Taxation

TAXATION
TAX19.M2001-PRITAX
GENERAL PRINCIPLES OF TAXATION
nowledge Engineer / Reviewer: Ernesto P. Moreno, MST, CPA “Home of Topnotch Professionals!”
MARGINAL NOTES
PRITAX.06 DOUBLE TAXATION
6.1. DOUBLE TAXATION

a) Taxing the object or subject within the territorial jurisdiction twice, for the same
period, involving the same kind of tax by the same taxing authority
6.2. Kinds:
a) Direct Double Taxation – this objectionable and prohibited because it violates
the constitutional provision on uniformity and equality
b) Indirect Double Taxation – no constitutional violation. Ex: taxing the same
property by two different taxing authority
6.3. International Double Taxation –a double taxation caused by two different taxing
authorities, one domestic and one foreign
6.4. Remedies to Double Taxation

a) provision for tax exemption
b) allowance for tax credit
c) allowance for principle of reciprocity
d) enter into treaties with and agreement with foreign government
MULTIPLE CHOICE QUESTIONS

1. Countries enter into bilateral tax treaties to and thus to
A. avoid double taxation; discourage the free flow of investments internationally
B. avoid double taxation; encourage the free flow of investments internationally
C. avoid excessive regulatory steps; encourage the free flow of investments
internationally
D. avoid taxation; encourage the free flow of investments internationally
E. none of the given
2. Double taxation in its general sense means taxing the same subject twice during the
same taxing period. In this sense, double taxation
A. Does not violate substantive due process
B. Does not violate the right to equal protection
C. Violates substantive due process
D. Violates the right to equal protection
3. Statement 1 Direct double taxation involves 2 taxes by the same taxing authority.
Statement 2 Indirect double taxation involves 2 taxes by 2 different taxing authority.
A. The first statement is true, but the second statement is false
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TAX19.M2001.PRITAX. Double Taxation
MARGINAL NOTES B. Both statements are true

C. The first statement is false, but the second statement is true
D. Both statements are false
PRITAX.10 ORGANIZATION OF BUREAU OF INTERNAL REVENUE, BUREAU

OF CUSTOMS, LOCAL GOVERNMENT TAX COLLECTING UNITS, BOARD OF
INVESTMENTS, PHILIPPINE ECONOMIC ZONE AUTHORITY
1. Statement 1 The RDO is known as the alter ego of the BIR Commissioner.
Statement 2 The BIR Commissioner is directly under the President’s Office.
A. Both statements are true
B. Only statement 1 is correct but not statement 2
C. Only statement 2 is correct but not statement 1
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TAX “Innovating
Educational
DOUBLE TAXATION Services”
KHEEN V. BATINGAL
REVIEW NOTES
a. Double taxation, concept

Taxing the object or subject within the territorial jurisdiction twice, for the
same period, involving the same kind of tax by the same taxing authority
b. International Juridical Double Taxation

“International judicial double taxation” means the imposition of comparable
taxes in two or more states on the same taxpayer in respect of the same
subject matter and for identical periods.
c. Elements of double taxation

i. Primary: Same object
ii. Secondary:
1. Same type of tax
2. Same purpose of tax
3. Same taxing jurisdiction
4. Same tax period
d. Types of double taxation

i. Direct Double Taxation – this objectionable and prohibited
because it violates the constitutional provision on uniformity and
equality
ii. Indirect Double Taxation – no constitutional violation. Ex.: taxing
the same property by two different taxing authority.
e. Minimization of double taxation

i. provision for tax exemption
ii. allowance for tax credit
iii. allowance for principle of reciprocity
iv. enter into treaties with/and agreement with foreign government
(see topic: Double Taxation Agreements)
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TAX “Innovating
ETHICAL TAX COMPLIANCE AND ADMINISTRATION Educational
Services”
KHEEN V. BATINGAL
REVIEW NOTES
a. Ethical tax compliance

i. Penalized acts against taxpayers
1. Attempt to evade or defeat tax (Sec. 254)
2. Failure to file return, supply correct and accurate
information, pay tax withhold and remit tax and refund
excess taxes withheld on compensation (Sec. 255)
3. Making false entries, records, or reports, or using
falsified or fake accountable forms (Sec. 257)
4. Unlawful pursuit of business (Sec. 258)
5. Illegal collection of foreign payments (Sec. 259)
6. Failure or refusal to issue receipts or sales or
commercial invoices, violations related to the printing of
such receipts or invoices and other violations (Sec. 264)
7. Failure to transmit sales data entered on cash register
machine (CRM)/ point of sales system (POS) machines
to the BIR’s electronic sales reporting system (Sec.
264-A)
8. Purchase, use, possession, sale or offer to sell,
installment, transfer, update, upgrade, keeping or
maintaining of sales suppression devices (Sec. 264-B)
9. Failure to obey summons (Sec. 266)
10. Offenses related to unlawful possession and/or removal
of excisable goods (Secs. 260-263-A, 265-A, 265-B)
11. Offenses relating to stamps (Sec. 265)
12. Misdeclaration or misrepresentation of manufacturers
subject to excise tax (Sec. 268(A), NIRC, as amended)
ii. General provisions on offenses and forfeitures

1. Any person convicted of a crime penalized by the NIRC
shall, in addition to being liable for the payment of the
tax, be subject to the penalties imposed herein:
Provided, That payment of the tax due after
apprehension shall not constitute a valid defense in any
prosecution for violation of any provision of this Code or
in any action for the forfeiture of untaxed articles.

AFAR ETHICAL TAX COMPLIANCE AND ADMINISTRATION. Review notes
2. Any person who willfully aids or abets in the commission
of a crime penalized herein or who causes the
commission of any such offense by another shall be
liable in the same manner as the principal.
3. If the offender is not a citizen of the Philippines, he shall
be deported immediately after serving the sentence
without further proceedings for deportation. If he is a
public officer or employee, the maximum penalty
prescribed for the offense shall be imposed and, in
addition, he shall be dismissed from the public service
and perpetually disqualified from holding any public
office, to vote and to participate in any election. If the
offender is a Certified Public Accountant, his certificate
as a Certified Public Accountant shall, upon conviction,
be automatically revoked or cancelled.
4. In the case of associations, partnerships or
corporations, the penalty shall be imposed on the
partner, president, general manager, branch manager,
treasurer, officer-in-charge, and the employees
responsible for the violation.
5. The fines to be imposed for any violation of the
provisions of this Code shall not be lower than the fines
imposed herein or twice the amount of taxes, interest
and surcharges due from the taxpayer, whichever is
higher. (Sec. 253, NIRC, as amended)
b. Ethical tax administration

i. Violations committed by Government Enforcement Officers
1. Extortion or willful oppression through the use of his
office or willful oppression and harassment of a
taxpayer who refused, declined, turned down or
rejected any of his offers specified in paragraph 4
hereof;
2. Knowingly demanding or receiving any fee, other or
greater sums that are authorized by law or receiving any
fee, compensation or reward, except as by law
prescribed, for the performance of any duty;
3. Willfully neglecting to give receipts, as by law required,
for any sum collected in the performance of duty or
willfully neglecting to perform any other duties enjoined
by law;

4. Offering or undertaking to accomplish, file or submit a
report or assessment on a taxpayer without the
appropriate examination of the books of accounts or tax
liability, or offering or undertaking to submit a report or
assessment less than the amount due the Government
for any consideration or compensation, or conspiring or
colluding with another or others to defraud the revenues
or otherwise violate the provisions of this Code;
5. Neglecting or by design permitting the violation of the
law by any other person;
6. Making or signing any false entry or entries in any book,
or making or signing any false certificate or return;
7. Allowing or conspiring or colluding with another to allow
the unauthorized retrieval, withdrawal or recall of any
return, statement or declaration after the same has
been officially received by the Bureau of Internal
Revenue;
8. Having knowledge or information of any violation of this
Code or of any fraud committed on the revenues
collectible by the Bureau of Internal Revenue, failure to
report such knowledge or information to their superior
officer, or failure to report as otherwise required by law;
9. Without the authority of law, demanding or accepting or
attempting to collect, directly or indirectly, as payment
or otherwise any sum of money or other thing of value
for the compromise, adjustment or settlement of any
charge or complaint for any violation or alleged violation
of this Code; and
10. Deliberate failure to act on the application for refunds
within prescribed period provided under Section 112 of
the NIRC (Refunds or Tax Credits of Input Tax).
ii. Covered violators – every official, agent, or employee of the

Bureau of Internal Revenue or any other agency of the
Government charged with the enforcement of the provisions of
the NIRC

iii. Penalty – upon conviction for each act or omission, be punished
by a fine of not less than Fifty thousand pesos (P50,000) but not
more than One hundred thousand pesos (P100,000) and suffer
imprisonment of not less than ten (10) years but not more than
fifteen (15) years and shall likewise suffer an additional penalty
of perpetual disqualification to hold public office, to vote, and to
participate in any public election (Sec. 269, NIRC, as amended)
iv. Other penalized acts against public officers

1. Unlawful divulgence of trade secrets (Sec. 270)
2. Unlawful interest of revenue law enforcers in business
(Sec. 271)
3. Violation of withholding tax provision (Sec. 272)
4. Failure to issue and execute warrant (Sec. 273)

TAXATION
TAX19.M2001-PRITAX
MARGINAL NOTES
PRITAX.01 GENERAL PRINCIPLES OF TAXATION
1.1. Taxation – is the act of laying a tax, i.e. the process or means by which the
sovereign (state power), through its lawmaking body (legislative process), raises
income to defray the necessary expenses of government (mode of government cost
distribution).
A. As a power – refers to the inherent power of the state to demand enforced

contribution for public purpose to support the government.
B. As a process – the legislative act of laying a tax to raise income for the
government to defray its necessary expenses.
C. As a mode of cost distributions – the mode by which the State allocates its
costs or burden to its subjects who are benefited by its spending.
1.2. Purpose of Taxation

A. Primary – to raise revenue
B. Secondary
i. Regulatory
▪ To regulate the conduct of businesses or professions
▪ To achieve economic and social stability
▪ To protect local industries
ii. Compensatory
▪ Key instrument of social control
▪ Reduces inequities in wealth distributions
▪ Strengthens anemic enterprises
▪ Provides incentives
▪ Uses as implement in the exercise of police power to promote general
welfare
▪ Check inflations
▪ Tools on international bargains
▪ Promotes science and inventions
1.3. Theory of Taxation

A. A system of government is indispensable to every society. Without it, people will
not relish the benefits of a civilized and orderly society. The government cannot
exist without a system of funding. The government’s necessity for funding is
the Theory of Taxation.

TAX19.M2001.General Principles of Taxation - TRAIN
MARGINAL NOTES B. Basis of Taxation

The government provides benefits to the people in the form of public service
and the people provide the funds that finance the government. This mutuality of
support between the people and the government is referred to as the Basis of
Taxation.
C. The Life Blood Theory or Necessity Theory

Taxes are indispensable to the existence of the state. Without taxation the state
cannot raise revenue to support is operations therefore should be collected
without unnecessary hindrance.
Manifestation of the Lifeblood Theory

1. Rule of “No estoppel against the government”;
2. Collection of taxes cannot be enjoined (estopped) by injunction;
3. Taxes could not be the subject of compensation or set-off;
4. Right to select objects (subjects) of taxation;
5. A valid tax may result in the destruction of the taxpayer’s property
D. Benefit Protection Theory (Symbiotic Relationship) – reciprocal duties of

protection and support between the state and its citizens and residents. The
state collects taxes from the subjects of taxation in order that it may be able to
perform the function of the government.
1.4. The Inherent Powers of the State

A. Power of Taxation – the power to take property for the support of the
government and for public purpose
B. Police Power – the power to enact laws to promote the general welfare of the
people. It is wider in application because it is the general power to make laws.
C. Power of Eminent Domain – the power to take private property for public use
upon payment of just compensation
1.5. Nature or Characteristics of the Power of Taxation

A. Inherent in sovereignty
B. Legislative in character (non-delegation rule), except;
I. Delegation to the President
II. Delegation to Local Government Unit
III. Delegation to Administrative agencies
IV. Subject to Constitutional and Inherent Limitations
C. Exemption of government entities, agencies and instrumentalities;
D. International Comity
E. Strongest among the inherent powers of the state
F. Territorial

TAX19.M2001.General Principles of Taxation - TRAIN TAX
1.6. Discretion of the Taxing Power- this extends to: MARGINAL NOTES
A. Amount or rate of the tax
B. Kinds of tax to be collected
C. Apportionment of the tax
D. The person, property and excises to be taxed, provided within it jurisdiction
E. Situs of taxation
F. Method of collection
G. Purposes for its levy, provided for public purpose
1.7. Underlying principles behind the power of taxation

A. Principles of Necessity – the existence of the government is a necessity and it
cannot continue without means to support itself – this is the Theory of Taxation
B. Benefit Received Theory – the government and the people have the reciprocal
and mutual duties of support and protection – this is the Basis of Taxation
1.8. Legal Basis of the Power of Taxation

A. Benefit-received theory
B. The sovereign power of the state over is people and property
C. The presumption of receipts or enjoyment of benefits and protection by the
people
D. To protect new conditions by imposing special duties
E. To uplift social conditions by imposing regulatory taxes or licenses
1.9. Similarities of the Three Powers

A. All three powers are necessary attributes of sovereignty, resting upon necessity
B. all are inherent powers of the State
C. All are legislative in nature
D. They are ways in which the State interferes with private rights and property
E. They exist independently with the Constitution although the condition for their
exercise may be prescribed or limited by the Constitution
F. They all presuppose an equivalent compensation received by the persons
affected by the exercise of the power, whether directly, indirectly or remote.
G. The exercise of these powers by the local government units may be limited by
national legislature
I. *Police power can be used to raise revenue for the government (ex: license
fee)

MARGINAL NOTES
1.10. Point of Differences of the Inherent Powers of the State
Point of Difference Taxation Police Power Eminent Domain

Exercising Government Government Government or private
Authority entities
Necessity of Delegation is not There must be There must be due

Delegation necessary since it delegation before delegation before local
is inherent local governments government or private
could exercise it party may exercise it
Purpose Revenue and Property is taken for Property is taken for

support of the public use public use
government
Persons affected Community or Community or class Operates on the owner

class of of individuals of the property
individuals
Effect of transfer of Money paid as There is no transfer There is transfer of

property rights taxes becomes of title, at most there right to property
part of the public is restraint on the whether it be of
fund injurious use of ownership or lesser
property right
Amount of Unlimited Sufficient to cover No imposition, the

Imposition the costs of owner is paid the fair
regulation market value of his
property
Importance Most important Most superior

of the three
Relationship with Inferior to the Superior to the “Non- Superior and may
the Constitution “Non-Impairment Impairment Clause” override the “Non-
Clause” of the of the Constitution Impairment Clause”
Constitution because the welfare of
the state is superior to
private contracts
Limitation Constitutionally Public interest and Public purpose and just

and inherently the requirement of compensation
restricted due process

MARGINAL NOTES
1.11. Elements of the tax system
A. Tax structure
B. Tax administration
C. Public tax consciousness
1.12. Kinds of Exemptions:

A. Express- granted by the constitution, statute, treaties, ordinance, contracts or
franchise
I. constitutional
II. statutory
III. contractual
B. Implied – exempted by accidental or intentional omission
C. Total-exemption from all taxes (OFWs)
D. Partial –exemption from certain taxes, partially or totally
E.
1.13. Grounds for Exemption
A. It may be based on a contract
B. It may be based on grounds of public policy - ex: granting of exemptions to rural
banks, and sweepstakes or lotto winnings
C. It may be based on some grounds to foster charitable and other benevolent
institutions
D. It may be created under a treaty on grounds of reciprocity
E. It may be created to lessen the rigors of international double or multiple taxation
1.14. Tax Exemptions:

A. is not automatic
B. is non-transferable
C. is revocable by the government (except when granted under a valid contract or
by the Constitution)
D. rule shall be uniform
E. does not contravene the Life Blood Doctrine
F. is always disfavored
G. is allowed only under a clear and unequivocal provision of the law
H. on real property tax will be based on the Doctrine of Usage and not Doctrine of
Ownership, except for real properties owned by the government which is
absolutely exempt from taxation
I. on real property tax cannot be granted by local governments but can condone
real property tax liabilities in special cases
J. on local taxes can be granted by local governments but they cannot condone
existing liabilities on local taxes

MARGINAL NOTES
1.15. Tax Exemption v. Tax Amnesty
Tax Exemption Tax Amnesty

There is no tax liability at all Connotes condonation from
payment of existing tax liability
The grantee need not pay anything The grantee pays a portion
1.16. Objects of Taxation

A. businesses
B. interests
C. transactions
D. rights
E. acts
F. persons
G. properties
H. privileges
1.17. Applications
A. persons – residence of the taxpayer
B. community development tax – residence or domicile of the taxpayer
C. business taxes – where the business was conducted or place where the
transaction took place
D. privilege or occupation tax – where the privilege is exercised
E. real property tax – where the property is located
F. personal property taxes –
G. tangible – where they are physically located
H. intangible – domicile of the owner unless the property has acquired a situs
elsewhere
I. Income – place where the income is earned or residence or citizenship of the
taxpayer
J. Transfer Taxes – residence or citizenship of the taxpayer or location of the
property
K. Franchise Taxes – State that grants the franchise
L. Corporate Taxes – depend on the law of incorporation

1. This is an inherent limitation on the power of taxation.
A. The rule on taxation shall be uniform and equitable
B. The tax laws cannot apply to the property of foreign governments
C. Charitable institutions, churches, personages or convents thereto, mosque and
non-profits cemeteries and all kinds of lands, buildings and improvements
actually, directly and exclusively used for religious or charitable purposes shall
be exempt from taxation
D. No law impairing the obligations of contracts shall be enacted.
MARGINAL NOTES
2. There can be no tax unless there is a law imposing the tax is consistent with the
doctrine or principle of
A. uniformity in taxation
B. due process of law
C. the power of taxation is very broad and the only limitation is the sense of
responsibility of the members of the legislature to their constituents.
D. non delegation of the power to tax
3. As a basic principle of taxation that taxes must be based on the taxpayer’s ability to
pay is called
A. ability to pay theory
B. equality in taxation
C. equity in taxation
D. theoretical justice
4. Statement 1 The power to tax can be delegated to units of local government, but
with limitations as may be imposed by law.
Statement 2 The power to tax cannot be delegated to the executive department of
the National Government
A. Both statements are false

B. Both statements are true
D. The first statement is true, but the second statement is false
5. Statement 1 A person may refuse to pay a tax on the ground that he receives no
personal benefit from it.
Statement 2 A taxpayer has a right to question illegal expenditures of public funds.
6. Tariff may generally be defined as

A. Amounts imposed on goods entering the imposing country
B. List of commodities with corresponding duties collectible therefrom
C. Amounts, imposed on goods passing through the imposing country, but
destined ultimately to another country
D. Amounts which are levied on goods leaving the imposing country
7. An annual tax of P500 was imposed upon all residents of the Philippines, who are
above 21 years of age, with a gross annual income of P250,000, whether or not they
send their children to public schools, for the purpose of raising funds in order to
improve public school buildings.

MARGINAL NOTES
The tax is
A. violation of the equal protection clause of the Constitution
B. for a public purpose
C. contradicts the inherent limitations
D. Confiscatory
8. Choose the correct answer from among the following choices:

I. The power to tax can be delegated to units of local government but with
limitations, as may be provided by law.
II. The power to tax cannot be delegated to the executive department of the
National Government.
A. False, false
B. True, false
C. True, true
D. False, true
9. Statement 1 Symbiotic relation is the reason why the government could impose
taxes on the incomes of resident citizens derived from sources outside the
Philippines
Statement 2 Jurisdiction is the reason why citizens must provide support to the
state so the latter could continue to give protection.
10. Statement 1 One of the essential characteristics of a tax is it is unlimited in amount.

Statement 2 A tax is generally unlimited because it is based on the needs of the
state.
11. One of the characteristics of our internal revenue laws is that they are
A. penal in nature
B. political in nature
C. generally prospective in operation although the tax statute may nevertheless
operate retrospectively provided it is clearly the legislative intent
D. answer not given
12. Which of the following is not for the benefit of the taxpayer?
A. optional standard deduction
B. substantiation rule
C. all events test
D. cohan rule
13. This is a constitutional limitation on the power of taxation MARGINAL NOTES

A. The power of taxation is limited to the territorial jurisdiction of the taxing state
B. No person shall be imprisoned for debt or non-payment of a poll tax
C. Exemption of government instrumentalities and agencies through which the
government exercised sovereign powers from taxation.
D. The power of taxation cannot be delegated
14. A fundamental rule in taxation is that the property of one country may not be taxed
by another country. This is known as
A. international law
B. international inhibition
C. reciprocity
D. international comity
15. The proportional contribution by person’s and property levied by the law-making
body of the State by virtue of its sovereignty for the support of the government and
all public needs is referred to as:
A. Taxes
B. Special assessment
C. License fees
D. Answer not given
16. The power of Mindoro to impose a gross sales tax of 1/2 percent on the gross
freight and fares of the cargo and passengers shipped or transported out from
Mindoro by vessels plying between the city and other ports was held valid.
A. the taxing power of the State cannot be delegated
B. an exception to the principle of non-delegability of the power of taxation
C. local governments units have the power of taxation like the State
D. taxation of the local governments is inherent
17. The police power, the power of taxation and the power of eminent domain are co-
equal and inherent powers of government. May a tax validly imposed in the exercise
of the police power and not of the power of tax?
A. Yes, because taxes may be imposed to regulate
B. Yes, because the police power of the state includes the power to regulate
C. Yes, because the power to tax and police power have some similar objectives
D. Yes, because taxation also involves the power to carry out the legitimate objects
of government
18. When different types of income are subjected to common tax rates, the tax system
is described as
A. gross income system
B. schedular tax system
C. totality tax system
D. segregated tax system

19. Which of the following is not a necessary condition to become a tax haven country?
MARGINAL NOTES
A. freedom of currency movements
B. low taxes
C. a stable government
D. good communication system
E. no national tax treaties
20. Taxation is a necessary burden to preserve the State’s sovereignty, and a means to
give the citizenry an army to resist an aggression, a navy to defend its shores from
invasions, a corps of civil servants to serve, public improvement designed for the
enjoyment of the citizenry and protection which a government is supposed to
provide
A. taxation is unlimited in scope
B. taxation is inherent in sovereignty
C. taxation involves the reciprocal obligation of the State and the citizens
D. taxation emanating from necessity

B. No law impairing the obligations of contracts shall be enacted.
C. The tax laws cannot apply to the property of foreign governments
D. Charitable institutions, churches, personages or convents thereto, mosque and
non-profits cemeteries and all kinds of lands, buildings and improvements
actually, directly and exclusively used for religious or charitable purposes shall
be exempt from taxation
22. Rule in taxation is that the property of a Filipino taxpayer in the US cannot be taxed in
the Philippines is a recognition of the principle of
A. reciprocity
B. territoriality
C. international law
23. Marshall said that the power to tax involves the power to destroy while Holmes
maintains the power to tax is not the power to destroy. Which among the following
statements does not reconcile the two seemingly inconsistent opinions?
A. The imposition of a valid tax could not be judicially restrained merely because it
would prejudice taxpayer’s property
B. An illegal tax could be judicially declared invalid and should not work to
prejudice a taxpayer’s property
C. Marshall’s view refers to a valid tax while Holmes’ view refers to an invalid tax
D. The power to tax could not be the subject of compensation and set-off.
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24. The power to tax is not without limitations. Such limitations may be constitutional
MARGINAL NOTES
(expressly found in the constitution or implied in its provisions) or inherent (restrict
the power although they are not embodied in the constitution). Which of the
following is an inherent limitation?
Exemption of religious, charitable, and educational entities, non-profit cemeteries,

and churches from property taxation.
A. Exemption of religious, charitable, and educational entities, non-profit
cemeteries, and churches from property taxation
B. Exemption from taxation of government entities
C. No imprisonment for non-payment of a poll tax
D. Equal protection of the laws
25. Statement 1 Because of the power of taxation is inherent in state, the inherent
limitations on the power of taxation always applies.
Statement 2 Inherent limitations on the power of taxation must give way to
constitutional limitations
A. The first statement is false, but the second statement is true
B. The first statement is true, but the second statement is false
C. Both statements are false
D. Both statements are true
26. Which of the following is not a condition imposed by the Constitution for the
exercise of the power of eminent domain?
A. The consent of the owner of the private property to sell the same to the
government.
B. The observance of due process in taking of private property.
C. The payment of just compensation.
D. The existence of public use for the taking of a private property.
27. Which theory in taxation states that without taxes, a government would be paralyzed
for lack of power to activate and operate it, resulting in its destruction?
A. Symbiotic theory
B. Sumptuary theory
C. Lifeblood theory
D. Power to destroy theory
28. What is the nature of tax laws?

A. penal
B. criminal
C. not political
D. political
29. Statement 1 A tax that is allowed by law to be passed on by a taxpayer to another is

called an indirect tax

MARGINAL NOTES Statement 2 Business taxes which are not allowed by law to be passed on by sellers
of goods and services to buyers are nonetheless imperceptibly passed on because
they are factored in on the selling price.
B. The first statement is false, but the second statement is true
C. The first statement is true, but the second statement is false
30. Statement 1 A revenue regulation must not be contrary to the provision of the law
that it implements.
Statement 2 A revenue regulation cannot expand the provision of the law that
implements by imposing a penalty when the law that authorizes the revenue
regulation does not impose a penalty
31. Although the power is basically legislative in character, it is not the function of
Congress to
A. Fix with certainty the amount of taxes
B. Collect the tax levied under the law
C. Determine who should be subject to tax
D. Identify who should collect the tax
32. Which among the following concepts of taxation is the basis for the situs of income
taxation?
A. Lifeblood doctrine of taxation
B. Symbiotic relation in taxation
C. Sumptuary purpose of taxation
D. Compensatory purpose of taxation

34. Statement 1 The power of taxation is inherent in sovereignty being essential to the
existence of every government. Hence, even if not mentioned in the Constitution the
state can still exercise the power.
Statement 2 It is essentially a legislative function. Even in the absence of any
constitutional provision, taxation power falls to Congress as part of the general
power of law making.

A. The first statement is true, but the second statement is false MARGINAL NOTES
B. Both statements are false
35. Which of the following statements is correct?

A. Provisions in the Philippine Constitution on taxation are grants of power
B. The power to tax may include the power to destroy
C. Non-payment of tax and debt is a ground of imprisonment
D. Land and buildings being used actually, directly and exclusively for religious and
charitable purposes by churches and charitable institutions are exempt from
income and property taxes.
36. Statement 1 A license fee at an amount that is more than necessary for regulation is
a tax, and hence may be imposed only on a clear authority under the law to impose
the tax.
Statement 2 A tax levied for a special purpose, which is spent for purposes other
than those stated in the law for its use, if involving a huge amount, may tantamount
to the crime of plunder.
37. Taxes are assessed for the purpose of generating revenues to be used for public
needs. Taxation itself is the power by which the State raises revenue to defray the
expenses of the government. A jurist said that a tax is what we pay for civilization
A. taxes are enforced charges and contributions
B. taxes are pecuniary in nature
C. laws are imposed on persons and property within the territorial jurisdiction of s
State
D. Taxes are levied by the legislative branch of the government
E. taxes are assessed according to a reasonable rule of apportionment
I. The power of taxation involves the promulgation of rules
II. The State has the power to impose taxes even without a constitutional grant
III. Taxes are based upon the lifeblood theory
IV. There should be no improper delegation of the power to tax
A. Statements I and II are both manifestations of taxation being legislative in

nature
B. Statements I and IV are both manifestations of taxation being inherent in nature
C. Statements II and III are both manifestations of the inherent nature of taxation
D. Statements II and IV are both manifestations of taxation being legislative in
nature
MARGINAL NOTES
39. No person shall be deprived of life, liberty and property without due process and this
means that:
A. there must be a progressive system of taxation
B. the taxpayer be secured from the abusive exercise of the taxing power of the
State
C. the tax law must be fair and based in one’s ability to pay
D. the tax law is applicable to all persons in the same class
40. The following propositions are erroneous except

A. taxes are always based on the amount received by the taxpayer
B. the power to tax is inherent because it requires a set of rules
C. public purpose includes indirect public advantage
D. taxpayer must receive personal benefit for the payment of tax
41. The main purpose of the foreign tax credit is to

A. avoid withholding taxes
B. avoid international double taxation
C. maximize tax collection on a global basis
D. avoid foreign taxes

DAVAO CITY (Main Office)
3F Gutierrez Bldg., J. P. Laurel Ave.,
Davao City
(082) 2214337 / 0925 5623787 |
www.certscollege.org
certscpareview@gmail.com

(082) 2214337
TAX “Innovating
Educational
IMPACT OF TAXES IN NATION-BUILDING Services”
KHEEN V. BATINGAL
REVIEW NOTES
a. Principal approaches in the distribution of tax burden

i. Benefit Approach – tax payment should be based on benefits
received
ii. Ability to Pay Approach – tax payments should be based relative
to the ability of taxpayers to pay
b. Aspects of the Ability to Pay approach

i. Vertical equity – gross concept
ii. Horizontal equity – net concept
c. Taxation and economic efficiency

i. Income Effect – makes people economically efficient (ex:
transformation)
ii. Substitution Effect – makes people economically inefficient (ex:
indirect taxes)

TAX IMPACT OF TAXES IN NATION-BUILDING
d. Analysis of Philippine revenue collections (2020 Data)
TAX TYPE
Percentage
Taxes
Other Taxes 6%
7%
Excise Taxes
15%
Income Taxes
54%
Value-Added
Tax
18%
e. Analysis of Philippine government spending

f. Impact of changes to taxation laws

TAX “Innovating
LEGISLATION OF TAX LAWS Educational
Services”
KHEEN V. BATINGAL
REVIEW NOTES
a. Types of taxation laws

i. Tax laws – laws that provide for the assessment and collection
of taxes
ii. Tax exemption laws – laws that grant certain immunity from
taxation
b. Sources of taxation law

i. Constitution
ii. Statutes, presidential decrees and batas pambansa
iii. Judicial decisions or case laws
iv. Executive orders
v. Administrative issuances
vi. Local ordinances
vii. Tax treaties and conventions with foreign countries
viii. Revenue regulations
c. Administrative issuances
i. Revenue regulations
ii. Revenue memorandum orders
iii. Revenue memorandum rulings
iv. Revenue memorandum circulars
v. Revenue bulletins
vi. BIR rulings
d. Nature of Philippine tax laws

Philippine tax laws are civil and not political in nature.
e. Construction and interpretation

i. When the language of the law is clear and categorical, there is
no room for interpretation
ii. When laws are vague, the doctrine of strict legal construction is
observed
1. Vague tax laws – construed against the government
and in favor of taxpayers
2. Vague exemption laws – construed against the
taxpayer and in favor of the government

TAXATION
TAX19.M2001-PRITAX
PRITAX.03 LIMITATIONS ON THE POWER OF TAXATION
3.1. LIMITATIONS OF TAXATION POWER
A. Constitutional Limitation
I. observance of due process of law
II. equal protection of the law
III. uniformity in taxation
IV. progressive scheme of taxation
V. non-imprisonment for non-payment debt or poll tax
VI. non-impairment of obligation and contract
VII. free worship rule
VIII. non-appropriation of public funds or property for the benefit of any church,
sect or system of religion
IX. exemption of religious, charitable or educational entities, non-profit
cemeteries, churches and mosque from property taxes.
X. exemption from taxes of the revenues and assets of non-profit, non-stock
educational institutions including grants, endowments, donations or
contributions for educational purposes
XI. concurrence of a majority of all members of Congress for the passage of a
law granting tax exemption
XII. non-diversification of tax collections
XIII. non-delegation of the power of taxation
Exceptions:
I. power to tax was delegated to the President under the Flexibility Clause of
the Tariff and Customs Code
II. power to tax was delegated to the local government units under the Local
Government Code
III. matters involving the expedient and effective administration and
implementations of assessment and collection of taxes or certain aspects
of taxing process that are not legislative in character
IV. non-impairment of the jurisdiction of the Supreme Court to review tax cases
V. appropriations, revenue or tariff bills shall originate exclusively in the House
of Representatives but the Senate may propose or concur with amendments
VI. each local government unit shall exercise the power to create its own
sources of revenue and shall have a just share in the national taxes
X TAX19.M2001.PRITAX. Limitations on the Power of Taxation
B. Inherent Limitation
I. territoriality of taxation
II. subject to international comity or treaty
III. tax exemption of the government
IV. tax is for public purpose
V. non-delegation of the power of taxation
N.B.: The last 2 limitations are also Constitutional limitations

TAX “Innovating
NATURE, SCOPE, CLASSIFICATION, AND ESSENTIAL Educational
CHARACTERISTICS Services”
KHEEN V. BATINGAL
REVIEW NOTES
a. Taxation, definition and purpose

i. Definition of taxation
Taxation – is the act of laying a tax, i.e. the process or means
by which the sovereign (state power), through its lawmaking
body (legislative process), raises income to defray the
necessary expenses of government (mode of government cost
distribution).
1. As a power – refers to the inherent power of the state

to demand enforced contribution for public purpose to
support the government.
2. As a process – the legislative act of laying a tax to raise
income for the government to defray its necessary
expenses.
3. As a mode of cost distribution – the mode by which
the State allocates its costs or burden to its subjects
who are benefited by its spending.
ii. Purpose of taxation

1. Primary – to raise revenue
2. Secondary
a. Special or Regulatory
b. Promotion of General Welfare
c. Reduction of Social Inequity
d. Encourage Economic Growth
e. Protectionism
b. Theories and bases of taxation

i. Lifeblood Theory
Taxes are the lifeblood of the government and so should be
collected without unnecessary hindrance. Without taxes, the
government would be paralyzed for lack of the motive power to
activate and operate it. (Commissioner of Internal Revenue v.
Algue, Inc., G.R. No. L-28896, February 17, 1988)

AFAR NATURE, SCOPE, CLASSIFICATION, AND ESSENTIAL CHARACTERISTICS. Review notes
Manifestation of the Lifeblood Theory
1. Rule of “No estoppel against the government”
2. Collection of taxes cannot be enjoined (estopped) by
injunction
3. Taxes could not be the subject of compensation or set-
off
4. Right to select objects (subjects) of taxation
5. A valid tax may result in the destruction of the
taxpayer’s property
ii. Necessity Theory

The power to tax is an attribute of sovereignty. It is a power
emanating from necessity. It is a necessary burden to preserve
the State’s sovereignty and a means to give the citizenry an
army to resist an aggression, a navy to defend its shores from
invasion, a corps of civil servants to serve, a public improvement
designated for the enjoyment of the citizenry and those which
come within the State’s territory, and facilities and protection
which a government is supposed to provide. (The Philippine
Guaranty Co., Inc. v. Commissioner of Internal Revenue, G.R.
No. L-22074, April 30, 1965)
iii. Benefit Protection Theory

Despite the natural reluctance to surrender part of one’s hard-
earned income to the taxing authorities, every person who is
able must contribute his share in the running of the government.
The government, for its part, is expected to respond in the form
of tangible and intangible benefits intended to improve the lives
of the people and enhance their moral and material values. This
symbiotic relationship is the rationale of taxation and should
dispel the erroneous notion that it is an arbitrary method of
exaction by those in the seat of power. (Commissioner of
Internal Revenue v. Algue, Inc., G.R. No. L-28896, February 17,
1988) Otherwise known as the “Doctrine of Symbiotic
Relationship.”
iv. Favorable Business Climate Theory

Domestic corporations owe their corporate existence and their
privilege to do business to the government. They also benefit
from the efforts of the government to improve the financial
market and to ensure a favorable business climate. It is
therefore fair for the government to require them to make a
reasonable contribution to the public expenses. (Chamber of
Real Estate and Builders’ Associations, Inc. v. Romulo, G.R. No.
160756, March 9, 2010)

c. Inherent powers of the state
i. Power of Taxation – the power to take property for the support
of the government and for public purpose
ii. Police Power – the power to enact laws to promote the general
welfare of the people. It is wider in application because it is the
general power to make laws.
iii. Power of Eminent Domain – the power to take private property
for public use upon payment of just compensation
d. Similarities and distinction of inherent powers of the state
Similarities of the Inherent Powers of the State

i. All three powers are necessary attributes of sovereignty, resting
upon necessity
ii. all are inherent powers of the State
iii. All are legislative in nature
iv. They are ways in which the State interferes with private rights
and property
v. They exist independently with the Constitution although the
condition for their exercise may be prescribed or limited by the
Constitution
vi. They all presuppose an equivalent compensation received by
the persons affected by the exercise of the power, whether
directly, indirectly or remote.
vii. The exercise of these powers by the local government units may
be limited by national legislature
Distinctions of the Inherent Powers of the State

Aspect Taxation Police Power Eminent Domain
Exercising The State and its The State and its The State, its
Authority political political political
subdivisions subdivisions subdivisions, and
(LGUs) may be granted to
public service
companies or
public utilities
Purpose To raise revenue To promote To take private
to defray public welfare property for public
government through use
expenditures regulations
Scope Affects all persons, Affects all Affects only the
property and rights persons, particular property
property, comprehended

privileges, and
even rights
Basis Public necessity Public necessity Public necessity,
and the right of private property is
the state to self- taken for public
protection and use
self-preservation
Amount of No limit as to Limited only to No exaction. It is
exaction amount involved or the cost of the government
the amount of regulation that pays just
imposition compensation to
the owner of the
property.
Benefits derived No special or direct No direct benefits Direct benefit
benefits received but a healthy received is in the
but the enjoyment economic form of just
of the privileges of standard of compensation
living in an society or
organized society “damnum absque
injuria” is attained
Non-impairment Inferior to the Superior to the Superior and may
of contract “Non-Impairment “Non-Impairment override the “Non-
Clause” of the Clause” of the Impairment
Constitution Constitution Clause” because
the welfare of the
state is superior to
private contracts
Limitation Constitutionally Public interest Public purpose
and inherently and the and just
restricted requirement of compensation
due process
Importance Most important Most superior Important
e. Nature of the power of taxation

i. Inherent in sovereignty
ii. Legislative in character (non-delegation rule), except:
1. Delegation to the President
2. Delegation to Local Government Unit
3. Delegation to Administrative agencies
iii. Subject to Constitutional and Inherent Limitations
iv. Exemption of government entities, agencies and
instrumentalities
v. International Comity
vi. Strongest among the inherent powers of the state
vii. Territorial

f. Scope of the power of taxation
i. Comprehensive
ii. Unlimited
iii. Plenary
iv. Supreme
g. Limitations on the power of taxation

i. Inherent limitations
1. Territoriality of taxation
2. Subject to international comity or treaty
3. Tax exemption of the government
4. Tax is for public purpose
5. Non-delegation of the power of taxation
ii. Constitutional limitations

1. Observance of due process of law
2. Equal protection of the law
3. Uniformity in taxation
4. Progressive scheme of taxation
5. Non-imprisonment for non-payment debt or poll tax
6. Non-impairment of obligation and contract
7. Free worship rule
8. Non-appropriation of public funds or property for the
benefit of any church, sect or system of religion
9. Exemption of religious, charitable or educational
entities, non-profit cemeteries, churches and mosque
from property taxes.
10. Exemption from taxes of the revenues and assets of
non-profit, non-stock educational institutions including
grants, endowments, donations or contributions for
educational purposes
11. Concurrence of a majority of all members of Congress
for the passage of a law granting tax exemption
12. Non-diversification of tax collections
13. Power to tax was delegated to the President under the
Flexibility Clause of the Tariff and Customs Code
14. Non-impairment of the jurisdiction of the Supreme Court
to review tax cases
15. Appropriations, revenue or tariff bills shall originate
exclusively in the House of Representatives, but the
Senate may propose or concur with amendments

16. Each local government unit shall exercise the power to
create its own sources of revenue and shall have a just
share in the national taxes
h. Elements of tax
i. Tax must be levied by the taxing power having jurisdiction over
the object of taxation
ii. Tax must not violate constitutional and inherent limitations
iii. Tax must be uniform and equitable
iv. Tax must be for public purpose
v. Tax must be proportional in character
vi. Tax is generally payable in money
i. Stages of taxation
i. Levy or imposition of tax
ii. Assessment and collection of tax
iii. Payment
iv. Refund
j. Tax distinguished from similar items

i. Revenue – all amount collected; tax – specific type of revenue
ii. License fee – exercise of police power; tax – exercise of
taxation power (life-blood doctrine)
iii. Toll – charge for use of property; tax – charge for demand of
sovereignty
iv. Debt – arises from contract; tax – arises from law
v. Special assessment – imposed on land only for land
improvement; tax – imposed upon persons, properties, or
privileges for public purpose
vi. Tariff – specific tax on import or export of goods; tax – broader
term which include tariff
vii. Penalty – charge of violation of rule; tax – charge for support of
government
k. Kinds of taxes
i. As to purpose
1. General, fiscal or revenue tax
2. Special, regulatory or sumptuary tax
ii. As to subject matter
1. Personal, poll or capitation tax
2. Property tax

3. Excise or privilege tax
iii. As to incidence
1. Direct tax
2. Indirect tax
iv. As to amount
1. Specific tax
2. Ad valorem tax
3. Mixed tax
v. As to rate
1. Proportional tax
2. Progressive or graduated tax
3. Regressive tax
vi. As to imposing authority
1. National tax
2. Local tax
l. Classification of internal revenue taxes

i. Tax on income
1. Tax on individual
2. Tax on corporations
3. Estates and trusts
ii. Gratuitous transfer tax
1. Estate tax
2. Donor’s tax
iii. Business transfer tax (consumption tax)
1. Value-added tax
2. Percentage taxes
iv. Excise tax on certain goods
v. Documentary stamp tax
m. Taxpayer classification
i. According to NIRC
1. Income taxpayers
a. Individual taxpayers
i. Residents
1. Resident citizens
2. Resident aliens
ii. Non-residents
1. Nonresident citizens and
OCWs
2. Nonresident aliens-engaged in
trade or business in the
Philippines (ETB)

3. Nonresident aliens-not
engaged in trade or business
in the Philippines (NETB)
b. Corporate taxpayers
i. Domestic corporations
ii. Foreign corporations
1. Resident foreign corporations
2. Nonresident foreign
corporations
c. Estate and trusts
2. Decedent taxpayers and donors
a. Citizens and resident aliens
b. Nonresident aliens
3. Business taxpayers
a. Non-VAT taxpayers
b. VAT taxpayers
4. Exempt taxpayers
ii. For purposes of tax administration
1. Large taxpayers
2. Non-large taxpayers

TAXATION
TAX19.M2001-PRITAX
MARGINAL NOTES


(082) 2214337
TAX “Innovating
ORGANIZATION AND FUNCTIONS OF THE BUREAU OF INTERNAL REVENUE, LOCAL GOVERNMENT TAX
COLLECTIVE UNITS, BOARD OF INVESTMENTS, PHILIPPINE ECONOMIC ZONE AUTHORITY AND THE BASES AND Educational
CONVERSION AND DEVELOPMENT AUTHORITY
Services”
KHEEN V. BATINGAL
REVIEW NOTES
a. Organization and functions of Bureau of Internal Revenue

i. Chief officials of the Bureau of Internal Revenue
1. 1 Commissioner
2. 4 Deputy commissioners, each to be designated to the
following:
a. Operations group
b. Legal enforcement group
c. Information systems group
d. Resource management group
ii. Powers of the Bureau of Internal Revenue

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. (Sec. 2, NIRC, as
amended)
iii. Powers of the Commissioner of Internal Revenue

1. Interpret tax laws and decide tax cases
2. Obtain information, and summon, examine and take
testimony of persons
3. Make assessments and prescribe additional
requirements for tax administration and enforcement:
a. Examination of return and determination of tax
due
b. Failure to submit required returns, statements,
reports and other documents
c. Authority to conduct inventory-taking,
surveillance and to prescribe presumptive
gross sales and receipts
d. Authority to terminate taxable period
e. Authority to prescribe real property taxes
f. Authority to inquire into bank deposit accounts
and other related information held by financial
institutions

COLLECTIVE UNITS, BOARD OF INVESTMENTS, PHILIPPINE ECONOMIC ZONE AUTHORITY AND THE BASES AND
AFAR CONVERSION AND DEVELOPMENT AUTHORITY. Review notes
g. Authority to accredit and register tax agents

h. Authority of the commissioner to prescribe
additional procedural or documentary
requirements
4. Authority to delegate power
5. Duty to ensure the provision and distribution of forms,
receipts, certificates, and appliances, and the
acknowledgment of payment of taxes
b. Organization and functions of Local Government Tax Collecting

Units
i. Organization of Local Government Tax Collecting Units
1. Local sanggunian
a. Provinces – Sangguniang panlalawigan
b. Cities – Sangguniang panlungsod
c. Municipalities – Sangguniang bayan
d. Barangays – Sangguniang barangay
2. Local chief executives
a. Provinces – Governors
b. Cities/municipalities – Mayor
c. Barangay – Punong barangay
3. Local treasurers
ii. Functions of Local Government Tax Collecting Units

1. Local Taxing Authority. – The power to impose a tax,
fee, or charge or to generate revenue under this Code
shall be exercised by the sanggunian of the local
government unit concerned through an appropriate
ordinance. (Sec. 132, LGC)
2. Collection of Local Revenue by Treasurer. – All local
taxes, fees, and charges shall be collected by the
provincial, city, municipal, or barangay treasurer, or
their duly authorized deputies. (Sec. 170, LGC)
c. Organization and functions of Board of Investments

i. Composition of the Board of Investments
1. Chairman of the Board – Secretary of the Department
of Trade and Industry (DTI)
2. 6 Governors:
a. 3 Undersecretaries of Trade and Industry –
chosen by the President

b. 3 Representatives from other government

agencies and the private sector
ii. Functions of the Board of Investments

1. Prepare annual Investment Priorities Plan
2. Promulgate such rules and regulations
3. Process and approve applications for registration with
the Board
4. After due hearing, decide controversies concerning the
implementation of the Omnibus investments code
5. Recommend to the Commissioner of Immigration and
Deportation the entry into the Philippines for
employment of foreign nationals
6. Periodically check and verify the proportion of the
participation of Philippine nationals in a registered
enterprise to ascertain compliance with its qualification
to retain registration
7. Periodically check and verify the compliance by
registered enterprises with the relevant provisions of
the Code
8. After due notice, cancel the registration or suspend the
enjoyment of incentives benefits of any registered
enterprise and/or require refund of incentives enjoyed
by such enterprise
9. Determine the organization structure, appoint,
discipline and remove its personnel
10. Prepare or contract for the preparation of feasibility and
other pre-investment studies for pioneer areas
11. When feasible and considered desirable by the Board,
require registered enterprise to list their shares of stock
in any accredited stock exchange or directly offer a
portion of their capital stock to the public and/or their
employees
12. Formulate and implement rationalization programs for
certain industries whose operation may result in
dislocation, overcrowding or inefficient use of
resources, thus impeding economic growth
13. In appropriate cases, suspend the national requirement
pin cases of ASEAN projects or investments by ASEAN
nationals in preferred projects
14. Extend the period of availment of incentives by any
registered enterprise

15. Regulate the making of investments and the doing of

business within the Philippines by foreigners or
business organizations owned in whole or in part by
foreigners
16. Prepare or contract for the preparation of industry and
sectoral development programs and gather and
compile statistical, technical, marketing, financial and
other data required
17. Within four (4) months after the close of the fiscal year,
submit annual reports to the President
18. Provide, directly or through Philippine Diplomatic
Missions, such information as may be of interest to
prospective foreign investors
19. Collate, analyze and compile pertinent information and
studies concerning areas that have been or may be
declared preferred areas of investments; and
20. Enter into agreements with other agencies of
government for the simplification and facilitation of
systems and procedures involved in the promotion of
investments, operation of registered enterprises and
other activities
d. Organization and functions of Philippine Economic Zone Authority

i. Organization of the Philippine Economic Zone Authority
1. 13 Board of directors
2. Director general with the rank of department
undersecretary
3. 3 Deputy directors general
a. Policy and planning
b. Finance and administration
c. Operations
ii. General powers and functions of the authority

1. To operate, administer, manage and develop the
ECOZONE
2. To register, regulate and supervise the enterprises in
the ECOZONE in an efficient and decentralized manner
3. To coordinate with local government units and exercise
general supervision over the development, plans,
activities and operations of the ECOZONES, industrial
estates, export processing zones, free trade zones, and
the like

4. In coordination with local government units concerned

and appropriate agencies, to construct, acquire, own,
lease, operate and maintain on its own or through
contract, franchise, license, bulk purchase from the
private sector and build-operate-transfer scheme or
joint venture, adequate facilities and infrastructure for
the operation and development of the ECOZONE
5. To create, operate and/or contract to operate such
agencies and functional units or offices of the authority
as it may deem necessary
6. To adopt, alter and use a corporate seal; make
contracts, lease, own or otherwise dispose of personal
or real property; sue and be sued; and otherwise carry
out its duties and functions
7. To coordinate the formulation and preparation of the
development plans of the different entities mentioned
above
8. To coordinate with the National Economic and
Development Authority (NEDA), the Department of
Trade and Industry (DTI), the Department of Science
and Technology (DOST), and the local government
units and appropriate government agencies for policy
and program formulation and implementation; and
9. To monitor and evaluate the development and
requirements of entities and recommend to the local
government units or other appropriate authorities the
location, incentives, basic services, utilities and
infrastructure required or to be made available for said
entities.
e. Organization and functions of Bases Conversion and Development

Authority
i. Composition of the Board of Directors
1. Full-time chairman who shall also be the president of
the Conversion Authority
2. 8 Other members from the private sector, 2 of whom
coming from the labor sector

ii. Functions of the Bases Conversion and Development

Authority
1. Key corporate powers
a. To adopt, prepare and implement a
comprehensive and detailed development plan
for the sound and balanced conversion of the
Clark and Subic military reservations
b. To encourage the active participation of the
private sector
c. To manage and operate through private sector
companies’ developmental projects outside the
jurisdiction of subsidiary companies and
Special Economic Zones
2. Special corporate powers
a. To construct, own, lease, operate and maintain
public utilities as well as infrastructure facilities
b. To reclaim or undertake reclamation projects
as it may deem necessary in areas adjacent or
contiguous to the Conversion Authority’s lands
c. To invest its funds and other assets other than
those of the Special Economic Zones
d. To exercise the right of eminent domain
e. To exercise oversight functions over the
Special Economic Zones as declared under RA
7227

B. The tax laws cannot apply to the property of foreign governments
C. Charitable institutions, churches, personages or convents thereto,
mosque and non-profits cemeteries and all kinds of lands, buildings and
improvements actually, directly and exclusively used for religious or
charitable purposes shall be exempt from taxation
D. No law impairing the obligations of contracts shall be enacted.

2. There can be no tax unless there is a law imposing the tax is consistent with the
doctrine or principle of
B. due process of law
C. the power of taxation is very broad and the only limitation is the sense
of responsibility of the members of the legislature to their constituents.
D. non delegation of the power to tax
3. As a basic principle of taxation that taxes must be based on the taxpayer’s ability
to pay is called
A. ability to pay theory
B. equality in taxation
C. equity in taxation
D. theoretical justice
4. Statement 1 A person may refuse to pay a tax on the ground that he receives
no personal benefit from it.
Statement 2 A taxpayer has a right to question illegal expenditures of public
funds.

6. A suit filed by a taxpayer questioning the constitutional of a law on the theory

that the expenditure of public funds of the government for the purpose of
administering an unconstitutional law constitutes a misapplication of such funds.
A. suit for certiorari and prohibition
B. taxpayer suit
C. constitutionality suit
D. derivative or representative suit

7. John is a law-abiding citizen who pays his real estate taxes promptly. Due to a
series of typhoons and adverse economic conditions, an ordinance is passed by
Quezon City granting a 50% discount for payment of unpaid real estate taxes for
the preceding year and the condonation of all penalties on fines resulting from
the late payment.
Arguing that the ordinance rewards delinquent taxpayers and discriminates

against prompt ones, John demands that he be refunded an amount equivalent
to 1/2 of the real estate taxes he paid. The municipal attorney rendered an
opinion that John cannot be reimbursed because the ordinance did not provide
for such reimbursement. John files suit to declare the ordinance void on the
ground that it is a class legislation.
Will his suit prosper?

A. the suit will not prosper because the ordinance is based on substantial
distinction. Each set of taxes is a class by itself and the law would be
open to attack only if all the taxpayers belonging to one class were not
treated alike
B. the suit will prosper because the ordinance is not based on substantial
distinction
C. the suit will not prosper because taxes are the lifeblood of the
government and should be collected without unnecessary hindrance
D. the suit will prosper because the ordinance is discriminatory in character
8. An annual tax of P500 was imposed upon all residents of the Philippines, who
are above 21 years of age, with a gross annual income of P250,000, whether or
not they send their children to public schools, for the purpose of raising funds in
order to improve public school buildings.
The tax is
D. confiscatory
9. In cases of deductions and exemptions on income tax returns, doubts shall be

resolved
A. strictly against the taxpayer
B. liberally against the government
C. strictly against the government
D. liberally in favor of the taxpayer

I. The power to tax can be delegated to units of local government but with
limitations, as may be provided by law.
II. The power to tax cannot be delegated to the executive department of
the National Government.
A. False, false
B. True, false
C. True, true
D. False, true
11. Statement 1 Symbiotic relation is the reason why the government could
impose taxes on the incomes of resident citizens derived from sources outside
the Philippines
Statement 2 Jurisdiction is the reason why citizens must provide support to
the state so the latter could continue to give protection.
12. Statement 1 One of the essential characteristics of a tax is it is unlimited in

amount.
Statement 2 A tax is generally unlimited because it is based on the needs of
the state.
13. One of the characteristics of our internal revenue laws is that they are
A. penal in nature
B. political in nature
C. generally prospective in operation although the tax statute may
nevertheless operate retrospectively provided it is clearly the legislative
intent
D. answer not given
14. Which of the following is not for the benefit of the taxpayer?
A. optional standard deduction
B. substantiation rule
C. all events test
D. cohan rule

15. Congress passed a law allowing the payment of taxes in kind/services. This
violates the principle of
A. theoretical justice
B. fiscal adequacy
C. economic efficiency
D. administrative feasibility
16. Transfer of the tax burden by one on whom the tax is assessed to another
A. Shifting
B. Tax exemption
C. Capitalization
D. Transformation
I. The levying, imposition and collection of tax are legislative in character
II. The aspects of taxation shared by the legislative and executive branches
of the government
A. False, true
B. False, false
C. True, true
D. True, false
18. This is a constitutional limitation on the power of taxation

A. The power of taxation is limited to the territorial jurisdiction of the taxing
state
B. No person shall be imprisoned for debt or non-payment of a poll tax
C. Exemption of government instrumentalities and agencies through which
the government exercised sovereign powers from taxation.
D. The power of taxation cannot be delegated
19. A fundamental rule in taxation is that the property of one country may not be
taxed by another country. This is known as
A. international law
B. international inhibition
C. reciprocity
20. The proportional contribution by person’s and property levied by the law-making
body of the State by virtue of its sovereignty for the support of the government
and all public needs is referred to as:
A. Taxes
B. Special assessment
C. License fees
D. Answer not given

21. The power of Mindoro to impose a gross sales tax of 1/2 percent on the gross
freight and fares of the cargo and passengers shipped or transported out from
Mindoro by vessels plying between the city and other ports was held valid.
A. the taxing power of the State cannot be delegated
B. an exception to the principle of non-delegability of the power of taxation
C. local governments units have the power of taxation like the State
D. taxation of the local governments is inherent
22. A group of concerned citizens desire to bring suit in order to question the validity
of a tax measure. They seek your advise on who has locus standi to bring such
a suit. You would tell them that one of the following could not bring such a suit.
A. an elected Senator of the Republic
B. any public official
C. any person required to pay the tax subject of the suit
D. a non-governmental organization
24. The police power, the power of taxation and the power of eminent domain are
co-equal and inherent powers of government. May a tax validly imposed in the
exercise of the police power and not of the power of tax?
A. Yes, because taxes may be imposed to regulate
B. Yes, because the police power of the state includes the power to
regulate
C. Yes, because the power to tax and police power have some similar
objectives
D. Yes, because taxation also involves the power to carry out the legitimate
objects of government
25. Naga Municipality has an ordinance which requires that all stores, restaurants,
and other establishments selling liquor should pay a fixed annual fee of P20,000.
Subsequently, the municipal board proposed an ordinance imposing a sales tax
equivalent to 5% of the amount paid for the purchase or consumption of liquor in
stores, restaurants, and other establishments. The municipal mayor refused to
sign the ordinance on the ground that it would constitute double taxation.
Is the refusal of the mayor justified?

A. No. The refusal of the mayor is unjustified because double taxation is

allowed in our jurisdiction
B. No. The refusal of the mayor is not justified because double taxation will
generate more revenues.
C. No. The refusal of the mayor is unjustified because it is not within his
power.
D. No. The refusal of the mayor is not justified because the impositions are
of different nature and character.
26. When different types of income are subjected to common tax rates, the tax
system is described as
A. gross income system
B. schedular tax system
C. totality tax system
D. segregated tax system
27. May the courts enjoin the collection of revenue taxes?

A. no, because taxes are the lifeblood of the government
B. no, except if the taxpayer is financially incapable
C. no, except if the collection will jeopardize the interest of the taxpayer
D. no, because taxes are needed to carry out the legitimate objects of the
government
28. Which of the following is not a necessary condition to become a tax haven
country?
A. freedom of currency movements
B. low taxes
C. a stable government
D. good communication system
E. no national tax treaties
29. That there should be no improper delegation of the legislative authority to tax is
A. an inherent limitation on the power to tax
B. both a constitutional and inherent limitation on the power of taxation
C. a principle of a sound tax system
D. a constitutional limitation on the power of taxation
30. The following are basic principles of a sound tax system

A. fiscal adequacy, economic feasibility and theoretical justice
B. fiscal deficit, administrative feasibility, and ability to pay
C. fiscal adequacy, ability to pay, symbiotic relationship
D. fiscal adequacy, administrative feasibility and theoretical justice


B. No law impairing the obligations of contracts shall be enacted.
C. The tax laws cannot apply to the property of foreign governments
D. Charitable institutions, churches, personages or convents thereto,
mosque and non-profits cemeteries and all kinds of lands, buildings and
improvements actually, directly and exclusively used for religious or
32. The City of Manila, claiming that it can impose taxes under the Local
Government Code, imposed a tax on banks. The banks within the City of Manila
objected for the various reasons given below.
Which would justify the objection the banks?
B. the rule on double taxation
C. the power of taxation cannot be delegated
D. none of the above
33. Goods in a foreign trade zone have not entered the country so far as the following
factors are concerned
A. the allocation of quotas
B. other import restrictions
C. import documentation
D. collection of custom duties
E. all of the above

A. avoid double taxation; discourage the free flow of investments
internationally
B. avoid double taxation; encourage the free flow of investments
internationally
C. avoid excessive regulatory steps; encourage the free flow of
investments internationally
E. none of the above
35. Settled is the rule that in tax matters, the government is not estopped by the
errors or mistakes committed by its agents or officers. This should be construed
to mean that
A. the power to tax is plenary and comprehensive
B. the power to tax is supreme and unlimited
C. the state may still collect prescribed taxes
D. BIR can still present evidence to prove assessment

36. Marshall said that the power to tax involves the power to destroy while Holmes
maintains the power to tax is not the power to destroy. Which among the
following statements does not reconcile the two seemingly inconsistent
opinions?
A. The imposition of a valid tax could not be judicially restrained merely
because it would prejudice taxpayer’s property
B. An illegal tax could be judicially declared invalid and should not work to
prejudice a taxpayer’s property
C. Marshall’s view refers to a valid tax while Holmes’ view refers to an
invalid tax
D. The power to tax could not be the subject of compensation and set-off.
37. The power to tax is not without limitations. Such limitations may be constitutional
(expressly found in the constitution or implied in its provisions) or inherent
(restrict the power although they are not embodied in the constitution). Which of
the following is an inherent limitation?
A. Exemption of religious, charitable, and educational entities, non-profit
cemeteries, and churches from property taxation.
B. Exemption of religious, charitable, and educational entities, non-profit
cemeteries, and churches from property taxation
C. Exemption from taxation of government entities
D. No imprisonment for non-payment of a poll tax
E. Equal protection of the laws
38. Statement 1 Because of the power of taxation is inherent in state, the

inherent limitations on the power of taxation always applies.
Statement 2 Inherent limitations on the power of taxation must give way to
constitutional limitations
A. The first statement is false, but the second statement is true
B. The first statement is true, but the second statement is false
C. Both statements are false
39. Which of the following is not a condition imposed by the Constitution for the
exercise of the power of eminent domain?
A. The consent of the owner of the private property to sell the same to the
government.
B. The observance of due process in taking of private property.
C. The payment of just compensation.
D. The existence of public use for the taking of a private property.

40. Which theory in taxation states that without taxes, a government would be
paralyzed for lack of power to activate and operate it, resulting in its destruction?
A. Symbiotic theory
B. Sumptuary theory
C. Lifeblood theory
D. Power to destroy theory
41. What is the nature of tax laws?

A. penal
B. criminal
C. not political
D. political
42. Which of the following is not considered as a step in making a revenue regulation
effective?
A. recommendation by the Commissioner of Internal Revenue to the
Secretary of Finance
B. publication in a newspaper of general circulation
C. legislation by Congress
D. approval by the Secretary of Finance
43. Double taxation in its general sense means taxing the same subject twice during
the same taxing period. In this sense, double taxation
44. Statement 1 A tax that is allowed by law to be passed on by a taxpayer to

another is called an indirect tax
Statement 2 Business taxes which are not allowed by law to be passed on
by sellers of goods and services to buyers are nonetheless imperceptibly passed
on because they are factored in on the selling price.
45. Statement 1 A revenue regulation must not be contrary to the provision of the
law that it implements.
Statement 2 A revenue regulation cannot expand the provision of the law that
implements by imposing a penalty when the law that authorizes the revenue
regulation does not impose a penalty


46. Although the power is basically legislative in character, it is not the function of
Congress to
A. Fix with certainty the amount of taxes
B. Collect the tax levied under the law
C. Determine who should be subject to tax
D. Identify who should collect the tax
47. Which among the following concepts of taxation is the basis for the situs of
income taxation?
A. Lifeblood doctrine of taxation
B. Symbiotic relation in taxation
C. Sumptuary purpose of taxation
D. Compensatory purpose of taxation
48. Statement 1 The power of taxation is inherent in sovereignty being essential

to the existence of every government. Hence, even if not mentioned in the
Constitution the state can still exercise the power.
Statement 2 It is essentially a legislative function. Even in the absence of any
constitutional provision, taxation power falls to Congress as part of the general
power of law making.

A. Provisions in the Philippine Constitution on taxation are grants of power
B. The power to tax may include the power to destroy
C. Non-payment of tax and debt is a ground of imprisonment
D. Land and buildings being used actually, directly and exclusively for
religious and charitable purposes by churches and charitable institutions
are exempt from income and property taxes.

50. Statement 1 Direct double taxation involves 2 taxes by the same taxing
authority.
Statement 2 Indirect double taxation involves 2 taxes by 2 different taxing
authority.
51. A person may be imprisoned for

A. Non-payment of a poll tax
B. Non-payment of his income tax
C. failure to pay his community tax
D. failure to pay a debt
52. Statement 1 A license fee at an amount that is more than necessary for
regulation is a tax, and hence may be imposed only on a clear authority under
the law to impose the tax.
Statement 2 A tax levied for a special purpose, which is spent for purposes
other than those stated in the law for its use, if involving a huge amount, may
tantamount to the crime of plunder.
53. Taxes are assessed for the purpose of generating revenues to be used for public
needs. Taxation itself is the power by which the State raises revenue to defray
the expenses of the government. A jurist said that a tax is what we pay for
civilization
A. taxes are enforced charges and contributions
B. taxes are pecuniary in nature
C. laws are imposed on persons and property within the territorial
jurisdiction of s State
D. Taxes are levied by the legislative branch of the government
E. taxes are assessed according to a reasonable rule of apportionment
54. As regards taxable year, one of the following statements is not correct
A. The taxable year of a domestic corporation maybe fiscal or calendar
year.
B. The taxable year is the accounting period
C. The taxable year maybe less than 12 months
D. The taxable year of a sole proprietorship business maybe fiscal or
calendar year

I. The power of taxation involves the promulgation of rules
II. The State has the power to impose taxes even without a constitutional
grant
IV. There should be no improper delegation of the power to tax
A. Statements I and II are both manifestations of taxation being legislative

in nature
B. Statements I and IV are both manifestations of taxation being inherent
in nature
C. Statements II and III are both manifestations of the inherent nature of
taxation
D. Statements II and IV are both manifestations of taxation being legislative
in nature
56. No person shall be deprived of life, liberty and property without due process and
this means that:
A. there must be a progressive system of taxation
B. the taxpayer be secured from the abusive exercise of the taxing power
of the State
C. the tax law must be fair and based in one’s ability to pay
D. the tax law is applicable to all persons in the same class
57. The Constitution does not prohibit indirect taxes. What the Constitution provides
is that Congress shall evolve a progressive system of taxation. Resort to indirect
taxes should be minimized but not avoided because it is difficult, if not
impossible, to avoid them
A. indirect taxes do not violate due process
B. regressive taxes is in accordance with theoretical justice or ability to pay
C. regressive taxes do not violate Sec 28 (1), Art VI of the Constitution
D. indirect taxes should be shifted without violating public purpose
58. The following propositions are erroneous except

A. taxes are always based on the amount received by the taxpayer
B. the power to tax is inherent because it requires a set of rules
C. public purpose includes indirect public advantage
D. taxpayer must receive personal benefit for the payment of tax
59. The main purpose of the foreign tax credit is to

A. avoid withholding taxes
B. avoid international double taxation
C. maximize tax collection on a global basis
D. avoid foreign taxes

60. Which of the following statement is wrong? A revenue bill

A. Maybe recommended by the President to Congress
B. May have a House version and a senate version approved separately
and then consolidated with both houses approving the consolidated
version.
C. May originate from the Senate and on which same bill the House of
Representatives may propose amendments.
D. Must originate from the House of Representative and on which same bill
the Senate may propose amendments.

TAXATION
TAX19.M2001-PRITAX
MARGINAL NOTES
PRITAX.02 PRINCIPLES OF SOUND TAX SYSTEM
2.1. Phases of Stages of Taxation (these all comprise the taxation system )
A. Levy or Imposition
B. Assessment of tax
C. Payment of the tax
2.2. Principles of a sound tax system. Non-observance of the principles does not
necessarily render a tax levy unconstitutional.
A. Fiscal Adequacy – sources of revenue should be sufficient to meet the demand
for public expenditure
B. Administrative Feasibility- tax laws must be capable of convenient, just and
effective administration
C. Theoretical Justice- tax must be imposed with equity and certainty and must
consider the taxpayers ability to pay and benefits received
2.3. Principal Approaches in the distribution of tax burden

A. Benefit Approach – tax payment should be based on benefits received
B. Ability to Pay Approach – tax payments should be based relative to the ability of
taxpayers to pay
2.4. Taxation and Economic Efficiency

A. Income Effect – makes people economically efficient (ex: transformation)
B. Substitution Effect – makes people economically inefficient (ex: indirect taxes)
2.5. Fundamental Doctrine in Taxation

A. No court may enjoin the collection of taxes
B. Claim for exemptions shall be interpreted strictly against the taxpayer
C. A law that permit deduction from the tax base is strictly construed against the
taxpayer
D. Tax assessment are presumed to be correct and done in good faith
E. Tax laws are generally prospective in application
F. Tax are not subject to compensation or set-off
G. Refund of taxes do not earn interest because interest do not run against the
government

TAX19.M2001.PRITAX. Principles of Sound Tax System
MARGINAL NOTES MULTIPLE CHOICE QUESTIONS

1. An annual tax of P500 was imposed upon all residents of the Philippines, who are
above 21 years of age, with a gross annual income of P250,000, whether or not they
send their children to public schools, for the purpose of raising funds in order to
improve public school buildings. The tax is
D. Confiscatory
2. In cases of deductions and exemptions on income tax returns, doubts shall be

resolved
A. strictly against the taxpayer
B. liberally against the government
C. strictly against the government
D. liberally in favor of the taxpayer

A. fiscal adequacy, economic feasibility and theoretical justice
B. fiscal deficit, administrative feasibility, and ability to pay
C. fiscal adequacy, ability to pay, symbiotic relationship
4. Settled is the rule that in tax matters, the government is not estopped by the errors
or mistakes committed by its agents or officers. This should be construed to mean
that
A. the power to tax is plenary and comprehensive
B. the power to tax is supreme and unlimited
C. the state may still collect prescribed taxes
D. BIR can still present evidence to prove assessment

A. fiscal adequacy, ability to pay, symbiotic relationship
B. fiscal adequacy, economic feasibility and theoretical justice
C. fiscal deficit, administrative feasibility, and ability to pay
6. The Constitution does not prohibit indirect taxes. What the Constitution provides is
that Congress shall evolve a progressive system of taxation. Resort to indirect taxes
should be minimized but not avoided because it is difficult, if not impossible, to
avoid them
A. indirect taxes do not violate due process
B. regressive taxes is in accordance with theoretical justice or ability to pay
C. regressive taxes do not violate Sec 28 (1), Art VI of the Constitution
D. indirect taxes should be shifted without violating public purpose

TAX “Innovating
PRINCIPLES OF SOUND TAX SYSTEM Educational
Services”
KHEEN V. BATINGAL
REVIEW NOTES
a. Tax system
It refers to the methods or schemes of imposing, assessing, and
collecting taxes, which includes all the tax laws and regulations, means
of their enforcement, and the government offices, bureaus and
withholding agents which are part of the machineries of the government
in tax collection.
b. Elements of the tax system

i. Tax structure
ii. Tax administration
iii. Public tax consciousness
c. Tax collection system

i. Withholding system on income tax
1. Creditable withholding tax
a. Withholding tax on compensation
b. Expanded withholding tax
2. Final withholding tax
ii. Withholding system on business tax – withholding tax on
government payments
iii. Voluntary compliance system – “self-assessment method”
iv. Assessment or enforcement system
d. Principles of a sound tax system

i. Fiscal adequacy – sources of revenue should be sufficient to
meet the demand for public expenditure
ii. Administrative Feasibility – tax laws must be capable of
convenient, just and effective administration
iii. Theoretical Justice – tax must be imposed with equity and
certainty and must consider the taxpayers ability to pay and
benefits received
e. Fundamental doctrine in taxation

i. Marshall Doctrine – “The power to tax involves the power to
destroy.”

AFAR PRINCIPLES OF SOUND TAX SYSTEM. Review notes
ii. Holmes Doctrine – “Taxation power is not the power to destroy
while the court sits.”
iii. Prospectivity of tax laws – Tax laws are generally prospective
in operation, unless specifically provided by law.
iv. Non-compensation or set-off – Taxes are not subject to
automatic set-off or compensation. The taxpayer cannot delay
payment of tax to wait for the resolution of a lawsuit involving
his pending claim against the government. Philex Mining
Corporation vs. CIR, 294 SCRA 687
v. Non-assignment of taxes – Tax obligations cannot be
assigned or transferred to another entity by contract.
vi. Imprescriptibility in taxation – The government’s right to
collect taxes does not prescribe unless the law itself provides
for such prescription.
vii. Doctrine of estoppel – The error of any government employee
does not bind the government.
viii. Judicial non-interference – Generally, courts are not allowed
to issue injunction against the government’s pursuit to collect
tax as this would unnecessarily defer tax collection.
ix. Impact and Incidence of Taxation – “Impact of taxation”
means the point at which a tax is originally imposed. “Incidence
of taxation” means the point at which the tax burden finally rests
or settles down.
x. Strict construction of tax laws – “Taxation is the rule,
exemption is the exception.” (See: Legislation of tax laws)

Principles of Taxation Taxation
Nature, Scope, Classification & Essential Characteristics Definition and Purpose
DEFINITION OF TAXATION
Taxation as a power
Taxation as a process
Taxation as a mode of cost distribution
Taxation is the act of laying a tax, i.e. the process or

means by which the sovereign, through its lawmaking
body, raises income to defray the necessary expenses of
government.
Nature, Scope, Classification & Essential Characteristics Definition and Purpose
PURPOSE OF TAXATION
Primary Secondary
to raise revenue Special or Regulatory
Promotion of General Welfare
Reduction of Social Inequity
Encourage Economic Growth
Protectionism
Nature, Scope, Classification & Essential Characteristics Theories and Bases of Taxation
THEORIES AND BASES OF TAXATION

Lifeblood Theory
Necessity Theory
Benefit Protection Theory
Favorable Business Climate Theory

LIFEBLOOD THEORY
Taxes are the lifeblood of the government and so should
be collected without unnecessary hindrance.
Without taxes, the government would be paralyzed for lack

of the motive power to activate and operate it.
(Commissioner of Internal Revenue v. Algue, Inc., G.R. No. L-28896, February 17,
1988)
MANIFESTATION OF THE LIFEBLOOD THEORY

1. Rule of “No estoppel against the government”
2. Collection of taxes cannot be enjoined (estopped) by
injunction
3. Taxes could not be the subject of compensation or set-
off
4. Right to select objects (subjects) of taxation
5. A valid tax may result in the destruction of the
taxpayer’s property
NECESSITY THEORY
It is a necessary burden to preserve the State’s
sovereignty and a means to give the citizenry an army to
resist an aggression, a navy to defend its shores from
invasion, a corps of civil servants to serve, a public
improvement designated for the enjoyment of the citizenry
and those which come within the State’s territory, and
facilities and protection which a government is supposed
to provide.
(The Philippine Guaranty Co., Inc. v. Commissioner of Internal Revenue, G.R. No. L-
22074, April 30, 1965)
BENEFIT PROTECTION THEORY

Despite the natural reluctance to surrender part of one’s
hard-earned income to the taxing authorities, every person
who is able must contribute his share in the running of the
government.
The government, for its part, is expected to respond in the

form of tangible and intangible benefits intended to
improve the lives of the people and enhance their moral
and material values.
(Commissioner of Internal Revenue v. Algue, Inc., G.R. No. L-28896, February 17,
1988)
FAVORABLE BUSINESS CLIMATE THEORY

Domestic corporations owe their corporate existence and
their privilege to do business to the government.
They also benefit from the efforts of the government to

improve the financial market and to ensure a favorable
business climate.
It is therefore fair for the government to require them to

make a reasonable contribution to the public expenses.
(Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo, G.R. No.
160756, March 9, 2010)
Nature, Scope, Classification & Essential Characteristics Inherent Powers of the State
INHERENT POWERS OF THE STATE
Power of Taxation Police Power Eminent Domain
the power to take the power to enact the power to take

property for the laws to promote the private property for
support of the general welfare of public use upon
government and for the people payment of just
public purpose compensation
Nature, Scope, Classification & Essential Characteristics Similarities and Distinctions
SIMILARITIES OF THE INHERENT POWERS

1. All three powers are necessary attributes of
sovereignty, resting upon necessity
2. All are inherent powers of the State
3. All are legislative in nature
4. They are ways in which the State interferes with private

rights and property
SIMILARITIES OF THE INHERENT POWERS

5. They exist independently with the Constitution
although the condition for their exercise may be
prescribed or limited by the Constitution
6. They all presuppose an equivalent compensation

received by the persons affected by the exercise of the
power, whether directly, indirectly or remote.
7. The exercise of these powers by the local government

units may be limited by national legislature
DISTINCTIONS OF THE INHERENT POWERS

Exercising Authority
Taxation Police Power Eminent Domain
The State and its The State and its The State, its
political political political
subdivisions (LGUs) subdivisions subdivisions, and
may be granted to
public service
companies or public
utilities

Purpose
To raise revenue to To promote public To take private

defray government welfare through property for public
expenditures regulations use

Scope
Affects all persons, Affects all persons, Affects only the

property and rights property, privileges, particular property
and even rights comprehended

Basis
Public necessity Public necessity and Public necessity,

the right of the state private property is
to self-protection taken for public use
and self-
preservation

Amount of Exaction
No limit as to Limited only to the No exaction. It is the

amount involved or cost of regulation government that
the amount of pays just
imposition compensation to the
owner of the
property.

Benefits Derived
No special or direct No direct benefits Direct benefit

benefits received but a healthy received is in the
but the enjoyment of economic standard form of just
the privileges of of society or compensation
living in an “damnum absque
organized society injuria” is attained

Non-Impairment of Contract
Inferior to the “Non- Superior to the Superior and may

Impairment Clause” “Non-Impairment override the “Non-
of the Constitution Clause” of the Impairment Clause”
Constitution because the welfare
of the state is
superior to private
contracts

Limitation
Constitutionally and Public interest and Public purpose and

inherently restricted the requirement of just compensation
due process

Importance
Most important Most superior Important

Nature, Scope, Classification & Essential Characteristics Nature of the Power of Taxation
NATURE OF THE POWER OF TAXATION

1. Inherent in sovereignty
2. Legislative in character
3. Subject to Constitutional and Inherent Limitations
4. Exemptions of government entities, agencies and
instrumentalities
5. International comity
6. Strongest among the inherent powers of the state
7. Territorial
Nature, Scope, Classification & Essential Characteristics Scope of the Power of Taxation
SCOPE OF THE POWER OF TAXATION

Comprehensive
Unlimited
Plenary
Supreme
Nature, Scope, Classification & Essential Characteristics Limitations on the Power of Taxation
LIMITATIONS ON THE POWER OF TAXATION

Inherent Limitations
Constitutional Limitations
INHERENT LIMITATIONS
1. Territoriality of taxation
2. Subject to international comity or treaty
3. Tax exemption of the government
4. Tax is for public purpose
5. Non-delegation of the power of taxation
Exceptions:
a. Delegation to Local Government Units
b. Delegation to the President
c. Delegation to Administrative Agencies
CONSTITUTIONAL LIMITATIONS
Section 1, Article III

No person shall be deprived of life, liberty, or property
without due process of law, nor shall any person be denied
the equal protection of the laws.
Section 28(1), Article VI

The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation.

No person shall be imprisoned for debt or non-payment of
a poll tax.

No law impairing the obligation of contracts shall be
passed.

No law shall be made respecting an establishment of
religion, or prohibiting the free exercise thereof. The free
exercise and enjoyment of religious profession and
worship, without discrimination or preference, shall
forever be allowed. No religious test shall be required for
the exercise of civil or political rights.

No public money or property shall be appropriated,
applied, paid, or employed, directly or indirectly, for the
use, benefit, or support of any sect, church, denomination,
sectarian institution, or system of religion, or of any priest,
preacher, minister, other religious teacher, or dignitary as
such, except when such priest, preacher, minister, or
dignitary is assigned to the armed forces, or to any penal
institution, or government orphanage or leprosarium.
8. Non-appropriation of public funds or property for the
benefit of any church, sect or system of religion

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.
Section 4(3), Article XIV

All revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt from
taxes and duties. Upon the dissolution or cessation of the
corporate existence of such institutions, their assets shall
be disposed of in the manner provided by law.
Proprietary educational institutions, including those

cooperatively owned, may likewise be entitled to such
exemptions, subject to the limitations provided by law,
including restrictions on dividends and provisions for
reinvestment.
10.Exemption from taxes of the revenues and assets of

No law granting any tax exemption shall be passed without
the concurrence of a majority of all the Members of the
Congress.
11.Concurrence of a majority of all members of Congress

All money collected on any tax levied for a special purpose
shall be treated as a special fund and paid out for such
purpose only. If the purpose for which a special fund was
created has been fulfilled or abandoned, the balance, if
any, shall be transferred to the general funds of the
Government.
11.Concurrence of a majority of all members of Congress
12.Non-diversification of tax collections

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.
13.Power to tax was delegated to the President under the
Section 5, Article VIII

The Supreme Court shall have the following powers:
…
2. 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:
…
b. All cases involving the legality of any tax, impost,
assessment, or toll, or any penalty imposed in
relation thereto.
14.Non-impairment of the jurisdiction of the Supreme
Court to review tax cases
Section 24, Article VI

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.
15.Appropriations, revenue or tariff bills shall originate
Section 5, Article X
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.
15.Appropriations, revenue or tariff bills shall originate
16.Each local government unit shall exercise the power to
create its own sources of revenue and shall have a just
share in the national taxes
LIMITATIONS ON THE POWER OF TAXATION

Inherent Limitations
Constitutional Limitations
Nature, Scope, Classification & Essential Characteristics Elements of Tax
ELEMENTS OF TAX
1. Tax must be levied by the taxing power having
jurisdiction over the object of taxation
2. Tax must not violate constitutional and inherent
limitations
3. Tax must be uniform and equitable
4. Tax must be for public purpose
5. Tax must be proportional in character
6. Tax is generally payable in money
Nature, Scope, Classification & Essential Characteristics Stages of Taxation
STAGES OF TAXATION
Levy or imposition
Assessment and Collection
Payment
Refund
Nature, Scope, Classification & Essential Characteristics Tax distinguished from Similar Items
TAX DISTINGUISHED FROM SIMILAR ITEMS
Tax vs. Revenue Tax vs. License Fee
Tax vs. Toll Tax vs. Debt
Tax vs. Special Assessment Tax vs. Tariff
Tax vs. Penalty

Nature, Scope, Classification & Essential Characteristics Kinds of Taxes
KINDS OF TAXES
As to purpose As to subject matter As to incidence
1. General, fiscal or 1. Personal, poll or 1. Direct tax

revenue tax capitation tax 2. Indirect tax
2. Special, 2. Property tax
regulatory or 3. Excise or
sumptuary tax privilege tax
Nature, Scope, Classification & Essential Characteristics Kinds of Taxes
KINDS OF TAXES
As to amount As to rate As to imposing authority
1. Specific tax 1. Proportional tax 1. National tax

2. Ad valorem tax 2. Progressive or 2. Local tax
3. Mixed tax graduated tax
3. Regressive tax
Nature, Scope, Classification & Essential Characteristics Classification of Internal Revenue Taxes
CLASSIFICATION OF INTERNAL REVENUE TAXES

1. Tax on income a. Tax on individual
b. Tax on corporations
c. Estates and trusts
2. Gratuitous transfer tax a. Estate tax

b. Donor’s tax
3. Business transfer tax a. Value-added tax
b. Percentage taxes
4. Excise tax on certain goods
5. Documentary stamp tax
Nature, Scope, Classification & Essential Characteristics Taxpayer Classification
ACCORDING TO NIRC
1. Income taxpayers
i. Individual taxpayers
a. Residents
1) Resident citizens
2) Resident aliens
b. Nonresidents
1) Nonresident citizens and OCWs
2) Nonresident aliens-engaged in trade or
business in the Philippines (ETB)
3) Nonresident aliens-not engaged in trade or
business in the Philippines (NETB)
ACCORDING TO NIRC
1. Income taxpayers
ii. Corporate taxpayers
a. Domestic corporations
b. Foreign corporations
1) Resident foreign corporations
2) Nonresident foreign corporations
iii. Estates and trusts
ACCORDING TO NIRC
2. Decedent taxpayers and donors
i. Citizens and resident aliens
ii. Nonresident aliens
3. Business taxpayers
i. Non-VAT taxpayers
ii. VAT taxpayers
4. Exempt taxpayers
FOR PURPOSES OF TAX ADMINISTRATION

1. Large taxpayers
2. Non-large taxpayers
Principles of Sound Tax System Tax System
TAX SYSTEM
It refers to the methods or schemes of imposing,
assessing, and collecting taxes, which includes all the tax
laws and regulations, means of their enforcement, and the
government offices, bureaus and withholding agents
which are part of the machineries of the government in tax
collection.
Principles of Sound Tax System Elements of the Tax System
ELEMENTS OF THE TAX SYSTEM

Tax Structure
Tax Administration
Public Tax Consciousness

Principles of Sound Tax System Tax Collection System
TAX COLLECTION SYSTEM

1. Withholding system on income tax
a. Creditable withholding tax
i. Withholding tax on compensation
ii. Expanded withholding tax
b. Final withholding tax
2. Withholding system on business tax – withholding tax
on government payments
3. Voluntary compliance system – “self-assessment
method”
4. Assessment or enforcement system
Principles of Sound Tax System Principles of a Sound Tax System
PRINCIPLES OF A SOUND TAX SYSTEM
Administrative
Fiscal Adequacy Theoretical Justice
Feasibility
sources of revenue tax laws must be tax must be

should be sufficient capable of imposed with equity
to meet the demand convenient, just and and certainty and
for public effective must consider the
expenditure administration taxpayers ability to
pay and benefits
received
Principles of Sound Tax System Fundamental Doctrine in Taxation
MARSHALL DOCTRINE
“The power to tax involves the power to destroy.”
HOLMES DOCTRINE
“Taxation power is not the power to destroy while the
court sits.”
PROSPECTIVITY OF TAX LAWS

Tax laws are generally prospective in operation, unless
specifically provided by law.
NON-COMPENSATION OR SET-OFF
Taxes are not subject to automatic set-off or
compensation. The taxpayer cannot delay payment of tax
to wait for the resolution of a lawsuit involving his pending
claim against the government.
(Philex Mining Corporation vs. CIR, 294 SCRA 687)

NON-ASSIGNMENT OF TAXES
Tax obligations cannot be assigned or transferred to
another entity by contract.
IMPRESCRIPTIBILITY IN TAXATION
The government’s right to collect taxes does not prescribe
unless the law itself provides for such prescription.
DOCTRINE OF ESTOPPEL
The error of any government employee does not bind the
government.
JUDICIAL NON-INTERFERENCE
Generally, courts are not allowed to issue injunction
against the government’s pursuit to collect tax as this
would unnecessarily defer tax collection.
IMPACT AND INCIDENCE OF TAXATION

“Impact of taxation” means the point at which a tax is
originally imposed.
“Incidence of taxation” means the point at which the tax

burden finally rests or settles down.
STRICT CONSTRUCTION OF TAX LAWS

“Taxation is the rule, exemption is the exception.”
(See: Legislation of tax laws)

Tax Evasion vs. Tax Avoidance Escapes from Taxation
ESCAPES FROM TAXATION
Not result in loss of revenue Result in loss of revenue

Shifting Tax Evasion
Capitalization Tax Avoidance
Transformation Tax Exemption

Tax Evasion vs. Tax Avoidance Nature of Tax Exemptions
NATURE OF TAX EXEMPTIONS

1. It is not automatic
2. It is non-transferable
3. It is revocable by the government (except when granted
under a valid contract or by the Constitution)
4. Its rule shall be uniform
5. It does not contravene the Life Blood Doctrine
6. It is always disfavored
7. It is allowed only under a clear and unequivocal
provision of the law
Tax Evasion vs. Tax Avoidance Nature of Tax Exemptions
NATURE OF TAX EXEMPTIONS

8. It on real property tax will be based on the Doctrine of
Usage and not Doctrine of Ownership, except for real
properties owned by the government which is
absolutely exempt from taxation
9. It on real property tax cannot be granted by local
governments but can condone real property tax
liabilities in special cases
10.It on local taxes can be granted by local governments
but they cannot condone existing liabilities on local
taxes
Tax Evasion vs. Tax Avoidance Kinds of Exemption
KINDS OF EXEMPTION
Express
Implied
Total
Partial
Tax Evasion vs. Tax Avoidance Grounds for Exemption
GROUNDS FOR EXEMPTION

1. It may be based on a contract
2. It may be based on grounds of public policy - ex:
granting of exemptions to rural banks and cooperatives
3. It may be based on some grounds to foster charitable
and other benevolent institutions
4. It may be created under a treaty on grounds of
reciprocity
5. It may be created to lessen the rigors of international
double or multiple taxation
Tax Evasion vs. Tax Avoidance Tax Exemption and Tax Amnesty
TAX EXEMPTION AND TAX AMNESTY
There is no tax liability at all. Connotes condonation from

payment of existing tax liability
Tax Evasion vs. Tax Avoidance Tax Exemption and Tax Amnesty
TAX EXEMPTION AND TAX AMNESTY
The grantee need not pay The grantee pays a portion

anything
Tax Evasion vs. Tax Avoidance Tax Evasion and Tax Avoidance
TAX EVASION AND TAX AVOIDANCE
Tax Evasion Tax Avoidance
It is a scheme used outside of It is a tax saving device within

those lawful means and when the means sanctioned by law
availed of, it usually subjects
the taxpayer to penalties
It is accomplished by breaking Accomplished by legal

the law procedures and do not violate
the law
It connotes fraud, deceit and No fraud is involved

malice
Tax Evasion vs. Tax Avoidance Tax Amnesty and Tax Condonation
TAX AMNESTY AND TAX CONDONATION
Tax Amnesty Tax Condonation
Covers both civil and criminal Covers only civil liabilities of

liabilities of the taxpayer the taxpayer
Tax Evasion vs. Tax Avoidance Tax Amnesty and Tax Condonation
Operates retrospectively by Applies prospectively to any

forgiving past violations unpaid balance of the tax
Tax Evasion vs. Tax Avoidance Tax Evasion and Tax Condonation
Conditional upon the taxpayer No payment required

paying the government a
portion of the tax
Situs/Place of Taxation Concept
CONCEPT
It is the tax jurisdiction that has the power to levy taxes
upon the tax object. Situs rules serve as frames of
reference in gauging whether the tax object is within or
outside the tax jurisdiction of the taxing authority.
Situs/Place of Taxation Factors that Determine the Situs of Taxation
FACTORS THAT DETERMINE SITUS OF TAXATION

1. nature, kind or classification of the tax
2. sources of income
3. subject matter of the tax
4. place of exercise, business or occupation being taxed
5. citizenship of the taxpayer
6. place where income-producing activity was held or
done
7. residence of the taxpayer
Situs/Place of Taxation Common Situs of Taxation Rules
COMMON SITUS OF TAXATION RULES

Business tax situs the place where the
business is conducted
Income tax situs on services the place where they are
rendered
Income tax situs on sale of the place of sale
goods
Property tax situs location of the property
Personal tax situs place of residence
Double Taxation Concept
CONCEPT
Taxing the object or subject within the territorial
jurisdiction twice, for the same period, involving the same
kind of tax by the same taxing authority.
Double Taxation International Juridical Double Taxation
INTERNATIONAL JURIDICAL DOUBLE TAXATION

The imposition of comparable taxes in two or more states
on the same taxpayer in respect of the same subject
matter and for identical periods.
Double Taxation Elements of Double Taxation
ELEMENTS OF DOUBLE TAXATION
Primary Secondary
Same object Same type of tax
Same purpose of tax
Same taxing jurisdiction
Same tax period

Double Taxation Types of Double Taxation
TYPES OF DOUBLE TAXATION
Direct Double Taxation Indirect Double Taxation
this objectionable and no constitutional violation. Ex.:

prohibited because it violates taxing the same property by
the constitutional provision on two different taxing authority.
uniformity and equality
Double Taxation Minimization of Double Taxation
MINIMIZATION OF DOUBLE TAXATION

1. provision for tax exemption
2. allowance for tax credit
3. allowance for principle of reciprocity
4. enter into treaties with/and agreement with foreign
government

Legislation of Tax Laws Types of Taxation Laws
TYPES OF TAXATION LAWS

Tax Laws
Tax Exemption Laws

Legislation of Tax Laws Sources of Taxation Law
SOURCES OF TAXATION LAW

1. Constitution
2. Statutes, presidential decrees and batas pambansa
3. Judicial decisions or case laws
4. Executive orders
5. Administrative issuances
6. Local ordinances
7. Tax treaties and conventions with foreign countries
8. Revenue regulations
Legislation of Tax Laws Administrative Issurances
ADMINISTRATIVE ISSUANCES
1. Revenue regulations
2. Revenue memorandum orders
3. Revenue memorandum rulings
4. Revenue memorandum circulars
5. Revenue bulletins
6. BIR rulings
Legislation of Tax Laws Nature of Philippine Tax Laws
NATURE OF PHILIPPINE TAX LAWS

Philippine tax laws are
CIVIL in nature
and neither POLITICAL nor PENAL in nature
Legislation of Tax Laws Construction and Interpretation
CONSTRUCTION AND INTERPRETATION

When the language of the law is CLEAR and
CATEGORICAL,
there is no room for interpretation
When laws are vague, the DOCTRINE of STRICT

LEGAL CONSTRUCTION is observed
Legislation of Tax Laws Construction and Interpretation
DOCTRINE OF STRICT LEGAL CONSTRUCTION
Vague Tax Laws Vague Exemption Laws
construed against the construed against the taxpayer

government and in favor of and in favor of the government
taxpayers
Impact of Taxes in Nation-Building Approaches in Distribution of Tax Burden
DISTRIBUTION OF TAX BURDEN

Benefit Approach
Ability to Pay Approach

Impact of Taxes in Nation-Building Aspects of the Ability to Pay Approach
ASPECTS OF ABILITY TO PAY APPROACH

Vertical equity
Horizontal equity
Impact of Taxes in Nation-Building Taxation and Economic Efficiency
TAXATION AND ECONOMIC EFFICIENCY

Income Effect
Substitution Effect
Impact of Taxes in Nation-Building Impact of Taxes in Nation-Building
IMPACT OF TAXES IN NATION-BUILDING

Analysis of Philippine Revenue Collections
Analysis of Philippine Government Spending
Impact of Changes to Taxation Laws

Ethical Tax Compliance and Administration Ethical Tax Compliance
PENALIZED ACTS AGAINST TAXPAYERS

1. Attempt to evade or defeat tax (Sec. 254)
2. Failure to file return, supply correct and accurate

information, pay tax withhold and remit tax and refund
excess taxes withheld on compensation (Sec. 255)
3. Making false entries, records, or reports, or using

falsified or fake accountable forms (Sec. 257)
4. Unlawful pursuit of business (Sec. 258)


5. Illegal collection of foreign payments (Sec. 259)
6. Failure or refusal to issue receipts or sales or

commercial invoices, violations related to the printing
of such receipts or invoices and other violations (Sec.
264)
7. Failure to transmit sales data entered on cash register

machine (CRM)/ point of sales system (POS) machines
to the BIR’s electronic sales reporting system (Sec. 264-
A)

8. Purchase, use, possession, sale or offer to sell,
installment, transfer, update, upgrade, keeping or
maintaining of sales suppression devices (Sec. 264-B)
9. Failure to obey summons (Sec. 266)
10.Offenses related to unlawful possession and/or

removal of excisable goods (Secs. 260-263-A, 265-A, 265-
B)

11.Offenses relating to stamps (Sec. 265)
12.Misdeclaration or misrepresentation of manufacturers

subject to excise tax (Sec. 268(A), NIRC, as amended)
GENERAL PROVISIONS ON OFFENSES AND FORFEITURES

Any person convicted of a crime penalized by the
NIRC shall, in addition to being liable for the payment of
the tax, be subject to the penalties imposed.
Provided, That payment of the tax due after

apprehension shall not constitute a valid defense in any
prosecution for violation of any provision of this Code or in
any action for the forfeiture of untaxed articles.

Any person who willfully aids or abets in the
commission of a crime penalized herein or who causes the
commission of any such offense by another shall be liable
in the same manner as the principal.

If the offender is not a citizen of the Philippines, he
shall be deported immediately after serving the sentence
without further proceedings for deportation.

If the offender is a public officer or employee, the
maximum penalty prescribed for the offense shall be
imposed and, in addition, he shall be dismissed from the
public service and perpetually disqualified from holding
any public office, to vote and to participate in any election.

If the offender is a Certified Public Accountant, his
certificate as a Certified Public Accountant shall, upon
conviction, be automatically revoked or cancelled.

In the case of associations, partnerships or
corporations, the penalty shall be imposed on the partner,
president, general manager, branch manager, treasurer,
officer-in-charge, and the employees responsible for the
violation.

The fines to be imposed for any violation of the
provisions of the NIRC shall not be lower than the fines
imposed herein or twice the amount of taxes, interest and
surcharges due from the taxpayer, whichever is higher.
(Sec. 253, NIRC, as amended)

Ethical Tax Compliance and Administration Ethical Tax Administration
UNLAWFUL ACTS BY PUBLIC OFFICIALS

1. Extortion or willful oppression through the use of his
office or willful oppression and harassment of a
taxpayer who refused, declined, turned down or
rejected any of his offers specified in paragraph 4
hereof;
2. Knowingly demanding or receiving any fee, other or

greater sums that are authorized by law or receiving
any fee, compensation or reward, except as by law
prescribed, for the performance of any duty;

3. Willfully neglecting to give receipts, as by law required,
for any sum collected in the performance of duty or
willfully neglecting to perform any other duties
enjoined by law;

4. Offering or undertaking to accomplish, file or submit a
report or assessment on a taxpayer without the
appropriate examination of the books of accounts or
tax liability, or offering or undertaking to submit a
report or assessment less than the amount due the
Government for any consideration or compensation, or
conspiring or colluding with another or others to
defraud the revenues or otherwise 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 entries in any

book, or making or signing any false certificate or
return;
7. Allowing or conspiring or colluding with another to

allow the unauthorized retrieval, withdrawal or recall of
any return, statement or declaration after the same has
been officially received by the Bureau of Internal
Revenue;

8. Having knowledge or information of any violation of the
NIRC or of any fraud committed on the revenues
collectible by the Bureau of Internal Revenue, failure to
report such knowledge or information to their superior
officer, or failure to report as otherwise required by law;

9. Without the authority of law, demanding or accepting or
attempting to collect, directly or indirectly, as payment
or otherwise any sum of money or other thing of value
for the compromise, adjustment or settlement of any
charge or complaint for any violation or alleged
violation of the NIRC; and
10.Deliberate failure to act on the application for refunds

within prescribed period provided under Section 112 of
the NIRC (Refunds or Tax Credits of Input Tax).
COVERED VIOLATORS
every official, agent, or employee of the Bureau of
Internal Revenue or any other agency of the Government
charged with the enforcement of the provisions of the
NIRC
PENALTY
upon conviction for each act or omission, be
punished by a fine of not less than Fifty thousand pesos
(P50,000) but not more than One hundred thousand pesos
(P100,000) and suffer imprisonment of not less than ten
(10) years but not more than fifteen (15) years and shall
likewise suffer an additional penalty of perpetual
disqualification to hold public office, to vote, and to
participate in any public election

OTHER PENALIZED ACTS

1. Unlawful divulgence of trade secrets (Sec. 270)
2. Unlawful interest of revenue law enforcers in business

(Sec. 271)
3. Violation of withholding tax provision (Sec. 272)
4. Failure to issue and execute warrant (Sec. 273)

Organization and Functions tasked with Taxation Bureau of Internal Revenue
CHIEF OFFICIALS OF THE BIR

1. 1 Commissioner
2. 4 Deputy commissioners, each to be designated to the
following:
a. Operations group
b. Legal enforcement group
c. Information systems group
d. Resource management group
POWERS OF THE BUREAU OF INTERNAL REVENUE

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.

POWERS OF THE COMMISSIONER

1. Interpret tax laws and decide tax cases
2. Obtain information, and summon, examine and take
testimony of persons
3. Make assessments and prescribe additional
requirements for tax administration and enforcement
4. Authority to delegate power
5. Duty to ensure the provision and distribution of forms,
receipts, certificates, and appliances, and the
acknowledgment of payment of taxes
TAX ADMIN & ENFORCEMENT POWER OF CIR

a. Examination of return and determination of tax due
b. Failure to submit required returns, statements, reports

and other documents
c. Authority to conduct inventory-taking, surveillance and

to prescribe presumptive gross sales and receipts
d. Authority to terminate taxable period

TAX ADMIN & ENFORCEMENT POWER OF CIR

e. Authority to prescribe real property taxes
f. Authority to inquire into bank deposit accounts and

other related information held by financial institutions
g. Authority to accredit and register tax agents
h. Authority of the commissioner to prescribe additional

procedural or documentary requirements
Organization and Functions tasked with Taxation Local Government Units
ORGANIZATION OF LOCAL GOV’T UNITS

1. Local sanggunian
a. Provinces – Sangguniang panlalawigan
b. Cities – Sangguniang panlungsod
c. Municipalities – Sangguniang bayan
d. Barangays – Sangguniang barangay
2. Local chief executives
a. Provinces – Governor
b. Cities/municipalities – Mayor
c. Barangays – Punong barangay
3. Local treasurers
LOCAL TAXING AUTHORITY

The power to impose a tax, fee, or charge or to generate
revenue under this Code shall be exercised by the
sanggunian of the local government unit concerned
through an appropriate ordinance.
(Sec. 132, Local Government Code)

COLLECTION OF LOCAL REVENUE BY TREASURER

All local taxes, fees, and charges shall be collected by the
provincial, city, municipal, or barangay treasurer, or their
duly authorized deputies.
(Sec. 170, Local Government Code)

Organization and Functions tasked with Taxation Board of Investments
COMPOSITION OF THE BOARD OF INVESTMENTS

1. Chairman of the Board – Secretary of the Department
of Trade and Industry (DTI)
2. 6 Governors
a. 3 Undersecretaries of Trade and Industry – chosen
by the President
b. 3 Representatives from other government agencies
and the private sector
FUNCTIONS OF THE BOARD OF INVESTMENTS

1. Prepare annual Investment Priorities Plan
2. Promulgate such rules and regulations
3. Process and approve applications for registration with

the Board
4. After due hearing, decide controversies concerning the

implementation of the Omnibus investments code

5. Recommend to the Commissioner of Immigration and
Deportation the entry into the Philippines for
employment of foreign nationals
6. Periodically check and verify the proportion of the

participation of Philippine nationals in a registered
enterprise to ascertain compliance with its qualification
to retain registration

7. Periodically check and verify the compliance by
registered enterprises with the relevant provisions of
the Code
8. After due notice, cancel the registration or suspend the

enjoyment of incentives benefits of any registered
enterprise and/or require refund of incentives enjoyed
by such enterprise
9. Determine the organization structure, appoint,

discipline and remove its personnel

10.Prepare or contract for the preparation of feasibility
and other pre-investment studies for pioneer areas
11.When feasible and considered desirable by the Board,

require registered enterprise to list their shares of
stock in any accredited stock exchange or directly offer
a portion of their capital stock to the public and/or their
employees

12.Formulate and implement rationalization programs for
certain industries whose operation may result in
dislocation, overcrowding or inefficient use of
resources, thus impeding economic growth
13.In appropriate cases, suspend the national requirement

pin cases of ASEAN projects or investments by ASEAN
nationals in preferred projects

14.Extend the period of availment of incentives by any
registered enterprise
15.Regulate the making of investments and the doing of

business within the Philippines by foreigners or
business organizations owned in whole or in part by
foreigners
16.Prepare or contract for the preparation of industry and

sectoral development programs and gather and
compile statistical, technical, marketing, financial and
other data required

17.Within four (4) months after the close of the fiscal year,
submit annual reports to the President
18.Provide, directly or through Philippine Diplomatic

Missions, such information as may be of interest to
prospective foreign investors
19.Collate, analyze and compile pertinent information and

studies concerning areas that have been or may be
declared preferred areas of investments; and

20.Enter into agreements with other agencies of
government for the simplification and facilitation of
systems and procedures involved in the promotion of
investments, operation of registered enterprises and
other activities
Organization and Functions tasked with Taxation Philippine Economic Zone Authority
ORGANIZATION OF THE PEZA

1. 13 Board of Directors
2. Director general with the rank of department
undersecretary
3. 3 Deputy directors general
a. Policy and planning
b. Finance and administration
c. Operations
GENERAL POWERS AND FUNCTIONS OF PEZA

1. To operate, administer, manage and develop the
ECOZONE
2. To register, regulate and supervise the enterprises in

the ECOZONE in an efficient and decentralized manner
3. To coordinate with local government units and exercise

general supervision over the development, plans,
activities and operations of the ECOZONES, industrial
estates, export processing zones, free trade zones, and
the like

4. In coordination with local government units concerned
and appropriate agencies, to construct, acquire, own,
lease, operate and maintain on its own or through
contract, franchise, license, bulk purchase from the
private sector and build-operate-transfer scheme or
joint venture, adequate facilities and infrastructure for
the operation and development of the ECOZONE
5. To create, operate and/or contract to operate such

agencies and functional units or offices of the authority
as it may deem necessary

6. To adopt, alter and use a corporate seal; make
contracts, lease, own or otherwise dispose of personal
or real property; sue and be sued; and otherwise carry
out its duties and functions
7. To coordinate the formulation and preparation of the

development plans of the different entities mentioned
above

8. To coordinate with the National Economic and
Development Authority (NEDA), the Department of
Trade and Industry (DTI), the Department of Science
and Technology (DOST), and the local government
units and appropriate government agencies for policy
and program formulation and implementation; and

9. To monitor and evaluate the development and
requirements of entities and recommend to the local
government units or other appropriate authorities the
location, incentives, basic services, utilities and
infrastructure required or to be made available for said
entities.
Organization and Functions tasked with TaxationBases Conversion and Development Authority
COMPOSITION OF THE BOARD OF DIRECTORS

1. Full-time chairman who shall also be the president of
the Conversion Authority
2. 8 Other members from the private sector, 2 of whom
coming from the labor sector
KEY CORPORATE POWERS

1. To adopt, prepare and implement a comprehensive and
detailed development plan for the sound and balanced
conversion of the Clark and Subic military reservations
2. To encourage the active participation of the private

sector
3. To manage and operate through private sector

companies’ developmental projects outside the
jurisdiction of subsidiary companies and Special
Economic Zones
SPECIAL CORPORATE POWERS

1. To construct, own, lease, operate and maintain public
utilities as well as infrastructure facilities
2. To reclaim or undertake reclamation projects as it may

deem necessary in areas adjacent or contiguous to the
Conversion Authority’s lands
SPECIAL CORPORATE POWERS

3. To invest its funds and other assets other than those of
the Special Economic Zones
4. To exercise the right of eminent domain
5. To exercise oversight functions over the Special

Economic Zones as declared under RA 7227
EXERCISES
This is an inherent limitation on the power of taxation.
a. The rule on taxation shall be uniform and equitable

b. The tax laws cannot apply to the property of foreign
governments
c. Charitable institutions, churches, personages or
convents thereto, mosque and non-profits cemeteries
and all kinds of lands, buildings and improvements
actually, directly and exclusively used for religious or
d. No law impairing the obligations of contracts shall be
enacted.
SUGGESTED ANSWER: B
Statement 1 A person may refuse to pay a tax on the

ground that he receives no personal benefit from it.
Statement 2 A taxpayer has a right to question illegal
expenditures of public funds.
a. Both statements are false

b. Both statements are true
c. The first statement is false, but the second statement
is true
d. The first statement is true, but the second statement is
false
SUGGESTED ANSWER: C
John is a law-abiding citizen who pays his real estate taxes

promptly. Due to a series of typhoons and adverse economic
conditions, an ordinance is passed by Quezon City granting a 50%
discount for payment of unpaid real estate taxes for the preceding
year and the condonation of all penalties on fines resulting from the
late payment.
Arguing that the ordinance rewards delinquent taxpayers and
discriminates against prompt ones, John demands that he be
refunded an amount equivalent to 1/2 of the real estate taxes he
paid. The municipal attorney rendered an opinion that John cannot
be reimbursed because the ordinance did not provide for such
reimbursement. John files suit to declare the ordinance void on the
ground that it is a class legislation.
Will his suit prosper?
a. the suit will not prosper because the ordinance is based

on substantial distinction. Each set of taxes is a class
by itself and the law would be open to attack only if all
the taxpayers belonging to one class were not treated
alike
b. the suit will prosper because the ordinance is not based
on substantial distinction
c. the suit will not prosper because taxes are the lifeblood
of the government and should be collected without
unnecessary hindrance
d. the suit will prosper because the ordinance is
discriminatory in character
SUGGESTED ANSWER: D
Choose the correct answer from among the following

choices:
I. The power to tax can be delegated to units of local
government but with limitations, as may be provided by
law.
II. The power to tax cannot be delegated to the executive
department of the National Government.
a. False, false
b. True, false
c. True, true
d. False, true
SUGGESTED ANSWER: C
One of the characteristics of our internal revenue laws is

that they are
a. penal in nature
b. political in nature
c. generally prospective in operation although the tax
statute may nevertheless operate retrospectively
provided it is clearly the legislative intent
d. answer not given
SUGGESTED ANSWER: C
Transfer of the tax burden by one on whom the tax is

assessed to another
a. Shifting
b. Tax exemption
c. Capitalization
d. Transformation
SUGGESTED ANSWER: A
A fundamental rule in taxation is that the property of one

country may not be taxed by another country. This is
known as
a. international law
b. international inhibition
c. reciprocity
d. international comity
SUGGESTED ANSWER: D
A group of concerned citizens desire to bring suit in order

to question the validity of a tax measure. They seek your
advise on who has locus standi to bring such a suit. You
would tell them that one of the following could not bring
such a suit.
a. an elected Senator of the Republic

b. any public official
c. any person required to pay the tax subject of the suit
d. a non-governmental organization
SUGGESTED ANSWER: D
Naga Municipality has an ordinance which requires that all

stores, restaurants, and other establishments selling
liquor should pay a fixed annual fee of P20,000.
Subsequently, the municipal board proposed an ordinance
imposing a sales tax equivalent to 5% of the amount paid
for the purchase or consumption of liquor in stores,
restaurants, and other establishments. The municipal
mayor refused to sign the ordinance on the ground that it
would constitute double taxation.
Is the refusal of the mayor justified?
a. No. The refusal of the mayor is unjustified because

double taxation is allowed in our jurisdiction
b. No. The refusal of the mayor is not justified because
double taxation will generate more revenues.
c. No. The refusal of the mayor is unjustified because it is
not within his power.
d. No. The refusal of the mayor is not justified because
the impositions are of different nature and character.
SUGGESTED ANSWER: D
Which of the following is not a necessary condition to

become a tax haven country?
a. freedom of currency movements

b. low taxes
c. a stable government
d. good communication system
e. no national tax treaties
SUGGESTED ANSWER: E
This is an inherent limitation on the power of taxation.
a. The rule on taxation shall be uniform and equitable

b. No law impairing the obligations of contracts shall be
enacted.
c. The tax laws cannot apply to the property of foreign
governments
d. Charitable institutions, churches, personages or
convents thereto, mosque and non-profits cemeteries
and all kinds of lands, buildings and improvements
actually, directly and exclusively used for religious or
SUGGESTED ANSWER: C
Countries enter into bilateral tax treaties to and thus to
a. avoid double taxation; discourage the free flow of

b. avoid double taxation; encourage the free flow of
c. avoid excessive regulatory steps; encourage the free
flow of investments internationally
d. avoid taxation; encourage the free flow of investments
internationally
e. none of the above
SUGGESTED ANSWER: B
The power to tax is not without limitations. Such

limitations may be constitutional (expressly found in the
constitution or implied in its provisions) or inherent
(restrict the power although they are not embodied in the
constitution). Which of the following is an inherent
limitation?
a. Exemption of religious, charitable, and educational

entities, non-profit cemeteries, and churches from
property taxation.
b. Exemption of religious, charitable, and educational
entities, non-profit cemeteries, and churches from
property taxation
c. Exemption from taxation of government entities
d. No imprisonment for non-payment of a poll tax
e. Equal protection of the laws
SUGGESTED ANSWER: C
Which theory in taxation states that without taxes, a

government would be paralyzed for lack of power to
activate and operate it, resulting in its destruction?
a. Symbiotic theory
b. Sumptuary theory
c. Lifeblood theory
d. Power to destroy theory
SUGGESTED ANSWER: C
Double taxation in its general sense means taxing the

same subject twice during the same taxing period. In this
sense, double taxation
a. Does not violate substantive due process

b. Does not violate the right to equal protection
c. Violates substantive due process
d. Violates the right to equal protection
SUGGESTED ANSWER: D
Although the power is basically legislative in character, it

is not the function of Congress to
a. Fix with certainty the amount of taxes

b. Collect the tax levied under the law
c. Determine who should be subject to tax
d. Identify who should collect the tax
SUGGESTED ANSWER: B
Which of the following statements is correct?
a. Provisions in the Philippine Constitution on taxation are

grants of power
b. The power to tax may include the power to destroy
c. Non-payment of tax and debt is a ground of
imprisonment
d. Land and buildings being used actually, directly and
exclusively for religious and charitable purposes by
churches and charitable institutions are exempt from
income and property taxes.
SUGGESTED ANSWER: B
Statement 1 A license fee at an amount that is more

than necessary for regulation is a tax, and hence may be
imposed only on a clear authority under the law to impose
the tax.
Statement 2 A tax levied for a special purpose, which
is spent for purposes other than those stated in the law for
its use, if involving a huge amount, may tantamount to the
crime of plunder.
a. The first statement is true, but the second statement is

false
b. Both statements are false
c. The first statement is false, but the second statement
is true
d. Both statements are true
SUGGESTED ANSWER: D
Choose the correct answer from among the following

choices:
I. The power of taxation involves the promulgation of
rules
II. The State has the power to impose taxes even without
a constitutional grant
IV. There should be no improper delegation of the power
to tax
a. Statements I and II are both manifestations of taxation

being legislative in nature
b. Statements I and IV are both manifestations of taxation
being inherent in nature
c. Statements II and III are both manifestations of the
inherent nature of taxation
d. Statements II and IV are both manifestations of
taxation being legislative in nature
SUGGESTED ANSWER: C
The following propositions are erroneous except
a. taxes are always based on the amount received by the

taxpayer
b. the power to tax is inherent because it requires a set of
rules
c. public purpose includes indirect public advantage
d. taxpayer must receive personal benefit for the payment
of tax
SUGGESTED ANSWER: C
TAXATION
TAX19.M2001-PRITAX
MARGINAL NOTES
PRITAX.05 SITUS / PLACE OF TAXATION
5.1. Factors that determine the situs of taxation

a) nature, kind or classification of the tax
b) sources of income
c) subject matter of the tax
d) place of exercise, business or occupation being taxed
e) citizenship of the taxpayer
f) place where income-producing activity was held or done
g) residence of the taxpayer

6.2. Kinds:


internationally
TAX19.M2001.PRITAX. Situs. Place of Taxation
MARGINAL NOTES



(082) 2214337
TAX “Innovating
SITUS/PLACE OF TAXATION Educational
Services”
KHEEN V. BATINGAL
REVIEW NOTES
a. Situs of taxation, concept

It is the tax jurisdiction that has the power to levy taxes upon the tax
object. Situs rules serve as frames of reference in gauging whether the
tax object is within or outside the tax jurisdiction of the taxing authority.
b. Factors that determine the situs of taxation

i. nature, kind or classification of the tax
ii. sources of income
iii. subject matter of the tax
iv. place of exercise, business or occupation being taxed
v. citizenship of the taxpayer
vi. place where income-producing activity was held or done
vii. residence of the taxpayer
c. Common situs of taxation rules

i. Business tax situs – the place where the business is
conducted
ii. Income tax situs on services – the place where they are
rendered
iii. Income tax situs on sale of goods – the place of sale
iv. Property tax situs – location of the property
v. Personal tax situs – place of residence
II. DOUBLE TAXATION
a. Double taxation, concept

Taxing the object or subject within the territorial jurisdiction twice, for the
same period, involving the same kind of tax by the same taxing authority
b. International Juridical Double Taxation

“International judicial double taxation” means the imposition of
comparable taxes in two or more states on the same taxpayer in respect
of the same subject matter and for identical periods.
c. Elements of double taxation

i. Primary: Same object

AFAR SITUS/PLACE OF TAXATION. Review notes
ii. Secondary:
1. Same type of tax
2. Same purpose of tax
3. Same taxing jurisdiction
4. Same tax period
d. Types of double taxation

i. Direct Double Taxation – this objectionable and prohibited
because it violates the constitutional provision on uniformity and
equality
ii. Indirect Double Taxation – no constitutional violation. Ex.:
taxing the same property by two different taxing authority.
e. Minimization of double taxation

i. provision for tax exemption
ii. allowance for tax credit
iii. allowance for principle of reciprocity
iv. enter into treaties with/and agreement with foreign government

TAXATION
TAX19.M2001-PRITAX
MARGINAL NOTES
PRITAX.04 TAX EVASION VS. TAX AVOIDANCE
4.1. Forms of Escape from Taxation

a) Those that will not result in loss of revenue to the government
I. Shifting –the process of transferring the tax burden from the statutory
taxpayer to another without violating the law.
II. Capitalization – the seller is willing to lower the price of the commodity
provided the taxes will be shouldered by the buyers
III. Transformation – the manufacturer absorbs the additional taxes imposed
by the government without passing it to the buyers for fear of lost of his
market. Instead, it increases quantity of production, thereby turning their
units of production at a lower cost resulting to the transformation of the tax
into a gain through the medium of productions.
b) Those that will result to loss of revenue to the government

1. Tax Evasion – tax dodging – resorting to acts and devices that illegally
reduces or totally escape the payment of taxes that are due to the taxpayer.
They are prohibited and are therefore are not subject to penalties.
2. Tax Avoidance –tax minimization scheme – the reduction or totally
escaping payment of taxes through legally permissible means, that are not
prohibited and therefore are not subject to penalties.
3. Tax Exemption- an immunity, privilege or freedom from payment of a
charge or burden to which others are obliged to pay.

TAX19.M2001.PRITAX. Tax Evasion vs. Tax Avoidance
4.2. Distinction between tax evasion and tax avoidance

MARGINAL NOTES
It is a scheme used outside of those It is a tax saving device within the
lawful means and when availed of, it means sanctioned by law
usually subjects the taxpayer to penalties
It is accomplished by breaking the law Accomplished by legal procedures and

do not violate the law
It connotes fraud, deceit and malice No fraud is involve

1. Transfer of the tax burden by one on whom the tax is assessed to another
A. Shifting
B. Tax exemption
C. Capitalization
D. Transformation
A person may be imprisoned for
A. Non-payment of a poll tax
B. Non-payment of his income tax
C. failure to pay his community tax
D. failure to pay a debt
PRITAX.05 SITUS / PLACE OF TAXATION
5.1. Factors that determine the situs of taxation

a) nature, kind or classification of the tax
b) sources of income
c) subject matter of the tax
d) place of exercise, business or occupation being taxed
e) citizenship of the taxpayer
f) place where income-producing activity was held or done
g) residence of the taxpayer

6.2. Kinds:

TAX19.M2001.PRITAX. Tax Evasion vs. Tax Avoidance TAX
MARGINAL NOTES


internationally


TAX19.M2001.PRITAX. Tax Evasion vs. Tax Avoidance
MARGINAL NOTES


(082) 2214337
TAX “Innovating
TAX EVASION VS. TAX AVOIDANCE Educational
Services”
KHEEN V. BATINGAL
REVIEW NOTES
a. Escapes from taxation

i. Those that will not result in loss of revenue to the
government
1. Shifting – the process of transferring the tax burden
from the statutory taxpayer to another without violating
the law.
2. Capitalization – the seller is willing to lower the price of
the commodity provided the taxes will be shouldered by
the buyers
3. Transformation – the manufacturer absorbs the
additional taxes imposed by the government without
passing it to the buyers for fear of lost of his market.
Instead, it increases quantity of production, thereby
turning their units of production at a lower cost resulting
to the transformation of the tax into a gain through the
medium of productions.
ii. Those that will result to loss of revenue to the government

1. Tax Evasion – tax dodging – resorting to acts and
devices that illegally reduces or totally escape the
payment of taxes that are due to the taxpayer. They are
prohibited and are therefore not subject to penalties.
2. Tax Avoidance – tax minimization scheme – the
reduction or totally escaping payment of taxes through
legally permissible means, that are not prohibited and
therefore are not subject to penalties.
3. Tax Exemption – an immunity, privilege or freedom
from payment of a charge or burden to which others are
obliged to pay.
b. Nature of tax exemptions

i. It is not automatic
ii. It is non-transferable
iii. It is revocable by the government (except when granted under
a valid contract or by the Constitution)
iv. Its rule shall be uniform
v. It does not contravene the Life Blood Doctrine

AFAR TAX EVASION VS. TAX AVOIDANCE. Review notes
vi. It is always disfavored
vii. It is allowed only under a clear and unequivocal provision of the
law
viii. It on real property tax will be based on the Doctrine of Usage
and not Doctrine of Ownership, except for real properties owned
by the government which is absolutely exempt from taxation
ix. It on real property tax cannot be granted by local governments
but can condone real property tax liabilities in special cases
x. It on local taxes can be granted by local governments but they
cannot condone existing liabilities on local taxes
c. Kinds of exemptions
i. Express – granted by the constitution, statute, treaties,
ordinance, contracts or franchise
ii. Implied – exempted by accidental or intentional omission
iii. Total – exemption from all taxes (OFWs)
iv. Partial – exemption from certain taxes, partially or totally
d. Grounds for exemption

i. It may be based on a contract
ii. It may be based on grounds of public policy - ex: granting of
exemptions to rural banks and cooperatives
iii. It may be based on some grounds to foster charitable and other
benevolent institutions
iv. It may be created under a treaty on grounds of reciprocity
v. It may be created to lessen the rigors of international double or
multiple taxation
e. Tax exemption and tax amnesty

There is no tax liability at all. Connotes condonation from payment of
existing tax liability
The grantee need not pay anything The grantee pays a portion

AFAR TAX EVASION VS. TAX AVOIDANCE. Review notes
f. Tax evasion and tax avoidance
It is a scheme used outside of those It is a tax saving device within the
lawful means and when availed of, it means sanctioned by law
usually subjects the taxpayer to
penalties
It is accomplished by breaking the law Accomplished by legal procedures and
do not violate the law
It connotes fraud, deceit and malice No fraud is involved
g. Tax amnesty and tax condonation

Covers both civil and criminal liabilities Covers only civil liabilities of the
of the taxpayer taxpayer
Operates retrospectively by forgiving Applies prospectively to any unpaid
past violations balance of the tax
Conditional upon the taxpayer paying No payment required
the government a portion of the tax

TAX “Innovating
RECOVERY OF ERRONEOUSLY PAID TAXES Educational
Services”
KHEEN V. BATINGAL
REVIEW NOTES
i. Prescriptive period
All required taxpayer procedures both for administrative
and judicial remedies must be executed within the TWO-YEAR
prescriptive period.
In any case, no remedies executed will toll/halt the

running of the prescriptive period.
ii. Scope
Applicable not only to taxes paid in error but also those
paid under protest or duress.
An administrative remedy must be instituted first before

seeking judicial remedy, unless the erroneous payment was
discovered when the prescriptive period is about to lapse, in
such case, a judicial remedy may be instituted simultaneously
with the administrative remedy.
iii. Recovery of erroneously paid taxes

1. Claim for Refund or Credit
File a Claim for Refund or Credit before the
appropriate BIR office.
2. If Claim is denied by the representative of the

Commissioner
Within thirty (30) days from receipt of denial, file
a Petition for Reconsideration before the
Commissioner.
3. If adverse decision was ruled by the Commissioner

Within thirty (30) days from receipt of adverse
decision, appeal the decision before the Court of Tax
Appeals (CTA).
Upon CTA’s receipt of appeal by the taxpayer,

the case is raffled to one of its divisions.

AFAR RECOVERY OF ERRONEOUSLY PAID TAXES. Review Notes
The taxpayer is expected to abide by the
judicial process pursuant to the Revised Rules of the
Court of Tax Appeals (A.M. No. 05-11-07-CTA)
4. If no action by BIR (Commissioner or

Representative)
Review by appeal before the Court of Tax
Appeals (CTA) before the expiration of the prescriptive
period.
5. If CTA division ruled against the taxpayer

Within fifteen (15) days, the taxpayer may:
a. File a motion for reconsideration (MR) or new
trial under the same division
b. Appeal to the CTA en banc
6. If CTA en banc ruled against the taxpayer

trial
b. File a petition for review on certiorari to the
Supreme Court
7. If SC ruled against the taxpayer

Within fifteen (15) days, the taxpayer may file a
motion for reconsideration (MR).
After which, the final decision can no longer be

appealed.
iv. Coverage
When an application for a claim for refund or credit not

necessary
A tax return filed showing an overpayment is by itself
considered a claim for refund. Hence, the taxpayer need not file
an application for claim for refund or credit.
When a claim for refund or credit not allowed

- Documentary stamp tax
- Payment on tax assessments that became final and
executory

AFAR RECOVERY OF ERRONEOUSLY PAID TAXES. Review Notes
Period of the 2-Year Prescriptive Period
1. For Income tax, from the date of filing of the Final
Adjusted Return, not from the date of the quarterly
income tax payments
2. For VAT, from the date of filing of the quarterly VAT
return, not from the monthly installments
3. If paid in installment, counted from the last installment
4. For withholding taxes
a. Final withholding tax – from the 25th day after
the close of each calendar quarter
b. Creditable withholding tax – from the last day of
the month following the close of the quarter
during which withholding was made
v. Forfeiture of refund/tax credit
Forfeiture of refund
Refund check or warrant issued by the BIR must be claimed or
encashed within five years from the date said warrant or check
was mailed or delivered; otherwise, the same will be forfeited in
favor of the Government and the amount thereof shall revert to
the general fund.
Forfeiture of credit
A tax credit certificate issued in accordance with the provision
of the NIRC must be utilized within 5 years from the date of
issue. Unless revalidated, a tax credit which remains unutilized
after such period shall be considered invalid and shall not be
allowed as payment for internal revenue tax liabilities of the
taxpayer.

TAX “Innovating
REMEDIES AVAILABLE TO BOTH Educational
Services”
KHEEN V. BATINGAL
REVIEW NOTES
i. Compromise
1. Conditions for Compromise
The CIR may compromise the payment of internal
revenue tax when:
a. A reasonable doubt exist as to the validity of the
claim against the taxpayer exists
b. The financial position of the taxpayer
demonstrates a clear inability to pay the
assessed tax
2. Minimum of compromise settlements

a. 10% pf the basic assessed tax – in cases of
financial incapacity
b. 40% of the basic assessed tax – for other cases
3. Who will approve the offer of compromise by

taxpayers?
a. Commissioner of Internal Revenue (General
rule)
b. National Evaluation Board (NEB)
c. Regional Evaluation Board (REB)
4. Compromise by the National Evaluation Board

(NEB)
The NEB shall approve the compromise offer when:
a. the basic tax involved exceeds P1,000,000 or
b. the settlement offered is less than the
prescribed minimum rates
Composition of the National Evaluation Board

(NEB)
a. The Commissioner of Internal Revenue
b. The four Deputy Commissioners
All the decisions of the NEB, favorable or unfavorable,

shall have the concurrence of the Commissioner.

AFAR REMEDIES AVAILABLE TO BOTH. Review Notes
5. Compromise by the Regional Evaluation Board
(REB)
The REB shall approve the compromise offer for:
a. assessments issued by Regional Offices
involving a basic deficiency tax of P500,000 or
less, or
b. minor criminal violations discovered by
Regional and District Offices
Composition of the Regional Evaluation Board

(REB)
a. Regional Director – as chairman
b. Assistant Regional Director
c. Chief, Legal Division
d. Chief, Assessment Division
e. Chief, Collection Division
f. Revenue District Officer having jurisdiction over
the taxpayer-applicant
6. What may be compromised

a. Delinquent accounts
b. Pending cases under administrative protest
c. Civil tax cases being disputed before the courts
d. Collection cases filed in courts
e. Criminal violations other than:
i. Those already filed in courts
ii. Those involving criminal tax fraud
f. Cases covered by pre-assessment notices
contested by the taxpayer
7. What cannot be compromised

a. Withholding tax cases
b. Criminal tax fraud cases
c. Criminal violations already filed in courts
d. Delinquent accounts with duly approved
schedule of installment payments
e. Cases of reduced assessment agreed upon by
the taxpayer
f. Cases which have become final and executory
after final judgment of a court

ii. Abatement
Authority of the Commissioner to Abate Taxes

The CIR is authorized to abate or cancel a tax liability under the
following conditions:
1. The tax or any portion of it which appears to be unjustly
or excessively assessed
2. The administrative or collection costs involved do not
justify the collection of the amount due
3. The taxpayer is dead, leaving no distrainable or leviable
property
4. The taxpayer is abroad leaving no forwarding address
with no distrainable or leviable property
5. The taxpayer is a corporation who has already
dissolved, and all subscribed shares of stock have been
fully paid
6. The tax case has already prescribed
1. The distinction between actual distraint and constructive distraint is that:

a. Actual distraint may be made on the property of any taxpayer whether
delinquent or not while constructive distraint is made on the property
only of a delinquent taxpayer.
b. In actual distraint, there is a taking of possession, while in constructive
distraint, the taxpayer is merely prohibited from disposing of the
property.
c. Actual distraint is effected by requiring the taxpayer to sign a receipt of
the property or by the revenue officer preparing and leaving a list of the
distrained property or by service of a warrant of distraint or garnishment.
d. Answer not given.
2. Where a return is filed, as a general rule, the prescriptive period for assessment
after the date the return was due or was filed, whichever is later, is within:
a. Three (3) years
b. Five (5) years
c. Seven (7) years
d. Ten (10) years
3. Which statement is correct? In case of an assessment of a tax:
a. A protest should be filed by the taxpayer, otherwise, the assessment
becomes final and cannot be questioned anymore in court.
b. A protest must be filed by the taxpayer anytime before the Bureau of
Internal Revenue collects the tax.

c. The assessment should be made by the Bureau of Internal Revenue
within five years from the date of filing of the return.
d. The assessment shall include only the tax proper.
4. Statement 1: The taxpayer shall respond to a pre-assessment notice, and if he
fails to respond, an assessment shall be issued.
Statement 2: An assessment issued may be questioned administratively with the
Bureau of Internal Revenue
a. True, true
b. False, false
c. True, false
d. False, true
5. Which of the following statements is wrong? An appeal on an assessment may
be made to the Court of Tax Appeals:
a. If the Bureau of Internal Revenue denies the protest in whole or in part
b. If the Bureau of Internal Revenue does not act on the protest within one
hundred eighty (180) days from the taxpayer’s submission of documents
supporting his protest
c. Within thirty (30) days from receipt of the decision of the Bureau of
Internal Revenue on the protest or within thirty (30) days from the lapse
of the one hundred eighty (180) day period (submission of documents
on the protest)
d. When the Bureau of Internal Revenue issues final letter of demand and
final assessment notice in response to the reply of the pre-assessment
notice
6. Which statement is correct? In case of a tax erroneously collected:
a. A case for refund may be filed with the court simultaneously with the
filing of a claim for refund with the Bureau of Internal Revenue
b. A case for refund may be filed with the court even without filing a claim
for refund with the Bureau of Internal Revenue
c. A claim for refund must first be filed with the Bureau of Internal Revenue
and a decision of the Bureau must, under any circumstance, be awaited,
before a case for refund may be filed with the court
d. A claim for refund must first be filed with the Bureau of Internal Revenue
and, in a given situation, a case for refund may be filed with the court
without awaiting the decision of the Bureau
7. When a taxpayer erroneously paid a tax in installments, the prescriptive period
for a claim for refund should be counted:
a. From the date of payment of the first installment
b. From the date of payment of the last installment
c. From the last day required by law for the payment of the tax in one lump
sum
d. From the day the error was discovered

8. Date the national internal revenue tax was paid – April 10, 2020. Claim for refund
was filed with the Bureau of Internal Revenue – March 10, 2022. Date decision
of denial of refund was received – March 21, 2022. Last day to appeal to the
Court of Tax Appeals:
a. April 20, 2022
b. April 10, 2022
c. April 21, 2022
d. April 15, 2022
9. Which of the following is not true?
a. If a taxpayer is acquitted in a criminal violation of the Tax Code, this
acquittal does not exonerate him from his civil liability to pay the taxes
b. A conviction for tax evasion is not a bar for collection of unpaid taxes
c. A tax assessment is necessary to a criminal prosecution for willful
attempt to defeat and evade payment of taxes
d. Criminal proceedings under the Tax Code is now a mode of collection
of internal revenue taxes, fees or charges
10. Which is the correct answer? The following additions to the delinquency tax are
called “civil penalties”:
a. Deficiency interest
b. Delinquency interest
c. Surcharge
d. All of the above
11. Statement 1: If before the expiration of the time prescribed for the assessment
of the tax, both the Commissioner and the taxpayer have agreed in writing to its
assessment after such time, the tax may be assessed within the period of
extension agreed upon.
Statement 2: Under the doctrine of equitable recoupment, a liability for tax the
collection of which has not prescribed may be offset against a refund of another
tax the refund of which has prescribed. Conversely, a liability for a tax the
collection for which has prescribed may be offset against a refund of another tax
the refund for which has not prescribed. This American jurisprudence can very
well apply in the Philippines.
a. True, true
b. False, false
c. True, false
d. False, true
12. Which statement is wrong?
a. Stocks and securities shall be distrained by serving a copy of the warrant
of distraint upon the taxpayer and upon the president, manager,
treasurer or other responsible officer of the corporation, company or
association which issued said stocks or securities
b. Debts and credits shall be distrained by leaving with the person owing
the debts or having in his possession or control such credits a copy of
the warrant of distraint

c. Bank accounts are garnished by serving a warrant of garnishment upon
the taxpayer and upon the president, manager, treasurer or other
responsible officer of the bank
d. Future properties may be levied for the satisfaction of unpaid taxes and
civil penalties
13. Statement 1: A refund check or warrant which shall remain unclaimed or
uncashed within five (5) years from the date the said warrant or check was
mailed or delivered shall be forfeited in favor of the Government
Statement 2: A tax credit certificate which shall remain unutilized after five years
from the date of issue shall, unless revalidated, be considered invalid, and shall
not be allowed as payment of any internal revenue tax liabilities of the taxpayer
a. True, true
b. False, false
c. True, false
d. False, true
14. Statement 1: A substantial underdeclaration of taxable sales, receipts or income,
or a substantial overstatement of deductions shall constitute prima facie
evidence of a false or fraudulent return
Statement 2: A return, statement or declaration filed with the Bureau of Internal
Revenue may not anymore be modified, changed or amended
a. True, true
b. False, false
c. True, false
d. False true
15. The following are administrative remedies available to a taxpayer in connection
with collection of taxes, except one:
a. Filing of claim for tax refund or credit
b. Filing a petition for reconsideration or reinvestigation
c. Filing of criminal complaint against erring BIR officials or employees
d. Entering into a compromise

TAXATION
TAX REMEDIES
REMEDIES OF THE TAXPAYERS
T Engineer / Reviewer:
Knowledge Ernesto P. Moreno, MST, CPA “Home of Topnotch Professionals!”
REMTAX.02 TAXPAYER’S RIGHTS

2.1. TAXPAYER’S RIGHT TO MODIFY, CHANGE OR AMEND RETURN
2.1.1 Any return, statement of declaration filed within any office authorized to receive the same shall not be
withdrawn. Provided, that within 3 years from the date of such filing, the same may be modified, change,
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 (Sec. 6 (A), NIRC).
2.2. TAX REMEDIES OF THE TAXPAYER: (1) Disputing an assessment – if the tax has not yet paid the
assessment; (2) Recovery of erroneously paid taxes – if the tax has already been paid
2.2.1 DISPUTING AN ASSESSMENT

A. Prescription
I. Upon receipt of the Pre-Assessment Notice, the taxpayer must explain his position within 15
days.
II. Upon receipt of the Formal Assessment Notice/Formal Letter of Demand, the taxpayer must file
a formal protest in 30 days.
B. Dispute of Assessment
I. The FLD/FAN may be administratively protested by the taxpayer by filing a written protest to the
BIR within 30 days upon receipt thereof.
C. Types of Taxpayer’s Protest

I. Request for reconsideration is a plea for a re-evaluation of an assessment on the basis of
existing records without need of additional evidence which may involve a question of fact or of
law or both; no new issues or evidence to be raised.
II. Request for re-investigation is a plea of re-evaluation of an assessment on the basis of newly
discovered or additional evidence that the taxpayer intends to present in the reinvestigation
which may also involve a question of fact or of law or both; new issues or evidence will be
raised.
 In case of a request for re-investigation, taxpayers are mandatorily required so submit

relevant supporting documents within 60 days from the date of filing of the protest. The
taxpayer will be required to sign a “Waiver of the Statutes of Limitations” for a period of not
less than 6 months to give way to reinvestigation. The BIR Assessment Division will settle
question of facts. The BIR Legal Division will settle questions of law.
 The failure of the taxpayer to seasonably interpose a valid protest shall make the
assessment final, executor and demandable and no request for reconsideration or
reinvestigation shall be granted.
 The taxpayer shall wait for BIR action within 180 days which shall be counted from:
1. The submission of documents – for request for re-investigation
2. The receipt of the FAN/FLD – for request for reconsideration
TAXATION. TAX REMEDIES. Remedies of the Taxpayers. Taxpayers’ Rights 2
D. BIR denied or adverse decision

I. If a duly authorized representative of the CIR denies the protest or issues an adverse decision,
the taxpayer may interpose either a/an:
 Judicial appeal – file a petition for review with the Court of Tax Appeals (CTA) within 30
days from the receipt of adverse decision
 Administrative appeal – file a motion for reconsideration with the CIR within 30 days from
the receipt of the adverse decision
II. The final decision (FDDA) of the CIR may be appealed to the CTA within 30 days from receipt of
the adverse decision.
E. BIR inaction within the 180-day period

I. The BIR may not act on the protest within the 180-day period. The taxpayer may either:
 Wait for the BIR decision after the lapse of the 180-day period, or
 File a petition for review with the CTA within 30 days from the lapse of the 180-day period
(Judicial appeal).
II. Upon receipt of an adverse ruling from the CTA, the taxpayer may, within 15 days:
III. File a motion for reconsideration or new trial under the same division, or an adverse decision of
the CTA in division may be appealed to the CTA en banc within 15 days. The CTA may grant an
additional 15 day leeway after payment of the docket fee. An adverse decision of the CTA en
banc may be appealed within 15 days to the Supreme Court.
IV. File a petition for review on certiorari to the Supreme Court. An adverse ruling from the Supreme
Court may be subject to a motion for reconsideration after which the final decision can no
longer be appealed.
F. Content of Reply to PAN

I. The taxpayer’s reply to the PAN shall include:
 Explanation on matters questioned by the examiner
 Factual and legal bases supporting the taxpayer’s position
 Prayer for full or partial cancellation of the PAN
G. Requirements for the validity of a protest:

I. The taxpayer must indicate the nature of protest (i.e. request for reconsideration or request for
reinvestigation) (Sec CIR vs. Philippine Global Communications, GR. No. 167146, October 31,
2006).
II. The taxpayer must state the date of the assessment notice.
III. The taxpayer should state the facts, the applicable law, rules and regulation or jurisprudence on
which the protest is based.
IV. The protest must be filed by the taxpayer or his/her duly authorized representatives, in person or
through registered mail with return card with the concerned Regional Director, Assistant
Commissioner-LTS or Assistant Commissioner-Enforcement Service, as the case may be (RMC
39-2013).
V. All relevant documents must be submitted within 60 days from the filing of the request for
reinvestigation.
H. Suspension of the prescriptive period

I. It is settled under jurisprudence that the 60-day period applies only to a request for re-
investigation but not to a request for reconsideration.
II. The suspension of the prescriptive period applies only upon approval of the request for re-
investigation. The act of requesting for re-investigation does not, by itself, suspends the running
of the prescriptive period of collection. The prescriptive period of collection will be suspended
only when the BIR grants the request for re-investigation (CIR vs. United Salvage and Towage
(Phils.), Inc., GR No. 197515).
I. Protest needs to be categorical

I. The taxpayer shall categorically raise all issues in the FAN/FLD that he objects to and backs
each objection individually by stating the facts, law, rules and regulations, and jurisprudence
supporting his position. It must be recalled that assessments on uncontested issues will
become final, executory, and demandable by the government.
J. Summary of Rule: Disputing an Assessment: Government side
BIR denial or lapse of 180 days CTA Adverse

whichever comes first decision
PAN FAN
15 days 30 days 60 days 180 days 30 days 15 days
TO REPLY TO FILE TO SUBMIT PETITION PETITION FOR SC

PROTEST SUPPORTING FOR CTA REVIEW ON
LETTER DOCUMENTS REVIEW CENTIORARI
REINVESTIGA
TION
OR JUDICIAL REMEDIES
RECONSIDER Or wait for BIR action whether favourable or
ATION 180 days adverse decision it may be appealed to the CTA
within 30 days from receipt
ADMINISTRATIVE REMEDIES
K. Taxpayer’s side
I. The remedy of last resort: Compromise
 A taxpayer who has exhausted all the remedies may settle his tax liability by way of
compromise payment. Compromise, however, is permissible only under rigid conditions
which will be discussed later.
L. Finality of assessment on undisputed issues

I. If the taxpayer disputes or protests only against the validity of some issues raised in the
assessment, the assessment attributable to the undisputed issue or issues shall become final,
executor and demandable.
II. If the taxpayer failed to state the facts, the applicable law, rules and regulations or jurisprudence
in support of his protest against certain issues the same shall be considered undisputed issues,
in which case, the assessment attributable thereto shall become final, executor and
demandable.
III. The failure of the taxpayer to validly protest the FLD/FAN within 30 days upon release thereof
shall result in the assessment becoming final and executory.
IV. In such case, the taxpayer shall lose his right to refute the findings, except when:
 The taxpayer did not receive the FAN
 The taxpayer availed of the amnesty program
V. It is also noteworthy to mention that the burden of proving that the assessment was actually
received by the taxpayer rests upon the government.
M. Final Decision on Disputed Assessment (FDDA)

I. The FDDA of the CIR may be communicated to the taxpayer within 180 days from the filing of
his protest.
N. Resolution of the Protested Assessment
If the protested assessment is The assessment is

a. Resolved in favor of the taxpayer Cancelled
b. Resolved with reduction of liability Revised
c. Sustained Enforced
O. Judicial Appeal
I. The FDDA of the CIR on a disputed assessment may be judicially protested by the taxpayer by
filing a petition for review with the Court of Tax Appeals after which an adverse ruling may be
the subject of a petition for a review on certiorari before the Supreme Court. However,
assessments that achieved administrative finality are enforceable by the BIR for collection.
1.2.1 RECOVERY OF ERRONEOUSLY PAID TAXES

A. Procedures
I. File a Claim for refund or credit within 2 year from the date of payment of the tax (Sec. 229,
NIRC).
II. When the claim for refund or credit is denied by an authorized representative of the CIR, the
taxpayer may file a petition for reconsideration within 30 days from receipt of the denial and
within two-year prescriptive period from the date of payment of the tax.
III. An adverse final decision of the CIR shall be appealed by filing a petition for review before the
CTA within 30 days from receipt of the final decision (Sec. 11 RA 1125) and within the two-year
prescriptive period.
IV. If the BIR did not act on the claim for refund or credit, the taxpayer must file a petition for review
before the CTA before the expiration of the two-year prescriptive period.
V. An adverse decision of the CTA may be appealed in the same division within 15 days. An
adverse decision of the concerned CTA division may be appealed to the CTA, en banc within 15
days.
VI. An adverse decision of the CTA shall be appealed within 15 days to the Supreme Court. These
procedural requirements apply not only to taxes paid in error but also those paid under protest
or duress (Sec. 229, NIRC).
B. Note on administrative procedures

I. It must be noted that aside from complying with the rules on deadlines, all required taxpayer
procedures for his administrative remedies must be executed within the two-year prescriptive
period and, in case of adverse decision, the taxpayer must have interposed a case for the
recovery of the tax with the CTA on or before the expiration of such period. The failure to do so
shall result in the forfeiture of the tax subject of the claim.
II. When the taxpayer discovered the erroneous payment when the 2-year period was about to
lapse, he may file a claim for refund or credit simultaneously with the institution of a case for the
recovery of the same before the CTA.
1.2.2 Claim for refund or credit

A. Tax refunds or credit are in the nature of a tax exemption and are highly construed against the
taxpayer. The taxpayer must present convincing evidence to substantiate his entitlement to refund
or credit.
B. When is an application for a claim for refund or credit not necessary?

I. A tax return filed showing an overpayment is by itself considered a claim for refund. Hence, the
taxpayer need not file application for claim for refund or credit.
C. When is a claim for refund or credit not allowed?

I. Documentary stamp tax
II. Payment on tax assessment that became final and executory*
*this is not payment under protest
D. Counting of the 2-year Prescriptive Period

I. The 2-year period is counted from the date of filing of the Final Adjusted Return, not from the
date of the quarterly income tax payments.
II. For VAT payments, the 2-year period is counted from the date of filing of the quarterly VAT
return, not from the monthly payments
III. If tax is paid in installment, the 2-year period is counted from the last installment
IV. For withholding taxes
 Final withholding tax – the 2-year period is counted from the 25th day after the close of
each calendar quarter
 Creditable withholding tax – the 2-year period is counted from the last day of the month
following the close of the quarter during which withholding was made
E. Summary of Rules: Recovery of Erroneously Paid Taxes: Government side
CTA Adverse
BIR denial decision
Claim for Petition for CTA Review Petition for SC Review on

Payment of
(with or without BIR denial of
Tax Refund claim of refund) 15 days Certiorari
30 days
Two (2) years
F. Taxpayer’s side
I. Forfeiture of refund
 Refund check or warrant issued by the BIR bust be claimed or encashed within five year
from the date said warrant or check was mailed or delivered; otherwise, the same will be
forfeited in favor of the Government and the amount thereof shall revert to the general fund.
(Sec. 230 (A), NIRC).
II. Forfeiture of tax credit

 A tax credit certificate issued in accordance with the provision of the NIRC must be utilized
within 5 years from the date of issue. Unless revalidated, a tax credit which remains
unutilized after such period shall be considered invalid and shall not be allowed as payment
for internal revenue tax liabilities of the taxpayer.
 It is also noteworthy to mention that a tax credit certificate is no longer assignable under
current tax regulations.
III. Action to Contest Forfeiture of Chattel

 In case of the seizure of personal property under claim of forfeiture, the owner desiring to
contest the validity of the forfeiture may, at any time before the sale or destruction of the
property, bring an action against the person seizing the property or having possession
thereof to recover the same, and upon giving proper bond, may enjoin the sale; or after the
sale and within (6) months, he may bring an action to recover the net proceeds realized
from the sale (Sec. 231, NIRC).
TAX “Innovating
Educational
ADDITIONS TO TAX Services”
KHEEN V. BATINGAL
REVIEW NOTES
Aside from demanding the unpaid deficiency (basic) tax, the BIR will also
impose increments in the assessment as required by law, such as:
surcharge, interest, and compromise penalty.
i. Surcharge
Surcharge is added when taxes are paid beyond the
deadline as required by law. It shall be based on the basic
(unpaid/deficiency) tax multiplied by the following rates:
1. 25% - simple neglect to file
2. 50% - willful neglect to file (criminal intent)
ii. Interest
Effective January 1, 2018, the effectivity date of the
TRAIN law, the rate of interest imposable for late payment of
taxes shall be 12 percent, which is twice the 6-percent interest
rate imposed on loans or forbearance of any money per BSP
Circular 799 Series of 2013.
Before the effectivity of the TRAIN law, the interest rate

is 20 percent per annum.
Kinds of Interest
1. Deficiency Interest – Imposed on the basic tax due from
the date prescribed for its payment (deadline) until its
full payment, or upon issuance of a notice and demand
by the Commissioner or his authorized representative,
whichever comes first. (Deadline until
Payment*/Assessment)
2. Delinquency Interest - Imposed on the basic deficiency
tax plus surcharge and interest, to be computed from
the due date appearing in the notice and demand by the
Commissioner until full payment. (Assessment Date to
Full Payment)
The regulations clarified that upon effectivity of the

TRAIN law, the deficiency and delinquency interest shall not be
imposed simultaneously. (RR 21-2018)

AFAR ADDITIONS TO TAX. Review Notes
iii. Compromise Penalty
Compromise penalties are amounts collected by the
BIR in lieu of criminal prosecution for violations committed by
taxpayers, the payment of which is based on a compromise
agreement validly entered into between the taxpayer and the
Commissioner of Internal Revenue.
Model
Basic Unpaid/Deficiency Tax XXX,XXX
Surcharge (Basic Tax x 25%/50%) XXX,XXX
Deficiency Interest (Basic Tax x 12% x Period A*) XXX,XXX
Total Deficiency Tax XXX,XXX
Add: Delinquency Interest
(Total Deficiency Tax x 12% x Period B**) XXX,XXX
Total Delinquency Tax XXX,XXX
*Period A – deadline prescribed by law to date of issuance of final
assessment
**Period B – date of issuance of final assessment to date of full payment
Model (Before TRAIN Law)

Basic Unpaid/Deficiency Tax XXX,XXX
Surcharge (Basic Tx x 25%/50%) XXX,XXX
Deficiency Interest (Basic Tax x 20% x Period A) XXX,XXX
Total Deficiency Tax XXX,XXX
Add: Additional Deficiency Interest
(Basic Tax x 20% x Period B) XXX,XXX
Delinquency Interest
(Total Deficiency Tax x 20% x Period B) XXX,XXX XXX,XXX
Total Delinquency Tax XXX,XXX

TAXATION
TAX REMEDIES
REMEDIES OF THE GOVERNMENT
Knowledge Engineer / Reviewer: Ernesto P. Moreno, MST, CPA “Home of Topnotch Professionals!”
REMGOV.04 ADDITIONS TO TAX

1. The following tax cases may be subject of a compromise, except?
A. delinquent payments
B. cases under administrative protest after issuance of final notice of assessment.
C. criminal violations involving tax fraud, that are already filed in court
D. Civil tax cases being disputed before the courts
2. Which of the following interest rate is not correct?

A. 20% if the tax assessed is a national tax
B. 24% if the tax assessed is a local tax
C. 12% if it is pertaining to redemption of real property sold in public auction in a levy proceeding
D. 1%/month if the tax assessed is real property tax
3. The tax payer was discovered not filing his tax return. Under net worth method of determining his income,
his basic tax deficiency assessed is P1,000,000. Which of the following statements in not correct?
A. His surcharge is P250,000
B. His total tax liability, including surcharge, before interest is P1,500,000
C. His tax violation is considered willful
D. He can apply for a tax compromise if he can prove that the assessment is excessive
TAXATION
TAX REMEDIES
REMGOV.02 ADMINISTRATIVE REMEDIES
2.1. ADMINISTRATIVE POWERS OF THE BIR
2.1.1 Assessment and collection of all national internal revenue taxes, fees and charges.
A. Assessment is the act or process of determining the tax liability of a taxpayer in accordance with tax
laws. Assessment also pertains to the notice sent by the government to the taxpayers informing
them of their unpaid or still unpaid tax obligations coupled with a demand to pay the same.
B. Collection pertains to the procedures of the government to enforce payment of unpaid taxes from
delinquent taxpayers.
2.1.2 Enforcement of all forfeitures, penalties and fines connected therewith

2.1.3 Execution of judgment in all cases decided in its favor by the Court of Tax Appeals (CTA) and the
ordinary courts.
2.1.4 Give effect to, and administer, the supervisory ad policies powers conferred to it by the code or other
laws.
2.2. ASSESSMENT
2.1.5 An assessment is calling for the payment of a deficiency tax or unpaid tax can only be made after the
government has established the correct or reasonably correct amount of tax of the taxpayers.
2.1.6 Power of the CIR Relative to the Determination of Correct Tax

A. Relative to the determination of the correct taxes of the taxpayer, the Commissioner of Internal
Revenue is empowered to:
I. Obtain data and information from third parties
II. Conduct inventory surveillance
III. Examine and inspect the books of accounts of a taxpayer.
IV. Prescribe presumptive gross sales and receipts.
2.1.7 STAGES OF ASSESSMENT

A. Selection of taxpayers to be audited
B. Audit of the taxpayers
C. Assessment of taxpayers with unpaid or deficiency tax
2.3. SELECTION OF TAXPAYERS TO BE AUDITED
2.1.8 The Selection Process

A. The BIR selects taxpayers to be audited based on selection criteria established in the BIR’s Annual
Audit Program. The BIR Annual Audit Program identities high risk taxpayers and medium risk
taxpayers to be the audit priority for each year.
www.certs-online.com www.certscollege.orgwww.rol-eclassroom.com 1
TAXATION. TAX REMEDIES. Remedies of the Government. Administrative Remedies 2
B. The BIR may also identify taxpayers to be subjected to regular audit from the following:
I. Tax compliance verification drive
II. Information furnished by tax informers
III. Pre-audit of tax returns
IV. Direct field observation by revenue officers
2.1.9 Tax Compliance Verification Drive

A. The Tax Compliance Verification Drive also known as Tax Mapping is intended to locate and identify
taxpayers who do not comply with basic tax requirements such as registration, bookkeeping or
invoicing.
B. To enforce taxpayer compliance, the BIR instituted a program called “0plan Kandado” (OK).
Taxpayers’ business will be suspended or temporarily closed for failure to comply with tax
regulations.
C. The tax compliance verification drive may also discover taxpayers with possible unpaid taxes which
may qualify for a detailed audit.
2.1.10 Tax Information

A. Taxpayers which could be subjected to regular detailed audit may be identified based on information
furnished by tax informants. Tax informants are given reward based on the taxes collected from
such information.
2.1.11 Pre-audit of Annual Income Tax Return

A. A pre-audit is conducted to verify the following:
I. Mathematical computations of income tax due and payment
II. Correctness and applicability of exemptions claimed by individuals against the registration
records
III. Correctness and validity of deductions and expenses subject to ceiling limitations
IV. Validity of claims for income tax holiday, tax exemption and other claimed tax incentives
V. Correctness of the application of the minimum corporate income tax
VI. Claimed creditable withholding taxes against tax due and substantiation of claims through
certificates of withholding tax
VII. Correct utilization of tax credit certificates which should be duly supported by an approved Tax
Debit Memo issued by the authorized RDO
VIII. Correctness of deductions claimed by taxpayers who opted OSD
IX. Accuracy and applicability of the computation of the NOLCO
X. Completeness of the required attachment to annual ITRs
B. The pre-audit of tax returns is not a regular audit. It is conducted entirely within the BIR office
without field investigation or also known as table audit.
C. If the pre-audit of tax returns in a deficiency tax, the revenue officer prepares a memorandum report.
The taxpayer shall be informed via a letter to be signed by the RDO. The letter shall state the
deficiency tax resulting from the pre-audit and shall require payment within 15 days.
D. If the taxpayer agrees to the deficiency tax, he shall pay using the Payment Form (BIR Form 0605). If
the taxpayer does not pay the deficiency tax, the revenue offer will prepare a report recommending
the issuance of an assessment of the taxpayer.
E. If the revenue officer recommends a thorough audit investigation of the taxpayer, the taxpayer will
be subjected to a regular audit.
2.4. THE BIR TAX AUDIT PROCESS

1. Release of Letter of Authority (LA) to the revenue officer
2. Conduct of the audit examination
3. Reporting on the results of examination
2.4.1 RELEASE OF LETTER OF AUTHORITY TO THE REVENUE OFFICER
A. What is a Letter of Authority?
I. A Letter of Authority (LA) is an official document that authorizes a BIR Revenue Officer to
examine a taxpayer’s books of accounts and other accounting records in order to determine his
correct internal revenue tax liabilities.
B. Who issues and approves the LAs?
Investigating Office Approving Official

Revenue District Office Regional Director
Large Taxpayer Service Audit Divisions Assistant Commissioner-LTS
National Investigation Division and Commissioner of Internal
Special Investigation Divisions Revenues
C. Requisites for the validity of an LA:

I. The LA must be served to the taxpayer within 30 days from its date of issuance.
II. The LA must be an electronic LA (eLA) printed under BIR Form 1966 issued under the BIR Letter
of Authority Monitoring System (LAMS).
 Manual LAs are no longer allowed. Examiners or revenue officers who conduct audit
investigations without an eLA will be subject to administrative sanctions.
 Only one LA shall be issued to the taxpayer. Taxpayers who were inadvertently issued with
multiple Las shall inform the concerned BIR officer and formalize his request for
cancelation of the other LAs.
D. Other BIR notices to taxpayers:

I. Tax Verification Notice (TVN)
A Tax Verification Notice (TVN) authorizes evaluation or verification of tax on one-time

transaction (ONETT) cases such as estate tax, donor’s tax, and capital gains tax.
II. Letter notice (LN)
 A Letter Notice (LN) is a communication from the BIR national office informing the taxpayer
of a finding of significant discrepancy between sales/purchases reported in his tax return
and information obtained by the BIR from third parties.
 Third party information may be taken by the BIR from Reconciliation of Listing for
Enforcement System (RELIEF) filings of other taxpayers including data gathered by the
other government agencies or instrumentalities.
 Data Matching Systems

1. The BIR national office embarked on a program called Data Matching which is basically
a data mining technique intended to match taxpayer’s reported data such as sales
against data furnished by third parties such as purchases of the taxpayer’s customers.
Significant discrepancies or variances noted may indicate the presence of unpaid taxes
which must be checked.
2. Discrepancies noted by the matching systems are forwarded by the national office to
the revenue district office having jurisdiction over the concerned taxpayer. The revenue
district office will serve the LN to the taxpayer.
 Reconciliation of discrepancies
1. Taxpayers have 5 days from receipt of the LN to reconcile the discrepancies noted
therein. If the taxpayer agrees to the finding of discrepancies, he/she must settle any
resultant tax liability within 30 days from the receipt of the LN.
2. Timely payment of the LN will entitle the taxpayer to abatement of corresponding

surcharge, interest, and compromise penalty.
 Consolidation of LN and eLA

1. Taxpayers who are selected for regular audit by the RDO may likewise be concurrently
issued an LN by the national office. The LN in such case shall be consolidated with the
eLA issued for such examination.
 LN payments may be claimed as tax credit

1. Taxpayers who are selected for regular audit may have paid taxes under an LN. The
amount paid under the LN may be considered as a tax credit against any findings of
deficiency under the eLA (regular audit) to the extent that they pertain to the same
issues.
2.4.2 CONDUCT OF THE AUDIT EXAMINATION

A. The examination must be generally conducted in the place of business of the taxpayer.
B. Period of investigation
I. Revenue officers have up to 120 days counted from the date of receipt of the eLA by the
taxpayer within which to conduct the audit and to submit their reports of investigation. After the
lapse of such period, the eLA must be surrendered and may be revalidated when needed.
C. Frequency of revalidation of LAs

I. The eLAs may be revalidated once for those issued by the Regional Offices or Revenue District
Offices or twice in the case of LAs issued by the National Office. Suspended eLAs must be
attached to the new eLAs.
D. Frequency of taxpayer examination

I. The taxpayer shall be subject to examination only once in every taxable year, except when:
 The CIR determined that fraud, irregularities, or mistakes were committed by the taxpayer.
 The taxpayer requested for re-investigation or re-examination.
 There is a need to verify the taxpayer’s compliance with withholding tax and other internal
revenue taxes.
 The taxpayer’s capital gains tax liabilities must be verified.
 The CIR exercises his power to obtain information relative to the examination of the other
taxpayers.
2.4.3 REPORTING ON THE RESULTS OF THE EXAMINATION

A. After the examination, the Revenue Officer reports the results of his investigation.
B. Finding of Sufficient Basis of Assessment

I. When the BIR examination or verification determined that there exists a sufficient basis to
assess the taxpayer for any deficiency tax or taxes, the Revenue Officer shall recommends the
issuance of an assessment to the taxpayer in his report.
2.5. ASSESSMENT OF THE TAXPAYER
2.5.1 The assessment stage may involve the issuance of the following notices in sequence:
1. Pre-Assessment Notice (PAN)
2. Formal Letter of Demand and Final Assessment Notice (FLD/FAN)
3. Final Decision on a Disputed Assessment (FDDA)
A. Note: The Notice of Informal Conference (NIC) stage before the PAN stage is removed from the
procedures of assessment under RR#18-2013. But under RR #7-2018 NIC has been reinstated.
B. What is a Preliminary Assessment Notice (PAN)?

I. A PAN is a written communication issued by the Regional Assessment Division or any other
concerned BIR office informing the taxpayer of his obligation for deficiency tax based on the
audit findings of a revenue officer.
II. The taxpayer has up to 15 days from the receipt of the PAN to reply to the proposed
assessment and does not establish a legal claim on the part of the government. However, the
failure of the taxpayer to reply to the PAN shall make impending assessment final, demandable
and non-appealable.
III. If the taxpayer’s agrees to the findings in the PAN and pays the tax, the BIR cancels the docket
and a termination letter or closure letter is sent to the taxpayer.
IV. If the taxpayer merely responds that he disagrees with the findings of deficiency, a Formal Letter
of Demand and Final Assessment Notice (FLD/FAN) calling for payment of the tax deficiency
will be issued to the taxpayer.
C. What is a Formal Letter of Demand and Final Assessment Notice (FLD/FAN)?

I. An FLD/FAN is a final declaration of deficiency tax issued to a taxpayer:
 Who defaulted by failing to respond to the PAN within 15 days of its receipt
 Whose reply to the PAN is unmeritorious.
II. The FLD/FAN shall be issued within 15 days from the filing or submission of the taxpayer’s
response or within 15 days form the issuance of the PAN in case the taxpayer failed to respond.
III. The issuance of an FLD/FAN to the taxpayer is tantamount to a denial of the taxpayer’s reply to
the PAN (Philippine Health Care Providers vs. CIR).
D. Requisites of Valid Assessment (FLD/FAN)

I. The assessment must be served within the prescriptive period.
II. The assessment must inform the taxpayer of the discovery of unpaid or still unpaid tax coupled
with a demand of the same including penalties.
III. The assessment must show in detail the facts and the law, rules and regulations, or
jurisprudence on which the assessment is based.
IV. The assessment must be served through registered mail or by personal delivery and
acknowledge by the taxpayer or his duly authorized representative.
V. The assessment must be preceded by a pre-assessment notice.
 An assessment which lacks any of these requisites is void. Hence, a “show-cause letter” or
a letter from a Revenue Officer granting the taxpayer an opportunity to disprove his audit
findings does not qualify as, or substitute for, an assessment.
 Moreover, affidavit executed by revenue officers containing computations of deficiency

taxes to support the criminal complaint against a taxpayer is also not an assessment (See
CIR vs. Pastor Realty).
E. Instances where no PAN is required

I. The PAN is required as a matter of procedural due process for the taxpayer to be apprised of his
obligation. Hence, a FLD/FAN is generally void without a PAN.
II. However, a PAN is not required in the following cases:

 When the finding of deficiency tax is the result of mathematical error in the computation of
the tax appearing on the face of the tax return filed by the taxpayer;
 When a discrepancy has been determined between the tax withheld and the amount actually
remitted by the withholding agent,
 When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding
tax for a taxable period was determined to have carried over and automatically applied the
same amount claimed against the estimated tax liabilities for the taxable quarter or
quarters of the succeeding taxable year; or
 When the excise tax due on excisable articles has not been paid;
 When an article locally purchased or imported by an exempt person, such as, but not limited
to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or
transferred to non-exempt persons.
III. An FLD/FAN is issued outright in the aforementioned exceptional cases.
IV. If the taxpayer pays the FLD/FAN, the docket is cancelled by the BIR and a termination letter or
closure letter is sent to the taxpayers.
F. Jeopardy Assessment
I. Jeopardy assessment is one made by an authorized revenue officer without the benefit of a
complete or partial audit in light of the officer’s belief that the assessment and collection of a
deficiency tax will be jeopardized by the delays caused by the taxpayer to comply with audit and
investigation requirements to present his book of accounts and pertinent records or
substantiate all of the deductions, exemptions or credit claimed in his return.
2.6. COLLECTION
2.6.1 Collection will be enforced by the government once the assessment achieves finality under any of the
following instances:
A. When the taxpayer defaulted in his administrative remedies
I. Failure of the taxpayer to seasonably respond to the PAN
II. Failure of the taxpayer to seasonably protest the FLD/FAN
B. Denial of the taxpayer’s protest by the CIR or his authorized representative
C. Whether or not on appeal, when the assessment is upheld by the court
2.6.2 Payment under Protest

A. To avoid the imposition of interest, penalties or charges on a contested assessment, a taxpayer
may pay the contested assessment under protest. The taxpayer can file a claim for refund later
when the disputed assessment is partially or wholly decided in his favor.
2.6.3 Government Remedies to Enforce Collections:

A. Imposition of tax lien
B. Seizure of the taxpayer’s properties (distraint or levy)
C. Auction sale and or forfeiture of taxpayer’s properties
D. Filing of civil or criminal action against the taxpayer
E. Imposition of administrative penalties and fines
F. Suspension of business operations
G. Entering into a tax compromise with the taxpayer
2.6.4 STAGES OF COLLECTION

A. Preliminary Collection Letter
B. Final Notice before Seizure Letter
C. Warrant of Distraint/Levy or Garnishment
D. Research of taxpayer properties
E. Notice of Tax Lien and or Notice of Tax Levy
F. Seizure of properties
G. Auction sale and/or forfeiture of properties
H. Filing of civil or criminal action
2.6.5 PRELIMINARY COLLECTION LETTER

A. Once the assessment achieved finality, the BIR Collection Division will send taxpayer a Preliminary
collection letter signed by the RDO who has jurisdiction over the taxpayer.
B. The taxpayer may pay the assessment either by:

I. Lump sum payment
II. Installment payment
 NOTE: Installment payment and compromise settlement are subject to approval by the BIR.
 Installment payments offer the taxpayer a chance to settle the tax conveniently without
causing him cash flow problems. However, installments are subject to interest.
Furthermore, the default of the taxpayer in any instalment will make the entire balance due
and demandable. Compromise payments offer the taxpayer a chance for a reduced tax
payments but are granted only under rigid conditions.
 The BIR will furnish the taxpayer a termination letter or closure letter upon fully payment of
the tax.
III. Compromise settlement
2.6.6 FINAL NOTICE BEFORE SEIZURE LETTER

A. Within 10 days form the issuance of the Preliminary Collection Letter, the BIR send the taxpayer the
Final Notice before Seizure Letter.
B. If the taxpayer ignores the final notice, the BIR will resort to enforcement of administrative summary
remedies.
2.6.7 Summary Remedies under the NIRC:

A. Seizure of taxpayer’s property
I. Distraint
 Distraint – the seizure by the government of tangible or intangible personal property of the
taxpayer to enforce the collection of taxes
 WARRANT OF DISTRAINT AND/OR LEVY
1. The Warrant of Distraint and/or Levy (WDL) or a Warrant of Garnishment is served to
the taxpayer after his failure to respond to the Final Notice.
 Limitation of the Warrant of Distraint and or Levy
1. Distraint or levy shall not be availed of where the amount of tax is not more than P100.
2. The WDL shall not be send earlier than 90 days from the date the assessment has
become due and demandable.
 Exception to the 90-day rule:

1. Delinquent taxes may be collected immediately by distraint or levy in cases where;
a. The amount shown in the return is not paid on time.
b. The individual taxpayer fails to pay the second installment of his income tax.
 RESEARCH OF TAXPAYER PROPERTIES

1. If the taxpayer fails to pay his delinquent accounts after the service of the WDL, the
Revenue Officer shall look for properties of the taxpayer that can be attached to his tax
liabilities.
2. Taxpayer properties may be identified from records of the City Assessor’s Office,
Registry of Deeds, Land Transportation Office, Securities and Exchange Commission,
business bureaus, and local banks.
 NOTICE OF TAX LIEN (NTL) OR NOTICE OF LEVY

1. The Notice of Tax Lien or Notice of Levy is used to validate the legal claims or charge
of the government on identified property of the taxpayer either personal or real, as
security for the payment of his tax liability.
2. The Tax Liens are annotated at the back of the title documents of the property in the
case of real property.
3. Tax liens will make the government a priority claimant on the identified properties of
the delinquent taxpayer.
 Distraint of Personal Property
1. Who shall conduct the distraint?

a. The CIR or his duly authorized representative – if the amount involved is in excess
of P1M
b. The Revenue District Officer – if the amount involved is P1M or less
2. Extent of properties to be distrained

a. Personal properties such as goods, chattels, effects, stocks and other securities,
debts, credits, bank accounts and interest or rights to personal properties shall be
seized in sufficient quantity to cover the following:
ꓺ Tax due
ꓺ Penalties and interests
ꓺ Expenses of distraint
ꓺ Costs of selling the properties
 Constructive Distraint
a. By constructive distraint, the government freezes the taxpayer’s property by requiring
the taxpayer or the person having possession or control of the property to sign a receipt
obligating him to preserve the same intact and unaltered and not to dispose it without
the express authority of the CIR.
b. In case the taxpayer on the person having the possession and control of the property
sought to be placed under constructive distraint refuses or fails to sign the receipt
herein referred to, the Revenue Officer effecting the constructive distraint shall proceed
to prepare a list of such property and, in the presence of two witnessed, leave a copy
thereof in the premises where the property distrained is located, after which the said
property shall be deemed to have been placed under constructive distraint.
 When a constructive distraint may be made?

a. The purpose of constructive distraint is to protect the interest of the government when,
in the opinion of the CIR, the taxpayer is:
ꓺ Retiring from a business subject to tax
ꓺ Intending to leave the Philippines
ꓺ Intending to remove his property or conceal the same
ꓺ Intending to perform an act tending to obstruct the proceeding for collecting the
tax due from him.
 To whom is the warrant of distraint or garnishment served?

a. For goods, chattels, effects, or other personal properties – to the possessor of the
goods distrained
b. For stocks and other securities – to the taxpayer and upon the president, manager,
treasurer or responsible officer of the corporation, company or association which
issued the said stocks
c. For debt and credits – to the person owning the debts or having in possession or under
his control such credit, or with his agent
d. For bank accounts – to the president, manager, treasurer, cashier or other responsible
officials
II. Levy
 Levy – the seizure by the government of real properties of the taxpayer to enforce the
collection of taxes
 Garnishment – the seizure or distraint of interest such as bank accounts and credits owned
by the taxpayer
 Either or both distraint and levy may be pursued by the authorities charged with the
collection of the tax.
 Levy on Real Property

1. The Revenue Officer shall prepare a duly authenticated certificate showing the name of
the taxpayer and the amount of tax and penalty due from him and indicate therein the
description of the property upon which the layer is made. Said certificate shall operate
with the force of a legal execution throughout the Philippines (See Sec. 207 (B), NIRC).
2. Levy on real property may be done before, simultaneous with, or after the distraint of
personal property.
 AUCTION SALE OF SEIZED PROPERTY

1. Seized properties will be sold at auction sales if the taxpayer did not settle the
delinquent tax. Within 20 days from levy, the Revenue Officer conducting the
proceeding shall advertise the property for auction sale for a least 30 days. The
property shall be awarded to the highest bidder.
2. The proceeds of the sale shall be used to satisfy the taxpayer’s unpaid tax liabilities.
The excess of the sale will be return to the taxpayer.
 FORFEITURE OF TAXPAYER’S PROPERTY

1. When the amounts offered by bidders in two consecutive auction sales fail to raise a
sufficient amount to cover the taxpayer’s liability, the government will forfeit the
property. Title to forfeited properties will be consolidated in the name of the Republic of
the Philippines.
 Taxpayer’s right of redemption
1. The taxpayer has up to one year from the date of auction sale of forfeiture within which
to redeem the property.
 Further distraint or Levy

1. Further distraint or levy may be made when the proceeds of the auction sale fail to
satisfy the unpaid tax.
B. Civil or criminal action
I. The government may alternatively or simultaneously pursue filing civil or criminal action
against the taxpayer with the summary remedies of distraint or levy (See Sec. 205, NIRC).
II. The RATE Program

 To prosecute criminal violations of the NIRC, the BIR instituted the “Run After Tax Evaders
(RATE) program. The RATE program is intended to identify and prosecute high-profile tax
evaders. Known personalities such as celebrities are usually targeted with RATE cases, an
effort commonly perceived as a deliberate display of the BIR’s serious resolve for erring
taxpayers.
III. Assessment is not necessary for criminal prosecution

 Assessment is not a requirement in the prosecution of criminal cases for violation of
internal revenue laws. (CIR vs. Pascor Realty & Development Corp., et. Al. (G.R. No. 128315
dated June 29, 1999) The judgement in the criminal case shall not only impose the penalty,
but shall also order payment of the taxes subject of the criminal case as finally decided by
the Commissioner.
 Hence, collection of tax may be made without a prior assessment if there is a criminal intent
to evade payment of taxes such as in the case of:
ꓺ Filing of a fraudulent return
ꓺ Wilful neglect to file return
 A return is generally deemed fraudulent when there is:
ꓺ Failure to report an income exceeding 30% of that declared per return.
ꓺ Overstatement of deductions exceeding 30% of the actual allowable deductions
 Civil and criminal actions and proceeding instituted in behalf of the Government under the
authority of the NIRC and other laws enforced by the BIR shall be brought in the name of the
Government of the Philippines and shall be conducted by legal officers of the BIR. No civil
or criminal action for the recovery of taxes or enforcement of any fine, penalty or forfeiture
under the Code shall be filed in court without the authority of the CIR.
2.6.8 PRESCRIPTIVE PERIOD OF COLLECTION

A. The government has 5 years from the date of release of the final assessment to the taxpayer to
make collection (Bank of the Philippines Islands vs. CIR, G.R. No. 139736).
B. When the demand letters is undated, the 5-years prescriptive period is counted from the date of
receipt of the assessment notice (Jardine Pacific Finance vs. CIR, CTA Case No. 6195).
C. Illustration 1
On July 15, 2016, Mr. A filed his 2015 income tax return which should have been filed April 15, 2016.
He paid the tax on August 15, 2016. The BIR issued a deficiency assessment on August 2, 2018.
The deadline to enforce collection shall be on or before August 2, 2023.
D. Illustration 2
On March 3, 2016, the BIR sent an undated assessment letter, the assessment covered the unpaid
estate tax of a decedent which should have been paid March 5, 2015. The estate administrator
received the assessment on March 18, 2016.
The deadline to enforce collection shall be on or before March 18, 2021 since the assessment is
undated.
E. Illustration 3
The taxpayer did not file an income tax return for the year 2002. The BIR discovered the non-filing on
May 4, 2009. The BIR issued a delinquency assessment on July 15, 2011,
The deadline to enforce collection is on or before July 15, 2016.
F. Suspension of the Statutes of Limitation

The prescriptive period for assessment and collection may be suspended under the following
circumstances:
I. Request for reinvestigation of the taxpayer which is granted by the CIR
II. When the Commissioner is prohibited from making an assessment or from beginning distraint
or levy or a proceeding is court1
III. When the taxpayer cannot be located in the address given by him2
IV. When the warrant of distraint or levy is served and no properties can be located
V. When the taxpayer is out of the Philippines
 Note:
ꓺ The suspension shall run for the period during which the CIR is so prohibited plus 60
days thereafter.
ꓺ If the taxpayer informed the CIR of any change is address, the running of the statutes of
limitation will not be suspended.
G. Summary of Prescription Rules: Collection
Deadline of collection Mode of collection

With a prior 5 years from Summary proceedings or
Assessment assessment By judicial action
Without a prior 10 years from discovery By judicial action only
Assessment of fraud or falsity
1. The official action of ascertaining the amount of tax due from a taxpayer, done under the existing law
A. Imposition
B. Assessment
C. Assessment notice
D. Informal conference
2. Which of the following statements is not correct?

A. All taxpayers must be registered with the BIR
B. Businesses must be registered with the BIR within 10 days from the start of its commercial activities.
C. Businesses regarded as for subsistence are required to be registered with BIR but exempt from
payment of registration fee.
D. The annual registration fee is P500 per business establishment
3. Which of the following comes ahead of the others

A. Pre-assessment notice
B. Subpoena duces tecum
C. Informal conference
D. Final assessment notice
4. The Following are administrative in character, except

A. Imposition
B. Assessment
C. Collection
D. Garnishment
5. The following statements are correct, except

A. government assessments are prima facie presumed correct and made in good faith.
B. Assessment is discretionary on the Commissioner who cannot therefore be compelled to assess a tax
when he believes that there is no basis for such assessment.
C. The authority vested in the Commissioner to assess tax may be delegated, but the power to make final
assessments cannot be delegated.
D. The rule of estoppel may be invoked against the government, if the Commissioner did not make
regular assessment for each period.
6. When is assessment deemed made within the prescriptive period?

A. When the demand letter is released to the taxpayer within the prescriptive period.
B. When the notice or demand was received by the taxpayer within 3 years.
C. When the amended return is substantially different from the original return, the right of the BIR to
assess the tax is counted from the filing of the initial return.
D. When the demand letter was mailed or sent to the taxpayer after 3 year period.
7. The following are true regarding Networth method of determining income, except
A. It is an extension of the accounting principles: Assets minus liabilities = net worth.
B. The increase or decrease in net worth is adjusted by deducting all non-deductible items and adding
back there from the non-taxable receipts
C. The legal basis for the use of the net worth method is the authority of the Commissioner to adopt an
accounting method that clearly reflects the income.
D. Conduct inventory taking to establish property ownership of the taxpayer.
8. The act or process of determining the value of a property or portion thereof subject to tax, including the
discovery, listing, classification, and appraisal of properties.
A. Imposition
B. Assessment
C. Collection
D. Garnishment
9. In which of the following pre-assessment notice is required

A. When the deficiency is a result of mathematical error as appearing on the face of the return.
B. When the deficiency is the difference between the tax withheld claim as tax credit against the amount
actually remitted by the withholding agent.
C. When the initial assessment of tax return, less than 30% deficiency was discovered.
D. When article of purchased by an exempt person has been sold/transferred to non-exempt person.
10. Which of the following violations is considered as fraudulent?
A. Failure to file return.
B. The understatement of declared taxable amount is 30% of the amount declared.
C. The over statement of deductions claimed is 30% of the allowable deduction
D. Late filing of return, but voluntarily filed before any govt assessment
11. The following are requisites of valid assessment, except

A. Assessment must be made within the prescriptive period
B. Pre-assessment notice must be sent to the taxpayer
C. The taxpayer must be informed in writing of the law and the facts upon which the assessment was
made.
D. When the tax deficiency discovered is more than 30%
12. In the following cases the running of prescriptive period for assessment is suspended, except
A. When the request for reinvestigation is granted by the Commissioner.
B. When the government avails of the distraint and levy procedures
C. When judicial remedies is availed by filing of complaint in the proper court.
D. When the pre-assessment notice was mailed to the taxpayer
13. The following are within the authority of the BIR Commissioner, except
A. To abate tax liability which in his judgment is excessively assessed,
B. To cancel tax liability where the cost to collect does not justify the amount due
C. To enter into tax compromise at an amount which in his judgment is reasonable, if the reason is
financial incapacity of taxpayer or doubtful assessment)
D. To refund taxes (erroneously or illegally collected)
14. The following taxes are under the administration of the Commissioner of Internal Revenue, except
A. Custom duties
B. Documentary stamp taxes
C. Business taxes
D. Transfer taxes
15. The following are within the Powers and Duties of BIR, except
A. Grant tax amnesty
B. Assess and collect all national internal revenue taxes, fees and charges
C. Enforce forfeitures, penalties and fines
D. Execute judgments decided in its favor by the Court of Tax Appeals
16. The following are within the Powers of the Internal Revenue Commissioner, except
A. Interpret Tax laws in order to render a decision
B. inquire into taxpayers bank deposit to arrive at an accurate assessment
C. Summon and obtain information
D. Make assessment and prescribe additional tax requirements
17. On March 30, 2012 Miguel Foods, Inc. received a notice of assessment and a letter of demand on its April
15, 2009 final adjustment return from the BIR. Miguel Foods then filed a request for reinvestigation
together with the requisite supporting documents on April 25, 2012. On June 2, 2012, the BIR issued a final
assessment reducing the amount of the tax demanded. Since Miguel Foods was satisfied with the
reduction, it did not do anything anymore. On April 15, 2017 the BIR garnished the corporation's bank
deposits to answer for the tax liability. Was the BIR action proper?
A. Yes. The BIR has 5 years from the filing of the protest within which to collect.
B. Yes. The BIR has 5 years from the issuance of the final assessment within which to collect.
C. No. The taxpayer did not apply for a compromise.
D. No. Without the taxpayer’s prior authority, the BIR action violated the Bank Deposit Secrecy Law.
18. Which of the following BIR administrative requirements is not correct?

A. A BIR authority to print is required before the printer could print job order to print invoice or receipt
B. Used invoices or Receipts must be preserved for at least 3 years from date of issue
C. Small and large businesses are required to maintain their books of accounts
D. The books of accounts are required to be audited by Certified Public Accountant if the annual gross
receipts or sale is more than P150,000.
19. Anion, Inc. received a notice of assessment and a letter from the BIR demanding the payment of P3 million
pesos in deficiency income taxes for the taxable year 2015. The financial statements of the company show
that it has been suffering financial reverses from the year 2016 up to the present. Its asset position shows
that it could pay only P500,000.00 which it offered as a compromise to the BIR. Which among the following
may the BIR require to enable it to enter into a compromise with Anion, Inc.?
A. Anion must show it has faithfully paid taxes before 2016.
B. Anion must promise to pay its deficiency when financially able.
C. Anion must waive its right to the secrecy of its bank deposits.
D. Anion must immediately deposit the P500,000.00 with the BIR.
20. Jeopardy assessment is a valid ground to compromise a tax liability

A. involving deficiency income taxes only, but not for other taxes.
B. because of doubt as to the validity of the assessment.
C. if the compromise amount does not exceed 10% of the basic tax.
D. only when there is an approval of the National Evaluation Board.
21. What is the effect on the tax liability of a taxpayer who does not protest an assessment for deficiency
taxes?
A. The taxpayer may appeal his liability to the CTA since the assessment is a final decision of the
Commissioner on the matter.
B. The BIR could already enforce the collection of the taxpayer's liability if it could secure authority from
the CTA.
C. The taxpayer's liability becomes fixed and subject to collection as the assessment becomes final and
collectible.
D. The taxpayer's liability remains suspended for 180 days from the expiration of the period to protest.
22. The BIR could not avail itself of the remedy of levy and distraint to implement, through collection, an
assessment that has become final, executory, and demandable where
A. the subject of the assessment is an income tax.
B. the amount of the tax involved does not exceed P100.00.
C. the corporate taxpayer has no other uncollected tax liability.
D. the taxpayer is an individual compensation income earner.
23. Which among the following circumstances negates the prima facie presumption of correctness of a BIR
assessment?
A. The BIR assessment was seasonably protested within 30 days from receipt.
B. No preliminary assessment notice was issued prior to the assessment notice.
C. Proof that the assessment is utterly without foundation, arbitrary, and capricious.
D. The BIR did not include a formal letter of demand to pay the alleged deficiency.
24. Given:
Date of tax erroneously paid April 15, 2012
Date of claim for refund was filed with BIR May 20, 2014
No reply from the BIR was received as of June 30, 2015
Which of the following is correct?
A. the request for refund could be followed up with the BIR Commissioner
B. the request for refund could be filed with the Count of Tax Appeals
C. the request for refund could be filed with the Court of Appeals
D. no more further recourse to pursue the request for refund
25. The information provided by an informer resulted to confiscation of P5,000,000 worth of Hazardous goods.
No tax revenue was recovered, because the confiscated goods were destroyed.
Which of the following statements is correct?
A. The informer is entitled to P5,000,000 reward
B. The informer is entitled to P1,000,000 reward
C. The informer is entitled to P500,000 reward
D. No reward could be given to informer because no tax revenue was recovered
26. It is the taking over of personal property of delinquent taxpayer which are in the possession of third party,
(bank deposit) , for purposes of collecting delinquent taxes.
A. Forfeiture
B. Seizure
C. garnishment
D. Tax lien
27. Given:
Date of tax erroneously paid April 15, 2008
Date of claim for refund was filed with BIR May 20, 2010
No reply from the BIR was received as of June 30,2011
Which of the following is correct?
A. the request for refund could be followed up with the BIR Commissioner
B. the request for refund could be filed with the Count of Tax Appeals
C. the request for refund could be filed with the Court of Appeals
D. no more further recourse to pursue the request for refund

A. The letter of Authority to assess is exclusively issued by the BIR Commissioner
B. The authority to revalidate letter of authority to assess is exclusively to the BIR Commissioner
C. The authority to issue final assessment is exclusively to the BIR Commissioner
D. The authority to accept tax compromise is exclusively to the BIR Commissioner
29. Which of the following taxes on importation of goods is not under the Direct administration of the BIR?
A. Custom duties
B. VAT
C. Excise tax
D. Documentary stamp tax
30. Which of the following tax collection remedies should come first ahead of the others?
A. Levy of real property
B. Distraint of movable property
C. Forfeiture
D. Either a or b
31. In administering distraint proceedings, if there are no bidders on goods being auction, the goods are
A. Forfeited in favor of the government
B. Purchased by the government
C. Destroyed
D. Either (a) or (c)
TAX “Innovating
Educational
ASSESSMENT Services”
KHEEN V. BATINGAL
REVIEW NOTES
i. NIRC basis of assessment
Powers of the Commissioner relative to the determination

of correct tax
1. order inventory-taking of goods
2. place the business operations of any person, natural or
juridical, under observation or surveillance
3. prescribe a minimum amount of such gross receipts,
sales and taxable base (presumptive gross sales and
receipts) (Sec. 6(C), NIRC, as amended)
ii. Stages of assessment

1. Selection of taxpayers to be audited
2. Audit of the taxpayers
3. Assessment of taxpayers with unpaid or deficiency tax
Selection of taxpayers to be audited

a. BIR’s Annual Audit Program – Taxpayer
Account Management Program (TAMP)
b. Tax compliance verification drive/Tax mapping
c. Tax information
d. Pre-audit of tax returns
Audit of Taxpayers – Process

a. Release of Letter of Authority (LA) to the
revenue officer
b. Conduct of the audit examination
c. Reporting on the results of examination
Release of Letter of Authority to the

Revenue Officer
Letter of Authority (LA) – an official document
that authorizes a BIR Revenue Officer to
examine a taxpayer’s books of accounts and
other accounting records in order to determine
his correct internal revenue tax liabilities.

AFAR ASSESSMENT. Review Notes
Who issues and approves the LAs?
Investigating/Audit Office Authorized Revenue
Official
Revenue District Offices Regional Director
Regional Investigation Regional Director
Divisions
Assessment Divisions Regional Director
Large Taxpayers Service Assistant
Investigating Divisions Commissioner-Large
Taxpayers Service
Large Taxpayers District Assistant
Offices Investigating Commissioner-Large
Divisions Taxpayers Service
National Investigation Commissioner of
Divisions or Regional Internal Revenue/
Investigation Divisions Deputy Commissioner-
Legal Group
Requisites for the validity of an LoA

a. The LA must be served to the taxpayer
within 30 days from its date of
issuance.
b. The LA must be an electronic LA (eLA)
issued under the BIR electronic Letter
of Authority Monitoring Systems
(eLAMS).
Note: Only one LA shall be issued to the
taxpayer.
Other BIR notices to taxpayers

a. Tax verification notice (TVN) – one-
time transaction (ONETT) cases
b. Letter notice – Reconciliation of Listing
for Enforcement System (RELIEF)
cases
Concerns over Letter Notice (LN)
 Reconciliation of discrepancies – 5 days

from receipt of LN
 Any tax liability arises – 30 days from
receipt
 Consolidation of LN and eLA – allowed

 LN payments may be claimed as tax credit
– to the extent pertaining to the same
issues
Conduct of Audit Examination
 In the place of business of the taxpayer

 Period of investigation – within 120 days
after receipt of eLA by taxpayer
 Frequency of revalidation of LAs – once for
those issued by Regional Offices or RDOs;
twice for those issued by the National
Office
Frequency of taxpayer examination
GENERAL RULE: only ONCE in every taxable

year, except when:
a. The CIR determined that fraud,

irregularities, or mistakes were
committed by the taxpayer
b. The taxpayer requested for re-
investigation or re-examination
c. There is a need to verify the taxpayer’s
compliance with withholding tax and
other internal revenue taxes
d. The taxpayer’s capital gains tax
liabilities must be verified
e. The CIR exercises his power to obtain
information relative to the examination
of other taxpayers
Power of the Commissioner to Obtain

Information, and to Summon, Examine, and
Take Testimony of Persons

When after reasonable demands,
certain documents, information or records are
not forthcoming during the examination, the
BIR may issue subpoena to the taxpayer and/or
other person in possession of the same to
produce them. (Sec. 5, NIRC, as amended)
Reporting on the results of examination
The Revenue Officer who audited the

taxpayer’s records shall, among others, state in
his report whether or not the taxpayer agrees
with his findings that the taxpayer is liable for
deficiency tax or taxes.
If the taxpayer is not amenable, based

on the submitted report of investigation, the
taxpayer shall be informed, in writing, of the
discrepancy or discrepancies in the taxpayer’s
payment of his internal revenue taxes.
Assessment of taxpayers with unpaid or deficiency

tax – Procedures
a. Notice of Informal Conference (NIC)

b. Pre-Assessment Notice (PAN)
c. Formal Letter of Demand and Final
Assessment Notice (FLD/FAN)
d. Final Decision on a Disputed Assessment
(FDDA)
iii. Notice of Information Conference (NIC)

Informal Conference is fixed in order to afford the
taxpayer with an opportunity to present his side of the case over
the discrepancy or discrepancies in the taxpayer’s payment of
his internal revenue taxes. (RR No. 7-2018)

The Informal Conference shall in no case extend
beyond thirty (30) days from receipt of the NIC.
If it is found that the taxpayer is still liable for deficiency

tax or taxes after presenting his side, and the taxpayer is not
amenable, the concerned officer shall endorse the case within
seven (7) days from conclusion of Informal Conference to the
Assessment Division for issuance of a deficiency tax
assessment.
iv. Pre-Assessment Notice (PAN)

If after review and evaluation, it is determined that there
exists sufficient basis to assess the taxpayer for any deficiency
tax or taxes, the said Office shall issue to the taxpayer a
Preliminary Assessment Notice (PAN) for the proposed
assessment. It shall show in detail the facts and the law, rules
and regulations, or jurisprudence on which the proposed
assessment is based. (RR 18-2013)
Importance of PAN
The Preliminary Assessment Notice (PAN) is required
as a matter of procedural due process for the taxpayer to be
apprised of his obligation.
Hence, an FLD/FAN is generally void without a PAN.
Instances where no PAN is required

1. When the finding for any deficiency tax is the result of
mathematical error in the computation of the tax as
appearing on the face of the return; or
2. When a discrepancy has been determined between the
tax withheld and the amount actually remitted by the
withholding agent; or
3. When a taxpayer who opted to claim a refund or tax
credit of excess creditable withholding tax for a taxable
period was determined to have carried over and
automatically applied the same amount claimed against
the estimated tax liabilities for the taxable quarter or
quarters of the succeeding taxable year; or
4. When the excise tax due on excisable articles has not
been paid; or
5. When the article locally purchased or imported by an
exempt person, such as, but not limited to, vehicles,
capital equipment, machineries and spare parts, has
been sold, traded or transferred to non-exempt
persons.

Period of Reply to PAN
The taxpayer has up to fifteen (15) days from the receipt
of the PAN to reply to the proposed assessment.
Failure to Reply to PAN

If the taxpayer fails to respond within fifteen (15) days
from date of receipt of the PAN, he shall be considered in
default, in which case, a Formal Letter of Demand and Final
Assessment Notice (FLD/FAN) shall be issued calling for
payment of the taxpayer's deficiency tax liability, inclusive of the
applicable penalties.
Effect of Reply to PAN

If the taxpayer, within fifteen (15) days from date of
receipt of the PAN, responds that he/it disagrees with the
findings of deficiency tax or taxes, an FLD/FAN shall be issued
within fifteen (15) days from filing/submission of the taxpayer’s
response, calling for payment of the taxpayer's deficiency tax
liability, inclusive of the applicable penalties.
v. Formal Letter of Demand and Final Assessment Notice

(FLD/FAN)
The Formal Letter of Demand and Final Assessment
Notice (FLD/FAN) shall be issued by the Commissioner or his
duly authorized representative. The FLD/FAN calling for
payment of the taxpayer's deficiency tax or taxes shall state the
facts, the law, rules and regulations, or jurisprudence on which
the assessment is based; otherwise, the assessment shall be
void.
Requisites of a valid assessment (FLD/FAN)

1. The assessment must be served within the prescriptive
period
2. The assessment must inform the taxpayer of the
discovery of unpaid or still unpaid tax coupled with a
demand of the same including penalties
3. The assessment must show in detail the facts and the
law, rules and regulations, or jurisprudence on which
the assessment is based
4. The assessment must be served through registered
mail or by personal delivery and acknowledged by the
taxpayer or his duly authorized representative
5. The assessment must be preceded by a pre-
assessment notice

Disputed Assessment
The taxpayer or its authorized representative or tax
agent may protest administratively against the aforesaid
FLD/FAN within thirty (30) days from date of receipt thereof.
vi. Final Decision on a Disputed Assessment (FDDA)

The decision of the Commissioner or his duly
authorized representative shall state the (i) facts, the applicable
law, rules and regulations, or jurisprudence on which such
decision is based, otherwise, the decision shall be void, and (ii)
that the same is his final decision.
NOTE: Issuance of an FDDA by the Commissioner or his duly

authorized representative is proper only when taxpayer disputes
an assessment.

TAX “Innovating
Educational
COLLECTION Services”
KHEEN V. BATINGAL
REVIEW NOTES
Collection is enforced by the government once assessment becomes

final and executory.
i. When assessment becomes final, executory and

demandable
1. Failure of the taxpayer to file a valid protest within thirty
(30) days from receipt of the Formal Letter of Demand
and Final Assessment Notice (FLD/FAN);
2. Failure of the taxpayer to submit all relevant documents
in support of his protest by way of request for
reinvestigation within sixty (60) days from the date of
filing thereof;
3. Failure of the taxpayer to appeal to the Commissioner
of Internal Revenue or the Court of Tax Appeals (CTA)
within thirty (30) days from date of receipt of the FDDA
issued by the Commissioner's duly authorized
representative;
4. Failure of the taxpayer to appeal to the CTA within thirty
(30) days from date of receipt of the FDDA issued by
the Commissioner;
5. Failure of the taxpayer to timely file a motion for
reconsideration or new trial before the CTA Division or
failure to appeal to the CTA En Banc and Supreme
Court based on existing Rules of Procedure; or
6. Failure of the taxpayer to receive any assessment
notices because it was served in the address indicated
in the BIR's registration database and the taxpayer
transferred to a new address or closed/ceased
operations without updating and transferring its BIR
registration or cancelling its BIR registration as the case
may be. (RMO No. 26-2016)
ii. Effect of Appeal to Court of Tax Appeals

GENERAL RULE: No appeal taken by the Court of Tax Appeals
from the decision of the Commissioner of Internal Revenue xxx
shall suspend the payment, levy, distraint, and or sale of any
property of the taxpayer for the satisfaction of his tax liability as
provided by existing law xxx.

AFAR COLLECTION. Review Notes
iii. Payment under Protest

To avoid the imposition of interest, penalties or charges
on a contested assessment, a taxpayer may pay the contested
assessment under protest. The taxpayer can file a claim for
refund later when the disputed assessment is partially or wholly
decided in his favor.
iv. Government Remedies to Enforce Collections

1. Imposition of tax lien
2. Seizure of the taxpayer’s properties (distraint or levy)
3. Auction sale and or forfeiture of taxpayer’s properties
4. Filing of civil or criminal action against the taxpayer
5. Imposition of administrative penalties and fines
6. Suspension of business operations
7. Entering into a tax compromise with the taxpayer
v. Stages of Collection
1. Preliminary Collection Letter
2. Final Notice before Seizure Letter
3. Warrant of Distraint/Levy or Garnishment
4. Research of taxpayer properties
5. Notice of Tax Lien and or Notice of Tax Levy
6. Seizure of properties
7. Auction sale and/or forfeiture of properties
8. Filing of civil or criminal action
Preliminary Collection Letter

Once the assessment achieved finality, the BIR
Collection Division will send the taxpayer Preliminary
Collection Letter signed by the RDO who has
jurisdiction.
Methods of payment: lump sum payment (general rule)
or installment payment or compromise settlement
(subject to approval by BIR)
Final Notice Before Seizure

Within 10 days from issuance of PCL, the BIR
sends the taxpayer the Final Notice before Seizure
Letter
Warrant of Distraint/Levy or Garnishment

Warrant of Distraint – seizure of personal properties
Warrant of Levy – seizure of real properties

Warrant of Garnishment – seizure of bank accounts
Limitation of the Warrant of Distraint and/or Levy

 Not availed if the amount of tax is not more
than P100
 Shall not be sent earlier than 90 days from
the date the assessment becomes due and
demandable
Exception to the 90-day rule
Delinquent taxes may be collected immediately

by distraint or levy in cases where:
 The amount shown in the return is not paid

on time
 The individual taxpayer fails to pay the
second installment of his income tax
Research of Taxpayer Properties
If the taxpayer fails to pay his delinquent

accounts after the service of the WDL, the revenue
officer shall look for properties of the taxpayer that can
be attached to his tax liabilities.
Notice of Tax Lien (NTL) or Notice of Levy
It is used to validate the legal claims or charge

of the government on identified property of the taxpayer
as security for payment of his tax liability.
Seizure of Property
 Distraint of Personal Property

 Garnishment of Bank Accounts
 Constructive Distraint
 Levy on Real Property

Who shall conduct the distraint?
a. the Commissioner or his duly authorized

representative, if the amount involved is in
excess of One million pesos (P1,000,000), or
b. the Revenue District Officer, if the amount
involved is One million pesos (P1,000,000) or
less (Sec. 207(A), NIRC, as amended)
Extent of properties to be distrained

any goods, chattels or effects, and the personal
property, including stocks and other securities, debts,
credits, bank accounts, and interests in and rights to
personal property of such persons in sufficient quantity
to satisfy the tax, or charge, together with any increment
thereto incident to delinquency, and the expenses of the
distraint and the cost of the subsequent sale.
Procedure for Distraint and Garnishment

 Goods, chattels, effects or other personal
property distrained – the owner or person
from whose possession such goods were
taken, or at the dwelling or place of
business of such person and with someone
of suitable age and discretion.
 Stocks and other securities – taxpayer and
upon the president, manager, treasurer or
other responsible officer of the corporation,
company or association, which issued the
said stocks or securities.
 Debts and credits – the person owing the
debts or having in his possession or under
his control such credits, or with his agent.
 Bank accounts – the taxpayer and upon the
president, manager, treasurer or other
responsible officer of the bank.

Levy on Real Property
Any internal revenue officer designated by the

Commissioner, or his duly authorized representative
shall prepare a duly authenticated certificate showing
the name of the taxpayer and the amounts of the tax
and penalty due from him. Said certificate shall operate
with the force of a legal execution throughout the
Philippines. (Sec. 207(B), NIRC, as amended)
Constructive Distraint
The constructive distraint of personal property

shall be affected by requiring the taxpayer or any
person having possession or control of such property to
sign a receipt covering the property distrained and
obligate himself to preserve the same intact and
unaltered and not to dispose of the same; in any
manner whatever, without the express authority of the
Commissioner.
In case the taxpayer or the person having the

possession and control of the property sought to be
placed under constructive distraint refuses or fails to
sign the receipt herein referred to, the revenue officer
effecting the constructive distraint shall proceed to
prepare a list of such property and, in the presence of
two (2) witnesses, leave a copy thereof in the premises
where the property distrained is located, after which the
said property shall be deemed to have been placed
under constructive distraint. (Sec. 206, NIRC)

When a constructive distraint may be made?
In the opinion of the Commissioner, when the taxpayer

is:
 Retiring from a business subject to tax

 Intending to leave the Philippines
 Intending to remove his property or conceal
the same
 Intending to perform an act tending to
obstruct the proceedings of collecting the
tax due
Auction Sale of Seized Property
Within 20 days from levy, the revenue officer

conducting the proceeding shall advertise the property
for auction sale for at least 30 days.
Forfeiture of taxpayer’s property
When the amounts offered by bidders in two

consecutive auction sales failed to raise a sufficient
amount to cover the taxpayer’s liability, the government
will forfeit the property.
Effect of Sale or Forfeiture
Taxpayer’s right of redemption – 1 year from the date

of auction sale of forfeiture
Further distraint or levy – when the proceeds of the

auction sale fail to satisfy the unpaid tax

TAXATION
TAX REMEDIES
REMEDIES OF THE TAXPAYERS
T Engineer / Reviewer:
Knowledge Ernesto P. Moreno, MST, CPA “Home of Topnotch Professionals!”
REMTAX.01 DEFINITION, SCOPE AND PRESCRIPTIVE PERIO
1.1. AUTHORITY OF THE CIR TO COMPROMISE, ABATE, AND REFUND OR CREDIT TAXES.
1.1.1 AUTHORITY TO COMPROMISE

A. Compromise is generally considered by tax experts as the remedy of last resort or the last-ditch
remedies. In some cases, compromise can be a win-win solution for both the government and the
taxpayer.
B. Conditions for compromise:

I. The CIR may compromise the payment of internal revenue tax when:
 A reasonable doubt exist as to the validity of the claim against the taxpayer exists.
 The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax.
C. Minimum of compromise settlements:

I. 10% of the basic assessed tax – in cases of financial incapacity
II. 40% of the basic assessed tax – for other cases
D. Who will approve the offer of compromise by taxpayer?

I. Office of the Commissioner of Internal Revenue
II. National Evaluation Board (NEB)
 Compromise by the NEB

1. The NEB shall approve the compromise offer when:
a. The basic tax involved exceeds P1,000,000 or
b. The settlement offered is less than the prescribed minimum rates
 Composition of the NEB:
1. The Commissioner if Internal Revenue
2. The four Deputy Commissioner
 All the decisions of the NEB, favourable or unfavourable, shall have the concurrence of the
Commissioner.
III. Regional Evaluation Board (REB)
 The compromise of taxes is within the judgement and discretion of the Commissioner of
Internal Revenue, except in the following cases:
 Compromise by the REB:

1. The REB shall approve the offer for compromise for:
a. Assessments issued by Regional Offices involving a basic deficiency tax of
P500,000 or less
b. Minor criminal violations discovered by Regional and District Offices
 Composition of the REB:

1. Regional Director – as chairman
2. Assistant Regional Director
3. Chief, Legal Division
TAXATION. TAX REMEDIES. Remedies of the Taxpayers. Definition, scope and prescriptive period 2
4. Chief, Assessment Division

5. Chief, Collection Division
6. Revenue District Officer having jurisdiction over the taxpayer-applicant
a. If the offer of compromise is less than the prescribe rates, the same shall always
be subject to the approval of the NEB.
b. The CIR alone can enter into compromise when the basic tax involved does not
exceed P1M, and the settlement is not below the prescribed percentages.
E. What may be compromised?

A. Delinquent accounts
B. Pending cases under administrative protest
C. Civil tax cases being disputed before the courts
D. Collection cases filed in courts
E. Criminal violations other than:
 Those already filed in courts
 Those involving criminal tax fraud
F. Cases covered by pre-assessment notices contested by the taxpayer
F. What cannot be compromised?

A. Withholding tax cases
B. Criminal tax fraud cases
C. Criminal violations already filed in courts
D. Delinquent accounts with duly approved schedule of installment payments
E. Cases of reduced assessment agreed upon by the taxpayer
F. Cases which have become final and executory after final judgement of court
1.1.2 AUTHORITY OF THE CIR TO ABATE TAXES

A. Under Section 204(B) if the NIRC, the CIR is authorized to abate or cancel a tax liability under the
I. The tax or any portion of it which appears to be unjustly or excessively assessed.
II. The administrative or collection costs involved do not justify the collection of the amount due.
III. The taxpayer is dead, leaving no distrainable or leviable property.
IV. The taxpayer is abroad leaving no forwarding address with no distrainable or leviable property.
V. The taxpayer is a corporation who has already dissolved and all subscribed share of stock have
been fully paid
VI. The tax case has already prescribed.
TAX “Innovating
DEFINITION, SCOPE, PRESCRIPTIVE PERIODS Educational
Services”
KHEEN V. BATINGAL
REVIEW NOTES
i. Remedies available
Remedies of
Common Remedies of
the
Remedies the Taxpayer
Government
Administrative Assessment Compromise Protest
Remedies Collection Abatement Refund
Appeal to
Civil Suit/Action
Courts
Judicial
Criminal suit
Remedies
Criminal Action against erring
BIR Officials
ii. Due process requirement

No person shall be deprived of life, liberty, or property
without due process of law, nor shall any person be denied the
equal protection of the laws. (Sec. 1, Art. III, 1987 Constitution)
Aspects of Due Process

1. Substantive due process – restriction on the
government’s law and rule-making powers. The kind of
tax that can be enforced against a taxpayer.
2. Procedural due process – restriction on actions of
judicial and quasi-judicial agencies of the government.
When and how the tax law shall be enforced against a
taxpayer.
iii. Rule on “No injunction to Restrain Tax Collection”

No court shall have the authority to grant an injunction to
restrain the collection of any national internal revenue tax, fee or
charge imposed by the NIRC, as amended. (Sec. 218, NIRC, as
amended)
The Court of Tax Appeals, however, is authorized to

suspend the collection of taxes when it may jeopardize the interest
of the taxpayer and/or the government. (Sec. 11, RA 1125)

AFAR DEFINITION, SCOPE, PRESCRIPTIVE PERIODS. Review Notes
It is upon taxation that the Government chiefly relies to
obtain the means to carry on its operations and it is of the utmost
importance that the means adopted to enforce the collection of
taxes levied should be summary and interfered with as little as
possible. (Churchill, et al. v. Rafferty, etc., 32 Phil. 580)
iv. Collectibility of tax as a basis for collection enforcement

The basic consideration, whether the assessment is final
and unappealable, or the decision of the CIR is final, executory
and demandable, is that whether the BIR has legal basis to collect
the tax liability either by distraint and levy or by civil action
v. Prescription of government’s right to assess and collect

taxes
GENERAL RULE: The law requires that assessment
must be made within 3 years from the date of the actual filing of
the return or the deadline required by law, whichever is later. (Sec.
203, NIRC, as amended)
Taxpayer’s right to modify, change or amend return

Any return, statement of declaration filed within any office
authorized to receive the same shall not be withdrawn. Provided,
that within 3 years from the date of such filing, the same may be
modified, changed, or amended. (Sec. 6(A), NIRC, as amended)
Exception to the 3-Year Rule

1. A fraudulent tax return is filed
2. Failure to file a return
The BIR has up to 10 years from the discovery of the fraud or non-
filing of returns to make assessments. (Sec. 222(a), NIRC, as
amended)
Prescription of Government’s Right to Collect Taxes

Any internal revenue tax which has been assessed within
the period of limitation xxx may be collected by distraint or levy or
by a proceeding in court within five (5) years following the
assessment of the tax. (Sec. 222(c), NIRC, as amended)

AFAR DEFINITION, SCOPE, PRESCRIPTIVE PERIODS. Review Notes
vi. Equitable recoupment and prescription
The rule in this jurisdiction is not to allow the set-off; for if
that were so, this would only encourage negligence on the part of
our collecting officers who would feel secure despite prescription
in the thought that they could always collect the prescribed tax
through the expedient of set-off. (CIR vs. University of Sto. Tomas,
et al., 104 Phil. 1062)
vii. Interruption of the prescriptive period

1. When the Commissioner is prohibited from making the
assessment or beginning distraint or levy or a proceeding
in court and for sixty (60) days thereafter;
2. When the taxpayer requests for the reinvestigation which
granted by the Commissioner (Waiver of the Statutes of
Limitation by the Taxpayer; not less than 180 days);
3. When the taxpayer cannot be located in the address given
by him in the return filed upon which a tax is being
assessed or collected; provided, that if the taxpayer
informs the Commissioner of any change in address, the
running of the Statute of Limitations will not be
suspended;
4. When the warrant of distraint and levy is duly served upon
the taxpayer, his authorized representative or a member
of his household with sufficient discretion and no property
could be located; and,
5. When the taxpayer is out of the Philippines.
viii. Rule on Prescription in Criminal Cases

1. All violations of any provision of the Tax Code shall
prescribe after five (5) years.
2. Prescription shall begin to run from the day of the
commission of the violation of the law, and if the same be
not known at the time, from the discovery thereof and the
institution of judicial proceedings for its investigation and
punishment.
3. The prescription shall be interrupted when proceedings
are instituted against the guilty persons and shall begin to
run again if the proceedings are dismissed for reasons not
constituting jeopardy.
4. The term of prescription shall not run when the offender
is absent from the Philippines. (Sec. 281, NIRC, as
amended)

TAXATION
TAX REMEDIES MARGINAL NOTES

REMGOV.01 DEFINITION, SCOPE, and PRESCRIPTIVE PERIOD

1.1 AN INTRODUCTION
1.1.1 Philippine taxes are self-assessing. Taxpayers compute their taxes, file tax returns, and then pay to the
government. The self-assessment method has an inherent risk: under-compliance or non-compliance.
1.1.2 The government is not totally at the mercy of taxpayers. The government can resort to its legally
mandated procedures to enforce the determination and collection of the correct amount of tax from the
taxpayers. These procedures are referred to as “government remedies.”
1.1.3 On the other hand, taxpayers may be improperly assessed taxes by the government. At time, the taxpayer
may erroneously pay taxes. The law provides the taxpayer procedures for disputing assessments and in
recovering taxes erroneously paid. These procedures are called “taxpayers’ remedies.”
1.2 REMEDIES AVAILABLE TO THE STATE AND TAXPAYER
Common
Remedies of the Remedies Remedies of the
State available to both Taxpayer
Assessment Compromise Protest
Administrative Level
Collection Abatement Refund
Civil Suit/Action Appeal to CTA
Criminal TRO/Injunction
Judicial Level Suit/Action
Criminal suit against
erring BIR officials
1.3 PRESCRIPTIVE PERIOD OF ASSESSMENT

1.3.1 The law requires that assessment must be made within 3 years from the date of the actual filing of the
return or the deadline required by law, whichever is later.
1.3.2 Illustration 1: Early filing or filing on the deadline

A. Ronnie Dela Cruz filed his 2017 annual income tax return which was due on April 15, 2018 on March
1, 2018.
B. A return filed before the last day prescribed by law for filing thereof shall be considered filed on such
last day (Sec. 203, NIRC). The counting of the prescriptive period shall be reckoned from April 15,
2018. The government must serve the assessment to the taxpayer on or before April 15, 2021.
1.3.3 Illustration 2: Late filing

A. Assume instead that Ronnie Dela Cruz filed his 2017 annual income tax return on July 1, 2018.
B. Where the return is filed beyond the period prescribed by law, the 3-years period shall be counted
from the day the return is filed (Sec. 203, NIRC). Hence, the counting of the prescriptive period shall
be reckoned from July 1, 2018. The assessment must be served on or before July 1, 2021.
TAXATION. TAX REMEDIES. Remedies of the Government. Definition, Scope and Prescriptive Period 2
1.3.4 EXCEPTION TO THE 3-YEAR RULE:

A. Fraudulent Returns
B. No return was filed by the taxpayer
a. In cases of fraudulent returns or non-filing of returns, the BIR has up to 10 years from the discovery
of the fraud or non-filing of returns to make assessments.
C. Waiver of statutes of limitation by the taxpayer
a. When the taxpayer requests for a reinvestigation of his assessment which is granted by the CIR, the
CIR and the taxpayer usually agree for the temporary suspension of the prescriptive period for not
less than 6 months to give way to the reinvestigation.
1.3.5 Summary of Prescription Rules: Deadline of Assessment
Deadline of assessment
With a tax return filed
- Return is non- 3 years from date of filing or
Fraudulent deadline
Whichever is late
- Return is fraudulent 10 years from the discovery
of fraud
Non-filing of tax return 10 years from the discovery
of non-filing
1.4 List of Deadlines of Various Taxes:

1.4.1 Income Tax Returns
A. Quarterly income tax
I. Individual – within 45 days following the end of the calendar quarter
II. Corporations – within 60 days following the end of the quarter
B. Annual income tax
I. Individual – April 15 of the following year (UNDER RA 8724); May 15 of the following year
(UNDER THE TRAIN LAW)
II. Corporation – on the 15th day of the fourth month following the end of the taxpayer’s year-end
C. Capital gains tax return
I. Capital gains tax return on sale of domestic stocks
 Transactional return – 30 days from the date of sale
 Annual return – 15th day of the fourth month following the end of the taxpayer’s year-end
II. Capital gains tax return on sale of real properties – 30 days from the date of sales
D. Withholding tax returns
I. Withholding of final tax and fringe benefits tax – 10 days following the month of withholding
(manual filing)
II. Withholding tax on compensation income and expanded withholding tax – 10 days from the end
of each calendar month; for December, January 15 of the succeeding year
1.4.2 Transfer Tax Returns

A. Donor’s tax – within 30 days from the date of the donation
B. Estate tax – within 6 months from the date of the decedent’s death (PRIOR TO Jan. 1, 2018); 1 year
from the date of death (UNDER THE TRAIN LAW)
1.4.3 Business Tax Returns

A. NON-Vat Taxpayers
I. Monthly Percentage tax (BIR Form 2551M) – within 20 days of the following month EXCEPT
Section 120, 125, 126, 127A and 127B (PRIOR TO TRAIN LAW); 25 days end of the quarter
(UNDER THE TRAIN LAW)
II. Quarterly Percentage tax (BIR Form 2551Q) – within 20 days end of the quarter (PRIOR TO
TRAIN LAW); 25 days end of the quarter (UNDER THE TRAIN LAW) Except Section 127A and
127B
B. Vat Taxpayers
I. Month Value Added Tax (BIR Form 2550M) – within 20 days of the following month
II. Quarterly Value Added Tax (BIR Form 2550Q) – within 20 days of the following month
1.4.4 Documentary stamp tax return – within 5 days of the following month
A. Except when late, the prescriptive period for assessment shall be counted from the aforementioned
deadline of filing of the tax type being assessed.
B. Example 1:
Any unpaid tax for a donation made on July 1, 2017 must be assessed on or before July 31, 2020.
C. Example 2:
Any unpaid VAT for the quarter ending August 31, 2018 must be assessed on or before September
25, 2021.

1. Given
Date of adverse decision of the CTA June 1, 2009
Date the CTA adverse decision received June 10, 2009
Question: When is the last day to appeal to the Court of Appeals?
A. June 16, 2009
B. June 25, 2009
C. July 1 2009
D. July 10, 2009
2. Given
Date of first installment payment of tax April 15, 2010
Date of second installment payment of tax July 15, 2010
If the payments are determined as refundable, when will be the prescribed date to file the request for
refund?
A. On or before April 15, 2012
B. On or before July 15, 2012
C. On or before April 15, 2013
D. On or before July 15, 2013
3. Given
Date of tax erroneously paid June 10, 2008
Date of claim for refund was filed with BIR June 10, 2009
Date of favorable BIR decision was issued August 1, 2009
Date when the refund check was mailed August 10, 2009
Date of refund check received August 25, 2009
When will the refund check be forfeited when not encashed in due time?
A. June 10, 2013
B. June 10 2014
C. August 10 2014
D. August 25, 2014
4. In the following cases, the government’s prescriptive period to collect starts to run except
A. Tax which has been subject of assessment may be collected within 5 years from the date of such
assessment.
B. the period of limitation to collect is counted from the time the demand or assessment notice has been
received by the taxpayer.
C. Where no assessment was made and the return is not false or fraudulent, the prescriptive period for
collection is within 3 years after the return was due or filed, whichever is later.
D. When the return is fraudulent with the intent to evade tax, or no tax return is filed, a proceeding in court
for the collection may be filed without assessment, any time within 10 years after discovery of fraud or
omission.
5. Which of the following is not a correct prescription period for the collection of taxes?
A. Tax which has been subject of assessment may be collected within 5 years from the date of such
assessment.
B. the period of limitation to collect is counted from the time the demand or assessment notice has been
sent released or mailed to the taxpayer.
C. Where no assessment was made and the return is not false or fraudulent, the prescriptive period for
collection is within 3 years after the return was due or filed, whichever is shorter.
D. When the return is fraudulent with the intent to evade tax, or no tax return is filed, a proceeding in court
for the collection may be filed without assessment, any time within 10 years after discovery of fraud or
omission.
6. As a general rule, within what period must a taxpayer elevate to the Court of Tax Appeals a denial of his
application for refund of income tax overpayment?
A. Within 30 days from receipt of the Commissioner’s denial of his application for refund.
B. Within 30 days from receipt of the denial which must not exceed 2 years from payment of income tax.
C. Within 2 years from payment of the income taxes sought to be refunded.
D. Within 30 days from receipt of the denial or within two years from payment.
7. The taxpayer filed his income tax return for year 2015 on May 2, 2016. The taxable year ended December
31, 2015. When is the last day for BIR to make assessment?
A. April 5, 2019
B. April 15, 2018
C. May 2, 2018
D. May 2, 2019
8. When the 2015 income tax return filed in 2016 is found to be deficient but not fraudulent, and final
assessment notice was sent by BIR April 5, 2016,when will be the last day for the BIR to collect?
A. April 15, 2018
B. April 15, 2019
C. April 5, 2020
D. April 5, 2018
9. The tax return is required to be filed on or before April 15, 2015. The actual tax return was filed March 15,
2015. The last day for assessment period is
A. April 15, 2015.
B. April 15, 2018.
C. March 15, 2015.
D. March 15, 2018.
10. A taxpayer filed an income tax return for calendar year 2016 on March 10, 2017. The prescribed filing is
April 15, of the year following the taxable year. The taxable year ended December 31, 2016. When is the
last day for the BIR to make an assessment?
A. March 10,2020
B. April 15, 2020
C. April 10, 2020
D. April 15, 2017
11. On July 31, 2016, Esperanza received a preliminary assessment notice from the BIR demanding that she
pays P180,000.00 deficiency income taxes on her 2014 income. How many days from July 31, 2016 should
Esperanza respond to the notice?
A. 180 days.
B. 30 days.
C. 60 days.
D. 15 days.
12. Given
Date of assessment was received January 2, 2016
Petition for reconsideration was filed with BIR January 12, 2016
Documents to support petition submitted January 22, 2016
No decision on the protest as of July 12, 2016
Question: When is the last day to appeal to the CTA?
A. July 2, 2016
B. July 12 2016
C. July 22 2016
D. August 12, 2016
13. Given
Date of adverse decision of the CTA June 1, 2017
Date the CTA adverse decision received June 10, 2017
Question: When is the last day to appeal to the Court of Appeals?
A. June 16, 2017
B. June 25, 2017
C. July 1 2017
D. July 10, 2017
14. Given
Date of first installment payment of tax April 15, 2010
Date of second installment payment of tax July 15, 2010
If the payments are determined as refundable, when will be the prescribed date to file the request for
refund?
A. On or before April 15, 2012
B. On or before July 15, 2012
C. On or before April 15, 2013
D. On or before July 15, 2013
15. Given
Date of claim for refund was filed with BIR June 10, 2009
Date of favorable BIR decision was issued August 1, 2009
Date when the refund check was mailed August 10, 2009
Date of refund check received August 25, 2009
When will the refund check be forfeited when not encashed in due time?
A. June 10, 2013
B. June 10 2014
C. August 10 2014
D. August 25, 2014
16. Given:
Date of claim for refund was filed with BIR March 3, 2016
Date of BIR decision of denial was received April 5, 2016

A. April 2, 2016
B. April 20,2016
C. May 5, 2016
D. June 10 2016
17. A taxpayer filed an income tax return for calendar year 2012 on March 10, 2013. The prescribed filing is
April 15, of the year following the taxable year. When is the last day for the BIR to make an assessment?
A. March 10,2016
B. April 15, 2016
C. April 10, 2015
D. March 10, 2015
18. The taxpayer filed his income tax return for year 2012 on May 2, 2013.When is the last day for BIR to
collect?
A. May 2, 2013
B. April 15, 2016
C. May 2, 2016
D. May 2, 2023
19. Given:
Date of claim for refund was filed with BIR March 3, 2010
Date of BIR decision of denial was received April 5, 2010
A. April 2, 2010
B. April 20,2010
C. May 5, 2010
D. June 10 2010
20. Given
Date of assessment was received January 2, 2009
Petition for reconsideration was filed with BIR January 12, 2009
Documents to support petition submitted January 22, 2009
No decision on the protest as of July 12, 2009
A. July 2, 2009
B. July 12 2009
C. July 22 2009
D. August 12, 2009
21. What is the prescribed period for redemption of real property levied and sold in public auction?
A. 1 year from the date of final assessment
B. 1 year from date the levy proceeding started
C. 1 year from the date the sale was granted to highest bidder
D. 1 year from the date the intention to redeem is manifested
22. When the 2012 income tax return filed in 2013 is found to be deficient but not fraudulent, and final
assessment notice was sent by BIR April 5, 2014 and received by the tax payer on May 5, 2014, when will
be the last day for the BIR to collect?
A. May 5, 2017
B. May 5, 2019
C. April 5, 2019
D. April 5, 2017
23. The tax return is required to be filed on or before April 15, 2013. The actual tax return was filed March 15,
2013. The last day for assessment period is
A. April 15, 2015.
B. April 15, 2016.
C. March 15, 2015.
D. March 15, 2016
TAX “Innovating
Educational
DISPUTING AN ASSESSMENT Services”
KHEEN V. BATINGAL
REVIEW NOTES
i. Assumption
To understand the procedure on where the taxpayer
should exercise his/her right to due process, we assume on the
following discussion that the taxpayer’s remedies are always
denied by the appropriate body/court.
ii. Administrative protest

1. Remedy for Notice of Informal Conference (NIC)
Within thirty (30) days from receipt of NIC, the
taxpayer is afforded an opportunity to present his side
of the case over the discrepancy or discrepancies in the
taxpayer’s payment of his internal revenue taxes.
2. Remedy for Preliminary Assessment Notice (PAN)

The taxpayer has up to fifteen (15) days from
the receipt of the PAN to reply to the proposed
assessment.
If no reply within 15 days – FLD/FAN will be issued
If reply was submitted within 15 days – FLD/FAN will be

issued WITHIN 15 DAYS after submission of reply
Content of Reply to PAN

a. Explanation on matters questioned by the
examiner
b. Factual and legal bases supporting the
taxpayer’s position
c. Prayer for full or partial cancellation of the PAN
3. Remedy for Formal Letter of Demand and Final

Assessment Notice (FLD/FAN)
The taxpayer has up to thirty (30) days from the
receipt of the FLD/FAN to file for an administrative
protest to the appropriate BIR office (not yet to the
Commissioner, unless the FLD/FAN was issued by the
Commissioner).

AFAR DISPUTING AN ASSESSMENT. Review Notes
Requirements for the validity of a protest
a. The taxpayer must indicate the nature of
protest
b. The taxpayer must state the date of the
assessment notice
c. The taxpayer should state the facts, the
applicable law, rules and regulations or
jurisprudence on which the protest is based
d. The protest must be filed by the taxpayer or
his/her duly authorized representatives, in
person or through registered mail with return
card with the concerned Regional Director,
Assistant Commissioner-LTS or Assistant
Commissioner-Enforcement Service, as the
case may be
e. All relevant documents must be submitted
within 60 days from the filing of the request for
reinvestigation
Types of Taxpayers’ Protest

a. Request for reconsideration – plea for a
reevaluation of an assessment on the basis of
EXISTING RECORDS
b. Request for re-investigation – plea for a
reevaluation of an assessment on the basis of
NEWLY DISCOVERED OR ADDITIONAL
EVIDENCE
If taxpayer files for Request for Reinvestigation
The taxpayer shall submit all relevant

supporting documents in support of his protest within
sixty (60) days from date of filing of his letter of protest,
otherwise, the assessment shall become final.
The taxpayer is also required to sign a “Waiver

of the Statutes of Limitation” for a period of not less than
6 months to give way to the reinvestigation. The
suspension of the prescriptive period shall only upon
approval of the protest.

Finality of assessment on undisputed issues
If there are several issues involved in the

FLD/FAN but the taxpayer only disputes or protests
against the validity of some of the issues raised, the
assessment attributable to the undisputed issue or
issues shall become final, executory and demandable
xxx.
If taxpayer fails to state the facts, the applicable

law, rules and regulations, or jurisprudence in support
of his protest against some of the several issues on
which the assessment is based, the same shall be
considered undisputed issue or issues, in which case,
the assessment attributable thereto shall become final,
executory and demandable xxx.
After filing of formal protest against FLD/FAN
The taxpayer shall wait for BIR action within 180

days counted from:
o Submission of documents – request for

reinvestigation
o Filing of protest – request for reconsideration
4. If protest is denied by Commissioner’s

Representative
a. Judicial Appeal – appeal to the Court of Tax
Appeals (CTA) within thirty (30) days from date
of receipt of the said decision;
b. Administrative Appeal – elevate protest through
request for reconsideration to the
Commissioner within thirty (30) days from date
or receipt of the said decision.

Note: No request for reinvestigation is allowed
anymore!
5. If no action by Commissioner’s Representative

after 180 days
a. appeal to the CTA within thirty (30) days after
the expiration of the one hundred eighty (180)-
day period; or
b. await the final decision of the Commissioner’s
duly authorized representative on the disputed
assessment.
Note: Options are mutually exclusive.
6. If appeal protest is denied by the Commissioner

a. Judicial Appeal – appeal to the Court of Tax
Appeals (CTA) within thirty (30) days from date
of receipt of the said decision;
b. Motion for Reconsideration (MR) to the
Commissioner.
Note: Motion for Reconsideration will not toll/halt the

counting of 30-day period of appeal to the CTA.
7. If no action by Commissioner after 180 days

a. appeal to the CTA within thirty (30) days after
the expiration of the one hundred eighty (180)-
day period; or
b. await the final decision of the Commissioner on
the disputed assessment.
Note: Options are mutually exclusive.
iii. Judicial appeal

1. If appeal was made before the CTA
Upon CTA’s receipt of appeal by the taxpayer,
the case is raffled to one of its divisions.
The taxpayer is expected to abide by the

judicial process pursuant to the Revised Rules of the
Court of Tax Appeals (A.M. No. 05-11-07-CTA)
2. If CTA division ruled against the taxpayer


trial under the same division
b. Appeal to the CTA en banc
3. If CTA en banc ruled against the taxpayer

trial
b. File a petition for review on certiorari to the
Supreme Court
4. If SC ruled against the taxpayer

Within fifteen (15) days, the taxpayer may file a
motion for reconsideration (MR).
After which, the final decision can no longer be

appealed.
5. Remedy of last resort

Settle tax liability by way of compromise
payment, which is permissible only under rigid
conditions.
6. Summary of availing remedies against assessment

a. Appeal on Administrative remedies – within 30
days, except in case of PAN – within 15 days
b. Appeal on Judicial remedies – within 15 days

TAX “Innovating
EXPANDED JURISDICTION OF THE COURT OF TAX APPEALS Educational
Services”
KHEEN V. BATINGAL
REVIEW NOTES
i. History of Court of Tax Appeals

The Court of Tax Appeals (CTA) was created by virtue of
Republic Act No. 1125 way back in June 16, 1954. Since then, it
only undergone two amendments, namely:
1. RA No. 9282 – expanding the jurisdiction of CTA
regarding its membership and elevating its rank in the
hierarchy of courts as a collegiate court, with equivalent
level with Court of Appeals; and,
2. RA No. 9503 – enlarging further the organizational
structure of the CTA.
ii. Composition of the Court of Tax Appeals

1. 1 Presiding Justice
2. 8 Associate Justice
Note: The justices may convene by division consisting 3 justices
(thus, 3 divisions) or en banc
iii. Purposes or objectives for the creation of the CTA:

1. To expedite the disposition of tax cases
2. To have a judicial body specialized in tax laws
iv. Exclusive Original and Appellate Jurisdiction over Civil

Cases
1. Court en banc
a. Decisions or resolutions on motions for
reconsideration or new trial of the Court in
Divisions in the exercise of its exclusive
appellate jurisdiction over:
i. Cases arising from administrative
agencies – BIR, BOC, DoF, DTI and
DA;
ii. Local tax cases decided by the RTC in
the exercise of their original
jurisdiction; and,

AFAR EXPANDED JURISDICTION OF THE COURT OF TAX APPEALS. Review Notes
iii. Tax collection cases decided by the
RTC in the exercise of their original
jurisdiction involving final and
executory assessments for taxes, fees,
charges and penalties, where the
principal amount of taxes and penalties
claimed is less than P1 million pesos;
b. Decisions, resolutions or orders of the RTC in
cases decided or resolved by them in the
exercise of their appellate jurisdiction over:
i. Local tax cases
ii. Tax collection cases
c. Decisions, resolutions or orders on motions for
reconsideration or new trial of the Court in
Division in the exercise of its exclusive original
jurisdiction over tax collection cases; and,
d. Decisions of the Central Board of Assessment
Appeals (CBAA) in the exercise of its appellate
jurisdiction over cases involving the
assessment and taxation of real property
originally decided by the provincial or city board
of assessment appeals.
2. Court in Divisions
a. Exclusive Appellate Jurisdiction
i. Decisions of the CIR in cases involving:
1. Disputed assessments;
2. Refunds of internal revenue
taxes, fees or other charges
and penalties imposed thereto;
3. Other matters arising under
NIRC or other laws
administered by the BIR;
ii. Inaction by the CIR in cases involving:

1. Disputed assessments;
2. Refunds of internal revenue
taxes, fees or other charges
and penalties imposed thereto;
NIRC or other laws
administered by the BIR,
where the NIRC provides a
specific period for action;

iii. Decisions, orders or resolutions of the
RTC in the exercise of their original
jurisdiction over local tax cases and tax
collection cases;
iv. Decisions of the Commissioner of

Customs (COC) in cases involving:
1. Liability for customs duties,
fees or other money charges;
2. Seizure, detention or release
of property affected;
3. Fines, forfeitures or other
penalties in relation thereto; or
Customs Law or other laws
administered by the BOC.
v. Decisions of the Secretary of Finance

on customs cases elevated for
automatic review from decisions of the
COC which are adverse to the
Government under Section 1128 of the
CMTA
vi. Decisions of the Secretary of Trade

and Industry, in the case of non-
agricultural product, commodity or
article, and the Secretary of
Agriculture, in the case of agricultural
product, commodity or article, involving
dumping and countervailing duties
under TCCP, and safeguard measures
under RA No. 8800, where either party
may appeal the decision to impose or
not to impose said duties

b. Exclusive jurisdiction over tax collections
cases
i. 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 one
million pesos or more.
ii. Appellate jurisdiction over appeals

from the judgments, resolutions or
orders of the Regional Trial Courts in
tax collection cases originally decided
by them within their respective
territorial jurisdiction.
v. Exclusive Original and Appellate Jurisdiction over Criminal

Cases
1. Exclusive original jurisdiction – the CTA in Division
shall have exclusive original jurisdiction over all criminal
offenses arising from violations of the NIRC or TCCP
and other laws administered by the BIR or the BOC,
where the principal amount of taxes and fees, exclusive
of charges and penalties, claimed is P1 million or more.
2. Exclusive appellate jurisdiction

a. CTA in Divisions
i. Appeals on judgements, resolutions or
orders of the RTC in their original
jurisdiction in criminal offenses arising
from violations of the NIRC or TCCP
and other laws administered by the BIR
or BOC, where the principal amount of
taxes and fees, exclusive of charges
and penalties, claimed is less than P1
million or where there is no specified
amount claimed; and,

ii. Criminal offenses over petitions for
review of the judgments, resolutions or
orders of the RTC in the exercise of
their appellate jurisdiction over tax
cases originally decided by the MeTC,
MTC and MCTC.
b. CTA en banc
i. Decisions, resolutions or orders on
motions for reconsideration or new trial
of the Court in division in the exercise
of its exclusive original jurisdiction over
criminal offenses arising from
violations of the NIRC or TCCP and
other laws administered by the BIR or
BOC where the principal amount of
taxes and fees, exclusive of charges
and penalties is P1 million or more;
ii. Decisions, resolutions, or orders on

motions for reconsiderations or new
trial of the Court in division in the
exercise of its exclusive appellate
jurisdiction over criminal offenses
arising from violations of the NIRC or
TCCP and other laws administered by
the BIR or BOC; and,
iii. Decisions, resolutions or orders of the

RTC decided or resolved by them in
the exercise of their appellate
jurisdiction over criminal offenses
arising from violations of the NIRC or
TCCP and other laws administered by
the BIR or BOC where the principal
amount of taxes and fees, exclusive of
charges and penalties claimed is less
than P1 million.

TAXATION
TAX REMEDIES
REMGOV.03 JUDICIAL ACTION

3.1 Power of the CIR to obtain information and to summon, examine and take testimony of persons
3.1.1 When after reasonable demands, certain documents, information or records are not forthcoming during
the examination, the BIR may issue subpoena to the taxpayer and/or other person in possession of the
same to produce them.
3.2 Types of Subpoena
3.2.1 Subpoena duces tecum

A. A summon upon the taxpayer or other persons compelling them to produce, under penalty of
neglect, certain documents sought therein. This is usually issued to the taxpayer after his failure to
comply with two consecutive requests to produce his books for examination.
3.2.2 Subpoena ad testificandum
A. A summon upon a person to appear and to give oral testimony.
B. If the requested documents, records, or information cannot be obtained by these means, an

assessment will be prepared based on the “Best Evidence Obtainable” rule.

1. Assessment is a prerequisite for judicial action in which of the following?
I. in the case of failure to file a return
II. in the case of fraudulent return with the intent to evade tax.
A. Only in case I
B. Only in case II
C. In both cases
D. Neither in case i or case II
2. STATEMENT 1: As a general rule, the courts have no authority to enjoin the collection of revenue taxes.
STATEMENT 2: the Court of Tax Appeals is empowered to enjoin the collection of taxes through
administrative remedies when collection could jeopardize the interest of the government or taxpayer.
A. True, true
B. true, false
C. false, true
D. false, false
3. When a BIR decision affirming an assessment is appealed to the CTA, the BIR's power to garnish the
taxpayer's bank Deposits
A. is suspended to await the finality of such decision.
B. is suspended given that the CTA can reverse BIR decisions when prejudicial to the taxpayer.
C. is not suspended because only final decisions of the BIR are subject to appeal.
D. is not suspended since the continued existence of government depends ontax revenues.
TAX “Innovating
Educational
OTHER SANCTIONS Services”
KHEEN V. BATINGAL
REVIEW NOTES
i. Run After Tax Evaders (RATE) program

In 2005, the Department of Finance and BIR launched
the Run After Tax Evaders (RATE) Program. The objective of
the program is to investigate criminal violations of the Tax Code
and make tax evaders pay for the taxes due to the government.
Under this program, the BIR was able to file several criminal
cases against media personalities and prominent businessmen.
Some of these cases were dismissed by the courts due to the
failure of the BIR to prove intent to evade, an important element
in tax evasion cases.
Three years later, the BIR issued Revenue

Memorandum Order (RMO) No. 24-2008, laying down the
policies and guidelines for the RATE cases.
In essence, RMO 24-2008 confirmed that the RATE

program is an investigative proceeding aimed at prosecuting tax
offenders, i.e., those who violate the provisions of the Tax Code,
as amended, particularly Chapter II, Title X. The collection of
taxes is just a collateral benefit.
Prima Facie Evidence of Fraud

Under the rules, the BIR must first establish a ground
for such special audit or investigation, which is done through
conducting a preliminary investigation to ascertain the existence
of prima facie evidence of fraud or tax evasion before a RATE
audit can be pursued.
Upon determination of the existence of fraud or tax

evasion, the BIR is required to submit a report including: (1) the
extent of the fraud possibly committed; and (2) a verification and
determination of the schemes employed by the taxpayer.
ii. Filing of Civil or Criminal Action

The government may alternatively or simultaneously
pursue filing civil or criminal action against the taxpayer with the
summary remedies of distraint or levy.

AFAR OTHER SANCTIONS. Review Notes
iii. Effect of Criminal Prosecution
The judgment in the criminal case shall not only impose
the penalty but shall also order payment of the taxes subject of
the criminal case as finally decided by the Commissioner.
Assessment is not necessary

If there is criminal intent to evade payment of taxes such as in
the case of:
- Filing of a fraudulent return
o Failure to report an income exceed 30% of that
declared per return
o Overstatement of deductions exceeding 30% of the
actual allowable deductions
- Willful neglect to file a return

Income Taxation Taxation
The Taxpayer and Tax Base Tax Exempt Individuals and Organizations
TAX EXEMPT INDIVIDUALS AND ORGANIZATIONS

1. Exempt Individuals
2. Exempt Organizations
a. Exempt domestic non-profit corporations
under the NIRC
b. Government agencies and instrumentalities
c. Certain Government-owned and/or controlled
corporations (GOCCs)
d. Cooperatives

under the NIRC
d. Cooperatives
Exempt Individuals
1. Compensation income earners, self-employed
and professional taxpayers (SEPs) whose annual
taxable incomes are P250,000 or loess
2. Regular income of Barangay Micro-business

Enterprises (BMBEs)
3. Minimum wage earners on certain

compensation income

under the NIRC
d. Cooperatives
Exempt domestic non-profit corporations

1. Labor, agricultural or horticultural organization
not organized principally for profit
2. Mutual savings bank not having a capital stock

represented by shares, and cooperative bank
without capital stock organized and operated for
mutual purposes and without profit

3. A beneficiary society, order or association,
operating for the exclusive benefit of the
members such as a fraternal organization
operating under the lodge system, or mutual aid
association or a nonstock corporation organized
by employees providing for the payment of life,
sickness, accident, or other benefits exclusively
to the members of such society, order, or
association, or nonstock corporation or their
dependents

4. Cemetery company owned and operated
exclusively for the benefit of its members
5. Nonstock corporation or association organized

and operated exclusively for religious,
charitable, scientific, athletic, or cultural
purposes, or for the rehabilitation of veterans,
no part of its net income or asset shall belong to
or inure to the benefit of any member, organizer,
officer or any specific person

6. Business league chamber of commerce, or
board of trade, not organized for profit and no
part of the net income of which inures to the
benefit of any private stock-holder, or individual
7. Civic league or organization not organized for

profit but operated exclusively for the promotion
of social welfare

8. A nonstock and nonprofit educational institution
9. Government educational institution


10.Farmers' or other mutual typhoon or fire
insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone
company, or like organization of a purely local
character, the income of which consists solely
of assessments, dues, and fees collected from
members for the sole purpose of meeting its
expenses; and

11.Farmers', fruit growers', or like association
organized and operated as a sales agent for the
purpose of marketing the products of its
members and turning back to them the proceeds
of sales, less the necessary selling expenses on
the basis of the quantity of produce finished by
them
Qualification of tax exemption

THE CLASSIFICATION RULE
Since exemption applies only to income from

related activities, the income of exempt
corporations is classified into income from related
activities and income from unrelated activities. The
income from unrelated activities is subjected to
regular income tax.
Requisites from exemption

1. It must be a non-stock corporation or
association organized and operated exclusively
for religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of
veterans.

2. It should meet the following tests:
a. Organizational test – Its constitutive
documents exclusively limit its purposes to
one or more of the purposes mentioned
above.
b. Operational test – The regular activities of the

corporation or association must be
exclusively devoted to the accomplishment of
the aforementioned purposes.

3. All net income or assets of the corporation must
be devoted to its purposes and no part of its net
income or asset accrues to or benefits any
member or specific person.
4. It must not be a branch of a foreign non-stock,

non-profit corporation.
Exception to the Classification rule

Non-stock, non-profit educational institutions
Certificate of tax exemption ruling

Non-profit corporations or associations must
secure a Tax Exemption Ruling from the BIR to
enjoy the tax exemption. The ruling shall be valid
for a period of 3 years, unless sooner revoked or
cancelled.

under the NIRC
d. Cooperatives
Government agencies and instrumentalities

Classification rule applies

under the NIRC
d. Cooperatives
Certain GOCCs
GOCCs are generally proprietary or
commercial in nature and are subject to regular
corporate income tax, except the following exempt
GOCCs:
a. Government Service Insurance System (GSIS)
b. Social Security System (SSS)
c. Home Development Mutual Fund (HDMF)
d. Philippine Health and Insurance Corporation
(PHIC)
e. Local water districts

under the NIRC
d. Cooperatives
Cooperatives
an autonomous association of persons who
voluntarily joint together to achieve their social,
economic, and cultural needs and aspirations by
making equitable contributions to the capital
required, patronizing their products and services,
and accepting a fair share of risks and benefits of
the undertaking.
Classification of cooperatives for tax purposes
Cooperatives which
Cooperatives which
transact business with
transact business only
both members and non-
with members
members
Cooperatives which transacts only with members

not subject to any taxes and fees under the
NIRC and other tax laws
Cooperatives which transacts business to anyone

1. Those with not more than P10M accumulated
reserve and undivided net savings – exempt
from taxes
2. Those with more than P10M accumulated

reserve and undivided net savings – subject to
the following taxes at full rate:
a. Income tax on the full amount allocated for
interest on capital

b. Value Added Tax (VAT) on transactions with
non-members
c. Percentage Tax on all sales of goods or

services rendered to non-members
d. All other internal revenue taxes unless

otherwise provided by the law
Taxability of cooperatives to internal revenue tax

All cooperatives regardless of classification
are subject to the following:
1. The applicable income tax on unrelated income
2. Capital gains tax


4. VAT on purposes of goods or services except
VAT exempt transactions
5. Withholding tax on wages except for minimum

wage earners
6. All other taxes for which cooperatives are

directly liable and not otherwise expressly
exempted by any law

under the NIRC
d. Cooperatives
TAXATION
TAX19.M2007 INCTAX
TAX RETURN PREPARATION, FILING, AND TAX PAYMENTS
MARGINA
COMREQ.01 TAX RETURN PREPARATION, FILING, AND TAX PAYMENT NOTES
TAX COMPLIANCE
The Philippines follows the “self-assessment method” wherein taxpayers determine

their gross income, prepare their income tax returns and pay the tax accordingly. The
return filed is presumed correct unless proven otherwise by the government.
However, in cases of failure to file a return, the Commissioner of Internal Revenue
shall file a return from best available information and such return thus filed is
presumed correct. The taxpayer has the burden of proof in this case. The same rule
applies when tax authorities has reasons to believed that the tax return of the
taxpayer is grossly misstated.
Income tax return is required for items of gross income that are subject to:
1. Regular Income Tax (quarterly and annual consolidated return)
2. Capital Gains Tax (per transaction and an annual consolidated return)
Who shall file income tax returns?

3. Every resident Filipino citizen
4. Every non-resident Filipino citizen on his income from sources within the
Philippines
5. Every resident alien on income from sources within the Philippines; and
6. Every non-resident alien engaged in trade or business or in the exercise of
profession in the Philippines, on income from sources within the Philippines
Who are not required to file individual returns for income tax?
1. An individual whose gross income does not exceed his total personal and
additional exemptions, except those engaged in business or profession
2. An individual with respect to pure compensation income, derived from sources in
the Philippines, the income tax on which has been correctly withheld, except
those with concurrent employment
3. An individual whose income has been subjected to final income tax
4. An individuals who is exempt from filing income tax returns in pursuant to other
provisions of the Tax Code and other laws.
Where to file income tax returns?

1. Authorized agent bank
2. Revenue District Officer
3. Collection Agent
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TAX TAX19.M2002-INCTAX. Tax Return Preparation, Filing, and Tax Payment
4. Duly authorized Treasurer of the city or municipality in which the taxpayer has his
MARGINAL legal residence or principal place of business in the Philippines or
NOTES 5. Office of the Commissioner if the taxpayer has no legal residence or place of
business in the Philippines
Payment of Income Tax

1. Outright
2. Installments (for individual taxpayers)
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The Taxpayer and Tax Base Income Taxation Schemes
INCOME TAXATION SCHEMES

Final income taxation
Capital gains taxation
Regular income taxation

Final Income Taxation

It is manifested as a final withholding tax where the
full tax due is withheld by the income payor at source and
is not creditable against income tax due of the payee on
other income subject to regular rates of tax for the taxable
year.
Final income taxation scheme is applicable on the

following cases:
1. Certain passive income enumerated in the Tax Code
2. Certain income taxpayers specified by the Tax Code

Tax Model:
Gross Income XX,XXX
Less: Final tax (withheld by income payor)

(Gross income x applicable tax rate) XX,XXX
Net proceeds to income payee XX,XXX

Capital Gains Taxation

It is imposed only on sale, exchange and other
dispositions on the following capital assets:
1. domestic stock sold directly to buyer
2. real property classified as capital asset located in the

Philippines
Regular Income Taxation

It refers to the catchall coverage; general rule in
income taxation and all other income that are not exempt,
not subject to final tax and not subject to capital gains tax.
The Taxpayer and Tax Base Individuals
Classification of Individuals according to Situs
Citizen Alien
Resident Citizen Resident Alien
Nonresident Citizen Nonresident Alien
Engaged in Trade or Business in the Not Engaged in Trade or Business in

Philippines (ETB) the Philippines (NETB)
Citizen
The following are citizens of the Philippines:
a. Those who are citizens of the Philippines at the time of
the adoption of the 1987 Constitution;
b. Those whose fathers or mothers are citizens of the
Philippines;
c. Those born before January 17, 1973, of Filipino
mothers, who elect Philippine Citizenship upon
reaching the age of majority; and,
d. Those who are naturalized in accordance with law.
Resident Citizen
A Filipino citizen residing in the Philippines.
Nonresident Citizen
Any of the following:
a. A citizen of the Philippines who establishes to the
satisfaction of the Commissioner the fact of his
physical presence abroad with a definite intention to
reside therein;
b. 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;
c. 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; and,
Nonresident Citizen
d. 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.
In default of intention, the presence of a citizen for at least

183 days qualifies him as non-resident citizen.
Citizen Alien

Resident Alien
An individual who is residing in the Philippines but is not a
citizen thereof, such as:
a. An alien who lives in the Philippines without definite

intention as to his stay; or,
Resident Alien
b. One who comes to the Philippines for definite purpose
which in its nature would require an extended stay and
to that end make his home temporarily in the
Philippines, although it may be his intention at all times
to return to his domicile abroad;
An alien who has acquired residence in the Philippines

retain his status as such until he abandons the same or
actually departs from the Philippines.
Nonresident Alien Engaged in Trade or Business

Aliens who stayed in the Philippines for an aggregate
period of more than 180 days during the year.
NRA Not Engaged in Trade or Business

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.
General Classification Rule

Intention
Length of Stay
Intention
THE GENERAL RULE
The intention of the taxpayer regarding the nature of

his stay within or outside the Philippines shall determine
his appropriate residency classification.
The taxpayer shall submit to the Commissioner of

Internal Revenue (CIR) documentary proofs such as visas,
work contracts and other documents indicating such
intention.
Length of Stay
THE EXCEPTION TO THE GENERAL RULE
In default of such documentary proof, the length of

stay of the taxpayer is considered.
Rule on Length of Stay

1. Citizens staying abroad for a period of at least 183
days are considered non-resident.
2. Aliens who stayed in the Philippines for more than 1
year as of the end of the taxable year are considered
resident.
3. Aliens who are staying in the Philippines for not more
than 1 year but more than 180 days are deemed non-
resident aliens engaged in business.
4. Aliens who stayed in the Philippines for not more than
180 days are considered non-resident aliens not
engaged in trade or business.
Taxability of Individual on Regular Income

1. Net taxable income, within and without the Philippines
– Resident citizen
2. Net taxable income, within the Philippines –

Nonresident citizen, resident alien, and nonresident
alien-engaged in trade or business in the Philippines
3. Gross taxable income, within the Philippines –

Nonresident alien-not engaged in trade or business in
the Philippines (using final income taxation scheme)
Classification according to Source of Income

Compensation Income Earner
Self-Employed/Professional Income Earner
Mixed Income Earner


The compensation income of employees, except
minimum wage earners, is subject to withholding tax on
compensation. Every employer is mandatorily required to
deduct the withholding tax from the compensation income
of their employees.
Treatment of Withholding Tax on Compensation

a. DEEMED FULL PAYMENT OF INCOME TAX – if the
employee has no other income and the tax is correctly
withheld
b. CLAIMED AS TAX CREDIT – if the employee has other

taxable income or if the tax is not correctly withheld
Employees with no Other Income

If the employee has no other taxable income, he may
avail himself of the use of the SUBSTITUTED FILING
SYSTEM.
Under this system, the withholding tax on

compensation is considered enough evidence of tax
compliance of the employee, provided that the employer
withheld the correct tax.
Conditions of the Substituted Filing System

a. The employee received purely compensation income
during the year.
b. The employee received the income from only one

employer in the Philippines during the taxable year.
c. The amount of tax due from the employee at the end of

the year equals the amount of tax withheld by the
employer.

d. The employee’s spouse also complies with all 3
conditions stated above.
e. The employer files the annual information return (BIR

From No. 1604-CF)
f. The employer issues BIR Form No. 2316 to each

employee.
Additional Return needed when:

a. Correct tax is not withheld – Adjusted Return
b. Employee or his spouse has other income –

Consolidated Return
Correct Tax is not withheld – Adjusted Return

a. Concurrent employment
b. Successive employment during the year
c. Incurrence of error by the employer
An annual return needs to be filed to adjust the tax

due to the correct amount of tax. This is referred to as an
ADJUSTMENT RETURN.
The employee shall claim Form 2316 as tax credit

and pay residual tax due or claim excess withheld amount
as tax credit or tax refund
Employee has Other Taxable Income

If the employee has other taxable income, the
employee is mandatorily required to file an annual income
tax return to incorporate other income sources in his
return.
This is referred to as a CONSOLIDATED INCOME

TAX RETURN.
Consolidated Income Tax Return

a. BIR Form No. 1700 – if the employee is not engaged in
business or profession
b. BIR Form No. 1701 for mixed income earners – if the
employee is also engaged in business and/or
profession
The withholding tax on compensation (BIR Form 2316)

given by the employer shall be claimed as tax credit.

Mixed Income Earner


Individual taxpayers engaged in business or practice
of profession shall file quarterly income tax returns and an
annual tax return:
a. 1st Quarter ITR – 1701Q – on or before May 15 of the
same calendar year
b. 2nd Quarter ITR – 1701Q – on or before August 15 of
the same calendar year
c. 3rd Quarter ITR – 1701Q – on or before November 15
of the same calendar year
d. Annual ITR – 1701A or 1701 – on or before April 15 of
the next calendar year
Excess Quarterly Estimated Tax

The excess quarterly estimated tax payments
against the quarterly tax due may, at the option of the
taxpayer, be carried forward to quarters of the succeeding
taxable year or claimed through tax refund. The option
must be indicated in the annual adjustment return.
Once the option to carry-over is made, it becomes
irrevocable for that period. The option to refund may be in
the form of cash or through a tax credit certificate. If the
option to refund is selected, the excess refundable amount
shall not be carried over as tax credit to the succeeding
quarters of the following year.

Mixed Income Earner

Mixed Income Earner

The compensation income of mixed income earners
will be subjected to the withholding tax on compensation
by their employers.
Mixed income earners would report their business or
professional income on a quarterly basis under Form
1701Q.
The compensation income shall not be reported in
the quarterly return. It shall be included only in the annual
consolidated return.
Mixed income taxpayers shall use BIR Form No.
1701.
Effective January 1, 2018 to December 31, 2022

Net Taxable Income
Rate
Over But not over
- P250,000 0%
P250,000 400,000 20% of the excess over P250,000
400,000 800,000 P30,000 + 25% of the excess over P400,000
800,000 2,000,000 P130,000 + 30% of the excess over P800,000
2,000,000 8,000,000 P490,000 + 32% of the excess over P2,000,000
8,000,000 - P2,410,000 + 35% of the excess over P8,000,000
Effective January 1, 2023 onwards

Net Taxable Income
Rate
Over But not over
- P250,000 0%
Regular Income Tax Model

Gross income/compensation income XXX,XXX
Less: Allowable deductions
(Itemized or optional standard) XXX,XXX
Net taxable income XXX,XXX
Use tax table 0%-35%
Income tax due XX,XXX
Less: Tax credits/withheld
(BIR Form 1701Q/2316/2307) XX,XXX
Income tax payable XX,XXX
8% Income Tax Option

The TRAIN law introduced a new tax scheme for
individual taxpayers – the 8% optional income tax.
The option to be taxed at 8% must be indicated in the

first quarter income tax return or in the first quarter
percentage tax return.
When the option is made, it shall be irrevocable for

the calendar year.
Nature
a. A bundled tax – in lieu of regular income tax (tax table)
and 1%/3% general percentage tax
b. An annual option
c. Paid quarterly and annually

Scope
a. Pure business or professional income earners
b. Mixed income earners

Covered Businesses
Only vatable businesses who are below the
P3,000,000 annual VAT threshold and did not register as
VAT taxpayer can opt to be taxed under the 8% income
tax.
Not Covered
a. VAT-registered business taxpayers
b. VAT-exempt business taxpayers, such as: exempt

businesses and businesses specifically subject to other
percentage taxes
c. Individual receiving income not subject to business tax.

Tax Base
The 8% optional income tax shall be based upon the
gross sales or gross receipt of the individual taxpayer that
is subject to 1%/3% percentage tax.
Other income subject to regular tax are added to the

tax base.
Pure Business or Professional Income Earner

The 8% income tax shall be computed from the tax
basis net of P250,000 annual income exemption.

Gross sales/receipts XXX,XXX
Add: Non-operating income XXX,XXX
Gross taxable income XXX,XXX
Less: Annual income exemption 250,000
Multiply by: Tax Rate 8%
Income tax due XXX,XXX
Less: Tax credits/withheld XXX,XXX
Income tax payable XXX,XXX
Mixed Income Earner

The income tax due from compensation shall be
separately determined using the income tax table while the
8% income tax for the income from business or
profession.
There will be no more P250,000 annual income
exemption allowable as deduction against the basis of the
8% income tax.
Furthermore, if the amount of compensation income
does not exceed P250,000, the unutilized deduction
cannot be deducted against business income.
Mixed Income Earner

ON COMPENSATION
Total compensation income XXX,XXX
Less: Nontaxable income XX,XXX
Exclusions from compensation XX,XXX
13th month pay & other benefits
(ceiling) 90,000 XXX,XXX
Taxable compensation income XXX,XXX
Tax due on compensation XX,XXX
Mixed Income Earner

ON BUSINESS INCOME
Taxable business income XXX,XXX
Multiply by: Tax rate 8%
Tax due on business income XX,XXX
Mixed Income Earner


Total income tax due XX,XXX
(BIR Form 1701Q/2316/2307) XX,XXX
Interim Transition to the Value-Added Tax

Individuals exceeding the P3,000,000 VAT threshold
during the year are mandatorily required to change
registration from non-VAT to a VAT taxpayer before the
end of the month following the month the taxpayer
exceeded the P3,000,000 threshold.

The taxpayer shall pay regular income tax for his
income during the entire year and pay VAT prospectively
starting the month he became a VAT taxpayer.
The 8% income tax payments shall be considered as

tax credit against the regular income tax due.
The taxpayer shall also be required to pay the 1%/3%

general percentage tax for sales or receipts generated
before becoming a VAT taxpayer.
Married Taxpayers
Taxable income of married individuals is computed
separately based on their respective income earned or
realized.
However, they are encouraged to file using a single

income tax return showing separately their respective
taxable income and tax due, unless it is impracticable for
the spouses to file a single return, then, each spouse may
file their separate tax returns.
Married Taxpayers
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 incomes.
Income of Unmarried Minors

The income of unmarried minors derived from
property received from a living parent shall be included in
the income tax return of the parent, except when:
a. The donor’s tax has been paid on such property.
b. The transfer of such property is exempt from donor’s

tax.
Deceased Taxpayer
In the case of the death of a taxpayer, there shall be
included in computing taxable income for the taxable
period in which falls the date of his death, amounts
accrued up to the date of his death if not otherwise
properly includible in respect of such period or a prior
period.
(See topic Accounting Periods)

Alien Employees of POGOs and Service Providers

Alien individuals regardless of residency and who
are employed and assigned in the Philippines, regardless
of the term and class of working or employment permit or
visa, by an offshore gaming licensee or its service
provider, shall pay a final withholding tax of twenty-five
percent (25%) on their gross income.
Provided, however, That the MINIMUM final
withholding tax due for any taxable month from said
persons shall not be lower than Twelve thousand five
hundred pesos (P12,500.00).
Coverage of Gross Income

Gross income shall include, whether in cash or in
kind, basic salary/wages, annuities, compensation,
remuneration and other emoluments, such as honoraria
and allowances, received from such service provider or
offshore gaming licensee.
Income from all other sources

Any income earned from all other sources within the
Philippines by the said alien employee shall be subject to
the pertinent income tax imposed under the NIRC, as
amended.
EXERCISES
1. Who is not allowed the option to be taxed at 8%?

a. Compensation income earner
b. Business income earner
c. Professional income earner
d. Mixed income earner
2. Which will not be included in the tax bases of the

8% income tax?
a. Gross sales
b. Gross receipts
c. Gross income from operation
d. Other gross income subject to regular income
tax
3. Which is incorrect regarding the 8% optional

income tax?
a. It substitutes the regular income tax and the 1%
percentage tax
b. The 8% income tax is irrevocable for the year it
is chosen
c. May be opted to if the taxpayer claimed optional
standard deduction
d. May be used even if the taxpayer is also an
employee
4. An individual income taxpayer is engaged in

self-employed business rendering tutorial services
from grades 1 to 10, and because of his increased
number of tutees, she employed more tutors, and
they render tutorial services every weekend. Since
the academic year in the Philippines starts around
July or August and ends around May or June, he
decided to set his accounting period around at the
same start an academic year start, which is on July
1 to June 30 of the next year. If he is to file his 3rd
Quarterly Income Tax Return, when shall be his
deadline?
SUGGESTED ANSWER:
November 15 of every year
5. Which of the following scenario will still require

an adjustment return from the employee even if the
employers correctly withheld the tax on their
compensation payments?
a. Employee has concurrent employment
b. Employee had successive employment during
the year
c. The employee earned income from other
sources
d. All of these
6. An adjustment return is least likely to be

required when
a. The employee receives compensation from
multiple employers
b. The employee has two successive employers
during the year
c. The employer has under-withheld the tax
d. The employer has over-withheld the tax
7. The length of stay of individuals for purposes of

taxpayer classification is reckoned as of
a. December 31 of the current year
b. December 31 of the prior year
c. The day the alien individual leaves the
Philippines
d. The date individual taxpayer files his income tax
return
8. In 2022, a Japanese, who failed to show his visa,

who had been residing in the Philippines since
August 17, 2022, as seen in his passport is
considered a
a. Resident citizen
b. Resident alien
c. Nonresident alien-engaged in trade or business
d. Nonresident alien-not engaged in trade or
business
9. Which of the following is not a constructive

receipt of income?
a. Forgiveness of indebtedness in consideration of
service
b. Matured detachable interest coupons
c. Deposit of income to taxpayer’s bank accounts
d. Cash salary of an employee
10. Which of the following is exempted from

income taxation because of the absence of ability
to pay?
a. Damages received from patent infringement suit
b. Unrealized income from investments
c. Gain on sale of goods
d. Inheritance
The Taxpayer and Tax Base Corporations
Definition according to the Tax Code

1. one-person corporations
2. partnerships, no matter how created or organized
3. joint-stock companies
4. joint accounts (cuentas en participacion)
5. associations
6. insurance companies
NOTE: A one-person corporation is a corporation with a

single stockholder; Provided, That only a natural person,
trust, or an estate may form a one-person corporation.
Not considered corporation for tax purposes

1. general professional partnerships
2. joint ventures or consortiums formed for the

purpose of undertaking construction projects

purpose of engaging in petroleum, coal,
geothermal and other energy operations
pursuant to an operating consortium agreement
under a service contract with the Government.
Corporations
Regular Corporations Special Corporations

Domestic Corporations Domestic Corporations
Foreign Corporations Resident Foreign Corporations
Nonresident Foreign Corps.
Resident Foreign Corporations Nonresident Foreign Corporations

Domestic Corporations
a corporation that is organized in accordance
with Philippine laws
(Effect: Taxable on their net taxable income, within

and without the Philippines)
Foreign Corporations
a corporation that is organized, authorized or
existing under the laws of any foreign country
(Effect: Taxable on their income within the

Philippines only)
Resident Foreign Corporations

a foreign corporation which is engaged in
trade or business within the Philippines or has a
branch or office operating in the Philippines
(Effect: Taxable on their net taxable income)

Nonresident Foreign Corporations

a foreign corporation which is not engaged in
trade or business within the Philippines or has no
branch or office operating in the Philippines, but
nonetheless receives income from Philippine
consumers
(Effect: Taxable on their gross taxable income,

using final withholding tax scheme)
Income Tax for Regular Corporations

Regular Corporate Income Tax (RCIT)
Minimum Corporate Income Tax (MCIT)
Branch Profit Remittance Tax (BPRT) for RFCs

Regular Corporate Income Tax

the general rule for corporate income tax; the
tax rate is generally applicable to all kinds of
regular corporations, however, they are applied to
different tax bases
Tax Rates for Domestic Corporations

1. until June 30, 2020 – 30%
2. July 1, 2020 onwards

a. 25% - in general
b. 20% - qualified domestic corporations only
Requisites to avail 20% Income Tax Rate

1. The net taxable income shall not exceed P5,000,000;
AND,
2. The total assets shall not exceed P100,000,000,
excluding the land on which the particular business
entity’s office, plant and equipment are situated
NOTE: Domestic corporations shall account separately

their Annual Financial Statements (AFS) the cost of the
land on which the particular business entity’s office, plant
and equipment are situated, and shall not lump the same
in one account title nor consolidated its cost with other
fixed asset accounts.
Tax Rates for Resident Foreign Corporations

1. until June 30, 2020 – 30%
2. July 1, 2020 onwards – 25%

Final Income Tax Scheme for NRFCs

Gross Income derived from all sources WITHIN THE
PHILIPPINES, such as interests, dividends, rents, royalties,
salaries, premiums (except reinsurance premiums),
annuities, emoluments, or other fixed or determinable
annual, periodic or casual gains, profits and income and
capital gains (except capital gains realized from sale,
exchange, disposition of shares of stock in any domestic
corporation which is subject to capital gains tax).
Tax Rates for Nonresident Foreign Corporations

1. until December 31, 2020 – 30%
2. January 1, 2021 onwards – 25%

Mechanics
Resident payors shall deduct and withhold the
applicable tax due and remit the same to the BIR.
Regular Corporate Income Tax Model A*

Gross income XXX,XXX
(Itemized or optional) XXX,XXX
Multiply by: Tax Rate 30%/25%/20%
*Applicable for Domestic Corporations & Resident Foreign

Corporations
Regular Corporate Income Tax Model B**

Less: Final income tax
(Gross income x 30%/25%) XXX,XXX
Net proceeds to NRFC XXX,XXX
**Applicable for Nonresident Foreign Corporations



Minimum Corporate Income Tax

applicable to every domestic and resident
foreign corporation taxable to the regular corporate
income tax (30%, 25% or 20%) including non-profit,
exempt, and special corporations with respect to
their taxable income subject to regular corporate
income tax, but not to their income subject to
special tax rates.
When becomes required and payable

1. The corporation has zero or negative net taxable
income; or,
2. MCIT is greater than the regular corporate

income tax (RCIT).
Tax Rate
1. until June 30, 2020 – 2%
2. July 1, 2020 to June 30, 2023 – 1%
3. July 1, 2023 onwards – 2%

Timing of Imposition
Imposed at the BEGINNING of the 4th taxable
year immediately following the year in which such
corporation commenced its operations.
Gross Income, Definition

1. Sale of goods – Gross sales less sales returns,
discounts, allowances and cost of goods sold,
plus non-operating income
2. Sale of service – Gross receipts less sales

returns, discounts, allowances and cost of
services*, plus non-operating income
*for banks, cost of services includes interest

expense
Excess MCIT Carryover

the excess of the MCIT over the RCIT in any
year is considered a tax credit that is deductible
against any RCIT tax due in the immediately
succeeding three years.
Rules on Excess MCIT

1. Excess MCIT can be used only as a tax credit
against RCIT tax due in any of the three
subsequent years. Excess MCIT cannot be
deducted against MCIT tax due.
2. Credit for the Excess MCIT from prior years can

be taken up to the full amount of RCIT tax due in
the next three years. This means that the
income tax payable when credit is made can get
below the amount of MCIT for that year.

3. When there are several Excess MCITs from prior
years, tax crediting shall be made on a first in,
first out (FIFO) basis.
4. Unused Excess MCIT at the end of the three-

year period shall expire and will no longer be
used.
Relief from MCIT

upon recommendation of the Commissioner
of Internal Revenue, the Secretary of Finance may
suspend the imposition of MCIT upon submission
of proof that the corporation sustained substantial
losses on account of:
1. prolonged labor dispute
2. force majeure
3. legitimate business reverses
Minimum Corporate Income Tax Model

Multiply by: Tax rate 2%/1%


Branch Profit Remittance Tax for RFCs

Any profit remitted by a branch to its head
office abroad shall be subject to a tax of 15% based
on the total profits applied or earmarked for
remittance without any deduction for the tax
component thereof.
The 15% BPRT is a FINAL TAX which is

required to be withheld at source by the branch of a
foreign corporation.
Coverage of BPRT
Interest, dividends, rents, royalties,
renumeration for technical services, salaries,
wages, premiums, annuities, emoluments or other
fixed or determinable annual, period or casual
gains, profits, income, and capital gains received
by a foreign corporation during each taxable year
from all sources within the Philippines shall not be
treated as branch profit UNLESS the same are
effectively connected with the conduct of the
taxpayer’s trade or business in the Philippines.
Coverage of BPRT
The term “effectively connected with the
conduct of the taxpayer’s trade or business” does
not necessarily mean that the income must be
derived from the actual operation of the taxpayer-
corporation’s trade or business, it is sufficient that
the income arises from the business activity in
which the corporation is engaged.
Coverage of BPRT
The income should be an active income or an
income from sources that are effectively
connected with the conduct of the taxpayer’s trade
or business of the resident foreign corporation to
be subjected to the branch profit remittance tax.
Passive investment income and gains are

excluded.
Scope of BPRT
The tax covers the remittance of all resident
foreign corporation including ROHQs of
multinational companies, FCDUs or OBUs of
foreign banks, and international carriers, except
PEZA-registered entities.
Remittance from prior year earnings is still taxable

The NIRC used the phrase “Any profit
remitted” without limiting the same to current year
profit remittance. The branch profit remittance tax
therefore is understood to apply to remittance of
prior year earnings.
Indirect Remittance
Even without actual remittance of profits
abroad, indirect remittance such as the following
are still subject to branch profit remittance tax:
1. Remittance of profits to a resident affiliate or to
a Philippine regional operating headquarters of
the home office;
2. Transfer of net profits to increase the branch
assigned capital account.
Repealed Provisions of the NIRC

Improperly accumulated earnings tax (IAET)
and gross income tax (GIT) are repealed by RA No.
11534 or the Corporate Recovery and Tax
Incentives for Enterprises (CREATE) Act.
Corporations


Special Domestic Corporations

1. Educational institutions and non-profit hospitals
2. Foreign currency deposit units (FCDUs) and

expanded foreign currency deposit units
(EFCDUs)
3. Offshore gaming licensees

Special Resident Foreign Corporations

1. Regional or area headquarters (RHQs) and
regional operating headquarters (ROHQs) of
multinational companies (MNCs)
2. International carrier

Special Nonresident Foreign Corporations

1. Cinematographic film owner, lessor or
distributor
2. Lessor of vessels, chartered by Philippine

nationals
3. Owner or lessor of aircraft, machineries and

other equipment


(EFCDUs)

Coverage
1. Proprietary education institutions
2. Non-profit hospitals
3. Non-stock, non-profit educational institutions

whose net income or assets accrue/inure to or
benefit any member or specific person
Proprietary educational institutions

any private schools maintained and
administered by private individuals or groups, with
an issued permit to operate from the Department of
Education (DepED) or the Commission on Higher
Education (CHEd) or the Technical Education and
Skills Development Authority (TESDA), as the case
may be. They may either be stock corporations or
non-stock corporations.
Non-profit hospitals
any private hospitals, which are non-profit for
income tax purposes, maintained and administered
by private individuals or groups.

those institutions mentioned in the first
paragraph of Section 4(3), Article XIV of the 1987
Constitution and Section 30 (H) of the NIRC, as
amended, whose revenues and assets that are
used actually, directly and exclusively for
educational purposes shall be exempt from taxes
and duties
Non-profit
means that no net income or asset accrues to
or benefits any member or specific persons, with
all the net income or assets devoted to the
institution’s purposes and all its activities
conducted not for profit.
Treatment of grant of per diems

Grant of per diems such as transportation
allowance in attendance of meetings,
compensation and/or endowments for services
rendered, or any other similar emoluments to the
Board of Trustees, officers, employees, or any
members of the covered institutions shall not be
prohibited and shall not necessarily be considered
a private instrument that would negate the status
of the institutions as non-profit.

Provided, that such per diems, compensation
or emoluments are subject to proper liquidation or
reimbursement procedures, and commensurate to
the functions and services rendered.
The principles of deductions should be

complied.
Tax base
net taxable income on all sources
(within and without)
Tax rates
1. Before July 1, 2020 – 10%
2. July 1, 2020 to June 30, 2023 – 1%
3. July 1, 2023, onwards – 10%,
subject to the PRE-DOMINANCE TEST.

Pre-dominance test
If the gross income from “unrelated trade,
business or other activity” exceeds 50% of the total
gross income derived by such educational
institutions or hospitals from all sources, the tax
prescribed for domestic corporations (25%) shall
be imposed on the entire taxable income.
Unrelated trade, business or other activity

Any trade, business, or other activity, the
conduct of which is not substantially related to the
exercise or performance by such educational
institution or hospital of its primary purpose or
function.


(EFCDUs)

FCDUs and EFCDUs

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 to RA 6426, as amended.
Local bank
a commercial bank, universal bank, and a
thrift bank organized under the laws of the
Philippines. The bank shall secure a Taxpayer
Identification Number (TIN) for its EFCDU or FCDU
separate from the TIN of its regular business unit
(RBU).
Authorized transactions of FCDUs

FCDUs are limited under their license to short-
term foreign currency-denominated transactions.
They are authorized to accept deposits and trusts
accounts, borrow on short-term maturity, and
invest in short-term maturity deposits, readily
marketable debt securities, and short-term foreign
currency loans.

They are also authorized to enter into
currency swap with the BSP, other FCDUs/EFCDUs
or OBUs, enter into security lending activities as
lender, and engage in repurchase agreement on
foreign currency denominated securities.
Authorized transactions of EFCDUs

The same transactions allowed to FCDUs plus
authorization to enter into foreign exchange trading, issue
letters of credit for non-resident foreign exporters, accept
or negotiate drafts or bills of exchange drawn under letters
of credits or make payments to the order of a non-resident
exporter upon request of their foreign correspondent bank,
purchase export bills of resident exporters, enter into
securities lending activities and repurchase agreements
involving foreign currency denominated securities.
Income tax on FCDUs and EFCDUs

FROM
Residents:
(E)FCDUs Other Non-
NATURE OF INCOME or OBUs Residents Residents
Income from forex transactions
Interest income from:
- Forex loans & receivables exempt 10% FIT exempt
- Forex deposits exempt - exempt
Other forex income exempt RCIT exempt
Income from non-forex

transactions RCIT RCIT RCIT
Allocation of Expenses
Based on Revenue Regulation No. 4-2011,
expenses and costs incurred by banks shall be
allocated using either specific allocation or pro-
rata allocation based on the gross income subject
to preferential tax, regular tax and exempt from
income tax, respectively. However, the Supreme
Court declared the said revenue regulation null and
void, noting that the Tax Code allows taxpayers to
self-determine the accounting method most
applicable to them.


(EFCDUs)

Offshore Gaming Licensees

the offshore gaming operator, whether
organized abroad or in the Philippines, duly
licensed and authorized, through a gaming license,
by the Philippine Amusement and Gaming
Corporation (PAGCOR) or any special economic
zone authority or freeport authority to conduct
offshore gaming operations, including the
acceptance of bets from offshore customers, as
provided for on their respective charters.
Accredited Service Providers to OGLs

a juridical person that is duly created or organized
within or outside the Philippines or a natural person,
regardless of citizenship or residence, which provides
ancillary services to an offshore gaming licensee or to any
gaming licensee or operator with licenses from other
jurisdictions (countries). Such ancillary services may
include, but shall not be limited to, customer and technical
relations and support, information technology, gaming
software, data provision, payment solutions and live studio
streaming services
Tax base and tax rate

The NON-GAMING REVENUES derived during
each taxable year from all sources within and
without the Philippines shall be taxable at twenty-
five percent (25%)
Taxability of Gaming Revenues

Subject to specific percentage tax only
(See Business Taxation)

Taxability of Accredited Service Providers

Taxed as regular domestic corporation
subject to regular corporate income tax and/or
minimum corporate income tax, as applicable.


(EFCDUs)



Regional or area headquarters (RHQ)

a branch established in the Philippines by
multinational companies which headquarters do
not earn or derive income from the Philippines and
which acts as a supervisory, communication and
coordinating center for their affiliates, subsidiaries,
or branches in the Asia Pacific Regional and other
foreign markets.
Regional operating headquarters (ROHQ)

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.
Taxation of RHQs
exempt from income tax – since they do not
earn income
Taxation of ROHQs before CREATE

subject to income tax at 10% of net taxable
income from sources within.
Taxation of ROHQs after CREATE

effective January 1, 2022, ROHQs are taxed as
resident foreign corporation (25% of net taxable
income from sources within, subject to 1% or 2%
MCIT of gross income).
Exemption of RHQs and ROHQs

Both RHQs and ROHQs are exempt from all
kinds of LOCAL TAXES, FEES or CHARGES
imposed by a LOCAL GOVERNMENT UNIT, except
real property tax on land improvements and
equipment.


International carrier
The term international carrier, also called
international common carrier, refers to entities that
transport passengers, mails and excess cargoes or
baggage from the Philippines to any destination
abroad and vice versa. They consist of
international air carrier and international sea or
shipping carrier.
Income tax rates of international carriers

General Rule: 2 ½% of the Gross Philippine Billings
Exception: Preferential rate or exemption on the

basis of applicable tax treaty or reciprocity
Gross Philippine Billings, Meaning

International air carriers
the amount of gross revenue derived from
carriage of persons, excess baggage, cargo and
mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of
the place of sale or issue and the place of payment
of the ticket or passage document.

International shipping carriers
gross revenue, whether for passenger, cargo
or mail originating from the Philippines up to final
destination, regardless of the place of sale or
payments of the passage or freight documents.
Continuous and uninterrupted flight or voyage

means a flight or voyage from the Philippines
up to the point of final destination of the
passenger, excess baggage, cargo, and/or mails.
Rule on revalidated, exchanged or endorsed tickets

Tickets revalidated, exchanged and/or
endorsed to another international airline form part
of the Gross Philippine Billings of the carrying
airline if the passenger boards a plane or a port or
point in the Philippines.
Exclusion in Gross Philippine Billings

1. Non-revenue passengers – those passengers
qualifying under the free mileage programs of
the air carriers
2. Refunded tickets
Transshipments or interrupted flights or voyage

For a flight which originates from the
Philippines, but transshipment of passenger takes
place at any port outside the Philippines on another
airline, only the aliquot portion of the cost of the
ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form
part of the Gross Philippine Billings.
The “48-hour” rule on transient passengers

Flights or voyages of passengers, mails, or excess
baggage commencing from foreign countries which will be
interconnected in the Philippines for continuance of the
flight or voyage to a foreign destination 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 international 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 the arrival and departure
from the Philippines.
Foreign currency translation

In the computation of the Gross Philippine
Billings, tickets in foreign currencies are translated
at whichever is HIGHER of the following conversion
rates:
1. Monthly average Airline Rate in the Bank
Settlement Plan (BSP) Monthly sales report
2. Bankers Association of the Philippines (BAP)
rate
Treaty or reciprocity consideration

tax on the basis of applicable tax treaty or
international agreement to which the Philippines is
a signatory or on the basis of reciprocity such that
an international carrier whose home country
exempts Philippine carriers shall likewise be
exempt from income tax in the Philippines.
Treatment of other income

The other income of international carriers,
other than income from international transports, is
subject to the appropriate type of income tax.
Off-line international carriers

Those without flights or voyage starting from
or passing through any point in the Philippines. The
branch or sales agent in the Philippines of off-line
international carriers which sells passage
documents for compensation or commission to
cover off-line flights or voyages of its head office
or other airline or sea carriers covering flight or
voyages originating from Philippine ports or off-
line flights or voyages is subject to the regular
corporate income tax.



The same tax rules with domestic offshore
gaming licensees (25% rate) except that the tax
base shall only be the non-gaming revenues
derived within the Philippines.
Changes introduced by CREATE Law

Effective April 11, 2021 (effectivity date of the
CREATE Law), Offshore Banking Units (OBUs) shall
now be taxed as resident foreign corporation (25%
of net taxable income from sources within subject
to 1% or 2% MCIT of gross income)
Income tax on OBUs before CREATE

FROM
Residents:
(E)FCDUs Other Non-

transactions RCIT RCIT EXEMPT
Income tax on OBUs upon effectivity of CREATE

FROM
Residents:
(E)FCDUs Other Non-
- Forex loans & receivables exempt RCIT exempt




distributor

nationals

other equipment
Cinematographic Film
Cinematographic film includes motion picture
films, films, tapes, discs and such other similar or
related products.
Tax rate and tax base

25% Final Tax on Gross Income from All
Sources within the Philippines.
“All Sources Within” encompasses any taxable

income, passive or active, other than those arising
from rentals of cinematographic films.

distributor

nationals

other equipment
Lessor of vessels, chartered by Philippine nationals

Tax rate and tax base – 4 ½% Final Tax on
Gross rentals, lease, or charter fees from leases or
charters to Filipino residents or corporations as
approved by the Maritime Industry Authority.

distributor

nationals

other equipment
Owner/lessor of aircraft, machineries & other equipment

Rentals, charters, and other fees.
Corporations


The Taxpayer and Tax Base Partnerships
PARTNERSHIPS
General Professional
Taxable Partnerships
Partnerships
General Professional Partnerships

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
Taxability of GPPs
A general professional partnership shall not
be subject to 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.
Tax liability of partners in a GPP

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.
Each partner shall report as gross income his

distributive share, actually or constructively
received, in the net income of the GPP.
Returns of GPPs
Every general professional partnership shall
file, in duplicate, a return of its income, except
those income exempt from income tax, setting
forth the items of gross income and deductions
allowed by the Tax Code, and the names, Taxpayer
Identification Numbers (TINs), addresses and
shares of each of the partners.
PARTNERSHIPS
Partnerships
any other partnership, no matter how created
or organized, other than general professional
partnerships
Taxability of Partnerships other than GPPs

Partnerships, other than GPPs, are taxed as
corporations using corporate income tax and
minimum corporate income tax.
(See topic Corporations)

Partner’s distributive share in partnership income

Partners’ distributive share in taxable
partnership’s income, actually or constructively
received, is treated in the same manner as
corporate dividends subject to final withholding
tax.
The Taxpayer and Tax Base Joint Ventures
JOINT VENTURES
Exempt Joint Ventures Taxable Joint Ventures

Joint Ventures not taxable as corporations

a joint venture or consortium formed for the
purpose of undertaking construction projects not
considered as corporation, should be:
a. for the undertaking of a construction project;
and
b. should involve joining or pooling of resources by
licensed local contracts; that is, licensed as
general contractor by the Philippine Contractors
Accreditation Board (PCAB) of the Department
of Trade and Industry (DTI);
Joint Ventures not taxable as corporations

c. these local contractors are engaged in
construction business; and,
d. the Joint Venture itself must likewise be duly

licensed as such by the Philippine Contractors
Accreditation Board (PCAB) of the Department
of Trade and Industry (DTI).
Joint Ventures involving Foreign Contractors

may also be treated as a non-taxable corporation
only if the member foreign contractor is covered by a
special license as contractor by the PCAB of the DTI; and
the construction is certified by the appropriate tendering
agency (government office) that the project is a foreign
finance/internationally-funded project and that the
international bidding is allowed under the bilateral
agreement entered into by and between the Philippine
Government and the foreign/international financing
institution pursuant to IRR of RA No. 4556 otherwise
known as ‘Contractor’s License Law.’
Joint Ventures involving Foreign Contractors

Absent any one of the aforesaid requirements,
the joint venture or consortium formed for the
purpose of undertaking construction projects shall
be considered as taxable corporations.
Not considered tax-exempt joint venture or consortium

not included as tax-exempt joint venture or
consortium are those who are merely suppliers of
goods, services or capital to a construction project.
Liability of members of Tax-exempt joint ventures

The member to a Joint Venture not taxable as
corporation shall each be responsible in reporting
and paying appropriate income taxes on their
respective share to the joint ventures profit.
Return of Tax-Exempt Joint Ventures

Each tax-exempt joint venture shall file a
return of its income, except those income exempt
from income tax, setting forth the items of gross
income and deductions allowed by the Tax Code,
and the names, Taxpayer Identification Numbers
(TINs), addresses and shares of members.
JOINT VENTURES

Taxable Joint Ventures

any other joint ventures and those joint
ventures who failed to qualify as tax-exempt joint
ventures.
Taxability
they are taxable as corporations

Member’s distributive share in JV’s profit

members’ distributive share in joint venture’s
income, actually or constructively received, is
treated in the same manner as corporate dividends
subject to final withholding tax.
JOINT VENTURES

The Taxpayer and Tax Base Estates and Trusts
Estate
The inheritance includes all the property,
rights and obligations of a person which are not
extinguished by his death.
(Article 774, New Civil Code of the Philippines)

Trust
A person who establishes a trust is called the
trustor; one in whom confidence is reposed as
regards property for the benefit of another person
is known as the trustee; and the person for whose
benefit the trust has been created is referred to as
the beneficiary.

ESTATES AND TRUSTS
Taxable Nontaxable
Taxable Estates Nontaxable Estates
Taxable Trusts Nontaxable Trusts
Employee Trust Funds

Income taxable to an estate or trust under the NIRC

a. Income accumulated in trust for the benefit of
unborn or unascertained person or persons with
contingent interests, and income accumulated
or held for future distribution under the terms of
the will or trust;
b. Income which is to be distributed currently by

the fiduciary to the beneficiaries, and income
collected by a guardian of an infant which is to
be held or distributed as the court may direct;

c. Income received by estates of deceased
persons during the period of administration or
settlement of the estate; and,
d. Income which, in the discretion of the fiduciary,

may be either distributed to the beneficiaries or
accumulated.
ESTATES AND TRUSTS
Taxable Nontaxable

Taxable Estates
An estate is an income taxpayer under judicial
settlement or administration. The executor or
administrator of an estate under judicial settlement
shall secure a Taxpayer Identification Number
(TIN) in the name of the estate of the deceased.
Taxability of Taxable Estate

Taxable estates are treated as individual
taxpayer whose taxable income under regular tax is
subject to graduated income tax rate.
Income distributions to heirs

any income from the estate currently
distributed by the executor or administrator to the
heirs are reported as deduction in computing the
taxable income of the estate. Income distribution
from the estate shall reported as gross income
subject to income tax by the heirs in their
respective income tax returns
ESTATES AND TRUSTS
Taxable Nontaxable

Taxable Trusts
An irrevocable trust is a separate and distinct
entity. The grantor or the trustee of an irrevocable
trust shall secure a Taxpayer Identification Number
(TIN) in the name of the trust.
Taxability of Irrevocable Trusts

Irrevocable trusts are treated as individual
Income distributions to beneficiaries

any income from the trust currently
distributed by the trustee to the beneficiaries are
reported as deduction in computing the taxable
income of the trust. Income distribution from the
estate shall be reported as gross income subject to
regular tax by the beneficiaries in their respective
income tax returns.
Exception to the deduction of income distributions

in the case of a trust administered in a foreign
country, the distributions mentioned shall not be
allowed, and the same shall not be included in
computing the taxable income of the beneficiaries.
Consolidation of two or more trusts

Multiple irrevocable trusts designated by the
same grantor for the benefit of the same
beneficiary shall be consolidated for purposes of
income tax.
ESTATES AND TRUSTS
Taxable Nontaxable

Nontaxable Estates
An estate under extra-judicial settlement is
not a taxpayer. The income of the estate under
extra-judicial settlement is taxable to the heirs.
Nontaxable Trusts
Revocable trust is not a taxpayer and is
treated as a pass-through entity whose income is
taxable to the grantor-trustor.

an employees’ trust which forms part of a
pension, stock bonus or profit-sharing plan of an
employer for the benefit of some or all of his
employees is exempt from all kinds of income
taxes under the tax code.
Requisites for exemption of employee’s trust funds

a. if contributions are made to the trust by such
employer, or employees, or both for the purpose
of distributing to such employees the earnings
and principal of the fund accumulated by the
trust in accordance with such plan

b. if under the trust instrument it is impossible, at
any time prior to the satisfaction of all liabilities
with respect to employees under the trust, for
any part of the corpus or income to be (within
the taxable year or thereafter) used for, or
diverted to, purposes other than for the
exclusive benefit of his employees

c. any amount actually distributed to any employee
or distributee shall be taxable to him in the year
in which so distributed to the extent that it
exceeds the amount contributed by such
employee or distributee.
The Taxpayer and Tax Base Co-Ownerships
Co-Ownerships
There is co-ownership whenever the
ownership of an undivided thing or right belongs to
different persons.

CO-OWNERSHIPS
Nontaxable
Taxable Co-ownerships
Co-ownerships
Nontaxable Co-ownerships
GENERAL RULE: Co-ownerships are not
subject to income tax because the activities of the
co-owners are usually limited to the preservation of
the property owned in common and collection of
the income therefrom.
Liability of the Co-Owners

Co-owners shall report in their respective
income tax returns their shares of the income of
the co-ownership subject to regular income tax.
CO-OWNERSHIPS
Nontaxable Co-
ownerships
Taxable Co-Ownerships
The following are the instances when the co-
ownership may become an unregistered general co-
partnership and therefore becomes a taxable corporation:
1. Co-owners appoint an administrator who manages the

affairs of the co-ownership by making investments
therein from which profits are realized. This applies
even if there is already a partition ordered by the court
should the joint management be given to the one of the
co-owners.
2. The co-owners used the common properties
and/or income derived therefrom as a common
fund with intent to make profits
3. When the property remained undivided for more

than ten (10) years and no attempt was made to
divide the same among the co-heirs, nor was the
property under administration proceedings nor
held in trust
4. In all other instances when the co-ownership
activities are already beyond mere preservation
of the co-owned property
CO-OWNERSHIPS
Nontaxable Co-
ownerships

under the NIRC
d. Cooperatives

under the NIRC
d. Cooperatives
Exempt Individuals
1. Compensation income earners, self-employed
and professional taxpayers (SEPs) whose annual
taxable incomes are P250,000 or loess
2. Regular income of Barangay Micro-business

Enterprises (BMBEs)
3. Minimum wage earners on certain

compensation income

under the NIRC
d. Cooperatives

1. Labor, agricultural or horticultural organization
not organized principally for profit
2. Mutual savings bank not having a capital stock

represented by shares, and cooperative bank
without capital stock organized and operated for
mutual purposes and without profit

3. A beneficiary society, order or association,
operating for the exclusive benefit of the
members such as a fraternal organization
operating under the lodge system, or mutual aid
association or a nonstock corporation organized
by employees providing for the payment of life,
sickness, accident, or other benefits exclusively
to the members of such society, order, or
association, or nonstock corporation or their
dependents

4. Cemetery company owned and operated
exclusively for the benefit of its members
5. Nonstock corporation or association organized

and operated exclusively for religious,
charitable, scientific, athletic, or cultural
purposes, or for the rehabilitation of veterans,
no part of its net income or asset shall belong to
or inure to the benefit of any member, organizer,
officer or any specific person

6. Business league chamber of commerce, or
board of trade, not organized for profit and no
part of the net income of which inures to the
benefit of any private stock-holder, or individual
7. Civic league or organization not organized for

profit but operated exclusively for the promotion
of social welfare

8. A nonstock and nonprofit educational institution
9. Government educational institution


10.Farmers' or other mutual typhoon or fire
insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone
company, or like organization of a purely local
character, the income of which consists solely
of assessments, dues, and fees collected from
members for the sole purpose of meeting its
expenses; and

11.Farmers', fruit growers', or like association
organized and operated as a sales agent for the
purpose of marketing the products of its
members and turning back to them the proceeds
of sales, less the necessary selling expenses on
the basis of the quantity of produce finished by
them
Qualification of tax exemption

THE CLASSIFICATION RULE
Since exemption applies only to income from

related activities, the income of exempt
corporations is classified into income from related
activities and income from unrelated activities. The
income from unrelated activities is subjected to
regular income tax.

1. It must be a non-stock corporation or
association organized and operated exclusively
for religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of
veterans.

2. It should meet the following tests:
a. Organizational test – Its constitutive
documents exclusively limit its purposes to
one or more of the purposes mentioned
above.
b. Operational test – The regular activities of the

corporation or association must be
exclusively devoted to the accomplishment of
the aforementioned purposes.

3. All net income or assets of the corporation must
be devoted to its purposes and no part of its net
income or asset accrues to or benefits any
member or specific person.
4. It must not be a branch of a foreign non-stock,

non-profit corporation.
Exception to the Classification rule

Certificate of tax exemption ruling

Non-profit corporations or associations must
secure a Tax Exemption Ruling from the BIR to
enjoy the tax exemption. The ruling shall be valid
for a period of 3 years, unless sooner revoked or
cancelled.

under the NIRC
d. Cooperatives
Government agencies and instrumentalities

Classification rule applies

under the NIRC
d. Cooperatives
Certain GOCCs
GOCCs are generally proprietary or
commercial in nature and are subject to regular
corporate income tax, except the following exempt
GOCCs:
a. Government Service Insurance System (GSIS)
b. Social Security System (SSS)
c. Home Development Mutual Fund (HDMF)
d. Philippine Health and Insurance Corporation
(PHIC)
e. Local water districts

under the NIRC
d. Cooperatives
Cooperatives
an autonomous association of persons who
voluntarily joint together to achieve their social,
economic, and cultural needs and aspirations by
making equitable contributions to the capital
required, patronizing their products and services,
and accepting a fair share of risks and benefits of
the undertaking.
Classification of cooperatives for tax purposes
Cooperatives which
Cooperatives which
transact business with
transact business only
both members and non-
with members
members
Cooperatives which transacts only with members

not subject to any taxes and fees under the
NIRC and other tax laws

1. Those with not more than P10M accumulated
reserve and undivided net savings – exempt
from taxes
2. Those with more than P10M accumulated

reserve and undivided net savings – subject to
the following taxes at full rate:
a. Income tax on the full amount allocated for
interest on capital

b. Value Added Tax (VAT) on transactions with
non-members
c. Percentage Tax on all sales of goods or

services rendered to non-members
d. All other internal revenue taxes unless

otherwise provided by the law

All cooperatives regardless of classification
are subject to the following:
1. The applicable income tax on unrelated income


4. VAT on purposes of goods or services except
VAT exempt transactions
5. Withholding tax on wages except for minimum

wage earners
6. All other taxes for which cooperatives are

directly liable and not otherwise expressly
exempted by any law

under the NIRC
d. Cooperatives
The Taxpayer and Tax Base
The Taxpayer and Tax Base
TAXATION
TAX19.M2007 INCTAX
ACCOUNTING METHODS
MARGINA
ACCMED.01 TAX ACCOUNTING METHODS NOTES
1.1 TAX ACCOUNTING METHODS
1.1.1 So as the reporting of items of gross income would be consistent, tax
accounting methods should be applied such as the following:
A. Principal Methods
I. Cash Basis Method – income is recorded in the year it is actually or
constructively received; expenses are generally reported in the year it
is paid
II. Accrual Method – income is reported in the year it is earned and
expenses are deducted in the year incurred
III. Hybrid method – combination of both cash basis and accrual basis
method
B. Deferred Payment Sales

I. Installment method – applicable in the following three cases only:
 Sale of personal property by a dealer
 Casual sale of personal property where:
1. selling price is over P1,000.00
2. initial payment do not exceed 25% of the selling price
3. property is of a kind which would be included in the taxpayer’s
inventory if on hand at the close of the taxable year
 Sale of real property where the initial payment do not exceed 25%
of the selling price
II. Initial Payment – refers to payments which the seller receives upon the
execution of the instruments of sale and those scheduled to be
received in the year of sale or disposition. It simply means “total first
year payments” but do not include receipts of evidence of
indebtedness of the buyer such as notes.
III. Deferred payment basis – applicable when the buyer has issued
evidence of obligation (notes). The notes shall be valued at its market
value at the date of receipt. The difference between the fair value and
the face value is reported as interest income in future taxable period.
This is an alternative to delaying tax payments when the installment
method is not available.

TAX TAX19.M2002-INCTAX.Accounting Methods
C. Long-term Construction Contracts

MARGINAL I. Percentage of completion – this is applicable only to long-term
NOTES construction contracts covering a period in excess of one year
(Architect or engineer’s certification is required)
II. Completed contract basis – gross income is recognized upon
completion of construction contract
D. Farming income
I. Cash Basis -
II. Accrual Basis –
III. Crop Year Basis – applicable only to farmers engaged in the
production of crops which takes more than a year from the time of
planting to the process of gathering and disposal. Expenses paid or
incurred are deductible in the year the gross income from the sale of
the crop is realized.
E. Leasehold improvement
I. Outright method – the value of the leasehold improvement attributable
to the lessor is reported in taxable income at the time of completion of
the leasehold
II. Spread-out method – the value of the leasehold improvement
attributable to the lessor is recognized in taxable income over the lease
term
1.2 REMINDERS ON TAX ACCOUNTING METHODS:

1.2.1 Absence of accounting method or use of one that does not clearly reflect the
income
A. If the taxpayer has no accounting method or if the method employed does
not clearly reflect the income, the computation shall be made in
accordance with such method as in the opinion of the Commissioner
clearly reflects the income.
1.2.2 Consolidation of gross income from two or more methods
A. If a taxpayer adopted the cash basis and accrual basis in accounting for
income earned on separate trade or business, he may opt to combine the
two income determined from the respective methods as a consolidated
income for tax purposes.
1.2.3 Change of Tax Method
A. Prior BIR approval is required
B. - If the taxpayer changes its accounting methods from accrual to
installment method, he should include in future periods the collection of
receivables in future gross income.*
1.2.4 Expenditures benefiting future periods
A. Expenditures benefiting more than one taxable period is deferred and
allocated to those periods expected to be benefited by the expenditure.

TAX19.M2002.Income Taxation-INCTAX.Income Taxation TAX
1.2.5 Advanced receipt of items of gross income MARGINAL

A. Receipt of income in advance is taxable in the year of receipt.
NOTES
1.3 THE NETWORTH METHOD

1.3.1 The Networth Method serves as a test of the existence of income when not
specifically disclosed.
Possible Gross Income = Personal Expenditures + Change in Net Worth*
1.3.2 *The change in net worth is computed as:
Asset, end - Liabilities, end = Net Worth, end

Less: Assets, beg. - Liabilities, beg. = Net Worth, beg.
Change in Net Worth

1. Which is incorrect regarding a change in accounting period by non-individual
taxpayers?
A. IF the change is 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
B. If the change is from calendar year to fiscal year, a separate final or
calendar year for which return was made and the date designated as the
close of the fiscal year
C. If the change is from one fiscal year to another fiscal year, a separate final or
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
D. If the change is from fiscal year to a calendar year, a separate final or
calendar year and the last fiscal year
2. Which is incorrect regarding change in accounting methods?

A. If the taxpayer changes from accrual to installment basis, he should include
the amounts received from sales or other dispositions of property made in
any prior year in the computation of his income for the year of change or any
subsequent year.
B. Any change in accounting method or accounting period require the BIR’s
approval
C. If a taxpayer adopted the cash basis and the accrual basis in computing
income earned on separate trade or business, he may opt to combine the
two income determined from the respective methods as a consolidated
income for tax purposes

D. If the taxpayer changes from accrual to installment basis, he should include

MARGINAL only receipts that relates to current sales or dispositions
NOTES
3. Which is correct?
A. The installment method of reporting income is applicable only to dealers in
property.
B. The installment method can be availed only by any taxpayer when the initial
payment do not exceed 25% of the selling price of the property sold.
C. The casual sale of personal property cannot avail of the installment method
if the selling price is below P1,000
D. Dealers in real properties can always avail of the installment method.
4. Income tax return may be filed on the following, except

A. Authorized agent bank
B. Collection agent of the BIR
C. Authorized City or Municipal Treasurer
D. Barangay treasurer of the taxpayer’s residence
5. In converting a GAAP accrual net income into taxable income, which of the
following is added?
A. Interest income from deposit
B. Penalties and other non-deductible expenses
C. Unrealized gain on financial assets carried at fair value through profit or loss
D. Gains from sale of stock investments of a domestic corporation
6. Katad, Inc. reported the following income in 2016 using GAAP cash basis:
Professional fees P 600,000

Less: Expenses
2016 salaries of staff paid 120,000
Supplies expenses for 2016 40,000
Rental expense (1/2 relates to 2017) ___80,000
Operating Income P 360,000
Unrealized gain on marketable equity securities ___20,000
Net income P 380,000
Additional information:
a. Accrued salaries of staff at December 31, 2016, P20,000.
b. Accrued professional fees at December 31, 2016, P80,000
Compute the taxable income of the taxpayer using the cash basis of accounting
A. P400,000
B. P420,000
C. P460,000
D. P480,000

7. Katad, Inc. reported the following income in 2016 using GAAP cash basis: MARGINAL
NOTES
Professional fees P 600,000
Less: Expenses
2016 salaries of staff paid 120,000
Supplies expenses for 2016 40,000
Rental expense (1/2 relates to 2017) ___80,000
Operating Income P 360,000
Unrealized gain on marketable equity securities ___20,000
Net income P 380,000
Additional information:
a. Accrued salaries of staff at December 31, 2016, P20,000.
b. Accrued professional fees at December 31, 2016, P80,000
Compute the taxable income of the taxpayer using the accrual basis of accounting
A. P400,000
B. P420,000
C. P460,000
D. P480,000
8. Mr. Tomas, a farmer, had the following data for the year:
Sales of livestock and farm products raised P 270,000

Sales of livestock and farm product purchased 160,000
Cost of raising livestock and farm products 190,000
Cost of livestock and farm products purchased and sold 140,000
Rental income of farm equipment 105,000
Inventory of livestock and farm products, January 1 110,000
Inventory of livestock and farm products, December 31 113,000
Using the cash method of accounting, the income is:

A. P205,000
B. P208,000
C. P395,000
D. P202,000

9. Mr. Tomas, a farmer, had the following data for the year:
MARGINAL
NOTES Sales of livestock and farm products raised P 270,000
Sales of livestock and farm product purchased 160,000
Cost of raising livestock and farm products 190,000
Cost of livestock and farm products purchased and sold 140,000
Rental income of farm equipment 105,000
Inventory of livestock and farm products, January 1 110,000
Inventory of livestock and farm products, December 31 113,000
10. Using the accrual method of accounting, the income is

A. P205,000
B. P208,000
C. P395,000
D. P202,000
11. Ms. Dy is a dealer of house and lot. The following relates to her sales during the
year:
Lot A House and Lot
Sales P 400,000 P 800,000
Cost of goods purchased and sold 220,000 400,000
Uncollected accounts at year-end 300,000 400,000
Compute the gross income to be reported by Ms. Dy if she preferred to use

installment method whenever practicable.
A. P245,000
B. P400,000
C. P445,000
D. P580,000

GF Efemela Bldg., Vinzon St, Davao City

(082) 2214337
.
TAXATION
TAX19.M2007 INCTAX
ACCOUNTING PERIODS
MARGINA
ACCPER.01 ACCOUNTING PERIODS NOTES
1.1. TAX ACCOUNTING PERIODS
1.1.1 Gross income accumulates over a period of time. Income taxation would
require adoption of an accounting period wherein to measure the income. The
NIRC provides that “taxable income shall be computed upon the basis of the
taxpayer’s annual accounting period in accordance with the methods of
accounting regularly employed in keeping the books of such taxpayer.”
1.1.2 There are two types of tax accounting periods:
A. Calendar year – the 12-month period ending December 31 and is

applicable to:
I. Individuals
II. taxpayers who do not keep books
III. taxpayers with accounting periods other than the fiscal year
IV. taxpayers with no annual accounting period
B. Fiscal period – any 12 months period ending the last day of any month
other than December 31st. This is Not available to non-corporate
taxpayers.
1.1.3 Normally, accounting period are uniformly 12 months, however, short

accounting period may arise in the following cases:
1. death of a taxpayer
2. dissolution of a business
3. newly organized business
4. changes in accounting period
1.2. TAX PAYMENTS

1.2.1 Tax shall be paid on the 15th day of the fourth month following the close of the
taxpayer’s taxable year.


MARGINAL
NOTES 1. Starting August, 2017, ABC Corporation changed its accounting period from a
fiscal year ending every June 30 to the calendar year. Which statement is
correct?
A. ABC Corporation should file an adjustment return on April 15, 2018 covering
the period of July 1, 2017 to December 31, 2017.
B. ABC Corporation should file an adjusted return on April 15, 2018 covering the
period of August 1, 2017 to December 31, 2017.
C. ABC Corporation should file an adjustment return on October 15 covering the
period of January 1, 2017 to June 30, 2017
D. ABC Corporation need not file an income tax return until April 15, 2018
2. XYZ Corporation changed its accounting period from a calendar year to a fiscal
year ending every March 31. XYZ Corporation should file its annual income tax
return not later than
A. April 15
B. June 15
C. August 15
D. July 15
3. Mac Joe, a resident citizen, changed its accounting period for internal reporting
purposes from a calendar year to a fiscal year ending every June 30 after a
significant change in the nature of his business. Mac Joe should file its annual
income tax not later than
A. June 30
B. October 15
C. September 15
D. April 15
4. Gross income is reported partially in each taxable year in proportion to

collections made in such period as it bears to the total contract price refer to
A. Crop year basis method
B. Percentage of completion basis method
C. Accrual method
D. Installment sales method
5. Mr. Mario was alleged to have under-declared his income during the previous
year. An examiner conducted an evaluation of Mr. Mario based on his statement
of assets and liabilities. The following information were available:

Declared asset, beginning of the year P 400,000

MARGINAL
Discovered undeclared assets existing at the beginning of the year 500,000
NOTES
Declared liabilities, beginning* 200,000
Ending assets as evaluated, inclusive of discovered undeclared assets 1,000,000
Ending liabilities as evaluated 150,000
*40% was discovered unsupported and apparently fictitious

In the same period, Mr. Mario donated a parcel of land out of its declared asset
with a declared value of P200,000. Mr. Mario also presented a lists of his
personal and family expenditures aggregating P150,000 during that year. Using
the net worth method, what is Mr. Mario’s possible income?
A. P70,000
B. P420,000
C. P270,000
D. P220,000
6. Which is correct? The fiscal accounting period is applicable only to

A. domestic corporations.
B. corporations and individuals by election.
C. resident corporations.
D. Any taxpayers who are not individuals.
7. Effective February 2017, DEF Corporation changed its accounting period from a
fiscal year ending every January 31 to another fiscal year ending every August
31. Which is correct?
A. DEF Corporation should file an adjustment return covering the period
covering August 31, 2016 to August 31, 2017.
B. DEF Corporation should file an adjustment return covering the period
January 1, 2017 to August 31, 2017
C. DEF Corporation should file an adjustment return covering the period of
February 1, 2017 to August 31, 2017.
D. DEF Corporation should file an adjustment return covering the period of
August 31, 2017 to December 31, 2017.
8. On July 1, 2017, Eliazar sold a real property for P600,000. 10% down-payment is
due upon signing of the contract of sale. The balance is payable as follows: 15%
December 31, 2017; 50% March 31, 2018; 35% July 31, 2018
Since the property is classified as ordinary asset only the gain of P300,000 is
subject to progressive tax. How much of the gain is taxable in 2017?
A. P 0
B. P300,000
C. P 6,000
D. P 70,500

9. The following accounts relates to book of Zeus, a dealer of household

MARGINAL appliances:
NOTES 12/31/2016 12/31/2017
Installment sales P 1,000,000 P 2,000,000
Cost of installment sales 500,000 1,100,000
2017 Installment receivables - 500,000
2016 Installment receivables 300,000 50,000
How much taxable gain is to be reported in 2017?

A. P1,750,000
B. P 800,000
C. P 675,000
D. P 900,000
10. On October 1, 2017, Vicky sold one of her business establishment (ordinary
asset). The land and building cost Vicky P10,000,000 and was sold for
P14,000,000. P500,000 was paid upon the signing of the contract. The
establishment is subject to P11,000,000 real mortgage and is to be assumed by
the buyer. Compute the amount of taxable gain to be reported in 2017.
A. P 500,000
B. P4,000,000
C. P5,000,000
D. P 625,000
11. On December 31, 2016, Carlo received P100,000 notes due April 1, 2017 as
payment for his business advisory services from his client. The notes can be
discounted at various bank at P96,000. Under deferred payment method, how
much is taxable in 2016 and in 2017?
A. P100,000; P 0
B. P 4,000; P 96,000
C. P 96,000; P 4,000
D. P 0; P100,000

12. The following computations were shown by the taxpayer as support of his GAAP MARGINAL
income under the accrual basis:
NOTES
Gross profit from cash and credit sales P 500,000
Rental Income:
Cash rentals received P300,000
Unearned rent, beginning 100,000
Unearned rent, end (50,000) 350,000
Other Income: P 850,000
Unrealized gain on trading securities 50,000
Total Income P 900,000
Determine the income for taxation purposes.
A. P800,000
B. P900,000
C. P500,000
D. P950,000
13. Which is incorrect? The calendar year accounting period is applicable to

A. individual income taxpayers only
B. taxpayers who do not keep book or with no annual accounting period
C. taxpayers with other than fiscal accounting period
D. individuals and corporations
14. A short accounting period may arise under the following scenarios, except one.
Select the exception?
A. When a taxpayer dies.
B. When a business is dissolved.
C. When the Commissioner of Internal Revenue terminates the taxpayer’s
accounting period.
D. When an individual taxpayer changes his accounting period to a fiscal year.

(082) 2214337
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TAXATION
TAX19.M2007 INCTAX
COMPLIANCE REQUIREMENTS
MARGINA
COMREQ.01 ADMIN REQUIREMENT NOTES
TAX COMPLIANCE
The Philippines follows the “self-assessment method” wherein taxpayers determine

their gross income, prepare their income tax returns and pay the tax accordingly. The
return filed is presumed correct unless proven otherwise by the government.
However, in cases of failure to file a return, the Commissioner of Internal Revenue
shall file a return from best available information and such return thus filed is
presumed correct. The taxpayer has the burden of proof in this case. The same rule
applies when tax authorities has reasons to believed that the tax return of the
taxpayer is grossly misstated.
Income tax return is required for items of gross income that are subject to:
1. Regular Income Tax (quarterly and annual consolidated return)
2. Capital Gains Tax (per transaction and an annual consolidated return)
Who shall file income tax returns?

3. Every resident Filipino citizen
4. Every non-resident Filipino citizen on his income from sources within the
Philippines
5. Every resident alien on income from sources within the Philippines; and
6. Every non-resident alien engaged in trade or business or in the exercise of
profession in the Philippines, on income from sources within the Philippines
Who are not required to file individual returns for income tax?
1. An individual whose gross income does not exceed his total personal and
additional exemptions, except those engaged in business or profession
2. An individual with respect to pure compensation income, derived from sources in
the Philippines, the income tax on which has been correctly withheld, except
those with concurrent employment
3. An individual whose income has been subjected to final income tax
4. An individuals who is exempt from filing income tax returns in pursuant to other
provisions of the Tax Code and other laws.
Where to file income tax returns?

1. Authorized agent bank
2. Revenue District Officer
3. Collection Agent
4. Duly authorized Treasurer of the city or municipality in which the taxpayer has his
MARGINAL legal residence or principal place of business in the Philippines or
NOTES 5. Office of the Commissioner if the taxpayer has no legal residence or place of
business in the Philippines
Payment of Income Tax

1. Outright
2. Installments (for individual taxpayers)

(082) 2214337
.
Co-Ownerships
There is co-ownership whenever the
ownership of an undivided thing or right belongs to
different persons.

CO-OWNERSHIPS
Nontaxable
Co-ownerships
Nontaxable Co-ownerships
GENERAL RULE: Co-ownerships are not
subject to income tax because the activities of the
co-owners are usually limited to the preservation of
the property owned in common and collection of
the income therefrom.
Liability of the Co-Owners

Co-owners shall report in their respective
income tax returns their shares of the income of
the co-ownership subject to regular income tax.
CO-OWNERSHIPS
Nontaxable Co-
ownerships
The following are the instances when the co-
ownership may become an unregistered general co-
partnership and therefore becomes a taxable corporation:
1. Co-owners appoint an administrator who manages the

affairs of the co-ownership by making investments
therein from which profits are realized. This applies
even if there is already a partition ordered by the court
should the joint management be given to the one of the
co-owners.
2. The co-owners used the common properties
and/or income derived therefrom as a common
fund with intent to make profits
3. When the property remained undivided for more

than ten (10) years and no attempt was made to
divide the same among the co-heirs, nor was the
property under administration proceedings nor
held in trust
4. In all other instances when the co-ownership
activities are already beyond mere preservation
of the co-owned property
CO-OWNERSHIPS
Nontaxable Co-
ownerships
Definition according to the Tax Code

1. one-person corporations
2. partnerships, no matter how created or organized
3. joint-stock companies
4. joint accounts (cuentas en participacion)
5. associations
6. insurance companies
NOTE: A one-person corporation is a corporation with a

single stockholder; Provided, That only a natural person,
trust, or an estate may form a one-person corporation.
Not considered corporation for tax purposes

1. general professional partnerships

purpose of undertaking construction projects

purpose of engaging in petroleum, coal,
geothermal and other energy operations
pursuant to an operating consortium agreement
under a service contract with the Government.
Corporations


Domestic Corporations
a corporation that is organized in accordance
with Philippine laws
(Effect: Taxable on their net taxable income, within

and without the Philippines)
Foreign Corporations
a corporation that is organized, authorized or
existing under the laws of any foreign country
(Effect: Taxable on their income within the

Philippines only)
Resident Foreign Corporations

a foreign corporation which is engaged in
trade or business within the Philippines or has a
branch or office operating in the Philippines
(Effect: Taxable on their net taxable income)

Nonresident Foreign Corporations

a foreign corporation which is not engaged in
trade or business within the Philippines or has no
branch or office operating in the Philippines, but
nonetheless receives income from Philippine
consumers
(Effect: Taxable on their gross taxable income,

using final withholding tax scheme)


Regular Corporate Income Tax

the general rule for corporate income tax; the
tax rate is generally applicable to all kinds of
regular corporations, however, they are applied to
different tax bases
Tax Rates for Domestic Corporations

1. until June 30, 2020 – 30%
2. July 1, 2020 onwards

a. 25% - in general
b. 20% - qualified domestic corporations only
Requisites to avail 20% Income Tax Rate

1. The net taxable income shall not exceed P5,000,000;
AND,
2. The total assets shall not exceed P100,000,000,
excluding the land on which the particular business
entity’s office, plant and equipment are situated
NOTE: Domestic corporations shall account separately

their Annual Financial Statements (AFS) the cost of the
land on which the particular business entity’s office, plant
and equipment are situated, and shall not lump the same
in one account title nor consolidated its cost with other
fixed asset accounts.
Tax Rates for Resident Foreign Corporations

1. until June 30, 2020 – 30%
2. July 1, 2020 onwards – 25%

Final Income Tax Scheme for NRFCs

Gross Income derived from all sources WITHIN THE
PHILIPPINES, such as interests, dividends, rents, royalties,
salaries, premiums (except reinsurance premiums),
annuities, emoluments, or other fixed or determinable
annual, periodic or casual gains, profits and income and
capital gains (except capital gains realized from sale,
exchange, disposition of shares of stock in any domestic
corporation which is subject to capital gains tax).
Tax Rates for Nonresident Foreign Corporations

1. until December 31, 2020 – 30%
2. January 1, 2021 onwards – 25%

Mechanics
Resident payors shall deduct and withhold the
applicable tax due and remit the same to the BIR.
Regular Corporate Income Tax Model A*

(Itemized or optional) XXX,XXX
Multiply by: Tax Rate 30%/25%/20%
*Applicable for Domestic Corporations & Resident Foreign

Corporations
Regular Corporate Income Tax Model B**

Less: Final income tax
(Gross income x 30%/25%) XXX,XXX
Net proceeds to NRFC XXX,XXX
**Applicable for Nonresident Foreign Corporations



Minimum Corporate Income Tax

applicable to every domestic and resident
foreign corporation taxable to the regular corporate
income tax (30%, 25% or 20%) including non-profit,
exempt, and special corporations with respect to
their taxable income subject to regular corporate
income tax, but not to their income subject to
special tax rates.
When becomes required and payable

1. The corporation has zero or negative net taxable
income; or,
2. MCIT is greater than the regular corporate

income tax (RCIT).
Tax Rate
1. until June 30, 2020 – 2%
2. July 1, 2020 to June 30, 2023 – 1%
3. July 1, 2023 onwards – 2%

Timing of Imposition
Imposed at the BEGINNING of the 4th taxable
year immediately following the year in which such
corporation commenced its operations.
Gross Income, Definition

1. Sale of goods – Gross sales less sales returns,
discounts, allowances and cost of goods sold,
plus non-operating income
2. Sale of service – Gross receipts less sales

returns, discounts, allowances and cost of
services*, plus non-operating income
*for banks, cost of services includes interest

expense
Excess MCIT Carryover

the excess of the MCIT over the RCIT in any
year is considered a tax credit that is deductible
against any RCIT tax due in the immediately
succeeding three years.

1. Excess MCIT can be used only as a tax credit
against RCIT tax due in any of the three
subsequent years. Excess MCIT cannot be
deducted against MCIT tax due.
2. Credit for the Excess MCIT from prior years can

be taken up to the full amount of RCIT tax due in
the next three years. This means that the
income tax payable when credit is made can get
below the amount of MCIT for that year.

3. When there are several Excess MCITs from prior
years, tax crediting shall be made on a first in,
first out (FIFO) basis.
4. Unused Excess MCIT at the end of the three-

year period shall expire and will no longer be
used.
Relief from MCIT

upon recommendation of the Commissioner
of Internal Revenue, the Secretary of Finance may
suspend the imposition of MCIT upon submission
of proof that the corporation sustained substantial
losses on account of:
1. prolonged labor dispute
2. force majeure
3. legitimate business reverses
Minimum Corporate Income Tax Model

Multiply by: Tax rate 2%/1%


Branch Profit Remittance Tax for RFCs

Any profit remitted by a branch to its head
office abroad shall be subject to a tax of 15% based
on the total profits applied or earmarked for
remittance without any deduction for the tax
component thereof.
The 15% BPRT is a FINAL TAX which is

required to be withheld at source by the branch of a
foreign corporation.
Coverage of BPRT
Interest, dividends, rents, royalties,
renumeration for technical services, salaries,
wages, premiums, annuities, emoluments or other
fixed or determinable annual, period or casual
gains, profits, income, and capital gains received
by a foreign corporation during each taxable year
from all sources within the Philippines shall not be
treated as branch profit UNLESS the same are
effectively connected with the conduct of the
taxpayer’s trade or business in the Philippines.
Coverage of BPRT
The term “effectively connected with the
conduct of the taxpayer’s trade or business” does
not necessarily mean that the income must be
derived from the actual operation of the taxpayer-
corporation’s trade or business, it is sufficient that
the income arises from the business activity in
which the corporation is engaged.
Coverage of BPRT
The income should be an active income or an
income from sources that are effectively
connected with the conduct of the taxpayer’s trade
or business of the resident foreign corporation to
be subjected to the branch profit remittance tax.
Passive investment income and gains are

excluded.
Scope of BPRT
The tax covers the remittance of all resident
foreign corporation including ROHQs of
multinational companies, FCDUs or OBUs of
foreign banks, and international carriers, except
PEZA-registered entities.
Remittance from prior year earnings is still taxable

The NIRC used the phrase “Any profit
remitted” without limiting the same to current year
profit remittance. The branch profit remittance tax
therefore is understood to apply to remittance of
prior year earnings.
Indirect Remittance
Even without actual remittance of profits
abroad, indirect remittance such as the following
are still subject to branch profit remittance tax:
1. Remittance of profits to a resident affiliate or to
a Philippine regional operating headquarters of
the home office;
2. Transfer of net profits to increase the branch
assigned capital account.
Repealed Provisions of the NIRC

Improperly accumulated earnings tax (IAET)
and gross income tax (GIT) are repealed by RA No.
11534 or the Corporate Recovery and Tax
Incentives for Enterprises (CREATE) Act.
Corporations




(EFCDUs)




distributor

nationals

other equipment


(EFCDUs)

Coverage
1. Proprietary education institutions
2. Non-profit hospitals
3. Non-stock, non-profit educational institutions

whose net income or assets accrue/inure to or
benefit any member or specific person
Proprietary educational institutions

any private schools maintained and
administered by private individuals or groups, with
an issued permit to operate from the Department of
Education (DepED) or the Commission on Higher
Education (CHEd) or the Technical Education and
Skills Development Authority (TESDA), as the case
may be. They may either be stock corporations or
non-stock corporations.
Non-profit hospitals
any private hospitals, which are non-profit for
income tax purposes, maintained and administered
by private individuals or groups.

those institutions mentioned in the first
paragraph of Section 4(3), Article XIV of the 1987
Constitution and Section 30 (H) of the NIRC, as
amended, whose revenues and assets that are
used actually, directly and exclusively for
educational purposes shall be exempt from taxes
and duties
Non-profit
means that no net income or asset accrues to
or benefits any member or specific persons, with
all the net income or assets devoted to the
institution’s purposes and all its activities
conducted not for profit.

Grant of per diems such as transportation
allowance in attendance of meetings,
compensation and/or endowments for services
rendered, or any other similar emoluments to the
Board of Trustees, officers, employees, or any
members of the covered institutions shall not be
prohibited and shall not necessarily be considered
a private instrument that would negate the status
of the institutions as non-profit.

Provided, that such per diems, compensation
or emoluments are subject to proper liquidation or
reimbursement procedures, and commensurate to
the functions and services rendered.
The principles of deductions should be

complied.
Tax base
net taxable income on all sources
(within and without)
Tax rates
1. Before July 1, 2020 – 10%
2. July 1, 2020 to June 30, 2023 – 1%
3. July 1, 2023, onwards – 10%,
subject to the PRE-DOMINANCE TEST.

Pre-dominance test
If the gross income from “unrelated trade,
business or other activity” exceeds 50% of the total
gross income derived by such educational
institutions or hospitals from all sources, the tax
prescribed for domestic corporations (25%) shall
be imposed on the entire taxable income.
Unrelated trade, business or other activity

Any trade, business, or other activity, the
conduct of which is not substantially related to the
exercise or performance by such educational
institution or hospital of its primary purpose or
function.


(EFCDUs)

FCDUs and EFCDUs

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 to RA 6426, as amended.
Local bank
a commercial bank, universal bank, and a
thrift bank organized under the laws of the
Philippines. The bank shall secure a Taxpayer
Identification Number (TIN) for its EFCDU or FCDU
separate from the TIN of its regular business unit
(RBU).

FCDUs are limited under their license to short-
term foreign currency-denominated transactions.
They are authorized to accept deposits and trusts
accounts, borrow on short-term maturity, and
invest in short-term maturity deposits, readily
marketable debt securities, and short-term foreign
currency loans.

They are also authorized to enter into
currency swap with the BSP, other FCDUs/EFCDUs
or OBUs, enter into security lending activities as
lender, and engage in repurchase agreement on
foreign currency denominated securities.
Authorized transactions of EFCDUs

The same transactions allowed to FCDUs plus
authorization to enter into foreign exchange trading, issue
letters of credit for non-resident foreign exporters, accept
or negotiate drafts or bills of exchange drawn under letters
of credits or make payments to the order of a non-resident
exporter upon request of their foreign correspondent bank,
purchase export bills of resident exporters, enter into
securities lending activities and repurchase agreements
involving foreign currency denominated securities.
Income tax on FCDUs and EFCDUs

FROM
Residents:
(E)FCDUs Other Non-

transactions RCIT RCIT RCIT
Allocation of Expenses
Based on Revenue Regulation No. 4-2011,
expenses and costs incurred by banks shall be
allocated using either specific allocation or pro-
rata allocation based on the gross income subject
to preferential tax, regular tax and exempt from
income tax, respectively. However, the Supreme
Court declared the said revenue regulation null and
void, noting that the Tax Code allows taxpayers to
self-determine the accounting method most
applicable to them.


(EFCDUs)


the offshore gaming operator, whether
organized abroad or in the Philippines, duly
licensed and authorized, through a gaming license,
by the Philippine Amusement and Gaming
Corporation (PAGCOR) or any special economic
zone authority or freeport authority to conduct
offshore gaming operations, including the
acceptance of bets from offshore customers, as
provided for on their respective charters.
Accredited Service Providers to OGLs

a juridical person that is duly created or organized
within or outside the Philippines or a natural person,
regardless of citizenship or residence, which provides
ancillary services to an offshore gaming licensee or to any
gaming licensee or operator with licenses from other
jurisdictions (countries). Such ancillary services may
include, but shall not be limited to, customer and technical
relations and support, information technology, gaming
software, data provision, payment solutions and live studio
streaming services
Tax base and tax rate

The NON-GAMING REVENUES derived during
each taxable year from all sources within and
without the Philippines shall be taxable at twenty-
five percent (25%)
Taxability of Gaming Revenues

Subject to specific percentage tax only
(See Business Taxation)

Taxability of Accredited Service Providers

Taxed as regular domestic corporation
subject to regular corporate income tax and/or
minimum corporate income tax, as applicable.


(EFCDUs)



Regional or area headquarters (RHQ)

multinational companies which headquarters do
not earn or derive income from the Philippines and
which acts as a supervisory, communication and
coordinating center for their affiliates, subsidiaries,
or branches in the Asia Pacific Regional and other
foreign markets.
Regional operating headquarters (ROHQ)

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.
Taxation of RHQs
exempt from income tax – since they do not
earn income
Taxation of ROHQs before CREATE

subject to income tax at 10% of net taxable
income from sources within.
Taxation of ROHQs after CREATE

effective January 1, 2022, ROHQs are taxed as
resident foreign corporation (25% of net taxable
income from sources within, subject to 1% or 2%
MCIT of gross income).
Exemption of RHQs and ROHQs

Both RHQs and ROHQs are exempt from all
kinds of LOCAL TAXES, FEES or CHARGES
imposed by a LOCAL GOVERNMENT UNIT, except
real property tax on land improvements and
equipment.


International carrier
The term international carrier, also called
international common carrier, refers to entities that
transport passengers, mails and excess cargoes or
baggage from the Philippines to any destination
abroad and vice versa. They consist of
international air carrier and international sea or
shipping carrier.
Income tax rates of international carriers

General Rule: 2 ½% of the Gross Philippine Billings
Exception: Preferential rate or exemption on the

basis of applicable tax treaty or reciprocity

International air carriers
the amount of gross revenue derived from
carriage of persons, excess baggage, cargo and
mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of
the place of sale or issue and the place of payment
of the ticket or passage document.

International shipping carriers
gross revenue, whether for passenger, cargo
or mail originating from the Philippines up to final
destination, regardless of the place of sale or
payments of the passage or freight documents.
Continuous and uninterrupted flight or voyage

means a flight or voyage from the Philippines
up to the point of final destination of the
passenger, excess baggage, cargo, and/or mails.
Rule on revalidated, exchanged or endorsed tickets

Tickets revalidated, exchanged and/or
endorsed to another international airline form part
of the Gross Philippine Billings of the carrying
airline if the passenger boards a plane or a port or
point in the Philippines.
Exclusion in Gross Philippine Billings

1. Non-revenue passengers – those passengers
qualifying under the free mileage programs of
the air carriers
2. Refunded tickets
Transshipments or interrupted flights or voyage

For a flight which originates from the
Philippines, but transshipment of passenger takes
place at any port outside the Philippines on another
airline, only the aliquot portion of the cost of the
ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form
part of the Gross Philippine Billings.

Flights or voyages of passengers, mails, or excess
baggage commencing from foreign countries which will be
interconnected in the Philippines for continuance of the
flight or voyage to a foreign destination 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 international 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 the arrival and departure
from the Philippines.
Foreign currency translation

In the computation of the Gross Philippine
Billings, tickets in foreign currencies are translated
at whichever is HIGHER of the following conversion
rates:
1. Monthly average Airline Rate in the Bank
Settlement Plan (BSP) Monthly sales report
2. Bankers Association of the Philippines (BAP)
rate
Treaty or reciprocity consideration

tax on the basis of applicable tax treaty or
international agreement to which the Philippines is
a signatory or on the basis of reciprocity such that
an international carrier whose home country
exempts Philippine carriers shall likewise be
exempt from income tax in the Philippines.
Treatment of other income

The other income of international carriers,
other than income from international transports, is
subject to the appropriate type of income tax.
Off-line international carriers

Those without flights or voyage starting from
or passing through any point in the Philippines. The
branch or sales agent in the Philippines of off-line
international carriers which sells passage
documents for compensation or commission to
cover off-line flights or voyages of its head office
or other airline or sea carriers covering flight or
voyages originating from Philippine ports or off-
line flights or voyages is subject to the regular
corporate income tax.



The same tax rules with domestic offshore
gaming licensees (25% rate) except that the tax
base shall only be the non-gaming revenues
derived within the Philippines.
Changes introduced by CREATE Law

Effective April 11, 2021 (effectivity date of the
CREATE Law), Offshore Banking Units (OBUs) shall
now be taxed as resident foreign corporation (25%
of net taxable income from sources within subject
to 1% or 2% MCIT of gross income)
Income tax on OBUs before CREATE

FROM
Residents:
(E)FCDUs Other Non-

Income tax on OBUs upon effectivity of CREATE

FROM
Residents:
(E)FCDUs Other Non-
- Forex loans & receivables exempt RCIT exempt




distributor

nationals

other equipment
Cinematographic Film
Cinematographic film includes motion picture
films, films, tapes, discs and such other similar or
related products.
Tax rate and tax base

25% Final Tax on Gross Income from All
Sources within the Philippines.
“All Sources Within” encompasses any taxable

income, passive or active, other than those arising
from rentals of cinematographic films.

distributor

nationals

other equipment
Lessor of vessels, chartered by Philippine nationals

Gross rentals, lease, or charter fees from leases or
charters to Filipino residents or corporations as
approved by the Maritime Industry Authority.

distributor

nationals

other equipment
Owner/lessor of aircraft, machineries & other equipment

Rentals, charters, and other fees.
Corporations


Deductions from Gross Income Principles of Deductions
Concept of Deduction from Gross Income

Deductions from gross income pertain to
business expenses incurred by a taxpayer engaged
in business or engaged in practice or profession.
Business
habitual engagement in a commercial activity
involving the regular sale of goods and services to
customers or clients, which is, in taxation, include
the exercise of profession and self-employment.
Issues on Expenditures
1. Personal expenses – non-deductible
2. Business expenses – deductible against

business gross income
3. Common expenses – allocated; only common

expenses attributable to business use shall be
deductible
4. Revenue expenditures – deducted outright on
the current taxable year
5. Capital expenditures – deducted upon the

taxable year where the expenditure is used, or
where the related benefit is earned, or allocated
systematically over useful life
6. Acquisition of intangible properties – amortized

over the period they are expected to be used
7. Expenses to promote goodwill – non-deductible
8. Rental payments on finance lease that transfer

ownership – not considered expense; total cost
of lease property is capitalized and
subsequently depreciated throughout the useful
life
Rules on Capital Expenditures

1. Non-depreciable assets – deducted against selling
price when sold
2. Depreciable assets – deducted using depreciation

Depreciation methods:
a. Straight line method
b. Sum-of-the-years-digit method
c. Declining balance method
d. Other methods which may be prescribed by the
Secretary of Finance upon recommendation of the
Commissioner of Internal Revenue

3. Intangible assets
a. Amortizable intangible assets – expensed
over legal life or expected usage life
whichever is lower
b. Non-amortizable intangible assets – not
amortized

4. Inventory – deducted when sold or used in the
business, using either:
a. Inventory method (FIFO or average; Periodic or
perpetual)
b. Specific identification method
5. Prepaid expenses – deducted when expired or used in

the business or profession
6. Immaterial capital expenditures – may be deducted

outright
Special Considerations with Deductions

1. Property repairs and improvements
a. Minor/general repairs - expense
b. Major repairs - capitalized
c. Improvements/replacements - capitalized
2. Acquisition-related costs
a. Related to PPE - capitalized to PPE
b. Related to inventories - capitalized to
inventory/ expensed to COGS
Special Considerations with Deductions

3. Security issue costs - deducted to
proceeds
4. Effect of accounting methods
a. Accrual basis - deducted when incurred
b. Cash basis - deducted when paid
Exception: prepayments and capital
expenditures
5. Effect of Value added taxes (input VAT)
a. VAT taxpayer - credited against output VAT
b. Non-VAT taxpayer - deducted as expense
GENERAL PRINCIPLES OF DEDUCTIONS

Legitimate, ordinary and necessary, and actual
Matching principle
Related party rule
Withholding rule
Characteristics of a legitimate business expense

1. incurred in and for the current taxable period.
2. not a capital expenditure.
3. pertains to the business or profession of the
taxpayer.
4. not contrary to law, public policy or morals.
5. adequately substantiated with receipts or other
documents.
Ordinary and Necessary Expense

NECESSARY - if reasonable and essential to the
development, management, operation, or conduct
of the trade, business or exercise of profession of
the taxpayer.
ORDINARY - when it is normal in relation to the

business of the taxpayer and the surrounding
circumstances. It is also considered ordinary when
the expense is normally incurred by other
taxpayers under the same circumstances.
Ordinary and Necessary Expense

RULE: A deductible expense must be both
ordinary and necessary
Actual Expense
An expense is actual if it is paid or resulted to
an incurrence of an obligation to the taxpayer. In
case of a loss, it must be sustained or realized by
the taxpayer in a closed and completed
transaction.

Matching principle
Related party rule
Withholding rule
The Matching Principle

Only business expenses that are incurred for
the generation of items of gross income subject to
regular tax are deductible.

Matching principle
Related party rule
Withholding rule
The Related Party Rule

Gains realized between related parties are
taxable, but losses are non-deductible.
Related parties are referred to as “Associated

Enterprises” in NIRC.
Who are Related Parties?

1. Members of a family
2. Except in cases of distribution in liquidation, the direct
or indirect controlling individual of a corporation
3. Except in cases of distribution in liquidation,
corporations under direct or indirect common control
by or for the same individual
4. Grantor and fiduciary of any trust
5. Fiduciaries of trusts with the same grantor
6. Fiduciaries of a trust and the beneficiary of such trust
Transfer Pricing Regulation

Pursuant to RR2-2013, the BIR may restate
the price of a non-arm’s length expense between
associated or related enterprises to their arm’s
length fair value comparable to those entered into
by independent enterprises. The amount
determined as arm’s length value shall be
deductible amount for purposes of income tax.

Matching principle
Related party rule
Withholding rule
The Withholding Rule

Payors of income are required to withhold
income taxes on their payments. The failure to
comply with this requirement shall result in the
disallowance of the expense as deduction.
Timing of Withholding
Pursuant to RR12-2001, the obligation of the
payor to deduct and withhold tax from the income
payment arises upon the occurrence of any of the
following, whichever comes first:
1. payment;
2. when the income payments becomes due or
payable;
3. recording of the income payment as expense or
asset in the books.
Late Payment of Withholding Taxes

Pursuant to RR6-2018, the BIR held that
expenses will still be deductible even if the
withholding tax, surcharge including interest of
such late withholding is paid at the time of audit
investigation or reinvestigation.
For income payments exempt from withholding tax

such as salary payments to minimum wage
earners, the taxpayer must comply with certain
documentary requirements of the BIR.
NON-DEDUCTIBLE EXPENSES
Explicitly provided by NIRC
Contrary to the Principles of Deductions
Contrary to the Requisites for Deductibility of an Item


a. Personal, living, or family expenses
b. Amount paid out for new buildings or for permanent, or
betterment made to increase the value of any property
or estate
c. Any amount expended in restoring property or in
making good the exhaustion thereof
d. Premiums paid on any life insurance policy covering
the life of any officer or employee, or any person
financially interest in any trade or business carried on
by the taxpayer, individually or corporate, when the
taxpayer is directly or indirectly a beneficiary under
such policy


Contrary to the “Actual Expense Rule”
Contrary to the “Matching Principle”

Contrary to the “Actual Expense Rule”

a. Decrease in value of properties or investments
b. Estimated future losses
c. Loss on properties covered by insurance or
indemnity contracts
Contrary to the “Matching Principle”

a. Expenses on exempt income
b. Expenses on income subject to special tax regime
c. Business expenses of taxpayers subject to final income
tax
d. Expenses and taxes on income subject to final tax or
capital gains tax
e. Foreign business expenses of taxpayers taxable only
on Philippine income
f. Loss on income not yet recognized in gross income

Contrary to the Requisites for Deductibility

Non-deductible interest expense
Non-deductible taxes
Other non-deductible items of deductions

Non-deductible Interest Expense

a. Interest on personal loans
b. Interest incurred with a related party
c. Discount or pre-deducted interest applicable to
future periods for individual taxpayers
d. Interest expense incurred to finance petroleum
operations
e. Interest on redeemable preferred shares
f. Imputed interest
Non-deductible Taxes
a. Philippine income taxes, except fringe benefit
tax
1. Final income tax
3. Regular income tax
b. Foreign income tax, if claimed as tax credit
c. Estate tax and donor’s tax
d. Special assessment
Other non-deductible items of deductions

generally, those in excess of the limits
allowed by the NIRC, namely, but not limited to:
a. Entertainment, amusement, and recreation
(EAR) expense
b. Net capital loss
c. Charitable and other contributions
Tax Reporting Classification of Deductions

Cost of sales or cost of services
Regular allowable itemized deductions
Special allowable itemized deductions
Net Operating Loss Carryover (NOLCO)

Modes of Claiming Deductions from Gross Income
Itemized Deductions Optional Standard Deduction
The taxpayers list every item of It is in lieu of the itemized

business expense they claim as deductions, regular or special,
deductions. Deductions are including NOLCO. The
strictly construed against the deduction is merely presumed
taxpayer. as a fixed percentage of gross
income for corporations and
gross sales/receipts for
individuals.
Deductions from Gross Income Regular Allowable Itemized Deductions


REGULAR ALLOWABLE ITEMIZED DEDUCTIONS

All necessary and ordinary expenses paid or
incurred during the taxable year including directly
attributable costs in carrying on the development,
management, operation and/or conduct of the
trade, business or exercise of profession.
Expenses, in General
1. Fringe benefits
2. Rental
3. Salaries, wages and allowances
4. SSS, GSIS, PhilHealth, HDMF and Other Contributions
5. Transportation and Travel
6. Janitorial and Messengerial Services
7. Professional Fees
8. Security Fees
9. Others (Deductions Subject to Withholding Tax and
Other Expenses)
Expenses, with Specific Rules

1. Entertainment, amusement, and recreation (EAR)
expense
EAR Expense
Entertainment, amusement, and recreation
(EAR) expense includes representation expense
and/or depreciation or rental expense relating to
entertainment facilities.
Representation Expense
Expenses incurred by a taxpayer in connection
with the conduct of his trade, business, or exercise
of profession in entertaining, providing amusement
and recreation to, or meeting with, a guest or
guests at a dining place, place of amusement,
country club, theater, concert, play, sporting event
or other similar places.
Entertainment Facilities
A yacht, vacation home or condominium, and
any similar item of real property used by the
taxpayer primarily for the entertainment,
amusement, or recreation of guests or employees.
A yacht shall be considered an entertainment

facility if its use is in fact not restricted to specified
officers or employee position in such manner as to
make the same fringe benefit subject to fringe
benefit tax.
Requisites of deductibility of EAR expense

1. It must be paid or incurred during the taxable
year.
2. It must be directly connected to the

development, management, and operation of the
trade, business, or profession of the taxpayer or
directly related to or in furtherance of the
conduct of his or its trade, business, or exercise
of a profession.

3. It must not be contrary to law, morals, good
customs, public policy, or public order.
4. It must not have been paid, directly or indirectly,

to an official or employee of the government or
government-owned and controlled corporation
or of a foreign government, private individual,
corporation, general professional partnership or
similar entity if it constitutes a bribe, kickback,
or other similar payments.

5. It must have been duly substantiated with
adequate proof. The official receipt, invoices,
bills or statements of accounts should be in the
name of the taxpayer claiming the deductions.
6. The appropriate amount of withholding tax

should have been withheld therefrom and paid
to the BIR.
Ceiling on deduction
1. For taxpayers engaged in the sales of GOODS or
PROPERTIES – 0.5% of net sales
2. For taxpayers engaged in the sales of SERVICES

– 1% of net revenues
Ceiling on deduction
3. For taxpayers engaged in the sales of both
goods or properties and services, the allowable
EAR shall in all cases be determined based on
the following apportionment formula:
Net Sales or Net Revenue
x Actual EAR
Total Net Sales and Net Revenue
In no case shall the deductible EAR exceed the

maximum percentage ceiling for the sales of goods
and sales of services.

expense
2. Interest expense
Requisites on the deductibility of interest

1. There must be a valid indebtedness.
2. The indebtedness must be that of the taxpayer.
3. The indebtedness must be connected with the
taxpayer’s trade, business, or exercise of
profession.
4. Interest expense must have been paid or
incurred during the taxable year.
5. Interest must have been stipulated in writing.
6. Interest must be legally due.
Requisites on the deductibility of interest

7. Interest payments must not be between related
taxpayers.
8. Interest must not be incurred to finance
petroleum operations.
9. In case of interest incurred in the acquisition of
property, used in trade, business, or profession,
the same is not treated as a capital expenditure.
10.The interest is not expressly disallowed by law
to be deducted from gross income of the
taxpayer. (RR 5-2021)
Deductible amount of Interest Expense

Gross interest expense XXX,XXX
Less: Arbitrage limit
Interest income x arbitrage limit XXX,XXX
Deductible interest expense XXX,XXX
Arbitrage Limit
Reductions in interest expense based on
interest income subject to final income tax, which
is intended to recover the tax savings of taxpayers
who take advantage of higher regular tax savings
created from interest expense deduction and a
lower final tax on deposit interest income.
Determination of the Arbitrage Rate

Corporate income tax rate – final tax rate on interest income
Corporate income tax rate
Applicable Arbitrage Rates

1. Corporations, in general – 20%
2. Qualified domestic corporations – 0*
3. Individuals – 20%**
*effective July 1, 2020

**effective upon April 11, 2021
Discount or pre-deducted interest, treatment

Discount or pre-deducted interest is a
prepayment, hence, not deductible upon release of
the loan, but upon payment of the same or as it
accrues as expense (amortization).
Borrowing Cost in Properties used in business

At the option of the taxpayer, may be claimed
as:
a. Outright deduction from gross income, or
b. A capital expenditure claimable through
depreciation
Other deductible interest expense

a. Interest from tax delinquency
b. Interest from scrip dividends

expense
2. Interest expense
3. Taxes
Taxes
Taxes paid or incurred within the taxable year
in connection with the taxpayer’s trade, business,
or exercise of profession shall be allowed as
deduction, except:
a. Philippine income taxes, except fringe benefit
tax
b. Foreign income tax, IF CLAIMED AS TAX CREDIT
c. Estate tax and donor’s tax
d. Special assessment
Treatment of Foreign Income Tax

1. Deduction from Gross Income
2. Tax Credit against Tax Due
Who can claim tax credit or deduction for foreign taxes

Taxpayers taxable on world income, such as
domestic corporations and resident citizens, can
claim.
Refunds or Credits of Taxes, Treatment

The refund or credit of DEDUCTIBLE TAXES
must be reverted back to gross income to the
extent of their tax benefit.

expense
2. Interest expense
3. Taxes
4. Losses
Requisites for the deduction of losses

1. It must be incurred in trade, profession, or
business of the taxpayer.
2. It must pertain to property connected with the
trade, business, or profession, if the loss arises
from fires, storms, shipwrecks, or other
casualties, or from robbery, theft, or
embezzlement.
3. The loss must not be compensated by insurance
or indemnity contract.
Requisites for the deduction of losses

4. A declaration of loss must have been filed by the
taxpayer within 45 days from the date of
discovery of the casualty or robbery, theft or
embezzlement giving rise to the loss.
5. The loss must not have been claimed as a

deduction for estate tax purposes in the estate
tax return.
Types of Losses
1. Ordinary loss – deductible in full
2. Capital loss – deductible only up to the extent of

capital gains
Restoration or replacement of destroyed properties

1. Total destruction of properties – tax basis of the
old property shall be claimed as loss; while the
entire replacement cost is capitalized as cost of
the replacement property subject to allowance
for depreciation
2. Partial destruction of properties – the
restoration cost shall be expensed up to the
extent of the tax basis of the property
immediately before the casualty. Any excess is
capitalized subject to allowance for depreciation
Loss of Value of Assets

generally, not deductible
EXCEPTION:
Impairment losses actually sustained
Loss on Insured Property

Only the excess of the tax basis of the
property lost over the insurance reimbursement is
deductible
Abandonment Loss
Carrying amount shall be allowed as a
deduction, provided Notice of Abandonment is filed
with the CIR
Losses from wagering transactions/passive activity

allowed only up to the extent of the gains from
the same transaction
Application of the Matching Principle

1. Taxpayers taxable on global income – can
deduct losses on properties wherever situated
2. Taxpayers taxable on Philippine income – can

only deduct losses on properties situated in the
Philippines

expense
2. Interest expense
3. Taxes
4. Losses
5. Bad debts
Requisites of claim for deduction of bad debt

1. The debt must have been ascertained to be
worthless.
2. It must be charged off within the taxable year.
3. It must be connected with the taxpayer’s
profession, trade, or business.
4. The taxpayer must be under the accrual basis of
accounting*.
5. It must not be incurred from a related party.
*Only required by Revenue Regulations, no provision in the
Tax Code (Law).
Application for the Matching Principle

1. Accrual basis – previously earned collectible,
currently ascertained to be worthless, can be
claimed as deductible bad debt expense
2. Cash basis – generally, no bad debt expense

Exception for cash basis: Bad debts representing
loss of capital
Securities* becoming worthless

For domestic banks and trust companies –
securities becoming worthless are bad debt
expense
*Covers only debt securities, not equity securities

Subsequent recovery of bad debts

Recovery of bad debts previously allowed as a
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.
Subsequent change in accounting methods

Bad debt expense sustained by the taxpayer
under the cash basis of accounting should not be
deducted even if the taxpayer subsequently
changed its accounting method to the accrual
basis of accounting.

expense
2. Interest expense
3. Taxes
4. Losses
5. Bad debts
6. Depreciation and amortization
Life tenancy to a property

the deduction shall be computed as if the life
tenant were the absolute owner of the property and
shall be allowed to the life tenant
Properties held in trust

the allowable deduction shall be apportioned
between the income beneficiaries and the trustees
in accordance with the provisions of the instrument
creating the trust, or on the basis of the trust
income allowable to each.
Depreciation on revalued property

must be premised on acquisition cost and not
on its reappraised value.
Deductibility of depreciation on passenger vehicles

1. Substantiation of the purchase with sufficient
evidence such as official receipts and other
documents bearing the total purchase price
including specific motor vehicle identification
numbers of the vehicles
2. Substantiation of the direct connection or
relation of the vehicle to the development,
operation, and/or conduct of the trade, business,
or profession of the taxpayer
Deductibility of depreciation on passenger vehicles

3. Only one vehicle for land transport is allowed for
an official and employee, and the value of which
shall not exceed P2,400,000
4. No depreciation shall be allowed for yachts,
helicopters, airplanes or aircrafts, and land
vehicles which exceed the threshold unless the
main line of business is transport operation or
lease of transportation equipment and the
vehicles purchased are used in said operations
Amortization of Intangible Assets

Similar concepts in depreciation are also
applicable to the exhaustion of intangible assets
with definite useful life.
Intangible assets that do not lose their value

throughout time should not be amortized.
Optional Expensing of Capital Expenditure

Private educational institutions are granted
the option to treat capital expenditures as an
outright expense or as a deduction through
allowance for depreciation.

expense
2. Interest expense
3. Taxes
4. Losses
5. Bad debts
7. Depletion
Stages of Wasting Asset Activities

1. EXPLORATION STAGE – involves ascertaining
the existence, location, extent or quality of any
deposit or mineral
2. DEVELOPMENT STAGE – commences when

deposits of ore or minerals are shown to exist in
sufficient commercial quantity
3. COMMERCIAL PRODUCTION – the stage of

actual extraction, processing and sale.
Common rules for both mining and oil operations

Taxpayers engaged in wasting assets shall
classify their expenditure into:
1. Cost of acquisition or improvement of tangible
properties
2. Intangible exploration, drilling and development
costs
Treatment of tangible development costs

Include the acquisition or development of
tangible property which are of a character subject
to the allowance for depreciation. This may include
construction of mine-plant roads, buildings,
processing plants and installation of heavy
equipment on-site.
Treatment of tangible development costs

Tangible exploration and development drilling
costs are capitalized and deducted through
allowance for depreciation subject to the rules
applicable for petroleum operations or mining
operations.
Tangible development costs – Petroleum operations

Properties directly used in petroleum operations
NIRC prescribes either the straight-line
method or declining-balance method at the option
of the taxpayer. A shift from the straight-line
method to declining balance method is allowed.
The useful life shall be 10 years, or such shorter
life as may be permitted by the CIR.
Tangible development costs – Petroleum operations

Properties not used directly in petroleum
operations
NIRC prescribed the straight-line method on
the basis of an estimated useful life of 5 years.
Tangible development costs – mining operations

If the expected life of the property used in
mining is 10 years or less, the taxpayer can use the
normal rate of depreciation. If the expected life is
more than 10 years, the property can be
depreciated over any number of years between 5
years and 10 years.
Intangible Exploration and Development Costs

1. Petroleum operations – include any incidental
and necessary costs of drilling wells or
preparing wells for petroleum production and
which have no salvage value
2. Mining operations – include the costs of

diamond drilling, tunneling, and other
improvements of a nature that is not subject to
allowance for depreciation.
Tax treatment of intangible E&D costs

1. Before commercial production – capitalized as cost of
the wasting asset
2. After commencement of commercial production, if
incurred with:
a. Non-producing wells or mines – deducted in the
period paid or incurred*
b. Producing wells or mines – at the option of the
taxpayer, either:
i. Capitalized and amortized using the cost-
depletion method, or
ii. Deducted in the year paid or incurred
*subject to 25% limit
Expense Option on Non-producing mines

Exploration and development drilling
expenses incurred on non-producing mines may be
deducted outright but the deductible amount shall
not exceed 25% of the net income from mining
operations without the benefit of any tax incentive
under existing laws. The unclaimed balance of the
expense shall be carried forward to the succeeding
years until fully deducted.
Cost-Depletion Formula
Units extracted Tax basis of

X
Units extracted + Est. Remaining Units wasting assets

expense
2. Interest expense
3. Taxes
4. Losses
5. Bad debts
7. Depletion
8. Charitable and other contributions
Requisites of claim for deduction on contribution

1. The donee institution must be a domestic
institution.
2. No income of the donee institution must inure to

the benefit of any private stockholder or
individual.
3. The contribution must be valued at the tax basis

of the property donated.
Requisites of claim for deduction on contribution

4. The taxpayer must be engaged in trade or
business.
5. The donee must issue a Certificate of Donation
(BIR Form 2322) which includes a donor’s
statement of values.
6. If the amount of donation is at least P50,000 the
donor shall file a Notice of Donation to the RDO
where he is registered within 30 days upon
receipt of the Certificate of Donation.
Classification of Deductible Contributions
Fully deductible Partially deductible

Fully deductible contributions

1. Donations to the government or political subdivisions
including fully owned government and controlled
corporations to be used exclusively in undertaking
priority activities as determined by the NEDA in
education; health; youth and sports development;
human settlements; culture and sports; and, economic
developments.
2. Donation to foreign institution or international
organization in pursuance of or in compliance with
agreements, treaties or special laws.
3. Donations to accredited domestic non-government
organizations.
Accrediting agencies for donee institutions

1. Department of Social Welfare and Development –
charitable and/or social welfare organizations,
foundations and associations
2. Department of Science and Technology – research and
other scientific activities
3. Philippine Sports Commission – sports development
4. National Commission for Culture and Arts – cultural
activities
5. Commission on Higher Education – educational
activities (EO 671)
Requisites for full deductibility of contributions

1. The NGO must be organized and operated
exclusively for the said purposes, and no income
inures to the benefit of any private individuals.
2. The non-profit organization makes utilization of
the contribution not later than the 15th day of
the third month after the close of its taxable
period.
3. The administrative expenses of the NGO do not
exceed 30% of its total expenses.
Requisites for full deductibility of contributions

4. Members of the Board of Trustees must not
receive remunerations.
5. In the event of liquidation, the asset of the NGO
will be distributed to another nonprofit domestic
corporation organized for similar purpose.
6. The amount of contribution of property other
than money must be valued at acquisition cost.
Contributions subject to limit

1. Donations to the Government of the Philippines
or political subdivisions exclusively for public
purposes not in accordance with priority
activities
2. Donation to non-accredited non-government
organizations or to domestic corporations
organized exclusively for the following
purposes: religious; charitable; scientific; youth
and sports development; cultural; educational;
rehabilitation of veterans; and, social welfare.
Limit for deduction for contributions

Based on the taxable income derived from
trade, business or profession before the deduction
of any contributions
1. 10% for individuals
2. 5% for corporations

expense
2. Interest expense
3. Taxes
4. Losses
5. Bad debts
7. Depletion
9. Contributions to Pensions and Trusts
Types of Employee Pension Plans

Defined contribution plan – the employer is
merely obligated to make certain amounts of
contribution to the pension fund on a regular basis.
The employer does not guarantee the amount of
the benefits to the employees.
Effect: deductible expense of the employer is

simply the amount of contribution made to the fund
Types of Employee Pension Plans

Defined benefit plan – the employer
guarantees the amount of the benefits to the
employees. Actuarial computations would be
necessary to determine the employer’s
contributions to ensure that the promised benefits
to covered employees will be met in due time.
Defined Benefit Plan

In defined benefit plan, employer’s funding is either
or both:
1. Current service cost – pension expense of the
employer accruing under the term of the pension plan
for services rendered by employees during the year.
2. Past service cost – pension expense of the employer
accruing in prior years for services rendered by
employees before the establishment of the pension
fund and additional pension expense accruing in prior
years arising from improvement in the benefit offering
of the plant.
Requisites of deductibility of pension expense

1. The employer must have established a pension or
retirement fund to provide for payment of reasonable
pensions to employees.
2. The actuarial assumptions used by the fund must be
sound and reasonable.
3. The fund must be actually funded by the employer.
4. The fund assets must be independent from and not
subject to the control or disposal of the employer.
5. Contribution for current service cost is deductible in
full.
6. Contribution for past service cost is amortized over a
period of 10 years.
Rules in computing the deductible pension expense

1. The contribution to the fund is first attributed to current
service cost. The funding of current service cost is
deductible in full.
2. The excess funding is attributed to any unfunded past
service cost. The funding of past service cost is
amortized over 10 years regardless of the actual
vesting period of covered employees.
3. Overfunding of the fund is a prepaid pension expense
deductible in the future as funding of future current
service cost.

expense
2. Interest expense
3. Taxes
4. Losses
5. Bad debts
7. Depletion
10.Research and development (R&D) costs
Research and Development (R&D) costs

1. Research activities are geared towards
discovery of new knowledge.
2. Development activities are geared towards

determining application of research knowledge
which could provide income and benefits for the
business.
Tax treatment of R&D Costs

1. Research and development costs related to capital
accounts such as property used in business are
capitalized as part of the cost of the property and
deducted through depreciation expense.
2. Research and development costs not related to capital
accounts are treated as follows at the option of the
taxpayer:
a. Outright expense or
b. Deferred expense amortized over a period not less
than 60 months beginning from the month the
taxpayer realize benefits from the R&D expenditures

expense
2. Interest expense
3. Taxes
4. Losses
5. Bad debts
7. Depletion
10.Research and development (R&D) costs
Deductions from Gross Income Special Allowable Itemized Deductions


Special Expenses Deduction Incentives

Special Expenses under NIRC & special laws

1. Income distribution from a taxable estate or trust
Income distribution from a taxable estate or trust

Income distribution made by the administrator
of a taxable estate in favor of the heirs or by a
trustee of a taxable trust in favor of the beneficiary
of the trust is a special deduction against the gross
income of the estate or trust. The income
distribution shall be included by the recipient heir
or beneficiary in his gross income.

2. Net transfer to Reserve Fund and Payments to Policies
and Annuity Contracts of Insurance Companies
Transfers and Payments of Insurance Companies

Under the Insurance Code, non-life insurance
companies are required to maintain a reserve
equivalent to 40% of their gross premium, less
returns and cancellations for risks expiring within
one year. For marine cargo risks, the reserve is
equivalent to the amount of premium on insurance
during the last two months of the calendar year.

The net additions, if any, required by law to be
made within the year to the reserve funds and the
sums, other than dividends, paid within the year on
policy and annuity contracts may be deducted from
the gross income of insurance companies.

Under current regulations, the transfer to the
reserve fund shall be deductible in the year it was
actually paid and not in the year it was determined.
Also in consonance with the tax benefit rule, the
release of the reserve is treated as an income in
the year of the release.

3. Dividend distribution of a Real Estate Investment Trust
(REIT) under RA 9856
Real Estate Investment Trust (REIT)

A publicly listed corporation established
principally for the purpose of owning income-
generating real estate assets. An REIT is legally
mandated to distribute 90% of its distributable
income as dividends to shareholders.
Under RA 9856, the dividend distributions of

REITs are treated as special deductions against
gross income.
Real Estate Investment Trust (REIT)

For purposes of computing the taxable net
income of REITs, dividends distributed by them
from their distributable income after the close of a
taxable year and on or before the last day of the
fifth month following the close of the taxable year
shall be considered as paid on the last day of such
taxable year.

4. Transfer to Reserve Fund of Taxable Cooperatives
Transfer to Reserve Fund of taxable cooperatives

Under RA 9520, cooperatives are required to
maintain reserves for their protection and stability.
Cooperatives are exempt from income tax but are
subject to tax on their income from unrelated
activities. The amount transferred by the
cooperative to the reserve fund out of the net
surplus from unrelated activities is an item of
deduction in the computation of the taxable net
income of the cooperative.

5. Discounts to Senior Citizens under RA 9257
Discounts to Senior Citizens under RA 9257

(See topic Specific provisions of other special
laws relating to income taxation)

6. Discounts to Persons with Disability under RA 9442
Discount to persons with disability under RA 9442


6. Discounts to Persons with Disability under RA 9442

Deduction Incentive under Special Laws

1. Additional labor training expenses for skills
development of enterprise-based trainees
Additional Labor Training Expense

Upon effectivity of the CREATE, an additional
deduction of one-half (1/2) of the value of labor
training expenses, but such deduction shall not
exceed ten percent (10%) of the Direct Labor Wage,
shall be granted to enterprises upon compliance of
the certain conditions.
Conditions for Deductibility

1. The labor training expenses shall be for skills
2. The enterprise-based trainees must be enrolled in
Public Senior High Schools, Public Higher Education
Institutions, or Public Education Institution, or Public
Technical and Vocational Institutions
3. The trainees must be covered by an apprenticeship
agreement under PD 442, or the Labor Code of the
Philippines, as amended.
4. The enterprise shall secure proper certification from
the DepEd, TESDA, or CHED.

2. Additional compensation expense for senior
citizen employees under RA 9257
Additional compensation expense for senior citizen


3. Additional compensation expense for persons
with disability under RA 7277, as amended by
RA 9442
Additional compensation expense for PWDs


RA 9442
4. Cost of facilities improvements for persons with
disability
Cost of facilities improvements for PWDs


RA 9442
disability
5. Additional training expenses under RA 8502
Additional Training Expense under RA 8502

Under the Jewelry Industry Development Act
of 1998 and its implementing rules and regulations,
a qualified jewelry enterprise duly registered and
accredited with the Board of Investments (BOI) is
entitled to an additional deduction from taxable
income of fifty percent (50%) of the expenses
incurred in training schemes approved by TESA.
The same shall be deductible during the year the
expenses were incurred.

1. A qualified jewelry enterprise must submit to the
BIR a certified true copy of its Certificate of
Accreditation issued by the BOI.
2. The training scheme must be approved and

certified by TESDA.

RA 9442
disability
5. Additional training expenses under RA 8502

6. Additional contribution expense under the
Adopt-a-School program under RA 8525
Qualification of Participating Schools

Any government school in all levels may
participate in the program. Priorities shall be given
to schools located in the poorest provinces, low-
income municipalities, and other local government
units experiencing severe classroom shortages,
insufficient budget, or having numerous poor but
high performing learners.
Qualification of Adopting Private Entity

1. It must have a credible track record
2. It must have been in existence for at least one

year
3. It must not have been prosecuted and found

guilty of engaging in illegal activities such as
money laundering and other similar cases
Tax Deduction Incentive

Contributions to the government in priority
activities are deductible in full while those made in
non-priority activities are deductible subject to
limit.
Aside from the regular deductible contribution

expense, an adopting entity shall be allowed an
additional deduction from gross income equivalent
to fifty percent (50%) of the contribution of the
adopting entity for the “Adopt-A-School Program.”

1. The deduction shall be availed of in the taxable
year in which the expense is paid or incurred.
2. The expense is substantiated with sufficient
evidence such as official receipts, delivery
receipts and other adequate records which shall
set forth the following:
a. The amount of expenses being claimed as
deductions.

b. Direct connection or relation of the expenses
to the adopting private entity’s participation in
the Adopt-A-School Program.
2. The application together with the approved MOA
endorsed by the National Secretariat shall be
filed with the RDO having jurisdiction over the
place of business of the adopting private entity,
copy furnished the RDO having jurisdiction over
the property, if the contribution is in the form of
real property.
Procedures for Availment

1. Memorandum of Agreement
2. Supporting Evidence
3. Apply for Certificate of Tax Incentive and Tax
Exemption
Valuation of Deductions (RR 10-2003)

1. Cash assistance, contributions or donations
shall be based on the actual amount appearing
in the official receipt issued by the donee.
2. Assistance other than money:

a. Personal property – acquisition cost of
assistance or contribution
b. Consumable goods – acquisition cost or value
at date of donation whichever is lower
Valuation of Deductions (RR 10-2003)

c. Services – the value of services rendered by the
donor and the service provider and the public
school as fixed in the MOA or the actual
expense incurred by the donor, whichever is
lower
d. Real property – fair value (higher of zonal value
or assessed value) at the time of contribution or
the depreciated cost of the property whichever
is lower

7. Additional deductions for compliance to
rooming-in and breast-feeding practices under
RA 7600, as amended by RA 10028
Purpose of Republic Act No. 10028

To encourage, protect, and support the
practice of breastfeeding which is believed to
provide distinct benefits to the mother and the
infant aside from saving the country’s valuable
foreign exchange that may otherwise be used for
milk importation.
Tax Deduction Incentives

The expenses incurred by a private health
institution in complying with the rooming-in and
breastfeeding practices shall be deductible
expenses for income tax purposes up to twice (2x)
the actual amount incurred.
Conditions for deductibility

a. The deduction shall apply for the taxable period
when the expenses were incurred.
b. All health or non-health facilities,
establishments and institutions shall comply
with the IRR of RA 10028 within 6 months after
its approval.
c. The facility, establishment or institution shall
secure a “Working Mother-Baby-Friendly
Certificate” from the DOH to filed with the BIR

8. Additional free legal assistance expense under
RA 9999
Requirement for Availment

Lawyers or professional partnerships
rendering actual free legal services shall secure a
certification from the Public Attorney’s Office
(PAO), the Department of Justice (DOJ), or
association accredited by the Supreme Court
indicating that the said legal service to be provided
are within the services defined by the Supreme
Court and that the agencies cannot provide the
legal services to be provided by the legal counsel.
Requirement for Availment

The association and/or organization duly
accredited by the Supreme Court shall issue the
necessary certification for the number of house
actually provided by the lawyer or partnership.

The practicing lawyer or professional
partnership shall be entitled to an allowable
deduction from gross income equivalent to the
amount that could have been collected for the
actual performance of the actual free services
rendered or up to 10% of gross income derived
from the actual performance of the legal
profession, whichever is lower.

For the purpose of this incentive, the free
legal services must be exclusive of the 60-hour
mandatory free legal assistance rendered to
indigent clients as mandatorily required under the
Rule on Mandatory Legal Aid Services for
Practicing Lawyers.

RA 9999
9. Additional productivity incentive bonus expense
under RA 6971
Additional productivity incentive bonus expense

Under the Productivity Incentive Act of 1990
(RA 6971), a business enterprise which adopts a
productivity incentive program is entitled to a
special additional deduction equivalent to fifty
percent (50%) of the total productivity bonuses
given to employees under the program.
Additional productivity incentive bonus expense

In addition, business enterprises providing
manpower training and special studies to rank-and-
file employees as accredited by the TESDA are also
entitled to fifty percent (50%) additional deduction
of the total grant for local trainings and special
studies.
However, the deduction incentive will not be
allowed on bonuses accruing during the pendency
of a strike or lockout arising from any violation of
the productivity incentive program.

RA 9999
9. Additional productivity incentive bonus expense
under RA 6971

Deductions from Gross Income Net Operating Loss Carryover



The amount of net operating loss that is
allowed by the law to be carried over as deduction
against available net income in the following three
years.
Net Operating Loss (NOL)

The excess of allowable deductions over the
gross income from business or exercise of a
profession during a taxable year.
Rationale of NOLCO
Intended to allow the taxpayer to recoup the
losses before taxation go full swing. Without
NOLCO, income taxation would result in taxation of
recoveries of lost capital.
Who can claim NOLCO?

All taxpayers subject to tax on taxable income
whether at the regular income tax or at preferential
tax rate can deduct NOLCO. Taxpayers who are
exempt, enjoying a tax holiday, subject to tax on
gross income, or those subject to final income tax,
cannot deduct NOLCO.
How to compute NOLCO?

Gross income subject to regular tax XXX,XXX
Less: Total deductions, excluding
NOLCO from prior years and
deduction incentives under
special laws XXX,XXX
Net operating loss carryover (NOLCI) XXX,XXX
Requisites for the Deductibility of NOLCO

1. The taxpayer must not be exempt from income
tax during the taxable year when the NOLCO was
incurred.
Rationale: Deductions are of no benefit to the

taxpayer in an exempt year. Hence, the net
operating loss from an exempt year should not be
given value by carry-over as this would cause
undue enrichment to the taxpayer.
Requisites for the Deductibility of NOLCO

2. There has been no substantial change in
ownership of the business or enterprise (75%
rule).
Rationale: When there is a substantial change in

the ownership of the business, NOLCO is no longer
allowed because the owners for whom the loss
recoupment is intended are no longer in the
business. NOLCO is a privilege that is not
transferrable.
Rules in claiming NOLCO

1. NOLCO is claimable in a first-in first-out (FIFO)
basis.
2. NOLCO can be claimed only up to the extent of

the business net income in the next three years.
Prior year NOLCO cannot be deducted against a
subsequent net operating loss.
3. Any NOLCO which remains unused at the end of

the three-year prescriptive period will expire.
Special consideration of NOLCO for Individuals

For individuals who are mixed income earners,
NOLCO is measured by separating compensation
income from business or professional income
following the income classification and
globalization rule.
NOLCO for Mining Companies

The net operating loss sustained by mining
companies without the benefit of incentives under
the Omnibus Investment Code of 1987 in any of
their first 10 years of operation is allowed to be
carried over a period of 5 years following the year
the net operating loss was sustained.
NOLCO during COVID-19 pandemic

Net operating losses sustained in taxable
years 2020 and 2021 shall be carried over as
NOLCO for the next five (5) consecutive taxable
years immediately following the year of such loss,
pursuant to RA No. 11494 (Bayanihan to Recover
as One Act); provided, this benefit shall remain in
effect even after the expiration of the said
Bayanihan law.
NOLCO and Net Capital Loss Carryover (NCLCO)

Net Capital Loss Carry-Over cannot be
claimed simultaneously with NOLCO. In
accordance with the income tax benefit rule, no
capital loss carry-over is allowed when the year’s
operation resulted in a net operating loss.
NOLCO and Merger and Consolidation

NOLCO of the Acquirer
The NOLCO of the acquirer which it incurred
before the merger or consolidation continues to be
deductible even after merger or consolidation so
long as there is no substantial change in its
ownership.
NOLCO and Merger and Consolidation

NOLCO of the Acquiree
NOLCO is not allowed as deduction when
there is a substantial change in the ownership of
the business. It is clear that the privilege for
NOLCO deduction is reserved by the law only to the
group of owners when the loss was incurred while
denying it to the new group of owners who
subsequently acquired substantial interest in the
business.
Deductions from Gross Income Optional Standard Deduction
Itemized Deductions Optional Standard Deduction
The taxpayers list every item of It is in lieu of the itemized

business expense they claim as deductions, regular or special,
deductions. Deductions are including NOLCO. The
strictly construed against the deduction is merely presumed
taxpayer. as a fixed percentage of gross
income for corporations and
gross sales/receipts for
individuals.
Concept of Optional Standard Deduction (OSD)

The OSD is in lieu of the itemized deductions
including NOLCO allowable under the NIRC and
special laws. Under the OSD, the allowable
deduction of the taxpayer is simply presumed as a
percentage of gross sales or receipts for
individuals and gross income for corporations.
There is no need to support every item of expense.
The OSD, however, does not relieve the taxpayer of
the responsibility to deduct withholding tax on
certain income payments as required by the NIRC.
Who can claim OSD?

OSD is a proxy for itemized deductions. As a
rule, all taxpayers who are subject to tax on taxable
net income can claim deductions, except for
certain taxpayers, namely:
1. Non-resident alien (NRA)
2. Taxpayers mandated to use itemized deductions
Corporations mandated to use itemized deductions

1. Exempt GOCCs and non-stock, non-profit
corporations with no taxable income
2. Those with income subject to

special/preferential tax rates
3. Those with income subject to regular corporate

income tax and special/preferential tax
Individuals mandated to use itemized deductions

1. Exempt individuals under the NIRC and special
laws with no other taxable income
2. Those with income subject to

special/preferential tax rates
3. Those with income subject to regular income tax

and special/preferential income tax
Mechanics
The option to claim OSD must be signified in
the income tax return, otherwise, itemized
deduction is presumed. The option to elect OSD or
itemized deduction must be made in the first
quarter return. Such election when made shall be
irrevocable in the taxable year for which the return
is made.
Mechanics
Taxpayers who opted to claim OSD are not
required to submit their financial statements with
their income tax return. Individual taxpayers opting
to deduct OSD shall keep records pertaining to
their gross sales or gross receipts. Corporations
opting to deduct OSD shall keep such records
pertaining to their gross income during the taxable
year.
Percentage of Optional Standard Deductions

1. Individual taxpayers – 40% of total
sales/revenues/receipts/fees
a. Those selling goods under accrual basis –
40% of gross sales
b. Those selling goods under cash basis – 40%
of gross receipts
c. Those selling services under accrual basis –
40% of revenue
2. Corporate taxpayers – 40% of gross income
Coverage of OSD for Individuals

Since the OSD of individuals is based on gross
receipts or gross sales, it is deemed to replace all
items of deductions against gross receipts or gross
sales in computing net income. Individuals using
OSD shall use either BIR Form 1701 (Mixed income
earners) or BIR Form 1701A (Purely self-employed
and/or professionals) in filing their annual return.
Coverage of OSD for Corporations

Since the corporate OSD is based on gross
income, it is deemed to replace all items of
deductions from gross income in computing net
income. Corporations opting to use OSD shall use
BIR Form 1702-RT for their annual income tax
return.
When to indicate the option to use OSD?

Whether individual or corporate taxpayers, the
option to use OSD for the taxable year must be
indicated in the first quarter return (1701Q for
individuals and 1702Q for corporations) and shall
be applied to all subsequent quarters and in the
annual return. The option to use either itemized
deduction or OSD is irrevocable only for the current
year it is made.
OSD Model for Individuals

Net sales/revenues/receipts/fees XXX,XXX
Add: Other taxable income from operation
not subject to final tax XXX,XXX
Total sales/revenues/receipts/fees XXX,XXX
Multiply by: OSD rate 40%
Optional standard deduction XXX,XXX
Gross Sales
Gross sales include only sales contributory to
income subject to regular tax. Since sales returns,
allowances and discounts are not contributory to
income, they must be deducted from the total
recorded sales.
Gross Receipts
Amounts actually or constructively received
during the taxable year. For sellers of services
employing the accrual basis of accounting, the
term “gross receipts” shall mean amounts earned
as gross revenue during the taxable year.
For individual taxpayers using other methods

of accounting, the gross sales or gross receipts
shall be determined in accordance with said
acceptable method of accounting.
Other taxable income from operations

This includes those revenues or receipts
arising from incidental or secondary activities of
business or profession but does not include items
that are net of costs such as gains.
Non-operating Income
1. Gains from dealings in properties
2. Distribution from a general professional
partnership, exempt co-ownership and taxable
estates or trusts
3. Casual active income
4. Passive income or those not connected to the
primary or secondary activities of the business
such as:
a. interest income on advances to employees
b. investment income subject to regular tax
OSD Model for Corporations

Net sales/revenues/receipts/fees XXX,XXX
Less: Cost of sales or services XXX,XXX
Gross income from operations XXX,XXX
Add: Other taxable income,
not subject to final tax XXX,XXX
Total gross income XXX,XXX
Multiply by: OSD rate 40%
Optional standard deduction XXX,XXX
Gross Income
Under the NIRC, gross income was
restrictively defined as:
1. Gross sales less sales return, discounts and
allowances and cost of sales; or,
2. Gross receipts, less sales returns, discounts and
allowances and cost of services.
Gross Income
However, under the amendments introduced
by RA 9504, gross income for purposes of the
corporate OSD pertains to all gross income subject
to the regular income tax. There is no distinction
between gross income from operations and gross
income from non-operating sources.
What constitutes cost of service?

Cost of services includes all direct costs and
expenses necessary to provide the service required by the
customer, such as:
1. Salaries and employee benefits of personnel,
consultants and specialists directly rendering the
service
2. Cost of facilities directly utilized in providing the
service such as depreciation or rental of equipment
used and cost of supplies
The cost of services of banks includes interest
expense
OSD for General Professional Partnerships (GPP)

A general professional partnership (GPP) is
not a taxable entity. It is merely viewed as a “pass-
through” entity where income is ultimately taxed to
the partners. Each partner shall report as gross
income his distributive share, actually or
constructively received, in the net income of the
GPP.
Determination of net income of a GPP

as a corporation.
Thus, a GPP can choose either the itemized
deduction or the optional standard deduction in
computing its distributive net income. The
allowable deduction for a GPP electing to deduct
OSD shall be 40% of gross income similar to the
OSD allowed for corporations.
Deductions against partner’s share in GPP income

The TRAIN law provides that either the GPP or
the partner may avail of OSD. However, the TRAIN
law retained the old rule which based individual
OSD on gross receipts or gross sales and did not
adopt the proposal to revert it back on gross
income. Thus, partners in GPP cannot claim OSD
against their share in net income. The share in the
net income of the GPP is not gross receipt but
rather a gross income.
Deductions against partner’s share in GPP income

It must be clarified however that partners may
use OSD against their gross sales or receipts from
business or profession.
No more allowed deduction against share in GPP income

Before the TRAIN law revision, a partner can
claim itemized deductions from his share in the net
income of a GPP, provided that the GPP also uses
itemized deductions in computing its distributive
net income and not OSD. Under RR8-2018, a
partner can no longer claim deductions from their
share in GPP net income.
Share in net income vs. actual profit distribution

The share in the net income is computed from
the net income of the GPP as determined by the tax
rules. The actual profit distribution is computed
from net income as determined by generally
accepted accounting rules.
These two normally differ because of the following:
a. Deductibility limits or requirements on some
items of deductions
b. Use of OSD by the general professional
partnership
Optional Standard Deduction and NOLCO

NOLCO cannot be claimed simultaneously
with OSD because NOLCO is an item of deduction
while OSD is a proxy for all itemized deductions.
NOLCO is deemed included in the claimable OSD.
OSD and Net Capital Loss Carryover (NCLCO)

OSD does not replace net capital loss carry-
over of individual taxpayers. The net capital loss
carry-over is used in the measurement of net
capital gain which is an item of gross income. In
other words, it is not an item of deduction. Hence, a
net capital loss carry-over from the prior year can
still be deducted against the net capital gain of the
current year even if the taxpayer opted to deduct
optional standard deduction for the current year.
Estate
The inheritance includes all the property,
rights and obligations of a person which are not
extinguished by his death.

Trust
A person who establishes a trust is called the
trustor; one in whom confidence is reposed as
regards property for the benefit of another person
is known as the trustee; and the person for whose
benefit the trust has been created is referred to as
the beneficiary.

ESTATES AND TRUSTS
Taxable Nontaxable


a. Income accumulated in trust for the benefit of
unborn or unascertained person or persons with
contingent interests, and income accumulated
or held for future distribution under the terms of
the will or trust;
b. Income which is to be distributed currently by

the fiduciary to the beneficiaries, and income
collected by a guardian of an infant which is to
be held or distributed as the court may direct;

c. Income received by estates of deceased
persons during the period of administration or
settlement of the estate; and,
d. Income which, in the discretion of the fiduciary,

may be either distributed to the beneficiaries or
accumulated.
ESTATES AND TRUSTS
Taxable Nontaxable

Taxable Estates
An estate is an income taxpayer under judicial
settlement or administration. The executor or
administrator of an estate under judicial settlement
shall secure a Taxpayer Identification Number
(TIN) in the name of the estate of the deceased.
Taxability of Taxable Estate

Taxable estates are treated as individual
Income distributions to heirs

any income from the estate currently
distributed by the executor or administrator to the
heirs are reported as deduction in computing the
taxable income of the estate. Income distribution
from the estate shall reported as gross income
subject to income tax by the heirs in their
respective income tax returns
ESTATES AND TRUSTS
Taxable Nontaxable

Taxable Trusts
An irrevocable trust is a separate and distinct
entity. The grantor or the trustee of an irrevocable
trust shall secure a Taxpayer Identification Number
(TIN) in the name of the trust.
Taxability of Irrevocable Trusts

Irrevocable trusts are treated as individual
Income distributions to beneficiaries

any income from the trust currently
distributed by the trustee to the beneficiaries are
reported as deduction in computing the taxable
income of the trust. Income distribution from the
estate shall be reported as gross income subject to
regular tax by the beneficiaries in their respective
income tax returns.
Exception to the deduction of income distributions

in the case of a trust administered in a foreign
country, the distributions mentioned shall not be
allowed, and the same shall not be included in
computing the taxable income of the beneficiaries.
Consolidation of two or more trusts

Multiple irrevocable trusts designated by the
same grantor for the benefit of the same
beneficiary shall be consolidated for purposes of
income tax.
ESTATES AND TRUSTS
Taxable Nontaxable

Nontaxable Estates
An estate under extra-judicial settlement is
not a taxpayer. The income of the estate under
extra-judicial settlement is taxable to the heirs.
Nontaxable Trusts
Revocable trust is not a taxpayer and is
treated as a pass-through entity whose income is
taxable to the grantor-trustor.

an employees’ trust which forms part of a
pension, stock bonus or profit-sharing plan of an
employer for the benefit of some or all of his
employees is exempt from all kinds of income
taxes under the tax code.

a. if contributions are made to the trust by such
employer, or employees, or both for the purpose
of distributing to such employees the earnings
and principal of the fund accumulated by the
trust in accordance with such plan

b. if under the trust instrument it is impossible, at
any time prior to the satisfaction of all liabilities
with respect to employees under the trust, for
any part of the corpus or income to be (within
the taxable year or thereafter) used for, or
diverted to, purposes other than for the
exclusive benefit of his employees

c. any amount actually distributed to any employee
or distributee shall be taxable to him in the year
in which so distributed to the extent that it
exceeds the amount contributed by such
employee or distributee.
Gross Income Inclusions in the Gross Income
Concept of Income
The tax concept of income is referred to as
“gross income” under the Tax Code. A taxable item
of income is referred to as an “item of gross
income” or “inclusion in gross income.”
Elements of Gross Income

1. It is a return on capital that increases net worth
2. It is a realized benefit
3. It is not exempted by law, contract or treaty

Capital items deemed with infinite value

compensation of which are return OF capital
1. Life
2. Health
3. Human reputation
Taxable proceeds on life insurance

1. Any excess amount received over premiums
paid by the insured upon surrender or maturity
of the policy
2. Gain realized by the insured from the
assignment or sale of his insurance policy
3. Interest income from the unpaid balance of the
proceeds of the policy
4. Any excess of the proceeds received over the
acquisition costs and premium payments by an
assignee of a life insurance policy
Recovery of loss
• Recovery of lost capital – return OF capital
• Recovery of lost profits – return ON capital

Realized Benefit
• Benefit – any form of advantage derived by the
taxpayer
• Realized – earned
Requisites of a realized benefit

1. There must be an exchange transaction
2. The transaction involves another entity
3. It increases the net worth of the recipient

Types of Transfers
1. Bilateral transfers or exchanges – there is
realized benefit; considered gross income
2. Unilateral transfers – no realized benefit; not

considered gross income
3. Complex transactions – partly gratuitous and

partly onerous; portion is considered realized
benefit

Another Entity
every person, natural or juridical, is an entity.
An entity may be a taxable entity or an exempt
entity. A taxable item of gross income arises from
transactions which involve another natural or
juridical entity.

Not Realized Benefits

• Benefits in the absence of transfers
• Inflow of wealth without increase in net worth
Mode of Receipt/Realization of Benefits

1. Actual receipt
2. Constructive receipt

Situs of Income
the place of taxation of income. It is the
jurisdiction that has the authority to impose tax
upon the income.
Income Situs Rules

Type of income Situs of taxation
Interest income Debtor’s residence
Royalties Where the intangible is employed
Rent income Location of the property
Service income Place where the service is rendered
Gain on sale of properties
1. Personal property
a. Domestic securities presumed earned within
b. Other personal properties where the property sold
2. Real property where the property is located
Income Situs Rules

Dividend income from
1. Domestic corporation presumed earned within
2. Foreign corporation
a. Resident foreign corporation Pre-dominance test
Pre-dominance Test on Resident Corporations

If the ratio of the Philippine gross income over
the world gross income of the resident foreign
corporation in the three-year period preceding the
year of dividend declaration is:
a. At least 50%, the portion of the dividend
corresponding to the Philippine gross income
ratio is earned within
b. Less than 50%, the entire dividends received is
received abroad
Income Situs Rules

b. Nonresident foreign corporation earned abroad
Merchandising income earned where the property is sold
Manufacturing income earned where the goods are
manufactured and sold
Classification of Gross Income

1. Gross income subject to final tax
2. Gross income subject to capital gains tax
3. Gross income subject to regular income tax
Introduction to Regular Income Tax

Characteristics of the Regular Income Tax
General in coverage
A net income tax
An annual tax
Creditable withholding tax
Progressive or proportional tax

The Regular Income Tax Model

Gross income – inclusions XXX,XXX
Less: Allowable deductions XXX,XXX
Taxable income XXX,XXX
Determination of Taxable Income

1. Taxable income of individual income taxpayers
2. Taxable income of corporate income taxpayers
Individual Income Taxpayers

Using Classification Rule and Globalization Rule
Classification Rule
1. Compensation income
2. Self-employed and/or professional income
3. Other taxable income
Globalization Rule
income of mixed income earner from both
sources is totaled. A negative net income or net
loss when deductions exceeds gross income from
business or profession shall not be offset against
taxable compensation income.
Corporate Income Taxpayers

same manner as self-employed and/or
professional income earner
Items of Gross Income subject to Regular Tax

1. Compensation for services in whatever form paid
Compensation for Services in whatever form paid

Compensation income refers to the types of
employee benefits that are subject to regular
income tax.
Exception
Fringe benefits of managerial or supervisory
employees – subject to final tax
(See topic income from compensation)


2. Gross income from the conduct of trade, business, or exercise of
a profession
Conduct of Trade, Business or Exercise of Profession

Sales/revenues/receipts/fees XXX,XXX
Not included in gross income subject to regular tax

a. Business income exempt from income tax
b. Business income subject to special tax regime
c. Business income subject to final tax

a profession
3. Gains derived from dealings in properties
Kinds of Properties
1. Ordinary Assets
a. Subject to regular income tax
b. ORDINARY GAINS – included as item of gross
income
c. ORDINARY LOSSES – included as item of deduction
against gross income
2. Capital Assets, other than domestic stocks and real
properties
a. Net capital gains (Capital gains > Capital loss) –
item of gross income
b. Net capital loss (Capital loss > Capital gains) – not
an item of gross income

a profession
4. Interest
Interest
Interest income other than passive interest
income subject to final tax. A taxable interest
income must have been actually paid out of an
agreement to pay interest. It cannot be imputed.
Exempt Interest Income

a. Interest income earned by landowners in
disposing their lands to their tenants pursuant to
the Comprehensive Agrarian Reform Law
b. Imputed interest income


a profession
4. Interest
5. Rents
Rents
Rent income arises from leasing properties of
any kind. It is a passive income but is not subject
to final tax under the NIRC; hence, it is subject to
regular income tax.
Special Considerations on Rent

Obligations of the lessor that are assumed by
the lessee are additional rental income to the
lessor

Advance rentals are:
1. Item of gross income upon receipt if:
a. Unrestricted
b. Restricted to be applied in future years or
upon the termination of the lease
2. Not an item of gross income if:
a. It constitutes a loan
b. It is a security deposit to guarantee payment
or rent subject to contingency which may or
may not happen

Leasehold improvements made by the lessee
on the leased property are recognized by the lessor
as income using the spread-out method or outright
method
(See topic Accounting Methods)


a profession
4. Interest
5. Rents
6. Royalties
Taxability of Royalties
1. Royalties subject to final tax – purely passive income
earned within the Philippines, exclusively enumerated
in the NIRC
(See topic Passive Income Subject to Final Withholding Tax)
2. Royalties subject to regular income tax – catchall

coverage, not subject to final tax
a. Active royalty income earned within the Philippines
b. All royalty income earned outside the Philippines

a profession
4. Interest
5. Rents
6. Royalties
7. Dividends
Taxability of Dividends
1. Dividends subject to Final Tax – declared and
distributed by Domestic Corporations, received by
Individual Shareholders
2. Dividends exempt from Tax
a. declared and distributed by Domestic Corporations,
received by Domestic or Resident Corporations
b. declared and distributed by Foreign Corporations,
received by Domestic Corporations, subject to
conditions
3. Dividends subject to regular income tax – catchall
coverage, neither exempt nor subject to final tax

a profession
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Annuities
Annuities
The excess of annuity payments received by
the recipient over premium paid is taxable income
in the year of receipt
Total annuity payments XXX,XXX

Less: Total premiums paid XXX,XXX
Taxable annuities XXX,XXX

a profession
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
Taxability of Prizes and Winnings

1. Prizes and winnings subject to final tax
a. Prizes earned within and PCSO and lotto winnings,
exceeding P10,000
b. Winnings from other sources within the Philippines
2. Prizes and Winnings exempt from Tax
a. Prizes received without effort to join a contest
b. Prizes in athletic competitions sanctioned by their
respective national sports association
c. Winnings from PCSO and lotto, not exceeding
P10,000
3. Prizes and Winnings to Regular Income Tax – catchall
coverage, neither exempt nor subject to Final Tax

a profession
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Annuities
10. Pensions
Taxability of Pensions
1. Pensions and retirement benefits excluded in
Gross Income – complied the exclusion criteria
provided by the Tax Code, Revenue Regulations
and Special Laws
2. Pensions and retirement benefits included in

Gross Income – Catchall coverage

a profession
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Annuities
10. Pensions
11. Partner’s distributive share from the net income of general
professional partnership
Partner’s distributive share from net income of GPP

COVERAGE: the partners are the ones subject
to regular income tax on their share in the net
income of the general professional partnership
Other shares subject to Regular Income Tax

distributive shares from net income of the
partnership, joint ventures, and/or co-ownership
organized or constituted outside the Philippines,
for taxpayers taxable globally

a profession
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Annuities
10. Pensions
Other Sources of Gross Income

1. Income distributions from taxable estates and
trusts
Income distribution from taxable estates and trusts

Any income distribution received by an heir or
beneficiary from a taxable estate or trust shall be
included in his gross income subject to regular tax,
provided that such income must not have been
subjected to final tax or capital gains tax.

trusts
2. Share from the net income of other pass-
through entities
Share from net income of other pass-through entities

The same tax treatment on recognition of
share in the net income of a general professional
partnership applies to the share from the net
income of exempt joint ventures and co-
ownerships.

trusts
through entities
3. Farming income
Classification of Farming Operations

1. Raise and sell operations – the proceeds on the
sales of livestock or farm products is included in
gross income subject to regular income tax.
Animal raising expenses are presented as items
of deductions against gross income.
2. Purchase and sell operation – the gross profit

from the sale (sales less cost of purchase) is
included in gross income.
Accounting Methods of Farming Income

1. Accrual Basis
2. Cash Basis
3. Crop Year Basis, for long-term crops
NOTE: Proceeds of crop or livestock insurance is

subject to regular tax.

trusts
through entities
3. Farming income
4. Recovery of past deductions
Recovery of Past Deductions

When past year deductions from gross
income are subsequently recovered by the taxpayer
or when accrued expense previously deducted are
subsequently paid at an amount less than the
deduction claimed, they should be analyzed
whether or not they resulted in tax benefit to the
taxpayer.

Past deductions that created tax benefit to the
taxpayer must be reverted back to gross income in
the year of recovery so that the government will
recover the tax lost from the deduction.
Tax Benefit
There are two ways a taxpayer may benefit from a
deduction:
1. Directly, through a reduction of taxable income
in the year deduction is made
2. Indirectly, through reduction of future taxable

income through carry-over of net operating loss
(NOLCO)
Examples of Recoveries of Past Deductions

1. Recovery of previously claimed bad debt expense
2. Refund of local tax expense
3. Refund of foreign tax previously claimed as deduction
4. Recommissioning of abandoned petroleum service
contracts or mining tenements
5. Release of reserve funds of insurance companies
6. Interest expense which were subsequently condoned
by the lender
Refund of Non-deductible Expenses

Expenses of payments which are non-
deductible against gross income in the
computation of taxable net income will never
create tax benefit to the taxpayer. As such, their
recovery should not be included in the gross
income.

trusts
through entities
3. Farming income
5. Reimbursement of expenses
Reimbursement of Expenses
Expenses of the taxpayer that are reimbursed
or paid by the customer or client constitute
additional income to the taxpayer

trusts
through entities
3. Farming income
6. Cancellation of indebtedness for a consideration
Cancellation of Indebtedness for a Consideration

a. In consideration of service or goods – treated as
income
b. As an act of gratuity – treated as gift, not as

income
c. As capital transaction, such as forfeiting the

right to receive dividends in exchange of the
debt – treated as dividend income

trusts
through entities
3. Farming income
Special Consideration in Reporting Gross Income

1. Accounting Methods
2. Situs Rules
3. Effect of Value-Added Tax
4. Creditable Withholding Tax
5. Power of the Commissioner to Redistribute
Income and Expenses
Accounting Methods
The accounting method adopted by the
taxpayer has a direct effect on the reportable
amount of gross income subject to regular income
tax.
Regardless of the accounting methods of the

taxpayer, advanced income must be included in
gross income in the period received.
Situs Rules
The situs of taxation also affects the extent of
income included as items of gross income of the
taxpayer.
a. Taxable on global income – resident citizens
and domestic corporations
b. Taxable on Philippine income – all other

taxpayers
Effect of Value-Added Tax

Remember that business taxpayers are
required to either register as:
a. VAT Taxpayers – if their sales or receipts
exceed P3,000,000 in the last consecutive 12-
month period
b. Non-VAT Taxpayers – if their sales or gross

receipts is below the VAT threshold or are
specifically designated by law to pay percentage
taxes

Every VAT Taxpayer is mandatorily required to
charge 12% output tax on their sales or receipt. The
regulations presume that the amount charged to
customers is inclusive of the 12% VAT.
The output VAT will be paid/remitted to the

government net of the VAT paid by the taxpayer
(input VAT) on his purchases. As such, the amount
of reportable gross income shall not include the
output VAT.
Creditable Withholding Tax

Creditable withholding taxes (CWT) deducted
by income payors against the gross income of the
taxpayer are not exclusions in gross income.
These should be added back to the reportable

amount of gross income.
CWTs are tax credits that are deductible

against the annual income tax due of the taxpayer.

2. Situs Rules
Income and Expenses
Concept
In the case of two or more organizations, trades or
businesses (whether or not incorporated and whether or
not organized in the Philippines) owned or controlled
directly or indirectly by the same interests, the
Commissioner is authorized to distribute, apportion or
allocate gross income or deductions between or among
such organization, trade or business, if he determined that
such distribution, apportionment or allocation is necessary
in order to prevent evasion of taxes or clearly to reflect the
income of any such organization, trade, or business.
(Section 50, NIRC, as amended)
Unfair Pricing Between Associated Enterprises

There is a risk that the pricing of the transfer
of goods and services between associated
enterprises will be controlled in such a way to
further the interests of the associated enterprises
as a whole in disregard of their social responsibility
on taxes.
The Transfer Pricing Guidelines

The example provided is one of the problems
in taxation brought about by unfair pricing
practices. To limit these unfair practices and to
properly reflect the income of associated
enterprises, the BIR and the Department of Finance
promulgated Revenue Regulation No. 2, Series of
2013 on Transfer Pricing.
Associated Enterprise
Two or more enterprises are associated if one
participates directly or indirectly in the
management, control, or capital of the other; or if
the same persons participate directly or indirectly
in the management, control, or capital of the
enterprises.
Associated enterprises are also called

“related parties.”
The Arm’s Length Principle

Transfer pricing between associated
enterprises shall be made under comparable
conditions and circumstances as those entered
into between independent parties where market
forces drive the terms and conditions of the
transactions rather than being controlled solely by
reason of special relationship between the
associated enterprises.
The Arm’s Length Principle shall be applied to

a. Cross-border transactions between associated
enterprises
b. Domestic transactions between associated

enterprises
Cross-Border Transactions
When operations are conducted cross-border,
the taxpayer may enter into an “advanced pricing
agreement” with the BIR where a pricing rate is
pre-agreed to apply for a period of time.
Although this is not a mandatory requirement,
this may serve as a safety net for the taxpayer to
avoid the risk of transfer pricing examination and
adjustment and the inconvenience it may possibly
cause.
Transfer Pricing Methods

1. Comparable Uncontrolled Price (CUP) Method
2. Resale Price Method (RPM)
3. Cost Plus Method (CPM)
4. Profit Split Method (PSM)
a. Residual Profit Split Approach
b. Contribution Profit Split Approach
5. Transactional Net Margin Method (TNMM)

When no comparatives can be derived within
the industry of the subject taxpayer, the BIR may
consider:
1. Extension of the transfer pricing methods using
comparatives derived from another industry
segment
2. Use a combination of the transfer pricing

methods or other methods
Selection of Transfer Pricing Method

To minimize the risks of transfer pricing
adjustments, taxpayers may also consider using
the transfer pricing methods used by the BIR in
pricing their transactions with associated
enterprises. The taxpayer must support the
propriety of the method adopted through proper
documentation.
EXERCISES
Erol negotiated a P1,000,000 non-interest bearing

promissory note to Simonn. Simonn paid Erol
P950,000. On due date, Erol paid Simonn
P1,000,000. Which is true?
a. Erol earned P50,000 return on capital
b. Simonn earned P50,000 return on capital
c. Simonn received P50,000 donation
d. Simonn received P1,000,000 return of capital
Efren paid P20,000 annual premium on a life

insurance contract which would pay her
P1,000,000 in case of his death. After paying for 4
years, Efren assigned the policy to Bryan for
P120,000.
Compute the return on capital.

Bryan purchased the P1,000,000 life insurance

policy of Efren for P120,000. Bryan paid the
P20,000 annual premiums on the policy for 4 years
after which Efren died.
Compute the total return on capital for Bryan.

Thomas Company insured the life of its president

for P2,000,000. A total of P500,000 in premiums
was paid before the president died. The company
collected the total proceeds.
Compute the return on capital.

Fitzgerald is worried that his entire potato

plantation which is expected to yield P400,000
income will be totally devastated by bad weather
conditions. He obtained a P300,000 crop insurance
cover for P30,000. Just before harvest, a rare frost
totally destroyed Fitzgerald’s plantation. The
insurance company paid the policy proceeds.
Compute the total recovery of loss profits to be

recognized by Fitzgerald as income.
Bret was one of the passengers of a van that fell

off a ravine. Bret sued the common carrier and was
awarded an indemnity of P800,000 for the
following:
• P500,000 for the impairment of his health
resulting to the amputation of his legs
• P200,000 for his loss of salaries during his
hospitalization
• P100,000 for his Attorney’s fees
Compute Bret’s return on capital.

Cara Mae received the following items during the

year:
• P200,000 donation from a boyfriend
• P100,000 service fee from professional services
• P300,000 inheritance from his deceased
grandfather
• P100,000 income from illegal gambling
• P50,000 gain on sale from her personal car
• P250,000 profits from his bar restaurant
Compute the total income subject to income tax

Gerald is a supervisory employee of JVA Corporation. He

had the following items of gross income during the year:
• Gerald was paid P800,000 salaries
• Gerald’s P100,000 personal loan was paid by JVA
Corporation as reward for his excellent performance
• Gerald’s P50,000 advances to the company was paid by
JVAs chief executive officer as a gift
• Gerald is entitled to excess representation and
transportation allowance. Gerald received P200,000
total allowance out of which P120,000 was disbursed
by him.
Compute Gerald’s total income subject to income tax.

A condominium homeowners’ association collects

dues from unit holders and remits the same to
service providers on their behalf. Such duties
include electricity, water, security, and
maintenance. The association charges unit holders
an additional 2% of their utility bills as service
charge.
During the year, the association processed utility
bills for unit holders totaling P5,000,000.
How much taxable income is realized by the

association?
Gross Income Exclusions/Exemptions from Gross Income
Concept
Exclusion is different with deductions. When
an item of income is exempted under the above
paragraph, or under special laws, it is deducted
from gross income if it was initially included
therein.
Exclusions are not shown as deductions from

gross income rather they are “excluded” from the
gross income amounts.
EXCLUSIONS FROM GROSS INCOME

1. Proceeds of a life insurance policy
Proceeds of a life insurance policy

received, whether in lump sum or otherwise,
by the heirs or beneficiary upon the death of the
insured is tax exempt since it is a mere
reimbursement for the loss of life.
Exception
a. The beneficiary was chosen for a valuable
consideration.
b. The interest earned on the insurance policy is


2. Amount received by the insured as a return of premium
Return of premium
Amount received by the insured as a return of
premium paid by him under a life insurance,
endowment, or annuity contract paid either during
the term or at the maturity of the term mentioned in
the contract or upon surrender of the contract.
Summary Rule
a. Return of premium – exempt
b. In excess – gross income

Property Insurance Contract

a. Proceeds up to the tax basis of the property lost
or destroyed – exempt
b. Proceeds in excess of the tax basis – gross

income

3. Gifts, bequests, devises or descent
Gifts, bequests, devises or descent

the value of property acquired by way of gift,
bequest, devise or descent provided, however,
incomes from such property, as well as, gift,
bequest, devise, or descent of income from any
property, in case of transfer of a divided interest,
are included in gross income.
a. Property inherited or received as gift – exempt

b. Income of above properties – taxable

4. Compensation for injuries or sickness
Compensation for injuries or sickness

amounts received under Accident or Health
Insurance or under Workmen’s Compensation Acts,
as compensation for personal injuries plus the
amount of any damages received whether by suit
or agreement on account of such injuries or
sickness.

5. Income exempt under treaty
Income exempt under treaty

income of any kind to the extent required by
any treaty obligation binding upon the Government
of the Philippines.

6. Separation or termination
Requisite of exemption for separation/termination

a. Due to job-threatening sickness, death or other
physical disability;
b. Any cause beyond the control of the employee

or official (i.e.: redundancy and closure of
business)
Exemption of benefits does not extend to:

a. Backwages or illegal deductions repaid by the
employer upon termination
b. Terminal leave pay or the commutation of

accumulated unused leave credits

7. Retirement gratuities, social security benefits and other
similar benefits from foreign government agencies and
other institutions, private or public
Retiring residents or non-residents or aliens

Retirement gratuities, social security benefits
and other similar benefits from foreign government
agencies and other institutions, private or public by
resident or non-resident citizens or aliens who
come to settle permanently in the Philippines

8. Investment income in the Philippines in loans, stocks,
bonds, or other domestic securities, or from interest on
deposits in banks in the Philippines
Income of foreign governments & foreign GOCCs

Investment income in the Philippines in loans,
stocks, bonds, or other domestic securities, or
from interest on deposits in banks in the
Philippines by:
a. Foreign governments
b. Financing institutions owned, controlled, or
enjoying refinancing from foreign government
c. International or regional financial institutions
established by foreign governments

8. Investment income in the Philippines in loans, stocks,
bonds, or other domestic securities, or from interest on
deposits in banks in the Philippines

9. Income in the Philippines of the government and its
political subdivisions
Income of Government and its Subdivisions

Income in the Philippines of the government
and its political subdivisions from:
a. any public utility or
b. exercise of essential government function

10.Prizes and awards in recognition of religious,
charitable, scientific, educational, artistic, literary, or
civic achievements
Certain prizes and awards for recognition

Prizes and awards in recognition of religious,
charitable, scientific, educational, artistic, literary,
or civic achievements – but only if:
a. the recipient was selected without any action on
his part to enter the contest or proceeding; and
b. the recipient is not required to render
substantial future services as a condition to
receiving the prize or award

civic achievements
11.Prizes and awards in sports competitions granted to
athletes
Prizes and awards in sports competitions

Prizes and awards in sports competitions
granted to athletes:
a. in local or international competitions and
tournaments
b. whether held in the Philippines or abroad; and
c. sanctioned by their national sports associations


civic achievements
athletes
12.Contributions to GSIS, SSS, PhilHealth, Pag-IBIG, and
union dues
GSIS, SSS, PHIC, HDMF and union dues

Contributions to GSIS, SSS, PhilHealth, Pag-
IBIG, and union dues
a. Pertains to the employee share in the premium
contributions
b. Pertains only to the mandatory or compulsory
monthly contributions. Voluntary contributions
in excess of mandatory monthly contributions
are still taxable

civic achievements
athletes
union dues
13.Contributions to Personal Equity Retirement Account
(PERA)
Concept of PERA
A contributor’s voluntary retirement account
established from qualified contributions of the
contributor and or his employer for the sole
purpose of being invested in qualified PERA
investment products.
Coverage
a. Each OFW – contribute up to P200,000 per year
to PERA account
b. Non-OFW – contribute up to P100,000 per year
c. Husband and wife – individual/each can

contribute up to the maximum allowable
contribution
Exemption
a. Contributions to PERA – exclusions from gross
income
b. Tax credit benefit – 5% of their PERA

contributions claimable as tax credits against
any internal revenue taxes

civic achievements
athletes
union dues
13.Contributions to Personal Equity Retirement Account
(PERA)

14.PERA investment income and PERA distributions
15.13th month pay and other benefits not exceeding
P90,000
13th month pay and benefits not exceeding P90K

13th month pay and other benefits not
exceeding P90,000 – Any amount in excess of
P90,000 (as amended) should form part of an
individual’s gross income and would be subject to
income tax and applicable creditable withholding
taxes.
(See topic Compensation Income)


14.PERA investment income and PERA distributions
15.13th month pay and other benefits not exceeding
P90,000
16.Gains from sale of bonds, debentures, or certificates of
indebtedness with maturity of more than 5 years
17.Gains from redemption of shares in mutual fund
Other exempt income under NIRC & special laws

1. USVA-administered benefits
USVA-administered Benefits
United States Veterans Administration
(USVA)-administered benefits – under the laws of
the United States received by any person residing
in the Philippines

2. SSS benefits
SSS Benefits
SSS benefits – under RA No. 8282, as
amended by RA No. 11199, received or enjoyed

2. SSS benefits
3. GSIS benefits
GSIS Benefits
GSIS benefits – under RA 8291 and including
retirement gratuity received by government
officials and employees

2. SSS benefits
3. GSIS benefits
4. Retirement benefit under RA No. 7641
Retirement benefit under RA No. 7641

Retirement benefit under RA No. 7641 and
those received by officials and employees of
private firms – Those received by officials and
employees of private firm, whether individual or
corporate, in accordance with reasonable private
benefit plan maintained by the employer
Conditions for Exemption

a. This is the first time availment of the exemption.
b. That the retiring official or employee has been in
the services of the same employer for at least
ten (10) years.
c. The retiring employee is at least fifty (50) years
of age at the time of retirement.
d. The employer maintains a reasonable private
benefit plan.
Reasonable private benefit plan

A reasonable private benefit plan is a pension,
gratuity, stock bonus or profit-sharing plan maintained by
the employer for the benefit of its employees covered
(plan members), wherein contributions are made by the
employer, employees or both, for the purpose of
distributing the corpus (principal) or earnings thus
accumulated to plan members; provided that in no time
shall any part of the corpus or income of the fund be used
for, or diverted to, any purpose other than the exclusive
benefit of said plan members.

2. SSS benefits
3. GSIS benefits
5. Minimum wage and certain benefits of MWEs
Minimum wage and certain benefits of MWEs

A minimum wage earner is an individual
recipient of a minimum wage as fixed by the
Regional Tripartite Wage and Productivity Board of
the Department of Labor and Employment.
(See topic Taxability of Minimum Wage Earners)


2. SSS benefits
3. GSIS benefits
6. Income of BMBEs
7. Income of Cooperatives
8. Income of non-stock, non-profit entities
9. Income of qualified employee trust funds
10.Income of self-employed and/or professionals opted to
be taxed at 8% income tax
Self-employed and/or individuals under 8% tax

The exemption we are referring here is
exemption from regular income tax. The gross
income is still subjected to a different tax regime
(8%), but the same shall not be included anymore
for the computation of taxable income subject to
regular income tax.
(See topic The Taxpayer and Tax Base: Individuals)


2. SSS benefits
3. GSIS benefits
6. Income of BMBEs
11.Income subject to final tax or capital gains tax
Income subject to final tax or capital gains tax

Taxability of gross income are mutually
exclusive, once a gross income is subjected to
either final tax or capital gains tax, the same gross
income shall not be included anymore in the gross
income subject to regular income tax.
(See topic Classification of Gross Income)


2. SSS benefits
3. GSIS benefits
6. Income of BMBEs
11.Income subject to final tax or capital gains tax
EXERCISES
Gross Income Income from Compensation
Elements of Employer-Employee Relationship

Selection and engagement of employees
Payment of wages
Power of dismissal
Power of control
Types of Employees as to Functions

Managerial Employees
Supervisory Employees
Rank and file Employees

Types of Employees as to Taxability

Minimum Wage Earners
Regular Employees
Tax model on Compensation Income

Gross compensation income XX,XXX
Less: Non-taxable compensation income XX,XXX
Taxable compensation income XX,XXX
NON-TAXABLE COMPENSATION
Mandatory Deductions
Exempt Benefits
NIRC and Special Laws
Treaty and International Agreements
Necessity of the Employer Rule
Convenience of the Employer Rule

Mandatory Contributions to the following:
1. GSIS/SSS
2. PhilHealth
3. HDMF (Pag-IBIG Fund)
4. Union Dues*
*not mandatory but excluded from gross

compensation income
Exempt Benefits

Exempted/Excluded under NIRC & special laws

1. Remunerations received as incidents of
employment
Received as Incidents of Employment

a. Exempt retirement benefits under RA No. 7641
including exempt retirement gratuities to
government officials and employees
b. Exempt termination benefits
c. Benefits from the United States Veterans

Administration
Received as Incidents of Employment

d. Social security, retirement gratuities, pensions,
and similar benefits from foreign government
agencies and other institutions, private or public
e. Benefits from SSS, under RA No. 8282, as

amended by RA No. 11199
f. Benefits from GSIS, under RA No. 8291

Exempted/Excluded under NIRC & special laws

1. Remunerations received as incidents of
employment
2. De minimis benefits, within the mandatory limits
3. 13th month pay and other benefits not exceeding
P90,000
4. Certain benefits of minimum wage earners
Exempt Benefits

Exempt under Treaty or International Agreements

Employee benefits of non-Filipino nationals
and/or non-permanent residents of the Philippines
from foreign governments, embassies or
diplomatic missions, and international
organizations in the Philippines are exempt from
income tax.
Withholding Tax Exemption vs. Income Tax Exemption

Foreign government embassies, diplomatic
missions and international organizations are
immune from income tax including the obligation
to withhold income tax by virtue of international
comity as embodied in several international
agreements to which the Philippines is a signatory.

However, this exemption from the obligation
to withhold tax does not mean income tax
exemption of their Filipino employees. In fact, most
of the international agreements to which the
Philippines is a signatory limit exemption only to
non-Filipino nationals and/or residents of the
Philippines.

Filipino employees of foreign governments,
international missions and organizations are
taxable as a rule except only to employees of the
following organizations:
a. United Nations (UN)
b. Specialized Agencies of the United Nations
c. Australian Agency for International

Development (AUSAID)
Filipinos employed exempt from Income Tax

d. Food and Agriculture Organization (FAO)
e. World Health Organization (WHO)
f. United Nations Development Programme

(UNDP)
g. International Organization for Migration (IOM)
h. International Seabed Authority (ISA)

Confirmation of Tax Exemptions

Filipinos claiming exemptions under the terms
of international agreements or under provisions of
special laws granting privileges to international
organizations shall file an application for
confirmation of tax exemption with the BIR’s
International Tax Affairs Division (ITAD). The
confirmation shall serve as proof of exemption.
Employees of Philippine Embassies or Consulate Office

Employees working in Philippine embassies or
Philippine consulate offices are not considered
non-resident citizens and are therefore subject to
Philippine income tax.
Exempt Benefits


Benefits or allowances furnished by the
employer to the employees to enable them to
appropriately and effectively execute their duties
as required by their employment are exempt from
income tax. This is referred to as “necessity of the
employer rule.”

These amounts given to the employee are not
income but are expenses of the trade, business or
profession of the employer that are incurred or
paid through the employee. These are not
employee benefits since they are mere advances or
replenishments of what are supposed to be direct
cash outflows from the employer; hence, they are
not considered as compensation income.
Exempt Benefits


Benefits or allowances which are intended for
the furtherance of the interest of the employer’s
business or to ensure its smooth operations are
likewise exempt from income tax. This is referred
to as the “convenience of the employer rule.”

These types of employer spending are
regarded as business expenses and are not
considered as employee reward because they are
not intended for the free personal consumption or
disposal of the employees but as implements of
the employer’s business to ensure the employer’s
convenience.

However, if the expense is unreasonably
excessive making it depart from the nature of a
reasonable business expense such as when it is
deliberately granted to include a benefit for the
employee, the portion of the expense representing
provision or privilege to the employee is
considered a taxable fringe benefit. These types of
expense are regarded as “hybrid expense” because
they are partially business expense and partially
employee benefits.
Exempt Benefits

De Minimis Benefits
De minimis benefits are facilities or privileges
such as entertainment, medical services, or
courtesy discounts on purchases that are
RELATIVELY SMALL VALUE and are furnished by
the employer merely as a means of promoting the
health, goodwill, contentment, or efficiency of his
employees.
Exempt De Minimis Benefits

1. Monetized unused VACATION LEAVE credits of
PRIVATE employees not exceeding TEN (10)
DAYS during the year
Note: Terminal leave pay or the commutation of

unused leave credits due to involuntary separation
from employment of the employee is now treated
as de minimis benefits subject to the 10-day leave
credit limit and is no longer exempt as part of
exempt termination benefits.

1. Monetized unused VACATION LEAVE credits of
PRIVATE employees not exceeding TEN (10)
DAYS during the year
2. Monetized unused 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 P250 per month

4. Rice subsidy not exceeding P2,000 or 1 sack of
50-kg rice per month amounting to not more
than P2,000
5. Uniform and clothing allowances not exceeding
P6,000 per annum
6. Actual Medical Allowance, e.g., medical
allowance to cover medical and healthcare
needs, annual medical/executive check-up,
maternity assistance, and routine consultations
not exceeding P10,000 per annum

7. Laundry allowance not exceeding P300 per
month
8. Employee Achievement Award, e.g., for length of
service or safety achievement, which must be in
the form of tangible personal property other
than cash or gift certificate, with an annual
monetary value not exceeding P10,000 received
by employee under an established written 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 (i.e., Christmas gift
and anniversary gifts)
10.Daily meal allowance for overtime work and
night or graveyard shift not exceeding 25%OF
THE BASIC MINIMUM WAGE on a per region
basis (i.e., overtime meal)

11.Benefits received by an employee by virtue of a
collective bargaining agreement (CBA) and
productivity incentive schemes provided that the
total annual monetary value from both CBA and
productivity incentive schemes combined do not
exceed P10,000 per employee per taxable year
CBA and productivity incentive benefits

Only CBA benefits and productivity incentives
amounting to P10,000 or less is de minimis. If the
amount of the benefit exceeds P10,000, the entire
amount is a taxable “other benefits.”
Taxable de minimis benefits

1. Excess de minimis over their regulatory limits
2. Other benefits of relatively small value that are

not included in the list of de minimis benefits
Treatment of taxable de minimis benefits

1. Rank and file employees – taxable de minimis
benefits is treated as other compensation
income under the category “13th month pay and
other benefits.”
2. Managerial and supervisory employees –

taxable de minimis benefits is treated as fringe
benefit subject to final fringe benefit tax
Composition of Taxable Compensation Income

Regular Compensation
Supplementary Compensation
13th Month Pay and Other Benefits, in excess of P90K

This pertains to fixed remunerations due to be
received by an employee every period, such as:
1. Basic salary
2. Fixed allowances such as cost-of-living

allowance, fixed housing allowance,
representation, transportation, and other
allowances paid to an employee every payroll
period
Exception on the Taxability of Allowances

1. Ordinary and necessary allowances for
travelling, representation or entertainment
expense of employees incurred in the pursuit of
the employer’s trade, business or profession
2. The expense is subject to accounting or

liquidation
3. Any excess advances are returned to the

employer
Paid vacation and sick leave allowances

The paid absences of an employee applied
against his vacation or sick leave credits which are
normally received as part of the regular salary is
part of the regular compensation.
Valuation of Compensation paid in kind

Compensation in kind is taxable at the fair
value of the consideration received. If received in
shares, the fair value of the shares at the date
services were provided shall be used.
Non-compensation items
1. Retainer fees of consultants, talents, and
directors who have no management function in
the business are professional income, not
compensation income of the recipient.
2. Commissions to non-employees such as

independent sales agents are business income
to the sales agent.
Non-compensation items
3. Tips and gratuities paid directly to an employee
by customers of the employer which are not
accounted for by the employee to the employer
are not considered as compensation income, but
are to be reported as “other income” in the
income tax return of the employee.


This pertains additional compensation which
includes PERFORMANCE-BASED remuneration to
an employee in addition to the regular
compensation with or without regard to the payroll
period.
Additional compensation under current tax rules

1. Overtime pay
2. Hazard pay
3. Night shift differential pay
4. Holiday pay
5. Commissions
6. Fees, including director’s fees (if director is an
employee)
Additional compensation under current tax rules

7. Emoluments and honoraria
8. Taxable retirement and separation pay
9. Value of living quarters or meals
10.Gains on exercise of stock options (BIR Ruling
No. 119-2012)
11.Profit sharing and taxable bonuses


13th month & other benefits, in excess of P90K

1. 13th month pay
2. Other benefits
a. CHRISTMAS BONUS of private employees
b. CASH GIFTS other than Christmas or anniversary
gifts or private employees (RR2-1998, as amended
by RR5-2011)
c. Additional compensation allowance (ACA) of
government personnel (RR8-2000)
d. 14th month pay, 15th month pay, etc.
e. Other fringe benefits of rank and file employees
Other fringe benefits of rank & file employees

1. Employee personal expenses shouldered by the
employer
2. Taxable de minimis benefits, such as:
a. Excess de minimis benefits
b. Benefits not included in the exempt de
minimis list


Taxability of Minimum Wage Earners (MWEs)

Minimum wage earners are exempt from
income tax on the following:
1. Basic minimum wage
2. Other benefits
a. Holiday pay
b. Hazard pay
c. Overtime pay
d. Night shift differential pay
Taxability of Minimum Wage Earners (MWEs)

Since the foregoing are legally exempted
benefits, they should be presented as non-taxable
compensation and deducted in the amount of
Receipt of other taxable income by MWEs

The minimum wage earner is still exempt
from income tax from the foregoing benefits even
if they receive other taxable compensation.
However, they may be subjected to tax if their other
taxable income exceeds P250,000 for the year.
(Soriano, et.al. vs. Secretary of Finance and Commissioner

of Internal Revenue, G.R. No. 184450, January 24, 2017)
Rules of change in status as MWE during a year

When an employee becomes a minimum wage
earner during the year, he shall be subject to
income tax only on compensation earned before
becoming a minimum wage earner.
From Regular (Taxable) Employee to MWE

This rule applies in cases of:
1. When there is an increase of the minimum wage
rate as declared by the Regional Wages and
Productivity Board
2. Transfer to an employer paying salary at the
minimum wage
3. Transfer of employment to a region with higher
minimum wage

When an employee ceases to be a minimum
wage earner during the year, only the income for
the rest of the year is taxable
From MWE to Regular (Taxable) Employee

This rule applies in cases of:
1. Increase in salary or promotion of the employee
2. Transfer to an employer paying salary above the
minimum wage
3. Transfer of employment to a region with lower
statutory minimum wage

NOTE: if the taxable income of the employee
does not exceed P250,000 for the year, there will
be no income tax due for the period under the tax
table.
Treatment of COLAs of MWEs

Under RMO23-2011, Cost-of-living Allowance
(COLA) which forms part of the new wage rates
prescribed to be they statutory minimum wage
should be treated as part of the minimum wage and
shall not be treated as a separate or other benefit.
Fringe Benefits - Definitions

1. Labor law – all other benefits or incentives of
employees other than the basic pay. The basic
pay is the fixed regular salary or wages of
employees every payroll period.
2. Tax code – goods, services or other benefits

furnished by the employer to the employees.
Tax Treatment of Fringe Benefits

Under current tax rules, however, items of fringe
benefits in the strict sense are treated differently
depending on their nature:
1. Fringe benefits that are FIXED every payroll period are
considered regular compensation
2. Fringe benefits that are variable and PERFORMANCE-
BASED are considered supplemental compensation
3. Fringe benefits in the form of INCENTIVES are
considered 13th month pay and other benefits
4. Fringe benefits furnished for the EMPLOYER’S
CONVENIENCE OR NECESSITY are exempt from
income tax
Other Fringe Benefits

Other fringe benefits not included or classifiable as
items of compensation income and which are not
exempted under the law are treated as follows:
1. For rank-and-file employees – included as “OTHER
BENEFITS” under “13th month pay and other benefits”
2. For managerial and supervisory employees – excluded

in compensation income subject to regular income tax
and subject to FRINGE BENEFIT TAX (FINAL TAX)
Scope of the Fringe Benefit Tax

The fringe benefit tax covers only the taxable
fringe benefits of MANAGERIAL or SUPERVISORY
employees.
For purposes of the fringe benefit tax, RR3-

1998 clarifies that taxable fringe benefits exclude
those items considered as compensation income.
General Categories of Fringe Benefits

Management Perquisite Benefits
Employee Personal Expenses Shouldered by Employer


Also called “management perks” are highly
privileged incentives given only to a special group
of employees. These benefits are non-performance
based and are given as incentives to management
employees. Perquisite benefits are not considered
as compensation income, but as fringe benefits
subject to fringe benefit tax.

In practice, the boundary between fringe
benefits subject to final tax and compensation
income subject to regular income tax sometimes
overlaps. Based on past rulings, however, BIR
seemed to maintain the view that performance-
based benefits are compensation income while
benefits in the nature of incentives or perks are
fringe benefits.
Employee Personal Expenses shouldered by Employer

When an expense takes the nature of an
employee personal expense or expenditure and is
paid or assumed by the employer in default of a
proximate business necessity, it is deemed a fringe
benefit in its entirety even if the expense is
receipted in the name of the employer.
Hybrid Expenses
When the employer incurs expenses which is
purported partly for business and partly for
employee’s incentive, only 50% of the expense
representing the employee incentive is subject to
the fringe benefit tax.
Hybrid Expenses
The following are hybrid expenses under RR3-
1998:
1. Housing benefits in the form of rental
accommodation
2. Allowing an employee free use of business

property
Taxable de minimis of managers and supervisors

a. Excess de minimis over their limits
b. Benefits not included in the exempt de minimis

list
Exempt Fringe Benefits

a. Fringe benefits which are authorized and
exempted from tax under special laws
b. Benefits required by the nature of, or necessary

to the trade, business, or profession of the
employer
c. Benefit given for the convenience or advantage

of the employer
Exempt Fringe Benefits

d. Contributions of the employer for the benefit of
the employee to retirement, insurance and
hospitalization benefit plans
e. Benefit given to rank-and-file employees

whether or not granted under a collective
bargaining agreement
f. De minimis benefits within their legal limits

The Fringe Benefit Tax

The fringe benefit tax is a final tax imposed on
the fringe benefit furnished, granted or paid by the
employer to the employee, except rank and file
employees, whether such employer is an individual,
a professional partnership or a corporation,
regardless of whether the corporation is taxable or
not, or the government and its instrumentalities.
The Fringe Benefit Tax

For the purposes of the fringe benefit tax,
fringe benefit means any good, service, or other
benefits furnished or granted in cash or in kind by
the employer to individual employees (except rank-
and-file employees).
Characteristics of the Fringe Benefit Tax

1. Final tax
2. Tax upon the fringe benefits of managerial or
supervisory employees
3. Paid by the employer
4. Grossed-up tax
5. Due quarterly
Procedures in Computing the Fringe Benefit Tax

1. Determine the Monetary Value
Determine the Monetary Value

Monetary value refers to the taxable amount
of benefits taken home or realized by the
managerial or supervisory employee. The monetary
value is presumed net of the final tax.

2. Determine the Gross-Up Rate and Fringe Benefit

Tax Rate applicable for the Taxpayer
Determine the Gross Up & Fringe Benefit Tax Rates

The gross-up rate is the complement of the
fringe benefit tax rate. Gross-up rate is determined
by deducting the fringe benefit tax rate from 100%.


3. Determine the Grossed-Up Monetary Value

Determine the Grossed-Up Monetary Value

Monetary value of the benefit XXX,XXX
Divide by: Gross-up rate XX%
Grossed-up monetary value XXX,XXX


4. Determine the Fringe Benefit Tax

Determine the Fringe Benefit Tax

Grossed-up monetary value XXX,XXX
Multiply by: Fringe benefit tax rate XX%
Fringe Benefit Tax XXX,XXX


4. Determine the Fringe Benefit Tax

General Rules on Valuation of Fringe Benefits

Benefits paid in cash
Benefits paid in kind
Benefit is given in the form of free use of employer’s property

Benefits paid in cash

When benefit is given in cash or paid for in
cash, the monetary value is the amount paid for in
cash.
NOTE: The only exception here is when the

employer pays for the rent of the residence of the
employee. Monetary value is 50% of the rental
payment.

When benefit is given in kind, the monetary
value is the fair value of the thing given unless its
book value is higher. Book value is the cost less
any provision for depreciation for depreciable
properties.

When ownership over the property is
transferred to the employee, the monetary value is
the entire fair value of the property even if the
property is partially used in the business by the
employer.
Given in the form of free use of employer’s property

When the benefit is given in the form of free
use of the employer’s property, the monetary value
is 50% of the rental value of the property. If the
property has no available rental value, the
depreciation value is used.

For purposes of the depreciation value, the
presumptive useful lives of the property are:
1. 20 years for real property – depreciation value is
computed as 1/20 or 5% of the value of the
property
2. 5 years for movable properties – depreciation
value is computed as 1/5 or 20% of the value of
the property

Since the fringe benefit tax is PAID
QUARTERLY, the valuation and reporting of the
monetary value is also done quarterly. In case of
use of employer properties, the reporting of
monetary value ceases from the month the free
use is discontinued.
Fringe Benefits subject to Fringe Benefit Tax

1. Housing benefits
Housing Benefits
CASE 1
Employer leases a residential property for the
USE of his employee and the said property is the
usual residence of the employee.
(Monetary value = 50% of the benefit)

Housing Benefits
CASE 2
Employer owns a residential property and
assigns the same for the USE of his employee as
his usual place of residence; the annual value of
the benefit is 5% of whichever is higher of the zonal
or assessed value of the land and improvement.
(Monetary value = 50% of the annual value of the

benefit)
Housing Benefits
CASE 3
The employer purchases a residential
property ON INSTALLMENT BASIS and allows his
employee to USE the same as his usual place of
residence; the annual value is 5% or 1/20 of the
acquisition cost, EXCLUSIVE OF INTEREST.
(Monetary value = 50% of the annual value of the

benefit)
Housing Benefits
CASE 4
Purchase by the employer of residential
property and TRANSFER of ownership in the name
of the employee; the value of the benefit is
whichever is higher of the acquisition cost or zonal
value.
(Monetary value = 100% of the value of the benefit)

Housing Benefits
CASE 5
Purchase by employer of property and
TRANSFER of title to employee for less than
adequate consideration, the value is the fair market
value or zonal value, whichever is higher less
consideration paid by the employee.

Exempt housing privileges

a. Military officials of the Armed Forces of the
Philippines (AFP), Philippine Air Force (PAF),
Philippine Army, and Philippine Navy on their
quarters which are within or accessible from the
military camp so they can be readily available on
call to meet the exigencies of their military
service

b. Housing unit situated or adjacent to the
premises of a business or factory (within a
maximum of 50 meters) from the perimeter of
the business premises
The 50-meter rule may be relaxed when upon the

basis of health or safety requirements such as in
the case of chemical manufacturing, the housing
needs to be located at a farther location.

c. Temporary housing for an employee in a
housing unit for 3 months or less (i.e., not
exceeding one quarter)

1. Housing benefits
2. Expense account
Expense Account
Expenses incurred by an employee but which
are paid by his or incurred and paid by employee
but reimbursed or advanced by the employer are
taxable fringe benefits.
The monetary value is the amount paid by the

employer.
Properly Documented Employer Expense

When the expense is receipted for and in the
name of the employer and the expenditure does not
partake of the nature of a personal expense
attributable to the employee, it is not a taxable
fringe benefit because it is a business expense.

Personal expenses of the employee such as
groceries for the personal consumption of the
employee and/or his family, if paid or reimbursed
by the employer, are taxable fringe benefits
whether or not receipted in the name of the
employer.

Fixed and regular RATA are treated as part of
regular compensation income and are subject to
creditable withholding taxes, not to fringe benefit
tax.

1. Housing benefits
2. Expense account
3. Vehicles of any kind
Vehicles of any kind

CASE 1
Purchase by employer of motor vehicle in the
name of the employee regardless of whether the
same is used partially in the business of the
employer.
(Monetary value = 100% of the cost of the motor

vehicle)
Note that the monetary value shall be reported
in the quarter of purchase.

CASE 2
Cash benefit to employee for the purchase of
a vehicle, even if the vehicle is partly used in the
business of the employer.
(Monetary value = 100% of the cash benefit, except

when the amount is subjected to withholding tax on
compensation)

CASE 2
Car benefits that are paid in cash and are

subjected to withholding tax on compensation are
subject to regular tax, not to fringe benefit tax. If
subject to fringe benefit tax, the monetary value
shall be reported in the quarter of payment.

CASE 3
Purchase of car on installment basis by the
employer with ownership placed in the name of the
employee even if the car is used partly for the
employer’s business, the benefit is the acquisition
cost divided by 5 years.
(Monetary value = 100% of the annual benefit)


CASE 4
Employer shoulders a portion and is placed in
the name of the employee, even if partially used in
business.
(Monetary value = 100% of the portion shouldered

by the employer)

CASE 5
Fleet of motor vehicles owned for the use of
the business and the employees, the value of the
benefit is the cost of all motor vehicles not used for
sales, freight, delivery service, and other non-
personal uses divided by 5 years.


CASE 5
It must be noted that because of the inherent

difficulty of tracing the realization of the fringe
benefits to a particular employee considering the
collective enjoyment of the benefit by the
employees (managerial, supervisory, or possibly
including rank-and-file alike), the regulations
simply subjected it to the final fringe benefit tax.

CASE 6
Fleet of motor vehicles leased for the use of
the business and the employee, the value of the
benefits is the rental payments for motor vehicles
not normally used for sales, freight, delivery,
service, and other non-personal use.

Aircrafts
Aircrafts including helicopters are deemed
solely for business use; hence, they are not subject
to fringe benefit tax.
Yachts
Yachts whether owned and maintained or
leased by the employer are presumed not for
business use; hence, taxable as fringe benefits. If
owned or maintained, the value of the benefit is
measured as the depreciation value over 20 years.
Note on aircrafts and yachts

The high cost of ownership of aircrafts makes
it inherently prohibitive or impractical to be for
personal use. Thus, aircrafts are deemed by the
regulations as solely for business use; hence, they
are exempt from fringe benefit tax.

Yachts, though expensive on the other hand,
generally lack any sensible business purpose aside
from being for personal pleasure; hence, its
depreciation value is subject to fringe benefit tax in
full.

Exceptionally, if the yacht is used solely for
the entertainment of guests or prospective clients,
it is not subject to the fringe benefit tax. In this
case, the depreciation of the yacht qualified as
“entertainment, amusement, and recreation
expense.”

1. Housing benefits
2. Expense account
4. Household personnel
Household Personnel
Employee expenses borne by the employer for
household personnel, salaries of household help,
personal driver of the employee, and other
personal expenses such as homeowners
association dues, garbage dues, electricity, and
water are taxable fringe benefits.
The monetary value is the amount paid.


1. Housing benefits
2. Expense account
5. Interest for the difference between market rate
and the actual rate granted
Interest on Loan at less than Market Rate

The interest forgone by the employer
representing the difference between 12% and the
actual interest charged is a taxable fringe benefit.

1. Housing benefits
2. Expense account
6. Membership fees, dues and other expenses
borne by the employer for the employee in social
and athletic clubs or other similar organizations
Expenses on Social and Athletic Clubs

Membership fees, dues and other expenses
constitute taxable fringe benefits and the monetary
value is the amount paid.

1. Housing benefits
2. Expense account
6. Membership fees, dues and other expenses

7. Expense for foreign travel
Expense for Foreign Travel

Reasonable business expenses for foreign
travel for attending business meetings and
conventions are exempt, such as the following:
1. Inland travel expenses
2. Lodging costs in hotel or similar establishment
amounting to an average of $300/day or less
3. Economy and business class airplane tickets
4. 70% of the cost of first-class ticket
30% Cost of First-Class Ticket

NOTE: 30% of the cost of first-class ticket in
foreign travels is considered de minimis. Also, the
foregoing rules apply only on foreign travels. The
cost of domestic travel is generally considered as
reasonable and hence deductible.
Substantiation Requirement
The rules apply if the expenses were
supported by documentations proving the actual
occurrences of the meeting or convention;
otherwise, they shall be subject to fringe benefit
tax.
Business meetings must be supported by an

official communication from business associates
abroad indicating the purpose of the meeting.
Substantiation Requirement
Business conventions must be supported by
an official invitation or communication from the
host organization or entity abroad.
Expenses for the family members of the

employee shouldered by the employer are taxable
fringe benefits in full.

8. Holiday and vacation expenses
Holiday and Vacation Expenses

Holiday and vacation expenses are taxable
fringe benefits if shouldered by the employer.
The monetary value is the amount paid or

shouldered by the employer.

9. Educational assistance to the employee or his
dependents
Educational Assistance
Educational assistance to the employee is generally
taxable, except when it is incurred for the convenience or
furtherance of the employer’s business, such as:
1. the education or study is directly connected with the
employer’s trade, business or profession; and
2. there is a written contract (i.e., employee bond) that the
employee is under obligation to remain at the employ
of the employer for a period of time they mutually
agreed upon.
Educational Assistance
Educational assistance granted to dependents
of the employee is generally taxable except when
the assistance was provided through a competitive
scheme under a scholarship program of the
company.

dependents
10.Life or health and other non-life insurance
premiums or similar accounts in excess of what
the law allows
Excess from Mandatory Insurance Premiums

Life or health and other non-life insurance premiums
or similar accounts in excess of what the law allows are
taxable fringe benefits except the following insurance or
premium contributions allowed or required by law:
1. Contributions of the employer for the benefit of the
employee pursuant to the provisions of existing law
such as contributions to SSS, GSIS, PhilHealth, and
HDMF.
2. Cost of premium for group insurance of employees.

dependents
10.Life or health and other non-life insurance
premiums or similar accounts in excess of what
the law allows
Fringe Benefit Tax Rates

Employees are
Residents or Citizens Nonresident Aliens
Year
FB Tax Gross Up FB Tax Gross Up
Rates Rates Rates Rates
1998 34% 66% 25% 75%
1999 33% 67% 25% 75%
2000-2017 32% 68% 25% 75%
2018 onwards 35% 65% 25% 75%
Tax Treatment of Total Fringe Benefit Expense

The total fringe benefit expense including the
fringe benefit tax expense is a deductible expense
of the employer against his gross income in the
computation of his taxable income.
Tax Treatment of Total Fringe Benefit Expense

It must be noted that a deductible fringe
benefit expense exists only when the benefit is
paid in cash or in kind.
The expense is measured at the actual cost or

tax basis of consideration given as fringe benefits.
EXERCISES
The following were received by a resident citizen

employee, married, and with four qualified
dependent children for the year 2022: Salary (net
of P40,000 withholding tax, P6,000 SSS
contribution; P4,000 union dues), P550,000; 13th
month pay, P50,000; 14th month pay, P50,000.
How much was the taxable compensation income?
A. P300,000
B. P320,000
C. P330,000
D. P600,000
Zennith Company made the following payments in the 3rd

quarter of 2022:
Fringe benefits:
• To the supermarket in payment of groceries for the
company’s manager and family, P16,500
• To a university in payment of the tuition fee of the
manager, P24,750
• Salary of the manager, net of P50,000 withholding tax,
P350,000
Determine the fringe benefit tax due.

A. P19,412 C. P7,765
B. P22,212 D. P184,118
The 2022 books of accounts of Delight Company showed

the following:
Fringe benefit expense P1,550,000
Fringe benefit tax expense 363,125
1. Compute the gross-up monetary value of fringe benefit

given to managers and supervisors.
2. Compute the value of fringe benefit given to rank and
file employees.
3. Compute the monetary value of fringe benefit given to
managers and supervisors.
4. Compute the total deductible amount against gross
income of Delight Company.
Alpha Zetta, Inc. established in the Philippines provided its
employees cash and non-cash fringe benefits in 2022 as follow:
Total amount of fringe benefits P1,000,000
60% of said amount was given to rank and file employees
40% of said amount was given to corporate officers as follow:
a. To resident citizens 45%
b. To non-resident aliens not engaged in business in the Philippines
35%
c. To resident aliens 20%
Compute the total fringe benefit tax expense of Alpha Zetta, Inc.
A. P238,824
B. P212,864
C. P242,891
D. P186,667
In 2022, ABC Corp. hired Ms. L. Bats as sales manager for
cosmetics. In accordance with her conditions for employment, she
was given the following compensation and fringe benefit:
• Salary, P200,000/month
• Three handsome houseboys as maids, P8,000 per maid/month
• A macho personal driver, P10,000/month
• Homeowners’ association dues, P1,200/year
The fringe benefit tax due is

A. P108,424
B. P102,212
C. P192,565
D. P220,338
Concept of Income
The tax concept of income is referred to as
“gross income” under the Tax Code. A taxable item
of income is referred to as an “item of gross
income” or “inclusion in gross income.”


Capital items deemed with infinite value

compensation of which are return OF capital
1. Life
2. Health
3. Human reputation
Recovery of loss
• Recovery of lost capital – return OF capital
• Recovery of lost profits – return ON capital

Realized Benefit
• Benefit – any form of advantage derived by the
taxpayer
• Realized – earned


Types of Transfers
1. Bilateral transfers or exchanges – there is
realized benefit; considered gross income
2. Unilateral transfers – no realized benefit; not

considered gross income
3. Complex transactions – partly gratuitous and

partly onerous; portion is considered realized
benefit

Another Entity
every person, natural or juridical, is an entity.
An entity may be a taxable entity or an exempt
entity. A taxable item of gross income arises from
transactions which involve another natural or
juridical entity.

Not Realized Benefits

• Benefits in the absence of transfers
• Inflow of wealth without increase in net worth
Mode of Receipt/Realization of Benefits

1. Actual receipt
2. Constructive receipt

Situs of Income
the place of taxation of income. It is the
jurisdiction that has the authority to impose tax
upon the income.
Income Situs Rules

Interest income Debtor’s residence
Royalties Where the intangible is employed
Rent income Location of the property
Service income Place where the service is rendered
Gain on sale of properties
1. Personal property
a. Domestic securities presumed earned within
b. Other personal properties where the property sold
2. Real property where the property is located
Income Situs Rules

Pre-dominance Test on Resident Corporations

If the ratio of the Philippine gross income over
the world gross income of the resident foreign
corporation in the three-year period preceding the
year of dividend declaration is:
a. At least 50%, the portion of the dividend
corresponding to the Philippine gross income
ratio is earned within
b. Less than 50%, the entire dividends received is
received abroad
Income Situs Rules

b. Nonresident foreign corporation earned abroad
Merchandising income earned where the property is sold
Manufacturing income earned where the goods are
manufactured and sold
Classification of Gross Income

1. Gross income subject to final tax
2. Gross income subject to capital gains tax
3. Gross income subject to regular income tax
Introduction to Regular Income Tax

Characteristics of the Regular Income Tax
General in coverage
A net income tax
An annual tax
Creditable withholding tax
Progressive or proportional tax

The Regular Income Tax Model

Gross income – inclusions XXX,XXX
Less: Allowable deductions XXX,XXX
Taxable income XXX,XXX
Determination of Taxable Income

1. Taxable income of individual income taxpayers
2. Taxable income of corporate income taxpayers
Individual Income Taxpayers

Using Classification Rule and Globalization Rule
Classification Rule
1. Compensation income
2. Self-employed and/or professional income
3. Other taxable income
Globalization Rule
income of mixed income earner from both
sources is totaled. A negative net income or net
loss when deductions exceeds gross income from
business or profession shall not be offset against
Corporate Income Taxpayers

same manner as self-employed and/or
professional income earner

Compensation for Services in whatever form paid

Compensation income refers to the types of
employee benefits that are subject to regular
income tax.
Exception
Fringe benefits of managerial or supervisory
employees – subject to final tax
(See topic income from compensation)


a profession
Conduct of Trade, Business or Exercise of Profession

Sales/revenues/receipts/fees XXX,XXX
Not included in gross income subject to regular tax

a. Business income exempt from income tax
b. Business income subject to special tax regime
c. Business income subject to final tax

a profession
Kinds of Properties
1. Ordinary Assets
a. Subject to regular income tax
b. ORDINARY GAINS – included as item of gross
income
c. ORDINARY LOSSES – included as item of deduction
against gross income
2. Capital Assets, other than domestic stocks and real
properties
a. Net capital gains (Capital gains > Capital loss) –
item of gross income
b. Net capital loss (Capital loss > Capital gains) – not
an item of gross income

a profession
4. Interest
Interest
Interest income other than passive interest
income subject to final tax. A taxable interest
income must have been actually paid out of an
agreement to pay interest. It cannot be imputed.
Exempt Interest Income

a. Interest income earned by landowners in
disposing their lands to their tenants pursuant to
the Comprehensive Agrarian Reform Law
b. Imputed interest income


a profession
4. Interest
5. Rents
Rents
Rent income arises from leasing properties of
any kind. It is a passive income but is not subject
to final tax under the NIRC; hence, it is subject to
regular income tax.

Obligations of the lessor that are assumed by
the lessee are additional rental income to the
lessor

Advance rentals are:
1. Item of gross income upon receipt if:
a. Unrestricted
b. Restricted to be applied in future years or
upon the termination of the lease
2. Not an item of gross income if:
a. It constitutes a loan
b. It is a security deposit to guarantee payment
or rent subject to contingency which may or
may not happen

Leasehold improvements made by the lessee
on the leased property are recognized by the lessor
as income using the spread-out method or outright
method


a profession
4. Interest
5. Rents
6. Royalties
Taxability of Royalties
1. Royalties subject to final tax – purely passive income
earned within the Philippines, exclusively enumerated
in the NIRC
(See topic Passive Income Subject to Final Withholding Tax)
2. Royalties subject to regular income tax – catchall

coverage, not subject to final tax
a. Active royalty income earned within the Philippines
b. All royalty income earned outside the Philippines

a profession
4. Interest
5. Rents
6. Royalties
7. Dividends
Taxability of Dividends
1. Dividends subject to Final Tax – declared and
distributed by Domestic Corporations, received by
Individual Shareholders
2. Dividends exempt from Tax
a. declared and distributed by Domestic Corporations,
received by Domestic or Resident Corporations
b. declared and distributed by Foreign Corporations,
received by Domestic Corporations, subject to
conditions
3. Dividends subject to regular income tax – catchall
coverage, neither exempt nor subject to final tax

a profession
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Annuities
Annuities
The excess of annuity payments received by
the recipient over premium paid is taxable income
in the year of receipt
Total annuity payments XXX,XXX

Less: Total premiums paid XXX,XXX
Taxable annuities XXX,XXX

a profession
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Annuities
Taxability of Prizes and Winnings

1. Prizes and winnings subject to final tax
a. Prizes earned within and PCSO and lotto winnings,
exceeding P10,000
b. Winnings from other sources within the Philippines
2. Prizes and Winnings exempt from Tax
a. Prizes received without effort to join a contest
b. Prizes in athletic competitions sanctioned by their
respective national sports association
c. Winnings from PCSO and lotto, not exceeding
P10,000
3. Prizes and Winnings to Regular Income Tax – catchall
coverage, neither exempt nor subject to Final Tax

a profession
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Annuities
10. Pensions
Taxability of Pensions
1. Pensions and retirement benefits excluded in
Gross Income – complied the exclusion criteria
provided by the Tax Code, Revenue Regulations
and Special Laws
2. Pensions and retirement benefits included in

Gross Income – Catchall coverage

a profession
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Annuities
10. Pensions
Partner’s distributive share from net income of GPP

COVERAGE: the partners are the ones subject
to regular income tax on their share in the net
income of the general professional partnership
Other shares subject to Regular Income Tax

distributive shares from net income of the
partnership, joint ventures, and/or co-ownership
organized or constituted outside the Philippines,
for taxpayers taxable globally

a profession
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Annuities
10. Pensions

trusts
Income distribution from taxable estates and trusts

Any income distribution received by an heir or
beneficiary from a taxable estate or trust shall be
included in his gross income subject to regular tax,
provided that such income must not have been
subjected to final tax or capital gains tax.

trusts
through entities
Share from net income of other pass-through entities

The same tax treatment on recognition of
share in the net income of a general professional
partnership applies to the share from the net
income of exempt joint ventures and co-
ownerships.

trusts
through entities
3. Farming income
Classification of Farming Operations

1. Raise and sell operations – the proceeds on the
sales of livestock or farm products is included in
gross income subject to regular income tax.
Animal raising expenses are presented as items
of deductions against gross income.
2. Purchase and sell operation – the gross profit

from the sale (sales less cost of purchase) is
Accounting Methods of Farming Income

1. Accrual Basis
2. Cash Basis
3. Crop Year Basis, for long-term crops
NOTE: Proceeds of crop or livestock insurance is

subject to regular tax.

trusts
through entities
3. Farming income

When past year deductions from gross
income are subsequently recovered by the taxpayer
or when accrued expense previously deducted are
subsequently paid at an amount less than the
deduction claimed, they should be analyzed
whether or not they resulted in tax benefit to the
taxpayer.

Past deductions that created tax benefit to the
taxpayer must be reverted back to gross income in
the year of recovery so that the government will
recover the tax lost from the deduction.
Tax Benefit
There are two ways a taxpayer may benefit from a
deduction:
1. Directly, through a reduction of taxable income
in the year deduction is made
2. Indirectly, through reduction of future taxable

income through carry-over of net operating loss
(NOLCO)
Examples of Recoveries of Past Deductions

1. Recovery of previously claimed bad debt expense
2. Refund of local tax expense
3. Refund of foreign tax previously claimed as deduction
4. Recommissioning of abandoned petroleum service
contracts or mining tenements
5. Release of reserve funds of insurance companies
6. Interest expense which were subsequently condoned
by the lender
Refund of Non-deductible Expenses

Expenses of payments which are non-
deductible against gross income in the
computation of taxable net income will never
create tax benefit to the taxpayer. As such, their
recovery should not be included in the gross
income.

trusts
through entities
3. Farming income
Reimbursement of Expenses
Expenses of the taxpayer that are reimbursed
or paid by the customer or client constitute
additional income to the taxpayer

trusts
through entities
3. Farming income
Cancellation of Indebtedness for a Consideration

a. In consideration of service or goods – treated as
income
b. As an act of gratuity – treated as gift, not as

income
c. As capital transaction, such as forfeiting the

right to receive dividends in exchange of the
debt – treated as dividend income

trusts
through entities
3. Farming income

2. Situs Rules
Income and Expenses
Accounting Methods
The accounting method adopted by the
taxpayer has a direct effect on the reportable
amount of gross income subject to regular income
tax.
Regardless of the accounting methods of the

taxpayer, advanced income must be included in
gross income in the period received.
Situs Rules
The situs of taxation also affects the extent of
income included as items of gross income of the
taxpayer.
a. Taxable on global income – resident citizens
and domestic corporations
b. Taxable on Philippine income – all other

taxpayers

Remember that business taxpayers are
required to either register as:
a. VAT Taxpayers – if their sales or receipts
exceed P3,000,000 in the last consecutive 12-
month period
b. Non-VAT Taxpayers – if their sales or gross

receipts is below the VAT threshold or are
specifically designated by law to pay percentage
taxes

Every VAT Taxpayer is mandatorily required to
charge 12% output tax on their sales or receipt. The
regulations presume that the amount charged to
customers is inclusive of the 12% VAT.
The output VAT will be paid/remitted to the

government net of the VAT paid by the taxpayer
(input VAT) on his purchases. As such, the amount
of reportable gross income shall not include the
output VAT.
Creditable Withholding Tax

Creditable withholding taxes (CWT) deducted
by income payors against the gross income of the
taxpayer are not exclusions in gross income.
These should be added back to the reportable

amount of gross income.
CWTs are tax credits that are deductible

against the annual income tax due of the taxpayer.

2. Situs Rules
Income and Expenses
Concept
In the case of two or more organizations, trades or
businesses (whether or not incorporated and whether or
not organized in the Philippines) owned or controlled
directly or indirectly by the same interests, the
Commissioner is authorized to distribute, apportion or
allocate gross income or deductions between or among
such organization, trade or business, if he determined that
such distribution, apportionment or allocation is necessary
in order to prevent evasion of taxes or clearly to reflect the
income of any such organization, trade, or business.
(Section 50, NIRC, as amended)
Unfair Pricing Between Associated Enterprises

There is a risk that the pricing of the transfer
of goods and services between associated
enterprises will be controlled in such a way to
further the interests of the associated enterprises
as a whole in disregard of their social responsibility
on taxes.
The Transfer Pricing Guidelines

The example provided is one of the problems
in taxation brought about by unfair pricing
practices. To limit these unfair practices and to
properly reflect the income of associated
enterprises, the BIR and the Department of Finance
promulgated Revenue Regulation No. 2, Series of
2013 on Transfer Pricing.
Associated Enterprise
Two or more enterprises are associated if one
participates directly or indirectly in the
management, control, or capital of the other; or if
the same persons participate directly or indirectly
in the management, control, or capital of the
enterprises.
Associated enterprises are also called

“related parties.”
The Arm’s Length Principle

Transfer pricing between associated
enterprises shall be made under comparable
conditions and circumstances as those entered
into between independent parties where market
forces drive the terms and conditions of the
transactions rather than being controlled solely by
reason of special relationship between the
associated enterprises.
The Arm’s Length Principle shall be applied to

a. Cross-border transactions between associated
enterprises
b. Domestic transactions between associated

enterprises
When operations are conducted cross-border,
the taxpayer may enter into an “advanced pricing
agreement” with the BIR where a pricing rate is
pre-agreed to apply for a period of time.
Although this is not a mandatory requirement,
this may serve as a safety net for the taxpayer to
avoid the risk of transfer pricing examination and
adjustment and the inconvenience it may possibly
cause.

1. Comparable Uncontrolled Price (CUP) Method
2. Resale Price Method (RPM)
3. Cost Plus Method (CPM)
4. Profit Split Method (PSM)
a. Residual Profit Split Approach
b. Contribution Profit Split Approach
5. Transactional Net Margin Method (TNMM)

When no comparatives can be derived within
the industry of the subject taxpayer, the BIR may
consider:
1. Extension of the transfer pricing methods using
comparatives derived from another industry
segment
2. Use a combination of the transfer pricing

methods or other methods
Selection of Transfer Pricing Method

To minimize the risks of transfer pricing
adjustments, taxpayers may also consider using
the transfer pricing methods used by the BIR in
pricing their transactions with associated
enterprises. The taxpayer must support the
propriety of the method adopted through proper
documentation.
INCOME TAXATION SCHEMES

Final income taxation
Capital gains taxation
Regular income taxation


It is manifested as a final withholding tax where the
full tax due is withheld by the income payor at source and
is not creditable against income tax due of the payee on
other income subject to regular rates of tax for the taxable
year.
Final income taxation scheme is applicable on the

following cases:
1. Certain passive income enumerated in the Tax Code
2. Certain income taxpayers specified by the Tax Code

Tax Model:
Gross Income XX,XXX
Less: Final tax (withheld by income payor)

(Gross income x applicable tax rate) XX,XXX
Net proceeds to income payee XX,XXX

Capital Gains Taxation

It is imposed only on sale, exchange and other
dispositions on the following capital assets:
1. domestic stock sold directly to buyer
2. real property classified as capital asset located in the

Philippines
Regular Income Taxation

It refers to the catchall coverage; general rule in
income taxation and all other income that are not exempt,
not subject to final tax and not subject to capital gains tax.
Citizen Alien

Citizen
The following are citizens of the Philippines:
a. Those who are citizens of the Philippines at the time of
the adoption of the 1987 Constitution;
b. Those whose fathers or mothers are citizens of the
Philippines;
c. Those born before January 17, 1973, of Filipino
mothers, who elect Philippine Citizenship upon
reaching the age of majority; and,
d. Those who are naturalized in accordance with law.
Resident Citizen
A Filipino citizen residing in the Philippines.
Nonresident Citizen
Any of the following:
a. A citizen of the Philippines who establishes to the
satisfaction of the Commissioner the fact of his
physical presence abroad with a definite intention to
reside therein;
b. 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;
c. 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; and,
Nonresident Citizen
d. 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.
In default of intention, the presence of a citizen for at least

183 days qualifies him as non-resident citizen.
Citizen Alien

Resident Alien
An individual who is residing in the Philippines but is not a
citizen thereof, such as:
a. An alien who lives in the Philippines without definite

intention as to his stay; or,
Resident Alien
b. One who comes to the Philippines for definite purpose
which in its nature would require an extended stay and
to that end make his home temporarily in the
Philippines, although it may be his intention at all times
to return to his domicile abroad;
An alien who has acquired residence in the Philippines

retain his status as such until he abandons the same or
actually departs from the Philippines.
Nonresident Alien Engaged in Trade or Business

Aliens who stayed in the Philippines for an aggregate
period of more than 180 days during the year.
NRA Not Engaged in Trade or Business

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.
General Classification Rule

Intention
Length of Stay
Intention
THE GENERAL RULE
The intention of the taxpayer regarding the nature of

his stay within or outside the Philippines shall determine
his appropriate residency classification.
The taxpayer shall submit to the Commissioner of

Internal Revenue (CIR) documentary proofs such as visas,
work contracts and other documents indicating such
intention.
Length of Stay
THE EXCEPTION TO THE GENERAL RULE
In default of such documentary proof, the length of

stay of the taxpayer is considered.
Rule on Length of Stay

1. Citizens staying abroad for a period of at least 183
days are considered non-resident.
2. Aliens who stayed in the Philippines for more than 1
year as of the end of the taxable year are considered
resident.
3. Aliens who are staying in the Philippines for not more
than 1 year but more than 180 days are deemed non-
resident aliens engaged in business.
4. Aliens who stayed in the Philippines for not more than
180 days are considered non-resident aliens not
engaged in trade or business.
Taxability of Individual on Regular Income

1. Net taxable income, within and without the Philippines
– Resident citizen
2. Net taxable income, within the Philippines –

Nonresident citizen, resident alien, and nonresident
alien-engaged in trade or business in the Philippines
3. Gross taxable income, within the Philippines –

Nonresident alien-not engaged in trade or business in
the Philippines (using final income taxation scheme)

Mixed Income Earner


The compensation income of employees, except
minimum wage earners, is subject to withholding tax on
compensation. Every employer is mandatorily required to
deduct the withholding tax from the compensation income
of their employees.
Treatment of Withholding Tax on Compensation

a. DEEMED FULL PAYMENT OF INCOME TAX – if the
employee has no other income and the tax is correctly
withheld
b. CLAIMED AS TAX CREDIT – if the employee has other

taxable income or if the tax is not correctly withheld
Employees with no Other Income

If the employee has no other taxable income, he may
avail himself of the use of the SUBSTITUTED FILING
SYSTEM.
Under this system, the withholding tax on

compensation is considered enough evidence of tax
compliance of the employee, provided that the employer
withheld the correct tax.

a. The employee received purely compensation income
during the year.
b. The employee received the income from only one

employer in the Philippines during the taxable year.
c. The amount of tax due from the employee at the end of

the year equals the amount of tax withheld by the
employer.

d. The employee’s spouse also complies with all 3
conditions stated above.
e. The employer files the annual information return (BIR

From No. 1604-CF)
f. The employer issues BIR Form No. 2316 to each

employee.
Additional Return needed when:

a. Correct tax is not withheld – Adjusted Return
b. Employee or his spouse has other income –

Consolidated Return
Correct Tax is not withheld – Adjusted Return

a. Concurrent employment
b. Successive employment during the year
c. Incurrence of error by the employer
An annual return needs to be filed to adjust the tax

due to the correct amount of tax. This is referred to as an
ADJUSTMENT RETURN.
The employee shall claim Form 2316 as tax credit

and pay residual tax due or claim excess withheld amount
as tax credit or tax refund
Employee has Other Taxable Income

If the employee has other taxable income, the
employee is mandatorily required to file an annual income
tax return to incorporate other income sources in his
return.
This is referred to as a CONSOLIDATED INCOME

TAX RETURN.
Consolidated Income Tax Return

a. BIR Form No. 1700 – if the employee is not engaged in
business or profession
b. BIR Form No. 1701 for mixed income earners – if the
employee is also engaged in business and/or
profession
The withholding tax on compensation (BIR Form 2316)

given by the employer shall be claimed as tax credit.

Mixed Income Earner


Individual taxpayers engaged in business or practice
of profession shall file quarterly income tax returns and an
annual tax return:
a. 1st Quarter ITR – 1701Q – on or before May 15 of the
same calendar year
b. 2nd Quarter ITR – 1701Q – on or before August 15 of
the same calendar year
c. 3rd Quarter ITR – 1701Q – on or before November 15
of the same calendar year
d. Annual ITR – 1701A or 1701 – on or before April 15 of
the next calendar year
Excess Quarterly Estimated Tax

The excess quarterly estimated tax payments
against the quarterly tax due may, at the option of the
taxpayer, be carried forward to quarters of the succeeding
taxable year or claimed through tax refund. The option
must be indicated in the annual adjustment return.
Once the option to carry-over is made, it becomes
irrevocable for that period. The option to refund may be in
the form of cash or through a tax credit certificate. If the
option to refund is selected, the excess refundable amount
shall not be carried over as tax credit to the succeeding
quarters of the following year.

Mixed Income Earner

Mixed Income Earner

The compensation income of mixed income earners
will be subjected to the withholding tax on compensation
by their employers.
Mixed income earners would report their business or
professional income on a quarterly basis under Form
1701Q.
The compensation income shall not be reported in
the quarterly return. It shall be included only in the annual
consolidated return.
Mixed income taxpayers shall use BIR Form No.
1701.
Effective January 1, 2018 to December 31, 2022

Net Taxable Income
Rate
Over But not over
- P250,000 0%
Effective January 1, 2023 onwards

Net Taxable Income
Rate
Over But not over
- P250,000 0%
Regular Income Tax Model

Gross income/compensation income XXX,XXX
(Itemized or optional standard) XXX,XXX
Income tax due XX,XXX
(BIR Form 1701Q/2316/2307) XX,XXX
8% Income Tax Option

The TRAIN law introduced a new tax scheme for
individual taxpayers – the 8% optional income tax.
The option to be taxed at 8% must be indicated in the

first quarter income tax return or in the first quarter
percentage tax return.
When the option is made, it shall be irrevocable for

the calendar year.
Nature
a. A bundled tax – in lieu of regular income tax (tax table)
and 1%/3% general percentage tax
b. An annual option
c. Paid quarterly and annually

Scope
a. Pure business or professional income earners
b. Mixed income earners

Covered Businesses
Only vatable businesses who are below the
P3,000,000 annual VAT threshold and did not register as
VAT taxpayer can opt to be taxed under the 8% income
tax.
Not Covered
a. VAT-registered business taxpayers
b. VAT-exempt business taxpayers, such as: exempt

businesses and businesses specifically subject to other
percentage taxes
c. Individual receiving income not subject to business tax.

Tax Base
The 8% optional income tax shall be based upon the
gross sales or gross receipt of the individual taxpayer that
is subject to 1%/3% percentage tax.
Other income subject to regular tax are added to the

tax base.

The 8% income tax shall be computed from the tax
basis net of P250,000 annual income exemption.

Gross taxable income XXX,XXX
Less: Annual income exemption 250,000
Multiply by: Tax Rate 8%
Mixed Income Earner

The income tax due from compensation shall be
separately determined using the income tax table while the
8% income tax for the income from business or
profession.
There will be no more P250,000 annual income
exemption allowable as deduction against the basis of the
8% income tax.
Furthermore, if the amount of compensation income
does not exceed P250,000, the unutilized deduction
cannot be deducted against business income.
Mixed Income Earner

ON COMPENSATION
Total compensation income XXX,XXX
Less: Nontaxable income XX,XXX
Exclusions from compensation XX,XXX
13th month pay & other benefits
(ceiling) 90,000 XXX,XXX
Taxable compensation income XXX,XXX
Mixed Income Earner

ON BUSINESS INCOME
Taxable business income XXX,XXX
Multiply by: Tax rate 8%
Mixed Income Earner


Total income tax due XX,XXX
(BIR Form 1701Q/2316/2307) XX,XXX

Individuals exceeding the P3,000,000 VAT threshold
during the year are mandatorily required to change
registration from non-VAT to a VAT taxpayer before the
end of the month following the month the taxpayer
exceeded the P3,000,000 threshold.

The taxpayer shall pay regular income tax for his
income during the entire year and pay VAT prospectively
starting the month he became a VAT taxpayer.
The 8% income tax payments shall be considered as

tax credit against the regular income tax due.
The taxpayer shall also be required to pay the 1%/3%

general percentage tax for sales or receipts generated
before becoming a VAT taxpayer.
Married Taxpayers
Taxable income of married individuals is computed
separately based on their respective income earned or
realized.
However, they are encouraged to file using a single

income tax return showing separately their respective
taxable income and tax due, unless it is impracticable for
the spouses to file a single return, then, each spouse may
file their separate tax returns.
Married Taxpayers
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 incomes.
Income of Unmarried Minors

The income of unmarried minors derived from
property received from a living parent shall be included in
the income tax return of the parent, except when:
a. The donor’s tax has been paid on such property.
b. The transfer of such property is exempt from donor’s

tax.
Deceased Taxpayer
In the case of the death of a taxpayer, there shall be
included in computing taxable income for the taxable
period in which falls the date of his death, amounts
accrued up to the date of his death if not otherwise
properly includible in respect of such period or a prior
period.
(See topic Accounting Periods)

Alien Employees of POGOs and Service Providers

Alien individuals regardless of residency and who
are employed and assigned in the Philippines, regardless
of the term and class of working or employment permit or
visa, by an offshore gaming licensee or its service
provider, shall pay a final withholding tax of twenty-five
percent (25%) on their gross income.
Provided, however, That the MINIMUM final
withholding tax due for any taxable month from said
persons shall not be lower than Twelve thousand five
hundred pesos (P12,500.00).
Coverage of Gross Income

Gross income shall include, whether in cash or in
kind, basic salary/wages, annuities, compensation,
remuneration and other emoluments, such as honoraria
and allowances, received from such service provider or
offshore gaming licensee.
Income from all other sources

Any income earned from all other sources within the
Philippines by the said alien employee shall be subject to
the pertinent income tax imposed under the NIRC, as
amended.
PARTNERSHIPS
Partnerships
General Professional Partnerships

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
Taxability of GPPs
A general professional partnership shall not
be subject to 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.
Tax liability of partners in a GPP

as a corporation.
Each partner shall report as gross income his

distributive share, actually or constructively
received, in the net income of the GPP.
Returns of GPPs
Every general professional partnership shall
file, in duplicate, a return of its income, except
those income exempt from income tax, setting
forth the items of gross income and deductions
allowed by the Tax Code, and the names, Taxpayer
Identification Numbers (TINs), addresses and
shares of each of the partners.
PARTNERSHIPS
Partnerships
any other partnership, no matter how created
or organized, other than general professional
partnerships
Taxability of Partnerships other than GPPs

Partnerships, other than GPPs, are taxed as
corporations using corporate income tax and
minimum corporate income tax.

Partner’s distributive share in partnership income

Partners’ distributive share in taxable
partnership’s income, actually or constructively
received, is treated in the same manner as
corporate dividends subject to final withholding
tax.
TAX “Innovating
Educational
ESTATE TAX Services”
KHEEN V. BATINGAL
REVIEW NOTES
a. Principles, concepts involving estate taxation

i. Concept of succession and its types
1. Concept of succession – Succession is a mode of
acquisition by virtue of which the property, rights, and
obligations to the extent of the value of the inheritance,
of a person are transmitted through his death to another
or others either by his will or by operation of law. (Article
774, Civil Code)
2. Types of succession
a. Testate. Voluntary or testamentary – A
succession carried out according to the wishes
of the testator expressed in a will executed in
the form prescribed by law.
b. Intestate, involuntary or legal – A succession
with an invalid will or without a will, thus giving
rise to a succession by operation of law.
c. Mixed – A succession which is effected partly
by will and partly by operation of law.
ii. Concept and types of will

1. Concept – An act whereby a person is permitted, with
the formalities prescribed by law, to control to a certain
degree the disposition of this estate, to take effect after
his death. (Article 783, Ibid)
2. Types of will
a. Holographic will – A will which is entirely
written, dated, and signed by the hand of the
testator himself, without the need of witnesses.
b. Notarial, ordinary or attested will – One
which is executed in accordance with the
formalities prescribed by the new civil code.

AFAR ESTATE TAX. Review notes
c. Codicil – A supplement or addition to a will,
made after the execution of a will and annexed
to be taken as a part thereof, by which
disposition made in the original will is
explained, added to, or altered.
iii. Nature of succession

1. Succession is gratuitous transmission of property from
a deceased person in favor of his successors.
2. Succession involves only the net properties of the
decedent.
iv. Elements of succession

1. Decedent – the person who dies and whose properties,
rights and obligations are transmitted. A decedent who
left a will is called a testator.
2. Estate – the properties, rights and obligations which are
the subject matter of the succession.
3. Heirs/successors – the person to whom the
properties, rights and obligations of the decedent will
pass. They are also known as the beneficiaries.
v. Types of heirs
1. Compulsory heirs – they are entitled to their share in
the estate, with or without a will, unless validly
disinherited or has repudiated his/her share in the
inheritance. Decedents can disinherit an heir on certain
grounds allowable by law, and similarly, heirs can
repudiate their share in the inheritance of the decedent.
a. Primary heirs – legitimate children and
descendants
b. Secondary heirs – legitimate/illegitimate
parents and ascendants
c. Concurring heirs – widow/widower and
illegitimate descendants
2. Voluntary heirs – they inherit only if their names are

provided in the will.

vi. Portions of estate for testamentary successions:
1. Legitime – the portion of the testator’s property which
could not be disposed of freely because the law has
reserved it for the compulsory heirs.
2. Free portion – the part of the whole estate which the
testator could dispose of freely through written will
irrespective of his relationship to the recipient.
vii. Intestate succession – in default of testamentary succession,

the following heirs in their order of priority shall be entitled to
claim the inheritance left by the decedent:
1. Concurring heirs and,
a. Descendants, or in their default,
b. Ascendants
2. Relatives in the collateral line up to fifth (5 th) degree of
consanguinity
3. State
viii. Other persons in succession

1. Legatee – a person whom gifts of personal property is
given by virtue of a will
2. Devisee – a person whom gifts of real property is given
by virtue of a will
3. Executors – a person named by the decedent who
shall carry out the provisions of his will
4. Administrators – a person appointed by the court to
manage the distribution of the estate of the decedent
ix. Estate Taxation

Estate taxation pertains to the taxation of the gratuitous transfer
of properties of the decedent to the heirs upon the decedent’s
death.
Estate taxation is governed by the law in force at the time of the

decedent’s death.

x. Estate tax
1. Definition – an excise tax imposed upon the privilege
of transmitting property at the time of death and on the
privilege that a person is given in controlling to a certain
extent the disposition of his property to take effect upon
death. Estate tax laws rest in their essence upon the
principle that death is the generating source from which
the taxing power takes it being, and that it is the power
to transmit or the transmission from the death to the
living on which the tax is more immediately based.
(Lorenzo vs. Posadas, 64 Phil. 353)
2. Nature of estate tax – it is not a tax on property

because their imposition does not rest upon general
ownership but rather, they are privilege tax since they
are imposed on the act of passing ownership of
property.
3. Characteristics of estate tax

a. It is a transfer tax
b. It is an ad valorem tax
c. It is a national tax
d. It is a general tax
e. It is a direct tax
f. It is an excise tax
4. Requisites for imposition of estate tax

a. Death of decedent
b. Successor is alive at the time of decedent’s
death
c. Successor is not disqualified to inherit
5. Purpose and object of estate tax

a. To generate additional revenue for the
government
b. To compensate the government for the
protection given to the decedent that enabled
him to prosper and accumulate wealth
c. Remove the disparity in the tax treatment of a
sale and transfer by death

6. Theories on the purposes of estate tax
a. Benefits-protection
b. Privilege or state-partnership
c. Ability to pay
d. Redistribution of wealth
xi. Estate Tax Model

Gross estate XXX,XXX
Less: Deductions from gross estate XXX,XXX
Net taxable estate XXX,XXX
b. Transfers which may be considered donation mortis causa

i. Transfers in contemplation of death
ii. Transfers intended to take effect upon death
iii. Conditional transfers and revocable transfers which are pre-
terminated by the death of the decedent
c. Classification of decedents
i. Resident citizen, non-resident citizen and resident alien
decedents – taxable on properties located within or outside the
Philippines
ii. Non-resident alien decedents – taxable only on properties
located in the Philippines, except intangible personal property
when the reciprocity rules apply
d. Gross estate
i. Concept of gross estate
Residents NRA without NRA with
or citizens reciprocity reciprocity
Property location Within Outside Within Outside Within Outside
Real properties ✓ ✓ ✓ X ✓ X
Personal properties
- Tangible ✓ ✓ ✓ X ✓ X
- Intangible ✓ ✓ ✓ X X X

ii. Gross estate formula
Inventory of properties at the point of death XXX,XXX
Less: Exempt transfers
Properties not owned XXX,XXX
Properties owned but excluded by law XXX,XXX XXX,XXX
Inventory of taxable present properties XXX,XXX
Add: Taxable transfers XXX,XXX
Gross estate XXX,XXX
iii. Exempt transfers

1. Transfers of properties not owned by the decedent
a. Merger of the usufruct in the owner of the naked
title
b. The transmission or delivery of the inheritance
or legacy by the fiduciary heir or legatee to the
fideicommissary
c. The transmission from the first heir, legatee, or
donee in favor or another beneficiary, in
accordance with the desire of the predecessor
d. Proceeds of irrevocable life insurance policy
payable to beneficiary other than the estate,
executor or administrator
e. Properties held in trust by the decedent
f. Separate properties of the surviving spouse of
the decedent
g. Transfer by way of bona fide sales
2. Properties owned but excluded by law from estate

tax
a. Proceeds of group insurance taken out by a
company for employees
b. Proceeds of GSIS policy or benefits from GSIS
c. Accruals from SSS
d. United States Veterans Administration (USVA)
benefits
e. War damage payments
f. All bequests, devises, legacies or transfers to
social welfare, cultural and charitable
institutions, no part of net income of which
inured to the benefit of any individual; provided,
however, that not more than 30% of the said
bequest, devises, legacies or transfers shall be
used by such institutions for administration
purposes

g. Acquisitions and/or transfers expressly
declared as non-taxable by law
iv. Taxable transfers

1. Transfers in contemplation of death
a. Transfers of property to take effect in
possession or enjoyment after death
b. Transfer of property with retention of
possession or enjoyment or right over income
of the property until death
c. Transfer of property with retention of the right
to designate, alone or in conjunction with any
person, the person who shall enjoy the property
and the income therefrom
2. Revocable transfers, including conditional transfers
3. Transfer with retention or reservation of certain rights
4. Transfers under the general power of appointment
v. Composition of gross estate

1. Properties, movable or immovable, tangible or
intangible
2. Decedent’s interest on properties
3. Proceeds of life insurance:
a. designated as revocable to any heir
b. regardless of designation, if the beneficiary is
the estate, administrator or executor
4. Taxable transfers
vi. Valuation of the gross estate

1. General valuation rules
a. Fair value at the time of death
b. Fair value set by laws and revenue regulations
c. In default of any laws and revenue regulations,
fair value according to GAAP
d. Encumbrances and decreases in values after
death are ignored

2. Specific valuation rules – all at the date of death of
the decedent
Property Valuation
Real properties Higher between Zonal value or Assessed value
Preferred shares Par value
Unlisted common Book value (unadjusted)
shares
Listed common Arithmetic mean between highest & lower quotation
shares
Usufruct and Present value with interest rate and period approved by
annuities Secretary of Finance, upon recommendation by the Insurance
Commissioner
Newly purchased Purchase price (Secondhand value if not newly acquired)
property
Pawned Grossing up pawn value by loan-to-value ratio
properties
Financial Face amount plus accrued interests
instruments
Foreign currency Prevailing exchange rate
vii. Composition of gross estate for married decedents

1. Exclusive properties of the decedent
2. Conjugal/common properties of the spouse
viii. Common types of property regimes

1. Absolute separation of property (ASP)
2. Conjugal partnership of gains (CGP)
3. Absolute community of property (ACP)
4. Local customs
ix. Applicable property regime in default of an agreement

1. Marriages celebrated before August 3, 1988 – Conjugal
partnership of gains
2. Marriages celebrated on or after August 3, 1988 –
Absolute Community of Property

x. Conjugal partnership of gains
Before marriage During marriage
Husband’s property Exclusive
Wife’s property Exclusive
Properties acquired by inheritance & donation Exclusive
during marriage
Other properties acquired during marriage Conjugal
Income from exclusive properties Conjugal
Income from conjugal properties Conjugal
xi. Absolute community of properties

Before marriage During marriage
Husband’s property Community
Wife’s property Community
Property from previous Exclusive
marriage
Properties acquired by inheritance & donation Exclusive
during marriage
Properties of personal exclusive use of either Exclusive
spouse, except jewelry
Other properties acquired during marriage Community
Income from exclusive properties Exclusive
Income from community properties Community
xii. Acquisition of exempt properties – included as exclusive or

common properties of the spouses but shall be excluded in the
computation of the gross estate
e. Deductions from gross estate

i. Concepts and principles of deductions
1. Concept of deductions – refers to amount, which are
subject to limitations by the Tax Code, which either
actually reduces the estate or in a form of incentives
provided, to determine the net taxable estate.
Conjugal/
Exclusive Communal Total
Gross Estate XXX,XXX XXX,XXX XXX,XXX
Less: Ordinary deductions XXX,XXX XXX,XXX XXX,XXX
Estate after Ordinary Deductions XXX,XXX XXX,XXX XXX,XXX
Less: Special deductions XXX,XXX
Net Estate XXX,XXX
Less: Share of the Surviving Spouse x½ XXX,XXX
Net Taxable Estate XXX,XXX

2. Principles of deductions
a. The substantiation rule – items of deduction
must be supported with either documentary
evidence or legal basis to establish their validity
b. Matching principle – proper classification and
categorization of deduction.
c. “No double claim” rule – items of deduction
shall not be claimed simultaneously under
several deduction categories
d. Default presumption on ordinary deduction
– in cases of married decedents, ordinary
deductions are presumed to be against the
common properties unless proven to be an
exclusive property of either spouse
e. Qualified deductions for Nonresident aliens
– No deduction shall be allowed in case of a
non-resident alien decedent, unless the
executor, administrator, or anyone of the heirs,
includes in the return the value at the time of
the decedent’s death that part of his gross
estate not situated in the Philippines
3. Classification of deductions
a. Ordinary deductions – generally those items
that diminish the amount of inheritance, except
for “property previously taxed” which is a
deduction incentive
b. Special deductions – generally those that are
deduction incentives, thus will result only to the
reduction of the net taxable estate, but not to
diminish the amount of inheritance
c. Share of the surviving spouse – interest of
the surviving spouse in the net conjugal or
communal properties of the spouses.
ii. Ordinary deductions

1. Losses, Indebtedness and Taxes (LIT)
a. Losses
i. Concept – These pertain to losses of
properties of the estate during the
settlement of the estate.

ii. Requisites for deductibility:
1. Loss must be a sustained
casualty loss
2. The loss must occur during the
settlement of the estate up to
the deadline of the estate tax
return
3. The loss must not be
concurrently claimed in the
income tax return
iii. Claims against insolvent persons

(Bad debts) – a form of loss but is
presented as a separate item of
deduction in the tax return.
iv. Classification of Losses – classified

based on the “Property classification
Rule.”
b. Claims against the estate (Indebtedness)

i. Concept – The word “claims” as used
in the statute is generally construed to
mean debts or demands of a pecuniary
nature which could have been reduced
to simple money judgments (RAMO 1-
80).
ii. Requisites of deductibility of claims

against the estate:
1. The liability represents a
personal obligation of the
deceased existing at the time
of his death except unpaid
medical expenses
2. The liability was contracted in
good faith and for adequate
and full consideration in
money or money’s worth
3. The claim must be a debt or
claim which is valid in law and
enforceable in court

4. The indebtedness must not
have been condoned by the
creditor or the action to collect
from the decedent must not
have prescribed
iii. Classification Rules:

1. Family benefit rule – if the
obligation was contracted or
incurred for the benefit of the
family, the claim shall be
classified as deduction against
common property.
2. Property classification rule –
if the family benefit rule is
inapplicable, the claims follow
the classification of the
relevant property.
iv. Special rules on certain claims

against the estate:
1. Unpaid mortgage – this
includes mortgage upon, or
any indebtedness, with
respect to property where the
value of the decedent’s
interest therein, undiminished
by such mortgage or
indebtedness, is included in
gross estate.
2. Unpaid taxes – this include
national internal revenue taxes
which have accrued as of the
death of the decedent and
which were unpaid as of the
time of death.
3. Accommodation loan –
presented as a receivable in
the gross estate and is
presented as a deduction.

v. Substantiation Requirements:
1. Simple loan and advances
a. 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
b. A duly notarized
Certification from the
creditor as to the
unpaid balance of the
debt, including interest
as of the time of death
c. Proof of financial
capacity of the creditor
to lend the amount at
the time the loan was
granted, as well as its
latest audited balance
sheet with a detailed
schedule of its
receivable showing
the unpaid balance of
the decedent debtor
d. A statement under
oath executed by the
administrator or
executor of the estate
reflecting the
disposition of the
proceeds of the loan if
said loan was
contracted within
three (3) years prior to
the death of the
decedent

2. Purchase of goods or
services
a. Pertinent documents
evidencing the
purchase of goods or
services as duly
acknowledged,
executed, and signed
by the decedent and
the creditor, such as:
i. Sale of goods
– sales
invoice/
delivery
receipt
ii. Sale of
services –
contract for
the services
agreed to be
rendered
b. Statement of account
given by the creditor
as duly received by
the decedent-debtor
c. Duly notarized
Certification from the
creditor as to the
unpaid balance of the
debt including interest
as of the time of death
d. 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

3. 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
c. Rule on claimable losses, indebtedness and

taxes:
i. Residents or citizens – claimable in
full
ii. Nonresident aliens – claimable pro
rata, if gross estate not situated in the
Philippines is also disclosed or
reported in the estate tax return,
otherwise, not deductible
Philippine gross estate
x Losses, indebtedness, & taxes = Claimable LIT
World gross estate
2. Transfers for Public Use – includes the amount of all

bequests, legacies, devises or transfer to or for the use
of the Government of the Republic of the Philippines, or
any political subdivision thereof, for the exclusive public
purposes.
3. Property Previously Taxed (Vanishing Deductions)

a. Concept – Vanishing deduction is an incentive
available to the estate who received certain
properties through gratuitous transfer, which
was previously subjected to transfer tax, within
a short period
b. Requisites of vanishing deduction:

i. The present decedent must have died
within FIVE (5) years from date of
acquisition of property by gratuitous
transfer

ii. The property with respect to which the
deduction is claimed must have been
part of the gross estate SITUATED IN
THE PHILIPPINES of the prior
decedent or taxable gift of the donor
iii. The property must be identified as the
same property received from prior
decedent or donor or the one received
in exchange thereof
iv. The taxes on the transmission from
previous donor or decedent of such
property must have been finally
determined and paid
v. No vanishing deduction on the property
or the property in exchange thereof
was allowed to the prior estate
c. Steps in computing for vanishing

deduction:
i. Determine the initial value (lower of
FMV at date of previous transfer &
FMV at date of death of current
decedent)
ii. Determine the initial basis
Initial value P xxx,xxx
Less: Indebtedness
assumed and paid
before death xxx,xxx
Initial basis P xxx,xxx
iii. Determine the final basis
Initial basis P xxx,xxx
Less:
(Initial basis/Gross estate)
x (LIT + TPU) xxx,xxx
Final basis P xxx,xxx
iv. Determine the vanishing deduction
Final basis P xxx,xxx
Vanishing percentage xx%
Vanishing deduction P xxx,xxx
100% - within 1 year;
80% - within 2 years;
20% - within 5 years

iii. Special deductions
1. Family home
a. Concept – Family home deduction refers to the
value of the family home, which includes the
dwelling house, and the land on which it is
situated, where the decedent and/or members
of his family reside, which is claimable as an
incentive by the Tax Code
b. Requisites for deduction of family home

i. 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;
ii. The total value of the family home must
be included as part of the gross estate
of the decedent; and,
iii. The allowable deduction must not
exceed the lowest among the current
fair market value of the family home as
declared or included in gross estate, or
the extent of the decedent’s interest
therein, or P10,000,000.
iv. Claimable only by married decedents
and single decedents who are heads of
their families
2. Standard deduction – a deduction incentive allowable

to the estate without the need of substantiation. A
standard deduction of P5,000,000 shall be allowed to
resident and citizen decedents and P500,000 for non-
resident alien decedents, which both shall be claimed in
full against the gross estate.

3. Benefits under RA No. 4917 – NIRC provides that any
amount received by the heirs from the decedent’s
employer as a consequence of the death of the
decedent-employee in accordance with RA No. 4917 is
allowed as a deduction provided that the amount of the
separation benefit is included as part of the gross estate
of the decedent. (NOTE: Benefit under RA No. 4917
shall be totally exempt from tax)
iv. Share of surviving spouse – one-half of the net conjugal or

community properties of the spouses.
Basis – After deducting the allowable deductions appertaining

to the conjugal or community properties included in the gross
estate, the share of the surviving spouse must be removed to
ensure that only the decedent’s interest in the estate is taxed
(RR No. 2-2003).
v. Rules on claimable deductions per decedent

classifications
Non-
Residents or
resident
Citizens
Aliens
Ordinary deductions
Losses Yes
Claims against the estate Yes Pro-rated
Indebtedness Yes Amount
Taxes Yes
Transfer for public use Yes Yes
Vanishing deductions Yes Yes
Special deductions
Family home Yes No
Standard deductions P5,000,000 P500,000
Benefits under RA 4917 Yes No
Share of the surviving
Yes Yes
spouse
f. Net estate and net taxable estate

i. Determination of the net taxable estate
1. Step 1: Enumerate all the items of inclusion in the gross
estate of the decedent
2. Step 2: Determine the classification of the decedent
(whether resident/citizen or non-resident alien and
whether single or married)

3. Step 3: Classify the items of gross estate into its situs
classification per country (if applicable) and property
regime classification (whether paraphernal, capital or
common/conjugal)
4. Step 4: Enumerate all the items of deduction from gross
estate and classify them accordingly per situs and
property regime classification
5. Step 5: Compute the net taxable estate
ii. Determination of the net estate per country

1. Residents/citizens (for tax credit purposes):
a. Rule on ordinary deductions – classification
rule shall be followed
b. Rule on special deductions:

i. Family home – Within the Philippines
ii. Standard deduction – pro-rated
based on gross estate
2. Non-resident alien (for determination of net

Philippine estate):
a. LIT – pro-rated based on gross estate
b. Other ordinary deductions – property
classification rule shall be followed
g. Tax due and tax credits, if applicable

i. Determination of tax due
Multiply by the net taxable estate by 6% to determine the total
estate tax due.
ii. Determination of foreign tax credit

1. Available only to the estate of resident or citizen
decedents
2. The tax credit is the lower between the actual foreign
estate tax paid or the ratio of the tax due from the
foreign sourced net estate over the total (world) net
estate
3. For multiple foreign countries, the lower of actual estate
tax and the foregoing limit for each country is
determined first. The final foreign tax credit shall be the
lower of the total of the tax credit allowable per country
and the world estate tax credit limit.

Foreign net taxable estate
x Philippine estate tax due
World net taxable estate
Total foreign net taxable estate

x Philippine estate tax due
World net taxable estate
h. Tax return preparation and filing and tax payments

i. Mode of filing of tax returns
1. Manual filing system
2. e-BIR Forms
3. Electronic Filing and Payment System (eFPS)
ii. Venue and time of filing of tax returns

1. Venue of filing
a. For resident decedents – the administrator or
executor shall register the estate of the
decedent and secure a new TIN therefor from
the RDO where the decedent is domiciled at the
date of his death
b. For non-resident decedents – whether non-
resident citizen or alien with executor or
administrator in the Philippines, the estate tax
return shall be filed and a new TIN shall be
secured from the RDO where such executor or
administrator is registered. If he is not
registered, the return shall be filed and new TIN
shall be secured from the RDO having
jurisdiction of his legal residence.
2. Where to file the estate tax returns?

a. Accredited agent bank
b. Revenue district office
c. Collection agent
d. Duly authorized treasurer of the city or
municipality in which the decedent or
administrator was domiciled at the time of his
death
e. Office of the commissioner, if the administrator
or executor has no legal residence in the
Philippines

3. Deadline of filing the estate tax return – shall be filed
within one year after the date of death
4. Extension of filing – The commissioner is authorized

to grant, in meritorious cases, a reasonable extension
not exceeding 30 days for filing the return
iii. Payment of estate tax due

1. General rule – shall be paid at the time the return is
filed following the rule, “pay as you file.”
2. Insufficiency of cash to pay tax – if there is difficulty
in paying the tax, the same may be settled by:
a. Installment payment
b. Partial disposition of estate
iv. Installment payment of estate tax

1. Installment payment – may be paid within two years
without the imposition of interest or civil penalties
Subject to approval of the CIR, the estate tax may be
paid as follows:
a. 24 monthly installments
b. 8 quarterly payments
c. 4 semi-annual payments
d. 2 annual payments
In case of lapse of two years without payment of the

entire tax due, the remaining cash balance thereof shall
be due and demandable subject to the applicable
penalties and interest reckoned from the prescribed
deadline for filing the return and payment of tax
2. Partial disposition – a written request which shall be

approved by the BIR, together with a notarized
undertaking that the proceeds thereof shall be
exclusively used for the payment of estate tax due, for
the partial disposition of properties of the estate to be
conveyed for cash consideration in settlement of the
estate tax due.

In case of a failure to pay the total estate tax due out
from the proceeds of said disposition, the estate tax due
shall be immediately due and demandable subject to
the applicable penalties and interest reckoned from the
prescribed deadline of filing of the return.
v. Extension of time – When the Commissioner finds that the

payment on the due date of the estate tax or of any part thereof
would impose undue hardship upon the estate or any of the
heirs, 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 the estate is
settled extrajudicially.
In such case, the amount in respect of which the extension is

granted shall be paid on or before the date of the expiration of
the period of the extension, and the running of the Statute of
Limitations for assessment shall be suspended for the period of
any such extension.
Where the taxes are assessed by reason of negligence,

intentional disregard of rules and regulations, or fraud on the
part of the taxpayer, no extension will be granted by the
Commissioner.
If an extension is granted, the Commissioner may require the

executor, or administrator, or beneficiary, as the case may be,
to furnish a bond in such amount, not exceeding double the
amount of the tax and with such sureties as the Commissioner
deems necessary, conditioned upon the payment of the said tax
in accordance with the terms of the extension.
vi. Liability for payment of the estate tax – The estate tax shall
be paid by the executor or administrator before delivery to any
heir of his distributive share of the estate. Where there are two
or more executors or administrators, all of them shall be
severally liable for the payment of tax.
The executor or administrator of an estate has the primary

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

vii. Discharge of executor or administrator from personal
liability – The executor or administrator shall make a written
application for the Commissioner of the amount of the estate tax
and discharge from personal liability. The executor or
administrator, upon payment of the amount of which he is
notified, shall be discharged from personal liability for any
deficiency in the tax thereafter found to be due and shall be
entitled to a receipt in writing showing such discharge.
No judge shall authorize the executor or judicial administrator to

deliver a distributive share to any party interested in the estate
unless a certification from the Commissioner that the estate has
been paid is shown.
If, after the payment of the estate tax, new obligations of the
decedent shall appear, and the persons interested shall have
satisfied them by order of the court, they shall have a right to the
restitution of the proportional part of the tax paid.
viii. Payment of tax antecedent to the transfer of shares, bonds

or rights – There shall not be transferred to any new owner in
the books of any corporation, sociedad anonima, partnership,
business, or industry organized or established in the Philippines
any share, obligation, bond or right by way of gift inter vivos or
mortis causa, legacy or inheritance, unless a certification from
the Commissioner that the estate taxes due thereon have been
paid is shown.
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.
ix. Accomplishing of tax returns and forms – BIR Form 1801

Estate Tax Return (January 2018)
The executor, administrator or any of the heirs shall file in

duplicate an estate tax return under oath, setting forth the
following:

1. Value of gross estate at the point of death or, in the case
of non-resident alien, that part of his gross estate
situated in the Philippines
2. The deductions allowed from gross estate
3. Supplemental data which may be necessary to
establish the correct tax
x. Attachments to the tax return – CPA Certification – where the

value of the gross estate exceeds P5,000,000, the return shall
be accompanied by a statement certified by a Certified Public
Accountant.
Contents of the statement:

1. Itemized assets of the decedent with their
corresponding gross value at the time of death or, in the
case of a non-resident decedent, that part of his gross
estate situated in the Philippines
2. Itemized deductions from gross estate
3. The amount of tax due whether paid or still due and
outstanding
i. Compliance requirements
i. Registration/application for TIN
1. BIR Form 1901 Application for Registration for Self-
Employed (Single Proprietor/Professional), Mixed
Income Individuals, Non-Resident Alien Engaged in
Trade/Business, Estate and Trust –
registration/application for TIN of estate undergoing
judicial settlement
2. BIR Form 1904 Application for Registration for One-
Time Taxpayer and Person registering under E.O. 98 –
registration/application for TIN shall be made before
payment of the tax due applicable for extrajudicial
settlement of the estate

ii. Estate tax amnesty act
1. Coverage – There is hereby authorized and granted a
tax amnesty, hereinafter called Estate Tax Amnesty,
which shall cover the estate of decedents who died on
or before December 31, 2017, with or without
assessments duly issued therefor, whose estate taxes
have remained unpaid or have accrued as of December
31, 2017: Provided, however, That the Estate Tax
Amnesty hereby authorized and granted shall not cover
in the exceptions.
2. Entitlement – Except for the exceptions, the estate

may enjoy the immunities and privileges of the Estate
Tax Amnesty and pay an estate amnesty tax at the rate
of six percent (6%) based on the decedent’s total net
estate at the time of death: Provided, That if an estate
tax return was previously filed with the Bureau of
Internal Revenue, the estate tax rate of six percent (6%)
shall be based on net undeclared estate. The provisions
of the National Internal Revenue Code of 1997, as
amended, or the applicable estate tax laws prevailing at
the time of death of the decedent, on valuation, manner
of computation, and other related matters shall apply
suppletorily, at the time of the entitlement: Provided,
further, That if the allowable deductions applicable at
the time of death of the decedent exceed the value of
the gross estate, the heirs, executors, or administrators
may avail of the benefits of tax amnesty under Title II of
this Act, and pay the minimum estate amnesty tax of
Five thousand pesos (₱5,000).
3. Availment – The executor or administrator of the

estate, or if there is no executor or administrator
appointed, the legal heirs, transferees or beneficiaries,
who wish to avail of the Estate Tax Amnesty shall,
within two (2) years from the effectivity of the
Implementing Rules and Regulations of this Act, file
with the Revenue District Office of the Bureau of
Internal Revenue, which has jurisdiction over the last
residence of the decedent, a sworn Estate Tax Amnesty
Return, in such forms as may be prescribed in the
Implementing Rules and Regulations. The payment of
the amnesty tax shall be made at the time the Return is
filed: Provided, That for nonresident decedents, the

Estate Tax Amnesty Return shall be filed and the
corresponding amnesty tax be paid at Revenue District
Office No. 39, or any other Revenue District Office
which shall be indicated in the Implementing Rules and
Regulations:
Provided, further, That the appropriate Revenue District

Officer shall issue and endorse an acceptance payment
form, in such form as may be prescribed in the
Implementing Rules and Regulations of this Act for the
authorized agent bank, or in the absence thereof, the
revenue collection agent or municipal treasurer
concerned, to accept the tax amnesty payment. Proof
of settlement of the estate, whether judicial or
extrajudicial, shall likewise be attached to said Return
in order to verify the mode of transfer and the proper
recipients:
Provided, finally, That the availment of the Estate Tax

Amnesty and the issuance of the corresponding
Acceptance Payment Form do not imply any admission
of criminal, civil or administrative liability on the part of
the availing estate.
4. Immunities and Privileges – Estates covered by the

Estate Tax Amnesty, which have fully complied with all
the conditions set forth, including the payment of the
estate amnesty tax shall be immune from the payment
of all estate taxes, as well as any increments and
additions thereto, arising from the failure to pay any and
all estate taxes for taxable year 2017 and prior years,
and from all appurtenant civil, criminal, and
administrative cases and penalties under the National
Internal Revenue Code of 1997, as amended.
Without prejudice to compliance with applicable laws on

succession as a mode of transfer, the Bureau of Internal
Revenue, in coordination with the applicable regulatory
agencies, shall set up a system enabling the transfer of
title over properties to heirs and/or beneficiaries and
cash withdrawals from the bank accounts of the
decedent, when applicable.

Upon full compliance with all the conditions set forth in
this Title and payment of the corresponding estate
amnesty tax, the tax amnesty granted under this Title
shall become final and irrevocable.
5. Exceptions – The Estate Tax Amnesty shall not extend

to estate tax cases which shall have become final and
executory and to properties involved in cases pending
in appropriate courts:
a. Falling under the jurisdiction of the Presidential
Commission on Good Government;
b. Involving unexplained or unlawfully acquired
wealth under Republic Act No. 3019, otherwise
known as the Anti-Graft and Corrupt Practices
Act, and Republic Act No. 7080 or An Act
Defining and Penalizing the Crime of Plunder;
c. Involving violations of Republic Act No. 9160,
otherwise known as the Anti-Money
Laundering Act, as amended;
d. Involving tax evasion and other criminal
offenses under Chapter II of Title X of the
National Internal Revenue Code of 1997, as
amended; and
e. Involving felonies of frauds, illegal exactions
and transactions, and malversation of public
funds and property under Chapters III and IV of
Title VII of the Revised Penal Code.
j. Tax implications of transactions applying the tax rules and

regulations, and sound tax planning strategies within legal and
ethical bounds to efficiently manage tax liabilities

TAX “Innovating
Educational
DONOR’S TAX Services”
KHEEN V. BATINGAL
REVIEW NOTES
a. Principles, concepts involving donor’s taxation

i. Concept of donation – an act of liberality whereby a person
disposes gratuitously of a thing or a right in favor of another who
accepts it. (Article 725, New Civil Code)
ii. Essential and formal requisites of donation

1. Essential elements of donation
a. Capacity of the donor
b. Donative intent, in cases of direct gift
c. Acceptance by the donee
d. Delivery, whether actual or constructive, of the
subject matter of the gift
2. Formal requisites of donation

a. Tangible personal property
i. Value not exceeding P5,000.00 – oral
(or in writing) with simultaneous
delivery
ii. Value exceeding P5,000.00 – in writing
b. Intangible personal property – public document
c. Real (immovable) property – public document.
The acceptance of the donation may be made
in the same deed of donation or in a separate
public instrument but shall not take effect
unless it is done during the lifetime of the donor.
iii. Concept and nature of donor’s tax

1. Concept of donor’s tax – a tax on the privilege to
transmit property between two or more persons who are
living at the time of the donation. The tax shall apply
whether the transfer is in trust or otherwise, whether the
gift is direct or indirect.

AFAR DONOR’S TAX. Review notes
2. Nature of donor’s tax
a. Privilege tax
b. Annual tax
c. Ad valorem tax
d. National tax
e. General revenue tax
f. Proportional tax
iv. Rationale of donor’s taxation

1. To supplement the estate tax
2. To supplement the capital gains tax
3. To recoup the reduced income taxes due to splitting of
capital
v. Exempt donations
1. Exempt Donations under NIRC & Special Laws
a. Aquaculture Department of the Southeast
Asian Fisheries Development Center (Sec. 2,
P.D. No. 292)
b. Aurora Pacific Economic Zone and Freeport
Authority (Sec. 7, R.A. No. 10083)
c. Development Academy of the Philippines (Sec.
12, P.D. No. 205)
d. Girl Scouts of the Philippines (Sec. 11, R.A. No.
10073)
e. Integrated Bar of the Philippines (Sec. 3, P.D.
No. 181)
f. International Rice Research Institute (Art. 5(2),
P.D. No. 1620)
g. National Commission for Culture and the Arts
(Sec, 35, R.A. No. 10066)
h. National Social Action Council (Sec. 4, P.D. No.
294)
i. National Water Quality Management Fund
(Sec. 9, R.A. No. 9275)
j. People’s Television Network, Incorporated
(Sec. 15, R.A. No. 10390)
k. People’s Survival Fund (Sec. 13, R.A. No.
10174)
l. Philippine-American Cultural Foundation (Sec.
4, P.D. No. 3062)

m. Philippine Normal University (Sec. 7, R.A. No.
9647)
n. Philippine Investors Commission (Sec. 9, R.A.
No. 3850)
o. Philippine Red Cross (Sec. 5, R.A. No. 10072)
p. Ramon Magsaysay Award Foundation (Sec. 2,
R.A. No. 3676)
q. Rural Farm School (Sec. 14, R.A. No. 10618)
r. Task Force on Human Settlements (Sec.
3(b)(8). E.O. No. 419)
s. Tubbataha Reefs Natural Park (Sec. 17, R.A.
No. 10067)
t. University of the Philippines (Sec. 25, R.A. No.
9500)
2. Donations for Election Campaign – any contribution

in cash or in kind to any candidate, political party, or
coalition of parties for campaign purposes shall be
governed by the Election Code, as amended. These
donations must be reported to the Commission on
Elections to be exempted from donor’s tax.
3. Transfer for Insufficient Consideration involving

Real Properties classified as Capital Assets – the
sale, exchange and other disposition of real property
classified as capital asset is subject to a capital gains
tax of 6% based on fair value or gross selling price,
whichever is higher.
4. General Renunciation of Inheritance – occurs when

an heir or the surviving spouse renounces his or her
share in the hereditary estate of a decedent in favor or
no particular coheir. A general renunciation is a
repudiation of inheritance which cannot be imputed as
a donation.
5. Donation with Reserved Powers (Incomplete

Transfers)
a. Conditional donation
b. Revocable transfers

6. Donation to the Government for Public Use
7. Donation to Accredited Non-Profit Institution
a. Concept – gifts in favor of an educational and
or charitable, religious, cultural or social welfare
corporation, institution, accredited
nongovernment organization, trust, or
philanthropic organization or institution are
exempt from donor’s tax (Sec. 101 (A)(3),
NIRC).
b. Requisites for exemption

i. Not more than 30% of said gift shall be
used by such donee for administrative
purposes
ii. The donee entity must be organized as
a non-stock entity
iii. The donee entity does not pay
dividends
iv. The donee entity’s board of trustees
earns no compensation
v. The donee entity must devote all its
income, donations, subsidies, or other
forms of philanthropy to the
accomplishment and promotion of its
purposes enumerated in its Articles of
Incorporation.
c. Accrediting agencies
i. Department of Social Welfare and
Development (DSWD) – for charitable
and or social welfare organizations,
foundations and associations including
but not limited to those engaged in
youth, children, women, family,
disabled persons, older persons,
welfare and development
ii. Department of Science and
Technology (DOST) – for research and
other scientific activities
iii. Philippine Sports Commission (PSC) –
for sports development

iv. National Council for Culture and Arts
(NCCA) – for cultural activities
v. Commission on Higher Education
(CHEd) – for educational activities
d. Gratuitous donations to associations –

associations do not qualify as exempt donee
institutions under Sec. 101 (A)(3) of the NIRC.
Hence, endowments or gifts received by
associations are not exempt from donor’s tax.
All donations to associations for tax purposes
must be covered by a donor’s tax return. (RMC
53-2013)
e. Onerous donations to associations – not in

the nature of an endowment or donation. They
are in the concept of a fee or price in exchange
for the performance of a service, use of
property, or delivery of an object. (RMC 53-
2013)
8. Quasi-Transfers – involve delivery of property to

another person but will never result in transfer of
ownership thereto.
a. Merger of the usufruct in the owner of the naked
title during the lifetime of the usufructuary
b. The transmission or delivery of the inheritance
or legacy by the fiduciary heir or legatee to the
fideicommissary during the lifetime of the
fiduciary heir
c. The transmission from the first heir, legatee, or
donee during his lifetime in favor of another
beneficiary, in accordance with the desire of the
predecessor
9. Void Donations – invalid donations—include those

prohibited by law and those with defects in their
execution.
a. Prohibited donation under the Civil Code:
i. Donation between spouses, except
moderate gifts

ii. Donations between persons who were
guilty of adultery or concubinage at the
time of donation
iii. Donations between persons found
guilty of the same criminal offense, in
consideration thereof
iv. Donations to a public officer or his wife,
descendants, or ascendants by reason
of his office
v. Donations to incapacitated persons
vi. Donations of future property
b. Donation with defects at execution

i. Donation by person who has no legal
title to the property donated
ii. Oral or written donation of real property
or intangible personal property
iii. Donation refused by the donee
10. Foreign Donations of Non-Resident Alien Donors
11. Donations of Property Exempt under Reciprocity –

the reciprocity rule—no tax shall be imposed with
respect to intangible personal property donations of
NRA donors if:
a. The donor at the time of the donation was a
citizen and resident of a foreign country which
at the time of his death or donation did not
impose a transfer tax of any character in
respect of intangible personal property of
citizens of the Philippines not residing therein.
b. The laws of the foreign country of which the
donor was a citizen and resident at the time of
donation allows a similar exemption from
transfer tax of every character in respect of
intangible personal property of citizens of the
Philippines not residing therein.
vi. Taxable donations – donations that do not qualify among those

exemption criteria are subject to tax.

b. Transfers which may be considered a donation
i. Direct Gift
ii. Gift through Creation of a Trust
iii. Condonation of Debt
iv. Specific Renunciation of Inheritance
v. 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/s
vi. Transfer for Insufficient Consideration (Except Real Properties
classified as Capital Assets)
c. Classification of donors
i. Natural persons
1. Taxable on global donations
a. Resident citizen
b. Nonresident citizen
c. Resident alien
2. Taxable on Philippine donations, subject to reciprocity
rule
a. Nonresident alien
ii. Juridical persons

1. Taxable on global donations
a. Domestic corporation
b. Resident foreign corporation
2. Taxable on Philippine donations, subject to reciprocity
rule
a. Nonresident foreign corporation
d. Net gifts/donations
i. Donor’s tax rate and structure
1. Donor’s tax model – first donation of the year
Net gift PXXX,XXX
Less: Exempt gift 250,000
Net gift subject to donor’s tax XXX,XXX
Multiply by: Donor’s tax rate 6%
Donor’s tax XXX,XXX
Less: Tax credits XXX,XXX
Donor’s tax due/payable XXX,XXX

2. Donor’s tax model – subsequent donations during
the year
Current net gift PXXX,XXX
Prior net gifts XXX,XXX
Total net gifts XXX,XXX
Less: Exempt gift 250,000
Net gift subject to donor’s tax XXX,XXX
Multiply by: Donor’s tax rate 6%
Donor’s tax XXX,XXX
Less: Tax credits XXX,XXX
Donor’s tax due/payable XXX,XXX
ii. Gross gifts

1. Components of gross gift
Residents or NRA without NRA with
Citizens reciprocity reciprocity
Property location Within Without Within Without Within Without
Real properties    X  X
Tangible personal properties    X  X
Intangible personal properties    X X X
2. Properties considered as located in the Philippines

a. Franchise which must be exercised in the
Philippines
b. Share, obligations, or bonds issued by any
corporation or sociedad anonima organized or
constituted in the Philippines in accordance
with its laws.
c. Share, obligations, or bonds issued by any
foreign corporation eighty-five per centum
(85%) of the business of which is located in the
Philippines.
d. Shares, obligations, or bonds which have
acquired business situs in the Philippines.
e. Shares or rights in any partnership, business or
industry established in the Philippines.
f. Any personal property, whether tangible or
intangible, located in the Philippines.

3. Encumbrances on the property – mortgage, real
property tax, and unpaid loans thereto which are to be
transferred to, or to be assumed by, the donee shall
NOT BE DEDUCTED from the value of the Gross Gift.
These shall be reported as ‘deduction against gross
gift,’ that is items in gross gift shall be presented in
gross amounts, free from deductions and diminutions.
4. Valuation of gross gifts

a. Real properties – higher between zonal value
and assessed value
b. Personal properties – fair market value
c. Preferred shares – par value
d. Unlisted common shares – book value
(unadjusted)
e. Listed common shares – arithmetic mean
between highest and lowest quotation
f. Usufruct and annuities – present value with
interest rate and period approved by Secretary
of Finance, upon recommendation by the
Insurance Commissioner
g. Newly purchased property – purchase price
(secondhand value if not newly acquired)
h. Pawned properties – grossing up pawn value
by loan-to-value ratio
i. Financial instruments – face amounts plus
accrued interests
j. Foreign currency – prevailing exchange rate
5. Timing of valuation – at the point of completion or

perfection of the donation, which is perfected upon
acceptance of the donee. In conditional donations, the
donation is completed and perfected upon satisfaction
by the donee of the terms of donation or upon waiver by
the donor of the conditions.
6. Donation of common properties – husband and wife

are considered as separate and distinct taxpayers for
purposes of the donor’s tax. Donation of conjugal or
community property by the spouses is deemed ½ made
by the husband and ½ made by the wife.

However, if what was donated is a conjugal or
community property and only the husband signed the
deed of donation, there is only one donor for donor’s tax
purposes, without prejudice to the right of the wife to
question the validity of the donation without her consent
pursuant to the pertinent provisions of the Civil Code of
the Philippines and the Family Code of the Philippines.
iii. Deductions from gross gifts

1. Obligations assumed by the donee
2. Donations to national government and its political
subdivisions
3. Donations in favor of educational, charitable, religious,
cultural and social welfare institution – see exempt
donations
4. Diminution of gift as specified by the donor – not exempt
from donor’s tax but deducted for purposes of future
taxability upon consummation of the subsequent
donation/transfer to the eventual donee.
iv. Net gift and net taxable gift

1. Step 1: Enumerate all the items of inclusion in the gross
gift of the donor in a particular date
2. Step 2: Determine the classification of the donor
(whether resident/citizen or non-resident alien and
whether single or married)
3. Step 3: Classify the items of gross gift into its situs
classification per country (if applicable)
4. Step 4: Enumerate all the items of deduction from gross
gift and classify them accordingly per situs
5. Step 5: Compute the net taxable gift
v. Determination of net gift per country – property classification

rule shall be observed in classifying deductions against gross
gift
e. Tax due and tax credits, if applicable

i. Determination of tax due – multiply the net gift subject to
donor’s tax by 6% in order to determine the tax due

ii. Determination of foreign tax credit
1. Available only to the donations made by resident and
citizen donors
2. The tax credit is the lower between the actual foreign
donor’s tax paid or the ratio of the tax due from the
foreign sourced net gift over the total (world) net gift
3. For multiple foreign countries, the lower of actual
donor’s tax and the foregoing limit for each country is
determined first. The final foreign tax credit shall be the
lower of the total of the tax credit allowable per country
and the world donor’s tax credit limit.
Foreign net taxable gift
x Philippine donor’s tax due
World net taxable gift
Total foreign net taxable gift

x Philippine donor’s tax due
World net taxable gift
f. Tax return preparation and filing and tax payments

1. Manual filing system
2. e-BIR Forms
3. Electronic Filing and Payment System (eFPS)
ii. Venue and time of filing of tax returns

1. Venue of filing
ANY PERSON making a donation (whether direct or
indirect), unless the donation is specifically exempt
under the NIRC or other special laws, is required, for
every donation, to accomplish under oath a donor’s tax
return in duplicate.
Unless the Commissioner otherwise permits, the return

shall be filed where the donor is domiciled at the time of
the transfer, or if there be no legal residence in the
Philippines, with the Office of the Commissioner.
In the case of gifts made by a non-resident, the return

may be filed with the Philippine Embassy or Consulate
in the country where he is domiciled at the time of the
transfer, or directly with the Office of the Commissioner.

2. Where to file the donor’s tax returns?
a. Accredited agent bank
b. Revenue district office
c. Collection agent
d. Office of the commissioner, if the donor has no
legal residence in the Philippines
e. Philippine embassy or consulate in the country
where the donor is domiciled at the time of
transfer
3. Deadline of filing the donor’s tax return – The

donor’s tax return shall be filed within THIRTY (30)
DAYS after the date the gift is made or completed.
4. Notice of donation by a donor engaged in business

– In order to be exempt from donor’s tax and to claim
full deduction of the donation given to qualified-donee
institutions duly accredited, the donor engaged in
business shall give a notice of donation on every
donation worth at least FIFTY THOUSAND PESOS
(P50,000) to the Revenue District Office (RDO) which
has jurisdiction over his place of business within thirty
(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, stating that not
more than thirty percent (30%) of the said donation/gifts
for the taxable year shall be used by such accredited
non-stock, non-profit corporation/NGO institution for
administration purposes.
iii. Payment of donor’s tax due – pay as you file
iv. Accomplishing of tax returns and forms – BIR Form 1800

Donor’s Tax Return
Any person making a donation shall accomplish under oath a

donor’s tax return which shall set forth:
1. Each gift made during the calendar year which is to be
included in gifts;
2. The deductions claimed and allowable;

3. Any previous net gifts made during the same calendar
year;
4. The name of the donee; and,
5. Such further information as the Commissioner may
require.
v. Attachments to the tax return – formal documents evidencing

the donation made and the acceptance made by the donee.
Common documents include Deed of Donation and Deed of
Acceptance of Donation or Certificate of Donation.
g. Compliance requirements
i. Registration/application for TIN
1. BIR Form 1901 Application for Registration for Self-
Employed (Single Proprietor/Professional), Mixed
Income Individuals, Non-Resident Alien Engaged in
Trade/Business, Estate and Trust –
registration/application for TIN of donor undergoing who
is expected to exercise subsequent donation or may
perform other taxable acts subject to internal revenue
taxes
2. BIR Form 1904 Application for Registration for One-
Time Taxpayer and Person registering under E.O. 98 –
registration/application for TIN shall be made before
payment of the tax due applicable for one-time taxpayer
or any taxpayer who does not expect to engage in
another taxable transaction in the near future
h. Tax implications of transactions applying the tax rules and


TAXATION
TAX19.M2013 VATTAX
VALUE ADDED TAX. Output VAT
MARGINAL
VATTAX.04 VAT OUTPUT TAX NOTES
4.1 OUTPUT VAT/TAX

Means the VAT due on the sale, lease or exchange of taxable goods or properties or
services by any person registered or required to register under Section 236 of the tax
code.
4.2 OUTPUT TAX OF SELLER OF GOODS
Tax Base P xxxx

Tax Rate xx%
Output Tax P xxxx
4.2.1 TAX BASE
A. Actual Sale
I. Personal Property Gross Selling Price
B. Transaction Deemed Sales [refer to VATTAX.03, 1.2.2 (B)]

II. 1, 2 and 3 above Fair Market Value
III. 4 above Acquisition Cost vs. Fair Market
Value whichever is lower
 Gross Selling Price (GSP) means and includes everything that the
buyer pays the seller (including excise tax) in order to get the
goods, except the value-added tax. It is composed of cash sales
and sales on account. It does not mean gross sales because it is
“net of the deductions allowed” consisting of:

TAX TAX19.M2013.VATTAX. Output Tax
4.2.2 Deductions from GSP
MARGINAL A. Sales discounts indicated in the invoice the granting of which does not
NOTES depend upon the happening of a future event.
B. Sales returns and allowances for which a proper credit or refund was
made during the month or quarter to the buyer for sales previously
recorded as taxable sales.
4.2.3 PROBLEM 1
Distilleria Limtuangco is a manufacturer of wine. During a particular calendar
quarter, it had the following transactions (net of VAT):
Jan. 04, 2018 : Consigned wine to a retailer in Makati City amounting to P20
Feb. 14, 2018 : Exported P1,000,000 worth of wine to Spain.
Feb. 27, 2018 : President of Winery celebrated his birthday, consuming
worth of wine given to him by the company as a birthday gift
Mar. 20, 2018 : Declared property dividend of one case of wine for every 10
amounting to P150,000.
The output tax for the calendar quarter ended March 31, 2018 is:
A. P48,000
B. P168,000
C. P140,000
D. P40,000
4.3 OUTPUT TAX OF SELLER OF PROPERTIES
Tax Base P xxxx

Tax Rate xx%
Output Tax P xxxx
4.3.1 TAX BASE
Actual Sale
Real Property
1) Cash sales Gross Selling Price, Fair Market Value,
2) Deferred Payment Basis Zonal Value whichever is higher
[(Collection/GSP) x GSP vs. Fair
3) Installment Basis Market Value vs. Zonal Value
whichever is higher]
4.4 VAT ON LEASE PROPERTIES

4.4.1 Transactions subject: Lease of real properties held primarily for lease to
customers in the ordinary course of trade or business.

TAX19.M2013.VATTAX. Output Tax TAX
4.4.2 Lease of residential units which are VAT exempt:
MARGINAL
a. Monthly rental does not exceed P15,000 (12,800 prior to TRAIN law)
regardless of the aggregate rentals received by lessor during the year; NOTES
b. Aggregate rentals of the lessor during the year does not exceed P3,000,000
(P1,919,500 prior to TRAIN Law) even if the monthly rental exceeds P15,000
(P12,800 prior to TRAIN Law).
The term ‘residential units’ shall refer to apartments and houses and lots used for
residential purposes, and buildings or parts or units thereof used solely as
dwelling places (e.g., dormitories, rooms and bed spaces) except motels, motel
rooms, hotels and hotel rooms.
The term ‘unit’ shall mean an apartment unit in the case of apartments, house in
the case of residential houses; per person in the case of dormitories, boarding
houses and bed spaces; and per room in case of rooms for rent.
4.4.3 PROBLEM 2
INDICATE if the following receipts from lease of residential units are subject to
VAT or not:
Case Monthly Rental Aggregate Annual Rental Vatable/Not Vatable

1 P14,500 P 3,400,000 __________
2 15,000 2,800,000 __________
3 12,500 2,950,000 __________
4 15,100 3,000,000 __________
5 15,100 3,600,000 __________
4.4.4 PROBLEM 3
Which of the following shall be subject to 0% VAT?
A. Sale of electricity by generation companies.
B. Sale of electricity by transmission companies.
C. Sale of electricity by distribution companies.
D. Sale of power or fuel generated through renewable sources of energy.
1.Statement 1: The Output value-added tax is computed by multiplying the gross

selling price by 12%; or multiplying the total amount indicated in the invoice by
12/112.
Statement 2: The Output value-added tax is computed by multiplying the total
amount indicated in the invoice by 12%.
A. Both statements are correct
B. Both statements are wrong
C. The first statement is correct but the second statement is wrong
TAX TAX19.M2013.VATTAX. Output Tax
D. The first statement is wrong but the second statement is correct
MARGINAL
NOTES 2. Which statement is correct?
A. The sales invoice that shows a total, with an indication that it includes the
value-added tax even if it does not show the tax separately, is a correctly
prepared invoice.
B. The invoice which shows the selling price and the value-added tax
separately, but with a total which is a correct amount is a properly prepared
invoice.
C. An invoice which shows the selling price and the value-added tax separately,
which is paid by the buyer, is violative of the revenue regulations on issuance
of sales invoices.
D. A sales invoice by a VAT taxpayer can be used only on a VAT sale.
3. Statement 1: In the books of accounts of a VAT-registered taxpayer, sales are

recorded net of output taxes.
Statement 2: In the books of accounts of a VAT-registered taxpayer, purchases
are recorded net of input taxes.
B. Both statements are wrong
C. The first statement is correct but the second statement is wrong
D. The first statement is wrong but the second statement is correct
4. On January 5, 2018, Nockia Co., VAT-registered, sold on account goods for

P112,000 to Blueberry Corp. The term was 2/10, n/30. Payment was made on
January 10, 2018. The total amount due is:
A. P112,000
B. P98,000
C. P109,760
D. P100,000
5. Frederik Bach, a German residing in the Philippines, bought garments from Bench
Corp., a domestic corporation, and exported the same to Germany. Total value of
export is P100,000. The output VAT due on the transaction is:
A. P12,000
B. P10,000
C. None, because 0% applies
D. None, because the sale is exempt from VAT

.
TAXATION
TAX19.M2012 VATTAX
VALUE ADDED TAX. VAT Sales
MARGINAL
VATTAX.03 VAT SALES NOTES
3.1 VAT ON SALE OF GOODS
3.1.1 Person Liable – any person who, in the course of his trade or business:
A. Sells, barter or exchanges goods or properties (Sell of goods or
properties)
3.2 KINDS OF SALE OF GOODS
3.2.1 Actual Sale

3.2.2 Transaction Deemed Sales
A. DEEMED SALES
I. These transactions are not recorded as sales by the seller.
Nevertheless, since these transactions are forms of taxable
consumptions they are considered “deemed sales” for VAT purposes.
B. Transactions Deemed Sale

I. 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 trade or
business can take place when VAT registered person withdraws
goods from his business for his personal use.
II. Distribution or transfer to -
 Shareholders or investors as share in the profits of the VAT
registered person.
1. Property dividends which constitute stocks in trade or

properties primarily held for sale or lease declared out of
retained earnings on or after Jan. 1, 1996 and distributed by
the company to its shareholders shall be subject to VAT
based on the zonal value or FMV at the time of distribution,
whichever is applicable.
 Creditors in payment of debt or obligation.

TAX TAX19.M2012. VATTAX. VAT Sales
III. Consignment of goods if actual sale is not made within 60 days
MARGINAL following the date such goods were consigned. Those returned within
NOTES the 60-day period are not deemed sold.
IV. 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, to wit:
 Change of ownership of business. There is change of ownership
of the business when a single proprietorship incorporates; or the
proprietor of a single proprietorship sells his entire business.
 Dissolution of a business partnership and creation of a new one
which takes over the business.
1. The output tax shall be based on the market value of the
goods deemed sold at the time of occurrence of the
transactions. However in the case of (4) the tax base shall be
the acquisition cost or the current market price of the goods
or properties, whichever is lower.
3.2.3 Zero-Rated Sales

A. Sales of Goods
I. Zero-rated transactions vs. Exempt transactions
 0% - subject to VAT only that the rate is 0%.
E - not subject to VAT
 0% - no output tax but the taxpayer is entitled to credit or input
taxes.
E - no tax credit for input taxes are allowed.
II. Sales by VAT registered persons subject to 0%:

 EXPORT SALES which shall mean:
1. The sale or actual shipment of goods from Philippines to
foreign country and paid for in acceptable foreign currency or
its equivalent in goods or services, and accounted for in
accordance with the rules and regulations of the BSP;
2. Shall be subject to the twelve percent (12%) VAT and no
longer be subject to zero percent VAT (*)
4. Sale of gold to BSP is reclassified from export sales to
exempt transactions.
6. Sale of goods, supplies, equipment and fuel to persons
engaged in international shipping or international air transport
operations. Provided, that the goods, supplies, equipment
and fuel shall be used exclusively for international shipping
or air transport operation.
TAX19.M2012. VATTAX. VAT Sales TAX
a. Note (*) Shall be subject to 12% VAT upon the successful
MARGINAL
establishment and implementation of an enhanced VAT
refund system that grants refunds of creditable input tax NOTES
within 90 days from filing of the VAT refund application
with the BIR; Provided that all application filed from
January 1, 2018 shall be processed and decided within 90
days from the filling of the VAT refund application.
 The 90 day period to process and decide, pending the establishment

of the enhanced VAT Refund System shall only be up to the date of
approval of the Recommendation report on such application for VAT
refund by the Commissioner or his duly authorized representative;
Provided; that all claims for refund/tax credit certificate filed prior
to January 1, 2018 will be governed by the 120 day processing
period. All pending VAT refund claim as of 31 December 2017
shall be fully paid in cash by 31 December 2019.
B. EFFECTIVE ZERO-RATED SALES

I. Sale to persons or entities deemed tax exempt under special law or
international agreement (Also known as Effectively zero-rated)
 sales of goods and properties to person or entities who are tax
exempt under Special Laws such as;
1. Sale to duly registered and accredited enterprises with Subic
Bay Metropolitan Authority (SBMA); and
2. Sale to duly registered and accredited enterprises with
Philippine Economic Zone Authority (PEZA).
 sales of goods and properties to person or entities who are tax

exempt under international Agreement to which the Philippines is
a signatory, such as;
1. Sale to Asian Development Bank (ADB);
2. Sale to International Rice Research Institute (IRRI);
C. STATUS QUO ON VAT ZERO RATING OF SALES TO PEZA ENTITIES

I. DOF Memorandum Circular No. 2018-003 declared “status quo” on
VAT zero rating incentive on the sale of goods/services to separate
customs territories. It further provides that Sec. 8 of the PEZA law,
which provides that special economic zones are to be operated and
managed as a separate customs territory, was not amended or
repealed by TRAIN Law. Consequently, until a law or revenue
regulation is passed or issued contrary to or incompatible with the
pronouncement by the DOF, the VAT zero-rating incentive being
enjoyed by PEZA locators or entities shall remain in full force and
effect.

MARGINAL D. PROBLEM 1
NOTES In a month, total invoice prices/costs:
Domestic sales P 672,000

Export sales 1,500,000
Purchases from VAT-registered persons of:
Goods exported 560,000
Goods sold in the Philippines 224,000
Operating expenses 112,000
The input taxes attributable to export sales which may be refunded or

credited against other internal revenue taxes, including any value-added
tax on domestic sales, is:
A. P60,000
B. P24,000
C. P84,000
D. P96,000
3.2.4 VAT EXEMPT TRANSACTIONS
A. Sale or importation of
I. agricultural and marine food products in their original state;
II. livestock and poultry of a kind generally used as, or yielding or
producing, foods for human consumption;
III. breeding stock and genetic materials;
 Products considered in their original state:

1. products which undergone simple process of preparation or
preservation for the market (freezing, drying, salting, broiling,
roasting, smoking or stripping)
2. polished or husked rice
3. corn grits
4. raw cane sugar and molasses
5. ordinary salt
6. copra
B. Sale or importation of:

I. fertilizers
II. seeds, seedlings and fingerlings
III. fish, prawn, livestock and poultry feeds
IV. ingredients (whether locally produced or imported) used in the
manufacture of finished feeds (except specialty feeds for race horses,
fighting cocks, aquarium fish, zoo animals and other animals generally
considered as pets);

MARGINAL
C. Importation of personal and household effects belonging to the
I. residents of the Philippines returning from abroad; and NOTES
II. non-resident citizens coming to resettle in the Philippines; provided,
that such goods are exempt from customs duties;
D. Importation of professional instruments and implements, tools of trade,

occupation or employment, wearing apparel, domestic animals, and
personal household effects (except any vehicle, vessel, aircraft, machinery
and other goods for use in the manufacture and merchandise of any kind
in commercial quantity)
I. belongs 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 herein referred to as overseas Filipinos;
II. In quantities and of the class suitable to the profession, rank or
position of the person importing said items;
III. for their own use and not for sale, barter or exchange;
IV. accompanying such persons, or arriving within ninety (90) days before
or after their arrival, upon the production of evidence satisfactory to
the Commissioner of Internal Revenue, that such persons are actually
coming to settle in the Philippines and that the goods are brought
from their former place of abode, exempt such goods from payment
of duties and taxes; Provider further, vehicles, vessels, aircrafts and
machineries and other similar goods for use in manufacture, shall not
fall within this classification and shall therefore be subject to duties,
taxes and other charges.
E. Services subject to percentage tax under Title V of the 1987 Tax Code as
amended;
F. Services by agricultural contract growers and milling for others of palay

into rice, corn into grits, and sugar cane into raw sugar;
I. Agricultural contract grower –refer to those persons producing for

others’ poultry, livestock or other agricultural and marine food
products in their original state such as contract for a package of
services of receiving eggs from breeder farm, sorting , fumigating,
setting, hatching, sexing of day- old broilers, sorting and delivering
them to other contract grower.
G. Medical, dental, hospital and veterinary services, except those rendered by

professionals;
I. Laboratory services are exempted. If the hospital or clinic operates a
pharmacy or drugstore, the sale of drugs and medicines are subject to
VAT.
II. Hospital bills constitute medical services. The sale made by the
drugstore to the in-patients which are included in the hospital bill are
part of medical bills (not subject to VAT).
III. The sales of the drug store to the out-patients are taxable because
MARGINAL they are not part of medical services of the hospital.
NOTES
H. Educational services rendered by;
I. private educational institutions duly accredited by:
 DepED;
 CHED,
 and TESDA
II. and those rendered by government educational institutions;
I. Services rendered by individuals pursuant to an employer-employee

relationship;
J. Services rendered by regional or area headquarters established in the

Philippines by multinational corporations which act as supervisory,
communications and coordinating centers for their affiliates, subsidiaries
or branches in the Asia Pacific Region and do not earn or derive income
from the Philippines;
K. Transactions which are exempt under international agreements to which

the Philippines is a signatory or under special laws except those granted
under PD No. 529 – Petroleum Exploration Concessionaires under the
Petroleum Act of 1949;
L. Agricultural cooperatives duly registered and in good standing with the

CDA
I. Sales to their members,
II. Sales to non-members if the cooperative is the producer (if not subject
to VAT)
III. 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 TAX
Sale of cooperative’s own produce to its
Exempt
members
Sale of cooperative’s own produce to its
Exempt
non-members
Sale to its members of goods other than
Exempt
the cooperative’s own produce
Sale to non-members of goods other than
Subject to VAT
the cooperative’s own produce

M. Gross receipts from lending activities by credit or multi-purpose
MARGINAL
cooperatives duly registered and in good standing with the CDA;
NOTES
GROSS RECEIPTS TAX
Gross receipts from lending activities to its
Exempt
members
Gross receipts from lending activities to its
Exempt
non-members
Gross receipts from NON-lending activities to
Subject to VAT
its members and non-members
N. Sales by non-agricultural, non-electric and non-credit cooperatives duly

registered with and in good standing with the CDA; provided, that the share
capital contribution of each member does not exceed P15,000 and
regardless of the aggregate capital and net surplus ratably distributed
among the members;
CONTRIBUTION TAX
Contribution per members < P15,000 Exempt
Contribution per members > P15,000 Subject to VAT
O. Export sales by persons who are not VAT-registered;
P. Sales of real properties, as follows:

I. Sale of real properties not primarily held for sale to customers or held
for lease in the ordinary course of trade or business. However, even if
the real property is not primarily held for sale to customers or held for
lease in the ordinary course of trade or business but the same is used
in trade or business of the seller, the sale thereof shall be subject to
VAT being a transaction incidental to the taxpayer’s main business.
II. Sale of real properties utilized for low-cost housing as defined by RA
No. 7279, otherwise known as the “Urban Development and Housing
Act of 1992” and other related laws, such as RA No. 7835 and RA No.
8763, wherein the price ceiling per unit is P750,000;
 Low cost housing – refer to housing projects intended for the

homeless low-income family beneficiaries undertaken by the
government or private developers, which may either be a
subdivision or condominium registered and licensed by HLURB
under BP 220 , PD 957 or any other similar law.
III. Sale of real properties utilized for socialized housing as defined under
RA No. 7279, and other related laws, such as RA No. 7835 and RA No.
8763, wherein the price ceiling per unit is P450,000 or as may from
time to time be determined by HUDCC and the NEDA and other related
laws;
MARGINAL  Socialized housing – refer to housing program covering house

NOTES and lots only that are undertaken by the Government or private
sectors for the underprivileged and homeless citizen which shall
include sites and services development, long-term financing’
liberated terms on interest payments and such other benefits in
accordance with the provisions of RA 7279 otherwise known as
the “Urban Development and Housing Act of 1992” and other
related laws, such as RA No. 7835 and RA No. 8763. It is also refer
to projects intended for the underprivileged and homeless wherein
the housing package selling price is within the lower interest rates
under the Unified Home Lending Program (UHLP);
IV. Sale of residential lot valued at P1,500,000 and below, or house and lot
and other residential dwellings valued at P2,500,000 and below where
the instrument of sale/transfer/disposition was executed on or after
January 1, 2012.
 If two or more adjacent residential lots are sold or disposed of 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 P1,500,000 (as
amended). Adjacent residential lots, although covered by separate
titles and/or separate tax declarations, when sold or disposed of
to one and the same buyer, whether covered by one or separate
Deed of Conveyance, shall be presumed as a sale of one
residential lot.
 Provided that 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 under RA 7279, sale of house and lot and other residential
dwelling with selling price of not more than 2M; Provided, further
that every three (3) years thereafter, the amount state herein shall
be adjusted to its present value using the CPI as published by the
PSA.
Q. Lease of residential units with a monthly rental per unit not exceeding
P15,000 (P12,800 prior to TRAIN Law), regardless of the amount of
aggregate rentals received by the lessor during the year;
I. Lease of residential units where the monthly rental per unit exceeds
P15,000 (P12,800 prior to TRAIN Law) but the aggregate of such
rentals of the lessor during the year do not exceed P3M (P1,919,500
prior to TRAIN Law) shall likewise be exempt from VAT, however, the
same shall be subjected to 3% percentage tax.

II. In cases where a lessor has several residential units for lease, some
MARGINAL
are leased out for a monthly rental per unit of not exceeding P15,000
(P12,800 prior to TRAIN Law) while others are leased out for more NOTES
than P15,000 or 12,800 per unit, his tax liability will be as follows:
 The gross receipts from rentals not exceeding P15,000 (P12,800
prior to TRAIN Law) per month per unit shall be exempt from VAT
regardless of the aggregate annual gross receipts.
 The gross receipts from rentals exceeding P15,000 (P12,800 prior
to TRAIN Law) 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 [P12,800 prior to TRAIN Law]) exceed P3M (P1,919,500
prior to TRAIN Law). Otherwise, the gross receipts will be subject
to the 3% percentage tax.
1. The term ‘residential units’ shall refer to apartments and

houses and lots used for residential purposes, and buildings
or parts or units thereof used solely as dwelling places (e.g.,
dormitories, rooms and bed spaces) except motels, motel
2. The term ‘unit’ shall mean an apartment unit in the case of

apartments, house in the case of residential houses; per
person in the case of dormitories, boarding houses and bed
spaces; and per room in case of rooms for rent.
R. Transport of passengers by international carriers doing business in the

Philippines. The same shall not be subject to Other Percentage Taxes as
amended under RA 10378 and transport of cargo by international carriers
doing business in the Philippines as the same is subject to 3% common
carrier’s tax as amended under RA 10378 and RR 15-2015.
S. Sale, importation, printing or publication of books and any newspaper,

magazine, review, or bulletin
I. which appears at regular intervals
II. with fixed prices for subscription and sale; and
III. which is not devoted principally to the publication of paid
advertisements;
T. 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, 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 importation
and mandatory vessel retirement program of MARINA (RR 15-2015);

U. Importation of fuel, goods and supplies by persons engaged in
MARGINAL international shipping or air transport operations; Provided, that
NOTES I. the said fuel, goods and supplies shall be used exclusively or shall
pertain to the transport of goods and/or passenger from a port in the
Philippines directly to a foreign port, or vice versa, without docking or
stopping at any other port in the Philippines unless the docking or
stopping at any other Philippine port is for the purpose of unloading
passengers and/or cargoes that originated from abroad, or to load
passengers and/or cargoes bound for abroad;
II. 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 twelve percent (12%) VAT;
V. Services of banks, non-bank financial intermediaries performing quasi-

banking functions, and other non-bank financial intermediaries subject to
percentage tax, such as money changers and pawnshops;
W. Sale or lease of goods and services to senior citizens and person with
disabilities as provided under RA 9994 (Expanded Senior Citizen Act of
2010) and RA 10754 (An Act expanding the Benefits and privileges of
Persons with Disability) respectively;
X. Transfer of property pursuant to Section 40 (C) (2) of the NIRC, as

amended; (new provision under the TRAIN Law);
Y. Association dues, membership fees and other assessments and charges

collected on a purely reimbursement basis by homeowners associations
and condominium corporations established under RA 9904 (Magna Carta
for Homeowners and Homeowners Association) and RA 4725
(Condominium Act) respectively; (new provision under the TRAIN Law);
Z. Sale of gold to the Bangko Sentral ng Pilipinas (new provision under the
TRAIN Law);
AA. Sale of drugs and medicines prescribed for diabetes, high cholesterol, and
hypertension beginning January 1, 2019 (new provision under the TRAIN
Law)’
BB. Sale or lease of goods or properties or the performance of services other

than the transactions mentioned in the preceding paragraphs, the annual
gross sales and/or receipts do not exceed the amount of P3M (P1,919,500
prior to TRAIN Law) as amended.

3.3 VAT ON SALE OF SERVICES AND LESSOR OF GOODS OR PROPERTIES
MARGINAL
3.3.1 Person Liable – any person who, in the course of his trade or business: NOTES
A. Renders services
B. Leases goods or properties (lessor)
3.4 OUTPUT TAX OF SELLER OF SERVICES AND LESSOR OF GOODS OR

PROPERTIES
Gross Receipts P xxxx

Tax Rate xx%
Output Tax P xxxx
3.4.1 Gross receipts means the total amount of money or its equivalent actually or
constructively received (excluding the VAT):
A. On the contract price, compensation, service fee, rental or royalty;
B. Payments for materials supplied with the services;
C. Deposits or advanced payments.
I. Gross Receipts express in a formula:
Cash Received (actually and constructively P xxxx

Advance payments (*) xxxx
Materials charged for services xxxx
Gross Receipts P xxxx
 (*) Advance Payment in a lease contract by the lessee may be:
Not subject Subject to

to VAT VAT
a) A loan to the lessor from the lessee /
b) An option money for the property /
c) A security deposit to insure the faithful performance
/
of certain obligation of the lessee based on contracts
d) Prepaid rental /
3.4.2 Gross Receipts for Dealers in Securities means gross selling price less cost of
securities sold.
3.4.3 Sale or exchange of services

A. It means the performance of all kinds of services in the Philippines for
others for a fee, remuneration or consideration, including those performed
or rendered by the following:
I. Construction and service contractors
II. Stock, real estate, commercial, customs and immigration brokers;
III. Lessors of property, whether real or personal;
MARGINAL IV. Warehousing services;
NOTES V. Lessors or distributors of cinematographic films;
VI. Persons engaged in milling, processing, manufacturing or repacking
goods for others except :
 Palay into rice
 Corn into corn grits
 Sugar cane into raw sugar
VII. Proprietors, operators or keepers of hotels, motels, rest houses,
pension houses, inns, resorts;
VIII. Dealers in securities and lending investors
IX. Proprietors or operators of restaurants, refreshment parlors, cafes and
other eating places, including clubs and caterers.
X. Transportation contractors on their transport of goods or cargoes,
including persons who transport goods or cargoes for hire and other
domestic carriers by land relative to their transport of goods or
cargoes;
XI. 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;
XII. Sales of electricity by generation companies, transmission and/or
distribution companies;
XIII. Services of franchise grantees of electric utilities, telephone and
telegraph, radio and/or television broadcasting and all other franchise
grantees of radio and/or television broadcasting companies whose
annual gross receipts of the preceding year do not exceed
P10,000,000, and franchise grantees of gas and water utilities;
XIV. Non-life insurance companies (except crop insurances), including
surety, fidelity, indemnity and bonding companies;
XV. Services performed in the exercise of profession or calling subject to
professional tax, and professional services performed by registered
professional partnerships; actors, actresses, talents, singers, and
emcees; radio and television broadcasters, choreographers; musical,
radio, movie, television and stage directors; and professional athletes;
XVI. Other similar services, regardless of whether or not the performance
thereof calls for the exercise or use of the physical or mental faculties.
3.4.4 Sales of Services subject to Zero-Rated
A. Services rendered to persons engaged in international shipping or

international air transport operations, including leases of property for use
thereof;
B. Transport of passengers and cargo by air or sea vessels from the
Philippines to a foreign country;
C. Shall be subject to the twelve percent (12%) VAT and no longer be subject
to zero percent VAT (*)

D. Shall be subject to the twelve percent (12%) VAT and no longer be subject
MARGINAL
to zero percent VAT (*)
E. Services other than processing, manufacturing or repacking goods for NOTES
other persons engaged in business who is outside the Philippines when
the services are performed, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance with the
rules and regulations of BSP.
F. 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 services to zero (0) percent rate;
G. Sale of power or fuel generated through renewable sources of energy such
as but not limited to:
I. Biomass
II. Solar
III. Wind
IV. Hydropower
V. Geothermal and Steam
VI. Ocean energy
VII. Other emerging sources using technologies such as fuel cells and
hydrogen fuels;
 Note (*) Shall be subject to 12% VAT upon the successful

establishment and implementation of an enhanced VAT refund
system that grants refunds of creditable input tax within 90 days
from filing of the VAT refund application with the BIR; Provided that
all application filed from January 1, 2018 shall be processed and
decided within 90 days from the filling of the VAT refund application.
 The 90 day period to process and decide, pending the establishment

of the enhanced VAT Refund System shall only be up to the date of
approval of the Recommendation report on such application for VAT
refund by the Commissioner or his duly authorized representative;
Provided; that all claims for refund/tax credit certificate filed prior
to January 1, 2018 will be governed by the 120 day processing
period. All pending VAT refund claim as of 31 December 2017
shall be fully paid in cash by 31 December 2019.
3.4.5 PROBLEM 2
SMBC is an operator of parking lots. What business tax is due on his income
from the business?
A. Broker’s tax
B. Common carrier’s tax
C. Caterer’s tax
D. Value-added tax

3.4.6 PROBLEM 3
MARGINAL
NOTES Sale of services by a VAT-registered contractor: Collections on total invoice
price for contracts completed
(including P448,000 for materials) P1,120,000
Receivables on billings (VAT included) 336,000
Advances on contracts (VAT not included) 200,000
Retentions on contracts made by clients out of
contract price already earned 90,000
Purchases of:
Materials (VAT included) 224,000
Services of sub-contractor (VAT not included) 448,000
Services of persons subject to percentage taxes 56,000
Salaries of employees 60,000
6. Output taxes are:

A. P158,400
B. P144,000
C. P132,000
D. P154,800
7. The input taxes are:

A. P67,200
B. P72,000
C. P77,760
D. P80,640
8. The value-added tax payable is:

A. P64,800
B. P86,400
C. P86,400
D. P66,240
3.4.7 PROBLEM 4
JJC Realty and Leasing, Inc. is a lessor of real property and personal property
(cars). The tax that he pays is:
A. Excise Tax
B. Value-added tax
C. Transaction tax
D. None of these
3.5 VAT ON SALE OF REAL PROPERTY
3.5.1 The following sales of real property are subject to VAT:

A. Those held primarily for sale to customers;
MARGINAL
B. Those held for lease in the ordinary course of trade or business of the
seller. NOTES
3.5.2 The following are not subject to VAT: Sale of real property which are:
A. Not held primarily for sale to customers or held for lease in the ordinary
course of trade or business;
B. Utilized for low-cost housing (P750,000 per unit or less);
C. Utilized for socialized housing (P225,000 per unit or less);
D. Made by real estate dealers and/or lessors of house and lot and other
residential dwellings valued at P1,500,000 and below on residential lot,
and P2,500,000 and below on residential house and lot where the
instrument of sale/transfer/disposition was executed on or after January
1, 2018.
1. When even if there is a business, there is no VAT imposition when:

I. Sale of house and lot and other residential dwelling valued at 2,500,000
and below beginning January 1, 2018;
II. Sale of residential lot at P1,500,000 per unit and below beginning
January 1, 2018;
III. Sale of real properties for socialize housing
IV. Sale of real properties for low cost housing
V. A business is pursued by an individual where the aggregate gross sales
and or receipts do not exceed P100,000 during the any twelve month
period;
A. All of the above

B. III, IV and V only;
C. II, III and IV only;
D. I, II and III only;
2. Which of the following carrier shall be subject to value-added tax?

A. Sea carrier classified as Resident Foreign Corp annual gross receipts is
P2,000,000
B. Air carrier classified as Resident Foreign Corp annual gross receipts is
P2,000,000
C. Sea carrier classified as Domestic Corp voyage is from Philippines to Japan
annual gross receipts is P2,000,000
D. None of the choices

3. When even if there is a business, there is no VAT imposition when:
MARGINAL I. Lease of residential unit with a monthly rental per unit exceeding
NOTES P15,000 but the aggregate of such rentals during the year do not exceed
P3,000,000.
II. Lease of commercial units regarded of monthly rental per unit.
A. B. C. D.
I OPT OPT OPT VAT
II VAT OPT VAT VAT
4. Plus Corp. is a VAT-registered dealer of liquors. On his sales in the Philippines,

his tax is:
A. Excise tax
B. Value-added tax
C. Percentage tax
D. None of these
5. To be subject to VAT under the TRAIN Law, the lease of residential units shall
have:
I. Monthly rental per unit of exceeding P15,000;
II. Gross annual rentals exceeding P3,000,000.
A. Both I and II are necessary
B. Both I and II are not necessary
C. Only I is necessary
D. Only II is necessary
6. Statement 1: A person subject to excise tax is also subject to value-added tax.

Statement 2: A person subject to percentage tax is also subject to value-added
tax.
B. Statement 1 is correct while Statement 2 is wrong
C. Both statements are wrong
D. Statement 1 is wrong while Statement 2 is correct
7. Atin Kape Cooperative is an agricultural cooperative which processes coffee

production of its members for sale to Commonwealth Foods Corporation, a
coffee processing company selling instant Café Barako. Atin Kape Cooperative
imported a coffee drier from abroad. After five years of active use Atin Kape
Cooperative sold the coffee drier to one of its members, Pepe Smith. Which of
the following is subject to VAT?
A. Importation of coffee drier
B. Sale of coffee to Commonwealth Foods Corporation
C. Sale of coffee by members to Atin Kape Cooperative
D. The sale of coffee drier to one of its members, Pepe Smith

8. A VAT-registered supplier sold goods amounting to P500,000 gross selling price
MARGINAL
to a government-controlled corporation during a particular quarter. Which of the
following statements is incorrect in relation to the sale of goods? NOTES
A. The sale is subject to withholding of final VAT.
B. The government-controlled corporation will withhold P25,000 final VAT.
C. The government-controlled corporation shall remit the withholding VAT to
the BIR within 10 days following the end of the month the withholding was
made.
D. The VAT-registered supplier may refuse the withholding of VAT as long as it
is willing to pay the full 12% VAT.
9. A VAT-registered supplier sold goods amounting to P 500 000 gross selling price
to a government-controlled corporation during a particular quarter. Which of the
following statements is incorrect in relation to the sale of goods?
A. The sale is subject to withholding of final VAT.
B. The government-controlled corporation will withhold P 25 000 final VAT
C. The government-controlled corporation shall remit withholding VAT to the
BIR within 10 days following the end of the month the withholding was made.
D. The VAT-registered supplier may refuse the withholding of VAT as long as it
is willing to pay the full 12% VAT.
10. Matsushita Panasonic Philippines is a domestic corporation engaged in the

manufacture and assembly of appliances. Kyushu Philippines is also a domestic
corporation incorporated by the same principals of Matsushita Panasonic.
Because of losses, Kyushu has to suspend operations. Matsushita Panasonic,
being the parent company, is proposing to buy all the products of Kyushu. Should
Kyushu be allowed 12% VAT on the proposed sale?
A. No, the parent company legally owns the assets of the subsidiary
corporation
B. Yes, since it is a sale in the ordinary course of business
C. Yes, since it is a transaction deemed sale
D. No, however, a capital gains tax will be charged at 6% on the market value of
the machineries
11. Identify the following statements as true or false.

I. On a sale of real property, if the VAT is not stated separately the deed of sale,
the consideration stated therein shall be deemed to be inclusive of the VAT,
hence the selling price net of VAT shall be determined, to arrive at the proper
tax base for the VAT.
II. On a sale of real property, the zonal or fair market value shall be considered
as net of VAT, hence such value shall be used to arrive at the proper tax base
of the VAT.
B. First statement is false but second statement is true.
C. Both statements are true
D. First statement is true but second statement is false
MARGINAL 9. Which of the following sales of real properties shall not be exempt from VAT?
NOTES A. Sale of real properties not primarily for sale to customers or held for lease in
the ordinary course of trade or business.
B. Sale of real properties utilized for low-cost and socialized housing.
C. Sale of real properties utilized for commercial purposes.
D. Sale of residential lot valued at P1,919,500 and below, or house and lot and
other residential dwellings valued at P3,199,500, and below

.
TAXATION
TAX19.M2015
VAT.TAX CREDITS,REFUNDS, AND TAX PREPARATION
MARGINAL
VATTAX.06 VAT TAX CREDITS NOTES
6.1 WITHHOLDING OF VAT

6.1.1 Creditable Withholding VAT
6.1.2 Final Withholding VAT
6.2 Creditable Withholding VAT

6.2.1 Non-resident persons who perform services in the Philippines are deemed to
be making sales in the course of trade or business, even if the performance of
services is not regular.
6.2.2 The recipient of the service is the one required to withhold and remit the VAT
to the BIR. Such VAT can be claimed by the recipient as Input tax.
6.3 Final Withholding VAT

6.3.1 The government or any of its political subdivisions, agencies/instrumentalities,
GOCCs shall before making payment on account of each purchase of goods
and/or services taxed at 12% deduct and withhold a final withholding VAT due
at the rate of 5% of the gross payment thereof.
6.3.2 The 5% final VAT shall represent the net VAT payable to the seller. The
remaining 7% effectively accounts for the standard input VAT of the seller, in
lieu of the actual input VAT.
6.3.3 The difference between actual input VAT and standard input VAT must be
closed to expense or cost account.
6.3.4 PROBLEM 1
A VAT registered business has the following transactions: Sales

of good to private entities, net of 12% VAT P 2,500,000
Purchases of goods sold to private entities, gross of 12% VAT 896,000
Sales to a GOCC, net of 12% VAT 1,000,000
Purchases of goods sold to GOCC, net of 12% VAT 700,000
1. How much is the withholding VAT?

A. 120,000
B. 70,000
TAX TAX19.M2014.Value Added Tax.Input Tax
C. 50,000
MARGINAL D. none of the above
NOTES
2. What is the treatment of the excess actual input VAT attributable to sales
to GOCC?
A. input tax credit
B. expense or cost
C. income
3. How much is the VAT payable?

A. 244,000
B. 204,000
C. 120,000
6.4 SPREAD OF VAT ON CAPITAL GOODS

6.4.1 Capital Goods refer to depreciable assets with estimated useful life greater
than one (1) year and used directly or indirectly in the production or sale of
taxable goods or services.
6.4.2 When is amortization or spread of VAT required?

A. Input tax on depreciable capital goods, the aggregate acquisition cost of
which (net of VAT) in a calendar month, exceeds P1,000,000 shall be
spread evenly over 60 months or their useful life, whichever is shorter.
B. When the aggregate acquisition cost (exclusive of VAT) of the existing or
finished capital goods purchased or imported during any calendar month
does not exceed P 1 M, the total input taxes will be allowable as credit
against output tax in the month of acquisition (100% deductible).
C. The aggregate acquisition cost of depreciable assets in any calendar

month refers to the total price, excluding the VAT, agreed upon for one or
more assets acquired and not on the payments actually made during the
calendar month.
I. If the capital good is sold within 5 years or prior to exhaustion of

input VAT thereon, the entire unamortized input tax on the capital
goods sold can be claimed as input tax credit during the
month/quarter when the sale was made.
II. The option to apply for refund/tax credit certificate of capital goods
has been withdrawn.
III. Construction in Progress (CIP) is a purchase of services. Input taxes
will be recognized in the month payment was made on the progress
billing. In the case where labor will be furnished by the contractor and
materials will be purchased by the contractee from other suppliers,

TAX19.M2014.Value Added Tax.Input Tax TAX
Input taxes will be recognized on labor when payment is made on the
MARGINAL
progress billings while input taxes will be recognized on materials at
the time the materials are purchased. NOTES
6.4.3 PROBLEM 18
Nueva Montana Corporation had the following data during the month of
February:
Case A Case B
Sales, net of VAT 1,900,000 2,800,000
Purchases of goods for sale, exclusive of VAT 1,260,000 1,600,000
Purchases of machines (VAT not included) 1,440,000 900,000
Machine life 6 years 3 years
1. The VAT payable in Case A:

A. 76,800
B. 73,920
C. 74,400
D. 154,080
2. The VAT payable in Case B:

A. 36,000
B. 141,000
C. 142,200
D. 300,000
3. The VAT payable in Case A if the life of the machine is 4 years only:
A. 73,920
B. 154,800
C. 73,200
D. 74,400
1. Kingsman Incorporated had the following data arising out of sales and
purchases in January, 2018:
Output taxes on sales P240,000

Input taxes on purchases of goods sold 238,200
Input taxes on machine bought with a useful life of 12 years 180,000
The value-added tax payable for the month:

A. P0
B. P1,800
C. P72,000
D. P60,000
2. Cirrolytix, a VAT taxpayer, had the following data for the first three months of
MARGINAL taxable year 2018:
NOTES
Data for the months of January February March
VAT not included:
Sales P1,150,000 P2,000,000 P1,850,000
Purchases 600,000 1,600,000 900,000
There was a deferred input tax of P20,000 at the end of the previous year. The
value-added tax payable at the end of March is:
A. P90,000
B. P180,000
C. P95,000
D. P114,000
3. After recognizing the value-added tax payable for the month of December 2017,
the books of accounts of Five Belo, a merchandising company, showed a debit
balance in the input taxes account of P12,000. Sales and purchases at total
invoice prices/costs for January 2018 were:
Sales P896,000
Sales returns and allowances 56,000
Sales discount 22,400
Purchases of:
Goods for sale, from VAT-registered persons 224,000
Goods for sale, from non-VAT registered persons 56,000
Services, from VAT-registered persons 21,280
Equipment (life of 10 years) from VAT-registered person 112,000
Importation of goods for sale:
Invoice cost, country of origin 20,000
Freight 500
Insurance 200
Customs duty 600
Excise tax 100
Other expenses prior to removal from customs custody 300
Other expenses after removal from customs custody 250
Operating expenses 30,000
The value-added tax payable for January 2018 is:

A. P34,716
B. P41,150
C. P40,716
D. P46,716

4. One Punch Corp., a VAT-registered stockbroker (not dealer in securities) who
MARGINAL
owns shares of stock as investments had the following selected data on gross
receipts, costs and expenses (value-added taxes not included), for January 2018: NOTES
Commissions received from buyers P200,000

Commissions received from sellers 300,000
Selling price of shares of stock traded in the LSE:
Machine Learning Company 400,000
AI Corporation 600,000
Cost of the shares sold:
Machine Learning Company 300,000
AI Corporation 500,000
Cost of supplies used in the brokerage business paid to VAT-taxpayers

amounted to P33,600, value-added tax included. Salaries of employees
amounted to P67,200.
The value-added tax payable and the other percentage tax due for the month are:
A. B. C. D.
VAT Payable 46,640 49,200 52,800 56,400
Percentage Tax due 10,000 20,000 40,000 5,000
5. Sale by a real estate dealer
Date of sale June 2, 2016

Consideration in the deed of sale 5,000,000
Fair market value in the assessment rolls 4,800,000
Zonal value 5,200,000
Payments on the consideration:
June 2, 2016 1,000,000
June 2, 2017 2,000,000
June 2, 2018 2,000,000
Installment output/input tax on payment of June 2, 2018:

A. 0
B. 124,800
C. 249,600
D. 624,000
6. A & G Construction, a VAT registered public works contractor had the following
transactions:
Sales of goodsContract price on government contracts P 3,000,000

Collections from private sector clients 2,000,000
Collections on government contracts 1,000,000

Purchases for services of a VAT-registered
MARGINAL
subcontractor (used in government contracts) 400,000
NOTES Purchases (used in private sector and government 300,000
contracts)
The tax payable for the quarter:

A. 50,000
B. 170,000
C. 120,000
D. None
7. An importer wishes to withdraw its importation from the Bureau of Customs. The
imported goods were subjected to a 10% customs duty in the amount of 12,500
and to other charges in the amount of 9,500. The value added tax due is:
A. 13,364
B. 17,640
C. 12,500
D. 13,750
VATTAX.08. VAT TAX PREPATION, FILING AND PAYMENT
8.1 VAT REGISTRATION
8.1.1 Mandatory Registration

A. Any person or entity who, in the course of his trade or business, sells
barters, exchanges, lease goods or properties and renders services subject
to VAT, if the aggregate amount of actual gross sales or receipts exceeds
P3,000,000 (P1,919,500 prior to TRAIN Law) for the past 12 months (other
than those that are exempt) OR there are reason to believe that the gross
sales or receipts for the next 12 months will exceed P3,000,000.
B. Radio and Television broadcasting companies whose annual gross
receipts of the preceding year exceeds P10,000,000
C. A person required to register as VAT taxpayer but failed to register.
I. Penalty for non-registration of those required to register as VAT

 He/she shall be liable to pay the tax as if he were a VAT-registered
person but he cannot avail the benefits of input tax credit for the
period he was not properly registered.
8.1.2 Optional Registration

A. Any person who is VAT-exempt or not required to register for VAT, may in
relation to 1a above, elect to be VAT-registered by registering with the RDO
that has jurisdiction over the head office of that person and pay the annual
registration fee of P500 for every separate and distinct establishment. Any

person who elects to register under optional registration shall not be
MARGINAL
allowed to cancel his registration for the next three (3) years.
NOTES
B. Any person who is VAT registered but enters into transactions which are
exempt from VAT (mixed transactions) may opt that the VAT apply to his
transactions which would have been exempt under Section 109 of the Tax
code.
C. Franchise grantees of radio and/or television broadcasting whose annual

gross receipts of the preceding year do not exceed ten million pesos
(P10M) derived from business covered by the law granting the franchise
may opt for VAT registration. This option once exercised shall be
irrevocable.
8.2 VAT PAYMENT
8.2.1 Invoicing Requirements

A. VAT registered person shall issue:
I. A VAT invoice for every sale, barter or exchange of goods or
properties; and
II. A VAT official receipt for every lease of goods or properties and for
every sale, barter or exchange of services;
8.2.2 Single invoice/receipt involving VAT and Non-VAT transactions:

A. A VAT registered taxpayer may issue a single invoice/receipt involving
VAT and Non-VAT transactions provided that the invoice or receipt shall
clearly indicate the breakdown of the sales 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.
8.2.3 Separate invoices/receipts involving VAT and Non-VAT transactions:

A. A VAT registered taxpayer may issue separate invoices/receipts for the
taxable, exempt and zero-rated component of its sales provided that if the
sales is exempt from VAT, the term “VAT-EXEMPT SALE” shall be written
MARGINAL or printed prominently on the invoice or receipt and if the sales is subject
NOTES to Zero percent (0%) VAT, the term “ZERO-RATED SALE” shall be written or
printed prominently on the invoice or receipt.
8.2.4 Consequences of issuing an erroneous invoice or official receipt

A. If a person who is not a VAT registered person issues an invoice or receipt
showing his/her TIN followed by the word VAT, the Non-VAT person shall
be liable to:
I. The percentage taxes applicable to his transactions.
II. The VAT due on the transactions without the benefit of any tax credit;
and
III. A 50% surcharge.
B. If a VAT registered person issues a VAT invoice or 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 VAT.
8.3 FILLING OF VAT RETURN AND PAYMENT OF TAX
8.3.1 Time for filing and payment –

a. Monthly VAT declaration - Within 20 days after the end of each month.
b. Quarterly Return - Within 25 days after the end of the quarter.
8.3.2 Place of filing and payment – Any authorized bank where the Revenue District
Officer is located.


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.
TAXATION
TAX19.M2015 VATTAX
VALUE ADDED TAX. VAT Tax Preparation, Filing and Payment
MARGINAL
VATTAX.08. VAT TAX PREPATION, FILING AND PAYMENT
NOTES
8.1 VAT REGISTRATION
8.1.1 Mandatory Registration

A. Any person or entity who, in the course of his trade or business, sells
barters, exchanges, lease goods or properties and renders services subject
to VAT, if the aggregate amount of actual gross sales or receipts exceeds
P3,000,000 (P1,919,500 prior to TRAIN Law) for the past 12 months (other
than those that are exempt) OR there are reason to believe that the gross
sales or receipts for the next 12 months will exceed P3,000,000.
B. Radio and Television broadcasting companies whose annual gross
receipts of the preceding year exceeds P10,000,000
C. A person required to register as VAT taxpayer but failed to register.
I. Penalty for non-registration of those required to register as VAT

 He/she shall be liable to pay the tax as if he were a VAT-registered
person but he cannot avail the benefits of input tax credit for the
period he was not properly registered.
8.1.2 Optional Registration

A. Any person who is VAT-exempt or not required to register for VAT, may in
relation to 1a above, elect to be VAT-registered by registering with the RDO
that has jurisdiction over the head office of that person and pay the annual
registration fee of P500 for every separate and distinct establishment. Any
person who elects to register under optional registration shall not be
allowed to cancel his registration for the next three (3) years.
B. Any person who is VAT registered but enters into transactions which are
exempt from VAT (mixed transactions) may opt that the VAT apply to his
transactions which would have been exempt under Section 109 of the Tax
code.
C. Franchise grantees of radio and/or television broadcasting whose annual

gross receipts of the preceding year do not exceed ten million pesos
(P10M) derived from business covered by the law granting the franchise
may opt for VAT registration. This option once exercised shall be
irrevocable.

TAX TAX19.M2014.VATTAX. VAT Tax Preparation, Filing and Payment
MARGINAL
NOTES
8.2 VAT PAYMENT
8.2.1 Invoicing Requirements

A. VAT registered person shall issue:
I. A VAT invoice for every sale, barter or exchange of goods or
properties; and
II. A VAT official receipt for every lease of goods or properties and for
every sale, barter or exchange of services;
8.2.2 Single invoice/receipt involving VAT and Non-VAT transactions:

A. A VAT registered taxpayer may issue a single invoice/receipt involving
VAT and Non-VAT transactions provided that the invoice or receipt shall
clearly indicate the breakdown of the sales 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.
8.2.3 Separate invoices/receipts involving VAT and Non-VAT transactions:

A. A VAT registered taxpayer may issue separate invoices/receipts for the
taxable, exempt and zero-rated component of its sales provided that if the
sales is exempt from VAT, the term “VAT-EXEMPT SALE” shall be written
or printed prominently on the invoice or receipt and if the sales is subject
to Zero percent (0%) VAT, the term “ZERO-RATED SALE” shall be written or
printed prominently on the invoice or receipt.
8.2.4 Consequences of issuing an erroneous invoice or official receipt

A. If a person who is not a VAT registered person issues an invoice or receipt
showing his/her TIN followed by the word VAT, the Non-VAT person shall
be liable to:
I. The percentage taxes applicable to his transactions.
II. The VAT due on the transactions without the benefit of any tax credit;
and

TAX19.M2014.VATTAX. VAT Tax Preparation, Filing and Payment TAX
III. A 50% surcharge.
MARGINAL
B. If a VAT registered person issues a VAT invoice or official receipt for a
VAT-exempt transaction but fails to display prominently on the invoice or NOTES
receipt the term “VAT EXEMPT SALE”, the issuer shall be liable to VAT.
8.3 FILLING OF VAT RETURN AND PAYMENT OF TAX
8.3.1 Time for filing and payment –

a. Monthly VAT declaration - Within 20 days after the end of each month.
b. Quarterly Return - Within 25 days after the end of the quarter.
8.3.2 Place of filing and payment – Any authorized bank where the Revenue District
Officer is located.

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.
TAX “Innovating
Educational
BUSINESS TAX Services”
KHEEN V. BATINGAL
REVIEW NOTES
I. INTRODUCTION TO BUSINESS TAXATION

a. Concept of consumption and consumption tax
i. Consumption is the acquisition or utilization of goods or services
by any person.
ii. The utilization of goods or services may be through purchase,
exchange, or other means.
iii. The utilization is subject to consumption tax.
b. Rationale of consumption tax

i. Promotes savings formation – some people wanting to avoid
consumption tax tends to save their income than spend it for
consumption.
ii. Rationalizes the benefit received theory – people receiving
more by way of income tends to spend more, thus should pay
more taxes. Consumption tax is a tax on everybody, but people
who spend more are burdened to pay more tax.
iii. Wealth redistribution – Rich people, having the capacity to
spend more, are taxed more, to redistribute wealth to the less
privileged members of the society.
c. Types of consumption
i. Destination principle – taxation power being inherently
territorial, only goods and services destined for consumption in
the Philippines are subject to consumption tax while those
destined for consumption abroad are not subject to
consumption tax.
ii. Cross-border principle – goods that cross the border destined
for foreign countries are not charged consumption taxes.
Type of General
Buyer Seller Term
Consumption Status
Foreign Resident Exportation Exempt
Non-Resident
Consumption Non-Resident Foreign Sales Non-Taxable
Domestic Resident Domestic Sales
Resident Taxable
Consumption Non-Resident Importation

AFAR BUSINESS TAX. Review notes
d. Types of domestic consumption as to source
i. Importation – purchases from abroad from non-residents
1. Exempt importation
2. Taxable importation
a. VAT on importation
b. Final withholding VAT
ii. Domestic sales – purchases from resident sellers
1. Exempt sales
2. Taxable sales
a. Subject to percentage tax
b. VATable consumption
i. VATable sales
ii. VATable receipts
e. Types of business taxes

i. Percentage tax – tax of various rates from 0% to 30%
ii. Value Added tax – a consumption tax of 12%
iii. Excise tax – an ad valorem or specific tax, or both, which is
imposed in addition to VAT or percentage tax, only on certain
goods or services
f. Taxability of consumptions
i. Exempt consumption – neither subject to percentage tax nor
value added tax
1. Based on human necessity
2. Based on out of scope of tax
3. Based on tax incentive
4. Based on international comity
ii. Services specifically subject to percentage tax – exclusively

subject to specific percentage tax, and will never be subjected
to VAT
iii. Vatable consumption – may be subject to general percentage

tax or value added tax depending upon circumstances provided
by the NIRC

g. Nature of business tax
i. Relative consumption tax
ii. Indirect tax
iii. Privilege tax
iv. National tax
h. Comparison of business taxes

Percentage
VAT Excise tax
tax
Timing of Production/
Sale Sale
imposition Importation
Nature Primary tax Primary tax Additional tax
Only
Subject Any business, Any business,
producers or
businesses in general in general
importers
Business or
Taxpayers Business only Business only
non-business
Usual Large Small Large or small
taxpayers businesses businesses businesses
Accounting Asset or
Liability Expense
treatment Liability
i. Concept and elements of business

i. Concept of business – Business refers to a habitual
engagement in a commercial activity involving the sale of goods
or services for a profit.
ii. Elements of business
1. Habitual engagement – there must be REGULARITY
IN TRANSACTIONS to construe the presence of a
business
a. Privilege stores/tiangge – the store should
engage in a business activity for a cumulative
period of not more than 15 days, otherwise,
they shall be considered regular taxpayers
subject to business taxes and income tax
b. Exception to the regularity rule – sale of
services by NON-RESIDENT PERSONS are
PRESUMED made in the course of business
regardless the sale is regular or isolated
2. Commercial activity – engagement in the sale of

goods or services for a PROFIT, however actual profit
is NOT A REQUISITE for imposing business tax

Not businesses:
a. Government agencies & instrumentalities
b. Non-profit organizations or associations
c. Employment
d. Directorship in a corporation
e. Business for mere subsistence
j. Concept and types of business taxpayers

i. Concept – the taxable person in business taxation includes any
individual, trust, estate, partnership, corporation, joint venture,
cooperative or association
Rules:
1. Each person, natural or juridical, is a taxable person for
purposes of business taxation.
2. Husband and wife are separate taxpayers.
3. A parent company is a separate taxable person with its
subsidiary company and each subsidiary company is a
taxable person.
4. Home office and branch offices of the same businesses
are one, not separate, taxable person.
5. Proprietorship is not a juridical entity. Its sales and
receipts is subject to business tax to the individual
proprietor. Multiple proprietorship businesses of the
same individual are all taxable to that individual as the
taxpayer.
Note: Income tax exemption does not equate to business tax

exemption.
ii. Types of business taxpayers

1. VAT taxpayers – pay 12% VAT
2. Non-VAT taxpayers – pay a 1% general percentage tax
k. Business activities and tax bases

i. Business activities enumerated in the NIRC
1. Sale or exchange of goods or properties – goods or
properties shall mean all tangible and intangible objects
which are capable of pecuniary estimation and shall
include:

a. Real properties held primarily for sale to
customers or held for lease in the ordinary
course of trade or business;
b. 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;
c. The right or the privilege to use in the
Philippines of any industrial, commercial or
scientific equipment;
d. The right or the privilege to use motion picture
films, tapes and discs; and
e. Radio, television, satellite transmission and
cable television time. (Sec. 106 (A)(1), NIRC)
2. Sale or exchange of services – means the

performance of all kinds of services in the Philippines
for others for a fee, remuneration or consideration,
including those performed or rendered by the following:
a. Construction and service contractors
b. Stock, real estate, commercial, customs and
immigration brokers
c. Lessors of property, whether personal or real
d. Warehousing services
e. Lessors or distributors of cinematographic films
f. Persons engaged in milling processing,
manufacturing or repacking goods for others
g. Proprietors, operators or keepers of hotels,
motels, rest houses, pension houses, inns,
resorts
h. Proprietors or operators of restaurants,
refreshment parlors, cafes and other eating
places, including clubs and caterers
i. Dealers in securities
j. Lending investors
k. Transportation contractors on their transport of
goods or cargoes, including persons who
transport goods or cargoes for hire another
domestic common carriers by land relative to
their transport of goods or cargoes
l. 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

m. Sales of electricity by generation companies,
transmission by any means entity, and
distribution companies, including electric
cooperatives
n. Services of franchise grantees of electric
utilities. telephone and telegraph, radio and
television broadcasting and all other franchise
grantees
o. Non-life insurance companies (except their
crop insurances), including surety, fidelity,
indemnity, and bonding companies
p. Similar services regardless of whether or not
the performance thereof calls for the exercise
or use of the physical or mental faculties
q. 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
r. The lease of the use of, or the right to use of
any industrial, commercial or scientific
equipment
s. The supply of scientific, technical, industrial or
commercial knowledge or information
t. 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 or any such knowledge
or information
u. The supply of services by a nonresident person
or his employee in connection with the use of
property or rights belonging to, or the
installation or operation of any brand,
machinery or other apparatus purchased from
such nonresident person
v. 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
w. The lease of motion picture films, films, tapes
and discs; and

x. The lease or the use of or the right to use radio,
television, satellite transmission and cable
television time. (Sec. 108 (A), NIRC)
ii. Tax basis

1. Sale or exchange of goods or properties – Gross
selling price
a. Concept – 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 goods, barter or
exchange of goods or properties.
b. Allowable deductions:
i. Discounts determined and granted at
the time of sale
ii. Sales returns and allowances
2. Sale or exchange of services or lease of properties

– Gross receipts
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
advanced payments actually or constructively
received during the taxable period for the
services performed or to be performed for
another person, excluding VAT.
b. Other considerations on gross receipts

i. Constructive receipt – included in the
tax base
ii. Agency monies – excluded from the
tax base
iii. Insurance proceeds on damaged
assets – excluded from the tax base
iv. Withholding taxes – included in the
tax base (added back)

3. Determining the appropriate tax base based on the
business taxpayer
a. For non-VAT taxpayers
Invoice price = tax base
Thus,
Percentage tax = invoice price x 1%
b. For VAT taxpayers

Invoice price = tax base + VAT
Suppose:
100% Tax base + 12% VAT = 112% Invoice
price
Then:
VAT (Output) = Invoice price x 12%/112%
or
VAT (Output) = Tax base x 12%
l. Business tax accounting period and reporting

i. Business tax accounting period
1. The length of accounting period for business taxes is
one quarter. (Secs. 114(A) and 128(A)(1), NIRC). This
is referred to as a taxable quarter.
2. The taxable quarter is composed of three months which
is synchronized with the taxable year of the taxpayer for
purposes of income tax.
ii. Business tax reporting

1. Types of business tax returns
a. VAT taxpayers
i. Monthly tax return – BIR Form 2550M
ii. Quarterly tax return – BIR Form 2550Q
b. Non-VAT taxpayers
i. Monthly tax return – Not applicable
2. Reporting of VAT taxpayers

a. 1st month – within 20 days following the close
of the 1st month, using BIR Form 2550M

b. 2nd month – within 20 days following the close
of the 2nd month, using BIR Form 2550M
c. 3rd month – within 25 days following the close
of the taxable quarter, using BIR Form 2550Q
Note: Effective January 1, 2023, the filing and

payment of VAT shall be done within 25 days
following the close of each taxable quarter.
Monthly payments shall be abandoned.
3. Reporting of Non-VAT taxpayers – shall be filed

within 25 days following the close of each taxable
quarter, using BIR Form 2551Q.
4. Short period returns – any person who retires from

business with due notice to the BIR office where the
taxpayer (head office) is registered or whose VAT
registration has been cancelled shall file a final quarterly
return and pay the tax due thereon within 25 days from
the end of the month when the business ceased to
operate or when the VAT registration had been officially
cancelled.
Provided, however, that subsequent monthly

declarations/quarterly returns are still required to be
filed if the results of the winding up of the
affairs/business of the taxpayer reveal taxable
transactions.
m. Transition from non-VAT to VAT

The general rule is that the 12-month totals of monthly sales or receipts
from the current month shall be monitored if it exceeds the P3M VAT
threshold.
Once the threshold is exceed in any particular month covering

the 12-month totals, percentage tax shall still be paid on that month, but
he is subjected to VAT prospectively starting the following month when
the threshold was exceed, and shall be required to update the
registration from non-VAT to VAT on or before the last day of the month
following the month the threshold was exceeded, in order to avail the
VAT system.

Generally, a business is subjected to both income tax and
business tax, unless the contrary is provided. Under individual income
taxation, there are an income tax options to which the business shall
choose that also affects the business tax to be reported/paid, which are:
i. Regular income tax option – (also applicable for corporate
taxpayers) income and percentage taxes are separately
reported and paid.
1. Month threshold exceeded – pay percentage tax for the
month
2. Month following threshold exceeded
a. Update registration from non-VAT to VAT
b. Pay VAT using VAT system
ii. 8% Income tax option – income and percentage taxes are paid
under singular rate of 8%.
1. Month threshold exceeded
a. 8% income tax option disqualified – previous
8% tax payments shall be attributed solely as
income tax payments
b. Recompute percentage tax from beginning of
taxable year to the month when the threshold
was exceeded and pay the percentage tax due
II. VALUE-ADDED TAX

a. Nature and characteristics of value-added tax
i. Nature and characteristics of VAT
1. Definition – VAT is a tax on consumption levied on the
sale, barter, exchange or lease of goods or properties
and services in the Philippines and on importation of
goods into the Philippines. The seller is the one
statutorily liable for the payment of the tax, but the
amount of the tax may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties or
services. However, in the case of importation, the
importer is the one liable for the VAT.

2. Nature and characteristics
a. Tax on value added
b. Sales tax
c. Tax on consumption
d. Indirect tax
e. Tax credit method
ii. The VAT Model and its concept

Output VAT XXX,XXX
Less: Creditable Input VAT XXX,XXX
VAT Payable XXX,XXX
Less: Tax Credits XXX,XXX
VAT Still Due/(Overpayment) XXX,XXX
b. Persons subject to value-added tax

i. Coverage – by residual definition, it covers all vatable sales of
goods, properties, services, or lease of properties by VAT
taxpayers.
Not covered:
1. Totally exempt sales
2. Receipts from services specifically subject to
percentage tax
ii. VAT taxpayers

1. VAT-registered persons
2. VAT-registrable persons
iii. VAT threshold

1. Special threshold – P10,000,000, franchise grantees of
radio or television
2. General threshold – P3,000,000, residual (all other VAT
taxpayers other than franchise grantees of radio or
television)
c. Transactions subject to 12%, 0% and withholding VAT and/or

exempt from value-added tax
i. Sales subject to special VAT rules
1. Sales to government – reduced VAT payable due to
withholding of VAT by payor government/GOCC

2. Zero-rated sales – no output VAT but with claimable
input VAT
3. Exempt sales – no output VAT and no claimable input
VAT
4. Other rules on value added tax

a. Classification rules
i. Sale of goods to a non-resident buyer
abroad is ZERO-RATED, even if it
involves exempt goods.
ii. Sale of vatable goods or services is
normally a regular vatable sale, except
when the sale is:
1. made to government or GOCC
2. Considered an export or
effectively zero-rated
iii. Sale of exempt goods and services to
the government or GOCC is still
exempt sales.
b. Other sales subject to VAT

i. Sales of registrable persons – subject
to VAT despite their non-registration as
VAT taxpayers but no input VAT credit
is allowed
ii. Sales of non-VAT taxpayers who
issues VAT invoice or receipt – subject
to VAT without the benefit of input VAT
plus 50% surcharge and the usual 1%
percentage tax
iii. Exempt sales billed by VAT taxpayers
as regular sales or failed to indicate
‘exempt’ – considered regular sales
subject to VAT

ii. Classification rules on sales
Zero-rated Sales to
Exempt sales Regular sales
sales government
12% of 12% of
Output VAT None Zero
sales/receipts sales/receipts
Claimable Actual input Actual input Actual input
None
input VAT VAT paid VAT paid VAT paid
Zero or Positive or Positive or
VAT payable None
Negative1 Negative2 Negative3
1. Zero, if the Actual Input VAT Paid is converted to either
Claim for Tax Refund or Tax Credit Certificate. Negative
if not tax refund or TCC claimed, may be credited
against other output taxes.
2. Reduced VAT payable due to the withholding of 5%
creditable withholding VAT, a form of advanced
collection of VAT by the government/GOCC to be
remitted to the BIR
3. Positive, amount shall be paid to BIR; Negative, claimed
as Input VAT Carryover for subsequent month
iii. Regular output VAT

1. Sale of vatable goods
a. Tax base – gross selling price (gross sales),
unless unreasonably lower, exclusive of VAT
(See topic Introduction to business taxation,
subtopic Business activities and tax bases)
b. Unreasonably lower selling price, concept –

when it is lower by more than 30% of the actual
market value of the goods sold. The fair value
of the goods shall be determined by the
Commissioner of the Internal Revenue.
Exception: If sale is made to the government,

the output VAT shall be based on the actual
selling price.
c. Timing of output VAT reporting – reported in

the month of sale

2. Sale of vatable services
a. Tax base – gross receipts, exclusive of VAT
b. Timing of output VAT reporting – reported in

the month of collection
3. Sale of vatable properties

a. Tax base – gross selling price = higher of the:
i. Consideration or selling price*
ii. Fair value of the property** = higher of
the:
1. Zonal value
2. Fair value per assessor’s
office
* presumed INCLUSIVE of VAT
** presumed EXCLUSIVE of VAT
b. Timing of output VAT reporting – month of

sale or by installment method
c. Installment reporting of output VAT on real

properties – if the Initial Payments from such
sale does not exceed 25% of the selling price
d. Initial Payment, concept – all payments

received during the year of sale, which includes
down payment and installment payments
during the year of sale.
e. Sale of property by a realty dealer on a

deferred payment basis – not an installment
plan, which shall be treated as a cash sale. VAT
shall be reported on the month of sale.

f. Sale of properties considered “ordinary
assets” – even if the real property is not
primarily held for sale to customers or held for
lease in the ordinary course of business but the
same is used in the trade or business of the
seller (PPE), the same is still subject to VAT
being a transaction incidental to the taxpayer’s
main business
g. Interest and penalties – interest and penalties

actually or constructively received by the seller
are also subject to VAT
h. Sale of property not in the ordinary course

of business (Capital assets) – exempt from
VAT
4. Transaction deemed sales

a. Concept – there is no actual sale of goods took
place but such transactions are subject to VAT
b. Transaction deemed sales (Sec. 106(B) and

(C), NIRC, as amended)
i. 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;
ii. Distribution or transfer to:
1. Shareholders or investors as
share in the profits of the VAT-
registered persons; or
2. Creditors in payment of debt;
iii. Consignment of goods if actual sale is
not made within sixty (60) days
following the date such goods were
consigned;
iv. Retirement from or cessation of
business, with respect to inventories of
taxable goods existing as of such
retirement or cessation; and,
v. Changes in or cessation of status of a
VAT-registered person.

c. Transfer, use or consumption not in the
ordinary course of business – this occurs
when vatable ordinary assets are used for
purposes other than their intended purpose,
such as when:
i. Goods or properties held for sale are
no longer sold but are transferred or
disposed of by other means other than
sale.
ii. Properties originally intended for use
are no longer used but are transferred,
disposed of or exchanged with other
properties.
d. Retirement or cessation of business

i. General rule: Business dissolution is
deemed sale
1. Change of ownership of the
business
a. Incorporation of a sole
proprietorship
b. Sale by a proprietor of
his entire business
2. Dissolution of a partnership
ii. Not business dissolution

1. Change in controlling
shareholder
2. Change in trade or corporate
name
3. Change in business address
iii. Exception to the business

dissolution rule
1. Merger or consolidation –
there is business dissolution
but not a deemed sale under
the law

2. Cessation of status as VAT-
registered person – there is
no business dissolution but is
treated as a deemed sale
e. Cessation of status as VAT-registered

person
Goods or properties originally intended
for sale or use in the business, and capital
goods existing as of the occurrence of any of
the following shall be deemed sold:
i. Change of business activity from VAT-
taxable status to VAT-exempt status
ii. Approval of a request for cancellation
of registration due to reversion to
exempt status
iii. Approval of request for cancellation of
registration due to a desire to revert to
exempt status after the lapse of 3
consecutive years from the time of
registration by a person who voluntarily
registered despite being exempt
iv. Approval of a request for cancellation
of registration of one who commenced
business with the expectation of gross
sales or receipt exceeding P3,000,000
but who failed to exceed this amount
during the first twelve months of
operations
f. Output tax on transaction deemed sales –

based on the market value of the goods sold as
of the occurrence of the deemed sale
transaction.
Exception: In the case of retirement or

cessation of business, it shall be based on the
acquisition costs or the current market price of
the goods or properties, whichever is LOWER.

g. Invoicing requirement for subsequent sale
of goods or properties deemed sold – the
subsequent sale of goods or properties
deemed sold shall not be subject to VAT. The
seller shall indicate the sales invoice number
wherein the output tax on the deemed sale was
imposed and the corresponding tax paid on the
items sold.
NOTE: Deemed sales rules apply to VAT

taxpayers only
iv. Zero-rated sales

1. Concept – with a zero output VAT and a claimable input
VAT, the VAT due would be negative. As such, the law
allows taxpayer the privilege to claim the input VAT as:
a. Tax refund, or
b. Tax credit against other internal revenue taxes
c. Claimable input VAT against output VAT on
other vatable sales
2. Zero-rated sale of goods

a. Export sales
i. Coverage
1. The sale and actual shipment
of goods from the Philippines
to a foreign country,
irrespective of any shipping
arrangement that may be
agreed upon which may
influence or determine the
transfer of ownership of the
goods so exported
Requisites:
a. paid for in acceptable
foreign currency or its
equivalent in goods or
services, and

b. accounted for in
accordance with the
rules and regulations
of the Bangko Sentral
ng Pilipinas (BSP)
2. The sale of goods, supplies,

equipment and fuel to persons
engaged in international
shipping or international air
transport operations:
Provided, That the goods,
supplies, equipment and fuel
shall be used for international
shipping or air transport
operations.
ii. Export sales which are now subject

to 12% VAT:
1. 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);
packaging materials to export-
oriented enterprise whose
export sales exceed seventy
percent (70%) of total annual
production; and,

3. Those considered export sales
under Executive Order NO.
226, otherwise known as the
“Omnibus Investment Code of
1987”, and other special laws
iii. Conditions for the shift from 0% to

12% VAT
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 its
effectivity, 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 21, 2017 shall
be fully paid in cash by
December 31, 2019.
b. Effectively zero-rated sales – sales to

persons or entities whose exemption under
special laws or international agreements to
which the Philippines is a signatory
i. Requirement for effective zero-
rating – requires prior application with
the appropriate BIR office. Without
approved application, the transaction
otherwise entitled to zero-rating shall
be considered exempt.

ii. Validity of approved application –
prospective effect from the date of
receipt by the BIR until December 31 of
the same year and renewable every
year thereafter
iii. Where to file application

1. Large taxpayers – Large
taxpayer audit and
investigation divisions I and II
(LTAID I and II), BIR national
office
2. Other taxpayers – Audit
information, tax exemption and
incentives division (AITEID),
Assessment service
iv. VAT reciprocity exemption on

embassies and their personnel –
qualified foreign embassies and their
qualified personnel and qualified
dependents of the latter are issued
VAT exemption certificates (VEC) or
VAT exemption identification cards
(VEIC)
c. Sales to offshore gaming licensees subject

to gaming tax – pursuant to Republic Act No.
11590
3. Zero-rated sale of services

a. Coverage
i. Services other than those mentioned in
the preceding paragraph, rendered to a
person engaged in business
conducted outside the Philippines or to
a nonresident person not engaged in
business who is outside the Philippines
when the services are performed, the
consideration for which is paid for in
acceptable foreign currency and
accounted for in accordance with the

rules and regulations of the Bangko
ii. 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;
iii. Services rendered to persons engaged
in international shipping or
international air transport operations,
including leases of property for use
thereof: Provided, That these services
shall be exclusive for international
shipping or air transport operations;
iv. Transport of passengers and cargo by
domestic air or sea vessels from the
Philippines to a foreign country; and
v. Sale of power or fuel generated
through renewable sources of energy
such as, but not limited to, biomass,
solar, wind, hydropower, geothermal,
ocean energy, and other emerging
energy sources using technologies
such as fuel cells and hydrogen fuels.
vi. Services rendered to offshore gaming
licensees subject to gaming tax
b. Services which are now subject to 12% VAT

i. 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

ii. Services performed by subcontractors
and/or contractors in processing,
converting, or manufacturing goods for
an enterprise whose export sales
exceed seventy percent (70%) of total
annual production;
c. Conditions for the shift from 0% to 12% VAT

i. 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 its effectivity, 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
ii. All pending VAT refund claims as of
December 21, 2017 shall be fully paid
in cash by December 31, 2019.
v. Exempt sales
1. Concept – Exempt sales will not be subject to output
VAT. Consequently, the seller is also not allowed to
credit input VAT. The input VAT traceable to exempt
sales is part of costs or expenses of the seller. (Note:
Not deductible against gross income subject to regular
tax.)
2. Coverage
a. Exempt sales of goods, services or properties
– totally exempt from business tax (VAT and
percentage tax)
b. Services specifically subject to percentage tax
– VAT exempt only

3. Exempt sales (including importation) pursuant to
NIRC, as amended
a. Sale or importation of agricultural and marine
food products
i. in their original state, livestock and
poultry of or kind generally used as, or
yielding or producing foods for human
consumption; and breeding stock and
genetic materials therefor.
ii. Agricultural and marine food products

shall be considered in their original
state even if they have undergone the
simple processes of preparation or
preservation for the market, such as
1. freezing,
2. drying,
3. salting,
4. broiling,
5. roasting,
6. smoking
7. stripping
iii. Also considered in their original state

1. Polished and/or husked rice,
2. corn grits,
3. raw cane sugar and molasses,
4. ordinary salt and
5. copra
b. Sale or importation of fertilizers; seeds,

seedlings and fingerlings; fish, prawn,
livestock and poultry feeds, including
ingredients, whether locally produced or
imported, used in the manufacture of
finished feeds
Exception: specialty feeds for race horses,

fighting cocks, aquarium fish, zoo animals and
other animals generally considered as pets

c. Importation of personal and household
effects
Conditions for exemption:

i. Personal and household effects shall
belong to the residents of the
Philippines returning from abroad and
nonresident citizens coming to resettle
in the Philippines
ii. The goods are exempt from customs
duties under the Tariff and Customs
Code of the Philippines
d. Importation of professional instruments and

implements, tools of trade, occupation or
employment, wearing apparel, domestic
animals, and personal and household
effects
i. Conditions for exemption:

1. The goods belong 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
2. The quantities and the class of
the goods are suitable to the
profession, rank or position of
the persons importing said
items, for their own use and
not for barter or sale
3. The goods are accompanied
by such persons, or arriving
within a reasonable time
4. Only upon the production of
satisfactory evidence that such
persons are actually coming to
settle in the Philippines and the
goods are brought from their
former place of abode

ii. Not included in the exemption –
vehicles, vessels, aircrafts,
machineries and other similar goods
for use in manufacture shall be subject
to duties, taxes and other charges
e. Services specifically subject to percentage

tax
NOTE: These are considered VAT Exempt

transactions but are not totally exempt from
business tax (See topic Percentage Tax)
f. Services by agricultural contract growers

and milling for others of palay into rice, corn
into grits and sugar cane into raw sugar
g. Medical, dental, hospital and veterinary

services except those rendered by
professionals
h. Educational services rendered by

i. private educational institutions, duly
accredited by
1. the Department of
Education(DepED)
2. the Commission on Higher
Education (CHED)
3. the Technical Education and
Skills Development Authority
(TESDA)
ii. government educational institutions
i. Services rendered by individuals pursuant to an

employer-employee relationship

j. Services rendered by regional or area
headquarters established in the Philippines
by multinational corporations which act as
supervisory, communications and coordinating
centers for their affiliates, subsidiaries or
branches in the Asia-Pacific Region and do not
earn or derive income from the Philippines
k. Transactions which are exempt under

international agreements to which the
Philippines is a signatory or under special
laws, except those under Presidential Decree
No. 529
l. Agricultural cooperatives duly registered with

the Cooperative Development Authority, in their
i. Sales to their members as well as sale
of their produce, whether in its original
state or processed form, to non-
members; and,
ii. 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
m. Gross receipts from lending activities by

credit or multi-purpose cooperatives duly
registered with the Cooperative Development
Authority;
n. Sales by non-agricultural, non- electric and

non-credit cooperatives duly registered with
the Cooperative Development Authority
Requisites:
i. The share capital contribution of each
member does not exceed Fifteen
thousand pesos (P15,000)
ii. Regardless of the aggregate capital
and net surplus ratably distributed
among the members;

o. Export sales by persons who are not VAT-
registered
p. 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 the selling price of not more than Two
million pesos (P2,000,000); Provided, further,
That every three (3) years thereafter, the
amount herein stated shall be adjusted to its
present value using the Consumer Price Index,
as published by the Philippine Statistics
Authority (PSA)
i. Socialized housing – housing

programs and projects covering
houses and lots or home lots only
undertaken by the Government or the
private sector for the
UNDERPRIVILEGED AND
HOMELESS CITIZENS which shall
include sites and services
development, long-term financing,
liberated terms on interest payments,
and such other benefits in accordance
with the provisions of RA No. 7279,
otherwise known as the “Urban
Development and Housing Act of
1992” and RA No. 7835 and RA No.
8763.
It also refers to projects intended for

the underprivileged and homeless
wherein the housing package selling
price is within the lowest interest rates
under the Unified Home Lending
Program (UHLP) or any equivalent
housing program of the Government,
the private sector or non-government
organizations.

ii. The adjusted 2011 value of
P2,000,000 using 2010 CPI values –
P2,559,300
iii. Sale of adjacent lots – 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 the threshold
amount.
Adjacent residential lots, although

covered by separate titles and/or
separate tax declarations, when sold or
disposed to one and the same buyer,
whether covered by one or separate
Deed of Conveyance, shall be
presumed as a sale of one residential
lot.
q. Lease of a residential unit with a monthly

rental not exceeding Fifteen thousand pesos
(₱15,000)
i. Coverage – regardless of aggregate
rentals received by the lessor during
the year
Monthly rental/unit Aggregate annual rentals Taxability
Not exceeding P15,000 Regardless Totally exempt
Exceeding P15,000 Not exceeding P3,000,000 1% percentage tax
Exceeding P15,000 Exceeding P3,000,000 VAT
Some units not exceeding All not exceeding P15,000 Totally exempt
P15,000 and some
exceeding P15,000 All exceeding P15,000 Follow above test
ii. Residential units – apartments and

houses and lots used for residential
purposes, and buildings or parts or
units thereof used solely as dwelling
places (e.g., dormitories, rooms and
bed spaces) except motels, motel

iii. The term UNIT shall mean
1. an apartment unit – in the
case of apartments
2. a house – in the case of
residential houses
3. per person – in the case of
dormitories, boarding houses
and bed spaces
4. per room – in the case of
rooms for rent
r. Sale, importation, printing or publication of

books, and any newspaper, magazine,
journal, review bulletin, or any such
educational reading material covered by the
UNESCO Agreement on the Importation of
Educational, Scientific and Cultural Materials,
including the digital or electronic format thereof

i. The materials enumerated are not
devoted principally to the publication of
paid advertisements
ii. The materials enumerated are
compliant with the requirements set
forth by the National Book
Development Board pursuant to RA
No. 8047
s. Transport of passengers by international

carriers
t. Sale, importation or lease of passenger or

cargo vessels and aircraft, including engine,
equipment and spare parts thereof for domestic
or international transport operations
u. Importation of fuel, goods and supplies by

persons engaged in international shipping
or air transport operations

Condition for exemption: the fuel, goods, and
supplies shall be used for international shipping
v. Services of bank, non-bank financial

intermediaries performing quasi-banking
functions, and other non-bank financial
intermediaries
Note: These are considered VAT Exempt

w. 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 (See topic Special Laws)
x. Transfer of property under the following tax-

free exchanges
i. Merger or consolidation
ii. Initial acquisition of control (See topic
Income Taxation, subtopic Dealings in
properties)
y. Associations dues, membership fees, and

other assessments and charges collected by
homeowners’ associations and
condominium corporations
z. Sale of gold to the Banko Sentral ng

Pilipinas (BSP)
aa. Sale of or importation of prescription drugs

and medicines for:
i. Diabetes, high cholesterol, and
hypertension beginning January 1,
2020; and

ii. Cancer, mental illness, tuberculosis,
and kidney diseases beginning
January 1, 2021.
Condition for exemption: The DOH shall

issue a list of approved drugs and medicines for
this purpose within sixty (60) days from the
effectivity of the RA No. 11467 and CREATE
laws, respectively.
bb. Sale or importation of the following, for COVID-

19 pandemic response, beginning January 1,
2021 to December 31, 2023:
i. Capital equipment, its spare parts and
raw materials, necessary for the
production of personal protective
equipment components such as
coveralls, gown, surgical cap, surgical
mask, N-95 mask, scrub suits, goggles
and face shield, double or surgical
gloves, dedicated shoes, and shoe
covers, for COVID-19 prevention
Condition for exemption: the

Department of Trade and Industry
(DTI) shall certify that such equipment,
spare parts or raw materials for
importation are not locally available or
insufficient in quantity, or not in
accordance with the quality or
specification required
ii. All drugs, vaccines and medical

devices specifically prescribed and
directly used for the treatment of
COVID-19
Condition for exemption: within sixty

(60) days from the effectivity of
CREATE law, and every three (3)
months thereafter, the Department of
Health (DOH) shall issue a list of
prescription drugs and medical devices
covered by this provision

iii. Drugs for the treatment of COVID-19
approved by the Food and Drug
Administration (FDA) for use in clinical
trials, including raw materials directly
necessary for the production of such
drugs.
cc. 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 (P3,000,000.00).

NOTE: All above enumerated items are totally exempt

from business tax, except for items 5, 22, and 29, which
are only VAT exempt but still subject to Percentage Tax
vi. Sale to government

1. Concept – The sales to the government and GOCCs is
vatable at 12% normal rate but the law requires
government agencies or GOCCs to withhold a 5%
creditable withholding VAT on their purchases. The
invoice sales or billing to the government or GOCCs will
be deducted 5% creditable withholding VAT based on
sales or receipts. The taxpayer will only collect the
balance.
2. Tax model and mechanics

a. VAT sale to government model
Output VAT 12% of sales or receipts
Less: Input VAT 12% of purchases
and expenses
VAT Payable XXX,XXX
Less: Creditable withholding VAT 5% of sales to or
receipt from government
VAT Still Due/(Refundable) XXX,XXX

b. Mechanics – In order to claim the 5%
creditable withholding VAT, a BIR Form 2307,
indicating the 5% VAT withheld by the
government/GOCC shall be attached in the
VAT return to which the withholding VAT shall
be claimed.
In accounting, 5% withholding VAT is

considered an advance on tax paid, thus
reported as an asset, to be debited against VAT
payable.
3. If the seller is a non-VAT registered seller – the

government or GOCC shall withhold a 1% FINAL
PERCENTAGE TAX on the sale before payment.
4. Not subjected to withholding tax system – payments

for purchases of goods and services arising from
projects funded by Official Development Assistance
(ODA) as defined under Republic Act No. 8182,
otherwise known as the Official Development
Assistance Act of 1996, as amended, shall not be
subject to the withholding tax system.
5. 5% final withholding VAT – before January 1, 2021,

the VAT system adopted was final withholding system,
not the creditable withholding system. It means that the
5% VAT withheld by the government already served as
the constructive settlement of the entire VAT due on
sales made to government or GOCCs, and that the VAT
taxpayer is no longer required to pay any balance on
VAT Payable on sales to government or GOCCs. To
achieve the mechanism that VAT Payable is equal to
the 5% final withholding VAT, the VAT taxpayer shall
report a 7% Standard Input VAT, which might be
different from the actual input VAT attributable to sales
to government, where the difference is charged as
either additional cost or an income, subject to income
tax.
Nonetheless, the creditable withholding system is

currently in force effective January 1, 2021, pursuant to
the TRAIN law.

d. Sources of input tax
i. Concept, nature and characteristics of input VAT
1. Concept – the VAT due or paid by a VAT-registered
person on importation or local purchases, from VAT-
registered supplier, of goods, properties, or services,
including lease or use of properties in the course of his
trade or business
2. Determination of input VAT – the VAT on purchases

is usually reflected as a separate item in the VAT
invoice or VAT official receipt issued by the VAT-
registered supplier
If the VAT is not billed separately, the selling price

stated in the sales document shall be deemed to be
inclusive of VAT.
ii. Requisites and types of creditable input VAT

1. Concept – Generally, input VAT is essential under tax
credit method since the amount determined shall be
claimed to reduce the VAT payable to the BIR.
However, not all input VAT paid on purchases is
creditable or deductible against output VAT, and not all
creditable input VAT pertains only to VAT on
importation or local purchases.
2. Requisites of a creditable input VAT

a. The input VAT must have been paid or incurred
in the course of trade or business.
b. The input VAT is evidenced by a VAT invoice
or official receipt.
c. The VAT invoice or receipt must be issued by a
d. Input VAT is incurred in relation to vatable
sales, not from exempt sales.
3. Types of input VAT

a. Transitional input VAT
b. Regular input VAT
c. Amortization of deferred input VAT
d. Presumptive input VAT
e. Standard input VAT (until December 31, 2020
only)

f. Input VAT Carry-over
iii. Regular input VAT

1. Input VAT on purchases of goods and services
a. Coverage – the 12% VAT paid on domestic
purchases of goods, services or properties
b. Timing of credit
i. Purchase of goods or properties – in
the month of purchase
ii. Purchase of services – in the month
paid
2. Input VAT on depreciable goods

a. Coverage – before January 1, 2022, purchase
of depreciable capital goods or properties are
subjected to the following rules on timing of
credit:
i. General treatment – in the month of
purchase
ii. When the monthly aggregate
acquisition cost exceeds P1,000,000
– amortized over useful life in month or
60 months, whichever is shorter
The input VAT to be amortized is called

the “Deferred input VAT.”
b. Definition of terms
i. Monthly aggregate acquisition cost
– the total price, excluding VAT, agreed
upon one or more assets acquired and
not the payments or installments
actually made during the calendar
month.

ii. Depreciable capital goods – goods or
properties with estimated useful life of
more than one year which are treated
as depreciable assets for income tax
purposes, used directly or indirectly in
the production or sale of taxable goods
or services.
c. Sale or transfer of depreciable capital

goods within 5 years
If the depreciable property is sold or transferred
within 5 years prior to the exhaustion of the
amortizable input tax thereon, the ENTIRE
UNAMORTIZED INPUT TAX on the capital
goods sold/transferred can be claimed as input
tax credit during the calendar month or quarter
when the sale or transfer was made.
d. Phase-out of the amortization treatment

Under the TRAIN Law, the amortization
treatment of deferred input VAT was phased
out effective January 1, 2022. Input VAT on
capital goods will be claimed outright in the
month of purchase effective January 1, 2022.
e. Effect of Deferred input VAT balances after

the phase-out
Previously recognized deferred input VAT will
continue to be amortized even after that date,
but the deferred treatment will be stopped.
3. Input VAT on importation

a. Concept – purchase of goods or services by
Philippine residents from non-resident sellers
b. Types of consumption tax on importation

i. VAT on importation – for the import of
goods
ii. Final withholding VAT – for the
purchase of services from non-
residents

VAT on importation Final withholding VAT
Object consumption Goods Services
Imposed upon Importers/buyers Foreign service providers
Resident purchaser
Statutory taxpayer Importers/buyers
of the service
Direct consumption Indirect consumption
Nature
tax Tax
Tax basis Landed cost Contract price
Collecting agency BOC BIR
Before withdrawal After the month
Timing of payment
of goods of payment
c. Import of goods
i. Exempt importation
(See topic Exempt sales)
ii. Vatable importation

1. VAT on importation – other
importation of goods, not
otherwise exempt, is subject to
VAT regardless of whether
the:
a. Importer is engaged or
not engaged in trade
or business
b. Importer is a VAT or
non-VAT business
c. Importation is for
business or personal
use
d. Non-resident seller is
engaged or not
engaged in business
2. Presumption of vatability –
importation is generally
subject to VAT unless it can be
proven as exempt under any of
those enumerated by the
NIRC or by special laws or
treaties. The burden of proof in
establishing VAT exemption
rests upon the importer.

3. Tax basis – 12% of the total
landed cost of the importation
4. Composition of landed cost

a. Dutiable/transaction
value
i. Cost of goods
ii. Freight cost
iii. Insurance
cost
iv. Other charges
and costs to
bring goods
herein
b. Other in-land costs
i. Customs duty
ii. Excise tax, if
any
iii. Other in-land
costs, such
as: bank
charge,
brokerage
fee, arrastre
charge,
wharfage due,
documentary
stamp tax, &
import
processing
fees
d. Import of services
i. Exempt import of services
1. Purchase of services from
non-residents when the
service is rendered abroad
non-residents when the
individual purchaser/consumer
is not engaged in business
non-residents by qualified
VAT-exempt persons

ii. Subject to specific percentage tax –
the only import of service that is
currently subject to a percentage tax is
the direct acquisition of insurance
coverage from abroad.
(See topic Percentage tax)
iii. Subject to final withholding VAT

1. Nature – the obligation to
withhold the VAT technically
exists only if:
a. The service is
rendered by non-
resident service
provider within the
Philippines
b. The payor-purchaser
of the service is an
individual engaged in
business or a
corporation
2. Coverage – all other import of

service, not otherwise exempt
nor subject to specific
percentage tax, is subject to
final withholding VAT.
3. Payment of the withholding

VAT – using BIR Form 1600,
the withholding VAT is
remitted monthly on or before
the 10th day of the following
month after the withholding
was made, except for taxes
withheld for December which
shall be filed or paid on or
before January 25 of the
following year.

e. Treatment of the VAT on importation and
the withholding VAT – if the resident
purchaser is:
i. VAT-registered business – input VAT
creditable against output VAT*
ii. Non-VAT business – part of the cost of
purchase (asset or expense)
iii. Not engaged in business – merely
added to the costs of goods imported
* imported goods or services shall be

held ordinarily for sale, for use, for
lease, or for consumption, in the
ordinary course of trade or business.
Otherwise, the input VAT on
importation shall not be credited
against output VAT.
f. Timing of credit if claimed as regular input

VAT – in the month VAT is paid
4. Special rules on input VAT credit

a. Input VAT on non-depreciable vehicles –
rules in the deductibility of depreciation
expense on vehicles:
i. Only one vehicle for land transport is
allowed for the use of an official or
employee, the value of which should
not exceed P2,400,000.
ii. No depreciation shall be allowed to
yachts, helicopters, airplanes and/or
aircrafts, and land vehicles which
exceed the P2,400,000 threshold,
unless the taxpayer’s main line of
business is transport operations or
lease of transport equipment and the
vehicles are used in said operations.
iii. The purchase must be substantiated
with sufficient evidence such as official
receipts or other adequate records.
iv. The direct connection or relation of the
trade or business or profession of the
taxpayer must be substantiated.

Non-conformance to these requisites shall
render the vehicle non-depreciable for income
tax purposes.
The input VAT on the purchase of a non-

depreciable vehicles and all input VAT on
maintenance expenses incurred thereon are
likewise disallowed for taxation purposes.
b. Input VAT on construction in progress –

construction in progress is not considered as a
purchase of capital goods, but as purchase of
service. Hence, the input tax is creditable upon
payment of each progress billings of the
contractor and is neither credited upon
completion of the construction activity nor
amortized over a period not more than 60
months.
Construction in progress – the cost of

uncompleted construction work of an asset.
This is the accumulated progress billing of the
contractor for the extent of completion on an
asset under construction. Upon completion of
the construction activity, the construction in
progress account is reclassified to an
appropriate asset account.
c. Input VAT on purchase of real property on

extended payment terms
i. Sale on a deferred-payment basis –
if the seller of real property is subject to
VAT on the sale on a deferred-payment
basis the input VAT shall be claimable
by the buyer at the time of the
execution of the instrument of sale,
subject to the amortization rule on
depreciable properties
ii. Sale on an installment basis – if the
purchase is by installment and the
seller is allowed to bill the output VAT
in installment, the buyer can also claim
the input VAT in the same period as the
seller recognizes the output VAT.

d. Input VAT on goods or properties deemed
sold – the claimable input VAT on goods or
properties previously deemed sold shall be the
portion of the output VAT imposed upon the
goods deemed sold which corresponds to the
goods purchased by the buyer.
iv. Transitional input VAT

1. Coverage – a person who becomes liable to value-
added tax or any person who elects to be a VAT-
registered person shall be given an INITIAL INPUT TAX
CREDIT equivalent to:
a. 2% of the beginning inventory of goods,
materials, or supplies; OR,
b. Actual VAT paid thereon, WHICHEVER IS
HIGHER
2. Other relevant rules

a. A value allowed for income tax purposes on
inventory shall be the basis of the computation
of the 2% transitional input VAT.
b. Goods exempt from VAT shall be excluded in
the computation of the transitional input VAT.
3. Timing of credit – claimable in the month of

registration as a VAT taxpayer
4. Requisites for claim

a. The taxpayer must submit an inventory list of
goods.
b. The taxpayer must prepare an entry
recognizing the transitional input VAT credit in
their accounting books.
v. Presumptive input VAT

1. Coverage – persons or firms engaged in the processing
of SARDINES, MACKEREL and MILK, and in
manufacturing REFINED SUGAR, COOKING OIL and
PACKED NOODLE BASED INSTANT MEALS
2. Rate and basis – four percent (4%) of the gross value

in money of their purchases of primary agricultural
products which are used as inputs to their production.

3. Meaning of processing – pasteurization, canning and
activities which through physical or chemical process
alter the exterior texture or form or inner substance of a
product in such manner as to prepare it for special use
to which it could not have been put in its original form or
condition.
vi. Input VAT carryover

1. Coverage – the excess of the input VAT over the output
VAT in a particular month or quarter. It is the VAT
overpayment that appears after tax credits and
payments are deducted against the net VAT payable.
2. Rules
a. The input VAT carry-over of the prior quarter is
deductible in the first month of the current
quarter.
b. The input VAT carry-over in the first month of
the quarter is deductible in the second month of
the quarter.
c. The input VAT carry-over in the second month
of a quarter is not deductible to the third month
of the quarter.
d. The input VAT carry-over of the prior quarter is
deductible in the third month quarterly balance
of the present quarter.
3. Excluded from input VAT carry-over

a. Advanced VAT which have been applied for a
tax credit certificate
b. Input VAT attributable to zero-rated claim which
have been applied for a tax refund or tax credit
certificate
c. Input VAT attributable to zero-rated sales that
expired after the two-year prescriptive period
vii. Composition of creditable input VAT

1. Input VAT traceable to regular sales
2. Input VAT traceable to export sales that are not applied
for tax refund or tax credit
3. 7% of sales to government agencies or GOCCs*
* until December 31, 2020 only

viii. Rules on claim of input VAT – applicable when there are
mixed transactions
1. SPECIFIC IDENTIFICATION – input VAT that can be
traced to a particular sales transaction is credited
against the output VAT of such sales
2. PRO-RATA ALLOCATION – the amount of input tax
due or paid that cannot be directly and entirely
attributed to any one of the sales transactions shall be
allocated proportionately on the basis of sales
(See Classification rules on sales)
ix. Computation and presentation of allowable input VAT

(Excerpt from BIR Form 2550M)
Input tax carried over from previous period XXX,XXX
Input tax deferred on capital goods exceeding P1Million from previous
period XXX,XXX
Transitional input tax XXX,XXX
Presumptive input tax XXX,XXX
Others XXX,XXX
Current transactions:
Purchase of capital goods not exceeding P1Million XXX,XXX
Purchase of capital goods exceeding P1Million XXX,XXX
Domestic purchases of goods other than capital goods XXX,XXX
Importation of goods other than capital goods XXX,XXX
Domestic purchase of services XXX,XXX
Services rendered by non-residents XXX,XXX
Others XXX,XXX
Total available input tax XXX,XXX
Less: Deductions from input tax
Input tax on purchases of capital goods exceeding P1Million deferred
for the succeeding period XXX,XXX
Input tax on sale to government closed to expense XXX,XXX
Input tax allocable to exempt sales XXX,XXX
VAT refund/TCC claimed XXX,XXX
Others XXX,XXX
Total allowable input tax XXX,XXX
e. Value-added tax payable or excess input tax credits and tax credits,
if applicable
i. Determination of VAT payable
(See topic The VAT Model)

ii. Tax credits/payments against net VAT payable
1. VAT paid in the previous two months – applies to the
quarterly VAT return (BIR Form 2550Q). This is not
applicable to the monthly VAT return (BIR Form
2550M).
2. VAT paid in return previously filed
3. Advanced payment made to the BIR
4. Advanced VAT on certain goods
5. Creditable withholding VAT on sales to the government
– the 5% of the sales withheld by government agencies
or GOCCs are claimed as a tax credit as evidenced by
BIR Form 2307. The balance could either be a VAT still
due or overpayment. Before January 1, 2021, the VAT
still due attributed to sales to government shall be zero
since the 5% tax withheld was final withholding VAT.
iii. Advanced VAT – the owners or sellers of the following goods

are required to pay advanced VAT before their withdrawal at the
point of production:
1. Refined sugar
a. Legal basis – Revenue Regulations Nos. 13-
2008, 6-2015, and 8-2015.
b. Base price – P1,400 per 50 kg. bag
c. Required – in general, the business tax (VAT

or Percentage Tax) on the sale of sugar, shall
be paid in advance by the owner/seller before
any warehouse receipt or quedans are issued
or before the sugar is withdrawn from any sugar
refinery/mill.
d. Definitions
i. Sugar owners – a person who has
legal title over the sugar and may
include sugar planters, traders, sugar
millers, cooperatives or associations.

ii. Sugar – refers to sugar other than raw
cane sugar and those sugar whose
content of sucrose by weight, in the dry
state corresponds to a polarimeter
reading of 99.5° and above and/or
whose color is 800 ICU or less.
This also includes cane sugar

produced from the following shall be
presumed, for internal revenue
purposes, to be refined sugar: (1)
product of a refining process, (2)
products of a Sugar Refinery, or (3)
product of a production line of a sugar
mill accredited by the BIR to be
producing and/or capable of producing
sugar with polarimeter reading of 99.5°
and above, and for which the quedan
issued therefor as verified by the Sugar
Regulatory Administration (SRA)
identifies the sugar to be of a
polarimeter reading of 99.5° and
above.
2. Flour by millers
a. Legal basis – Revenue Regulation No. 29-
2003
b. Requirement – the VAT on the sale of flour

milled from imported wheat shall be paid in
advance by the flour miller.
Inasmuch as wheat is the principal raw material

in the milling of flour, and wheat is entirely
imported, the point of payment of the advance
VAT on sale of flour is established at the time
of importation of the wheat by the flour miller so
as to effectively ensure the payment of VAT on
flour which shall subsequently be milled from
this imported wheat. Thus, the advance VAT on
flour shall be paid prior to the release from the
Bureau of Custom's custody of the wheat which
is imported and declared for flour milling.

Purchases by flour millers of imported wheat
from traders shall also be subjected to advance
VAT and shall be paid by the flour miller prior to
its delivery.
c. Prohibition of withdrawal of shipment

before payment of advance VAT – unless and
until prior and full payment of the advance VAT
has been made by the flour miller at time of
importation of wheat , as evidenced by the
Authority to Release Imported Goods (ATRIG)
issued by the BIR and the submission of the
Payment Form evidencing the payment of the
advance VAT, any withdrawal in any manner or
form, in full or partially, of imported wheat to be
used in the milling of flour, from customs
custody shall not be allowed.
Importation of wheat by any trader shall still be

exempt from the payment of VAT. However, in
order to monitor all importation of wheat
regardless of its intended use, the importer,
whether miller or trader, shall be required to
secure ATRIG from the BIR.
The Bureau of Customs will require the

submission of the ATRIG by the importer before
releasing the imported wheat from its custody.
d. Tax base for the advance VAT

i. For wheat imported by flour millers
– 75% of the sum of:
1. the invoice value multiplied by
the currency exchange rate on
the date of payment;
2. estimated customs duties and
other charges prior to the
release of the imported wheat
from customs custody, except
for the advance VAT; and
3. five percent (5%) mark-up on
the sum of (a) and (b).

ii. For wheat purchased from traders –
75% of the sum of:
1. invoice value,
2. estimated freight expenses
and
3. five percent (5%) on the sum of
(a) and (b).
e. Definitions
i. Flour miller – a person who is
engaged in the milling of imported
wheat to produce flour as finished
product, where such wheat may be
directly imported or purchased from an
importer/trader.
ii. Wheat trader – a person who is

engaged in the importing/buying and
selling of imported wheat.
3. Naturally grown and planted timber products

a. Legal basis – Revenue Regulation No. 13-
2007
b. Requirement – the value added tax on

transport of naturally grown and planted timber
products shall be paid in advance by the
owner/seller to the Bureau of Internal Revenue
through the Authorized Agent Banks (AABs), or
to the Revenue Collection Officers (RCOs) or
deputized City or Municipal Treasurers, in
places where there are no AABs, before
transporting them from place of production or
concession.
c. Base price – the VAT rate of 12% on the

corresponding value per cubic meter of the
different species of naturally grown and planted
timber products as follows:

Luzon Visayas Mindanao
Philippine mahogany group,
Manggasinoro group,
Manggachupui group,
P1,400/m3 P1,400/m3 P1,425/m3
Narig group,
Palosapis group,
Guijo group
Yakal group 1,500/m3 1,500/m3 1,530/m3
Apitong group 1,260/m3 1,260/m3 1,260/m3
Softwood species except igem 715/m3 715/m3 715/m3
Igem 1,275/m3 1,275/m3 1,275/m3
Nato 1,000/m3 1,000/m3 1,000/m3
Furniture/construction hardwood 950/m3 950/m3 950/m3
Premium species, allowed cut 3,000/m3 3,000/m3 3,000/m3
Lesser-used 700/m3 700/m3 700/m3
Pulpwood, chip wood and
95/m3 95/m3 95/m3
matchwood species
Note: It is an advanced payment of VAT which is a deduction

after the net VAT payable is determined. However, unutilized
advanced VAT in the period may be claimed by the taxpayer as:
input VAT carryover, or tax credit against other internal revenue
taxes.
iv. VAT still due/overpayment

1. Tax still due – the positive amount (tax still payable) in
the VAT return is paid to the government as follows:
a. 1st month of the quarter – within 20 days from
the end of the month
b. 2nd month of the quarter – within 20 days from
c. 3rd month of the quarter – within 25 days from
the end of the quarter
2. Overpayment – the negative amount (overpayment) in

the VAT return may be treated as “Input VAT carry-
over” to the succeeding period.
3. Alternative treatment on certain overpayments

a. Overpayments arising from input VAT on
zero-rated sales – any unutilized input VAT
arising from zero-rated sales or effectively
zero-rated sales may be claimed as a:

i. tax refund
ii. tax credit against other internal
revenue taxes
b. Overpayments arising from advanced input

VAT – advanced VAT payments which remain
unutilized at the end of the taxpayer’s taxable
year when advanced payment was made, and
which is tantamount to excess payment may, at
the option of the owner/seller/taxpayer or
importer/miller/taxpayer, be available for the
issuance of a tax credit certificate.
f. Process for claiming input VAT refund

i. Where to claim for VAT refund or TCC – the claim for refund
or tax credit shall be made to the VAT refund centers found
either, whichever is applicable:
1. Bureau of Internal Revenue
2. Bureau of Customs
ii. Prescriptive period – within 2 years, counted from the close of

the taxable quarter when the zero-rated sales were made, not
from the date of payment of the VAT. Only the administrative
claim must be filed within the prescriptive period, the judicial
action may be filed beyond the prescriptive period.
iii. Period within which Refund or Tax Credit of Input Tax shall
be made – in proper cases, the Commissioner shall grant a
refund for creditable input taxes within 90 days from the date of
submission of the official receipts or invoices and other
documents.
1. Remedy in case of full or partial denial – the taxpayer
affected may, within 30 days from receipt of the decision
of denial, appeal the claim with the Court of Tax
Appeals Division
2. Remedy in case of no action within 90 days – the
failure on the part of any official, agent, or employee to
the BIR to act on the application shall be punishable
under Section 269 of the NIRC.

iv. Perfect matching of input VAT with zero-rated sales not
required – the input VAT reported in past quarters which are
attributable to zero-rated sales reported in subsequent quarters
are still claimable as tax credit or tax refund.
Input VAT claimed for refund or tax credit shall no longer be

creditable against Output VAT and must be removed from the
total amount of creditable input VAT.
v. Requisite for TCC claim on unutilized advanced VAT

1. The seller/owner or importer/miller must file a claim for
credit within 2 years from the date of filing of the fourth
quarter VAT return of the year such return was made.
2. Claim shall be limited to the unutilized advanced VAT
payment and shall not include excess input VAT.
vi. When input VAT may be claimed for refund – there are only
two cases where a taxpayer can ask for refund of input VAT:
1. Unutilized input VAT on zero-rated sales
2. Unutilized input VAT upon cancellation of VAT
registration due to retirement from or cessation of
business
g. Tax return preparation and filing and tax payments

i. Who are required to file VAT returns?
1. Any person or entity who, in the course of his trade or
business, sells, barters, exchanges, leases goods or
properties, and renders services subject to VAT, if the
aggregate amount of actual gross sales or receipts
exceeds P3,000,000
2. A person required to register as a VAT taxpayer but
failed to register
3. Any person who imports goods, whether or not made in
the course of his trade or business
ii. Mode of filing of tax returns

1. Manual filing
2. eBIR
3. Electronic filing and payment system (eFPS)

iii. Venue and timing of filing of tax returns
1. Venue of filing the VAT return – to the following in
order of priority:
a. Authorized agent bank under the jurisdiction of
the RDO/LTO where the taxpayer (head office
of the business establishment) is required to be
registered
b. Revenue collection officer
c. Duly authorized treasurer of the municipality or
city
2. Deadline of filing of tax returns

a. Deadline of filing of monthly VAT returns
i. Under manual filing – using BIR Form
2550M, it shall be filed in TRIPLICATE
copies (two copies for the BIR and one
copy retained by the taxpayer) WITHIN
20 DAYS from the end of the month.
ii. Under eFPS – the deadline varies per

business industry grouping, which is
within 21 to 25 days following the end
of the month. Details are found in
Revenue Regulation No. 26-2002.
b. Deadline of the quarterly VAT return – using

BIR Form 2550Q, it shall be filed within 25 days
from the end of the quarter.
iv. Payment of VAT tax due – pay as you file rule

v. Accomplishing of tax returns and forms
1. BIR Form 2550M

2. BIR Form 2550Q
vi. Attachments to the tax return

1. Quarterly summary lists to be submitted by all VAT
taxpayers
a. Quarterly summary list of sales to regular
buyers or customers, casual buyers or
customers and output tax
Content of the quarterly summary list of

sales
i. BIR registered name of the buyer
engaged in business or profession
ii. TIN of buyer for sales subject to VAT
iii. Exempt sales
v. Sales subject to VAT
vi. Output tax

Regular buyer or customer – a buyer or
customer who are engaged in business or
exercise of profession with whom the taxpayer
had transacted at least six transactions in the
previous year or current year regardless of the
amount per transaction.
Casual buyer or customer – a buyer or

exercise of profession with individual purchase
or transaction amounting to P100,000 or more
but did not qualify as a regular buyer or
customer.
b. Quarterly summary list of local purchases

and input tax

purchases
i. BIR registered name of the supplier
ii. Address of supplier
iii. TIN of the supplier
iv. Exempt purchases
v. Zero-rated purchases
vi. Purchases subject to VAT (services,
capital goods, and goods other than
capital goods)
vii. Creditable input tax
viii. Non-creditable input tax
c. Quarterly summary list of importation

importations
i. Import entry declaration number
ii. Assessment or release order
iii. Date of importation
iv. Name of supplier (seller)
v. Country of origin
vi. Dutiable value
vii. Charges before release from Custom’s
custody
viii. Landed cost (exempt and taxable)

ix. VAT paid
x. Official receipt number
xi. Date of VAT payment
2. Deadline of summary lists – these shall be submitted

by the taxpayer before the 25th day of the month
following the close of the taxable quarter.
3. Penalties for failure to submit summary list – for

each failure to file, keep or supply a statement, list, or
information on the date prescribed, the taxpayer pays
an administrative penalty of P1,000, unless such failure
was due to reasonable cause and not to willful neglect.
The aggregate amount to be imposed for such failures
during the taxable year shall not exceed P25,000.
Willful failure by the taxpayer to keep any record and

supply the correct information at the time or times
required shall be subject to criminal penalty upon
conviction of the offender under the Tax Code.
The imposition of the penalties under the Tax Code and

the compromise of the criminal liability on such
violations shall not relieve the violating taxpayer from
the obligation to submit the required documents.
4. The BIR RELIEF system – a taxpayer’s quarterly sales

and purchases are submitted to the BIR’s website
through the RELIEF Data Entry System.
The Reconciliation of Listing for Enforcement (RELIEF)

System supports the third party information program
and voluntary assessment program of the Bureau of
Internal Revenue through the cross-referencing of third
party information with the taxpayer’s quarterly summary
lists of sales and purchases.
h. Compliance requirements
i. Registration requirement
1. Mandatory VAT registration
a. Gross sales or receipts for the past 12 months
have exceeded the threshold amount.

b. There are reasonable grounds to believe that
the gross sales or receipts for the next 12
months will exceed the threshold amount.
2. Threshold amount
a. Special threshold: P10,000,000 – Franchise
grantees of radio or television
b. General threshold: P3,000,000 – applicable to
all other taxpayers, other than abovementioned
franchise grantees
3. Optional VAT registration – a person who is below the

VAT threshold may, at his option, register as VAT
taxpayer.
4. Timing of VAT registration

a. Persons commencing business with an
expectation to exceed the VAT threshold within
12 months shall simultaneously register as VAT
taxpayer with the registration of their new
business or trade with the BIR.
b. Persons exceeding the VAT threshold shall
register as VAT taxpayer before the end of the
month following the month the threshold is
exceeded.
c. Franchise grantees of radio and television
broadcasting, whose gross annual receipts for
the preceding calendar year exceeded
P10,000,000, shall register as VAT taxpayer
within 30 days from the end of the calendar
year.
d. Persons who are below the threshold but opt to
be registered as VAT taxpayer shall register not
later than 10 days before the beginning of the
taxable quarter.
5. VAT treatment of exempt transactions – a VAT-

registered taxpayer who enters into a VAT-exempt
transaction may also opt that the VAT apply to his
transactions which would have been exempt.

6. Optional VAT registration not allowed – self-
employed and/or professional individuals who opted the
8% commuted tax under income taxation.
7. Revocability of VAT registration

a. The VAT registration, whether voluntary or
mandatory, of franchise grantees of radio or
television is PERPETUALLY IRREVOCABLE.
b. Any person, other than franchise grantees of
radio or television, who voluntarily registered as
VAT taxpayers shall not be allowed to cancel
their VAT registration for the next 3 years.
c. Any person who registered as VAT taxpayers
with an expectation to exceed the VAT
threshold but failed to exceed the same within
12 months of operations may apply for
cancellation of VAT registration.
8. Type of VAT taxpayers

a. VAT-registered taxpayer – a taxpayer who
registered under the VAT system
b. VAT-registrable taxpayer – a taxpayer who
exceeded the VAT threshold but did not yet
register as a VAT taxpayer
9. Penalty for registrable persons – registrable persons

are still liable to VAT but WITHOUT THE BENEFIT of
INPUT TAX CREDIT in the periods in which they are
not properly registered.
ii. Invoicing and accounting requirements

1. Invoicing requirement
a. A VAT-registered person shall issue:
i. A VAT invoice for every sale, barter or
exchange of goods or properties; and
ii. A VAT official receipt for every lease of
goods or properties, and for every sale,
barter or exchange of services

All persons subject to internal revenue tax shall
issue duly registered receipts prepared at least
in duplicate, for each sale or transfer of
merchandise or for services rendered valued at
P100.00 or more.
b. Using a single invoice or receipt for mixed

sales – a VAT-registered taxpayer may use a
single invoice or receipt involving VAT and non-
VAT transactions, provided that:
i. the invoice or receipt must clearly
indicate the breakdown of the sales or
receipts among taxable, exempt and
zero-rated components; and,
ii. the calculation of VAT on each portion
of the sale shall be shown on the
invoice or receipt.
c. Using a separate invoice or receipt for

mixed sales – a VAT-registered taxpayer may
also use different invoice or receipt for the
taxable, exempt and zero-rated components of
its sales. Provided that:
i. if the sale is exempt from VAT, the term
“VAT-EXEMPT SALE” shall be written
or printed prominently on the invoice or
receipt
ii. if the sale is subject to zero percent
(0%) VAT, the term “ZERO-RATED
SALE” shall be written prominently on
the invoice or receipt
d. Content of the VAT invoice or official receipt

i. Name of Seller
ii. Business Style of the Seller
iii. Business Address of the Seller
iv. Statement that the seller is a VAT-
registered person, followed by its TIN
v. Name of Buyer
vi. Business Style of Buyer
vii. Address of Buyer

viii. TIN of buyer, if VAT-registered and
sale/receipt amount exceeds
P1,000.00
ix. Date of transaction
x. Quantity
xi. Unit cost
xii. Description of the goods or properties
or nature of the service
xiii. Authority to Print Receipt Number at
the lower left corner of the invoice or
receipt
xiv. Purchase price plus the VAT, provided
that:
1. The amount of tax shall be
shown as a separate item in
the invoice or receipt;
2. If the sale is exempt from VAT,
the term “VAT-EXEMPT
SALE” shall be written or
printed prominently on the
invoice or receipt;
3. 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; and,
4. If the sale involves goods,
properties or services some of
which are subject to VAT and
some of which are zero-rated
or exempt from VAT, the
invoice or receipt shall clearly
indicate the breakdown of the
sales price among its taxable,
exempt, and zero-rated
components, and the
calculation of the VAT on each
portion of the sale be shown on
the invoice or receipt.

e. Application for Authority to Print Receipts &
Invoices
i. Coverage – all persons who are
engaged in business shall secure from
the BIR an Authority to Print receipts or
sales or commercial invoice before a
printer can print the same.
ii. Tax form – BIR Form 1906 Application

for Authority to Print Receipts and
Invoices
iii. Documentary requirements

1. Final & clear sample of
principal and supplementary
receipts/invoices
2. Photocopy of last issued ATP
or Printer's Certificate of
Delivery (PCD) or any booklet
from the last issued ATP for
subsequent application
iv. Procedures
1. For taxpayers
a. Accomplish BIR Form
1906 and submit the
same together with
the documentary
requirements to RDO
where the HO is
located or concerned
office under the Large
Taxpayer Service;
b. Keep/File PCD and
ATP copy duly
received/issued by
BIR for audit
purposes;

c. Taxpayer’s branch
office shall furnish its
RDO a copy of the
ATP issued by the
appropriate BIR office
having jurisdiction
over the head office.
2. For printer/supplier
a. Prepare Printer’s
Certificate of Delivery
(PCD) in five (5)
copies and submit to
RDO where the place
of business is located
or concerned office
under the Large
Taxpayer Service
within thirty (30) days
from date of ATP and
prior to delivery of
receipts and/or
invoices to taxpayer;
b. Furnish the taxpayer
and its branches copy
of the received PCD
and approved ATP
together with the
taxpayer’s Sworn
Statement within thirty
(30) days from the
issuance of PCD. One
copy thereof shall
likewise be submitted
to the BIR Office that
has jurisdiction over
the head office of the
printer.
v. Deadlines – secure Application for

Authority to Print Receipts and
Invoices on or before the
commencement of business

2. Accounting requirement
a. Books of accounts – All persons subject to
VAT shall maintain:
i. Regular accounting records
ii. Subsidiary sales journal
iii. Subsidiary purchase journal
b. Registration of books of accounts

i. Newly registered (in general)
1. Tax form – BIR Form 1905
Application for Registration
Information Update/
Correction/ Cancellation
2. Documentary requirements
a. Manual books of
accounts (new or
subsequent)
i. New sets of
permanently
bound books
of accounts
for
registration/st
amping or the
bound
journals
and/or
ledgers
b. Manual loose-leaf
books of accounts
i. Permit to Use
Loose Leaf
Books of
Accounts
ii. Permanently
bound Loose
Leaf Books of
Accounts

iii. Affidavit
attesting the
completeness
, accuracy
and
correctness of
entries in
Books of
Accounts and
the number of
Loose Lead
used for the
period.
3. If transacting through
representative
a. Individual
i. Special power
of attorney
(SPA)
ii. any
government-
issued ID of
the authorized
representativ
e
b. Corporations/
partnerships
i. board
resolution
indicating the
purpose and
the name of
the authorized
representativ
e; or
secretary’s
certificate

ii. any
government-
issued ID of
the authorized
representativ
e
4. Procedures
a. Submit duly
accomplished BIR
Form 1905 at the RDO
or concerned office
under the Large
Taxpayer Service
having jurisdiction
over the place where
the head office and
branch is located,
respectively; and
b. Present the
manual/loose-leaf
books of accounts for
Stamping and
registration purposes.
5. Deadline – newly registered

taxpayers shall present the
manual books of accounts to
the RDO or concerned office
under the Large Taxpayer
Service where the place of
business is located for
approval and registration
before the deadline for filing of
the first quarterly income tax
return or the annual income tax
return whichever comes
earlier.

ii. Subsequent registration of
books/renewal (in general)
1. Procedure
1905 at the RDO or
concerned office
under the Large
Taxpayer Service
having jurisdiction
over the place where
the head office and
branch is located,
respectively
b. Present the
manual/loose-leaf
books of accounts at
the RDO or concerned
office under the Large
Taxpayer Service
where the place of
business is located for
Stamping and
2. Deadline – the registration of

a new set of manual books of
accounts shall only be at the
time when the pages of the
previously registered books
have all been already
exhausted, provided, that the
portions pertaining to a
particular year should be
properly labeled or marked by
taxpayer. This means that it is
not necessary for a taxpayer to
register/stamp a new set of
manual books of accounts
each and every year.

iii. Suspension of business operations and cancellation of
VAT registration
1. Suspension of business operations and temporary
closure of business – the Commissioner or his
authorized representative are empowered to suspend
business operations for any of the following violations:
a. For a VAT-registered person
i. Failure to issue receipts or invoices
ii. Failure to file VAT return
iii. Understatement of taxable sales or
receipt by 30% or more of his correct
taxable sales or receipt for the taxable
quarter
b. Failure to register as a taxpayer
2. Cancellation of VAT registration – the approval of a

request for cancellation of VAT registration shall be
effective on the first day of the month following the
month of the approval of the cancellation.
iv. Liability of non-VAT persons issuing VAT invoice or

receipts – the sale is subject to VAT without the benefit of input
VAT plus 50% surcharge and the usual 1% percentage tax
v. Withholding by the government or GOCCs

1. Coverage – the legal requirement for the creditable
withholding of VAT shall apply if the goods or services
purchased from VAT suppliers were vatable. Before
January 1, 2021, the final withholding system was
effective before transitioning to creditable withholding
system.
2. Exceptions to the 5% creditable withholding tax

a. Lease or use of proprietary rights of non-
residents – subject to 12% final VAT
b. Purchase of goods or services arising from
projects funded by the Official
Developmental Assistance (ODA) under RA
No. 8182 – under the TRAIN law, government
purchases for projects funded by the ODA shall
be exempt from the 5% final withholding tax. It

means that the taxpayer supplying goods or
services to ODA funded projects can claim full
credit on input VAT on such sales.
3. Withholding requirements on income tax – the

obligation of the government and GOCCs to withhold
VAT is a separate obligation from that of the obligation
to withhold income tax (expanded withholding tax).
a. 1% creditable withholding tax – purchase of
goods
b. 2% creditable withholding tax – purchase of
services
i. Tax implications of transactions applying the tax rules and

In this topic, you are expected to analyze the alternative approaches in

value-added taxation, that are within the bounds allowed by the tax laws,
which are beneficial to both the taxpayer and/or the government.
III. PERCENTAGE TAX

a. Nature and characteristics of percentage tax
i. Definition – percentage tax is a national tax imposed upon
business taxpayers on either from upon the vatable sale of
goods and/or services, for validly registered non-VAT
taxpayers, or upon services which are specifically designated
by the tax code to be subjected to specific percentage tax
ii. Nature and characteristics

1. National tax
2. Business tax
3. Sales tax
4. Tax on consumption
5. Direct tax
6. Quarterly tax
7. Ad valorem tax

b. Persons subject to percentage tax
i. Non-VAT taxpayers – those taxpayers engaged in business
validly registered as non-VAT taxpayers for having accumulated
or expected to accumulate sale of vatable goods or services
below P3,000,000, the VAT threshold, within any 12-month
period, which is considered VAT exempt, but not totally exempt
from business tax, unless voluntarily registered as VAT
taxpayer.
ii. Taxpayers with sale of services specifically subject to

percentage tax – those taxpayers engaged in business
registered as either non-VAT or VAT taxpayers, with which,
certain sale of services, specifically enumerated by the Tax
Code as subject to percentage tax, shall be reported separately
from vatable sale of goods and/or services, which the former are
taxed at appropriate specific percentage tax
c. Transactions subject to and/or exempt from percentage tax

i. General percentage tax
1. Coverage – vatable sale of goods and/or services by
non-VAT taxpayer (see topic Introduction to business
taxation, subtopic Business activities and tax bases)
2. Tax base
a. Sale of goods and/or property – gross selling
price (general rule)
b. Sale of services or lease of property – gross
receipts or earnings
(See topic Value-added tax, subtopic Regular output
VAT)
3. Tax rate
a. 1% – for period starting July 1, 2020 to June 30,
2023
b. 3% – for periods before July 1, 2020 and July
1, 2023 onwards
ii. Specific percentage tax

1. Domestic common carriers and keepers of garages
a. Coverage – domestic common carriers of
passengers by land and keepers of garages

b. Tax base – receipts from transport or carrying
of passengers by land and/or from lease of cars
for rent or hire by keepers of garages
c. Tax rate – 3% common carrier’s tax
d. Definition of common carrier – any person,

corporation, firm, or association engaged in the
business of carrying or transporting
passengers or goods or both, by land, water, or
air, for compensation, and offering their
services to the public.
For purposes of the percentage tax, common

carriers include cars for rent or hire driven by
the lessee, transportation contractors, persons
who transport passengers for hire and other
domestic land carriers on their transport of
passengers
e. Common carriers are exempt from local

taxes – the gross receipts of common carriers
derived from their incoming and outgoing
freight shall not be subject to local taxes under
the Local Government Code of 1991.
f. Exemptions to the common carrier’s tax

i. Owners of bancas and animal-drawn
two-wheeled vehicles are exempt from
percentage tax.
ii. The law is silent regarding pedicabs,
but these businesses may qualify as
“business for mere subsistence”;
hence, these are also exempt from
business tax.

g. Minimum presumptive gross receipts per
NIRC
Quarterly Monthly
Jeepney for hire:
Manila and other cities P2,400 P800
Provincial 1,200 400
Public utility bus:
Not exceeding 30 passengers 3,600 1,200
Exceeding 30 but not more than 50 6,000 2,000
Exceeding 50 passengers 7,200 2,400
Taxis:
Manila and other cities 3,600 1,200
Car for hire:
With chauffeur 3,000 1,000
Without chauffeur 1,800 600
Note: Revenue Regulation No. 9-2007 updated
the presumptive gross receipts, supposedly to
catch up with the inflation for that period, but the
said regulation was recommended to be
suspended by the Senate, in a Committee
Report, due to various factors
h. Summary on the taxability of receipts by

domestic common carriers
Mode of transport Passengers Baggage/Mails/Cargoes
By land 3% CCT Vatable
By water or sea Vatable Vatable
By air Vatable Vatable
2. International air/shipping carriers doing business

in the Philippines
a. Coverage – international air or sea carriers
owned by foreign corporations that operate in
the Philippines and transport passengers or
cargoes from the Philippines to overseas and
vice versa
b. Tax base – quarterly gross receipts derived

from the transport of cargoes, baggage, or
mails from the Philippines to another country
c. Tax rate – 3%

d. Tax rules on outgoing flight or voyage
Sea or air carriers owned by
Domestic corporation Foreign corporation
Passengers Vatable Exempt
Cargoes/baggage Vatable 3% percentage tax
3. Certain franchise grantees

a. Coverage – generally, franchises are vatable,
except on the following franchise grantees:
i. Radio or television broadcasting
companies whose annual gross
receipts do not exceed P10,000,000 –
3%
ii. Gas and water utilities – 2%
b. VAT registration
companies are mandatorily required to
register as VAT taxpayer IF THEY
EXCEED the P10,000,000 gross
receipt threshold. Even if below the
threshold, they may register as VAT
taxpayer. Once the option is exercised,
said option shall be irrevocable.
ii. Gas and water utilities franchisees
have no similar provision applicable.
Note: Since receipts of franchise grantees of

radio or television broadcasting companies are
vatable, but only with different VAT threshold,
the amendment of the general percentage tax
on vatable sale of goods and/or services, from
3% to 1%, does not affect the tax rate
applicable for the same franchise grantee
c. Vatable franchises
i. Electricity – electric generation or
transmission and distribution by
electric cooperatives are vatable

ii. Telecommunication – Telecom
companies are vatable, except on their
receipts from outgoing messages
(subject to 10% overseas
communication tax)
iii. Transportation – Transport
companies are vatable, except receipts
of common carriers by land on their
transport of passengers (3% common
carrier’s tax)
iv. Private franchises
4. Telephone companies on overseas communication

a. Coverage – the overseas dispatch, message
or conversation transmitted from the
Philippines by telephone, telegraph, telewriter
exchange, wireless and other communication
equipment services
Note: Only the receipt from overseas

communication is subjected to this specific
percentage tax, while the rest of the other
receipts of the same telephone company is
vatable.
b. Tax rate – 10% overseas communication tax
c. Exemptions – overseas communication tax

shall not apply to the following outgoing calls:
i. Government – including any of its
political subdivisions or
instrumentalities
ii. Diplomatic services – embassies and
consular offices of foreign
governments
iii. International organizations – those
enjoying privileges, exemptions and
immunities under international
agreements
iv. News services

5. Banks and non-bank financial intermediaries
a. Tax on banks and non-bank financial
functions
Interest income, commissions and discounts from lending activities, and income
from financial leasing, on the basis of remaining maturities of instruments from
which the receipts were derived:
Maturity period of five years or less 5%
Maturity period of more than five years 1%
Dividend and equity shares in the net income of subsidiaries 0%
On royalties, rentals of property, real or personal, profits from exchange and all 7%
other items treated as gross income
On net trading gains within the taxable year on foreign currency, debt securities, 7%
derivatives, and other similar instruments
b. Tax on other non-bank financial

intermediaries without quasi-banking
functions
From all other items treated as gross income under the NIRC 5%
c. Definition of terms
i. Banks – entities engaged in the
lending of funds obtained in the form of
deposits. This includes commercial
banks, savings banks, mortgage
banks, development banks, rural
banks, stocks and savings
associations, branches and agencies
of foreign banks.
This also includes cooperative banks,

Islamic banks and other banks
determined by the Monetary Board of
the BSP in the classifications of banks.
ii. Non-bank financial intermediaries –

persons or entities whose principal
function include the lending, investing
or placement of funds or evidences of
indebtedness or equity deposited with

them, acquired by them or otherwise
coursed through them, either for their
own account or for the account of
others.
This includes all entities regularly

engaged in the lending of funds or
purchasing of receivables or other
obligations with funds obtained from
the public through the issuance,
endorsement or acceptance of debt
instruments of any kind for their own
account, or through the issuance of
certificates, or of repurchase
agreements, whether any of these
means of obtaining funds from the
public is done on a regular basis or only
occasionally.
iii. Quasi-banking function/quasi-

banks – the borrowing of funds from 20
or more personal or corporate lenders
at any one time, through the issuance,
instruments of any kind, other than
deposits, for the borrower’s own
account or through the issuance of
certificates of assignment or similar
instruments, with recourse, or of
repurchase agreements for purposes
of relending or purchasing receivables
or other similar obligations.
Provided, however, that commercial,

industrial and other non-financial
companies, which borrows funds
through any of these means for the
limited purpose of financing their own
needs or the needs of their agents or
dealers, shall not be considered as
performing quasi-banking functions.

d. Rules for banks, quasi-banks and other
i. Accounting rules – basis of the
calculation of gross receipts shall be
the GAAP prescribed by BSP (banks
and quasi-banks) and SEC (other non-
bank financial intermediaries). GAAP
shall refer to the Philippine Financial
Reporting Standards (PFRS) based
upon International Accounting
Standards (IAS)
ii. Tax base of finance and operating

leases
1. Finance lease – interest
income
2. Operating lease – gross
rentals received
iii. Rule on pre-termination of loans –

the maturity period shall be reckoned to
end as of the date of pre-termination for
purposes of classifying the transaction
and applying the correct rate of tax.
iv. Withholding of percentage tax on

banks – BSP shall withhold the
percentage tax on all its payments to
special deposit accounts and reserve
liquidity accounts.
6. Certain insurance companies and agents of foreign

insurance
a. Tax on life insurance premiums
i. Coverage – a person, company or
corporation doing LIFE INSURANCE
BUSINESS of any sort in the
Philippines

ii. Tax base – premiums collected,
whether such premium is paid in
money, notes, credits or any substitute
for money.
iii. Tax rate – 2% premiums tax
iv. Excluded life insurance companies

– purely cooperative companies or
associations doing life insurance
business
v. Life insurance company – a

company which deals with the
insurance on human lives and
insurance appertaining thereto or
connected therewith. The service
likewise includes soliciting group
insurance, and health and accident
insurance policies which the company
is nevertheless authorized to pursue as
part of its business activity.
vi. Excluded from gross premium

receipts
1. Premiums refunded within 6
months after payment on
account of rejection of risk or
returned for other reasons
2. Re-insurance premiums
3. Premiums of life insurance of
non-residents received from
abroad by branches of
domestic corporation, firm or
association doing business
outside the Philippines
4. Excess of premiums on
variable contracts in excess of
the amounts necessary to
insure the lives of the variable
contract owners

vii. Other receipts of life insurance
business and taxability
1. Renewal or re-insurance fee,
re-instatement fee and
penalties – 2% premiums tax
2. Management fees, rental
income, or other income from
unrelated services – vatable
3. Investment income realized
from investment of premiums –
exempt
4. Investment income realized
from investment of funds
obtained from other sources –
5% (gross receipt tax on non-
financial intermediaries)
b. Tax on foreign insurance

i. Agents of foreign insurance
1. Coverage – fire, marine or
miscellaneous insurance
agents authorized under the
Insurance Code to procure
policies of insurance on risks
located in the Philippines for
companies not authorized to
transact business in the
Philippines
2. Tax base – premiums

collected, whether such
premium is paid in money,
notes, credits or any substitute
for money.
3. Tax rate – equal to twice the

tax imposed on life insurance
premiums or 4% penalty tax

ii. Direct insurance from abroad
1. Coverage – imposed upon
owners of property who
obtained insurance directly
with foreign insurance
companies (no domestic agent
involved), who shall have the
duty to report each transaction
to the Insurance
Commissioner and to the
Commissioner of Internal
Revenue
2. Tax base – premium paid to

foreign insurance companies
3. Tax rate – 5%
c. Summary on tax on insurance

Domestic insurers Life insurance Non-life insurance
Direct premiums 2% premiums tax Vatable
Reinsurance premiums Exempt Exempt
Insurance commissions Vatable Vatable
7. Certain amusement activities/places

a. Coverage – proprietor, lessee or operator of
the following amusement places shall pay the
following respective amusement tax according
to its specific tax rate:
i. Jai-alai and racetracks – 30%
ii. Night or day clubs, cockpits and
cabarets – 18%
iii. Places of professional basketball
games – 15%
iv. Boxing exhibitions – 10%
b. Tax base – quarterly gross receipts which

embrace all receipts of the proprietor, lessee or
operator of the amusement places. Said
receipts include income from television, radio,
and motion picture rights, if any.

c. Note
i. Other operators of amusement places
such as bowling alleys, golf courses,
and billiard halls are vatable.
ii. Cinemas and theaters are not subject
to this national amusement tax
because it is exclusively subject to
local amusement tax.
d. Exempt receipts on professional boxing –

the gross receipts from professional boxing are
exempt from percentage tax under the
i. World or Oriental Championship
ii. At least one of the contenders is a
Filipino citizen
iii. The promoter is a Filipino citizen or a
corporation 60% of which is owned by
Filipino citizens
e. Illegal cockpits – persons who are engaged in

the same operations such as operators of
illegal “tupada” cockpit are also taxed at 18% of
their gross receipts.
8. Services rendered by Offshore Gaming Licensees

a. Coverage – Gaming income from services
rendered by Offshore Gaming Licensees
(POGOs)
b. Tax base – the higher between

i. Entire gross gaming revenue or
receipts, or
ii. The agreed predetermined minimum
monthly revenue or receipts from
gaming
c. Gross gaming revenue or receipts – gross

wages less payouts

d. Tax rate – 5% of the tax base
e. Limit on regulatory fees – the PAGCOR or

any special economic zone authority or tourism
zone authority or freeport authority may impose
regulatory fees which shall not cumulatively
exceed 2% of the tax base
9. Winnings from jai-alai and horse race

a. Coverage – the following are subject to the
following tax on winnings:
i. Net winnings in horse race or jai-alai, in
general (straight wagers) – 10%
ii. Net winnings from double,
forecast/quinella and trifecta bets
(combination bets) – 4%
iii. Owners of winning horses – 10%
b. Tax base – in general, net winnings = total

winnings minus cost of winning tickets
10. Brokers in effecting sales of stocks through local

stock exchange (LSE)
a. Coverage – the sale, barter or exchange,
including block sale, of listed stocks through the
Philippine Stock Exchange (PSE), other than
by dealers in securities
b. Tax base – gross selling price or gross value in

money of the shares of stocks sold
c. Tax rate – 6/10 of 1% or 0.6% stock transaction

tax
Note: The tax on the shares of stock sold or exchange

through an initial public offering (IPO) or IPO tax was
repealed (not suspended), pursuant to Republic Act No.
11494 (Bayanihan to Recover as One Act), effective
December 19, 2020.

iii. Exemption from percentage tax
1. Exempt sales of goods, properties and services –
totally exempt from any form of business tax (See topic
Value-added tax, subtopic Exempt sales)
2. VAT taxpayers – sale by Vat taxpayers on their vatable

goods and/or properties.
3. Business, professional or mixed income earners

who opted the 8% income tax
a. 8% income tax option – business,
professional or mixed income earners may opt
to be taxed to the 8% income tax which covers
both income tax and the general percentage
tax. (See topic Income taxation,
b. Applicability of 8% income tax option

i. Annual option
ii. Self-Employed Individuals and/or
Professionals or Mixed Income
Earners
iii. Valid if the taxpayer remained as non-
VAT taxpayer (Annual sales/receipts
do not exceed threshold or not
voluntarily registered as VAT)
4. Cooperatives – they shall be exempt from the general

percentage tax; however, it is not absolute. Sales or
receipts of cooperatives outside their registered
activities are still subject to business tax similar to the
business tax treatment of government agencies and
nonprofit institutions.
d. Percentage tax due, and tax credits, if applicable

i. Determination of the percentage tax due
Tax base (Gross sales or gross receipts) XXX,XXX
Multiply by: Appropriate tax rate XX%
Percentage tax due XXX,XXX
Less: Tax credits, if any XXX,XXX
Percentage tax still due/payable XXX,XXX

ii. Application of credit on withholding tax on government
payments
1. Withholding of percentage tax on government
money payments – sale to government agencies, and
instrumentalities including government-owned and
controlled corporations (GOCCs) is subject to a
withholding tax at source. The amount of money
received represents the amount billed less the
withholding tax. Withholding of percentage tax is
considered an advance remittance to the BIR, in which,
the same amount can be claimed as tax credit to reflect
the remaining percentage tax due.
2. Tax rate
a. 1% – for period July 1, 2020 to June 30, 2023
b. 3% – for periods before July 1, 2020 and July
1, 2023 onwards
3. Mechanics for claiming tax credit – upon withholding,

the government agency or GOCC concerned shall
provide a duly accomplished BIR Form 2307 Certificate
of creditable tax withheld at source, to the payor-
taxpayer, detailing the tax base and the amount of tax
withheld. The BIR Form 2307 shall be attached to the
quarterly percentage tax return of the period to which
the corresponding tax credit shall be claimed. The
period of claiming the tax credit shall be at the quarter
when the withholding was made.
e. Tax return preparation and filing and tax payments

1. Manual filing
2. eBIR

ii. Venue and timing of filing of tax returns
1. Venue of fling of tax returns – to the following in order
of priority:
the RDO/LTO where the taxpayer (head office
of the business establishment) is required to be
registered
city
2. Timing of filing of tax returns

a. General rule
i. Deadline – within 25 days following the
close of the taxable quarter
ii. Coverage – all other percentage taxes
b. Exception
i. Deadline – within five (5) banking days
from the date of collection
ii. Coverage – sale of shares of stocks
listed and traded through the local
iii. Payment of percentage tax due – pay as you file

iv. Accomplishing of tax returns and forms
1. BIR Form 2551Q – Quarterly percentage tax return

2. BIR Form 2552 – Percentage tax return for transactions
involving shares of stock listed and traded through the
local stock exchange (LSE) or through initial and/or
secondary public offering

3. BIR Form 2553 – Return of percentage tax payable
under special laws
v. Attachments to the tax return

1. Duly issued Certificate of creditable tax withheld at
source (BIR Form 2307), if applicable
2. Duly approved Tax debit memo, if applicable
3. For amended return, proof of payment and the return
previously filed
4. Authorization letter, if filed by an authorized
representative
5. Copy of Certificate of registration issued by the
Cooperative Development Authority for cooperatives,
and from the National Electrification Administration for
electric cooperatives

f. Compliance requirements
1. Concept – for persons engaged in business not
required to be registered as VAT taxpayer and/or those
with gross receipts or earnings subject to specific
percentage tax must register their business annually
2. Mechanics – the business taxpayer must accomplish

either of the following, and attach the necessary
requirements indicating proof of the existence of
business:
a. BIR Form 1901 – Application for registration for
self-employed (single proprietor/professional),
mixed income individuals, non-resident alien
engaged in trade/business. Estate and trust
b. BIR Form 1903 – Application for registration for
corporations, partnerships (taxable/non-
taxable) including GAIs, LGUs, cooperatives
and associations
c. BIR Form 1905 – Application for registration
information update/correction/cancellation
3. Deadline of application for registration

a. First time registration – before the
commencement of the business operations
b. Renewal – on or before January 31 of the
taxable year
4. Venue of application for registration – in the RDO

where the head office is located or concerned office
under the Large Taxpayer Service (LTS)
5. Proof of registration – upon compliance and approval

of the registration, the BIR RDO or LTS shall issue a
BIR Form 2303 Certificate of registration. Such
document indicates the different tax types with its
corresponding deadlines to which the taxpayer must file
and comply. A copy of such document shall be
displayed conspicuously within the premises of the
business office.

1. Invoicing requirements – the same manner of
application for the printing of invoice and/or receipts for
VAT registered taxpayers, however, the invoice and/or
receipt must clearly indicate that it is a non-VAT invoice.
The same rule on the manner of filing in the invoice
and/or receipt as to the kind of sale whether taxable or
exempt.
2. Accounting requirements – the same manner of

application for registration of books of accounts for VAT
registered taxpayers. The same minimum books of
accounts are needed.
g. Tax implications of transactions applying the tax rules and


IV. SPECIFIC PROVISIONS OF OTHER SPECIAL LAWS RELATING TO

BUSINESS TAXATION
a. Senior Citizen’s Law (RA 7432)
i. Privileges of the senior citizens – the senior citizens shall be
entitled to the following:
1. the grant of twenty percent (20%) discount and
exemption from the value-added tax (VAT), if
applicable, on the sale of the certain goods and services
from all establishments, for the exclusive use and
enjoyment or availment of senior citizens
2. exemption from the payment of individual income taxes
of senior citizens who are considered to be minimum
wage earners in accordance with Republic Act No. 9504
ii. Coverage of 20% discount and VAT exemption

1. on the purchase of medicines, including the purchase
of influenza and pneumococcal vaccines, and such
other essential medical supplies, accessories and
equipment to be determined by the Department of
Health (DOH).

The DOH shall establish guidelines and mechanisms of
compulsory rebates in the sharing of burden of
discounts among retailers, manufacturers and
distributors, taking into consideration their respective
margins.
2. on the professional fees of attending physician/s in all

private hospitals, medical facilities, outpatient clinics
and home health care services
3. on the professional fees of licensed professional health

workers providing home health care services as
endorsed by private hospitals or employed through
home health care employment agencies
4. on medical and dental services, diagnostic and

laboratory fees in all private hospitals, medical facilities,
outpatient clinics, and home health care services, in
accordance with the rules and regulations to be issued
by the DOH, in coordination with the Philippine Health
Insurance Corporation (PhilHealth)
5. in actual fare for land transportation travel in public

utility buses (PUBs), public utility jeepneys (PUJs),
taxis, Asian utility vehicles (AUVs), shuttle services and
public railways, including Light Rail Transit (LRT), Mass
Rail Transit (MRT), and Philippine National Railways
(PNR)
6. in actual transportation fare for domestic air transport

services and sea shipping vessels and the like, based
on the actual fare and advanced booking
7. on the utilization of services in hotels and similar lodging

establishments, restaurants and recreation centers
8. on admission fees charged by theaters, cinema houses

and concert halls, circuses, carnivals, and other similar
places of culture, leisure and amusement
9. on funeral and burial services for the death of senior

citizens

iii. Establishments offering discount to senior citizens – the
establishment may claim the discounts granted under R.A. No.
7432, as amended, as tax deduction based on the cost of the
goods sold or services rendered: Provided, that
1. the cost of the discount shall be allowed as deduction
from gross income for the same taxable year that the
discount is granted;
2. the total amount of the claimed tax deduction net of
VAT, if applicable, shall be included in their gross sales
receipts for tax purposes and shall be subject to proper
documentation and to the provisions of the National
Internal Revenue Code (NIRC), as amended.
iv. Requirements and documents – in the availment of the

privileges mentioned above, the senior citizen, or his/her duly
authorized representative, may submit as proof of his/her
entitlement thereto any of the following:
1. an identification card issued by the Office of the Senior
Citizen Affairs (OSCA) of the place where the senior
citizen resides: Provided, That the identification card
issued by the particular OSCA shall be honored
nationwide;
2. the passport of the senior citizen concerned; and
3. other documents that establish that the senior citizen is
a citizen of the Republic and is at least sixty (60) years
of age as further provided in the implementing rules and
regulations.
b. Magna Carta for Disabled Persons (RA 7277)

i. Rights and privileges of PWDs – persons with disability shall
be entitled to at least twenty percent (20%) discount and
exemption from the value-added tax (VAT), if applicable, on the
sale of certain goods and services for the exclusive use and
enjoyment or availment of the PWD.
ii. Coverage of 20% discount & VAT exemption

1. On the fees and charges relative to the utilization of all
services in hotels and similar lodging establishments;
restaurants and recreation centers

2. On admission fees charged by theaters, cinema
houses, concert halls, circuses, carnivals and other
similar places of culture, leisure and amusement
3. On the purchase of medicines in all drugstores
4. On medical and dental services including diagnostic

and laboratory fees such as, but not limited to, x-rays,
computerized tomography scans and blood tests, and
professional fees of attending doctors in all government
facilities, subject to the guidelines to be issued by the
Department of Health (DOH), in coordination with the
Philippine Health Insurance Corporation (PhilHealth)
5. On medical and dental services including diagnostic

and laboratory fees, and professional fees of attending
doctors in all private hospitals and medical facilities, in
accordance with the rules and regulations to be issued
by the DOH, in coordination with the PhilHealth
6. On fare for domestic air and sea travel
7. On actual fare for land transportation travel such as, but

not limited to, public utility buses or jeepneys
(PUBs/PUJs), taxis, Asian utility vehicles (AUVs),
shuttle services and public railways, including light Rail
Transit (LRT), Metro Rail Transit (MRT) and Philippine
National Railways (PNR)
8. On funeral and burial services for the death of the PWD:

Provided, That the beneficiary or any person who shall
shoulder the funeral and burial expenses of the
deceased PWD shall claim the discount under this rule
for the deceased PWD upon presentation of the death
certificate. Such expenses shall cover the purchase of
casket or urn, embalming, hospital morgue, transport of
the body to intended burial site in the place of origin, but
shall exclude obituary publication and the cost of the
memorial lot
iii. Privileges of establishments offering discounts to PWDs –

the establishments may claim the discounts granted as tax
deductions based on the net cost of the goods sold or services
rendered: Provided, however, That

from the gross income for the same taxable year that
the discount is granted;
2. the total amount of the claimed tax deduction net of
value-added tax, if applicable, shall be included in their
gross sales receipts for tax purposes and shall be
subject to proper documentation and to the provisions
of the National Internal Revenue Code (NIRC), as
amended.
iv. Requirements and documents – the abovementioned

privileges are available only to PWD who are Filipino citizens
upon submission of any of the following as proof of his/her
entitlement thereto:
1. An identification card issued by the city or municipal
mayor or the barangay captain of the place where the
PWD resides;
2. The passport of the PWD concerned; or
3. Transportation discount fare Identification Card (ID)
issued by the National Council for the Welfare of
Disabled Persons (NCWDP).

TAX “Innovating
BUSINESS TAX Educational
Services”
KHEEN V. BATINGAL
REVIEW NOTES
I. INTRODUCTION TO BUSINESS TAXATION

a. Concept of consumption and consumption tax
i. Consumption is the acquisition or utilization of goods or services
by any person.
ii. The utilization of goods or services may be through purchase,
exchange, or other means.
iii. The utilization is subject to consumption tax.
b. Rationale of consumption tax

i. Promotes savings formation – some people wanting to avoid
consumption tax tends to save their income than spend it for
consumption.
ii. Rationalizes the benefit received theory – people receiving
more by way of income tends to spend more, thus should pay
more taxes. Consumption tax is a tax on everybody, but people
who spend more are burdened to pay more tax.
iii. Wealth redistribution – Rich people, having the capacity to
spend more, are taxed more, to redistribute wealth to the less
privileged members of the society.
c. Types of consumption
i. Destination principle – taxation power being inherently
territorial, only goods and services destined for consumption in the
Philippines are subject to consumption tax while those destined
for consumption abroad are not subject to consumption tax.
ii. Cross-border principle – goods that cross the border destined
for foreign countries are not charged consumption taxes.
Type of General
Buyer Seller Term
Consumption Status
Foreign Resident Exportation Exempt
Non-Resident
Consumption Non-Resident Foreign Sales Non-Taxable
Domestic Resident Domestic Sales
Resident Taxable
Consumption Non-Resident Importation
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TAX BUSINESS TAX
d. Types of domestic consumption as to source
i. Importation – purchases from abroad from non-residents
1. Exempt importation
2. Taxable importation
a. VAT on importation
b. Final withholding VAT
ii. Domestic sales – purchases from resident sellers
1. Exempt sales
2. Taxable sales
a. Subject to percentage tax
b. VATable consumption
i. VATable sales
ii. VATable receipts
e. Types of business taxes

i. Percentage tax – tax of various rates from 0% to 30%
ii. Value Added tax – a consumption tax of 12%
iii. Excise tax – an ad valorem or specific tax, or both, which is
imposed in addition to VAT or percentage tax, only on certain
goods or services
f. Taxability of consumptions
i. Exempt consumption – neither subject to percentage tax nor
value added tax
1. Based on human necessity
2. Based on out of scope of tax
3. Based on tax incentive
4. Based on international comity
ii. Services specifically subject to percentage tax – exclusively

subject to specific percentage tax, and will never be subjected to
VAT
iii. Vatable consumption – may be subject to general percentage

tax or value added tax depending upon circumstances provided
by the NIRC
g. Nature of business tax

i. Relative consumption tax
ii. Indirect tax

TAX BUSINESS TAX
iii. Privilege tax
iv. National tax
h. Comparison of business taxes

VAT Percentage tax Excise tax
Timing of Production/
Sale Sale
imposition Importation
Nature Primary tax Primary tax Additional tax
Subject Any business, Any business, Only producers
businesses in general in general or importers
Business or
Taxpayers Business only Business only
non-business
Usual Large Small Large or small
taxpayers businesses businesses businesses
Accounting Asset or
Liability Expense
treatment Liability
i. Concept and elements of business

i. Concept of business – Business refers to a habitual engagement
in a commercial activity involving the sale of goods or services for
a profit.
ii. Elements of business
1. Habitual engagement – there must be REGULARITY IN
TRANSACTIONS to construe the presence of a business
a. Privilege stores/tiangge – the store should
engage in a business activity for a cumulative
period of not more than 15 days, otherwise, they
shall be considered regular taxpayers subject to
business taxes and income tax
b. Exception to the regularity rule – sale of
services by NON-RESIDENT PERSONS are
PRESUMED made in the course of business
regardless the sale is regular or isolated
2. Commercial activity – engagement in the sale of goods

or services for a PROFIT, however actual profit is NOT A
REQUISITE for imposing business tax
Not businesses:
a. Government agencies & instrumentalities
b. Non-profit organizations or associations
c. Employment
d. Directorship in a corporation
e. Business for mere subsistence

TAX BUSINESS TAX
j. Concept and types of business taxpayers
i. Concept – the taxable person in business taxation includes any
individual, trust, estate, partnership, corporation, joint venture,
cooperative or association
Rules:
1. Each person, natural or juridical, is a taxable person for
purposes of business taxation.
2. Husband and wife are separate taxpayers.
3. A parent company is a separate taxable person with its
subsidiary company and each subsidiary company is a
taxable person.
4. Home office and branch offices of the same businesses
are one, not separate, taxable person.
5. Proprietorship is not a juridical entity. Its sales and
receipts is subject to business tax to the individual
proprietor. Multiple proprietorship businesses of the same
individual are all taxable to that individual as the taxpayer.
Note: Income tax exemption does not equate to business tax

exemption.
ii. Types of business taxpayers

1. VAT taxpayers – pay 12% VAT
2. Non-VAT taxpayers – pay a 1% general percentage tax
k. Business activities and tax bases

i. Business activities enumerated in the NIRC
1. Sale or exchange of goods or properties – goods or
properties shall mean all tangible and intangible objects
which are capable of pecuniary estimation and shall
include:
a. Real properties held primarily for sale to
customers or held for lease in the ordinary course
of trade or business;
b. 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;
c. The right or the privilege to use in the Philippines
of any industrial, commercial or scientific
equipment;
d. The right or the privilege to use motion picture
films, tapes and discs; and

TAX BUSINESS TAX
e. Radio, television, satellite transmission and cable
television time. (Sec. 106 (A)(1), NIRC)
2. Sale or exchange of services – means the performance

of all kinds of services in the Philippines for others for a
fee, remuneration or consideration, including those
performed or rendered by the following:
a. Construction and service contractors
b. Stock, real estate, commercial, customs and
immigration brokers
c. Lessors of property, whether personal or real
d. Warehousing services
e. Lessors or distributors of cinematographic films
f. Persons engaged in milling processing,
manufacturing or repacking goods for others
g. Proprietors, operators or keepers of hotels,
motels, rest houses, pension houses, inns,
resorts
h. Proprietors or operators of restaurants,
refreshment parlors, cafes and other eating
places, including clubs and caterers
i. Dealers in securities
j. Lending investors
k. Transportation contractors on their transport of
goods or cargoes, including persons who
transport goods or cargoes for hire another
domestic common carriers by land relative to their
transport of goods or cargoes
l. 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
m. Sales of electricity by generation companies,
transmission by any means entity, and
distribution companies, including electric
cooperatives
n. Services of franchise grantees of electric utilities.
telephone and telegraph, radio and television
broadcasting and all other franchise grantees
o. Non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity,
and bonding companies

TAX BUSINESS TAX
p. Similar services regardless of whether or not the
performance thereof calls for the exercise or use
of the physical or mental faculties
q. 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
r. The lease of the use of, or the right to use of any
industrial, commercial or scientific equipment
s. The supply of scientific, technical, industrial or
commercial knowledge or information
t. 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 or any such knowledge or
information
u. The supply of services by a nonresident person
or his employee in connection with the use of
property or rights belonging to, or the installation
or operation of any brand, machinery or other
apparatus purchased from such nonresident
person
v. 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
w. The lease of motion picture films, films, tapes and
discs; and
x. The lease or the use of or the right to use radio,
television, satellite transmission and cable
television time. (Sec. 108 (A), NIRC)
ii. Tax basis

1. Sale or exchange of goods or properties – Gross
selling price
equivalent which the purchaser pays or is
obligated to pay to the seller in consideration of
the sale, barter or exchange of goods, barter or
exchange of goods or properties.

TAX BUSINESS TAX
b. Allowable deductions:
i. Discounts determined and granted at the
time of sale
ii. Sales returns and allowances
2. Sale or exchange of services or lease of properties –

Gross receipts
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
advanced payments actually or constructively
received during the taxable period for the
services performed or to be performed for
another person, excluding VAT.
b. Other considerations on gross receipts

i. Constructive receipt – included in the
tax base
ii. Agency monies – excluded from the tax
base
iii. Insurance proceeds on damaged
assets – excluded from the tax base
iv. Withholding taxes – included in the tax
base (added back)
3. Determining the appropriate tax base based on the

business taxpayer
a. For non-VAT taxpayers
Invoice price = tax base
Thus,
Percentage tax = invoice price x 1%
b. For VAT taxpayers

Invoice price = tax base + VAT
Suppose:
100% Tax base + 12% VAT = 112% Invoice price

TAX BUSINESS TAX
Then:
VAT (Output) = Invoice price x 12%/112%
or
VAT (Output) = Tax base x 12%
l. Business tax accounting period and reporting

i. Business tax accounting period
1. The length of accounting period for business taxes is one
quarter. (Secs. 114(A) and 128(A)(1), NIRC). This is
referred to as a taxable quarter.
2. The taxable quarter is composed of three months which
is synchronized with the taxable year of the taxpayer for
purposes of income tax.
ii. Business tax reporting

1. Types of business tax returns
a. VAT taxpayers
i. Monthly tax return – BIR Form 2550M
b. Non-VAT taxpayers
i. Monthly tax return – Not applicable
2. Reporting of VAT taxpayers

a. 1st month – within 20 days following the close of
the 1st month, using BIR Form 2550M
b. 2nd month – within 20 days following the close of
the 2nd month, using BIR Form 2550M
c. 3rd month – within 25 days following the close of
the taxable quarter, using BIR Form 2550Q
Note: Effective January 1, 2023, the filing and

payment of VAT shall be done within 25 days
following the close of each taxable quarter.
Monthly payments shall be abandoned.
3. Reporting of Non-VAT taxpayers – shall be filed within

25 days following the close of each taxable quarter, using
BIR Form 2551Q.

TAX BUSINESS TAX
4. Short period returns – any person who retires from
business with due notice to the BIR office where the
taxpayer (head office) is registered or whose VAT
registration has been cancelled shall file a final quarterly
return and pay the tax due thereon within 25 days from
the end of the month when the business ceased to
operate or when the VAT registration had been officially
cancelled.
Provided, however, that subsequent monthly

declarations/quarterly returns are still required to be filed
if the results of the winding up of the affairs/business of
the taxpayer reveal taxable transactions.
m. Transition from non-VAT to VAT

The general rule is that the 12-month totals of monthly sales or receipts
from the current month shall be monitored if it exceeds the P3M VAT
threshold.
Once the threshold is exceed in any particular month covering the

12-month totals, percentage tax shall still be paid on that month, but he is
subjected to VAT prospectively starting the following month when the
threshold was exceed, and shall be required to update the registration
from non-VAT to VAT on or before the last day of the month following the
month the threshold was exceeded, in order to avail the VAT system.
Generally, a business is subjected to both income tax and

business tax, unless the contrary is provided. Under individual income
taxation, there are an income tax options to which the business shall
choose that also affects the business tax to be reported/paid, which are:
i. Regular income tax option – (also applicable for corporate
taxpayers) income and percentage taxes are separately reported
and paid.
1. Month threshold exceeded – pay percentage tax for the
month
ii. 8% Income tax option – income and percentage taxes are paid
under singular rate of 8%.
1. Month threshold exceeded

TAX BUSINESS TAX
a. 8% income tax option disqualified – previous 8%
tax payments shall be attributed solely as income
tax payments
b. Recompute percentage tax from beginning of
taxable year to the month when the threshold was
exceeded and pay the percentage tax due
II. VALUE-ADDED TAX

a. Nature and characteristics of value-added tax
i. Nature and characteristics of VAT
1. Definition – VAT is a tax on consumption levied on the
sale, barter, exchange or lease of goods or properties and
services in the Philippines and on importation of goods
into the Philippines. The seller is the one statutorily liable
for the payment of the tax, but the amount of the tax may
be shifted or passed on to the buyer, transferee or lessee
of the goods, properties or services. However, in the case
of importation, the importer is the one liable for the VAT.
2. Nature and characteristics

a. Tax on value added
b. Sales tax
c. Tax on consumption
d. Indirect tax
e. Tax credit method
ii. The VAT Model and its concept

Output VAT XXX,XXX
Less: Creditable Input VAT XXX,XXX
VAT Payable XXX,XXX
Less: Tax Credits XXX,XXX
VAT Still Due/(Overpayment) XXX,XXX
b. Persons subject to value-added tax

i. Coverage – by residual definition, it covers all vatable sales of
goods, properties, services, or lease of properties by VAT
taxpayers.

TAX BUSINESS TAX
Not covered:
1. Totally exempt sales
2. Receipts from services specifically subject to percentage
tax
ii. VAT taxpayers

1. VAT-registered persons
2. VAT-registrable persons
iii. VAT threshold

1. Special threshold – P10,000,000, franchise grantees of
radio or television
2. General threshold – P3,000,000, residual (all other VAT
taxpayers other than franchise grantees of radio or
television)
c. Transactions subject to 12%, 0% and withholding VAT and/or exempt

from value-added tax
i. Sales subject to special VAT rules
1. Sales to government – reduced VAT payable due to
withholding of VAT by payor government/GOCC
2. Zero-rated sales – no output VAT but with claimable
input VAT
3. Exempt sales – no output VAT and no claimable input
VAT
4. Other rules on value added tax

a. Classification rules
i. Sale of goods to a non-resident buyer
abroad is ZERO-RATED, even if it
involves exempt goods.
ii. Sale of vatable goods or services is
normally a regular vatable sale, except
when the sale is:
1. made to government or GOCC
2. Considered an export or
effectively zero-rated
iii. Sale of exempt goods and services to the
government or GOCC is still exempt
sales.

TAX BUSINESS TAX
b. Other sales subject to VAT
i. Sales of registrable persons – subject to
VAT despite their non-registration as
VAT taxpayers but no input VAT credit is
allowed
ii. Sales of non-VAT taxpayers who issues
VAT invoice or receipt – subject to VAT
without the benefit of input VAT plus 50%
surcharge and the usual 1% percentage
tax
iii. Exempt sales billed by VAT taxpayers as
regular sales or failed to indicate ‘exempt’
– considered regular sales subject to
VAT
ii. Classification rules on sales

Zero-rated Sales to
Exempt sales Regular sales
sales government
12% of 12% of
Output VAT None Zero
sales/receipts sales/receipts
Claimable Actual input Actual input Actual input
None
input VAT VAT paid VAT paid VAT paid
Zero or Positive or Positive or
VAT payable None
Negative1 Negative2 Negative3
1. Zero, if the Actual Input VAT Paid is converted to either
Claim for Tax Refund or Tax Credit Certificate. Negative
if not tax refund or TCC claimed, may be credited against
other output taxes.
2. Reduced VAT payable due to the withholding of 5%
creditable withholding VAT, a form of advanced collection
of VAT by the government/GOCC to be remitted to the
BIR
3. Positive, amount shall be paid to BIR; Negative, claimed
as Input VAT Carryover for subsequent month
iii. Regular output VAT

1. Sale of vatable goods
a. Tax base – gross selling price (gross sales),
unless unreasonably lower, exclusive of VAT

TAX BUSINESS TAX
b. Unreasonably lower selling price, concept –
when it is lower by more than 30% of the actual
market value of the goods sold. The fair value of
the goods shall be determined by the
Commissioner of the Internal Revenue.
Exception: If sale is made to the government, the

output VAT shall be based on the actual selling
price.
c. Timing of output VAT reporting – reported in

the month of sale
2. Sale of vatable services

a. Tax base – gross receipts, exclusive of VAT (See
topic Introduction to business taxation, subtopic
Business activities and tax bases)
b. Timing of output VAT reporting – reported in

the month of collection
3. Sale of vatable properties

a. Tax base – gross selling price = higher of the:
i. Consideration or selling price*
ii. Fair value of the property** = higher of
the:
1. Zonal value
2. Fair value per assessor’s office
* presumed INCLUSIVE of VAT
** presumed EXCLUSIVE of VAT
b. Timing of output VAT reporting – month of sale

or by installment method
c. Installment reporting of output VAT on real

properties – if the Initial Payments from such
sale does not exceed 25% of the selling price

TAX BUSINESS TAX
d. Initial Payment, concept – all payments
received during the year of sale, which includes
down payment and installment payments during
the year of sale.
e. Sale of property by a realty dealer on a

deferred payment basis – not an installment
plan, which shall be treated as a cash sale. VAT
shall be reported on the month of sale.
f. Sale of properties considered “ordinary

assets” – even if the real property is not primarily
held for sale to customers or held for lease in the
ordinary course of business but the same is used
in the trade or business of the seller (PPE), the
same is still subject to VAT being a transaction
incidental to the taxpayer’s main business
g. Interest and penalties – interest and penalties

actually or constructively received by the seller
are also subject to VAT
h. Sale of property not in the ordinary course of

business (Capital assets) – exempt from VAT
4. Transaction deemed sales

a. Concept – there is no actual sale of goods took
place but such transactions are subject to VAT
b. Transaction deemed sales (Sec. 106(B) and

(C), NIRC, as amended)
i. 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;
ii. Distribution or transfer to:
1. Shareholders or investors as
share in the profits of the VAT-
registered persons; or
2. Creditors in payment of debt;
iii. Consignment of goods if actual sale is
not made within sixty (60) days following
the date such goods were consigned;

TAX BUSINESS TAX
iv. Retirement from or cessation of
business, with respect to inventories of
taxable goods existing as of such
retirement or cessation; and,
v. Changes in or cessation of status of a
c. Transfer, use or consumption not in the

ordinary course of business – this occurs when
vatable ordinary assets are used for purposes
other than their intended purpose, such as when:
i. Goods or properties held for sale are no
longer sold but are transferred or
disposed of by other means other than
sale.
ii. Properties originally intended for use are
no longer used but are transferred,
disposed of or exchanged with other
properties.
d. Retirement or cessation of business

i. General rule: Business dissolution is
deemed sale
1. Change of ownership of the
business
a. Incorporation of a sole
proprietorship
b. Sale by a proprietor of
his entire business
2. Dissolution of a partnership
ii. Not business dissolution

1. Change in controlling
shareholder
2. Change in trade or corporate
name
3. Change in business address

TAX BUSINESS TAX
iii. Exception to the business dissolution
rule
1. Merger or consolidation –
there is business dissolution but
not a deemed sale under the law
2. Cessation of status as VAT-
registered person – there is no
business dissolution but is
treated as a deemed sale
e. Cessation of status as VAT-registered person

Goods or properties originally intended
for sale or use in the business, and capital goods
existing as of the occurrence of any of the
following shall be deemed sold:
i. Change of business activity from VAT-
taxable status to VAT-exempt status
ii. Approval of a request for cancellation of
registration due to reversion to exempt
status
iii. Approval of request for cancellation of
registration due to a desire to revert to
exempt status after the lapse of 3
consecutive years from the time of
registration by a person who voluntarily
registered despite being exempt
iv. Approval of a request for cancellation of
registration of one who commenced
business with the expectation of gross
sales or receipt exceeding P3,000,000
but who failed to exceed this amount
during the first twelve months of
operations
f. Output tax on transaction deemed sales –

based on the market value of the goods sold as
of the occurrence of the deemed sale transaction.
Exception: In the case of retirement or cessation

of business, it shall be based on the acquisition
costs or the current market price of the goods or
properties, whichever is LOWER.

TAX BUSINESS TAX
g. Invoicing requirement for subsequent sale of
goods or properties deemed sold – the
subsequent sale of goods or properties deemed
sold shall not be subject to VAT. The seller shall
indicate the sales invoice number wherein the
output tax on the deemed sale was imposed and
the corresponding tax paid on the items sold.
NOTE: Deemed sales rules apply to VAT

taxpayers only

1. Concept – with a zero output VAT and a claimable input
VAT, the VAT due would be negative. As such, the law
allows taxpayer the privilege to claim the input VAT as:
a. Tax refund, or
b. Tax credit against other internal revenue taxes
c. Claimable input VAT against output VAT on other
vatable sales
2. Zero-rated sale of goods

a. Export sales
i. Coverage
1. The sale and actual shipment of
goods from the Philippines to a
foreign country, irrespective of
any shipping arrangement that
may be agreed upon which may
influence or determine the
transfer of ownership of the
goods so exported
Requisites:
a. paid for in acceptable
foreign currency or its
equivalent in goods or
services, and
b. accounted for in
accordance with the
rules and regulations of
the Bangko Sentral ng
Pilipinas (BSP)

TAX BUSINESS TAX
2. The sale of goods, supplies,
equipment and fuel to persons
engaged in international
shipping or international air
transport operations: Provided,
That the goods, supplies,
equipment and fuel shall be used
for international shipping or air
transport operations.
ii. Export sales which are now subject to

12% VAT:
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
packaging materials to export-
oriented enterprise whose export
sales exceed seventy percent
(70%) of total annual production;
and,
3. Those considered export sales
under Executive Order NO. 226,
otherwise known as the
“Omnibus Investment Code of
1987”, and other special laws
iii. Conditions for the shift from 0% to

12% VAT
1. The successful establishment
and implementation of an
enhanced VAT refund system
that grants refunds of creditable

TAX BUSINESS TAX
input tax within ninety (90) days
from the filing of the VAT refund
application with the Bureau:
Provided, That, to determine its
effectivity, 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 21, 2017 shall be
fully paid in cash by December
31, 2019.
b. Effectively zero-rated sales – sales to persons

or entities whose exemption under special laws
or international agreements to which the
Philippines is a signatory
i. Requirement for effective zero-rating
– requires prior application with the
appropriate BIR office. Without approved
application, the transaction otherwise
entitled to zero-rating shall be considered
exempt.
ii. Validity of approved application –

prospective effect from the date of receipt
by the BIR until December 31 of the
same year and renewable every year
thereafter
iii. Where to file application

1. Large taxpayers – Large
taxpayer audit and investigation
divisions I and II (LTAID I and II),
BIR national office
2. Other taxpayers – Audit
information, tax exemption and
incentives division (AITEID),
Assessment service

TAX BUSINESS TAX
iv. VAT reciprocity exemption on
embassies and their personnel –
qualified foreign embassies and their
qualified personnel and qualified
dependents of the latter are issued VAT
exemption certificates (VEC) or VAT
exemption identification cards (VEIC)
c. Sales to offshore gaming licensees subject to

gaming tax – pursuant to Republic Act No.
11590
3. Zero-rated sale of services

a. Coverage
i. Services other than those mentioned in
the preceding paragraph, rendered to a
person engaged in business conducted
outside the Philippines or to a
nonresident person not engaged in
business who is outside the Philippines
when the services are performed, the
consideration for which is paid for in
acceptable foreign currency and
ii. Services rendered to persons or entities
whose exemption under special laws or
Philippines is a signatory effectively
subjects the supply of such services to
zero percent (0%) rate;
iii. Services rendered to persons engaged in
international shipping or international air
transport operations, including leases of
property for use thereof: Provided, That
these services shall be exclusive for
international shipping or air transport
operations;
iv. Transport of passengers and cargo by
domestic air or sea vessels from the
Philippines to a foreign country; and

TAX BUSINESS TAX
v. Sale of power or fuel generated through
renewable sources of energy such as,
but not limited to, biomass, solar, wind,
hydropower, geothermal, ocean energy,
and other emerging energy sources
using technologies such as fuel cells and
hydrogen fuels.
vi. Services rendered to offshore gaming
licensees subject to gaming tax
b. Services which are now subject to 12% VAT

i. 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 Bangko Sentral ng
Pilipinas (BSP);
ii. Services performed by subcontractors
and/or contractors in processing,
converting, or manufacturing goods for
an enterprise whose export sales exceed
seventy percent (70%) of total annual
production;
c. Conditions for the shift from 0% to 12% VAT

i. 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 its effectivity, 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
ii. All pending VAT refund claims as of
December 21, 2017 shall be fully paid in
cash by December 31, 2019.

TAX BUSINESS TAX
v. Exempt sales
1. Concept – Exempt sales will not be subject to output
VAT. Consequently, the seller is also not allowed to credit
input VAT. The input VAT traceable to exempt sales is
part of costs or expenses of the seller and is deductible
against gross income subject to income tax.
2. Coverage
a. Exempt sales of goods, services or properties –
totally exempt from business tax (VAT and
percentage tax)
b. Services specifically subject to percentage tax –
VAT exempt only
3. Exempt sales (including importation) pursuant to

NIRC, as amended
a. Sale or importation of agricultural and marine
food products
i. in their original state, livestock and
poultry of or kind generally used as, or
yielding or producing foods for human
consumption; and breeding stock and
genetic materials therefor.
ii. Agricultural and marine food products

shall be considered in their original state
even if they have undergone the simple
processes of preparation or
preservation for the market, such as
1. freezing,
2. drying,
3. salting,
4. broiling,
5. roasting,
6. smoking
7. stripping
iii. Also considered in their original state

1. Polished and/or husked rice,
2. corn grits,
3. raw cane sugar and molasses,

TAX BUSINESS TAX
4. ordinary salt and
5. copra
b. Sale or importation of fertilizers; seeds,

seedlings and fingerlings; fish, prawn,
livestock and poultry feeds, including
ingredients, whether locally produced or
imported, used in the manufacture of finished
feeds
Exception: specialty feeds for race horses,

fighting cocks, aquarium fish, zoo animals and
other animals generally considered as pets
c. Importation of personal and household effects

i. Personal and household effects shall
belong to the residents of the Philippines
returning from abroad and nonresident
citizens coming to resettle in the
Philippines
ii. The goods are exempt from customs
duties under the Tariff and Customs
Code of the Philippines
d. Importation of professional instruments and

implements, tools of trade, occupation or
employment, wearing apparel, domestic
animals, and personal and household effects
i. Conditions for exemption:

1. The goods belong 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

TAX BUSINESS TAX
2. The quantities and the class of
the goods are suitable to the
profession, rank or position of
the persons importing said items,
for their own use and not for
barter or sale
3. The goods are accompanied by
such persons, or arriving within a
reasonable time
4. Only upon the production of
satisfactory evidence that such
persons are actually coming to
settle in the Philippines and the
goods are brought from their
former place of abode
ii. Not included in the exemption –

vehicles, vessels, aircrafts, machineries
and other similar goods for use in
manufacture shall be subject to duties,
taxes and other charges
e. Services specifically subject to percentage tax
NOTE: These are considered VAT Exempt

f. Services by agricultural contract growers and

milling for others of palay into rice, corn into
grits and sugar cane into raw sugar
g. Medical, dental, hospital and veterinary

services except those rendered by professionals
h. Educational services rendered by

i. private educational institutions, duly
accredited by
1. the Department of
Education(DepED)

TAX BUSINESS TAX
2. the Commission on Higher
Education (CHED)
3. the Technical Education and
Skills Development Authority
(TESDA)
ii. government educational institutions
i. Services rendered by individuals pursuant to an

employer-employee relationship
j. Services rendered by regional or area

headquarters established in the Philippines
by multinational corporations which act as
supervisory, communications and coordinating
centers for their affiliates, subsidiaries or
branches in the Asia-Pacific Region and do not
earn or derive income from the Philippines
k. Transactions which are exempt under

Philippines is a signatory or under special laws,
except those under Presidential Decree No. 529
l. Agricultural cooperatives duly registered with

the Cooperative Development Authority, in their
i. Sales to their members as well as sale of
their produce, whether in its original state
or processed form, to non-members;
and,
ii. 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
m. Gross receipts from lending activities by credit

or multi-purpose cooperatives duly registered
with the Cooperative Development Authority;

TAX BUSINESS TAX
n. Sales by non-agricultural, non- electric and
non-credit cooperatives duly registered with the
Cooperative Development Authority
Requisites:
i. The share capital contribution of each
member does not exceed Fifteen
thousand pesos (P15,000)
ii. Regardless of the aggregate capital and
net surplus ratably distributed among the
members;
o. Export sales by persons who are not VAT-

registered
p. 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 the selling price of
not more than Two million pesos (P2,000,000);
Provided, further, That every three (3) years
thereafter, the amount herein stated shall be
adjusted to its present value using the Consumer
Price Index, as published by the Philippine
Statistics Authority (PSA)
i. Socialized housing – housing programs

and projects covering houses and lots or
home lots only undertaken by the
Government or the private sector for the
UNDERPRIVILEGED AND HOMELESS
CITIZENS which shall include sites and
services development, long-term
financing, liberated terms on interest
payments, and such other benefits in
accordance with the provisions of RA No.
7279, otherwise known as the “Urban
Development and Housing Act of 1992”
and RA No. 7835 and RA No. 8763.

TAX BUSINESS TAX
It also refers to projects intended for the
underprivileged and homeless wherein
the housing package selling price is
within the lowest interest rates under the
Unified Home Lending Program (UHLP)
or any equivalent housing program of the
Government, the private sector or non-
government organizations.
ii. The adjusted 2011 value of P2,000,000

using 2010 CPI values – P2,559,300
iii. Sale of adjacent lots – 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 the threshold
amount.
Adjacent residential lots, although

covered by separate titles and/or
separate tax declarations, when sold or
disposed to one and the same buyer,
whether covered by one or separate
Deed of Conveyance, shall be presumed
as a sale of one residential lot.
q. Lease of a residential unit with a monthly rental

not exceeding Fifteen thousand pesos (₱15,000)
i. Coverage – regardless of aggregate
rentals received by the lessor during the
year
Monthly rental/unit Aggregate annual rentals Taxability
Not exceeding P15,000 Regardless Totally exempt
Exceeding P15,000 Not exceeding P3,000,000 1% percentage tax
Exceeding P15,000 Exceeding P3,000,000 VAT
Some units not exceeding All not exceeding P15,000 Totally exempt
P15,000 and some
exceeding P15,000 All exceeding P15,000 Follow above test

TAX BUSINESS TAX
ii. Residential units – apartments and
houses and lots used for residential
purposes, and buildings or parts or units
thereof used solely as dwelling places
(e.g., dormitories, rooms and bed
spaces) except motels, motel rooms,
hotels and hotel rooms.
iii. The term UNIT shall mean

1. an apartment unit – in the case
of apartments
2. a house – in the case of
residential houses
3. per person – in the case of
dormitories, boarding houses
and bed spaces
4. per room – in the case of rooms
for rent
r. Sale, importation, printing or publication of

books, and any newspaper, magazine,
journal, review bulletin, or any such
educational reading material covered by the
UNESCO Agreement on the Importation of
Educational, Scientific and Cultural Materials,
including the digital or electronic format thereof

i. The materials enumerated are not
devoted principally to the publication of
paid advertisements
ii. The materials enumerated are compliant
with the requirements set forth by the
National Book Development Board
pursuant to RA No. 8047
s. Transport of passengers by international

carriers

TAX BUSINESS TAX
t. Sale, importation or lease of passenger or cargo
vessels and aircraft, including engine,
equipment and spare parts thereof for domestic
or international transport operations
u. Importation of fuel, goods and supplies by

persons engaged in international shipping or
air transport operations
Condition for exemption: the fuel, goods, and

supplies shall be used for international shipping
v. Services of bank, non-bank financial

functions, and other non-bank financial
intermediaries

w. 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 (See topic Special Laws)
x. Transfer of property under the following tax-free

exchanges
i. Merger or consolidation
ii. Initial acquisition of control (See topic
Income Taxation, subtopic Dealings in
properties)
y. Associations dues, membership fees, and other

assessments and charges collected by
homeowners’ associations and condominium
corporations

TAX BUSINESS TAX
z. Sale of gold to the Banko Sentral ng Pilipinas
(BSP)
aa. Sale of or importation of prescription drugs and

medicines for:
i. Diabetes, high cholesterol, and
hypertension beginning January 1, 2020;
and
ii. Cancer, mental illness, tuberculosis, and
kidney diseases beginning January 1,
2021.
Condition for exemption: The DOH shall issue

a list of approved drugs and medicines for this
purpose within sixty (60) days from the effectivity
of the RA No. 11467 and CREATE laws,
respectively.
bb. Sale or importation of the following, for COVID-19

pandemic response, beginning January 1, 2021
to December 31, 2023:
i. Capital equipment, its spare parts and
raw materials, necessary for the
production of personal protective
equipment components such as
coveralls, gown, surgical cap, surgical
mask, N-95 mask, scrub suits, goggles
and face shield, double or surgical
gloves, dedicated shoes, and shoe
covers, for COVID-19 prevention
Condition for exemption: the

Department of Trade and Industry (DTI)
shall certify that such equipment, spare
parts or raw materials for importation are
not locally available or insufficient in
quantity, or not in accordance with the
quality or specification required
ii. All drugs, vaccines and medical devices

specifically prescribed and directly used
for the treatment of COVID-19

TAX BUSINESS TAX
Condition for exemption: within sixty
(60) days from the effectivity of CREATE
law, and every three (3) months
thereafter, the Department of Health
(DOH) shall issue a list of prescription
drugs and medical devices covered by
this provision
iii. Drugs for the treatment of COVID-19

approved by the Food and Drug
Administration (FDA) for use in clinical
trials, including raw materials directly
necessary for the production of such
drugs.
cc. 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 (P3,000,000.00).

NOTE: All above enumerated items are totally exempt

from business tax, except for items 5, 22, and 29, which
are only VAT exempt but still subject to Percentage Tax
vi. Sale to government

1. Concept – The sales to the government and GOCCs is
vatable at 12% normal rate but the law requires
government agencies or GOCCs to withhold a 5%
creditable withholding VAT on their purchases. The
invoice sales or billing to the government or GOCCs will
be deducted 5% creditable withholding VAT based on
sales or receipts. The taxpayer will only collect the
balance.

TAX BUSINESS TAX
2. Tax model and mechanics
a. VAT sale to government model
Output VAT 12% of sales or receipts
Less: Input VAT 12% of purchases
and expenses
VAT Payable XXX,XXX
Less: Creditable withholding VAT 5% of sales or
receipt to government
VAT Still Due/(Refundable) XXX,XXX
b. Mechanics – In order to claim the 5% creditable

withholding VAT, a BIR Form 2307, indicating the
5% VAT withheld by the government/GOCC shall
be attached in the VAT return to which the
withholding VAT shall be claimed.
In accounting, 5% withholding VAT is considered

an advance on tax paid, thus reported as an
asset, to be debited against VAT payable.
3. If the seller is a non-VAT registered seller – the

government or GOCC shall withhold a 1% FINAL
PERCENTAGE TAX on the sale before payment.
4. Not subjected to withholding tax system – payments

for purchases of goods and services arising from projects
funded by Official Development Assistance (ODA) as
defined under Republic Act No. 8182, otherwise known as
the Official Development Assistance Act of 1996, as
amended, shall not be subject to the withholding tax
system.
5. 5% final withholding VAT – before January 1, 2021, the

VAT system adopted was final withholding system, not
the creditable withholding system. It means that the 5%
VAT withheld by the government already served as the
constructive settlement of the entire VAT due on sales
made to government or GOCCs, and that the VAT
taxpayer is no longer required to pay any balance on VAT
Payable on sales to government or GOCCs. To achieve
the mechanism that VAT Payable is equal to the 5% final
withholding VAT, the VAT taxpayer shall report a 7%
Standard Input VAT, which might be different from the
actual input VAT attributable to sales to government,

TAX BUSINESS TAX
where the difference is charged as either additional cost
or an income, subject to income tax.
Nonetheless, the creditable withholding system is

currently in force effective January 1, 2021, pursuant to
the TRAIN law.
d. Sources of input tax

i. Concept, nature and characteristics of input VAT
1. Concept – the VAT due or paid by a VAT-registered
person on importation or local purchases, from VAT-
registered supplier, of goods, properties, or services,
including lease or use of properties in the course of his
trade or business
2. Determination of input VAT – the VAT on purchases is

usually reflected as a separate item in the VAT invoice or
VAT official receipt issued by the VAT-registered supplier
If the VAT is not billed separately, the selling price stated

in the sales document shall be deemed to be inclusive of
VAT.
ii. Requisites and types of creditable input VAT

1. Concept – Generally, input VAT is essential under tax
credit method since the amount determined shall be
claimed to reduce the VAT payable to the BIR. However,
not all input VAT paid on purchases is creditable or
deductible against output VAT, and not all creditable input
VAT pertains only to VAT on importation or local
purchases.
2. Requisites of a creditable input VAT

a. The input VAT must have been paid or incurred
in the course of trade or business.
b. The input VAT is evidenced by a VAT invoice or
official receipt.
c. The VAT invoice or receipt must be issued by a
d. Input VAT is incurred in relation to vatable sales,
not from exempt sales.

TAX BUSINESS TAX
3. Types of input VAT
a. Transitional input VAT
b. Regular input VAT
c. Amortization of deferred input VAT
d. Presumptive input VAT
e. Standard input VAT (until December 31, 2020
only)
f. Input VAT Carry-over
iii. Regular input VAT

1. Input VAT on purchases of goods and services
a. Coverage – the 12% VAT paid on domestic
purchases of goods, services or properties
b. Timing of credit
i. Purchase of goods or properties – in
the month of purchase
ii. Purchase of services – in the month
paid
2. Input VAT on depreciable goods

a. Coverage – before January 1, 2022, purchase of
depreciable capital goods or properties are
subjected to the following rules on timing of credit:
i. General treatment – in the month of
purchase
ii. When the monthly aggregate
acquisition cost exceeds P1,000,000 –
amortized over useful life in month or 60
months, whichever is shorter
The input VAT to be amortized is called

the “Deferred input VAT.”
b. Definition of terms
i. Monthly aggregate acquisition cost –
the total price, excluding VAT, agreed
upon one or more assets acquired and
not the payments or installments actually
made during the calendar month.

TAX BUSINESS TAX
ii. Depreciable capital goods – goods or
properties with estimated useful life of
more than one year which are treated as
depreciable assets for income tax
purposes, used directly or indirectly in the
production or sale of taxable goods or
services.
c. Sale or transfer of depreciable capital goods

within 5 years
If the depreciable property is sold or transferred
within 5 years prior to the exhaustion of the
amortizable input tax thereon, the ENTIRE
UNAMORTIZED INPUT TAX on the capital
goods sold/transferred can be claimed as input
tax credit during the calendar month or quarter
when the sale or transfer was made.
d. Phase-out of the amortization treatment

Under the TRAIN Law, the amortization treatment
of deferred input VAT was phased out effective
January 1, 2022. Input VAT on capital goods will
be claimed outright in the month of purchase
effective January 1, 2022.
e. Effect of Deferred input VAT balances after

the phase-out
Previously recognized deferred input VAT will
continue to be amortized even after that date, but
the deferred treatment will be stopped.
3. Input VAT on importation

a. Concept – purchase of goods or services by
Philippine residents from non-resident sellers
b. Types of consumption tax on importation

i. VAT on importation – for the import of
goods

TAX BUSINESS TAX
ii. Final withholding VAT – for the
purchase of services from non-residents
VAT on importation Final withholding VAT
Object consumption Goods Services
Imposed upon Importers/buyers Foreign service providers
Resident purchaser
Statutory taxpayer Importers/buyers
of the service
Direct consumption Indirect consumption
Nature
tax Tax
Tax basis Landed cost Contract price
Collecting agency BOC BIR
Before withdrawal After the month
Timing of payment
of goods of payment
c. Import of goods
i. Exempt importation
(See topic Exempt sales)
ii. Vatable importation

1. VAT on importation – other
importation of goods, not
otherwise exempt, is subject to
VAT regardless of whether the:
a. Importer is engaged or
not engaged in trade or
business
b. Importer is a VAT or
non-VAT business
c. Importation is for
business or personal
use
d. Non-resident seller is
engaged or not engaged
in business
2. Presumption of vatability –
importation is generally subject
to VAT unless it can be proven
as exempt under any of those
enumerated by the NIRC or by
special laws or treaties. The
burden of proof in establishing
VAT exemption rests upon the
importer.

TAX BUSINESS TAX
3. Tax basis – 12% of the total
landed cost of the importation
4. Composition of landed cost

a. Dutiable/transaction
value
i. Cost of goods
ii. Freight cost
iii. Insurance cost
iv. Other charges
and costs to
bring goods
herein
b. Other in-land costs
i. Customs duty
ii. Excise tax, if
any
iii. Other in-land
costs, such as:
bank charge,
brokerage fee,
arrastre charge,
wharfage due,
documentary
stamp tax, &
import
processing fees
d. Import of services
i. Exempt import of services
1. Purchase of services from non-
residents when the service is
rendered abroad
residents when the individual
purchaser/consumer is not
engaged in business
residents by qualified VAT-
exempt persons

TAX BUSINESS TAX
ii. Subject to specific percentage tax –
the only import of service that is currently
subject to a percentage tax is the direct
acquisition of insurance coverage from
abroad.
(See topic Percentage tax)
iii. Subject to final withholding VAT

1. Nature – the obligation to
withhold the VAT technically
exists only if:
a. The service is rendered
by non-resident service
provider within the
Philippines
b. The payor-purchaser of
the service is an
individual engaged in
business or a
corporation
2. Coverage – all other import of

service, not otherwise exempt
nor subject to specific
percentage tax, is subject to final
withholding VAT.
3. Payment of the withholding

VAT – using BIR Form 1600, the
withholding VAT is remitted
monthly on or before the 10th day
of the following month after the
withholding was made, except
for taxes withheld for December
which shall be filed or paid on or
before January 25 of the
following year.
e. Treatment of the VAT on importation and the

withholding VAT – if the resident purchaser is:
i. VAT-registered business – input VAT
creditable against output VAT*
ii. Non-VAT business – part of the cost of
purchase (asset or expense)

TAX BUSINESS TAX
iii. Not engaged in business – merely added
to the costs of goods imported
* imported goods or services shall be

held ordinarily for sale, for use, for lease,
or for consumption, in the ordinary
course of trade or business. Otherwise,
the input VAT on importation shall not be
credited against output VAT.
f. Timing of credit if claimed as regular input

VAT – in the month VAT is paid
4. Special rules on input VAT credit

a. Input VAT on non-depreciable vehicles – rules
in the deductibility of depreciation expense on
vehicles:
i. Only one vehicle for land transport is
allowed for the use of an official or
employee, the value of which should not
exceed P2,400,000.
ii. No depreciation shall be allowed to
yachts, helicopters, airplanes and/or
aircrafts, and land vehicles which exceed
the P2,400,000 threshold, unless the
taxpayer’s main line of business is
transport operations or lease of transport
equipment and the vehicles are used in
said operations.
iii. The purchase must be substantiated with
sufficient evidence such as official
receipts or other adequate records.
iv. The direct connection or relation of the
trade or business or profession of the
taxpayer must be substantiated.
Non-conformance to these requisites shall render

the vehicle non-depreciable for income tax
purposes.
The input VAT on the purchase of a non-

depreciable vehicles and all input VAT on
maintenance expenses incurred thereon are
likewise disallowed for taxation purposes.

TAX BUSINESS TAX
b. Input VAT on construction in progress –
construction in progress is not considered as a
purchase of capital goods, but as purchase of
service. Hence, the input tax is creditable upon
payment of each progress billings of the
contractor and is neither credited upon
completion of the construction activity nor
amortized over a period not more than 60
months.
Construction in progress – the cost of

uncompleted construction work of an asset. This
is the accumulated progress billing of the
contractor for the extent of completion on an
asset under construction. Upon completion of the
construction activity, the construction in progress
account is reclassified to an appropriate asset
account.
c. Input VAT on purchase of real property on

extended payment terms
i. Sale on a deferred-payment basis – if
the seller of real property is subject to
VAT on the sale on a deferred-payment
basis the input VAT shall be claimable by
the buyer at the time of the execution of
the instrument of sale, subject to the
amortization rule on depreciable
properties
ii. Sale on an installment basis – if the
purchase is by installment and the seller
is allowed to bill the output VAT in
installment, the buyer can also claim the
input VAT in the same period as the
seller recognizes the output VAT.
d. Input VAT on goods or properties deemed

sold – the claimable input VAT on goods or
properties previously deemed sold shall be the
portion of the output VAT imposed upon the
goods deemed sold which corresponds to the
goods purchased by the buyer.

TAX BUSINESS TAX
iv. Transitional input VAT
1. Coverage – a person who becomes liable to value-added
tax or any person who elects to be a VAT-registered
person shall be given an INITIAL INPUT TAX CREDIT
equivalent to:
a. 2% of the beginning inventory of goods,
materials, or supplies; OR,
b. Actual VAT paid thereon, WHICHEVER IS
HIGHER
2. Other relevant rules

a. A value allowed for income tax purposes on
inventory shall be the basis of the computation of
the 2% transitional input VAT.
b. Goods exempt from VAT shall be excluded in the
computation of the transitional input VAT.
3. Timing of credit – claimable in the month of registration

as a VAT taxpayer
4. Requisites for claim

a. The taxpayer must submit an inventory list of
goods.
b. The taxpayer must prepare an entry recognizing
the transitional input VAT credit in their
accounting books.
v. Presumptive input VAT

1. Coverage – persons or firms engaged in the processing
of SARDINES, MACKEREL and MILK, and in
manufacturing REFINED SUGAR, COOKING OIL and
PACKED NOODLE BASED INSTANT MEALS
2. Rate and basis – four percent (4%) of the gross value in

money of their purchases of primary agricultural products
which are used as inputs to their production.
3. Meaning of processing – pasteurization, canning and

activities which through physical or chemical process alter
the exterior texture or form or inner substance of a product
in such manner as to prepare it for special use to which it
could not have been put in its original form or condition.

TAX BUSINESS TAX
vi. Input VAT carryover
1. Coverage – the excess of the input VAT over the output
VAT in a particular month or quarter. It is the VAT
overpayment that appears after tax credits and payments
are deducted against the net VAT payable.
2. Rules
a. The input VAT carry-over of the prior quarter is
deductible in the first month of the current quarter.
b. The input VAT carry-over in the first month of the
quarter is deductible in the second month of the
quarter.
c. The input VAT carry-over in the second month of
a quarter is not deductible to the third month of
the quarter.
d. The input VAT carry-over of the prior quarter is
deductible in the third month quarterly balance of
the present quarter.
3. Excluded from input VAT carry-over

a. Advanced VAT which have been applied for a tax
credit certificate
b. Input VAT attributable to zero-rated claim which
have been applied for a tax refund or tax credit
certificate
c. Input VAT attributable to zero-rated sales that
expired after the two-year prescriptive period
vii. Composition of creditable input VAT

1. Input VAT traceable to regular sales
2. Input VAT traceable to export sales that are not applied
for tax refund or tax credit
3. 7% of sales to government agencies or GOCCs*
* until December 31, 2020 only
viii. Rules on claim of input VAT – applicable when there are mixed
transactions
1. SPECIFIC IDENTIFICATION – input VAT that can be
traced to a particular sales transaction is credited against
the output VAT of such sales
2. PRO-RATA ALLOCATION – the amount of input tax due
or paid that cannot be directly and entirely attributed to

TAX BUSINESS TAX
any one of the sales transactions shall be allocated
proportionately on the basis of sales
(See Classification rules on sales)
ix. Computation and presentation of allowable input VAT

(Excerpt from BIR Form 2550M)
Input tax carried over from previous period XXX,XXX
Input tax deferred on capital goods exceeding P1Million from previous
period XXX,XXX
Transitional input tax XXX,XXX
Presumptive input tax XXX,XXX
Others XXX,XXX
Current transactions:
Purchase of capital goods not exceeding P1Million XXX,XXX
Purchase of capital goods exceeding P1Million XXX,XXX
Domestic purchases of goods other than capital goods XXX,XXX
Importation of goods other than capital goods XXX,XXX
Domestic purchase of services XXX,XXX
Services rendered by non-residents XXX,XXX
Others XXX,XXX
Total available input tax XXX,XXX
Less: Deductions from input tax
Input tax on purchases of capital goods exceeding P1Million deferred for
the succeeding period XXX,XXX
Input tax on sale to government closed to expense XXX,XXX
Input tax allocable to exempt sales XXX,XXX
VAT refund/TCC claimed XXX,XXX
Others XXX,XXX
Total allowable input tax XXX,XXX
e. Value-added tax payable or excess input tax credits and tax credits,
if applicable
i. Determination of VAT payable
(See topic The VAT Model)
ii. Tax credits/payments against net VAT payable

1. VAT paid in the previous two months – applies to the
quarterly VAT return (BIR Form 2550Q). This is not
applicable to the monthly VAT return (BIR Form 2550M).
2. VAT paid in return previously filed
3. Advanced payment made to the BIR
4. Advanced VAT on certain goods
5. Creditable withholding VAT on sales to the government –
the 5% of the sales withheld by government agencies or

TAX BUSINESS TAX
GOCCs are claimed as a tax credit as evidenced by BIR
Form 2307. The balance could either be a VAT still due
or overpayment. Before January 1, 2021, the VAT still due
attributed to sales to government shall be zero since the
5% tax withheld was final withholding VAT.
iii. Advanced VAT – the owners or sellers of the following goods are
required to pay advanced VAT before their withdrawal at the point
of production:
1. Refined sugar
a. Legal basis – Revenue Regulations Nos. 13-
2008, 6-2015, and 8-2015.
b. Base price – P1,400 per 50 kg. bag
c. Required – in general, the business tax (VAT or

Percentage Tax) on the sale of sugar, shall be
paid in advance by the owner/seller before any
warehouse receipt or quedans are issued or
before the sugar is withdrawn from any sugar
refinery/mill.
d. Definitions
i. Sugar owners – a person who has legal
title over the sugar and may include
sugar planters, traders, sugar millers,
cooperatives or associations.
ii. Sugar – refers to sugar other than raw

cane sugar and those sugar whose
content of sucrose by weight, in the dry
state corresponds to a polarimeter
reading of 99.5° and above and/or whose
color is 800 ICU or less.
This also includes cane sugar produced

from the following shall be presumed, for
internal revenue purposes, to be refined
sugar: (1) product of a refining process,
(2) products of a Sugar Refinery, or (3)
product of a production line of a sugar
mill accredited by the BIR to be
producing and/or capable of producing
sugar with polarimeter reading of 99.5°

TAX BUSINESS TAX
and above, and for which the quedan
issued therefor as verified by the Sugar
Regulatory Administration (SRA)
identifies the sugar to be of a polarimeter
reading of 99.5° and above.
2. Flour by millers
a. Legal basis – Revenue Regulation No. 29-2003
b. Requirement – the VAT on the sale of flour

milled from imported wheat shall be paid in
advance by the flour miller.
Inasmuch as wheat is the principal raw material

in the milling of flour, and wheat is entirely
imported, the point of payment of the advance
VAT on sale of flour is established at the time of
importation of the wheat by the flour miller so as
to effectively ensure the payment of VAT on flour
which shall subsequently be milled from this
imported wheat. Thus, the advance VAT on flour
shall be paid prior to the release from the Bureau
of Custom's custody of the wheat which is
imported and declared for flour milling.
Purchases by flour millers of imported wheat from

traders shall also be subjected to advance VAT
and shall be paid by the flour miller prior to its
delivery.
c. Prohibition of withdrawal of shipment before

payment of advance VAT – unless and until
prior and full payment of the advance VAT has
been made by the flour miller at time of
importation of wheat , as evidenced by the
Authority to Release Imported Goods (ATRIG)
issued by the BIR and the submission of the
Payment Form evidencing the payment of the
advance VAT, any withdrawal in any manner or
form, in full or partially, of imported wheat to be
used in the milling of flour, from customs custody
shall not be allowed.
Importation of wheat by any trader shall still be

exempt from the payment of VAT. However, in

TAX BUSINESS TAX
order to monitor all importation of wheat
regardless of its intended use, the importer,
whether miller or trader, shall be required to
secure ATRIG from the BIR.
The Bureau of Customs will require the

submission of the ATRIG by the importer before
releasing the imported wheat from its custody.
d. Tax base for the advance VAT

i. For wheat imported by flour millers –
75% of the sum of:
1. the invoice value multiplied by
the currency exchange rate on
the date of payment;
2. estimated customs duties and
other charges prior to the release
of the imported wheat from
customs custody, except for the
advance VAT; and
3. five percent (5%) mark-up on the
sum of (a) and (b).
ii. For wheat purchased from traders –

75% of the sum of:
1. invoice value,
2. estimated freight expenses and
3. five percent (5%) on the sum of
(a) and (b).
e. Definitions
i. Flour miller – a person who is engaged
in the milling of imported wheat to
produce flour as finished product, where
such wheat may be directly imported or
purchased from an importer/trader.
ii. Wheat trader – a person who is engaged

in the importing/buying and selling of
imported wheat.
3. Naturally grown and planted timber products

a. Legal basis – Revenue Regulation No. 13-2007

TAX BUSINESS TAX
b. Requirement – the value added tax on transport
of naturally grown and planted timber products
shall be paid in advance by the owner/seller to the
Bureau of Internal Revenue through the
Authorized Agent Banks (AABs), or to the
Revenue Collection Officers (RCOs) or deputized
City or Municipal Treasurers, in places where
there are no AABs, before transporting them from
place of production or concession.
c. Base price – the VAT rate of 12% on the

corresponding value per cubic meter of the
different species of naturally grown and planted
timber products as follows:
Luzon Visayas Mindanao
Philippine mahogany group,
Manggasinoro group,
Manggachupui group,
P1,400/m3 P1,400/m3 P1,425/m3
Narig group,
Palosapis group,
Guijo group
Yakal group 1,500/m3 1,500/m3 1,530/m3
3 3
Apitong group 1,260/m 1,260/m 1,260/m3
3 3
Softwood species except igem 715/m 715/m 715/m3
3 3
Igem 1,275/m 1,275/m 1,275/m3
3 3
Nato 1,000/m 1,000/m 1,000/m3
3 3
Furniture/construction hardwood 950/m 950/m 950/m3
3 3
Premium species, allowed cut 3,000/m 3,000/m 3,000/m3
3 3
Lesser-used 700/m 700/m 700/m3
Pulpwood, chip wood and
95/m3 95/m3 95/m3
matchwood species
Note: It is an advanced payment of VAT which is a deduction after

the net VAT payable is determined. However, unutilized advanced
VAT in the period may be claimed by the taxpayer as: input VAT
carryover, or tax credit against other internal revenue taxes.
iv. VAT still due/overpayment

1. Tax still due – the positive amount (tax still payable) in
the VAT return is paid to the government as follows:
a. 1st month of the quarter – within 20 days from
b. 2nd month of the quarter – within 20 days from

TAX BUSINESS TAX
c. 3rd month of the quarter – within 25 days from
the end of the quarter
2. Overpayment – the negative amount (overpayment) in

the VAT return may be treated as “Input VAT carry-over”
to the succeeding period.
3. Alternative treatment on certain overpayments

a. Overpayments arising from input VAT on
zero-rated sales – any unutilized input VAT
arising from zero-rated sales or effectively zero-
rated sales may be claimed as a:
i. tax refund
ii. tax credit against other internal revenue
taxes
b. Overpayments arising from advanced input

VAT – advanced VAT payments which remain
unutilized at the end of the taxpayer’s taxable
year when advanced payment was made, and
which is tantamount to excess payment may, at
the option of the owner/seller/taxpayer or
importer/miller/taxpayer, be available for the
issuance of a tax credit certificate.
f. Process for claiming input VAT refund

i. Where to claim for VAT refund or TCC – the claim for refund or
tax credit shall be made to the VAT refund centers found either,
whichever is applicable:
1. Bureau of Internal Revenue
2. Bureau of Customs
ii. Prescriptive period – within 2 years, counted from the close of

the taxable quarter when the zero-rated sales were made, not
from the date of payment of the VAT. Only the administrative claim
must be filed within the prescriptive period, the judicial action may
be filed beyond the prescriptive period.
iii. Period within which Refund or Tax Credit of Input Tax shall
be made – in proper cases, the Commissioner shall grant a refund
for creditable input taxes within 90 days from the date of
submission of the official receipts or invoices and other
documents.

TAX BUSINESS TAX
1. Remedy in case of full or partial denial – the taxpayer
affected may, within 30 days from receipt of the decision
of denial, appeal the claim with the Court of Tax Appeals
Division
2. Remedy in case of no action within 90 days – the
failure on the part of any official, agent, or employee to
the BIR to act on the application shall be punishable under
Section 269 of the NIRC.
iv. Perfect matching of input VAT with zero-rated sales not

required – the input VAT reported in past quarters which are
attributable to zero-rated sales reported in subsequent quarters
are still claimable as tax credit or tax refund.
Input VAT claimed for refund or tax credit shall no longer be

creditable against Output VAT and must be removed from the total
amount of creditable input VAT.
v. Requisite for TCC claim on unutilized advanced VAT

1. The seller/owner or importer/miller must file a claim for
credit within 2 years from the date of filing of the fourth
quarter VAT return of the year such return was made.
2. Claim shall be limited to the unutilized advanced VAT
payment and shall not include excess input VAT.
vi. When input VAT may be claimed for refund – there are only
two cases where a taxpayer can ask for refund of input VAT:
1. Unutilized input VAT on zero-rated sales
2. Unutilized input VAT upon cancellation of VAT registration
due to retirement from or cessation of business
g. Tax return preparation and filing and tax payments

i. Who are required to file VAT returns?
1. Any person or entity who, in the course of his trade or
business, sells, barters, exchanges, leases goods or
properties, and renders services subject to VAT, if the
aggregate amount of actual gross sales or receipts
exceeds P3,000,000
2. A person required to register as a VAT taxpayer but failed
to register
3. Any person who imports goods, whether or not made in
the course of his trade or business

TAX BUSINESS TAX
ii. Mode of filing of tax returns
1. Manual filing
2. eBIR
iii. Venue and timing of filing of tax returns

1. Venue of filing the VAT return – to the following in order
of priority:
the RDO/LTO where the taxpayer (head office of
the business establishment) is required to be
registered
city
2. Deadline of filing of tax returns

a. Deadline of filing of monthly VAT returns
i. Under manual filing – using BIR Form
2550M, it shall be filed in TRIPLICATE
copies (two copies for the BIR and one
copy retained by the taxpayer) WITHIN
20 DAYS from the end of the month.
ii. Under eFPS – the deadline varies per

business industry grouping, which is
within 21 to 25 days following the end of
the month. Details are found in Revenue
Regulation No. 26-2002.
b. Deadline of the quarterly VAT return – using

BIR Form 2550Q, it shall be filed within 25 days
from the end of the quarter.
iv. Payment of VAT tax due – pay as you file rule
v. Accomplishing of tax returns and forms

TAX BUSINESS TAX
1. BIR Form 2550M

TAX BUSINESS TAX
2. BIR Form 2550Q
vi. Attachments to the tax return

1. Quarterly summary lists to be submitted by all VAT
taxpayers
a. Quarterly summary list of sales to regular
buyers or customers, casual buyers or
customers and output tax
Content of the quarterly summary list of sales

i. BIR registered name of the buyer
engaged in business or profession
ii. TIN of buyer for sales subject to VAT
iii. Exempt sales
v. Sales subject to VAT
vi. Output tax
Regular buyer or customer – a buyer or

exercise of profession with whom the taxpayer
had transacted at least six transactions in the

TAX BUSINESS TAX
previous year or current year regardless of the
amount per transaction.
Casual buyer or customer – a buyer or

exercise of profession with individual purchase or
transaction amounting to P100,000 or more but
did not qualify as a regular buyer or customer.
b. Quarterly summary list of local purchases and

input tax

purchases
i. BIR registered name of the supplier
ii. Address of supplier
iii. TIN of the supplier
iv. Exempt purchases
v. Zero-rated purchases
vi. Purchases subject to VAT (services,
capital goods, and goods other than
capital goods)
vii. Creditable input tax
viii. Non-creditable input tax
c. Quarterly summary list of importation

importations
i. Import entry declaration number
ii. Assessment or release order
iii. Date of importation
iv. Name of supplier (seller)
v. Country of origin
vi. Dutiable value
vii. Charges before release from Custom’s
custody
viii. Landed cost (exempt and taxable)
ix. VAT paid
x. Official receipt number
xi. Date of VAT payment

TAX BUSINESS TAX
2. Deadline of summary lists – these shall be submitted by
the taxpayer before the 25th day of the month following
the close of the taxable quarter.
3. Penalties for failure to submit summary list – for each

failure to file, keep or supply a statement, list, or
information on the date prescribed, the taxpayer pays an
administrative penalty of P1,000, unless such failure was
due to reasonable cause and not to willful neglect. The
aggregate amount to be imposed for such failures during
the taxable year shall not exceed P25,000.
Willful failure by the taxpayer to keep any record and

supply the correct information at the time or times
required shall be subject to criminal penalty upon
conviction of the offender under the Tax Code.
The imposition of the penalties under the Tax Code and

the compromise of the criminal liability on such violations
shall not relieve the violating taxpayer from the obligation
to submit the required documents.
4. The BIR RELIEF system – a taxpayer’s quarterly sales

and purchases are submitted to the BIR’s website through
the RELIEF Data Entry System.
The Reconciliation of Listing for Enforcement (RELIEF)

System supports the third party information program and
voluntary assessment program of the Bureau of Internal
Revenue through the cross-referencing of third party
information with the taxpayer’s quarterly summary lists of
sales and purchases.
h. Compliance requirements
1. Mandatory VAT registration
a. Gross sales or receipts for the past 12 months
have exceeded the threshold amount.
b. There are reasonable grounds to believe that the
gross sales or receipts for the next 12 months will
exceed the threshold amount.

TAX BUSINESS TAX
2. Threshold amount
a. Special threshold: P10,000,000 – Franchise
grantees of radio or television
b. General threshold: P3,000,000 – applicable to all
other taxpayers, other than abovementioned
franchise grantees
3. Optional VAT registration – a person who is below the

VAT threshold may, at his option, register as VAT
taxpayer.
4. Timing of VAT registration

a. Persons commencing business with an
expectation to exceed the VAT threshold within
12 months shall simultaneously register as VAT
taxpayer with the registration of their new
business or trade with the BIR.
b. Persons exceeding the VAT threshold shall
register as VAT taxpayer before the end of the
month following the month the threshold is
exceeded.
c. Franchise grantees of radio and television
broadcasting, whose gross annual receipts for
the preceding calendar year exceeded
P10,000,000, shall register as VAT taxpayer
within 30 days from the end of the calendar year.
d. Persons who are below the threshold but opt to
be registered as VAT taxpayer shall register not
later than 10 days before the beginning of the
taxable quarter.
5. VAT treatment of exempt transactions – a VAT-

registered taxpayer who enters into a VAT-exempt
transaction may also opt that the VAT apply to his
transactions which would have been exempt.
6. Optional VAT registration not allowed – self-employed

and/or professional individuals who opted the 8%
commuted tax under income taxation.

TAX BUSINESS TAX
7. Revocability of VAT registration
a. The VAT registration, whether voluntary or
mandatory, of franchise grantees of radio or
television is PERPETUALLY IRREVOCABLE.
b. Any person, other than franchise grantees of
radio or television, who voluntarily registered as
VAT taxpayers shall not be allowed to cancel their
VAT registration for the next 3 years.
c. Any person who registered as VAT taxpayers
with an expectation to exceed the VAT threshold
but failed to exceed the same within 12 months of
operations may apply for cancellation of VAT
registration.
8. Type of VAT taxpayers

a. VAT-registered taxpayer – a taxpayer who
registered under the VAT system
b. VAT-registrable taxpayer – a taxpayer who
exceeded the VAT threshold but did not yet
register as a VAT taxpayer
9. Penalty for registrable persons – registrable persons

are still liable to VAT but WITHOUT THE BENEFIT of
INPUT TAX CREDIT in the periods in which they are not
properly registered.

1. Invoicing requirement
a. A VAT-registered person shall issue:
i. A VAT invoice for every sale, barter or
exchange of goods or properties; and
ii. A VAT official receipt for every lease of
goods or properties, and for every sale,
barter or exchange of services
All persons subject to internal revenue tax shall

issue duly registered receipts prepared at least in
duplicate, for each sale or transfer of
merchandise or for services rendered valued at
P100.00 or more.

TAX BUSINESS TAX
b. Using a single invoice or receipt for mixed
sales – a VAT-registered taxpayer may use a
single invoice or receipt involving VAT and non-
VAT transactions, provided that:
i. the invoice or receipt must clearly
indicate the breakdown of the sales or
receipts among taxable, exempt and
zero-rated components; and,
ii. the calculation of VAT on each portion of
the sale shall be shown on the invoice or
receipt.
c. Using a separate invoice or receipt for mixed

sales – a VAT-registered taxpayer may also use
different invoice or receipt for the taxable, exempt
and zero-rated components of its sales. Provided
that:
i. if the sale is exempt from VAT, the term
“VAT-EXEMPT SALE” shall be written or
printed prominently on the invoice or
receipt
ii. if the sale is subject to zero percent (0%)
VAT, the term “ZERO-RATED SALE”
shall be written prominently on the
invoice or receipt
d. Content of the VAT invoice or official receipt

i. Name of Seller
ii. Business Style of the Seller
iii. Business Address of the Seller
iv. Statement that the seller is a VAT-
registered person, followed by its TIN
v. Name of Buyer
vi. Business Style of Buyer
vii. Address of Buyer
viii. TIN of buyer, if VAT-registered and
sale/receipt amount exceeds P1,000.00
ix. Date of transaction
x. Quantity
xi. Unit cost
xii. Description of the goods or properties or
nature of the service

TAX BUSINESS TAX
xiii. Authority to Print Receipt Number at the
lower left corner of the invoice or receipt
xiv. Purchase price plus the VAT, provided
that:
1. The amount of tax shall be
shown as a separate item in the
invoice or receipt;
2. If the sale is exempt from VAT,
the term “VAT-EXEMPT SALE”
shall be written or printed
prominently on the invoice or
receipt;
3. 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; and,
4. If the sale involves goods,
properties or services some of
which are subject to VAT and
some of which are zero-rated or
exempt from VAT, the invoice or
receipt shall clearly indicate the
breakdown of the sales price
among its taxable, exempt, and
zero-rated components, and the
calculation of the VAT on each
portion of the sale be shown on
the invoice or receipt.
e. Application for Authority to Print Receipts &

Invoices
i. Coverage – all persons who are
engaged in business shall secure from
the BIR an Authority to Print receipts or
sales or commercial invoice before a
printer can print the same.
ii. Tax form – BIR Form 1906 Application

for Authority to Print Receipts and
Invoices

TAX BUSINESS TAX
iii. Documentary requirements
1. Final & clear sample of principal
and supplementary
receipts/invoices
2. Photocopy of last issued ATP or
Printer's Certificate of Delivery
(PCD) or any booklet from the
last issued ATP for subsequent
application
iv. Procedures
1. For taxpayers
1906 and submit the
same together with the
documentary
requirements to RDO
where the HO is located
or concerned office
under the Large
Taxpayer Service;
b. Keep/File PCD and ATP
copy duly
received/issued by BIR
for audit purposes;
c. Taxpayer’s branch office
shall furnish its RDO a
copy of the ATP issued
by the appropriate BIR
office having jurisdiction
over the head office.
2. For printer/supplier
a. Prepare Printer’s
Certificate of Delivery
(PCD) in five (5) copies
and submit to RDO
where the place of
business is located or
concerned office under
the Large Taxpayer
Service within thirty (30)
days from date of ATP
and prior to delivery of

TAX BUSINESS TAX
receipts and/or invoices
to taxpayer;
b. Furnish the taxpayer
and its branches copy of
the received PCD and
approved ATP together
with the taxpayer’s
Sworn Statement within
thirty (30) days from the
issuance of PCD. One
copy thereof shall
likewise be submitted to
the BIR Office that has
jurisdiction over the
head office of the printer.
v. Deadlines – secure Application for

Authority to Print Receipts and Invoices
on or before the commencement of
business
2. Accounting requirement
a. Books of accounts – All persons subject to VAT
shall maintain:
i. Regular accounting records
ii. Subsidiary sales journal
iii. Subsidiary purchase journal
b. Registration of books of accounts

i. Newly registered (in general)
1. Tax form – BIR Form 1905
Application for Registration
Information Update/ Correction/
Cancellation
2. Documentary requirements
a. Manual books of
accounts (new or
subsequent)

TAX BUSINESS TAX
i. New sets of
permanently
bound books of
accounts for
registration/sta
mping or the
bound journals
and/or ledgers
b. Manual loose-leaf
books of accounts
i. Permit to Use
Loose Leaf
Books of
Accounts
ii. Permanently
bound Loose
Leaf Books of
Accounts
iii. Affidavit
attesting the
completeness,
accuracy and
correctness of
entries in Books
of Accounts and
the number of
Loose Lead
used for the
period.
3. If transacting through
representative
a. Individual
i. Special power
of attorney
(SPA)
ii. any
government-
issued ID of the
authorized
representative

TAX BUSINESS TAX
b. Corporations/
partnerships
i. board resolution
indicating the
purpose and the
name of the
authorized
representative;
or secretary’s
certificate
ii. any
government-
issued ID of the
authorized
representative
4. Procedures
a. Submit duly
accomplished BIR Form
1905 at the RDO or
the Large Taxpayer
Service having
place where the head
office and branch is
located, respectively;
and
b. Present the
manual/loose-leaf books
of accounts for
Stamping and
5. Deadline – newly registered

taxpayers shall present the
manual books of accounts to the
RDO or concerned office under
the Large Taxpayer Service
where the place of business is
located for approval and
registration before the deadline
for filing of the first quarterly

TAX BUSINESS TAX
income tax return or the annual
income tax return whichever
comes earlier.
ii. Subsequent registration of

books/renewal (in general)
1. Procedure
1905 at the RDO or
the Large Taxpayer
Service having
place where the head
office and branch is
located, respectively
b. Present the
manual/loose-leaf books
of accounts at the RDO
or concerned office
under the Large
Taxpayer Service where
the place of business is
located for Stamping
and registration
purposes.
2. Deadline – the registration of a

new set of manual books of
accounts shall only be at the time
when the pages of the previously
registered books have all been
already exhausted, provided,
that the portions pertaining to a
particular year should be
properly labeled or marked by
taxpayer. This means that it is
not necessary for a taxpayer to
register/stamp a new set of
manual books of accounts each
and every year.

TAX BUSINESS TAX
iii. Suspension of business operations and cancellation of VAT
registration
1. Suspension of business operations and temporary
closure of business – the Commissioner or his
authorized representative are empowered to suspend
business operations for any of the following violations:
a. For a VAT-registered person
i. Failure to issue receipts or invoices
ii. Failure to file VAT return
iii. Understatement of taxable sales or
receipt by 30% or more of his correct
taxable sales or receipt for the taxable
quarter
b. Failure to register as a taxpayer
2. Cancellation of VAT registration – the approval of a

request for cancellation of VAT registration shall be
effective on the first day of the month following the month
of the approval of the cancellation.
iv. Liability of non-VAT persons issuing VAT invoice or receipts

– the sale is subject to VAT without the benefit of input VAT plus
50% surcharge and the usual 1% percentage tax
v. Withholding by the government or GOCCs

1. Coverage – the legal requirement for the creditable
withholding of VAT shall apply if the goods or services
purchased from VAT suppliers were vatable. Before
January 1, 2021, the final withholding system was
effective before transitioning to creditable withholding
system.
2. Exceptions to the 5% creditable withholding tax

a. Lease or use of proprietary rights of non-
residents – subject to 12% final VAT
b. Purchase of goods or services arising from
projects funded by the Official Developmental
Assistance (ODA) under RA No. 8182 – under
the TRAIN law, government purchases for
projects funded by the ODA shall be exempt from
the 5% final withholding tax. It means that the
taxpayer supplying goods or services to ODA

TAX BUSINESS TAX
funded projects can claim full credit on input VAT
on such sales.
3. Withholding requirements on income tax – the

obligation of the government and GOCCs to withhold VAT
is a separate obligation from that of the obligation to
withhold income tax (expanded withholding tax).
a. 1% creditable withholding tax – purchase of
goods
b. 2% creditable withholding tax – purchase of
services
i. Tax implications of transactions applying the tax rules and


III. PERCENTAGE TAX

a. Nature and characteristics of percentage tax
i. Definition – percentage tax is a national tax imposed upon
business taxpayers on either from upon the vatable sale of goods
and/or services, for validly registered non-VAT taxpayers, or upon
services which are specifically designated by the tax code to be
subjected to specific percentage tax
ii. Nature and characteristics

1. National tax
2. Business tax
3. Sales tax
4. Tax on consumption
5. Direct tax
6. Quarterly tax
7. Ad valorem tax
b. Persons subject to percentage tax

i. Non-VAT taxpayers – those taxpayers engaged in business
validly registered as non-VAT taxpayers for having accumulated
or expected to accumulate sale of vatable goods or services below

TAX BUSINESS TAX
P3,000,000, the VAT threshold, within any 12-month period, which
is considered VAT exempt, but not totally exempt from business
tax, unless voluntarily registered as VAT taxpayer.
ii. Taxpayers with sale of services specifically subject to

percentage tax – those taxpayers engaged in business
registered as either non-VAT or VAT taxpayers, with which,
certain sale of services, specifically enumerated by the Tax Code
as subject to percentage tax, shall be reported separately from
vatable sale of goods and/or services, which the former are taxed
at appropriate specific percentage tax
c. Transactions subject to and/or exempt from percentage tax

i. General percentage tax
1. Coverage – vatable sale of goods and/or services by non-
VAT taxpayer (see topic Introduction to business taxation,
2. Tax base
a. Sale of goods and/or property – gross selling
price (general rule)
b. Sale of services or lease of property – gross
receipts or earnings
(See topic Value-added tax, subtopic Regular output
VAT)
3. Tax rate
a. 1% – for period starting July 1, 2020 to June 30,
2023
b. 3% – for periods before July 1, 2020 and July 1,
2023 onwards
ii. Specific percentage tax

1. Domestic common carriers and keepers of garages
a. Coverage – domestic common carriers of
passengers by land and keepers of garages
b. Tax base – receipts from transport or carrying of

passengers by land and/or from lease of cars for
rent or hire by keepers of garages
c. Tax rate – 3% common carrier’s tax

TAX BUSINESS TAX
d. Definition of common carrier – any person,
corporation, firm, or association engaged in the
business of carrying or transporting passengers
or goods or both, by land, water, or air, for
compensation, and offering their services to the
public.
For purposes of the percentage tax, common

carriers include cars for rent or hire driven by the
lessee, transportation contractors, persons who
transport passengers for hire and other domestic
land carriers on their transport of passengers
e. Common carriers are exempt from local taxes

– the gross receipts of common carriers derived
from their incoming and outgoing freight shall not
be subject to local taxes under the Local
Government Code of 1991.
f. Exemptions to the common carrier’s tax

i. Owners of bancas and animal-drawn
two-wheeled vehicles are exempt from
percentage tax.
ii. The law is silent regarding pedicabs, but
these businesses may qualify as
“business for mere subsistence”; hence,
these are also exempt from business tax.
g. Minimum presumptive gross receipts per

NIRC
Quarterly Monthly
Jeepney for hire:
Manila and other cities P2,400 P800
Public utility bus:
Not exceeding 30 passengers 3,600 1,200
Exceeding 30 but not more than 50 6,000 2,000
Exceeding 50 passengers 7,200 2,400
Taxis:
Manila and other cities 3,600 1,200
Car for hire:
With chauffeur 3,000 1,000
Without chauffeur 1,800 600

TAX BUSINESS TAX
Note: Revenue Regulation No. 9-2007 updated
the presumptive gross receipts, supposedly to
catch up with the inflation for that period, but the
said regulation was recommended to be
suspended by the Senate, in a Committee
Report, due to various factors
h. Summary on the taxability of receipts by

domestic common carriers
Mode of transport Passengers Baggage/Mails/Cargoes
By land 3% CCT Vatable
By water or sea Vatable Vatable
By air Vatable Vatable
2. International air/shipping carriers doing business in

the Philippines
a. Coverage – international air or sea carriers
owned by foreign corporations that operate in the
Philippines and transport passengers or cargoes
from the Philippines to overseas and vice versa
b. Tax base – quarterly gross receipts derived from

the transport of cargoes, baggage, or mails from
the Philippines to another country
c. Tax rate – 3%
d. Tax rules on outgoing flight or voyage

Sea or air carriers owned by
Domestic corporation Foreign corporation
Passengers Vatable Exempt
Cargoes/baggage Vatable 3% percentage tax
3. Certain franchise grantees

a. Coverage – generally, franchises are vatable,
except on the following franchise grantees:
companies whose annual gross receipts
do not exceed P10,000,000 – 3%
ii. Gas and water utilities – 2%

TAX BUSINESS TAX
b. VAT registration
companies are mandatorily required to
register as VAT taxpayer IF THEY
EXCEED the P10,000,000 gross receipt
threshold. Even if below the threshold,
they may register as VAT taxpayer. Once
the option is exercised, said option shall
be irrevocable.
ii. Gas and water utilities franchisees have
no similar provision applicable.
Note: Since receipts of franchise grantees of

radio or television broadcasting companies are
vatable, but only with different VAT threshold, the
amendment of the general percentage tax on
vatable sale of goods and/or services, from 3% to
1%, does not affect the tax rate applicable for the
same franchise grantee
c. Vatable franchises
i. Electricity – electric generation or
transmission and distribution by electric
cooperatives are vatable
ii. Telecommunication – Telecom
companies are vatable, except on their
receipts from outgoing messages
(subject to 10% overseas communication
tax)
iii. Transportation – Transport companies
are vatable, except receipts of common
carriers by land on their transport of
passengers (3% common carrier’s tax)
iv. Private franchises
4. Telephone companies on overseas communication

a. Coverage – the overseas dispatch, message or
conversation transmitted from the Philippines by
telephone, telegraph, telewriter exchange,
wireless and other communication equipment
services

TAX BUSINESS TAX
Note: Only the receipt from overseas
communication is subjected to this specific
percentage tax, while the rest of the other
receipts of the same telephone company is
vatable.
b. Tax rate – 10% overseas communication tax
c. Exemptions – overseas communication tax shall

not apply to the following outgoing calls:
i. Government – including any of its
political subdivisions or instrumentalities
ii. Diplomatic services – embassies and
consular offices of foreign governments
iii. International organizations – those
enjoying privileges, exemptions and
immunities under international
agreements
iv. News services
5. Banks and non-bank financial intermediaries

a. Tax on banks and non-bank financial
functions
Dividend and equity shares in the net income of subsidiaries 0%
On royalties, rentals of property, real or personal, profits from exchange and all 7%
other items treated as gross income
On net trading gains within the taxable year on foreign currency, debt securities, 7%
derivatives, and other similar instruments
b. Tax on other non-bank financial

intermediaries without quasi-banking
functions
From all other items treated as gross income under the NIRC 5%

TAX BUSINESS TAX
c. Definition of terms
i. Banks – entities engaged in the lending
of funds obtained in the form of deposits.
This includes commercial banks, savings
banks, mortgage banks, development
banks, rural banks, stocks and savings
associations, branches and agencies of
foreign banks.
This also includes cooperative banks,

Islamic banks and other banks
determined by the Monetary Board of the
BSP in the classifications of banks.
ii. Non-bank financial intermediaries –

persons or entities whose principal
function include the lending, investing or
placement of funds or evidences of
indebtedness or equity deposited with
them, acquired by them or otherwise
coursed through them, either for their
own account or for the account of others.
This includes all entities regularly

engaged in the lending of funds or
purchasing of receivables or other
obligations with funds obtained from the
public through the issuance,
instruments of any kind for their own
account, or through the issuance of
certificates, or of repurchase
agreements, whether any of these
means of obtaining funds from the public
is done on a regular basis or only
occasionally.
iii. Quasi-banking function/quasi-banks –

the borrowing of funds from 20 or more
personal or corporate lenders at any one
time, through the issuance, endorsement
or acceptance of debt instruments of any
kind, other than deposits, for the
borrower’s own account or through the
issuance of certificates of assignment or

TAX BUSINESS TAX
similar instruments, with recourse, or of
repurchase agreements for purposes of
relending or purchasing receivables or
other similar obligations.
Provided, however, that commercial,

industrial and other non-financial
companies, which borrows funds through
any of these means for the limited
purpose of financing their own needs or
the needs of their agents or dealers, shall
not be considered as performing quasi-
banking functions.
d. Rules for banks, quasi-banks and other

i. Accounting rules – basis of the
calculation of gross receipts shall be the
GAAP prescribed by BSP (banks and
quasi-banks) and SEC (other non-bank
financial intermediaries). GAAP shall
refer to the Philippine Financial Reporting
Standards (PFRS) based upon
International Accounting Standards (IAS)
ii. Tax base of finance and operating

leases
1. Finance lease – interest income
2. Operating lease – gross rentals
received
iii. Rule on pre-termination of loans – the

maturity period shall be reckoned to end
as of the date of pre-termination for
purposes of classifying the transaction
and applying the correct rate of tax.
iv. Withholding of percentage tax on

banks – BSP shall withhold the
percentage tax on all its payments to
special deposit accounts and reserve
liquidity accounts.

TAX BUSINESS TAX
6. Certain insurance companies and agents of foreign
insurance
a. Tax on life insurance premiums
i. Coverage – a person, company or
corporation doing LIFE INSURANCE
BUSINESS of any sort in the Philippines
ii. Tax base – premiums collected, whether

such premium is paid in money, notes,
credits or any substitute for money.
iii. Tax rate – 2% premiums tax
iv. Excluded life insurance companies –

purely cooperative companies or
associations doing life insurance
business
v. Life insurance company – a company

which deals with the insurance on human
lives and insurance appertaining thereto
or connected therewith. The service
likewise includes soliciting group
insurance, and health and accident
insurance policies which the company is
nevertheless authorized to pursue as
part of its business activity.
vi. Excluded from gross premium

receipts
1. Premiums refunded within 6
months after payment on
account of rejection of risk or
returned for other reasons
2. Re-insurance premiums
3. Premiums of life insurance of
non-residents received from
abroad by branches of domestic
corporation, firm or association
doing business outside the
Philippines
4. Excess of premiums on variable
contracts in excess of the
amounts necessary to insure the

TAX BUSINESS TAX
lives of the variable contract
owners
vii. Other receipts of life insurance

business and taxability
1. Renewal or re-insurance fee, re-
instatement fee and penalties –
2% premiums tax
2. Management fees, rental
income, or other income from
unrelated services – vatable
3. Investment income realized from
investment of premiums –
exempt
4. Investment income realized from
investment of funds obtained
from other sources – 5% (gross
receipt tax on non-financial
intermediaries)
b. Tax on foreign insurance

i. Agents of foreign insurance
1. Coverage – fire, marine or
miscellaneous insurance agents
authorized under the Insurance
Code to procure policies of
insurance on risks located in the
Philippines for companies not
authorized to transact business
in the Philippines
2. Tax base – premiums collected,

whether such premium is paid in
money, notes, credits or any
substitute for money.
3. Tax rate – equal to twice the tax

imposed on life insurance
premiums or 4% penalty tax

TAX BUSINESS TAX
ii. Direct insurance from abroad
1. Coverage – imposed upon
owners of property who obtained
insurance directly with foreign
insurance companies (no
domestic agent involved), who
shall have the duty to report each
transaction to the Insurance
Commissioner and to the
Commissioner of Internal
Revenue
2. Tax base – premium paid to

foreign insurance companies
3. Tax rate – 5%
c. Summary on tax on insurance

Domestic insurers Life insurance Non-life insurance
Direct premiums 2% premiums tax Vatable
Reinsurance premiums Exempt Exempt
Insurance commissions Vatable Vatable
7. Certain amusement activities/places

a. Coverage – proprietor, lessee or operator of the
following amusement places shall pay the
following respective amusement tax according to
its specific tax rate:
i. Jai-alai and racetracks – 30%
ii. Night or day clubs, cockpits and cabarets
– 18%
iii. Places of professional basketball games
– 15%
iv. Boxing exhibitions – 10%
b. Tax base – quarterly gross receipts which

embrace all receipts of the proprietor, lessee or
operator of the amusement places. Said receipts
include income from television, radio, and motion
picture rights, if any.
c. Note
i. Other operators of amusement places
such as bowling alleys, golf courses, and
billiard halls are vatable.

TAX BUSINESS TAX
ii. Cinemas and theaters are not subject to
this national amusement tax because it is
exclusively subject to local amusement
tax.
d. Exempt receipts on professional boxing – the

gross receipts from professional boxing are
exempt from percentage tax under the following
conditions:
i. World or Oriental Championship
ii. At least one of the contenders is a
Filipino citizen
iii. The promoter is a Filipino citizen or a
corporation 60% of which is owned by
Filipino citizens
e. Illegal cockpits – persons who are engaged in

the same operations such as operators of illegal
“tupada” cockpit are also taxed at 18% of their
gross receipts.
8. Services rendered by Offshore Gaming Licensees

a. Coverage – Gaming income from services
rendered by Offshore Gaming Licensees
(POGOs)
b. Tax base – the higher between

i. Entire gross gaming revenue or receipts,
or
ii. The agreed predetermined minimum
monthly revenue or receipts from gaming
c. Gross gaming revenue or receipts – gross

wages less payouts
d. Tax rate – 5% of the tax base
e. Limit on regulatory fees – the PAGCOR or any

special economic zone authority or tourism zone

TAX BUSINESS TAX
authority or freeport authority may impose
regulatory fees which shall not cumulatively
exceed 2% of the tax base
9. Winnings from jai-alai and horse race

a. Coverage – the following are subject to the
following tax on winnings:
i. Net winnings in horse race or jai-alai, in
general (straight wagers) – 10%
ii. Net winnings from double,
forecast/quinella and trifecta bets
(combination bets) – 4%
iii. Owners of winning horses – 10%
b. Tax base – in general, net winnings = total

winnings minus cost of winning tickets
10. Brokers in effecting sales of stocks through local

a. Coverage – the sale, barter or exchange,
including block sale, of listed stocks through the
Philippine Stock Exchange (PSE), other than by
dealers in securities
b. Tax base – gross selling price or gross value in

money of the shares of stocks sold
c. Tax rate – 6/10 of 1% or 0.6% stock transaction

tax
Note: The tax on the shares of stock sold or exchange

through an initial public offering (IPO) or IPO tax was
repealed (not suspended), pursuant to Republic Act No.
11494 (Bayanihan to Recover as One Act), effective
December 19, 2020.
iii. Exemption from percentage tax

1. Exempt sales of goods, properties and services –
totally exempt from any form of business tax (See topic
Value-added tax, subtopic Exempt sales)

TAX BUSINESS TAX
2. VAT taxpayers – sale by Vat taxpayers on their vatable
goods and/or properties.
3. Business, professional or mixed income earners who

opted the 8% income tax
a. 8% income tax option – business, professional
or mixed income earners may opt to be taxed to
the 8% income tax which covers both income tax
and the general percentage tax. (See topic
Income taxation,
b. Applicability of 8% income tax option

i. Annual option
ii. Self-Employed Individuals and/or
Professionals or Mixed Income Earners
iii. Valid if the taxpayer remained as non-
VAT taxpayer (Annual sales/receipts do
not exceed threshold or not voluntarily
registered as VAT)
4. Cooperatives – they shall be exempt from the general

percentage tax; however, it is not absolute. Sales or
receipts of cooperatives outside their registered activities
are still subject to business tax similar to the business tax
treatment of government agencies and nonprofit
institutions.
d. Percentage tax due, and tax credits, if applicable

i. Determination of the percentage tax due
Tax base (Gross sales or gross receipts) XXX,XXX
Multiply by: Appropriate tax rate XX%
Percentage tax due XXX,XXX
Less: Tax credits, if any XXX,XXX
Percentage tax still due/payable XXX,XXX
ii. Application of credit on withholding tax on government

payments
1. Withholding of percentage tax on government money
payments – sale to government agencies, and
instrumentalities including government-owned and
controlled corporations (GOCCs) is subject to a
withholding tax at source. The amount of money received

TAX BUSINESS TAX
represents the amount billed less the withholding tax.
Withholding of percentage tax is considered an advance
remittance to the BIR, in which, the same amount can be
claimed as tax credit to reflect the remaining percentage
tax due.
2. Tax rate
a. 1% – for period July 1, 2020 to June 30, 2023
b. 3% – for periods before July 1, 2020 and July 1,
2023 onwards
3. Mechanics for claiming tax credit – upon withholding,

the government agency or GOCC concerned shall
provide a duly accomplished BIR Form 2307 Certificate of
creditable tax withheld at source, to the payor-taxpayer,
detailing the tax base and the amount of tax withheld. The
BIR Form 2307 shall be attached to the quarterly
percentage tax return of the period to which the
corresponding tax credit shall be claimed. The period of
claiming the tax credit shall be at the quarter when the
withholding was made.
e. Tax return preparation and filing and tax payments

1. Manual filing
2. eBIR
ii. Venue and timing of filing of tax returns

1. Venue of fling of tax returns – to the following in order
of priority:
the RDO/LTO where the taxpayer (head office of
the business establishment) is required to be
registered
city

TAX BUSINESS TAX
2. Timing of filing of tax returns
a. General rule
i. Deadline – within 25 days following the
close of the taxable quarter
ii. Coverage – all other percentage taxes
b. Exception
i. Deadline – within five (5) banking days
from the date of collection
ii. Coverage – sale of shares of stocks
listed and traded through the local stock
exchange (LSE)
iii. Payment of percentage tax due – pay as you file

TAX BUSINESS TAX
iv. Accomplishing of tax returns and forms
1. BIR Form 2551Q – Quarterly percentage tax return

TAX BUSINESS TAX
2. BIR Form 2552 – Percentage tax return for transactions
involving shares of stock listed and traded through the
local stock exchange (LSE) or through initial and/or
secondary public offering

TAX BUSINESS TAX
3. BIR Form 2553 – Return of percentage tax payable under
special laws
v. Attachments to the tax return

1. Duly issued Certificate of creditable tax withheld at source
(BIR Form 2307), if applicable
2. Duly approved Tax debit memo, if applicable
3. For amended return, proof of payment and the return
previously filed
4. Authorization letter, if filed by an authorized
representative
5. Copy of Certificate of registration issued by the
Cooperative Development Authority for cooperatives, and
from the National Electrification Administration for electric
cooperatives
f. Compliance requirements
1. Concept – for persons engaged in business not required
to be registered as VAT taxpayer and/or those with gross
receipts or earnings subject to specific percentage tax
must register their business annually

TAX BUSINESS TAX
2. Mechanics – the business taxpayer must accomplish
either of the following, and attach the necessary
requirements indicating proof of the existence of
business:
a. BIR Form 1901 – Application for registration for
self-employed (single proprietor/professional),
mixed income individuals, non-resident alien
engaged in trade/business. Estate and trust
b. BIR Form 1903 – Application for registration for
corporations, partnerships (taxable/non-taxable)
including GAIs, LGUs, cooperatives and
associations
c. BIR Form 1905 – Application for registration
information update/correction/cancellation
3. Deadline of application for registration

a. First time registration – before the
commencement of the business operations
b. Renewal – on or before January 31 of the taxable
year
4. Venue of application for registration – in the RDO

where the head office is located or concerned office under
the Large Taxpayer Service (LTS)
5. Proof of registration – upon compliance and approval of

the registration, the BIR RDO or LTS shall issue a BIR
Form 2303 Certificate of registration. Such document
indicates the different tax types with its corresponding
deadlines to which the taxpayer must file and comply. A
copy of such document shall be displayed conspicuously
within the premises of the business office.

1. Invoicing requirements – the same manner of
application for the printing of invoice and/or receipts for
VAT registered taxpayers, however, the invoice and/or
receipt must clearly indicate that it is a non-VAT invoice.
The same rule on the manner of filing in the invoice and/or
receipt as to the kind of sale whether taxable or exempt.

TAX BUSINESS TAX
2. Accounting requirements – the same manner of
application for registration of books of accounts for VAT
registered taxpayers. The same minimum books of
accounts are needed.
g. Tax implications of transactions applying the tax rules and


IV. SPECIFIC PROVISIONS OF OTHER SPECIAL LAWS RELATING TO

BUSINESS TAXATION
a. Senior Citizen’s Law (RA 7432)
i. Privileges of the senior citizens – the senior citizens shall be
entitled to the following:
1. the grant of twenty percent (20%) discount and exemption
from the value-added tax (VAT), if applicable, on the sale
of the certain goods and services from all establishments,
for the exclusive use and enjoyment or availment of senior
citizens
2. exemption from the payment of individual income taxes of
senior citizens who are considered to be minimum wage
earners in accordance with Republic Act No. 9504
ii. Coverage of 20% discount and VAT exemption

1. on the purchase of medicines, including the purchase of
influenza and pneumococcal vaccines, and such other
essential medical supplies, accessories and equipment to
be determined by the Department of Health (DOH).
The DOH shall establish guidelines and mechanisms of

compulsory rebates in the sharing of burden of discounts
among retailers, manufacturers and distributors, taking
into consideration their respective margins.
2. on the professional fees of attending physician/s in all

private hospitals, medical facilities, outpatient clinics and
home health care services
3. on the professional fees of licensed professional health

workers providing home health care services as endorsed

TAX BUSINESS TAX
by private hospitals or employed through home health
care employment agencies
4. on medical and dental services, diagnostic and laboratory

fees in all private hospitals, medical facilities, outpatient
clinics, and home health care services, in accordance with
the rules and regulations to be issued by the DOH, in
coordination with the Philippine Health Insurance
Corporation (PhilHealth)
5. in actual fare for land transportation travel in public utility

buses (PUBs), public utility jeepneys (PUJs), taxis, Asian
utility vehicles (AUVs), shuttle services and public
railways, including Light Rail Transit (LRT), Mass Rail
Transit (MRT), and Philippine National Railways (PNR)
6. in actual transportation fare for domestic air transport

services and sea shipping vessels and the like, based on
the actual fare and advanced booking
7. on the utilization of services in hotels and similar lodging

establishments, restaurants and recreation centers
8. on admission fees charged by theaters, cinema houses

and concert halls, circuses, carnivals, and other similar
places of culture, leisure and amusement
9. on funeral and burial services for the death of senior

citizens
iii. Establishments offering discount to senior citizens – the

establishment may claim the discounts granted under R.A. No.
7432, as amended, as tax deduction based on the cost of the
goods sold or services rendered: Provided, that
from gross income for the same taxable year that the
2. the total amount of the claimed tax deduction net of VAT,
if applicable, shall be included in their gross sales receipts
for tax purposes and shall be subject to proper
documentation and to the provisions of the National
Internal Revenue Code (NIRC), as amended.

TAX BUSINESS TAX
iv. Requirements and documents – in the availment of the
privileges mentioned above, the senior citizen, or his/her duly
authorized representative, may submit as proof of his/her
entitlement thereto any of the following:
1. an identification card issued by the Office of the Senior
Citizen Affairs (OSCA) of the place where the senior
citizen resides: Provided, That the identification card
issued by the particular OSCA shall be honored
nationwide;
2. the passport of the senior citizen concerned; and
3. other documents that establish that the senior citizen is a
citizen of the Republic and is at least sixty (60) years of
age as further provided in the implementing rules and
regulations.
b. Magna Carta for Disabled Persons (RA 7277)

i. Rights and privileges of PWDs – persons with disability shall be
entitled to at least twenty percent (20%) discount and exemption
from the value-added tax (VAT), if applicable, on the sale of
certain goods and services for the exclusive use and enjoyment
or availment of the PWD.
ii. Coverage of 20% discount & VAT exemption

1. On the fees and charges relative to the utilization of all
services in hotels and similar lodging establishments;
restaurants and recreation centers
2. On admission fees charged by theaters, cinema houses,

concert halls, circuses, carnivals and other similar places
of culture, leisure and amusement
3. On the purchase of medicines in all drugstores
4. On medical and dental services including diagnostic and

laboratory fees such as, but not limited to, x-rays,
computerized tomography scans and blood tests, and
professional fees of attending doctors in all government
facilities, subject to the guidelines to be issued by the
Department of Health (DOH), in coordination with the
Philippine Health Insurance Corporation (PhilHealth)

TAX BUSINESS TAX
5. On medical and dental services including diagnostic and
laboratory fees, and professional fees of attending
doctors in all private hospitals and medical facilities, in
accordance with the rules and regulations to be issued by
the DOH, in coordination with the PhilHealth
6. On fare for domestic air and sea travel
7. On actual fare for land transportation travel such as, but

not limited to, public utility buses or jeepneys
(PUBs/PUJs), taxis, Asian utility vehicles (AUVs), shuttle
services and public railways, including light Rail Transit
(LRT), Metro Rail Transit (MRT) and Philippine National
Railways (PNR)
8. On funeral and burial services for the death of the PWD:

Provided, That the beneficiary or any person who shall
shoulder the funeral and burial expenses of the deceased
PWD shall claim the discount under this rule for the
deceased PWD upon presentation of the death certificate.
Such expenses shall cover the purchase of casket or urn,
embalming, hospital morgue, transport of the body to
intended burial site in the place of origin, but shall exclude
obituary publication and the cost of the memorial lot
iii. Privileges of establishments offering discounts to PWDs –

the establishments may claim the discounts granted as tax
deductions based on the net cost of the goods sold or services
rendered: Provided, however, That
from the gross income for the same taxable year that the
2. the total amount of the claimed tax deduction net of value-
added tax, if applicable, shall be included in their gross
sales receipts for tax purposes and shall be subject to
proper documentation and to the provisions of the
National Internal Revenue Code (NIRC), as amended.
iv. Requirements and documents – the abovementioned privileges

are available only to PWD who are Filipino citizens upon
submission of any of the following as proof of his/her entitlement
thereto:

TAX BUSINESS TAX
1. An identification card issued by the city or municipal
mayor or the barangay captain of the place where the
PWD resides;
2. The passport of the PWD concerned; or
3. Transportation discount fare Identification Card (ID)
issued by the National Council for the Welfare of Disabled
Persons (NCWDP).

TAXATION
TAX19.M2014 VATTAX
VALUE ADDED TAX.INPUT Tax
MARGINAL
VATTAX.05 VAT INPUT TAX NOTES
5.1 INPUT VAT/TAX
5.1.1 Definition.
A. It means the VAT due on or paid by a VAT-registered taxpayer on
importation of goods or local purchase of goods, properties or services,
including lease or use of property in the course of his trade or business.
5.1.2 INPUT TAX: Requisites:

A. The taxpayer is a registered VAT person
B. The input tax is related to business subject to VAT (12% or 0%)
5.2 KINDS OF INPUT TAX
5.2.1 Transitional input tax

5.2.2 Presumptive Input tax
5.2.3 Input tax on importation of goods or properties other than capital goods
5.2.4 Input tax on local purchases of goods or properties other than capital goods
5.2.5 Input tax on local purchase or importation of capital goods
5.2.6 Input tax on local purchases of services
5.2.7 Withholding of VAT

TAX TAX19.M2014.VATTAX. Input Tax
A. TRANSITIONAL INPUT VAT/TAX (TIT)
MARGINAL I. Is allowed on the inventory on hand (goods, materials of supplies) of a
NOTES person who for the first time becomes liable to VAT or those who elect
to be VAT registered. Whichever is higher between:
 2% of the beginning inventory of VAT subject goods, materials
and supplies, or
 Actual VAT paid on such beginning inventory
II. PROBLEM 1
Dizon Farm Corporation became subject to VAT effective January
1, 2018:
The following are its records:

Gross sales – January 1 to Dec. 31, 2017 P 2,900,000
January 2018 data:
January 1 inventory:
Purchased from VAT registered persons 48,000
Purchased from non-VAT registered persons 332,000
Actual VAT paid 5,140
Sales (total invoice amount) 224,000
Purchases (exclusive of VAT) 60,000
The VAT payable on January 2018 is –

A. 11,660
B. 9,200
C. 16,400
D. None
B. PRESUMPTIVE INPUT VAT/TAX (PIT)

I. Input tax on purchases of a VAT-registered person despite that there
is no actual VAT payment made on VAT-exempt transactions. The
VAT registered persons or firms are engaged in the –
 Processing of sardines, mackerel, and milk, and in
 Manufacturing refined sugar, cooking oil and packed noodle-
based instant meals
1. 4% of the gross value in money of their purchases of primary

agricultural products which are used as inputs to their
production.
II. PROBLEM 11
Don Pedro de Azucarera is a processor of refined sugar. It
purchases sugarcane from farmers for processing into
intermediate stages until it becomes refined sugar. In a month it
had the following sales and purchases, no tax included:

TAX19.M2014.VATTAX. Input Tax TAX
Sales P 880,000
MARGINAL
Purchases of sugarcane 220,000
Purchases of containers and paper labels 100,000 NOTES
The value-added tax payable is:

A. P67,200
B. P89,200
C. P84,800
D. P69,200
C. VAT ON IMPORTATION
I. Subject: Goods and properties whether the importation is –
 For sale, or
 For use in business, or
 For personal use.
II. Person Liable:

 Any person who bring goods into the Philippines, whether or not
made in the course or his/her trade or business;
 It includes non-exempt persons or entities who acquire tax free
imported goods from exempt persons, entities or agencies.
III. Formula:
 Custom duties is Ad Valorem (based on value)
Dutiable Value P xxxx

Custom duties xxxx
Excise Tax xxxx
Other charges within BOC xxxx
Tax base P xxxx
VAT rate 12%
VAT on Importation P xxxx
 Custom duties is Specific (based on quantity or volume)
Invoice amount P xxxx

Custom duties xxxx
Freight xxxx
Insurance xxxx
Other charges within BOC xxxx
Landed Cost P xxxx
Excise Tax xxxx
Tax base P xxxx
VAT rate 12%
VAT on Importation P xxxx

MARGINAL IV. Time of Payment– It shall be paid by the importer prior to the release
NOTES of the goods from customs custody.
5.3 VAT ACCOUNTING ENTRIES
5.3.1 PROBLEM 1
Best Line Company sold to AM First Enterprises goods worth P 10,000,

exclusive of vat. Record the accounting entries in the sales book and in the
purchase book if:
A. The buyer and the seller are subject to VAT.
B. Seller is VAT registered, while the buyer is not.
C. Seller is not VAT registered while the buyer is VAT registered.
5.3.2 PROBLEM 2
All amounts given are total invoice costs/prices: A, non-VAT

taxpayer, sells to B, VAT taxpayer P 67,200
B, VAT taxpayer, sells to C, VAT taxpayer 100,800
C, VAT taxpayer, sells to D, VAT taxpayer, an exporter 168,000
D, VAT taxpayer, exports 300,000
1. The value-added tax of B:

A. Payable of P3,600
B. Payable of P10,800
C. Payable of P10,080
D. Payable of P12,096
2. The value-added tax of C:

B. Payable of P6,720
D. Refundable of P10,900
3. The value-added tax of D:

B. Refundable of P18,000
D. Refundable of P36,000

MARGINAL
5.3.3 PROBLEM 3
NOTES
Dan Vil Corporation imported an article from Turkey. The invoice value of the
following article was 1,000,000 Lira (1 Lira = P0.50). The following were
incurred in connection with the importation:
Insurance P 15,000
Freight 10,000
Postage 5,000
Wharfage dues 7,000
Arrastre charges 8,000
Brokerage fee 25,000
Facilitation fee 3,000
The imported article was subject to P50,000 customs duty and P30,000 excise
tax. Dan Vil Corporation spent P5,000 for trucking from the customs
warehouse to its warehouse in Pasig City.
1. The VAT on importation is:

A. P65,800
B. P78,000
C. P65,000
D. P50,000
2. Assuming that the imported article was sold for P950,000, VAT exclusive,
the VAT payable is:
A. P36,000
B. P29,200
C. P30,000
D. P114,000
5.3.4 PROBLEM 4
Jurong Corporation is VAT-registered. Importations were for:
Any value-added tax not included. Sale Own use

Invoice cost (Exchange rate is $1 : P56) $80,000 $4,000
Expenses based on cost:
Freight and insurance 4% 4%
Other expenses up to the point of removal from customs house 6% 6%
Transfer expenses from customs house to warehouse in Manila 1/2% 1/2%
Selling price of goods imported for sale within the same taxable period of
importation, value-added tax included, was P6,720,000.

1. The value-added tax payable on the importations of M. Porter is:
MARGINAL A. P492,800
NOTES B. P491,300
C. P517,440
D. P620,928
2. The value-added tax payable on the sale is:

A. P99,072
B. P128,640
C. P107,200
D. P720,000
5.4 ALLOCATION OF INPUT TAXES

5.4.1 It refers to a situation wherein the taxpayer is engaged in transactions subject
to VAT (12% or 0%) as well as not subject to VAT (exempt). The main concern
in such a case is the determination of input tax that can be claimed for VAT
purposes.
5.4.2 A VAT registered person who is also engaged in transactions not subject to
VAT shall be allowed of Input Tax credit as follows:
A. Total input tax which can be directly attributed to transactions subject to
VAT (except VAT taxable sales of goods and services to the government
or GOCC); and
B. Ratable Portion of any input tax which cannot be directly attributed to
either activity. (Allocation shall be on the basis of sales volume).
5.4.3 PROBLEM 5
Miss Sarsi Emmanuel, a bold actress, had the following data for the quarter
ending June 30, 2017 (amounts are exclusive of tax):
Receipts from talent fees P 1,000,000

Gross receipts from taxicabs (4 units) 500,000
Purchases of wardrobes used in films 200,000
Purchase of spare parts of taxicabs 100,000
Public relations services for image build-up as an actress 85,000
Insurance premiums for taxicabs 61,000
Rent of office space used both for her occupation and
taxicab business, subject to VAT 400,000
The VAT payable by Miss Emmanuel is –

A. 37,800
B. (41,520)
C. 53,800
D. 18,480

MARGINAL
5.4.4 PROBLEM 6
NOTES
Syl-van International Corp. is a VAT-registered taxpayer. The following data
from the books of accounts were transactions for each of the months of
January, February and March (first quarter) of 2018:
January February March

Credits to sales account P440,000 P550,000 P770,000
Debits to purchases account on
local purchases of goods from:
VAT-registered persons 110,000 660,000 330,000
Non-VAT registered persons 20,000 30,000 15,000
Importation of goods, landed cost 50,000
1. The value-added tax payable at the end of January is:

A. P33,000
B. P39,600
C. P30,000
D. P52,800
2. The value-added tax payable (refundable) at the end of February is:

A. (P19,200)
B. P19,800
C. Due of P0
D. P66,000
3. The output taxes on the return for the period ending March is:
A. P160,000
B. P176,000
C. P211,200
D. P92,400
4. The value-added tax payable at the end of March 2018 is:

A. P13,800
B. P33,600
C. P13,200
D. P39,600
5.4.5 PROBLEM 7
The following first quarter data pertain to a value-added taxpayer whose

purchases were all from value-added taxpayers:
Output taxes, January P 132,000

Input taxes, January 240,000
Output taxes, February 348,000
Input taxes, February 144,000
MARGINAL Sales, total invoice price, March 3,360,000
NOTES Purchases, total invoice cost, March 1,456,000
The value-added tax payable for March is:

A. P190,400
B. P192,000
C. P204,000
D. P260,400
1. AyreBenBeh Logistics Corp., a VAT-registered taxpayer, is a customs broker and

a forwarder, representing importers at the piers and transporting their
importations to warehouses all over Luzon. On an importation by Kalsada
Trading Corp., its costs were (taxes not included) as follows:
Invoice cost of importation (Exchange rate is $1 : P56) $30,000

Expenses on the importation up to Philippine port P20,000
Excise tax 10,000
Customs duty 15,000
Customs brokerage charges paid to AyreBenBeh Logistics Corp. 8,000
Forwarding charges paid to AyreBenBeh Logistics Corp. 25,000
The value-added tax of Kalsada Trading Corp., before any tax credits, is:
A. P210,960
B. P175,800
C. P173,300
D. P207,960
2. AyreBenBeh Logistics Corp., a VAT-registered taxpayer, is a customs broker and

a forwarder, representing importers at the piers and transporting their
importations to warehouses all over Luzon. On an importation by Kalsada
Trading Corp., its costs were (taxes not included) as follows:
Invoice cost of importation (Exchange rate is $1 : P56) $30,000

Expenses on the importation up to Philippine port P20,000
Excise tax 10,000
Customs duty 15,000
Customs brokerage charges paid to AyreBenBeh Logistics Corp. 8,000
Forwarding charges paid to AyreBenBeh Logistics Corp. 25,000

The business tax of AyreBenbeh Logistics Corp., before any tax credits, is:
MARGINAL
A. Value-added tax of P3,960
B. Percentage tax of P990 NOTES
C. Value-added tax of P0
D. Percentage tax of P0
3. The allowable transitional input tax is:

A. The lower between 2% of the value of beginning inventory or actual VAT paid
on such inventory.
B. The higher between 2% of the value of beginning inventory or actual VAT
paid on such inventory.
C. The actual VAT paid on the beginning inventory.
D. 2% of the value of beginning inventory.
4. Which statement is wrong?

A. There is a transitional input tax on sales of goods or properties.
B. There is a transitional input tax on sales of services.
C. There is a presumptive input tax on sales of goods or properties.
D. There is a presumptive input tax on sales of services.
5. Go Jek, a VAT taxpayer, on January 1, 2018, made the following purchases from
VAT sellers, for use in his business. The amounts stated below are not inclusive
of value-added taxes:
Machine 1, with a useful life of 20 years P3,000,000

Machine 2, with a useful life of 3 years 1,800,000
Patent, with usefulness of 10 months 600,000
The input taxes from the purchases, available to Go Jek, for the month of
January, 2018:
A. P19,200
B. P70,000
C. P79,500
D. P84,000
6. Roxanoca Land, a real estate developer, organized in the 1960s, bought several
parcels of land in Rio Tuba, Palawan during the 1960s. It has never registered as
VAT liable since its sales during the past years did not meet the mandatory
liability for VAT. However, during the current year, due to increased transactions,
it became liable for the first time for VAT. Roxanoca Land invoked entitlement to
transitional input taxes on all its landholdings, but the same was disallowed
because according to the BIR, the purchase of these lands happened at a time
when no VAT was imposed in the country, and that no input VAT was actually
paid on such lands. Was the action of the BIR proper? Decide

A. Roxanoca Land is not entitled to transitional input VAT because when the
MARGINAL purchase was made, the VAT law was not yet in force.
NOTES B. Roxanoca Land is entitled to transitional input VAT regardless of its prior non
VAT registration
C. Roxanoca Land is not entitled to transitional input VAT as it never registered
itself in the past as VAT liable
D. Roxanoca Land is entitled to transitional input VAT only if it can claim that it
shouldered the burden of the VAT during the prior years.

.
TAXATION
TAX19.M2011 VATTAX
VALUE ADDED TAX. Introduction to Consumption Tax
MARGINAL
NOTES
VATTAX.02 INTRODUCTION TO BUSINESS TAX VAT
2.1 VAT BUSINESS TAXES
2.1.1 Are those imposed upon onerous transfers such as sale, barter, exchange and
importation. It is called as such because without a business pursued in the
Philippines (except importation) by the taxpayer, business taxes cannot be
applied. Business taxes are in addition to income and other taxes paid, unless
specifically exempted.
2.1.2 Any business pursued by an individual wee the aggregate gross sales or
receipts do not exceed P100,000 during the any 12 month period shall be
considered principally for subsistence or livelihood and not in the ordinary
course of trade or business. Hence not subject to business taxes.
2.2 WHAT IS IN THE COURSE OF TRADE OR BUSINESS?
2.2.1 The regular conduct or pursuit of a commercial or an economic activity,

including transactions incidental thereto, by any person regardless of whether
or not the person engaged therein is a non-stock, non-profit private
organizations or government entity.
1. First statement: Sales of drugs and medicines of pharmacy run by the hospital to
outpatients are subject to VAT.
Second statement: Pharmacy items used in the performance of medical
procedures in hospital units such as in the operating and delivery rooms and by
other departments are considered part of medical services rendered by the
hospital, hence, not subject to VAT.
B. Both statements are incorrect
C. Only the first statement is correct
D. Only the second statement is correct
2. Which statement is correct? The value-added tax on an importation:

TAX TAX19.M2011.VATTAX. Introduction to Consumption Tax
A. A. Should be paid by the tax-exempt importer, if he subsequently sells the
MARGINAL goods to a non-tax- exempt purchaser.
NOTES B. Should be paid by the non-tax-exempt purchaser to whom the tax-exempt
importer sells it.
C. Is a liability either of the tax-exempt importer or the non-tax-exempt
purchaser.
D. Shall not pay the value-added tax because the transaction was exempt at the
point of importation.
3. Which statement is wrong? Transactions considered “in the course of trade or

business” and, therefore, subject to the business taxes include:
A. Regular conduct or pursuit of a commercial or an economic activity by a
stock private organization.
B. Regular conduct or pursuit of a commercial or an economic activity by a non-
stock, non-profit private organization.
C. Isolated services in the Philippines by non-resident foreign persons.
D. Isolated sale of goods or services for a gross selling price or receipts of
P500,000.
4. First statement: For a person to be subjected to any business tax. It is necessary

that he is regularly engaged in the conduct or pursuit of an economic activity.
Second statement: /a non-resident foreign person performing isolated
transaction in the Philippines shall be liable to VAT.
A. B. C. D.
Statement 1 True True False False
Statement 2 True False True False
5. Fortune Philip Corporation imported cigarettes from Taiwan for sale. At a later
date, he sold the cigarettes in the Philippines. He is subject to the value-added
tax. Fortune Philip Corporation is also subject to the business tax of:
A. Excise tax
B. Income tax
C. Percentage tax
D. None of these
6. Lamb Vhanog is manufacturer of fermented liquors. In making sales, all taxes on

the products and transactions are passed on to the buyers. For purposes of the
value-added tax, which of the three taxes listed below that he pays forms part of
the gross selling price?
A. Excise tax
B. Value-added tax
C. Percentage tax
D. None of these


(082) 2214337 / 0925 5623787 |
.
TAXATION
TAX19.M2011 VATTAX
VALUE ADDED TAX. Introduction to Consumption Tax
MARGINAL
VATTAX.01 INTRODUCTION TO CONSUMPTION TAX NOTES
1.1. WHAT IS VAT?

1.1.1 VAT is a valued on added by every seller to the purchase price or cost in the
sale or lease of goods, property or service in the ordinary course of trade or
business as well as on importation of goods into the Philippines, whether for
personal or business use.
1.2. HISTORY OF PHILIPPINE SALES TAX SYSTEM

1.2.1 The Philippine Sales Tax system from 1939 to 1978 was essentially a single
stage value added tax computed under the so called “cost deduction method”.
This was imposed only on manufacturers, producers and importers.
1.2.2 On July 1, 1978, PD 1358 made an amendment on the tax code and replaced
the system with the “tax credit method” of collecting the sales tax. It was a
gross product type value added system applied only to manufacturers.
1.2.3 Subsequently, PD Nos. 1705 and 1773 were imposed providing value added tax
on the second sale of articles but was replaced not long after by PD 1991. The
said PD imposed a 3% turnover tax on all second sales. This was soon
replaced by a turnover rate of 1.5% on all subsequent sales under PD 2006.
1.2.4 On Jan. 1, 1988, the VAT system was introduced and implemented under EO
273. It covered limited number of goods and services. On May 5, 1994 the
President signed into law RA 7716 to increase the parameter of the coverage
of the 1988 VAT law known as “Expanded VAT Law”.
1.2.5 RA 9337 was approved into law which now known as “New Expanded VAT
Law” implemented by RR 14-2005 and supersedes by RR 16-2005.
1.3. WHO ARE LIABLE TO VAT?

i. Any individual, trust, estate, partnership, corporation, joint venture, cooperative
or association who in the course of his trade or business:
ii. Sells, barters, exchanges goods or properties
iii. Sells or renders services
iv. Leases properties
v. Import goods

A. Exceptions, where even there is no business, VAT is imposable:
MARGINAL I. Importation of goods for personal use; and
NOTES II. Services rendered in the Philippines by non-resident foreign persons,
even isolated, shall be considered as being rendered in the course of
trade or business.
1.4. NATURE AND CHARACTERISTICS OF VAT

1.4.1 VAT is a tax on consumption levied on the sale, barter, exchange or lease of
goods or properties and services in the Philippines. The seller is the one
statutorily liable for the payment of the tax but the amount of the tax may be
shifted or passed on to the buyer, transferee or lessee of the goods, properties
or services.
1.5 CONVENTIONAL VAT FORMULA
1. Gross selling price includes all of the following, except one. Which one?
A. Total amount which the purchaser pays to the seller.
B. Total amount which the purchaser is obligated to pay to the seller.
C. Excise tax.
D. Value-added tax.
2. Alfonso is a manufacturer of fermented liquors. In making sales, all taxes on the

products and transactions are passed on to the buyers. For purposes of the value
added tax, which of the three (3) taxes listed below that he pays forms part of the
gross selling price?
A. Percentage Tax.
B. Value-added tax.
C. Excise tax.
D. None of the above

TAX19.M2011.VATTAX. Introduction to Consumption Tax TAX
VATTAX.02 INTRODUCTION TO BUSINESS TAX VAT MARGINAL
2.1 VAT BUSINESS TAXES NOTES
2.1.1 Are those imposed upon onerous transfers such as sale, barter, exchange and
importation. It is called as such because without a business pursued in the
Philippines (except importation) by the taxpayer, business taxes cannot be
applied. Business taxes are in addition to income and other taxes paid, unless
specifically exempted.
2.1.2 Any business pursued by an individual wee the aggregate gross sales or
receipts do not exceed P100,000 during the any 12 month period shall be
considered principally for subsistence or livelihood and not in the ordinary
course of trade or business. Hence not subject to business taxes.
2.2 WHAT IS IN THE COURSE OF TRADE OR BUSINESS?
2.2.1 The regular conduct or pursuit of a commercial or an economic activity,

including transactions incidental thereto, by any person regardless of whether
or not the person engaged therein is a non-stock, non-profit private
organizations or government entity.
1. First statement: Sales of drugs and medicines of pharmacy run by the hospital to
outpatients are subject to VAT.
Second statement: Pharmacy items used in the performance of medical
procedures in hospital units such as in the operating and delivery rooms and by
other departments are considered part of medical services rendered by the
hospital, hence, not subject to VAT.
B. Both statements are incorrect
C. Only the first statement is correct
D. Only the second statement is correct
2. Which statement is correct? The value-added tax on an importation:

A. A. Should be paid by the tax-exempt importer, if he subsequently sells the
goods to a non-tax- exempt purchaser.
B. Should be paid by the non-tax-exempt purchaser to whom the tax-exempt
importer sells it.
C. Is a liability either of the tax-exempt importer or the non-tax-exempt
purchaser.
D. Shall not pay the value-added tax because the transaction was exempt at the
point of importation.
MARGINAL 3. Which statement is wrong? Transactions considered “in the course of trade or
NOTES business” and, therefore, subject to the business taxes include:
A. Regular conduct or pursuit of a commercial or an economic activity by a
stock private organization.
B. Regular conduct or pursuit of a commercial or an economic activity by a non-
stock, non-profit private organization.
C. Isolated services in the Philippines by non-resident foreign persons.
D. Isolated sale of goods or services for a gross selling price or receipts of
P500,000.
4. First statement: For a person to be subjected to any business tax. It is necessary

that he is regularly engaged in the conduct or pursuit of an economic activity.
Second statement: /a non-resident foreign person performing isolated
transaction in the Philippines shall be liable to VAT.
A. B. C. D.
Statement 1 True True False False
Statement 2 True False True False
5. Fortune Philip Corporation imported cigarettes from Taiwan for sale. At a later
date, he sold the cigarettes in the Philippines. He is subject to the value-added
tax. Fortune Philip Corporation is also subject to the business tax of:
A. Excise tax
B. Income tax
C. Percentage tax
D. None of these
6. Lamb Vhanog is manufacturer of fermented liquors. In making sales, all taxes on

the products and transactions are passed on to the buyers. For purposes of the
value-added tax, which of the three taxes listed below that he pays forms part of
the gross selling price?
A. Excise tax
B. Value-added tax
C. Percentage tax
D. None of these


(082) 2214337 / 0925 5623787 |
.
TAX “Innovating
Educational
EXCISE TAX Services”
KHEEN V. BATINGAL
REVIEW NOTES
I. NATURE AND CHARACTERISTICS OF EXCISE TAX

a. Nature of excise tax
Excise tax is a hybrid consumption tax with a regulatory
overture. It is imposed only on certain goods or services.
Excise taxes are generally levied at the point of production or

importation. The tax is collected before the goods are removed at the
point of production or before the removal of the goods from Customs.
Exceptionally, cosmetic surgery and mineral products are subject to
excise tax at the point of sale.
b. Scope of excise tax

The Philippine version of excise tax is limited only to certain
goods with the exception of cosmetic surgery—the only service currently
subject to excise tax.
In other countries, even vices or morally damaging activities are

taxed.
c. Nature of Philippine excise tax

i. Excise Tax as a regulatory tax
1. Environmental tax
2. Sumptuary tax
3. Sin tax
ii. Excise tax as an indirect tax
iii. Excise tax as a consumption tax
iv. Excise tax as an additional business tax
v. Excise tax as specific and ad valorem tax
d. Differences between excise tax and other business tax

i. With only few exceptions, excise tax is an indirect tax levied at
the point of production or importation while other business taxes
are levied only at the point of sale
ii. Excise tax is typically a specific or per unit tax while business
tax is purely ad valorem tax

AFAR EXCISE TAX. Review notes
iii. Excise tax covers the production or import or sale of narrower
range of products or services while business taxes covers the
sale of almost all products and services including those already
subjected to excise tax
iv. Excise tax imposes heavier tax rates compared to reasonable
business taxes which are fairly reasonable
v. Excise tax may subject even non-business producers while
business tax covers only those engaged in business
vi. Excise tax is a revenue tax with a regulatory overture as it
intends to curb health risks, or social, moral, or environmental
wrongs while business tax is purely levied to raise revenue.
e. Similarities of excise tax and other business tax

i. Excise tax is generally a consumption tax similar to other
business taxes. Thus, the export of the goods is both exempted
from excise or business tax. Exceptionally, export of minerals is
subject to excise tax.
ii. Excise tax which are imposed ad valorem are similar to
business taxes which are also imposed based on selling price.
iii. Excise tax and business tax are both classified as indirect taxes
since it is normally passed on by sellers to consumers.
II. TRANSACTIONS SUBJECT TO AND/OR EXEMPT FROM EXCISE TAX

a. Excisable articles and services and timing
Taxable at the point of
Excisable article or service
Import Production Sale
1. Alcohol products Yes Yes
2. Tobacco products Yes Yes
3. Petroleum products Yes Yes
4. Mineral products Yes Yes
5. Automobiles Yes Yes
6. Non-essential goods Yes Yes
7. Sweetened beverages Yes Yes
8. Non-essential services Yes
b. Transactions exempt from excise tax

(see item III, c. Excise taxes per NIRC)
III. TAX BASE AND TAX DUE

a. Types of excise tax
i. Specific tax – excise tax imposed based on weight or volume
capacity or any other physical unit of measurement

ii. Ad valorem tax – excise tax imposed on selling price and other
specified value
Specific sin taxes are now indexed to inflation at a rate of 4%-

6% per annum to preserve the regulatory potency of the tax from the
gradual decline in purchasing power of money over time.
b. Basis of ad valorem tax

i. Locally produced goods – Locally produced goods imposed
with ad valorem tax is subject to tax on GROSS SELLING
PRICE.
Gross selling price means the price, excluding VAT, at which

the goods are sold at wholesale in the place of production or
through their sales agent to the public.
If the manufacturer also sells or allows such goods to

be sold at wholesale in another establishment of which he is the
owner or in the profits of which he has an interest, the wholesale
price in such establishment shall constitute the selling price.
Should such price be less than the cost of manufacture

plus expenses incurred until the goods are finally sold, then a
proportionate margin of profit, not less than 10% of such
manufacturing costs and expenses, shall be added to constitute
the gross selling price.
ii. Imported goods – Unless otherwise specified by law, imported

goods imposed with ad valorem tax shall be subject to the same
rates and basis of excise taxes applicable to locally
manufactured articles.
c. Excise taxes per NIRC

i. Excise tax on alcohol products
1. Tax rates
2021 2022 2023
Rate Rate Rate
Distilled spirits
Specific tax (per proof liter) P47.00 P52.00 P59.00
Ad valorem (NRP) 22% 22% 22%
Wines (per liter) P53.00 P56.18 P59.55
Fermented liquor (per liter) P37.00 P39.00 P41.00

2. Conditional tax-free removal of alcohol products
a. Removal of wines and distilled spirits for
treatment of tobacco leaf
b. Domestic denatured alcohol
c. Removal of spirits for rectification
d. Removal of fermented liquors to bonded
warehouse
e. Removal of damaged liquors
ii. Excise tax on tobacco products

1. Tobacco products
2021 2022 2023
Rate Rate Rate
A. Tobacco products (per kilogram)
a. Tobacco twisted by hand or reduced into a condition
to be consumed in any manner other than the ordinary
mode of drying and curing;
b. Tobacco prepared or partially prepared with or
without the use of any machine or instrument or without
being pressed or sweetened; and,
c. Fine-cut shorts and refuse, scraps, clippings,
cuttings, stems, midribs and sweepings of tobacco; P2.39 P2.49 P2.59
d. Chewing tobacco unsuitable for use in any other
P2.05 P2.13 P2.22
manner
B. Heated tobacco products (per pack of 20) P27.50 P30.00 P32.50
C. Vapor products
1. Nicotine sale or salt nicotine (per mL) P42.00 P47.00 P52.00
2. Conventional ‘freebase’ or ‘classic’ nicotine (per 10
P50.00 P55.00 P60.00
mL)
3. Novel tobacco products P2.50* P2.60
*effective August 10, 2022
2. Cigars and cigarettes

2021 2022 2023
Rate Rate Rate
A. Cigars
Ad valorem (NRP) 20% 20% 20%
Specific (per cigar) P6.83 P7.10 P7.38
B. Cigarettes packed by hand (per pack) P50.00 P55.00 P60.00
C. Cigarettes packed by machine (per pack) P50.00 P55.00 P60.00

3. Inspection fee
a. Cigars – P0.50 per thousand pieces or fraction
thereof
b. Cigarettes – P0.10 per thousand pieces or
fraction thereof
c. Heated tobacco – P0.10 per thousand pieces
d. Vapor products – P0.01 per milliliter
e. Novel tobacco products – P0.03 per kilo
f. Whole leaf tobacco – P0.02 per kilo or fraction
thereof
g. Scrap and other manufactured tobacco – P0.03
per kilo or fraction thereof
iii. Excise tax on petroleum products

1. Tax rates
Jan 1,
Unit of
Product 2020 &
measure
onwards
1. Lubricating oils and greases, including but not limited to P10.00 liter &
base stock for lube oils and greases, high vacuum kilogram
distillates, aromatic extracts and other similar
preparations, and additives for lubricating oils and
greases, whether such additives are petroleum based or
not
a. Locally produced or imported oils previously
taxed but are subsequently reprocessed, re-
refined or recycled
2. Processed gas P10.00 liter
3. Waxes and petrolatum P10.00 kilogram
4. Denatured alcohol to be used for motive power P10.00 liter
5. Asphalt, per kilogram P10.00 kilogram
6. Naphtha, regular gasoline, pyrolysis gasoline and other P10.00 liter
similar products of distillation
7. Unleaded premium gasoline P10.00 liter
8. Kerosene P5.00 liter
9. Aviation turbo jet fuel, aviation gas P4.00 liter
10. Kerosene when used as aviation fuel
11. Diesel fuel oil, and on similar oils having more or less P6.00 liter
the same generating power
12. Liquified petroleum gas used for motive power P6.00 kilogram
13. Bunker fuel oil, and on similar oils having more or less P6.00 liter
the same generating power
14. Petroleum coke P6.00 metric ton
15. Liquified petroleum gas P3.00 kilogram

16. Naphtha and pyrolysis gasoline, when used as raw P0.00 liter
material in the production of petrochemical products or in
the refining of petroleum products, or as replacement fuel
for natural-gas-fired-combined cycle power plant, in lieu of
locally-extracted natural gas during the non-availability
thereof
17. Liquified petroleum gas, when used as raw material in P0.00 kilogram
the production of petrochemical products
18. Petroleum coke when used as feedstock to any power P0.00 metric ton
generating facility
2. Creditable excise tax

The excise tax paid on the purchase of
basestock (bunker) in the manufacture of excisable
articles and forming part thereof shall be credited
against the excise tax due thereon. Any excise tax paid
on raw materials resulting from manufacturing,
blending, processing, storage and handling losses shall
not give rise to a tax refund or credit.
3. Mandatory marking of all petroleum products

Imported or locally manufactured petroleum
products are required to be marked after the taxes and
duties thereon have been paid.
Products found in domestic market which do

not contain the marker, or which contain markers but
are diluted beyond the acceptable percentage
approved by the Secretary of Finance shall be
presumed that the same were withdrawn with the
intention to evade the payment of taxes and duties due
thereon.
4. Sale of petroleum products to exempt entities –

petroleum products sold to the following are exempt
from excise tax:
a. International carriers
b. Entities exempted under tax treaties,
conditional on reciprocal tax exemption
treatment
c. Entities which are exempt from direct and
indirect tax

iv. Excise tax on mineral products
1. Tax rates
Domestically
Imported
produced
Coal and coke (per metric ton) P150 P150
Non-metallic minerals & quarry resources 4% 4%
Copper, gold, chromite and other metallic minerals 4% 4%
Indigenous petroleum 6%
Natural gas and liquified petroleum gas Exempt
2. Tax base for ad valorem tax on mineral products

a. Excise tax on metallic and non-metallic
minerals
If domestically produced, the excise tax is
based on the actual market value of the gross
output upon removal. If imported, it is based on
value used by the BOC in determining tariff and
customs duties, net of excise tax.
b. Excise tax on indigenous petroleum

It shall be based on the fair international market
price on the first taxable sale, barter or
exchange of such similar transaction or the
transfer of indigenous petroleum in its original
state to a first taxable transferee.
3. Small scale miners

RA No. 11256 exempts registered small scale
miners and accredited traders who are selling gold to
the Bangko Sentral ng Pilipinas (BSP) from paying
income tax and excise tax. Also, the sale of gold to the
BSP is exempt from business tax.
Gold which is sold, or eventually sold to the

BSP, shall be exempt from the payment of excise tax. If
the excise tax due thereon is paid prior to the sale of the
gold to the BSP, the taxpayer may file a claim for refund
with the Commissioner.
All gold sold to the BSP by accredited traders

shall be presumed to have been purchased by said
traders from small-scale miners.

v. Excise tax on automobiles
1. Tax base and tax rates
Selling price (net of taxes) Rate
Up to P600,000 4%
Over P600,000 to P1,000,000 10%
Over P1,000,000 to P4,000,000 20%
Over 4,000,000 50%
2. Exception to the excise tax rates

a. Hybrid vehicles shall be subject to 50% of the
applicable excise tax
b. Purely electric vehicles shall be exempt on
excise tax on automobiles
c. Pick-ups
3. Net manufacturer or importer’s selling price

The price, net of excise tax and VAT at which
locally manufactured/assembled or imported
automobiles are offered for sale to dealers, or the public
directly or through their sales agents, as reflected in the
manufacturer or importer’s sworn declaration or in their
sales invoice, whichever is higher.
4. Minimum prices
The net manufacturer or importer’s selling price
shall include the value of air conditioning unit, radio and
mag wheels including the installation cost thereof
whether or not the same is actually installed in the
automobile.
The net manufacturer’s selling price shall not

be less than:
a. 80% x (Suggested retail price – excise tax –
VAT); and,
b. 110% x (Cost of manufacture or import + selling
expenses)
The suggested retail price shall not be less than

the actual selling price of the automobile when sold in
the market.

5. Imported vehicles not for sale – shall be subject to
the excise tax on the total landed value, including
transaction value, customs duty and all other charges.
6. Qualified importation
Automobiles imported by exempt persons is not
subject to excise tax. When the same is subsequently
sold to taxable persons, the same shall be subject to
excise tax at the higher of the consideration paid and
the depreciation cost.
A 10% depreciation expense shall be provided

but not in excess of 50% of the original cost or value.
7. Tax exempt removals of automobiles

a. Removal for export
b. Delivery to tax-exempt persons or entities
c. Removals for delivery and exclusively within
the Freeport zone
d. Removal of automobiles for test run
vi. Excise tax on non-essential goods – a 20% AD VALOREM

TAX is imposed upon the following non-essential goods:
1. Jewelry
2. Perfume and toilet waters
3. Yachts and other vessels intended for pleasure or
sports
vii. Excise tax on sweetened beverages

1. Tax base and tax rates
Tax
Rate
(per
liter)
Using purely caloric sweeteners, and P6.00
purely non-caloric sweeteners, or a mix
of caloric and non-caloric sweeteners
Using purely high fructose corn syrup or P12.00
in combination with any caloric or non-
caloric sweetener
Using purely coconut sap sugar and Exempt
purely steviol glycosides

2. Exempt products from excise tax
a. All milk products, including plain milk, infant
formula milk, follow-on milk, growing up milk,
powdered milk, ready-to-drink milk, flavored
milk, and fermented milk
b. Soymilk and flavored soymilk
c. 100% natural fruit juices
d. 100% natural vegetable fruit juices
e. Meal replacement and medically indicated
beverages
f. Ground coffee, instant soluble coffee, and pre-
packed powdered coffee products
3. Issues on excise tax on sweetened beverages

a. Transfer of raw materials – Qualified
Exemption
b. Transfer of semi-processed goods – Taxable
c. Beverages consumed within the place of
production – Taxable
d. Export of sweetened beverages – Qualified
Exemption
viii. Excise tax on non-essential services

A tax of 5% on gross receipts derived from the
performance of services, net of excise tax and VAT, on invasive
cosmetic procedure, surgeries, and body enhancement directed
solely towards improving, altering, or enhancing the patient’s
appearance and do not meaningfully promote the proper
function of the body or prevent or treat illness or disease.
IV. TAX RETURN PREPARATION AND FILING AND TAX PAYMENTS

a. Mode of filing of tax returns
i. Who are the persons liable to excise tax?
1. For domestically produced excisable article
a. General rule: PRODUCER
b. Exception to the general rule:

i. The excise tax on indigenous
petroleum, natural gas or liquefied
natural gas is payable by the following
person:

1. If the goods is for local sale,
the taxpayer is the first buyer
or assignee
2. If the goods is for export sale,
the owner, lessee,
concessionaire or operator of
the mining claim
ii. Removal without payment – If goods

are removed in their place of
production without payment of the
excise tax, the owner or person having
possession thereof shall be liable to the
tax.
2. For imported excisable article

a. General rule: IMPORTER
b. Exception to the general rule: NON-EXEMPT

BUYER
When imported goods were exempted
by an exempt person are subsequently sold to
another non-exempt buyer, the latter shall pay
for the excise tax, otherwise due thereon on the
importation.
b. Venue and time of filing of tax returns

i. When to file excise tax?
1. Domestically produced excisable products
a. General rule: BEFORE REMOVAL
b. Exception to the general rule: MINERAL OR

MINERAL PRODUCTS
The excise tax on locally produced or
extracted mineral or mineral products is
payable within 15 days after the end of the
calendar quarter when such products were
removed.

The taxpayer shall file a bond in an
amount which approximates the amount of
excise tax on the removal for the said quarter.
2. Imported excisable products

The excise tax on imported excisable products
shall be paid before their removal from customs
custody. This rule applies even for imported metallic or
non-metallic mineral products.
ii. Manner of filing:

1. Electronic filing and payment system (eFPS) – the
return shall be e-filed and the tax shall be e-paid using
eFPS facilities through BIR website.
2. Non-eFPS – The return shall be filed and the tax shall
be paid with any Authorized Agent Bank (AAB) located
within the territorial jurisdiction of the Revenue District
Office (RDO) where the taxpayer is required to register.
In places where there are no AABs, the return shall be
filed and the tax due shall be paid with the Revenue
Collection Officer (RCO) or duly Authorized City or
Municipal Treasurer of the city or municipality falling
under the jurisdiction of the aforesaid RDO.
iii. Concerns provided in NIRC on movement of excisable

goods
1. Excise tax-free importation by exempt persons
a. General rule:
The importation of products into tax
and duty-free shops, Freeport zones, and
special economic zones shall not be subject to
excise taxes since they are considered foreign
territories. Consumption of persons inside
these places are considered foreign
consumption; hence, exempt.
b. Exception to the general rule:

Exemption does not apply to sin
products. A surety bond, however, may be
required in some cases to protect the interest
of the government.

2. Introduction of tax-free articles into the customs
territory
Introduction into the customs territory refers to
the sale or transfer of tax-free articles to persons
outside tax and duty-free shops, Freeport zones and
special economic zones.
When tax-free articles are subsequently

introduced into the customs territory, this is a technical
importation subject to excise tax.
3. Export of excisable goods

a. General rule:
When goods locally produced or
manufactured are removed and actually
exported without returning to the Philippines,
any excise tax paid thereon may be claimed as:
tax refund, or tax credit.
This applies whether the goods are

exported in their original state or as ingredients
or parts of any manufactured goods or
products. Note that the excise tax is levied only
on domestic consumption.
b. Exception to the general rule: MINERAL

PRODUCTS
The excise tax on mineral products,
except coal and coke, shall not be creditable or
refundable even if the mineral products are
actually exported.
Excise tax on minerals is apparently

imposed to compensate the environmental
destruction arising from the extraction or
production, as such the excise tax applies even
if the goods are for foreign consumption.
c. Payment of tax due

Pay as you file: It shall be paid before the BIR collection officer
designated/assigned in the producer/manufacturer.

d. Accomplishing of tax returns and forms
i. BIR Form 2200-A – Excise tax return for alcohol products
ii. BIR Form 2200-AN – Excise tax return for automobile and non-
essential goods
iii. BIR Form 2200-C – Excise tax return for cosmetic procedures
iv. BIR Form 2200-M – Excise tax return for mineral products
v. BIR Form 2200-P – Excise tax return for petroleum products
vi. BIR Form 2200-S – Excise tax return for sweetened beverages
vii. BIR Form 2200-T – Excise tax return for tobacco, heated
tobacco and vapor products
e. Attachments to the tax return

i. For amended return, proof of the payment and the return
previously filed.
ii. All returns filed by an authorized representative must attach
authorization letter.
V. TAX IMPLICATIONS OF TRANSACTIONS APPLYING THE TAX RULES AND

REGULATIONS, AND SOUND TAX PLANNING STRATEGIES WITHIN
LEGAL AND ETHICAL BOUNDS TO EFFICIENTLY MANAGE TAX
LIABILITIES
In this topic, you are expected to provide advantageous tax options and
strategies to your client that will result to a lower tax due within the bounds of the
lawful means and ethical practices.

TAX “Innovating
Educational
DOCUMENTARY STAMP TAX Services”
KHEEN V. BATINGAL
REVIEW NOTES
I. NATURE AND CHARACTERISTICS OF DOCUMENTARY STAMP TAX

a. Definition of DST
Documentary stamp tax (DST) is an excise tax on the exercise
of certain rights embodied in certain documents. It is either imposed as
a fixed tax or an ad valorem tax based on the value of the document
underlying the transaction.
b. Nature of the DST

Documentary stamp tax is in the nature of an excise tax. It is
imposed upon the privilege, opportunity or facility offered at exchanges
for the transaction of the business. It is an excise upon the facilities for
the transaction of the business separate and apart from the business
itself.
Documentary stamp taxes are levied on the exercise by persons

of certain privileges conferred by law for the creation, revision, or
termination of specific legal relationships through the execution of
specific instruments. (Antam Pawnshop Corp. v. CIR, 2008)
c. Principles in imposition of DST

i. One transaction, one tax
ii. It applies whenever the right or obligation arises from or when
property or object of contract is in the Philippines regardless of
the place where the document is executed
iii. Invalidity of contract does not affect DST imposition
iv. Only transactions or documents listed by the law is taxable
II. TRANSACTIONS SUBJECT TO AND/OR EXEMPT FROM DOCUMENTARY

STAMP TAX
a. Documents/transactions subject to DST
i. Real properties (Sec. 196)
1. Deed of sale
2. Deed of donation
ii. Shares of stocks
1. Original issue of shares (Sec. 174)
2. Transfer of shares (Sec. 175)
iii. Certificate of profits or interest in property or accumulations
(Sec. 177)

AFAR DOCUMENTARY STAMP TAX. Review notes
iv. Bonds, debentures, certificate of stocks or indebtedness issued
in foreign countries (Sec. 176)
v. Indemnity bonds (Sec. 187)
vi. Bank checks, drafts, certificates of deposits not bearing interest,
and other instruments (Sec. 178)
vii. Bills of exchange or drafts (Sec. 180)
viii. Acceptance of bills of exchange and others (Sec. 181)
ix. Foreign bills of exchange and letters of credits (Sec. 182)
x. Debt instruments (Sec. 179)
xi. Insurance
1. Life insurance policies (Sec. 183)
2. Property insurance (Sec. 184)
3. Fidelity bonds and other insurance policies (Sec. 185)
xii. Policies of annuities and pre-need plans (Sec. 186)
xiii. Certificates (Sec. 188)
xiv. Warehouse receipts (Sec. 189)
xv. Bill of lading or receipts (Sec. 191)
xvi. Proxies (Sec. 192)
xvii. Power of attorney (Sec. 193)
xviii. Leases and other hiring agreements (Sec. 194)
xix. Mortgages, pledges and deeds of trusts (Sec. 195)
xx. Charter parties and similar arrangements (Sec. 197)
xxi. Assignments and renewals of certain instruments (Sec. 198)
xxii. Jail-alai and horse race tickets, lotto and other authorized
number games (Sec. 190)
b. Documents and papers not subject to DST

i. Policies of insurance made or granted by a fraternal, society,
order, association or cooperative company
ii. Certificates of oaths administered to any government official in
his official capacity
iii. Borrowing or lending of securities under the Securities
Borrowing and Lending Program
iv. Loans agreement or promissory notes, the aggregate of which
do not exceed P250,000 for non-business purpose
v. Sale, barter or exchange of shares of stocks listed and traded
through the local stock exchange
vi. Assignment or transfer of any mortgage, lease or policy of
insurance or renewal or continuances of any agreement,
contract, charter or evidence of obligation or indebtedness, if
there is no change in the maturity date or remaining period of
coverage from that of the original document

vii. Fixed income or other documents traded in the secondary
market
viii. Derivatives, including repurchase agreements and reverse
repurchase agreements
ix. Inter-branch or interdepartmental advances within the same
legal entity
x. All forbearances arising from sales or service contracts
including credit cards and trade receivables (limited to those
executed by the seller or service provider)
xi. Bank deposit without a fixed term or maturity
xii. All contracts, deeds, documents and transactions related to the
conduct of business of the BSP
xiii. Tax-free transfers of property (corporate re-adjustment)
xiv. Inter-bank call loans with maturity of more than 7 days to cover
deficiencies in reserve deposit liabilities, including those made
between banks and quasi-banks
xv. Remittances of all OFWs
III. TAX BASE AND TAX DUE

a. Real properties
i. Deed of sale of real properties
1. General rule:
a. Tax rate: P15 for every P1,000 or 1.5%
b. Tax base: Higher of selling price or fair value
2. Exception: Sale to government or GOCC – tax base

shall be selling price ONLY
ii. Deed of donation of real properties

1. General rule:
a. Tax rate: P15 for every P1,000 or 1.5%
b. Tax base: Fair value
2. Exception: Exempt from DST the following donations

to:
a. Government
b. Accredited non-profit organizations

b. Shares of stocks
i. Original issuance of stocks
1. Tax rate: P2.00 for every P200 or 1%
2. Tax base:
a. Par value shares: Total par value of shares
b. No-par value shares: Actual consideration
3. Date of taxability:
a. Newly incorporated corporations: upon
approval of the articles of incorporation and by-
laws
b. Subsequent to incorporation: upon subscription
of shares
ii. Subsequent sale of stocks

1. Par value shares:
a. Tax rate: P1.50 for every P200 or 0.75%
b. Tax base: Total par value of shares
2. No-par value shares

a. Tax rate: 50%
b. Tax base: DST paid upon its original issuance
iii. Special cases concerning shares of stocks:

1. Issue of stocks for property – the issuance of share
shall be the object of DST
2. Stock dividend – stock issued as stock dividends are
taxable at the actual value represented by the stock
dividends
3. Initial public offering and sale of stocks through the
PSE – the sale, barter or exchange of shares of stocks
listed and traded through the local stock exchange is
not subject to documentary stamp tax
4. Deposit for stock subscription – not yet subject to
DST, until the actual issuance of the stocks

c. Certificates of Profits or Interest in Property or Accumulations
i. Coverage: all certificates of profits or any certificate or
memorandum showing interest in the property or accumulations
of any association, company or corporation, and on all transfer
of such certificate or memoranda
1. Tax rate: P1 for every P200 or 0.5%
2. Tax base: Face value of such certificate or
memorandum
ii. Definition of terms:

1. Profit participation certificate (PPC) – PPC entitle
holders to dividend distributions but are not equity
interest in a corporation thereby holders are not allowed
to vote in the company. They are also similar to bonds
without the fixed interest return and nominal value.
2. Interest in property or accumulations – includes
interests in various funds such as trust funds, mutual
funds and others whether of income or accumulation
types.
d. Bonds, debentures, certificates of stocks or indebtedness issued

in foreign countries
i. Rule:
1. When the foreign instrument is sold, bought, or
transferred by a Philippine resident
2. When the transaction happened in the Philippines
3. Same DST as is required by law on similar instruments
when issued, sold or transferred in the Philippines

ii. Comparison of DST rules on shares and debt instruments
Taxable transactions Domestic Foreign
Shares of stocks
Issue of stocks Taxable Exempt
Transfer of stocks Taxable Taxable1
Debt instruments
Issue of debt instruments Taxable Exempt
Assignment of debt instruments Taxable2 Taxable1
1. Taxable if the buyer or assignee is a Philippine resident
2. Taxable if assignment or re-assignment of the
instrument entails changing the maturity date or
remaining period of coverage from that of the original
instrument or carries with it a renewal of issuance of
new instruments in the name of the transferee to
replace the old ones, otherwise, it is exempt.
e. Indemnity bonds
i. Coverage: all bonds for indemnifying any person, firm or
corporation who shall become bound or engaged as surety for
the payment of any sum of money or for the due execution or
performance of the duties of any office or position or to account
for money received by virtue thereof, and on all other bonds of
any description
1. Tax rate: P0.30 for every P4.00 or 7.5%
2. Tax base: Premium charged
ii. Exception: all other bonds as may be required in legal

proceedings – exempt
f. Bank checks, drafts, certificate of deposits, not bearing interest,

and other instruments
i. Coverage: each bank check, draft, or certificate of deposit not
drawing interest, or order for the payment of any sum of money
drawn upon or issued by any bank, trust company, or any
person or persons, companies or corporations, at sight or on
demand
1. Tax rate: P3.00
2. Tax base: Each instrument, regardless of face value

1. Check – an instrument containing an unconditional
order to a banker directing him to pay a specified sum
of money to the person named therein.
2. Draft – an instrument created by the bank (drawer) to
be given to a payee. It is a guaranteed payment by a
bank on behalf of payer. The amount on the bank draft
is normally pre-deducted to the source account before
release of the bank.
iii. Checks vs. Drafts

Checks Drafts
Parties Drawer, drawee and Drawer and payee
payee
Drawer Account holder of the One branch of a bank to
bank another
Clearance and Required No need (assured)
approval
Protesting on dishonor No protest Can be protested
g. Bill of exchange, drafts or order

i. Coverage: all bill of exchange (between points within the
Philippines) or drafts
1. Tax rate: P0.60 for every P200 or 0.3%
2. Tax base: face value of any such bill of exchange or
draft

1. Bill of exchange – a written unconditional order made
by one party to another to pay a certain sum of money
on demand or on a predetermined date.
iii. Checks vs. Bills of Exchange

Checks Bills of Exchange
Drawee Bank Bank/other persons
Expiration 3 months Not applicable
Acceptance Not required Required
Payment On demand upon presentation Grace period is allowed
Protesting on dishonor No protest Can be protested

h. Acceptance of bills of exchange and others
i. Coverage: any acceptance or payment of any bill of exchange
or order for the payment of money purporting to be drawn in a
foreign country but payable in the Philippines
2. Tax base: Face value of any such bill of exchange, or
order, of the Philippine equivalent to such value, if
expressed in foreign currency
i. Foreign bills of exchange and letters of credit

i. Coverage: all foreign bills of exchange and letters of credit
(including orders, by telegraph or otherwise, for the payment of
money issued by express or steamship companies or by any
person or persons) drawn in but payable out of the Philippines
in a set of three (3) or more according to the custom of
merchants and bankers
2. Tax base: Face value of any such bill of exchange or
letter of credit, or the Philippine equivalent of such face
value, if expressed in foreign currency
j. Debt instruments
i. Coverage: on every original issue of debt instruments
2. Tax base: Issue price of any such debt instrument
ii. Specialized rules on taxability of debt instruments:

1. Short-term borrowing: DST shall be the proportional
amount in accordance with the ratio of its terms in
number of days to 365 days (DST x Loan Term/365)
2. Taxable excisable transaction: Only one DST shall be
imposed on either loan agreement, or promissory notes
issued to secure such loan.

iii. Debt instrument; Meaning – it shall mean debt instrument
representing borrowing and lending transactions including but
not limited to debentures, certificates of indebtedness, due bills,
bonds, loan agreements, including those signed abroad wherein
the object of contract is located or used in the Philippines,
instruments and securities issued by the government or any of
its instrumentalities, deposit substitute debt instruments,
certificates or other evidences of deposits that are either
drawing interest significantly higher than the regular savings
deposit taking into consideration the size of the deposit and the
risks involved or drawing interest and having a specific maturity
date, orders for payment of any sum of money otherwise than
at sight or on demand, promissory notes, whether negotiable or
non-negotiable, except bank notes issued for circulation.
k. Life insurance policies

Life insurance policy DST per policy
If the amount of insurance does not exceed P100,000 Exempt
> P100,000 to P300,000 P 20.00
> P300,000 to P500,000 50.00
> P500,000 to P750,000 100.00
> P750,000 to P1,000,000 150.00
> P1,000,000 200.00
Tax rates apply both upon making or renewal of such contracts
l. Insurance upon properties

i. Coverage: all policies of insurance or other instruments by
whatever name the same may be called, by which insurance
shall be made or renewed upon property of any description,
including rents or profits, against peril by sea or on inland
waters, or by fire or lightning
2. Tax base: Amount of premium charged
ii. Exception on taxability: no documentary stamp tax shall be

collected on reinsurance contracts or on any instrument by
which cession or acceptance of insurance risks under any
reinsurance agreement is effected or recorded.
iii. Rule on taxability: taxable upon issuance of the contract,

regardless whether there is subsequent cancellation of the
policy.

m. Fidelity bonds and other insurance policies
i. Coverage: all policies of insurance or bonds or obligations of
the nature of indemnity for loss, damage or liability made or
renewed by any person, association, company or corporation
transacting the business of accident, fidelity, employer’s liability,
plate, glass, steam, boiler, burglar, elevator, automatic sprinkler,
or other branch of insurance (except life, marine, inland, and fire
insurance), and all bonds, undertakings, or recognizances,
conditioned for the performance of the duties of any office or
position, for the doing or not doing of anything therein specified,
and on all obligations guaranteeing the validity or legality of any
bond or other obligations issued by any province, city,
municipality, or other public body or organization, and on all
obligations guaranteeing the title to any real estate, or
guaranteeing any mercantile credits, which may be made or
renewed by any such person, company or corporation
2. Tax base: Amount of premium charged
n. Policies of annuities and pre-need plans

i. Annuities
1. Coverage: all policies of annuities, or other instruments
by whatever name the same may be called, whereby an
annuity may be made, transferred or redeemed
3. Tax base: Premium or installment payment or contract
price collected
ii. Pre-need plans

1. Coverage: all pre-need plans
3. Tax base: Premium or contribution collected

o. Certificates
i. Coverage: each certificate of damages or otherwise, and on
every other certificate or document issued by any customs
officer, marine surveyor, or other person acting as such, and on
each certificate issued by a notary public, and on each
certificate of any description required by law or by rules or
regulations of a public office, or which is issued for the purpose
of giving information, or establishing proof of a fact, and not
otherwise specified herein
1. Tax rate: P30.00
2. Tax base: Each certificate
p. Warehouse receipts
i. Coverage: each warehouse receipt for property held in storage
in a public or private warehouse or yard for any person
1. Tax rate: P30.00
2. Tax base: Each warehouse receipt
ii. Exception:
1. Warehouse receipt for property held in storage for the
proprietor of such warehouse or yard.
2. Warehouse receipt issued to any one person in any one
calendar month covering property the value of which
does not exceed Two hundred pesos (P200).
q. Bill of lading or receipts

i. Definition: Bills of lading is a document signed by a transport
carrier of goods to a shipper of goods that evidences the receipt
of goods to be shipped to a particular destination or person.
ii. Types of bills of lading:

1. Straight bill – goods are consigned to a designated
party; hence, non-transferrable or non-negotiable
2. Order bill – goods are consigned to the order of a
named party; hence, transferrable or negotiable
iii. Taxable transaction: On each set of bills of lading or receipt

for any good, merchandise, or effects shipped:
1. From Philippine port to another Philippine port
2. From Philippine port to any foreign port

iv. Tax rates:
1. If value of goods exceeds P100 to P1,000 – P2
2. If value of goods exceeds P1,000 – P20
v. Exception:
1. Charter party
2. Ferries across rivers
3. Baggage accompanying passengers of land and water
carriers
r. Proxies
i. Coverage: each proxy for voting at any election for officers of
any company or association, or for any other purpose
1. Tax rate: P30.00
2. Tax base: Each instrument of proxy
ii. Exception: Proxies issued affecting the affairs of associations

or corporations organized for religious, charitable or literary
purposes.
s. Power of Attorneys
i. Coverage: each power of attorney to perform any act
whatsoever
1. Tax rate: P10.00
2. Tax base: Each instrument
ii. Exception: Power of attorneys involving acts connected with

the collection of claims due from or accruing to the Government
of the Republic of the Philippines, or the government of any
province, city or municipality.
t. Leases and hiring agreements

i. Coverage: each lease, agreement, memorandum, or contract
for hire, use or rent of any lands or tenements, or portions
thereof
1. Tax base and rates:
a. First Two thousand pesos (P2,000), or fraction
thereof – P6.00

b. Excess of first P2,000: for every One Thousand
pesos (P1,000) or fraction thereof – P2.00
2. Tax due frequency: Each year of the term of said
contract or agreement
ii. Lessor regulation: RR 12-211 set reportorial requirements for

leasing or renting commercial establishments. Lessors are
required to see to it that lessees have:
1. A taxpayer’s identification number (TIN)
2. BIR certificate of registration
3. Duly registered receipts or invoices
u. Mortgages, pledges and deeds of trusts

i. Coverage: every mortgage or pledge of lands, estate, or
property, real or personal, heritable or movable, whatsoever,
where the same shall be made as a security for the payment of
any definite and certain sum of money lent at the time or
previously due and owing of forborne to be paid, being payable
and on any conveyance of land, estate, or property whatsoever,
in trust or to be sold, or otherwise converted into money which
shall be and intended only as security
1. Tax base and rates:
a. When the amount secured does not exceed
P5,000- P40.00
b. On each P5,000, or fractional part thereof in
excess of P5,000 – an additional tax of P20.00
v. Charter parties and similar arrangements

i. Coverage: every charter party, contract or agreement for the
charter of any ship, vessel or steamer, or any letter or
memorandum or other writing between the captain, master or
owner, or other person acting as agent of any ship, vessel or
steamer, and any other person or persons for or relating to the
charter of any such ship, vessel or steamer, and on any renewal
or transfer of such charter, contract, agreement, letter or
memorandum

ii. Tax rates and bases:
Duration of charter
Ship gross tonnage First 6 months Excess over 6 months
≤ 1,000 tons P1,000 P100/month or fraction
> 1,000 to 10,000 tons P2,000 P200/month or fraction
> 10,000 tons P3,000 P300/month or fraction
w. Assignments and renewals of certain instruments

i. Coverage:
1. Every assignment or transfer of any:
a. Mortgage
b. Lease
c. Policy of insurance
2. Renewal or continuance by altering or otherwise of any:
a. Agreement
b. Contract
c. Charter
d. Any evidence of indebtedness
ii. Tax rate and base: Same rate as that imposed on the original
instrument
x. Jai-alai, horse race tickets, lotto and other authorized numbers

games
i. Tax rates and bases:
1. If ticket cost is ≤ P1.00 – P0.20
2. If ticket cost is > P1.00 – P0.20/P1.00 or fractional
thereof
IV. TAX RETURN PREPARATION AND FILING AND TAX PAYMENTS

a. Mode of filing of tax returns
i. Who is liable?
1. The person making, signing, issuing, accepting or
transferring documents.
2. Either of the contracting party is liable.
3. Normally in practice, it is the benefiting party to the
transaction who pays the documentary stamp tax but
the parties may agree between them who will pay the
same.

4. However, if the agreeing party fail to pay the
documentary stamp tax, the government may enforce
the tax against the other party.
5. If one of the contracting parties enjoys exemption to
documentary stamp tax, the other party who is not
exempt shall be liable to the same.
b. Venue and time of filing of tax returns

i. Who shall file the documentary stamp tax return?
Mode of payment Person liable to file
Loose stamps or actual Revenue collection officer who sold the stamps
affixture
Machine imprinted stamps Imprinting machine user
Constructive affixture The person making, signing, issuing, accepting or
transferring document
c. Payment of tax due

i. Deadline of payment: Documentary stamp tax is generally
payable within 10 days after the close of the month when the
taxable document was signed, issued, accepted or transferred.
ii. Mode of payment: DST may be paid by either:

1. Purchase of documentary stamp tax and actual affixture
on the document
2. Imprinting a secured stamp on the taxable document
through the web-based Electronic Documentary Stamp
Tax (eDST) System
3. Constructive affixture by filing of a documentary stamp
tax return
d. Accomplishing of tax returns and forms

i. Documentary stamp tax declaration – BIR Form 2000
ii. Documentary stamp tax declaration – One-time transactions –
BIR Form 2000-OT
e. Attachments to the tax return

i. Photocopy of the document
ii. Proof of payment of the documentary stamp tax
iii. A schedule showing the details of the usage or consumption of
documentary stamps

V. COMPLIANCE REQUIREMENTS
a. Effect of non-compliance
i. An instrument, document or paper which is required by law to
be stamped and which has been signed, issued, accepted or
transferred without being duly stamped, shall not be recorded,
nor shall it or any copy thereof or any record of transfer of the
same be admitted or used in evidence in any court until the
requisite stamp or stamps are affixed thereto and cancelled.
ii. No notary public or other office authorized to administer oaths
shall add this jurat or acknowledgment to any document subject
to documentary stamp tax unless the proper documentary
stamps are affixed thereto and cancelled.
VI. TAX IMPLICATIONS OF TRANSACTIONS APPLYING THE TAX RULES AND

LIABILITIES
In this topic, you are expected to provide advantageous tax options and
strategies to your client that will result to a lower tax due within the bounds of the
lawful means and ethical practices.

TAX “Innovating
TAXATION UNDER THE LOCAL GOVERNMENT CODE Educational
Services”
KHEEN V. BATINGAL
REVIEW NOTES
I. FUNDAMENTAL PRINCIPLES. SCOPE OF TAXING POWER OF LOCAL

GOVERNMENT UNITS (LGUs)
a. Legal basis – Local Government Code of 1991 (Republic Act No. 7160)
b. Aspects of local taxation

i. Local government taxation (Secs. 128-196, LGC) – imposition
of license, taxes, fees and other impositions, including
community tax
ii. Real property taxation (Secs. 197-283, LGC) – system of levy
on real property imposed on a country-wide basis but
authorizing, to a limited extent and within certain parameters,
local governments to vary the rates of taxation
c. Fundamental principles
i. Local government taxation – the following fundamental
principles shall govern the exercise of the taxing and other
revenue-raising powers of local government units:
1. Taxation shall be uniform in each local government unit
2. Taxes, fees, charges and other impositions shall
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
3. The collection of local taxes, fees, charges and other
impositions shall in no case be let to any private person
4. The revenue collected pursuant to the provisions of the
LGC shall inure solely to the benefit of, and be subject
to the disposition by, the local government unit levying
the tax, fee, charge or other imposition unless otherwise
specifically provided herein
5. Each local government unit shall, as far as practicable,
evolve a progressive system of taxation

AFAR TAXATION UNDER THE LOCAL GOVERNMENT CODE. Review notes
ii. Real property taxation – the appraisal, assessment, levy and
collection of real property tax shall be guided by the following
fundamental principles:
1. Real property shall be appraised at its current and fair
market value
2. Real property shall be classified for assessment
purposes on the basis of its actual use
3. Real property shall be assessed on the basis of a
uniform classification within each local government unit
4. The appraisal, assessment, levy and collection of real
property tax shall not be let to any private person
5. The appraisal and assessment of real property shall be
equitable
d. Legal foundation of LGUs’ powers

i. Article X, Section 5 of the 1987 Constitution – “Each LGU
shall have the power to create their 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.”
ii. Section 129 of the Local Government Code of 1991 (LGC) –

“Each LGU shall exercise its power to create its own sources of
revenue and levy taxes, fees, and charges subject to the
provisions herein, consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall accrue
exclusively to the LGUs.”
iii. Charter of cities – additional taxing authority exclusively

granted to cities include the power to impose percentage tax
and taxes on articles subject to specific tax
e. Scope of taxing power

i. Each LGU shall exercise its power to create its own sources of
revenue and to levy taxes, fees, and charges, consistent with
the basic policy of local autonomy. Such taxes, fees, and
charges shall exclusively accrue to it.

ii. All LGUs are granted general powers to levy taxes, fees or
charges on any base or subject not otherwise specifically
enumerated in the LGC or taxed under the provisions of the
NIRC or other applicable laws. The levy must not be unjust,
excessive, oppressive, confiscatory or contrary to a declared
national economic policy.
iii. No such taxes, fees or charges shall be imposed without a

public hearing having been held prior to the enactment of the
ordinance.
iv. Copies of the provincial, city, and municipal tax ordinances or

revenue measures shall be published in full for three
consecutive days in a newspaper of local circulation or posted
in at least two conspicuous and publicly accessible places.
f. Limitations on the power of local taxation

i. Inherent limitations
ii. Constitutional limitations
iii. Congressional limitations – the Congress shall ensure that:
1. The taxpayers will not be overburdened or saddled with
multiple and unreasonable impositions
2. Each LGU will have its fair share of available resources
3. The resources of national government will not be unduly
disturbed; and
4. Local taxation will be fair, uniform and just.
g. Limitations of local government to administer, appraise, levy, and

collect real property taxes
i. Authorization limitation – the LGC authorizes only certain LGUs
to administer real property taxation
ii. Fundamental principles of appraisal, assessment, levy and
collection of real property taxes
iii. The real property taxes collected shall accrue solely to the
benefit of the LGU concerned
h. Local taxing authority – the power to impose a tax, fee, or charge or

to generate revenue under the LGC shall be exercised by the
sanggunian of the local government unit concerned through an
appropriate ordinance.

i. Common limitations on the taxing powers of LGUs – unless
otherwise provided by the LGC, the exercise of the taxing powers of
provinces, cities, municipalities, and barangays shall not extent to the
levy of the following:
i. Income tax, except when levied on banks and other financial
institutions
ii. Documentary stamp tax
iii. Taxes on estates, inheritance, gifts, legacies and other
acquisitions mortis causa, except tax on transfer of real property
iv. 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
v. 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, or other taxes, fees, or
charges in any form whatsoever upon such goods or
merchandise
vi. Taxes, fees or charges on agricultural and aquatic products
when sold by marginal farmers or fishermen
vii. Taxes on business enterprises certified to by the Board of
Investments as pioneer or non-pioneer for a period of six (6) and
four (4) years, respectively from the date of registration
viii. Excise taxes on articles enumerated under the national Internal
Revenue Code, as amended, and taxes, fees or charges on
petroleum products
ix. Percentage or value-added tax (VAT) on sales, barters or
exchanges or similar transactions on goods or services except
as otherwise provided herein
x. 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 by the LGC
xi. Taxes on premiums paid by way or reinsurance or retrocession
xii. 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
xiii. Taxes, fees, or other charges on Philippine products actually
exported, except as otherwise provided herein

xiv. Taxes, fees, or charges, on Countryside and Barangay
Business Enterprises and cooperatives duly registered under
R.A. No. 6810 and Republic Act Numbered Sixty-nine hundred
thirty-eight (R.A. No. 6938) otherwise known as the
"Cooperative Code of the Philippines" respectively
xv. Taxes, fees or charges of any kind on the National Government,
its agencies and instrumentalities, and local government units.
j. Authority to prescribe penalties for tax violations

i. Limited as to the amount of imposable fine as well as the length
or period of imprisonment
ii. The Sanggunian is authorized to prescribed fines or other
penalties for violations of tax ordinances
1. in no case shall fines be less than P1,000 nor more than
P5,000
2. nor shall the imprisonment be less than one (1) month
nor more than six (6) months
iii. Such fine or other penalty shall be imposed at the discretion of
the court
iv. The Sangguniang Barangay may prescribe a fine of not less
than P100 nor more than P1,000
k. Authority to grant local tax exemptions

i. Tax exemption and reliefs
1. May be granted in cases of natural calamities, civil
disturbance, general failure of crops or adverse
economic conditions such as substantial decrease in
prices of agricultural or agri-based products
2. The grant shall be through an ordinance
3. Any exemption or relief granted to a type or kind of
business shall apply to all businesses similarly situated
4. The same may take effect only during the calendar year
not exceeding 12 months as may be provided in the
ordinance
5. In case of shared revenues, the relief or exemption shall
only extend to the LGU granting such
ii. Tax incentives

1. Shall be granted only to new investments in the locality
and the ordinance shall prescribe the terms and
conditions therefore

2. The grant shall be for a definite period not exceeding 1
calendar year
3. The grant shall be through an ordinance passed prior to
the 1st day of January of any year
4. Tax incentive granted to a type or kind of business shall
apply to all businesses similarly situated
l. Withdrawal of exemptions
i. Privileges withdrawn upon effectivity of the LGC – tax
exemptions or incentives granted to or enjoyed by all persons,
whether natural or juridical, including government-owned or
controlled corporations are hereby withdrawn upon the
effectivity of the Local Government Code of 1991.
ii. Exceptions – those exemptions or incentives conferred to:

1. Local water districts
2. Cooperatives duly registered under RA No. 6938
3. Non-stock and non-profit hospitals
4. Educational institutions
m. Authority to adjust local tax rates – LGUs shall have the authority to
adjust the tax rates as prescribed by the LGC not oftener than once
every 5 years, but in no case shall such adjustment exceed 10% of the
rates fixed under the LGC.
n. Residual taxing power of local governments

i. Concept – LGUs may exercise the power to levy taxes, fees or
charges on any base or subject NOT otherwise specifically
enumerated or taxed under the:
1. Local Government Code
2. National Internal Revenue Code
3. Other applicable laws
ii. Conditions in the exercise of the residual power of taxation

1. The tax base or subject is not taxed under the NIRC or
other applicable laws
2. The taxes, fees, or charges are not unjust, excessive,
confiscatory, oppressive, or contrary to the declared
national economic policy of the government

3. A public hearing has been conducted prior to the
enactment of the ordinance levying taxes, fees, or
charges
4. The procedures for the approval, effectivity, and
publication of tax ordinance have been complied with
5. The residual power is subject to the constitutional
limitations on the taxing power and the common
limitations on the taxing power of LGUs as prescribed
in Section 133 of LGC
6. Principle of pre-emption or exclusionary rule –
refers to the instance where the national government
elects to tax a particular area, impliedly withholding from
the local government the delegated power to tax the
same field. This doctrine primarily rests upon the
intention of Congress. Conversely, should Congress
allow municipal corporations to cover fields of taxation
it already occupies, then the doctrine of preemption will
not apply.
II. SCOPE AND DIFFERENT TYPES OF LOCAL TAXES

a. Local taxes imposed by provincial government units
i. Tax on transfer of real property ownership
ii. Tax on business of printing and publication
iii. Franchise tax
iv. Tax on sand, gravel and other quarry resources
v. Professional tax
vi. Amusement tax
vii. Annual fixed tax for every delivery truck or van of manufacturers
or producers, wholesalers of, dealers, or retailer in certain
products
viii. Annual ad valorem tax on real property such as land, building,
machinery, and other improvement not specifically exempted at
the rate not exceeding 1% of the assessed value of the real
property
ix. Special levies on real property
x. 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 provincial government
xi. Reasonable fees and charges for services rendered
xii. Charges for the operation of public utilities owned, operated,
and maintained by the provincial government
xiii. Slaughter fees, corral fees, market fees, charges for holding
benefits

xiv. Tuition fees from the operation of the provincial high school,
except in the public elementary grades
b. Local taxes imposed by municipality and city government units

i. Local taxes imposed by municipalities
1. Tax on business
2. Fees and charges on business and occupation
3. Fees for sealing and licensing of weights and measures
4. Fishery rentals, fees and charges
ii. Local taxes imposed by cities – the city may levy the taxes,
fees, and charges which the province or municipality may
impose, except as otherwise provided in the LGC. Those levied
and collected by highly urbanized and independent component
cities shall accrue to them and distributed in accordance with
the provisions of LGC.
c. Local taxes imposed by barangay government units

i. Barangay taxes
ii. Service fees or charges
iii. Barangay clearance
iv. Other fees and charges
d. Common revenue-raising powers

i. Fees, service or user charges
ii. Public utility charges
iii. Toll fees or charges
III. TAX BASE AND TAX RATES

a. Taxing power of a province
i. Summary rules
Transactions subject
Tax base Tax rate Exception
to tax
Tax on transfer of real property ownership
Sale, donation, barter, Whichever is higher Not more Transfer under the
or on any other mode between: than 50% of Comprehensive
of transferring 1. Total consideration the 1% Agrarian Reform
ownership or title of involved in the Program
real property

acquisition of the
property; or
2. The fair market
value in case the
monetary
consideration involved
in the transfer is not
substantial
Person liable to pay: Seller, donor, transferor, executor, or administrator
Time of payment: within 60 days from the date of the execution of the deed or from
the date of the decedent’s death
Exception: If buyer is a foreign government, no tax is due
Tax on the business or printing and publication

Business of printing Gross annual receipts Not School texts or
and publication of for the preceding exceeding references,
books, cards, poster, calendar year 50% of 1% prescribed by the
leaflets, handbills, Capital investment In the case DepEd shall be
certificates, receipts, of a newly exempt from tax.
pamphlets, and started
others of similar business,
nature the tax shall
not exceed
one-
twentieth
(1/20) of
1%
Franchise tax
Business enjoying a Gross annual receipts Not
franchise for the preceding exceeding
calendar year based 50% of 1%
on the incoming
receipt, or realized,
within its territorial
jurisdiction
Capital investment In the case
of a newly
started
business,
the tax shall
not exceed
1/20 of 1%
Tax on sand, gravel, and other quarry services

Sand, gravel, and Fair market value in Not more
other resources the locality per cubic than 10%
extracted from public meter of ordinary
lands or from the stones, sand, gravel,
beds of seas, lakes, earth, and other
rivers, streams, quarry resources
creeks, and other
public waters within
its territorial
jurisdiction
Who issues permit: issued exclusively by the provincial governor pursuant to the
ordinance of the Sangguniang Panlalawigan
Distribution of tax proceeds:

a. Province – 30%
b. Component city or municipality – 30%
c. Barangay where resources were extracted – 40%
NOTE: The authority to impose taxes and fees for extraction of sand and gravel
belongs to the province, and not to the municipality where they are found.
Professional tax
Exercise or practice At such amount and Not to Professional
of profession reasonable exceed exclusively
requiring government classification as the P300 employed in the
licensure sangguniang government shall
examination panlalawigan may be exempt from the
impose payment of this tax
Date of payment: Payable annually on or before January 31 or before beginning the
practice of the profession.
Place of payment: Province where he practices his profession or where the principal
office is located.
NOTE: TAX TO BE PAID ONLY ONCE. Person who has paid the corresponding
professional tax shall be entitled to practice his profession in any part of the Philippines
without being subjected to any other national or local tax, license, or fee for the practice
of such profession.
Amusement tax
Ownership, lease, or Gross receipts from Not more General rule: The
operation of theaters, admission fees. than 10% of holding of operas,
cinemas, concert gross concerts, dramas,
halls, circuses, receipts recitals, painting

boxing stadia and In case of theaters or from and art exhibitions,
other places of cinemas, the tax shall admission flower shows,
amusement first be deducted and fees. musical programs,
withheld by their literary and
proprietors, lessees, oratorical
or operators and paid presentation shall
to the provincial be exempt from the
treasurer before the payment of
gross receipts are amusement tax.
divided between said
proprietors, lessees, Exception: Holding
or operators and the of pop, rock, or
distributors of the similar concerts
cinematographic shall be subject to
films. amusement tax.
Distribution of proceeds: Tax shall be shared equally by the province and
municipality where such amusement places are located.
Note: Resorts, swimming pools, bath houses, hot springs, and tourist spots do not
belong to the same category or class as theaters, cinemas, concert halls, and boxing
stadia because the latter class are venues primarily “where one seeks admission to
entertain oneself by seeing or viewing the show or performances.” It follows that they
cannot be considered as among the ‘other places of amusement’ contemplated by
Sec. 140 of the LGC and which may properly be subject to amusement taxes.
Tax on delivery truck/van

Use by Every truck, van, or Not Exempt from tax on
manufacturers, vehicle exceeding peddlers imposed
producers, P500 by municipalities
wholesalers, dealers
or retailers of truck,
van or any vehicle in
the delivery or
distribution of
distilled spirits,
fermented liquors,
soft drinks, cigars
and cigarettes, and
other products as
may be determined by
the Sangguniang
Panlalawigan, to
sales outlets or
consumers, whether
directly or indirectly.

ii. Other relevant provisions
1. Concept of franchise in LGC – a right or privilege,
affected with public interest which is conferred upon
private persons or corporations, under such terms and
conditions as the government and its political
subdivisions may impose in the interest of public
welfare, security and safety.
The Congress defined it in the sense of a secondary or

special franchise. It is not levied on the corporation
simply for existing as a corporation, upon its property or
income, but on its exercise of the rights or privileges
granted to it by the government.
2. Professionals who are subject to professional tax –

they are those who have passed the bar examinations,
or any board or examinations conducted by the
Professional Regulation Commission (PRC), wherein
each professional license constitutes separate
professional tax due if the professional is to practice
both professions.
3. Amusement tax
a. Definition of terms
i. Amusement – is a pleasurable
diversion and entertainment. It is
synonymous to relaxation, avocation,
pastime, or fun.
ii. Amusement places – include

theaters, cinemas, concert halls,
circuses and other places of
amusement where one seeks
admission to entertainment oneself by
seeing or viewing the show or
performances.
b. Amusement places upon which provinces

or cities cannot impose amusement taxes
i. Cockpits
ii. Cabarets
iii. Night or day clubs

iv. Boxing exhibitions
v. Professional basketball games
vi. Jai-alai
vii. Racetracks
b. Taxing power of a municipality

i. Summary rules
Persons/entities
Tax base Tax rate Exception
subject to tax
Tax on business
Manufacturers, Based on the Graduated
assemblers, taxpayer’s gross annual fixed tax
repackers, sales or receipts
processors, brewers, for the preceding
distillers, rectifiers, calendar year.
and compounders of Gross sales or Ceases to be a
liquours, distilled receipts amount fixed tax, instead
spirit and wines or to P6,500,000 or a PERCENTAGE
manufacturers of any more for the TAX of 37.5% of
article of commerce preceding 1% is imposed.
of whatever kind of calendar year.
nature
Wholesalers, Based on the Graduated
distributors or gross sales or annual fixed tax.
dealers in any article receipts for the
of commerce of preceding
whatever kind of calendar year.
nature Gross sales or Tax becomes a
receipts PERCENTAGE
amounting to TAX at the rate of
P2,000,000 or 50% of 1%
more
Exporters and Gross sales or Not exceeding
manufacturers, receipts one-half (1/2) of
millers, producers, the rates
wholesalers, prescribed under
distributors, dealers subsections (a),
or retailers of the (b) and (d) of this
following essential Section
commodities
Retailers Gross sales or Annual a. Gross sales or
receipts for the percentage tax of receipts in cities
preceding 2% P50,000 or less

calendar year b. Gross sales or
P400,000 or less receipts in
Sales or receipts Annual municipalities
exceeding percentage tax of P30,000 or less
P400,000 1% NOTE: taxed by
barangays.
Contractors and Gross receipts for Graduated
other independent the preceding annual fixed tax
contractors calendar year.
Gross receipts Percentage tax of
amounting to 50% of 1%
P2,000,000 or
more.
Banks and other Gross receipts of 50% of 1%
financial institutions the preceding
calendar year
derived from
interests,
commission and
discounts from
lending activities,
income from
financial leasing,
dividends, rentals
on property and
profit from
exchange or sale
of property
insurance
premium.
Peddlers engaged in Per peddler Not exceeding
the sale of any P50
merchandise or
article of commerce
On any business, not Gross sales or Graduated Any business
otherwise specified receipts schedule subject to the
above which the imposed by the excise, value-
sanggunian Sanggunian, but added or
concerned may deem in no case to percentage tax
proper to tax exceed the rates under the National
prescribed above. Internal Revenue
Code, as
amended, the rate
of tax shall not

exceed 2% of
gross sales or
receipts of the
preceding
calendar year
Municipal non-revenue fees & charges
Municipalities may impose & collect reasonable fees & charges on business &
occupation and, except in case of professional tax, (which only provinces & cities may
levy) on the practice of any profession or calling commensurate with the cost of
regulation, inspection & licensing before any person may engage in such
business/occupation/practice of such profession or calling.
ii. Other relevant provisions

1. Concept of essential commodities
a. Rice and corn
b. Wheat or cassava flour, meat, dairy products,
locally manufactured, processed or preserved
food, sugar, salt and other agricultural, marine
and freshwater products, whether in their
original state or not
c. Cooking oil and cooking gas
d. Laundry soap, detergents, and medicine
e. Agricultural implements, equipment and post-
harvest facilities, fertilizers, pesticides,
insecticides, herbicides, and other farm inputs
f. Poultry feeds and other animal feeds
g. School supplies
h. Cement
2. Bank income not subject to local taxation

a. Interest earned under the expanded foreign
currency deposit system
b. Interest accumulated by lending institutions on
mortgages insured under Home Financing Act
(RA No. 480), as amended
c. Receipts from filing fees, service, and other
administrative charges

3. Definition of terms
a. Wholesale – a sale where the purchaser buys
or imports the commodities for resale to
persons other than the end user regardless of
the quantity of the transaction
b. Dealers – one whose business is to buy and
sell merchandise, goods, and chattels as a
merchant. He stands immediately between the
producer or manufacturer and the consumer
and depends for his profit not upon the labor he
bestows upon his commodities but upon the
skill and foresight with.
c. Retail – a sale where the purchaser buys the
commodity for his own consumption,
irrespective of the quantity of the commodity
sold.
d. Contractor – includes persons, natural or
juridical, not subject to professional tax, whose
activity consists essentially of the sale of all
kinds of services for a fee, regardless of
whether or not the performance of the service
calls for the exercise of the use of the physical
or mental faculties of such contractor or his
employees.
e. Peddler – any person who, either for himself or
on commission, travels from place to place and
sells his goods or offers to sell and deliver the
same.
4. Ceilings on business taxes imposed by LGUs within

Metro Manila – the municipalities in Metro Manila may
levy taxes at rates which shall not exceed 50% the
maximum rates prescribed in Section 143, LGC (above
table)
5. Tax on retirement of business

a. A business subject to tax shall, upon
termination thereof, submit a sworn statement
of its gross sales or receipts for the current
year.

b. 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.
6. Rules on payment of business taxes

a. Taxes shall be payable for every separate or
distinct establishment or place where business
subject to the tax is conducted and one line of
business does not become exempt by being
conducted with some other business for which
such tax has been paid.
b. The tax on a business must be paid by the
person conducting the same.
c. In cases where a person conducts or
operations 2 or more of the businesses
mentioned in Section 143 of LGC which are
subject to:
i. Same rate of tax – the tax shall be
computed on the combined total gross
sales or receipts of the said 2 or more
related business.
ii. Different rates of tax – the gross sales
or receipts of each business shall be
separately reported for the purpose of
computing the tax due from each
business.
7. Fees and charges for regulation and licensing – the

municipality may impose and collect such reasonable
fees and charges on business and occupation except
professional taxes reserved for provinces:
a. Fees for sealing and licensing of weights and
measures
b. Fishery rentals, fees and charges, including the
authority to grant fishery privileges within
municipal waters, as well as issue licenses for
the operation of fishing vessels of three tons or
less.

8. Situs of tax collected
Situations Recognition of sale Payment of tax
With branch or sales All sales made in the The tax shall be payable to
office or warehouse locality where the branch the city or municipality
or office or warehouse is where the same is located
located
Where there is not The municipality where the The tax shall accrue to the
branch or sales office or sale or transaction is city or municipality where
warehouse made. The sale shall be said principal office is
recorded in the principal located.
office along with the sales
made by said principal
office.
Branch office – a fixed place in a locality which conducts operations of the business
as an extension of the principal office.
Principal office – head or main office of the business appearing in pertinent

documents submitted to the SEC and specifically mentioned in the Articles of
Incorporation.
Where there is a factory, All sales shall be recorded Of all sales recorded in the
project office, plant or in the principal office. principal office:
plantation in pursuit of 1. 30% taxable to the city
business or municipality where the
principal office is located.
2. 70% taxable to the city
or municipality where the
factory, plant, etc. is
located.
If plantation is at a place The 70% (above) shall be
other than where the divided as follows:
factory is located. 1. 60% to the city or
municipality where the
factory is.
2. 40% to the city or
municipality where the
plantation is located.
If manufacturer, The 70% shall be prorated
contractor, etc. has two among the localities where
or more factories, project such factories, project
offices, plants or offices, plants and
plantations located in plantations are located
different localities. based on their respective
volumes of production.

c. Taxing power of cities
i. Scope of the taxing power of a city – the city may levy the
taxes, fees, and charges which the province or municipality may
impose, except as otherwise provided in the LGC. Those levied
and collected by highly urbanized and independent component
cities shall accrue to them and distributed in accordance with
the provisions of the LGC.
ii. Specific limitations on the taxing power of cities – a city

shall not levy the taxes and other impositions enumerated under
the common limitations on the taxing powers of local
governments, except:
1. Tax that may be levied by cities on the transfer of real
property ownership; and
2. Wharfage on wharves constructed and maintained by
the city.
d. Taxing power of barangays

Fees and
Sources of revenue Tax base Tax rate
charges
Barangay taxes – on Gross sales receipts Not exceeding
stores or retailers for preceding calendar 1% of such
with fixed business year of gross sales or
establishments - P50,000 or less (for receipts.
barangay in the cities);
and
- P30,000 or less (for
barangay in
municipalities)
Service fees or Services rendered in Reasonable fees
charges connection with the or charges
regulation or the use of
barangay-owned
properties; or
Service facilities such
as palay, copra, or
tobacco dryers
Barangay clearance Reasonable fee
as Sangguniang
Barangay may
impose
Other fees and Reasonable fees
charges and charges as

a. Commercial the barangay
breeding of fighting may levy
cocks, cockfights and
cockpits
b. Places of recreation
which charge
admission fees
c. Billboards,
signboards, neon signs
and outdoor
advertisements
e. Common revenue-raising powers

i. Fees, service or user charges – LGUs may impose and collect
such reasonable fees and charges for services rendered.
ii. Public utility charges – LGUs may fix the rates for the
operation of public utilities owned, operated, and maintained by
them within their jurisdiction
iii. Toll fees or charges – the sanggunian concerned may
prescribe the terms and conditions and fix the rates for the
imposition of toll fees or charges for the use of any public road,
pier, or wharf, waterway, bridge, ferry or telecommunication
system funded and constructed by the LGU concerned.
Persons exempted from payment of tolls, fees, or other

charges
1. Officers and enlisted men of the Armed Forces of the
Philippines and members of PNP on mission
2. Post office personnel delivering mail
3. Physically handicapped and disabled citizens who are
65 years old or older
f. Community tax
i. Concept – a poll or capitation tax imposed upon residents of a
city or municipality. It replaced the former residence tax. It may
be levied by a city or municipality but not a province.
ii. Persons liable to pay community tax

1. Individuals – every inhabitant of the Philippines 18
years of age or over:

a. who has been regularly employed on a wage or
salary basis for at least 30 consecutive working
days during any calendar year
b. who is engaged in business or occupation
c. who owns real property with in aggregate
assessed value of P1,000.00 or more; or
d. who is required by law to file an income tax
return
2. Juridical persons – every corporation no matter how

created or organized, whether domestic or resident
foreign, engaged in or doing business in the Philippines.
iii. Amount of community taxes

1. Individuals
a. Basic: P5.00
b. Additional: additional tax of P1.00 for every
P1,000.00 of income regardless of whether
from business, exercise of profession or from
property which in no case shall exceed
P5,000.00
Note: In case of husband and wife, the

additional tax shall be based on the total
property, gross receipts or earnings owned or
derived by them.
2. Juridical persons
a. Basic: P500.00
b. Additional: additional tax, which, in no case,
shall exceed Ten thousand pesos (P10,000.00)
in accordance with the following schedule:
i. for every five thousand pesos
(P5,000.00) 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 – two pesos (P2.00); and,

ii. for every P5,000.00 of gross receipts or
earnings derived by it from its business
in the Philippines during the preceding
year – two pesos (P2.00)
iv. Exemption from community tax

1. Diplomatic and consular representatives
2. Transient visitors when their stay in the Philippines does
not exceed three (3) months
v. Community tax certificate – it is issued to every person or

corporation upon payment of the community tax. It may also be
issued to any person or corporation NOT subject to the
community tax upon payment of P1.00.
vi. Proceeds of community tax actually and directly collected

by barangay treasurers:
1. Fifty percent (50%) shall accrue to the general fund of
the city or municipality concerned; and
2. Fifty percent (50%) shall accrue to the barangay where
the tax is collected.
g. Real property taxation

i. Nature of real property taxation
1. Direct tax whose burden could not be shifted by the one
who pays to other persons
2. Ad valorem tax based on the assessed value of the
property
3. Local tax
4. Imposed on use and not on ownership
5. Progressive in character pending to a certain extent on
the use and value of the property
6. Indivisible single obligation
ii. LGUs responsible for the administration of real property tax

1. Provinces
2. Cities
3. Municipalities in Metro Manila area

iii. Subject of real property taxation
1. Definition of real property – under Article 415 of the
New Civil Code, the following are Immovable Property:
a. Land, buildings, roads and constructions of all
kinds adhered to the soil
b. Trees, plants, and growing fruits, while they are
attached to the land or form an integral party of
an immovable
c. Everything attached to an immovable in a fixed
manner, in such a way that it cannot be
separated therefrom without breaking the
material or deterioration of the object
d. Statues, reliefs, paintings or other objects for
use or ornamentation, placed in buildings or on
lands by the owner of the immovable in such a
manner that it reveals the intention to attach
them permanently to the tenements
e. Machinery, receptacles, instruments or
implements intended by the owner of the
tenement for an industry or works which may
be carried on in a building or on a piece of land,
and which tend directly to meet the needs of the
said industry or works
f. Animal houses, pigeon-houses, beehives,
fishponds or breeding places of similar nature,
in case their owner has placed them or
preserves them with the intention to have them
permanently attached to the land, and forming
part of it; the animals in these places are
included
g. Fertilizer actually used on a piece of land
h. Mines, quarries, and slag dumps, while the
matter thereof forms part of the bed, and waters
either running or stagnant
i. Docks and structures which, though floating,
are intended by their nature and object to
remain at a fixed place on a river, lake, or coast;
and
j. Contracts for public works, and servitudes and
other real rights over immovable property

2. Improvement – a valuable addition made to a property
or an amelioration in its condition, amounting to more
than a mere repair or replacement of parts involving
capital expenditures and labor, which is intended to
enhance its value, beauty or utility or to adapt it for new
or further purposes
3. Requisites for taxability of an improvement

a. Must enhance the value of the property
b. Must be separately assessable
c. Can be treated independently from the main
property
4. Doctrine of essentiality – properties considered as

personal under the Civil Code may nonetheless be
considered as real property for tax purposes where said
property is essential to the conduct of business. The
property to be considered as immobilized for RPT must
be “essential and a principal element” of an industry
without which such industry would be unable to carry on
the principal industrial purpose for which it was
established.
5. Kinds of real property tax and special levies

a. Basic real property tax
b. Additional levy on real property for the Special
Education Fund
c. Additional ad valorem tax on idle lands
d. Special levy by LGUs
6. Socialized housing tax – LGUs are authorized to

impose an additional one-half percent (0.5%) on the
assessed value of all lands in urban areas in excess of
P50,000, except those from lands which are exempted
from the coverage of RA No. 7279.

iv. Imposition of real property tax
1. Power to levy
a. Extent of the local taxing power in real
property taxation – provinces, cities and
municipalities do not only have the power to
levy real estate taxes, but they may also fix real
estate tax rates. Sec. 233 of the LGC provides
that they shall fix a uniform rate of basic real
property tax applicable to their respective
localities.
b. Real properties subject to tax

i. For basic real property tax and
special levy on education fund
1. Land
2. Building
3. Machinery
4. Other improvements
ii. For special levy on idle lands and

special levy on public works
(special assessments)
1. Land only
c. Rates of levy
i. In a province – at the rate not
exceeding 1% of the assessed value of
real property; and
ii. In a city or municipality within the
Metro Manila area – at the rate not
exceeding 2% of the assessed value of
real property
d. Ordinance imposing special levy for public

works must contain the following:
i. The ordinance shall
1. describe the nature, extent,
and location of the project
2. state estimated cost; and,
3. specify metes and bounds by
monuments and lines

ii. It must state the number of annual
installments, not less than 5 years nor
more than 10 years
Note: In the apportionment of special

levy, Sanggunian may fix different
rates depending on whether such land
is more or less benefited by the
proposed work
iii. Notice to the owners and public

hearing
iv. Owner can appeal to the LBAA and

CBAA
e. Special levy or special assessment by LGUs

i. General rule – a province, city or
municipality may impose a special levy
on the lands within its territorial
jurisdiction specially benefited by
public works projects or improvements
by the LGU concerned
ii. Exception – it shall not apply to lands

exempt from basic real property tax
and the remainder of the land, portions
of which have been donated to the
LGU concerned for the construction of
such projects or improvements
Note: The special levy shall not exceed

60% of the actual cost of such projects
and improvements, including the costs
of acquiring land and such other real
property in connection therewith.

f. Additional levy on real property for the
Special Education Fund – a province, city or
municipality within the Metro Manila area may
levy and collect an annual tax of 1% on the
assessed value of real property, which shall be
in addition to the basic real property tax. The
proceeds thereof shall exclusively accrue to the
Special Education Fund created under R.A.
5447.
g. Additional ad valorem tax on idle lands – a

province or city or a municipality within the
Metro Manila rea may levy an annual tax on idle
lands at the rate not exceeding 5% of the
assessed value of the property which shall be
in addition to the basic real property tax.
h. The following are considered “idle lands”

i. Agricultural lands:
1. More than one (1) hectare in
area
2. Suitable for cultivation,
dairying, inland fishery, and
other agricultural uses
3. One-half (1/2) of which remain
uncultivated or unimproved by
the owner or person having
legal interest.
Note: Agricultural lands

planted to permanent or
perennial crops with at least
fifty (50) trees to a hectare
shall not be considered idle
lands. Lands actually used for
grazing purposes shall
likewise not be considered idle
lands.

ii. Lands other than agricultural
1. Located in a city or
municipality
2. More than one thousand
square meters (1,000 m 2) in
area
3. One-half (1/2) of which remain
unutilized or unimproved by
the owner or person having
legal interest
Regardless of land area, this

Section shall apply to
residential lots in subdivisions
duly approved by proper
authorities, the ownership of
which has been transferred to
individual owners, who shall
be liable for the additional tax:
Provided, however, that
individual lots of such
subdivisions, ownership of
which has not been transferred
to the buyer shall be
considered as part of the
subdivision and shall be
subject to the additional tax
payable by subdivision owner
or operator.
i. Causes for exemption from idle lands tax

i. Force majeure
ii. Civil disturbance
iii. Natural calamity
iv. Any cause or circumstance which
physically or legally prevents the owner
or person having legal interest from
improving utilizing or cultivating the
same

2. Exemption from real property tax
a. Exemptions under the Local Government
Code
i. Real property owned by the Republic of
the Philippines or any of its political
subdivisions except when the
beneficial use thereof has been
granted for consideration or otherwise
to a taxable person
Note: This exemption shall not apply to

real properties the beneficial use of
which has been granted, for
consideration or otherwise, to a taxable
person.
ii. Charitable institutions, churches,

parsonages, or convents appurtenant
thereto, mosques, non-profit or
religious cemeteries, and all lands,
buildings, and improvements actually,
directly and exclusively used for
religious, charitable, or educational
purposes.
Note: The tax exemption herein rests

on the premise that they are actually,
directly and exclusively used by said
entities or institutions for their stated
purposes and not necessarily because
they are owned by religious, charitable
or educational institutions.
iii. All machineries and equipment that are

actually, directly and exclusively used
by local water utilities and government-
owned or controlled corporations
engaged in the supply and distribution
of water and/or generation and
transmission of electric power.
iv. All real property owned by duly

registered cooperatives as provided for
under RA No. 6938.

v. Machinery and equipment used for
pollution control and environmental
protection.
Note: Pollution control and

infrastructure devices refer to
infrastructure, machinery, equipment
and/or improvements used for
impounding, treating or neutralizing,
precipitating, filtering, conveying and
cleansing mine industrial waste and
tailings as well as eliminating or
reducing hazardous effects of solid
particles, chemicals, liquids, or other
harmful by-products and gases emitted
from any facility utilized in mining
operations for their disposal.
b. Other properties exempt from real property

tax
i. Real property in any one city or
municipality belonging to a single
owner, the entire assessed valuation of
which is not in excess of P1,000.00
ii. Land acquired by grant, purchase, or
lease from the public domain for
conversion into dairy farms for a period
of 5 years from the time of such
conversion
iii. Machinery of a pioneer and preferred
industry as certified by the Board of
Investments used or operated for
industry, agriculture, manufacturing or
mining purposes, during the first 3
years of the operation of the
machinery.
iv. Perennial trees and plants of economic
value except where the land upon
which they grow is planted principally
to such growth

v. Properties owned by non-stock or non-
profit educational institutions, the total
assessed value of which does not
exceed P3,000.00, including those
owned by Educational Foundations
organized under RA No. 6055.
3. Appraisal and assessment

a. Steps in the assessment and collection of
real property tax
i. Declaration of real property
ii. Listing of real property in the
assessment rolls
iii. Appraisal and valuation of real property
iv. Determination of assessed value and
RPT
v. Payment and collection of tax
b. Classes of real property for assessment

purposes
i. Residential
ii. Agricultural
iii. Commercial
iv. Industrial
v. Mineral
vi. Timberland
vii. Special
c. Special classes of real property – lands,

buildings, and other improvements thereon
which are:
i. Actually, directly and exclusively used
for hospitals, cultural, or scientific
purposes
ii. Owned and used by local water
districts
iii. Owned and used by Government-
owned or controlled corporations
rendering essential public services in
the supply and distribution of water
and/or generation and transmission of
electric power

Note: Special classes of real property
have lower assessment level
compared with other classes of real
property.
d. Assessment based on actual use

i. Concept
1. Actual use – refers to the
purpose for which the property
is principally or predominantly
utilized by the person in
possession thereof
Note: The basis of taxing real

property is actual use, even if
the user is not the owner.
ii. Assessment of property

1. 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.
2. 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.
iii. Effect of assessment – an

assessment fixes and determines the
tax liability of the taxpayer. It is a notice
to the effect that the amount therein
stated is due as tax and a demand for
payment thereof.

e. Instances when the LGU shall make
classification, appraisal, and assessment of
real property irrespective of any previous
assessment or taxpayers’ valuation thereon
(1st general rule)
i. Real property is declared and listed for
taxation purposes for the 1st time
ii. There is an ongoing general revision of
property classification and assessment
iii. A request is made by the person in
whose name the property is declared
assessor shall make a classification,
appraisal and assessment or
taxpayer’s valuation
Note: Provided, however, that the assessment

of real property shall not be increased oftener
than once every 3 years except in case of new
improvements substantially increasing the
value of said property or of any change in its
actual use
f. Assessment level – the percentage applied to

the fair market value to determine the taxable
value of the property. The assessment levels to
be applied to the fair market value of real
property to determine its assessed value shall
be fixed by ordinances of the sangguniang
panlalawigan, sangguniang panlungsod or
sangguniang bayan of a municipality within the
Metropolitan Manila area, at the rates not
exceeding those enumerated under Section
218 of the LGC.
g. General revisions of assessments and

property classifications – the provincial, city
or municipal assessor shall undertake a
general revision of real property assessments
within 2 years after the effectivity of the LGC
and every 3 years thereafter.

h. Date of effectivity of assessment or
reassessment – all assessments or
reassessments made after the 1st day of
January or any year shall take effect on the 1st
day of January of the succeeding year;
Provided, however, That the reassessment of
real property due to its partial or total
destruction, or to a major change in its actual
use, or to any great and sudden inflation or
deflation of real property values, or to the gross
illegality of the assessment when made or to
any other abnormal cause, shall be made within
90 days from the date of any such cause or
causes occurred, and shall take effect at the
beginning of the quarter next following the
reassessment.
i. Assessment of real property subject to back

taxes – real property declared for the first time
shall be assessed for taxes (back 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: Provided, however,
that 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, taxes shall be subject to
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.
j. Notification of new or revised assessments

– assessor shall give a written notice to the
person whose property is assessed in case of
new or revised assessment.

When real property is assessed for the first time
or when an existing assessment is increased or
decreased, the provincial, city or municipal
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.
k. Appraisal and assessment of machinery

i. Classification of machineries:
1. Realty by destination –
machinery essential to the
business
Note: Movable equipment to

be immobilized in
contemplation of the law must
first be “essential and principal
elements” of an industry or
works without which such
industry or works would be
“unable to function or carry on
the industrial purpose for
which it was established.”
2. Realty by incorporation –
machinery permanently
attached
ii. Appraisal and assessment of

machinery
1. For brand new machinery,
FMV is the acquisition cost
2. In all other cases:

Estimated economic life Replacement or
FMV = X
Remaining economic life reproduction cost

3. Depreciation allowance:
a. Rate not exceeding
5% of original cost OR
replacement or
reproduction cost for
each year of use
b. Remaining value shall
be fixed at not less
than 20% of the cost
c. Machinery remains
useful and in
operation
IV. VENUE AND TIME OF PAYMENT

a. Local taxes
i. Venue of payment – the local treasurer to which the local tax
was levied and imposed
ii. Time of payment

1. General rule – on or before January 20 of the current
year
2. Exception – refer to the specific local taxes
enumerated above
b. Community tax
i. Venue of payment – residence of the individual, or in the place
where the principal office of the juridical entity is located.
ii. Time of payment – accrues on the 1st day of January of each

year which shall be paid not later than the last day of February
of each year.
iii. Penalty for delinquency – an interest of 24% per annum from

the due date until it is paid shall be added to the amount due.

c. Real property taxes
i. Date of accrual – real property tax for any year shall accrue on
the first day of January. From the date it shall constitute a lien
on the property superior to any other lien, mortgage, or
encumbrance of any kind whatsoever extinguished only upon
the payment of the delinquent tax.
ii. Collection of taxes

1. General rule – the collection of real property tax with
interest thereon and related expenses, and the
enforcement of the remedies are the responsibility of
the city or municipal treasurer.
2. Exception – treasurer may deputize the barangay

treasurer to collect all taxes on real property located in
the barangay, provided that:
a. The barangay treasurer is properly bonded for
the purpose: provided, further,
b. The premium on the bond shall be paid by the
city or municipal government concerned.
iii. Duty of assessor to furnish local treasurer with assessment

rolls – the provincial, city, or municipal 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.
iv. Notice of time for collection of taxes – treasurer shall post

the notice of the dates when the tax may be paid without interest
in a public accessible place at the city or municipal hall. Notice
shall likewise be published in a newspaper of general circulation
in the locality once a week for two consecutive weeks on or
before the 31st day of January each year in the case of the basic
real property tax and the additional tax for the Special Education
Fund or any other date to be prescribed by the sanggunian
concerned in the case of any other tax levied.

v. Tax discount for advanced/prompt payment – if the basic
real property and the additional tax accruing to the Special
Education Fund (SEF) are paid in advance the sanggunian may
grant a discount not exceeding 20% of the annual tax due.
Note: For prompt payment – discount not exceeding 10% of

annual tax due.
vi. Payment of real property taxes in installment – the owner or

the person having legal interest may pay the basic real property
tax and the additional tax for Special Education Fund without
interest in four equal installments (on or before March 31/June
30/September 30/December 31).
vii. Interest on unpaid real property taxes – the rate is 2% per

month on the unpaid amount until the delinquent tax shall have
been fully paid. Provided, in no case shall the total interest on
the unpaid tax or portion thereof exceed 36 months.
viii. Disposition of proceeds – proceeds of real property tax,

including interest thereon plus proceeds from the use, lease or
disposition, sale or redemption of property acquired at a public
auction shall be distributed as follows:
1. In the case of provinces:
a. Province – 35% shall accrue to the general
fund
b. Municipality – 40% to the general fund of the
municipality where the property is located; and
c. Barangay – 25% shall accrue to the barangay
where the property is located.
2. In the case of cities:

a. City – 70% shall accrue to the general fund of
the city; and
b. Component barangays – 30% shall be
distributed among the component barangays of
the cities where the property is located in the
following manner:
i. 50% shall accrue to the barangay
where the property is located; and,
ii. 50% shall accrue equally to all
component barangays of the city.

3. In the case of a municipality within the Metropolitan
Manila area:
a. Metropolitan Manila Authority – 35% shall
accrue to the general fund of the authority
b. Municipality – 35% shall accrue to the general
fund of the municipality where the property is
located
c. Barangays – 30% shall be distributed among
the component barangays of the municipality
where the property is located in the following
manner:
i. 50% shall accrue to the barangay
where the property is located; and
ii. 50% shall accrue equally to all
component barangays of the
municipality.
Note: The share of each barangay shall be released, without

need of any further action, directly to the barangay treasurer on
a quarterly basis within 5 days after the end of each quarter and
shall not be subject to any lien or holdback for whatever
purpose.
ix. Application of the proceeds of the additional one percent

SEF tax – the proceeds from the additional 1% tax on real
property accruing to the Special Education Fund (SEF):
1. Shall be automatically released to the local school
boards, provided, in case of provinces, the proceed
shall be divided equally between the provincial and
municipal school boards
2. The proceeds shall be allocated for the:
a. Operation and maintenance of public schools
b. Construction and repair of school buildings,
facilities and equipment
c. Educational research
d. Purchase of books and periodicals
e. Sports development as determined and
approved by the Local School Board
x. Proceeds of the tax on idle lands – it shall accrue to the:

1. Respective general fund of the province or city where
the land is located

2. In the case of a municipality within the Metropolitan
Manila area, the proceeds shall accrue equally to the
Metropolitan Manila Authority and the municipality
where the land is located
xi. Proceeds of the special levy – the proceeds of the special levy
on lands benefited by public works, projects and other
improvements shall accrue to the general fund of the LGU which
financed such public works, projects or other improvements.
V. REMEDIES AVAILABLE TO THE GOVERNMENT AND THE TAXPAYER

a. Local taxation
i. Requirements for a valid tax ordinance
1. Procedure for approval and effectivity of tax
ordinances
a. The procedure applicable to local government
ordinances in general should be observed
The following procedural details must be

complied with:
i. Necessity of a quorum
ii. Submission for approval by the local
chief executive
iii. The matter of veto and overriding the
same
iv. Publication and effectivity
b. Public hearings are required before any local

tax ordinance is enacted
c. 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,
then the ordinance may be posted in at least
two conspicuous and publicly accessible
places.

Note: The requirement of publication in full for 3
consecutive days is mandatory for a tax ordinance to be
valid. The tax ordinance will be null and void if it fails to
comply with such publication requirement.
2. When an ordinance takes effect – 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.
3. Test in determining the validity of an ordinance – to

be valid, an ordinance must conform to the following
substantive requirements:
a. must not contravene the Constitution or any
statute
b. must not be unfair or oppressive
c. must not be partial or discriminatory
d. must not prohibit but may regulate trade
e. must be general and consistent with public
policy; and
f. must not be unreasonable
ii. Taxpayer’s Remedies

1. Protest
a. When the correct tax, fee, or charge is not paid,
the Local Treasurer shall issue a notice of
assessment within the applicable prescriptive
period, stating the nature of the levy, the
amount of deficiency, the surcharges, interests
and penalties.
b. Within 60 days from receipt of the assessment,
the taxpayer may file a written protest of the
assessment with the local treasurer contesting
the assessment; otherwise the assessment
shall become final and executory.
c. The local treasurer shall decide the protest
within 60 days from the time of its filing. If the
local treasurer finds the assessment to be
wholly or partly correct, he shall deny the
protest wholly or partly with notice to the
taxpayer.

d. The taxpayer shall have 30 days from the
receipt of the denial of the protest or from the
lapse of the 60-day period prescribed herein
within which to appeal with the court of
competent jurisdiction otherwise the
assessment becomes conclusive and
unappealable.
e. The competent court referred to is the
RTC/MTC/MeTC/MCTC which acts in the
exercise of its original jurisdiction, depending
on the amount. Local tax cases originally
decided by the MTC/MeTC/MCTC may be
appealed to the RTC.
Note: When an assessment is seasonably

disputed, the collection of tax, fee, or charge
subject matter of the assessment should be
held in abeyance pending final determination
thereof.
2. Refund
a. A written claim for refund or credit is filed with
the local treasurer.
b. A claim or proceeding is then filed with the court
of competent jurisdiction (depending upon the
jurisdictional amount) within 2 years from the
date of the payment of such tax, fee, or charge,
or from the date the taxpayer is entitled to a
refund or credit.
Note: The filing of a written claim for refund with

the local treasurer is a condition precedent for
maintaining a court action. If the local treasurer
does not act on the written claim for refund and
the 2-year statute of limitation is about to
expire, the taxpayer should forthwith initiate
court action and consider the treasurer’s
inaction as a denial of his claim for refund.
3. Action before the Secretary of justice

a. Administrative appeal questioning the
constitutionality or legality within 30 days from
the effectivity of the tax ordinance or revenue
measure

b. Secretary of Justice shall render a decision
within 60 days from date of receipt of the appeal
c. Within 30 days after receipt of the decision or
the lapse of 60-day period without action from
the Secretary of Justice, aggrieved party may
file appropriate proceedings with a court of
competent jurisdiction
iii. Assessment and collection of local taxes

1. General rule – local taxes, fees, or charges shall be
assessed within 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.
Exception – 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.
2. Claim for refund of tax credit for erroneously or

illegally collected tax, fee, or charge
a. Grounds for the refund of local government
taxes, fees or charges
i. Erroneously collected
ii. Illegally collected
b. Procedure for the refund of local

government taxes, fees or charges
i. A written claim for refund or credit is
filed with the local treasurer
ii. A claim or proceeding is then filed with
the court of competent jurisdiction
(depending upon the jurisdictional
amount) within two (2) years from the
date of the payment of such tax, fee, or
charge, or from the date the taxpayer is
entitled to a refund or credit

3. Remedies of local government units
a. Local government lien – local taxes, fees,
charges, and other revenues constitute lien,
superior to all liens, charges or encumbrances
in favor of any person, enforceable by
appropriate administrative or judicial action, not
only upon any property or rights therein which
may be subject to the lien but also upon
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.
b. Civil remedies
i. Distraint of personal property
ii. Levy of real property
iii. Judicial action
c. Discussions
i. Levy of real property may be
simultaneously issued with the
warrant of distraint – the levy of a real
property may be made before or
simultaneous with distraint. In case the
levy on real property is not issued
before or simultaneously with the
warrant of distraint on personal
property, and the personal property of
the taxpayer is not sufficient to satisfy
his delinquency, the provincial, city or
municipal treasurer, as the case may
be, shall within 30 days after execution
of the distraint, proceed with the levy
on taxpayer’s real property.

ii. LGU has right to purchase real
property advertised for sale, when
1. No bidder for the real property
2. If the highest bid is for an
amount insufficient to pay the
taxes, fees, or charges, related
surcharges, interests,
penalties, and costs
iii. Local government may repeat the

remedies of distraint and levy – the
remedies by distraint and levy may be
repeated if necessary until the full
amount due, including all expenses, is
collected
iv. Penalty of the local treasurer for

failure to issue and execute the
warrant – automatically dismissed
from service after notice and hearing, if
found guilty of abusing the exercise
thereof by competent authority, without
prejudice to criminal prosecution under
the RPC and other applicable laws.
v. Exempt properties from distraint or

levy
1. Tools and implements
necessarily used by the
delinquent taxpayer in his
trade or employment
2. One horse, cow, carabao, or
other beast of burden, such as
the delinquent taxpayer may
select, and necessarily used
by him in his ordinary
occupation
3. His necessary clothing, and
that of all his family

4. Household furniture and
utensils necessary for
housekeeping and used for
that purpose by the delinquent
taxpayer, such as he may
select, of a value not
exceeding P10,000.00
5. Provisions, including crops,
actually provided for individual
or family use sufficient for 4
months
6. The professional libraries of
doctors, engineers, lawyers
and judges
7. One fishing boat and net, not
exceeding the total value of
P10,000.00, by the lawful use
of which a fisherman earns his
livelihood; and
8. Any material or article forming
part of a house or
improvement of any real
property.
4. Judicial action
a. LGU’s enforcement of the judicial remedy in
collection of taxes – the LGU concerned may
enforce the collection of delinquent taxes, fees,
charges and other revenues by civil action in
any court of competent jurisdiction. The civil
action shall be filed by the local treasurer within
5 years from delinquent taxes, fees or charges
become due.
b. Mode of appeal from the decision of the

Regional Trial Court involving local taxes
i. R.A. 9282 expanded the jurisdiction of
the CTA to include, among others, the
power to review by appeal decisions,
orders or resolutions of the RTC in
local tax cases originally decided or

resolved by them in the exercise of
their original or appellate jurisdiction.
ii. The authority to exercise either original
or appellate jurisdiction over local tax
cases depended on the amount of the
claim. In cases where the amount
sought to be refunded is below the
jurisdictional amount of the RTC, the
MeTC, MTC, MCTC are clothed with
ample authority to rule on such claims.
iii. In cases where the RTC exercises
appellate jurisdiction, it necessarily
follows that there must be a court
capable of exercising original
jurisdiction—otherwise there would be
no appeal over which the RTC would
exercise appellate jurisdiction. The
Court cannot consider the City
Treasurer as the entity that exercises
original jurisdiction not only because it
is not a “court” within the context of BP
Blg. 129, but also because BP 129
expressly delineates the appellate
jurisdiction of the Regional Trial
Courts, confining as it does said
appellate jurisdiction to cases decided
by MeTC, MTC, and MCTC. Verily,
unlike in the case of the Court of
Appeals, BP 129 does not confer
appellate jurisdiction on the RTC over
rulings made by non-judicial entities.
The RTC exercises appellate
jurisdiction only from cases decided by
the MeTC, MTC, and MCTC in the
proper cases. The nature of the
jurisdiction exercised by these courts
are original, considering it will be the
first time that a court will take judicial
cognizance of a case instituted for
judicial action.

5. Prescriptive period
a. Period of assessment of local taxes – local
taxes, fees, or charges shall be assessed within
5 years from the date they come due.
b. Period of collection of local taxes – local

taxes, fees, or charges may be collected within
5 years from the date of assessment by
administrative or judicial action.
c. Suspension of running of prescriptive

period – the running of the periods of
prescription provided in the preceding
paragraphs shall be suspended for the time
during which:
i. The treasurer is legally prevented from
making the assessment of collection
ii. The taxpayer requests for a
reinvestigation and executes a waiver
in writing before expiration of the period
within which to assess or collect; and
iii. The taxpayer is out of the country or
otherwise cannot be located.
b. Real property taxation

i. Remedies of local government units
1. Issuance of delinquency notice for real property tax
payment – when real property tax or other tax imposed
becomes delinquent, the local treasurer shall
immediately cause a notice of the delinquency to be
posted at the main hall and in a publicly accessible and
conspicuous place in each barangay of the LGU
concerned. Notice of delinquency shall also be
published once a week for two (2) consecutive weeks,
in a newspaper of general circulation in the province,
city, or municipality.

2. LGU’s lien – guidelines in the exercise of local
government lien
a. A legal claim on the property subject on the real
property tax as security for the payment of tax
obligation
b. It is constituted on the property subject to the
tax from the date the RPT accrued, i.e.,
January 1
c. It is superior to any lien, mortgage, or
encumbrance of any kind whatsoever in favor
of any person, irrespective of the owner or
possessor thereof
d. It is enforceable by administrative or judicial
action
e. It may be extinguished only upon payment of
the tax and related interests and expenses
3. Remedies, in general – remedies of the LGUs for the

collection of real property tax
a. Administrative action
i. Exercise of lien on the property subject
to tax
1. Superior to all liens, charges or
encumbrances and is
enforceable by administrative
or judicial action. It is
extinguished only upon
payment of tax and other
expenses.
ii. Levy on the real property subject of the
tax
iii. Distraint of personal property
b. Judicial action
4. Redemption of delinquent property

a. Right of redemption of owner of the
delinquent property – within 1 year from the
date of sale, the owner of the delinquent real
property or person having legal interest therein,
or his representatives, shall have the right to
redeem the property upon payment to the local
treasurer of the:
i. Amount of the delinquent tax

ii. The interest due thereon
iii. The expenses of sale from the date of
delinquency of the date of sale
iv. Plus interest of not more than 2% per
month on the purchase price from the
date of sale to the date of redemption
b. Effect of redemption of the delinquent

property – such payment shall invalidate the
certificate of sale issued to the purchaser and
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 or his
deputy.
Note: From the date of sale until the expiration

of the period of redemption, the delinquent real
property shall remain in possession of the
owner or person having legal interest therein
who shall have entitled to the income and other
fruits thereof
.
c. Effect of failure to redeem – in case the owner
or person having legal interest fails to redeem
the delinquent property, the treasurer shall
execute a deed conveying to the purchaser
said property, free from lien of the delinquent
tax, interest due thereon and expenses of sale.
5. Right of pre-emption – at any time before the date

fixed for the sale, the taxpayer may stay the
proceedings by paying the taxes, fees, charges,
penalties, and interests
6. Distraint of personal property how effected under

real property taxation – when notice of delinquency
has been accordingly posted and published, the local
treasurer shall proceed to sell the personal property of
the delinquent taxpayer in order to satisfy his unpaid
obligation

7. LGUs may purchase real property advertised for
sale when
a. There is no bidder; or
b. The highest bid is for an amount insufficient to
pay the real property tax, fees, charges,
surcharges, interests or penalties.
8. Resale of real estate taken for taxes, fees, or

charges – Sanggunian may dispose of the real property
acquired. The sanggunian concerned may, by
ordinance duly approved and upon notice of not less
than twenty (20) days, sell and dispose of the real
property acquired under at public auction. The
proceeds of the sale shall accrue to the general fund of
the LGU concerned.
9. Further levy until full payment of amount due – levy

may be repeated if necessary until the full amount due,
including all expenses, is collected.
ii. Taxpayer’s remedies

1. Available remedies to the taxpayer under real
property taxation
a. Dispute assessment (protest)
i. Any owner or person having legal
interest in the property who is not
satisfied with the action of the assessor
in the assessment of his property; or
ii. Any owner of real property affected by
a special levy or any person having
legal interest therein may protest the
assessment by filiing an appeal to the
Local Board of Assessment Appeals
(LBAA) within 60 days from receipt of
notice of the assessment.
b. Claim for refund or tax credit
c. Redemption of real property

d. Judicial
i. Court action
1. Appeal to the CTA en banc
within 15 days from receipt in
case of adverse decision by
the Central Board of
Assessment Appeals (CBAA)
2. Appeal by certiorari with the
Supreme Court (SC) within 15
days from notice in case of
adverse decision by the CTA
ii. Suit assailing the validity of the tax sale
– deposit of amount for which the real
property was sold together with interest
of 2% per month from date of sale to
the time of institution of action.
2. Contesting an assessment
a. Available remedy for a taxpayer contesting
an assessment – any owner or person having
legal interest in the property not satisfied with
the action of the assessor in the assessment of
his property may within 60 days from the date
of receipt of the written notice of assessment
appeal to the Board of Assessment Appeals of
the provincial or city by filing a petition under
oath in the form prescribed for the purpose,
together with copies of the tax declarations and
such affidavits or documents submitted in
support of the appeal.
b. Payment under protest, exceptions

i. Reason for the necessity of prior
payment before protest may be
entertained by the courts – the basis
for requiring payment before protest
can be entertained is that taxes are the
lifeblood of the nation and as such
collection cannot be restrained by
injunction or any like action.

ii. Rules as to the necessity of paying
real property tax prior to protest
1. General rule – the taxpayer
must pay the real property tax
assessed prior to protesting a
real property tax assessment
2. Exception – the payment of

the tax prior to protest is not
necessary where the taxpayer
questions the authority and
power of the assessor to
impose the assessment and of
the treasurer to collect the tax.
Note: The protest contemplated under

Section 252, LGC is required where
there is a question as to the
reasonableness or correctness of the
amount assessed. Hence, if a taxpayer
disputes the reasonableness of an
increase in a real property tax
assessment, he is required to “first pay
the tax” under protest. Otherwise, the
city or municipal treasurer will not act
on his protest.
c. File protest with treasurer – guidelines in

paying tax under protest
i. No protest shall be entertained unless
the taxpayer first pays the tax. There
shall be annotated on the tax receipts
the words “paid under protest.” The
protest in writing must be filed within 30
days from payment of the tax to
treasurer who shall decide the protest
within 60 days from receipt.
ii. The tax or a portion paid under protest
shall be held in trust by the treasurer
concerned.

iii. In the event that the protest is finally
decided in favor of the taxpayer, the
amount or portion of the tax protested
shall be refunded to the protestant or
applied as tax credit against his
existing or future tax liability.
iv. In the event that the protest is denied
or upon the lapse of the 60-day period,
the taxpayer may avail appeal the
assessment before the Local Board of
Assessment Appeals.
v. In case there is adverse decision by the
LBAA, the taxpayer may appeal with
the CBAA within 30 days from receipt
of the adverse decision by the LBAA.
d. Posting of surety bond – by posting the surety

bond, a taxpayer may be considered t have
substantially complied with Section 252 of the
LGC for the said bond already guarantees the
payment to the Office of the Local Treasurer of
the total amount of real property taxes and
penalties due.
e. Refunds or credits of real property taxes

i. Remedy of a taxpayer in case of
excessive collections – the taxpayer
may file a written claim for refund or
credit for taxes and interests with the
local treasurer, in case an assessment
of RPT or any other tax under Real
Property Taxation is found to be illegal
or erroneous.
ii. Period for claim for refund – the

claim must be filed with the local
treasurer within two (2) years from the
date the taxpayer is entitled to such
reduction or adjustment.

f. Procedure for claim for refund or credit
i. Taxpayer files a written claim for refund
or credit with the treasurer within 2
years from the date the taxpayer is
entitled to such reduction or
adjustment.
ii. Provincial or city treasurer should
decide the claim within 60 days from
receipt of the written claim for refund or
credit
iii. In case of denial, appeal to the LBAA
within 30 days as in protest case
iv. Appeal to CBAA within 30 days if LBAA
gives an adverse decision

Procedure for tax refund Procedure for tax refund
based on unreasonable based on solution
collection of RPT indebiti
Payment under protest at the Payment under protest is
time of payment or within 30 NOT required.
days thereafter is
MANDATORY.
Treasurer has 60 days from Treasurer has 60 days from
receipt of the protest to claim for refund to decide on
decide. the claim.
Taxpayer may appeal the Treasurer’s denial would
decision or inaction of the bring the case within the
treasurer to the LBAA within original jurisdiction of the
30 days from receipt of the RTC.
decision or expiration of 60
days.
The LBAA has 120 days from The decision of the RTC is
receipt of the appeal to decide. appealable to the CTA
division by way of petition
for review.
Taxpayer may appeal the The decision of the CTA
decision of LBAA to CBAA division may be the subject
within 30 days from receipt of of a review by CTA en banc.
the decision.
The adverse decision of CBAA The decision of CTA en
may be appealed to the CTA banc may be appealed to
division within 30 days from the SC by way of petition for
receipt of decision. review on certiorari within
15 days from the receipt of
decision.
The decision of CTA division
may be subjected to a Motion
for Reconsideration or New
Trial before the CTA en banc,
and thereafter, an appeal to
SC by means of petition for
review on certiorari.

g. Repayment of excessive collections –
remedy available for a taxpayer whose real
property was erroneously assessed. When an
assessment of basic real property tax, or any
other tax levied under this Title, is found to be
illegal or erroneous and the tax is accordingly
reduced or adjusted, the taxpayer may file a
written claim for refund or credit for taxes and
interests with the provincial or city treasurer
within 2 years from the date the taxpayer is
entitled to such reduction or adjustment.
3. Contesting a valuation of real property

a. Appeal to the Local Board of Assessment
Appeals (LBAA)
i. Composition of the LBAA
1. The Registrar of Deeds, as
Chairman
2. The provincial or city
prosecutor as member
3. The provincial or city engineer
as a member
ii. Jurisdiction of the LBAA – LBAA has

jurisdiction to hear appeals of owners
or persons having legal interest in the
property who are not satisfied with the
action of the assessor on an
assessment of his property. The
proceedings of the Board shall be
conducted solely for the purpose of
ascertaining the facts without
necessarily adhering to technical rules
applicable in judicial proceedings.

iii. Power of the LBAA in the exercise of
its appellate jurisdiction
1. summon witnesses
2. administer oaths
3. conduct ocular inspection
4. take depositions, and
5. issue subpoena and subpoena
duces tecum
iv. Period for the decision of an appeal

– the LBAA shall decide the appeal
within 120 days from the date of receipt
of such appeal. The Board, after
hearing, shall render its decision based
on substantial evidence or such
relevant evidence on record as a
reasonable mind might accept as
adequate to support the conclusion.
b. Appeal to the Central Board of Assessment

Appeals (CBAA)
i. Composition of the CBAA
1. A Chairman; and
2. Two (2) members
ii. Jurisdiction of the CBAA – the Board

shall have appellate jurisdiction over all
assessment cases decided by the
LBAA. The owner of the property or the
person having legal interest therein or
the assessor who is not satisfied with
the decision of the Board may, within
30 days after receipt of the decision of
said Board, appeal to the Central
Board of Assessment Appeals, as
herein provided. The decision of the
Central Board shall be final and
executory.

Note: The CBAA can be appointed by
the Supreme Court to act as a court-
appointed fact-finding commission to
assist the Court in resolving the factual
issues raised in the cases before it. In
that regard, the CBAA is not acting in
its appellate jurisdiction.
iii. CBAA has no authority to hear

purely legal issues – such authority is
lodged with the regular courts. Thus,
the issue of whether RA No. 7160
repealed PD No. 921, is an issue which
does not find referral to the CBAA
before resort is made to the courts.
iv. Appeal to LBAA or CBAA do not

suspend the collection of tax – an
appeal on assessments of real
property shall in no case, suspend the
collection of the corresponding realty
taxes the property involved as
assessed. This is without prejudice to
subsequent adjustment depending
upon the final outcome of the appeal.
Note: No court shall have the authority

to enjoin or restrain the collection of
any tax, fee, or charge collected by the
provincial, city or municipal treasurer.
“No injunction rule”
v. Instances where CTA en banc has

exclusive appellate jurisdiction over
cases filed with CBAA
1. In the exercise of its appellate
jurisdiction
2. Over cases involving the
assessment and taxation of
real property
3. Originally decided by the
provincial or CBAA

vi. Period within which CBAA should
resolve a case submitted to it for
decision – the Central Board shall
decide cases brought on appeal within
12 months from the date of receipt
thereof, which decision shall become
final and executory after the lapse of 15
days from the date of receipt thereof by
the appellant.
vii. Exception when prior resort to

administrative action is not required
– in disputes involving real property
taxation, the general rule is to require
the taxpayer to first avail of
administrative remedies and pay the
tax under protest before allowing any
resort to a judicial action, except when
the assessment itself is alleged to be
illegal or is made without legal
authority. Stated differently, the
general rule of a prerequisite recourse
to administrative remedies applies
when questions of fact are raised, but
the exception of direct court action is
allowed when purely questions of law
are involved.
c. Effect of payment of taxes – appeal on

assessments of real property shall, in no case,
suspend the collection of the corresponding
realty taxes on the property involved as
assessed by the provincial or city assessor,
without prejudice to subsequent adjustment
depending upon the final outcome of the
appeal.

4. Compromising real property tax assessment
a. Instances which the sanggunian may
condone or reduce real property tax – the
sanggunian by ordinance passed prior to the 1st
day of January of any year and upon
recommendation of the local disaster
coordinating council, may condone or reduce,
wholly or partially, the taxes and interest
thereon for the succeeding year or years in the
city or municipality affected by the calamity in
cases of
i. General failure of crops
ii. Substantial decrease in the price of
agricultural or agri-based products
iii. Calamity in any province, city or
municipality
b. President’s power to condone or reduce

real property tax – the president may, when
public interest so requires, condone or reduce
the real property tax and interest for any year in
any province or city or a municipality within
Metro Manila.
VI. TAX IMPLICATIONS OF TRANSACTIONS APPLYING THE TAX RULES AND

LIABILITIES

TAX “Innovating
Educational
PREFERENTIAL TAXATION Services”
KHEEN V. BATINGAL
REVIEW NOTES
I. PREFERENTIAL TAXATION ON BUSINESS REGISTERED IN INVESTMENT

PROMOTION AGENCIES
a. Investment Promotion Agencies – government entities created by
law, executive order, decree or other issuance, in charge of promoting
investments, granting and administering tax and non-tax incentives, and
overseeing the operations of the different economic zones and freeports
in accordance with their respective special laws. These includes:
i. Board of Investments (BOI)
ii. Regional Board of Investments-Autonomous Region in Muslim
Mindanao (RBOI-ARMM)
iii. Philippine Economic Zone Authority (PEZA)
iv. Bases Conversion and Development Corporation (BCDA)
v. Subic Bay Metropolitan Authority (SBMA)
vi. Clark Development Corporation (CDC)
vii. John Hay Management Corporation (JHMC)
viii. Poro Point Management Corporation (PPMC)
ix. Cagayan Economic Zone Authority (CEZA)
x. Zamboanga City Special Economic Zone Authority (ZCSEZA)
xi. PHIVIDEC Industrial Authority (PIA)
xii. Aurora Pacific Economic Zone and Freeport Authority (APECO)
xiii. Authority of the Freeport Area of Bataan (AFAB)
xiv. Tourism Infrastructure and Enterprise Zone (TIEZA)
b. Fiscal Incentives Review Board – given the power to grant appropriate

tax incentives to be granted to registered business enterprises only to
the extent of their approved registered project or activity under the
Strategic Investment Priority Plan. Investment Promotion Agencies,
under delegated authority from the Fiscal Incentives Review Board, may
also exercise the same power of granting tax incentives.

AFAR PREFERENTIAL TAXATION. Review notes
c. Covered businesses
i. Export enterprise – any individual, partnership, corporation,
Philippine branch of a foreign corporation, or other entity
organized and existing under Philippine laws and registered
with the Investment Promotion Agency to engage in
manufacturing, assembling or processing activity, and services
such as information technology (IT) activities and business
process outsourcing (BPO), and resulting in the direct
exportation, and/or sale of its manufactured, assembled or
processed product or IT/BPO services to another registered
export enterprise that will form part of the final export product or
export service of the latter, of at least seventy percent (70%) of
its total production or output.
d. Tax and Duty Incentives and Conditions for Availment

Incentive Conditions of Availment
Income Tax Holiday (ITH)
Special Corporate Income Tax (SCIT) The income tax holiday shall be followed
Rate – for export enterprise, a tax rate by the Special Corporate Income Tax rate
equivalent to five percent (5%) effective or Enhanced Deductions at the option of
July 1, 2020, based on the gross income the export enterprise.
earned, in lieu of all national and local
taxes. In no case shall the enhanced deductions
be granted simultaneously with the
Special Corporate Income Tax.
Enhanced Deductions (ED)

1. Depreciation allowance of shall be allowed for assets that are
assets acquired for the entity’s directly related to the registered
production of goods and enterprise's production of goods and
services (qualified capital services other than administrative and
expenditure) – additional 10% other support services.
for buildings; and additional 20%
for machineries and equipment
2. 50% additional deduction for shall not include salaries, wages,
labor expense incurred in the benefits, and other personnel costs
taxable year incurred for managerial, administrative,
indirect, labor, and support services.

3. 100% additional deduction on  only apply to research and
research and development development directly related to
expense incurred in the taxable the registered project or activity
year of the entity and
 shall be limited to local
expenditure incurred for salaries
of Filipino employees and
consumables and payments of
local research and development
organizations.
4. 100% additional deduction on shall only apply to trainings, as approved
training expense incurred in the by the Investment Promotion Agencies
taxable year based on the Strategic Investment
Priority Plan, given to the Filipino
employees engaged directly in the
registered business enterprise's
production of goods and services.
5. 50% additional deduction on shall only apply to domestic input that are
domestic input expense directly related to and actually used in the
incurred in the taxable year registered export project or activity of the
registered business enterprise.
6. 50% additional deduction on shall only apply to power utilized for the
power expense incurred in the registered project or activity.
taxable year
7. Deduction for reinvestment shall be determined in the Strategic
allowance to manufacturing Investment Priority Plan.
industry – when a manufacturing
registered business enterprise
reinvests its undistributed profit or
surplus in any of the projects or
activities listed in the Strategic
Investment Priority Plan, the
amount reinvested to a maximum
of fifty percent (50%) shall be
allowed as a deduction from its
taxable income within a period of
five (5) years from the time of
such reinvestment

8. Enhanced Net Operating Loss
Carry-Over (NOLCO) – The net
operating loss of the registered
project or activity during the first
three (3) years from the start of
commercial operation, which had
not been previously offset as
deduction from gross income,
may be carried over as deduction
from gross income within the next
five (5) consecutive taxable years
immediately following the year of
such loss
Duty exemption on importation of shall only apply to the importation of
capital equipment, raw materials, capital equipment, raw materials, spare
spare parts, or accessories parts, or accessories directly and
exclusively used in the registered project
or activity by registered business
enterprises.
Value-Added Tax (VAT) exemption on shall only apply to goods and services
importation and VAT zero-rating on directly and exclusively used in the
local purchases registered project or activity by a
registered business enterprise.
Other incentives the importation of COVID-19 vaccine
shall be exempt from import duties, taxes
and other fees, subject to the approval or
licenses issued by the Department of
Health or the Food and Drug
Administration.
Persons who directly import petroleum
products defined under Republic Act No.
8479, otherwise known as the
'Downstream Oil Industry Deregulation
Act of 1998,' for resale in the Philippine
customs territory and/or in free zones as
defined under Republic Act No. 10863,
otherwise known as the Customs
Modernization and Tariff Act, shall not be
entitled to the foregoing tax and duty
incentives, and shall be subject to
appropriate taxes imposed under
CREATE law.

Crude oil that is intended to be refined at
a local refinery, including the volumes that
are lost and not converted to petroleum
products when the crude oil actually
undergoes the refining process, shall be
exempt from payment of applicable duties
and taxes upon importation.
e. Period of Availment
Registered Enterprise Period of Availment
Export enterprise income tax holiday of four (4) to seven (7)
years, depending on location and industry
priorities, and followed by special
corporate income tax rate or enhanced
deductions for ten (10) years.
Domestic market enterprise under the income tax holiday for four (4) to seven
Strategic Investment Priority Plan (7) years followed by special corporate
income tax or enhanced deductions for
five (5) years.
f. Basis for length of income tax holidays (ITH)

i. Location of the registered project or activity
1. National Capital Region
2. Metropolitan areas or areas contiguous and adjacent to
the National Capital Region
3. All other areas
ii. Industry of the registered project or activity

1. Tier I shall include activities that
a. have high potential for job creation
b. take place in sectors with market failures
resulting in underprovision of basic goods and
services
c. generate value creation through innovation,
upgrading or moving up the value chain
d. provide essential support for sectors that are
critical to industrial development; or
e. are emerging owing to potential comparative
advantage.

2. Tier II shall include activities that produce supplies,
parts and components, and intermediate services that
are not locally produced but are critical to industrial
development and import-substituting activities,
including crude oil refining.
3. Tier III activities shall include:
a. research and development resulting in
demonstrably significant value-added, higher
productivity, improved efficiency,
breakthroughs in science and health, and high-
paying jobs
b. generation of new knowledge and intellectual
property registered and/or licensed in the
Philippines
c. commercialization of patents, industrial
designs, copyrights and utility models owned or
co-owned by a registered business enterprise
d. highly technical manufacturing; or
e. are critical to the structural transformation of the
economy and require substantial catch-up
efforts.
II. DOUBLE TAXATION AGREEMENTS

a. General Principles
i. Residence and source-based taxation
1. Residence based taxation – the country can tax
persons if they are residents or domiciled in the country,
regardless of the source of income. In cases of
corporations, the place of incorporation or registration
of the entity is located is its place of residence.
2. Source based taxation – the country which provides
the opportunity and facilities to generate income or
profits should also have the right to tax the same.
ii. Methods for elimination of double taxation

1. Exemption method – a taxpayer is exempt from tax in
their residence country or jurisdiction regardless of
where the income is generated. However, taxpayers
are liable to pay tax in the host country where income is
generated.

2. Credit method – the income of residents regardless of
where it arises are taxable. Under this method, the
country of the resident allow a credit against domestic
tax liability from where a resident pays tax in another
country where the revenue arises.
b. Covered model tax treaties

i. Organization for Economic Co-operation and Development
(OECD) Model Tax Convention (2017)
ii. United Nations (UN) Model Double Taxation Convention (2017)
iii. United States (US) Model Income Tax Convention (2016)
c. Royalties
OECD UN US
1. Royalties arising in a 1. Royalties arising in a 1. Royalties arising in a
Contracting State and Contracting State and paid Contracting State and
beneficially owned by a to a resident of the other beneficially owned by a
resident of the other Contracting State may be resident of the other
Contracting State shall be taxed in that other State. Contracting State shall be
taxable only in that other taxable only in that other
State. 2. However, such royalties Contracting State.
may also be taxed in the
2. The term “royalties” as Contracting State in which 2. Notwithstanding the
used in this Article means they arise and according to provisions of paragraph 1
payments of any kind the laws of that State, but if of this Article:
received as a the beneficial owner of the
consideration for the use royalties is a resident of a) a royalty arising in a
of, or the right to use, any the other Contracting Contracting State and
copyright of literary, artistic State, the tax so charged beneficially owned by a
or scientific work including shall not exceed ___ per resident of the other
cinematograph films, any cent (the percentage is to Contracting State that is a
patent, trade mark, design be established through connected person with
or model, plan, secret bilateral negotiations) of respect to the payor of the
formula or process, or for the gross amount of the royalty may be taxed in the
information concerning royalties. The competent first-mentioned
industrial, commercial or authorities of the Contracting State in
scientific experience. Contracting States shall by accordance with domestic
mutual agreement settle law if such resident
3. The provisions of the mode of application of benefits from a special tax
paragraph 1 shall not this limitation. regime with respect to the
apply if the beneficial royalty in its Contracting
owner of the royalties, 3. The term “royalties” as State of residence; and
being a resident of a used in this Article means

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Contracting State, carries payments of any kind b) in the case of the United
on business in the other received as a States, royalties paid by an
Contracting State in which consideration for the use expatriated entity and
the royalties arise through of, or the right to use, any beneficially owned by a
a permanent copyright of literary, artistic company resident in
establishment situated or scientific work including __________ that is a
therein and the right or cinematograph films, or connected person with
property in respect of films or tapes used for respect to such expatriated
which the royalties are radio or television entity may be taxed in
paid is effectively broadcasting, any patent, accordance with the law of
connected with such trademark, design or the United States for a
permanent establishment. model, plan, secret period of ten years
In such case the formula or process, or for beginning on the date on
provisions of Article 7 shall the use of, or the right to which the acquisition of the
apply. use, industrial, commercial domestic entity is
or scientific equipment or completed. For purposes
4. Where, by reason of a for information concerning of applying this paragraph:
special relationship industrial, commercial or
between the payer and the scientific experience. i) no effect shall be given to
beneficial owner or any amendment to section
between both of them and 4. The provisions of 7874 of the Internal
some other person, the paragraphs 1 and 2 shall Revenue Code after the
amount of the royalties, not apply if the beneficial date of signature of this
having regard to the use, owner of the royalties, Convention; and
right or information for being a resident of a
which they are paid, Contracting State, carries ii) no entity shall be treated
exceeds the amount which on business in the other as an expatriated entity
would have been agreed Contracting State in which that:
upon by the payer and the the royalties arise, through
beneficial owner in the a permanent A) is a connected person
absence of such establishment situated with respect to the
relationship, the provisions therein, or performs in that domestic entity
of this Article shall apply other State independent immediately after the date
only to the last-mentioned personal services from a on which the acquisition of
amount. In such case, the fixed base situated therein, the domestic entity is
excess part of the and the right or property in completed; and
payments shall remain respect of which the
taxable according to the royalties are paid is B) prior to that date, was
laws of each Contracting effectively connected with never a connected person
State, due regard being (a) such permanent with respect to the
had to the other provisions establishment or fixed domestic entity.
of this Convention. base, or with (b) business
activities referred to in (c)

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of paragraph 1 of Article 7. However, an entity
In such cases the described in the preceding
provisions of Article 7 or sentence shall become an
Article 14, as the case may expatriated entity if,
be, shall apply. subsequent to the date on
which the acquisition of the
5. Royalties shall be domestic entity is
deemed to arise in a completed, the entity joins
Contracting State when in filing a U.S. consolidated
the payer is a resident of return with either the
that State. Where, domestic entity or another
however, the person entity that was a connected
paying the royalties, person with respect to the
whether he is a resident of domestic entity
a Contracting State or not, immediately prior to the
has in a Contracting State date on which the
a permanent acquisition of the domestic
establishment or a fixed entity was completed.
base in connection with
which the liability to pay 3. Notwithstanding the
the royalties was incurred, provisions of paragraph 1
and such royalties are of this Article, in the case of
borne by such permanent a company seeking to
establishment or fixed satisfy the requirements of
base, then such royalties paragraph 4 of Article 22
shall be deemed to arise in (Limitation on Benefits) of
the State in which the this Convention regarding
permanent establishment a royalty, if such company
or fixed base is situated. fails to satisfy the criteria of
that paragraph solely by
6. Where by reason of a reason of the requirement
special relationship in subclause (B) of clause
between the payer and the (i) of subparagraph (e) of
beneficial owner or paragraph 7 of Article 22
between both of them and (Limitation on Benefits) of
some other person, the this Convention, such
amount of the royalties, company may be taxed in
having regard to the use, the Contracting State of
right or information for which the royalty arises
which they are paid, and according to the laws
exceeds the amount which of that Contracting State,
would have been agreed except that the tax so
upon by the payer and the charged shall not exceed
beneficial owner in the the highest rate among the

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absence of such rates of tax to which
relationship, the provisions persons described in
of this Article shall apply subparagraph (e) of
only to the last-mentioned paragraph 7 of Article 22
amount. In such case, the (Limitation on Benefits) of
excess part of the this Convention
payments shall remain (notwithstanding the
taxable according to the requirement of subclause
laws of each Contracting (B) of clause (i) of
State, due regard being subparagraph (e) of
had to the other provisions paragraph 7 of Article 22
of this Convention. (Limitation on Benefits))
would have been entitled if
such persons had received
the royalty directly. For
purposes of this
paragraph, a person
described in clause (iii) of
subparagraph (e) of
paragraph 7 of Article 22
(Limitation on Benefits)
shall be treated as entitled
to the limitation of tax to
which such person would
be entitled if such person
were a resident of the
same Contracting State as
the company receiving the
royalties.
4. The term “royalty” as

used in this Article means
payments of any kind
received as consideration
for the use of, or the right
to use, any copyright of
literary, artistic, scientific or
other work (including
cinematographic films);
any patent, trademark,
design or model, plan,
secret formula or process;
or for information

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concerning industrial,
commercial or scientific
experience.
5. The provisions of
paragraphs 1 through 3 of
this Article shall not apply if
the beneficial owner of the
royalties, being a resident
of a Contracting State,
carries on business in the
other Contracting State in
which the royalties arise
through a permanent
establishment situated
therein and the right or
property in respect of
which the royalties are paid
is effectively connected
with such permanent
establishment. In such
case the provisions of
Article 7 (Business Profits)
shall apply.
6. Royalties shall be
deemed to arise in a
Contracting State when
they are in consideration
for the use of, or the right
to use, property,
information or experience
in that Contracting State.
7. Where, by reason of a
special relationship
between the payor and the
beneficial owner or
between both of them and
some other person, the
amount of the royalties,
having regard to the use,
right, or information for
which they are paid,

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exceeds the amount that
would have been agreed
upon by the payor and the
beneficial owner in the
absence of such
relationship, the provisions
of this Article shall apply
only to the last-mentioned
amount. In such case the
excess part of the
payments shall remain
taxable according to the
laws of each Contracting
State, due regard being
had to the other provisions
of this Convention.
d. Dividends
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1. Dividends paid by a 1. Dividends paid by a 1. Dividends paid by a
company which is a company which is a company that is a resident
resident of a Contracting resident of a Contracting of a Contracting State to a
State to a resident of the State to a resident of the resident of the other
other Contracting State other Contracting State Contracting State may be
may be taxed in that other may be taxed in that other taxed in that other
State. State. Contracting State.
2. However, dividends 2. However, such 2. However, such

paid by a company which dividends may also be dividends may also be
is a resident of a taxed in the Contracting taxed in the Contracting
Contracting State may State of which the State of which the
also be taxed in that State company paying the company paying the
according to the laws of dividends is a resident and dividends is a resident and
that State, but if the according to the laws of according to the laws of
beneficial owner of the that State, but if the that Contracting State, but
dividends is a resident of beneficial owner of the if the beneficial owner of
the other Contracting dividends is a resident of the dividends is a resident
State, the tax so charged the other Contracting of the other Contracting
shall not exceed: State, the tax so charged State, except as otherwise
a) 5 per cent of the gross shall not exceed: provided, the tax so
amount of the dividends if charged shall not exceed:
the beneficial owner is a

OECD UN US
company which holds (a) ___ per cent (the a) 5 percent of the gross
directly at least 25 per cent percentage is to be amount of the dividends if,
of the capital of the established through for the twelve-month
company paying the bilateral negotiations) of period ending on the date
dividends throughout a the gross amount of the on which the entitlement to
365 day period that dividends if the beneficial the dividends is
includes the day of the owner is a company (other determined:
payment of the dividend than a partnership) which
(for the purpose of holds directly at least 25 i) the beneficial owner has
computing that period, no per cent of the capital of been a company that was
account shall be taken of the company paying the a resident of the other
changes of ownership that dividends throughout a Contracting State or of a
would directly result from a 365 day period that qualifying third state. The
corporate reorganisation, includes the day of the term “qualifying third state”
such as a merger or payment of the dividend means a state that has in
divisive reorganisation, of (for the purpose of effect a comprehensive
the company that holds the computing that period, no convention for the
shares or that pays the account shall be taken of avoidance of double
dividend); changes of ownership that taxation with the
b) 15 per cent of the gross would directly result from a Contracting State of the
amount of the dividends in corporate reorganisation, company paying the
all other cases. such as a merger or dividends that would have
The competent authorities divisive reorganisation, of allowed the beneficial
of the Contracting States the company that holds the owner to benefit from a
shall by mutual agreement shares or that pays the rate of tax on dividends
settle the mode of dividend); that is less than or equal to
application of these (b) ___ per cent (the 5 percent; and
limitations. This paragraph percentage is to be
shall not affect the taxation established through ii) at least 10 percent of the
of the company in respect bilateral negotiations) of aggregate vote and value
of the profits out of which the gross amount of the of the shares of the payor
the dividends are paid. dividends in all other of the dividends was
cases. owned directly by the
3. The term “dividends” as beneficial owner or a
used in this Article means The competent authorities qualifying predecessor
income from shares, of the Contracting States owner. The term
“jouissance” shares or shall by mutual agreement “qualifying predecessor
“jouissance” rights, mining settle the mode of owner” means a company
shares, founders’ shares application of these from which the beneficial
or other rights, not being limitations. This paragraph owner acquired the shares
debt-claims, participating shall not affect the taxation of the payor of the
in profits, as well as of the company in respect dividends, but only if such
income from other of the profits out of which company was, at the time
corporate rights which is the dividends are paid. the shares were acquired,

OECD UN US
subjected to the same a connected person with
taxation treatment as 3. The term “dividends” as respect to the beneficial
income from shares by the used in this Article means owner of the dividend, and
laws of the State of which income from shares, a resident of a state that
the company making the “jouissance” shares or has in effect a
distribution is a resident. “jouissance” rights, mining comprehensive convention
shares, founders’ shares for the avoidance of double
4. The provisions of or other rights, not being taxation with the
paragraphs 1 and 2 shall debt claims, participating Contracting State of the
not apply if the beneficial in profits, as well as company paying the
owner of the dividends, income from other dividends that would have
being a resident of a corporate rights which is allowed such company to
Contracting State, carries subjected to the same benefit from a rate of tax on
on business in the other taxation treatment as dividends that is less than
Contracting State of which income from shares by the or equal to 5 percent. For
the company paying the laws of the State of which this purpose, a company
dividends is a resident the company making the that is a resident of a
through a permanent distribution is a resident. Contracting State shall be
establishment situated considered to own directly
therein and the holding in 4. The provisions of the shares owned by an
respect of which the paragraphs 1 and 2 shall entity that:
dividends are paid is not apply if the beneficial
effectively connected with owner of the dividends, A) is considered fiscally
such permanent being a resident of a transparent under the laws
establishment. In such Contracting State, carries of that Contracting State;
case the provisions of on business in the other and
Article 7 shall apply. Contracting State of which
the company paying the B) is not a resident of the
5. Where a company dividends is a resident, other Contracting State of
which is a resident of a through a permanent which the company paying
Contracting State derives establishment situated the dividends is a resident;
profits or income from the therein, or performs in that
other Contracting State, other State independent in proportion to the
that other State may not personal services from a company’s ownership
impose any tax on the fixed base situated therein, interest in that entity; and
dividends paid by the and the holding in respect
company, except insofar of which the dividends are b) 15 percent of the gross
as such dividends are paid paid is effectively amount of the dividends in
to a resident of that other connected with such all other cases.
State or insofar as the permanent establishment
holding in respect of which or fixed base. In such case This paragraph shall not
the dividends are paid is the provisions of Article 7 affect the taxation of the
effectively connected with company in respect of the

OECD UN US
a permanent or Article 14, as the case profits out of which the
establishment situated in may be, shall apply. dividends are paid.
that other State, nor
subject the company’s 5. Where a company 3. Notwithstanding the
undistributed profits to a which is a resident of a provisions of paragraph 2
tax on the company’s Contracting State derives of this Article, dividends
undistributed profits, even profits or income from the shall not be taxed in the
if the dividends paid or the other Contracting State, Contracting State of which
undistributed profits that other State may not the company paying the
consist wholly or partly of impose any tax on the dividends is a resident if:
profits or income arising in dividends paid by the
such other State. company, except in so far a) the beneficial owner of
as such dividends are paid the dividends is a pension
to a resident of that other fund that is a resident of
State or in so far as the the other Contracting
holding in respect of which State; and
the dividends are paid is
effectively connected with b) such dividends are not
a permanent derived from the carrying
establishment or a fixed on of a trade or business
base situated in that other by the pension fund or
State, nor subject the through a person that is a
company’s undistributed connected person with
profits to a tax on the respect to the pension
company’s undistributed fund.
profits, even if the
dividends paid or the 4. a) Subparagraph (a) of
undistributed profits paragraph 2 of this Article
consist wholly or partly of shall not apply in the case
profits or income arising in of dividends paid by a U.S.
such other State. Regulated Investment
Company (RIC) or a U.S.
Real Estate Investment
Trust (REIT). In the case of
dividends paid by a RIC,
subparagraph (b) of
paragraph 2 and
paragraph 3 of this Article
shall apply. In the case of
dividends paid by a REIT,
subparagraph (b) of
paragraph 2 and
paragraph 3 of this Article
shall apply only if:

OECD UN US
i) the beneficial owner of

the dividends is an
individual or pension fund,
in either case holding an
interest of not more than
10 percent in the REIT;
ii) the dividends are paid

with respect to a class of
shares that is publicly
traded and the beneficial
owner of the dividends is a
person holding an interest
of not more than 5 percent
of any class of the REIT’s
shares; or
iii) the beneficial owner of

the dividends is a person
holding an interest of not
more than 10 percent in
the REIT and the REIT is
diversified.
b) For purposes of this

paragraph, a REIT shall be
“diversified” if the value of
no single interest in real
property (immovable
property) exceeds 10
percent of its total interests
in real property
(immovable property). For
the purposes of this rule,
foreclosure property shall
not be considered an
interest in real property
(immovable property).
Where a REIT holds an
interest in a partnership, it
shall be treated as owning
directly a proportion of the

OECD UN US
partnership’s interests in
real property (immovable
property) corresponding to
its interest in the
partnership.
5. In the case of the United

States, notwithstanding
the provisions of
paragraph 2 of this Article,
dividends paid by an
expatriated entity and
beneficially owned by a
company resident in
__________ that is a
connected person with
respect to such expatriated
entity may be taxed in
accordance with the law of
the United States for a
period of ten years
beginning on the date on
domestic entity is
completed. For purposes
of applying this paragraph:
a) no effect shall be given

to any amendment to
section 7874 of the Internal
Revenue Code after the
date of signature of this
Convention; and
b) no entity shall be treated

as an expatriated entity
that:
i) is a connected person
with respect to the
domestic entity
immediately after the date
on which the acquisition of

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the domestic entity is
completed; and
ii) prior to that date, was

never a connected person
with respect to the
domestic entity.
However, an entity
described in the preceding
sentence shall become an
expatriated entity if,
subsequent to the date on
domestic entity is
completed, the entity joins
in filing a U.S. consolidated
return with either the
domestic entity or another
entity that was a connected
person with respect to the
domestic entity
immediately prior to the
date on which the
acquisition of the domestic
entity was completed.
6. Notwithstanding the
provisions of paragraphs 1
and 2 of this Article, in the
case of a company seeking
to satisfy the requirements
of paragraph 4 of Article 22
regarding a dividend, if
such company fails to
satisfy the criteria of that
paragraph solely by reason
of:
a) the requirement in
subclause (B) of clause (i)
of subparagraph (e) of

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(Limitation on Benefits) of
this Convention; or
b) the requirement in
clause (ii) of subparagraph
(e) of paragraph 7 of Article
22 (Limitation on Benefits)
that a person entitled to
benefits under paragraph 5
of Article 22 (Limitation on
Benefits) would be entitled
to a rate of tax with respect
to the dividend that is less
than or equal to the rate\
applicable under
paragraph 2 of this Article;
such company may be

taxed in the Contracting
State of which the
company paying the
dividends is a resident and
according to the laws of
that Contracting State. In
these cases, however, the
tax so charged shall not
exceed the highest rate
among the rates of tax to
which persons described in
subparagraph (e) of
this Convention
(notwithstanding the
requirements referred to in
subparagraphs (a) and (b)
of this paragraph) would
have been entitled if such
persons had received the
dividend directly. For
purposes of this
paragraph, (i) such
persons’ indirect

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ownership of the shares of
the company paying the
dividends shall be treated
as direct ownership, and
(ii) a person described in
clause (iii) of subparagraph
dividends.
7. For purposes of this

Article, the term
“dividends” means income
from shares or other rights,
not being debt-claims,
participating in profits, as
well as income that is
subject to the same
taxation treatment as
income from shares under
the laws of the Contracting
State of which the
company making the
distribution is a resident.
The term does not include
distributions that are
treated as gain under the
laws of the Contracting
State of which the
company making the
distribution is a resident. In
such case, the provisions
of Article 13 (Gains) shall
apply.

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dividends, being a resident
of a Contracting State,
other Contracting State, of
which the company paying
the dividends is a resident,
through a permanent
therein, and the holding in
respect of which the
dividends are paid is
effectively connected with
such permanent
shall apply.
9. A Contracting State may

not impose any tax on
dividends paid by a
resident of the other
Contracting State, except
insofar as the dividends
are paid to a resident of the
first-mentioned
Contracting State or the
dividends are attributable
to a permanent
therein, nor may it impose
tax on a corporation’s
undistributed profits,
except as provided in
paragraph 10 of this
Article, even if the
dividends paid or the
undistributed profits
consist wholly or partly of

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profits or income arising in
that Contracting State.
10. a) A company that

is a resident of one of the
Contracting States and
that has a permanent
establishment in the other
Contracting State or that is
subject to tax in the other
Contracting State on a net
basis on its income that
may be taxed in the other
Contracting State under
Article 6 (Income from Real
Property (Immovable
Property)) or under
(Gains) may be subject in
that other Contracting
State to a tax in addition to
the tax allowable under the
other provisions of this
Convention.
b) Such tax, however, may

be imposed:
i) on only the portion of the

business profits of the
company attributable to the
permanent establishment
and the portion of the
income referred to in
subparagraph (a) of this
paragraph that is subject to
tax under Article 6 (Income
from Real Property
(Immovable Property) or
under paragraph 1 of
Article 13 (Gains) that, in
the case of the United
States, represents the

OECD UN US
dividend equivalent
amount of such profits or
income and, in the case of
__________, is an amount
that is analogous to the
dividend equivalent
amount; and
ii) at a rate not in excess of

the rate specified in
subparagraph (a) of
paragraph 2 or paragraph
6 of this Article, but only if
for the twelve-month
period ending on the date
on which the entitlement to
the dividend equivalent
amount is determined, the
company has been a
Contracting State or of a
qualifying third state. The
term “qualifying third state”
has the same meaning as
in clause (i) of
subparagraph (a) of
paragraph 2 of this Article.
e. Interests
OECD UN US
1. Interest arising in a 1. Interest arising in a 1. Interest arising in a
Contracting State and paid Contracting State and paid Contracting State and
to a resident of the other to a resident of the other beneficially owned by a
Contracting State may be Contracting State may be resident of the other
taxed in that other State. taxed in that other State. Contracting State shall be
taxable only in that other
2. However, interest 2. However, such interest Contracting State.
arising in a Contracting may also be taxed in the
State may also be taxed in Contracting State in which 2. Notwithstanding the
that State according to the it arises and according to provisions of paragraph 1
laws of that State, but if the the laws of that State, but of this Article:
beneficial owner of the if the beneficial owner of
interest is a resident of the the interest is a resident of

OECD UN US
other Contracting State, the other Contracting a) interest arising in
the tax so charged shall State, the tax so charged __________ that is
not exceed 10 per cent of shall not exceed ___ per determined with reference
the gross amount of the cent (the percentage is to to receipts, sales, income,
interest. The competent be established through profits or other cash flow of
authorities of the bilateral negotiations) of the debtor or a connected
Contracting States shall by the gross amount of the person with respect to the
mutual agreement settle interest. The competent debtor, to any change in
the mode of application of authorities of the the value of any property of
this limitation. Contracting States shall by the debtor or a connected
mutual agreement settle person with respect to the
3. The term “interest” as the mode of application of debtor or to any dividend,
used in this Article means this limitation. partnership distribution or
income from debt-claims similar payment made by
of every kind, whether or 3. The term “interest” as the debtor or a connected
not secured by mortgage used in this Article means person with respect to the
and whether or not income from debt claims of debtor may be taxed in
carrying a right to every kind, whether or not __________, and
participate in the debtor’s secured by mortgage and according to the laws of
profits, and in particular, whether or not carrying a __________, but if the
income from government right to participate in the beneficial owner is a
securities and income from debtor’s profits, and in resident of the United
bonds or debentures, particular, income from States, the interest may be
including premiums and government securities and taxed at a rate not
prizes attaching to such income from bonds or exceeding 15 percent of
securities, bonds or debentures, including the gross amount of the
debentures. Penalty premiums and prizes interest;
charges for late payment attaching to such
shall not be regarded as securities, bonds or b) interest arising in the
interest for the purpose of debentures. Penalty United States that is
this Article. charges for late payment contingent interest of a
shall not be regarded as type that does not qualify
4. The provisions of interest for the purpose of as portfolio interest under
paragraphs 1 and 2 shall this Article. the law of the United
not apply if the beneficial States may be taxed by the
owner of the interest, 4. The provisions of United States, but if the
being a resident of a paragraphs 1 and 2 shall beneficial owner is a
Contracting State, carries not apply if the beneficial resident of __________,
on business in the other owner of the interest, the interest may be taxed
Contracting State in which being a resident of a at a rate not exceeding 15
the interest arises through Contracting State, carries percent of the gross
a permanent on business in the other amount of the interest;
establishment situated Contracting State in which

OECD UN US
therein and the debt claim the interest arises, through c) interest arising in a
in respect of which the a permanent Contracting State and
interest is paid is establishment situated beneficially owned by a
effectively connected with therein, or performs in that resident of the other
such permanent other State independent Contracting State that is a
establishment. In such personal services from a connected person with
case the provisions of fixed base situated therein, respect to the payor of the
Article 7 shall apply. and the debt claim in interest may be taxed in
respect of which the the first-mentioned
5. Interest shall be interest is paid is Contracting State in
deemed to arise in a effectively connected with accordance with domestic
Contracting State when (a) such permanent law if such resident
the payer is a resident of establishment or fixed benefits from a special tax
that State. Where, base, or with (b) business regime with respect to
however, the person activities referred to in (c) such interest in its
paying the interest, of paragraph 1 of Article 7. Contracting State of
whether he is a resident of In such cases the residence;
a Contracting State or not, provisions of Article 7 or
has in a Contracting State Article 14, as the case may d) in the case of the United
a permanent be, shall apply. States, interest paid by an
establishment in expatriated entity and
connection with which the 5. Interest shall be beneficially owned by a
indebtedness on which the deemed to arise in a company resident in
interest is paid was Contracting State when __________ that is a
incurred, and such interest the payer is a resident of connected person with
is borne by such that State. Where, respect to such expatriated
permanent establishment, however, the person entity may be taxed in
then such interest shall be paying the interest, accordance with the law of
deemed to arise in the whether he is a resident of the United States for a
State in which the a Contracting State or not, period of ten years
permanent establishment has in a Contracting State beginning on the date on
is situated. a permanent which the acquisition of the
establishment or a fixed domestic entity is
6. Where, by reason of a base in connection with completed. For purposes
special relationship which the indebtedness on of applying this paragraph:
between the payer and the which the interest is paid
beneficial owner or was incurred, and such i) no effect shall be given to
between both of them and interest is borne by such any amendment to section
some other person, the permanent establishment 7874 of the Internal
amount of the interest, or fixed base, then such Revenue Code after the
having regard to the debt- interest shall be deemed to date of signature of this
claim for which it is paid, arise in the State in which Convention; and
exceeds the amount which the permanent

OECD UN US
upon by the payer and the establishment or fixed ii) no entity shall be treated
beneficial owner in the base is situated. as an expatriated entity
absence of such that:
relationship, the provisions 6. Where, by reason of a
of this Article shall apply special relationship A) is a connected person
only to the last-mentioned between the payer and the with respect to the
amount. In such case, the beneficial owner or domestic entity
excess part of the between both of them and immediately after the date
payments shall remain some other person, the on which the acquisition of
taxable according to the amount of the interest, the domestic entity is
laws of each Contracting having regard to the debt completed; and
State, due regard being claim for which it is paid,
had to the other provisions exceeds the amount which B) prior to that date, was
of this Convention. would have been agreed never a connected person
upon by the payer and the with respect to the
beneficial owner in the domestic entity.
absence of such
relationship, the provisions However, an entity
of this Article shall apply described in the preceding
only to the last-mentioned sentence shall become an
amount. In such case, the expatriated entity if,
excess part of the subsequent to the date on
payments shall remain which the acquisition of the
taxable according to the domestic entity is
laws of each Contracting completed, the entity joins
State, due regard being in filing a U.S. consolidated
had to the other provisions return with either the
of this Convention. domestic entity or another
entity that was a connected
person with respect to the
domestic entity
immediately prior to the
date on which the
acquisition of the domestic
entity was completed;
e) interest arising in a
Contracting State and
Contracting State that is a
connected person with
respect to the payor of the

OECD UN US
interest may be taxed in
the first-mentioned
Contracting State in
accordance with domestic
law if such resident
benefits, at any time during
the taxable year in which
the interest is paid, from
notional deductions with
respect to amounts that the
Contracting State of which
the beneficial owner is
resident treats as equity;
f) interest arising in a
Contracting State and
Contracting State that is
entitled to the benefits of
this Article only by reason
of paragraph 5 of Article 22
may be taxed in the first-
mentioned Contracting
State, but the tax so
charged shall not exceed
10 percent of the gross
amount of the interest; and
g) interest that is an excess

inclusion with respect to a
residual interest in a real
estate mortgage
investment conduit may be
taxed by each Contracting
State in accordance with
its domestic law.
3. Notwithstanding the
provisions of paragraph 1
of this Article, in the case of
a company seeking to
satisfy the requirements of

OECD UN US
this Convention regarding
a payment of interest, if
such company fails to
satisfy the criteria of that
paragraph solely by reason
of:
a) the requirement in
subclause (B) of clause (i)
of subparagraph (e) of
this Convention; or
b) the requirement in
clause (ii) of subparagraph
that a person entitled to
benefits under paragraph 5
of Article 22 (Limitation on
Benefits) would be entitled
to a rate of tax with respect
to the interest that is less
than or equal to the rate
applicable under
paragraph 2 of this Article;
such company may be

taxed by the Contracting
State in which the interest
arises according to the
laws of that Contracting
State. In these cases,
however, the tax so
charged shall not exceed
the highest rate among the
rates of tax to which
persons described in
subparagraph (e) of

OECD UN US
this Convention
(notwithstanding the
requirements referred to in
subparagraphs (a) and (b)
of this paragraph) would
have been entitled if such
persons had received the
interest directly. For
purposes of this
paragraph, a person
described in clause (iii) of
subparagraph (e) of
interest.
4. The term “interest” as

used in this Article means
income from debt-claims of
every kind, whether or not
secured by mortgage, and
whether or not carrying a
right to participate in the
debtor’s profits, and in
particular, income from
government securities and
income from bonds or
debentures, including
premiums or prizes
attaching to such
securities, bonds or
debentures, and all other
income that is subjected to
the same taxation
treatment as income from
money lent under the law

OECD UN US
of the Contracting State in
which the income arises.
Income dealt with in Article
10 (Dividends) and penalty
charges for late payment
shall not be regarded as
interest for the purposes of
this Convention.
interest, being a resident of
a Contracting State,
other Contracting State in
which the interest arises
through a permanent
therein, and the debt-claim
in respect of which the
interest is paid is
effectively connected with
such permanent
shall apply.
6. For purposes of this

Article, interest shall be
deemed to arise in a
Contracting State when the
payor is a resident of that
Contracting State. Where,
however, the person
paying the interest,
whether a resident of a
Contracting State or not,
has in a Contracting State
a permanent
establishment or derives

OECD UN US
profits that are taxable on a
net basis in a Contracting
State under paragraph 5 of
Article 6 (Income from Real
Property (Immovable
Property)) or paragraph 1
of Article 13 (Gains), and
such interest is borne by
such permanent
establishment or allocable
to such profits, then such
interest shall be deemed to
arise in the Contracting
State in which the
is situated or from which
such profits are derived.
7. The excess, if any, of the

amount of interest
allocable to the profits of a
company resident in a
Contracting State that are:
a) attributable to a
in the other Contracting
State (including gains
Article 13 (Gains)); or
b) subject to tax in the

other Contracting State
under Article 6 (Income
from Real Property
(Immovable Property)) or
(Gains);
over the interest paid by

that permanent
establishment, or in the
case of profits subject to
tax under Article 6 (Income

OECD UN US
from Real Property
(Immovable Property)) or
(Gains), over the interest
paid by that company, shall
be deemed to arise in that
other Contracting State
and to be beneficially
owned by a resident of the
first-mentioned
Contracting State. The tax
imposed under this Article
on such interest shall not
exceed the rates provided
in paragraphs 1 through 3
of this Article.
8. Where, by reason of a
special relationship
between the payor and the
beneficial owner or
between both of them and
some other person, the
amount of the interest,
having regard to the debt-
claim for which it is paid,
exceeds the amount that
upon by the payor and the
beneficial owner in the
absence of such
relationship, the provisions
of this Article shall apply
only to the last-mentioned
amount. In such case the
excess part of the
payments shall remain
taxable according to the
laws of each Contracting
State, due regard being
had to the other provisions
of this Convention.

f. Capital gains
OECD UN US
1. Gains derived by a 1. Gains derived by a 1. Gains derived by a
resident of a Contracting resident of a Contracting resident of a Contracting
State from the alienation of State from the alienation of State from the alienation of
immovable property immovable property real property (immovable
referred to in Article 6 and referred to in Article 6 and property) situated in the
situated in the other situated in the other other Contracting State
Contracting State may be Contracting State may be may be taxed in that other
taxed in that other State. taxed in that other State. Contracting State.
2. Gains from the 2. Gains from the 2. For the purposes of this
alienation of movable alienation of movable Article the term “real
property forming part of the property forming part of the property (immovable
business property of a business property of a property) situated in the
permanent establishment permanent establishment other Contracting State”
which an enterprise of a which an enterprise of a shall include:
Contracting State has in Contracting State has in
the other Contracting the other Contracting State a) real property
State, including such gains or of movable property (immovable property)
from the alienation of such pertaining to a fixed base referred to in Article 6
a permanent available to a resident of a (Income from Real
establishment (alone or Contracting State in the Property Immovable
with the whole enterprise), other Contracting State for Property));
may be taxed in that other the purpose of performing
State. independent personal b) where that other
services, including such Contracting State is the
3. Gains that an enterprise gains from the alienation of United States, a United
of a Contracting State that such a permanent States real property
operates ships or aircraft in establishment (alone or interest; and
international traffic derives with the whole enterprise)
from the alienation of such or of such fixed base, may c) where that other
ships or aircraft, or of be taxed in that other Contracting State is
movable property State. __________,
pertaining to the operation
of such ships or aircraft, 3. Gains that an enterprise i) shares, including rights
shall be taxable only in that of a Contracting State that to acquire shares, other
State. operates ships or aircraft in than shares in which there
international traffic derives is regular trading on a
4. Gains derived by a from the alienation of such stock exchange, deriving
resident of a Contracting ships or aircraft, or of 50 percent or more of their
State from the alienation of movable property value directly or indirectly
shares or comparable pertaining to the operation from real property referred
interests, such as interests of such ships or aircraft, to in subparagraph (a) of
in a partnership or trust,

OECD UN US
may be taxed in the other shall be taxable only in that this paragraph situated in
Contracting State if, at any State. __________; and
time during the 365 days
preceding the alienation, 4. Gains derived by a ii) an interest in a
these shares or resident of a Contracting partnership or trust to the
comparable interests State from the alienation of extent that the assets of
derived more than 50 per shares or comparable the partnership or trust
cent of their value directly interests, such as interests consist of real property
or indirectly from in a partnership or trust, situated in __________, or
immovable property, as may be taxed in the other of shares referred to in
defined in Article 6, Contracting State if, at any clause (i) of this
situated in that other State. time during the 365 days subparagraph.
preceding the alienation,
5. Gains from the these shares or 3. Gains from the
alienation of any property, comparable interests alienation of movable
other than that referred to derived more than 50 per property forming part of the
in paragraphs 1, 2, 3 and cent of their value directly business property of a
4, shall be taxable only in or indirectly from permanent establishment
the Contracting State of immovable property, as that an enterprise of a
which the alienator is a defined in Article 6, Contracting State has in
resident. situated in that other State. the other Contracting
State, including such gains
5. Gains, other than those from the alienation of such
to which paragraph 4 a permanent
applies, derived by a establishment (alone or
resident of a Contracting with the whole enterprise),
State from the alienation of may be taxed in that other
shares of a company, or Contracting State.
comparable interests,
such as interests in a 4. Gains derived by an
partnership or trust, which enterprise of a Contracting
is a resident of the other State from the alienation of
Contracting State, may be ships or aircraft operated
taxed in that other State if or used in international
the alienator, at any time traffic or personal property
during the 365 days pertaining to the operation
preceding such alienation, or use of such ships or
held directly or indirectly at aircraft shall be taxable
least ___ per cent (the only in that Contracting
percentage is to be State.
established through
bilateral negotiations) of 5. Gains derived by an
enterprise of a Contracting

OECD UN US
the capital of that company State from the alienation of
or entity. containers (including
trailers, barges and related
6. Gains from the equipment for the transport
alienation of any property of containers) used for the
other than that referred to transport of goods or
in paragraphs 1, 2, 3, 4 merchandise shall be
and 5 shall be taxable only taxable only in that
in the Contracting State of Contracting State, unless
which the alienator is a those containers are used
resident. for transport solely
between places within the
other Contracting State.
6. Gains from the

alienation of any property
other than property
referred to in paragraphs 1
through 5 of this Article
shall be taxable only in the
Contracting State of which
the alienator is a resident.
7. Where an individual
who, upon ceasing to be a
resident (as determined
Article 4 (Resident)) of one
of the Contracting States,
is treated under the
taxation law of that
Contracting State as
having alienated property
for its fair market value and
is taxed in that Contracting
State by reason thereof,
the individual may elect to
be treated for purposes of
taxation in the other
Contracting State as if the
individual had,
immediately before
ceasing to be a resident of
the first-mentioned

OECD UN US
Contracting State,
alienated and reacquired
such property for an
amount equal to its fair
market value at such time.
g. Business profits
OECD UN US
1. Profits of an enterprise 1. The profits of an 1. Profits of an enterprise
of a Contracting State shall enterprise of a Contracting of a Contracting State shall
be taxable only in that State shall be taxable only be taxable only in that
State unless the enterprise in that State unless the Contracting State unless
carries on business in the enterprise carries on the enterprise carries on
other Contracting State business in the other business in the other
through a permanent Contracting State through Contracting State through
establishment situated a permanent a permanent
therein. If the enterprise establishment situated establishment situated
carries on business as therein. If the enterprise therein. If the enterprise
aforesaid, the profits that carries on business as carries on business as
are attributable to the aforesaid, the profits of the aforesaid, the profits that
permanent establishment enterprise may be taxed in are attributable to the
in accordance with the the other State but only so permanent establishment
provisions of paragraph 2 much of them as is in accordance with the
may be taxed in that other attributable to (a) that provisions of paragraph 2
State. permanent establishment; of this Article may be taxed
(b) sales in that other State in that other Contracting
2. For the purposes of this of goods or merchandise State.
Article and Article [23 A] of the same or similar kind
[23 B], the profits that are as those sold through that 2. For the purposes of this
attributable in each permanent establishment; Article, the profits that are
Contracting State to the or (c) other business attributable in each
permanent establishment activities carried on in that Contracting State to the
referred to in paragraph 1 other State of the same or permanent establishment
are the profits it might be similar kind as those referred to in paragraph 1
expected to make, in effected through that of this Article are the profits
particular in its dealings permanent establishment. it might be expected to
with other parts of the make, in particular in its
enterprise, if it were a 2. Subject to the provisions dealings with other parts of
separate and independent of paragraph 3, where an the enterprise, if it were a
enterprise engaged in the enterprise of a Contracting separate and independent
same or similar activities State carries on business enterprise engaged in the
under the same or similar in the other Contracting same or similar activities

OECD UN US
conditions, taking into State through a permanent under the same or similar
account the functions establishment situated conditions, taking into
performed, assets used therein, there shall in each account the functions
and risks assumed by the Contracting State be performed, assets used
enterprise through the attributed to that and risks assumed by the
permanent establishment permanent establishment enterprise through the
and through the other the profits which it might be permanent establishment
parts of the enterprise. expected to make if it were and through the other
a distinct and separate parts of the enterprise.
3. Where, in accordance enterprise engaged in the
with paragraph 2, a same or similar activities 3. Where, in accordance
Contracting State adjusts under the same or similar with paragraph 2 of this
the profits that are conditions and dealing Article, a Contracting State
attributable to a permanent wholly independently with adjusts the profits that are
establishment of an the enterprise of which it is attributable to a permanent
enterprise of one of the a permanent establishment of an
Contracting States and establishment. enterprise of one of the
taxes accordingly profits of Contracting States and
the enterprise that have 3. In the determination of taxes accordingly profits of
been charged to tax in the the profits of a permanent the enterprise that have
other State, the other State establishment, there shall been charged to tax in the
shall, to the extent be allowed as deductions other Contracting State,
necessary to eliminate expenses which are the other Contracting State
double taxation on these incurred for the purposes shall, to the extent
profits, make an of the business of the necessary to eliminate
appropriate adjustment to permanent establishment double taxation, make an
the amount of the tax including executive and appropriate adjustment if it
charged on those profits. general administrative agrees with the adjustment
In determining such expenses so incurred, made by the first-
adjustment, the competent whether in the State in mentioned Contracting
authorities of the which the permanent State; if the other
Contracting States shall if establishment is situated Contracting State does not
necessary consult each or elsewhere. However, no so agree, the Contracting
other. such deduction shall be States shall eliminate any
allowed in respect of double taxation resulting
4. Where profits include amounts, if any, paid therefrom by mutual
items of income which are (otherwise than towards agreement.
dealt with separately in reimbursement of actual
other Articles of this expenses) by the 4. Where profits include
Convention, then the permanent establishment items of income that are
provisions of those Articles to the head office of the dealt with separately in
shall not be affected by the enterprise or any of its other Articles of this
provisions of this Article. other offices, by way of Convention, then the
royalties, fees or other provisions of those Articles

OECD UN US
similar payments in return shall not be affected by the
for the use of patents or provisions of this Article.
other rights, or by way of
commission, for specific 5. In applying this Article,
services performed or for paragraph 8 of Article 10
management, or, except in (Dividends), paragraph 5
the case of a banking of Article 11 (Interest),
enterprise, by way of paragraph 5 of Article 12
interest on moneys lent to (Royalties), paragraph 3 of
the permanent Article 13 (Gains) and
establishment. Likewise, paragraph 3 of Article 21
no account shall be taken, (Other Income), any
in the determination of the income, profit or gain
profits of a permanent attributable to a permanent
establishment, for establishment during its
amounts charged existence is taxable in the
(otherwise than towards Contracting State where
reimbursement of actual such permanent
expenses), by the establishment is situated
permanent establishment even if the payments are
to the head office of the deferred until such
enterprise or any of its permanent establishment
other offices, by way of has ceased to exist.
royalties, fees or other
similar payments in return
for the use of patents or
other rights, or by way of
commission for specific
services performed or for
management, or, except in
the case of a banking
enterprise, by way of
interest on moneys lent to
the head office of the
enterprise or any of its
other offices.
4. In so far as it has been

customary in a Contracting
State to determine the
profits to be attributed to a
on the basis of an

OECD UN US
apportionment of the total
profits of the enterprise to
its various parts, nothing in
paragraph 2 shall preclude
that Contracting State from
determining the profits to
be taxed by such an
apportionment as may be
customary; the method of
apportionment adopted
shall, however, be such
that the result shall be in
accordance with the
principles contained in this
Article.
5. For the purposes of the

preceding paragraphs, the
profits to be attributed to
the permanent
establishment shall be
determined by the same
method year by year
unless there is good and
sufficient reason to the
contrary.
6. Where profits include

items of income which are
dealt with separately in
other Articles of this
Convention, then the
provisions of those Articles
shall not be affected by the
provisions of this Article.
(NOTE: The question of

whether profits should be
attributed to a permanent
establishment by reason of
the mere purchase by that
of goods and merchandise
for the enterprise was not

OECD UN US
resolved. It should
therefore be settled in
bilateral negotiations.)
III. TAX IMPLICATIONS OF TRANSACTIONS APPLYING THE TAX RULES AND

LIABILITIES

Taxation

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TAXATION

6.1. DOUBLE TAXATION

6.4. Remedies to Double Taxation

MULTIPLE CHOICE QUESTIONS

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MARGINAL NOTES B. Both statements are true

PRITAX.10 ORGANIZATION OF BUREAU OF INTERNAL REVENUE, BUREAU

MULTIPLE CHOICE QUESTIONS

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3F Gutierrez Bldg., J. P. Laurel Ave., Davao City

a. Double taxation, concept

b. International Juridical Double Taxation

c. Elements of double taxation

d. Types of double taxation

e. Minimization of double taxation

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a. Ethical tax compliance

ii. General provisions on offenses and forfeitures

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b. Ethical tax administration

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ii. Covered violators – every official, agent, or employee of the

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iv. Other penalized acts against public officers

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A. As a power – refers to the inherent power of the state to demand enforced

1.2. Purpose of Taxation

1.3. Theory of Taxation

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MARGINAL NOTES B. Basis of Taxation

C. The Life Blood Theory or Necessity Theory

Manifestation of the Lifeblood Theory

D. Benefit Protection Theory (Symbiotic Relationship) – reciprocal duties of

1.4. The Inherent Powers of the State

1.5. Nature or Characteristics of the Power of Taxation

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1.7. Underlying principles behind the power of taxation

1.8. Legal Basis of the Power of Taxation

1.9. Similarities of the Three Powers

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Point of Difference Taxation Police Power Eminent Domain

Necessity of Delegation is not There must be There must be due

Purpose Revenue and Property is taken for Property is taken for

Persons affected Community or Community or class Operates on the owner

Effect of transfer of Money paid as There is no transfer There is transfer of

Amount of Unlimited Sufficient to cover No imposition, the

Importance Most important Most superior

Limitation Constitutionally Public interest and Public purpose and just

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1.12. Kinds of Exemptions:

1.14. Tax Exemptions:

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Tax Exemption Tax Amnesty

1.16. Objects of Taxation

MULTIPLE CHOICE QUESTIONS

A. Both statements are false

6. Tariff may generally be defined as

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8. Choose the correct answer from among the following choices:

10. Statement 1 One of the essential characteristics of a tax is it is unlimited in amount.

13. This is a constitutional limitation on the power of taxation MARGINAL NOTES

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21. This is an inherent limitation on the power of taxation.

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