments actually or constructively received during the
taxable period for the services performed or to be
performed for another person, excluding the VAT, except
those amounts earmarked for payment to unrelated
third (3rd) party or received as reimbursement for
advance payment on behalf of another which do not
redound to the benefit of the payor.
A payment is a payment to a third (3rd) party if the same
is made to settle an obligation of another person, e.g.,
customer or client, to the said third party, which obligation
is evidenced by the sales invoice/official receipt issued by
said third party to the obligor/debtor (e.g., customer or
client of the payor of the obligation).
An advance payment is an advance payment on behalf of
another if the same is paid to a third (3rd) party for a
present or future obligation of said another party which
obligation is evidenced by a sales invoice/official receipt
issued by the obligee/creditor to the obligor/debtor (i.e., the
aforementioned "another party") for the sale of goods or
services by the former to the latter.
For this purpose 'unrelated party' shall not include
taxpayer's employees, partners, affiliates (parent,
subsidiary and other related companies), relatives by
consanguinity or affinity within the fourth (4th) civil degree,
and trust fund where the taxpayer is the trustor, trustee or
beneficiary, even if covered by an agreement to the
contrary.
'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. The following are examples of constructive
receipts:
(1.) deposits in banks which are made available to the
seller of services without restrictions;
(2.) issuance by the debtor of a notice to offset any debt or
obligation and acceptance thereof by the seller as payment
for services rendered; and
(3.) transfer of the amounts retained by the payor to the
account of the contractor."
Meaning of “Sale or Exchange of Services”
The term "sale or exchange of services" means the
performance of all kind of services in the Philippines for
others for a fee, remuneration or consideration, whether in
TAXATION LAW
kind or in cash, including those performed or rendered by
the following:
(1) construction and service contractors;
(2) stock, real estate, commercial, customs and
immigration brokers;
(3) lessors of property, whether personal or real;
(4) persons engaged in warehousing services;
(5) lessors or distributors of cinematographic films;
(6) persons engaged in milling, processing, manufacturing
or repacking goods for others;
(7) proprietors, operators, or keepers of hotels, motels, rest
houses, pension houses, inns, resorts, 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;
(10) lending investors;
(11) transportation contractors on their transport of goods
or cargoes, including persons who transport goods or
cargoes for hire and other domestic common carriers by
land relative to their transport of goods or cargoes;
(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 (including electric cooperatives);
(14) franchise grantees of electric utilities, telephone and
telegraph, radio and/or television broadcasting and all
other franchise grantees, 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), and franchise grantees of gas
and water utilities; (The ten million limit is found only in the
regulations)
(15) non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity and
bonding companies; and
(16) similar services regardless of whether or not the
performance thereof calls for the exercise or use of the
physical or mental faculties.
The phrase "sale or exchange of services" shall likewise
include:
(1) The lease or the use of or the right or privilege to use
any copyright, patent, design or model, plan, secret
formula or process, goodwill, trademark, trade brand or
other like property or right;
(2) The lease or the use of, or the right to use any industrial,
commercial or scientific equipment;
(3) The supply of scientific, technical industrial or
commercial knowledge or information;
(4) The supply of any assistance that is ancillary and
subsidiary to and is furnished as a means of enabling the
application or enjoyment of any such property, or right as
is mentioned in subparagraph (2) hereof or any such
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knowledge or information as is mentioned in subparagraph
(3) hereof;
(5) The supply of services by a non-resident person or his
employee in connection with the use of property or rights
belonging to, or the installation or operation of any brand,
machinery or other apparatus purchased from such
nonresident person;
(6) The supply of technical advice, assistance or services
rendered in connection with technical management or
administration of any scientific, industrial or commercial
undertaking, venture, project or scheme;
(7) The lease of motion picture films, films, tapes, and
discs; and
(8) The lease or the use of, or the right to use, radio,
television, satellite transmission and cable television time.
(Rev. Regs. 16-05)
Note: This list is not exclusive (Lhuillier v. CIR CTA Case
No. 6533, 2003)
Rules for Specific Services 82
a. For lessors of property
All forms of property for lease, whether real or personal,
are liable to VAT subject to the provisions of Sec. 4.109-
1(B)(1)(v) of these Regulations.
"Real estate lessor" includes any person engaged in the
business of leasing or subleasing real property.
Lease of property shall be subject to VAT regardless of the
place where the contract of lease or licensing agreement
was executed if the property leased or used is located in
the Philippines.
VAT on rental and/or royalties payable to non-resident
foreign corporations or owners for the sale of services and
use or lease of properties in the Philippines shall be based
on the contract price agreed upon by the licensor and the
licensee. The licensee shall be responsible for the
payment of VAT on such rentals and/or royalties in behalf
of the non-resident foreign corporation or owner in the
manner prescribed in Sec. 4.114-2(b) hereof.
"Non-resident lessor/owner" refers to any person, natural
or juridical, an alien, or a citizen who establishes to the
satisfaction of the Commissioner of Internal Revenue the
fact of his physical presence abroad with a definite
intention to reside therein, and who owns/leases
properties, real or personal, whether tangible or intangible,
located in the Philippines.
82 Rev. Regs. 16-05 as amended by Rev. Regs. 04-07, and as
further amended by Rev. Regs. 13-18
TAXATION LAW
In a lease contract, the advance payment by the lessee
may be:
(i) a loan to the lessor from the lessee, or
(ii) an option money for the property, or
(iii) a security deposit to insure the faithful performance of
certain obligations of the lessee to the lessor, or
(iv) pre-paid rental.
If the advance payment is actually a loan to the lessor, or
an option money for the property, or a security deposit for
the faithful performance of certain obligations of the lessee,
such advance payment is not subject to VAT. However,
a security deposit that is applied to rental shall be subject
to VAT at the time of its application.
If the advance payment constitutes a pre-paid rental, then
such payment is taxable to the lessor in the month when
received, irrespective of the accounting method employed
by the lessor.
b. Transportation not subject to percentage taxes
All receipts from service, hire, or operating lease of
transportation equipment not subject to the percentage tax
on domestic common carriers and keepers of garages
imposed under Sec. 117 of the Tax Code shall be subject
to VAT.
"Common carrier" refers to persons, corporations, firms or
associations engaged in the business of carrying or
transporting passengers or goods or both, by land, water,
or air, for compensation, offering their services to the public
and shall include transportation contractors.
Common carriers by land with respect to their gross
receipts from the transport of passengers including
operators of taxicabs, utility cars for rent or hire driven by
the lessees (rent-a-car companies), and tourist buses used
for the transport of passengers shall be subject to the
percentage tax imposed under Sec. 117 of the Tax Code,
but shall not be liable for VAT.
c. Domestic common carriers by air and sea
Domestic common carriers by air and sea are subject to
twelve percent (12%) VAT on their gross receipts from their
transport of passengers, goods or cargoes from one place
in the Philippines to another place in the Philippines
starting Feb. 1, 2006. (2007)
d. Sale of electricity
Sale of electricity by generation, transmission by any entity
including the National Grid Corporation of the Philippines
(NGCP), and distribution companies including electric
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cooperatives shall be subject to twelve percent (12%) VAT
on their gross receipts. (2018)
"Generation companies" refers to persons or entities
authorized by the Energy Regulatory Commission (ERC)
to operate facilities used in the generation of electricity. For
this purpose, generation of electricity refers to the
production of electricity by a generation company or a co-
generation facility pursuant to the provisions of the RA No.
9136 (EPIRA). They shall include all Independent Power
Producers (IPPs) and NPC/Power Sector Assets and
Liabilities Management Corporation (PSALM)-owned
generation facilities.
"Transmission companies" refers to any person or entity
that owns and conveys electricity through the high voltage
backbone system and/or subtransmission assets, e.g.
NPC or TRANSCO. 'Subtransmission assets' shall refer to
the facilities related to the power delivery service below the
transmission voltages and based on the functional
assignment of asset including, but not limited to step-down
transformers used solely by load customers, associated
switchyard/substation, control and protective equipment,
reactive compensation equipment to improve power factor,
overhead lines, and the land where such
facilities/equipments are located. These include NPC
assets linking the transmission system and the distribution
system which are neither classified as generation or
transmission.
"Distribution companies" refer to persons or entities
which operate a distribution system in accordance with the
provisions of the EPIRA. They shall include any distribution
utility such as an electric cooperative organized pursuant
to Presidential Decree No. 269, as amended, and/or under
RA No. 6938, or as otherwise provided in the EPIRA, a
private corporation, or a government-owned utility or
existing local government unit which has an exclusive
franchise to operate a distribution system in accordance
with the EPIRA.
For this purpose, a distribution system refers to the system
of wires and associated facilities belonging to a franchised
distribution utility extending between the delivery points on
the transmission or subtransmission system or generator
connection and the point of connection to the premises of
the end-users.
"Gross Receipts" under this Subsection (f) shall refer
to the following:
(a) Total amount charged by generation companies for the
sale of electricity and related ancillary services; and/or
(b) Total amount charged by transmission companies for
transmission of electricity and related ancillary services;
and/or
TAXATION LAW
(c) Total amount charged by distribution companies and
electric cooperatives for distribution and supply of
electricity, and related electric service. The universal
charge passed on and collected by distribution companies
and electric cooperatives shall be excluded from the
computation of the Gross Receipts.
e. Dealers in securities
Dealers in securities and lending investors shall be subject
to VAT on the basis of their gross receipts. However, for
Dealer in Securities, the term "gross receipts" means gross
selling price less cost of the securities sold.
"Dealer in securities" means a merchant of stock or
securities, whether an individual partnership or
corporation, with an established place of business,
regularly engaged in the purchase of securities and their
resale to customers, that is, one who as a merchant buys
securities and sells them to customers with a view to the
gains and profits that may be derived therefrom.
"Lending investor" includes 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.
f. Service of franchise grantees of telephone and
telegraph, radio and/or television broadcasting, toll
road operations and all other franchise grantees,
except gas and water utilities
Services of franchise grantees of telephone and telegraph,
radio and/or television broadcasting, toll road operations
and all other franchise grantees, except gas and water
utilities, shall be subject to VAT in lieu of franchise tax,
pursuant to Sec. 20 of RA No. 7716, as amended.
However, 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)
shall not be subject to VAT, but to the three percent (3%)
franchise tax imposed under Sec. 119 of the Tax Code,
subject to the optional registration provisions under Sec.
9.236-1(c) hereof.
Likewise, franchise grantees of gas and water utilities shall
be subject to two percent (2%) franchise tax on their gross
receipts derived from the business covered by the law
granting the franchise pursuant to Sec. 119 of the Tax
Code. (2005)
Gross receipts of all other franchisees, other than those
covered by Sec. 119 of the Tax Code, regardless of how
their franchises may have been granted, shall be subject
to the twelve percent (12%) VAT imposed under Sec. 108
of the Tax Code starting Feb. 1, 2006. This includes among
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others, the Philippine and Amusement Gaming
Corporation (PAGCOR), and its licensees or franchisees.
(2007)
Franchise grantees of telephone and telegraph shall be
subject to VAT on their gross receipts derived from their
telephone, telegraph, telewriter exchange, wireless and
other communication equipment services. However,
amounts received for overseas dispatch, message, or
conversation originating from the Philippines are subject to
the percentage tax under Sec. 120 of the Tax Code and
hence exempt from VAT. (2005)
g. Non-life insurance
Non-life insurance companies including surety, fidelity,
indemnity and bonding companies are subject to VAT.
They are not liable to the payment of the premium tax
under Sec. 123 of the Tax Code.
'Non-life insurance companies' including surety, fidelity,
indemnity and bonding companies, shall include all
individuals, partnerships, associations, or corporations,
including professional reinsurers defined in Sec. 280 of PD
612, otherwise known as the Insurance Code of the
Philippines, mutual benefit associations and government-
owned or controlled corporations, engaging in the business
of property insurance, as distinguished from insurance on
human lives, health, accident and insurance appertaining
thereto or connected therewith which shall be subject to
the percentage tax under Sec. 123 of the Tax Code.
The gross receipts from non-life insurance shall mean total
premiums collected whether paid in money, notes, credits
or any substitute for money.
Non-life insurance premiums are subject to VAT whereas
non-life reinsurance premiums are not subject to VAT, the
latter being already subjected to VAT upon receipt of the
insurance premiums. Insurance and reinsurance
commissions, whether life of non-life, are subject to VAT.
h. Pre-need companies
Pre-need Companies are corporations registered with the
Securities and Exchange Commission and
authorized/licensed to sell or offer for sale pre-need plans,
whether a single plan or multi-plan. They are engaged in
business as seller of services providing services to plan
holders by managing the funds provided by them and
making payments at the time of need or maturity of the
contract.
83 Rev. Regs. 13-18
TAXATION LAW
As service providers, the compensation for their services
is the premiums or payments received from the plan
holders.
i. HMOs
Health Maintenance Organizations (HMOs) are entities,
organized in accordance with the provisions of the
Corporation Code of the Philippines and licensed by the
appropriate government agency, which arranges for
coverage or designated managed care services needed by
plan holders/members for fixed prepaid membership fees
and for a specified period of time.
HMO's gross receipts shall be the total amount of money
or its equivalent representing the service fee actually or
constructively received during the taxable period for the
services performed or to be performed for another person,
excluding the value-added tax. The compensation for their
services representing their service fee, is presumed to be
the total amount received as enrollment fee from their
members plus other charges received.
4. ZERO-RATED AND EFFECTIVELY ZERO-RATED
SALES OF GOODS OR PROPERTIES AND SERVICES
Refer to sale of goods or properties and/or services that
are subject to VAT at the rate of 0%, and the seller is
allowed to claim a tax credit (input tax) on purchases.
a. The following sales by VAT-REGISTERED persons
shall be subject to 0% rate:
For Goods83
1. The sale and actual shipment of goods from the
Philippines to a foreign country
a. Irrespective of any shipping arrangement;
b. Paid for in acceptable foreign currency or its
equivalent in goods or services; and
c. Accounted for in accordance with the rules and
regulations of the BSP,
2. Sale of raw materials or packaging materials by a VAT-
registered entity to a nonresident buyer
a. For delivery to a resident local export-oriented
enterprise;
b. Used in the manufacturing, processing, packing,
repacking in the Philippines of the said buyer’s
goods;
c. Paid for in acceptable foreign currency; and
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d. Accounted for in accordance with the rules and
regulations of the BSP
3. Sale of raw materials or packaging materials to export-
oriented enterprise whose export sales exceed 70% of
total annual production
4. Those considered export sales under the Omnibus
Investment Code of 1987 and other special laws
5. Sale of goods, supplies, equipment and fuel to persons
engaged in international shipping or international air
transport operations.
Constructive Exports:
1. Sales to bonded manufacturing warehouses of export-
oriented manufacturers;
2. Sales to export processing zones
3. Sale to enterprises duly registered and accredited with
the Subic Bay Metropolitan Authority pursuant to RA
7227;
4. Sales to registered export traders operating bonded
trading warehouses supplying raw materials in the
manufacture of export products under guidelines to be
set by the Board in consultation with the Bureau of
Internal Revenue (BIR) and the Bureau of Customs
(BOC);
5. 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.
Note: For purposes of zero-rating export sales of
registered export, traders shall include commission
income.
Exportation of goods on consignment shall not be deemed
export sales until the export products consigned are in fact
sold by the consignee.
Provided, finally, that sales of goods, properties or services
made by a VAT-registered supplier to a BOI-registered
manufacturer/producer whose products are 100%
exported are considered export sales.
A certification to this effect must be issued by the Board of
Investment (BOI) which shall be good for one year unless
subsequently re-issued by the BOI.
The sale of goods, supplies, equipment and fuel to persons
engaged in international shipping or international air
TAXATION LAW
transport operations are zero rated provided that these are
limited to goods, supplies, equipment and fuel pertaining
to or attributable to the transport of goods and passengers
from a port in the Philippines directly to a foreign port
without docking or stopping at any other ports in the
Philippines
EXEMPT PERSONS OR ENTITIES
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.
The most prominent example of this is sales to PEZA-
registered enterprises as the said sales are considered as
being made “outside the customs territory”.
Hence, the following rules govern the VAT treatment
of transactions involving PEZA-registered entities:
1. Any sale of goods, property or services by a VAT-
registered supplier from the customs-territory to any
Ecozone-registered enterprise – regardless of
incentive availed – is zero-rated on the part of the
VAT-registered seller because ecozones are foreign
soil by fiction and thus the sale is considered an export
sale.
2. Sales to an ecozone enterprise made by a non-VAT
or unregistered supplier would only be exempt from
VAT and the supplier shall not be able to claim
credit/refund for its input VAT because, under Section
109(O) of the Tax Code, export sales by persons who
are not VAT-registered are exempt transactions.
3. If the ecozone-enterprise is an exporter, its input VAT
are subject to refund not because of the incentives it
availed but because of the nature of its transactions
(export sales).
4. Any sale of goods or property by an ecozone-
registered enterprise to a buyer in the customs
territory shall be subject to 12% VAT because it shall
be considered an importation. The tax is imposed on
the buyer/importer.
5. The sale of service or lease of properties by PEZA-
registered enterprises to a customer or lessee from
the customs territory shall be exempt from VAT if
the service is performed within the ecozone. The lease
of properties will be exempt if the property is located
within the ecozone. However, if the properties are
located outside of the ecozone, payments to such
enterprise shall be considered as royalties and subject
to final withholding VAT of 12%. (RMC No. 74-99)
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b. Automatic v. Effectively Zero-Rated Sale
Although both are taxed similarly, automatic zero-rated
transactions differ from effectively zero-rated transactions
as to their source.
Automatically zero-rated sale refers to a sale of goods,
properties and services by a VAT-registered seller/supplier
that is regarded as either an export sale or a foreign
currency denominated sale under Section 106 of the Tax
Code of 1997. (RMC No. 50-07)
Effectively zero-rated sale refers to the local sale of
goods, properties and services by a VAT-registered person
to an entity that was granted indirect tax exemption under
special laws or international agreements. Since the buyer
is exempt from indirect tax, the seller cannot pass on the
VAT and therefore, the exemption enjoyed by the buyer
shall extend to the seller, making the sale effectively zero-
rated. (RMC No. 50-07)
CIR v. Seagate Technology Philippines (G.R. No.
153866, 2005)
Automatic zero-rated transactions generally refer to the
export sale of goods and supply of services. The tax rate
is set at zero. When applied to the tax base, such rate
obviously results in no tax chargeable against the
purchaser. The seller of such transactions charges no
output tax, but can claim a refund of tax credit certificate
for the VAT previously charged by supplier.
Effectively zero-rated transactions, however, refer to sale
of goods or supply of services to persons or entities whose
exemption under special laws or international agreements
to which the Philippines is a signatory effectively subjects
such transactions to zero-rate. Again, as applied to the tax
base, such rate does not yield any tax chargeable against
the purchaser. The seller who charges output tax on such
transactions can also claim a refund or tax credit certificate
for VAT previously charged by suppliers.
Note: Rev. Regs. 04-07, dated February 7, 2007, removed
the distinction between automatic and effectively zero-
rated transactions found in prior Revenue Regulations,
including Rev. Regs. 16-05, with respect to prior
application.
ENHANCED VAT REFUND SYSTEM (introduced by
TRAIN)
84 Rev. Regs. 13-18
TAXATION LAW
The following:
b. Sale of raw materials or packaging materials to a
nonresident buyer for delivery to a resident local
export-oriented enterprise to be used in
manufacturing, processing, packing or repacking in
the Philippines of the said buyer's goods and paid
for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP)
c. Sale of raw materials or packaging materials to
export-oriented enterprise whose export sales
exceed seventy percent (70%) of total annual
production||| (Tax Reform for Acceleration and
Inclusion (TRAIN), Republic Act No. 10963,
[December 19, 2017])
d. Those considered export sales under Executive
Order No. 226, otherwise known as the Omnibus
Investment Code of 1987, and other special laws|||
(Tax Reform for Acceleration and Inclusion (TRAIN),
Republic Act No. 10963, [December 19, 2017])
shall be subject to the 12% VAT and no longer be
considered export sales subject to 0% VAT rate upon
satisfaction of the following conditions:
(1) The successful establishment and implementation of an
enhanced VAT refund system that grants refunds of
creditable input tax within ninety (90) days from the filing of
the VAT refund application with the Bureau: Provided,
That, to determine the effectivity of item no. 1, all
applications filed from January 1, 2018 shall be processed
and must be decided within ninety (90) days from the filing
of the VAT refund application; and
(2) All pending VAT refund claims as of December 31,
2017 shall be fully paid in cash by December 31, 2019.
The Department of Finance shall establish a VAT refund
center in the Bureau of Internal Revenue (BIR) and in the
Bureau of Customs (BOC) that will handle the processing
and granting of cash refunds of creditable input tax.
For Services84
A zero-rated sale of service (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
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zero-rated sale shall be available as tax credit or refund in
accordance with these Regulations.
Transactions Subject to Zero Percent (0%) VAT Rate. —
The following services performed in the Philippines by a
VAT-registered person shall be subject to zero percent
(0%) VAT rate:
(1) Processing, manufacturing or repacking goods for
other persons doing business outside the Philippines,
which goods are subsequently exported, where the
services are paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations
of the BSP;
(2) Services other than processing, manufacturing or
repacking rendered to a person engaged in business
conducted outside the Philippines or to a non-resident
person not engaged in business who is outside the
Philippines when the services are performed, the
consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules
and regulations of the BSP;
(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;
(4) Services rendered to persons engaged in
international shipping or air transport operations, including
leases of property for use thereof: Provided, that these
services shall be exclusively for international shipping or
air transport operations. Thus, 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 Philippines to
another place in the Philippines, the same being subject to
twelve percent (12%) VAT under Sec. 108 of the Tax
Code;
(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 the total annual production;
(6) Transport of passengers and cargo by domestic air
or sea vessels from the Philippines to a foreign country.
Gross receipts of international air or shipping carriers doing
business in the Philippines derived from transport of
passengers and cargo from the Philippines to another
country shall be exempt from VAT; however, they are still
liable to a percentage tax of three percent (3%) based on
their gross receipts derived from transport of cargo from
the Philippines to another country as provided for in Sec.
118 of the Tax Code; and
TAXATION LAW
(7) Sale of power or fuel generated through renewable
sources of energy such as, but not limited to, biomass,
solar, wind, hydropower, geothermal and steam, ocean
energy, and other emerging sources using technologies
such as fuel cells and hydrogen fuels: Provided, however,
that 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.
Provided, That Subparagraphs (1) and (5)
abovementioned shall be subject to the twelve percent
(12%) VAT and no longer be subject to zero percent (0%)
VAT rate upon satisfaction of the same conditions in the
enhanced VAT refund system mentioned above.
5. VAT-EXEMPT TRANSACTIONS
Refer to the sale of goods or properties and/or services
and the use or lease of properties that are not subject to
VAT (output tax) and the seller is not allowed any tax
credit of VAT (input tax) on purchases
The person making the exempt sale of goods, properties
or services shall not bill any output tax to his customers
because the said transaction is not subject to VAT.
b. Exempt transactions, enumerated.
i. Sale or importation of agricultural and marine food
products in their original state, livestock and poultry
of a kind generally used as, or yielding or producing
foods for human consumption; and breeding stock
and genetic materials therefore
Livestock: cows, bulls and calves, pigs, sheep, goats and
rabbits
Poultry: fowls, ducks, geese and turkey
Does not include fighting cocks, race horses, zoo animals
and other animals generally considered as pets.
Marine food products: fish and crustaceans, such as but
not limited to, eels, trout, lobster, shrimps, prawns, oysters,
mussels and clams
Meat, fruit, vegetables and other agricultural and marine
food products are considered in their original state even if
they have undergone the simple process of preparation or
preservation for the market: freezing, drying, salting,
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broiling, roasting, smoking or stripping, shrink wrappings in
plastic, vacuum packing, tetra-pack, and other similar
packaging methods
Polished and/or husked rice, corn grits and raw cane sugar
and molasses, ordinary salt and copra shall be considered
as agricultural product in their original state
PRODUCTS
CONSIDERED IN THEIR
“ORIGINAL STATE”
1. Coffee beans (VAT
Ruling No. 049, May 29,
1991)
2. Ordinary salt or marine
solar salt
3. Century Eggs, Balut,
Penoy (BIR Ruling No.
025-2000, May 25, 2000)
4. Roasted and ground
coffee except when
packed or placed in bottles
or cans and sold (BIR
Ruling No. 012, Feb. 2,
1988)
5. Dried fruits and
vegetables (BIR Ruling
No. 071, March 4, 1988)
6. Frozen sliced potato
(BIR Ruling No. 135, April
14, 1988)
TAXATION LAW
PRODUCTS NOT CONSIDERED “IN
CONSIDERED IN THEIR THEIR ORIGINAL
“ORIGINAL STATE” STATE” / HAVE
UNDERGONE SIMPLE
PROCESSES OF
PREPARATION OR
PRESERVATION
d) Herbal products which
NOT CONSIDERED “IN have undergone drying,
THEIR ORIGINAL pulverizing and
STATE” / HAVE encapsulation or tea
UNDERGONE SIMPLE bagging (BIR Ruling No.
PROCESSES OF 003-06, April 10, 2006
PREPARATION OR 4. Patis (BIR Ruling No.
PRESERVATION 070, march 4, 1988)
1. Dried parings – a by- 5. Fried green peas,
product of dessicated peanuts and “patani”
coconuts (VAT Ruling No. beans (BIR Ruling No.
244, Sept. 22, 1989) 092, May 2, 1981)
2. Iodized salt (VAT Ruling 6. Hamburger patties
No. 059-2003, Dec. 15, (VAT Ruling No. 065, June
2003) 27, 1991)
3. The following
processed foods: Sugar whose content of sucrose by weight, in the dry state:
a) Dried fruits (e.g., parameter reading of 99.5 and above are presumed to be
mangoes, papaya) – refined sugar
made from fresh fruits
which are dried using a Bagasse is not included in the exemption provided for
locally fabricated dryer; under this section.
sold to
wholesalers/repackers “Raw sugar” refers to sugar produced by the simple
b) Dried and ground fruits process of conversion of sugar cane without need of any
and tubers (e.g., guava, mechanical or similar device. Raw sugar refers only to
tamarind, ube) – made by muscovado sugar. (Rev. Regs. 13-13)
blanching, slicing, drying
and grinding the Centrifugal process of producing sugar is not a simple
fruits/tubers; sold to process, and thus not exempt from VAT. (Rev. Regs. 13-
blenders for the 13)
manufacture of soup
mixes and other products ii. Sale or importation of fertilizers, seeds, seedlings
c) Fruits preserved in and fingerlings, fish, prawn, livestock and poultry
syrup (e.g. jackfruit, feeds, including ingredients, whether locally produced
banana, mango) – made or imported, used in the manufacture of finished feeds
by adding sugar to raw (except specialty feeds for race horses, fighting cocks,
fruits then heat sterilizing, aquarium fishes, zoo animals and other animals generally
packing and chilling the considered as pets)
same; sold to
manufacturers of ice
cream and other products.
(VAT Ruling No. 071, July
5, 1991)
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iii. Importation of personal and household effects
belonging to residents of the Philippines returning
from abroad and non-resident citizens coming to
resettle in the Philippines
Such goods are exempt from customs duties under the
Customs Modernization and Tariff Act.
iv. Importation of professional instruments and
implements, wearing apparel, domestic animals, and
personal household effects.
• belonging to persons coming to settle in the
Philippines, or Filipinos or their families and
descendants who are now residents or citizens of
other countries, such parties hereinafter referred
to as overseas Filipinos, in quantities and of the
class suitable to the profession, rank or position of
the persons importing said items;
• For their own use and not for sale, barter or
exchange;
• Accompanying such persons or arriving within a
reasonable time;
• Upon the production of evidence satisfactory to the
CIR that such persons are actually coming to settle
in the Philippines;
• The change of residence is bona fide.
v. Services subject to percentage tax
vi. Services by agricultural contract growers and
milling for others of palay into rice, corn into grits and
sugar into raw sugar
BIR has clarified that toll processing or toll dressing, which
are covered by the VAT exemption of services by
agricultural contract growers under Section 109(F) of the
Tax Code of 1997, pertain to toll processing services for
clients from which growing of animals were contracted.
Thus, the activity of preparing and packaging hogs/chicken
ready for delivery after producing or growing is considered
within the purview of agricultural contract growing, which is
exempt from VAT under Section 109(F) of the Tax Code of
1997, as amended. However, if the toll processing/toll
dressing/toll manufacturing service is performed
independently from growing poultry, livestock, or other
agricultural and marine food products, the activity is not
covered by the agricultural contract growing and therefore
subject to VAT under Section 108 of the Tax Code of 1997,
as amended.(RMC No. 97-10)
TAXATION LAW
vii. 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 merchandise is subject to VAT.
However, sales of drugs to in-patients of hospitals are
considered part of hospital services, which are exempt
from VAT.
A healthcare company which does not actually provide
medical and/or hospital services, but merely arranges for
the same is not VAT-exempt. (CIR v. Philippine Health
Care Providers, Inc., G.R. No. 168129, 2007)
HMOs gross receipts shall be the total amount of money
or its equivalent representing the service fee actually or
constructively received during the taxable period for the
services performed for another person, excluding the
value-added tax. (Maxicare Healthcare Corp. v. CIR, C.T.A
Case No. 8441, May 5, 2015)
viii. Educational services rendered by private
educational institutions duly accredited by the DepED,
CHED and TESDA and those rendered by government
educational institutions
Does not include seminars, in-service training, review
classes and other similar services rendered by persons
who are not accredited by the DepED, the CHED and/or
TESDA
ix. Services rendered by individuals pursuant to an
employer-employee relationship
x. Services rendered by regional or area HQ
established in the Philippines by multinational
corporations which act as supervisory,
communications and coordinating centers for their
affiliates, subsidiaries or branches in the Asia Pacific
Region and do not earn or derive income from the
Philippines
xi. Transactions which are exempt under international
agreements to which the Philippines is a signatory,
except those under PD 529 (Petroleum Exploration
Concessionaires under the Petroleum Act of 1949)
xii. Sales by agricultural cooperatives duly registered
and in good standing with the CDA to their members,
as well as sale for their produce, whether in its original
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state or processed form, to non-members their
importation of direct farm inputs, machineries and
equipment, including spare parts thereof, to be used
directly and exclusively in the production and/or
processing of their produce
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;
However, the sale or importation of agricultural food
products in their original state is exempt from VAT
irrespective of the seller and buyer
xiii. Gross receipts from lending activities by credit or
multi-purpose cooperatives duly registered and in
good standing with the CDA
xiv. Sales by non-agricultural, non-electric and non-
credit cooperatives duly registered with and in good
standing with the CDA
Share capital contribution of each member does not
exceed 15,000 and regardless of the aggregate capital and
net surplus ratably distributed among the members
Importation of machineries and equipment, including spare
parts thereof, to be used by them are subject to VAT
xv. Export sales by persons who are not VAT-
registered
xvi. The following sales of real properties are exempt
from VAT:
• Not primarily held for sale to customers or held for
lease in the ordinary course of trade or business
• Sale of real properties utilized for low-cost housing
• A subdivision or a condominium registered and
licensed by the HLURB
• Undertaken by the government or private
developers
• Utilized for socialized housing
• Residential lot valued at P1,919,500 and below, or
house and lot and other residential dwellings
valued at P3,199,200 and below. (as amended by
Rev. Regs. 16-11)
TAXATION LAW
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 do not exceed 1.9195M.
Such adjacent real properties although covered by
separate titles and/or separate tax declarations, when sold
to one and the same buyer, whether covered by one or
separate deeds of conveyance, shall be presumed as a
sale of one residential lot, house and lot or residential
dwelling. (as amended by Rev. Regs. 16-11 and Rev.
Regs. 13-12)
The sale of parking lots in a condominium is a separate
and distinct transaction and is not covered by the rules on
threshold amount not being a residential lot, house and lot,
or a residential dwelling. Thus, it is subject to VAT
regardless of amount of selling price. (Rev. Regs. 13-12)
Note: Beginning January 1, 2021, the VAT exemption shall
only apply to sale of real properties not primarily held for
sale to customers or held for lease in the ordinary course
of trade or business, sale of real property utilized for
socialized housing as defined by Republic Act No. 7279,
sale of house and lot, and other residential dwellings with
selling price of not more than Two million pesos
(₱2,000,000).
xvii. Lease of residential units
Monthly rental: not exceeding P15,000
Gross receipts from rentals exceeding P15,000 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 P15,000)
exceed 3M, otherwise, these gross receipts are subject to
3% percentage tax.
xviii. 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 which is not devoted
principally to the publication of paid advertisements
The abovementioned provision does not include e-books
or e-journals. The terms “book,” “newspaper,” “magazine,”
“review” and “bulletin” shall refer to printed materials in
hard copies and do not include those in digital or
electronic format or computerized versions Hence, the
same is not exempt from VAT(RMC No. 75-12)
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xix. Transport of passengers by international carriers
doing business in the Philippines (R.A. No. 10378)
The transport of cargo by international carriers is VAT-
exempt, but subject to percentage tax. (Rev. Regs. 15-13)
xx. Sale, importation, or lease of passenger or cargo
vessels and aircraft, including engine, equipment and
spare parts thereof for domestic or international
transport operations; Provided, however, that the
exemption from VAT on the importation and local
purchase of passenger and/or cargo vessels shall be
subject to the requirements on restriction on vessel
retirement program of Maritime Industry Authority
(MARINA). (Rev. Regs. 13-18)
xxi. Importation of fuel, goods and supplies by
persons engaged in international shipping or air
transport operations
Shall be used exclusively or shall pertain to the transport
of goods and/or passengers from a port in the Philippines
directly to a foreign port without stopping at any other port
in the Philippines
Provided further, that 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 February 1, 2006
(Rev. Regs. 04-07)
xxii. Services of banks, non-bank financial
intermediaries performing quasi-banking functions,
and other non-bank financial intermediaries subject to
percentage tax
Money changers and pawnshops are treated as non-bank
financial intermediaries, hence they are VAT-exempt, but
are subject to percentage tax. (Rev. Regs. 04-07) (H.
Tambunting Pawnshop, Inc. v. CIR, 2010)
xxiii. Sale or lease of goods and services to senior
citizens and persons with disability, as provided under
Republic Act Nos. 9994 (Expanded Senior Citizens Act of
2010) and 10754 (An Act Expanding the Benefits and
Privileges of Persons With Disability), respectively;
xxiv. Transfer of property pursuant to Section 40(C)(2)
of the NIRC, as amended;
TAXATION LAW
xxv. Association dues, membership fees, and other
assessments and charges collected on a purely
reimbursement basis by homeowners’ associations
and condominium corporations established under
Republict Act No. 4726 (The Condominium Act),
respectively;
xxvi. Sale of gold to the Bangko Sentral ng Pilipinas
(BSP);
xxvii. Sale of drugs and medicines prescribed for
diabetes, high cholesterol, and hypertension
beginning January 1, 2019 as determined by the
Department of Health; and
xxviii. 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 Three Million Pesos (P 3,000,000)
For purposes of the threshold of P3,000,000, the husband
and wife shall be considered separate taxpayers.
The aggregation rule for each taxpayer shall apply
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. Thus, the VAT-exempt
sales shall not be included in determining the threshold.
(Rev. Regs. 04-07)
Note: A VAT-registered person may elect that the
exemption shall not apply to his sales of goods or
services or properties. Said choice is irrevocable for a
period of 3 years.
[add rule on 8% GIT and its relation to VAT exemption
– RR 13-2018]
LIST OF VAT EXEMPT TRANSACTIONS IS EXCLUSIVE
The Court ruled that the fact that the services offered in a
business engaged in tollway operations is not in Section
109 is enough basis to impose VAT on the same even if it
is not covered under Section 108 of the Code. This implies
that Section 109 (i.e., VAT exempt transactions) is an
exclusive list while Section 108 is not. (Diaz vs. Secretary
of Finance, G.R. No. 193007, 2011)
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Zero-Rated v. VAT-Exempt Transactions (CIR v. Cebu

Toyo Corporation, 451 SCRA 447, 2005) The term "output tax" means the value-added tax due on
the sale or lease of taxable goods or properties or services
ZERO-RATED VAT-EXEMPT by any person registered or required to register under
Section 236 of the NIRC.
No output tax
Input tax on purchases of Seller in an exempt CIR v. Benguet Corp., (G.R. No. 145559, 2006)
a VAT-registered person transaction is not entitled
Input VAT or input tax represents the actual payments,
with zero-rated sales may to any input tax on his
costs, and expenses incurred by a VAT-registered
be allowed as tax purchases despite the
taxpayer in connection with his purchase of goods and
credits or refunded issuance of a VAT invoice
services. Thus, input tax means the value-added tax paid
or receipt
by a VAT-registered person/entity in the course of his/its
Persons engaged in Registration is optional trade or business on the importation of goods or local
transactions which are for VAT-exempt persons purchases of goods or services from a VAT-registered
zero-rated, being subject but if they do register then person.
to VAT, are required to their transactions are
register subject to VAT.
When that person or entity sells his/its products or
services, the VAT-registered taxpayer generally becomes
liable for 12% of the selling price as output VAT or output
Exempt Transaction v. Exempt Party tax. Hence, output tax is the value added tax on the sale
(CIR v. Seagate Technology (Philippines), G.R. No. of taxable goods or services by any person registered or
153866, 2005) required to register under the Tax Code.

EXEMPT TRANSACTION
Involves goods or
services which, by their
nature, are specifically
listed and expressly
exempted from the VAT
under the NIRC, without
regard to the tax status
(VAT exempt or not) of the
party to the transaction
Such transaction is not
subject to VAT, but the
seller is not allowed any
tax refund of or credit for
any input taxes paid
6. INPUT AND OUTPUT TAX
EXEMPT PARTY
A person or an entity
granted VAT exemption
under the NIRC, a special
law or an international
agreement to which the
Philippines is a signatory,
and by virtue of which its
taxable transactions
become exempt from VAT
Such party is also not
subject to VAT since it
may be zero-rated, but
may be entitled to a tax
refund or credit for input
taxes paid, depending on
its registration as a VAT or
non-VAT taxpayer
b) Sources of input tax – The following are sources of
input VAT:
(1) Purchase or importation of goods:
i. For sale;
ii. For conversion into or intended to form part of a
finished product for sale including packaging
materials;
iii. For use as supplies in the course of business;
iv. For use as materials supplied in the sale of service;
or
v. For use in trade or business for which deduction for
depreciation or amortization is allowed under this
Code.
(2) Purchase of real properties for which a VAT has
actually been paid
(3) Purchase of services in which VAT has actually
been paid

a) Definition (4) Transactions deemed sale

The term "input tax" means the value-added tax due from
or paid by a VAT-registered person in the course of his
trade or business on importation of goods or local
purchase of goods or services, including lease or use of
property, from a VAT-registered person. It shall also
include the transitional input tax determined in accordance
with Section 111 of the NIRC.
(5) Presumptive input tax
The following shall be entitled to 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 of firms engaged in either:
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(a) processing of sardines, mackerel and milk; or (3) Allocation of input tax on mixed transactions – if
(b) manufacturing refined sugar and cooking oil. any input tax cannot be directly attributed to either a VAT
taxable or VAT-exempt transaction, the input tax shall be
(6) Transitional input: An input tax on the beginning pro-rated to the VAT taxable and VAT-exempt transactions
inventory of goods, materials and supplies equivalent to and only the ratable portion pertaining to transactions
two percent (2%) of the value of such inventory or the subject to VAT may be recognized for input tax credit.
actual value-added tax paid on such goods, materials and
supplies, whichever is higher, which shall be creditable Illustration: “A” Corporation has the following sales during
against the output tax shall be allowed for: the month:
(1) A person who becomes liable to VAT; or Sale to private entities subject to Php 100,000.00
(2) Any person who elects to be a VAT-registered person. 12% VAT
Sale to private entities subject to 100,000.00
The transitional input VAT shall be subject to the filing of 0% VAT
an inventory according to rules and regulations prescribed Sale of VAT-exempt goods 100,000.00
by the Secretary of finance, upon recommendation of the
Sale to government subject to 5% 100,000.00
Commissioner.
final VAT withholding

Fort Bonifacio Development Corporation v. CIR, (G.R.

IMPT Note:
No. 173425, 2012); Fort Bonifacio Development
Beginning January 1, 2021, the
Corporation v. CIR, (G.R. Nos. 175807, 180035, 18109,
VAT withholding system shall
2014)
shift from final to a creditable
There is nothing in the NIRC which indicates that prior
system (Sec. 114 (C))
payment of taxes is necessary for the availment of the
transitional input tax credit. All that is required is for the Total sales for the month 400,000.00
taxpayer to file a beginning inventory with the BIR.
The following input taxes were passed on by its VAT-
c) Persons who can avail input of tax credits: The input registered suppliers:
tax credit on importation of goods or local purchases of Input tax on taxable goods (12%) Php 5,000.00
goods, properties or services by a VAT-registered person Input tax on zero-rated sales 3,000.00
shall be creditable:
Input tax on sale of exempt goods 2,000.00
(1) to the importer upon payment of VAT prior to the
Input tax on sale to government 4,000.00
release of goods from customs duty;
(2) to the purchaser of the domestic goods or properties Input tax on depreciable capital 20,000.00
upon consummation of the sale; or good not attributable to any specific
(3) to the purchaser of services or the lessee or licensee activity (monthly amortization for 60
upon payment of the compensation, rental, royalty or months)
fee. (RR 16-2005)
The creditable input tax for the month shall be computed
d) Determination of output/input tax; VAT payable; as follows:
excess input tax credits
(1) Determination of output tax - In a sale of goods or Total sales (0% and 12%) X Amount of input
properties, the output tax is computed by multiplying the Total sales tax not directly
gross selling price by the regular rate of VAT. For sellers attributable to
of services, the output tax is computed by multiplying the any sales
gross receipts by the regular rate of VAT.
Php 200,000.00
(2) Determination of creditable input tax – see previous X P20,000.00
400,000.00
discussion.

The amount of P10,000.00 allocated to 12% and 0% VAT

sales shall be considered in the computation of total
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creditable input tax for the month. Hence, total creditable
input tax is P18,000.00.
(4) Determination of the output tax and VAT payable
and computation of VAT payable or excess tax credits
– see previous discussion. (Rev. Regs. 16-05)
e) Substantiation of input tax credits
Input taxes for the importation of goods or the domestic
purchase of goods, properties or services is made in the
course of trade or business, whether such input taxes shall
be credited against zero-rated sale, non-zero-rated sales,
or subjected to the 5% Final Withholding VAT, 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. Importation of goods – import entry or other
equivalent document showing actual payment of VAT
on the imported goods.
b. Domestic purchase of goods and properties –
invoice showing the information required under Secs.
113 and 237 of the Tax Code
c. Purchase of real property – public instrument i.e.,
deed of absolute sale, deed of conditional sale,
contract/agreement to sell, etc., together with VAT
invoice issued by the seller
d. Purchase of services – official receipt showing the
information required under Secs. 113 and 237 of the
Tax Code.
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.
e. Transitional input tax – to be supported by an
inventory of goods as shown in a detailed list to be
submitted to the BIR.
f. Input tax on “deemed sale” transactions –invoice
required under Sec. 4.113-2 of these Regulations.
g. Input tax from payments made to non-residents
(such as for services, rentals and royalties) - to 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.
h. Advance VAT on sugar - to be supported by the
Payment Order showing payment of the advance VAT.
Note: The input tax credit above enumerated shall be
creditable as follows:
TAXATION LAW
a. Importer of goods – upon payment of VAT prior to the
release of goods from customs custody;
b. Purchaser of domestic goods or properties – upon
consummation of sale; and
c. Purchaser of services or lessee or licensee – upon
payment of the compensation, rental, royalty or fee.
(Rev. Regs. 16-05, as amended)
A taxpayer cannot be permitted to substitute vital and
material documents such as VAT official receipts and VAT
returns with secondary evidence like financial statements.
(Luzon Hydro Corporation v. CIR, G.R. No. 188260, 2013)
7. REFUND OR TAX CREDIT OF EXCESS INPUT TAX;
PROCEDURE
a) Who may claim for refund/apply for issuance of tax
credit certificates
Any VAT-registered person whose sales are zero-rated or
effectively zero-rated may within 2 years after the close of
the taxable quarter when the sales were made, apply for
the issuance of a tax credit certificate or refund of the
creditable input tax due or paid attributable to such sale.
The creditable input tax allowed to be refunded does not
include transitional input tax.
In case the taxpayer is engaged both in zero-rated and
taxable or exempt sale, and the amount of creditable input
tax due or paid cannot be directly and entirely attributed to
any one of the transactions, it shall be allocated
proportionately on the basis of the volume of sales.
In the Luzon Hydro case, the Supreme Court reiterated the
requisites for a claim for refund or tax credit for unutilized
input VAT, thus:
1. The taxpayer is VAT-registered;
2. The taxpayer is engaged in zero-rated or
effectively zero-rated sales;
3. The input taxes are due or paid;
4. The input taxes are not transitional input taxes;
5. The input taxes have not been applied against
output taxes during and in the succeeding
quarters;
6. The input taxes claimed are attributable to zero-
rated or effectively zero-rated sales;
7. For zero-rated sales under Section 106(A)(2)(1)
and (2); 106(B); and 108(B)(1) and (2), the
acceptable foreign currency exchange proceeds
have been duly accounted for in accordance
with the rules and regulations of the Bangko
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Sentral ng Pilipinas;
8. Where there are both zero-rated or effectively
zero-rated sales and taxable or exempt sales, and
the input taxes cannot be directly and entirely
attributable to any of these sales, the input taxes
shall be proportionately allocated on the basis
of sales volume; and
9. The claim is filed within two years after the close
of the taxable quarter when such sales were made.
(Luzon Hydro Corporation v. CIR, G.R. No.
188260, 2013)
Coral Bay Nickel Corporation v. CIR (G.R. No. 190506,
2016)
In case of an erroneous pass-on of VAT to a PEZA-
registered enterprise, the right to recover the same is
against the supplier who erroneously passed-on the VAT
amount.
The CIR has 90 days, from the date of the submission of
the complete documents within which to grant or deny the
claim for refund/credit of input VAT.
In case of full or partial denial by the CIR, the taxpayer’s
recourse is to file an appeal before the CTA within 30 days
from receipt of the decision of the CIR.
Otherwise, if after the 90-day period the, CIR fails to act on
the application for tax refund/credit, the remedy of the
taxpayer is to appeal the inaction of the CIR to CTA within
30 days.
Hence, if the taxpayer filed with CTA before the 90-day
period expires, CTA will dismiss the appeal on the ground
of prematurity. If filed with CTA after the 120-day (90+ 30
days), CTA will dismiss for being late. This only applies to
creditable input tax refunds.

Unutilized creditable input taxes attributable to zero-rated Note: The 120-day period as discussed in the actual
sales can only be recovered through the application for case was modified to reflect 90 days to incorporate the
refund or tax credit. The practice of claiming as an outright TRAIN amendment.
(income tax) expense accumulated and unapplied input
VAT credits after the expiration of the 2-year period to
CIR v. San Roque (G.R. No. 187485, 2013)
process the claim does not have any legal basis (RMC No.
57-13). PERIOD WHEN
ADMINISTRATIVE APPLICABLE DOCTRINE
CLAIM FILED WITH
b) Period to file claim / apply for the issuances of tax
CIR
credit certificates
Before June 8, 2007 Verba Legis Rule – 2
The CIR shall grant a TCC/refund for creditable input taxes
year period should be
within 90 days from the date of submission of complete
counted from the close of
documents in support of the application.
the taxable quarter when
the sales were made
Taxpayer may appeal to the CTA within 30 days from June 8, 2007 to Atlas Doctrine - 2 year
receipt of said denial. September 11, 2008 period should be counted
from the date of filing of
If no action on the claim for refund has been taken by the the return and payment of
CIR after the 90-day period from the date of submission of the output VAT
the application with complete documents, the taxpayer On or after September Mirant Doctrine (verba
may appeal to the CTA within 30 days from the lapse of the 11, 2008 legis rule)
90-day period. Provided, however, That failure on the part
of any official, agent, or employee of the BIR to act on the PERIOD WHEN
application within the 90-day period shall be punishable APPLICABLE DOCTRINE
JUDICIAL CLAIM
under Section 269 of NIRC. FILED WITH CTA
Before December 10, 90+30 day periods are
Note: The 120-day period is now changed to 90 days as 2003 mandatory and
amended by TRAIN. jurisdictional
December 20, 2003 BIR Ruling No. DA-489-
CIR v. Aichi Forging Company (G.R. No. 184823, 2010) to October 6, 2010 03 Taxpayer-claimant
does not need to wait for
the lapse of the 90-day
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period before it could
seek judicial relief with
the CTA by way of
Petition for Review
(90+30 day periods are
merely permissive, not
jurisdictional)
On or after October 6, Aichi Doctrine (90+30
2010 day periods are
mandatory and
jurisdictional)
Note: The 120-day period as discussed in the actual
case was modified to reflect 90 days to incorporate the
TRAIN amendment.
Two exceptions to the mandatory and jurisdictional
treatments of the 90-day period as pronounced in the
Aichi case, as follows:
i. If the Commissioner, through a specific ruling,
misleads a particular taxpayer to prematurely file a
judicial claim with the CTA. Such specific ruling is
applicable only to such particular taxpayer.
ii. If the Commissioner, through a general
interpretative rule issued under Section 4 of the
Tax Code, misleads all taxpayers into filing
premature judicial claims with the CTA.
In these cases, the Commissioner cannot be allowed to
later on question the CTA’s assumption of jurisdiction over
such claim since equitable estoppel has set in as expressly
authorized under Section 246 of the Tax Code.
Strict compliance with the 90+30 day period is necessary
for such claim to prosper, except for the period from the
issuance of BIR Ruling No. DA-493-03 on 10 December
2003 to 6 October 2010 when the Aichi doctrine was
adopted, which again reinstated the 90+30 day periods as
mandatory and jurisdictional.
Team Energy Corporation v. Commissioner of Internal
Revenue, G.R. No. 190928, 2014
The 30-day period given to the taxpayer within which to file
an appeal before the CTA need not necessarily fall within
the two-year prescriptive period on applying for TCC or
refund, as long as the administrative claim is filed within
the two-year prescriptive period.
SUMMARY OF RULES
(Commissioner of Internal Revenue v. Mindanao II
Geothermal Partnership, G.R. No. 191498, 2014)
TAXATION LAW
A. Two-Year Prescriptive Period
It is only the administrative claim that must be filed within
the two-year prescriptive period. (Aichi)
The proper reckoning date for the two-year prescriptive
period is the close of the taxable quarter when the relevant
sales were made. (San Roque)
The only other rule is the Atlas ruling, which is applicable
only from 8 June 2007 to 12 September 2008. Atlas states
that the two-year prescriptive period for filing a claim for tax
refund or credit of unutilized input VAT payments should
be counted from the date of filing of the VAT return and
payment of the tax. (San Roque)
B. 90+30 Day Period
The taxpayer can file an appeal in one of two ways: (1) file
the judicial claim within thirty days after the Commissioner
denies the claim within the 90-day period, or (2) file the
judicial claim within thirty days from the expiration of the
90-day period if the Commissioner does not act within the
90-day period.
The taxpayers are reminded that that when the 90-day
period lapses and there is inaction on the part of the CIR,
they must no longer wait for it to come up with a
decision thereafter. The CIR’s inaction is the decision
itself. It is already a denial of the refund claim. Thus, the
taxpayer must file an appeal within 30 days from the
lapse of the 90-day waiting period.
The 90-day period is counted from the submission of
complete documents and not from the filing of the claim.
(CIR vs. GST Phils., Inc., G.R. No. 190872, 2013)
Note: The 120-day period as discussed in the actual
case was modified to reflect 90 days to incorporate the
TRAIN amendment.
As of June 11, 2014, all claims must already attach
complete supporting documents and this fact must be
attested under oath. As such, the 90-day period already
runs on the date the claim is filed in all instances.
(Philippine Total Gas, Inc. v. CIR, G.R. No. 207112, 2015)
Note: The 120-day period as discussed in the actual
case was modified to reflect 90 days to incorporate the
TRAIN amendment.
The 30-day period always applies, whether there is a
denial or inaction on the part of the CIR.
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As a general rule, the 30-day period to appeal is both
mandatory and jurisdictional. (Aichi and San Roque)
The exception is that premature filing is allowed only if filed
between 10 December 2003 and 5 October 2010, when
BIR Ruling No. DA-489-03 was still in force. (San Roque)
Late filing is absolutely prohibited, even during the time
when BIR Ruling No. DA-489-03 was in force. (San Roque)
c) Manner of giving refunds
Refund shall be made upon warrants drawn by the CIR or
by his duly authorized representative without the necessity
of being countersigned by the Chairman of COA.
Refunds under this paragraph shall be subject to post audit
by the COA.
d) Destination principle or cross-border doctrine (see
previous discussion)
8. COMPLIANCE REQUIREMENTS
a. Registration
b. Invoicing Requirements
a) In general
A VAT-registered person shall issue:
a. VAT invoice for every sale, barter or exchange of
goods or properties; and
b. 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 official
receipts. Said documents shall be considered as a “VAT
Invoice” or VAT official receipt. All purchases covered by
invoices/receipts other than VAT Invoice/VAT Official
Receipt shall not give rise to any input tax.
VAT invoice /official receipt shall be prepared at least in
duplicate, the original to be given to the buyer and the
duplicate to be retained by the seller as part of his
accounting records.
TAXATION LAW
Information contained in VAT invoice or VAT official
receipt
The following information shall be indicated:
a. A statement that the seller is a VAT-registered
person, followed by his TIN;
b. The total amount which the purchaser pays or is
obligated to pay to the seller with the indication that
such amount includes the VAT; Provided, That:
i. The amount of tax shall be shown as a separate
item in the invoice or receipt;
ii. If the sale is exempt from VAT, the term “VAT-
exempt sale” shall be written or printed
prominently on the invoice or receipt;
iii. If the sale is subject to zero percent (0%) VAT, the
term “zero-rated sale” shall be written or printed
prominently on the invoice or receipt;
Having the words "zero-rated" stamped in the VAT invoice
/ official receipt is sufficient compliance with the law. The
same need not be printed. (Commissioner of Internal
Revenue v. Toledo Power Company, G.R. No. 183880,
2014)
iv. 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 break-down of the
sale price between its taxable, exempt and zero-
rated components, and the calculation of the VAT
on each portion of the sale shall be shown on the
invoice or receipt. The seller has the option to
issue separate invoices or receipts for the taxable,
exempt, and zero-rated components of the sale.
c. The date of transaction, quantity, unit cost and
description of the goods or properties or nature of the
service; and
d. 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 TIN of the purchaser,
customer or client, shall also be indicated. (Rev. Regs.
16-05, Sec. 4.113-1(B))
The change of petitioner’s name to “Bonifacio GDE Water
Corporation,” being unauthorized and without approval
of the SEC, and the issuance of official receipts under that
name which were presented to support petitioner’s claim
for tax refund, cannot be used to allow the grant of tax
refund or issuance of a tax credit certificate in petitioner’s
favor. The absence of official receipts issued in its
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name is tantamount to non- compliance with the
substantiation requirements provided by law.
(Bonifacio Water Corporation v. CIR, GR No. 175142,
2013)
b) Deemed sale transactions
a. Transfer, use or consumption not in the course of
business of goods or properties originally intended for
sale or use in the course of business - a memorandum
entry in the subsidiary sales journal to record
withdrawal of goods for personal use is required
b. Distribution or transfer to shareholders or
creditors - An invoice shall be prepared at the time of
the occurrence of the transaction, which should
include all the necessary information. The data
appearing in the invoice shall be duly recorded in the
subsidiary sales journal. The total amount of “deemed
sale” shall be included in the return to be filed for the
month or quarter.
c. Consignment of goods – similar to “b”.
d. Retirement from or cessation of business - an
inventory shall be prepared and submitted to the 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, but it must show the total
amount.
c) Consequences of issuing erroneous VAT invoice or
VAT official receipt
1. If a person who is not VAT-registered issues an invoice
or receipt showing his TIN, followed by the word “VAT”,
the erroneous issuance shall result to the following:
a. The Non-VAT person shall be liable to the:
i. Percentage taxes applicable;
ii. VAT due on the transactions without the
benefit of any input tax credit; and
iii. 50% surcharge as penalty.
b. The VAT shall, if the other requisite information
required is shown on the invoice or receipt, be
recognized as an input tax credit to the purchaser.
2. 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, the issuer shall be liable to
account for the VAT imposed. The purchaser shall be
entitled to claim an input tax credit on said purchase.
TAXATION LAW
c. Filing of Return and Payment
Time of Filing and Payment
Monthly VAT Declarations shall be filed and the taxed due
thereon shall be paid not later than the 20th day following
the end of each month.
A Quarterly VAT return shall be filed within 25 days
following the close of taxable quarter. The term “taxable
quarter” shall mean the quarter that is synchronized to the
income tax quarter of the taxpayer.
Amounts reflected in the monthly VAT Declarations for the
first 2 months of the quarter shall still be included in the
quarterly VAT return which reflects the cumulative figures
for the taxable quarter.
Note: Beginning January 1, 2023, the filing AND payment
of VAT shall be done within twenty-five (25) days following
the close of each taxable quarter.
Place of Filing and Payment
Monthly VAT Declarations and quarterly VAT returns shall
be filed with, and VAT due thereon paid to, an AAB under
the jurisdiction of the RDO or BIR office where the taxpayer
is required to be registered.
d. Withholding of final VAT on Sales to Government
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 of services taxed at 12% VAT pursuant to Secs. 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
thereof.
The 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 exceed 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 is
less than 7% of gross payment, the difference must be
closed to expense or cost.
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Note: Beginning January 1, 2021, the VAT withholding
system referred above shall shift from final to a creditable
system.
e. Administrative and Penal Sanctions
F. PERCENTAGE TAXES: CONCEPT AND NATURE
Any person whose sales or receipts are exempt under
Section 109 (BB) of this Code from the payment of value-
added tax and who is not a VAT-registered person shall
pay a tax equivalent to three percent (3%) of his gross
quarterly sales or receipts: Provided, That cooperatives,
and beginning January 1, 2019, self-employed and
professionals with total annual gross sales and/or gross
receipts not exceeding Five hundred thousand pesos
(P500,000) shall be exempt from the three percent (3%)
gross receipts tax herein imposed." (Sec. 116)
Percentage tax is a business tax which is based on a given
ratio between the gross sales or receipts and the burden
imposed upon the taxpayer. (City of Manila v. InterIsland
Gas, G.R. No. L-8799, 1956)
Unlike income tax, percentage tax is not subject to
withholding. (CIR v. Solidbank Corporation, G.R. No.
148191, 2003)
To be subject to the 3% percentage tax, the person must
be exempt under Section 109(1)(v) and is not a VAT-
registered person.
All exempt transactions enumerated in subsection (1) (A to
U) of Section 109, except subsection (1)(E), referring to
services subject to percentage tax under Title V, are
exempt both from VAT and percentage tax.
G. EXCISE TAX: CONCEPT AND NATURE
Excise taxes apply to goods manufactured or produced in
the Philippines for domestic sales or consumption or for
any other disposition and to things imported as well as
services performed in the Philippines. The excise tax
imposed herein shall be in addition to the value-added tax
imposed under Title IV.
"For purposes of this Title, excise taxes herein imposed
and based on weight or volume capacity or any other
physical unit of measurement shall be referred to as
'specific tax' and an excise tax herein imposed and based
on selling price or other specified value of the good or
service performed shall be referred to as 'ad valorem tax.'"
“Specific tax” – excise taxes imposed and based on
weight or volume capacity or any other physical unit of
measurement.
TAXATION LAW
“Ad valorem tax” – excise tax imposed and based on
selling price or other specified value of the goods.
Although they may be considered taxes on production,
being collected only from manufacturers and producers,
they are really taxes on property as they are imposed
directly on certain specific goods. (Silkair (Singapore) Pte.
Ltd. V. CIR, G.R. No. 173594, 2008)
A tax is not excise where it does not subject directly the
produce or goods to tax but indirectly as an incident to, or
in connection with, the business to be taxed.
Excise taxes, whether under the specific or ad valorem tax
system is basically an indirect tax impose on consumption
of certain types or class of goods, whether locally
manufactured or imported. While the tax is directly levied
upon the manufacturer/producer/importer upon removal of
the taxable goods from its place of production or from the
customs custody in reality, the tax is actually passed on to
the end consumer as part of the transfer value or selling
price of the goods sold, bartered or exchanged. (Silkair
(Singapore) Pte. Ltd. V. CIR, G.R. No. 173594, 2008)
Goods subject to excise taxes, unless otherwise provided,
are subject to VAT.
H. DOCUMENTARY STAMP TAX: CONCEPT AND
NATURE
Documentary stamp tax (DST) is a tax on documents,
instruments and papers evidencing the acceptance,
assignment, sale or transfer of an obligation, right, or
property incident thereto. It is actually an excise tax
because it is imposed on the transaction rather than on the
document. (Phil. Banking Corp. v. CIR, G.R. No. 170574,
2009)
The liability to the tax and the amount thereof are
determined from the fact of the document itself, i.e., by the
form and face thereof, and cannot be affected by proof of
facts outside of the same. The name given by the parties
is not controlling. However, in case of doubt, construction
is in favor of exemption. (US v. Isham, 84 U.S. 496, 1873)
The stamps must be affixed on the original document but
if for some reason the original is not available, then on the
duplicate which has been used in place of the original.
DST is an excise tax on the exercise of a right or privilege
to transfer obligations, rights or properties incident thereto.
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In general, DSTs are levied on the exercise by persons of
certain privileges conferred by law for the creation,
revision, or termination of specific legal relations through
the execution of specific instruments. Hence, in imposing
the DST, not only the document but also the nature and
character of the transaction is considered. (Phil. Banking
Corp. v. CIR, G.R. No. 170574, 2009)
DST is not a tax on the business transacted but on the
privilege, opportunity, or facility offered at exchanges for
the transaction of the business. It is an excise tax on the
facilities used in the transaction of the business separate
and apart from the business itself. (Phil. Health Care
Providers, Inc. v. CIR, G.R. No. 167330, 2008)
Being an excise tax, DST is paid only once. Since DST is
not a tax on income, an exemption from income tax does
not include DST.
Q: The SC set aside the assessments for deficiency
documentary stamp taxes (DST) on Bank A’s special
savings accounts for the taxable years 1996 and 1997 and
deficiency tax on onshore interest income for taxable year
1996 in view of its availment of the tax amnesty program
under RA 9480. BIR argues that the DST on Bank A’s
special savings accounts are not covered by tax amnesty,
pursuant to Q-1 of RMC Nos. 69-2007 and 19-2008 which
excludes DST for being “taxes passed-on and collected
from customers for remittance to the BIR”. Are
documentary stamp taxes excluded from the tax amnesty
grant granted by RA 9480?
Suggested Answer: DST is one of the taxes covered by
the Tax Amnesty Program. The law expressly covers “all
national internal revenue taxes for the taxable year 2005
and prior years…that have remained unpaid as of
December 31, 2005”. DST is considered a national
internal revenue tax under Sec. 21 of NIRC of 1997. RA
9480 provides a general grant of tax amnesty subject only
to the cases specifically excepted by it. Thus, excluded
from the tax amnesty are only those cases enumerated
under Sec. 8:
a. Withholding agents with respect to their
withholding tax liabilities;
b. Those with pending cases falling under the
jurisdiction of the PCGG;
c. Those with pending cases involving unexplained
or unlawfully acquired wealth or under the Anti-
Graft and Corrupt Practices Act;
d. Those with pending cases filed in court involving
violation of the AMLA;
e. Those with pending criminal cases for tax evasion
and other criminal offenses under Chapter II of
Title X of the NIRC of 1997, as amended, and the
felonies of frauds, illegal exactions and
transactions, and malversation of public funds and
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property under Chapters III and IV of Title VII of
the RPC; and
f. Tax cases subject of final and executory judgment
by the courts.
Moreover, administrative issuances, such as revenue
memorandum circulars, cannot amend nor modify the law.
The exception “taxes passed-on and collected from
customers for remittance to the BIR” provided in RMC Nos.
69-2007 and 19-2008 is equivalent to the withholding tax
liabilities of a withholding agent. Thus, a taxpayer who is
deemed to be a “withholding or collecting agent” of “the tax
collected from its customer” is excluded from the coverage
of the tax amnesty, with respect to its liability as a
withholding or collecting agent.
Rev. Regs. 09-00 clarifies that all parties to a transaction,
and not only the person making, signing, issuing,
accepting, or transferring the document, are primarily liable
for the DST. As a general rule, any of the parties to a
transaction shall be liable for the full amount of the
documentary stamp tax due, unless they agree among
themselves on who shall be liable.
SC has previously declared a special savings account or
special savings deposit account to be a certificate of
deposit drawing interest subject to DST. Bank A is directly
liable for the DST as the maker and issuer of the instrument
evidencing the special savings account transaction. Thus,
Bank A is responsible for the payment and remittance of
the DST. However, if Bank A were exempt from the tax, it
should be required to remit the same only as a collecting
agent of BIR. In this case, there is no proof that Bank A is
exempt from the DST. Neither is there any agreement
showing the party liable for the DST due. (ING Bank N.V.
vs. CIR, GR No. 167679, 2016)
I. TAX REMEDIES UNDER THE NIRC
1. ASSESMENT OF INTERNAL REVENUE TAXES
a. Procedural Due Process in Tax Assessments
Power of the Commissioner of Internal Revenue to
Make Assessments
An assessment is relevant in the proper pursuit of judicial
and extrajudicial remedies to enforce taxpayer liabilities
and certain matters that relate to it, such as the imposition
of surcharges and interest, and in the application of
statutes of limitations and in the establishment of tax liens.
(Tupaz v. Ulep, G.R. No. 127777, 1999)
Note: The Commissioner, under Sec. 6 of the NIRC, has
the power to make assessments.
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After a return has been filed as required under the
provisions of this Code, the Commissioner or his duly
authorized representative may authorize the examination
of any taxpayer and the assessment of the correct amount
of tax.
Failure to file a return shall not prevent the Commissioner
from authorizing the examination of any taxpayer. (NIRC,
Sec. 6[A])
a) Assessment
Definition of Assessment
Any notice sent to the taxpayer demanding payment of
the tax liability within a prescribed period is an
assessment.
An assessment contains not only:
1. A computation of tax liabilities, but also;
2. A demand for payment within a prescribed period (CIR
v. Pascor Realty & Dev’t Corp, G.R. No. 123895, 1999)
The assessment must be in writing. (NIRC, Sec. 228)
An assessment must be sent to and received by the
taxpayer, and payment of the taxes must be demanded
within a prescribed period (CIR v. Pascor Realty & Dev’t
Corp, G.R. No. 123895, 1999)
How Taxes are Assessed
1. Self-Assessment: System under which taxpayer
makes a declaration in the return on the basis of his
assessment and calculate the tax due. It is usually
accompanied by payment.
Pay-as-you-file system: The tax payment system is
self-assessing, i.e., “pay-as-you-file system.” Thus, if
tax is properly paid, no deficiency assessment is
necessary (NIRC, Sec. 56[A][1])
2. Deficiency Assessment: - Deficiency assessment is
an assessment made by the BIR after the conduct of
an investigation or audit when it finds that the tax return
filed by the taxpayer contains, for example, an under-
declaration of income, or when the taxpayer does not
at all file a tax return.
Distinction in relation to compromise: The Court
made a distinction between a self-assessed tax and a
BIR-assessed tax in relation to the amounts for
compromise, to wit: where tax liabilities are self-
assessed, the compromise payment shall be based on
the tax return filed by the taxpayer; on the other hand,
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where the BIR already issued an assessment, the
compromise payment shall be computed based on the
tax due on the assessment notice. (Philippine National
Oil Company v. CA, G.R. No. 109976, 2005)
Kinds of Assessments
1. Self-Assessment – one in which the tax is assessed
by the taxpayer himself (NIRC, Sec. 56[A][1])
Examples: income tax, capital gains tax, estate tax,
donor’s tax, VAT, DST
2. Deficiency Assessment – made by tax assessor
whereby the correct amount of tax is determined
through examination or investigation (NIRC, Sec.
56[B])
3. Jeopardy Assessment – a tax assessment made by
an authorized Revenue Officer without the benefit of
complete or partial audit (R.R. No. 30-2002, Sec.
3[1][a])
4. Disputed Assessment – a taxpayer questions a
deficiency assessment and asks the BIR to reconsider
or cancel the assessment because he believes that he
is not liable therefor (St. Stephen’s Ass’n v. CIR, G.R.
No. L-11238, 1958). In short, an assessment that has
been duly protested by the taxpayer by filing a request
for reconsideration or request for reinvestigation
pursuant to Sec. 228 of the NIRC.
Assessment Process
Generally
• Issuance of a Letter of Authority;
• Tax Audit or Investigation;
• Notice of Informal Conference
• Issuance of Preliminary Assessment Notice
(PAN);
• Issuance of Formal Letter of Demand / Final
Assessment Notice (FAN);
• Administrative Action / Inaction on Disputed
Assessment
a) Letter of Authority and 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, on the strength of a
Letter of Authority.
Letter of Authority (LOA)
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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. (CIR v.
Lancaster PH, CTA [En Banc] EB No. 352, 2008)
It is valid for 120 days but can be extended through
revalidation. The revalidation is done by issuing a new
LOA. (RR No. 38-88)
A LOA should cover a taxable period not exceeding
one taxable year. An LOA covering audit of “unverified
prior years” is prohibited and thus, void. (CIR v. Sony
Philippines, Inc., G.R. No. 178697, 2010)
However, in the 2016 case of De La Salle vs.
Commissioner of Internal Revenue G.R. No. 196596,
Justice Brion opined that a LOA which states a particular
year and includes unverified taxable years is not entirely
void. The assessment for the year specifically mentioned
is valid even if the others are not.
Letter of Notice (LN)
It is a discrepancy notice issued by the CIR after
conducting data matching processes, informing the
taxpayer of findings of discrepancy, e.g. undeclared sales
or overclaimed purchases. Compared with an LOA, the
coverage of an LOA is more comprehensive than an LN.
A LN shall be treated as a notice of audit or investigation
in the absence of evident error or clear abuse of discretion.
(RMO No. 55-10) As such, when an LN has been served
upon a taxpayer, such taxpayer shall be disqualified from
amending any return which is subject of the audit or
investigation. (RMC No. 40-03)
A “tentative tax return” shall be considered as a final
return, unless a final amended return is filed by the
taxpayer. However, once a notice of audit or investigation
is received, the taxpayer is barred from making
amendments to the tentative tax return filed. (RMC No. 50-
13)
b) Notice of Informal Conference
A Notice of Informal Conference is a written notice
informing a taxpayer that the findings of the audit
conducted on his accounting records indicate that
additional taxes or deficiency assessment has to be paid.
The taxpayer is given 30 days from receipt of such
notice to explain his side. (RR No. 7-18)
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c) Issuance of Preliminary Assessment Notice (PAN);
General Rule and Exceptions
Preliminary Assessment Notice (PAN)
A PAN is the communication issued by the BIR informing
a taxpayer of its findings after audit. The PAN shall be in
writing, and shall show in detail the facts and the law,
rules and regulations, or jurisprudence on which the
assessment is based. Otherwise, the assessment is void.
(NIRC, Sec. 228; R.R. No. 18-2013)
Prior to the issuance of the PAN, the taxpayer may be
allowed to make voluntary payments of probable
deficiency taxes and penalties. (R.M.C. No. 11-2014)
Under RR No. 12-99, it is clear that the sending of a PAN
to taxpayer to inform him of the assessment made is but
part of the "due process requirement in the issuance of
a deficiency tax assessment," the absence of which
renders nugatory any assessment made by the tax
authorities. (CIR v. Metro Star Superama, G.R. No.
185371, 2010)
The assessment must have been conducted within the
scope of the authority given by a valid Letter of Authority.
(CIR v. Sony, G.R. No. 178697, 2010)
Issuance of PAN as Pre-Requisite to FAN
General Rule: The BIR may not issue a FAN without first
issuing a PAN. Lack of PAN is fatal.
The use of the word “shall” in subsection 3.1.2 [of Rev.
Regs. 12-99] describes the mandatory nature of the
service of a PAN” (CIR v. Metro Star Superama, G.R. No.
185371, 2010)
Exceptions: When PAN shall not be necessary and an
FLD/FAN (defined below) shall be issued outright: (MET
DC)
1. When the finding for deficiency tax is a result of
Mathematical error in the computation of tax appearing
on the face of the return;
2. Discrepancy is determined between the tax withheld
and the amount actually remitted by the withholding
agent;
3. A taxpayer who opted to claim a refund or tax credit
was determined to have Carried over and applied the
amount against succeeding tax liabilities;
4. Excise tax has not been paid; or
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5. An article locally purchased or imported by an exempt
person has been sold, traded or Transferred to non-
exempt persons (NIRC, Sec. 228)
Scenarios After Issuance of PAN
• Taxpayer may pay the assessment;
• Taxpayer may file a reply; or
• Taxpayer may ignore PAN (i.e. not reply)
Reply/Protest to PAN
If the taxpayer disagrees with the PAN, he has 15 days
from receipt of the PAN to file a written reply to contest the
proposed assessment. (R.R. No. 12-99, Sec. 3.1.1., as
amended by R.R. No. 18-2013)
Failure to reply to the PAN will put the taxpayer in default
and will warrant the issuance of FLD and/or FAN. (NIRC,
Sec. 228, ¶ 3)
Note: Taxpayer can still protest the FLD/FAN.
d) Issuance of Formal Letter of Demand (FLD) and/or
Final Assessment Notice (FAN)
FLD/FAN
A FLD/FAN is a formal letter of demand where a
declaration of deficiency taxes is issued to a taxpayer who
fails to respond to a PAN within 15 days from receipt of
the PAN, or whose reply to the PAN was found to be
without merit.
Period for Issuance of FLD/FAN
Within 15 days from the date of receipt by the taxpayer of
the PAN, whether the same was protested or not. (R.M.O.
No. 26-2016)
Note: The issuance of FAN before the lapse of the 15-day
period for the taxpayer to file its reply to the PAN inflicts no
prejudice on thetaxpayer for as long as the taxpayer is
properly served the FAN and it is able to intelligently
contest the FAN by filing a protest within the period allowed
by law.
A PAN preparatory to the issuance of the FAN is not,
legally speaking, an assessment even if it contains a
computation of the tax liabilities of a taxpayer and a
demand for payment of computed tax liabilities was made
(Oakwood Management Services v. CIR, CTA Case No.
7989, 2013)
Requirement to State the Facts and Law on Which the
Assessment is Based On
TAXATION LAW
The FLD/FAN shall be issued by the CIR or his duly
authorized representative, and shall state the facts, the
law, rules and regulations, or jurisprudence on which
the assessment is based. Otherwise, the assessment
shall be void. (R.M.C. No. 18-2013)
The law requires that the legal and factual bases of the
assessment be stated in the formal letter of demand and
assessment notice pursuant to RR 12-99. (CIR v. Enron
Subic Power Corporation, G.R. No. 166387, 2009)
The decision of the CIR or his duly authorized
representative shall state:
1. the facts, the applicable law, rules and regulations, or
jurisprudence on which such decision is based
(otherwise, the decision shall be void), and
2. that the same is his final decision. (RR No. 18-13)
However: The taxpayer is not denied due process when
the FAN and demand letter issued were not accompanied
by a written explanation of the legal and factual bases of
the deficiency taxes assessed but were instead
explained at full length when the CIR responded to the
taxpayer’s protest. There is no violation of due process
when the CIR fully informed the taxpayer in writing the
factual and legal bases of the assessment which enabled
the taxpayer to file an “effective” protest. (Samar-I Electric
Cooperative v. CIR, G.R. No. 193100, 2014)
When FAN is Deemed Made
General Rule: FAN is deemed made on the date when the
demand letter or notice of assessment is released, mailed,
or sent, even if the same is actually received by the
taxpayer after the expiration of the prescriptive period.
(Basilan Estates v. CIR, G.R. No. L-22492, 1967)
Exception: However, if the taxpayer denies receipt of the
FAN, the burden of proof is shifted to the BIR to prove that
the FAN was actually mailed within the period and actually
received (even if after the period expires). (Republic v. CA,
G.R. No. L-38540, 1987; Barcelon Roxas Securities v.
CIR, G.R. No. 157604, 2006)
While it is true that an assessment is made when the notice
is sent within the prescribed period, the release, mailing, or
sending of the same must still be clearly and satisfactorily
proved. (CIR v. GJM PHL Manufacturing, G.R. No.
202695, 2016)
Issuance of FLD/FAN as Disputed Assessment
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The issuance of FLD/FAN reiterating immediate payment
of assessment previously made in the PAN is a denial of
the PAN protest and is thus a decision on a disputed
assessment which may be appealed. (R.R. No. 18-2013)
Scenarios After Issuance of FLD/FAN
• Taxpayer may pay the assessment;
• Taxpayer fails to file a protest; or
• Taxpayer may file a protest
e) Disputed Assessment
If the taxpayer disagrees with the PAN, he has 15 days
from receipt of the PAN to file a written reply to contest the
proposed assessment.
If the taxpayer disagrees with the FAN, he has 30 days
from receipt of the FAN to file a written protest to contest
the proposed assessment.
b. Requisites for Valid Assessment
1. It must have been issued within the prescriptive period
for the issuance of assessment notices;
2. As a general rule, it may be issued only after a pre-
assessment notice (PAN) has been served upon the
taxpayer;
3. It shall state, in writing, the law and the facts on which
the assessment is made (NIRC, Sec. 228); and
4. The assessment must be served on and received by
the taxpayer (CIR v. Pascor Realty & Dev’t Corp, G.R.
No. 123895, 1999)
Not all documents coming from the BIR containing a
computation of tax liability can be deemed assessments.
An affidavit, which was executed by revenue officers
stating the tax liabilities of a taxpayer and attached to a
criminal complaint for tax evasion, cannot be deemed an
assessment that can be questioned before the CTA. (CIR
v. Pascor Realty and Development, G.R. No. 128315,
1999)
Assessment must be based on “actual facts”:
An assessment should not be based on mere
presumptions, no matter how logical said presumptions
may be. (CIR v. Benipayo, G.R. No. L-13656, 1962)
Sources of information may be from:
Examination of books, papers, records, or other data;
subpoena duces tecum; subpoena ad testificandum; tax
mapping; examination of returns; best evidence
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obtainable; inventory-taking, surveillance, and
presumptive gross sales and receipts; termination of
taxable period; fixing of real property values; inquiry of
bank deposits; accreditation and registration of tax agents;
prescribe additional procedural or documentary
requirements (NIRC, Sec. 5)
Authority to Issue Assessment Based on “Best
Evidence Obtainable”
CIR may use the best evidence obtainable to issue an
assessment under the following circumstances:
1. When a report required by law as a basis for the
assessment of any national internal revenue tax shall
not be forthcoming within the time fixed by laws or rules
and regulations; or
2. When there is reason to believe that any such report is
false, incomplete or erroneous (NIRC, Sec. 6[B])
Presumed Correctness of Tax Assessments
General Rule: All presumptions are in favor of the
correctness of tax assessments. When the assessment is
made by the CIR or his duly authorized agents, the same
is presumed correct and made in good faith. The taxpayer
has the duty to prove otherwise. (CIR v. Wyeth Suaco
Laboratories, G.R. No. 76281, 1991)
Exception: The prima facie correctness of a tax
assessment does not apply to “naked assessments”, which
are assessments without any foundation, the
determination of the tax due is without rational basis (CIR
v. Hantex Trading, G.R. No. 136975, 2005)
Assessment is discretionary; not compellable by
mandamus.
General Rule: Mandamus will not lie for it will constitute
judicial encroachment on executive functions. (Meralco
Securities v. Savellano, G.R. No. L-36181, 1982)
Exception: Mandamus will lie if the CIR acts with grave
abuse of discretion. (Meralco Securities v. Savellano, G.R.
No. L-36181, 1982)
Collection Process
a) Requisites
Collection via Assessment: Requisites
• There must be a valid assessment made;
• In civil action, such assessment must be final,
executory, and demandable; while in
summary/administrative remedies of distraint or
levy, even if such assessment is not yet final and
executory, the BIR may enforce collection
provided that the protest has already been denied
in whole or in part; and
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Note: The BIR may even issue a Warrant of
Distraint and Levy to enforce collection while the
TP is appealing the decision denying the protest to
the CTA. (R.A. No. 1125, as amended by R.A. No.
9282, Sec. 11)
which gives the government only five (5) years from the
date the assessment was made to collection. (Republic v.
Ret, G.R. No. L-13754, March 31, 1962)
If an assessment is made, then the period to collect is five
years from assessment, not ten (10) years.

• Collection must be made within 5 years following • A letter by the CIR demanding the amount of a
the finality of the assessment of the tax rubber-check previously paid by a taxpayer should
be deemed to be an assessment if it declares and
Instances When Assessed Tax Becomes Collectible fixes the tax payable against the party thereto and
The government can collect when the assessment demands the settlement thereof. Hence, the five-
becomes final and executory for: year period for collection of the tax due should
• Failure to protest FLD/FAN within the prescribed commence anew from the time said letter of
period; demand was sent to the taxpayer. (Republic v.
• Failure to appeal Final Demand on Disputed Limaco & de Guzman Commercial Co., Inc., G.R.
Assessment (FDDA) within the prescribed period; No. L-13081, August 31, 1962)
or
• Failure to appeal an adverse decision of the court Note: The period for collecting a tax through a judicial
within the prescribed period proceeding, in case.no return has been filed, is ten (10)
years from the discovery of the omission.
How Tax May Be Collected
3. Summary Remedies: Distraint and Levy
b) Prescriptive Periods
Distraint and levy proceedings are validly begun by
General Rule: 5 years from date of Final assessment
issuance of warrant and service thereof on the
(NIRC, Sec. 222[c])
taxpayer (BPI v. CIR, G.R. No. 139736, 2005)
4. Judicial Remedies: Civil or Criminal
Exception:10 years
7. False or fraudulent returns (NIRC, Sec. 222[a]);
Judicial remedies: When the government files the
8. Failure or omission to file return (NIRC, Sec. 222[a]); or
complaint with the proper regular trial court, or where
9. Execution of waiver in writing executed within the 5-
the assessment is appealed to the CTA, by filing an
year period (NIRC, Sec. 222[d]).
answer to the taxpayer’s petition for review wherein
payment of the tax is prayed for. (PNOC v. CA, G.R.
Regular return False, Fraudulent, or
No. 109976, 2005)
was Made Failure to file a Return
Assessment
Collection via Court Proceedings
3 years 10 years from discovery
General Rule: No proceeding in court without assessment
for the collection of tax shall be commenced (NIRC, Sec. Collection after assessment
203) 5 years from 5 years from
assessment by assessment.
Exception: A proceeding in court for the collection of tax summary and/or
may be filed without prior assessment in the following judicial
cases: Collection without assessment
5. False or fraudulent return with intent to evade the tax; 10 years from discovery.
or
They are, however,
6. Failure to file return (NIRC, Sec. 222[a])
limited to purely judicial
remedies. (Sec. 222[a])
Note: However, once assessment is made against the
taxpayer, the government cannot avail of the 10-year
period in Sec 222(A) Suspension of Running of Statute of Limitations – see
discussion below on Section 223
An assessment against the taxpayer takes the case out of
provisions of Sec 222(A) and places it under Sec 222 (C) c. Tax Delinquency and Tax Deficiency
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Tax Delinquency
1. Entails failure to pay tax due on any return required to
be filed, or tax due for which no return is required;
2. Subject to administrative penalties such as 25%
surcharge, interest and compromise penalty;
3. A disputed assessment where the taxpayer’s protest
has already been denied by the Commissioner in whole
or in part;
4. An assessment that has become final, executory and
demandable; and
5. Can be immediately collected through administrative
action with the issuance of distraint and levy.
Tax Deficiency
1. Refers to the amount by which the tax imposed or
required to be paid exceeds the amount shown in the
taxpayer’s return and/or paid by him.
2. If the taxpayer disagrees, he must go thru the process
of filing a protest (administrative remedy) and/or filing
an action before the CTA (judicial remedy).
Jeopardy Assessment
A tax assessment made by an authorized Revenue Officer
without the benefit of complete or partial trial in light of the
Revenue Officer’s belief that assessment and collection of
tax will be jeopardized by the delay caused by the
taxpayer’s failure to:
1. Comply with audit and investigation requirements; and
2. Substantiate any or all claims, deductions or credits in
his return. (R.R. No. 30-2002, Sec. 3[1][a])
It is usually issued when statutory prescriptive periods for
the assessment or collection of taxes are about to lapse
due principally to the taxpayer’s fault.
d. Prescriptive Period Assessment
Secs. 203 and 222 of the NIRC provide for a statute of
limitations on the assessment and collection of internal
revenue taxes, and exceptions therefrom, in order to
safeguard the interest of the taxpayer against
unreasonable investigation.
Unreasonable investigation contemplates cases where
the period for assessment extends indefinitely because
this deprives the taxpayer of the assurance that it will no
longer be subjected to further investigation for taxes after
the expiration of a reasonable period of time.
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Construction of statutory provision on prescription
The law on prescription, being a remedial measure, should
be interpreted in a way conducive to bringing about the
beneficent purpose of affording protection to the taxpayer.
(Phil. Journalists, Inc. v. CIR, G.R. No. 162852, 2004)
(1) General Rule
Prescriptive Period
The assessment must be made 3 years after the date the
return is filed or tax is due or the tax is actually paid,
whichever is later.
Note: A return filed before the last day prescribed by law
for filing shall be considered as filed on the last day. (NIRC,
Sec. 203)
Example: If TP files his/her ITR on April 10, 2021, the
government’s right to assess will prescribe on April 15,
2024. When the return was filed BEFORE the due date,
then it is considered as filed on the last day.
If TP files ITR files his/her ITR on April 20, 2021, the
government’s right to assess will prescribe on April 20,
2024. When the return was filed beyond the period
prescribed by law (April 15), then the period shall be
counted from the day the return was filed.
Burden of Proof that Return was Filed to Apply 3-Year
Prescriptive Period
The taxpayer has the burden to prove that a return had
been filed by him in order that the 3-year period can apply.
(Republic v. Marsman Dev’t, G.R. No. L-18956, 1972)
Prescription of the government’s right to assess taxes is an
affirmative defense. (Tagaliman Lumber v. CIR, G.R. No.
L-15716, 1962)
When to Raise the Defense of Prescription
A taxpayer can raise the defense of prescription for the first
time on appeal to CTA En Banc, Rule IX, Section 1 of the
Revised Rules on Civil Procedure provides that if the
pleadings and evidence on record show that the claim is
barred by prescription, the court must dismiss the claim on
the ground of prescription. (Rule IX, Section 1 of the
Revised Rules on Civil Procedure; China Banking
Corporation vs. CIR, G.R. No. 172509, 2015)
Requisites in Order That a Return May Be Considered
Filed for Purposes of Starting the Running of the
Prescriptive Period
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1. The return must be valid – it must comply
substantially with the requirements of the law; and
2. The return must be appropriate–It is a return for
the particular tax required by law (i.e. income tax
return is NOT the equivalent of the VAT return)
(Butuan Sawmill v. CTA, G.R. No. L-20601, 1966)
When an Assessment is Deemed Made
An assessment is deemed made when notice to this effect
is released, mailed or sent to the taxpayer within the 3-year
period. It is not required that the notice be received by
the taxpayer within the prescribed period. But the
sending of the notice must clearly be proven. (Basilan
Estate v. CIR, G.R. No. L-22492, 1967)
Example: TP filed his/her ITR on April 15, 2021. The BIR
mailed the notice of assessment to TP on April 10, 2024.
However, the TP only received the notice on April 20,
2024. In this case, the assessment is deemed made on
April 10, 2024, when the notice is mailed to the TP which
is within the 3-year period. Hence, the government’s right
to assess has not yet prescribed.
If the taxpayer denies having received the assessment, the
CIR must then prove by competent evidence that such
notice was indeed received by the addressee. The onus
probandi has shifted to the BIR to show by contrary
evidence that the taxpayer indeed received the
assessment. While a mailed letter is deemed received by
the addressee in the course of mail, this is merely a
disputable presumption, the direct denial of which shifts the
burden to the sender to prove that the mailed letter was
received by the addressee. (CIR v. GJM Manufacturing,
Inc. G.R. No. 202695, 2016)
Computing the Prescriptive Period
The Administrative Code, not Art. 13 of the Civil Code,
governs. A year is composed of 12 months and the number
of days is irrelevant. (CIR v. Primetown Property Group,
G.R. No. 162155, 2007)
Example: One calendar month from December 31, 2021
will be from January 1, 2022 to January 31, 2022; one
calendar month from January 31, 2022 will be from
February 1, 2022 until February 29, 2022.
Amendment of Tax Return
General Rule:
1. Substantial Amendment – The counting of the
prescriptive period shall be reckoned on the date the
substantial amendment was made
TAXATION LAW
Example: Amendment of an original income tax
return showing a net loss to show more losses (CIR
v. Phoenix Assurance, G.R. No. L-19727, 1965)
2. Superficial Amendment – The counting of the
prescriptive period shall still be the original period
(CIR v. Phoenix Assurance, G.R. No. L-19727, 1965)
Exception: If the return is sufficiently complete to
enable the CIR to intelligently determine the proper
amount of the tax to be assessed, the prescriptive
period for assessment starts from the filing of the
original return (A.L. Ammen Transportation v.
Collector, CTA Case No. 540, 1965)
Note: If a return for a different tax is filed, the effect is as if
NO RETURN was filed, and thus, the applicable
prescriptive is 10 years from discovery of the omission to
file a return, rather than the 3-year prescriptive period
(Butuan Sawmill, Inc. v. CTA, G.R. No. L-20601, 28
February 1966)
Exceptions to the general prescriptive period
1. False/fraudulent return or no return – 10-year
prescriptive period (NIRC, Sec. 222[a])
2. Suspension of prescriptive period – CIR is prohibited
from assessing or collecting, plus 60 days (NIRC, Sec.
223)
3. Waiver of prescriptive period (NIRC, Sec. 222[b])
(2) False Returns vs. Fraudulent Returns vs. Non-filing
of Returns
Prescriptive Periods
1. Failure to file return: 10 years from date of discovery of
the omission to file the return
2. False return or fraudulent return with intention to evade
the tax: 10 years from the date of the discovery of the
falsity or fraud
Note: The law should be interpreted to mean a separation
of the three different situations of false return, fraudulent
return with intent to evade tax, and failure to file a return is
strengthened immeasurably by the last portion of the
provision which segregates the situation into three different
classes, namely "falsity," "fraud," and "omission." (Aznar v.
CTA, G.R. No. L-20569, August 23, 1974)
False Return
Contains wrong information due to mistake, carelessness,
or ignorance (Aznar v. CIR, G.R. No. L-20569, 1974)
A substantial under-remittance of withholding tax on
compensation constitutes falsity to warrant the 10-year
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prescriptive period (Samar-I Electric Cooperative v. CIR,
G.R. No. 193100, 2014)
Fraudulent Return
Fraud must be alleged and proved as a fact. It must be the
product of a deliberate intent to evade taxes. It may be
established by:
1. Intentional and substantial understatement of the
taxpayer’s sales, receipts or income by more than 30%;
or
2. Intentional and substantial overstatement of deductions
by more than 30%. (NIRC, Sec. 248[B])
Such fact in a fraud assessment which has already
become final and executory shall be judicially taken
cognizance of in a civil or criminal action for the collection
thereof. (NIRC, Sec. 222[a])
Note: Mere understatement of gross earnings does not of
itself prove fraud. (Yutivo Sons v. CTA, G.R. No. L-
13,1961)
False vs. Fraudulent Return
FALSE RETURN FRAUDULENT RETURN
Deviation from the truth Intentional/deceitful entry
whether intentional or not with intent to evade tax due
Taxpayer is not subject to Taxpayer may be subject
criminal penalty to criminal penalty
50% surcharge penalty applies to both
10-year prescriptive period applies to both
Failure to File Return – Instances
A deficient return which prevented the CIR from
computing taxes due; such return is the same as if no
return is filed at all (CIR v. Gonzales, G.R. No. L-19495,
1966)
Failure to report income in the returns which were clearly
not exempted from tax – CTA did not treat it as a simple
omission since it involved substantial sums (Standard
Chartered Bank v. CIR, CTA EB Case No. 731, 2012)
Note: Nothing in Sec. 222(A) shall be construed to
authorize the examination and investigation or inquiry into
any tax return filed in accordance with the provisions of any
tax amnesty law or decree.
TAXATION LAW
(3) Suspension of the Running of Statute of
Limitations
The running of the statute of limitations on the making of
assessment or commencing of collection shall be
suspended, and for sixty days thereafter:
1. When the CIR is prohibited from making the
assessment or beginning the distraint or levy or a
proceeding in court – during such period and for 60
days thereafter;
When a case is on appeal to the CTA, the CIR is
prevented from filing an ordinary action to collect the
tax in the regular courts; the filing of the petition for
review in the CTA interrupts the running of the
prescriptive period for collection, until its termination in
the Supreme Court. (Republic v. Ker, G.R. No. L-
21609, 1966)
2. When the taxpayer requests for a reinvestigation
which is granted by the CIR;
There must be a request for reinvestigation (which is
granted which is interpreted by jurisprudence as “acted
upon”); not merely a request for reconsideration. (CIR
v. Philippine Global Commc’n, G.R. No. 167146, 2006)
CIR must have granted or acted upon the request for
reconsideration. (BPI v. CIR, G.R. No. 174942, 2008)
Note: The burden of proof that the taxpayer’s request
for reinvestigation had been actually granted is with the
CIR. (BPI v. CIR, G.R. No. 139736, 2005)
3. When the taxpayer cannot be located in the address
given by him in the return, unless he informs the CIR of
any change in his address;
This rule does not apply even if the taxpayer failed to
follow the process for the notification on the change of
address as long as there is proof that BIR is in fact
aware of the whereabouts of the taxpayer. (CIR v.
BASF Coating + Inks Phils., Inc., G.R. No. 198677,
2014)
4. When the warrant of distraint or levy is duly served, and
no property is located; and
5. When the taxpayer is out of the Philippines. (NIRC,
Sec. 223)
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(4) Waiver / Extension of prescriptive period
Nature of Waiver of Statute of Limitations
A waiver of the statute of limitations, [it] being a derogation
of the TP’s right to security against prolonged and
unscrupulous investigations, must be carefully and strictly
construed (CIR v. Philippine Daily Inquirer, G.R. No.
213943, 2017)
General Rule: Taxpayer and CIR may agree to waive the
prescriptive period if they comply with the requirements of
a valid waiver.
Only upon a written agreement between the CIR and the
taxpayer executed before the expiration of the three-year
period (NIRC, Sec. 222[b])
Requirements of a Valid Waiver of the Statute of
Limitations (R.M.O. 14-2016)
1. The waiver may not necessarily be in the form
prescribed by RMO 20-90 or RDAO 05-01, provided
that the following conditions are complied with:
a. The waiver is executed before the expiration
of the period to assess or to collect taxes;
b. The waiver is signed by the taxpayer himself,
his duly authorized representative, or by any
of the responsible officials for corporations;
and
c. The expiry date of the period agreed upon to
assess/collect the tax after the three-year
period of prescription.
2. The waiver need not specify the taxes to be assessed
nor the amount thereof except in cases of waiver for
collection of taxes. It may simply state “All internal
revenue taxes” except for waiver of collection of taxes
which shall indicate the particular taxes assessed.
3. The taxpayer has the burden to ensure that the waiver
is validly executed by its authorized representative. The
waiver cannot thereafter be invalidated on the ground
that the taxpayer’s representative who participated in
the conduct of the audit is not authorized to sign the
waiver.
4. Notarization of the waiver is now optional. However, it
is sufficient that the waiver is in writing as specifically
provided by the NIRC, as amended.
The waiver shall take legal effect and be binding on the
taxpayer upon its execution and acceptance of the
waiver by the relevant BIR Officer. The BIR officer shall
TAXATION LAW
indicate acceptance by signing the same. Both the
execution of waiver and the acceptance must be done
prior to the expiration of the period to assess or collect.
5. The waiver can be accepted by the Commissioner on
Internal Revenue, the Commissioner’s authorized
representative as prescribed in existing regulations, the
revenue district officer, or the group supervisor
designated in the Letter of Authority for the audit.
6. There are only two dates that need to be present on the
waiver, namely:
(a)The date of execution; and
(b)The expiry date of the period the taxpayer waives
the statute of limitations.
Before the expiration of the period set on the previously
executed waiver, the period earlier set may be
extended by subsequent waiver made in accordance
with this Order. (R.M.O. No. 14-2016)
Note: The waiver must be executed in 3 copies, the
original to be attached to the docket, the second copy
for the taxpayer and the third copy for the Office
accepting the waiver. Taxpayer must be furnished a
copy of the waiver in order to perfect the agreement
since the waiver is not a mere unilateral act. (RMO 20-
90; See also CIR v. Stanley Works Sales (Phils.), Inc.,
G.R. No. 187589, 2014)
Recently, the Bureau of Internal Revenue issued Revenue
Memorandum Order No. 14-2016, which further clarifies
that:
1. The waiver shall be executed before the
expiration of period to assess or collect taxes.
The date of execution shall be specifically
indicated in the waiver.
2. The waiver shall be signed by the taxpayer
himself or his duly authorized representative. The
taxpayer is charged with the burden of ensuring
that the waiver is validly executed by its authorized
representative. The authority of the taxpayer's
representative who participated in the audit or
investigation shall not be thereafter contested to
invalidate the waiver.
3. The expiry date of the period agreed upon to
assess/collect the tax after the regular 3-year
period of prescription should be indicated.
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A waiver of the statute of limitations, [it] being a derogation
of the TP’s right to security against prolonged and
unscrupulous investigations, must be carefully and
strictly construed (CIR v. Philippine Daily Inquirer, G.R. No.
213943, 2017)
The waiver must be signed by the taxpayer himself or his
duly authorized representative. In the case of a
corporation, the waiver must be signed by any of its
responsible officials. In case the authority is delegated by
the taxpayer to a representative, such delegation should
be in writing and duly notarized. The waiver should be duly
notarized. (CIR v. Kudos Metal Corp., G.R. No. 178087,
2010)
Note: Notarization of the waiver is now optional. (R.M.O.
14-2016)
Exceptions to Waiver
Doctrine of Equitable Estoppel (CIR v. Next Mobile,
G.R. No. 212825, 2015)
CTA found the following flaws in multiple waivers executed
by the taxpayer: (i) lack of notarized board authority; (ii)
dates of acceptance by the BIR not indicated; (iii) fact of
receipt by the TP not indicated. However, SC ruled that the
waivers were valid, in contrast to its ruling in Kudos Metal
Both parties knew the infirmities of the waivers yet they
continued dealing with each other based on these
documents. The waiver should have been void for being
defective but due to peculiar circumstances, this is an
exception and the waivers are valid because the parties
are in pari delicto. (CIR v. Next Mobile, Inc., G.R. No.
212825, 2015)
Partial Payment
Partial payment of the assessment issued within the
extended period to assess as provided in the Waiver of
Defense of Prescription is an implied admission of the
validity of the waiver. (RCBC v. CIR, G.R. No. 170257,
2011)
Estoppel applies if both the BIR and the taxpayers are
at fault. The TP’s act of impugning its waivers after
benefitting from them was considered an act of bad faith.
Likewise, the BIR was at fault when it accepted Transitions’
Waivers despite their non-compliance with the
requirements in the RMO. TP is then estopped. However,
since the FAN was issued beyond the extended period,
prescription had nevertheless set in. (CIR vs. Transition
Optical Philippines, Inc., G.R. No. 227544, 2017)
TAXATION LAW
BUT SEE: A taxpayer, by paying the other tax
assessments covered by a Waiver of the Statute of
Limitations, is not estopped from questioning the
validity of said waiver (on the basis that CIR did not sign
it and some dates were lacking) with respect to the other
covered but unsettled assessments. In this case, the
taxpayer did not waive the prescription of the other
deficiencies as it continued to raise the issue of
prescription in its Pre-Trial Brief, Joint Stipulations, direct
testimonies, and Memorandum filed. (CIR v. Standard
Chartered Bank, G.R. No. 192173, 2015)
2. TAXPAYER’S REMEDIES
a. Protesting an Assessment
i. Protested assessment
Protest in General
A protest is a vital document which is a formal declaration
of resistance of the taxpayer. It is a repository of all
arguments. It is also the formal act of the taxpayer
questioning the official actuations of the CIR. This is
equivalent to a pleading.
ii. Period to File Protest
A written request for reinvestigation or reconsideration
must be filed within 30 days from receipt of the FAN. (R.R.
No. 12-99, as amended by R.R. No. 18-2013)
Failure to file any protest to the FAN shall render the
assessment final, executory and demandable.
iii. Form, Content, and Validity
Requisites of a valid protest
A protest is considered valid if it satisfies the following
conditions:
1. It is made in writing, addressed to the CIR and made
within the prescribed time (i.e., 30 days from receipt of
the FAN);
2. It contains the information required by Sec. 6 of RR No.
12-85, thus:
(a) Name of the taxpayer and address for the
immediate past 3 taxable years;
(b) Nature of request (i.e., whether for reinvestigation
or reconsideration, specifying newly discovered
evidence he intends to present if it is a request for
reinvestigation);
(c) The taxable periods covered;
(d) FAN number;
(e) Date of receipt of FAN;
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(f) Itemized statement of the findings to which the Statute of limitations is

taxpayer agrees as a basis for computing the tax tolled, provided the
due, which amount should be paid immediately request is granted
upon the filing of the protest; for this purpose, the Statute of limitations is
(i.e., acted upon) by
protest shall not be deemed validly filed unless not tolled
the CIR (BPI v. CIR,
payment of the agreed portion of the tax is paid G.R. No. 139736,
first; 2005)
(g) Itemized schedule of adjustments with which the
taxpayer does not agree; and 180-day period
(h) Statement of facts and/or law in support of the 180-day period commences from the
protest. (R.R. No. 12-85, as amended by) commences from the submission of
filing of the protest complete supporting
3. R.R. No. 18-2013 reiterates that the taxpayer shall documents
state in his protest:
(a) Nature of protest, whether reconsideration or Note: Undoubtedly, a reinvestigation, which entails the
reinvestigation, specifying newly discovered or reception and evaluation of additional evidence, will take
additional evidence he intends to present if it is a more time than a reconsideration of a tax assessment,
request for reinvestigation; which will be limited to the evidence already at hand. This
justifies why the former can suspend the running of the
(b) Date of the assessment notice; and statute of limitations on collection of the assessed tax,
(c) Applicable law, rules and regulations, or while the latter cannot. (BPI v. CIR, G.R. No. 181836,2014)
jurisprudence on which his protest is based.
iv. Submission of Relevant Supporting
Effect of Non-Compliance with Requirements Documents
Otherwise, his protest shall be considered void and
without force and effect. Submission of Documents After Protest
Only applies to requests for reinvestigation, i.e., the 60-day
Request for Reconsideration v. Request for period for submission of all relevant supporting documents
Reinvestigation shall not apply to requests for reconsideration (R.R. No.
REQUEST FOR REQUEST FOR 18-2013)
RECONSIDERATION REINVESTIGATION
Relevant Supporting Documents
A plea of re-evaluation The taxpayer shall submit all relevant supporting
of an assessment on documents in support of his request for reinvestigation
A plea of re-evaluation
the basis of newly within 60 days from date of filing of such written request.
of an assessment on
discovered or Otherwise, the FAN shall become final. (NIRC, Sec. 228,
the basis of existing
additional evidence R.R. No. 18-2013)
records without need of
that a taxpayer intends
additional evidence.
to present in the “Relevant supporting documents” refers to those
reinvestigation. documents necessary to support the legal and factual
It may involve a bases in disputing a tax assessment as determined by the
question of fact or of taxpayer. (R.R. No. 18-2013)
It may involve a
law or both. The relevant supporting documents mentioned in the law
question of fact or of
refer to such documents which the taxpayer feels would be
law or both.
necessary to support his protest and not what the CIR feels
Taxpayer does not Taxpayer has to should BIR’s action on the protest to the FAN be submitted.
need to present present relevant Otherwise, the taxpayer would always be at the mercy of
additional evidence supporting documents the CIR which may require production of such documents
which taxpayer could not produce. (Standard Chartered
Bank v. CTA, CTA Case No. 5696, 2001)

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The BIR cannot demand what type of supporting
documents should be submitted (CIR v. First Express
Pawnshop Company, G.R. No. 172046, 2009). This means
that the taxpayer may validly not submit any supporting
documents to support its protest.
Effect of Non-Submission of Relevant Supporting
Documents
The assessment becomes final (R.R. No. 12-99, as
amended by R.R. No. 18-2013)
v. Effect of Failure to File Protest
Within 60 days from filing of protest, all relevant supporting
documents should have been submitted, otherwise, the
assessment shall become final and unappealable.
(NIRC, Sec. 228)
vi. Decision of the Commissioner on the protest
filed
Scenarios After Protest Filed:
1. CIR denies the protest to the FAN (directly or
indirectly); or
2. Does not act on such protest.
Direct Denial: Final Decision on Disputed Assessment
(FDDA)
The nomenclature of the BIR’s denial of the protest to the
FAN could vary. It may be called a Final Decision on a
Disputed Assessment (FDDA), among others. (R.M.C.
No. 18-13)
Requisites of a Valid FDDA
1. Must be issued by the CIR or his duly authorized
representative;
2. Must contain the facts, law, and rules on which the
assessment is based;
This is the same rule applied for the assessment itself
although it is clear that the assessment and the
decision are two distinct documents
3. Must be served to the taxpayer through (i) personal
service, (ii) substituted service, and (iii) service by mail;
service to the tax agent/practitioner, who is appointed
by the taxpayer under circumstances prescribed in the
pertinent regulations on accreditation of tax agents,
shall be deemed service to the taxpayer; and
4. Must state that the same is his final decision (R.R. No.
12-99, as amended by R.R. No. 18-2013)
TAXATION LAW
Rationale: To avoid any confusion that could
adversely affect the rights and interests of the taxpayer
(Allied Banking Corporation v. CIR, G.R. No. 175097,
2010)
It is true that the Commissioner is not obliged to accept
the taxpayer's explanations. However, when the
Commissioner rejects these explanations, he or she must
give some reason for doing so. He or she must give the
particular facts upon which his or her conclusions are
based, and those facts must appear in the record. Further,
the Court ruled that the presumption of regularity rule
cannot be applied here given that it was shown that there
were evidence that the CIR did not exert utmost efforts to
review. Thus, the assessment was deemed null and void.
(CIR vs. Avon Products Manufacturing, Inc., G.R. Nos.
201398-99, 2018)
The FDDA must contain the facts, law, and rules on which
the assessment is based. This is the same rule applied for
the assessment itself although it is clear that the
assessment and the decision are two distinct documents.
The rationale for the requirement imposed on the
assessment is to accord due process to the taxpayer to be
able to file an intelligent protest. On the other hand, if the
FDDA itself does not conform to the requirements , the
same is void and thus it is as if no decision was rendered.
The effect therefore is that what is appealable to the CTA
is the inaction of the CIR or the duly authorized
representative. (CIR vs. Liquigaz Philippines Corporation,
G.R. No. 215534, 2016)
Indirect Denial: (without FDDA)
Examples of Indirect Denial
1. Civil collection instituted during pendency of
protest (CIR v. Union Shipping, G.R. No. 66160,
1990; Yabes v. Flojo, G.R. No. 46954, 1982)
2. Issuance of warrant of distraint and levy to enforce
collection (CIR v. Int’l Pharmaceuticals, CTA E.B.
No. 608, 2011)
3. Referral by the CIR of request for reinvestigation
to Solicitor General (Republic v. Lim Tian Teng
Sons, G.R. No. L-21731, 1966)
4. Final demand for payment of delinquent taxes
This Court has considered the following
communications sent by the CIR or his duly authorized
representative to taxpayers as embodying rulings
appealable to the CTA:
1. A letter which stated the result of the
reinvestigation requested by the taxpayer and the
consequent modification of the assessment;
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2. A letter which denied the request of the taxpayer Differences between PAN, FAN and FDDA
for the reconsideration, cancellation, or withdrawal PAN FAN FDDA
of the original assessment;
3. A letter which contained a demand on the taxpayer
for the payment of the revised or reduced A A declaration Decision of the
assessment; and communication of deficiency CIR or his duly
4. A letter which notified the taxpayer of a revision of issued by the taxes issued authorized
previous assessments Regional to a taxpayer representative
Assessment who fails to that states the
The CIR should ALWAYS indicate to the taxpayer in clear Division or by respond to a facts and the
and unequivocal language whenever his action on an the CIR or his PAN within the law, rules and
assessment questioned by a TP constitutes his final duly authorized prescribed regulations or
determination on the disputed assessment. (Surigao representative period, or jurisprudence
Electric Co. Inc. v. CTA, G.R. No. L-25289, 1974) informing the whose reply is on which the
Inaction by the CIR or Duly Authorized taxpayer who found to be decision is
Representatives has been without merit based;
audited of the otherwise, it is
Void FDDA constitutes inaction: If the FDDA itself does findings of the void.
not conform to the requirements. It is as if no decision was Revenue
rendered. The effect therefore is that what is appealable to Officer following
the CTA is the inaction of the CIR or the duly authorized the review and
representative. (CIR v. Liquigaz Philippines Corporation, evaluation of
G.R. No. 215557, 2016) these findings

Shall be in Shall be in
writing and shall writing and
show in detail shall show in
the facts and detail the facts
the law, rules and the law,
and regulations rules and
or regulations or
jurisprudence jurisprudence
on which the on which the
proposed proposed
assessment is assessment is
based; based;
otherwise, the otherwise, the
assessment is assessment is
void. void.

15 days to reply 30 days to file

protest after 30 days to
receipt of FAN appeal to CTA

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Denial by FDDA Issued by CIR’s Authorized

Response is Protest must
Representative
general due to be
1. Judicial appeal to CTA within 30 days from receipt of
shorter time. comprehensiv
FDDA; or
does not e that explains
2. Administrative appeal to CIR within 30 days from
necessarily the legal and
receipt of the FDDA through request for
tackle specific factual basis
reconsideration;
findings why the
assessment is • If the protest or request for reconsideration is
wrong and still denied by the CIR, appeal to the CTA
must present within 30 days from date of receipt of said
all decision.
documentary Note: MR will not toll the 30-day period to appeal to CTA
evidences Note: No request for reinvestigation shall be allowed in
administrative appeal, and only issues raised in the
Filing of reply is Filing of decision of the CIR’s duly authorized representative shall
directory protest is be entertained by the CIR (R.R. No. 12-99, as amended)
mandatory The administrative appeal filed with the CIR will toll the 30-
day period to the CTA.
Non-filing of Failure to file
reply will protest to FAN Inaction by CIR or Duly Authorized Representative
warrant will make the 1. Appeal to the CTA within 30 days from lapse of 180-
issuance of assessment day period; or
Final final and
Assessment executory and 2. Await the decision of the CIR’s authorized
Notice (FAN) the taxpayer representative, in which case the taxpayer may appeal
loses its right to the CTA within 30 days from receipt of the BIR’s
to seek judicial decision or elevate the protest through motion for
remedy. reconsideration to the CIR within 30 days from receipt
of the BIR’s decision (i.e., administrative appeal)
(1) Period provided for the protest to be acted upon or
decide on protest filed Note: In case of inaction on protested FAN, the option
Protest for Reconsideration of the taxpayer to either file a petition in the CTA or
One hundred and eighty (180) days from filing of the await the decision of the CIR’s authorized
protest. representative or of the CIR are mutually exclusive.
Resort to one bars the application of the other.
Protest for Reinvestigation (Lascona Land v. CIR, G.R. No. 171251, 2012)
If the protest is denied in whole or in part, or is not acted
upon within one hundred and eighty (180) days from Compliance with requirements to dispute an
submission of supporting documents, the taxpayer assessment – assessment not final, executory and
adversely affected by the decision or inaction may appeal demandable
to the CTA within thirty (30) days from receipt of the said After the company submitted its letter-reply stating that
decision, or from the lapse of one hundred eighty (180)- it would not comply with the presentation of the proof
day period; otherwise, the decision shall become final, of DST payment, no reply was then heard from the CIR.
executory and demandable. (NIRC, Sec. 228) The company has complied with the requisites in
disputing an assessment, which provides that in case
(2) Remedies of the Taxpayer in Case the the protest is not acted upon within 180 days from the
Commissioner denies the Protest or Fails to Act on submission of the documents, the taxpayer adversely
the Protest affected may appeal to the CTA within 30 days from
the lapse of the 180-day period. Thus, the tax
Taxpayer’s Remedies from BIR’s Denial on Protest to assessment cannot be considered as final, executory
FAN (FDDA): and demandable. (CIR v. First Express Pawnshop
Company, Inc., G.R. No. 172045-46, 2009)

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Motion to Suspend Collection of Tax During Protest 5. Failure of taxpayer to file a MR or new trial before the
While the TP is appealing the decision denying the protest CTA Division, or failure to appeal to CTA En Banc and
to the CTA, and the BIR issues a Warrant of Distraint and Supreme Court based on existing Rules of Procedure;
Levy to enforce collection, the Taxpayer may file a “Motion or
to Suspend Collection of Tax” on the ground that the 6. Failure of taxpayer to receive any assessment notices
collection of the tax will jeopardize the interest of the TP because it was served in the address indicated in the
(RA 1125 § 11) and post bond in an amount not more than BIR’s registration database and the taxpayer
twice the amount being collected transferred to a new address or closed/ceased
operations without updating and transferring, or
Rule on Prior Payment When Protesting Assessment cancelling its BIR registration, as the case may be
General Rule: No prior payment of assessed internal (R.M.O. No. 26-2016)
revenue tax is required when protested or disputed.
Summary of Appeals: Assessments
Exception: when there are several issues involved but the
taxpayer only disputes or protests against the validity of
some of the issues raised, the taxpayer shall be required
PAN FAN PROTEST (30 DAYS)
to pay the deficiency tax or taxes attributable to the
undisputed issues. No action shall be taken on the
taxpayer's disputed issues until the taxpayer has paid the
deficiency tax or taxes attributable to the said undisputed
issues. (R.R. No. 12-99)

Preservation of Books
Submit supporting docs
All taxpayers are required to preserve their books of BIR ACTION
(60 days, if “request for
accounts and other accounting records (including invoices, (180 DAYS)
reinvestigation”)
receipts, vouchers, and other source documents) for a
period of ten (10) years reckoned from the day following
the deadline in filing a return or if filed after the deadline, If the BIR denies the protest in whole or in part:
from the date of actual filing. If there is a pending
examination due to an assessment or a filed refund claim,
the records are to be preserved until the case is finally APPEAL
BIR denial of CTA in
TO CTA
resolved. (R,R, No. 17-2013) protest in whole division
in division
or in part decision
(30 days)
(3) Effect of Failure to Appeal
Effect of Failure to Appeal to CTA: The decision shall be
final, executory and demandable

Summary: Instances When Assessment Becomes

Final, Executory, and Demandable Appeal
1. Failure of taxpayer to file a valid protest within 30 days File MR CTA in division to CTA
from receipt of the FLD/FAN; (15 days) - denial of MR en banc
2. Failure to submit all relevant supporting documents in (15 days)
support of his protest (request for reinvestigation)
within 60 days from date of filing thereof;
3. Failure of taxpayer to appeal to the CIR or CTA within
30 days from the date of receipt of the FDDA issued by
CIR’s duly authorized representative;
4. Failure of taxpayer to appeal to CTA within 30 days CTA en Petition for Review with SC
from the date of receipt of the decision of the CIR banc or Motion for Extension to
denying the request for reconsideration of the FDDA decision File Petition (15 days)
rendered by the CIR's authorized representative;

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b. Recovery of Tax Erroneously or Illegally Collected
a) Tax Refund as Distinguished from Tax Credit
TAX REFUND TAX CREDIT
Tax refund takes The government
place when there is issues a Tax Credit
actually a Certificate covering
reimbursement of the amount
tax. determined to be
reimbursable, which
A “refund” is a written is applied after proper
claim for the payment verification against
of cash for taxes any sum that may be
erroneously or due to the taxpayer.
illegally paid by the
taxpayer to the May be applied
government. against any internal
revenue tax, except
withholding taxes
Original copy is
surrendered to the
revenue officer
No tax refund will be
given resulting from
availment of
incentives granted by
law where no actual
payment was made
(NIRC, Sec 204[C])
The following must be established:
1. That there was an actual collection and
receipt of the government of the tax to be
recovered and this requires actual proof;
and
2. That there is a legal basis for granting the
refund or credit including the verification of
compliance with the statutory requirements
relative to the filing of the claims within the
reglementary two-year period.
TAXATION LAW
Forfeiture of cash refund/tax credit:
1. Forfeiture of refund in favor of the
government when a refund check or
warrant remains unclaimed or uncashed
within 5 years from date of mailing or
delivery
2. Forfeiture of Tax Credit – a tax credit
certificate which remains unutilized after
5 years from date of issue, shall be
invalid, unless revalidated. (NIRC, Sec.
230)
a) Grounds, Requisites, and Period for Filing a Claim
for Refund or Issuance of a Tax Credit Certificate
Grounds for Filing a Claim for Refund
Taxpayer files in writing with the CIR a claim for tax refund
for:
1. Taxes erroneously or illegally received;
Taxes are erroneously paid when a taxpayer pays
under a mistake of fact, such as when 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.
Refunds for input VAT are NOT in the nature of
erroneously paid tax/illegally assessed/collected. (CIR
v. Aichi Forging Company of Asia, Inc., G.R. No.
184823, 2010
2. Penalties imposed without authority;
3. Any sum alleged to have been excessively or in any
manner wrongfully collected (CIR v. Pilipinas Shell,
G.R. No. 188497, 2012);
4. Value of internal revenue stamps when returned in
good condition by the purchaser; and
5. Value of unused stamps rendered unfit for use upon
proof of destruction, in the discretion of the CIR.
Requisites for Claims for Tax Refund
1. Necessity of written claim for refund;
Exceptions: No written claim is needed
(a) A return filed showing an overpayment shall be
considered as a written claim for credit or refund
(NIRC, Sec. 204[C])
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(b) On the face of the return upon which the payment

was made, such payment appears clearly to have
been erroneously paid (NIRC, Sec. 229)
2. Claim must contain a categorical demand for
reimbursement (Bermejo v. CIR, G.R. No. L-3029,
1950); and
3. Filing of administrative claim for refund and the
suit/proceeding before the CTA both within 2 years
from date of payment regardless of any
supervening cause.
Note: The suit may be maintained whether or not such
tax/penalty/sum has been paid under protest;
If proven that the entity is tax exempt, then the previously
paid tax can be refunded but the claim is still subject to the
prescriptive period of 2 years. (CIR vs. Manila Electric
Company, G.R. No. 181459, 2014)
Prescriptive Period for Filing Claims for Refund
Internal Revenue Taxes, in General
KIND OF FILE
PERIOD TO FILE
CLAIM WITH
TP need not wait for a decision and
Inaction on
must file an appeal with the CTA
the BIR’s
when the 2-year period is about to
part re:
lapse. Failure to appeal bars
claim for
recovery (Gibbs v. CIR, G.R. No.
refund
L-13453, 1960)
Verily, the primary purpose of filing an administrative claim
was to serve as a notice of warning to the CIR that court
action would follow unless the tax or penalty alleged to
have been collected erroneously or illegally is refunded. To
clarify, Section 229 of the Tax Code, however, does not
mean that the taxpayer must await the final resolution of its
administrative claim for refund, since doing so would be
tantamount to the taxpayer’s forfeiture of its right to seek
judicial recourse should the 2-year prescriptive period
expire without the appropriate judicial claim being filed.
(CIR v. Goodyear Philippines, Inc., G.R. No. 216130,
2016)
Special Rule for Prescriptive Periods to File Refund of
Input VAT for Zero-Rated Sales
General Rule: The CIR has 90 days, from the date of the
submission of the complete documents within which to
grant or deny the claim for refund/credit of input VAT.

Administrative In case of full or partial denial by the CIR, the taxpayer’s

Within 2 years from recourse is to file an appeal before the CTA within 30 days
Claim (NIRC, BIR
payment of tax from receipt of the decision of the CIR.
Sec. 204)
Otherwise, if after the 90-day period the, CIR fails to act on
Judicial Claim
the application for tax refund/credit, the remedy of the
(NIRC, Sec. CTA (see below table)
taxpayer is to appeal the inaction of the CIR to CTA within
229) 30 days.

Hence, if the taxpayer filed with CTA before the 90-day

Note: The taxpayer must file an administrative claim period expires, CTA will dismiss the appeal on the ground
of prematurity.
before filing a judicial claim (NIRC, Sec. 204, in relation to
Sec. 229)
If filed with CTA after the 120-day (90 + 30 days), CTA will
dismiss for being late.
SCENARIO WHEN TO APPEAL TO CTA
This only applies to creditable input tax refunds.

Taxpayer must file an appeal with KIND OF FILE

PERIOD TO FILE
the CTA, whichever is earlier CLAIM WITH
between:
BIR decides
on the claim Within 2 years from
[1] within 30 days from receipt of
for refund the close of the
the decision, or taxable quarter
[2] within the 2-year period under Administrative
BIR when the sales were
Sec. 229 of the NIRC Claim
made (CIR v. Mirant
Pagbilao Corp., G.R.
172129, 2008)

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Within 30 days from From date of the

denial of claim or If the tax is paid in last or final
from the lapse of the installment or only in installment or (CIR
120 day (now 90- part v. Prieto, G.R. No.
day) period without L-13912, 1960)
Judicial Claim CTA
any action from the
BIR (CIR v. Aichi From conversion of
If the taxpayer merely
Forging Company, the deposit to
made a deposit
G.R. No. 184823, payment
2010)
If tax has been From date it falls due
withheld from source at the end of the
Exception: The exception to the 120+30 day rule does not (through the taxable year (Gibbs v
require that the San Roque decision nor the 2003 BIR withholding tax CIR, G.R. No. L-
ruling be cited by the claimant. If the claim falls within the system) 17406, 1965)
exception period (i.e. Dec. 10, 2003 to Oct. 6, 2010), the
120+30 day rule is relaxed and taxpayers who did not wait At the earliest, on the
for the expiry of the 120 days to appeal the inaction of the date of the actual filing
CIR shall not be faulted. In short, the San Roque ruling is of the adjusted final
Corporate taxpayer return at the end of
automatically applied to all taxpayers who filed their claims
the taxable year (CIR
within the exception period (CIR v. Air Liquide Philippines, v. CA, G.R. No.
Inc., G.R. No. 210646, 2015) 117254, 1999)

In VAT Returns, 30-day period to appeal need not

necessarily fall within 2-year period
The 30-day period given to the taxpayer within which to file
an appeal before the CTA need not necessarily fall within
the two-year prescriptive period on applying for TCC or
refund, as long as the administrative claim is filed within
the two-year prescriptive period (Team Energy
Corporation v. CIR, G.R. No. 190928, 2014)
Taxpayer must not wait for CIR decision to file appeal
regarding refund claim
When the 120-day period lapses and there is inaction on
the part of the CIR, they must no longer wait for it to come
up with a decision thereafter. The CIR’s inaction is the
decision itself. It is already a denial of the refund claim.
Thus, the taxpayer must file an appeal within 30 days from
the lapse of the 120-day waiting period.” (Rohm Apollo
Semiconductor v. CIR, G.R. 168950, 2015)
Start of 2-Year Prescriptive Period
General Rule: From the payment of tax
CASE START OF 2-YEAR
PERIOD
From date tax was
Tax is illegally or paid (CIR v. Victorias
erroneously collected Milling, G.R. No. L-
24108, 1968)
NOTE: If a Rev. Reg. provides for a prescriptive period
different from the NIRC, then the regulation is invalid and
the NIRC period should be used. (PBCom v. CIR, G.R. No.
112024, 1999)
The 2-year prescriptive period commences to run from the
time the refund is ascertained, i.e., the date such tax was
paid, and not upon the discovery by the taxpayer of the
erroneous or excessive payment of taxes. (Metropolitan
Bank and Trust Company v. CIR, G.R. No. 182582, 2017)
Option for Corporate Taxpayers
In case of corporate taxpayers, if the sum of the quarterly
tax payments made during the taxable year exceeds the
total tax due on the entire taxable income of that year, the
corporation shall either:
1. File a claim for refund;
2. Avail a tax credit; or
3. Carry over the excess credit in the succeeding taxable
periods.
Once the option to carry-over and apply the excess
quarterly income tax against income tax due for the taxable
quarters of the succeeding taxable years has been made,
such option shall be considered irrevocable for that taxable
period and no application for cash refund or issuance of a
tax credit certificate shall be allowed therefor. (NIRC, Sec.
76)Statutory Basis and Proof of Claim for Refund or
Tax Credit

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Civil Code Provisions
NIRC Provisions: Secs. 204 & 229
Necessity of Proof for Claim or Refund
Prior payment of the tax must be proven. There must be
actual collection and receipt by the government of the tax
sought to be recovered and this requires factual proof. (CI
v. Li Yao, G.R. No. L-11861, 1963)
The burden of proof is on the taxpayer claiming the refund
that he is entitled to the same. (CIR v. Tokyo Shipping Ltd.,
G.R. No. L-68252, 1995)
A tax refund partakes of the nature of an exemption and is
strictly construed against the claimant. (CIR v. Tokyo
Shipping Ltd., G.R. No. L-68252, 1995)
Rules Re: Submission of Supporting Documents for
Claims of Unutilized Input VAT
For claims filed before June 11, 2014:
1. If the claimant has no additional supporting documents,
then the 120-day period begins to run on the date the
claim is filed;
2. Claimant has 30 days from filing of the claim to submit
supporting documents unless the CIR extends the
period; and
3. Upon filing of the supporting documents or upon expiry
of the period provided, the CIR has 120 days to act on
the claim; and
4. In all cases, the claim must be completed within the 2-
year period.
For claims filed after June 11, 2014:
1. All claims must already attach complete supporting
documents and this fact must be attested to under oath.
As such, the 120-day period already runs on the date
the claim is filed in all instances.(Pilipinas Total Gas,
Inc. v. CIR, G.R. No. 207112, 2015)
b) Proper Party to File Claim for Refund or Tax Credit
A claim for tax refund or issuance of a tax credit certificate
may be filed by:
1. Taxpayer;
2. Statutory taxpayer; or
3. Withholding agent.
Other Considerations Affecting Tax Refunds
Payment Under Protest is NOT Necessary Under the
NIRC
TAXATION LAW
A suit or proceedings for tax refund may be maintained
whether or not such tax, penalty or sum has been paid
under protest or duress.
Similarly, payment under protest is not necessary in refund
for local taxes. (LGC, Sec. 196)
However, payment under protest is necessary in certain
cases real property taxes (LGC, Sec. 252)
Note: The CIR may, even without a written claim, refund or
credit a tax, where on the face of the return upon which
payment was made, payment appears to be erroneous.
Question: If a taxpayer had lost his right to dispute the
validity of a tax assessment in view of his failure to appeal
the CIR’s decision to CTA, may he be granted a refund?
Answer: No. The expediency of an appeal from a denial
of a tax request for cancellation of warrant of distraint and
levy cannot be utilized for the purpose of testing the legality
of an assessment, which had become conclusive and
binding on the taxpayer, there being no appeal, the
procedure set forth in Section 306 (now Sec. 204 (C) and
Sec. 229) of the NIRC is not available to revive the right to
contest the validity of an assessment once the same had
been irretrievably lost not only by the failure to appeal but
likewise by the lapse of the reglementary period within
which to appeal could have been taken. (CIR v.
Concepcion, G.R. No. L-23912, 1968)
c. Power of Commissioner of Internal Revenue to
Compromise
a) Compromise
Authority of the CIR to Compromise Taxes
1. Criminal cases, other than those already filed in court
or those involving tax fraud
(a) Before the complaint is filed with the
prosecutor’s office, the CIR has full discretion to
enter into a compromise.
(b) After the complaint is filed with the
prosecutor’s office but before the information
is filed with the court, the CIR can still enter into
a compromise, provided the prosecutor gives
consent.
(c) After information is filed with the court, the CIR is
no longer permitted to enter into a compromise,
with or without the consent of the prosecutor.
(People v. Magdaluyo, G.R. No. 16235, 1961)
2. Civil cases
(a) The CIR is expressly authorized by the NIRC to
compromise taxes subject to certain conditions.
(NIRC, Sec. 204 A)
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(b) The compromise settlement shall be subject to the
following minimum amounts:
GROUND MIN. COMPROMISE RATE
Financial
10% of the basic assessed tax
Incapacity
Other Cases 40% of the basic assessed tax
Instances When the Compromise shall be Subject to
the Approval of the Evaluation Board (composed of the
CIR and 4 Deputy Commissioners):
1. The basic tax involved exceeds Php 1 million; or
2. The settlement offered is less than the prescribed
minimum rates.
Leave of Court Required
It is possible, at any stage of litigation before final
judgment, to compromise taxes, provided there is leave of
court. (Pampanga Sugar Dev. Corp v. CIR, G.R. No. L-
13178, 1961)
Compromise cannot be entered into after final
judgment.
Reason: By virtue of such final judgment, the Government
had already acquired a vested right. (Rovero v. Amparo,
G.R. No. L-5482, 1952)
Instances when the CIR may compromise taxes
1. Doubtful validity of the assessment; and
2. Financial incapacity. (NIRC, Sec. 204)
Instances Constituting Doubtful Validity
Compromise may be entered into when it is shown that:
1. The delinquent account or disputed assessment is one
resulting from a jeopardy assessment;
2. The assessment seems to be arbitrary in nature,
appearing to be based on presumptions and there is
reason to believe that it is looking in legal and/or factual
basis;
3. The taxpayer failed to file an administrative protest on
account of the alleged failure to receive notice of
assessment and there is reason to believe that the
assessment is lacking in legal and/or factual basis;
4. The taxpayer failed to file a request for
reinvestigation/reconsideration within 30 days from
receipt of the FAN and there is reason to believe that
the assessment is lacking in legal and/or factual basis;
TAXATION LAW
5. The taxpayer failed to elevate to the CTA an adverse
decision of the CIR, or his authorized representative,
within 30 days from receipt thereof and there is reason
to believe that the assessment is lacking in legal and/or
factual basis;
6. The assessments were issued on or after January 1,
1998, where the demand notice allegedly failed to
comply with the formalities prescribed under Sec. 228
of the NIRC;
7. Assessments made based on the "Best Evidence
Obtainable Rule" and there is reason to believe that the
same can be disputed by sufficient and competent
evidence;
8. An assessment based on “Best Evidence Obtainable
Rule” should not be automatically considered as a
doubtful assessment. The surrounding circumstances
that led to the issuance of such assessment must be
thoroughly evaluated. (R.M.C. No. 34-14)
9. The assessment was issued within the prescriptive
period for assessment as extended by the taxpayer's
execution of Waiver of the Statute of Limitations the
validity or authenticity of which is being questioned or
at issue and there is strong reason to believe and
evidence to prove that it is not authentic; and
10. The assessment is based on an issue where a court of
competent jurisdiction made an adverse decision
against the BIR, but for which the Supreme Court has
not decided upon with finality. (added by RR No. 08-04)
Instances Constituting Financial Incapacity
Compromise may be entered into when it is shown that:
1. The corporation ceased operation or is already
dissolved (however, the tax liabilities for the assets
distributed to the stockholders as return of capital
cannot be compromised);
2. Taxpayer has a surplus deficit resulting to capital
impairment by at least 50%;
3. Taxpayer is suffering from a net worth deficit (for
corporations);
4. The taxpayer is a compensation income earner and he
has no more leviable assets except his family home; or
5. The taxpayer has been declared by any competent
tribunal, authority, body, or government agency as
bankrupt or insolvent. (R.R. No. 30-2002, Sec. 4)
Additional Notes: Grounds for Compromise
The CIR shall not consider any offer for compromise
settlement on the ground of financial incapacity of a
taxpayer with Tax Credit Certificate (TCC), on hand or in
transit, or with pending claim for tax refund or tax credit
with the BIR, or with existing finalized agreement or
prospect of future agreement with any party that resulted
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or could result to an increase in the equity of the taxpayer
at the time of the offer for compromise or at a definite future
time.
Moreover, no offer of compromise shall be entertained
unless and until the taxpayer waives in writing his
privilege of the secrecy of bank deposits under RA
1405 or under other general or special laws, and such
waiver shall constitute as the authority of the CIR to inquire
into the bank deposits of the taxpayer.
Taxpayers seeking a compromise settlement of unsettled
tax obligations must now pay the compromise offer upfront
before their applications are processed. No application for
compromise settlement shall be processed without the full
settlement of the offered amount. (R.R. No. 09-13)
Cases Which may be Compromised
1. Delinquent accounts;
2. Cases under administrative protest after issuance of
the FAN to the taxpayer which are still pending in the
Regional Offices, Revenue District Offices, Legal
Service, 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; and
5. Criminal violations, other than those already filed in
court or those involving tax fraud. (R.R. No. 30-02)
Cases that may NOT be Subject of Compromise
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 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 or
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; 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
TAXATION LAW
7. Estate tax cases where compromise is requested on
the ground of financial incapacity of the taxpayer. (R.R.
No. 30-02)
b) Abatement
Abatement (NIRC, Sec. 204 B)
the diminution or decrease in the amount of tax imposed,”
such that to abate is “to nullify or reduce in value or
amount.” “In abatement or cancellation, no mutual
concessions between the taxpayer and the CIR are made.”
(People v. Sandigayanbayan, G.R. No. 152532, 2005)
Coverage of Abatement
General Rule: Surcharge and compromise penalties only
Exception: In meritorious instances, the CIR may abate
the interest as well as basic tax assessed, provided,
however, that cases for abatement, cancellation of tax,
penalties, and/or interest by the CIR shall be coursed
through certain officials (R.R. No. 13-01, Sec. 4)
Grounds for Abatement
1. The tax or any portion thereof appears to be unjustly or
excessively assessed; or
2. The administration and collection costs involved do not
justify the collection of the amount due. (NIRC, Sec.
204[B])
Instances Where there Exists an Unjust or Excessive
Assessment: (R.R. No. 13-01, Sec. 2)
1. Filing of the return/payment was made at the wrong
venue;
2. Taxpayer’s mistake in payment of tax was due to
erroneous written advice of a revenue officer;
3. Taxpayer’s non-compliance is due to a difficult
interpretation of a law;
4. Failure to pay on time due to substantial losses from
prolonged labor disputes, force majeure and legitimate
business reverses;*
5. Failure to pay because of circumstances beyond the
taxpayer’s control;
6. Late payment of tax under meritorious circumstances
such as: (R.R. No. 04-12)
(a) Use of wrong tax form but correct amount of tax
was remitted;
(b) Filing an amended return under meritorious
circumstances, provided, however, that abatement
shall cover only the penalties and not the interest;
(c) Surcharge erroneously imposed;
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(d) Late filing of return due to unresolved issue on
classification/valuation of real property (for capital
gains tax cases, etc.);
(e) Offsetting of taxes of the same kind, i.e.,
overpayment in one quarter/month is offset against
underpayment in another quarter/month;
(f) Automatic offsetting of overpayment of one kind of
withholding tax against the underpayment in
another kind;
(g) Late remittance of withholding tax on compensation
of expatriates for services rendered in the
Philippines pending the issuance by the Securities
and Exchange Commission of the license to the
Philippine branch office or subsidiary, provided,
however, that the abatement shall only cover the
surcharge and the compromise penalty and not the
interest;
(h) Wrong use of Tax Credit Certificate (TCC) where
Tax Debit Memo (TDM) was not properly applied
for; and
(i) Such other instances which the Commissioner may
deem analogous to the enumeration above.
• Other cases similar or analogous thereto.
*Note: In items 4 and 5 above, abatement will only cover
the surcharge and compromise settlement, and not the
interest.
Instances When the Administration and Collection
Costs are More Than the Amount Sought to be
Collected
1. Abatement of penalties on assessment confirmed by
lower court but appealed by the taxpayer to a higher
court;
2. Abatement of penalties on withholding tax assessment
under meritorious circumstances;
3. Abatement of penalties on delayed installment
payment under meritorious circumstances;
4. Abatement of penalties on assessment reduced after
reinvestigation but taxpayer is still contesting reduced
assessment; and
5. Such other instances which the CIR may deem
analogous to the above. (R.R. No. 13-01, Sec. 3)
d. Non-Retroactivity of Rulings
General Rule: Any revocation, modification or reversal of
(1) rules and regulations promulgated in accordance with
the NIRC, or (2) any rulings or circulars promulgated by the
CIR shall not be given retroactive application if the
revocation, modification, or reversal is prejudicial to the
taxpayers. (NIRC, Sec. 246)
TAXATION LAW
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.
Rulings, circulars, rules and regulations promulgated by
the CIR should have no retroactive application if applying
them would prejudice the taxpayers. (CIR v. Court of
Appeals, G.R. No. 117982, 1997) However, when the
ruling, circular, or rules and regulations was nullified by a
court (and not by the CIR), then the non-retroactivity rule
does not apply. (Philippine Bank of Communications v.
CIR, G.R. No. 112024, 1999)
A general interpretative rule issued by the CIR may be
relied upon by taxpayers from the time the rule is issued
up to its reversal by the Commissioner or this Court. (CIR
v. San Roque, G.R. No. 187485, 2013)
3. GOVERNMENT REMEDIES
Remedies Available to the Government (NIRC, Sec.
205)
1. Administrative Remedies; and
a. Distraint; and
b. Levy
Note: Distraint and levy are unavailable when tax
liability is not more than PhP 100
2. Judicial Remedies
a. Civil; and
b. Criminal Actions
Pursuing SEC. 205 Remedies Simultaneously
The above remedies may be pursued singly or
simultaneously at the discretion of the revenue authorities
(NIRC, Sec. 205)
Must the Assessment be Final and Executory Before
the CIR may Collect the Tax Deficiency?
It depends on the remedy sought.
1. Summary Remedies of Distraint and Levy: The
assessment need not be final and executory (R.A. No.
1125, as amended)
2. Civil Case for Collection: The assessment must be
final and executory (Yabes v. Flojo, 1982; San Juan v.
Vasquez, 1961; R.A. No. 1125 as amended, Sec.
7(b)(2)(c))
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Note: In the case of a false or fraudulent return with
intent to evade tax or of failure to file a return... a [civil
or criminal] proceeding in court for the collection of
such tax may be filed without assessment (NIRC, Sec.
222[a])
1. Administrative Remedies
a) Tax Lien (NIRC, Sec. 219)
Definition
A legal claim or charge on property, either real or personal,
established by law as a security in default of the payment
of taxes (The Hongkong and Shanghai Bank v. Rafferty,
G.R. No. L-13188, 1918)
Nature of Tax Lien
A lien in favor of the Government of the Philippines when
a person liable to pay a tax neglects or refuses to do so
upon demand (NIRC, Sec. 219)
Duration
Lien exists from the time assessment is made by the CIR
until paid, with interests, penalties and costs that may
accrue in addition thereto; generally, it attaches to the
property irrespective of ownership or transfer thereof.
Extent of Lien
Upon all property and rights to property belonging to the
taxpayer
Effectivity Against Third Persons
Not valid against any mortgagee, purchaser, or judgment
creditor until notice of such lien is filed by the CIR in the
Register of Deeds in the province/city where the property
is situated
Note: A tax lien is superior to a judgment claim of a private
person
b) Distraint and Levy
(1) Summary Remedy of Distraint of Personal Property
Including Garnishment
Distraint
Involves the seizure by the government of personal
property, tangible or intangible, to enforce payment of
taxes; followed by the public sale of such property, if the
taxpayer fails to pay the taxes voluntarily.
A remedy whereby the collection of delinquent taxes is
TAXATION LAW
enforced on the goods, chattels, or effects and other
personal property of whatever character of the taxpayer.
(NIRC, Sec. 205[a])
Kinds of Distraint
1. Actual Distraint – resorted to when there is actual
delinquency in tax payment (NIRC, Sec. 207[A])
It consists in the actual seizure of the personal property
of the taxpayer. If tax due is in excess of PhP 1 million,
the CIR will commence the proceeding; otherwise, for
tax due less than PhP 1 million, it shall be the Revenue
District Officer.
2. Constructive Distraint (NIRC, Sec. 206) – a
preventive remedy which aims at forestalling a possible
dissipation of the taxpayer’s assets when delinquency
sets in – hence, no actual delinquency in payment is
necessary
Effecting Constructive Distraint
Constructive distraint of personal property shall be
effected by requiring the taxpayer or any person having
possession or control of such property:
(a) To sign a receipt covering the property distrained;
and
(b) To 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 CIR. (NIRC, Sec. 206)
Instances when the CIR can place property of a
taxpayer under constructive distraint:
(a) Delinquent taxpayer;
(b) Taxpayer is retiring from any business subject to
tax;
(c) Taxpayer is intending to leave the Philippines;
(d) Taxpayer is intending to remove his property from
the Philippines;
(e) Taxpayer is intending to hide or conceal his
property; or
(f) Taxpayer is intending to perform any act tending to
obstruct the proceedings for collecting the tax due
or which may be due from him.
Purchase by the Government at Sale Upon Distraint
When the amount bid for the property under distraint 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,
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The Commissioner or his deputy may purchase the same
in behalf of the national Government for the amount of
taxes, penalties and costs due thereon.
Property so purchased may be resold and the net
proceeds there from shall be remitted to the National
Treasury and accounted for as internal revenue. (NIRC,
Sec. 212)
Procedure for distraint and garnishment
1. Report on the distraint
(a) By the distraining officer – submitted to the
Revenue District Officer or Revenue Regional
Officer within 10 days from receipt of the warrant
(b) by the Revenue Regional Director – a consolidated
report shall be prepared and submitted as may be
required by the CIR
The order of distraint may be lifted by the CIR or his
duly authorized representative. (NIRC, Sec. 207[A])
2. Service of warrant of distraint
(a) Goods, chattels, effects, or other personal
property
A copy of the warrant of distraint shall be left either
with the owner or person from whom the property
was taken, or at the dwelling or place of business
of such person and with someone of suitable age
and discretion;
Together with a statement of the sum demanded
and note of the time and place of sale
(b) Stocks and other securities
A copy of the warrant of distraint shall be served
upon the taxpayer AND upon the president,
manager, treasurer or other responsible officer of
the issuing corporation
(c) Debts and credits
A copy of the warrant of distraint shall be left with
the person owing the debts or having in his
possession such credits or his agent
(d) Bank accounts
A copy of the warrant of garnishment shall be
served upon the taxpayer AND upon the president,
manager, treasurer or other responsible officer of
the bank
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The bank shall turn over to the CIR so much of the
bank accounts as may be sufficient to satisfy the
claim of the government (NIRC, Sec. 208)
3. Posting of notice
(a) Notice shall specify the time and place of sale and
the articles distrained.
(b) The posting shall be made in not less than 2 public
places in the city or municipality where the distraint
is made, one of which shall be the office of the
mayor of such city or municipality. (NIRC, Sec. 209)
Sale of Property Distrained and Disposition of
Proceeds
The time of sale shall not be less than 20 days after
notice/posting.
At the time and place fixed in such notice, the said revenue
officer shall sell the goods, chattels, or effects, or other
personal property, including stocks and other securities so
distrained, at public auction, to the highest bidder for cash,
or with the approval of the Commissioner, through duly
licensed commodity or stock exchanges.
In the case of Stocks and other securities, the officer
making the sale shall execute a bill of sale which he shall
deliver to the buyer, and a copy thereof furnished the
corporation, company or association which issued the
stocks or other securities.
Within 5 days after the sale, a return by the
distraining/levying officer of the proceedings shall be
entered upon the records of the relevant BIR officers. In
case the proceeds of the sale exceed the claim and
cost of sale, the excess shall be turned over to the
owner of the property. (NIRC, Sec. 213)
Report of Sale to the BIR
Within 2 days after the sale, the officer making the same
shall make a report of the proceedings in writing to the CIR
and shall preserve a copy of the report as an official record.
(NIRC, Sec. 211)
Further Distraint (not always applicable)
The remedy by distraint/levy may be repeated if necessary
until the full amount due, including all expenses, is
collected. (NIRC, Sec. 217)
Summary Remedy of Distraint is Available Pending
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Appeal
The BIR may issue a Warrant of Distraint and Levy to
enforce collection while the TP is appealing the decision
denying the protest to the CTA. No appeal taken to the
CTA . . . shall suspend the payment, levy, distraint and/or
sale of any property of the taxpayer for the satisfaction of
his tax liability (R.A. No. 1125, as amended by R.A. No.
9282, Sec. 11)
(2) Summary Remedy of Levy on Real Property
Levy
Involves the seizure by the government of real property to
enforce payment of taxes; followed by the public sale of
such property, if the taxpayer fails to pay the taxes
voluntarily
Real property may be levied upon before, simultaneously
or after the distraint of personal property. (NIRC, Sec.
207[B])
Procedure for Levy:
1. Issuance of warrant of levy
The CIR or his duly authorized representative shall prepare
a duly authenticated certificate showing:
(a) The name of the taxpayer
(b) the amount of tax and penalty due from him; and
(c) a description of the property levied upon.
The order of levy may be lifted by the CIR or his duly
authorized representative. (NIRC, Sec. 207[B])
2. Service of warrant of levy
The certificate shall be served upon:
(a) the delinquent taxpayer, or
(b) if he be absent from the Philippines, to his agent
or the manager of his business to which the liability
arose, or
(c) if there be none, to the occupant of the property in
question;
It is mailed to or served upon the Register of Deeds of the
province or city where the property is located.
3. Advertisement and sale
Advertisement shall be made within 20 days after the levy,
and for a period of at least 30 days. It shall be effected by:
(a) Posting a notice at the main entrance of the
municipal building or the city hall and in public and
conspicuous place in the barrio or district where
the property is located; and
(b) By publication once a week for 3 consecutive
TAXATION LAW
weeks in newspaper of general circulation in the
municipality or city where the property is located.
Within 5 days after the sale, a return by the
distraining/levying officer of the proceedings shall be
entered upon the records of the relevant BIR officers. In
case the proceeds of the sale exceed the claim and cost of
sale, the excess shall be turned over to the owner of the
property. (NIRC, Sec. 213)
4. Redemption of property sold
At any time before the day fixed for the sale, the taxpayer
may discontinue all proceedings by paying the amount
due. (NIRC, Sec. 213)
Otherwise, within 1 year from the date of sale, the taxpayer
or any one for him may redeem the property.
• Breakdown of amount to be paid shall be:
1. Taxes, penalties and interest computed from
the date of delinquency to the date of sale; and
2. Interest on above purchase price at the rate of
15% per annum from the date of sale to the
date of redemption.
The owner shall not be deprived of the possession of the
property and shall be entitled to the rents and other income
thereof until the expiration of the redemption period.
(NIRC, Sec. 214)
5. Final deed of sale to the purchaser
If the property is not redeemed, a final deed of sale shall
be issued to the purchaser.
6. Further levy
The remedy by distraint/levy may be repeated if necessary
until the full amount due, including all expenses, is
collected. (NIRC, Sec. 217)
c) Forfeiture of Personal/Real Property
Definition of Forfeiture
Forfeiture is the divestiture of property without
compensation, in consequence of a default or offense.
Enforcement of the Remedy of Forfeiture
Forfeiture of Personal Property: enforced by seizure
and sale/destruction of the property
Forfeiture of Real Property: enforced by a judgment of
condemnation and sale in a legal action (NIRC, Sec. 224)
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In case of forfeiture of personal property, the owner
desiring to contest the validity of such forfeiture may: (a)
before the sale/destruction of the property, may bring an
action to recover the same, and upon giving bond, may
enjoin the sale/destruction; or (b) after the sale and within
6 months, may bring an action to recover the net proceeds
realized at the sale. (NIRC, Sec. 231)
Forfeited property shall not be destroyed until at least 20
days after seizure. (NIRC, Sec. 225)
Forfeiture to Government for Want of Bidder
In case: (a) there is no bidder; or (b) the highest bid is
insufficient to pay the amount due, the revenue officer shall
declare the property forfeited to the government in
satisfaction of the claim.
Title to the forfeited property shall be transferred to the
government without the necessity of an order from a
competent court.
Within 1 year from the date of forfeiture, the taxpayer or
any one for him may redeem the property. Otherwise, the
forfeiture shall become absolute. (NIRC, Sec. 215)
Remedy of Enforcement of Forfeiture
1. Action to contest forfeiture of chattel (NIRC, Sec. 231)
2. Resale of real estate taken for taxes (NIRC, Sec. 216)
• The CIR shall have charge of any real estate
obtained by the government in payment or
satisfaction of taxes, penalties or costs arising under
the NIRC or in compromise or adjustment of any
claim therefor.
• The CIR may:
i. Upon the giving of not less than 20 days notice, sell
and dispose of the same at public auction; or
ii. With prior approval of the Secretary of Finance,
dispose of the same at private sale.
• In either case, the proceeds of the sale shall be
deposited with the National Treasury, and an
accounting of the same shall be rendered to the
Chairman of the Commission on Audit.
When Property to be Sold or Destroyed
Forfeited property shall not be destroyed until at least 20
days from seizure. (NIRC, Sec. 225)
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Disposition of Funds Recovered in Legal Proceedings
or Obtained from Forfeiture (NIRC, Sec. 226)
• The Revenue District Officer or his duly authorized
representative, other than the officer referred to in
Section 208 shall, according to rules and regulations
prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, forthwith
cause a notification to be exhibited in not less than
two (2) public places in the municipality or city where
the distraint is made, specifying; the time and place
of sale and the articles distrained.
• The time of sale shall not be less than twenty (20)
days after notice. One place for the posting of such
notice shall be at the Office of the Mayor of the city
or municipality in which the property is distrained.
• At the time and place fixed in such notice, the said
revenue officer shall sell the goods, chattels, or
effects, or other personal property, including stocks
and other securities so distrained, at public auction,
to the highest bidder for cash, or with the approval of
the Commissioner, through duly licensed commodity
or stock exchanges.
• In the case of stocks and other securities, the officer
making the sale shall execute a bill of sale which he
shall deliver to the buyer, and a copy thereof
furnished the corporation, company or association
which issued the stocks or other securities. Upon
receipt of the copy of the bill of sale, the corporation,
company or association shall make the
corresponding entry in its books, transfer the stocks
or other securities sold in the name of the buyer, and
issue, if required to do so, the corresponding
certificates of stock or other securities.
• Any residue over and above what is required to pay
the entire claim, including expenses, shall be
returned to the owner of the property sold.
• The expenses chargeable upon each seizure and
sale shall embrace only the actual expenses of
seizure and preservation of the property pending the
sale, and no charge shall be imposed for the
services of the local internal revenue officer or his
deputy.
d) Suspension of Business Operations
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• The CIR or his authorized representative may
suspend the business operations and temporarily
close the business establishment of a VAT-
registered person for failure to issue receipts or
invoices, or failure to file VAT returns, or
understatement of taxable sales or receipts by 30%
• CIR is also empowered to suspend the business
operations of any person for failure to register as
required under Sec. 236
• Duration of temporary closure shall be for a period of
not less than 5 days
• Closure shall be lifted upon compliance with the
requirements in the closure order (NIRC, Sec. 115)
e) Non-availability of Injunction to Restrain Collection
of Tax
General Rule: No court can issue an injunction to restrain
collection of tax. (NIRC, Sec. 218)
Exception: When in the opinion of the CTA, the collection
of tax may jeopardize the interest of the government and/or
the taxpayer, the CTA may suspend said collection and
require the taxpayer to deposit the amount claimed or file
a surety bond (R.A. No. 9282, Sec. 11)
Note: CTA has the power to provide injunctive relief and
dispense with the bond requirement in cases where the
court determines that the method employed by the CIR in
the collection of tax is not sanctioned by law. However, the
CTA must preliminarily determine if the collection is
compliant with the law. (Sps. Pacquiao v. CTA & CIR, G.R.
No. 213394, 2016)
2. Judicial Remedies
Civil and Criminal Actions
1. Must be brought in the name of the Government of the
Philippines;
2. Must be conducted by legal officers of the BIR;
3. In case of actions for recovery of taxes or enforcement
of a fine, penalty or forfeiture, must be filed with the
approval of the CIR (NIRC, Sec. 220)
a) Civil Action
In cases of a decision against the BIR in Petitions for
Review brought by a taxpayer on disputed assessment
before the CTA, the remedy of the BIR is appellate – it may
TAXATION LAW
appeal the decision of the CTA in Division to the CTA En
banc via a Petition for Review. If the CTA En Banc still
renders a decision against the BIR, the BIR may appeal
the same with the SC through a Petition for Review on
Certiorari under Rule 45 of the Rules of Court.
However, BIR may initiate collection proceedings with the
regional trial courts.
BIR can file a civil action for collection pending decision of
the administrative protest. The civil suit will in effect be a
denial of the question for reinvestigation and
reconsideration (CIR v. Union Shipping, G.R. No. L-66160,
1990)
Appeal of Tax Ordinances
The procedure for appeal of tax ordinances is:
1. Secretary of Justice –
o Any question on the constitutionality or legality
of tax ordinances or revenue measures may
be raised on appeal within 30 days from the
effectivity thereof to the Secretary of Justice
o Secretary of Justice must render a decision on
the appeal within 60 days from receipt of
appeal
o Pendency of the appeal does not suspend the
effectivity of ordinance or accrual and
payment of taxes, fees and charges levied
thereon
2. Court of competent jurisdiction (RTC) – within 30
days from receipt of adverse decision or from the
lapse of the 60 day period without the Sec. of
Justice acting on the appeal, aggrieved party may
file appropriate proceedings with a court of
competent jurisdiction
b) Criminal action
Criminal actions may only be initiated through a
recommendation of the filing of an Information by the DOJ
for offenses found in the NIRC.
Criminal Cases
All violations of any provision of the NIRC shall prescribe
after 5 years. (NIRC, Sec. 281)
Prescriptive Period – When It Begins To Run
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1. From the day of the commission of the violation of the
law; or
2. If the same not be known at the time, from the discovery
thereof AND the institution of judicial proceedings for
the investigation and punishment (NIRC, Sec. 281)
Interruption of Prescriptive Period
1. When proceedings are instituted against the guilty
persons; or
2. When the offender is absent from the Philippines
(NIRC, Sec. 281); or
Examples of Punishable Crimes
1. Attempt to evade or defeat tax (NIRC, Sec. 254); and
2. Failure to file return, supply correct and accurate
information, pay tax, withhold and remit tax and refund
excess taxes withheld on compensation (NIRC, Sec.
255)
Elements: Non-Filing of Tax Return
1. The accused was a person required to make or file a
return;
2. The accused failed to make or file the return at the time
required by law; and
3. The failure was willful
Elements: Failure to Supply Correct Information
1. The accused is a person required under the NIRC or by
rules and regulation to pay any tax, make a return, keep
any record or supply correct and accurate information;
2. The accused failed to supply correct and accurate
information; and
3. Such failure was willful
“Willful Blindness” Doctrine
“Willful” in tax crimes means voluntary, intentional violation
of a known legal duty, and bad faith or bad purpose need
not be shown
The “Willful Blindness” doctrine means neglect or omission
(to ensure filing of ITR, to know how much taxes are due,
or inquire on the facts surrounding the ITR) is tantamount
to “deliberate ignorance or conscious avoidance.
Thus, an experienced businesswoman’s reliance on her
husband to file their ITRs is not a valid reason to justify her
non-filing, considering that she knew from the start that she
and her husband are mandated by law to file their ITRs
(People v. Kintanar, CTA EB Crim No. 006, 2010)
“Willfulness” cannot be presumed from mere inadvertent or
negligent acts. While the TP is negligent, such is enough
to convict.
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Example: TP entered showbiz at 8 yrs. old; at 12 yrs.,
engaged services of Tito Alfie Lorenzo as manager. TP
entrusted all her transactions to manager, e.g., contract
negotiations, signing, handling of fees, etc. Signed
contracts without reading them; checks were issued in the
name of manager, so TP had no idea how much she was
earning per project (she simply trusted manager to make
proper accounting). As custodian of records, manager took
care of all financial matters, including compliance with tax
obligations (People v. Judy Anne Santos, CTA Crim. Case
No. O-012, 2013).
Filing of Criminal Action Against the Taxpayer
• A criminal action may be filed during the pendency
of an administrative protest in the BIR.
• It is not a requirement for the filing thereof that there
be a precise computation and assessment of the tax,
since what is involved in the criminal action is not the
collection of tax but a criminal prosecution for the
violation of the NIRC, provided, however, that there
is a prima facie showing of a willful attempt to evade
taxes.
• An assessment of a deficiency is not necessary to a
criminal prosecution for willful attempt to defeat and
evade the income tax. A crime is complete when the
violator has knowingly and willfully filed a fraudulent
return with intent to evade and defeat the tax. The
perpetration of the crime is grounded upon
knowledge on the part of the taxpayer that he has
made an inaccurate return, and the government's
failure to discover the error and promptly to assess
has no connections with the commission of the
crime. (Ungab v. Cusi, G.R. No. 41919-24,1980; CIR
v. Pascor Realty, G.R. No. 128315, 1999)
• Filing by the BIR of a civil suit for collection of the
deficiency tax is considered a denial of the request
for reconsideration.
• An indication to the taxpayer by the Commissioner
“in clear and unequivocal language” of his final
denial on the issuance of the warrant of distraint and
levy. The subject of appeal is the final decision, not
the warrant of distraint.
• A BIR demand letter sent to the taxpayer after his
protest of assessment notice is considered as the
final decision of the Commissioner on the protest.
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f) To enforce statutory penal provisions

• A letter of the BIR Commissioner reiterating to a g) To enforce forfeiture or property
taxpayer his previous demand to pay an assessment
is considered a denial of the request for 2) Judicial Remedies
reconsideration or protest and is appealable to the a) Civil
CTA. b) Criminal

• Final notice before seizure considered as

Commissioner’s decision on taxpayer’s request for 4. CIVIL PENALTIES
reconsideration, when the taxpayer received no
other response. a. New Rule on Delinquency Interest and Deficiency
Interest
Note: The CIR does not always have to approve the filing
Collection of interest is not punitive in nature, but
of tax criminal cases. The Tax Code requirement of having
compensatory; it is compensation to the State for the delay
the CIR approve the filing of civil and criminal cases is a
in the payment of the tax. (Republic v. Heras, G.R. No.
delegable power. As the filing in this case was done after
26742, 1970)
recommendation by the Regional Director who is at least
the rank of a division chief, the requirement is deemed
complied with. (People v. Valeriano) ACCRUAL
TAX % OF
TYPE OF
BASE INTEREST
Summary of Tax Remedies for Taxpayers and the INTEREST
Government
12% p.a.
Accrues from
interest
• Remedies of the Taxpayer the date
Deficiency imposed on
prescribed for
Interest Basic Tax the
Before Payment of Taxes its payment
(249[B]) deficiency in
• Administrative Remedies until full
the basic tax
• Protest against assessment due
payment
• Compromise
• Redemption of property after sale at public Basic Tax 12% p.a.
auction + Accrued imposed in
Due date
• Judicial Remedies (249[B]) case of
appearing in
• Ordinary civil action Delinquency
Interest + failure to
the notice and
• Filing of petition before the CTA Surcharge pay a
Interest demand (i.e.,
deficiency
(249[C]) FAN/FLD),
After Payment of Taxes tax, or any
until full
(1) Administrative Remedies surcharge or
payment
(1) Claim for refund or tax credit interest
(2) Judicial Remedies thereon
(1) Filing of Petition before the CTA
Deficiency Interest
• Remedies of the Government A deficiency interest at the rate of 12% per annum shall
1) Administrative Remedies be imposed on any unpaid amount of tax from the date
i. To make deficiency assessments within 3 or prescribed for payment until the amount is fully paid. The
10 years 12% interest is the double of the legal interest rate for loans
ii. To enforce deficiency assessments and or forbearance of any money as set by the BSP (Currently
collect taxes within 5 years – 6% per BSP Circ No. 799 Series of 2013).
a) To effect distraint of personal property
b) To effect levy on real property A higher rate of deficiency interest may be prescribed by
c) To pursue judicial proceeding to collect rules and regulations.
d) To compromise, abate, or cancel taxes
e) To enforce tax liens
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Delinquency Interest
Delinquency interest shall be imposed in case of failure to
pay:
1. Tax due on any return required to be filed, or
2. 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 CIR.
Delinquency interest shall be at the rate of 12% per
annum on the unpaid amount until the amount is fully paid.
Interest shall form part of the tax.
Note: Pursuant to Sec. 249 of the NIRC, the imposition of
interest on delinquency is mandatory. (Jamora v. Meer,
G.R. No. L-48129, 1942)
Note: The deficiency and the delinquency interest cannot
be imposed simultaneously. (NIRC, Sec. 249)
Example: TP did not file his/her ITR on April 15, 2021. On
May 15, 2021, the TP realized that his/her taks liability
amounts to 10 million. On June 15, 2021, BIR demands
balance/total to be paid on or before July 15, 2021. TP only
paid on August 1, 2021.
The computation of deficiency interest starts on April 15,
2021 and ends on July 15, 2021. While delinquency
interest starts on July 16, 2021 and ends on August 1,
2021.
Interest on Extended Payment
1. Any person who is qualified and elects to pay the tax
on installment but fails to pay the tax or any installment,
or any part thereof, on or before the date prescribed; or
2. Where the CIR has authorized an extension of time
within which to pay a tax or a deficiency tax or any part
thereof, from the date of notice and demand until it is
paid.
b. Surcharge
Penalty: 25% of the amount due, in addition to the tax
required to be paid, in case of the following: (RID2)
1. Failure to file any Return and pay the tax 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 otherwise authorized by the CIR; or
3. Failure to pay the Deficiency tax within the time
prescribed for its payment in the notice of assessment;
or
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4. Failure to pay on or before the Date prescribed for its
payment:
(a) The full or part of the amount of tax shown on any
return required to be filed; or
(b) The full amount of tax due for which no return is
required to be filed.
Surcharge Penalty
50% of the amount due in case of: (FiFa)
1. Willful neglect to File the return within the period
prescribed; or
2. False or fraudulent return is willfully made, in case any
payment has been made on the basis of such return
before the discovery of the falsity or fraud.
The following shall be prima facie evidence of a false
or fraudulent return:
(a) 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
(b) Substantial over-statement of deductions – claim
of deductions in an amount exceeding 30% of
actual deductions.
c. Compromise Penalties
Imposed in all cases of criminal violations of the NIRC, not
involving commission of fraudulent act
Violations which are commonly resorted to by taxpayers as
means of tax evasion are deleted from the coverage of
compromise penalties, for having met the requirements of
the definition of fraudulent acts. (RMO No. 07-15)
d. Fraud Penalty
MISCELLANEOUS ITEMS
(1) Statutory Offenses and Penalties
(1) Attempt to evade or defeat tax
(2) Failure to file return, supply correct and accurate
information, pay tax, withhold and remit tax and
refund excess taxes withheld on compensation
Other Statutory Offenses: (Sections 253-282)
1. Unlawful pursuit of business
2. Illegal collection of foreign payments
3. Unlawful possession of cigarette paper in bobbins or
rolls, etc.
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4. Unlawful use of denatured alcohol
5. Shipment or removal of liquor or tobacco products
under false name or brand or as an imitation of any
existing or otherwise known product name or brand
6. Unlawful possession or removal of articles subject to
excise tax without payment of tax
7. Failure or refusal to issue receipts or sales or
commercial invoices, violations related to the printing
of such receipts or invoices or other violations
8. Offenses relating to stamps
9. Failure to obey summons
10. Declaration under penalties of perjury
11. Other crimes and offenses
• Misdeclaration or misrepresentation of
manufacturers subject to excise tax
12. Forfeiture of property used in unlicensed business or
dies used for printing false stamps
13. Selling, transferring, encumbering, or in any way
disposing of property placed under constructive
distraint
14. Failure to surrender property placed under distraint or
levy
15. Procuring unlawful divulgence of trade secrets
Offenses Committed by Government Enforcement
Officers (Sections 269-273)
1. Extortion or willful oppression
2. Demanding or receiving a fee etc. other or greater
sums that are authorized by law, or for the
performance of any duty
3. Willfully neglecting to give receipts
4. Offering or undertaking to accomplish, file or submit a
report or assessment on taxpayer without the
appropriate examination of books, or offering or
undertaking to submit or report an assessment less
than the amount due for any consideration or
compensation, or conspiring or colluding with others to
defraud the revenues or violate the provisions of the
NIRC
5. Neglecting or by design permitting the violation of the
law by any other person
6. Making or signing any false entry or false certificate or
return
7. Allowing or conspiring or colluding with another to
allow the unauthorized retrieval, withdrawal or recall of
any return etc. after the same has been officially
received by the BIR
8. Failure to report such knowledge or information of any
violation of the NIRC or of any fraud committed on the
revenues collectible by the BIR
TAXATION LAW
9. Demanding or accepting or attempting to collect as
payment any sum of money or other thing for value for
compromise, adjustment or settlement of any charge
or complaint, without the authority of law
10. Unlawful divulgence of trade secrets
11. Unlawful interest of revenue law enforcers in business
12. Violation of withholding tax provisions
13. Failure to issue and execute warrant
(2) Penal Liability of Corporations
• Any corporation, association or general co-partnership
liable for any acts or omissions penalized under the
NIRC shall be punished by a fine (P50,000-P100,000)
• In addition to penalties imposed upon responsible
corporate officers, partners, or employees
Penal Liability for Making False Entries, Records or
Reports, or Using Falsified or Fake Accountable
Forms –
• Any financial officer or independent CPA engaged to
examine and audit books of accounts
• Willfully falsifies any report or statement bearing
on any examination or audit
• Renders a report which has not been verified by
him personally or under his supervision
• Certifies financial statements containing an
essential misstatement of facts or omissions
• CPA: Certificate as a CPA shall be automatically
revoked or cancelled upon conviction
• Foreigner: Conviction results in immediate
deportation after serving sentence, without further
proceedings
(3) Informer’s Reward (NIRC, Sec. 282)
For violations of the NIRC
• 10% of the revenues, surcharges or fees recovered
and/or fine or penalty imposed and collected; or
• One million pesos (P1,000,000), whichever is lower.
• Any person who voluntarily gives definite and sworn
information, not yet in the possession of the BIR –
resulting in the recovery of revenues, surcharges and
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fees and/or the conviction of the guilty party and/or the

imposition of any fine or penalty

• Reward shall also be given to an informer where the

offender has offered to compromise and his offer has
been accepted by the CIR and collected from the
offender

• Informer shall not be entitled to a reward when no

revenue, surcharges or fees have been actually
collected

• Information shall not refer to a case already pending or

previously investigated

For discovery and seizure of smuggled goods

• Cash reward equivalent to 10% of the fair market value

of the smuggled and confiscated goods; or

• One million pesos (P1,000,000), whichever is lower.

Disqualified persons:
1. BIR official or employee or any other incumbent public
official or employee
2. Relative within the 6th civil degree of consanguinity of
a BIR official or employee
3. BIR officials or employees or other public officials who
acquired information in the course of the performance
of their duties during their incumbency, though already
retired or separated from service

Note: Cash rewards of informers shall be subject to income

tax: Final withholding tax of 10%.

———— end of topic ————

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 LOCAL
TAXATION
Taxation Law
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III. LOCAL TAXATION i. Appeal to the Local Board of

Assessment Appeals (LBAA)
TOPIC OUTLINE UNDER THE SYLLABUS: ii. Appeal to Central Board of
Assessment Appeals (CBAA)
III. LOCAL TAXATION iii. Effect of Payment of Taxes
A. LOCAL GOVERNMENT TAXATION c. Compromising Real Property Tax
1. Fundamental Principles Assessment
2. Nature and Source of Taxing Power
a. Grant of Local Taxing Power under the
Local Government Code
b. Authority to Prescribe Penalties for Tax
Violations
c. Authority to Grant Local Tax Exemptions
d. Withdrawal of Exemptions
e. Authority to Adjust Local Tax Rates
f. Residual Taxing Power of Local
Governments
3. Scope of Taxing Power
4. Specific Taxing Power of LGUs
5. Common Revenue Raising Power
6. Community Tax
7. Common Limitations on the Taxing Powers of
LGUs
8. Requirements for Valid Tax Ordinance
9. Taxpayer’s Remedies
a. Protest
b. Refund
c. Action before Secretary of Justice
10. Assessment and Collection of Local Taxes
a. Remedies of LGUs
b. Prescriptive Period

B. REAL PROPERTY TAXATION

1. Fundamental Principles
2. Nature
3. Imposition
a. Power to Levy
b. Exemption from Real Property Tax
4. Appraisal and Assessment
a. Classes of Real Property
b. Assessment based on Actual Use
5. Collection
a. Date of Accrual
b. Periods to Collect
c. Remedies of LGUs
6. Taxpayer Remedies
a. Contesting and Assessment
i. Payment under Protest; exceptions
ii. File Protest with Treasurer
iii. Refunds or Credits on Real Property
Taxes
b. Contesting a Valuation of Real Property
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A. LOCAL GOVERNMENT TAXATION
1. FUNDAMENTAL PRINCIPLES
ULIPE
a. Taxation shall be Uniform in each local
government unit;
b. Taxes, fees, charges, and other impositions shall
[EPuJuL]:
a. Be Equitable and based as far as
practicable on the taxpayer's ability to pay;
b. Be levied and collected only for Public
purposes;
c. Not be unJust, excessive, oppressive, or
confiscatory;
d. Not be contrary to Law, public policy,
national economic policy, or in the
restraint of trade;
c. Collection of local taxes, fees, charges shall not be
Let to any private person;
d. The revenue collected shall Inure solely to the
benefit of the local government unit levying the tax,
fee, charge or other imposition unless otherwise
specifically provided herein; and,
e. Each local government unit shall, as far as
practicable, evolve a Progressive system of
taxation. (LGC, Sec. 130)
Equality and uniformity in local taxation means that all
taxable articles or kinds of property of the same class shall
be taxed at the same rate within the territorial jurisdiction
of the taxing authority or local government unit. In fine,
uniformity is required only within the geographical limits of
the taxing authority. (Punsalan v. City of Manila, G.R. No.
L-4817, 1954, J. Reyes)
2. NATURE AND SOURCE OF TAXING POWER
a. Grant of Local Taxing Power Under The Local
Government Code
Each local government unit shall have the power to:
1. Create its own sources of revenues; and
2. Levy taxes, fees and charges subject to such
guidelines and limitations as the Congress may
provide, consistent with the basic policy of local
autonomy.
Such taxes, fees, and charges shall accrue exclusively to
the local governments. (1987 Constitution, Article X,
Section 5; LGC, Sec. 129)
Note: This is distinguished from internal revenue taxes that
do not accrue exclusively to the national government but
TAXATION LAW
are shared to the local governments in the form of internal
revenue allotments. (NIRC, Title XI)
The power to tax is primarily vested in the Congress;
however, in our jurisdiction, it may be exercised by local
legislative bodies, no longer merely by virtue of a valid
delegation as before, but pursuant to direct authority
conferred by Section 5, Article X of the Constitution. Under
the latter, the exercise of the power may be subject to such
guidelines and limitations as the Congress may provide
which, however, must be consistent with the basic policy
of local autonomy. (Mactan Cebu International Airport
Authority v. Marcos, G.R. No. 120082, September 11,
1996, J. Davide)
a. Authority to Prescribe Penalties For Tax Violations
And Limitations Thereon
GR: The sanggunian is authorized to prescribe fines or
other penalties for violations of tax ordinances:
1. Amount: P1,000 - P5,000;
2. Imprisonment: 1 month - 6 months;
3. Such fine or other penalty shall be imposed at the
discretion of the court.
EXCEPTION: The sangguniang barangay may prescribe a
fine of P100 - P1,000. (LGC, Sec. 516)
c. Authority to Grant Local Tax Exemptions
LGUs may, through ordinances duly approved, grant tax
exemptions, incentives or reliefs under such terms and
conditions, as they may deem necessary. (LGC, Sec. 192)
Tax exemptions shall be conferred through the issuance of
a non-transferable Tax Exemption Certificate. (IRR of
LGC, Art. 282)
d. Withdrawal of Exemptions
Unless otherwise provided by the LGC, tax exemptions,
incentives, or reliefs granted to, or presently enjoyed by all
persons, whether natural or juridical, including GOCCs, are
hereby withdrawn upon the effectivity of the LGC, except
the following [CHEW-PIER]:
1. Local Water districts;
2. Cooperatives duly registered under RA 6938; and
3. Non-stock and non-profit Hospitals and
Educational institutions; (LGC, Sec. 192)
4. Business enterprises certified by the Board of
Investments (BOI) as:
a. Pioneer – for a period of 6 years from the date
of registration; or
b. Non-pioneer for a period of 4 years from the
date of registration;
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5. Business Entity, association, or cooperatives
registered under R.A. 6810;
6. Printer and/or publisher of books or other reading
materials prescribed by DECS as school texts or
references, insofar as receipts from the printing
and/or publishing thereof are concerned. (IRR of
LGC, Art. 283)
7. See all the RPT exemptions. (LGC, Sec. 234)
Note: Business and economic enterprises operating within
export processing zones administered by the Export
Processing Zone Authority shall continue to enjoy the tax
exemption privileges and tax incentives granted in P.D. 66,
as amended, unless repealed by law. (IRR of LGC, Art.
283)
Tax Exemptions not applicable to Regulatory Fees
The power to grant tax exemptions, tax incentives, and tax
reliefs shall not apply to regulatory fees which are levied
under the police power of the LGU. (IRR of LGC, Art. 282)
Guidelines for the Granting of Tax Exemptions, Tax
Incentives and Tax Reliefs (IRR of LGC, Art. 282(b))
1. Tax exemptions or tax reliefs:
a. The same may be granted in cases of the
following:
i. natural calamities,
ii. civil disturbance,
iii. general failure of crops, or
iv. adverse economic conditions such as
substantial decrease in prices or agricultural
or agri-based products;
b. Ordinance is required;
c. It shall apply to all kinds business similarly
situated;
d. Effective only during the next calendar year for a
period not exceeding 12 months as may be
provided by the ordinance;
e. In the case of shared revenue, the exemption or
relief shall only extend to the LGU granting such
exemption or relief.
2. Tax incentives:
a. It shall only be granted to new investments in the
locality and the ordinance shall prescribe the
terms and conditions;
b. It shall only be for a definite period not exceeding
1 calendar year;
c. It shall be granted by ordinance passed prior to
the 1st day of January of any year;
d. It shall apply to all kinds business similarly
situated.
e. Authority to Adjust Local Tax Rate
LGUs are authorized to adjust the tax rates as prescribed
herein not oftener than once every 5 years, and in no case
TAXATION LAW
shall such adjustment exceed 10% of the rates fixed under
the LGC. (LGC, Sec. 191)
Section 191 of the LGC presupposes that the following
requirements are present for it to apply:
1. there is a tax ordinance that already imposes a tax
in accordance with the provisions of the LGC; and
2. there is a second tax ordinance that made
adjustment on the tax rate fixed by the first tax
ordinance. (Mindanao Shopping v. Duterte, G.R.
No. 211093. June 6, 2017, J. Peralta)
f. Residual Taxing Power of Local Governments
Limitations of the Residual Power
1. Constitutional limitations on taxing power;
2. Common limitations prescribed in Sec. 133 of LGC;
3. Fundamental principles governing the exercise of the
taxing power of the LGUs prescribed under Sec. 130 of
the LGC;
4. Sec. 186 limitations:
1. Not specifically enumerated in LGC, NIRC, and
other applicable laws; and
2. Public hearing before enactment of ordinance;
3. Not unjust, excessive, oppressive, confiscatory, or
contrary to declared national policy; (LGC, Sec. 186)
5. The principle of preemption.
Principle of Preemption or Exclusion
Where the national government elects to tax a particular
area, it impliedly withholds from the local government the
delegated power to tax the same field. This doctrine
principally rests on the intention of Congress. (Victorias
Milling Co, Inc. v. Municipality of Victorias, G.R. No. L-
21183, 1968, J. Sanchez)
Excluded Impositions Pursuant to the Doctrine of
Preemption
• Taxes which are levied under the NIRC, unless
otherwise provided by LGC of 1991;
• Taxes, fees, etc. which are imposed under the Tariff
and Customs Code;
• Taxes, fees, etc. the imposition of which contravenes
existing governmental policies or which violates the
fundamental principles of taxation.
Places where provinces/cities cannot impose
amusement tax (because the NIRC already imposes
amusement tax):
1. Cockpits
2. Cabarets
3. Night or day clubs
4. Boxing exhibitions
5. Professional basketball games
6. Jai-Alai; and
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7. Racetracks (NIRC, Sec. 125) Sec. 152), which shall exclusively accrue to them.
(LGC, Sec. 152)
Other Sources of Revenues:

Internal Revenue Allotment (IRA)

1. National internal revenue collected and not specially
disposed of by law shall accrue to the National Treasury
and shall be available for the general purposes of the
Government, with the exception of the amounts set
apart by way of allotment as provided for under the
LGC. (NIRC, Sec. 382)
2. LGUs shall have a 40% share in the national internal
revenue taxes. (LGC, Sec. 284)
3. 50% share in collections for the following:
e. VAT on sale of goods or properties under Sec.
106, NIRC;
f. VAT on sale of services and use or lease of
properties under Sec. 108, NIRC;
g. Percentage taxes under Sec. 116, NIRC. (NIRC,
Sec. 283(2))

3. SCOPE OF TAXING POWER

a. Provinces – may levy only the taxes, fees, and

charges as provided in this Article. (LGC, Sec. 134)

Hence, they are limited to what is prescribed in the

LGC Chapter II Article I Secs. 135-141 as the word
is “only.”

b. Municipalities – may levy the taxes, fees, and

charges not otherwise levied by the provinces.
(LGC, Sec. 142)

c. Cities – may levy the taxes, fees, and charges

which the provinces or municipality may impose.

However, the taxes, fees, and charges levied and

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

The rates of taxes that the city may levy may exceed
the maximum rates allowed for the province or
municipality by not more than 50% except the rates
of professional and amusement taxes. (LGC, Sec.
151)

Note: City can tax something even if it is taxed by

the province or municipality. But the province and
municipality cannot tax the same thing.

d. Barangays – may levy the taxes, fees, and charges,

as provided in this Article (LGC Chapter II Article IV

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4. SPECIFIC TAXING POWER OF LGUS

Taxing Powers of Provinces

SCOPE: Except as otherwise provided in the LGC, the province may levy only the taxes, fees, and charges as provided in
this Article. (LGC, Sec. 134)

For provinces, they are limited to what is prescribed in the LGC, as the word is “only.”
TYPE OF TAX RATE AND BASE EXCEPTIONS NOTES
Tax on Transfer of Real Property Not more than 50% Sale, transfer or other Duty of the seller, donor,
Ownership - tax on the sale, of the 1% of the total disposition of real transferor or administrator -
donation, barter, or on any other mode consideration or of property pursuant to pay the tax imposed within 60
of transferring ownership or title of real the FMV, whichever R.A. No. 6657 (CARL). days from the date of the
property. (LGC, Sec. 135) is higher execution of the deed or from
the date of the decedent's
death.
Tax on Business of Printing and Not exceeding 50% For newly started
Publication - tax on the business of of 1% of the gross business, the tax shall
persons engaged in the printing annual receipts for not exceed 1/20 of 1%
and/or publication of books, cards, the preceding of the capital
posters, leaflets, handbills, calendar year. investment.
certificates, receipts, pamphlets, and
others of similar nature. (LGC, Sec. Exempt:
136) School texts or
references prescribed
by the DECS
Franchise Tax - Notwithstanding any Not exceeding 50% For newly started The province shall not impose
exemption granted by any law or other of 1% of the gross business, the tax shall the tax on “business enjoying
special law, the province may impose annual receipts for not exceed 1/20 of 1% franchise” operating within the
a tax on businesses enjoying a the preceding of the capital territorial jurisdiction of any city
franchise. (LGC, Sec. 137) calendar year, investment. located in the province. (IRR of
within its territorial LGC, Sec. 226)
jurisdiction.
Business enjoying franchise –
shall not include holders of
Certificates of Public
Convenience (CPC) for the
operation of public utility
vehicles for reason that such
CPC are not considered as
franchises.
Tax on Sand, Gravel and Other Not more than 10% The permit to extract
Quarry Resources. - taxes on of FMV in the resources shall be issued
ordinary stones, sand, gravel, earth, locality per cubic exclusively by the provincial
and other quarry resources extracted meter governor, pursuant to the
from public lands or from the beds of ordinance of the sangguniang
seas, lakes, rivers, streams, creeks, panlalawigan.
and other public waters within its
territorial jurisdiction. (LGC, Sec. 138) Proceeds distributed as
follows:
• Province - 30%

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• Component City or
Municipality where
the quarry resources
are extracted - 30%
• Barangay where the
quarry resources are
extracted - 40%.
Professional Tax - annual At such amount and Professionals To be paid to the province
professional tax on each person reasonable exclusively employed in where he/she:
engaged in the exercise or practice of classification as the the government shall be a. practices his/her
his profession requiring government sangguniang exempt from the profession; or
examination. panlalawigan may payment of this tax. b. maintains principal office
determine but shall in case the practice is in
To be paid on or before the January in no case exceed If an individual several places.
31. Any person first beginning to P300.00. exercises 2 Provided, after payment
practice a profession after the month professions, 2 separate he/she shall be entitled to
of January must, however, pay the full taxes are due. practice his/her profession in
tax before engaging therein. any part of the Philippines
Example: CPA lawyer – w/out being subjected to any
Any employer of a person subject to must pay the other national or local tax,
professional tax shall require payment professional tax license, or fee for the practice
by the person of the tax on his imposed on lawyers and of the profession.
profession before employment and on CPAs, if he/she is to
practice both
annually thereafter. (LGC, Sec. 139) Professionals – only those
professions. (IRR of
LGC, Art. 228(f)) who have passed:
i. Bar examinations; and
ii. Board examinations
conducted by the PRC
(IRR of LGC, Art.
228(f))
Amusement Tax - tax to be collected Not more than 30% The holding of operas, The proceeds from the
from the proprietors, lessees or of the gross receipts concerts, dramas, amusement tax shall be
operators of theaters, cinemas, from admission recitals, painting and art shared equally by the
concert halls, circuses, boxing stadia, fees. exhibitions, flower province and the municipality
and other places of amusement. shows, musical where such amusement
(LGC, Sec. 140) programs, literary and places are located.
oratorical
presentations, except Other places of amusement –
pop, rock, or similar all venues primarily for the
concerts shall be staging of spectacles or the
exempt. holding of public shows,
exhibitions, performances,
and other events meant to be
viewed by an audience.
(Pelizloy Realty Corporation
v. Province of Benguet, G.R.
No. 183137, April 10, 2013, J.
Leonen)

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Annual Fixed Tax For Every Not exceeding
Delivery Truck or Van of P500.00.
Manufacturers or Producers,
Wholesalers of, Dealers, or Retailers
of, Certain Products. The province
may levy an annual fixed tax for every
truck or any motor vehicle used by
manufacturers, producers,
wholesalers, dealers or retailers in the
delivery of distilled spirits, soft drinks,
cigars and cigarettes, and other
products as may be determined by the
sanggunian, to sales outlets, or
consumers, whether directly or
indirectly, within the province. (LGC,
Sec. 141; IRR of LGC, Art. 230)
A province may impose a tax on quarry resources
extracted from public lands but not on private lands.
(Lepanto v. Ambanloc, G.R. No. 180639, 2010, J. Abad)
Section 186 (power to levy other taxes, fees, or charges)
allows a province to levy taxes other than those specifically
enumerated under the LGC, subject to the conditions
specified therein. This finding, nevertheless, affords cold
comfort to petitioners as they are still prohibited from
imposing taxes on stones, sand, gravel, earth and other
quarry resources extracted from private lands. The tax
imposed by the Province of Bulacan is an excise tax, being
a tax upon the performance, carrying on, or exercise of an
activity. (Province of Bulacan v. CA, G.R. No. 126232,
1998, J. Romero)
Franchise Tax
A franchise tax is a tax on the privilege of transacting
business in the state and exercising corporate franchise
granted by the state. The tax covers special or secondary
franchises which refer to the right or privileges conferred
upon an existing corporation such as the right to use the
streets of a municipality to lay pipes of tracks, erect poles
or string wires.
Requisites to be Covered by Franchise Tax:
1. It has a “franchise” in the sense of a secondary or
special franchise; and
2. It is exercising its rights or privileges under this
franchise within the territory of the LGU (NAPOCOR
v. City of Cabanatuan, G.R. No. 149110, 2003, J.
Puno)
Section 137 is categorical in stating that franchise tax can
only be imposed on businesses enjoying a franchise. This
goes without saying that without a franchise, LGU cannot
impose a franchise tax. In this case, the enactment of
EPIRA separated the transmission and sub-transmission
functions of the state-owned Napocor from its generation
TAXATION LAW
They shall be exempt from
tax on peddlers which may be
imposed by municipalities
(LGC, Sec. 141(b))
function, and transferred all its transmission assets to the
TRANSCO. Power generation is no longer considered a
public utility operation, and companies which shall engage
in power generation and supply of electricity are no longer
required to secure a national franchise. EPIRA effectively
removed power generation from the ambit of local
franchise taxes. Hence, as regards Napocor's business of
generating electricity, the franchise taxes sought to be
collected by the Provincial Government of Bataan are
devoid of any statutory basis. (NAPOCOR v. Provincial
Government of Bataan, G.R. No. 180654, J. Leonen)
Simultaneous Imposition of Franchise Tax and Local
Business Tax
A business tax is imposed on the privilege of engaging in
the business of contracting a system of communications,
whereas a franchise tax is imposed for the exercise of
enjoying a franchise. While the city tax and franchise tax
are both imposed by the same taxing authority, on the
same subject matter and for the same taxing period, the
imposition thereof does not constitute double taxation as
they are not of the same kind or character (Sky Cable v.
Quezon City, CTA AC No. 102, 2014)
Amusement Tax
Other businesses not subject to amusement tax:
8. Resorts, swimming pools, bath houses, hot
springs, and tourist spots (Pelizloy Realty v.
Province of Benguet, G.R. No. 183137, 2013, J.
Leonen)
9. Professional basketball games – they do not fall
within “other places of amusement.” Also, these
are already taxed under the NIRC. (PBA v. CA,
G.R. No. 119122, 2000, J. Purisima)
In summary, the provinces may impose tax on the
following:
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a. Transfer of real property ownership;
b. Business of printing and publication;
c. Franchise;
d. Sand, gravel and other quarry resources;
e. Professional;
f. Amusement; and
g. Delivery truck or van.
Taxing powers of Municipalities
SCOPE: Except as otherwise provided in the LGC, the
municipalities may levy taxes, fees and charges not
otherwise levied by provinces. (LGC, Sec. 142)
Tax on Various Types of Businesses (LGC, Sec. 143)
The municipality may impose taxes on the following:
• On manufacturers, assemblers, repackers,
processors, brewers, distillers, rectifiers, and
compounders of:
o liquors,
o distilled spirits, and
o wines or
o manufacturers of any article of commerce of
whatever kind or nature (other than those
mentioned in No. 3).
• On wholesalers, distributors, or dealers of:
o any article of commerce of whatever kind or
nature. (The businesses in No. 1 shall not be
subject to the tax in No. 2)
• On exporters, and on manufacturers, millers,
producers, wholesalers, distributors, dealers or
retailers of the following essential commodities
(where the rate prescribed does not exceed ½ of the
regular rate under (a), (b), (d))
o Rice and corn;
o Wheat or cassava flour, meat, dairy products,
locally manufactured, processed or preserved
food, sugar, salt and other agricultural, marine,
and fresh water products, whether in their
original state or not;
o Cooking oil and cooking gas;
o Laundry soap, detergents, and medicine;
o Agricultural implements, equipment and post-
harvest facilities, fertilizers, pesticides and
other farm inputs;
o Poultry feeds and other animal feeds;
o School supplies; and
o Cement.
• On retailers.
However, barangays shall have the exclusive
power to levy taxes on gross sales or receipts of
the preceding calendar year of P50,000.00 or
less for cities, and P30,000.00 or less for the
TAXATION LAW
municipalities.
• On contractors and other independent contractors
• On banks and other financial institutions, at a rate not
exceeding 50% of 1% on the gross receipts of the
preceding calendar year derived from:
o interest,
o commissions and
o discounts from lending activities,
o income from financial leasing,
o dividends,
o rentals on property and profit from exchange
or sale of property,
o insurance premium.
Note: All other income and receipts of banks and
financial institutions not enumerated above shall
be excluded from the taxing authority of the LGU
concerned. (IRR of LGC, Art. 232(f))
• On peddlers engaged in the sale of any merchandise
or article of commerce, at a rate not P50.00 per
peddler annually.
Note: Delivery trucks, vans, or motor vehicles
used by manufacturers, producers, wholesaler,
dealers or retailers, which are liable to the
provinces under Sec. 141 of LGC, shall be
exempt from peddler’s tax imposed here. (IRR of
LGC, Art. 232(g))
• On any business, not otherwise specified above,
which the Sanggunian concerned may deem proper
to tax. However, for businesses subject to the excise,
value-added or percentage tax, the tax rate shall not
exceed 2% of gross sales of the preceding calendar
year.
Note: Any business engaged in the production,
manufacture, refining, distribution, or sale of:
• Oil,
• Gasoline, or
• Other petroleum products
-shall not be subject to any local tax
imposed in Sec. 143. (IRR of LGC, Art.
232(h))
Note: The sanggunian may prescribe a schedule of
graduated tax rates but in no case to exceed the rates
prescribed in the LGC.
Ceiling on Business Tax Imposable on Municipalities
Municipalities within the MMA may levy higher tax rates
than those municipalities outside MMA, as long as these
rates do not exceed 50% the maximum rates prescribed
in Sec. 143 – Tax on various types of business. (LGC,
Sec. 144)
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Tax on Retirement of Business
A business subject to municipal tax shall, upon
termination thereof, submit a sworn statement of its
gross sales or receipts for the current year. If the tax paid
during the year be less than the tax due on said gross
sales or receipts of the current year, the difference shall
be paid before the business is considered officially retired.
(LGC, Sec. 145)
Termination shall mean that business operations are
stopped completely. Any change in ownership,
management and/or name of the business shall not
constitute termination. (IRR of LGC, Art. 241)
LBT is paid for the privilege of carrying a business during
the year it is paid, and not for the previous year (although
the tax base may be the gross sales of the previous year
because LBT is paid at the start of the year). If the tax paid
is more than the tax due on said gross sales or receipts of
the current year upon retirement, the business is entitled
to a tax credit, otherwise, the business shall pay for the
difference. (Mobil Philippines v. The City Treasurer of
Makati, G.R. No. 154092, 2005, J. Quisumbing)
Rules on Payment of Business Taxes
It shall be payable for every separate or distinct
establishment or place where the business subject to the
tax is conducted. One line of business does not become
exempt by being conducted with some other business for
which such tax has been paid.
The tax on a business must be paid by the person
conducting the same.
In cases where a person conducts or operates 2 or more
of the businesses mentioned in Section 143 of LGC, the
tax shall be computed as follows:
1. If subject to the same rate – compute the tax based
on the combined total gross sales or receipts of the
said 2 or more related businesses.
2. If subject to different rates – compute the tax
separately. (LGC, Sec. 146)
a) Fees and Charges for Regulation and Licensing
1. On business and occupation except professional
taxes reserved for provinces; (LGC, Sec. 147)
2. On sealing and licensing of weights and measures;
(LGC, Sec. 148)
3. Fishery rentals, fees and charges, including the
exclusive authority to grant fishery privileges within
municipal waters, as well as issue licenses for the
operation of fishing vessels of three tons or less.
TAXATION LAW
The sangguniang bayan may:(LGC, Sec. 149)
• Grant fishery privileges to erect fish corrals,
oysters, mussels or other aquatic beds or
bangus fry areas, within its municipal waters;
• Grant 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 to
marginal fishermen free of any rental, fee,
charge or any other imposition whatsoever.
• Issue licenses for the operation of fishing
vessels of 3 tons or less to qualified applicants.
The imposition of 5% tax on the gross receipts on rentals
or lease of space in privately-owned public markets is not
income tax, rather, these constitutes as valid license fees
for the regulation of the business. (Progressive Dev’t
Corp. v. Quezon City, G.R. No. L-36081, 1989, J.
Feliciano)
Situs of Local Taxation (LGC, Sec. 150; IRR of LGC,
Art. 243)
Branch/Sales Office - A fixed place in a locality which
conducts operations of the business as an extension of the
principal office.
All sales made in a branch/sales office shall be taxed by
the city or municipality where the said branch/sales office
is located.
Note: Display offices where no stocks or items are stored
for sale, although orders for the products may be received
there are not considered as branch office.
Warehouse - A building utilized for the storage of products
for sale and from which goods or merchandise are
withdrawn for delivery to customers or dealers, or by
persons acting in behalf of the business.
Note: If a warehouse does any of the following, it shall be
considered as a branch/sales office:
a. accepts orders; or
b. issues sales invoices.
Principal Office - The head or main office of the business.
If the sale is made in a place where there is no
branch/sales office, it shall be recorded and taxed by the
city or municipality where the principal office is located.
All sales recorded in the principal office where the
business has factories, project office, plant, and
plantations in different places, the following sales
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allocation shall be followed:
• 30% shall be taxed by the city or municipality
where the principal office is located; and
• 70% of all sales recorded in the principal office
shall be taxable by the city or municipality where
the factory, project office, plant, or plantation is
located.
o Where the plantation and the factory have
different location, this 70% shall be divided as
follows:
60% to the city or municipality where the
factory is located; and
40% to the city or municipality where the
plantation is located.
o Where 2 or more factories, project offices,
plants, or plantations have different locations,
this 70% shall be prorated among the localities
where the factories, project offices, plants, and
plantations are located in proportion to their
respective volumes of production.
GR: If there is a branch/sales office, the sale shall be taxed
in that locality.
EXCEPTION: If there is no branch/sales office, the sale
shall be taxed in the locality where the principal office is
located, subject to the rule on allocation, if applicable.
Plantation - A tract of agricultural land planted to trees or
seedlings whether fruit bearing or not, uniformly spaced or
seeded by broadcast methods or normally arranged to
allow highest production, including inland fishing ground.
Experimental Farms - An agricultural land utilized by a
business or corporation to conduct studies, tests,
researches or experiments involving agricultural,
agribusiness, marine, or aquatic, livestock, poultry, dairy
and other similar products for the purpose of improving the
quality and quantity of goods or products.
LGUs where only experimental farms are located shall not
entitled to the sales allocation.
For manufacturers or producers which engage the
services of an independent contractor to produce or
manufacture some of their products, same rules shall
apply except that the factory or plant and warehouse of
the contractor utilized for the production and storage of the
manufacturers’ products shall be considered as the factory
or plant and warehouse of the manufacturer.
Port of Loading
GR: The city or municipality where the port of loading is
located shall not levy and collect the LBT.
EXCEPTION: The exporter maintains in said city or
municipality its principal office, a branch, sales office or
TAXATION LAW
warehouse, factory, plant, or plantation (same rule shall
apply)
Sales Made by Route Trucks, Vans, or Vehicles
For route sales made in a locality where there is a
branch/sales office, such sale shall be taxed by the city or
municipality where such branch/sales office is located. If
there is no branch/sales office, such shall be taxed by the
city or municipality of the branch/sales office where route
trucks withdraw their products for sale is located.
Therefore, LGUs where route trucks deliver merchandise
cannot impose any tax on said trucks except the annual
fixed tax (LGC, Sec. 141) and mayor’s permit fee. (LGC,
Sec. 148)
Truck sales were made independently of transactions in
the main office. The delivery trucks were not used solely
for the purpose of delivering soft drinks. They served as
selling units. Thus, the corporation was engaged in the
separate business of selling or distributing soft drinks
independently of its business of bottling them. The situs
of the act of distributing must be within city limits before
the entity can be taxed. (Iloilo Bottlers Inc v. City of Iloilo,
GR-No-L-52019, 1988, J. Cortez)
Illustration
A company maintains its principal office in Quezon City. It
has branches/sales offices in Cebu and Davao. Its factory
is located in Marikina City where most of its workers live.
Its principal office in Quezon City is also a sales office.
Sales of finished products for calendar year 2020 in the
amount of P10M were made at the following locations:
i. Cebu branch – 25%
ii. Davao branch – 15%
iii. Quezon City Branch – 60%
Where should the local taxes be paid?
Suggested Answer: The local taxes must be paid in Cebu,
Davao, and Quezon City. The sales were made in the
branch offices in Cebu and Davao and the sales office in
Quezon City. (Bar 2010)
For purposes of identifying the LGU entitled to collect
taxes, the location stated in the certificate of title should
be followed, until amended through proper judicial
proceedings. (Municipality of Cainta v. City of Pasig, G.R.
No. 176703. June 28, 2017, J. Martires)
A city can validly tax the sales to customers outside the
city as long as the orders were booked and paid for in the
company’s branch office in the city. A different
interpretation would defeat the tax ordinance in question
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or encourage tax evasion by simply arranging for the follows:

delivery at the outskirts of the city. (Philippine Match a. Highly urbanized city – 60%
Company v. City of Cebu, G.R. No. L-30745, 1978, J. b. Barangay where extracted – 40% (IRR of LGC,
Aquino) Art. 239)

Situs According to the Cases: MUNICIPALITY WITHIN A PROVINCE

Excise Tax – not dependent on the domicile of the PROVINCE May levy only taxes, fees and
taxpayer, but on the place in which the act is performed charges on Sec. 135 –
or the occupation is engaged in; not upon the location of 141(province)
the office, but the place where the act is perfected. (Allied MUNICIPALITY May levy only taxes, fees and
Thread Co., Inc. v. City Mayor of Manila, G.R. No. L- charges on Sec. 143 – 149
(municipality)
40296,1984, J. Abad Santos)
CITY WITHIN A PROVINCE
Sales Tax – it is the place of the consummation of the
PROVINCE May levy only taxes, fees and
sale, associated with the delivery of the things which are charges on Sec. 135 - 141
the subject matter of the contract that determines the situs (province)
of the contract for purposes of taxation, and not merely CITY May levy taxes, fees and
the place of the perfection of the contract. (Shell Co., Inc. charges on Sec. 135 – 141
v. Municipality of Sipocot, Camarines Sur,G.R. No, L- (province) and Sec. 143 - 149
12680, 1959, J. Montemayor) (municipality)
Taxing powers of Cities HIGHLY URBANIZED AND INDEPENDENT
SCOPE: Except as otherwise provided in the LGC, the COMPONENT CITIES
city may levy the taxes, fees, and charges which the CITIES May levy taxes, fees and
province or municipality may impose. (LGC, Sec. 151) charges on Sec. 135 – 141
(province) and Sec. 143 – 149
(municipality)
The city may:
a. Levy and collect any of the taxes, fees, charges, and
Taxing Powers of Barangays
other impositions that the province and municipality
SCOPE: The barangays may levy the following taxes and
may impose.
charges, which shall exclusively accrue to them: [TOBS]
Note: The tax rates that the city may levy may
exceed the maximum rates allowed for the
1. Taxes - On stores or retailers with fixed business
province or municipality by not more than 50%
establishments with gross sales of receipts of the
except the rates of professional and amusement
preceding calendar year of P50,000 or less for cities
taxes.
and P30,000 or less, in the case of municipalities, rate
• Professional tax – not exceeding P300
= not exceeding 1% on gross sales or receipts.
• Amusement tax – Not more than 30% of the 2. Service Fees or Charges for services rendered in
gross receipts from admission fees. connection with the regulations or the use of
Note: These 2 taxes are uniform for the city and barangay-owned properties or service facilities such
the province. as palay, copra, or tobacco dryers.
b. Levy and collect a percentage tax on any business 3. Barangay Clearance. - No city or municipality may
not otherwise specified under Sec. 143 (Tax on issue any license or permit for any business or activity
various types of business No. 1-7), at rates not unless a clearance is first obtained from the barangay
exceeding 3% of the gross sales or receipts of the where such business or activity is located or
preceding calendar year. (IRR of LGC, Art. 237) conducted.

However, the taxes, fees and charges levied and Note: The application for clearance shall be acted
collected by highly urbanized and independent upon within 7 working days from its filing. If not issued
component cities shall accrue to them and distributed in within 7 days, the city or municipality may issue the
accordance with the provisions of the LGC. (LGC, Sec. said license or permit.
151)
4. Other fees and Charges. - The barangay may levy
The proceeds of the tax on sand, gravel, and other quarry reasonable fees and charges: [CoCoRB]
resources in highly-urbanized cities shall be distributed as a. On commercial breeding of fighting Cocks
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Note: Commercial breeding – with annual sale of
more than 5 fighting cocks of a duly registered
breeder.
b. Cockfights and cockpits;
c. On places of Recreation which charge admission
fees; and
d. On Billboards, signboards, neon signs, and
outdoor ads. (LGC, Sec. 152; IRR of LGC, Art.
240)
5. COMMON REVENUE-RAISING POWERS OF LGUS
PuSeT
a) Service Fees and Charges for services rendered.
(LGC, Sec. 153)
b) Public Utility Charges for the operation of public
utilities owned, operated and maintained by LGUs
within their jurisdiction. (LGC, Sec. 154)
c) 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 LGU concerned. (LGC, Sec. 155)
Exceptions to Collection of Toll Fees or Charges:
• Officers and enlisted men of the AFP and PNP on
mission,
• Post office personnel delivering mail,
• Physically handicapped,
• Disabled citizens who are sixty-five (65) years or
older. (LGC, Sec. 155)
Note: When public safety and welfare so requires, the
sanggunian may discontinue the collection of the tolls, and
thereafter the said facility shall be free and open for public
use. (LGC, Sec. 155)
6. COMMUNITY TAX
Only cities or municipalities may levy a community tax.
(LGC, Sec. 156)
A Community Tax Certificate (CTC) shall be issued to
every person or corporation upon payment of the
community tax. (LGC, Sec. 162)
A CTC may also be issued to any person or corporation
not subject to the community tax upon payment of P1.
(LGC, Sec. 162)
Individuals
Requisites:
1. Resident of the Philippines
2. Eighteen (18) years of age or over
3. Either:
TAXATION LAW
a. regularly employed on a wage or salary basis
for at least 30 consecutive working days
during any calendar year, or
b. engaged in business or occupation, or
c. owner of real property with an aggregate
assessed value of P1,000 or more, or
d. required by law to file an income tax return.
(LGC, Sec. 157)
Amount to Pay for Individuals
1. P5 - Annual additional tax; and
2. P1 - Additional tax - for every P1,000 of income
regardless of whether from business, exercise of
profession or from property;
3. Limit: up to P5,000 only;
4. In the case of husband and wife, the additional tax
shall be based upon the total property owned by
them and the total gross receipts or earnings
derived by them. (LGC, Sec. 157)
Juridical Persons
Requisites:
1. Corporation (domestic or resident foreign);
2. Engaged in or doing business in the Philippines.
(LGC, Sec. 158)
Amount to Pay for Juridical Persons
1. P500 - Annual community tax; and
2. Annual additional tax:
a. P2 - for every P5,000 worth of real property in
the Philippines owned by it during the
preceding year based on the valuation used
for the payment of real property tax under
existing laws, found in the assessment rolls of
the city or municipality where the real property
is situated; and
b. P2 - for every P5,000 of gross receipts or
earnings derived by it from its business in the
Philippines during the preceding year.
3. Limit: up to P10,000 only.
4. The dividends received by a corporation from
another corporation however shall, for the purpose
of the additional tax, be considered as part of the
gross receipts or earnings of said corporation.
(LGC, Sec. 158)
Exemptions
1. Diplomatic and consular representatives; and
2. Transient visitors when their stay in the Philippines
does not exceed 3 months. (LGC, Sec. 159)
Place of Payment
1. Individual - place of residence
2. Juridical person - location of principal office
a. In case of branch, sales office or
warehouse where sales are made and
recorded, corresponding community tax
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shall be paid to the LGU where such
branch, sales office or warehouse is
located. (IRR of LGC, Art. 246)
It shall be unlawful for any city or municipal treasurer to
collect community tax outside the territorial jurisdiction of
the city or the municipality. Any person, natural or juridical,
who pays community tax to a city or municipality other than
the city or municipality where his residence, or principal
office in the case of juridical persons, is located shall
remain liable to pay such tax to the city or municipality
concerned. (IRR of LGC, Art. 246)
Time for Payment
Individuals - Accrue on January 1 of each year
GR: Payment shall not be later than the last day of
February of each year.
EXCEPTIONS:
1. If a person reaches the age of 18 years or loses
the benefit of exemption on or before March 31, he
shall have 20 days to pay the community tax
without becoming delinquent.
2. If a person reaches the age of 18 years, or loses
the benefit of exemption on or before June 30, he
shall be liable for the community tax on that day.
3. If a person comes to reside in the Philippines, or
reaches the age of 18 years, or loses the benefit
of exemption on or after July 1, he shall not be
subject to the community tax for that year.
Juridical persons - If established and organized on or
before June 30, it shall be liable for the community tax for
that year. Conversely, if it is established and organized
July 1, it shall not be subject to the community tax for that
year.
1. If established and organized on or before March
31, it shall have 20 days to pay.
If Interest is not paid on time – liable for 24% per annum of
the unpaid amount from the due date until it is paid. (LGC,
Sec. 161)
When Presentation of CTC is Required
When an individual subject to the community tax:
1. acknowledges any document before a notary
public;
2. takes the oath of office upon election or
appointment to any position in the government
service;
3. receives any license, certificate, or permit from
any public authority;
4. pays any tax or fee;
5. receives any money from any public fund;
6. transacts other official business; or
TAXATION LAW
7. receives any salary or wage from any person or
corporation with whom such transaction is made
or business done or from whom any salary or
wage is received to require such individual to
exhibit the community tax certificate.
However, the presentation of CTC shall not be required
in connection with the registration of a voter.
When, through its authorized officers, any corporation
subject to the community tax:
1. receives any license, certificate, or permit from
any public authority,
2. pays any tax or fee,
3. receives money from public funds, or
4. transacts other official business.
When the CTC is required, it shall be the one issued for
the current year, except for the period from January until
April 15, in which case, the CTC issued for the preceding
year shall suffice. (LGC, Sec. 163)
Distribution of Proceeds
The proceeds of the tax shall accrue to the general funds
of the cities, municipalities and barangays except a portion
thereof which shall accrue to the general fund of the
national government to cover the actual cost of printing
and distribution of the forms and other related expenses.
The city or municipal treasurer shall deputize the barangay
treasurer to collect the community tax in their respective
jurisdictions, provided that said barangay treasurer shall
be bonded in accordance with existing laws.
If the proceeds are collected by the city or municipal
treasurer, it shall accrue entirely to the general fund of the
city or municipality concerned. However, if it is collected
through the barangay treasurers, it shall be apportioned as
50-50 to the general fund of the city or municipality and to
the barangay where the tax is collected, respectively.
(LGC, Sec. 164)
7. COMMON LIMITATIONS ON THE TAXING POWERS
OF LGUS
LGUs cannot levy [P3IT MADE IN BGC2]:
a. Income tax, except on banks and other financial
institutions;
Section 131(e) defines “banks and other financial
institutions,” which excludes holding companies. Section
3.A.02(h) of the Revised Makati Revenue Code imposes
an LBT on the dividend income of banks and other
financial institutions. Section 3.A.02(p), however, makes
holding companies, such as MHI, liable for the same
business tax. Section 3.A.02(p) of the Revised Makati
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Revenue Code violates the limit set by Section 133(a) of
the LGC, which prohibits the imposition of income tax
except when levied on banks and other financial
institutions. The said provision is therefore an ultra vires
exercise of local taxing power that cannot be given effect
without violating the principle that an ordinance must
conform with and can neither amend nor repeal a statute.
(Michigan Holdings, Inc. v City Treasurer of Makati, CTA
Case No. 1093, 2015)
b. Documentary stamp tax;
c. Estate Tax, Inheritance, gifts, legacies and other
acquisitions mortis causa, except as otherwise
provided;
d. 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 local government unit concerned;
e. Taxes, fees and charges and other impositions upon
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;
f. Taxes, fees or charges on Agricultural and aquatic
products when sold by marginal farmers or fishermen;
g. Taxes on business enterprises certified to by the
Board of Investments as:
• pioneer – 6 years from registration or
• non-pioneer – 4 years from registration;
h. Excise taxes on articles enumerated under the NIRC,
as amended and taxes, fees, and charges on
Petroleum products;
The language of Section 133(h) makes plain that the
prohibition with respect to petroleum products extends not
only to excise taxes thereon, but all "taxes, fees and
charges." While local government units are authorized to
burden all such other class of goods with "taxes, fees and
charges", excepting excise taxes, a specific prohibition is
imposed barring the levying of any other type of taxes with
respect to petroleum products. (Petron Corporation v.
Tiangco, 2008, J. Tinga)
i. Percentage or VAT on sales, barters or exchanges or
similar transactions on goods or services except as
otherwise provided;
A tax that bears a direct relation to the volume of sales (or
when there is a set ratio on the volume of sales and the
amount of tax) may not be imposed by the local
government since these amounts to percentage tax on
sales. (Serafica v. Treasurer of Ormoc City, G.R. No. L-
24813, 1969, C.J. Concepcion)
TAXATION LAW
j. 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 LGC;
Section 133 of the LGC prohibits LGUs from imposing
taxes on the gross receipts of transportation contractors,
persons engaged in the transportation of passengers or
freight by hire, and common carriers by air, land, or water.
This is an exception to the grant of taxing power given to
municipalities and cities per Section 143(h) of the LGC.
(City of Manila v. Colet, G.R. No. 120051, 2014)
k. Taxes on Premiums paid by way of reinsurance or
retrocession;
l. Taxes, fees or charges for the registration of Motor
vehicles and for the issuance of all kinds of licenses
or permits for the driving thereof, except tricycles;
m. Taxes, fees, or other charges on Philippine products
actually Exported, except as otherwise provided;
n. Taxes, fee, or charges, on Countryside and Barangay
Business Enterprises and cooperatives duly
registered under R.A. 6810 and R.A. 6938
(Cooperative Code of the Philippines); and
o. Taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities, and
local government units. (LGC, Sec. 133)
8. REQUIREMENTS OF A VALID TAX ORDINANCE
Authority to Issue Local Tax Ordinance
The power to impose a tax, fee or charge or to generate
revenue is exercised by the sanggunian of the LGU
concerned through an appropriate ordinance. (LGC, Sec.
132)
Sangguniang Panlalawigan – for provinces
Sangguniang Panglungsod – for cities
Sangguniang Bayan – for municipalities
Barangay Council – for barangays / barrios (LGC, Sec.
41(b))
Procedure for Approval and Effectivity of Local Tax
Ordinances
The procedure applicable to local government ordinances
in general should be observed.
General Requirements for an Ordinance
a. Necessity of quorum; (LGC, Sec. 53)
b. Submission for approval by the local chief
executive; (LGC, Sec. 54)
c. The matter of veto and overriding the same; (LGC,
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Sec. 55)
d. The publication and effectivity; (LGC, Sec. 59)
Specific Requirements for Tax Ordinance
a. Public hearings are required before any local tax
ordinance is enacted. (IRR of LGC, Art. 276)
b. Within 10 days after their approval, publication in
full for 3 consecutive days in a newspaper of
general circulation. In the absence of such
newspaper in the province, city or municipality, the
ordinance may be posted in at least two
conspicuous and publicly accessible places.
(LGC, Sec. 188)
c. Copies of all provincial, city, and municipal and
Barangay tax ordinances and revenue measures
shall be furnished the respective local treasurers
for public dissemination. (LGC, Sec. 189)
Public hearing is Required
1. Within 10 days from filing of any proposed tax
ordinance or revenue measure, the same shall
first be published for 3 consecutive days in a
newspaper of local circulation or shall be posted
simultaneously in at least 4 conspicuous public
places within the territorial jurisdiction of the LGU
concerned.
2. In addition to the requirement for publication or
posting, the sanggunian concerned shall cause
the sending of written notices of the proposed
ordinance, enclosing a copy thereof, to the
interested or affected parties operating or doing
business within the territorial jurisdiction of the
LGU concerned.
3. The notice shall specify the date or dates and
venue of the public hearing. The initial public
hearing shall be held not earlier than 10 days from
the sending out of notice, or the last day of
publication, or date of posting thereof, whichever
is later.
4. At the public hearing, all interested parties shall be
accorded an opportunity to appear and present or
express their views, comments and
recommendations, and such public hearing shall
continue until all issues have been presented and
fully deliberated upon and/or consensus is
obtained, whether for or against the enactment of
the proposed tax ordinance or revenue measure.
5. The secretary of the sanggunian shall prepare the
minutes of such public hearing and shall attach to
the minutes the position papers, memoranda, and
other documents submitted by those who
participated.
6. No tax ordinance or revenue measure shall be
enacted or approved in the absence of a public
hearing duly conducted. (IRR of LGC, Art. 276;
TAXATION LAW
Figuerres v. CA, G.R. No. 119172, March 25,
1999)
In case the effectivity of any tax ordinance or revenue
measure falls on any date other than the beginning of the
quarter, the same shall be considered as falling at the
beginning of the next ensuing quarter and the taxes, fees,
or charges due shall begin to accrue therefrom. (IRR of
LGC, Art. 276)
A municipal tax ordinance which prescribes a set ratio
between the amount of the tax and the volume of sales of
the taxpayer imposes a sales tax and is null and void for
being beyond the power of a municipality to enact.
(Arabay, Inc. V. CFI of Zamboanga, G.R. No. L-37684,
1975, J. Castro)
9. TAXPAYER’S REMEDIES
a. Protest of Assessment
1. The Local Treasurer or his duly authorized
representative shall issue a notice of assessment
stating the nature of the tax, fee, or charge, the amount
of deficiency, surcharges, interests and penalties if he
finds that correct taxes, fees, or charges have not been
paid.
2. Within 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 the assessment shall become final and
executory.
3. The Local Treasurer shall decide the protest within 60
days from the time of filing of the written protest.
4. If the protest is found to be meritorious, he shall issue
a notice cancelling wholly or partially the assessment.
5. If the assessment is found to be wholly or partly correct,
the Local Treasurer shall deny the protest wholly or
partly with notice to the taxpayer.
6. The taxpayer has 30 days from the receipt of the denial
of the protest or from the lapse of the 60-day period
within which to appeal with the court of competent
jurisdiction, otherwise the assessment becomes
conclusive and unappealable. (LGC, Sec. 195)
Note: Unlike a disputed real property tax assessment
where payment under protest is generally required, a
protest against a disputed Notice of Assessment for
deficiency local tax need not be preceded or
accompanied by payment under protest.
Where no payment is made, the taxpayer's procedural
remedy is governed strictly by Section 195. That is, in
case of whole or partial denial of the protest, or inaction
by the local treasurer, the taxpayer's only recourse is to
appeal the assessment with the court of competent
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jurisdiction. The appeal before the court does not seek a
refund but only questions the validity or correctness of the
assessment.
Where payment was made, the taxpayer may maintain a
a court action protesting the assessment (LGC, Sec. 195)
and at the same time and seeking a refund of the taxes
(LGC, Sec. 196) (City of Manila v. Cosmos Bottling
Corporation, G.R. No. 196681, June 27, 2018, J. Martires)
Jurisdiction of Courts Over Local Taxation Cases
With the amendment brought by RA No. 9282, the Court
of Tax Appeals now has appellate jurisdiction over local
taxation cases decided by the RTC in the exercise of its
appellate or original jurisdiction.
The case which arose from the dispute between Napocor
and the Provincial Government of Bataan over the
purported franchise tax delinquency of Napocor is a local
tax case that is within the exclusive appellate jurisdiction
of the CTA, not the CA. Although the complaint filed with
the trial court is a Petition for declaration of nullity of
foreclosure sale with prayer for preliminary mandatory
injunction, a reading of the petition shows that it essentially
assails the correctness of the local franchise tax
assessments. In order for the trial court to resolve the
complaint, the issues regarding the correctness of the tax
assessment and collection must also necessarily be dealt
with. Hence, the CA correctly dismissed the appeal for lack
of jurisdiction. (NAPOCOR v. Provincial Government of
Bataan, G.R. No. 180654, J. Leonen)
Regular judicial courts are not prohibited from enjoining
the collection of local taxes, subject to Rule 58
(preliminary injunction) of the Rules of Court.
Injunction – if irreparable damage would be caused to
the taxpayer and no adequate remedy is available.
Unlike the NIRC, the Local Tax Code does not contain
any specific provision prohibiting courts from enjoining the
collection of local taxes. Such statutory lapse or intent
may have allowed preliminary injunction where local taxes
are involved. But it cannot negate the procedural rules
and requirements under Rule 58 of the Rules of Court
(Valley Trading Co. v. CFI of Isabela, 171 SCRA 501,
1989, J. Regalado)
TAXATION LAW
b. Claim for Refund or Tax Credit for Erroneously or
Illegally Collected Tax, Fee or Charge
A written claim for refund or credit must be filed with the
Local Treasurer for the recovery of any tax, fee, or charge
erroneously or illegally collected.
The claim must be filed within 2 years from:
a. date of the payment of such tax, fee, or
charge, or
b. date the taxpayer is entitled to a refund or
credit. (LGC, Sec. 196). Thus, a tax paid
pursuant to an ordinance that was judicially
declared invalid may still be recovered within
two years from finality of the judgment. (ICTSI
v. City of Manila, CTA AC No. 11, Mar. 10,
2021)
Note: Actual payment is required under Sec. 196, unlike
in Sec. 195 that can be resorted to even without payment.
Note: Notice of Assessment is required in Sec. 195 but
not in Sec. 196.
What determines the appropriate remedy between Sec.
195 and Sec. 196 is the local government's basis for the
collection of the tax. It is explicitly stated in Sec. 195 that it
is a remedy against a notice of assessment issued by the
local treasurer, upon a finding that the correct taxes, fees,
or charges have not been paid. Here, no notice of
assessment for deficiency taxes was issued by the City
Treasurer. While the receipts state the amount and nature
of the tax assessed, they do not contain any amount of
deficiency, surcharges, interests, and penalties due from
Corp A. They cannot be considered the "notice of
assessment" required under Sec. 195. Consequently,
Section 196 applies. (International Container Terminal
Services v. City of Manila, G.R. No. 185622, October 17,
2018, J. Leonen)
Corp A sent letters of claims for refund for the first three
quarters it paid taxes due to alleged double taxation, but
the City Treasurer failed to act upon the same. Corp A no
longer sent letters for the subsequent quarters because it
would essentially just reiterate the same arguments it
made in the former letters. Due to the City Treasurer’s
inaction, it filed a Petition for Certiorari and Prohibition with
prayer for TRO before the RTC. Is Corp A entitled to refund
it paid subsequent to third quarter?
Answer: Yes. To be entitled to a refund under Sec. 196,
the taxpayer must comply with the following procedural
requirements:
1. File a written claim for refund or credit with the
local treasurer; and
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2. File a judicial case for refund within 2 years from • erroneous payment
the payment of the tax, fee, or charge, or from the • invalid collection
date when the taxpayer is entitled to a refund or Taxpayer has 60 days Taxpayer must first file a
credit.
from receipt of notice of written claim for refund
In this case, while the corporation admittedly failed to file
claims for refund for the taxes subsequent to the third assessment to protest it before bringing a suit in
quarter, this failure was warranted under the for being erroneous. Then court which must be
circumstances. First, the filing of the subsequent written the treasurer shall decide initiated within two years
claims would have yielded the same result every time. within 60 days. He shall from the date of payment.
Second, the issue of the Corp A’s claim for refund is a thereafter have 30 days
question of law (double taxation). When the issue raised from the receipt of the
by the taxpayer is purely legal and there is no question denial of the protest or
concerning the reasonableness of the amount assessed, from the lapse of the 60-
then there is no need to exhaust administrative remedies. day period of inaction
(International Container Terminal Services v. City of
within which to appeal
Manila, G.R. No. 185622, October 17, 2018, J. Leonen)
with the court of
Tax Credit competent jurisdiction.
It shall only be applied to future tax obligations of the same Treasurer has 60 days to Unlike Section 195,
taxpayer for the same business and not refundable in decide said protest. however, Section 196
cash. does not expressly
provide a specific period
If a taxpayer has no other tax obligation payable to the within which the local
LGU during the year, his tax credits shall be applied in full treasurer must decide the
during the first quarter of the next calendar year for the
written claim for refund or
same business.
credit. It is, therefore,
Any unapplied balance of the tax credit shall be refunded possible for a taxpayer to
in cash in the event that he terminates operation of the submit an administrative
business involved within the locality. (IRR of LGC, Art. 286) claim for refund very early
in the 2-year period and
In the event that the protest is finally decided in favor of initiate the judicial claim
the taxpayer, the amount or portion of the tax protested already near the end of
shall be refunded to the taxpayer, or applied as tax credit such 2-year period due to
against his existing or future tax liability. It is not an extended inaction by
necessary for petitioner to move for the issuance of the the local treasurer. In this
writ of execution because the remedy has already been instance, the taxpayer
provided by law. (Coca-Cola Bottlers Philippines, Inc. v. cannot be required to
City of Manila, 721 SCRA 1, 2014, J. Peralta) await the decision of the
local treasurer any
Difference between Sec. 195 (Protest) and Sec. 196 longer, otherwise, his
(Refund/Tax Credit) judicial action shall be
SEC. 195 SEC. 196 barred by prescription.
Protest – contesting an Refund/Tax Credit – (City of Manila v. Cosmos Bottling Corporation, G.R. No.
assessment recovery of erroneously 196681, June 27, 2018, J. Martires; International
paid or illegally collected Container Terminal Services v. City of Manila, G.R. No.
tax 185622, October 17, 2018, J. Leonen)
File a written protest with File a written claim with
the treasurer. the treasurer. c. Action Before The Secretary Of Justice
Actual payment is not Actual payment is
Protest Against a Newly Enacted Ordinance
required. required.
Any question on the constitutionality or legality of tax
Notice of assessment is Notice of assessment is ordinances or revenue measures may be raised on
required. not required as long as appeal within 30 days from the effectivity thereof to the
the grounds are the Secretary of Justice.
following:
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Summary of Remedies
The SOJ shall render a decision within 60 days from the REMEDIES GROUNDS PROCEDURE
date of receipt of the appeal. (LGC, Sec. 187) PROTEST The 1. Local treasurer
AGAINST AN correctness of will issue a
Effect of Appeal ASSESSMENT the amount of notice of
The appeal will not suspend the effectivity of the (LGC, Sec. the assessment;
195) assessment 2. File a written
ordinance and the accrual and payment of the tax, fee, or
protest with the
charge levied therein. local treasurer
within 60 days
The aggrieved party may file appropriate proceedings from the
with a court of competent jurisdiction (RTC): receipt of the
a. within 30 days after receipt of the decision; or notice of
b. after the lapse of the 60-day period without the SOJ assessment;
acting upon it. (LGC, Sec. 187) 3. The treasurer
shall decide
The SOJ can declare an ordinance void for not having within 60 days
from the time of
followed the requirements of the law but he cannot
its filing;
replace it with his own law or he cannot say that is unwise. 4. Appeal with the
When the SOJ alters or modifies or sets aside a tax court of
ordinance, he is not allowed to substitute his own competent
judgment for the judgment of the LGU that enacted the jurisdiction
measure since he only exercises supervision and not within 30 days
control. (Drilon v. Lim, G.R. No. 112497, 1994, J. Cruz) from:
• receipt of
SOJ dismissed an appeal assailing the constitutionality of denial, or
the tax ordinances of the Municipality of San Juan on the • lapse of the 60-
ground that it was filed out of time. The failure of the day period.
5. Taxpayer will
petitioners in the case to appeal to the Secretary within 30
then appeal to
days from the date of effectivity is fatal to their cause. the CTA within
(Reyes v. CA, G.R. No. 118233, December 10, 1999, J. 30 days
Quisumbing) CLAIM FOR Taxes 1. File a written
While the appeal to the DOJ is mandatory and fatal to the REFUND OR erroneously claim for
taxpayer if not availed of, if the issue is on pure questions TAX CREDIT paid and refund/tax
of law, the appeal to the DOJ is not mandatory and the (LGC, Sec. illegally credit with the
case can be brought straight to the RTC. (Alta Vista Golf 196) collected. local treasurer
and Country Club v. Cebu, G.R. No. 180235, 2016, J. within 2 years
Leonardo-De Castro) from:
Under Section 187 of the Local Government Code of 1991, • Date of
aggrieved taxpayers who question the validity or legality of payment; or
a tax ordinance are required to file an appeal before the • Date when
Secretary of Justice before they seek intervention from the taxpayer is
regular courts.||| (Aala v. Uy, G.R. No. 202781, 2017, J. entitled to a
Leonen) refund or
credit.
If the 30-day period lapses without any direct action being QUESTION Any question 1. Appeal within
filed with the SOJ to question the constitutionality or THE NEWLY on the 30 days from
ENACTED constitutionality effectivity of
legality of the tax ordinance or revenue measure, it does
ORDINANCE or legality of tax the ordinance
not preclude the taxpayer from questioning the (LGC , Sec. ordinances or to the SOJ;
constitutionality or legality of the tax ordinance or revenue 187 & 188) revenue 2. SOJ shall
measure in an indirect or collateral attack as an affirmative measures decide within
defense in a protest under Sec. 195 or as a ground for a 60 days from
claim for refund under Sec. 196. receipt of the
appeal;
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3. Within 30 days
from receipt of
the decision or
the lapse of the
60 day period
without any
action from the
SOJ, the
aggrieved
taxpayer may
go to court.
10. ASSESSMENT AND COLLECTION OF LOCAL
TAXES
Tax Period
The tax period shall be the calendar year, unless
otherwise provided in the LGC. (LGC, Sec. 165)
Manner of Payment
It may be paid in quarterly installments. (LGC, Sec. 165)
Accrual of Tax
GR: It shall accrue on the January 1 of each year, unless
otherwise provided in the LGC.
EXCEPTION: New taxes, fees or charges, or changes in
the rates thereof, shall accrue on the 1st day of the quarter
next following the effectivity of the ordinance imposing
such new levies or rates. (LGC, Sec. 166)
Time of Payment
It charges shall be paid within 20 days of January or of
each subsequent quarter, as the case may be, unless
otherwise provided in the LGC. The sanggunian may, for
a justifiable cause, extend the time for payment of such
taxes without surcharges or penalty for a period not
exceeding 6 months. (LGC, Sec. 167)
Surcharges and Penalties on Unpaid Taxes, Fees, or
Charges
The sanggunian may impose the following:
a. Surcharge - not exceeding 25% of the unpaid
taxes, fees or charges not paid on time.
b. Interest - not exceeding 2% per month of the unpaid
taxes, fees or charges including surcharges, until
such amount is fully paid but in no case shall the
total interest on the unpaid amount exceed 36
months. (LGC, Sec. 168)
c. On any other source of revenue, LGUs are
authorized to impose an interest of a maximum of
2% per month, maximum of 36 months, on the
amount unpaid. (LGC, Sec. 169)
TAXATION LAW
Authority of the Local Treasurer
1. All local taxes, fees and charges shall be collected
by the provincial, city, municipal or barangay
treasurer, or their duly authorized deputies.
The provincial, city or municipal treasurer may designate
the barangay treasurer or his deputy to collect local taxes,
fees or charges. In case a bond is required for the
purpose, the provincial city or municipal government shall
pay premiums in addition to the premiums of the bond that
may be required under LGC. (LGC, Sec. 170)
City Treasurer cannot be compelled by mandamus to
accept payment of taxes, if in his reasoning and
assessment, the payment is incorrect or deficient. (San
Juan v. Castro, 541 SCRA 526, 2007, J. Carpio-Morales)
2. He may examine the books of accounts and
pertinent records of businessmen in order to
ascertain, assess, and collect the correct amount of
taxes, fees, and charges.
The examination shall be made during regular business
hours not oftener than once a year for every tax period,
which shall be the year immediately preceding the
examination, and shall be certified by the examining
official. Such certification shall be made of record in the
books of accounts of the taxpayer examined.
In case the examination is made by a duly authorized
deputy of the local treasurer, the written authority of the
deputy shall specifically state the name, address, and
business of the taxpayer whose books, accounts, and
pertinent records are to be examined, the date and place
of such examination, and the procedure to be followed in
conducting the same. (LGC, Sec. 171)
Penalty on Local Treasurer
The local treasurer shall be automatically dismissed from
the service after due notice and hearing, without prejudice
to criminal prosecution if he does any of the following;
1. Fails to issue or execute the warrant of distraint or
levy after the expiration of the time prescribed; or
2. Is found guilty of abusing the exercise thereof, by
competent authority. (LGC, Sec. 177)
a. Remedies of The Local Government Units
Local Government's Lien
Local taxes, fees, charges and other revenues constitute
a lien, superior to all liens, charges or encumbrances in
favor of any person, enforceable by appropriate
administrative or judicial action, upon:
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d. Any property or rights therein which may be subject
to the lien; and
e. Property used in business, occupation, practice of
profession or calling, or exercise of privilege with
respect to which the lien is imposed.
The lien may only be extinguished upon full payment of the
delinquent local taxes fees and charges including related
surcharges and interest. (LGC, Sec. 173)
Civil Remedies:
1. By administrative action:
a. Distraint of personal property; and
b. Levy upon real property;
2. Judicial action.
Note: Either of these remedies or all may be pursued
concurrently or simultaneously at the discretion of the
LGU concerned. (LGC, Sec. 174)
Distraint of Personal Property
(LGC, Sec. 175)
Seizure: Upon failure to pay taxes at the time required, the
local treasurer may, upon written notice, seize or
confiscate any personal property belonging to the taxpayer
or any personal property subject to the lien in sufficient
quantity to satisfy the tax, fee, or charge, and any
increment thereto incident to delinquency and the
expenses of seizure. The local treasurer shall issue a duly
authenticated certificate based upon the records of his
office showing the following:
1. The fact of delinquency; and
2. Amounts of the tax, fee, or charge and penalty
due.
Certificate of Delinquency: It shall serve as sufficient
warrant for the distraint of personal property, subject to the
taxpayer's right to claim exemption under the provisions of
existing laws.
Accounting: The officer executing the distraint shall
account the goods, chattels or effects distrained. A copy of
such accounting and a statement of the sum demanded
and the time and place of sale, shall be left either with:
1. Owner or person from whose possession the
goods, chattels or effects are taken; or
2. At the dwelling or place or business of that person
and with someone of suitable age and discretion.
Publication: A notice shall be exhibited in not less than 3
public and conspicuous places in the territory of the LGU
where the distraint is made, specifying the time and place
of sale, and the articles distrained. One place for the
TAXATION LAW
posting of the notice shall be at the office of the chief
executive of the LGU in which the property is distrained.
Effect if Paid Prior to Sale: If at any time prior to the
consummation of the sale, all the proper charges are paid,
the goods distrained shall be restored to the owner.
Sale at Public Auction: The time of sale shall not be less
than 20 days after the notice and publication or posting. If
not disposed of within 120 days, the same shall be
considered as sold to the LGU for the amount of the
assessment made thereon by the Committee on Appraisal
and to the extent of the same amount, the tax
delinquencies shall be cancelled.
At the time and place fixed in the notice, the officer
conducting the sale shall sell the goods so distrained at
public auction to the highest bidder for cash.
Report: Within 5 days after the sale, the local treasurer
shall make a report of the proceedings in writing to the local
chief executive.
Disposition of proceeds: The proceeds of the sale shall
be applied to satisfy the tax, surcharges, interest, other
penalties incident to delinquency, and the expenses of the
distraint and sale.
Difference: If there is an excess, it shall be returned to the
owner of the property sold. If insufficient, other property
may be distrained until the full amount due, including all
expenses, is collected.
The said expenses shall only cover the actual expenses of
seizure and preservation of the property pending the sale,
and no charge shall be imposed for the services of the local
officer.
Levy on Real Property
(LGC, Sec. 176, 178, 179, 180, 181, 182)
After the expiration of the time required to pay the
delinquent tax, fee, or charge, real property may be levied
on, before, simultaneously, or after the distraint of personal
property belonging to the delinquent taxpayer.
The local treasurer shall prepare a duly authenticated
certificate showing the following:
1. Name of the taxpayer; and
2. Amount of the tax, fee, or charge, and penalty due;
and
3. To effect levy, the description of the property upon
which levy is to be made shall be added.
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Certificate of Delinquency: This shall operate with the
force of a legal execution throughout the Philippines.
Warrant of Levy: A written notice of the levy shall be
mailed to or served upon the following:
1. Assessor who shall annotate the levy on the tax
declaration
2. Register of Deeds of the province or city where the
property is located who shall annotate the levy on
the certificate of title of the property; and
3. Delinquent taxpayer
a. Agent or the manager of the business in
respect to which the liability arose - if he is
absent from the Philippines;
b. If none, to the occupant of the property in
question.
If the personal property of the taxpayer is insufficient to
satisfy the delinquency, the local treasurer shall proceed
with the levy on the taxpayer's real property within 30 days
after execution of the distraint. However, this is only
applicable if the levy on real property is not issued before
or simultaneously with the warrant of distraint on personal
property.
1st Report: Within 10 days after the receipt of warrant, a
report on any levy shall be submitted by the levying officer
to the sanggunian.
Advertisement: Within 30 days after the levy, the local
treasurer shall publicly advertise for sale or auction the
property as may be necessary to satisfy the claim and cost
of sale. Such advertisement shall cover a period of at least
30 days. It shall be effected by the following:
1. Posting a notice at the main entrance of the
municipal building or city hall, and in a public and
conspicuous place in the barangay where the real
property is located; and
2. Publication once a week for 3 weeks in a
newspaper of general circulation in the province,
city or municipality where the property is located.
The advertisement shall contain the following:
1. Amount of taxes, fees or charges, and penalties
due;
2. Time and place of sale,
3. Name of the taxpayer against whom the taxes,
fees, or charges are levied; and
4. Short description of the property to be sold.
Effect if Paid Prior to Sale: If the taxpayer pays the taxes,
fees, charges, penalties and interests before the date fixed
for the sale, such stays they proceedings.
Sale at Public Auction: It shall be held either:
TAXATION LAW
1. At the main entrance of the provincial, city or
municipal building;
2. On the property to be sold; or
3. At any other place as determined by the local
treasurer conducting the sale and specified in the
notice of sale.
2nd Report: Within 30 days after the sale, the local
treasurer shall make a report of the sale to the sanggunian.
Certificate of Sale: The local treasurer shall make and
deliver to the purchaser a certificate of sale stating the
following:
1. Proceeding of the sale;
2. Property description;
3. Name of the buyer;
4. Amount of all taxes, fees, charges, surcharges,
interests, and penalties:
Excess: Any excess in the proceeds shall be turned over
to the owner of the property.
Redemption: Within 1 year from the date of sale, the
delinquent taxpayer shall have the right to redeem the
property upon payment to the local treasurer of the total
amount of taxes, fees, or charges, and related surcharges,
interests or penalties from the date of delinquency to the
date of sale, plus interest of not more than 2% per month
on the purchase price from the date of purchase to the date
of redemption.
Effects of Redemption:
1. It shall invalidate the certificate of sale issued to
the buyer;
2. Upon surrender by the buyer of the certificate of
sale, the local treasurer shall then return to the
buyer the following:
a. entire purchase price paid by him;
b. the interest of not more than 2% per month;
c. portion of the cost of sale and other legitimate
expenses incurred by him;
3. The owner shall be entitled to a certificate of
redemption issued by the local treasurer;
4. The said property shall be free from the lien of
such taxes, fees, or charges, related surcharges,
interests, and penalties.
The owner shall not, however, be deprived of the
possession of said property and shall be entitled to the
rentals and other income thereof until the expiration of the
time allowed for its redemption.
Final Deed to Purchaser: If the taxpayer fails to redeem
the property, the local treasurer shall execute a deed
conveying to the purchaser so much of the property as has
been sold, free from liens of any taxes, fees, charges,
related surcharges, interests, and penalties.
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Purchase of Property by the LGU for Want of Bidder: If
there is no bidder for the real property, or if the highest bid
is for an amount insufficient to pay the taxes, fees, or
charges, related surcharges, interests, penalties and
costs, the local treasurer shall purchase the property in
behalf of the LGU to satisfy the claim.
Note: In local tax, the LGU may purchase the property for
want of bidder or if the highest bid is insufficient. But in
RPT, it is only applicable for want of bidder. (LGC, Secs.
181, 263)
3rd Report: Within 2 days after the purchase by LGU, the
local treasurer shall make a report of his proceedings.
The Registrar of Deeds, upon registration, shall transfer
the title of the forfeited property to the LGU without the
necessity of an order from a competent court.
Note: The sale is still subject to 1 year right of redemption.
If the property is not redeemed, the ownership shall be
vested on the LGU.
Resale of Real Estate Taken by the LGU: The
sanggunian may, by ordinance, and upon notice of not less
than 20 days, sell and dispose of the real property
acquired. The proceeds of the sale shall accrue to the
general fund of the LGU.
Exemption of property from distraint or levy:
a. Tools and the implements necessarily used by the
delinquent taxpayer in his trade or employment;
b. 1 horse, cow, carabao, or other beast of burden, such
as the delinquent taxpayer may select, and
necessarily used by him in his ordinary occupation;
c. His necessary clothing, and that of all his family;
d. Household furniture and utensils necessary for
housekeeping and used for that purpose by the
delinquent taxpayer, such as he may select, of a
value not exceeding P10,000;
e. Provisions, including crops, actually provided for
individual or family use sufficient for 4 months;
f. The professional libraries of doctors, engineers,
lawyers and judges;
g. One fishing boat and net, not exceeding the total
value of P10,000, by the lawful use of which a
fisherman earns his livelihood; and
h. Any material or article forming part of a house or
improvement of any real property. (LGC, Sec. 185)
2. Judicial action
The LGU may enforce the collection of delinquent taxes,
fees, charges or other revenues by civil action in any court
of competent jurisdiction which shall be filed by the local
TAXATION LAW
treasurer within the period prescribed in Sec. 195 (protest)
of the LGC. (LGC, Sec. 183)
Further Distraint or Levy
The remedies by distraint and levy may be repeated if
necessary until the full amount due is collected. (LGC,
Sec. 184)
b. Prescriptive Period
Prescriptive Period for Assessment
GR: Local taxes, fees, or charges shall be assessed 5
years from the date they became due. No action for the
collection of such taxes, fees, or charges, whether
administrative or judicial, shall be instituted after the
expiration of such period.
EXCEPTIONS:
But those which have accrued before the effectivity of the
LGC may be assessed within a period of 3 years from the
date they became due.
In case of fraud or intent to evade the payment of taxes,
fees, or charges, the same may be assessed within 10
years from discovery of the fraud or intent to evade
payment. (LGC, Sec. 194)
Prescriptive Period for Collection
GR: Local taxes, fees, or charges may be collected within
5 years from the date of assessment by administrative or
judicial action. No such action shall be instituted after the
expiration of said period.
EXCEPTIONS: But those which have assessed before the
effectivity of the LGC may be collected within a period of 3
years from the date of assessment. (LGC, Sec. 194)
Suspension of Prescriptive Periods
a. When the treasurer is legally prevented from making
the assessment of collection;
b. When the taxpayer requests for a reinvestigation
and executes a waiver in writing before expiration of
the period within which to assess or collect; and
c. When the taxpayer is out of the country or otherwise
cannot be located. (LGC, Sec. 194)
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PROCEDURES Application for Refund/Credit

Protest of Assessment
Payment
Notice of Assessment shall be issued by
the local treasurer

Within 2 years from payment,

file a written claim for refund/credit with the
Within 60 days from receipt of notice, file a local treasurer
written protest with the local treasurer

Treasurer shall decide within 60 days from Treasurer shall decide. Take note that
receipt of protest there is no period required by LGC for the
local treasurer to decide. Thus, as clarified
by jurisprudence, the taxpayer may resort
to judicial action even before the 2-year
period expires.
Granted Denied/No action

Appeal to Court of Competent Jurisdiction

Cancel the Within 30 days
assessment from receipt of
decision or 30
days after the 60 MTC RTC
days of inaction,
appeal to
MTC/RTC

CTA
RTC division
(Rule 42)

CTA en banc (Rule 43)

SC

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Distraint of Personal Property Levy of Real Property

Deficiency
Deficiency

Certificate of delinquency shall be prepared by the

Certificate of delinquency shall be issued by the local local treasurer
treasurer

Service of warrant of levy to the owner, assessor,

and RD
Seizure of personal property

Within 10 days from the receipt of warrant, the

levying officer shall report the levy to the sanggunian

Accounting for distrained goods. A copy of which shall be

left with the owner/dwelling place/place of business
Within 30 days from service of warrant, the sale shall
be advertised by posting and publication

Publication
Sale at public auction

Within 30 days from sale, the treasurer shall report

After 20 days from publication, sale at public auction such sale to sanggunian

Treasurer shall deliver the certificate of sale to the

buyer
Within 5 days after sale, the local treasurer shall report
to the sanggunian
Proceeds of sale in excess of tax liability, including
interest and expenses, shall be remitted to the
owner
Any excess shall be returned to the owner but if
insufficient to satisfy the claim, other property may be
distrained until fully collected
Within 1 year, the owner may redeem the property

After 1 year from sale and if the property is not

redeemed, the treasurer shall execute a deed of
conveyance to the buyer

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Procedures if there is No Bidder Upon Sale at Public
Auction or if the Highest Bid is Insufficient
Treasurer shall purchase the property in behalf
of the LGU
Within 2 days, report the proceedings
Upon registration, RD shall transfer the title to
LGU without need of court order
Within 1 year from forfeiture, the owner may
redeem the property
If the property is not redeemed after the 1-year
period, the LGU may sell the property at public
auction
B. REAL PROPERTY TAXATION
1. FUNDAMENTAL PRINCIPLES
CUANE
• CURRENT and fair market value is the basis of
appraisal
• UNIFORMITY in classification in each local
government unit should be observed
• ACTUAL USE of the property shall be the basis of
classification
• Appraisal, assessment, levy and collection should
NOT BE LET to any private person
• EQUITABLE appraisal and assessment (LGC, Sec.
198)
Actual Use
85Ingles, Tax Made Less Taxing: A Reviewer
with Codals and Cases, 2018.
TAXATION LAW
It refers to the purpose for which the property is principally
or predominantly utilized by the person in possession
thereof. (LGC, Sec. 199(b))
2. NATURE OF REAL PROPERTY TAX
LiLIPAD
1. Direct tax on the ownership or privilege to use of
real property
2. Ad Valorem tax - the assessed value is the tax base
3. Proportionate - the tax is calculated on the basis of
a certain percentage of the value of the property
assessed
4. Indivisible single obligation
5. Local Tax - with respect to LGUs, it is levied thru a
delegated power
6. Lien - It attaches on the property and is enforceable
against it.
Ad Valorem Tax
It is a levy on real property determined on the basis of a
fixed proportion of the value of the property. (LGC, Sec.
199(c))
3. IMPOSITION OF REAL PROPERTY TAX
a. Power to Levy Real Property Tax
Imposing Authority [PC-MM]
LGUs, through their sanggunian, that may levy RPT are
the following:
1. Province;
2. City; and
3. Municipality within Metro Manila Area (MMA) (LGC,
Sec. 200, 232)
Note: Municipalities outside MMA cannot levy RPT but
they can impose special levies.85 (LGC, Sec. 240)
Extent of Taxing Powers
LGUs have the power to levy RPT and fix the rates. (LGC,
Sec. 232, 233)
Rates of Levy
1. Province – not exceeding 1% of the assessed value
of real property
2. City or a municipality within the MMA – not exceeding
2% of the assessed value of real property (LGC, Sec.
232)
GR: No need for public hearing is required
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No public hearing shall be required before the enactment
of a local tax ordinance levying the basic real property tax
(IRR of LGC, Art. 324) as well as the special education
fund tax (IRR of LGC, Art. 326) in comparison with local
business tax ordinances which require public hearing
(LGC, Sec. 187)
Public hearing is not required for the enactment of local
tax ordinance levying basic RPT and SEF tax. (IRR of
LGC, Art. 324, 326)
EXCEPTION: Public hearing is required for special levies.
(LGC, Sec. 242)
Territorial Jurisdiction
While a LGU is authorized under several laws to collect
real estate tax on properties falling under its territorial
jurisdiction, it is imperative to first show that these
properties are unquestionably within its geographical
boundaries. The suit on the boundary dispute between
two LGUs is a prejudicial question which must be resolved
before determining the RPT liability of the property subject
of the dispute. It is an exception to the general rule that
prejudicial questions only apply when a civil and a criminal
action is involved. (Sta. Lucia Mall vs. City of Pasig, G.R.
No. 166838, 2011, J. Leonardo-De Castro)
b. Exemption from Real Property Tax
Go-WatCh-ECo (LGC, Sec. 234)
1. Owned by the Government or any of its political
subdivisions.
b. When beneficial use has been granted to a
EXCEPTIONS:
a. Properties owned by GOCCs (except those
engaged in water or electric supply) are subject
to RPT since they are not enumerated herein,
unless they fall under other exceptions.
Compare these with properties owned by
government instrumentalities (like PEZA) which
are exempt from RPT. (City of Lapu-Lapu v.
PEZA, G.R. No. 184203, November 26, 2014, J.
Leonen)
MWSS is a government instrumentality vested
with corporate powers or a government corporate
entity as classified by E.O. 596 and GOCC Act of
2011. Hence, it is exempt from RPT, unless the
beneficial use of its properties has been extended
to a taxable person. (MWSS v. The Local
Government of Quezon City, G.R. No. 194388,
November 7, 2018, J. Leonen)
TAXATION LAW
The following are classified by jurisprudence as
government instrumentality vested with corporate
powers or government corporate entity, as
adopted by E.O. 596 and GOCC Act of 2011:
1. Manila International Airport Authority
(MIAA)
2. Mactan-Cebu International Airport
Authority (MCIAA)
3. Philippine Ports Authority (PPA)
4. Philippine Deposit Insurance Corporation
(PDIC)
5. Metropolitan Waterworks and Sewerage
System (MWSS)
6. Philippine Rice Research Institute (PRRI)
7. Laguna Lake Development Authority
(LLDA)
8. Philippine Fisheries Development
Authority (PFDA)
9. Bases Conversion and Development
Authority (BCDA)
10. Cebu Port Authority (CPA)
11. Cagayan de Oro Port Authority
12. San Fernando Port Authority
13. Local Water Utilities Administration
(LWUA)
14. Asian Productivity Organization (APO)
(MWSS v. The Local Government of
Quezon City, G.R. No. 194388,
November 7, 2018, J. Leonen)
taxable person.
Parcels of land owned by the State but leased to
a private commercial establishment are subject to
RPT since private commercial establishments are
the taxable beneficial users of the parcels of land
owned by the State. (City of Pasig vs. Republic of
the Philippines, G.R. No. 185023, 2011, J.
Carpio)
The Mactan-Cebu International Airport Authority,
is a government instrumentality and not a GOCC.
Thus, its properties actually, solely and
exclusively used for public purposes, consisting
of the airport terminal building, airfield, runway,
taxiway and the lots on which they are situated,
are exempt from RPT. However, the portions of
the land leased to taxable persons like private
parties are subject to RPT. (Mactan Airport
Authority vs. City of Lapu- Lapu, G.R. No.
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181756, June 15, 2015, J. Leonardo-De Castro)
2. Charitable institutions, churches, parsonages,
convents appurtenant thereto, mosques, non-profit or
religious cemeteries, lands, buildings and
improvements actually, directly and exclusively used
for religious, charitable or educational purposes
A charitable institution does not lose its character and its
exemption simply because it derives income from paying
patients so long as the money received is devoted to the
charitable object it was intended to achieve, and no
money inures to the benefit of persons managing the
institution. However, a hospital, even though it was a
charitable institution, was not exempt from real property
tax on the portions of its property not actually, directly,
and exclusively used for charitable purposes. Those
leased out for commercial purposes are subject to real
property tax. (Lung Center of the Philippines v Quezon
City, GR No. 144104, June 29, 2004, J. Callejo)
Take note that this provision was lifted from the 1987
Constitution, which reads:
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. (1987 Constitution, Art. VI, Sec. 28 (3))
Therefore, machinery is not included in this exemption.
Improvements do not include machinery. As such,
machinery that is permanently attached to land and
buildings is subject to RPT, even though this is actually,
directly, and exclusively used for religious, charitable or
educational purposes. (Local Finance Circular No. 01-
2001)
However, there is an issue as to the machinery of non-
stock, non-profit educational institutions used actually,
directly, and exclusively for educational purposes
because of another constitutional provision, which reads:
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. (1987 Constitution, Art. XIV, Sec. 4(3))
Therefore, a machinery (which is an asset) of non-stock,
non-profit educational institutions used actually, directly,
and exclusively for educational purposes is exempt from
TAXATION LAW
RPT. (CIR v. DLSU, G.R. No. 196596, Nov. 8, 2016, J.
Brion; Local Finance Circular No. 01-2002)
3. Machinery and equipment actually, directly, and
exclusively used by local Water districts and GOCCs
engaged in the supply and distribution of water and/or
generation and transmission of electric power
Requisites: [MAWE]
a. This exemption only covers Machinery and
equipment;
b. Actually, directly, and exclusively used by local
water districts used by local water districts and
GOCCs; and
c. Local water districts and GOCCs must be
engaged in the supply and distribution of Water
and/or generation and transmission of Electric
power.
The privilege of exemption from RPT granted to NPC
cannot be extended to another contracting party by
entering into an agreement. (Fels energy, Inc. v. Province
of Batangas, GR No. 168557, February 16, 2007, J.
Callejo)
The contractual provision would appear to make the NPC
liable and give it standing to protest the assessment. But
the real property tax liability imposed is the liability arising
from law that the local government unit can rightfully and
successfully enforce, not the contractual liability that is
enforceable between the parties to a contract. By law, the
tax liability rests on Mirant based on its ownership, use,
and possession of the plant and its machineries, not on
NAPOCOR. (NAPOCOR v. Province of Quezon, G.R. No.
171586, July 15, 2009, J. Brion)
In a contract wherein one party assumes the tax liabilities
of another, and the latter operates and uses the property
in question, the former does not have legal interest to
protest the tax imposed by law on the latter. (NAPOCOR
v. Province of Quezon, G.R. No. 171586, January 25,
2010, J. Brion)
Persons Having Legal Interest in the Property
a. An entity in whose name the real property shall be
listed, valued, and assessed;
b. Who may be summoned by the local assessor to
gather information on which to base the market
value of the real property;
c. Who may protest the tax assessment before the
LBAA and may appeal the latter’s decision to the
CBAA;
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d. Who may be liable for the idle land tax, as well as
who may be exempt from the same;
e. Who shall be notified of any proposed ordinance
imposing a special levy, as well as who may object
the proposed ordinance;
f. Who may pay the real property tax;
g. Who is entitled to be notified of the warrant of levy
and against whom it may be enforced;
h. Who may stay the public auction upon payment of
the delinquent tax, penalties and surcharge; and
i. Who may redeem the property after it was sold at
the public auction for delinquent taxes (NAPOCOR
v. Province of Quezon, G.R. No. 171586, January
25, 2010, J. Brion)
4. Real property owned by duly registered Cooperatives
under RA 6938
Section 234 of the LGC exempts all real property owned
by cooperatives without distinction. Nothing in the law
suggests that the real property tax exemption only applies
when the property is used by the cooperative itself.
Leasing of the property to another is not a ground for
withdrawal of tax exemption. (Provincial Assessor of
Agusan Del Sur v. Filipinas Palm Oil Plantation, Inc., G.R.
No. 183416, 2016, J. Leonen)
PHILRECA, a cooperative registered under P.D. 269,
complained that 1991 LGC provision violated the equal
protection clause for limiting its coverage with
cooperatives registered under R.A. 6938. But the
Supreme Court ruled that such provision permits
reasonable classification as these exemptions are not
limited to existing conditions and apply equally to all
members of the same class. Exemptions from local
taxation (LGC, Sec. 193), including real property tax
(LGC, Sec. 234), are granted to all cooperatives covered
by R.A. No. 6938. (PHILRECA v. Secretary of Interior and
Local Government, GR No. 143076, 10 June 2003, J.
Puno)
5. Machinery & equipment for pollution control and
Environment protection
Under Section 234(e) of the 1991 LGC, the tax exemption
of machineries and equipment used for pollution control
and environmental protection is based on usage, i.e.,
direct, immediate and actual application of the property
itself to the exempting purpose. (Provincial Assessor of
Marinduque v. Court of Appeals, GR No. 170532, 30 Apr.
2009, J. Austria-Martinez)
Classifications of RPT Exemptions [OCU]
1. Ownership Exemptions
TAXATION LAW
Exemptions from real property taxes on the basis of
ownership are real properties owned by:
• Republic;
• Province;
• City;
• Municipality;
• Barangay; and
• Registered cooperatives
2. Character Exemptions
Exempted from real property taxes on the basis of their
character are:
• Charitable institutions;
• Houses and temples of prayer like churches,
parsonages or convents appurtenant thereto,
mosques; and
• Non-profit or religious cemeteries
3. Usage exemptions.
Exempted from real property taxes on the basis of the
actual, direct and exclusive use to which they are
devoted are:
• All lands buildings and improvements which are
actually, directed and exclusively used for
religious, charitable or educational purpose;
• All machineries and equipment actually, directly
and exclusively used or by local water districts or
by government-owned or controlled corporations
engaged in the supply and distribution of water
and/or generation and transmission of electric
power; and
• All machinery and equipment used for pollution
control and environmental protection. To help
provide a healthy environment in the midst of the
modernization of the country, all machinery and
equipment for pollution control and
environmental protection may not be taxed by
local governments. (Mactan Cebu International
Airport Authority v. Marcos, G.R. No. 120082,
September 11, 1996)
Note: All exemptions previously granted (not falling within
the above enumeration) are withdrawn upon the effectivity
of the LGC. (LGC, Sec. 234)
Proof of Tax Exemption
File with the local assessor within 30 days from date of
declaration of real property sufficient documentary
evidence in support of such claim (i.e. corporate charters,
title of ownership, articles of incorporation, contracts,
affidavits, etc.) (LGC, Sec. 206)
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If the required evidence is not submitted, the property
shall be listed as taxable in the assessment roll. However,
if the property shall be proven to be tax exempt, the same
shall be dropped from the assessment roll. (LGC, Sec.
206)
4. APPRAISAL AND ASSESSMENT OF REAL
PROPERTY TAX
Appraisal – the act or process of determining the value of
property as of a specified date for a specific purpose (LGC,
Sec. 199(e))
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. (LGC, Sec. 201)
Fair Market Value
It is the price at which a property may be sold by a seller
who is not compelled to sell and bought by a buyer who is
not compelled to buy. (LGC, Sec. 199(l))
Assessment
The act or process of determining the value of a property,
or proportion thereof subject to tax, including the
discovery, listing, classification, and appraisal of
properties. (LGC, Sec. 199(f))
a. Classes of Real Property
SIM-CART
• Residential
• Agricultural
• Commercial
• Industrial
• Mineral
• Timberland
• Special (LGC, Sec. 215)
a) lands, buildings, and other improvements
• actually, directly and exclusively
used for hospitals, cultural, or
scientific purposes, or
• those owned and used by local water
districts, and GOCCs rendering
essential public services in the
supply and distribution of water
and/or generation and transmission
of electric power (LGC, Sec. 216)
A non-stock non-profit organization owned a hospital and
a medical arts center in Cebu. The medical arts building
was built to house its doctors and the latter were paying
rentals. Thereafter, the said building classified by the city
TAXATION LAW
as “commercial.” But the Supreme Court classified it as
“special,” which has a lower rate than commercial, for the
following reasons:
1. The medical arts building was an integral part of
the hospital;
2. The medical arts facility was incidental to and
reasonably necessary for the operations of the
hospital; and
3. Charging rentals for the offices used by its
accredited physicians was a practical necessity
and could not be equated to a commercial
venture. (City Assessor of Cebu City v.
Association of Benevola de Cebu, Inc., GR No.
152904, 8 June 2007, J. Velasco)
Residential Land
A land principally devoted to habitation. (LGC, Sec. 199
(u))
Agricultural Land
A land devoted principally to the planting of trees, raising
of crops, livestock and poultry, dairying, salt making,
inland fishing and similar aquacultural activities, and other
agricultural activities, and is not classified as mineral,
timber, residential, commercial or industrial land. (LGC,
Sec. 199(d))
Commercial Land
A land devoted principally for the object of profit and is not
classified as agricultural, industrial, mineral, timber, or
residential land. (LGC, Sec. 199(i))
Industrial Land
A land devoted principally to industrial activity as capital
investment and is not classified as agricultural,
commercial, timber, mineral or residential land. (LGC,
Sec. 199(n))
Mineral Land
A land in which minerals, metallic or non-metallic, exist in
sufficient quantity or grade to justify the necessary
expenditures to extract and utilize such materials. (LGC,
Sec. 199(p))
Cities and municipalities within MMA – with power to
classify lands, through sanggunian, in accordance with
zoning ordinances and on the basis of its actual use
regardless of where located. (IRR of LGC, Art. 308)
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Properties Liable for RPT [O-LBM]
• Land
• Buildings
• Machinery and
• Other improvements not otherwise exempted under
LGC. (LGC, Sec. 232)
Although the term real property has not been expressly
defined in the LGC, early decisions of the Supreme Court
in Mindanao Bus Co. v. City Assessor of Cagayan de Oro
(G.R. No. L-17870, 1962); Board of Assessment Appeals
v. Meralco (G.R. No. L-15334, 1964); Manila Electric Co.
v. Board of Assessment Appeals (G.R. No. L-47943,
1982), seem to suggest that Art. 415 of the Civil Code
could also be controlling.
However, in Meralco v. City Assessor and City Treasurer
of Lucena (G.R. No. 166102, 2015), the SC stated that the
definition of machinery in the LGC prevails over the
definition of immovables in the Civil Code, for RPT
purposes. Hence, transformers, electric posts may qualify
as “machinery” under the LGC, even if they wouldn’t have
been considered “immovables” in the Civil Code (because
they weren’t placed in the tenement by the owner of the
tenement and destined for use in the industry or work in
the tenement).
Machinery
It embraces machines, equipment, mechanical
contrivances, instruments, appliances or apparatus,
which may or may not be attached, permanently or
temporarily, to the real property. It includes the physical
facilities for production, the installations and appurtenant
service facilities, those which are mobile, self-powered or
self-propelled, and those not permanently attached to the
real property which are actually, directly, and exclusively
used to meet the needs of the particular industry,
business or activity and which by their very nature and
purpose are designed for, or necessary to its
manufacturing, mining, logging, commercial, industrial or
agricultural purposes. (LGC, Sec. 199(o))
Machinery which are of general purpose use including but
not limited to office equipment, typewriters, telephone
equipment, breakable or easily damaged containers
(glass or cartons), microcomputers, facsimile machines,
telex machine, cash dispensers, furniture and fixtures,
freezers, refrigerators, display cases or racks, fruit juice
or beverage automatic dispensing machines which are
not directly and exclusively used to meet the needs of a
particular industry, business or activity shall not be
considered within the definition of machinery. (IRR of
LGC, Sec. 290(o))
TAXATION LAW
Summary of Rules on Machinery
1. If permanently attached – subject to RPT, even
though this is actually, directly, and exclusively used for
religious, charitable, or educational purposes.
2. If not permanently attached:
a. If it is an essential and principal element of an
industry without which such industry, work or
activity cannot function – subject to RPT
b. If it is not an essential and principal element of an
industry, work, or activity – not subject to RPT (e.g.
Parking lots, Courts for sports and recreational
purposes)
3. Notwithstanding Rules 1 and 2, machinery of non-
stock, non-profit educational institutions used actually,
directly, and exclusively for educational purposes is not
subject to RPT. (DOF Local Finance Circular 001-
2002)
Improvement
A valuable addition made to a property or amelioration in
its condition, which is intended to enhance its value,
beauty, or utility, or to adapt it for new or further purposes,
amounting to more than a mere replacement of parts
involving capital expenditures and labor and normally
requiring a building permit. (IRR of LGC, Art 290(m))
Types of Real Property Tax
1. Basic RPT
2. Additional levies: [SI-SA]
a. Special Education Fund (SEF) tax
b. Ad valorem on Idle lands
c. Special levy/Special Assessment
Special Education Fund (SEF)
A province or city, or a municipality of MM area may levy
and collect an annual tax of 1% on the assessed value of
real property, in addition to the basic RPT. The proceeds
thereof shall exclusively accrue to the Special Education
Fund (SEF). (LGC, Sec. 235)
A province, city or municipality within the Metropolitan
Manila Area can impose Special Education Fund (SEF) at
a rate of less than 1%. There is no limiting qualifier under
Section 235 of the LGC to the articulated rate of 1% which
unequivocally indicates that any and all special education
fund collections must be at such rate. (Demaala v. COA,
G.R. No. 199752, 2015, J. Leonen)
Additional Ad Valorem on idle Lands
A province or city, or a municipality of MMA may levy an
annual tax on idle lands at the rate not exceeding 5% of
the assessed value of the property, in addition to basic
RPT (LGC, Sec. 236)
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Types of Idle Lands [ASO]
1. Agricultural lands
More than 1 hectare in area which is suitable for
cultivation, dairying, inland fishery, and other agricultural
uses, and if more than ½ of which remain uncultivated or
unimproved, except:
o Lands planted to permanent or perennial crops
with at least 50 trees to a hectare;
o Lands actually used for grazing purposes.
2. Other than agricultural lands
Located in a city or municipality, more than 1,000 sq.m. in
area, and 1/2 of which remain unutilized or unimproved
3. Residential lots in Subdivisions
Regardless of land area but the person liable to pay may
vary as follows:
1. If the ownership of individual lots has been
transferred to individual owners, the latter shall be
liable for the additional tax.
2. If the ownership of which has not been transferred
to the buyer, the subdivision owner or operator
shall be liable for the additional tax. (LGC, Sec.
237)
Exempted Idle Lands
Idle lands may be exempted from the additional tax by
reason of:
• Force majeure;
• Civil disturbance;
• Natural calamity; or
• Any cause which physically or legally prevents the
owner of the property or person having legal
interest therein from improving the land. (LGC,
Sec. 238)
Special Levies/Special Assessments
A province or city, or a municipality may impose a special
levy on lands specially benefited by public works, projects
or improvements funded by the LGU
i. Not exceeding 60% of the actual cost of such
projects and improvements, including the costs of
acquiring land and such other real property in
connection therewith. (LGC, Sec. 240)
ii. Not applicable to lands exempt from basic RPT and
the remainder of the land had been donated to the
local government unit concerned for the construction
of said projects. (LGC, Sec. 240)
86
Ingles, Tax Made Less Taxing: A Reviewer with Codals and
Cases, 2018.
TAXATION LAW
iii. Accrue on the 1st day of the quarter next following the
effectivity of the ordinance imposing the special levy.
(LGC, Sec. 245)
Note: Municipalities outside MMA cannot levy RPT but
they can impose special levies.86 (LGC, Sec. 240)
Ordinance Imposing a Special Levy
Specify the following:
1. Describe with reasonable accuracy the nature,
extent, and location of the public works projects
or improvements to be undertaken;
2. Estimated cost of the projects
3. Metes and bounds by monuments and lines
4. Number of annual installments for the payment of
the special levy which in no case shall be less
than 5 nor more than 10 years. (LGC, Sec. 241)
It may fix different rates for different parts of the land
depending on whether such land is more or less benefited
by proposed work. A uniform percentage of all lands is
not required. (LGC, Sec. 241)
Procedures for Enacting an Ordinance Imposing a
Special Levy
1. Send a written notice to the owners of the real
property to be affected or the persons having
legal interest therein as to the date and place
thereof and afford the latter the opportunity to
express their positions or objections relative to
the proposed ordinance.
2. Conduct a public hearing (LGC, Sec. 242)
b. Assessment Based on Actual Use
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. (LGC, Sec. 217)
Actual Use
It refers to the purpose for which the property is principally
or predominantly utilized by the person in possession
thereof. (LGC, Sec. 199(b))
Usage means direct, immediate and actual application of
the property (MCIAA v. Marcos, G.R. No. 120082, 1996, J.
Davide)
Unpaid realty taxes attached to the property and are
chargeable against the person who had actual or beneficial
use and possession of it, regardless of whether or not he
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is the owner. To impose the RPT on the subsequent owner
which was neither the owner nor the beneficial user of the
property during the designated periods would not only be
contrary to law but also unjust. (Estate of Lim v. City of
Manila, G.R. No. 90639, 1990, J. Gutierrez)
General Revision of Assessment and Property
Classification
The local assessor shall undertake a general revision of
real property assessments once every 3 years. (LGC,
Sec. 219)
Effectivity Date of Assessment or Reassessment
All assessments or reassessments made after January 1
of any year shall take effect on January 1 of the succeeding
year.
However, the reassessment of real property shall be made
within 90 days from the date any causes below occurred,
and shall take effect at the beginning of the quarter next
following the reassessment:
a. partial or total destruction,
b. major change in its actual use,
c. great and sudden inflation or deflation of real
property values,
d. gross illegality of the assessment when made, or
e. any other abnormal cause. (LGC, Sec. 221)
Reassessment
The assigning of new assessed values to property,
particularly real estate, as the result of a general, partial,
or individual reappraisal of the property. (LGC, Sec.
199(q))
Effect of Pendency of the Enactment of FMV Schedule
and New Assessment Levels
Pending the enactment of a schedule of FMV and the
effectivity of the revised new assessment levels, the
prevailing schedules of market values and the levels
currently used by the provincial, city, and municipal
assessors shall continue to be applied. (IRR of LGC, Art.
309)
Notification of New or Revised Assessment (LGC,
Sec. 223)
When real property is assessed for the first time or when
an existing assessment is increased or decreased, the
local assessor shall, within 30 days, give written notice of
such new or revised assessment to the person in whose
name the property is declared. The notice may be
delivered personally or by registered mail or through the
assistance of the punong barangay to the last known
address of the person to be served.
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Valuation of Real Property
The Assessor shall make a classification, appraisal and
assessment or taxpayer's valuation when:
a. A real property is declared and listed for taxation
purposes for the first time;
b. There is an ongoing general revision of property
classification and assessment; or
c. A request is made by the person in whose name
the property is declared. (LGC, Sec. 220)
The assessment shall not be increased oftener than once
every 3 years except:
a. new improvements substantially increasing the
value of said property; or
b. any change in its actual use. (LGC, Sec. 220)
Computation of RPT
Assessed Value = FMV x Assessment level(%)
RPT = Assessed Value x Tax Rate(%)
Assessment level (%)
The percentage applied to the FMV to determine the
taxable value of the property. This is fixed by ordinances.
The maximum rates per type of real property are provided
by Sec. 218. (LGC, Secs. 199(g), 218)
Note: Assessed Value is synonymous with “taxable
value.” (LGC, Sec. 199(h))
5. COLLECTION
a. Date of Accrual
The RPT for any year shall accrue on the 1st day of
January. It shall constitute a lien from such date and shall
only be extinguished upon payment of the delinquent tax.
(LGC, Sec. 246)
b. Periods to Collect
GR: Within 5 years from the date they become due;
EXCEPTION: Within 10 years from discovery, in case of
fraud or intent to evade. (LGC, Sec. 270)
When Period of Prescription Shall be Suspended
• When local treasurer is legally prevented from
collecting the tax;
• Owner or the person having legal interest requests for
reinvestigation and executes a waiver in writing
before the expiration of the period;
• Owner or the person having legal interest is out of the
country or cannot be located. (LGC, Sec. 270)
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Collecting Authority
a. City or municipal treasurer;
b. Barangay treasurer, if deputized by the treasurer and
upon filing a bond; (LGC, Sec. 247) and
c. Provincial treasurer, at the option or convenience of
the owner. (IRR of LGC, Art. 338)
Other Duties of the Local Treasurer
The local treasurer shall:
1. Prepare a certified list of all RPT delinquencies
which remained uncollected or unpaid for at least
1 year in his jurisdiction;
2. Statement of the reason for such non-collection
or non-payment; and
3. Submit the list to the sanggunian on or before
December 31st of the year immediately
succeeding the year in which the delinquencies
were incurred, with a request for assistance in the
enforcement of the remedies for collection. (LGC,
Sec. 269)
Any local treasurer shall be dismissed from the service,
without prejudice to criminal prosecution, who:
1. Fails to issue the warrant of levy within 1 year
from the time the tax becomes delinquent;
2. Fails to execute the warrant within 30 days from
the date of its issuance; or
3. Found guilty of abusing the exercise thereof in an
administrative or judicial proceeding (LGC, Sec.
259)
Notice of Time for Collection of Tax
a. Basic RPT: on or before January 31 each year
b. Additional tax for SEF: on or before January 31 each
year
c. Other additional RPT: date prescribed by the
sanggunian
The city or municipal treasurer shall post the notice of the
dates when the tax may be paid without interest at a
conspicuous and publicly accessible place at the city or
municipal hall. Said notice shall likewise be published in a
newspaper of general circulation in the locality once a
week for two (2) consecutive weeks. (LGC, Sec. 249)
Special Rules on Payment
a) Payment in Installments
4 equal installments:
• 1st: on or before March 31
• 2nd: on or before June 30
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• 3rd: on or before September 30
• 4th: on or before December 31 (LGC, Sec. 250)
Note: This scheme is only for Basic RPT and additional
tax for SEF. For special levy and other RPT, the payment
of which shall be governed by ordinance of the
sanggunian. (LGC, Sec. 250)
Note: Payments of RPT shall first be applied to prior
years’ delinquencies, interests, and penalties, and only
after said delinquencies are settled may tax payments be
credited for the current period. (LGC, Sec. 250)
b) Interests on unpaid RPT
In case of failure to pay upon the expiration of the periods,
or when due, the taxpayer shall be subject to the payment
of interest.
RATE: 2% per month on the unpaid amount but in no case
shall the total interest exceed 36 months. (LGC, Sec. 255)
c) Tax Discount for Advanced and Prompt
Payment
The sanggunian may grant a discount for the following:
• Advanced payment – discount not exceeding 20% of
annual tax due (LGC, Sec. 251)
• Prompt payment - discount not exceeding 10% of
annual tax due (IRR of LGC, Art. 342)
Note: This rule only applies to basic RPT and SEF tax.
d) Condonation or Reduction of RPT and Interest
[SaP]
1) By the Sanggunian
The sanggunian, by ordinance passed prior to January 1
of any year, and upon recommendation of the Local
Disaster Coordinating Council, may condone or reduce
the real property tax and interest for the succeeding years
in the city or municipality affected by the following
instances:
• General failure of crops
• Substantial decrease in the price of agricultural or
agri-based products
• Calamity. (LGC, Sec. 276)
2) By the President
The President may condone or reduce the real property
tax and interest when public interest so requires. (LGC,
Sec. 277)
Steps in the Assessment and Collection of RPT
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STEP 1: DECLARATION OF REAL PROPERTY
Rules on Declaration of Real Property
1. By the owner or administrator (Voluntary)
File with local assessor a sworn statement declaring the
true value of property, which is the current and fair market
value (whether previously declared or undeclared, taxable
or exempt) once every 3 years during the period from
January 1 to June 30. (LGC, Sec. 202)
2. By the person acquiring real property or
making improvement thereon (Voluntary)
File with local assessor and a sworn statement declaring
the true value of subject property, within 60 days after the
acquisition of such property or upon completion or
occupancy of the improvement, whichever comes earlier.
(LGC, Sec. 203)
Commencement of the 60-day period
a. GR: The 60-day period shall commence on the
date of execution of the deed of conveyance.
(IRR of LGC, Art. 294)
b. In the case of houses, buildings, or other
improvements acquired or newly constructed
which will require building permits, the owners
shall file a sworn declaration of the true value of
the subject house, building, or other improvement
within 60 days after:
• Date of a duly notarized final deed of sale,
contract, or other deed of conveyance
covering the subject property executed;
• Completion or occupancy of the newly
constructed building, house, or improvement
whichever comes earlier; and
• Completion or occupancy of any expansion,
renovation, or additional structures or
improvements made upon any existing
building, house, or other real property,
whichever comes earlier. (IRR of LGC, Art.
294)
c. In the case of machinery, the 60-day period shall
commence on the date of installation as
determined by the city or municipal assessor.
(IRR of LGC, Art. 294)
Notification of Transfer of Real Property Ownership
A person transferring a real property ownership to another
shall notify the local assessor within 60 days from the date
of transfer, which shall include the following: [MoDes-NA]
a. Mode of transfer;
b. Description of the property alienated; and
TAXATION LAW
c. Name and Address of the transferee. (LGC, Sec. 208)
3. By the local assessors (Involuntary)
When any person by whom real property is required to be
declared refuses or fails for any reason to make such
declaration, the provincial, city or municipal assessor shall
himself declare the property in the name of the defaulting
owner. (LGC, Sec. 204)
Thus, this only covers real property previously
undeclared. (IRR of LGC, Art. 295)
In case of unknown owners, the real property discovered
shall be declared in the name of the Unknown Owner,
copy furnished the provincial assessor in the case of
declarations made by a component city or municipal
assessor, until such time that a person comes forth and
files the sworn declaration of property values required.
(IRR of LGC, Art. 295)
Oath is not required if the real property is declared by local
assessors. (LGC, Sec. 204; IRR of LGC, Art. 295)
Assessment of Property subject to Back Taxes
Real property declared for the first time shall be assessed
for taxes for the period during which it would have been
liable but in no case of more than 10 years prior to the date
of initial assessment. Such taxes shall be computed on the
basis of the applicable schedule of values in force during
the corresponding period.
If such taxes are paid on or before the end of the quarter
following the date the notice of assessment was received
by the owner, no interest for delinquency shall be imposed
thereon; otherwise, such taxes shall be subject to an
interest at the rate of 2% per month or a fraction thereof
from the date of the receipt of the assessment until such
taxes are fully paid. (LGC, Sec. 222)
STEP 2: LISTING OF REAL PROPERTY IN THE
ASSESSMENT ROLLS (LGC, Secs. 205 & 207)
Listing of all Real Property in the Assessment Rolls
Note: This includes even the exempt real property.
Assessment roll
The local assessor must maintain a list of all real property,
whether taxable or exempt, located within the territorial
jurisdiction of the LGU in the name of the following
persons:
a. GR: Real property shall be listed, valued and
assessed in the name of the owner or
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administrator, or anyone having legal interest in
the property;
b. Undivided real property of a deceased person –
may be listed, valued and assessed in the name
of the estate or of the heirs and devisees without
designating them individually;
c. Undivided real property other than that owned by
a deceased – may be listed, valued and assessed
in the name of one or more co-owners;
Note: The heir, devisee, or co-owner shall be
liable severally and proportionately for the
payment of all RPT and the like obligations with
respect to the undivided property.
d. Real property owned by a corporation,
partnership, or association – shall be listed, valued
and assessed in the same manner as that of an
individual.
e. Real property owned by the Republic of the
Philippines, its instrumentalities and political
subdivisions, but the beneficial use of which has
been granted to a taxable person – shall be listed,
valued and assessed in the name of the
possessor, grantee or of the public entity if such
property has been acquired or held for resale or
lease. (LGC, Sec. 205)
All declarations shall be kept and filed under a uniform
classification system to be established by the provincial,
city or municipal assessor. (LGC, Sec. 207)
Duty of the Assessor to Furnish the Treasurer with
the Assessment Roll
The local assessor shall prepare and submit to the
treasurer of the LGU, on or before the 31st day of
December each year, an assessment roll containing a list
of all persons whose real properties have been newly
assessed or reassessed and the values of such
properties. (LGC, Sec. 248)
4. The assessor may recommend to the sanggunian
amendments to correct errors in valuation in the
schedule of FMV. The sanggunian shall, by
ordinance, act upon the recommendation within
90 days from receipt. (LGC, Sec. 214)
Authority of Assessor to Take Evidence [DOS]
For the purpose of obtaining information on which to base
the market value of any real property, the local assessors
may:
1. Summon owners or persons having legal interest
or witnesses
2. Administer Oaths, or
3. Take Depositions (LGC, Sec. 213)
Special Rules on Machinery
1. Brand new machinery
FMV = Acquisition Cost
Acquisition Cost
It refers to the actual cost of the machinery to its present
owner, plus the cost of transportation, handling, and
installation at the present site. This is applicable for newly-
acquired machinery not yet depreciated and appraised
within the year of its purchase. (LGC, Sec. 199(a))
If the machinery is imported, the acquisition cost is the
total landed cost which includes: [FIT-CABS]
• Freight;
• Insurance;
• Bank and other Charges;
• Brokerage;
• Arrastre and handling;
• Duties and Taxes; and
• Charges at the present Site. (LGC, Sec. 224)

STEP 3: APPRAISAL AND VALUATION OF REAL 2. Machinery other than brand new
PROPERTY
Remaining
How to Determine Fair Market Value Economic Life Replacement or
FMV = X
Estimated Reproduction Cost
Real Property, In General Economic Life
1. The assessor prepares a schedule of FMV for
different classes of properties. Economic Life
2. The sanggunian enacts an ordinance. It is the estimated period over which it is anticipated that
3. The schedule of FMV shall be published in a a machinery or equipment may be profitably utilized.
newspaper of general circulation in the province, (LGC, Sec. 199(k))
city or municipality concerned, or in the absence
thereof, shall be posted in the provincial capitol, Remaining Economic Life
city or municipal hall places therein. (LGC, Sec. It is the period of time expressed in years from the date of
212) appraisal to the date when the machinery becomes
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valueless. (LGC, Sec. 199(r))
Replacement or reproduction cost
It refers to the cost that would be incurred on the basis of
current prices, in acquiring an equally desirable property,
on the basis of current prices with the same or closely
similar materials. (IRR of LGC, Art.290 (t))
Allowance for Depreciation for Machinery
A depreciation allowance shall be made for machinery at
a rate not exceeding 5% of its original cost or its
replacement or reproduction cost, as the case may be, for
each year of use.
The remaining value for all kinds of machinery shall be
fixed at not less than 20% of such original, replacement,
or reproduction cost for so long as the machinery is useful
and in operation. (LGC, Sec. 225)
Remaining Value
It is the value corresponding to the remaining useful life of
the machinery. (LGC, Sec. 199(s))
STEP 4: DETERMINE ASSESSED VALUE
Procedure
• Take the schedule of FMV (LGC, Sec. 218)
• Compute for the assessed value
Assessed value = FMV x Assessment level
• Compute for the RPT
RPT = Assessed value x Tax rate
STEP 5: PAYMENT AND COLLECTION OF TAX
Date of accrual: January 1 of every year (LGC, Sec. 246)
How:
1. Basic RPT and additional levy on SEF in 4 equal
installments (March 31, June 30, September 30,
December 31)
2. Other additional levy - governed by ordinance
(See Special Rules on Payment above)
c. Remedies of Local Government Units
Remedies, In General [A-Ju]
a. Administrative action thru levy on real property;
b. Judicial action. (LGC, Sec. 256)
a. Administrative Remedies
1. Levy on real property, and
TAXATION LAW
2. Sale of real property at public auction. (IRR of
LGC, Art. 347)
Issuance of Notice of Delinquency
1. When the RPT becomes delinquent, the treasurer
shall immediately post a notice of the delinquency at
the main hall and in a publicly accessible and
conspicuous place in each barangay of the LGU. It
shall also be published once a week for 2 consecutive
weeks in a newspaper of general circulation in the
province, city, or municipality.
2. Specify the date upon which the tax became
delinquent.
3. State that personal property may be distrained to
effect payment unless the tax liabilities be paid before
such distraint.
4. If not paid, the delinquent real property will be sold at
public auction, except when the notice of assessment
or special levy is contested.
5. However, the sale is subject to right of redemption
within 1 year from the date of such sale. (LGC, Sec.
254)
Local Governments Lien
The RPT constitutes a lien on the property subject to tax,
superior to all liens, charges or encumbrances in favor of
any person, irrespective of the owner or possessor, and
may only be extinguished upon payment of the tax and the
related interests and expenses. (LGC, Sec. 257)
Levy on Real Property
1. After the expiration of the time required to pay the
RPT, the real property subject to such tax may be
levied upon through the issuance of a warrant on or
before, or simultaneously with, the institution of the
civil action for the collection of the delinquent tax.
2. The treasurer shall prepare a duly authenticated
certificate showing the following:
• Name of the delinquent owner of the property or
person having legal interest;
• Description of the property;
• Amount of the tax due and the interest.
3. Warrant:
• Operates with the force of a legal execution
• Mail to:
o Delinquent owner or person having legal
interest, or in case he is out of the country or
cannot be located, the administrator or
occupant of the property;
o Assessor; and
o Register of Deeds where the property is
located.
4. The levying officer shall submit a report on the levy to
the sanggunian within 10 days after receipt of the
warrant by the owner of the property or person having
legal interest. (LGC, Sec. 258)
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Sale of Real Property at Public Auction
Advertisement: Within 30 days after service of the
warrant of levy, the local treasurer shall proceed to publicly
advertise for sale or auction the property to satisfy the tax
delinquency and expenses of sale. The advertisement
shall be effected by posting a notice at the main entrance
of the provincial, city or municipal building, and in a publicly
accessible and conspicuous place in the barangay where
the real property is located, and by publication once a week
for 2 weeks in a newspaper of general circulation in the
province, city or municipality where the property is located.
The advertisement shall specify the following: [DaDe-
APO]
1. Amount of the delinquent tax, the interest due
thereon and expenses of sale,
2. Date and Place of sale,
3. Name of the Owner of the real property or person
having legal interest therein, and
4. Description of the property to be sold.
However, if the owner of the real property pays the
delinquent tax, the interest due and the expenses before
the intended sale, the proceedings shall be stayed.
Sale: It be held either at the main entrance of the
provincial, city or municipal building, or on the property to
be sold, or at any other place as specified in the notice of
the sale.
Documentation: Within 30 days after the sale, the local
treasurer shall make a report of the sale to the sanggunian,
and which shall form part of his records. The local treasurer
shall likewise prepare and deliver to the purchaser a
certificate of sale which shall contain the name of the
purchaser, a description of the property sold, the amount
of the delinquent tax, the interest due, the expenses of sale
and a brief description of the proceedings.
Note: The proceeds of the sale in excess of the tax liability,
interest and expenses shall be remitted to the owner of the
real property.
By ordinance, the local treasurer may advance an amount
sufficient to defray the costs of collection. (LGC, Sec. 260)
Redemption of Property Sold
Within 1 year from the date of sale, the owner of the
delinquent real property or person having legal interest
therein shall have the right to redeem the property upon
payment to the local treasurer of the amount of the
following:
• delinquent tax,
• interest due,
• expenses of sale from the date of delinquency to
the date of sale
TAXATION LAW
• interest of not more than 2% per month on the
purchase price from the date of sale to the date of
redemption. (LGC, Sec. 261)
The period of redemption of tax delinquent properties
should be counted not from the date of registration of the
certificate of sale, but on the date of sale of the tax
delinquent property (City of Davao v Intestate Estate of
Amado Dalisay, G.R. No. 207791, July 15, 2015, J.
Mendoza)
However, a special law prevails over a general law. Thus,
the Quezon City Revenue Code of 1993 prevailed over
the 1991 Local Government Code in that the redemption
period was reckoned, not from the date of sale of the
property, but from the date of annotation of sale of the
property at the proper registry as stated in the QC
Revenue Code. (City Mayor of Quezon City v. Rizal
Commercial Banking Corporation, GR No. 171033,
August 3, 2010, J. Peralta)
Effects of Redemption
1. It shall invalidate the certificate of sale issued to
the purchaser. The local treasurer shall return to
the purchaser the entire amount paid by him plus
interest of not more than 2% per month;
2. The owner of the delinquent real property or
person having legal interest therein shall be
entitled to a certificate of redemption which shall
be issued by the local treasurer; and
3. The property shall be free from lien of such
delinquent tax, interest due thereon and expenses
of sale. (LGC, Sec. 261)
Possession of the Real Property Prior to Redemption
From the date of sale until the expiration of the period of
redemption, the delinquent real property shall remain in
possession of the owner or person having legal interest
therein who shall be entitled to the income and other fruits
thereof. (LGC, Sec. 261)
Final Deed to Purchaser
In case the owner or person having legal interest fails to
redeem the delinquent property, the local treasurer shall
execute a deed conveying to the purchaser said property,
free from lien of the delinquent tax, interest due and
expenses of sale. The deed shall briefly state the
proceedings upon which the validity of the sale rests.
(LGC, Sec. 262)
Purchase of Property by the LGU for Want of Bidder
In case there is no bidder, the local treasurer shall:
• Purchase the real property advertised for sale in
behalf of the LGU to satisfy the claim, if there is no
bidder.
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• Make a report of his proceedings within 2 days.
The Registrar of Deeds, upon registration, shall transfer
the title of the forfeited property to the LGU without the
necessity of an order from a competent court. (LGC, Sec.
263)
Note: The sale is still subject to 1 year right of redemption.
If the property is not redeemed, the ownership shall be
vested on the LGU. (LGC, Sec. 263)
Resale by LGU
The sanggunian may, upon notice of not less than 20 days,
sell and dispose of the real property acquired. The
proceeds of the sale shall accrue to the general fund of the
LGU. (LGC, Sec. 264)
Further Distraint or Levy
Levy may be repeated if necessary until the full amount
due, including all expenses, is collected. (LGC, Sec. 265)
Take note that distraint is expressly allowed by Sec.
254(b), which reads:
Such notice shall specify the date upon which the tax
became delinquent and shall state that personal property
may be distrained to effect payment.
Summary of Administrative Actions
1) Lien – the RPT constitutes a lien on the property
subject to tax, superior to all liens, charges or
encumbrances. (LGC, Sec. 257)
2) Levy on real property – real property subject to such
tax may be levied upon through the issuance of a
warrant. Levy may be repeated if necessary until
the full amount due, including all expenses, is
collected. (LGC, Secs. 258 & 265)
3) Distraint – personal property may be distrained to
effect payment. (LGC, Sec. 254)
4) Sale of real property at public auction (LGC, Sec.
260)
5) Purchase of real property for want of bidder (LGC,
Sec. 263)
b. Judicial Remedies
The judicial remedy is availed of in the court of appropriate
jurisdiction. These remedies are cumulative,
simultaneous and unconditional, that is, any or all of the
remedies or combination thereof may be resorted to and
the use or non-use of one remedy shall not be a bar
against the institution of the others. Formal demand for
the payment of the delinquent taxes and penalties due is
not a pre-requisite to such remedies. The notice of
delinquency shall be sufficient. (IRR of LGC, Art. 347)
TAXATION LAW
Civil Action
The LGU may enforce the collection of the RPT by civil
action in any court of competent jurisdiction. It shall be filed
by the local treasurer within the period required. (LGC,
Sec. 266)
Who shall file
Provincial attorney or city or municipal legal officer shall
file, within 15 days after the receipt of the documents
provided by the local treasurer, the civil action in the name
of the province, city, or municipality in the proper court of
competent jurisdiction. (IRR of LGC, Art. 357)
Duty of the local treasurer
The local treasurer shall furnish the following to the
provincial attorney or city or municipal legal officer:
1. a certified statement of delinquency; and
2. exact address of the defendant where he may be
served with summons. (IRR of LGC, Art. 357)
6. TAXPAYER’S REMEDIES
a. Contesting an Assessment
I. PAYMENT UNDER PROTEST
No protest shall be entertained unless the taxpayer pays
the tax first. There shall be annotated on the tax receipts
the words "paid under protest". The tax paid under protest
shall be held in trust by the treasurer. (LGC, Sec. 252)
EXCEPTIONS:
a. Prior payment is not required when the taxpayer is
questioning the very authority and power of the
assessor to impose the assessment and of the
treasurer to collect the tax. (Jardine Davies
Insurance Brokers, Inc. v. Aliposa, 398 SCRA 176,
2003, J. Callejo);
b. Posting a surety bond that covers the tax in question
is substantial compliance of the requirement of
payment under protest. (Meralco v. City Assessor
and City Treasurer of Lucena City, G.R. No. 166102,
2015, J. Leonardo-De Castro);
c. In case of illegal assessment, the taxpayer may
directly resort to judicial action without paying under
protest the assessed tax. (City of Lapu- Lapu v.
PEZA, G.R. Nos. 184203 and 187583, 2014, J.
Leonen)
Erroneous Assessment vs. Illegal Assessment
An erroneous assessment presupposes that the taxpayer
is subject to the tax but is disputing the correctness of the
amount assessed. With an erroneous assessment, the
taxpayer claims that the local assessor erred in
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determining any of the items for computing the real
property tax, i.e., the value of the real property or the
portion thereof subject to the tax and the proper
assessment levels. In case of an erroneous assessment,
the taxpayer must exhaust the administrative remedies
provided under the LGC.
On the other hand, an assessment is illegal if it was made
without the authority under the law. In case of an illegal
assessment, the taxpayer may directly resort to judicial
action without paying under protest the assessed tax and
filing an appeal with the Local and Central Boards of
Assessment Appeals. (City of Lapu- Lapu v. PEZA, G.R.
Nos. 184203 and 187583, 2014, J. Leonen)
II. FILE PROTEST WITH TREASURER
Where to file: To the local treasurer
When to file: Within 30 days from payment of the tax
Period to decide: 60 days from receipt (LGC, Sec. 252)
III. REFUNDS OR CREDITS OF RPT
If the protest is granted, the amount or portion of the tax
protested shall be:
Refunded to the protestant, or
Applied as tax credit against his existing or future tax
liability.
If the protest is denied or upon the lapse of the 60-day
period to decide, the taxpayer may appeal in accordance
with the rules on appeal below. (LGC, Sec. 252)
Repayment of Excessive Collections
When an assessment is found to be illegal or erroneous
and the tax is accordingly reduced or adjusted, the
taxpayer may file a written claim for:
a) Refund; or
b) Credit for taxes and interests. (LGC, Sec. 253)
Where to file: To the local treasurer.
When to file: Within 2 years from the date the taxpayer is
entitled to such reduction or adjustment.
Period to decide: Within 60 days from receipt.
In case of denial, the taxpayer may appeal in accordance
with the rule on appeal below.
b. Contesting a Valuation of Real Property
I. APPEAL TO LOCAL BOARD OF ASSESSMENT
APPEALS (LBAA)
TAXATION LAW
Who can file an appeal: Any owner or person having
legal interest in the property who is not satisfied with the
assessment of his property
Where to file:
1. LBAA of the provincial or city; (LGC, Sec. 226) or
2. Municipal Board of Assessment Appeals (MBAA)
– in case of municipalities within MMA (IRR of
LGC, Art. 317)
When to file: Within 60 days from the date of receipt of
the written notice of assessment
How: By filing a petition under oath, together with copies
of the tax declarations and such affidavits or documents
submitted in support of the appeal.
Failure to appeal within the statutory period renders the
assessment final and unappealable. (Victorias Milling v.
CTA, G.R. No. L-24213, 1968, J. Bengzon J.P.)
Filing of a petition for injunction before the RTC upon the
issuance of a warrant of levy is not in accordance with the
remedies provided in the LGC. (Republic vs. City of
Kidapawan, G.R. No. 166651, 2005, J. Ynares-Santiago)
A day before the scheduled sale at public auction of the
properties of MWSS, it filed before the CA, instead in
RTC, a Petition for Certiorari and Prohibition with Prayer
for the Issuance of a TRO and/or Writ of Preliminary
Injunction. The CA ruled that MWSS need not exhaust
administrative remedies since the issue involved a purely
legal question. It noted, however, that the Petition should
have been first filed before the RTC, which shares
concurrent jurisdiction with the CA over petitions for
certiorari and prohibition. Nonetheless, it proceeded to
resolve the case on its merits. The SC agreed. (MWSS v.
The Local Government of Quezon City, G.R. No. 194388,
November 7, 2018, J. Leonen)
Actions by the LBAA
Quantum of evidence required: Substantial evidence –
such relevant evidence on record as a reasonable mind
might accept as adequate to support the conclusion.
Period to decide: 120 days from the date of receipt of
appeal
In the exercise of its appellate jurisdiction, the LBAA shall
have the following powers:
a. Summon witnesses,
b. Administer oaths,
c. Conduct ocular inspection,
d. Take depositions, and
e. Issue subpoena and subpoena duces tecum.
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The proceedings of the LBAA shall be conducted solely for
the purpose of ascertaining the facts without necessarily
adhering to technical rules applicable in judicial
proceedings.
If the provincial or city assessor concurs in the revision or
the assessment, he shall notify the owner or the person
having legal interest of such fact. (LGC, Sec. 229)
II. APPEAL TO CENTRAL BOARD OF ASSESSMENT
APPEALS (CBAA)
Who can appeal: Those who were not satisfied with the
decision of the LBAA, either: [OA]
• Owner or the person having legal interest or
• Assessor
Where to file: CBAA
When to file: Within 30 days after receipt of the decision
of the LBAA (LGC, Sec. 229)
Note: The decision of the CBAA shall be final and
executory. (LGC, Sec. 229)
Effect of Appeal on the Payment of RPT
It does not suspend the collection of the RPT as assessed
by the provincial or city assessor, without prejudice to
subsequent adjustment depending upon the final
outcome of the appeal. (LGC, Sec. 231)
Appeal to CTA En Banc
The Court of Tax Appeals En Banc shall exercise
exclusive appellate jurisdiction to review by appeal the
decisions of the 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. (Revised
Rules of the CTA, Rule 4, Sec. 2(e))
A party adversely affected by a decision or ruling of the
CBAA and the RTC in the exercise of their appellate
jurisdiction may appeal to the CTA en banc by filing before
it a petition for review under Rule 43 of the ROC within 30
days from receipt of a copy of the questioned decision or
ruling. (Revised Rules of the CTA, Rule 8, Secs. 3(c),
4(c))
Appeal to Supreme Court
Appeal must be filed within 15 days from receipt of
decision of the CTA en banc (Rules of Court, Rule 45)
Other Remedies
Action Assailing Validity of Sale at Public Auction
TAXATION LAW
No court shall entertain any action assailing the validity or
any sale at public auction of real property until the taxpayer
shall have deposited with the court the amount for which
the real property was sold plus interest of 2% per month
from the date of sale to the time of the institution of the
action.
Purpose: The amount so deposited shall be paid to the
purchaser at the auction sale if the deed is declared invalid
but it shall be returned to the depositor if the action fails.
The court can only declare a sale at public auction invalid
if the substantive rights of the delinquent owner or the
person having legal interest have been impaired, and not
just by reason of irregularities or informalities. (LGC, Sec.
267)
However, the bond mandated in Section 267, whose
purpose it is to ensure the collection of the tax delinquency,
should not be required of NHA, being a tax-exempt entity,
before it can bring suit assailing the validity of the auction
sale. Hence, its tax exemption extends to RPT. (National
Housing Authority v. Iloilo City, GR No. 172267, August 20,
2008, J. Tinga)
Taxpayer's Remedies Against Special Levy
Any owner of real property affected by a special levy or
any person having a legal interest therein may, upon
receipt of the written notice of assessment of the special
levy, appeal to LBAA. (LGC, Sec. 244)
III. EFFECT OF PAYMENT OF TAXES
Extinguishment of Lien on Real Property
The RPT constitutes a lien on the property subject to tax,
superior to all liens, charges or encumbrances in favor of
any person, irrespective of the owner or possessor, and
may only be extinguished upon payment of the tax and the
related interests and expenses. (LGC, Sec. 257)
Payments of RPT shall first be applied to prior years’
delinquencies, interests, and penalties, and only after said
delinquencies are settled may tax payments be credited for
the current period. (LGC, Sec. 250)
Payment under Protest (LGC, Sec. 252)
No protest shall be entertained unless the taxpayer pays
the tax first. There shall be annotated on the tax receipts
the words "paid under protest". The tax paid under protest
shall be held in trust by the treasurer.
If the protest is granted, the amount or portion of the tax
protested shall be:
a) refunded to the protestant, or
b) applied as tax credit against his existing or future tax
liability
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If the protest is denied or upon the lapse of the 60-day value, the former shall thereafter no longer have any
period to decide, the taxpayer may appeal. jurisdiction to entertain any request for a review or
readjustment. The appropriate forum where the aggrieved
Sale of Real Property at Public Auction party may bring his appeal is the LBAA, as provided by
If the owner of the real property pays the delinquent tax, law. (Callanta v. Office of the Ombudsman, GR Nos.
the interest due and the expenses before the intended
115253-74, 30 Jan. 1998, J. Panganiban)
sale, the sale at public auction shall be stayed. (LGC, Sec.
260)
Summary of Taxpayer’s Remedies
Effect of Redemption REMEDIES GROUNDS PROCEDURE
1. It shall invalidate the certificate of sale issued to REMEDY To question the 1. Appeal to the
the purchaser. The local treasurer shall return to AGAINST valuation of the LBAA within 60
the purchaser the entire amount paid by him plus ASSESSMENT real property days from date
interest of not more than 2% per month; of receipt of the
2. The owner of the delinquent real property or written notice of
person having legal interest therein shall be assessment
entitled to a certificate of redemption which shall 2. The LBAA has
be issued by the local treasurer; and 120 days from
3. The property shall be free from lien of such receipt of the
delinquent tax, interest due thereon and expenses appeal to
of sale. (LGC, Sec. 261) decide
3. If still
Payment of Delinquent Taxes on Property Subject of unsatisfied,
Controversy appeal to the
In any action involving the ownership or possession of, or CBAA within 30
succession to real property, the court may, motu propio or days from
upon representation of the local treasurer, award such receipt of the
ownership, possession, or succession to any party to the decision
action upon payment to the court of the taxes with interest PAYMENT To question the 1. Pay under
due on the property and all other costs that may have UNDER assessment protest
accrued, subject to the final outcome of the action. (LGC, PROTEST 2. File a protest
Sec. 268) AND TAX (i.e., with the local
REFUND OR reasonableness treasurer
c. Compromising RPT Assessment CREDIT or correctness within 30 days
of the amount from payment
Condonation or Reduction of RPT and Interest [SaP] assessed) 3. Treasurer has
1) By the Sanggunian 60 days to
The sanggunian, by ordinance passed prior to January 1 resolve the
of any year, and upon recommendation of the Local protest
Disaster Coordinating Council, may condone or reduce 4. In case of
denial or lapse
the real property tax and interest for the succeeding years
of 60 days,
in the city or municipality affected by the following follow the
instances: LBAA and
• General failure of crops CBAA rules on
• Substantial decrease in the price of agricultural or appeal above.
agri-based products
• Calamity. (LGC, Sec. 276) APPLICABLE Appeal 1. If unsatisfied
TO BOTH with the
REMEDIES decision of the
2) By the President
ABOVE CBAA, appeal
The President may condone or reduce the real property
to the CTA En
tax and interest when public interest so requires. (LGC, Banc within 30
Sec. 277) days from
receipt of
Whenever the local assessor sends a notice to the owner decision.
or lawful possessor of real property of its revised assessed

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2. If still
unsatisfied,
appeal to SC
within 15 days
from the
receipt of
decision.

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Procedures for Claiming Exemption
Declaration of real property once every 3
years
Within 30 days from the declaration, the
owner shall file with the assessor a claim for
exemption together with the documents to
prove exemption
If proven to be exempt, the real property
shall be dropped from the Assessment Roll;
if not, the real property shall be taxed
Computation of RPT
Determine the FMV
Determine the classification
Ascertain the assessment level of the
property
Compute for the assessed value:
FMV x Assessment level
Compute for the RPT:
Assessed value x Tax rate
TAXATION LAW
Procedures for Collection
Assessor shall submit the Assessment Roll to
the Treasurer on or before December 31 of
each year
Treasurer shall post or publish notice of
deadline of payment
Treasurer shall collect RPT starting January
1 of each year
Procedures for General Revision of Assessments
and Property Classification
(Once Every 3 Years)
Prepare the Schedule of FMV
Enact ordinance
(send written notice to the owner + public hearing, if
required)
•Levy RPT and additional levies
•Fix the assessment levels
•Provide necessary appropriation to defray
expenses
•Adopt the Schedule of FMV
Publication or Posting of the Schedule of FMV
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Questioning the Valuation of Real Property Protesting the Assessment of RPT

Declaration of real property once every 3 Pay the tax under protest
years

Within 30 days from payment, file a written

protest with the Treasurer

Assessor prepares the Assessment Rolls

Treasurer shall decide within 60 days from

receipt of protest

Within 30 days from the assessment, the

assessor sends notice of assessment to
the owner Granted Denied/No action

Within 60 days from receipt of notice, the Within 2 years Within 60 days
owner may appeal the assessment to from from receipt of
LBAA entitlement to decision or after
reduction or 60 days of
adjustment, file inaction, appeal
a written claim to LBAA – 120
for refund or tax days to decide
LBAA shall decide within 120 days from the credit
receipt of protest

Within 30 days
Treasurer shall from receipt of
decide within 60 notice of adverse
If denied by LBAA, within 30 days from decision, appeal
receipt of decision, the owner may appeal days from
receipt of claim to CBAA
to CBAA

Granted Denied Within 30 days

If denied by CBAA, within 30 days from
from receipt of
receipt of decision, the owner may appeal
to CTA en banc decision, appeal
to CTA en banc
Refund/ Follow
Credit the rules
on
If denied by the CTA en banc, within 15 appeal Within 15 days
days from receipt of decision, the owner to LBAA
may appeal to SC from receipt of
decision, appeal
to SC

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Levy of Real Property
Deficiency
Notice of delinquency shall be issued by the
Treasurer
Warrant of Levy shall be issued by the Treasurer
Service of warrant to the owner, assessor, and
RD
Within 10 days from the receipt of warrant, the
levying officer shall report the levy to the
sanggunian
Within 30 days from service of warrant, the sale
shall be advertised by posting and publication
Sale at public auction
Within 30 days from sale, the treasurer shall
report such sale to sanggunian
Treasurer shall deliver the certificate of sale to
the buyer
Proceeds of sale in excess of tax liability,
including interest and expenses, shall be
remitted to the owner
Within 1 year, the owner may redeem the
property
After 1 year from sale and if the property is
not redeemed, the treasurer shall execute a
deed of conveyance to the buyer
TAXATION LAW
Procedures If There is No Bidder Upon Sale at Public
Auction
Treasurer shall purchase the property in behalf
of the LGU
Within 2 days, report the proceedings
Upon registration, RD shall transfer the title to
LGU without need of court order
Within 1 year from forfeiture, the owner may
redeem the property
If the property is not redeemed after the 1-year
period, the LGU may sell the property at public
auction
Judicial Remedies for Collection
Treasurer shall furnish the provincial
attorney/city or municipal legal officer the
following:
•Certified statement of delinquency
•Exact address of the defendant where to
serve the summons
Within 15 days after receipt of the documents,
the provincial attorney/city or municipal legal
officer shall file the civil action in the name of the
province, city, or municipality in the court of
competent jurisdiction
————- end of topic ————-
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 JUDICIAL
REMEDIES
Taxation Law
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IV. JUDICIAL REMEDIES NATURE OF THE COURT OF TAX APPEALS

TOPIC OUTLINE UNDER THE SYLLABUS: Laws Governing the Court of Tax Appeals
4. RA 1125, enacted June 16, 1954, created the Court of
IV. JUDICIAL REMEDIES Tax Appeals (CTA)
A. JURISDICTION OF THE COURT OF TAX 5. RA 9282, enacted March 30, 2004, amended RA 1125
APPEALS 6. RA 9503, enacted June 12, 2008, further amended RA
1. Exclusive Original and Appellate Jurisdiction 1125
over Civil Cases 7. RA 9282 expanded the jurisdiction of the CTA and
2. Exclusive Original and Appellate Jurisdiction elevated it to the level of the Court of Appeals
over Criminal Cases 8. RA 9282 also provided, among others, that appeals
from the decision of the CTA En Banc shall now be
B. PROCEDURE made before the Supreme Court
1. Filing for an Action for Collection of Taxes 9. RA 9503 provided for the increase in the number of the
a. Internal Revenue Taxes CTA Justices from 6 to 9, increased the number of
b. Local Taxes Divisions from 2 to 3, with each division composed of 3
2. Civil Cases justices
a. Who may Appeal, Mode of Appeal, and
Effect of Appeal Features of the CTA
b. Suspension of Collection of Taxes 10. Regular Court, vested with exclusive appellate
c. Injunction not Available to Restrain jurisdiction over cases arising out of the NIRC and
Collection CMTA (CIR v. CA, G.R. No. 104151, 1995)
3. Criminal Cases 11. A highly specialized body specifically created for the
a. Institution and Prosecution of Criminal purpose of reviewing tax cases. (Philippine Refining
Action Company v. CA, G.R. No. 118794, 1996)
b. Institution of Civil Action in Criminal Action 12. A Court of special or limited jurisdiction, and as such, it
c. Period to Appeal can only take cognizance of such matter clearly within
4. Appeal to the Court of Tax Appeals en banc its jurisdiction (Ker v. CTA, G.R. No. L-12396, 1962)
5. Petition for Review on certiorari to the 13. Proceedings are judicial in nature, although the CTA is
Supreme Court not bound by the technical rules of evidence (R.A. No.
1125, as amended, Sec. 8)

Declaratory Relief in Tax Cases

In CIR v. Standard Insurance Co., Inc., G.R. No. 219340,
November 17, 2018, Respondent filed a declaratory relief
action in the RTC to determine the constitutionality of
Sections 108 and 184 of the Tax Code with respect to
taxes paid by non-life insurance companies.
One of the elements for a proper declaratory relief is that
adequate relief is not available through other means.
However, the correct remedy was to appeal the
assessment with the CTA. The Court ruled that the RTC
did not have jurisdiction as the declaratory relief action was
procedurally improper as a remedy.

Tax Cases NOT filed with the CTA but with SOJ
P.D. 242 expressly provides that all disputes and claims
solely between governmental agencies and offices,
including GOCCs, shall be administratively settled or
adjudicated by the SOJ, the Solicitor General, or the
Government Corporate Counsel, depending on the issues
and government agencies involved. As this case only
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involves questions of law, the SOJ has jurisdiction. This
rule applies when there are no private parties involved. As
the President has control over all executive departments,
intra-government disputes are beyond the scope of judicial
review and courts, including the CTA, cannot intrude in the
executive function. The fact that P.D. 242 is a special law
and the Tax Code is a general law is also basis to apply
the former.
The decision of the SOJ is appealable to the Office of the
President and then onwards to the Court of Appeals but
the Supreme Court nevertheless decided on the issue to
not further delay the disposition of the same. (PSALM vs.
CIR, G.R. No. 198146, 2017)
A. JURISDICTION OF THE COURT OF TAX APPEALS
1. EXCLUSIVE ORIGINAL AND APPELLATE
JURISDICTION OVER CIVIL CASES
Cases Within the Jurisdiction of the Court En Banc
1. Decisions or resolutions on MRs or MNTs of the Court
in Division in the exercise of its exclusive appellate
jurisdiction over:
a. Cases arising from administrative agencies;
b. Local tax cases decided by the RTCs in the
exercise of their original jurisdiction;
c. Tax collection cases decided by RTCs in the
exercise of their original jurisdiction involving final
and executory assessments for taxes, fees,
charges, and penalties, where the principal
amount of taxes and penalties claimed is less
than P1,000,000; or
d. Criminal offenses arising from violations of the
NIRC or TCC and other laws administered by the
BIR or BOC.
2. Decisions, resolutions or orders on MRs or MNTs of the
Court in Division in the exercise of its exclusive
original jurisdiction over:
a. Tax collection cases; or
b. Cases involving criminal offenses arising from
violations of the NIRC or TCC and other laws
administered by the BIR or BOC
3. Decisions, resolutions or orders of the RTCs in the
exercise of its appellate jurisdiction over:
a. Local tax cases
b. Tax collection cases; or
TAXATION LAW
c. Criminal offenses arising from violations of the
NIRC or TCC and other laws administered by the
BIR or BOC
Real property tax cases decided by the RTC are not under
the CTA’s jurisdiction. Decisions, orders, and resolutions
of the RTC in local tax cases do not include real property
tax which is an ad valorem tax. The jurisdiction of the CTA
involves only those real property tax cases originally
decided by the CBAA in the exercise of its appellate
jurisdiction (Habawel v. CTA, GR No. 174759, 2011)
4. Decisions of the CBAA in the exercise of its appellate
jurisdiction over cases involving assessment and
taxation of real property originally decided by the
provincial or city board of assessment appeals. (Sec. 2,
Rule 4, A.M. No. 05-11-07-CTA)
Cases Within the Jurisdiction of the Court in Divisions
1. Decisions of or inaction of the CIR
a. In cases involving disputed assessments, refunds
of internal revenue taxes, fees or other charges,
penalties in relation thereto; or
b. Other matters arising under the NIRC or other laws
administered by the BIR
CTA Jurisdiction Covers CIR Inaction
The jurisdiction of the CTA has been expanded to include
not only decisions or rulings but also inaction as well of
the CIR. (RCBC v. CIR, G.R. No. 168498,2007)
The inaction by the CIR within the 180-day period under
Sec. 228 of the NIRC is deemed a denial for purpose of
allowing the taxpayer to appeal with the CTA but it does
not necessarily constitute the CIR’s formal decision
(Revised Rules of the Court of Tax Appeals “RRCTA”, Sec.
3[a][2], Rule 4)
In case the CIR fails to act on the disputed assessment
within the 180-day period from date of submission of
documents, a taxpayer can either:
1. File a petition for review with the CTA within 30
days after the expiration of the 180-day period, or
2. Await the final decision of the Commissioner or
the disputed assessments and appeal such final
decision to the CTA 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.
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Definition of “Other Matters”
The term other matters is limited only by the qualifying
phrase that follows it. The appellate jurisdiction of the CTA
is not limited to cases which involve decisions of the CIR
on matters relating to assessments or refunds. The second
part of the provision covers other cases that arise out of
the NIRC or related laws administered by the BIR. (CIR v.
Hambrecht & Quist PHL, G.R. No. 169225, 2010)
2. Decisions, orders or resolutions of the RTCs in
local tax cases decided or resolved by them in the
exercise of their original jurisdiction
3. Decisions of the Commissioner of Customs
a. In cases involving liability for customs duties, fees,
or other money charges, seizure, detention or
release of property affected, fines, forfeitures of
other penalties in relation thereto; or
b. Other matters arising under the Customs Law or
other laws administered by the Bureau of Customs
4. Decisions of the Secretary of Finance on customs
cases elevated to him automatically for review from
decisions of the Commissioner of Customs which are
adverse to the Government under Section 2315 of the
TCC
5. Decisions of the DTI Secretary in the case of non-
agricultural product, commodity or article and the DA
Secretary in case of agricultural product, commodity or
article, involving dumping and countervailing duties
under Sections 301 and 302 of the TCC and safeguard
measures under the Safeguard Measures Act (RA
8800) where either party may appeal the decision to
impose or not to impose said duties. (Rule 4, A.M. No.
05-11-07-CTA, Section 3[a])
CTA Jurisdiction Over a Special Civil Action for
Certiorari Assailing an Interlocutory Order
While RA 9282 does not contain a categorical statement
which vests to the CTA jurisdiction over petitions for
certiorari on orders by the RTC on local tax cases, the
grant of appellate jurisdiction on local tax cases leads to an
assumption that the law intended to transfer also such
power as is deemed necessary if not indispensable in aid
of such appellate jurisdiction. The Court pointed out that to
confer the power over certiorari petitions to the Court of
Appeals would create a “split-jurisdiction” situation which is
anathema to the orderly administration of justice. Thus, the
power of the CTA to rule on petitions for certiorari on
interlocutory orders issued by the RTC in local tax cases is
TAXATION LAW
included in the powers granted by the Constitution as well
as inherent in the exercise of its appellate jurisdiction. (City
of Manila v. Grecia-Cuerdo, G.R. No. 17523, 2014)
DOJ Resolution in a Preliminary Investigation
Involving Tax and Tariff Offenses
Under RA 9282, the rule on where to appeal decisions of
the Secretary of the DOJ is no longer clear. However, as
stated in Grecia-Cuerdo, split-jurisdiction is frowned
upon and such principle should be interpreted to carry
forward to a DOJ resolution in a preliminary investigation
involving tax and tariff offenses. The oversight
notwithstanding, the Court relaxed the rule given that the
Grecia-Cuerdo decision just came out recently but instead
of remanding the case to the CTA, the Court decided to
rule on the same. (BOC v. Devanadera, G.R. No. 193253,
2015)
Regulatory Fees Not Within CTA Jurisdiction
The primary reason for the CTA’s lack of jurisdiction is that
what was imposed under the questioned ordinance are not
taxes but are instead regulatory fees, specifically to
address the environmental depredation of the said special
projects. As such, the case that originated from the RTC is
not considered a local tax case over which the CTA has
jurisdiction. (Smart Communication v Municipality of
Malvar, G.R. No. 204429, 2014)
HOWEVER: In the 2018 Resolution of the MR filed by
Petron, the SC ruled that in conjunction with the Banco De
Oro ruling that the CTA has jurisdiction to resolve all tax
matters (which includes the validity of the CIR’s
interpretation and consequent imposition of excise tax on
alkylate), the Court finds it proper to reconsider its
decision. (CIR v. CTA and Petron Corporation, G.R. No.
207843, 2018)
A Taxpayer Cannot File A Petition For Certiorari Under
Rule 65 Directly to the Supreme Court to Question a
Revenue Regulation
The CIR and the Secretary of Finance issued the
regulations on the excise tax on importation of petroleum
products into the BCDA in the exercise of their quasi-
legislative or rule-making powers, not judicial or quasi-
judicial functions. Thus, the same is outside the scope of a
petition for certiorari. The Court lastly ruled that it shall not
entertain a direct resort to them unless there are
exceptional and compelling circumstances. (Clark
Investors and Locators Association, Inc. v. CIR, G.R. No.
200670, 2015)
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2. EXCLUSIVE ORIGINAL AND APPELLATE
JURISDICTION OVER CRIMINAL CASES
Exclusive Original Jurisdiction
The CTA shall exercise exclusive original jurisdiction over
all criminal cases where the principal amount involved of
taxes and fees is P1,000,000 or more, exclusive of charges
and penalties, arising from violations of the NIRC, TCC and
other laws administered by the BOC or the BIR.
Exclusive Appellate Jurisdiction
Appeals from judgments, resolutions or orders of the RTCs
in tax cases originally decided by them in their respective
territorial jurisdiction; and
Petitions for review of the judgments, resolutions or orders
of the RTCs in the exercise of their appellate jurisdiction
over tax cases originally decided by the MeTCs, MTCs or
MCTCs.
Summary
Appealable to the CTA ---
• Ruling of SOF on RRs, RMCs, rulings, etc.
• Interlocutory orders by RTC on local tax cases
• Tax collection cases (of duties) from RTC
• SOJ’s decision dismissing filing of criminal case
under TCCP
Appealable to the SC ---
• Ruling of SOF if there are compelling
circumstances
• Pure question of law (Alta Vista case supra)
SOF has jurisdiction to review COC’s issuance (CMC)
as an exercise of quasi-legislative function
In local tax collection cases, the amount of the claim
determines where the case should be filed. (China
Banking Corporation v. City Treasurer of Manila, G.R.
No. 204117, 2015)
• When the claim does not exceed P300,000 (or
P400,000 in Metro Manila), the case should be
filed in the MTC, not the RTC.
• The RTC exercises appellate jurisdiction in
those cases.
TAXATION LAW
B. JUDICIAL PROCEDURES
1. FILING OF AN ACTION FOR COLLECTION OF
TAXES
a. Internal Revenue Taxes
The CTA has exclusive jurisdiction over the following
cases involving tax collection:
14. Original jurisdiction in tax collection cases involving
final and executory assessments for taxes, fees,
charges and penalties where the principal amount of
taxes and fees, exclusive of charges and penalties,
claimed is P1,000,000 or more.
15. Appellate jurisdiction over appeals from the
judgment, resolutions or orders of the RTC in tax
collection cases originally decided by them within their
respective jurisdiction.
16. Over petitions for review of the decisions of the RTC in
exercise of their appellate jurisdiction over tax collection
cases originally decided by MTC.
Prescriptive Period
A party adversely affected by a decision, ruling or the
inaction of the Commissioner of Internal Revenue on
disputed assessments or claims for refund of internal
revenue taxes, or by a decision or ruling of the
Commissioner of Customs, the Secretary of Finance, the
Secretary of Trade and Industry, the Secretary of
Agriculture, or a Regional Trial Court in the exercise of its
original jurisdiction may appeal to the Court by petition for
review filed within 30 days after receipt of a copy of
such decision or ruling, or expiration of the period
fixed by law for the CIR to act on the disputed
assessments.
In case of inaction of the Commissioner of Internal
Revenue on claims for refund of internal revenue taxes
erroneously or illegally collected, the taxpayer must file a
petition for review within the two-year period prescribed
by law from payment or collection of the taxes.
See earlier discussion under Protesting an Assessment for
Taxpayer’s Remedies.
Judicial Claim to CTA for VAT Return
See earlier discussion under Refund or tax credit of excess
input tax.
b. Local Taxes
(see discussion under the chapter of Local Taxes)
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2. CIVIL CASES
a. Who may Appeal, Mode of Appeal, and Effect of
Appeal
1. Any party adversely affected by a decision,
ruling, or the inaction of:
• CIR
• COC
• DOF Secretary
• DTI Secretary
• DA Secretary
• RTC (in the exercise of its original jurisdiction)
2. A party adversely affected by a decision or
resolution of a Division on a MR or MNT
3. A party adversely affected by a decision or ruling
of the CBAA and the RTC in the exercise of
their appellate jurisdiction.
4. Under Section 11 of RA 1125, the government
or any of its agencies, instrumentalities or
officials has no right to appeal. When a
taxpayer refuses to pay the tax or protests an
assessment and contests its validity before the
CTA, the government can either impose distraint
or levy of property or enforce the collection by
judicial remedy before the regular court. The only
time the government can initiate any action is
when it appeals the decision of the CTA which is
adverse to the government, pursuant to Rule 45 of
the Rules of Court.
Mode and Effect of Appeal
Petition for review under Rule 42 to be acted upon the CTA
in division with respect to a decision, ruling or inaction of:
• CIR (on disputed assessments or claim for refund
of internal revenue taxes erroneously or illegally
collected)
• COC
• DOF Secretary
• DTI Secretary
• DA Secretary
• RTC (in the exercise of their original jurisdiction)
• Period to file: 30 days
Petition for review under Rule 43 to be acted upon the CTA
En Banc with respect to a decision or resolution of the
Court in Division on a MR or MNT.
• Period to file: 15 days. It may be extended to an
additional period not exceeding 15 days.
TAXATION LAW
Petition for review under Rule 43 to be acted upon by the
CTA En Banc with respect to the decisions or rulings of:
• CBAA
• RTCs (in the exercise of their appellate
jurisdiction)
• Period to file: 30 days (Sec. 11, R.A. No. 1125, as
amended by RA 9282)
Appeal within 30 days from receipt of decision or period of
inaction of CIR, COC, Secretary of Finance, Secretary of
Trade and Industry or Secretary of Agriculture, or the
CBAA or the RTC:
• Generally, appeal will be to a Division
• Exception: Appeal by filing a petition for review to
En Banc in case of decisions of CBAA or RTC in
the exercise of its appellate jurisdiction
In case the decision of the Division is adverse:
• File MR with same Division within 15 days from
notice thereof
In case resolution of Division on the MR or motion for new
trial is still adverse:
• File petition for review with CTA En Banc
In case the decision of the CTA En Banc is adverse, file a
review on certiorari with the SC pursuant to Rule 45 of
Rules of Court
Appealing a Decision of a Local Assessment Board
(Sec. 9, R.A. No. 9282)
• To the CBAA and not yet to the CTA
• It is only after the CBAA has ruled that an appeal
may be made to the CTA
• In which case, the appeal shall be by petition for
review to the CTA En Banc
b. Suspension of Collection of Taxes
General Rule: No injunction to restrain collection of taxes
Exception: Under Section 9 of RA 9282, suspension is
allowed when the following conditions concur:
• It is an appeal to the CTA from a decision of CIR,
COC or the RTC, provincial, municipal treasurer,
or the Secretary of Finance, Secretary of Trade
and Industry or Secretary of Agriculture, as the
case may be; and
• In the opinion of the Court, the collection by the
aforementioned government agencies may
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jeopardize the interest of the Government and/or
taxpayer.
In case of suspension, what is the taxpayer required to
do?
The taxpayer will be required to either deposit the amount
claimed or file a surety bond for not more than double the
amount with the Court.
c. Injunction Not Available to Restrain Collection
General rule: No injunction to restrain collection of taxes
Exception: Suspension is allowed when the following
conditions concur:
1. There is an appeal to the CTA, and
2. In the opinion of the court, the collection by the
government agencies may jeopardize the interest
of the Government and/or the taxpayer, and
3. Taxpayer either to deposit the amount claimed or
to file a surety bond for not more than the double
the amount with the Court.
Taking of Evidence
The Court may receive evidence in the following cases:
• In all cases falling within the original jurisdiction
of the CTA in division pursuant to Section 3, Rule
4 of the RRCTA
• 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
The following are authorized to take evidence:
• Any justice of the court when:
1. The determination of a question of fact arises
at any stage of the proceedings; or
2. The taking of an account is necessary; or
3. The determination of an issue of fact
requires the examination of a long account.
• Any court official for the sole purpose of marking
comparison with the original and identification by
witnesses of the received documentary evidence
Motion for Reconsideration/Motion for New Trial
Any aggrieved party may seek a reconsideration or new
trial of any decision, resolution or order of the court
The period to file the MR or MNT is 15 days.
TAXATION LAW
No second MR or MNT is allowed (Sec. 7, Rule 15, A.M.
No. 05-11-07-CTA)
The filing of the MR or MNT shall suspend the running of
the period within which an appeal may be perfected.
Grounds for filing a MR or MNT
• Fraud, accident, mistake or excusable
negligence (FAME) which ordinary prudence
could not have guarded against and by reason of
which such aggrieved party has probably been
impaired in his rights or
• 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.
1. Criminal Cases
a) Institution and Prosecution of Criminal Actions
All criminal actions before the CTA in Division in the
exercise of its original jurisdiction shall be instituted by the
filing of an information in the name of the People of the
Philippines. (Sec. 2, Rule 9, A.M. No. 05-11-07-CTA)
The institution of the criminal action shall interrupt the
running of the period of prescription.
For violations of the NIRC and other laws enforced by the
BIR, the CIR must approve the filing.
For violations of the TC and other laws enforced by the
BOC, the COC must approve the filing.
The criminal actions shall be conducted and prosecuted
under the direction and control of the public prosecutor.
(Sec. 2, Rule 9, A.M. No. 05-11-07-CTA)
For violations of the NIRC and other laws enforced by the
BIR and violations of the TCC and other laws enforced by
the BOC, their respective duly deputized legal officers may
conduct the prosecution.
b) Institution of Civil Action in Criminal Action
The criminal action and corresponding civil action for the
recovery of civil liability for taxes and penalties shall be
deemed jointly instituted in the same proceeding. The filing
of the criminal action shall necessarily carry with it the filing
of the civil action. No right to reserve the filing of such civil
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action separately from the criminal action shall be allowed. petition for review concerning a case falling under its
(Sec. 12, Rule 9, A.M. No. 05-11-07-CTA) exclusive appellate jurisdiction, the litigant must sufficiently
show that it sought prior reconsideration or moved for a
c) Period to appeal new trial with the concerned CTA division. (COC v. Marina
Sales, Inc., G.R. No. 183868, 2010)
Solicitor General as Counsel for the People and
Government Officials Sued in their Official Capacity 5. PETITION FOR REVIEW ON CERTIORARI TO THE
SUPREME COURT
Modes of appeal with respect to criminal cases:
Any party adversely affected by a decision or ruling of the
• Notice of Appeal pursuant to Sections 3(a) and
Court En Banc may appeal to the Supreme Court. (Sec. 1,
6, Rule 122 of the Rules of Court to the CTA in
R.A. No. 1125; Sec. 19, Rule 16, A.M. No. 05-11-07-CTA)
Division with respect to an appeal from criminal
cases decided by the RTC in the exercise of its
The mode of appeal is a petition for review on certiorari
original jurisdiction
under Rule 45.
• Petition for Review under Rule 43 to the CTA En
Banc with respect to criminal cases decided by:
CTA in Division in the exercise of its
appellate jurisdiction
RTC in the exercise of its appellate
jurisdiction. (Sec. 9, Rule 9,A.M. No. 05-
11-07-CTA)
In both cases, the period to file is 15
days.

The Solicitor General shall represent the People and

government officials sued in their official capacity in all
cases brought to the CTA in the exercise of its appellate
jurisdiction.

4. APPEAL TO THE CTA EN BANC

Who may file an appeal to the CTA En Banc:

• A party adversely affected by a resolution of a
Division of the CTA on a MR or MNT may file a
petition for review with the CTA En Banc
• A party adversely affected by a decision or ruling of
the CBAA or the RTC in the exercise of their
appellate jurisdiction (Sec. 1, R.A. No. 1125)

A decision or order of a Division cannot be directly

appealed to the CTA En Banc. There must first be a timely
filing of MR or MNT. (Sec. 1, Rule 8, A.M. No. 05-11-07-
CTA)

The mandatory provisions of Rule 8, Section 1 of the

Revised Rules of the CTA require that “the petition for
review of a decision or resolution of the Court in Division
must be preceded by the filing of a timely motion for
reconsideration or new trial with the Division.” The word
“must” clearly indicates the mandatory -- not merely
directory -- nature of a requirement. The rules are clear.
Before the CTA En Banc could take cognizance of the

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Summary of Appeals: Assessments

PAN FAN PROTEST (30 DAYS)

Submit supporting docs

BIR ACTION
(60 days, if “request for
(180 DAYS)
reinvestigation”)

If protest denied in whole or in part

APPEAL
BIR denial of CTA in
TO CTA
protest in whole division
in division
or in part decision
(30 days)

Appeal
File MR CTA in division to CTA
(15 days) - denial of MR en banc
(15 days)

CTA en Petition for Review with SC

banc or Motion for Extension to
decision File Petition (15 days)

—— end of topic ———

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ANNEX A: REMEDIES UNDER THE NIRC

A. ASSESSMENT AND COLLECTION: THE RETURN WAS NOT FALSE OR FRAUDULENT

Date return was filed, or last day required by

law for filing, if filed before the last day
* (NIRC, Section 203)

Date return was filed, or last day required by

law for filing, if filed before the last day
* (NIRC, Section 203) 3 years
Last day to collect (By judicial proceedings only)
* (NIRC, Section 222 (d) & CIR v. Phil. Global
Communications, Inc., GR No. 167146, Oct.
31,2006)

3 years Last day to 5 years

assess

Last day to collect either by:

(a) Summary proceedings; or
(b) Judicial proceedings
• The date when the prescriptive period for assessment starts to run differs for each type of tax (e.g.,
* (NIRC, monthly
Section for documentary
222 (d)) stamp tax, quarterly for value-
added tax, and annually for income tax).
• “The Supreme Court on several occasions ruled that it is the date when the demand letter or notice of assessment is released, mailed or sent to the
taxpayer that constitutes an actual assessment. The law does not require that the demand or notice be received within the prescriptive period. As long as
the release thereof is effected before prescription sets in, the assessment is deemed made on time even if the same is actually received by the taxpayer
after the expiration of the prescriptive period”87

B. ASSESSMENT AND COLLECTION: THE RETURN WAS FALSE OR FRAUDULENT

87
HpcoAgridev Corporation, Vs. Commissioner Of Internal Revenue, [C.T.A. CASE NO. 6355 July 18, 2002. Citing Republic vs. Limaco & de Guzman Commercial Co., Inc., 5
SCRA 990; Basilan Estates, Inc. vs. Commissioner of Internal Revenue, et al., 21 SCRA 17

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Date of discovery of the falsity, fraud or

omission.
* (NIRC, Section 222 (a))

Date of discovery of the falsity, fraud or

10 years
omission. Last day to collect (By judicial proceedings only)
* (NIRC, Section 222 (a))
* (NIRC, Section 222 (a) & CIR v. Phil. Global
Communications, Inc., GR No. 167146, Oct. 31,
2006)

10 years 5 years
Last day to
assess
Last day to collect either by:
[a] Summary proceedings;
or
[b] Judicial proceedings
* (NIRC, Section 222 (c))

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C. REMEDY WHEN AN ASSESSMENT WHERE THE BIR DID NOT DECIDE WITHIN 180 DAYS

Letter of Authority Pre-assessment notice Assessment and demand

(LA) Audit/ * (NIRC, Section 228 (e);RR 18- * (NIRC, Section 228 (e); RR 18-2013 Submit Supporting Docs - if
*(NIRC, Section 13; Examination request for reinvestigation
RMO 44-2010) 2013 Section 2& RMO 26-2016) Section 2& RMO 26-2016)
* (NIRC, Section 228 (e); RR 18-
2013 Section 2&RMO 26-2016)
Respond Protest ))
* (NIRC, Sec. 228 (e); RR 18- * (NIRC, Sec. 228 (e);RR 18-
2013 Sec. 2& RMO 26-2016) 2013 Sec. 2& RMO 26-2016)
30 days 120 days
A

15 days 30 days 60 days

Appeal to CTA Decision of CTA Div. Decision of CTA Div. Decision of en banc

No decision by the BIR Motion for Appeal to Appeal to SC

* (NIRC, Section 228 (e); RR 18-
2013 Section 2& RMO 26-2016)
Recon. CTA en banc

180 days 30 days 15 days 15 days 15 days

* (NIRC, * (NIRC, * (A.M. * (A.M. *(Rules of
Section 228 (e) Section 228 (e) No.05-11-07- No.05-11- Court,
& RR 18-2013 & RR 18-2013 CTA, Rule 8, 07-CTA, Rule 45)
Section 2)) Sec. 3 (b)) Rule 8,
Section 2)) Sec. 3 (c))

• The Letter of Authority must be served to the taxpayer within 30 days from the date of its issuance, otherwise, it is void.
• Starting 1 June 2010, there is no need to for the revalidation of the LA even if the 120-day audit period after issuance has been exceeded, but the revenue
official shall be subject to applicable administrative sanctions. (RMO 44-2010)
• Protest to the FAN may be in the form of: (a) Request for Reconsideration; or (b) Request for Reinvestigation. The 60-day period to file supporting
documents applies only to Request for Reinvestigation.
• The Decision of the BIR is called the “Final Decision on Disputed Assessment” (FDDA). The FDDA can be issued by the BIR beyond 180 days. Once the
decision is rendered same appeals procedure in D below applies. However, there is a risk in waiting for the FDDA because the BIR could start the

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summary remedies of collection by issuing a collection letter or warrant of levy. In this instance, you treat these documents as the decision of the BIR and
elevate your case to the CTA and ask for an injunction.
• From Decision of the CTA En Banc, taxpayer may file an MR or Motion for New Trial (A.M. No.05-11-07-CTA, Rule 8, Sec. 1)

D. REMEDY WHEN AN ASSESSMENT WHERE THE BIR DECIDED WITHIN 180 DAYS

Letter of Authority Pre-assessment notice Assessment and demand

(LA) Submit Supporting Docs - if
Audit/ * (NIRC, Section 228 (e);RR 18- * (NIRC, Section 228 (e); RR 18-2013
*(NIRC, Section 13;
RMO 44-2010) Examination 2013 Section 2& RMO 26-2016) Section 2& RMO 26-2016) request for reinvestigation
* (NIRC, Section 228 (e); RR 18-
No more need for 2013 Section 2&RMO 26-2016)
Respond Protest ))
* (NIRC, Sec. 228 (e); RR 18- * (NIRC, Sec. 228 (e);RR 18-
2013 Sec. 2& RMO 26-2016) 2013 Sec. 2& RMO 26-2016)
30 days 120 days
A

15 days 30 days 60 days

Decision of the BIR Decision of CTA Div. Decision of CTA Div. Decision of en banc

Motion for Appeal to Appeal to SC

Recon. CTA en banc

A
Appeal to CTA

30 days 15 days 15 days 15 days

* (NIRC, * (A.M. * (A.M. * (Rules of
Section 228 (e) No.05-11-07- No.05-11- Court,
& RR 18-2013 CTA, Rule 8, 07-CTA, Rule 45)
Section 2)) Sec. 3 (b)) Rule 8,
Sec. 3 (c))

• The Letter of Authority must be served to the taxpayer within 30 days from the date of its issuance, otherwise, it is void.

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• Starting 1 June 2010, there is no need to for the revalidation of the LA even if the 120-day audit period after issuance has been exceeded, but the revenue
official shall be subject to applicable administrative sanctions. (RMO 44-2010)
• Protest to the FAN may be in the form of: (a) Request for Reconsideration; or (b) Request for Reinvestigation. The 60-day period to file supporting
documents applies only to Request for Reinvestigation.
• From Decision of the CTA En Banc, taxpayer may file an MR or Motion for New Trial (A.M. No.05-11-07-CTA, Rule 8, Sec. 1)
• An administrative appeal to the CIR from the Decision of the CIR’s authorized representative on the protest to the FAN may be made.
• A Motion for Reconsideration of the CIR’s denial of the protest or administrative appeal but this will not toll the prescriptive period for appeal to the CTA.

E. REFUND OF TAX ERRONEOUSLY OR ILLEGALLY COLLECTED (SECTION 204/229) – CASE 1

Date of Payment Claim filed with BIR Denial Received Appeal to CTA

30 days
* (NIRC, Sec. 204/229)

2 years
* (NIRC, Sec. 204/229)

F. REFUND OF TAX ERRONEOUSLY OR ILLEGALLY COLLECTED (SECTION 204/229) – CASE 2

Date of Payment Claim filed with BIR Denial Received Appeal to CTA

30 days
2 years * (NIRC, Sec. 204/229)
* (NIRC, Sec. 204/229)
• Administrative claim and judicial claim must be done within the 2 year period.

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G. REFUND OF UNUTILIZED INPUT VAT (SECTION 112, AS AMENDED BY TRAIN; SAN ROQUE)

Close of taxable period Claim filed with BIR Appeal to

when the sales were made CTA

90+30 days
* (NIRC, Sec. 112 (c), as
amended by TRAIN(RA 10963)&
CIR v. San Roque Power Corp.,
GR No. 187485, Feb. 12, 2013)

2 years
* (NIRC, Sec.
112 (a)

• Administrative claim must be filed within the 2 years after close of taxable period.
o Exception: 2-year period must be counted from the fling of VAT return for cases filed between June 8, 2007 and September 12, 2008 (CIR v. San
Roque Power Corp., GR No. 187485, Feb. 12, 2013)

• Judicial claim must follow the 90+30 day mandatory period, i.e., it can only be filed within the 30 day period.
• The 120-day period is amended to 90-day period under RA 10963 (TRAIN), Sec.36, effective 1 January 2018. The 90-day period for the CIR to grant the
refund is reckoned from the date of submission of the official receipts or invoices and other documents in support of the application filed in accordance with
NIRC, Sec. 112 (a) and (b). Failure of the BIR to act on the application within the 90-day period shall be punishable under NIRC, Sec. 269.
• Filing a judicial claim before the 120-day (now 90-day) period expires will make the claim premature, while filing it beyond the 120+30 (now 90+30) day
period will make it late.
o Exception: Under the 120-30 day rule, premature filing of judicial claim made between December 10, 2003 and October 6, 2010 (CIR v. San Roque
Power Corp., GR No. 187485, Feb. 12, 2013)

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H. REFUND OF UNUTILIZED INPUT VAT (SECTION 112, MIRANT AND SAN ROQUE) – JUDICIAL APPEAL FALLS BEYOND THE 2-YEAR PERIOD

Close of taxable period Claim filed with BIR Inaction Appeal to CTA
when the sales were made

120 30 days
days

2 years

I. REFUND OF UNUTILIZED INPUT VAT (SECTION 112, MIRANT AND SAN ROQUE) – JUDICIAL APPEAL FALLS WITHIN THE 2-YEAR PERIOD

Close of taxable period Claim filed with BIR Inaction Appeal to CTA
when the sales were made

120 30 days
days
2 years

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TAXATION LAW

ANNEX B: REMEDIES UNDER THE LGC

A. LOCAL GOVERNMENT REMEDIES

1. Challenging the Constitutionality of Local 2. Protesting an Assessment of Local Tax

Tax Ordinance
Assessment Notice
Date of Effectivity
Protest within 60 days (payment
30 days from effectivity under protest NOT required)

Local Treasurer
(60 days to decide)
DOJ Secretary
(60 days to decide) Appeal within 30 days

Appeal within 30 days

RTC

Petition for review within 30 days

RTC

CTA Division (if

RTC exercised its
original jurisdiction)

CTA En Banc (if

RTC exercised its
appellate
jurisdiction)
Petition for Review on
Certiorari within 15 days

SC

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TAXATION LAW

B. REAL PROPERTY
TAXATION

1. Protest: Assessment of Land Value 2. Protest: Assessment/Collection of RPT

Assessment Notice Date of Payment

from Local Assessor (Payment under
Protest Required)
Protest within 60 days
Protest within 30 days

LBAA
(120 days to decide) Local Treasurer
(60 days to decide)
Appeal within 30 days
Appeal within 60 days

CBAA
LBAA
Petition for review within 30 (120 days to decide)

days
Appeal within 30 days

CTA En Banc
CBAA
Petition for review on certiorari
Petition for review within 30
within 15 days
days

SC
CTA En Banc

Petition for review on certiorari

within 15 days

SC

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C. CTA DIVISION
APPELLATE JURISDICTION GENERAL JURISDICTION
A. GENERAL/CIVIL MATTERS (Technically appellate jurisdiction , but AM 05-11-07 states “ Exclusive original or appellate jurisdiction to review
by appeal….”
(1) Decisions of the Commissioner of Internal Revenue in cases
involving:
- disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or
- other matters arising under the NIRC or other laws administered by
the BIR;
(2) Inaction by the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue taxes, fees
or other charges penalties in relation thereto, or other matters arising
under the National Internal Revenue Code or other laws administered
by the Bureau of Internal Revenue, where the National Internal
Revenue Code or other applicable law provides a specific period for
action:
- In case of disputed assessments, the inaction of the Commissioner
within 180 days under Sec. 228 of the NIRC shall be deemed a denial
for purposes of allowing the taxpayer to appeal his case to the Court
and does not necessarily constitute a formal decision of the
Commissioner of Internal Revenue on the tax case;
- Should the taxpayer opt to await the final decision of the Commissioner
of Internal Revenue on the disputed assessments beyond the one
hundred eighty day-period abovementioned, the taxpayer may appeal
such final decision to the Court under Section 3(a), Rule 8 of these
Rules (PETITION FOR REVIEW); and
- In case of claims for refund for taxes erroneously or illegally collected,
the taxpayer must file a PETITION FOR REVIEW with the Court prior to
the expiration of the two-year period under Section 229 of the NIRC;
(3) Decisions, resolutions or orders of the Regional Trial Court in local
tax cases decided or resolved by them in the exercise of their original
jurisdiction;
(4) Decisions of the Commissioner of Customs in cases involving
liability for custom duties, fees or other money charges, seizure,
detention or release of property affected, fines, forfeitures of other

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penalties in relation thereto, or other matters arising under the Customs

Law or other laws administered by the Bureau of Customs;
(5) Decisions of the Secretary of Finance on customs cases elevated
to him automatically for review from decisions of the Commissioner of
Customs adverse to the Government under Section 2315 of the Tariff
and Customs Code; and
(6) Decisions of the Secretary of Trade and Industry, in the case of
nonagricultural product, commodity or article, and the Secretary of
Agriculture, in the case of agricultural product, commodity or article,
involving dumping and countervailing duties under Section 301 and 302,
respectively, of the Tariff and Customs Code, and safeguard measured
under Republic Act No. 8800, where either party may appeal the
decision to impose or not impose said duties.
B. CRIMINAL OFFENSES
(1) Appeals from judgments of the RTC in their original jurisdiction in (1) Criminal offenses arising from violations of the NIRC, TCC and other laws
the same criminal offenses decided by them administered by the BIR or the Bureau of Customs
If principal tax or fee, exclusive of penalties and charges is less than • If principal tax or fee (exclusive of penalties and charges) is P1M or more.
P1M or where there is no specified amount claimed.
C. TAX COLLECTION CASES
(1) Judgments of the RTC in tax collection cases originally decided by (1) Over tax collection cases involving final and executory assessments for taxes,
them fees, charges, and penalties
If principal amount of taxes and fees, exclusive of penalties and charge • If principal amount of taxes and fees, exclusive of penalties and charges is
is less than P1M. P1M or more.

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BAR OPERATIONS 2020/21 TAXATION LAW

CTA EN BANC: APPELLATE JURISDICTION

Decisions or resolutions on MRs or MNTs of the CTA Decisions, resolutions, or Decisions, resolutions, or orders of Decisions of the CBAA in the
Division in the exercise of its exclusive appellate order on MRs or MNTs in the RTC in the exercise of its exercise of its appellate
jurisdiction the CTA Division in the appellate jurisdiction jurisdiction over cases
exercise of its exclusive involving assessment and
original jurisdiction taxation of real property
originally decided by the
• Cases from administrative agencies – Bureau of • Tax collection cases • Local tax cases provincial or city board of
Internal Revenue, Bureau of Customs, Department • Cases involving • Tax collection cases assessment appeals
of Finance, Department of Trade and Industry, criminal offenses • Criminal offenses arising from
Department of Agriculture arising from violations violations of the NIRC or TCC
• Local taxes cases by the RTC (original jurisdiction) of the NIRC or TCC and administered by the BIR or
(Note: Phil. British Assurance Company v. and other laws BOC
Republic of the Philippines – action to collect on administered by the
bond used to secure the payment of taxes is not a BIR or BOC
tax collection case but a simple case of
enforcement of contractual liability)
• Tax collection cases by the RTC (original
jurisdiction)S
-involving final and executory assessments for
taxes, fees, charges, and penalties, where the
principal amount of taxes and penalties is claimed
is less than P1M
• Criminal offenses arising from violation of the
NIRC or TCC and other laws administered by the
BIR or BOC

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D. THE PROCESS OF APPEAL TO THE CTA

File a Petition for Review (Rule 42) to the CTA Division from:
CIR (1)decision
(1) makes a decision (2) expiration of the 180 days
(2) does not act within 180 30 days from
Note: TP can wait for the decision even after the 180 day period
Cases within the days receipt of
jurisdiction of the decision or
CTA Division inaction
RTC/SOF/STI/SoA/COC File a Petition for Review (Rule 42) to
makes a decision 30 days from the CTA Division
receipt of decision

File a Petition for Review

CTA en banc (Rule 43) to the CTA en
Decision CTA Division File a MR in the CTA Division
banc 15 days from
Decision Division Decision
receipt of decision 15 days from
receipt of decision

Petition for Review (Rule 45) to

15 days from receipt of decision the Supreme Court

File a Motion to Extend Time to

file a Petition for Review with the
15 days SC
from
receipt of
decision
File MR with CTA En Banc
CTA En Banc
(Optional) Decision/Resolution 15 days from receipt of
decision/resolution

CBAA decision/RTC File a Petition for Review

denying TP’s Protest (Rule 43) to the CTA en banc
30 days from receipt of
decision

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E. THE PROCESS OF APPEAL TO THE CTA: CRIMINAL CASES

Filing of Information CTA division (P1M or Issuance of Court makes its

above) or RTC (less than Warrant of decision
P1M) Arrest
(optional)

Within 15 days from receipt

of the copy of the decision

a) RTC original jurisdiction

– file to CTA Division Motion for
within 15 days Reconsideration
Appeal to the proper b) RTC appellate or New Trial with
court jurisdiction – file to CTA Within 15 days from receipt proper court
Within 15 days En Banc within 15 days
from receipt of the of the copy of the decision
copy of the c) CTA division – file to
decision CTA En Banc within 15
days

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Criminal cases decided by RTC in
the exercise of its original jurisdiction
Criminal cases decided by the Court
in Division
Criminal Cases decide by the RTC in
the exercise of its appellate
jurisdiction
F. MODES OF APPEAL: CRIMINAL
Notice of Appeal, Sec. 3(a) and
6, Rule 122 of the ROC
Petition for Review (Rule 43,
ROC)
Petition for Review (Rule 43,
ROC)
TAXATION LAW
Where: CTA Division
Within 15 days from the receipt of a copy of the decision or final order
with the court which rendered the final judgment or order appealed
from
- and by serving a copy upon the adverse party
CTA En Banc
- within 15 days from receipt of a copy of the decision or resolution
appealed from
- may be extended by the Court upon petition
CTA En Banc
- within 15 days from the receipt of a copy of the decision or final order
appealed from
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G. MODES OF APPEAL: CIVIL

WHO MODE
Any party adversely affected by a Petition for Review under Rule 42 (Note: Where: CTA Division
decision, ruling, or inaction of must be preceded by a timely MNT or - within 30 days after the receipt of such decision OR
• CIR (on disputed assessments or MR with the Division) - after the expiration of the period fixed by law for action
claim for refund of internal In case of inaction of CIR on claims of refund of internal revenue
revenue taxes erroneously or taxes erroneously or illegally collected, the taxpayer must file
illegally collected) - within 2 years from the payment or collection of taxes
• COC
• DOF Sec [This can be extended for a period of 15 days, Sec. 1, Rule 42 –
• DTI Sec City of Manila v. Coca-cola Bottlers Philippines]
• DA Sec After this: You can file MR or MNT within 15 days from notice of
• RTC (in the exercise of their denial (with the same court)
original jurisdiction)
If decisions of the Petition for Review under Rule 43 Where: CTA En Banc
- CTA division (with respect to decision on Period to file: 15 days from receipt of a copy of the questioned
MR or MNT) decision/resolution. Extendable by 15 days upon proper motion and
the payment of the full amount of the docket and other lawful fees
and deposit for costs before the expiration of the reglementary
period fixed
If decisions of the Petition for Review under Rule 43 Where: CTA En Banc
- CBAA and Period to File: 30 days from receipt of the copy of the questioned
- The RTC (in its appellate decision or ruling
jurisdiction)

H. CHIEF OFFICIALS OF THE BIR

Commissioner of Internal Revenue

Deputy Commissioner Deputy Commissioner Deputy Commissioner Deputy Commissioner

Operations Legal Information Systems Resource Management

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I. POWERS AND DUTIES OF THE BIR AND THE CIR

POWERS AND DUTIES OF THE BIR POWERS OF THE CIR

1. Assessment and collection 1. To interpret tax laws
2. Enforcement of forfeiture, fine, penalties 2. To decide (assessment/refund) cases
3. Execution of judgment in cases decided in its favor 3. To obtain information summon/examine, take testimony
4. Effecting and administering supervisory and police powers under the 4. To examine returns
Tax Code 5. Make findings based on best evidence obtainable if taxpayer fails to
submit required documents
6. To conduct inventory-taking surveillance, prescribe presumptive gross
sales and receipts
7. To terminate taxable period – when taxpayer is
a. Retiring from business
b. Intending to leave the country
c. Remove property
d. Doing acts to obstruct collection
8. Prescribe real property values – FMV as determined by CIR or as
determined by Provincial and city assessors, whichever is higher
9. Inquire into bank deposits
10. Accredit and register tax agents
11. Prescribe real property values – FMV as determined by CIR or as
determined by Provincial and city assessors, whichever is higher.

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