TABLE OF CONTENTS

PART ONE: COMMERCIAL LAW

I. BUSINESS ORGANIZATIONS
A. Partnerships
1. General Provisions ..................................................................................... ………….1
2. Rights and Obligations of Partnership and Partners ...................................... ………..15
3. Dissolution and Winding Up ........................................................................ ………..25
4. Limited Partnership .................................................................................... ………..33
B. Corporations
1. Definition of Corporation ............................................................................ ………..40
2. Classes of Corporations .............................................................................. ………..41
3. Nationality of Corporations ......................................................................... ………..50
4. Corporate Juridical Entity ........................................................................... ………..51
5. Capital Structure ........................................................................................ ………..57
6. Incorporation and Organization .................................................................. ………..65
7. Corporate Powers ...................................................................................... ………..75
8. Stockholders and Members ......................................................................... ………..96
9. Board or Directors and Trustees ................................................................. ……….116
10. Capital Affairs ............................................................................................ ……….135
11. Dissolution and Liquidation ......................................................................... ……….147
12. Other Corporations .................................................................................... ……….155
13. Merger and Consolidation ........................................................................... ……….181

II. BANKING LAWS

A. New Central Bank Act (R.A. No. 7653, as amended by R.A. No. 11211)……………………..185
B. General Banking Law of 2000 (R.A. No. 8791) ................................................... ……….206
C. Secrecy of Bank Deposits ................................................................................. ……….230
D. Anti-Money Laundering Act .............................................................................. ……….238

III. INSURANCE LAW

A. Basic Concepts ................................................................................................ ……….262
B. Perfection of the Insurance Contract ................................................................. ……….285
C. Rights and Obligations of Parties ...................................................................... ……….290
D. Rescission of Insurance Contracts ..................................................................... ……….294

IV. TRANSPORTATION LAW

A. Common Carriers ............................................................................................. ……….302
B. Vigilance Over Goods ....................................................................................... ……….316
C. Safety of Passengers ........................................................................................ ……….326
D. The Montreal Convention of 1999……………………………………………………………………........332
 V. INTELLECTUAL PROPERTY CODE (R.A. NO. 8293)
A. Patents .................................................................................................................... 340
B. Trademarks ............................................................................................................. 354
C. Copyright ................................................................................................................ 373

VI. ELECTRONIC COMMERCE ACT (R.A. NO. 8792)

A. Legal Recognition of Electronic Data Messages, Documents, and Signatures ................ 413
B. Presumption Relating to Electronic Signatures ........................................................... 417
C. Admissibility and Evidential Weight of Electronic Data Message or Electronic Document 417
D. Obligation of Confidentiality ...................................................................................... 421

VII. FOREIGN INVESTMENTS ACT (RA 7042, AS AMENDED BY RA 11647)

A. Policy of the Law [Sec. 1, RA 11647] ......................................................................... 421
B. Definition of Terms [Sec. 2, RA 11647]...................................................................... 422
C. Registration of Investment of Non-Philippine Nationals [Sec. 6, RA 11647] .................. 424
D. Foreign Investments in Export Enterprises [Sec. 7, RA 11647] .................................... 427
E. Foreign Investments in Domestic Market Enterprises [Sec. 7, RA 7042] ....................... 427
F. Foreign Investment Negative List [Sec. 8, RA 11647] ................................................. 427

VIII. PUBLIC SERVICE ACT (COMMONWEALTH ACT NO. (CA) 146, AS AMENDED BY RA
11659)
A. Critical Infrastructure [Sec. 2(e), RA 11659] .............................................................. 433
B. Foreign State-Owned Enterprise [Sec. 2(g), RA 11659] .............................................. 434
C. Public Service as Public Utility [Sec. 4, RA 11659] ...................................................... 435
D. Unlawful Acts [Sec. 9, RA 11659] .............................................................................. 439
E. Powers of the President to Suspend or Prohibit Transaction or Investment [Sec. 23, RA
11659] .................................................................................................................... 440
F. Investments by an Entity Controlled by or Acting on Behalf of the Foreign Government, or
Foreign State-owned Enterprises [Sec. 24, RA 11659] ................................................ 440
G. Reciprocity Clause [Sec. 25, RA 11659] ..................................................................... 441

PART TWO: TAXATION LAW

I. GENERAL PRINCIPLES
A. Power of Taxation as Distinguished from Police Power and Eminent Domain ............... 441
B. Inherent and Constitutional Limitations of Taxation .................................................... 442
C. Requisites of a Valid Tax .......................................................................................... 450
D. Tax as Distinguished from Other Forms of Exactions .................................................. 450
E. Kinds of Taxes ......................................................................................................... 451
F. Doctrines in Taxation ............................................................................................... 452

II. NATIONAL TAXATION

A. Taxing Authority ...................................................................................................... 459
B. Income Tax ............................................................................................................. 468
C. Value-Added Tax (VAT) ............................................................................................ 537
D. Tax Remedies Under the National Internal Revenue ................................................... 559
III. LOCAL TAXATION
A. Local Government Taxation ...................................................................................... 611
B. Real Property Taxation ............................................................................................. 641

IV. Judicial Remedies

A. Court of Tax Appeals (CTA) ...................................................................................... 658
B. Procedures .............................................................................................................. 662
I. Business Organizations
A. PARTNERSHIPS
1. GENERAL PROVISIONS
a) DEFINITION, ELEMENTS, AND
CHARACTERISTICS
DEFINITION
A partnership is a contract of two or more persons
who bind themselves to contribute money,
property or industry to a common fund, with the
intention of dividing the profits among
themselves. Two or more persons may also form
a partnership for the exercise of a profession (Art.
1767, NCC).
Partnership as Separate Personality
A partnership has a juridical personality separate
and distinct from that of each of the partners
even in case of failure to comply with the
registration of partnership(Art. 1768, NCC).
Under the old and new Civil Codes, Philippine
law has consistently treated partnerships as
having a juridical personality separate from its
partners. The partners cannot be held liable for
the obligations of the partnership unless it is
shown that the legal fiction of a different juridical
personality is being used for fraudulent, unfair, or
illegal purposes. (Saludo, Jr. v. Philippine National
Bank, G.R. No. 193138, August 20, 2018)
A taxable partnership has a separate juridical
personality from its partners and is liable for
income taxation. Without clear and convincing
proof that the taxpayers received taxable income
personally, or through the partnership, no
intention to evade payment of taxes may be
inferred. (Commissioner of Internal Revenue v.
Spouses Magaan, G.R. No. 232663, May 3, 2021)
Although a partnership is based on delectus
personae or mutual agency, whereby any partner
can generally represent the partnership in its
business affairs, it is non sequitur that a suit
against the partnership is necessarily a suit
impleading each and every partner. It must be
remembered that a partnership is a juridical
entity that has a distinct and separate personality
from the persons composing it. (Guy v. Gacott, G.R.
No. 206147, January 13, 2016)
ELEMENTS
Under Article 1767 of the NCC, there are two
essential elements in a contract of partnership:
(1) Two or more persons bind themselves to
contribute money, property, or industry to a
common fund.
 Money — referring to currency which is
legal tender in the Philippines. It must be
pointed out that checks, drafts, promissory
notes payable to order, and other
mercantile documents are not money but
only representatives of money.
Consequently, there is no contribution of
money until they have been cashed. (Art.
1249, NCC)
 Property — may be real or personal,
corporeal or incorporeal. Hence, credit
such as promissory note or other evidence
of obligation or even a mere goodwill may
be contributed, as they are considered
property. It has been held that a license to
construct and operate a cockpit may be
given as a contribution to a partnership.
(De Leon & De Leon, Jr., Comments and Cases
on Partnership, Agency and Trusts, 2019, p. 19)
 Industry — the active cooperation, the
work of the party associated, which may be
either personal manual efforts or
intellectual, and for which he receives a
share in the profits (not merely salary) of
the business. The law does not specify the
kind of industry that a partner may
contribute. A limited partner in a limited
partnership, however, cannot contribute
mere industry or services. (Art. 1845.) The
partner contributing his industry or
services must be independent of the other
partners, that is, he is not subject to the
1
 supervision of the other partners. (ibid., p.
20)
(2) They intend to divide profits among
themselves. (Dusol v. Lazo, G.R. No. 200555,
January 20, 2021)
Generally, it is not required that the agreement
be in writing or in a public instrument. However,
when immovable properties or real rights are
contributed to the partnership, it is required that
an inventory of the real properties or rights
contributed be prepared and signed by the
parties, and attached to the public instrument,
otherwise, the agreement is void. (ibid.)
A partnership may be deemed to exist among
parties who agree to borrow money to pursue a
business and to divide the profits or losses that
may arise therefrom, even if it is shown that they
have not contributed any capital of their own to a
“common fund,” as their contribution to such
fund could be an intangible like credit or industry.
(Lim Tong Lim v. Philippine Fishing Gear Industries,
Inc., G.R. No. 136448, November 3, 1999)
Legal capacity of the parties to enter into
the contract
A partner may be a human being, a partnership,
a corporation, or a joint venture.
i. Individuals
General Any person may be a partner who is
Rule capable of entering into contractual
relations.
Exception any person who cannot give consent
to a contract cannot be a partner
o Unemancipated minors;
o Insane or demented persons;
o Deaf-mutes who do not know
how to write;
o Persons who are suffering from
civil interdiction; and
o Incompetents who are under
guardianship.
Under Article 1782, persons who are
prohibited from giving each other
any donation or advantage cannot
enter into a universal partnership.
A married woman may enter into a
contract of partnership even without
her husband’s consent, but the latter
may object under certain conditions,
only on valid, serious or moral
ground.
(De Leon & De Leon, Jr., Comments and Cases on
Partnership, Agency and Trusts, 2019, p. 17)
ii. Partnership
There is no prohibition against a partnership
being a partner in another partnership. (ibid.)
iii. Corporation
General The doctrine adopted by our
Rule Supreme Court is that, unless
authorized by statute or by its
charter, a corporation is without
capacity or power to enter into a
contract of partnership
Reason: Public policy – The mutual
agency between the partners,
whereby the corporation would be
bound by the acts of persons who
are not its duly appointed and
authorized agents and officers,
which would be entirely inconsistent
with the policy of the law that the
corporation shall manage its own
affairs separately and exclusively.
Exception A corporation, however, may enter
into joint venture partnership with
another where the nature of the
venture is in line with the business
authorized by its charter.
Where the partnership agreement
provides that the two partners will
manage the partnership so that the
management of corporate interest is
not surrendered, the partnership
may be allowed.
Where the entry of the foreign
corporation as a limited partner in a
limited partnership is merely for
investment purposes and it shall not
take part in the management and
control of the business operation of
the partnership.
2
(ibid.)
Formalities required by law for the
organization or constitution of a
partnership
No required form is necessary, but the contract is
subject to the provisions of Arts. 1771, 1772 and
1773, NCC and to the Statute of Frauds.
If the partnership is general, it may be constituted
in any form, except where immovable property or
real rights are contributed to the common fund,
in which case a public instrument, to which is
attached an inventory of said property, signed by
any of the partners, shall be necessary for
validity. (Arts. 1771, 1773, NCC) Furthermore, if
it has a capital of P3,000.00 or more, it must
appear in a public instrument, which shall be
recorded in the Office of the Securities and
Exchange Commission. However, this is not
necessary for validity. (Art. 1772, NCC)
A contract of partnership is void, whenever
immovable property is contributed thereto, if
inventory of said property is not made, signed by
the parties, and attached to the public
instrument. Where a partnership was formed "to
operate a fishpond", not to "engage in a fishpond
business", and the partners contributed
P1,000.00 each as their share, Art. 1773 of the
Civil Code does not apply, it appearing that
neither a fishpond nor a real right thereto was
contributed to the partnership or become a part
of the capital thereof, even if a fishpond or a real
right thereto could become part of its assets.
(Agad v. Mabato, G.R. No. L-24193, June 28, 1968)
If the partnership is limited, it is required that the
contracting parties, in addition to the formalities
prescribed for the organization of a general
partnership, shall execute a certificate of limited
partnership which must be recorded in the Office
of the Securities and Exchange Commission. (Art.
1843, NCC) These formalities must be complied
with; otherwise, the partnership is not limited but
general. (Jurado, Civil Law Reviewer, 2019, p. 116)
CHARACTERISTICS
General Characteristics of Partnership
Consensual it is perfected by mere consent,
that is, upon the express or
implied agreement of two or
more persons
Nominate it has a special name or
designation in our law (Art. 1767,
NCC)
Bilateral it is entered into by two or more
persons and the rights and
obligations arising therefrom are
always reciprocal
Onerous each of the parties aspires to
procure for himself a benefit
through the giving of something
(Art. 1767, NCC)
Commutative the undertaking of each of the
partners is considered as the
equivalent of that of the others
Principal it does not depend for its
existence or validity upon some
other contracts
Preparatory it is entered into as a means to
an end, i.e., to engage in
business or specific venture for
the realization of profits with the
view of dividing them among the
contracting parties.
Fiduciary Based on trust and confidence.
Partnership is a form of voluntary
association entered into by the
associates.
It is a personal relation in which
the element of delectus personae
exists, involving as it does trust
and confidence between the
partners.
(De Leon & De Leon, Jr., Comments and Cases on
Partnership, Agency and Trusts, 2019, pp.11-12)
b) RULES TO DETERMINE EXISTENCE
In general, to establish the existence of a
partnership, all of its essential features or
characteristics must be shown as being present.
When the intent of the parties is clear, such intent
shall govern. When it does not clearly appear, the
following rules apply:
3
(1) Requirement of Consent; Partners not
partners as to each other
(2) Co-ownership or Co-possession
(3) Sharing of Gross Returns
(4) Sharing of Profits
(1) Requirement of Consent
General Persons who are not partners as to
Rule each other are not partners as to third
persons (Art. 1769[1], NCC).
Exception When a person represents himself or
consents to another representing him
to anyone, as a partner in an existing
partnership or with one or more
persons not actual partners, he is
liable to persons who, in good faith,
has relied on such representation and
given credit to the actual or apparent
partnership. (Partnership by
estoppel). (Art. 1825, NCC)
Persons not in partnership with each
other:
(a) Partnership by Estoppel (Art.
1825, NCC); and
(b) Persons living together without
the benefit of marriage. (Aznar
v. Garcia, G.R. No. L-16749,
January 31, 1963)
Illustration: If A and B are not partners as to each
other, neither will they be partners with respect
to C, a third person. But if A, with the consent of
B, represents to C that they are partners, then A
and B will be considered partners as to C even if
they are not really partners. (De Leon & De Leon,
Jr., Comments and Cases on Partnership, Agency
and Trusts, 2019, p.31)
When a man and a woman who are capacitated
to marry each other, live exclusively with each
other as husband and wife without the benefit of
marriage or under a void marriage, their wages
and salaries shall be owned by them in equal
shares and the property acquired by both of them
through their work or industry shall be governed
by the rules on co-ownership. (Art. 147, FC)
If the partnership is a universal partnership, a
husband and a wife cannot enter into such
contract. This is so because under the NCC (Art.
1782), persons prohibited from making donations
to each other are prohibited from entering into
universal partnerships. However, if the
partnership is a particular partnership or a limited
partnership, they can. (Jurado, Civil Law Reviewer,
2019, pp. 114-115)
(2) Co-ownership or Co-possession
General Co-ownership or co-possession does
Rule not in itself establish a partnership,
whether such co-owners or co-
possessors do or do not share any
profits made by the use of the
property (Art. 1769[2], NCC).
There must be a clear intent to form
a partnership.
Exception The co-ownership of inherited
properties is automatically converted
into an unregistered partnership the
moment said common properties
and/or the income derived therefrom
are used as a common fund with
intent to produce profits for the heirs
in proportion to their respective
shares in the inheritance as
determined in a project partition (Ona
vs. CIR, G.R. L-19342, May 25, 1972).
Illustration:
(a) A and B inherited from their father an
apartment which is leased to third persons.
In this situation they are merely co-owners
of the property, whether or not they share in
the profits made by the lease of the
property, and not of the lease business itself.
(b) A, B, and C, joint owners of merchandise,
consigned it for sale abroad to the same
consignee. Each gave separate instructions
for his own share. In this case, the interests
are “several” and they are not to be treated
as “partners” in the adventure. (Berthold vs.
Goldsmith, 65 U.S. 536; 31 Words and Phrases
272.)
(c) A and B put up money to buy lottery tickets
for the sole purpose of dividing equally the
prize money which they may win. The
parties in this case formed a partnership.
(De Leon & De Leon, Jr., Comments and Cases
on Partnership, Agency and Trusts, 2019, p. 32)
4
(3) Sharing of Gross Returns
(a) The sharing of gross returns does not of
itself establish a partnership, whether or not
the persons sharing them have a joint or
common right or interest in any property
from which the returns are derived (Art.
1769[3], NCC).
(b) There must be a clear intent to form a
partnership, the existence of a juridical
personality different from the individual
partners, and the freedom of each party to
transfer or assign the whole property.
(Pascual vs. CIR, G.R. No. 78133, October 18,
1988).
Illustration: A, owner of a passenger jeepney,
agrees with B, a driver, that B shall have full
control and use of the jeepney to carry
passengers, pay for gasoline and oil, and
shoulder the cost of repairs, and that the gross
receipts are to be divided between them. In this
case, no partnership is established between A and
B as no sharing of profits is contemplated. (De
Leon & De Leon, Jr., Comments and Cases on
Partnership, Agency and Trusts, 2019, p. 37)
(4) Sharing of Profits
General Receipt by a person of a share of thr
Rule profit of a business is prima facie
evidence that he is a partner in the
business.
Exception No such inference shall be drawn if
profits were received in payment as:
(a) As a debt by installment or
otherwise;
(b) As wages of an employee or rent
to a landlord;
(c) As an annuity to a widow or
representative of a deceased
partner;
(d) As interest on a loan, though the
amount of payment vary with the
profits of the business;
(e) As the consideration for the sale
of a goodwill of a business or
other property by installments or
otherwise.
In other words, to be a partner, one
must have an interest with another
in the profits of a business as profits.
(Art. 1769[4], NCC; Santiago v. Spouses Garcia, G.R.
No. 228356, March 9, 2020)
Case illustration: Failed to Prove Existence
of Partnership
Partnership is essentially a result of an agreement
or a contract, either express or implied, oral or in
writing, between two or more persons. Here,
there was neither allegation nor proof that Merian
and Edna agreed to enter into a partnership for
purposes of carrying out the lending business.
There was likewise no agreement for the sharing
of profits, only that Merian expects to receive
remittance of monthly interest from the amount
she invested. At any rate, the receipt by a person
of a share of the profits, or of a payment of a
contingent amount in case of profits earned, is
not a conclusive evidence of partnership. Article
(Art.) 1769 (3) of the Civil Code provides that
"the sharing of gross returns does not of itself
establish a partnership, whether or not the
persons sharing them have a joint or common
right or interest in any property from which the
returns are derived." There must be an
unmistakable intention to form a partnership
which is lacking in this case. Most importantly,
the facts do not disclose that there is mutual
agency between Merian and Edna, that is, neither
party alleged that she can bind by her acts the
other, and can be bound by the acts of the other
in the ordinary course of business. (Santiago v.
Spouses Garcia, G.R. No. 228356, March 9, 2020)
There is no evidence that petitioners entered into
an agreement to contribute money, property or
industry to a common fund, and that they
intended to divide the profits among themselves.
The sharing of returns does not in itself establish
a partnership whether or not the persons sharing
therein have a joint or common right or interest
in the property. There must be a clear intent to
form a partnership, the existence of a juridical
personality different from the individual partners,
and the freedom of each party to transfer or
assign the whole property. Hence, there is no
adequate basis to support the proposition that
they thereby formed an unregistered partnership.
The two isolated transactions whereby they
5
purchased properties and sold the same a few
years thereafter did not thereby make them
partners. They shared in the gross profits as co-
owners and paid their capital gains taxes on their
net profits and availed of the tax amnesty
thereby. Under the circumstances, they cannot be
considered to have formed an unregistered
partnership which is thereby liable for corporate
income tax, as the respondent commissioner
proposes. (Pascual v. Commissioner of Internal
Revenue, G.R. No. 78133, October 18, 1988)
Tests or indicia to determine the existence
of a partnership
There are always two (2) tests which must be
applied in order to determine whether or not a
partnership exists.
(1) To determine whether or not there is an
agreement to contribute money, property, or
industry to a common fund, and
(2) To determine whether or not there is an
intent of the contracting parties to divide the
profits among themselves.
Once it can be shown that there was an
agreement to contribute money, property, or
industry to a common fund and that there was an
intent to divide the profits among themselves,
then a partnership contract exists. (Art. 1769, NCC;
Jurado, Civil Law Reviewer, 2019, pp. 111-112 citing
Evangelista vs. Coll. of Int. Revenue, 54 Off. Gaz. 996;
Negado vs. Makabenta, 54 Off Gaz. 4082; Yulo vs.
Yang Chiaco Seng, L-12541, August 28, 1959)
A pool is considered a corporation for taxation
purposes. Citing the case of Evangelista v. CIR,
the court held that Sec. 24 of the NIRC covered
these unregistered partnerships and even
associations or joint accounts, which had no legal
personalities apart from individual members.
Further, the pool is a partnership as evidence by
a common fund, the existence of executive board
and the fact that while the pool is not in itself, a
reinsurer and does not issue any insurance policy,
its work is indispensable, beneficial and
economically useful to the business of the ceding
companies and Munich, because without it they
would not have received their premiums. (Afisco
Insurance Corp. v. Court of Appeals, G.R. No. 112675,
January 25, 1999)
An examination of the "Power of Attorney"
reveals that a partnership or joint venture was
indeed intended by the parties. Perusal of the
agreement denominated as the "Power of
Attorney" indicates that the parties had intended
to create a partnership and establish a common
fund for the purpose. They also had a joint
interest in the profits of the business as shown by
a 50-50 sharing in the income of the mine. Under
the "Power of Attorney", petitioner and Baguio
Gold undertook to contribute money, property
and industry to the common fund known as the
Sto. Niño mine. 17 In this regard, we note that
there is a substantive equivalence in the
respective contributions of the parties to the
development and operation of the mine. (Philex
Mining Corp. v. Commissioner of Internal Revenue,
G.R. No. 148187, April 16, 2008)
Disputable presumption of partnership
The sharing of profits and losses is prima facie
evidence of an intention to form a partnership but
not a conclusive evidence. The presumption of
partnership arising from such profit-sharing
agreement may be rebutted and outweighed by
other circumstances. (De Leon & De Leon, Jr.,
Comments and Cases on Partnership, Agency and
Trusts, 2019, p. 37)
Burden of proof and presumption.
(a) The burden of proving the existence of a
partnership rests on the party having the
affirmative of that issue; and
(b) The existence of a partnership must be
proved and will not be presumed. (ibid., p. 45)
Incidents of Partnership
(a) The partners share in profits and losses.
(Arts. 1767, 1797, 1798, NCC)
In the absence of stipulation, the share
of each in the profits and losses shall be
in proportion to what he may have
contributed, but the industrial partner
shall not be liable for the losses. As for
the profits, the industrial partner shall
receive such share as may be just and
equitable under the circumstances. If
besides his services he has contributed
6
 capital, he shall also receive a share in
the profits in proportion to his capital.
(Marsman Drysdale Land, Inc. v. Philippine
Geoanalytics, Inc., G.R. Nos. 183374 &
183376, June 29, 2010)
(b) They have equal rights in the
management and conduct of the
partnership business (Art. 1803, NCC);
(c) Every partner is an agent of the
partnership, and entitled to bind the
other partners by his acts, for the
purpose of its business. (Art. 1818 ,NCC)
He may also be liable for the entire
partnership obligations;
(d) All partners are personally liable for the
debts of the partnership with their
separate property (Arts. 1816, 1822-
1824, NCC) except that the limited
partners are not bound beyond the
amount of their investment (Art. 1843,
NCC);
(e) The books of the partnership shall be
kept, subject to any agreement between
the partners, at the principal place of
business of the partnership (Art. 1805,
NCC)
(f) A fiduciary relation exists between the
partners (Art. 1807, NCC);
(g) A capitalist partner cannot carry on any
competing business venture unless there
is a stipulation to the contrary (Art. 1808,
NCC) while an industrial partner is
absolutely prohibited from engaging in
any kind of business (Art. 1789, NCC) and
(h) On dissolution, the partnership is not
terminated, but continues until the
winding up of partnership is completed.
(Art. 1828, NCC)
These incidents may be modified by stipulations
of the partners subject to the rights of third
persons dealing with partnership. (De Leon & De
Leon, Jr., Comments and Cases on Partnership, Agency
and Trusts, 2019, p. 47)
Object or purpose of partnership
A partnership must have a lawful object or
purpose, and must be established for the
common benefit or interest of the partners. (Art.
1770 [1], NCC)
When an unlawful partnership is
dissolved by a judicial decree, the profits
shall be confiscated in favor of the State,
without prejudice to the provisions of the
Penal Code governing the confiscation of
the instruments and effects of a crime.
(Art. 1770 [2], NCC)
The parties possess absolute freedom to
choose the transaction or transactions
they must engage in. The only limitation
is that the object must be lawful and for
the common benefit of the members. The
illegality of the object will not be
presumed; it must appear to be of the
essence of the relationship. (De Leon & De
Leon, Jr., Comments and Cases on
Partnership, Agency and Trusts, 2019, p. 58)
Effects of an unlawful partnership
(1) The contract is void ab initio and the
partnership never existed in the eyes of the
law (Art. 1409(1)), and consequently,
neither the partner has the right to require
the division of the profits, if any;
(2) The profit shall be confiscated in favor of the
government;
(3) The instrument or trolls and proceeds of the
crime shall be forfeited in favor of the
government; and
(4) The contributions of the parties shall not
be confiscated unless they fall under no.
3. (ibid., p. 59)
c) PARTNERSHIP TERM
Commencement and terms of partnership
(1) From the time of execution of contract – A
partnership is a consensual contract; hence,
it exists from the moment of the celebration
of the contract by the partners.
(2) No time limit to life of partnership – The birth
and life of a partnership is predicated on the
mutual desire and consent of the parties.
Hence, the partners may fix in their contract
any term and they shall be bound to remain
under such a relation for the duration of the
term barring the occurrence of any of the
events causing dissolution of the partnership
7
 before its expiration. (Arts. 1830-1831) (ibid., p.
89)
Kinds of Partnership as to duration
Definition and Concept
Partnership with a fixed A fixed term is agreed upon by the parties.
term
One where the term for which the
partnership is to exist is fixed or agreed
upon or one formed for a particular
undertaking, and upon the expiration of
the term or completion of the particular
undertaking, the partnership is dissolved,
unless continued by the partners.
Partnership for a The partnership may not have a fixed term
particular undertaking but it is intended merely for a particular
undertaking.
One which is organized for a certain
undertaking, which when attained, will
cause the termination of the partnership,
(Art. 1785, NCC) such as a partnership
formed to construct 20 residential houses.
The expiration of the term thus fixed or
the accomplishment of the particular
undertaking specified (or the
demonstration of the impossibility of its
accomplishment) will cause the automatic
dissolution of the partnership. (Art.
1830[1][a], NCC)
However, it may be extended or renewed
by the partners by express agreement,
written or oral, or impliedly, by the mere
continuation of the business after the
termination of such term or particular
undertaking without any settlement or
liquidation.
Summary of Rules
Partnership may be extended or
renewed by the partners by express
agreement, written or oral, or impliedly,
by the mere continuation of the business
after the termination of such term or
particular undertaking without any
settlement or liquidation.
When a partnership for a fixed term is
continued after the termination of such
term without any express agreement,
the rights and duties of the partners
remain the same as they were at such
termination, so far as is consistent with
a partnership at will (Art. 1785, NCC).
A continuation of the business by the
partners or such of them as habitually
acted therein during the term, without
any settlement or liquidation of the
partnership affairs, is primafacie
evidence of a continuation of the
partnership (Art. 1785, NCC).
When a partnership for a particular
undertaking is continued after the
termination of the undertaking without
any express agreement, the rights and
duties of the partners remain the same
as they were at such termination; the
partnership becomes a partnership at
will (Art. 1785, NCC).
A continuation of the business by the
partners or such of them as habitually
acted therein during the term, without
any settlement or liquidation of the
partnership affairs, is primafacie
evidence of a continuation of the
partnership (Art. 1785, NCC).
Furthermore, any one of the partners
may, at his sole pleasure, dictate a
dissolution of a partnership at will. He
must, however, act in good faith not that
the attendance of bad faith can prevent
the dissolution of the partnership but
that can result in a liability for damages
to the other partners.
8
 Definition and Concept Summary of Rules

In other words, with such continuation, Even a partnership for a fixed term may
the partnership for a fixed term or likewise be terminated by the express
particular undertaking is dissolved and a will of any partner before the time
new one, a partnership at will, is created mentioned. There is no such thing as an
by implied agreement the continued indissoluble partnership.
existence of which will depend upon the
mutual desire and consent of the partners.
Partnership at will A partnership that can be terminated at A partnership for a fixed term or for a
any time. particular undertaking becomes a
partnership at will if the partnership
continues without an express agreement
(Art. 1785, NCC).
One in which no time is specified and is
not formed for a particular undertaking or Verily, any one of the partners may, at
venture and which may be terminated at his sole pleasure, dictate the dissolution
any time by mutual agreement of the of the partnership at will. He must
partners or by the will of any of the however, act in good faith, not that the
partners. attendance of bad faith can prevent the
dissolution of the partnership but that it
can result in a liability in damages.
(Tocao v. Court of Appeals, G.R. No.
127405, October 4, 2000 citing Ortega
vs. CA, G.R No. 109248, July 3, 1995)
(Aquino and Sundiang Sr., Reviewer on Commercial Law, 2022 Ed., pp. 226-228; De Leon & De Leon, Jr., Comments
and Cases on Partnership, Agency and Trusts, 2019, pp. 91-92)

d) PARTNERSHIP BY ESTOPPEL A partnership liability may be imposed upon a

(Ostensible Partnership)
Partnership by Estoppel
It is a partnership imposed by law even though
the parties have not entered into any partnership
agreement but the parties act as if there were an
agreement to the detriment of some third party.
(De Leon & De Leon, Jr., Comments and Cases on
Partnership, Agency and Trusts, 2019, p. 201)
Estoppel
A bar which precludes a person from denying or
asserting anything contrary to that which has
been established as the truth by his own deed or
representation, either express or implied. (ibid)
When a person represents himself or consents to
another representing him to anyone, as a partner
in an existing partnership or with one or more
persons not actual partners, he is liable to
persons who, in good faith, has relied on such
representation and given credit to the actual or
apparent partnership. (Art. 1825, NCC).
person under principles of estoppel where he
holds himself out, or permits himself to be held
out, as a partner in an enterprise. In such cases,
there is no actual or legal partnership relation but
merely a partnership liability imposed by law in
favor of third persons. (Art. 1825, NCC).
Note: A partnership may be created without any
definite intention to create it. In case there is no
written agreement between the parties, the
existence or non-existence of a partnership must
be determined from the conduct of the parties,
any documentary evidence bearing thereon, and
the testimony of the parties.
Example: Suppose A, B, and C are not really
partners, but A told X that he (A), B, and C are
partners. X, believing the representation made by
A and consented to by B, extended credit to A. As
against A and B, A, B, and C constitute a
partnership by estoppel. But as against C, there
is no partnership and X cannot hold him liable as
a partner. When the debt matures, X is entitled

9
to collect only from A and B who are liable as
partners although not actually partners. (De Leon
& De Leon, Jr., Comments and Cases on Partnership,
Agency and Trusts, 2019, p. 203)
Estoppel does not create partnership;
Partner by Estoppel
While an uregistered commercial partnership has
no juridical personality, nevertheless, where two
or more persons, attempt to create a partnership
failing to comply with all the legal formalities, the
law considers them as partners and the
association is a partnership in so far as it is
favorable to third persons, by reason of the
equitable principle of estoppel. (McDonald vs.
National City Bank of New York, G.R. No. L-7991. May
21, 1956)
Requisites of Party by Estoppel
Even if there is no partnership, there are cases
when a person is estopped from claiming that he
or she is not a partner. The requisites are:
(1) there is no partnership;
(2) a person, by words or conduct, represents
himself or consents to a representation to a third
party that he or she is a partner in an existing
partnership;
(3) the third person relies or gives credit to the
representation (Art. 1825, NCC; Aquino and Sundiang
Sr., Reviewer on Commercial Law, 2022 Ed., p. 231)
e) PARTNERSHIP AS DISTINGUISHED
FROM JOINT VENTURE
A joint venture being a form of partnership, it is
to be governed by the laws on partnership.
(Marsman Drysdale Land, Inc. v. Philippine
Geoanalytics, Inc., G.R. Nos. 183374 & 183376, June
29, 2010)
Though some claim that partnerships and joint
ventures are totally different animals, there are
very few rules that differentiate one from the
other; thus, joint ventures are deemed "akin" or
similar to a partnership. In fact, in joint venture
agreements, rules and legal incidents governing
partnerships are applied. (Divina, Divina on
Commercial Law, A Comprehensive Guide, Vol. I, 2021
Ed., p. 352)
The legal concept of a joint venture is of common
law origin. It has no precise legal definition, but
it has been generally understood to mean an
organization formed for some temporary
purpose. It is in fact hardly distinguishable from
the partnership, since their elements are similar
— community of interest in the business, sharing
of profits and losses, and a mutual right of
control. (Valdes v. La Colina Development Corp., G.R.
No. 208140, July 12, 2021, J. Hernando)
The main distinction cited by most opinions in
common law jurisdictions is that the partnership
contemplates a general business with some
degree of continuity, while the joint venture is
formed for the execution of a single transaction,
and is thus of a temporary nature. This
observation is not entirely accurate in this
jurisdiction, since under the Civil Code,
a partnershipmay be particular or universal, and
a particular partnership may have for its object a
specific undertaking. It would seem therefore
that under Philippine law, a joint venture is a form
of partnership and should be governed by the law
of partnerships. The Supreme Court has however
recognized a distinction between these two
business forms, and has held that although a
corporation cannot enter into a partnership
contract, it may however engage in a joint
venture with others. (ibid).
Essential Elements of Joint Venture
A joint venture, therefore, is akin to
a partnership, the essential elements of which are
as follows:
(1) an agreement to contribute money, property,
or industry to a common fund; and
(2) an intent to divide the profits among the
contracting parties. (ibid.)
Partnership Joint Venture
Two or more persons bind An association of
themselves to contribute persons or companies
money, property, or jointly undertaking
industry to a common some commercial
fund, with the intention of enterprise; generally,
dividing the profits among all contribute assets
themselves (Article 1767, and share risks.
NCC). (Kilosbayan v
Guingona, G.R. No.
113375, May 5, 1994)
10
 a partnership, though it A joint venture is f) PROFESSIONAL PARTNERSHIP
may exist for a single ordinarily limited to a
transaction, usually single transaction and Two or more persons may also form a partnership
contemplates the not intended to for the exercise of a profession (Article 1767[2],
undertaking of a general pursue a continuous NCC).
and continuous business of business;
a particular kind which
necessarily involves a Profession has been defined as a group of men
series of transactions pursuing a learned art as a common calling in the
the property used remains the property used spirit of public service — no less a public service
the undivided property of remains the undivided because it may incidentally be a means of
its contributor, as a rule, property of its livelihood. (In Re: Sycip, Salazar, Feliciano,
becomes the property of contributor Hernandez & Castillo, G.R. No. X92-1 (Resolution), July
the business entity and 30, 1979)
hence of all the partners
a partner, when acting in none of the co- The practice of a profession is not a business or
pursuance of the firm venturers can bind an enterprise for profit, however, the law allows
business, binds not only the joint adventure or the joint pursuit thereof by two or more persons
himself as a principal but, his co-adventurers
as partners. (Art. 1783, NCC)
as their agent as well, also
the partnership and his co-
partners In such case, it is the individual partners, and not
required to operate under has no firm name the partnership, who engage in the practice of the
a firm name profession and are responsible for their own acts
(Villanueva, Agency & Trust, Partnership & Joint as such. (De Leon & De Leon, Jr., Comments and
Ventures, 2018 Ed., pp. 429-430) Cases on Partnership, Agency and Trusts, 2019, p. 10)

Note: The main distinction cited by most
opinions in common law jurisdiction is that the
partnership contemplates a general business with
some degree of continuity, while the joint venture
is formed for the execution of a single
transaction, and is thus of a temporary nature.
This observation is not entirely accurate in this
jurisdiction, since under the Civil Code, a
partnership may be particular or universal, and a
particular partnership may have for its object a
specific undertaking. It would seem therefore
that under Philippine law, a joint venture is a form
of partnership and should thus be governed by
the law of partnerships. The Supreme Court has
however recognized a distinction between these
two business forms, and has held that although a
corporation cannot enter into a partnership
contract, it may however engage in a joint
venture with others. (Roque, Jr. v. Commission on
Elections, G.R. No. 188456, September 10, 2009)
The law does not allow individuals to practice a
profession as a corporate entity. Personal
qualifications for such practice cannot
be possessed by a corporation. (ibid.)
Partnership for the practice of law
A mere association for non-business purpose. It
is not a partnership formed for the purpose of
trade or business or of holding property. The
practice of law is intimately and peculiarly related
to the administration of justice and should not be
considered like an ordinary “money-making
trade.’’ (De Leon & De Leon, Jr., Comments and Cases
on Partnership, Agency and Trusts, 2019, pp. 10-11)
The right to practice law is not a natural or
constitutional right but is in the nature of a
privilege or franchise. (ibid.)
In the formation of partnerships for the practice
of law, no person should be admitted or held out
as a practitioner or member who is not a member
of the legal profession duly authorized to practice,
and amenable to professional discipline. (ibid.)

11
Partnerships between lawyers and members of
other profession or non-professional persons
should not be formed or permitted where any
part of the partnership’s employment consists of
the practice of law. (ibid.)
The practice of a profession is not a business or
an enterprise for profit. It is the individual
partners, and not the partnership, who engage in
the practice of the profession and are responsible
for their own acts as such. (ibid.)
For tax purposes, professional partnerships are
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. (Sec. 20(b), NIRC).
Other Classifications of Partnership
(1) As to the extent of its subject matter — A
partnership may be:
1.1 Universal partnership — one which refers
to: (Art. 1777, NCC)
1.1.1 all present property (Art. 1778,
NCC); and
1.1.2 of profits. (Art. 1780, NCC); or
1.2 Particular partnership — (Art. 1783, NCC)
(2) As to extend to liability of the partners. — It
may be:
2.1 General partnership or one consisting of
general partners who are liable pro rata
and subsidiarily (Art. 1816, NCC) and
sometimes solidarily (Arts. 1822-1824,
NCC) with their separate property for
partnership debts; or
2.2 Limited partnership or one formed by two
or more persons having as members one
or more general partners and one or
more limited partners, the latter not
being personally liable for the obligations
of the partnership. (Art. 1843, NCC)
(3) As to the legality of its existence. — It may
be:
3.1. De jure partnership or one which has
complied with all the legal requirements
for its establishment (see Arts. 1772[2];
1773, NCC); or
3.2. De facto partnership or one which has
failed to comply with all the legal
requirements for its establishment.
(Ibid.)
(4) As to representation to others. — It may be:
4.1 Ordinary or real partnership or one which
actually exists among the partners and
also as to third persons; or
4.2 Ostensible partnership or partnership by
estoppel or one which in reality is not a
partnership, but is considered a
partnership only in relation to those who,
by their conduct or admission, are
precluded to deny or disprove its
existence. (Art. 1825, NCC)
(5) As to publicity. — It may be:
5.1 Secret partnership or one wherein the
existence of certain persons as partners
is not avowed or made known to the
public by any of the partners; or
5.2 Open or notorious partnership or one
whose existence is avowed or made
known to the public by the members of
the firm.
(6) As to purpose. — It may be:
6.1 Commercial or trading partnership or one
formed for the transaction of business
(Art. 1767, NCC); or
6.2 Professional or non-trading partnership
or one formed for the exercise of a
profession. (Ibid.)
g) MANAGEMENT
Management of the partnership is primarily
governed by the agreement of the partners in the
articles of partnership. It may be stipulated that
the partnership will be managed by:
(a) All the partners; or
(b) A number of partners appointed as
managers, which may be appointed:
 In the articles of partnership; or
 After constitution of the partnership.
Manner of Management
When Manner of Management Has Been
Provided for in the Partnership Agreement:
12
(a) Appointment as manager in articles of
partnership
When a managing partner has been appointed:
The managing partner may execute all acts of
administration despite the opposition of his
partners unless he acts in bad faith. (Art. 1800,
NCC)
General Power is irrevocable without just or
Rule lawful cause
Exception It can only be revoked:
(1) Upon showing to remove him for
just cause, vote of partners
having controlling interest is
necessary;
(2) Upon showing to remove him
without just cause, unanimous
vote is necessary, including his
own vote.
(Art. 1800, NCC)
(b) Appointment as manager after the
partnership has been constituted:
Extent of appointment:
He/she may execute all acts of administration but
in case of opposition by the other partners, the
partners owning the controlling interest may
resort to voting for his removal as manager. (Tai
Tong Chuache vs. Insurance Commission, G.R. No.
L055397, February 29, 1988)
Power of a Managing Partner
General The partner designated as manager
Rule in the articles may execute all acts of
administration despite opposition by
the other partners.
Exception He cannot do so when he acts in bad
faith
(Art. 1800, NCC)
Revocation Of Power By Managing Partner
General Power is irrevocable without just or
Rule lawful cause.
Exception The powers of the managing partner
may be revoked:
(a) If appointed in the articles of
partnership, when:
 There is just or lawful cause
for revocation;
 and
 The partners representing the
controlling interest revoke
such power.
(b) If appointed after the
constitution of the partnership,
at any time and for any cause
(Art. 1800, NCC)
Reason: Such appointment is a mere delegation
of power, not founded on a change of will on the
part of the partners, the appointment not being a
condition of the contract. It is merely a simple
contract of agency, which may be revoked at any
time. Removal, however, should also be done by
the partners having the controlling interest. (De
Leon & De Leon, Jr., Comments and Cases on
Partnership, Agency and Trusts, 2019, p. 121)
Scope of power of a managing partner
General A partner appointed as manager has
Rule all the powers of a general agent as
well as all the incidental powers
necessary to carry out the object of
the partnership in the transaction of
its business.
Exception when the powers of the manager are
specifically restricted
(Art. 1800, NCC; De Leon & De Leon, Jr., Comments
and Cases on Partnership, Agency and Trusts, 2019, p.
121)
Compensation for services rendered.
General Rule Exception
Partner generally not In proper cases, however,
entitled to the law may imply a
compensation. contract for compensation
Note: In the absence of an agreement to the
contrary, each member of the partnership
assumes the duty to give his time, attention, and
skill to the management of its affairs, so far, at
least, as may be reasonably necessary to the
success of the common enterprise; and for this
service a share of the profits is his only
compensation. (ibid., p. 123)
13
When two or more partners have been
appointed as managers:
When there are two or more managing partners
appointed,
(1) without specification of their duties; or
(2) without a stipulation on how each one will
act:
(a) Each one may separately execute all acts
of administration.
(b) If any of them opposes the acts of the
others, the decision of the majority
prevails.
(c) In case of a tie, the partners owning the
controlling interest will decide (Art. 1801,
NCC)
Requisites:
(1) Two or more partners have been appointed
as managers;
(2) There is no specification of their respective
duties; and
(3) There is no stipulation that one of them shall
not act without the consent of all the others.
Where stipulation requires unanimous
consent
Unanimous consent of all the managing partners
shall be necessary for the validity of the acts, and
the absence or disability of any one of them
cannot be alleged, except when there is imminent
danger of grave or irreparable injury to the
partnership (Art. 1802, NCC).
Where there is opposition by a managing partner,
imminent danger of grave or irreparable injury to
the partnership is not applicable when one of the
managers is not absent or disabled, and in the
exercise of his right to oppose, objects to the
proposed act. (De Leon & De Leon, Jr., Comments
and Cases on Partnership, Agency and Trusts, 2019,
pp. 128-129)
When the manner of management has not
been agreed upon:
(1) All the partners shall be considered as
managers and agents (Art. 1803 in relation to
Art. 1818, NCC)
 All partners shall have equal rights in the
management and conduct of the partnership
affairs. Thus, whatever any one of them may
do alone shall bind the partnership (Art.
1803[1], NCC).
 This is true regardless of the amount of
their capital contributions or extent of their
services to the partnership.
 But if any of them should oppose the acts of
any other partner, the decision of the
majority vote shall prevail, and in case of a
tie, the matter shall be decided by the parties
owning the controlling interest (Art. 1803, in
relation to Art. 1801, NCC).
(2) Unanimous consent required for alteration of
immovable property (Art. 1803 [2], NCC).
 Any important alteration in the immovable
property of the partnership, even if useful
to the partnership, requires unanimity.
 If the refusal is manifestly prejudicial to the
partnership, court intervention may be
sought
 If the alteration is necessary for the
preservation of the property, however,
consent of the others is not required
 The consent need not be express. It may
be presumed from the fact of knowledge of
the alteration without interposing any
objection.
Attribution of Acts
Although a partnership is a person, it is just an
artificial being that has no physical existence. It
can only act through the partners and duly
appointed agents. (Aquino and Sundiang Sr.,
Reviewer on Commercial Law, 2022 Ed., pp. 226-222)
Mutual Agency Rule
Every partner is an agent of the partnership for
the purpose of its business, and the act of every
partner, including the execution in the
14
partnership name of any instrument, for
apparently carrying on in the usual way the
business of the partnership of which he is a
member binds the partnership (Art. 1818, NCC;
ibid.).
Third parties need not inquire about the extent of
authority. However, the partnership is not bound
if:
(1) the partner so acting has in fact no authority
to act for the partnership in the particular
matter, and
(2) the third person with whom he is dealing has
knowledge of the fact that he has no such
authority (ibid.)
Apparent Authority
Article 1818 further provides in part that, "every
partner is an agent of the partnership for the
purpose of its business, and the act of every
partner, including the execution in the
partnership name of any instrument, for
apparently carrying on in the usual way the
business of the partnership of which he is a
member binds the partnership, unless the partner
so acting has in fact no authority to act for the
partnership in the particular matter, and the
person with whom he is dealing has knowledge
of the fact that he has no such authority." (ibid.)
Example: Payment made by a third person to a
partner binds the partnership even if there is no
authority to receive the payment (Arbilon v.
Manlangit, G.R. No. 197920, January 22, 2018).
Acts of Strict Dominion
Approval of acts of strict dominion or ownership
requires unanimity of the will of the partners. All
partners must therefore approve the following:
(1) Assignment of partnership property in trust
for creditors or on the assignee's promise to
pay the debts of the partnership;
(2) Disposition of the goodwill of the business;
(3) Any other act which would make it impossible
to carry on the ordinary business of a
partnership;
(4) Confession of a judgment;
(5) Entering into a compromise concerning a
partnership claim or liability;
(6) Submission of a partnership claim or liability
to arbitration;
(7) Renunciation of a claim of the partnership
(Art. 1818, NCC; ibid.).
2. RIGHTS AND OBLIGATIONS OF
PARTNERSHIP AND PARTNERS
Relations created by a contract of
partnership
A contract of partnership gives rise to at least four
distinct juridical relations, namely:
(1) Relations among the partners themselves;
(2) Relations of the partners with the
partnership;
(3) Relations of the partnership with third
persons with whom it contracts; and
(4) Relations of the partners with such third
persons. (De Leon & De Leon, Jr., Comments and
Cases on Partnership, Agency and Trusts, 2019, p.
87)
a) RIGHTS AND OBLIGATIONS OF THE
PARTNERSHIP
Right of the Partnership to Contribution,
Right to Warranty
Every partner is a debtor of the partnership for
whatever he may have promised to contribute
thereto. (Art. 1786, NCC)
The rule is, when a partner who has undertaken
to contribute a sum of money fails to do so, he
becomes a debtor of the partnership for whatever
he may have promised to contribute and for
interests and damages from the time he should
have complied with his obligation. (Moran, Jr. v.
Court of Appeals, G.R. No. 59956, October 31, 1984)
Every partner shall also be bound for warranty in
case of eviction with regard to specific and
determinate things which he may have
contributed to the partnership. (ibid.)
Note: The money or property contributed by a
partner becomes the property of the partnership.
15
It necessarily follows that the same cannot be unless the
withdrawn or disposed of by the contributing (4) Right to demand a partnership
partner without the consent or approval of the formal account (Art. expressly permits
partnership or of the other partners. (De Leon & 1809, NCC) him to do so (Arts.
De Leon, Jr., Comments and Cases on Partnership, 1789, NCC)
Agency and Trusts, 2019, p. 95 citing Lozana v. (5) Property rights of a
Depakakibo, G.R. No. L-13680, April 27, 1960) partner (Art. 1810, (4) Obligation of a
NCC) managing partner
who collects debt
Responsibility of the partnership to the (6) Rights In Specific from person who
partners. Property (Art. 1811, also owed the
NCC) partnership to credit
The partnership shall be responsible to every the firm (Arts. 1792,
partner to: (7) Share of the profits NCC)
(1) Refund amounts disbursed by the partner in and surplus (Art.
behalf of the partnership plus the 1812, NCC) (5) Obligation of partner
corresponding interest from the time the who received from
(8) Right to ask for the an insolvent debtor
expenses are made (not from the date of
dissolution at the to share with other
demand). Here, the law refers to loans or proper time (Art. partners. (Arts.
advances made by a partner to the 1830-1831, NCC) 1793, NCC)
partnership other than capital contributed by
him; (6) Obligation of partner
(2) Answer for the obligations the partner may to pay for damages
have contracted in good faith in the interest caused by his fault
of the partnership business; and (Arts. 1794, NCC)
(3) Answer for risks in consequence of its
(7) Duty to render
management. (Art. 1796, NCC)
information (Art.
1806, NCC)
Since the capital was contributed to the
partnership, not to petitioners, it is the (8) Partners accountable
partnership that must refund the equity of the as fiduciary (Art.
retiring partners. (Villareal v. Ramirez, G.R. No. 1807, NCC)
144214, July 14, 2003, 453 PHIL 999-1013)
(9) Capitalist partners
Summary of Rights and Obligation of a not to engage in the
Partner same business as
that of the
partnership (Art.
Rights Obligation
1808, NCC)
(1) Rights in the (1) Obligations with
management and respect to
conduct of contribution of b) OBLIGATIONS OF PARTNERS AMONG
partnership affairs property (Art. 1786, THEMSELVES
(Art. 1803, NCC) NCC)
Rights of Partners
(2) Right to Associate (2) Obligations of the
another person with partners with respect Right to Associate another person with him
him in his share – to the partnership in his share; Contract of Subpartnership
Subpartnership (Art. capital (Arts. 1788,
1804, NCC) NCC)
A partner may associate another person with him
(3) Right with respect to (3) An industrial partner in his share without the consent of the other
partnership books cannot engage in partners. Their association is called
(Art. 1805, NCC) business for himself subpartnership. (Art. 1804, NCC; De Leon & De Leon,

16
Jr., Comments and Cases on Partnership, Agency and
Trusts, 2019, p. 133)
Subpartnership agreements do not in any wise
affect the composition, existence, or operations
of the firm. The subpartners are partners inter se,
but, in the absence of the mutual assent of all the
parties, a subpartner does not become a member
of a partnership, even though the agreement is
known to the other members of the firm.
Right with respect to partnership books
General Rule Exception
Each partner should Equity will intervene to
have free access to prevent one partner from
the partnership keeping or concealing the
books for the books. He can be restrained
purpose of from using the information
inspecting them gathered for other than
partnership purpose.
(Art. 1805, NCC; De Leon & De Leon, Jr., Comments
and Cases on Partnership, Agency and Trusts, 2019,
pp. 135-136)
“Reasonable Hours” means at reasonable hours
on business days throughout the year; and not
merely during some arbitrary period for a few
days chosen by the managers. (Pardo v. Hercules
Lumber Co., Inc., G.R. No. 22442, August 1, 1924)
The books shall be placed and kept in a place
agreed upon by the partners. In the absence of
any agreement, the books shall be kept at the
principal place of business of the firm whereat
each partner may come, have access, inspect or
copy entries in the books for valid purposes (Art.
1805, NCC; De Leon & De Leon, Jr., Comments and
Cases on Partnership, Agency and Trusts, 2019, p.
135)
Right to demand a formal account
General The right to a formal account of
Rule partnership affairs accrues only
when the partnership is dissolved.
Exception In the special and unusual cases,
formal accounting may be
demanded by any partner even
before dissolution:
(a) If he is wrongfully excluded
from the partnership business
or possession of its property by
his co- partners;
(b) If the right exists under the
terms of any agreement;
(c) If, without his consent, a
partner has derived profits from
any transaction connected with
the formation, conduct, or
liquidation of the partnership or
from any use of partnership
property;
(d) Whenever other circumstances
render it just and reasonable
(Art. 1809, NCC)
Regarding the prescriptive period within which
the private respondent may demand an
accounting, Articles 1806, 1807, and 1809 show
that the right to demand an accounting exists as
long as the partnership exists. (Dan Fue Leung v.
Intermediate Appellate Court, G.R. No. 70926, January
31, 1989)
Prescription of the said right starts to run only
upon the dissolution of the partnership when the
final accounting is done. (Emnace v. Court of
Appeals, G.R. No. 126334, November 23, 2001)
Distribution of losses and profits of a
partnership
The losses and profits shall be distributed in
conformity with the agreement. If only the share
of each partner in the profits has been agreed
upon, the share of each in the losses shall be in
the same proportion.
In the absence of stipulation, the share of each
partner in the profits and losses shall be in
proportion to what he may have contributed, but
the industrial partner shall not be liable for the
losses. As for the profits, the industrial partner
shall receive such share as may be just and
equitable under the circumstances. If besides his
services he has contributed capital, he shall also
receive a share in the profits in proportion to his
capital. (Divina, Divina on Commercial Law, A
Comprehensive Guide, Vol. I, 2021 Ed., pp. 361-362)
Note: A stipulation which excludes one or more
partners from any share in the profits or losses is
void. (Art. 1799, NCC)
17
Property rights of a partner partnership name with continuing the
partnership funds, partnership.
Principal rights – The property rights of a partner unless a contrary
enumerated under Article 1810 are as follows: intention is shown
(a) His rights in specific partnership property (Art. (ibid., p. 153)
1811, NCC);
(b) His interest in the partnership (Art. 1812, NCC); Rights In Specific Property
and
(c) His right to participate in the management. (1) The partners have equal rights to possess
(Art. 1803, NCC) partnership property for partnership
purposes.
Related rights – A partner has other rights which
are related to the above, namely: For other purposes, the consent of his
(a) the right to reimbursement for amounts partners is necessary.
advanced to the partnership and to o If the partner is excluded, he may ask
indemnification for risks in consequence of for:
management (Art. 1796, NCC);  Formal accounting (Art. 1809[1]); or
(b) the right of access and inspection of  Dissolution by judicial decree (Art.
partnership books (Art. 1805, NCC); 1831).
(c) the right to true and full information of all o On the death of a partner, his right in
things affecting the partnership (Art. 1806, specific partnership property vests in the
NCC); surviving partners, not in the legal
(d) the right to a formal account of partnership representative of the deceased partner
affairs under certain circumstances (Art. 1809, (except when he was the last surviving
NCC); and partner).
(e) the right to have the partnership dissolved o By agreement, the right to possess
also under certain conditions. (Arts. 1830- specific partnership property may be
1831, NCC) surrendered and provide for the vesting
(De Leon & De Leon, Jr., Comments and Cases on
of exclusive control in one partner. In the
Partnership, Agency and Trusts, 2019, p. 152)
absence of special agreement, however,
neither partner separately owns, or has
Partnership property and partnership
the exclusive right of possession of, any
capital distinguished
particular partnership property; nor does
he own any proportional part of any
Partnership Property Partnership Capital
Susceptibility to change in value particular partnership property, but each
is variable – its value is constant — it remains has dominion over such property and
may vary from day to unchanged as the over the entire partnership property.
day with changes in the amount fixed by o possession of partnership property by
market value of the agreement of the one partner is the possession of all
partnership assets partners, and is not partners until his possession becomes
affected by fluctuations adverse.
in the value of
partnership property
(2) A partner’s right in such property is not
Assets included
assignable, except when all the partners
includes not only the represents the
original capital aggregate of the
assign their rights in the same property;
contributions of the individual contributions
partners, but all made by the partners in (3) Right limited to share of what remains after
property subsequently establishing or partnership debt
acquired on account of
the partnership, or in the

18
(Art. 1811, NCC; De Leon & De Leon, Jr., Comments
and Cases on Partnership, Agency and Trusts, 2019, As an industrial partner,
pp. 156-159) private respondent had
the right to demand for a
Share of the profits and surplus; Interest In formal accounting of the
Partnership business and to receive
her share in the net profit
The partner’s interest in the partnership consists (Tocao v. Court of Appeals, G.R. No. 127405, October
of his proportional share in the undistributed 4, 2000)
profits during the life of the partnership as a
going concern and his share in the undistributed We have a situation where two brothers engaged
surplus after its dissolution. (Art. 1812, NCC) in a business venture. One furnished the capital,
the other contributed his industry and talent.
Profit Surplus Justice and equity dictate that the two share
the excess of refers to the assets of the equally the fruit of their joint investment and
returns over partnership after efforts. (Ramnani v. Court of Appeals, G.R. Nos.
expenditure in a partnership debts and 85494 & 85496, May 7, 1991)
transaction or liabilities are paid and
series of settled and the rights of Right to ask for the dissolution at the
transactions; or the partners among proper time (Art. 1830-1831, NCC)
the net income of themselves are adjusted.
the partnership (Art. 1839.) It is the Any one of the partners may, at his sole pleasure,
for a given period excess of assets over dictate the dissolution of the partnership at will.
of time liabilities. If the liabilities He must, however, act in good faith, not that the
are more than the assets, attendance of bad faith can prevent the
the difference represents dissolution of the partnership but that it can result
the extent of the loss. in a liability for damages. (Tocao v. Court of Appeals,
(De Leon & De Leon, Jr., Comments and Cases on G.R. No. 127405, October 4, 2000, citing Ortega v. CA,
Partnership, Agency and Trusts, 2019, p. 161) G.R. No. 109248, July 3, 1995).

Being a contract of partnership, each partner Obligations of Partners

must share in the profits and losses of the
venture. That is the essence of a partnership. And
even with an assurance made by one of the
partners that they would earn a huge amount of
profits in the absence of fraud, the other partner
cannot claim a right to recover the highly
speculative profits. It is rare business venture
guaranteed to give 100% profits. (Moran, Jr. v.
Court of Appeals, G.R. No. 59956, October 31, 1984)
The partner of a partnership is not a creditor of
such partnership for the amount of his
share. (Leyte-Samar Sales Co. v. Cea, G.R. No. L-
5963, May 20, 1953)
General Rule Exception
Each partner must Except that the industrial
share in the profits partner shall not be liable
and losses for the losses.
Obligations with respect to contribution of
property
Art. 1786 deals with the obligations of the
partners among themselves and to the
partnership with respect to contribution of
property. They are as follows:
(1) To contribute at the beginning of the
partnership or at the stipulated time the
money, property, or industry which he may
have promised to contribute;
(2) To answer for eviction in case the partnership
is deprived of the determinate property
contributed; and
(3) To answer to the partnership for the fruits of
the property the contribution of which he
delayed, from the date they should have

19
 been contributed up to the time of actual General Rule Exception
delivery. The industrial partner The prohibition will not
himself cannot exploit apply if the other
In addition, the partner has the obligation: his own services for his partners give the
profit without the industrial partner
(1) To preserve said property with the diligence
express permission of express permission to do
of a good father of a family pending delivery the partnership. so
to the partnership (Art. 1163, NCC); and (Arts. 1789, NCC)
(2) To indemnify the partnership for any damage
caused to it by the retention of the same or Note: An action for specific performance to compel the
by the delay in its contribution. (Arts. 1788, partner to perform the promised work or service is not
1170, NCC) available as a remedy because this will amount to
involuntary servitude which, as a rule, is prohibited by
Obligations of the partners with respect to the Constitution.
the partnership capital under Article 1788
as follows: Capitalist partners not to engage in the same
business as that of the partnership
(1) To contribute on the date due the amount he
has undertaken to contribute to the General Rule Exception to the prohibition
partnership; (Prohibition)
(2) To reimburse any amount he may have taken A capitalist The other partners may agree to
from the partnership coffers and converted to partner cannot stipulate that the capitalist
his own use; engage in the partners may engage in the
(3) To pay the agreed or legal interest, if he fails business for his same business as that of the
to pay his contribution on time or in case he own account or partnership if it is perceived that
takes any amount from the common fund and benefit in a no destructive competition will
business which arise such as when the place of
converts it to his own use; and
is similar to the operation is far away from the
(4) To indemnify the partnership for the
business of the sphere of influence of the
damages caused to it by the delay in the partnership partnership, or when the
contribution or the conversion of any sum for business will enhance healthy
his personal benefit. competition with the business of
the partnership
Partner may be obliged to sell his interest (Art. 1808, NCC)
to the other partners
Obligation of a managing partner who
If there is no agreement to the contrary, in case collects debt from person who also owed
of an imminent loss of the business of the the partnership to credit the firm
partnership, any partner who refuses to
contribute an additional share to the capital, General Rule Exception
except an industrial partner, to save the venture, A partner authorized to If he received it for
shall be obliged to sell his interest to the other manage collects a the account of
partners. (Art. 1791, NCC) demandable sum, which partnership, the
was owed to him in his own whole sum shall be
name, from a person who applied to
An industrial partner cannot engage in owed the partnership partnership credit.
business for himself unless the partnership another sum also
expressly permits him to do so demandable, the sum thus
An industrial partner is one who contributes his collected shall be applied to
industry, labor, or services to the partnership. He the two credits in
is considered the owner of his services, which is proportion to their
his contribution to the common fund. amounts, even though he
may have given a receipt
for his own credit only

20
(Arts. 1792, NCC) Duty to render information

The following are the requisites for the
application of this article:
(a) There exist at least two debts, one where the
collecting partner is creditor, and the other,
where the partnership is the creditor;
(b) Both debts are demandable; and
(c) The partner who collects is authorized to
manage and actually manages the
partnership. (ibid.)
Obligation of partner who received from an
insolvent debtor to share with other
partners.
Partners shall render on demand true and full
information of all things affecting the partnership
to any partner or the legal representative of any
deceased partner or of any partner under legal
disability. (Art. 1806, NCC)
Note: Not only is a partner bound to give
information on demand but in certain
circumstances, he is under the duty of voluntary
disclosure of material facts within his knowledge
relating to or affecting partnership affairs. (De
Leon & De Leon, Jr., Comments and Cases on
Partnership, Agency and Trusts, 2019, p. 161)

A partner who has received, in whole or in part, Partners accountable as fiduciary

his share of a partnership, when the other
partners have not collected theirs, shall be
obliged, if the debtor should thereafter become
insolvent, to bring to the partnership capital what
he received even though he may have given
receipt for his share only. (Arts. 1793, NCC)
The requisites for the application of this article
are as follows:
(a) A partner has received, in whole or in part,
his share of the partnership credit;
(b) The other partners have not collected their
shares; and
(c) The partnership debtor has become
insolvent. (ibid.)
Obligation of partner to pay for damages
caused by his fault
Every partner must account to the partnership for
any benefit, and hold as trustee for it any profits
derived by him without the consent of the other
partners.
(1) Duty to act for common benefit.
(2) Duty begins during formation of partnership
(3) Duty continues even after dissolution of
partnership.
(4) Duty to account for secret and similar profits.
(5) Duty to account for earnings accruing even
after termination of partnership.
(6) Duty to make full disclosure of information
belonging to partnership.
(7) Duty not to acquire interest or right adverse
to partnership. (Art. 1807, NCC; ibid. pp. 137-
140)

General Rule Exception c) OBLIGATIONS OF PARTNERSHIP/

Damages not generally
subject to set-off.
As a general rule, the
damages caused by a
partner to the partnership
cannot be offset by the
profits or benefits which he
may have earned for the
partnership by his industry.
(Arts. 1794, NCC)
If unusual profits are PARTNERS TO THIRD PERSONS
realized through the
extraordinary efforts Right of partners to choose firm name
of the partner at
fault, the courts may
Every partnership shall operate under a firm
equitably mitigate or
lessen his liability for
name, which may or may not include the name of
damages. This rule one or more of the partners. (Art. 1815, NCC)
rests on equity.
Those who, not being members of the
partnership, include their names in the firm
name, shall be subject to the liability of a partner.
(ibid.)

21
 General the partners may adopt any firm
Rule name desired. The firm name of a
partnership may be that of an
individual partner, the surnames of
all the partners, or the surname of
one or more of the members with the
addition of “and Company,” or it may
consist.
Exceptions (1) They cannot use a name which is
“identical or deceptively or
confusingly similar to an existing
or corporation [or partnership] or
to any other name already
protected by law or is patently
deceptive, confusing or contrary
to existing laws” (Sec. 18,
Corporation Code).
(2) Use of names of deceased
partner in law firms is
“permissible provided that the
firm indicates in all its
communications that said partner
is deceased” (Rule 3.02, Code of
Professional Responsibility).
Liability for inclusion of name in firm name
only after all the falls under Articles 1822 or
partnership assets 1823.
have been
exhausted.
(ibid.)
Partners liable with their personal property
All partners, including industrial ones, shall be
liable pro rata with all their property and after all
the partnership assets have been exhausted, for
the contracts which may be entered into in the
name and for the account of the partnership,
under its signature and by a person authorized to
act for the partnership. However, any partner
may enter into a separate obligation to perform a
partnership contract. (Art. 1816, NCC; Divina, Divina
on Commercial Law, A Comprehensive Guide, Vol. I,
2021 Ed., p. 370)
Liability of partnership for acts of partners
(1) Acts apparently for the carrying on of usual
business

Persons who, not being partners, include their General Rule Exception
names in the firm name do not acquire the rights Any act of a partner The partnership is not
of a partner (Art. 1767) but under Article 1815, which is apparently bound when the
they shall be subject to the liability of a partner for the carrying on following concur:
(Art. 1816) insofar as third persons without notice of the usual (a) The partner has in
are concerned. (De Leon & De Leon, Jr., Comments business of the fact no authority to
and Cases on Partnership, Agency and Trusts, 2019, p. partnership binds act; and
161 citing Philippine National Bank v. Lo, G.R. No. the latter, including (b) The person with
26937, October 5, 1927) the execution of any whom he deals has
instrument in the knowledge of such
Liability of Partners for Partnership partnership name. fact
Contracts; Partnership Debts (Art. 1818 [1], NCC).

The partnership is primarily liable for contracts (2) Acts not apparently for carrying on of the
entered into: usual business
(1) In its name and for its account;
(2) Under its signature; and General Rule Exception
(3) By a person authorized to act for it. (Art. 1816, Acts of a partner The partnership is bound if
NCC) which is not all the other partners
apparently for authorized him to do the
General Rule Exception carrying on of the act
The partners are A third person who transacted usual business does
liable subsidiarily with the partnership can hold not bind the
because the the partners solidarily (rather partnership.
partners become than subsidiarily) liable for the (Art. 1818 [2], NCC).
personally liable whole obligation if the case

22
(3) Acts of Strict Dominion Every partner is an agent of the partnership for
the purpose of its business, and the act of every
General Rule Exception partner, including the execution in the
One or some of the They may do so if: partnership name of any instrument, for
partners have no (a) Authorized by all the apparently carrying on in the usual way the
authority to do the partners; or business of the partnership of which he is a
following acts of strict (b) The other partners
member binds the partnership, unless the partner
dominion: have abandoned the
(a) Assign the business
so acting has in fact no authority to act for the
partnership partnership in the particular matter, and the
property in trust person with whom he is dealing has knowledge
for creditors or on of the fact that he has no such authority. Thus,
the assignee’s an act of a partner in apparently carrying on in
promise to pay the usual way the business of the partnership
the debts of the binds the partnership unless he has no authority
partnership; and the third party has knowledge that he has no
(b) Dispose of the
authority. The existence of the partnership having
goodwill of the
business;
been admitted, proof of express authority was
(c) Do any other act unnecessary. Rather, it was defendant's burden
which makes it to establish no authority and plaintiff's
impossible to knowledge. (Stratemeyer v. West 466 NE 2d 306)
carry on the
ordinary business Liability for Admission by a Partner
of the
partnership; An admission or representation by any partner
(d) Confess a
may be used as evidence against the partnership
judgment;
(e) Enter into a
when:
compromise (1) It concerns partnership affairs;
concerning a (2) Such affairs are within the scope of his
partnership claim authority (Art. 1820, NCC).
or liability;
(f) Submit a Note: Before the partnership can be charged with
partnership claim the admission of a partner under Article 1820, the
or liability to partnership relation must be shown and proof of
arbitration;
that fact must be made by evidence other than
(g) Renounce a claim
of the
the admission itself.
partnership.
(Art. 1818 [3], NCC). Instances Where Knowledge of a Partner is
Considered Knowledge of the Partnership
(4) Acts In Contravention of a Restriction (1) Knowledge of the partner acting in the
particular matter
Any act of a partner in contravention of a (a) Acquired while a partner; or
restriction on authority does not bind the (b) Then present to his mind
partnership to persons having knowledge of the (2) Knowledge of any other partner who
restriction (Art. 1818 [4], NCC). reasonably could and should have
communicated it to the acting partner (Art.
The partnership is not liable to third persons 1821, NCC).
having actual or presumptive knowledge of the
restrictions, whether or not the acts are for
apparently carrying on in the usual business of
the partnership. (ibid.)

23
Liability for Wrongful Acts of a Partner
The partnership is solidarily liable with the partner
who causes loss or injury to any person not a
partner, or incurs any penalty through any
wrongful act or omission:
(1) In the ordinary course of the business of the
partnership; or
(2) Not in such ordinary course of business, but
with the authority of his co-partners (Art.
1822, NCC).
Liability for Misapplication of Money or
Property
The partnership is liable for losses suffered by a
third person whose money or property was:
(1) Received by a partner:
(a) Acting within the scope of his apparent
authority; and
(b) Misapplied it;
(2) Received by the partnership:
(a) In the course of its business; and
(b) Misapplied by any partner while it is in
the custody of the partnership (Art. 1823,
NCC).
Applicability of the Rule of Respondeat
Superior
The rule of respondeat superior (also called the
rule of vicarious liability) applies to the law of
partnership in the same manner as other rules
governing the agency relationship.
It is not only the partners who are liable in
solidum; it is also the partnership
The injured party may proceed against the
partnership or any partner. (Art. 1824, NCC).
Under Article 1824 of the Civil Code of the
Philippines, all partners are solidarily liable with
the partnership for everything chargeable to the
partnership, including loss or injury caused to a
third person or penalties incurred due to any
wrongful act or omission of any partner acting in
the ordinary course of the business of the
partnership or with the authority of his co-
partners. Whether innocent or guilty, all the
partners are solidarily liable with the partnership
itself. (J. Tiosejo Investment Corp. v. Spouses Ang,
G.R. No. 174149, September 8, 2010)
Liability of a Partner by estoppel; Nature
Summarizing Article 1825, a partner by estoppel
is liable in the following manner:
Direct A partner by estoppel is liable to any
Represen- such persons:
tation (1) To whom such representation has
been made; and
(2) Who has, on the faith of such
representation, given credit to the
actual or apparent partnership
Indirect If he has made such representation
Represen- or consented to its being made in a
tation public manner, whether the
representation has or has not been
made or communicated to such
persons so giving credit by or with his
knowledge.
(1) When partnership liability results
If all the actual partners
consented to the representation,
then the liability of the person who
represented himself to be a
partner or who consented to such
representation. The person is
liable as though he were an actual
member of the partnership, he
becomes an agent of the
partrnership.
(2) When liability pro rata
There is no existing partnership
and all those represented as
partners consented to the
representation, or not all of the
partners of an existing partnership
consented to the representation
he is liable pro rata with the other
persons, if any, so consenting to
the contract or representation.
(3) When liability is separate
When there is no existing
partnership and not all but only
some of those represented as
partners consented to the
representation, or none of the
24
 partners in an existing partnership
consented to such representation,
then the liability will be separate
(Art. 1825[1], NCC).
3. DISSOLUTION AND WINDING UP
The final stages in the life of a partnership are:
(1) Dissolution,
(2) Winding-up, and
(3) Termination.
On dissolution, the partnership is not terminated
but continues until the winding up of partnership
affairs is completed (Primelink Properties and
Development Corporation v. Ma. Clarita T. Lazatin-
Magat, et al., No. 167379, June 27, 2006).
Dissolution
The dissolution of a partnership is the change in
the relation of the partners caused by any partner
ceasing to be associated in the carrying on as
distinguished from the winding up of the
business. (Art. 1828, NCC).
Note: The dissolution of a partnership must not
be understood in the absolute and strict sense so
that at the termination of the object for which it
was created the partnership is extinguished
(Testate Estate of Mota v. Serra, G.R. No. L-22825,
1925).
The partnership, although dissolved, continues to
exist until its termination, at which time the
winding up of its affairs should have been
completed and the net partnership assets are
partitioned and distributed to the partners
(Emnace v. Court of Appeals, G.R. No. 126334,
November 23, 2001)
Winding up
Is the actual process of settling the partnership
business or affairs after dissolution. It involves
collection and distribution of partnership assets,
payment of debts, and determination of the value
of the interest of the partners in the partnership.
(De Leon & De Leon, Jr., Comments and Cases on
Partnership, Agency and Trusts, 2019, p. 218)
Termination
The point in time when all partnership affairs are
completely wound up and finally settled. It
signifies the end of the partnership life. (ibid.)
Effect of Dissolution and Winding-up
On dissolution the partnership is not terminated,
but continues until the winding up of partnership
affairs is completed. (Art. 1829, NCC).
Dissolution does not automatically result in the
termination of the legal personality of the
partnership, or the cessation of his business, nor
the relations of the partners among themselves
who remain as co-partners until the partnership
is terminated. (De Leon & De Leon, Jr., Comments
and Cases on Partnership, Agency and Trusts, 2019, p.
218)
After dissolution, a partnership is considered as
maintaining a limited existence for the purpose of
making good all outstanding engagements, of
taking and settling all accounts, and collecting all
the property, means and assets of the partnership
existing at the time of its dissolution for the
benefit of all interested. The partnership as a
business enterprise remains viable only for the
purpose of winding up its affairs. (ibid., p. 219)
No new partnership business should be
undertaken, but affairs should be liquidated and
distribution made to those entitled to the
partners’ interest. (ibid.)
It is only after winding up is accomplished that
the existence of the partnership is terminated.
(ibid.)
Grounds or Causes of Dissolution
(1) Without Violation of the Agreement
(a) By the termination of the definite term or
particular undertaking specified in the
agreement;
(b) By the express will of any partner, who must
act in good faith, when no definite term or
particular is specified.
25
(c) By the express will of all the partners who
have not assigned their interests or suffered
them to be charged for their separate debts,
either before or after the termination of any
specified term or particular undertaking
(should be unanimous);
(d) By the expulsion of any partner from the
business bona fide in accordance with such a
power conferred by the agreement between
the partners; (Art. 1830[1], NCC).
Note: Any one of the partners may, at his sole
pleasure, dictate the dissolution of the
partnership at will. He must, however, act in good
faith, not that the attendance of bad faith can
prevent the dissolution of the partnership but that
it can result in a liability for damages (Ortega v.
CA, G.R. No. 109248, July 3, 1995)
There shall be a liquidation and winding up of
partnership affairs, return of capital, and other
incidents of dissolution because the continuation
of the partnership has become inequitable. (Dan
Fue Leung v. Intermediate Appellate Court, G.R. No.
70926, January 31, 1989)
(2) In Contravention of the Agreement
Where circumstances do not permit dissolution
under any other provision of Art. 1830, it may
also be dissolved by the express will of any
partner at any time. (Art. 1830[2], NCC).
Under Article 1830, par. 2 of the Civil Code, even
if there is a specified term, one partner can cause
its dissolution by expressly withdrawing even
before the expiration of the period, with or
without justifiable cause. (Rojas v. Maglana, G.R.
No. L-30616, December 10, 1990)
(3) By operation of Law
(a) Illegality of the Business – By any event
which makes it unlawful for the business of
the partnership to be carried on or for the
members to carry it on in partnership; (Art.
1830[3], NCC).
(b) Loss – When a specific thing which a partner
had promised to contribute, perishes before
delivery, or by the loss of the thing, only the
use or enjoyment of which has been
contributed; the loss of a specific thing,
however, does not dissolve the corporation
after its ownership has already been
transferred to the partnership; (Art. 1830[4],
NCC).
(c) By the death of any partner; (Art. 1830[5],
NCC).
(d) By the insolvency of any partner or of the
partnership; (Art. 1830[6], NCC).
(e) By the civil interdiction of any partner; (Art.
1830[7], NCC).
(4) By Decree of Court (Art. 1830[8], NCC).
A partner may apply for dissolution in court when:
(1) A partner has been declared insane in any
judicial proceeding or is shown to be of
unsound mind; (Art. 1831[1], NCC).
(2) A partner becomes in any other way
incapable of performing his part of the
partnership contract; (Art. 1831[2], NCC).
(3) Misconduct – A partner has been guilty of
such conduct as tends to affect prejudicially
the carrying on of the business; (Art. 1831[3],
NCC).
(4) A partner willfully or persistently commits a
breach of the partnership agreement, or
otherwise so conducts himself in matters
relating to the partnership business that it is
not reasonably practicable to carry on the
business in partnership with him; (Art.
1831[4], NCC).
(5) The business of the partnership can only be
carried on at a loss; (Art. 1831[5], NCC).
(6) Other circumstances render a dissolution
equitable. (Art. 1831[6], NCC).
A person who acquires the interest of a partner
may likewise apply:
(1) After the termination of the specified term or
particular undertaking;
(2) At any time if the partnership was a
partnership at will when the interest was
assigned or when the charging order was
issued (Art. 1831, NCC).
26
e. Other Causes
(1) When a new partner is admitted into an
existing partnership;
(2) When any partner retires;
(3) When the other partners assign their rights to
the sole remaining partner;
(4) When all the partners assign their rights in
the partnership property to third persons (Art.
1840, NCC).
Effects of Dissolution
(1) On Authority of the Partners
General In general, upon dissolution, the
Rule authority of the partners to
represent the partnership is
confined only to acts necessary to:
(1) Wind up partnership affairs; or
(2) Complete transactions begun
but not then finished
The event of dissolution, therefore,
terminates the actual authority of a
partner to undertake new business
for the partnership. (Art. 1832 [1],
NCC).
Exception With respect to partners
The authority of partners to act for
the partnership is terminated, with
respect to partners:
(1) When the dissolution is not by
the act, insolvency or death of
a partner; or (Art. 1832, NCC).
(2) When the dissolution is by such
act, insolvency or death, when
the partner acting for the
partnership has knowledge or
notice of the cause. In other
cases, each partner is still liable
for his share in the liability
created by the partner acting
for the partnership (Art. 1832,
NCC).
With respect to third persons
With respect to persons not
partners:
(1) After dissolution, a partner can
bind the partnership by any act
appropriate for:
(a) Winding up partnership
affairs; or
(b) Completing transactions
unfinished at dissolution.
(2) He can also bind it by any
transaction which would bind
the partnership as if dissolution
had not taken place, provided
the other party to the
transaction:
(a) Had extended credit to the
partnership prior to
dissolution and had no
knowledge or notice
thereof; or
(b) Had not so extended credit
but had known of the
partnership prior to
dissolution, and having no
knowledge or notice of
dissolution, the fact had
not been advertised in a
newspaper of general
circulation in the place or
in each place if more than
one at which the
partnership business was
regularly carried on par. 1,
Art. 1834.
(2) On Liability for Transactions after
Dissolution
The liability shall be satisfied out of the
partnership assets alone
(1) When the partner had been, prior to the
dissolution, unknown as a partner to the
person with whom the contract is made;
(2) When the partner had been, prior to the
dissolution, so far unknown or inactive in
partnership affairs that the business
reputation of the partnership could not be
said to have been in any degree due to his
connection with it.
Since it is the partnership, as a separate and
distinct entity, that must refund the shares of the
partners, the amount to be refunded is
necessarily limited to its total resources. In other
words, it can only pay out what it has in its
coffers, which consists of all its assets. However,
before the partners can be paid their shares, the
creditors of the partnership must first be
compensated. After all the creditors have been
27
paid, whatever is left of the partnership assets acting for the partnership
becomes available for the payment of the had knowledge of the
partners' shares. Evidently, in the present case, dissolution; or
the exact amount of refund equivalent to (2) The dissolution being by
respondents' one-third share in the partnership death or insolvency of a
cannot be determined until all the partnership partner, the partner acting
assets will have been liquidated — in other words, for the partnership had
sold and converted to cash — and all partnership knowledge or notice of the
creditors, if any, paid. The CA's computation of death or insolvency
the amount to be refunded to respondents as (Art. 1833, NCC).
their share was thus erroneous. (Villareal v.
Ramirez, G.R. No. 144214, July 14, 2003) (4) On Existing Liability of Partners

Any act of a partner after dissolution in no case General Dissolution does not of itself
binds the partnership in the following cases: Rule discharge the existing liability of
(1) Where the partnership is dissolved because any partner.
it is unlawful to carry on the business, unless Exception A partner may be relieved when
the act is appropriate for winding up there is an agreement to that
partnership affairs; effect between:
(2) Where the partner has become insolvent; or, (a) Himself;
(3) Where the partner has no authority to wind (b) The partnership creditor;
up partnership affairs, except by a and
transaction with one who: (c) The person or partnership
(a) Had extended credit to the partnership continuing the business.
prior to dissolution and had no
knowledge or notice of his want of Such agreement may be
authority; or inferred from the course of
(b) Had not extended credit to the dealing between:
partnership prior to dissolution, and, (a) the creditor having
having no knowledge or notice of his knowledge of the
want of authority, the fact of his want dissolution and
of authority has not been advertised (b) the person or partnership
continuing the business.
Art. 1834 does not affect the liability under Art. (Art. 1835, NCC).
1825 of any person who, after dissolution,
represents himself or consents to another In case of dissolution by death, the individual
representing him as a partner in a partnership property of a deceased partner is liable for
engaged in carrying on business (Art. 1834, obligations of the partnership incurred while he
NCC). was a partner, after payment of his separate
debts (ibid.)
(3) On Liability for Contracts after
Dissolution by Specific Causes Winding-up

General A contract entered into by a Persons authorized to wind-up

Rule partner acting for the The following partners have the right to wind up
partnership after dissolution by the partnership affairs:
act, death or insolvency of a (1) Those designated in an agreement;
partner binds the other partners (2) Those who have not wrongfully dissolved
Exception (1) The dissolution being by act the partnership; or
of any partner, the partner

28
 (3) The legal representative of the last
surviving partner, who was not insolvent.
The court may, in its discretion, appoint a receiver
to wind up the partnership affairs. (De Leon & De
Leon, Jr., Comments and Cases on Partnership,
Agency and Trusts, 2019, pp. 252-253)
Manner of Winding Up
The winding-up of the dissolved partnership may
be done either:
Extrajudicial Judicial
by the partners under the control and
themselves direction of the proper court
upon cause shown by any
partner, his legal
representative, or his assignee
(ibid.)
Note: The action for liquidation of the partnership
is personal, hence it may be brought in the place
of residence of either the plaintiff or the
defendant.
Survivor’s right and duty to liquidate
The death of one of the partners dissolves the
partnership, but the liquidation of its affairs is by
law intrusted to the surviving partners, or to
liquidators appointed by them, and not to the
executors of the deceased partner. (Guidote v.
Borja, G.R. No. 28920, October 24, 1928)
In equity, surviving partners are treated as
trustees of the representatives of the deceased
partner in regard to his interest in the firm and
are held to that strictness of accountability
required of an incident to the position of one
occupying a confidential relation. (ibid.)
Thus, when a member of a partnership dies, the
duty of liquidating its affairs devolves upon the
surviving member or members of the firm, not
upon the legal representative of the deceased
partner (except when such partner was the last
surviving partner).
The legal representative has no right to interfere
with the partnership business, so long as the
surviving partner proceeds in good faith to settle
its affairs, and it makes no difference how well
qualified such representative may be to assist.
The executor or administrator of a deceased
partner cannot insist on continuing the business
in the absence of some controlling agreement to
that effect. (De Leon & De Leon, Jr., Comments and
Cases on Partnership, Agency and Trusts, 2019, p.
253)
Under the Uniform Partnership Act, “xxx a
surviving partner is entitled to reasonable
compensation for his services in winding up
partnership affairs.” (Sec. 18[f] thereof.) Our law
is silent on this point. (ibid.)
Power of the liquidating partner
(1) Make new contracts. Without express
authorization, he cannot make new contracts
or create new liabilities, as by giving
promissory notes binding on the firm nor can
he extend the time for the payment of
existing obligations to the firm, or make
acknowledgments of the validity of claims
against the firm
(2) Raise money to pay partnership debts. He
may bind the partnership by borrowing
money to meet its accruing liabilities, and
may sell its real estate to raise money to pay
its debts
(3) Incur obligations necessary to complete
existing contracts or preserve partnership
assets or in procuring a favorable market for
their disposal.
(4) Incur expenses necessary in the conduct of
litigation. — he has power to employ an
attorney, with resultant obligations, to
prosecute and defend the action or to incur
other expenses necessary in the conduct of
such litigation. (De Leon & De Leon, Jr.,
Comments and Cases on Partnership, Agency and
Trusts, 2019, pp. 253-254)
Rights of Partners in Case of Dissolution
(Art. 1837, NCC)
(a) Dissolution without Violation of the
Agreement
29
Each partner may have:
(1) The partnership property applied to discharge
the partnership liabilities; and
(2) The surplus applied in cash to the net amount
owing to the respective partners.
This is a right as against his co-partners and all
partners claiming through them in respect of
their interests in the partnership. It cannot be
availed if there is an agreement to the contrary.
Note: When dissolution is caused by expulsion
of a partner bona fide (so without violation of
partnership agreement), expelled partner may
be discharged from all partnership liability in
the same manner as above but he shall receive
in cash only the net amount due him from the
partnership. (Art. 1837, NCC; De Leon & De Leon,
Jr., Comments and Cases on Partnership, Agency
and Trusts, 2019, p. 257)
(b) Dissolution in Contravention of the
Agreement
(1) Partners who did not cause the
dissolution.
The partners who did not cause the
dissolution wrongfully has the following
rights:
a. To have partnership property applied
for the payment of its liabilities and
to receive in cash his share of the
surplus
b. To be indemnified for damages for
breach of the agreement against the
partner who caused the dissolution
wrongfully;
c. To continue the business:
c.1 In the same name;
c.2 By themselves or jointly with
others;
c.3 During the agreed term for the
partnership.
d. For the purpose of continuing the
business, the said partners may
possess the partnership property
provided:
d.1 They secure the payment by
bond approved by the court; or
d.2 They pay any partner who has
caused the dissolution
wrongfully the value of his
interest in the partnership, less
any damages recoverable, and
indemnity against all present or
future partnership liabilities.
(ibid.)
(2) Partners who did caused the dissolution.
The partner who caused the dissolution
wrongfully has the following rights:
a. If the business is not continued by
the other partners, to have the
partnership property applied to
discharge its liabilities and to receive
in cash his share of the surplus less
damages caused by his wrongful
dissolution.
b. If the business is continued, the
right, as against his co-partners and
all claiming through them, to:
b.1 Ascertainment, without
considering the value of the
goodwill of the business, and
payment to him in cash the value
of his partnership interest, less
any damage, or have the
payment secured by a bond
approved by the court; and
b.2 Be released from all existing
liabilities of the partnership.
(ibid.)
Right of partner to rescind contract of
partnership. (Art. 1838, NCC)
If one is induced by fraud or misrepresentation to
become a partner, the contract is voidable or
annullable. (Art. 1390[2], NCC)
If the contract is annulled, the injured partner is
entitled to restitution. (Art. 1398, NCC)
Here, the fraud or misrepresentation vitiates
consent. (Art. 1330, NCC) However, until the
partnership contract is annulled by a proper
action in court, the partnership relations exist (Art.
1390, NCC) and the defrauded partner is liable for
all obligations to third persons. (Art. 1838, NCC;
30
De Leon & De Leon, Jr., Comments and Cases on
Partnership, Agency and Trusts, 2019, p. 260)
Rights of injured partner where
partnership contract rescinded. (Art. 1838,
NCC)
(1) Right of a lien on, or retention of, the surplus
of partnership property after satisfying
partnership liabilities for any sum of money
paid or contributed by him;
(2) Right to subrogation in place of partnership
creditors after payment of partnership
liabilities; and
(3) Right of indemnification by the guilty partner
against all debts and liabilities of the
partnership. (Art. 1838, NCC)
It is to be noted that the rights of the partner
entitled to rescind (to annul) are without
prejudice to any other rights under other
provisions of law. (ibid.)
Rules to be observed in settling accounts
between the partners after dissolution.
In settling accounts between the partners after
dissolution, the following rules shall be observed,
subject to any agreement to the contrary:
(a) The assets of the partnership are:
i. The partnership property,
ii. The contributions of the partners
necessary for the payment of all the
liabilities specified in No. 2 of Article
1839.
(b) The liabilities of the partnership shall rank in
order of payment, as follows:
i. Those owing to creditors other than
partners,
ii. Those owing to partners other than for
capital and profits,
iii. Those owing to partners in respect of
capital,
iv. Those owing to partners in respect of
profits.
(c) The assets shall be applied in the order
oftheir declaration in No. 1 of Article 1839
to the satisfaction of the liabilities.
(d) The partners shall contribute, as provided
by Article 1797, the amount necessary to
satisfy the liabilities.
(e) An assignee for the benefit of creditors or
any person appointed by the court shall
have the right to enforce the contributions
specified in the preceding number.
(f) Any partner or his legal representative shall
have the right to enforce the contributions
specified in No. 4 of Article 1839, to the
extent of the amount which he has paid in
excess of his share of the liability.
(g) The individual property of a deceased
partner shall be liable for the contributions
specified in No. 4 of Article 1839.
(h) When partnership property and the
individual properties of the partners are in
possession of a court for distribution,
partnership creditors shall have priority on
partnership property and separate
creditors on individual property, saving the
rights of lien or secured creditors.
(i) Where a partner has become insolvent or
his estate is insolvent, the claims against
his separate property shall rank in the
following order:
i. Those owing to separate creditors;
ii. Those owing to partnership creditors;
iii. Those owing to partners by way of
contribution. (Art. 1835, NCC; Divina,
Divina on Commercial Law, A
Comprehensive Guide, Vol. I, 2021 Ed., p.
352)
31
Rights of Creditors of Dissolved Partnership
(Art. 1840, NCC)
(a) As Creditors of the New Partnership
In the following cases, creditors of the dissolved
partnership are also creditors of the person or
partnership continuing the business:
(1) When the business is continued without
liquidation, and the cause of dissolution is:
1.1. Admission of a new partner into the
existing partnership;
1.2. Retirement or death of any partner, and
his rights to partnership property are
assigned to [1] two or more of the
partners, or [2] one or more of the
partners and one or more third persons;
1.3. Retirement of all but one partner, and
their rights to partnership property are
assigned to the remaining partner, who
continues the business, either alone or
with others;
1.4. Wrongful dissolution by any partner, and
the remaining partners continue the
business, either alone or with others;
1.5. Expulsion of a partner, and the remaining
partners continue the business, either
alone or with others.
(2) When the cause of dissolution is the
retirement or death of any partner, and
business is continued with the consent of the
retired partner or the representative of the
deceased partner, without assignment of
their rights to partnership property.
(3) When the cause of dissolution is the
assignment by all the partners or their
representatives of their rights in partnership
property to one or more third persons who
promise to pay the debts and who continue
the business of the partnership (Art. 1840[1],
NCC).
In the ordinary course of events, the legal
personality of the expiring partnership persists for
the limited purpose of winding up and closing of
the affairs of the partnership. In the case at bar,
it is important to underscore the fact that the
business of the old partnership was simply
continued by the new partners, without the old
partnership undergoing the procedures relating
to dissolution and winding up of its business
affairs. Thus, not only the retiring partners but
also the new partnership itself which continued
the business of the old, dissolved, one, are liable
for the debts of the preceding partnership. (Yu v.
National Labor Relations Commission, G.R. No. 97212,
June 30, 1993)
(b) Liability of A New Partner
The liability to the creditors of the dissolved
partnership of a new partner in the partnership
continuing the business shall be satisfied out of
the partnership property alone. However, he
may, through agreement, assume individual
liability (Art. 1840[3], NCC).
(c) Priority of Creditors of Dissolved
Partnership
Creditors of the dissolved partnership have prior
right to any claim of the retired partner or the
representative of the deceased partner against
the person or partnership continuing the
business (Art. 1840[3], NCC).
This is without prejudice to the right of creditors
to set aside any assignment on the ground of
fraud (Art. 1840[4], NCC).
Rights of a Retired Partner or a
Representative of Deceased Partner
Unless otherwise agreed upon, when any partner
retires or dies, and the business is continued
without any settlement of accounts as between
him or his estate and the person or partnership
continuing the business, he or his legal
representative, as against such person or
partnership, subject to the prior rights of creditors
of the dissolved partnership:
(1) May have the value of his interest at the date
of dissolution ascertained; and
(2) Shall receive as an ordinary creditor:
(a) An amount equal to the value of his
interest in the dissolved partnership with
interest; or
(b) At his option or at the option of his legal
representative, in lieu of interest, the
profits attributable to the use of his right
32
 in the property of the dissolved
partnership. (Art. 1841, NCC)
Right to an account
In the absence of any agreement to the contrary,
the right to an account of his interest shall accrue
to any partner, or his legal representative at the
date of dissolution, as against:
(1) The winding up partners;
(2) The surviving partners; or
(3) The person or partnership continuing the
business (Art. 1842, NCC)
4. LIMITED PARTNERSHIP
Definition of Limited Partnership
A limited partnership is one formed by two or
more persons under the provisions of the
following article, having as members one or more
general partners and one or more limited
partners. The limited partners as such shall not
be bound by the obligations of the partnership.
(Art. 1843, NCC)
Characteristics of Limited Partnership
(1) A limited partnership is formed by
compliance with the statutory
requirements (Art. 1844, NCC)
(2) The business is controlled or managed by
one or more general partners, who are
personally liable to creditors (Arts. 1848 and
1850, NCC).
(3) One or more limited partners contribute to
the capital and share in the profits but do
not manage the business and are not
personally liable for partnership obligations
beyond their capital contributions (Arts.
1845, 1848 and 1856, NCC).
(4) Obligations or debts are paid out of the
partnership assets and the individual
property of the general partners (Art.
1843, NCC).
(5) The limited partners may have their
contributions back subject to conditions
prescribed by law (Arts. 1844 and 1957, NCC)
(De Leon & De Leon, Jr., Comments and Cases on
Partnership, Agency and Trusts, 2019, pp. 283-284)
In the Philippines a limited partnership duly
organized in accordance with law has a
personality distinct from that of its members; and
if it commits an act of bankruptcy, such as that of
failing for more than thirty days to pay debts
amounting to P1,000 or more, it may be adjudged
insolvent on the petition of three of its creditors
although its members may not be insolvent.
(Campos Rueda & Co. v. Pacific Commercial Co., G.R.
No. 18703, August 28, 1922)

Limited Partnership Distinguished from General Partnership.

General Partnership Limited Partnership

As to their is composed of general partners only is composed of both general and
composition limited partners
As to is formal in nature, may be constituted must be constituted through a sworn
constitution in any form by contract or conduct of certificate of partnership in
the parties accordance with Article 1844(1) which
must be registered with SEC Article
1844(2), in compliance set forth by
law
As to firm name must operate under a firm name must include the word “Limited”
As to dissolution There are also differences, formal and procedural, between the dissolution and
and winding up winding up of a general partnership and that of a limited partnership.
(Jurado, Civil Law Reviewer, 2019, p. 1131; Aquino and Sundiang Sr., Reviewer on Commercial Law, 2022
Ed., p. 242; De Leon & De Leon, Jr., Comments and Cases on Partnership, Agency and Trusts, 2019, pp.
286-287)

33
Limited Partner Distinguished from General Partner.

General Partner Limited Partner

As to their liability They may be made personally liable for Their liability is limited; they are not liable
partnership obligations if the partnership for partnership obligations beyond their
properties are not sufficient. contributions.

The exception is when the limited partner

takes part in the control of the business
(Art. 1848, NCC).
As to management They participate in the management of the They do not participate in the
participation partnership. management.
As to contribution They may contribute money, property or They can only contribute money or
industry property and not industry (Art. 1845,
NCC).
As to name Their name may appear in the partnership Their names may not appear in the
appearance in name. partnership name (Art. 1846, NCC).
partnership name
As to prohibition They cannot engage in competing business They are not subject to this same
to business for capitalist partners, or in any business limitation or prohibition.
engament for industrial partners.
As to rights The right of a general partner cannot be The right of a limited partner is
assigned to make the transferee a partner assignable and the assignee acquires all
unless the other partners consent (Arts. rights of the assignor as limited partner
1812 and 1813, NCC). (Art. 1859, NCO.
As to dissolution Retirement, death, insolvency, insanity or Death of a limited partner does not
civil interdiction of a general partner dissolve the partnership (Art. 1861, NCO.
generally dissolves the partnership (Art.
1860, NCC).
As a party to court A general partner may be a proper party to A limited partner is not a proper party in
proceeding a court proceeding by or against the a case by or against the partnership.
partnership (Art. 1853, NCC).
As to obligation The obligations to general partners are Obligations to limited partners and other
given less priority in case of dissolution and creditors shall be settled first in case of
liquidation. liquidation (Arts. 1854, 1856, and
1857[1], NCC).
As to return of the The return of the capital of general The return of the capital of limited
capital partners is given less priority in case of partners is given preference over the
dissolution and liquidation. return of capital of general partners in
case of dissolution and liquidation.
(Aquino and Sundiang Sr., Reviewer on Commercial Law, 2022 Ed., pp. 242-244)

34
Formation of Limited Partnership
(a) General Requirements
Two or more persons desiring to form a limited
partnership shall:
(1) Sign and swear to a certificate stating the
items in Art. 1844;
(a) Name of partnership plus the word
"Limited"
(b) Character of business
(c) Location of principal place of business
(d) Name/place of residence of members
(e) Term for partnership is to exist
(f) Amount of cash/value of property
contributed
(g) Additional contributions
(h) Time agreed upon to return contribution
of limited partner
(i) Sharing of profits/other compensation
and
(2) File for record the certificate in the Office
of Securities and Exchange Commission
(Art. 1844, NCC)
A limited partnership is formed if there is
substantial compliance in good faith with the
requirements under Art. 1844. When there is
failure to substantially comply with the
requirements:
(1) In relation to third persons, the partnership is
general, unless they recognized that the firm
is a limited partnership; and
(2) As between the partners, the partnership
remains limited, since they are bound by their
agreement. (Jo Chung Cang vs. Pacific
Commercial Co., G.R. No. 19892. September 6,
1923)
(b) Purpose of Filing
(1) To give actual or constructive notice to
potential creditors or persons dealing
with the partnership; and
(2) To acquaint them with its essential
features, including the limited liability of
limited partners (De Leon & De Leon, Jr.,
Comments and Cases on Partnership, Agency
and Trusts, 2019, p. 289)
Surname of limited partner appears in
partnership name
General Rule Exception
The surname of a (1) It is also the surname of a
limited partner general partner; or
shall not appear (2) Prior to the time when the
in the partnership limited partner became
name. such, the business had
been carried on under a
name in which his
surname appeared.
A limited partner whose surname appears in a
partnership name contrary to this prohibition is
liable as a general partner to partnership
creditors who extend credit without actual
knowledge that he is not a general partner. (Art.
1846, NCC)
False Statement in the Certificate
If the certificate contains a false statement, one
who suffers loss by reliance thereon may hold
liable any party to the certificate who knew the
statement to be false:
(1) At the time he signed the certificate; or
(2) Subsequently, but within a sufficient time
before the statement was relied upon to
enable him to cancel or amend the certificate,
or to file a petition for its cancellation or
amendment. (Art. 1847, NCC)
Note: Article 1847 does not say that the guilty
partner shall be liable as a general partner. The
liability imposed by Article 1847 is merely a
statutory penalty and does not make the limited
partner a general partner for all purposes, even
as to third persons.
Management; Consent/Ratification of All
Limited Partners Needed
A general partner in a limited partnership is
vested with the entire control of the firm’s
business and has all the rights and powers and is
subject to all the liabilities and restrictions of a
partner in a partnership without limited partners
35
However, written consent or ratification by all
limited partners is necessary to authorize the
general partners to:
(1) Do any act in contravention of the certificate;
(2) Do any act which would make it impossible to
carry on the ordinary business of the
partnership;
(3) Confess a judgment against the partnership;
(4) Possess partnership property, or assign their
rights in specific property, for other than a
partnership purpose;
(5) Admit a person as a general partner;
(6) Admit a person as a limited partner, unless
the right to do so is given in the certificate;
(7) Continue the business with partnership
property on the:
(a) Death;
(b) Retirement;
(c) Insanity;
(d) Civil interdiction; or
(e) Insolvency of a general partner, unless
the right so to do is given in the
certificate
The general partner who violates the requirement
imposed by Article 1850 is liable for damages to
the limited partners. (Art. 1850, NCC)
Specific Rights of Limited Partners; In
General
(Art. 1851, NCC)
A limited partner shall have the same rights as a
general partner to:
(1) Require that the partnership books be kept at
the principal place of business of the
partnership;
(2) To inspect and copy any of them at a
reasonable hour;
(3) To demand true and full information of all
things affecting the partnership;
(4) To demand a formal account of partnership
affairs whenever circumstances render it just
and reasonable;
(5) To ask for dissolution and winding up by
decree of court;
(6) To receive a share of the profits or other
compensation by way of income (Art. 1856,
NCC); and
(7) To receive the return of his contribution
provided the partnership assets are in excess
of all its liabilities (Art. 1857, NCC).
General and Limited Partner at the Same
Time
A person may be a general and a limited partner
in the same partnership at the same time.
This fact must be stated in the certificate.
Such person shall have: all the rights and powers,
and be subject to all the restrictions of a general
partner, except that, in respect to his contribution
as a limited partner, he shall have the rights
against the other members which he would have
had if he were not also a general partner (Art.
1853, NCC)
Right to Transact Business with the
Partnership
A limited partner (who is not a general partner)
may:
(1) Grant loan money to the partnership;
(2) Transact other business with the partnership;
and
(3) Receive a pro rata share of the partnership
assets with general creditors if he is not also
a general partner
Limitations: A limited partner, with respect to his
transactions with the partnership, cannot:
(1) Receive or hold as collateral security any
partnership property; or
(2) Receive any payment, conveyance, or release
from liability if it will prejudice the right of
third persons
Violation of the prohibition is considered a fraud
on the creditors of the partnership. (Art. 1854,
NCC)
Preference of Limited Partners
General rule Exception
The limited By an agreement of all the
partners stand partners [general and limited]
on equal stated in the certificate, priority or
footing preference may be given to some
36
 limited partners over others with
respect to:
(1) The return of contributions;
(2) Their compensation by way of
income; or
(3) Any other matter
(Art. 1855, NCC)
Right to Share in Profits
A limited partner may receive from the
partnership the share of the profits or the
compensation by way of income stipulated for in
the certificate.
This right is subject to the condition that
partnership assets will still be in excess of
partnership liabilities after such payment. The
partnership liabilities being referred to exclude
the liabilities to the limited and general partners.
(Art. 1856, NCC)
Right to Return of Contribution
A limited partner may have his contributions
withdrawn or reduced when:
(1) All the liabilities of the partnership, except
liabilities to general partners and to limited
partners on account of their contributions,
have been paid or there remains property of
the partnership sufficient to pay them;
(2) The consent of all members is had, unless the
return may be demanded as a matter of
right; and
(3) The certificate is cancelled or so amended as
to set forth the withdrawal or reduction (Art.
1857[1], NCC)
When return of contribution a matter of
right
The return of his contributions may be
demanded, as a matter of right [i.e., even when
not all the other partners consent]:
(1) On the dissolution of the partnership;
(2) Upon the arrival of the date specified in the
certificate for the return; or
(3) After the expiration of a 6-month notice in
writing given by him to the other partners, if
no time is fixed in the certificate for:
(a) The return of the contribution; or
(b) The dissolution of the partnership (Art.
1857[2], NCC)
Right of limited partner to cash in return for
contribution
General rule Exception
A limited partner, He may receive his
irrespective of the contribution in a form
nature of his other than cash when:
contribution has only (1) There is a statement
the right to demand in the certificate to the
and receive cash in contrary; or
return for his (2) All the members of the
contribution. partnership consent
(Art. 1857[3], NCC)
Right to Ask for Dissolution
Dissolution of judicial decree. – A limited partner
may have the partnership dissolved and its affairs
wound up when:
(1) He rightfully but unsuccessfully demands the
return of his contribution; or
(2) He has a right to contribution but his
contribution is not paid because the
partnership property is insufficient to pay its
liabilities (Art. 1857[4], NCC)
Liability of limited partner
A limited partner is liable to the partnership:
(1) For the difference between his contribution
as actually made and that stated in the
certificate as having been made; and
(2) For any unpaid contribution which he agreed
in the certificate to make in the future at the
time and on the conditions stated in the
certificate. (Art. 1858[1], NCC)
A limited partner holds as trustee for the
partnership:
(1) Specific property stated in the certificate as
contributed by him, but which was not
contributed or which has been wrongfully
returned, and
(2) Money or other property wrongfully paid or
conveyed to him on account of his
contribution. (Art. 1858 [2], NCC)
37
Requisites for waiver or compromise of liabilities Effect of retirement, death, civil
The waiver or compromise shall: interdiction, insanity or insolvency of a
(1) Be made with the consent of all partners; and partner
(2) Not prejudice partnership creditors who (1) General partner – The partnership is
extended credit or whose claims arose before dissolved unless the business is continued by
the cancellation or amendment of the the remaining general partners:
certificate. (Art. 1858 [3], NCC) (a) Under the right stated in the certificate;
or
Liability for return of contribution lawfully (b) With the consent of all the partners.
received. (2) Limited partner – The partnership is not
dissolved except all limited partners cease to
The limited partner is liable to the partnership for be such. (Art. 1860, NCC)
the return of contribution lawfully received by him
(Art. 1857) to pay creditors who extended credit Rights of the executor/administrator on
or whose claim arose before such return. His the death of the limited partner
liability, of course, cannot exceed the sum
received by him (Art. 1843) with interest. (Art. (1) All the rights of a limited partner for the
1858 [4], NCC) purpose of settling his estate
(2) To have the same power as the deceased had
Substituted limited partner to constitute his assignee as substituted
limited partner.
It is a person admitted to all the rights of a limited
partner who has died or assigned his interest in The estate of a deceased limited partner shall be
the partnership. liable for all his liabilities as a limited partner.
(Art. 1861, NCC)
Rights and liabilities of a substituted
limited partner Rights of creditors of limited partner
The creditor of a limited partner may apply to the
General rule Exception proper court for an order charging the limited
He has all the rights Those liabilities which he partner’s interest in the partnership for the
and powers and is was ignorant of at the time payment of any unsatisfied amount of his claim.
subject to all the that he became a limited
restrictions and partner and which could The interest so charged may be redeemed with
liabilities of his not be ascertained from
the separate property of any general partner but
assignor. the certificate
not with partnership property. (Art. 1862, NCC)
(Art. 1859, NCC)
Dissolution of a limited partnership
Requirements for the admission of a
substituted limited partner
Causes
(1) All the members must consent to the
assignee becoming a substituted limited
General rule Exception
partner or the limited partner, being
The retirement, It is not so dissolved when
empowered by the certificate must give the death, insolvency, the business is continued
assignee the right to become a limited insanity or civil by the remaining general
partner; interdiction of a partners, under a right to
(2) The certificate must be amended in general partner do so stated in the
accordance with Art. 1865 of the NCC; and dissolves the certificate or with the
(3) The certificate as amended must be partnership. consent of all members
registered in the SEC. (Art. 1859, NCC; De Leon
& De Leon, Jr., Comments and Cases on (De Leon & De Leon, Jr., Comments and Cases on
Partnership, Agency and Trusts, 2019, p. 317) Partnership, Agency and Trusts, 2019, pp. 320-1)

38
Suit for dissolution
A limited partner may bring a suit for the
dissolution of the firm, an accounting, and the
appointment of a receiver when the misconduct
of a general partner or the insolvency of the firm
warrants it (ibid.)
Notice of dissolution
When the firm is dissolved by the expiration of
the term fixed in the certificate, notice of the
dissolution need not be given since the papers
filed and recorded in the Securities and Exchange
Commission are notice to all the world of the term
of the partnership. (ibid.)
Where, however, the dissolution is by the express
will of the partners, the certificate shall be
cancelled, and a dissolution of the partnership is
not effected until there has been compliance with
the requirement in this respect. (ibid.)
Settlement of Accounts
(a) Order of Payment
In settling accounts after dissolution, the
liabilities of the partnership shall be entitled to
payment in the following order:
(1) Those to creditors, including limited partners
except those on account of their
contributions, in the order of priority as
provided by law;
(2) Those to limited partners in respect to their
share of the profits and other compensation
by way of income in their contributions;
(3) Those to limited partners in respect to the
capital of their contributions;
(4) Those to general partners other than for
capital and profits;
(5) Those to general partners in respect to
profits;
(6) Those to general partners in respect to
capital (Art. 1863, NCC)
Note: In settling accounts of a general
partnership, those owing to partners in respect to
capital enjoy preference over those in respect to
profits.
(b) Share in the Partnership Assets
The share of limited partners in respect to their
claims for capital, profits, or for compensation by
way of income, is in proportion of their
contribution, unless:
(1) There is a statement in the certificate as to
their share in the profits; or
(2) There is a subsequent agreement fixing their
share (Art. 1863, NCC)
Amendment or Cancellation of Certificate
(a) Cancellation of Certificate
The certificate shall be cancelled when:
(1) The partnership is dissolved; or
(2) All limited partners cease to be such
limited partners. (Art. 1864, NCC)
(b) Amendment of Certificate
A certificate shall be amended when:
(1) There is a change in the name of the
partnership or in the amount or character
of the contribution of any limited partner;
(2) A person is substituted as a limited
partner;
(3) An additional limited partner is admitted;
(4) A person is admitted as a general
partner;
(5) A general partner retires, dies, becomes
insolvent or insane, or is sentenced to
civil interdiction and the business is
continued;
(6) There is a change in the character of the
business of the partnership;
(7) There is a false or erroneous statement
in the certificate;
(8) There is a change in the time as stated in
the certificate for the dissolution of the
partnership or for the return of a
contribution;
(9) A time is fixed for the dissolution of the
partnership, or the return of a
contribution, no time having been
specified in the certificate; or
(10) The members desire to make a
change in any other statement in the
certificate in order that it shall accurately
represent the agreement among them.
(Art. 1864, NCC)
39
Requirements for Amendment or
Cancellation
To amend or cancel a certificate:
(1) The amendment or cancellation must be in
writing;
(2) It must be signed and sworn to by all the
members including the new members, and
the assigning limited partner in case of
substitution or addition of a limited or general
partner; and
(3) The writing to amend (with the certificate, as
amended) or to cancel must be filed for
record in the SEC. (Art. 1865, NCC)
Limited Partnerships Formed Prior to the
CC
Limited partnerships formed under the law prior
to the CC may
(1) continue to be governed by the provisions of
the old law
(2) become a limited partnership under the CC
by compliance with Art. 1844, provided that
the certificate states:
(a) the amount of the original contribution of
each limited partner and the time it was
made; AND
(b) that the partnership assets exceeds its
liabilities to third persons by an amount
greater than the sum of all limited
partner’s contributions
B. CORPORATIONS
1. DEFINITION OF CORPORATION
Corporation
A corporation is an artificial being created by
operation of law, having the right of succession
and the powers, attributes, and properties
expressly authorized by law or incidental to its
existence. (Section 2, Revised Corporation Code
[RCC])
Attributes of a Corporation
(1) It is an artificial being;
(2) It is created by operation of law;
(3) It has the right of succession; and
(4) It has only the powers, attributes and
properties expressly authorized by law or
incident to its existence. (Sec. 2, RRC)
(1) It is an artificial being (Juridical
Personality);
A corporation is a being; it is a separate
juridical entity. As a juridical entity, the
corporation has rights and obligations under
existing laws. (Aquino & Aquino, Commentaries
and Jurisprudence on the Revised Corporation
Code of the Philippines, 2020 edition, p. 47)
As a juridical person, it may own properties,
exercise rights, and incur obligations
independently of the persons comprising it. A
corporation may invoke the right against
unreasonable search and seizure. (Stonehill
vs. Diokno, G.R. No. L-19550, June 19, 1967)
However, it cannot invoke the right against
self-incrimination. (BASECO vs. PCGG, G.R. No.
75885, May 27, 1987)
A corporation, being an artificial person and
having existence only in legal contemplation,
has no feelings, no emotions, no senses;
therefore, it cannot experience physical
suffering and mental anguish. (LBC Express,
Inc. vs. Court of Appeals, G.R. No. 108670,
September 21, 1994) However, while a
corporation cannot experience wounded
feelings, anxiety, and sleepless nights, which
are the causes of moral damages under Article
2217 of the New Civil Code, it may acquire
goodwill or reputation of its own, which, if
besmirched or tarnished, entitles the
corporation to moral damages. (Filipinas
Broadcasting Network vs. Ago Medical and
Educational Center, G.R. No. 141994, January 17,
2005)
(2) It is created by operation of law
(Concession Theory);
A corporation is a creation of and is purely
dependent on the State’s will. A corporation is
a creation of statute that defines its powers
and prescribes rules for the regulation of its
internal as well as its business affairs. (Aquino
40
 & Aquino, Commentaries and Jurisprudence on the
Revised Corporation Code of the Philippines, 2020
edition, p. 48)
A corporation is not created by mere
agreement of the incorporators nor by their
execution of the articles of incorporation.
There ought to be a law from which the
corporation derives its legal existence. (Divina,
Questions and Answers on the Revised Corporation
Code, 2020 edition, p. 3)
(3) It has the right of succession (Perpetual
Succession);
Perpetual succession is that continuous
existence which enables a corporation to
manage its affairs, and hold property without
the necessity of perpetual conveyances, for
purposes of transmitting it. By reason of this
quality, this ideal and artificial person remains,
in its legal entity and personality, the same,
though frequent changes may be made of its
members. (Black’s Law Dictionary, 6th edition, p.
1141)
“All individual members that have existed from
the foundation to the present time, or that
shall ever hereafter exist, are but one person
in law, a person that never dies; in like manner
as the River Thames is still the same river,
though parts which compose it are changing
every instant.” (1 Blackstone Commentaries, pp.
467-468)
(4) It has powers, attributes, and
properties expressly authorized by law
or incidental to its existence. (Sec. 2,
RCC)
A corporation can only exercise powers
conferred upon it:
 By law (Sec. 35, Sec. 36-43, RCC);
 Its articles of incorporation, those implied
from the conferred powers (Sec. 35, RCC);
or
 Incidental to its existence (Sec. 44, RCC)
Any act of the corporation contrary to or
outside these powers is ultra vires. (Divina,
Questions and Answers on the Revised Corporation
Code, 2020, p. 4)
2. CLASSES OF CORPORATIONS
Classes of Corporations
A. As to the existence of shares of stock
(a) Stock corporations – are those which
have capital stock divided into shares and
are authorized to distribute to the holders
of such shares, dividends, or allotments of
the surplus profits on the basis of the
shares held. All other corporations are
nonstock corporations. (Sec. 3, RCC)
Requisites of a stock corporation:
i. It has a capital stock divided into shares;
and,
ii. It is authorized to distribute dividends or
allotments as surplus profits to its
stockholders on the basis of the shares
held by each of them
Although a corporation has a capital stock
divided into shares if it is not authorized to
distribute dividends and allotment of surplus
and profits to its stockholders, it may not be
classified as a stock corporation because it
lacks the second requisite. (Republic vs. City of
Parañaque, G.R. No. 191109, July 18, 2012)
(b) Non-stock corporations – are those
which have no capital stock, do not issue
stocks, and do not distribute dividends to
its members. (Aquino & Aquino,
Commentaries and Jurisprudence on the
Revised Corporation Code of the Philippines,
2020 edition, p. 137)
Requisites of a Non-stock corporation:
i. No part of its income is distributable as
dividends to its members; and.
ii. It may be formed or organized for
charitable, religious, educational,
professional, cultural, civic service,
fraternal, literary, or similar purposes like
41
 trade, industry, agricultural and like
chambers or any combination thereof.
(Sec. 86 and 87, RCC)
Purposes of non-stock corporations
Non-stock corporations may be formed or
organized subject to the special provisions
governing particular classes of non-stock
corporations for:
(1) Charitable,
(2) Religious,
(3) Educational,
(4) Professional,
(5) Cultural,
(6) Fraternal,
(7) Literary,
(8) Scientific,
(9) Social,
(10) Civic service,
(11) Or similar purposes, like trade, industry,
agricultural and like chambers,
(12) Or any combination thereof. (Sec. 87, RCC)
Treatment of profits
Any profit which a non-stock corporation may
obtain as an incident to its operations shall,
whenever necessary or proper, be used for the
furtherance of the purpose or purposes for which
the corporation was organized, subject to the
provisions of this Title. (Sec. 86, RCC)
The actual purpose is not controlled by the
corporate form or by the commercial aspect of
the business prosecuted, but may be shown by
extrinsic evidence, including the by-laws and the
method of operation. The essence of a non-stock
non-profit corporation is not the non-existence of
shares of stock to cover its capital but that:
(1) Its primary purpose should be any of those
under Sec. 87 of the Revised Corporation
Code, and
(2) There is a prohibition in the articles of
incorporation and by-laws that no part of the
income or any form of dividend is
distributable to the members, trustees, and
officers of the corporation (Collector of Internal
Revenue vs. Club Filipino, Inc. de Cebu, G.R. No.
L-12719, 1962)
B. As to whether for public or private
purpose
(a) Public – created for the purpose of
government and management of public
affairs founded by the State and managed
by it for governmental purposes. (Aquino &
Aquino, Commentaries and Jurisprudence on the
Revised Corporation Code of the Philippines, 2020
edition, p. 141)
(b) Private – formed for some private purpose,
welfare, benefit, aim, or end.
“The mere fact that the Government happens
to be the majority stockholder does not make
it a public corporation. No provisions of Act
No. 2705 are found to be inconsistent with the
provisions of the Corporation Law. As a private
corporation, it has no greater rights, powers
or privileges than any other corporation which
might be organized for the same purpose
under the Corporation Law, and certainly it
was not the intention of the Legislature to give
it a preference or right or privilege over other
legitimate private corporations in the mining
of coal.” (National Coal Company vs. Collector of
Internal Revenue, G.R. No. L-22619, December 2,
1924)
(c) Quasi-Public – corporations like railroad
and canal corporations that are engaged in
private business affected with public
interest. (Philippine National Railways vs.
Intermediate Appellate Court, G.R. No. 70547
January 22, 1993)
Test whether public or private corporation:
The true test to determine the nature of a
corporation as public or private is found in the
relation of the body to State. Strictly speaking,
a public corporation is one that is created,
formed or organized for political or
governmental purposes with political powers
to be exercised for purposes connected with
the public good in the administration of civil
government. (Ladia and Reyes, The Revised
Corporation Code of the Philippines, Annotated,
2021, p. 15)
42
 Dual status of public corporations:
Every local government unit created or
recognized under the Code is a body politic
and corporate endowed with powers to be
exercised by it in conformity with law. As such,
it shall exercise powers as a political
subdivision of the national government and as
a corporate entity representing the inhabitants
of its territory. (Sec. 15, Local Government Code
of 1991)
A public or municipal corporation possesses
two kinds of power, governmental or public
and proprietary or private. In the exercise of
the former, it is a municipal government, while
as to the latter; it is a “corporate legal
individual.”
C. As to governing law
(a) Government-owned and controlled
corporation (GOCC) - are regarded as
private corporations. That the government
may own the controlling shares in the
corporation does not diminish the fact that
the latter owes its existence to the
Corporation Code. (Philippine National
Construction Corp. vs. Pabion, G.R. No. 131715,
December 8, 1999)
i. With original charter or created by special
law – governed by the special law
creating it; civil service laws Section 16,
Article XII of the 1987 Constitution
expressly prohibits the creation or
establishment of private corporations
through special laws except government-
owned or controlled corporations.
(Veterans Federation of the Philippines vs.
Reyes, G.R. No. 155027, February 28, 2006)
ii. Incorporated under the general law or
RCC – governed by the RCC and the
Labor Code (Salenga vs. Court of Appeals,
G.R. No. 174941, February 1, 2012)
In order to qualify as a GOCC, one must be
organized either as a stock or non-stock
corporation. Section 3 defines a stock
corporation as one whose “capital stock is
divided into shares and ... authorized to
distribute to the holders of such shares
dividends.” BCDA has an authorized capital of
P100 Billion, however, it is not divided into
shares of stock; it has no voting shares; and has
no provision which authorizes the distribution of
dividends and allotment of surplus and profits
to BCDA’s stockholders. It is clear that BCDA is
neither a stock nor a nonstock corporation
because its primary purpose does not fall within
the purposes enumerated under Section 88.
BCDA is a government instrumentality vested
with corporate powers. (BCDA v. CIR, G.R. No.
205925, 20 June 2018)
(b) Private – governed by the RCC. The RCC is
also the governing law for non-chartered
GOCC. (Divina, Divina on Commercial Law, A
Comprehensive Guide, Vol. I, 2021, p. 410)
D. As to their legal right to corporate
existence
(a) De Jure – “a matter of law;” fulfilled all
requirements mandated by law and can
successfully resist a suit by the State to
challenge its existence (Divina, Questions and
Answers on the Revised Corporation Code, 2020
edition, p. 42)
(b) De Facto – “a matter of fact;” organized
with colorable compliance with the
requirements mandated by law and shall not
be inquired collaterally in any private suit in
which such corporation may be a party. Such
inquiry may be made by the Solicitor General
in a quo warranto proceeding. (Sec. 19, RCC)
Requisites of a De Facto Corporation:
(1) There is a valid statute under which the
corporation could have been created as a
de jure corporation (or according to some,
an apparently valid statute);
(2) An attempt, in good faith, to form a
corporation according to the requirements
of law, which goes far enough to amount
to a “colorable compliance” with the law;
43
 (3) A user of corporate powers, the transaction strength of such appearance. Anyone who
of business in some way as if it were a assumes an obligation to an ostensible
corporation; and corporation as such cannot resist
performance thereof on the ground that
(4) Good faith in claiming to be and doing there was in fact no corporation. (Sec. 20,
business as a corporation. (Ladia and Reyes, RCC)
The Revised Corporation Code of the
Philippines, Annotated, 2021, p. 70) General Rule:
All persons, not stockholders and members, who
Persons acting as corporation may not claim assume to act as a corporation knowing it to be
rights of "de facto" corporation if they have without authority to do so shall be liable as
not obtained certificate of incorporation. (Hall general partners for all debts, liabilities, and
vs. Piccio, G.R. No. L-2598. June 29, 1950) damages incurred or arising as a result thereof.
(Sec. 20, RCC)
The filing of Articles of Incorporation and the
issuance of the certificate of incorporation are A person acting or purporting to act on behalf of
essential for the existence of a de facto a corporation which has no valid existence
corporation. An organization not registered with assumes such privileges and obligations and
the Securities and Exchange Commission (SEC) becomes personally liable for contracts entered
cannot be considered a corporation in any into or for other acts performed as such agent.
concept, not even as a corporation de facto. (Albert vs. University Publishing Co., Inc., G.R. No. L-
(Seventh Day Adventist Conference Church of 19118, January 30, 1965)
Southern Philippines, Inc. vs. Northeastern Mindanao De Jure De Facto Corporation
Mission of Seventh Day Adventist, Inc., G.R. No. Corporation
150416, July 21, 2006) As to Creation
organized in organized with colorable
Instances when there is a de facto corporation: accordance with the compliance with the
(1) Failure to give the notice required by the requirements of the requirements mandated
statue for the meeting for its organization; law by law
(2) Failure to fix and limit the amount of capital As to Availability of Quo Warranto
stock of the company at the first meeting; Proceedings
(3) Failure to issue stocks; Not available Available
(4) Informalities in the proceedings of corporate
Only the State, however,
meetings;
can institute a quo
(5) Lack of certificate of organization filed or
warranto proceeding to
executed; directly attack the
(6) Lack of elected Board of Directors; existence of a de facto
(7) Irregularities with respect to the number, corporation. Private
term, place of residence, and meeting of the persons cannot directly,
Board of Directors; much less, collaterally
(8) Some of the persons elected as directors are attack its existence. (Ladia
disqualified; and and Reyes, The Revised
(9) In general, when there is defect in the
Corporation Code of the
Philippines, Annotated,
organization of the corporation and not on its 2021, p. 71)
creation. (Chung Ka Bio vs. IAC, G.R. No. 71837,
July 26, 1988)
In the absence of fraud, a person who has
contracted or otherwise dealt with an association
(c) By Estoppel – a group of persons who
in such a way as to recognize and in effect admit
holds itself out as a corporation and enters
its legal existence as a corporate body is thereby
into a contract with a third person on the
estopped to deny its corporate existence in any

44
action leading out of or involving such contract or
dealing, unless its existence is attacked for
because which have arisen since making the
contract or other dealing relied on as an estoppel
and this applies to foreign as well as to domestic
corporations. (Asia Banking Corporation vs. Standard
Products Co., G.R. No. 22106. September 11, 1924)
Exceptions:
(1) Fraud - while as a general rule, a person who
has contracted or dealt with an association in
such a way as to recognize its existence as a
corporate body is estopped from denying the
same in an action arising out of such
transaction or dealing, yet this doctrine may
not be held to be applicable where fraud
takes part in the said transaction. (Salvatierra
vs. Garlitos, G.R. No. L-11442, May 23, 1958)
(2) Third party claiming from the contract -
When such persons are not trying to escape
liability from the contract from which they
have benefited but rather are the ones
claiming from the contract. (International
Express vs. CA, G.R. No. 119002, October 19,
2000)
(3) Third party claiming from the contract,
foreign corporation- the doctrine of
estoppel applies to foreign corporations doing
business although not authorized to do so, as
if it is not allowed it would result to injustice
on the part of the corporation (Georg Grotjahn
GMBH & Co. vs. Isnani, G.R. No. 109272, August
10, 1994)
An unincorporated association, which
represented itself to be a corporation, will be
estopped from denying its corporate capacity
in a suit against it by a third person who relied
in good faith on such representation. Also, a
third party who, knowing an association to be
unincorporated, nonetheless treated it as a
corporation and received benefits from it, may
(Subsidiary)
be barred from denying its corporate
47.4%
existence in a suit brought against the alleged
corporation. (Lim vs. Philippine Fishing Gear
Industries, Inc, G.R. No. 136448, November 3,
1999)
Where there is no third person involved and
the conflict arises only among those assuming
to form a corporation, who therefore know
that it has not been registered, there is no
corporation by estoppel. (Lozano vs. De los
Santos, G.R. No. 125221. June 19, 1997)
(d) By Prescription – not formally organized as
such but has been duly recognized by
immemorial usage as a corporation, with
rights and duties enforceable under the law.
(Aquino & Aquino, Commentaries and
Jurisprudence on the Revised Corporation Code of
the Philippines, 2020 edition, p. 136)
E. As to relationship of management and
control
(a) Holding corporation – holds stocks in
other companies for purposes of control;
(b) Subsidiary corporation – owned or
controlled by another company called the
parent company;
(c) Affiliates – two companies are affiliates
when one company owns less than the
majority of the voting stock of the other;
(d) Parent company – owns enough voting
stock in another company to control
management and operation. (Divina,
Questions and Answers on the Revised
Corporation Code, 2020 edition, p. 43)
Illustration:
AYALA CORPORATION
(Holding Corporation)
Ayala BPI Globe ACEN
Land
(Subsidiary) (Subsidiary) (Subsidiary)
48.6% 30.9% 65%
45
F. As to place of incorporation
(a) Domestic – formed, organized, or
existing under Philippine laws; (Sec. 140,
RCC)
I.
It is organized or created under or by virtue
of Philippine laws, either by legislative act
or under the provisions of the General
Corporation Law. (Ladia and Reyes, The
Revised Corporation Code of the Philippines,
Annotated, 2021, p. 17)
(b) Foreign – formed, organized, or existing
under laws other than those of the
Philippines and whose laws allow Filipino
citizens and corporations to do business in
its own country or State. (Sec. 140, RCC)
G. As to whether they are for religious
purpose or not
(a) Ecclesiastical – exclusive of spiritual
persons; established for the furtherance of
religion and for the perpetuation of church
rights; (Aquino & Aquino, Commentaries and
Jurisprudence on the Revised Corporation
Code, 2020 edition, p. 137)
J.
(b) Lay – corporations for purposes other than
(ibid.)
It is established for purposes other than
religion. (Ladia and Reyes, The Revised
Corporation Code of the Philippines,
Annotated, 2021 edition, p. 16)
H. As to whether they are for charitable
purpose or not
(a) Eleemosynary – corporations for
charitable and benevolent purposes;
It is created for charitable and benevolent
purposes such as those organized for the
purpose of maintaining hospital and
houses for the sick, aged or poor. (Ladia
and Reyes, The Revised Corporation Code of
the Philippines, Annotated, 2021, p. 16)
(b) Civil – organized for the benefit of its
members. (Aquino & Aquino, Commentaries
and Jurisprudence on the Revised Corporation
Code, 2020 edition, p. 138)
As to whether they are open to the
public or not
(a) Open Corporations - formed to openly
accept outsiders or stockholders or
investors; (Villanueva-Castro, Commercial Law
Recap, 2020 edition, p. 10)
(b) Close corporation – one whose articles
of incorporation provide that:
i. All of the corporation’s issued stocks of
all classes, exclusive of treasury shares,
shall be held of record by not more than
a specified number of persons, not
exceeding twenty;
ii. All issued stocks of all classes shall be
subject to one or more specified
restrictions on transfer permitted; and
iii. Corporation shall not list in any stock
exchange or make any public offering
of its stocks of any class (Sec. 95, RCC)
Other classifications
(a) Special corporations
i. Educational corporations – organized
for educational purposes (Sec. 105, RCC)
 Non-stock educational corporation
– trustees of educational institutions
organized as nonstock corporations shall
not be less than five nor more than
fifteen, provided that the number of
trustees shall be in multiples of five (Sec.
106, RCC)
 Stock educational corporation – for
institutions organized as stock
corporations, the number and term of
directors shall be governed by the
provisions on stock corporations (Sec.
106, RCC)
46
 ii. Religious corporations
 Corporation sole – formed for the
purpose of administering and managing,
as trustee, the affairs, property and
temporalities of any religious
denomination, sect, or church, by the
chief archbishop, bishop, priest, rabbi, or
other presiding elder of such religious
denomination, sect or church. (Sec. 108,
RCC)
 Religious societies – A religious
corporation incorporated by any religious
society, religious order, diocese, synod,
or district organization of any religious
denomination, sect or church. (Sec. 114,
RCC)
(b) Going Public – a corporation is said to be
“going public” when its shares are being
made available for listing in the stock
exchange and for public offering/trading;
(Aquino & Aquino, Commentaries and
Jurisprudence on the Revised Corporation Code,
2020 edition, p. 138)
(c) Going Private – a corporation is “going
private” when it would restrict the
shareholders to a certain group. (ibid.)
K. One-person corporation
A corporation with a single stockholder, provided
that, only a natural person, trust, or an estate
may form a One-person corporation (Sec. 116,
RCC)
The following cannot be a One Person
Corporation:
(1) Banks and quasi-banks, preneed, trust,
insurance, public and publicly-listed
companies, and non-chartered government-
owned and controlled corporations;
(2) A natural person who is licensed to exercise
a profession except as provided under special
laws. (Sec. 116, RCC)
L. As to corporations vested with public
interest
i. Publicly-held corporations under Section
17.2 of the SRC whose securities are
registered with the SEC, corporations
listed with an exchange or with assets of
at least P50,000,000.00 and having 200
or more holders of shares, each holding
at least 100 shares of a class of its equity
shares;
ii. Banks and quasi-banks, non-stock
savings and loan associations,
pawnshops, corporations engaged in
money service business, preneed, trust
and insurance companies, and other
financial intermediaries; and
iii. Other corporations engaged in
businesses vested with public interest
similar to the above, as may be
determined by the SEC. (Sec. 22, RCC)
De Facto Corporation versus Corporation
by Estoppel
De Facto Corporation
A de facto corporation is one that is so defectively
created as not to be a de jure corporation but
nevertheless exists, for all practical purposes, as
a corporate body, by virtue of its bona fide
attempt to incorporate under existing statutory
authority, coupled with the exercise of corporate
powers. (Ladia and Reyes, The Revised Corporation
Code of the Philippines, Annotated, 2021 edition, p. 70)
De Facto Corporation; Requisites
(1) The existence of a valid law under which it
may be incorporated;
No de facto corporation will result if there is no
law under which the corporation is organized
even if the components thereof assume corporate
powers. To be a de facto corporation, it must be
possible to be a corporation de jure. The absence
of such law erases such possibility. (Aquino &
Aquino, Commentaries and Jurisprudence on the
Revised Corporation Code of the Philippines, 2020
edition, p. 266)
(2) An attempt in good faith to incorporate; and
47
The issuance of the Certificate of Incorporation is
essential to the claim of good faith. An association
of persons claiming to exercise the powers of a
corporation knowing that no Certificate of
Incorporation had yet been issued cannot claim
to be exercising such powers in good faith. (Hall
vs. Piccio, G.R. No. L-2598, June 29, 1950)
The filing of articles of incorporation and the
issuance of the certificate of incorporation are
essential for the existence of a de facto
corporation. We have held that an organization
not registered with the Securities and Exchange
Commission (SEC) cannot be considered a
corporation in any concept, not even as a
corporation de facto. (Seventh Day Adventist
Conference Church of Southern Philippines, Inc. vs.
Northeastern Mindanao Mission of Seventh Day
Adventists, Inc., G.R. No. 150416, July 21, 2006)
(3) An assumption of corporate powers (Seventh
Day Adventist Conference Church of Southern
Philippines, Inc. vs. Northeastern Mindanao Mission
of Seventh Day Adventists, Inc., G.R. No. 150416,
July 21, 2006)
A corporation must have exercised its franchise
to be a corporation by doing business under it.
There must be some corporate act or acts in
attempted execution of the powers conferred by
the Articles of Incorporation or by the special
charter granted by the legislature. The acts relied
upon as showing user must be corporate acts.
(Aquino & Aquino, Commentaries and Jurisprudence
on the Revised Corporation Code of the Philippines,
2020 edition, p. 268)
(4) Good faith in claiming to be and doing
business as a corporation. (Ladia and Reyes,
The Revised Corporation Code of the Philippines,
Annotated, 2021, p. 70)
Consequence of a de facto status
For all intents and purposes, a de facto
corporation has the same rights, powers,
obligations, and liabilities as a de jure
corporation. The only difference is that the due
incorporation of a de facto corporation may be
directly inquired into by the Solicitor General in a
quo warranto proceeding (Sec. 19, RCC)
A corporation organized under a statute
subsequently declared invalid cannot acquire the
status of a ‘de facto’ corporation unless there is
some other statute under which the supposed
corporation may be validly organized. (Municipality
of Malabang vs. Benito, G.R. No. L-28113, March 28,
1969)
Corporation by Estoppel
There is a corporation by estoppel when a group
of persons assumes to act as a corporation
knowing it to be without authority to do so, and
enters into a transaction with a third person on
the strength of such appearance. It cannot be
permitted to deny its existence in an action under
said transaction. (Sec. 20, RCC)
A corporation may exist on the ground of estoppel
by virtue of the agreement, admission, or conduct
of the parties such that they will not be permitted
to deny the fact of the existence of the
corporation. It is neither a corporation de jure nor
de facto because of serious defects in its
incorporation or organization and, unlike the de
facto doctrine, it does not involve a theory that
the irregular corporation has acquired a corporate
status generally. It applies to the consequences
of some particular transactions or acts done in
the corporate name by associates assuming to be
a corporation. (Ladia and Reyes, The Revised
Corporation Code of the Philippines, Annotated, 2021
edition, p. 75-76)
The doctrine of corporation by estoppel may
apply to the alleged corporation or to a third-
party transacting with the former.
The doctrine of estoppel applies to a third party
only when he tries to escape liability on a contract
from which he has benefitted on the ground of
defective incorporation. It does not apply to a
third party who is not trying to escape liability
from the contract, but rather is the one claiming
from the contract. (International Express Travel vs.
Court of Appeals, G.R. No. 119002, October 19, 2000)
48
Liability
All persons who assume to act as a corporation
knowing it to be without authority to do so shall
be liable as general partners for all debts,
liabilities and damages incurred or arising as a
result thereof.
When any such ostensible corporation is sued on
any transaction entered by it as a corporation or
on any tort committed by it as such, it shall not
be allowed to use its lack of corporate personality
as a defense.
Anyone who assumes an obligation to an
ostensible corporation as such cannot resist
performance thereof on the ground that there
was in fact no corporation. (Sec. 20, RCC)
All those who derived benefit from the transaction
made by the ostensible corporation, despite
knowledge of its legal defects, may be held liable
for contracts they impliedly assented to or took
advantage of. (Lim vs. Philippine Fishing Gear
Industries, Inc., G.R. No. 136448, November 3, 1999)

DE FACTO CORPORATION CORPORATION BY ESTOPPEL

As to existence
It exists as a corporation, separate and distinct from the A corporation may exist on the ground of estoppel by
stockholders or members. (Ladia and Reyes, The Revised virtue of the agreement, admission, or conduct of the
Corporation Code of the Philippines, Annotated, 2021 parties such that they will not be permitted to deny the
edition, pp. 70) fact if the existence of the corporation. But it is neither
a corporation de jure nor de facto because of serious
defects in its incorporation or organization, and it does
not involve a theory that the irregular corporation has
acquired a corporate status generally. (Ladia and Reyes,
The Revised Corporation Code of the Philippines,
Annotated, 2021 edition, pp. 75)
As to who can question its corporate existence
Only the State through the Solicitor General in a quo Any third person who relied in its representation in good
warranto proceeding. (Sec. 19, RCC) faith.
As to liabilities of the stockholders
Stockholder are liable in the same way as stockholders Stockholders are liable as general partners for all debts,
of a de jure corporation. They are liable only to the liabilities and damages incurred. (Sec. 20, RCC; Divina,
extent of their subscription to the corporation. Those Question & Answer on the Revised Corporation Code,
liable as general partners are persons who assume 2020, p. 145)
themselves to be a corporation when they have no legal
authority to do so. (Sec. 20, RCC; Divina, Question &
Answer on the Revised Corporation Code, 2020, p. 144).

49
3. NATIONALITY OF CORPORATIONS
The nationality of a corporation is determined by
law and not by the corporation and/or its
subsidiaries. It is the test or tests, as provided by
law, that should prevail in determining the
nationality of a corporation, and not its
representations and/or those of its subsidiaries.
(SEC-OGC Opinion No. 11-42 dated October 12, 2011)
Tests in determining the nationality of a
corporation:
Incorporation Test – the nationality of the
corporation is determined by the place of
incorporation. A corporation is a Philippine
national if it is organized and existing under
Philippine laws, regardless of nationality of the
shareholders. (Divina, Questions and Answers on the
Revised Corporation Code, 2020 edition, p. 47)
While the incorporation test serves as the primary
test under Philippine jurisdiction, other tests such
as the control test must be used for purposes of
compliance with the provisions of the Constitution
and of other laws on nationality requirements.
(SEC-OGC Opinion No. 11-42 dated October 12, 2011)
Presents for a simple method of determining the
nationality of a corporation, the main criterion
being the state of the incorporation, regardless of
the nationality of the stockholders. (SEC-OGC
Opinion No. 16-15)
a) CONTROL TEST
Control Test – mode of determining the
nationality of a corporation engaged in
nationalized areas of activities, provided for under
the Constitution and other applicable laws, where
corporate shareholders with foreign
shareholdings are present, by ascertaining the
nationality of the controlling stockholder of the
corporation. (Divina, Questions and Answers on the
Revised Corporation Code, 2020 edition, p. 47)
The "control test" is still the prevailing mode of
determining whether or not a corporation is a
Filipino corporation, within the ambit of Sec. 2,
Art. II of the 1987 Constitution, entitled to
undertake the exploration, development and
utilization of the natural resources of the
Philippines. (Narra Nickel Mining and Development
Corp vs Redmont Consolidated Mines Corp., G.R.
195580, April 21, 2014)
Shares belonging to corporations or partnerships
at least 60% of the capital of which is owned by
Filipino citizens shall be considered as of
Philippine nationality, but if the percentage of
Filipino ownership in the corporation or
partnership is less than 60%, only the number of
shares corresponding to such percentage shall be
counted as of Philippine nationality. (Narra Nickel
Mining and Development Corp vs. Redmont
Consolidated Mines Corp., G.R. 195580 (Resolution),
January 28, 2015)
Under Philippine jurisdiction, the primary test is
always the Place of Incorporation Test since we
adhere to the doctrine that a corporation is a
creature of the State whose laws it has been
created. A corporation organized under the laws
of a foreign country, irrespective of the nationality
of the persons who control it is necessarily a
foreign corporation. The control test and the
principal place of business test (siege social), are
merely adjunct tests, when the place of
incorporation test indicates that the subject
corporation is organized under Philippine laws.
(Villanueva, Philippine Corporate Law, p. 58 as cited in
SEC-OGC Opinion No. 11-42 dated October 12, 2011)
Corporations considered as “Philippine
Nationals” under Foreign Investment Act of
1991 (R.A. 7042):
Under the Foreign Investment Act of 1991 (RA
No. 7042), a corporation shall be considered a
“Philippine National” if it is:
(1) A corporation organized under Philippine laws
of which 60% of the capital stock outstanding
and entitled to vote is owned and held by
Filipino citizens; or
(2) A corporation organized abroad and
registered as doing business in the
Philippines under the Corporation Code of
which 100% of the capital stock entitles to
vote belong to Filipinos.
50
Where a corporation and its non-Filipino
stockholders’ own stocks in an SEC-registered
enterprise, at least 60% of the capital stock
outstanding and entitled to vote of each of both
corporations must be owned and held by citizens
of the Philippines and at least 60% of the
members of the Board of Directors of each of
both corporations must be citizens of the
Philippines, in order that the corporation shall be
considered a Philippine national. (Double 60% rule)
(Sec. 3(a), RA No. 7042, as amended by RA No. 8179)
b) GRANDFATHER RULE
Grandfather Rule – the percentage of Filipino
equity in a corporation engaged in nationalized
and/or partly nationalized areas of activities,
provided for under the Constitution and other
applicable laws, is accurately computed, in cases
where corporate shareholders with foreign
shareholdings are present, by attributing the
nationality of the second or even subsequent tier
of ownership to determine the nationality of the
corporate shareholder. (Divina, Questions and
Answers on the Revised Corporation Code, 2020
edition, p. 47)
When in the mind of the Court, there is doubt,
based on the attendant facts and circumstances
of the case, in the 60-40 Filipino equity ownership
in the corporation, then it may apply the
"grandfather rule." — the Grandfather Rule is a
"supplement" to the Control Test so that the
intent underlying the averted Sec. 2, Art. XII of
the Constitution be given effect. (Narra Nickel
Mining and Development Corp vs Redmont
Consolidated Mines Corp., G.R. 195580, Jan. 28, 2015)
The purpose of this rule is to trace the nationality
of the stockholder of investor corporations to
ascertain the nationality of the corporation where
the investment is made. (SEC Opinion dated May 4,
1987)
The grandfather rule is applied in the following
cases:
(a) Under the Grandfather Rule Proper, if the
percentage of Filipino ownership in the
corporation or partnership is less than 60%,
only the number of shares corresponding to
such percentage shall be counted as of
Philippine nationality;
(b) Under the Strict Rule or Grandfather Rule
Proper, the combined totals in the Investing
Corporation and the Investee Corporation,
when traced to determine the total
percentage of Filipino ownership, show less
than 60% requirement;
(c) If based on records, Filipinos own at least
60% of the investing corporation but there
is doubt as to where control and beneficial
ownership in the corporation really reside.
(Divina, Questions and Answers on the Revised
Corporation Code, 2020 edition, p. 50)
4. CORPORATE JURIDICAL ENTITY
a) DOCTRINE OF SEPARATE
JURIDICAL PERSONALITY
A private corporation organized under this Code
commences its corporate existence and juridical
personality from the date the Commission issues
the certificate of incorporation under its official
seal. (Sec. 18, RCC)
Note: A corporation sole, after filing the verified
articles of incorporation along with the
documents required in Sec. 110 with the SEC,
immediately becomes endowed with corporate
personality. This serves as an exception to the
rule that a corporation acquires juridical
personality only upon the issuance of a certificate
of incorporation by the said government agency.
(Ladia and Reyes, The Revised Corporation Code of the
Philippines, Annotated, 2021, p. 114)
A corporation has a personality separate and
distinct from its members. A corporation has a
legal personality separate and distinct from that
of people comprising it. (Secosa, et. al. vs. Heirs of
Erwin Francisco, G.R. No. 160039, January 29, 2004)
Juridical persons may acquire and possess
property of all kinds, as well as incur obligations
and bring civil or criminal actions, in conformity
with the laws and regulations of their
organization. (Art. 46, New Civil Code)
By virtue of that doctrine, stockholders of a
corporation enjoy the principle of limited liability:
51
the corporate debt is not the debt of the
stockholder. Thus, being an officer or a
stockholder of a corporation does not make one's
property the property also of the corporation.
(Bustos vs. Millian Shoes Inc., G.R. 185024, April 4,
2017)
The president and manager of a corporation, who
entered into and signed a contract in his official
capacity, cannot be made liable thereunder in his
individual capacity in the absence of stipulation to
that effect due to the personality of a corporation
being separate and distinct from the person
composing it. (Rustan Pulp & Paper Mills, Inc. vs.
Intermediate Appellate Court, G.R. No. 70789 October
19, 1992)
Legal Consequences
(a) Right to Acquire Property – Properties
registered in the name of the corporation are
owned by it as an entity separate and distinct
from its corporators. The corporators are not
entitled to the possession of any definite
portion of its property or assets. (Divina,
Questions and Answers on the Revised
Corporation Code, 2020 edition, p. 8)
(b) Separate Liability from its Officers – As a
general rule, directors, officers, or agents of
a corporation cannot be held personally liable
for the obligations incurred by the
corporation, unless it can be shown that such
director/officer/agent is guilty of gross
negligence or bad faith or committed an
unlawful act and that the same was clearly
and convincingly proven. (Ibid., 10)
(c) Cause of Action Limited to the
Corporation – The cause of action
available to the corporation cannot be
generally enforced by its directors, officer, or
stockholder and vice-versa (Ibid., 12)
(d) Liability for Torts – A corporation is civilly
liable in the same manner as natural persons
for torts, because “generally speaking, the
rules governing the liability of a principal or
master for a tort committed by an agent or
servant are the same whether the principal be
a natural person or a corporation, and
whether the servant or agent be a natural or
artificial person. All of the authorities agree
that a principal or master is liable for every tort
which he expressly directs or authorizes, and
this is just true of a corporation as of a natural
person. A corporation is liable, therefore,
whenever a tortious act is committed by the
officer or agent under express direction or
authority from the stockholder or members
acting as a body, or generally, from directors
as governing body. (PNB vs. Court of Appeals,
G.R. No. L-27155, May 1978)
(e) Liability for Crimes – Corporations are
incapable of intent, hence, they cannot
commit felonies that are punishable under the
Revised Penal Code. They cannot commit
crimes that are punishable under special laws
because crimes are personal in nature
requiring a personal performance of overt
acts. In addition, the penalty of imprisonment
cannot be imposed. (Sec. 171, RCC)
A corporation may be charged and prosecuted
for a crime if the imposable penalty is fine.
Even if the statute prescribes both fines and
imprisonment as penalty, a corporation may
be prosecuted and, if found guilty, may be
fined. (Ching vs. Secretary of Justice, G.R. No.
164317, February 6, 2006)
Moreover, if by express provision of law (e.g.,
Sections 9 and 14 of Anti-Dummy Act Law and
Anti-Money Laundering Act), the corporation
is held criminally liable.
(f) Since a corporation is a mere legal fiction, it
cannot be held liable for a crime committed by
its officers since it does not have malice. In
such case, the responsible officers would be
criminally liable. (People vs. Tan Boon Kong, G.R.
No. 32652, March 1930)
Exceptions: A corporation may be charged and
prosecuted for a crime if the imposable
penalty is fine. Even if the statute prescribes
both fines and imprisonment as penalty, a
corporation may be prosecuted and, if found
guilty, may be fined. (Ching vs. Secretary of
Justice, G.R. No. 164317, February 6, 2006)
52
 Moreover, if by express provision of law (e.g.
Sections 9 and 14 of Anti-Dummy Act Law and
Anti-Money Laundering Act), the corporation is
held criminally liable.
Doctrine of corporate negligence
The hospital’s failure to supervise its resident
physicians and nurses and to take an active step
in order to remedy their negligence renders it
directly liable. The duty of providing quality
medical service is no longer the sole prerogative
and responsibility of the physician. This is
because the modern hospital now tends to
organize a highly-professional medical staff
whose competence and performance need also to
be monitored by the hospital commensurate with
its inherent responsibility to provide quality
medical care. Such responsibility includes the
proper supervision of the members of its medical
staff. Accordingly, the hospital has the duty to
make a reasonable effort to monitor and oversee
the treatment prescribed and administered by the
physicians practicing in its premises. (Professional
Services, Inc. vs Court of Appeals, G.R. No. 126297,
February 2008)
Corporations not entitled to moral damages
General A corporation is not entitled to
Rule moral damages because it has no
feelings, no emotions and no
senses. (ABS-CBN vs. Court of
Appeals, GR. 128690, January
1999)
Exceptions (1) When the corporation has a
good reputation that is
debased, resulting in its
humiliation in the business
realm. (Coastal Pacific
Trading, Inc. vs. Southern
Rolling Mills Co., Inc., G.R. No.
118692, July 28 2006);
(2) In cases of libel, slander or
any other form of defamation.
Article 2219(7) does not
qualify whether the plaintiff is
a natural or juridical person.
(Filipinas Broadcasting
Network, Inc. vs. AMEC-
BCCM, G.R. No. 141994,
January 17, 2005)
While the Court may allow the grant of moral
damages to corporations, it is not automatically
granted; there must still be proof of the existence
of the factual basis of the damage and its causal
relation to the defendant’s acts. This is so
because moral damages, though incapable of
pecuniary estimation, are in the category of an
award designed to compensate the claimant for
actual injury suffered and not to impose a penalty
on the wrongdoer. (Crystal vs. Bank of the Philippine
Islands, G.R. No. 172428, November 2008)
b) DOCTRINE OF PIERCING THE
CORPORATE VEIL
The principle of piercing the veil of corporate
fiction, and the resulting treatment of two
related corporations as one and the same
juridical person with respect to a given
transaction, is basically applied only to determine
established liability; it is not available to confer
on the court a jurisdiction it has not acquired,
in the first place, over a party not impleaded in
a case. Elsewise put, a corporation not
impleaded in a suit cannot be subject
to the court's process
of piercing the veil of its corporate fiction.
In that situation, the court has not acquired
jurisdiction over the corporation and, hence, any
proceedings taken against that corporation and
its property would infringe on its right to due
process. x x x
Moreover, this Court also held that “the
doctrine of piercing the veil of corporate entity
can only be raised during a full-blown trial over
a cause of action duly commenced involving
parties duly brought under the authority
of the court by way of service of summons or
what passes as such service. (Parayday v.
Shogun Shipping Co., Inc., G.R. No. 204555, July 6,
2020, J. Hernando)
The corporation’s separate juridical personality
may be disregarded when there is an abuse of
the corporate form. Whenever the doctrine
applies, the principal and the conduit will be
treated as one; the controlled corporation will
be deemed to have, “so to speak, no separate
mind, will or existence of its own, and is but a
conduit for its principal.” (WPM International
53
Trading, Inc. and Warlito Manlapaz vs. Labayen, G.R.
No. 182770, September 17, 2014)
Piercing the corporate veil based on the alter ego
theory requires the concurrence of three
elements: control of the corporation by the
stockholder or parent corporation, fraud or
fundamental unfairness imposed on the plaintiff,
and harm or damage caused to the plaintiff by
the fraudulent or unfair act of the corporation.
The absence of any of these elements prevents
piercing the corporate veil. (PNB vs. Hydro Resource
Contractors, G.R. no. 167530, March 13, 2013)
Areas of Application
The doctrine of piercing the corporate veil applies
only in three basic instances, namely:
(a) when the separate distinct corporate
personality defeats public convenience, as
when the corporate fiction is used as a
vehicle for the evasion of an existing
obligation;
(b) in fraud cases, or when the corporate entity
is used to justify a wrong, protect a fraud, or
defend a crime; or
(c) is used in alter ego cases, i.e., where a
corporation is essentially a farce, since it is a
mere alter ego or business conduit of a
person, or where the corporation is so
organized and controlled and its affairs
conducted as to make it merely an
instrumentality, agency, conduit or adjunct of
another corporation.
We find that the application of the doctrine
of piercing the corporate veil is unwarranted
in the present case. First, no evidence was
presented to prove that CyberOne PH was
organized for the purpose of defeating public
convenience or evading an existing obligation.
Second, petitioners failed to allege any
fraudulent acts committed by CyberOne PH in
order to justify a wrong, protect a fraud, or
defend a crime. Lastly, the mere fact that
CyberOne PH's major stockholders are
CyberOne AU and respondent Mikrut does not
prove that CyberOne PH was organized and
controlled and its affairs conducted in a manner
that made it merely an instrumentality, agency,
conduit or adjunct of CyberOne AU. In order to
disregard the separate corporate personality of
a corporation, the wrongdoing must be clearly
and convincingly established.
Moreover, petitioners failed to prove that
CyberOne AU and Mikrut, acting
as the Managing Director of both corporations,
had absolute control over CyberOne PH. Even
granting that CyberOne AU and Mikrut
exercised a certain degree of control
over the finances, policies and practices of
CyberOne PH, such control does not necessarily
warrant piercing the veil of corporate fiction
since there was not a single proof that
CyberOne PH was formed to defraud petitioners
or that CyberOne PH was guilty of bad faith or
fraud.
Hence, the doctrine of piercing the corporate
veil cannot be applied in the instant case. This
means that CyberOne AU cannot be considered
as doing business in the Philippines through its
local subsidiary CyberOne PH. This means as
well that CyberOne AU is to be classified as a
non-resident corporation not doing business
in the Philippines. (Gesolgon v. CyberOne PH.,
Inc., G.R. No. 210741, [October 14, 2020, J.
Hernando)
3-Pronged Test
The applicability of the alter ego or
instrumentality theory is determined through
the three-pronged test of control test, fraud test,
and harm test:
In this connection, case law lays down a three-
pronged test to determine the application of
the alter ego theory, which is also known as the
instrumentality theory, namely:
(1) Control Test – not mere majority or complete
stock control, but complete domination, not
only of finances but of policy and business
practice in respect to the transaction
attacked so that the corporate entity as to
this transaction had at the time no separate
mind, will or existence of its own;
(2) Fraud Test – Such control must have been
used by the defendant to commit fraud or
wrong, to perpetuate the violation of a
54
 statutory or other positive legal duty, or
dishonest and unjust act in contravention of
plaintiff's legal right; and
(3) Harm Test – The aforesaid control and
breach of duty must have proximately
caused the injury or unjust loss complained
of. (Roquel v. Philippine National Bank, G.R. No.
246270, June 30, 2021)
The first prong is the "instrumentality" or
"control" test.
This test requires that the subsidiary be
completely under the control and domination of
the parent. It examines the parent corporation's
relationship with the subsidiary. It inquires
whether a subsidiary corporation is so organized
and controlled and its affairs are so conducted as
to make it a mere instrumentality or agent of the
parent corporation such that its separate
existence as a distinct corporate entity will be
ignored. It seeks to establish whether the
subsidiary corporation has no autonomy and the
parent corporation, though acting through the
subsidiary in form and appearance, "is operating
the business directly for itself." (ibid.)
The second prong is the "fraud" test.
This test requires that the parent corporation's
conduct in using the subsidiary corporation be
unjust, fraudulent or wrongful. It examines the
relationship of the plaintiff to the corporation. It
recognizes that piercing is appropriate only if the
parent corporation uses the subsidiary in a way
that harms the plaintiff creditor. As such, it
requires a showing of "an element of injustice or
fundamental unfairness." (ibid.)
The third prong is the "harm" test.
This test requires the plaintiff to show that the
defendant's control, exerted in a fraudulent,
illegal or otherwise unfair manner toward it,
caused the harm suffered. A causal connection
between the fraudulent conduct committed
through the instrumentality of the subsidiary and
the injury suffered or the damage incurred by
the plaintiff should be established. The plaintiff
must prove that, unless the corporate veil is
pierced, it will have been treated unjustly by the
defendant's exercise of control and improper use
of the corporate form and, thereby, suffer
damages. (ibid.)
To summarize, piercing the corporate veil based
on the alter ego theory requires the concurrence
of three elements: control of the corporation by
the stockholder or parent corporation, fraud or
fundamental unfairness imposed on the plaintiff,
and harm or damage caused to the plaintiff by
the fraudulent or unfair act of the corporation.
(Roquel v. Philippine National Bank, G.R. No. 246270,
June 30, 2021)
This test requires the plaintiff to show that the
defendant's control, exerted in a fraudulent,
illegal or otherwise unfair manner toward it,
caused the harm suffered. A causal connection
between the fraudulent conduct committed
through the instrumentality of the subsidiary and
the injury suffered or the damage incurred by the
plaintiff should be established. The plaintiff must
prove that, unless the corporate veil is pierced, it
will have been treated unjustly by the defendant's
exercise of control and improper use of the
corporate form and, thereby, suffer damages.
(PNB vs. Hydro Resource Contractors, G.R. No.
167530, March 13, 2013)
The Court has declared that "mere ownership by
a single stockholder or by another corporation of
all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for
disregarding the separate corporate personality.”
It has likewise ruled that the "existence of
interlocking directors, corporate officers and
shareholders is not enough justification to pierce
the veil of corporate fiction in the absence of
fraud or other public policy considerations.”
(Zambrano vs. Phil. Carpet Manufacturing Corp., G.R.
No. 224099, June 21, 2017)
Application to Non-Stock Organizations
In determining the propriety of applicability of
piercing the veil of corporate fiction, this Court, in
a number of cases, did not put in issue whether
a corporation is a stock or non-stock corporation.
The Supreme Court considered but ultimately
refused to pierce the corporate veil of a non-stock
non-profit corporation which sought to institute
55
an action for reconveyance of real property on
behalf of its members. This Court held that the
non-stock corporation had no personality to
institute a class suit on behalf of its members,
considering that the non-stock corporation was
not an assignee or transferee of the real property
in question, and did not have an identity that was
one and the same as its members. (Sulo ng Bayan
vs. Araneta, G.R. No. L-31061, Aug. 17, 1976)
Non-profit corporations are not immune from the
doctrine of piercing the corporate veil. The court’s
view piercing of the corporation as an equitable
remedy, which justifies said courts to scrutinize
any organization however organized and in
whatever manner it operates. Moreover, control
of ownership does not hinge on stock ownership.
(Intl. Academy of Management and Economics vs.
Litton and Company, G.R. No. 191525, Dec. 13, 2017)
Alter-Ego Doctrine
The doctrine of alter ego is based upon the
misuse of a corporation by an individual for
wrongful or inequitable purposes, and in such
case the court merely disregards the corporate
entity and holds the individual responsible for acts
knowingly and intentionally done in the name of
the corporation. (Sulo ng Bayan vs. Araneta, G.R. no.
L-31061, Aug. 17, 1976)
Kinds of Piercing
(1) Traditional veil-piercing – a court
disregards the existence of the corporate
entity so a claimant can reach the assets of a
corporate insider (Intl. Academy of Management
and Economics vs. Litton and Company, G.R. No.
191525, Dec. 13, 2017)
(2) Reverse piercing action – flows in the
opposite direction (of traditional corporate
veil-piercing) and makes the corporation
liable for the debt of the shareholders. (ibid.)
Two Types of Reverse Pierce
(1) Outside Reverse Piercing — occurs when
a party with a claim against an individual or
corporation attempts to be repaid with assets
of a corporation owned or substantially
controlled by the defendant.
(2) Inside Reverse Piercing — in insider
reverse piercing, the controlling members will
attempt to ignore the corporate fiction in
order to take advantage of a benefit available
to the corporation, such as an interest in a
lawsuit or protection of personal assets. (Intl.
Academy of Management and Economics vs. Litton
and Company, G.R. No. 191525, Dec. 13, 2017)
Effects of piercing the corporate veil:
(a) If only one corporation is involved, to regard
its existence as an association of persons;
and
(b) If two corporations participate, to merge
them, and consider them only as one entity.
(Remo vs. IAC, G.R. No. L-67626, April 1989);
(c) The corporation continues for other
legitimate objectives, the corporate character
not necessarily abrogated. (Reynoso IV vs. CA,
G.R. Nos. 116124-25, November 22, 2010)
When not justified
Two corporations cannot be treated as single
bargaining unit just because they have related
businesses. The legal entity is disregarded only if
sought to hold the officers and stockholders
liable. (Indophil Textile Mill Workers Union vs. Calica,
G.R. No. 96490. February 3,1992)
The mere fact that a corporation owns all of the
stocks of another corporation, taken alone is not
sufficient to justify their being treated as one
entity. If used to perform legitimate functions, a
subsidiary’s separate existence may be
respected, and the liability of the parent
corporation as well as the subsidiary will be
confined to those arising in their respective
businesses. (Philippine National Bank vs. Ritratto
Group, Inc., G.R. No. 142616. July 31, 2001)
When directors and officers of a corporation are
unable to compensate a party for a personal
obligation, it is far-fetched to allege that the
corporation is perpetuating fraud or promoting
injustice, and be thereby held liable therefore by
piercing its corporate veil. (Francisco Motors
56
Corporation vs. Court of Appeals, GR. No. 100812, June
25, 1999)
5. CAPITAL STRUCTURE
This refers to the aggregate of the securities or
instruments which represent relatively long-term
investment issued by the corporation.
a) NUMBER AND QUALIFICATIONS OF
INCORPORATORS
Incorporators
Stockholders or members mentioned in the
articles of incorporation as originally forming and
composing the corporation and who are
signatories thereof. (Sec. 5, RCC)
Required Numbers and Qualifications of
Incorporators
(1) Any person, partnership, association, or
corporation, singly or jointly with others but
not more than fifteen (15) in number, may
organize a corporation for lawful purpose or
purposes. (Sec. 10, RCC)
Exception: Incorporated cooperatives are
allowed to be incorporators in rural banks.
(Rural Bank Act of 1992)
(2) For the purpose of forming a new domestic
corporation under the RCC, two or more
persons, but not more than 15, may organize
themselves and form a corporation.
Exception:
(a) Educational Institution Trustees of
educational institutions organized as non-
stock corporations shall not be less than
five (5) nor more than fifteen (15):
Provided, That the number of trustees shall
be in multiples of five (5) (Sec. 106, RCC)
(b) Close Operations - shall be held of record
by not more than 20 specified persons
(Sec. 96, RCC)
(3) A natural person incorporator must be of
legal age. (Sec. 10, RCC)
(4) Each incorporator of a stock corporation must
own or subscribe to at least one (1) share of
the capital stock (Sec. 10, RCC)
Individual licensed professionals and
associations or partnerships organized for the
purpose of practicing a profession may only
organize a corporation if allowed by a special
law. (Sec. 10, RCC)
Note: Only a One Person Corporation (OPC) may
have a single stockholder, as well as a sole
director. Accordingly, its registration must comply
with the corresponding separate guidelines on
the establishment of an OPC. (Sec. 1, SEC
Memorandum Circular No. 16-2019)
b) SUBSCRIPTION REQUIREMENTS
General Stock corporations shall not be
Rule required to have a minimum capital
stock. (Sec. 12, RCC)
Exception (1) As otherwise provided
specifically provided by special
law.
(2) After Incorporation, in case of an
increase of capital stock, at least
25% of the increase in capital
stock must be subscribed and at
least 25% of the amount
subscribed must be paid in cash
or in property, the valuation of
which is equivalent to at least
25% of the subscription. (Sec.
37(f), RCC)
c) CORPORATE TERM
The time or period the corporation is allowed to
exercise its corporate powers to attain the
purpose of its incorporation. (Divina, Questions
and Answers on the Revised Corporation Code,
2020, p. 89)
Salient provisions under the RCC on
corporate term
(1) A corporation shall have perpetual
existence unless its AOI provides
otherwise.
(2) Corporations with certificates of
incorporation issued prior to the effectivity
57
 of the RCC, and which continue to exist, for the revival of its corporate existence. Upon
shall have a perpetual existence, unless the approval by the SEC, it will then issue a
corporation, upon vote of its stockholders certificate of revival giving it perpetual
representing a majority of its outstanding existence, with all its rights and privileges, and
capital stock notifies the SEC that it elects subject to all its duties, debts, and liabilities
to retain its specific corporate term prior to revival, unless it requests for a limited
pursuant to its AOI. term. (Sec. 11, RCC)
(3) The period to extend the corporate term
has been reduced from five (5) to three (3) Summary of Revisions under RCC on
years prior to the original or subsequent corporate Term
expiry date(s).
(4) Extension of the corporate term shall take Corporations Existing Corporations
effect only on the day following the original established Corporations with expired
or subsequent expiry date (s). under the RCC terms
(5) A corporation whose term has expired is General Rule: General Rule: General Rule:
not ipso facto dissolved but may apply for Perpetual AOI is deemed The corporation
a revival of its corporate existence. Upon existence amended to may apply with
approval by the SEC, the corporation shall reflect a the SEC for the
be deemed revived and a certificate of Exception: perpetual revival of its
revival of corporate existence shall be Unless the existence corporate
issued, giving it perpetual existence, unless corporation’s existence.
its application for revival provides AOI provides a Exception:
specific period. Unless the Upon approval
otherwise. (Divina, Divina on Commercial Law:
corporation’s by the SEC, the
A Comprehensive Guide Volume I, 2021 Edition,
AOI provides a corporation shall
pp. 438)
specific period. be deemed
(6) The automatic conversion of the corporate revived and a
term to perpetual existence does not Procedures: certificate of
require an amendment of the AOI, the 2/3 ● Upon the vote revival of
affirmative vote of the outstanding shares of its corporate
to amend the AOI would not be required. stockholders existence shall
(SEC-OGC No. 19-28; July 22, 2019) representing be issued, giving
the majority of it perpetual
Remedy of a stockholder the existence, unless
outstanding its application for
capital stock. revival provides
In view of the automatic conversion of the
otherwise.
corporate term to the perpetual existence of a ● Notifying the (Sec. 11, RCC)
corporation organized prior to the effectivity of SEC that it
the RCC, the stockholder may exercise his elects to retain
appraisal right, meaning demand the payment its specific
of the fair value of his shares, unless the corporate
corporation, upon a vote of its stockholders term, pursuant
representing a majority of its outstanding to its AOI.
capital stock, notifies the SEC that it elects to (Sec. 11, RCC)
retain its specific corporate term pursuant to its
AOI. (SEC-OGC No. 28-19; July 22, 2019) Who may not apply for Revival

Remedy of a corporation with an expired
term
Corporations with an expired term upon the
effectivity of the RCC may apply with the SEC
The following are not allowed to file a Petition for
Revival of Corporate Existence:
(a) An Expired Corporation which has completed
the liquidation of its assets;

58
(b) A corporation whose Certificate of
Registration has been revoked for reasons
other than non-filing of reports (e.g. General
Information Sheet, and Audited Financial
Statements);
(c) A corporation dissolved by virtue of Sections
6(c) and 6(d) of Presidential Decree No. 902-
A, as amended by Presidential Decree No.
1799; or
(d) An Expired Corporation which already availed
of re-registration, in accordance with
Memorandum Circular No. 13, series of 2019
(Amended Guidelines and Procedures on the
Use of Corporate and Partnership Names), or
other memorandum circulars issued by the
Commission pertaining to re-registration,
except when:
i. The re-registered corporation has given its
consent to the Petitioner to use its
corporate name, and has undertaken to
undergo voluntary dissolution immediately
after the issuance of the Petitioner’s
Certificate of Revival; or
ii. The re-registered corporation has given its
consent to the Petitioner to use its
corporate name, and has undertaken to
change its corporate name immediately
after the issuance of the Petitioner’s
Certificate of Revival. (SEC Memo No. 23,
Series of 2019)
d) CLASSIFICATION OF SHARES
Shares of stock are units into which the capital
stock is divided. A share of stock represents
interest of the holder thereof to participate in the
management of the corporation, to share
proportionally in the profits of the business and,
upon liquidation, to obtain an aliquot part of
corporate assets after all corporate debts have
been paid.
A share of a corporate stock is the tangible
interest or right which an owner has in the
management, profit, and assets of the
corporation. (Aquino & Aquino, Commentaries and
Jurisprudence on the Revised Corporation Code of the
Philippines, 2020 edition, p. 154)
The share comprises of what is known as the
capital stock. Capital consists of all classes of
shares issued to stockholders, that is common
shares, as well as preferred shares, which may
have different rights, privileges, or restrictions as
stated in the articles of incorporation. A specific
class of shares may have rights or privileges or
restrictions different from the rest of the shares
in the corporation. (Heirs of Wilson Gamboa vs.
Teves, G.R. No. 176579, October 9, 2012)
Nature of Shares of Stock
Classification of shares is allowed to make
business organizations attractive by making it
flexible in providing for the financial
arrangements within the corporate entity itself.
(Aquino & Aquino, Commentaries and Jurisprudence on
the Revised Corporation Code of the Philippines, 2020
edition, p. 155)
The classes and number of shares, which a
corporation shall issue, are first determined by
the incorporators in the Articles of Incorporation
filed with the SEC. After the corporation comes
into existence, the Board of Directors and the
stockholders may alter them by amending the
Articles of Incorporation. (SEC SGC Opinion No. 10-
18, April 12, 2010)
Shares of stock are units of capital stock. Once
issued, they are considered personal property of
the stockholder owning it. While shares of stock
constitute personal property, they do not
represent the property of the corporation. The
corporation has property of its own. A share of
stock only typifies an aliquot part of the
corporation’s property, or the right to share in its
proceeds to the extent when distributed
according to law and equity. (Boyer Roxas vs. Court
of Appeals, G.R. No. 100866, July 14, 1992)
As personal property, shares of stock may be
transferred, either through sale, donation or
succession, or encumbered or otherwise be
subject to a security interest. (Divina, Question and
Answers on the Revised Corporation Code, 2020
edition, p. 402)
a. CLASSES OF SHARES OF STOCK
The shares in stock corporations may be divided
into classes or series of shares, or both. The
rights, privileges, or restrictions, and the stated
59
par value of the class or series of shares must be
indicated in the Articles of Incorporation. (Sec. 6,
RCC)
General Rule Exception
No share may be Preferred non-voting shares,
deprived of Redeemable Shares, and those
voting rights. provided by the Code (e.g.
Treasury Shares)
(Sec. 6, RCC)
There shall always be a class/series of shares
which have COMPLETE VOTING RIGHTS. (Sec. 6,
RCC)
Doctrine of Equity of Shares
Except as otherwise provided in the articles of
incorporation and stated in the certificate of
stock, each share shall be equal in all respects to
every other share. (Sec. 6, RCC)
Under this doctrine, all stocks issued by the
corporation are presumed to be equal with the
same privileges and liabilities, provided that the
Articles of Incorporation is silent on such
differences. (Commissioner of Internal Revenue vs.
Court of Appeals, G.R. No. 108576, January 20, 1999;
SEC Opinion No. 10-20 dated May 27, 2010)
All shares are to be treated equal. The Board of
Directors cannot provide preference or additional
rights if nothing is provided for in the Articles of
Incorporation. (SEC Opinion dated March 9, 1994)
Any special agreement between a particular
subscriber and a corporation or its promoters by
which he is allowed to subscribe for shares upon
different terms from other subscribers and is
guaranteed against loss at their expense is
fraudulent and invalid. (SEC Opinion dated April 18,
1985)
Classification may be done by the
(a) Incorporators – the classes and number of
shares which a corporation shall issue are
first determined by the incorporators as
stated in the articles of incorporation filed
with the SEC.
(b) Board of directors and stockholders – after
the corporation comes into existence,
classification of shares may be altered by the
board of directors and the stockholders by
amending the articles of incorporation.
Classification of Shares
(1) Common or Preferred Shares
(a) Cumulative or Non-Cumulative
(b) Participating or Non-Participating
(c) Preferred as to Dividends or Preferred as
to Assets upon Distribution
(2) Voting or Non-voting Shares
(3) Par Value or No Par Value Shares
(4) Treasury Shares
(5) Redeemable Shares
(6) Founder’s Shares
(7) Escrow Shares
(8) Scripless Shares
(1) Common Shares
Represents the residual ownership interest in the
corporation. It is a basic class of stock ordinarily
and usually issued without extraordinary rights or
privileges and entitles the shareholder to a pro
rata division of profits. It usually carries with it
the right to vote, and frequently, the exclusive the
right to do so.
A class of stock entitling the holder to vote
incorporate matters, to receive dividends after
other claims and dividends have been paid
(specially to preferred shareholders), and to
share in the asset s upon liquidation. (Chavez
Corporation Code Simplified 2012, p. 119)
It is a basic class of stock ordinarily and usually
issued without extraordinary rights or privileges
and entitles the shareholder to a pro rata division
of profits.
Note: It is often called capital stock or the residual
ownership interest in the corporation if it is the
corporation’s only class of stock outstanding.
General Rule Exception
Common shares cannot where the exclusive
be deprived of the right right to vote and be
to vote in any corporate voted for in the election
60
 meeting, and any of directors is granted to later date. (Ladia and Reyes, The Revised
provision in the articles Founder’s Shares, for a Corporation Code of the Philippines, 2021, p.
of incorporation limited period not 55)
restricting the right of exceeding five (5) years
common shareholders to from the date of (c) Participating preferred shares – Entitled to
vote is invalid. (Gamboa incorporation. (Sec. 7, participate with the common shares in excess
vs. Teves G.R. No. RCC)
distribution
176579 June 28, 2011)
(d) Non-participating preferred shares – Not
(2) Preferred Shares
entitled to participate with the common
These entitle the shareholder to some priority on
shares in excess distribution.
distribution of dividends and assets over those
holders of common shares. Preferred shares may
(e) Preferred shares as to dividends – entitled to
be issued only with a stated par value. (Sec. 6,
RCC)
receive dividends on said share to the extent
agreed upon before any dividends at all are
Kinds of Preferred Shares paid to the holders of common stock.

(a) Cumulative - those that entitle the owner to i. Preferred shares as to assets – gives the
the payment of not only current dividend but holder preference in the distribution of the
also back dividends not previously paid assets of the corporation in case of
whether or not during the past years, liquidation
dividends were declared or paid. In order
Common Shares Preferred Shares
that a preferred stock may be considered
Also called ordinary Shares which are
cumulative, the same must be provided for
shares and they share in entitled the holders
and specified in the contract of subscription. profits pro-rata. It is a thereof to certain
basic class of stock preference over the
(b) Non-cumulative - those which entitle the ordinarily and usually holders of common
holder of such share only to the payment of issued without stock. The preference
current dividends when dividends are paid, to extraordinary rights and may be;
the extent agreed upon before any other privileges. (1) As to asset;
stockholders are paid the same. Dividends in (2) As to dividends; or
Outstanding common (3) As may be
arrears do not have to be paid. Once a
shares are granted all determined by the
periodic dividend is omitted, it will not be
the ordinary rights board of directors
paid. (Chavez Corporation Law Simplified granted to a share under when so
2012, p. 122) the law and subject to authorized to do
the ordinary limitations so. (Sec. 6, RCC)
i. Discretionary dividend type - gives the provided under the law.
holder of such share the right to have (Commission of Internal Preferred shareholders
dividends paid in a particular years Revenue vs. Court of are often excluded from
depending on the judgment and discretion Appeals, G.R. No. any control, that's,
of the board. 108576, January 20, deprived of the right to
1999) vote in the election of
ii. Mandatory if earned type - impose a
directors and on other
positive duty on directors to declare General Rule: Common matters, on the theory
dividends every year when profits are shares are ALWAYS that the preferred
earned. voting shares. (Sec. 6, shareholders are merely
iii. Earned cumulative or dividend credit type - RCC) investors in the
the holder has the right to arrears in corporation for income
dividends every year when profits are Exception: Delinquent in the same manner as
earned during the previous year but shares (Sec. 70, RCC) shareholders (Aquino,
dividends were not declared. The right to Commentaries and
Jurisprudence on the
receive dividends is merely postponed to a

61
 Revised Corporation (2) Common shares
Code of the Philippines, when declared
2020 edition, p. 157) delinquent
(3) After the exercise
(3) Voting Shares of appraisal right
(Chavez,
Corporation Law
There shall always be a class or series of shares
Simplified, 2012, p.
which have complete voting rights. (Sec. 6, par. 116)
2, RCC)
Where “Non-Voting”
Whenever a vote is necessary to approve a Shares are Entitled to
particular corporate act, such vote refers only to Vote;
stocks with voting rights except in certain cases (1) Amendment of
when even non-voting shares may also vote. AOI
(2) Adoption and
Concept of “Capital” in Relation to Section amendment of by-
laws;
11, Article XII of the Constitution
(3) Sale, lease,
exchange
The term ''capital" in Section 11, Article XII of the mortgage, pledge,
Constitution refers only to shares of stock that or disposition of all
can Vote in the election of directors (Heirs-of to substantially all
Gamboa V. Teves, G.R. No. 176579, Resolution of of corporate
October 9, 2012). property;
(4) Incurring,
(4) Non-Voting Shares creating, or
increasing bonded
Shares may be deprived of voting rights when indebtedness;
(5) Increase or
they are classified as redeemable or preferred
decrease of capital
shares. (Sec. 6, par. 2, RCC) stock
(6) Merger or
Voting Shares Note: Non-Voting Shares consolidation
Redeemable shares or (7) Investment of
preferred share may still corporate funds in
have voting rights. another
In the absence of a No share may be corporation or
provision in the Articles deprived of voting rights another business
of Incorporation, and except those classified purpose; and
consistent with the and issued as (8) Corporate
Doctrine of Equality of “preferred” or dissolution (Sec. 6,
Shares, the shares in a “redeemable” shares, RCC)
stock corporation are unless otherwise
considered voting provided in this Code
shares. (Aquino & provided that there shall
(5) Par Value
Aquino, Commentaries always be a class or
and Jurisprudence on series of shares with Shares with a value fixed in the articles of
the Revised Corporation complete voting rights. incorporation and the certificates of stock. The
Code of the Philippines, (Sec. 6, RCC) par value fixes the minimum issue price of the
2020 edition, p. 164) shares. (Sec. 62, RCC)
Note: The following
shares may also be General Rule Exception
deprived of voting A corporation The prohibition applies only to
rights: cannot issue original issuance of shares and
(1) Treasury shares not to the subsequent sale of

62
 shares at less than treasury shares and sale of (7) Treasury Shares
its par value. shares made by stockholders. Shares which have been issued and fully paid for,
but subsequently re-acquired by the issuing
(6) No-Par Value corporation by purchase, redemption, donation or
through some other lawful means. Such shares
Shares having no stated value in the Articles of may again be disposed of for a reasonable price
Incorporation fixed by the BOD. (Sec. 9, NCC)

Limitations on the issuance of No-Par Value Shares may be reacquired without impairing the
Shares corporate trust fund. Reacquisition of shares is
(1) Cannot have an issue price of less than P5.00. allowed, provided the corporation will use assets
(2) Entire consideration constitutes capital. No up to the extent of its unrestricted retained
part of it should be Distributed as dividends. earnings. (SEC Rules Governing Redeemable and
(3) Cannot be issued as Preferred stocks. Treasury Shares, Sec 3, par [1][a])
(4) Cannot be issued by Banks, Building and loan
association, Trust companies, Insurance Limitation on Treasury Shares
companies, and public utilities.
(5) Articles of incorporation must state the fact (1) They may be re-issued or sold again as long
that it issued no par value shares as well as as it is for a reasonable price fixed by the
the number of said shares BOD.
(6) Once issued, are deemed fully paid and non- (2) Cannot participate in dividends.
assessable (Sec. 6, RCC) (3) It has no voting right as long as such shares
remain in the Treasury. (Sec. 56, RCC)
Par Value Shares Non-Par Value (4) It cannot be represented during stockholder’s
Shares meetings.
Shares of stock issued Shares of stock issued (5) The amount of URE equivalent to the cost of
with a value fixed in the without face value in the treasury shares being held shall be restricted
AOI and the certificates AOI or the certificates of
from being declared and issued as dividends.
of stock. Such face value stock. The Board of
merely represents the Directors will set the
lowest possible price at issue price upon Limitation on Re-Acquisition
which the corporation issuance of the stock as
may issue the stock and it is made available for Acquisition of own shares may be done only
are often well-below subscription. (Aquino, when:
their trading or market Commentaries and (1) The corporation has unrestricted retained
value (Aquino, Jurisprudence on the earnings in its books to cover the shares to
Commentaries and Revised Corporation bet purchased or acquired; and
Jurisprudence on the Code of the Philippines,
(2) acquisition is for the following purposes:
Revised Corporation 2020 edition, p. 161-
Code of the Philippines, 162) (a) To eliminate fractional shares arising out
2020 edition, p. 161) of stock dividends
Non-par value shares (b) To purchase delinquent shares; or
Because they are vested are deemed fully paid (c) To pay dissenting or withdrawing
with public interest, the and non-assessable so stockholders entitled to exercise
following types of holders of such are not appraisal right. (Sec. 40, RCC)
corporations may only liable to the corporation
issue par value shares: or its creditors. Shares, once re-acquired, become Treasury
(1) Banks
Shares. They are not canceled or retired but
(2) Trust Companies The consideration
(3) Insurance received is treated as
retain their status as issued and subscribed
Companies capital and cannot be shares which may be resold or re-disposed by the
(4) Public Utilities declared as dividends. board of directors at reasonable prices (SEC-OGC
(5) Building and Loan Opinion No 16-16, June 27, 2016)
Associations.

63
Note: Treasury shares are currently owned by
the corporation and not its shareholders. As an
owner of the treasury shares, the corporation
may opt to retire, sell or distribute the treasury
shares as property dividends (Aquino,
Commentaries and Jurisprudence on the Revised
Corporation Code of the Philippines, 2020 edition, p.
174)
(8) Redeemable Shares
Share is purchased or taken up by the corporation
upon the expiration of a fixed period (Sec. 8, RCC);
right to vote may be restricted (Sec. 6, RCC)
Redeemable shares may be issued by the
corporation when expressly provided in the
articles of incorporation. They are shares which
may be purchased by the corporation from the
holders of such shares upon the expiration of a
fixed period, regardless of the existence of
unrestricted retained earnings in the books of the
corporation, and upon such other terms and
conditions stated in the articles of incorporation
and the certificate of stock representing the
shares, subject to rules and regulations issued by
the Commission (Sec. 8, RCC)
Special Rules on Redeemable Shares
(1) May be issued by the corporation only when
it is expressly authorized by the AOI
(2) The terms and conditions affecting said
shares must be stated both in the AOI and in
the certificates of stocks representing such
shares
(3) May be deprived of voting rights in the AOI
unless otherwise provided (Sec. 6 and 8, RCC)
Limitations
(1) Redeemable shares may be issued only when
expressly provided for in the AOI (Sec. 8,
RCC).
(2) The terms and conditions affecting said
shares must be stated both in the AOI and in
the certificate of stock (Sec. 8, RCC).
(3) Redeemable shares may be deprived of
voting rights in the AOI. (Sec. 6, RCC)
(4) The corporation is required to maintain a
sinking fund to answer for redemption price
if the corporation is required to redeem. (SEC-
OGC Opinion No. 07-03)
(5) The redeemable shares are deemed retired
upon redemption, unless otherwise provided
in the AOI (i.e., if the AOI allows for re-
issuance of such shares) (SEC Rules Governing
Redeemable and Treasury Shares, 26 April 1982)
(6) Unrestricted retained earnings are NOT
necessary before shares can be redeemed,
but there must be sufficient assets to pay the
creditors and to answer for operations.
(Republic Planters Banks v. Agana, G.R. No.
51765, March 3, 1997)
(7) Redemption cannot be made if such
redemption will result in insolvency or
inability of the corporation to meet its
obligations. (SEC Opinion, 24 Aug 1987)
(9) Founder’s Shares
Shares classified as such in the Articles of
Incorporation, which are given certain rights and
privileges not enjoyed by the owners of other
stocks. These may be given special preference in
voting rights and dividend payments.
Where exclusive right to vote and be voted for in
the election of directors is granted, such right
must be for a limited period not to exceed 5
years, subject to approval by SEC The 5-year
period shall commence from date of approval by
SEC.
Note: Founder’s shares given the exclusive right
to vote and be voted for are not allowed to
exercise that right in violation of the Anti-Dummy
Law and the Foreign Investment Act. (Sec. 7, RCC)
Since Section 7 makes no distinction (and is found
under General Provisions), then it must mean that
founders’ shares may be applied to both stock
and nonstock corporations. Although [Section 88
of the Revised Corporation Code] allows in a
nonstock corporation to limit, broaden or deny
the right of members of any class, the specific
provision of Section 7 to founders’ share must
prevail, and that the nonstock corporation can
lawfully suspend or define the voting rights of its
members, but with respect to founders’ share,
the exclusive right to vote and be voted for of the
founders’ share should expire after five years
from the approval of the SEC. (Forest Hills and
64
Country Club, Inc. v. Kings Properties Corp., G.R. No.
212833, August 7, 2019).
(10) Escrow Shares
Held by a third person to be released only upon
the performance of a condition or the happening
of a certain event contained in the agreement.
(Villanueva-Castro, Commercial Law, p. 139)
The fact that shares are held in escrow do not
diminish the right of the stockholder on record to
vote such (Trans Middle East Phil vs. Sandiganbayan,
G.R. No. 172556, June 9, 2006)
(11) Scripless Shares
Shares listed in the stock exchange traded
without the necessity of complying with the
formalities under the law on the transfer of shares
but only a computerized book entry is required to
effect the transfer.
(12) Watered Shares
Shares issued as fully paid when in truth no
consideration is paid, or the consideration
received is known to be less than the par value or
issued value of the shares. (Sec. 64, RCC)
6. INCORPORATION AND ORGANIZATION
a) PROMOTER
A person who brings about or causes to bring
about the formation and organization of a
corporation by bringing together the
incorporators or the persons interested in the
enterprise, procuring subscriptions or capital to
the corporation and setting in motion the
machinery which leads to the incorporation of the
corporation itself. (Divina, Questions and Answers on
the Revised Corporation Code, 2020 ed., p.62-63)
Under the Securities Regulation Code, a promoter
is defined as a person who, acting alone or with
others, takes initiative in founding and organizing
the business or enterprise of the issuer and
receives consideration therefor. (Sec. 3.10, R.A.
No. 8799)
(1) LIABILITY OF PROMOTER
Contracts entered into by the promoter may, in
certain cases, bind a corporation. The general
rule, however, is that the acts of the promoter are
not binding on the corporation that will be
organized. (Aquino, Commentaries and Jurisprudence
on the Revised Corporation Code of the Philippines,
2020 edition, p. 263).
The promoter of a corporation is not in any sense
the agent of the corporation before it comes to
existence, for there cannot be an agency unless
there is a principal. But he may of course become
the agent of the corporation after it has been
formed provided that there is assent on the part
of the corporation. He, however, occupies a
fiduciary or quasi-trust relation toward the
corporation when it comes to existence and
towards the subscribers prior to its organization.
This fiduciary relation imposes upon the promoter
to act in good faith in all dealings on behalf of the
corporation. (Divina, Questions and Answers on the
Revised Corporation Code, 2020 ed., p.63)
(2) LIABILITY OF CORPORATION FOR
PROMOTER’S CONTRACTS
As a general rule, a corporation should have a full
and complete organization and existence as an
entity before it can enter into any kind of contract
or transact any business. This is subject to the
exception that a contract made by the promoters
of the corporation on its own behalf may be
adopted, accepted or ratified by the corporation
when organized. (Rizal Light & Ice Co. Inc. vs
Municipality of Morong, Rizal, G.R. No. L-20993,
September 28, 1968)
b) SUBSCRIPTION CONTRACT
This is any contract for the acquisition of unissued
stock in an existing corporation or a corporation
still to be formed notwithstanding the fact that
the parties refer to it as a purchase or some other
contract. (Sec. 59, RCC)
Purchase/ Transfer Subscription of
of Shares Shares
As to shares involved
65
 Pertains to shares Pertains to unissued
already issued by the shares of the
corporation corporation.
As to how the rights can be exercised
Buyer/ transferee cannot Subscriber is entitled to
exercise the rights exercise the rights of a
pertaining to the stockholder even without
purchased sales without full payment of the
full payment of the subscription; provided
purchase price, unless the subscriber is not
the sale agreement delinquent.
otherwise provides.
As to when may creditor enforce payment
The creditor of the The creditor of the
corporation cannot corporation may enforce
enforce payment of the payment on the unpaid
unpaid purchase price subscriptions under the
for lack of privity to the trust fund doctrine.
contract.
(Divina, Questions and Answers on the Revised
Corporation Code, 2020 ed., p.391)
c) PRE-INCORPORATION SUBSCRIPTION
AGREEMENTS
Pre-incorporation subscription refers to
subscription of shares in a corporation still to be
formed. (Divina, Questions and Answers on the
Revised Corporation Code, 2020 ed., p.396)
General A subscription for shares of stock of
Rule a corporation still to be formed is
irrevocable.
Exceptions (a) Lapse of a period of 6 months
from the date of subscription;
(b) Within six months from date of
subscription and all the
subscribers’ consent to the
revocation; or
(c) The corporation fails to
incorporate within the same
period or within a longer period
stipulated in the contract of
subscription.
(Sec. 60, RCC)
No pre-incorporation subscription may be
revoked after the articles of incorporation is
submitted to the Commission. (Ibid.)
The parties’ in joint venture agreement to
incorporate a company, when not implemented
within the stipulated period, maybe rescinded and
necessitate the return of the pre-incorporation
subscription. By parity of reasoning, the pre-
incorporation subscription should also be
returned if the SEC rejected the application for
incorporation. (Fong vs. Duenas, G.R. No. 185592,
June 15, 2015)
d) CONSIDERATION FOR STOCKS
Stocks shall not be issued for a consideration less
than the par or issued price thereof.
Consideration for the issuance of stock may be:
(1) Actual cash paid to the corporation
With respect to pre-incorporation subscription
involving cash payments, the SEC no longer
requires the submission of a Bank Certificate
of deposit of paid up capital. (Aquino & Aquino,
Commentaries and Jurisprudence on the Revised
Corporation Code of the Philippines, 2020 edition,
p. 615)
(2) Property, tangible or intangible actually
received by the corporation AND necessary or
convenient for its use and lawful purposes at
a fair valuation equal to the par or issued
value of the stock issued;
Property
Property issued for consideration must be:
(a) Actually received by the corporation
(b) Necessary or convenient for its use and
lawful purpose
(c) Subject to fair valuation equal to the par
or issued value of the stock issued
(d) Valuation shall initially be determined by
the stockholders or the board of directors
and
(e) Valuation is subject to the approval of the
SEC
Intangible Property
Intangible properties that may be used as
consideration include patent or copyrights. If
intellectual properties will serve as the
consideration, the corporation must submit to
the SEC:
66
 (a) a copy of the Certificate of Registration of What Forms Are Unacceptable
the intellectual property;
(b) an appraisal report by an accredited (a) Future services
appraisal company that is not more than 6 (b) Promissory notes
months old; and (c) Value less than the stated par value (Sec. 61,
(c) a deed of assignment in favor of the par. 3, RCC)
corporation (Aquino & Aquino, Commentaries
and Jurisprudence on the Revised Corporation Not limited to those enumerated
Code of the Philippines, 2020 edition, p. 616)
However, the consideration for the issuance of
(3) Labor performed for or services actually stock is not limited to only one of the items
rendered to the corporation enumerated because the law states that the
consideration may be any or a combination of any
Future services are not acceptable. Only such two or more of the considerations enumerated.
services that have been actually rendered are However, Section 61 imposes the following
acceptable subscription payment. (SEC Opinion conditions:
dated December 1, 1995)
(1) Stocks shall not be issued for a consideration
(4) Previously incurred indebtedness of the less than the par or issued price thereof;
corporation; (2) Shares of stock shall not be issued in
exchange for promissory notes or future
The indebtedness is the one that is services; and
acknowledged by the Board. Even (3) Where the consideration is property, whether
indebtedness is subject to the confirmation of tangible or intangible, such as patents or
the SEC regarding valuation. copyrights, the valuation thereof shall initially
be determined by the stockholders or the
To prevent watering of stocks, the amount of board of directors, subject to approval by the
indebtedness or liabilities to be settled should SEC. (Aquino & Aquino, Commentaries and
be at least equal to the par value of the shares Jurisprudence on the Revised Corporation Code of
of stock, which the corporation intends to the Philippines, 2020 edition, p. 615)
issue. (SEC-OGC Opinion No. 13-03 dated April 17,
2013) “Consideration” in the New Civil Code vs.
Revised Corporation Code of the
(5) Amounts transferred from unrestricted Philippines
retained earnings to stated capital;
Article 1350, NCC Section 61, RCC
(6) Outstanding shares exchange for stocks the Cause or consideration The agreement is valid
event of reclassification or conversion is understood to be, for but the stipulated
each contracting party, consideration is invalid if
(7) Shares of stock in another corporation; or the prestation or the same is not one of
promise of the thing or those allowed under
service by the other, Section 61.
The shares of stock in another corporation is the service or benefit
also considered as property. Hence, the that is remunerated, or
acceptance of shares is subject to the rule on mere liberality
approval of the valuation of property. (Aquino depending on the type
& Aquino, Commentaries and Jurisprudence on the of contract.
Revised Corporation Code of the Philippines, 2020 Consideration is the Consideration is not the
edition, p. 618) justification for the stipulated value but the
contract. Contract for property or right or
(8) Other generally accepted forms of valuable consideration service to be actually
consideration. (Sec. 61, RCC) means value is exchanged or received.

67
 stipulated in the
contract.
Where the consideration is other than actual
cash, or consists of intangible property such as
patents or copyrights, the valuation thereof shall
initially be determined by the stockholders or the
board of directors, subject to the approval of the
Commission. (Sec. 61, RCC)
Payment for subscription arising or which accrues
from the stocks is not one of the lawful
considerations mentioned in the enumeration. It
is akin to a promissory note whose realization is
uncertain hence not only unlawful but prejudicial
to the interest of a corporation. (National Exchange
vs. Dexter G.R. No. L-27872, February 25, 1928)
e) ARTICLES OF INCORPORATION
The Articles of Incorporation defines the charter
the corporation and the contractual relationships
between the State and the corporation, the
stockholders and the State, and between the
corporation and its stockholders (Lanuza vs. CA,
G.R. No. 131394, March 28, 2005).
No AOI of banks and quasi-banks, NSSLAS,
pawnshops, corporations engaged in money
service business, pre-need, trust and insurance
companies, and other financial intermediaries
shall be approved unless accompanied by
favourable recommendation from the appropriate
government agency (Sec. 10, SEC Memorandum 16-
2019).
In interpreting the AOI and by-laws of a
corporation, the literal meaning of their provisions
shall control, and such provisions should be
construed as a whole and not in isolation. By-laws
should prevail because they constituted the
private statutes of the corporation and its
members and must be strictly complied with and
applied to the letter (Forest Hills Golf and Country
Club, Inc., vs. Gardpro, Inc., G.R. No. 164686, October
22, 2014).
(1) CONTENTS
All corporations shall file with the Commission
articles of incorporation in any of the official
languages, duly signed and acknowledged or
authenticated, in such form and manner as may
be allowed by the Commission, containing
substantially the following matters, except as
otherwise prescribed by this Code or by special
law:
(1) The name of the corporation;
(2) The specific purpose or purposes for which
the corporation is being formed. Where a
corporation has more than one stated
purpose, the articles of incorporation shall
indicate the primary purpose and the
secondary purpose or purposes: Provided,
That a nonstock corporation may not include
a purpose which would change or contradict
its nature as such;
(3) The place where the principal office of the
corporation is to be located, which must be
within the Philippines;
(4) The term for which the corporation is to exist,
if the corporation has not elected perpetual
existence;
(5) The names, nationalities, and residence
addresses of the incorporators;
(6) The number of directors, which shall not be
more than fifteen (15) or the number of
trustees which may be more than fifteen
(15);
(7) The names, nationalities, and residence
addresses of persons who shall act as
directors or trustees until the first regular
directors or trustees are duly elected and
qualified in accordance with this Code;
(8) If it be a stock corporation, the amount of its
authorized capital stock, number of shares
into which it is divided, the par value of each,
names, nationalities, and residence
addresses of the original subscribers, amount
subscribed and paid by each on the
subscription, and a statement that some or
all of the shares are without par value, if
applicable;
(9) If it be a nonstock corporation, the amount
of its capital, the names, nationalities, and
residence addresses of the contributors, and
amount contributed by each;
(10) Such other matters consistent with law and
which the incorporators may deem
necessary and convenient (Sec. 13, RCC).
68
SEC shall accept AOI for registration provided
that they are submitted along with the
Certificate of Authentication signed by all
incorporators. SEC, under the guidelines,
shall neither require notarization nor
consularization of both the AOI and the
Certificate of Authentication (Sec. 2, SEC
Memorandum 16-2020, Series of 2020).
Provisions of New Requirements under
the Articles of the RCC
Incorporation
Corporate Name The term OPC should be
included in the corporate name
if the corporation is a One
Person Corporation.
Incorporators a) Incorporators can be a
natural person, partnership,
corporation or association;
b) One incorporator Is
sufficient; and
c) There is no residency
requirement for incorporators.
Term The term can be perpetual or a
fixed term. The default rule is
that the term is perpetual.
Treasurer’s A separate treasurer’s affidavit
Certification is no longer required but the
certification of the treasurer is
now incorporated in the Ninth
clause of the AOI.
Undertaking to It is no longer required to
Change Corporate submit a separate undertaking
Name but the contents of the
undertaking are now included
in the Tenth clause of the AOI.
Signatories The incorporators and the
treasurer sign the AOI.
Directors and a) There is no more minimum
Trustees number of directors and
trustees. The exceptions are
educational corporations and
religious societies which still
require a minimum of five
trustees.
b) There is no more residency
requirement for directors.
Subscribed and a) Subscribed and paid-up
Paid-Up Capital capital are now both in the
Eight clause of the new form
under Section 14 of the RCC.
b) There is no longer any
required minimum subscribed
and paid-up capital unless
special laws provide otherwise.
(Aquino & Aquino, Commentaries and Jurisprudence on
the Revised Corporation Code of the Philippines, 2020
edition, p. 225)
(2) NON-AMENDABLE ITEMS
Matters of accomplished fact cannot be amended,
such as:
(a) names and addresses of the incorporators,
(b) date and place of incorporation, and
(c) the notary public before whom the articles of
incorporation was acknowledged. (Divina,
Questions and Answers on the Revised
Corporation Code, 2020 edition, p. 118)
f) CORPORATE NAME AND LIMITATIONS
ON ITS USE
No corporate name shall be allowed by the SEC:
(1) If it is not distinguishable from that already
reserved or registered for the use of another
corporation, or
(2) If such name is already protected by law or
(3) When its use is contrary to existing law, rules,
and regulations (Sec. 17, RCC).
A change in the corporate name does not make
a new corporation and has no effect on the
identity of the corporation, or on its property,
rights, or liabilities (Republic Planters Bank vs. CA,
G.R. No. 93073, December 21, 1992).
Distinguishability Test
A name is not distinguishable even if it contains
the following:
(1) The words “corporation,” “company,”
“incorporated,” “limited,” “limited liability,” or
an abbreviation of such words; and
(2) Punctuations, articles, conjunctions,
contractions, prepositions, abbreviations,
different tenses, spacing, or number of the
same word or phrase (Sec. 17, RCC).
Prior Right
The right to the exclusive use of a corporate
name came with freedom from infringement by
similarity is determined by priority of adoption.
(Philips Export B.V. vs. CA, G.R. No. 96161, February
21, 1992).
69
Doctrine of Secondary Meaning
A word or phrase originally incapable of exclusive
appropriation with reference to an article on the
market, because it is geographical or otherwise
descriptive, may nevertheless be used exclusively
by one producer with reference to his article so
long as in that trade and to that branch of the
purchasing public, the word or phrase has come
to mean that the article was his product (Ang v.
Teodoro, G.R. No. L-48226, Dec. 14, 1942). If a
corporate name, though descriptive, has been
used for so long and exclusively by one
corporation and has become associated with that
corporation alone in the mind of the public,
another corporation cannot register said name as
a corporate name. (Aquino & Aquino, Commentaries
and Jurisprudence on the Revised Corporation Code of
the Philippines, 2020 edition, p. 245)
Priority of Adoption Rule
The corporation that first adopts a corporation
name has the right thereto and a subsequent
corporation cannot use the same name (Indian
Chamber of Commerce Phils., Inc., vs. Filipino Indian
Chamber of Commerce in the Philippines, Inc., G.R. No.
184008, August 3, 2016).
A corporation seeking to prevent another
corporation from using its name under Section 17
must prove that:
(1) The corporation has acquired a prior right
over the use of such corporate name; and
(2) It is any of the cases mentioned under
Section 18 of the RCC, that is (a) the name is
not distinguishable from the already reserved
or registered for the use of another
corporation; or (b) the name is already
protected by law; or (c) the use of the name
is contrary to existing law, rules and
regulations (Industrial Refractories Corporation
of the Philippines vs. CA, G.R. No. 122174,
October 3, 2002).
Powers of the SEC on Non-Compliance to
Rules on Corporate Name
If the name of a corporation is not distinguishable
from a name already reserved or registered for
the use of another corporation or is already
protected by law or is contrary to law, rules and
regulations, the SEC may:
(a) Reject the AOI
(b) Summarily order the corporation to cease and
desist from using such name;
(c) Summarily order the corporation to register a
new name and amend its Articles of
Incorporation bearing the new name;
(d) Cause the removal of all visible signages,
marks, advertisements, labels, prints and
other effects bearing such corporate name.
(Aquino & Aquino, Commentaries and
Jurisprudence on the Revised Corporation Code of
the Philippines, 2020 edition, p. 240-241)
If the corporation fails to comply with the orders
of the SEC (2,3 and 4 above), the SEC may:
(a) Hold the corporation or its responsible
directors and officers in contempt; and/or
(b) Hold them (corporation and directors/
officers) administratively, civilly and/or
criminally liable; and/or
(c) Revoke the registration/certificate of
incorporation of the corporation (Sec. 17,
RCC).
In accordance with SEC Memo Circular No. 6, s.
2015, a dissolved corporation’s name shall not be
allowed to be used within 3-years after approval
of dissolution by the SEC, unless allowed by the
last stockholders representing at least majority of
the outstanding capital stock (Indian Chamber of
Commerce Phils., Inc., vs. Filipino Indian Chamber of
Commerce in the Philippines, Inc., G.R. No. 184008,
August 03, 2016).
g) REGISTRATION, INCORPORATION,
AND COMMENCEMENT OF CORPORATE
EXISTENCE
A person or group of persons desiring to
incorporate shall submit the intended corporate
name to the Commission for verification. If the
Commission finds that the name is distinguishable
from a name already reserved or registered for
the use of another corporation, not protected by
law and is not contrary to law, rules and
regulations, the name shall be reserved in favor
of the incorporators. The incorporators shall then
70
submit their articles of incorporation and bylaws h) ELECTION OF DIRECTORS OR
to the Commission. (Sec. 18, RCC). TRUSTEES

Issuance of a Certificate of Incorporation Election

If the Commission finds that the submitted
documents and information are fully compliant
with the requirements of this Code, other relevant
laws, rules and regulations, the Commission shall
issue the certificate of incorporation (Sec. 18,
RCC).
Commencement of Corporate Existence
General Rule: The issuance of the certificate of
incorporation by the Securities and Exchange
Commission marks the commencement of the
corporate term of corporations incorporated
under the RCC (Aquino & Aquino, Commentaries and
Jurisprudence on the Revised Corporation Code of the
Philippines, 2020 edition, p. 262).
Except when the exclusive right is reserved for
holders of founders’ shares under Section 7 of this
Code, each stockholder or member shall have the
right to nominate any director or trustee who
possesses all of the qualifications and none of the
disqualifications set forth in this Code. (Sec. 23,
RCC)
Manner of election
At all elections of directors or trustees, there must
be present, either in person or through a
representative authorized to act by written proxy,
the owners of majority of the outstanding capital
stock, or if there be no capital stock, a majority
of the members entitled to vote. (Ibid.)

A private corporation organized under this Code Note: When so authorized in the bylaws or by a
commences its corporate existence and juridical majority of the board of directors, the
personality from the date the Commission issues stockholders or members may also vote through
the certificate of incorporation under its official remote communication or in absentia. The right
seal and thereupon the incorporators, to vote through such modes may be exercised in
stockholders/members and their successors shall corporations vested with public interest,
constitute a body corporate under the name notwithstanding the absence of a provision in the
stated in the articles of incorporation for the by-laws of such corporations. (Ibid.)
period of time mentioned therein, unless said
period is extended or the corporation is sooner Manner of Election Method of Election
dissolved in accordance with law (Sec. 18, RCC).
Answers the question: Answers the question:
What? How?
Exceptions: 1. Viva Voce Stock Corporations
(1) Corporations Created by Special Laws or 2. Show of hands 1. Straight
Charters. – Corporations created by special 3. Ballot (must be 2. Cumulative
laws or charters shall be governed primarily specifically requested) a. 1 candidate
by the provisions of the special law or charter (Sec. 23, RCC) b. By distribution (Sec.
creating them or applicable to them, 23, RCC)
supplemented by the provisions of this Code,
insofar as they are applicable. (Sec. 4, RCC) Non-stock Corporations
1. 1 vote for 1 candidate
(2) Corporation Sole – A corporation sole is one
2. 5 votes for 1 candidate
formed by the chief archbishop, bishop, 3. Cumulative
priest, minister, rabbi, or other presiding a. 1 candidate
elder of such religious denomination, sect, or b. By distribution
church (Sec. 108, RCC) provided in the AOI
or By-laws (Sec.88,
RCC)

71
Election of Independent Directors
Independent directors must be elected by the
shareholders present or entitled to vote in
absentia during the election of directors. (Sec. 22,
RCC)
Independent directors shall be subject to rules
and regulations governing their qualifications,
disqualifications, voting requirements, duration of
term and term limit, maximum number of board
memberships; and other requirements that the
Commission will prescribe to strengthen their
independence and align with international best
practices. (Ibid.)
Time to Determine Voting Right
a. At the time fixed in the by-laws
b. If by-laws are silent, at time of election (Sec.
23, RCC)
Quorum requirement
At all elections of directors or trustees, there must
be present, either in person or through a
representative authorized to act by written proxy:
a. In a stock corporation, the owners of majority
of the outstanding capital stock, excluding
the non-voting shares;
b. In a non-stock corporation, a majority of the
members entitled to vote. (Sec. 51, RCC)
Note: Non-voting shares are not included
because it is not one of the instances when non-
voting shares are entitled to vote. (Sec. 6, RCC)
It is necessary that there be a quorum. An
election without a quorum is invalid.
Note: If the owners of majority of the
outstanding capital stock or majority of the
members entitled to vote are not present in
person, by proxy, or through remote
communication, or not voting in absentia at the
meeting, such meeting may be adjourned. (Sec.
23, RCC)
Cumulative voting
A matter of right granted to stockholders to
multiply their number of shares by the number of
the directors to be elected, sum of which is his
total number of votes, which he may cast in favor
of only one candidate or distribute them to many
candidates as he may deem fit as long as it will
not exceed his total number of votes. (Sec. 23,
RCC)
In stock corporations, it is a matter of right.
In non-stock corporations, it can only be allowed
if it is provided in the Articles of Incorporation or
By-laws. (Sec. 88, RCC)
a. Straight Voting
Every stockholder may vote such number of
shares for as many persons as there are
directors to be elected. (Sec. 23, RCC)
Illustration:
Mr. A (Stockholder)
Number of Mr. A’s Shares = 100 shares
Number of Directors to be elected = 5
Directors
100 shares multiplied by 5 directors = 500
votes
Mr. A can give 100 votes to each of the
directors
b. Cumulative voting for one candidate
A stockholder is allowed to concentrate his
votes and give one candidate as many votes
as the number of directors to be elected
multiplied by the number of his shares shall
equal. (Sec. 23, RCC)
Illustration:
Mr. A and Mr. B (Majority Stockholders)
Number of shares of Mr. A and B = 400 shares
Mr. C, Mr. D, Mr. E, Mr. F (Minority Stockholders)
Number of shares of Mr. C, D, E, and F = 100
shares
Number of Directors to be elected = 5 Directors
Mr. A and B’s shares (400 shares) multiplied by 5
directors = 2000 votes
Mr. C, D, E, and F’s shares (100 shares) multiplied
by 5 directors = 500 votes
If Mr. C, D, E, and F vote individually, there is no
assurance that the voted candidate shall win.
However, they may cumulate their votes (500
votes) to a single candidate.
72
c. Cumulative Voting by Distribution
A stockholder may cumulate his shares by
multiplying the number of his shares by the
number of directors to be elected and distribute
the same among as many candidates as he shall
see fit. (Sec. 23, RCC)
Illustration:
Mr. A (Stockholder)
Number of Mr. A’s Shares = 100 shares
Number of Directors to be elected = 5 Directors
100 shares multiplied by 5 directors = 500 votes
Mr. A may cast his votes in any combination
desired by him provided that the total number of
votes cast by him does not exceed 500 (SEC-OGC
Opinion No. 10-14, June 2, 2014)
Rationale of Cumulative Voting
Through cumulative voting, the minority
stockholders are given an opportunity to
cumulate their shares to improve the chance of
getting a seat in the board of directors.
Note: Cumulative voting in case of non‐stock
corporations may only be done if it is provided in
the Articles of Incorporation. Nominees for
directors or trustees receiving the highest number
of votes shall be declared elected. (Sec. 23, RCC)
Rules Governing all Methods of Voting
a. The total number of votes cast shall not
exceed the number of shares owned by the
stockholders as shown in the books of the
corporation multiplied by the whole number
of directors to be elected.
b. No delinquent stock shall be voted. (Ibid.)
i) ADOPTION OF BY-LAWS
Nature and Function of By-laws
The By-Laws of a corporation are the rules and
regulations or private laws enacted by the
corporation to regulate, govern, and control its
own actions, affairs and concerns and of its
stockholders or members and directors and
officers in relation thereto and among themselves
in their relation to the corporation. (Loyola Grand
Villas Homeowners (South) Association, Inc., vs.
Hon. Court of Appeals, et al., G.R. No. 117188, August
7, 1997)
Relatively permanent and continuing rules of
action adopted by the corporation for its own
government and that of the individuals
composing it those having the direction,
management and control of its affairs, in whole
or in part, in the management and control of its
affairs and activities. (China Banking Corporation vs.
CA, G.R. No. 117604, March 26, 1997)
Procedure in the Adoption of By-laws:
Pre-incorporation: By-laws adopted and filed
prior to incorporation shall be approved and
signed by all the incorporators and submitted to
the SEC, together with the Articles of
Incorporation. (Sec. 45, RCC)
Post-incorporation: The affirmative vote of the
stockholders representing at least a majority of
the outstanding capital stock, or at least a
majority of the members in case of nonstock
corporations, shall be necessary. The
stockholders or members voting for the by-laws
shall sign them and a copy thereof, duly certified
by a majority of the board of directors or trustees
and countersigned by the secretary, shall be filed
with the SEC and attached to the Articles of
Incorporation. (Ibid.)
(1) CONTENTS OF BY-LAWS
(a) Time, place and manner of calling and
conducting meetings of directors or trustee;
(b) Time and manner of calling and conducting
of stockholders‘ or members‘ meetings and
mode of notifying them;
(c) The required quorum and the manner of
voting;
(d) The modes by which a stockholder, member,
director or trustee may attend meetings and
cast their votes;
(e) The form for proxies of stockholders or
members and the manner voting them;
(f) The directors’ or trustees’ qualifications,
duties and responsibilities, guidelines for
setting the compensation of directors or
trustees and officers, and the maximum
number of other board representations that
73
 an independent director or trustee may
have;
(g) The time for holding the annual election of
directors or trustees and the mode or
manner of giving notice thereof;
(h) The manner of election or appointment of
officers other than directors or trustees;
(i) The penalties for violation of bylaws;
(j) In case of stock corporations, the manner of
issuing stock certificates;
(k) Such other matters necessary for the proper
and convenient transaction of its corporate
affairs;
(l) An arbitration agreement may be provided in
the by-laws pursuant to Section 181 of the
RCC. (Sec. 46, RCC)
(2) BINDING EFFECTS
The provisions of the By-Laws are binding not
only upon the corporation but also on its
stockholder, members and those having
direction, management and control of its affairs.
(Aquino & Aquino, Commentaries and Jurisprudence on
the Revised Corporation Code of the Philippines, 2020
edition, p. 535)
As to the However, the provisions of the By-
Employees of Laws are not binding on
the subordinate employees having no
Corporation actual knowledge of the
provisions thereof.
As to Third As to third persons, the By-Laws
Persons provisions are also not binding
unless there is actual knowledge.
Third persons are not even bound
to investigate the contents of the
By-Laws because they are not
bound to know that By-Laws are
merely provisions for the
government of a corporation. By-
laws operate merely as internal
rules among stockholders,
directors and officers and they
cannot affect or prejudice third
persons who dealt with the
corporation.
(Ibid.)
(3) AMENDMENTS
Amendment of By-laws, voting
requirements
Amendment of bylaws may be done by the board
of directors or trustees, by:
(1) The vote of the majority vote of the directors
or trustees and the majority vote of the
owners of outstanding capital stock or
members in a non-stock corporation, at a
regular or special meeting called for that
purpose.
(2) By the Board of Directors alone if the owners
of two-thirds (⅔) of the outstanding capital
stock or two thirds (⅔) of the members in a
non-stock corporation delegate to the board
of directors or trustees the power to amend
or repeal the bylaws or adopt new bylaws
(Sec. 47, RCC).
Any power delegated to the board of directors or
trustees to amend or repeal the bylaws or adopt
new bylaws shall be considered as revoked
whenever stockholders owning or representing a
majority of the outstanding capital stock or
majority of the members shall so vote at a regular
or special meeting (Ibid.).
Filing and Effectivity
Whenever the bylaws are amended or new
bylaws are adopted, the corporation shall file with
the SEC:
(1) Such amended or new bylaws; and
(2) If applicable, the stockholders’ or members’
resolution authorizing the delegation of the
power to amend and/or adopt new bylaws,
duly certified under oath by the corporate
secretary and a majority of the directors or
trustees. (Ibid.)
The amended or new by-laws shall only be
effective upon the issuance by the SEC of a
certification that the same is in accordance with
this Code and other relevant laws. (Ibid.)
74
j) EFFECTS OF NON-USE OF CORPORATE (b) Failure to comply with the requirements and
CHARTER resume operations within the period given by
the SEC shall cause the revocation of the
Two Circumstances on the Effect corporation’s certificate of incorporation.
Non-Use of Corporate (Ibid.)
Charter under Sec. 21, RCC
Failure to Corporation does Certificate of 7. CORPORATE POWERS
Organize not formally incorporation
and organize and shall be
A corporation has no power except those
commence its deemed
Commence expressly conferred on it by the Corporation Code
business within revoked as of
Business and its charter, and those that are implied or
five (5) years the day
from the date of following the incidental to its existence.
its incorporation end of the five-
year period A corporation exercises its power through the
Subsequent Corporation has The SEC may, BOD and/or its duly authorized officers and
Non- commenced its after due agents. (Philippine Corporate Law, Villanueva, 2013,
operation business but notice and p. 227)
subsequently hearing, place
of the
becomes the corporation Classification of Corporate Powers
Business
inoperative for a under
period of at least delinquent
five (5) status. (1) Express powers – Those which are
consecutive expressly granted under the Revised
years Corporation Code and those embodied in the
corporation’s article of incorporation, as
Effect of failure to organize and commence sanctioned by the State.
business is deemed automatic
(2) Implied or incidental powers – These are
The effect of failure to organize and commence the corporation’s “powers, attributes and
business is appears to be automatic because in properties… incident to its existence,” which
case of such non-compliance with the conditions may be “essential or necessary to carry out
subsequent, the corporation’s “certificate of its purpose or purposes as stated in its
incorporation shall be deemed revoked as of the articles of incorporation.
day following the end of the five (5)-year period.”
Nevertheless, it is still necessary for the SEC to Implied powers test:
determine in an appropriate proceeding if the life
of the non-compliant corporation ended the day To determine whether an act is within the implied
following the end of the five-year period. (Aquino powers of a corporation, it must be ascertained
& Aquino, Commentaries and Jurisprudence on the whether the act in question is in direct and
Revised Corporation Code of the Philippines, 2020 immediate furtherance of the corporation’s
edition, p. 278) business, fairly incident to the express powers
and reasonably necessary to their exercise.
Effects of delinquent status (University of Mindanao vs. BSP, G.R. No. 194964-65,
January 11, 2016)
A delinquent corporation shall have a period of
two (2) years to resume operations and comply Articles of Incorporation provides that the
with all requirements that the SEC shall prescribe. corporation may generally perform any and all
acts connected with the business of
(a) Upon compliance by the corporation, the SEC manufacturing portland cement or arising
shall issue an order lifting the delinquent therefrom or incidental thereto. It cannot be
status denied that the operation of an electric light, heat
and power plant is necessarily connected with the

75
business of manufacturing cement. If in the
modern world where we live today electricity is
virtually a necessity for our daily needs, it is more
so in the case of industries like the manufacture
of cement. (Teresa Electric & Power Co., Inc. vs.
Public Service Commission, G.R. No. L-
21804. September 25, 1967)
The NPC was created and empowered not only to
construct, operate and maintain power plants,
reservoirs, transmission lines and other works,
but also to exercise such powers and do such
things as may be reasonably necessary to carry
out the business and purposes for which it was
organized, or which, from time to time, may be
declared by the Board to be necessary, useful,
incidental or auxiliary to accomplish said purpose
(National Power Corporation vs. Vera, G.R. No. 83558,
February 27, 1989)
(3) Inherent powers – Those which are not
expressly stated but are deemed to be within
the capacity of corporate entities. The
inherent powers of a corporation are also
included in the enumeration of express
powers under Section 35(k) of the RCC.
Acts outside these powers are ultra vires acts.
The statutory provision prohibiting them is
Section 44 of the RCC. (Divina, Divina on
Commercial Law: A Comprehensive Guide Volume
I, 2021 Edition, pp. 477)
Other classification of corporate powers
1. General powers
2. Special powers
a) GENERAL POWERS; THEORY OF
GENERAL CAPACITY
General Powers
Theory of general capacity
The Corporation is said to hold such powers as
are not prohibited or withheld from it by general
laws.
General Express Powers under the
Corporation Code (Sec. 35)
(1) Sue and be sued in its corporate name;
(2) Succession;
(3) Adopt and use a corporate Seal;
(4) Amend Articles of Incorporation
(5) Adopt, amend or repeal By-laws;
(6) For stock corporations – Issue stocks to
subscribers and to sell treasury stocks; for
non-stock corporations – admit members;
(7) Purchase, receive, take, or grant, hold,
convey, sell, lease, pledge, mortgage and
otherwise deal with real and personal
property, pursuant to its lawful business;
(8) Enter into Partnership, joint venture,
merger, consolidation, or any other
commercial agreement with natural and
juridical persons;
(9) Reasonable Donations for public welfare,
hospital, charitable, cultural, scientific, civil
or similar purposes (Prohibited: for partisan
political activity);
(10) Establish pension, retirement and other
Plans for the benefit of directors, trustees,
officers and employees; and
(11) Other powers essential or necessary to carry
out its purposes.
(1) Power to sue and be sued in its corporate
name;
Under Section 35 of the RCC, read in relation to
Section 22, it is clear that where the corporation
is the injured party, the power to sue is lodge with
the board of directors or trustees. For this
purpose, the board may authorize a
representative of the corporation to perform all
necessary physical acts, such as the signing of
documents. Such authority may be derived from
the by-laws or from specific act of the board of
directors. (Divina, Divina on Commercial Law: A
Comprehensive Guide Volume I, 2021 Edition, pp. 479)
Venue of action – instituted at the place where
the principal office of the corporation is located.
(Clavecillia vs. Antillon, G.R. No. L-22238, February 18,
1967)
Note: The venue for a petition for voluntary
insolvency proceeding under the Insolvency
Law is the Regional Trial Court of the province or
city where the insolvent debtor resides. A
corporation is considered a resident of the place
where its principal office is located as stated in its
76
Articles of Incorporation. However, when it is
uncontroverted that the insolvent corporation
abandoned the old principal office, the
corporation is considered a resident of the city
where its actual principal office is currently found.
(Pilipinas Shell Petroleum Corp. v. Royal Ferry Services,
Inc., G.R. No. 188146, February 1, 2017)
Service upon domestic private juridical entity may
be made through:
(a) President;
(b) Managing partner;
(c) General partner;
(d) Corporate secretary;
(e) Treasurer;
(f) In-house Counsel; or
(g) In case of the absence or unavailability of the
above-mentioned, on their secretaries. (Sec.
12, Rule 14, 2019 Amended Rules of Court )
Prior to the effectivity of the 2019 Amendments,
Sec. 11 of Rule 14 of the Rules of Court does not
allow service of summons to the secretaries of the
above-mentioned.
In case of intra-corporate dispute, service shall be
deemed adequate if made upon any of the
statutory or corporate officers as fixed by the by-
laws or their respective secretaries. (Sec. 5, Rule
2, A.M. No. 01-2-04-SC, March 13, 2001)
The designation of persons or officers who are
authorized to accept summons for a domestic
corporation or partnership is limited and more
clearly specified. The rule states, "general
manager" instead of only "manager"; "corporate
secretary" instead of "secretary"; and "treasurer"
instead of "cashier." The phrase "agent, or any of
its directors" is conspicuously deleted in the new
rule. The service of summons upon the branch
manager of petitioner at its branch office at
Cagayan de Oro, instead of upon the general
manager at its principal office at Davao City is
improper. Consequently, trial court did not
acquire jurisdiction over the person of the
petitioner. (E.B. Villarosa & Partner Co. vs. Benito, GR
14926, August 6, 1999)
(2) Power to have perpetual existence unless the
certificate of incorporation provides
otherwise;
Unlike the Old Corporation Code which prescribed
a maximum corporate term of 50 years unless
extended, corporations are now expressly
allowed to have perpetual existence unless their
certificate of incorporation provides otherwise.
(Divina, Divina on Commercial Law: A Comprehensive
Guide Volume I, 2021 Edition, pp. 480)
Corporations with certificates of incorporation
issued prior to the effectivity of the RCC and
which continue to exist shall have perpetual
existence (Sec. 11, RCC)
(3) Power to adopt and use a corporate seal;
A seal is not indispensable for the transactions or
contacts of the corporation.
A document may be considered valid and binding
even in the absence of a seal. However, one
instance when a seal is necessary is with respect
to the certificate of stock:
The capital stock of corporations shall be divided
into shares for which certificates signed by the
president or vice president, countersigned by the
secretary or assistant secretary, and sealed with
the seal of the corporation shall be issued in
accordance with the bylaws. (Sec. 62, RCC)
(4) Power to amend its articles of incorporation
in accordance with the provisions of this
Code;
The power to amend the Articles of Incorporation
must be in accordance with Section 15 of the
RCC.
(5) Power to adopt by-laws, not contrary to law,
morals or public policy, and to amend or
repeal the same in accordance with this
Code;
A corporation’s life may start without the By-
Laws. The existence of the power of the
corporation to adopt By-Laws does not, ordinarily
and of necessity, make the exercise of such
power essential to its corporate life or to the
validity of its acts. By-Laws are meant to regulate
the manner of conducting the internal affairs of
the corporation. (SEC Opinions dated July 30, 1999
and June 19, 1986)
77

R.A. No. 11232 removed the requirement that if
the by-laws, if not simultaneously filed with the
articles of incorporation, must be subsequently
filed with the SEC within one (1) month after
receipt of official notice of the issuance of the
certificate of incorporation. However, Section 21
of the RCC now provides that "if a corporation
does not formally organize and commence its
business within five (5) years from the date of its
incorporation, its certificate of incorporation shall
be deemed revoked as of the day following the
end of the five (5)-year period.” (Ladia and Reyes,
The Revised Corporation Code of the Philippines,
Annotated, 2021 edition, p. 91-92)
(6) Power to Issue or Sell Stocks, in case of
stock corporations, and to Admit
Members, in case of non-stock
corporations;
The manner, requirements, and procedure for the
issuance and sale of a corporation’s stock are
subject to specific rules and regulations by the
Corporation Code and the SEC (Ladia and Reyes,
The Revised Corporation Code of the Philippines,
Annotated, 2021 edition, p. 248)
In case of stock corporations, power to issue or
sell stocks to subscribers and to sell treasury
stocks in accordance with the provisions of this
Code; and to admit members to the corporation
if it be a nonstock corporation (Sec. 35, RCC);
(7) Power to purchase, receive, take or grant,
hold, convey, sell, lease, pledge, mortgage,
and otherwise deal with such real and
personal property, including securities and
bonds of other corporations, as the
transaction of the lawful business of the
corporation may reasonably and necessarily
require, subject to the limitations prescribed
by law and the Constitution;
This, however, is subject to the following
limitations:
(a) It must be in furtherance of the purpose for
which the corporation was organized.
In the case of Luneta Motors vs. AD Santos, the
corporation purchased a certificate of public
convenience to operate a taxicab service.
However, the corporation’s line of business was
to engage in the transportation of persons by
water. The Supreme Court ruled that it cannot
engage in the business of land transportation,
which is an entirely different line of business. As
such, the purchase was beyond the lawful
business of the corporation that may reasonably
and necessarily require because such acquisition
would be without purpose and would have no
necessary connection with the corporation's
legitimate business. (Luneta Motors vs. AD Santos,
G.R. No. L-17716, July 31, 1962)
(b) It is subject to Constitutional limitations
i. Corporations cannot acquire public lands
except by lease, for a period not exceeding
25 years, renewable for not more than 25
years, and not to exceed 1,000 hectares in
area (Sec. 3, Art. XII, 1987 Constitution)
ii. Only corporations at least 60 per centum of
whose capital is owned by Filipino citizens
can acquire private lands (Sec. 7, Art. XII,
1987 Constitution)
(c) It is subject to the provisions of special laws
such as the Bulk Sales Law, Philippine
Competition Act, and other related laws (Sec.
39, RCC)
The law expressly declares that corporations may
acquire such real estate as is reasonably
necessary to enable them to carry out the
purposes for which they were created; and that
the owning of a business lot upon which to
construct and maintain its offices is reasonably
necessary to a building and loan association at
the time this property was acquired. (El Hogar
Filipino vs. National Bank Nos. 43459 and
43460. August 11, 1937)
A corporation authorized under its articles of
incorporation to operate and otherwise deal in
automobiles and automobile accessories and to
engage in the transportation of persons by water,
may not engage in the business of land
transportation, which is an entirely different line
of business, and, for this reason, may not acquire
any certificate of public convenience to operate a
taxicab service, because such acquisition would
be without purpose and would have no necessary
78
connection with the corporation's legitimate
business. (Luneta Motor Company vs. A. D. Santos,
Inc., G.R. No. L-17716, July 31, 1962)
(8) Power to enter into a partnership, joint
venture, merger, consolidation, or any other
commercial agreement with natural and
juridical persons;
The corporation has the power to enter into
merger and consolidation. (Sec. 35(h), RCC)
Merger occurs when one corporation absorbs
another constituent corporation.
Consolidation occurs when two or more
corporations form a single new corporation.
(9) To make reasonable donations, including
those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar
purposes: Provided, that no foreign
corporation shall give donations in aid of any
political party or candidate or for purposes of
partisan political activity;
There is no more prohibition for domestic
corporations to donate in favor of a political
party or candidate. (Divina, Divina on
Commercial Law: A Comprehensive Guide Volume
I, 2021 Edition, pp. 481)
(10) Power to establish pension, retirement, and
other plans for the benefit of its directors,
trustees, officers, and employees; and
Providing gratuity pay is one of the express
powers of the corporation and therefore,
resolutions duly passed by the board
approving the grant of gratuity pay to the
employees of the corporation are not ultra
vires. The grant of gratuity pay does not
require shareholder’s approval as it is not
tantamount to the sale, lease, exchange or
disposition of all or substantially all of the
corporation’s assets. (Lopez Realty, Inc. vs.
Fontecha, G.R. No. 76801, August 11,1995)
Where the ultra vires transaction has been
executed by the other party and the
corporation has received the benefit of it, the
law interposes an estoppel, and will not permit
the validity of the transaction or contract to be
questioned, and this is especially true where
there is nothing in the circumstances to put
the other party to the transaction on notice
that the corporation has exceeded its powers
in entering into it and has in so doing
overstepped the line of corporate privileges.
Thus, the validity of the resolution of Board of
Directors of the corporation accepting full
responsibility in connection with funds to be
received by its postmaster, should be upheld
on the ground of estoppel. (Republic vs. Acoje
Mining Co., Inc., G.R. No. L-18062, February 28,
1963)
(11) To exercise such other powers as may be
essential or necessary to carry out its
purpose or purposes as stated in the articles
of incorporation. (Sec. 35, RCC)
A corporation is not restricted to the exercise
of powers expressly conferred upon it by its
charter but has the power to do what is
reasonably necessary or proper to promote
the interest or welfare of the corporation.
(NPC vs. Vera, G.R. No. 83558 February 27, 1989)
b) SPECIFIC POWERS; THEORY OF
SPECIFIC CAPACITY
Specific Powers
Theory of specific capacity
No corporation under the Corporation Code shall
possess or exercise any corporate powers, except
those conferred by law, its articles of
incorporation, those implied from express
powers, and those as are necessary or incidental
to the exercise of the powers so conferred. (Sec.
44, RCC)
The specific capacity theory maintains that the
corporation cannot exercise powers except those
expressly/impliedly given.
Specific Powers Granted by the RCC:
(1) Power to extend or shorten corporate term
(Sec. 36)
(2) Power to increase or decrease capital stock
or incur, create, increase bonded
indebtedness (Sec. 37)
(3) Power to deny pre-emptive rights (Sec. 38)
79
(4) Power to sell or dispose corporate assets (Sec.
39)
(5) Power to acquire own shares (Sec. 40)
(6) Power to invest corporate funds in another
corporation or business (Sec. 41)
(7) Power to declare dividends (Sec. 42)
(8) Power to enter into management contract
(Sec. 43)
c) POWER TO EXTEND OR SHORTEN
CORPORATE TERM
Extend or shorten corporate term (Sec. 36, RCC);
A corporate term for a specific period may be
extended or shortened by amending the articles
of incorporation (Sec. 11, RCC)
Requirements
(a) The actions must be approved by a majority
vote of the board of directors or trustees.
(b) The action must be ratified at a meeting by
the stockholders representing at least 2/3 of
the outstanding capital stock or by at least
2/3 of the members in case of non-stock
corporations
(c) For purposes of such stockholders’/
members’ meeting, written notice of the
proposed action and of the time and place of
the meeting shall be addressed to each
stockholder or member at his/her/its place of
residence as shown in the books of the
corporation and deposited to the addressee
in the post office with postage prepaid, or
served personally, or sent electronically
(d) A copy of the amended Articles of
Incorporation shall be submitted to the SEC
for its approval (Sec. 36, RCC)
Limitation for extension of period
In case of extension, the same cannot be made
earlier than 3 years prior to the original or
subsequent expiry date unless there are
justifiable reasons for an earlier extension.
Moreover, the same must be made during the
lifetime of the corporation. (Sec. 11, RCC)
Shortening period with effect of dissolution
(1) The shortening of the corporate term may be
designed to have the effect of dissolving the
corporation
(2) The dissolution takes effect on the date of the
approval of the Amended Articles of
Corporation by the SEC
(3) The three-year liquidation period shall
likewise be reckoned from the date of the SEC
approval of the Amended Articles of
Incorporation (Aquino, 2011, p. 335)
d) POWER TO INCREASE OR DECREASE
CAPITAL STOCK OR INCUR, CREATE,
INCREASE BONDED INDEBTEDNES
Poweer to increase or decrease capital stock (Sec.
37, RCC);
Requirements (Sec. 37, RCC)
Requirements for the exercise of the power of
increasing and decreasing capital stocks
(a) Approval by the majority vote of the board of
directors.
(b) Ratification by the stockholders holding or
representing at least 2/3 of the outstanding
capital stock at a meeting duly called for that
purpose.
(c) Prior written notice of the proposed increase
or decrease of the capital stock indicating the
time and place of meeting addressed to each
stockholder must made either by personal
service or through electronic means
recognized in the by-laws and/or SEC’s rules.
(d) A certificate must be signed by a majority of
the directors, countersigned by the chairman
and the secretary of the stockholders
meeting.
(e) In case of increase in capital stock, 25% of
such increase in capital must be subscribed
and at least 25% of the amount must be paid
either in cash or property, accompanied by a
sworn statement of the treasurer of the
corporation lawfully holding office at the time
of the filing of the certificate, attesting to
such fact.
(f) In case of decrease in capital stock, the same
must not prejudice the right of creditors, as
such, the consent of the creditors needs to be
secured.
(g) Filing of the certificate of increase or
decrease and amended articles with SEC.
(h) Approval thereof by the SEC.
80
A corporation has no power to release an original
subscriber to its capital stock from the obligation
of paying for his shares, without a valuable
consideration for such release; and as against
creditors a reduction of the capital stock can take
place only in the manner and under the conditions
prescribed by the statute or the charter or the
Articles of Incorporation. Moreover, strict
compliance with the statutory regulations is
necessary. (Philippine Trust Co. vs. Rivera, No.
19761. January 29, 1923)
The increase or decrease of capital stock involves
the amendment of the Articles of Incorporation.
Ways to increase capital stock:
(a) By increasing the number of shares and
retaining the par value
(b) By increasing the par value of existing shares
without changing the number of shares
(Estate of Ortanez vs. Lee, G.R. No. 184251,
March 9, 2016)
(c) By increasing the number of shares and
increasing the par value
Reasons for increasing the capital stock
(a) To generate more working capital.
(b) To issue shares to sell to acquire assets.
(c) To have extra shares to meet the
requirement for declaration of stock dividend.
(Miravide, Bar Review Materials in Commercial
Law, 2002)
Ways to decrease capital stock:
(a) By decreasing the number of shares and
retaining the par value
(b) By decreasing the par value of existing shares
without changing the number of shares
(c) By decreasing the number of shares and
decreasing the par value
The decrease of the capital stock consequently
amends the contractual relationship between the
corporation and the stockholders. Consent of the
contracting parties is required to give effect to
such power of the corporation to decrease its
capital stock. (SEC Opinion No. 10-18 dated April 12,
2010)
Reasons for decreasing the capital stock
(a) To reduce or wipe out existing deficit where
no creditors would thereby be affected.
(b) When the capital is more than what is
necessary to procreate the business or
reduction of capital surplus.
(c) To write down the value of its fixed assets to
reflect their present actual value in case
where there is a decline in the value of the
fixed assets of the corporation. (Ladia and
Reyes, The Revised Corporation Code of the
Philippines, Annotated, 2021, p. 264)
Stock Split
A share is divided or converted into two or more
shares but the amount of the outstanding capital
remains the same because the par value is also
divided in as many shares.
Reverse Stock Split
The pro-rata combination of all the outstanding
shares of a specific class into smaller number of
shares of that class. A reverse stock split may be
required to increase the market value per share
or it may be designated to eliminate minority
stockholder. (SEC Opinion No. 05-01 dated January
4, 2005)
Incur, create, increase bonded
indebtedness
Any increase or decrease in the capital stock or
the incurring, creating or increasing of any
bonded indebtedness shall require prior approval
of the Commission, and where appropriate, of the
Philippine Competition Commission. The
application with the Commission shall be made
within six (6) months from the date of approval
of the board of directors and stockholders, which
period may be extended for justifiable reasons.
(Sec. 37, RCC)
Bond
A security representing denominated units of
indebtedness issued by a corporation to raise
money or capital obliging the issuer to pay the
maturity value at the end of a specified period.
81
(SEC Interim Guidelines for Registration of Bonds, SRC
Rule 8 and 12)
Bonded Indebtedness
Security indebtedness or indebtedness secured
by real or personal property that are covered by
certificates. They refer to negotiable corporate
bonds secured by mortgage on property. (SEC
Opinion dated April 29, 1987)
e) POWER TO DENY PRE-EMPTIVE RIGHTS
Pre-Emptive Right
Right of shareholders to subscribe to all issue or
disposition of shares of any class in proportion to
their shareholdings. It is the right granted to the
stockholders to have the first option to subscribe
to any issuance or disposition of share from the
capital stock in proportion to the stockholdings of
the shareholders. (SEC-OGC Opinion No. 19-25 dated
March 13, 2019)
Purpose of pre-emptive right
The foundation or underlying basis of this right is
to maintain the proportionate voting strength and
control of existing stockholders that is the existing
ratio of their interest and voting power in the
corporation. (SEC OGC Opinion, 30 September 1992,
Industrial Security Consultancy and Management Inc.)
To enable the shareholder to retain his
proportionate control in the corporation and
retain his equity in the surplus.
Power to deny pre-emptive rights
As a general rule, all stockholders of a stock
corporation shall enjoy preemptive right to
subscribe to all issues or disposition of shares of
any class, in proportion to their respective
shareholdings, unless such right is denied by the
articles of incorporation or an amendment thereto
(Sec. 38, RCC);
Waiver
A stockholder who neither desires nor intends to
buy any of the stocks being offered may waive
such rights. In such event, the shares may be
offered to any interested person acceptable to the
corporation. (SEC Opinion dated January 25, 1990)
Shares subject of pre-emptive right
Under Sec. 38 of the RCC, preemptive rights
extends to all shares of any class, including
treasury shares. Thus, the ruling in Benito case
that pre-emptive rights are recognized only with
respect to new issues of shares has already been
abandoned in lieu of the express provision of the
Revised Corporation Code expressly on the
broadened the extent of pre-emptive right. (SEC
OGC Opinion No. 11-41 dated October 5, 2011)
Exceptions: When Pre-Emptive Right Not
Available
(1) Shares are issued in compliance with laws
requiring stock offerings or minimum stock
ownership by the public; and
(2) Shares are issued in good faith with the
approval of the stockholders representing 2/3
of the outstanding capital stock, in exchange
for property needed for corporate purposes
or in payment of a previously contracted
debt.
(3) Right is denied in the Articles of Incorporation
(Aquino & Aquino, Commentaries and
Jurisprudence on the Revised Corporation Code of
the Philippines, 2020 edition, p. 468)
Exceptions nos. 1 and 2 will not apply to close
corporations:
(1) The corporation shall not list in any stock
exchange or make any public offering of any
of its stock of any class (Sec. 95, RCC);
(2) The pre-emptive right of stockholders in close
corporations shall extend to all stock to be
issued, including reissuance of treasury
shares, whether for money, property or
personal services, or in payment of corporate
debts, unless the articles of incorporation
provide otherwise. (Sec. 101, RCC)
A stockholder enjoys no pre-emptive right to buy
unissued shares of originally authorized capital
stock. the general rule is that pre-emptive right
is recognized only with respect to new issue of
shares, and not with respect to additional issues
of originally authorized shares. (Datu Tagoranao
Benito vs. Securities & Exchange Commission, G.R. No.
L-56655, July 25, 1983)
82
Although the Supreme Court held in the Benito
case and Dee case that pre-emptive rights are
recognized only with respect to new issues of
shares it must be emphasized that the events
which gave rise to said cases (i.e. the issuance of
shares) took place under the old Corporation Law
where in pre-emptive right is not expressly
provided. Thus, when the Corporation Code
expressly granted and broadened the extent of
pre-emptive right, the principles stated in said
two cases no longer apply. (SEC OGC Opinion No.
11-41, 5 October 2011)
Pre-emptive right may not be exercised by PSE
shareholders who have already exceeded the
ownership threshold laid down by the SRC. (ibid.)
f) POWER TO SELL OR DISPOSE
CORPORATE ASSETS
Sell, dispose, lease, encumber property and
assets (including all or substantially all corporate
assets) (Sec. 39, RCC);
Requisites
i. If sale, disposition, lease, or encumbrance of
property and assets do not involve all or
substantially all
 only majority vote of the Board of
directors or trustees is required (SEC-
OGC Opinion No. 19-01 dated January 31,
2019)
ii. If sale, disposition, lease, encumbrance of
either all or substantially all of corporate
assets and properties
(a) Must be approved by the majority of the
directors or trustees
(b) Must be with approval/assent of the
stockholders representing 2/3 of
outstanding capital stock or 2/3 of the
members in a meeting duly called for the
purpose after written notice.
The sale is void if requirements not complied
with. (Islamic Directorate pf the Philippines vs. Court
of Appeals, G.R. No. 117897 May 14, 1997)
When authorization by the
stockholder/members not necessary even
if sale involves all or substantially all of
corporate assets or property
(1) When the disposition of property and assets
is necessary in the usual and regular course
of business of the corporation
(2) If the proceeds of the sale or other
disposition of such property and assets shall
be appropriated for the conduct of its
remaining business
(3) When the sale is incidental or necessary to
accomplish the purpose of the corporation
(Sec. 39, RCC)
When the sale pertains to “substantially
all” of the corporate assets
It is substantially all if the corporate property and
assets of the corporation is rendered incapable of
continuing the business or accomplishing the
purpose for which it was incorporated. The test is
not the amount involved but the nature of the
transaction. (Sec. 39, RCC; SEC-OGC Opinion No. 19-
01 dated January 31, 2019; SEC-OGC Opinion No. 13-
13)
The determination of whether or not the sale
involves all or substantially all of the corporation's
properties and assets must be computed based
on its net asset value, as shown in its latest
financial statements. (Sec. 39, RCC)
Directors Approval
If transaction does not cover all or substantially
all assets, decision of Board is sufficient and
stockholders’ approval not necessary. (SEC-OGC
Opinion No. 19-01 dated January 31, 2019)
Effect of Sale
General The transferee-corporation of all or
Rule substantially all of the assets of the
transferor-corporation will not be
liable for the debts of said transferor-
corporation. (Aquino & Aquino,
Commentaries and Jurisprudence on
the Revised Corporation Code of the
Philippines, 2020 edition, p. 477)
Exception Nell Doctrine
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 The transferee-corporation is liable:
(a) If there is an express or implied
assumption of liabilities;
(b) The transaction amounts to a
consolidation or merger;
(c) If the transaction is entered into
fraudulently in order to escape
liability from debtors or the
purchase was in fraud of
creditors; and
If the purchase becomes a
continuation of the seller (Edward
Nell Co. vs. Pacific Farms, Inc., G.R.
No. L-20850, November 29, 1965)
Conditions for valid exercise of the power to
dispose of corporate assets:
(a) Majority vote of the board of
directors/trustees.
(b) Authorization by the vote of stockholders
representing at least 2/3 of the outstanding
capital stock or 2/3 of the members in case
of non-stock corporation in a meeting duly
called for that purpose.
(c) Written notice of the proposed action and of
the time and place of meeting addressed to
each stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the addressee
in the post office with postage prepaid,
served personally, or electronically when
allowed in the by-laws or with consent of the
stockholder.
(d) The sale of the assets shall be subject to the
provisions of existing laws on illegal
combinations and monopolies. (Sec. 39, RCC)
(e) Any dissenting stockholder shall have the
option to exercise his appraisal right.
Board of Directors or Trustees may abandon the
sale or disposition of all or substantially all
corporate assets even after having authorized by
the stockholders or member without further
action by the latter, subject to the rights of third
parties under any contract relating thereto. (Sec.
39, RCC)
Abandonment of sale
Board of Directors or Trustees may abandon the
sale or disposition of all or substantially all
corporate assets even after having authorized by
the stockholders or member without further
action by the latter, subject to the rights of third
parties under any contract relating thereto. (Sec.
39, RCC)
g) POWER TO ACQUIRE OWN SHARES
Purchase or acquire own shares (Sec. 40, RCC);
A stock corporation shall have the power to
purchase or acquire its own shares for legitimate
corporate purposes, provided that the
corporation has unrestricted retained earnings in
its books to cover the shares to be
purchased/acquired. (Sec. 40, RCC)
Requirements
(a) The acquisition is for a legitimate corporate
purpose or purposes; and
(b) The corporation has unrestricted retained
earnings in its books to cover the shares to
be purchased or acquired (Aquino & Aquino,
Commentaries and Jurisprudence on the Revised
Corporation Code of the Philippines, 2020 edition,
p. 486)
Purposes for acquisition of shares
(a) To eliminate fractional shares arising out of
stock dividends;
(b) To collect or compromise an indebtedness to
the corporation, arising out of unpaid
subscription, in a delinquency sale, and to
purchase delinquent shares sold during said
sale; and
(c) To pay dissenting or withdrawing
stockholders entitled to payment for their
shares under the provisions of the RCC. (Sec.
40, RCC)
When a corporation may redeem its own
share
(a) To redeem redeemable shares; (Sec. 8, RCC)
(b) To acquire treasury shares; (Sec. 9, RCC)
(c) To eliminate fractional shares arising out of
stock dividends. (Sec. 40(a), RCC)
(d) To collect or compromise an indebtedness to
the corporation arising out of unpaid
subscription in a delinquency sale, and to
84
 purchase delinquent shares sold during said
sale; (Sec. 40(b), RCC)
(e) To pay dissenting or withdrawing
stockholders entitled to payment for their
shares – in the exercise of appraisal right;
(Sec. 40(c), RCC)
(f) To effect a decrease of capital stock;
(g) In close corporations, when there is a
deadlock in the management of the business.
(Sec. 103, RCC)
(h) In close corporations, a stockholder may
compel the corporation to purchase his
shares, for any reason, provided only that the
corporation has sufficient assets in its books
to cover its debts and liabilities exclusive of
capital stock (Sec. 104, RCC)
Conditions before a corporation may
acquire its own share
(a) The corporate capital is not thereby impaired;
(b) It should be for legitimate and proper
corporate objectives;
(c) The condition of the corporate affairs
warrants it;
(d) The transaction is designed to carry out in
good faith and without prejudice to the rights
of creditors and stockholders;
(e) There is no intended and there results no
undue advantage to a few favored
stockholders at the expense of the reminder;
(f) The rights of the creditor are not jeopardized;
(g) There must be surplus (profit) to reacquire
them. (Ladia and Reyes, The Revised Corporation
Code of the Philippines, Annotated, 2021, p.279,
citing SEC Opinion addressed to Trident Dev’t
Corp., December 1982)
Rule on unrestricted retained earnings
requirement
General Corporation cannot use its capital
rule stock to purchase its own shares,
that is, corporate assets below the
Legal or Stated Capital but only
Surplus Profits. (Ladia and Reyes,
The Revised Corporation Code of
the Philippines, Annotated, 2021,
p.279)
Reason: The requirement of
unrestricted retained earnings to
cover the shares is based on the
trust fund doctrine which means
that the capital stock, property and
other assets of a corporation are
regarded as equity in trust for the
payment of corporate creditors. The
reason is that creditors of the
corporation are preferred over the
stockholders in the distribution of
corporate assets. There can be no
distribution of assets among
stockholders without first paying
corporate creditors. Hence, any
disposition of corporate funds to the
prejudice of creditors is null and
void. (Boman Environmental
Development Corporation vs. CA,
G.R. No. 77860, November 22,
1988)
Exceptions (a) In the redemption of
redeemable shares (Sec. 8,
RCC);
(b) In case of deadlock in a close
corporation, when SEC orders
the corporation to purchase
shares of any stockholder at fair
value (Sec. 103, RCC); and
(c) In case of a close corporation,
any stockholder may, for any
reason, exercise their right to
compel the corporation to
purchase their share at their fair
value which shall not be less
than par or issued value when
the corporation has sufficient
assets in its books to cover its
debts and liabilities exclusive of
capital stock. (Sec. 104, RCC)
The creditors of a corporation have the right to
assume that so long as there are debts and
liabilities, the board of directors of the corporation
will not use its assets to purchase its own stock
or to declare dividends to its stockholders when
the corporation is insolvent. (Steinberg vs. Velasco,
G.R. No. No. 30460. March 12, 1929)
h) POWER TO INVEST CORPORATE FUNDS
IN ANOTHER CORPORATION OR
BUSINESS
Invest in another corporation, business or for any
other purpose (Sec. 41, RCC);
85
Primary Purpose
Where the investment by the corporation is
reasonably necessary to accomplish its primary
purpose as stated in the Articles of Incorporation,
the approval of the stockholders or members shall
not be necessary. (Sec. 41, RCC) Only the approval
of the board is needed. (SEC Opinion No. 54, Series
of 2003 dated November 3, 2003)
Exception to the Primary Purpose Rule:
In case the SEC-registered domestic corporation
or association is made an incorporator, its
investment in the new corporation must be
approved by a majority of the board of directors
or trustees and ratified by the stockholders
representing at least 2/3 of the OCS, or by at least
2/3 of the members if it’s a non-stock corporation
at a meeting duly called for the purpose.
Even if the investment in the new corporation is
reasonably necessary to accomplish the investor-
incorporator’s primary purpose, ratification by the
stockholders or members is required. (SEC
Memorandum Circular No. 16, dated July 30, 2019)
Pursuing Secondary Purpose
Subject to the provisions of this Code, a private
corporation may invest its funds in any other
corporation, business, or for any purpose other
than the primary purpose for which it was
organized:
(a) When approved by a majority of the board of
directors or trustees
(b) The approval of the board of directors or
trustees must be ratified by the stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock, or by at least two
thirds (2/3) of the members in the case of
nonstock corporations, at a meeting duly
called for the purpose.
(c) Notice of the proposed investment and the
time and place of the meeting shall be
addressed to each stockholder or member at
the place of residence as shown in the books
of the corporation and deposited to the
addressee in the post office with postage
prepaid, served personally, or sent
electronically in accordance with the rules
and regulations of the Commission on the use
of electronic data message, when allowed by
the bylaws or done with the consent of the
stockholders. (Sec. 41, RCC)
“May Invest its Funds”
The phrase “may invest its funds” has been held
by the SEC to mean an investment in the form of
money, stock, bonds and other liquid assets and
does not include real properties or other fixed
assets. (Ladia and Reyes, The Revised Corporation
Code of the Philippines, Annotated, 2021 edition, p.
283)
Exercise of Appraisal Rights
Any dissenting stockholder shall have the option
to exercise his appraisal right. It’s a remedy given
to any dissenting stockholder to exercise this
right as a protection because his investment will
be exposed to additional risks which was not
contemplated when he made the investment
(Aquino & Aquino, Questions and Answers on the
Revised Corporation Code, 2020 edition, p. 491-
492).
Only approval by majority of the Board of
Directors or Trustees is required if investment is
in line with the corporation’s primary purpose.
When stockholder’s approval necessary
When the purchase of shares of another
corporation is done solely for investment and not
to accomplish the purpose of its incorporation,
the vote of approval of the stockholders is
necessary (De la Rama vs. Ma-ao Sugar Central Co.,
Inc., G.R. Nos. L-17504 & L-17506., February 28,
1969)
When stockholder’s approval not necessary
An act, if done pursuance of the corporate
purpose, does not need the approval of the
stockholders; but when the purchase of shares of
another corporation is done solely for investment
and not to accomplish the purpose of its
incorporation, the vote of approval of the
stockholders is necessary, and further states that
when purpose or purposes as stated in its articles
of incorporation, the approval of the stockholders
is not necessary. (De la Rama vs. Ma-ao Sugar
86
Central Co., Inc., G.R. Nos. L-17504 & L-17506.,
February 28, 1969)
Illustration: Ma-ao Sugar Central’s primary
purpose is sugar manufacturing business. It
invested in Philippine Fiber, a corporation
engaged in the manufacture of sugar bags. The
Supreme Court ruled that the stockholder’s prior
approval is not necessary because sugar bags are
essential to sugar manufacturing, which is the
primary purpose of the corporation. (De la Rama
vs. Ma-ao Sugar Central Co., Inc., G.R. Nos. L-17504 &
L-17506., February 28, 1969)
If the investment is made in a corporation whose
business is important to the investing corporation
and would aid it in its purpose, the prior approval
of stockholders is not necessary. To require
authority of the stockholders would be to unduly
curtail the power of the Board of Directors
Illustration: SMC’s primary purpose was beer
manufacturing and marketing. SMC invested in
beer manufacturing facilities. The Supreme Court
ruled that stockholders’ approval is not necessary
because beer manufacturing facility would aid
SMC in its primary purpose. (Gokongwei, Jr. vs.
Securities and Exchange Commission, G.R. No. L-
45911, April 11, 1979)
Ratification of ultra-vires investment
Purely ultra vires corporate acts of corporate
officers to invest corporate funds in another
business or corporation, i.e., acts not contrary to
law, morals, public order as public policy, may be
ratified by the stockholders holding 2/3 of the
voting power. (Gokongwei, Jr. vs. Securities and
Exchange Commission, G.R. No. L-45911, April 11,
1979)
i) POWER TO DECLARE DIVIDENDS
Discretion to Declare dividends (Sec. 42,
RCC)
The Board of Directors has the discretion to
declare dividends out of the unrestricted retained
earnings which shall be payable in cash, property,
or in stock to all stockholders on the basis of
outstanding stock held by them. (Sec. 42, RCC)
Dividends
It refers to the part or portion of the profits of the
enterprise which the corporation sets apart for
ratable distribution among the holders of the
capital stock.
Dividends are corporate profits allocated, lawfully
declared and ordered by the directors to be paid
to the stockholders on demand or at a fixed time.
(Aquino, 2011, p. 376, citing SEC Memorandum
Circular No. 11, Series of 2009)
In other words, it is the shares of stock that are
ORIGINALLY ISSUED by the corporation and
FORMING PART OF THE CAPITAL that can be
exchanged for cash or services rendered, or
property; that is, if the corporation has original
shares of stock unsold or unsubscribed, either
coming from the original capitalization or from the
increased capitalization. STOCK DIVIDENDS are
issued only to stockholders because only
stockholders are entitled to dividends. (Nielson and
Co. v. Lepanto Consolidated Mining, G.R. No. L- 21601,
December 28, 1968).
Difference between Profits and Dividends
Profits are the sources of dividends. Profits are
dividends only when they have been set aside for
distribution to stockholders under the conditions
specified by law. Profits belong to the corporation
while dividends once declared, belong to the
stockholder. (Divina, Questions and Answers on the
Revised Corporation Code, 2020 edition, p. 299)
Nature; Valuation of dividends
Dividends, regardless of the form these are
declared, that is, cash, property or stocks, are
valued at the amount of the declared dividend
taken from the unrestricted retained earnings of
a corporation. Thus, the value of the declaration
in the case of a stock dividend is the actual value
of the original issuance of said stocks. In G.R. No.
127937 we said that "in the case of stock
dividends, it is the amount that the corporation
transfers from its surplus profit account to its
capital account" or "it is the amount that the
corporation receives in consideration of the
original issuance of the shares." It is "the
87
distribution of current or accumulated earnings to
the shareholders of a corporation pro rata based
on the number of shares owned." Such
distribution in whatever form is valued at the
declared amount or monetary equivalent.
(Philippine Long Distance Telephone Company vs.
National Telecommunications Commission, G.R. No.
152685, December 4, 2007)
Requirements for dividend declaration
1. Unrestricted retained earnings;
2. Resolution of the board; and,
3. If stock dividends are declared, there must be
resolution of the board with the concurrence
of the 2/3 of the outstanding capital. (Aquino,
Philippine Corporate Law Compendium, 2011, p.
372)
Retained Earnings
The accumulated profits realized out of normal
and continuous operations of the business after
deducting therefrom distributions to stockholders
and transfer to capital stock or other accounts.
(Sec. 2, Memorandum Circular No. 11, Series of 2009)
Unrestricted Retained Earnings
transfers to capital stock or other accounts which
is:
(1) Not appropriated by its Board of Directors for
corporate expansion projects or programs;
(2) Not covered by a restriction for dividend
declaration under a loan agreement; and
(3) Not required to be retained under special
circumstances obtaining in the corporation
such as when there is a need for as special
reserve for probable contingencies (Sec. 2,
Memorandum Circular No. 11, Series of 2009)
Persons entitled to receive dividends
General rule: Dividends belong to the person
who owns the stock at the time of the declaration
of dividend on the basis of outstanding stock held
by them. (SEC Opinions dated July 15, 1994 and
November 12, 1996)
Exception: A record date may be provided for.
A record date is the future date specified in the
resolution declaring dividend that the dividend
shall be payable to those who are stockholders of
record on such specified future date or as of the
date of the meeting declaring such dividends.
(SEC Opinions dated June 19, 1991, August 6, 1990,
and June 5, 1974)

The amount of accumulated profits and gains Forms of Dividend:

realized out of the normal and continuous 1. Cash
operations of the company after deducting 2. Property
therefrom distributions to stockholders and 3. Stock

Cash Dividends Property Dividends Stock Dividends

Distribution
of funds or money paid to
stockholders generally as part of
the corporation's current earnings
or accumulated profits.
Nature
It refers to the paid in property Stock dividends is the amount that the
instead of cash where the surplus corporation transfers from its surplus
is in that form and it is practicable profit account to its capital account. It is
to do so distribute them among the distribution of current or accumulated
the shareholders (SEC Opinion earnings to the shareholders of a
dated February 5, 1991) corporation pro rata based on the number
of shares owned. Such distribution in
whatever form is valued at the declared
amount or monetary equivalent.
(Philippine Long Distance Telephone
Company vs. National

88

Requisites for dividend declaration
(1) There must be unrestricted (1) There must be unrestricted (1) There must be unrestricted retained
retained earnings or surplus retained earnings or surplus
profit as of the last fiscal or profit as of the last fiscal or
calendar year calendar year
(2) Resolution approved by (2) Resolution
majority of the Board of majority of the Board of
Directors declaring such Directors declaring such
dividends dividends
Note: If the stock dividend declaration requires
an increase of authorized capital stock, an
application therefor is mandated to be filed with
the SEC pursuant to Sec. 37 of the RCC (SEC
Opinion No. 19-23 dated June 17, 2019)
No Dividends from the Capital
General Dividends cannot be declared out of
Rule the capital.
Dividends either cash or stock
dividend must be declared out of
unrestricted retained earnings
because of the Trust Fund Doctrine.
The Trust Fund Doctrine provides
that subscriptions to the capital
stock of a corporation constitute a
fund to which the creditors have the
right to look for the satisfaction of
their claims. (Ong v. Tiu, G.R. No.
144476, 18 Apr. 2003) Thus,
dividends must never impair the
subscribed capital stock.
Exceptions (a) Liquidating dividends; and
(b) Dividends from Investments in
Wasting Assets Corporation.
(Aquino & Aquino,
Commentaries and
Jurisprudence on the Revised
Corporation Code of the
Philippines, 2020 edition, p.
505)
Telecommunications Commission, G.R.
No. 152685, December 4, 2007)
earnings or surplus profit as of the last
fiscal or calendar year
(2) Resolution approved by majority of
approved by the Board of Directors declaring such
dividends
(3) Approval of stockholders
representing at least two-thirds
(2/3) of the outstanding capital
stock at a regular or special meeting
duly called for the purpose
(4) The declared stock dividends must not
exceed the authorized capital stock
under its Articles of Incorporation
Interim Income
General Rule The presence of unrestricted
retained earnings can be
determined only at the end of the
fiscal year, thus, there can be no
dividend declaration for profits in a
fiscal year that has not yet expired.
Exceptions (1) The amount of the dividends
involved would not be impaired
by losses during the remaining
period of the year;
(2) The projected income for the
remaining period shall be
submitted to the SEC; and
(3) Should the company sustain
losses during the remaining
period, the dividends should be
refunded. (Aquino, (Philippine
Corporate Law Compendium,
2011, p. 384)
Stock corporation prohibited from retaining
surplus profit in excess 100%
General Rule Stock corporations are prohibited
from retaining surplus profits in
excess of 100% of their paid-up
capital stock.
Exceptions (1) When justified by definite
corporate expansion projects or
programs approved by the
board of directors;
(2) When the corporation is
prohibited under any loan
89
 agreement with any financial
institution or creditor, whether
local or foreign, from declaring
dividends without its/his
consent, and such consent has
not yet been secured; or
(3) When it can be clearly shown
that such retention is necessary
under special circumstances
obtaining in the corporation,
such as when there is a need for
special reserve for probable
contingencies. (Sec. 42, RCC)
Effects of Stock Delinquency on Dividends
Declared
(1) Any cash dividends due on delinquent stock
shall first be applied to the unpaid balance on
the subscription plus costs and expenses.
(2) Stock dividends shall be withheld from the
delinquent stockholders until their unpaid
subscription is fully paid. (Sec. 42, RCC)
(3) Enter into management contracts (Sec. 43,
RCC).
j) POWER TO ENTER INTO
MANAGEMENT CONTRACT
Management Contract
An agreement whereby one undertakes to
manage or operate all or substantially all of the
business or another, whether such contracts are
called service contracts, operating agreements or
otherwise. (Sec. 43, RCC)
Section 43 of the Revised Corporation Code do
not cover every contract denominated as
“Management Contract.” It applies only to every
contract whereby a corporation undertakes to
manage or operate all or substantially all of the
business of another corporation, whether such
contracts are called service contracts, operating
agreements or otherwise.
Rationale
Because of the nature of the business of a
corporation or because of the loans a corporation
may incur, it may be necessary to assure not only
technical competence but continuity in
management policy in running corporation affairs
which can be achieved through management
contract. (Proceedings of Corporation Code as cited in
Ladia, The Corporation Code of the Philippines,
Annotated, 2007, p.286)
Approving Authority
The management contract must be approved by
at least the majority of the BOD or BOT of both
the managing and managed corporation; AND
2. The contract must be approved by the
stockholders owning at least the majority of
the outstanding capital stock (OCS), or
members in case of a non-stock corporation,
of both the managing and the managed
corporation, at a meeting duly called for the
purpose.
When 2/3 approval of stockholders or
members is required
The contract must be approved by the
stockholders of the managed corporation owning
at least two-thirds (2/3) of the total Outstanding
Capital Stock entitled to vote, or by at least two-
thirds (2/3) of the members in the case of a
nonstock corporation when:
(a) Stockholder or stockholders representing the
same interest of both the managing and the
managed corporations own or control more
than one-third (1/3) of the total outstanding
capital stock (OCS) entitled to vote of the
managing corporation (Interlocking
Stockholders);
(b) Majority of the members of the board of
directors of the managing corporation also
constitute a majority of the members of the
board of directors of the managed
corporation (Interlocking Directors).
(c) Where the contract would constitute the
management or operation of all or
substantially all of the business of another
corporation, whether such contracts are
called service contracts, operating
agreements, or otherwise (Sec. 43, RCC)
90
 General No management contract shall be
Rule entered into for a period longer than
five (5) years for any one (1) term.
Exception Service contracts or operating
agreements which relate to the
exploration, development,
exploitation, or utilization of natural
resources that may be entered into
for such periods as may be provided
by pertinent laws or regulations.
Maximum term
The maximum term prescribed under Sec. 43 is
five (5) years. However, it was intended that this
period may be subject to renewal.
A period is provided for to give the stockholders
the opportunity to review the management
contract and to decide if the contract will be
continued. (Aquino, 2011, p. 393)
The option to renew rule is not always
available, if based of experience that there has
been some abuse on the managing corporation,
the contract will not be renewed for another term.
(Aquino & Aquino, Commentaries and Jurisprudence
on the Revised Corporation Code of the Philippines,
2020 edition, p. 518)
Instance where a Management Contract
Cannot be entered into
A management contract cannot be entered into
with a foreign corporation for partly or wholly
nationalized activities that are covered by the
Anti-Dummy Law, Intervention in management
and operations is not allowed in those activities.
(Ibid.)
k) DOCTRINE OF INDIVIDUALITY OF
SUBSCRIPTION
No certificate of stock shall be issued to a
subscriber until the full amount of his subscription
together with interest and expenses (in case of
delinquent shares), if any is due, has been paid.
(Sec. 63, RCC)
All partial payments on one subscription shall be
deemed applied proportionately among the
number of shares. (De Leon, Corporation Code supra
at 565)
The failure to pay any of the installments due
would necessarily affect all other installments,
because the subscription is to be treated as one,
whole, entire and indivisible contract. The default
of payment on any of the installment results in
the entire subscription becoming due and
demandable. (Villanueva-Castro, Commercial Law,
supra at 175).
Pursuant to this doctrine, unpaid subscription
cannot be transferred in parts. It is only upon full
payment of the whole subscription contract that
the stockholder can transfer the same to several
transferees. (SEC Opinion 16-05 dated March 31,
2015)
l) DOCTRINE OF EQUALITY OF
SHARES
Each share shall be equal in all respects to every
other share, except as otherwise provided in the
articles of incorporation and in the certificate of
stock. (Sec. 6, RCC)
All stocks issued by the corporation are presumed
equal with the same privileges and liabilities,
provided that the Articles of Incorporation is
silent on such differences. (Commissioner of
Internal Revenue vs. CA, et al., G.R. No. 108576,
January 20, 1999)
m) ULTRA VIRES DOCTRINE
No corporation under this Code shall possess or
exercise any corporate powers except those
conferred by this Code or by its articles of
incorporation and except as necessary or
incidental to the exercise of the powers so
conferred. (Sec. 44, RCC)
Ultra Vires Act
An “ultra vires” act is one committed outside the
object for which a corporation is created as
defined by the law of its organization and
therefore beyond the power conferred upon it by
law. The term "ultra vires" is "distinguished from
91
an illegal act for the former is merely voidable
which may be enforced by performance,
ratification, or estoppel, while the latter is void
and cannot be validated. (Atrium Management
Corporation vs. Court of Appeals, G.R. No. 109491,
February 28, 2001)
General Corporate acts that are outside those
Rule express definitions under the law or
articles of incorporation or those
committed outside the object for which
a corporation is created are ultra vires.
Exception When the acts are necessary and
incidental to carry out a corporation’s
purposes and to the exercise of powers
conferred by the Corporation Code and
under a corporation’s article of
incorporation. (University of Mindanao,
Inc. vs. Bangko Sentral ng Pilipinas,
G.R. No. 194964-65, January 11, 2016)
Types of Ultra Vires Acts
(1) Acts done beyond the powers of the
corporation as provided in the law or its
articles of incorporation.
which are merely ultra vires. The former
contemplates the doing of an act which is
contrary to law, morals, or public order, or
contravene some rules of public policy or public
duty, and are, like similar transactions between
individuals, void. They cannot serve as basis of a
court action, nor acquire validity by performance,
ratification, or estoppel. Mere ultra vires acts, on
the other hand, or those which are not illegal and
void ab initio, but are not merely within the scope
of the articles of incorporation, are merely
voidable and may become binding and
enforceable when ratified by the stockholders.
(Pirovano vs. De La Rama Steamship, G.R. No. L-5377,
December 29, 1954)
Thus, even though a person did not give another
person authority to act on his or her behalf, the
action may be enforced against him or her if it is
shown that he or she ratified it or allowed the
other person to act as if he or she had full
authority to do so. (University of Mindanao vs BSP
G.R. No. 194964-65, January 11, 2016)

(2) Acts entered into on behalf of the corporation Ultra Vires Act vs. Illegal Act
by persons who have no corporate authority ULTRA VIRES ACT ILLEGAL ACT
or exceeded the scope of their authority. Ultra vires acts are those One that is contrary to
which are not illegal and law, morals, public
(3) Acts or contracts, which are per se illegal as void ab initio, but are not order, public policy or
merely within the scope public duty, and is
being contrary to law (Divina, Divina on
of the articles of necessarily an ultra
Commercial Law: A Comprehensive Guide Volume
incorporation. It is vires act.
I, 2021 Edition, pp. 518)
neither wrong in itself nor
against public policy, but
When can ultra-vires act become binding which is defective from a
and enforceable failure to observe in its
execution a requirement
Ultra-vires act may be enforced by performance, of law
ratification, or estoppel, as long as there are no Merely voidable which Void and cannot be
creditors, or the creditors are not injured thereby, may be enforced or validated.
and where the rights of the state or the public are validated by
performance, ratification,
not involved. (Pirovena vs. De La Rama Steampship
or estoppel.
Co, G.R. No. L-5377, December 29, 1954)
(Divina, Divina on Commercial Law: A Comprehensive
Guide Volume I, 2021 Edition, pp. 520)
Ultra Vires Act distinguished from Illegal
Act Consequence of ultra vires acts

A distinction should be made between corporate (a) If the contract is executed on both sides,
acts or contracts which are illegal and those the courts will not set aside or interfere to

92
 deprive either party of what has been
acquired under them.
(b) If the contract is executory on both sides,
it will not be enforced at the suit of either
party, because their enforcement is not
required by any equitable principles, and will
be contrary to public policy.
(c) If the contract is executed on one side,
and executory on the other, courts in
some jurisdictions, although not in all, will
enforce in favor of the party who has
executed the same on his part against the
other party who has received and retained
the benefits on the ground that equitable
principles and outweighing considerations of
public policy, require that the latter should
not be permitted, while retaining the benefits
of the contract, to escape liability on the
ground that it was ultra vires.
(d) Contracts, whether wholly executory or
executed on one side, apparently
authorized, but in fact, ultra vires
because they are made for a purpose not
within the scope of the business of the
corporation, the ultra vires purpose being
unknown to the other party, are enforceable
against the corporation (Divina, Divina on
Commercial Law: A Comprehensive Guide Volume
I, 2021 Edition, pp. 521-522).
The articles authorize collection of fees from
members but they do not authorize the
corporation to engage in the business of
registering and accepting war notes for deposit
and collecting fees from such services. Neither
does the association has authority to accept and
collect fees for reparation claims for civilian
casualties and other injuries. This is beyond any
of the powers of the association as embodied in
its articles and have absolutely no relation to the
avowed purpose of the association to work for the
redemption of war notes. (Japanese War Notes
Claimants Asso. Inc. vs. Securities and Exchange Com.,
G.R. No. L-8987, May 23, 1957)
Corporate officers, such as the president and
vice-president, have no power to execute for
mere accommodation a negotiable instrument of
the corporation for their individual debts or
transactions arising from or in relation to matters
in which the corporation has no legitimate
concern. Since such accommodation paper
cannot thus be enforced against the corporation,
especially since it is not involved in any aspect of
the corporate business or operations, the
signatories thereof (president and vice-president)
shall be personally liable therefor, as well as the
consequences arising from their acts in
connection therewith. (Crisologo-Jose vs. Court of
Appeals, G.R. No. 80599, September 15, 1989)
The doctrine of ultra vires, when invoked for or
against a corporation, should not be allowed to
prevail where it would defeat the ends of justice
or work a legal wrong. The defense of the ultra
vires doctrine is by some courts regarded as an
ungracious and odious one, to be sustained only
where the most persuasive considerations of
public policy are involved, and there are
numerous decisions and dicta to the effect that
the plea should not as a general rule prevail
whether interposes for or against the corporation,
where it will not advance justice but on the
contrary will accomplish a legal wrong. (Carlos vs.
Mindoro Sugar Co., G.R. No. 36207, October 26, 1932)
n) TRUST FUND DOCTRINE
The trust fund doctrine provides that
subscriptions to the capital stock of a corporation
constitute a fund to which the creditors have a
right to look for the satisfaction of their claims.
(Ong vs. Tiu, G.R. Nos. 144476 and 144629, April 8,
2003)
In a sense they have to be unimpaired for the
protection of creditors. These cover the entire
consideration received for the issuance of no par
value shares or the aggregate amount for the par
value shares issued by the corporation.
It must be noted, however, that the trust fund
doctrine is not limited to stockholders’
subscriptions. The scope of the doctrine
encompasses not only the capital stock but also
other property and assets generally regarded in
equity as a trust fund for the payment of
93
corporate debts. (Halley vs. Printwell, Inc. G.R. No.
157549, May 30, 2011)
The requirement of unrestricted retained
earnings to cover the shares is based on the trust
fund doctrine which means that the capital stock,
property and other assets of a corporation are
regarded as equity in trust for the payment of
corporate creditors. The reason is that creditors
of a corporation are preferred over the
stockholders in the distribution of corporate
assets. There can be no distribution of assets
among the stockholders without first paying
corporate creditors. Hence, any disposition of
corporate funds to the prejudice of creditors is
null and void. Creditors of a corporation have the
right to assume that so long as there are
outstanding debts and liabilities, the board of
directors will not use the assets of the corporation
to purchase its own stock. (Turner vs. Lorenzo
Shipping Corporation, G.R. No. 157479, November 24,
2010)
The trust fund doctrine is violated in the
following cases:
(a) When the corporation releases or condones
payment of the unpaid subscription.
(b) When there is payment of dividends without
unrestricted retained earnings.
(c) When properties are transferred in fraud of
creditors.
(d) When properties are disposed of or undue
preference is given to some creditors even if
the corporation is insolvent (Sundiang and
Aquino, Reviewer on Commercial Law, 2019
Edition, pp. 277)
HOW POWERS ARE EXERCISED
A corporation exercises its power through the
BOD and/or its duly authorized officers and
agents. (Philippine Corporate Law, Villanueva, 2013,
p. 227)
By the shareholders
By exercising their right to vote in the following:
(a) Election or removal of directors/trustees;
(b) Management contract;
(c) Adoption, amendment or repeal of by-laws;
(d) Fixing the issued price of no-par value shares,
if Board of Directors (BOD) is not authorized
by the articles of incorporation;
(e) Amendment of articles of incorporation;
(f) Ratification of certain acts of directors;
(g) Extension or shortening of corporate term;
(h) Increase or decrease of capital stock;
(i) Incur, create or increase in bonded
indebtedness;
(j) Denial of pre-emptive right;
(k) Sale, lease, exchange, mortgage, pledge or
disposal of all or substantially all of corporate
assets;
(l) Investment of corporate funds in another
corporation or business or for any other
purpose other than the primary purpose
(m) Issuance of stock dividends;
(n) Merger or consolidation. (Sundiang & Aquino,
Reviewer on Commercial Law, 2019, p. 243)
By the Board of Directors
The Board of Directors exercises the powers of
the corporation. Generally, the Board alone,
without the concurrence of the stockholders,
cannot overrule the directors in its exercise of the
corporate powers. (Sec. 22, RCC)
By the officers
In some cases, corporate officers like the
President can also bind the corporation. The
authority of such individuals to bind the
corporation is generally derived from:
(1) Law,
(2) Corporate by-laws,
(3) Authorization from the board, either
expressly or impliedly by habit, custom or
acquiescence in the general course of
business. (Sundiang & Aquino, Reviewer on
Commercial Law, 2019, p. 241)
By the corporate officer or agent
A corporate officer or agent may represent and
bind the corporation in transactions with third
persons to the extent that the authority to do so
has been conferred upon him, and these include:
94
(1) Powers that, in the usual course of the
particular business, are incidental to those
expressly provided,
(2) Powers that may be implied from the powers
intentionally conferred,
(3) Powers added by custom and usage, as
usually pertaining to the particular officer or
agent,
(4) Such apparent powers as the corporation has
caused person dealing with the officer or
agent to believe that it has conferred.
(University Of Mindanao, Inc., vs. Bangko Sentral
Ng Pilipinas, et al., G.R. No. 194964-65, January
11, 2016)
A. The Board of Directors/ Trustees exercises
the powers of the corporation (Sec. 22, RCC).
Generally, the Board alone, without the
concurrence of the stockholders/ members,
may exercise the powers. The
stockholders/members cannot overrule the
directors in the latter’s exercise of the
corporate powers.
The powers are not exercised by the Board
directly if:
(a) There is a management contract (Sec. 43,
RCC); and
(b) The powers of the Board are delegated
by majority vote (of the Board) to an
executive committee. (Sec. 34, RCC)
B. In some cases, corporate officers like the
President can also bind the corporation. The
authority of such individuals to bind the
corporation is generally derived from:
(a) Law;
(b) Corporate By-laws; or
(c) Authorization from the Board, either
expressly or impliedly by habit, custom or
acquiescence in the general course of
business. (Inter-Asia Investment Industries,
Inc. vs. Court of Appeals, G.R. No. 125778,
June 10, 2003)
C. A corporate officer or agent may represent
and bind the corporation in transactions with
third persons to the extent that the authority
to do so has been conferred upon him, and
these include:
(a) Powers that, in the usual course of the
particular business, are incidental to
those expressly provided;
(b) Powers that may be implied from the
powers intentionally conferred;
(c) Powers added by custom and usage, as
usually pertaining to the particular officer
or agent; and
(d) Such apparent powers as the corporation
has caused the person dealing with the
officer or agent to believe that it has
conferred. (Inter-Asia Investment
Industries, Inc. vs. Court of Appeals, G.R. No.
125778, June 10, 2003, J. Carpio-Morales)
D. An officer may also bind the corporation if he
has apparent authority. Apparent authority is
derived not merely from practice. Its
existence mat be ascertained through:
(a) The general manner in which the
corporation holds out an officer or agent
as having the power to act or, in other
words, the apparent authority to act in
general, with which it clothes hum; or
(b) The acquiescence in his acts of a
particular nature, with actual or
constructive knowledge thereof, within or
beyond the scope of his ordinary powers.
It requires presentation of evidence of similar
acts executed either in its favor or in favor of
other parties. It is not the quantity of similar acts
which establishes apparent authority, but the
vesting of a corporate officer with power to bind
the corporation. (Georg vs. Holy Trinity College, Inc.,
G.R No. 190408, July 20, 2016, J. Perez)
Necessary concurrence or ratification of the
stockholders/ members in the following
instances:
(a) To extend or shorten corporate term (Sec. 36,
RCC);
(b) To increase/ decrease corporate stock (Sec.
37, RCC);
(c) To incur, create or increase bonded
indebtedness (Sec. 37, RCC);
(d) To deny pre-emptive right after corporation-
since the denial is required to be in the
Articles of Incorporation or any amendment
thereto, and approval of amendments to the
95
 Articles of Incorporation requires the vote or
written assent of stockholders representing
2/3 of the outstanding capital stock or 2/3 of
members (Sec. 15 and 38, RCC);
(e) To sell, dispose, lease, encumber all or
substantially all of corporate assets (Sec. 39,
RCC);
(f) To invest in another corporation, business
other than the primary purpose like the
secondary purpose (Sec. 41, RCC);
(g) To declare stock dividends (Sec. 42, RCC);
(h) To enter into management contract (Sec. 43,
RCC);
(i) To amend the Articles of Incorporation (Sec. 15,
RCC);
(j) Voluntary dissolution (Sec. 134 and 135, RCC);
(k) To adopt, amend or repeal the By-laws (Sec.
46 and 48, RCC);
(l) Delegate to the Board the power to amend
the By-laws (Sec. 48, RCC); and
(m) Revoke the power of the Board to amend the
By-laws, which was previously delegated
(Sec. 47, RCC).
8. STOCKHOLDERS AND MEMBERS
Ways by Which a Person May Become a
Stockholder
(1) Entering into a subscription contract;
(2) One becomes a stockholder upon
acceptance by the corporation of his offer to
subscribe.
(3) Purchasing of treasury shares from the
corporation;
(4) Purchasing or acquiring shares from existing
stockholders; and
(5) Person whose ownership by transfer are
registered in the stock and transfer book are
considered stockholders of record (Sec. 62,
RCC)
(6) Acquiring shares through other modes of
acquiring ownership like succession.
(Sundiang & Aquino, Reviewer on Commercial
Law, p. 280.)
a) FUNDAMENTAL RIGHTS OF A
STOCKHOLDER
Fundamental Rights of Stockholders
Control and Participation in Management
Rights
(1) Right to elect and remove directors (Secs. 23
and 27, RCC);
(2) Right to adopt, amend, or repeal the by-laws
or adopt a new by-law (Secs. 45 and 47, RCC);
(3) Right to attend and vote in person or by
written proxy at stockholder’s meetings (Secs.
49 and 57, RCC);
(4) Right to compel the calling of meetings (Sec.
49, RCC);
(5) Right to approve or ratify certain corporate
actions (Sec. 50, RCC);
(6) Right to enter into voting trust agreements
(Sec. 58, RCC); and
(7) Right to have the corporation voluntarily
dissolved (Secs. 134 and 135, RCC)
Proprietary Rights
(1) Right to pre-emption in the issuance of
shares (Sec. 38, RCC);
(2) Right to dividends when declared (Sec. 42,
RCC);
(3) Right to issuance of stock certificate for fully
paid shares (Sec. 62, RCC);
(4) Right to transfer of stocks in the corporate
books (Sec. 62, RCC);
(5) Right to exercise appraisal right (Sec. 80,
RCC); and
(6) Right to proportionate participation in the
distribution of assets in liquidation (Secs. 134,
135, and 139, RCC)
Other Fundamental Rights
(1) Right to demand payment in the exercise of
appraisal right (Secs. 40 and 80, RCC);
(2) Right to recover stocks unlawfully sold for
delinquent payment of subscription (Sec. 68,
RCC);
(3) Right to inspect books and records (Sec. 73,
RCC);
96
(4) Right to be furnished with the most recent
financial statements or reports (Sec. 74, RCC);
and
(5) Right to file individual, representative,
and/or derivative suit.
Fundamental Rights of a Member
(1) Right to vote (Sec. 88, Revised Corporation
Code); and
A member is entitled to one (1) vote.
Note: Right to vote of a member may be
broadened, limited, and/or denied in the
articles of incorporation or by-laws (Sec. 88,
RCC).
(2) Right to transfer membership (Sec. 89,
RCC).
A member cannot transfer his membership (and
rights arising therefrom) in a non-stock
corporation unless the articles of incorporation or
the by-laws provide for transferability of
membership (Sec. 89, RCC)
b) PARTICIPATION IN MANAGEMENT
Right to Vote
Stockholders and members may vote in person or
by proxy in all meetings of stockholders or
members (Sec. 57, RCC)
The right to vote is a right that is inherent in and
incidental to the ownership of corporate stock,
and as such, it is a property right.
The right is generally vested with legal owner of
the shares. Whoever owns the shares as
appearing in the books of the corporation
exercises, therefore, the right to vote. (Ladia, The
Corporation Code of the Philippines, Annotated, 2007,
p. 326)
Limitations on the Right to Vote:
(1) Where the Articles of Incorporation provides
for classification of shares pursuant to Sec. 6,
non-voting shares are not entitled to vote
except as provided under the same section;
(2) Preferred or redeemable shares may be
deprived of the right to vote unless otherwise
provided in the RCC;
(3) Fractional shares of stock cannot be voted
unless they constitute at least one full share;
(4) Treasury shares have no voting rights as long
as they remain in the treasury;
(5) Holders of stock declared delinquent by the
board of directors for unpaid subscription are
not entitled to vote or a representation at any
stockholder’s meeting;
(6) A transferee of stock cannot vote if his
transfer is not registered in the stock and
transfer book; and
(7) A stockholder is still entitled to vote even if
the shares are mortgaged or pledged unless
he authorizes the creditor in writing to vote.
(Sundiang & Aquino, Reviewer on Commercial
Law, 2017, p. 249)
Manner of Voting
Stockholders or members may vote in all
meetings of stockholders or members:
1. In person (Sec. 57, RCC)
2. By proxy (Secs. 49, 57, RCC)
3. Through remote communication or in
absentia (Sec. 49, RCC)
4. By executors, administrators, receivers, and
other legal representatives duly appointed by
the court. (Sec. 54, RCC)
Note: Voting through remote communication or
in absentia shall be allowed only when so
authorized in the by-laws or by majority of the
Board of Director or Trustees, except in
corporation vested with public interest where
voting through remote communication or in
absentia is available despite the absence of
provision in the by-laws allowing the same (Sec.
58, in relation to Sec. 49, RCC)
Representative Voting
1. Voting by Proxy
2. Trust Agreement
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a. PROXY
Stockholders and members may vote in person or
by proxy in all meetings of stockholders or
members (Sec. 57, RCC)
A proxy is a form of agency created in instances
when a person is unable to personally cast his or
her vote; hence, the act of voting is delegated to
another person. (Cezar Yatco Real Estate Services,
Inc., vs. Bel-Air Village Association Inc., G.R. No.
211780, November 21, 2018)
A proxy is the written instrument signed by the
stockholder authoring another person to exercise
the voting rights of the former. It may also refer
to the person exercising the voting authority
granted by the stockholder. (Divina, Questions and
Answers on the Revised Corporation Code, 2020, p.
366)
The term is also used to refer to the instrument
or paper which is evidence of the authority of an
agent or the holder thereof to vote for and in
behalf of the stockholder or member. (Ladia, The
Corporation Code of the Philippines Annotated, 2007,
p. 328)
Note: Any natural person who has the legal
capacity to act may be a proxy. He is basically an
agent, with the stockholder granting the proxy as
his principal. A stockholder disqualified to vote
under the RCC or the corporation’s bylaws may
be appointed proxy as long as he has the legal
capacity. (Divina, Questions and Answers on the
Revised Corporation Code, 2020, p. 366)
Purpose of Proxy
Through proxies, stockholders can ensure their
participation and voting during the stockholders
meeting and protect their interest even though
they may not by physically present (Divina,
Questions and Answers on the Revised Corporation
Code, p. 366)
Two types of proxy:
(1) General – gives a general discretionary
power of attorney to vote for directors and all
ordinary matters that may properly come
before a meeting. It is not an authority,
however, to vote for fundamental changes in
the corporate charter or for other unusual
transactions, unless so specified.
(2) Limited – restricts the authority to vote on
specified matters only and may direct the
manner in which the vote will be cast. (Ladia
and Reyes, The Revised Corporation Code of the
Philippines, Annotated, 2021 edition, pp. 339-340)
Characteristics of a Proxy
(1) It shall be in writing;
(2) It shall be signed and filed by the stockholder
or member in any form authorized in the by-
laws;
(3) It shall be received by the corporate
secretary within a reasonable time before the
scheduled meeting;
(4) It shall be valid only for the meeting for which
it is intended, unless otherwise provided in
the proxy; and
(5) No proxy shall be valid and effective for a
period longer than five (5) years at any one
time. (Sec. 57, RCC)
Note: No broker or dealer shall give any proxy,
consent or any authorization, in respect of any
security carried for the account of the customer,
to a person other than the customer, without
written authorization of the customer. (Sec. 20.4,
R.A. 8799)
Personal Right
The appointment of a proxy is a purely personal
and the right to vote inseparable from the
ownership of the share. Hence, the proxy must
be given by the shareholder and cannot be
imposed by the corporation. (SEC-OGC Opinion No.
19-37 dated September 13, 2019)
Rule on Formalities
General Every Proxy shall be in writing, signed
rule and filed by the stockholder or
member in any form authorized in the
by-laws (Sec. 57, RCC)
Exception Executors, administrators, receivers,
and other legal representatives duly
appointed by the court may attend
and vote on behalf of the
98
 stockholders or members without
need of any written proxy. (Sec. 54,
RCC)
Note: No broker or dealer shall give any proxy,
consent or any authorization, in respect of any
security carried for the account of the customer,
to a person other than the customer, without
written authorization of the customer. (Sec. 20.4,
R.A. 8799)
Who may act as proxy
Any natural person who has the legal capacity to
act may be a proxy. He is basically an agent, with
the stockholder granting the proxy as his
principal. A stockholder disqualified to vote under
the RCC or the corporation’s bylaws may be
appointed proxy as long as he has the legal
capacity. (Divina, Questions and Answers on the
Revised Corporation Code, 2020 edition, p. 366)
Proxies, who are not stockholders or members,
cannot be elected as a director or trustee. (Lim v.
Moldex Land, Inc., G.R. No. 206038, January 25,
2017).
Effect of security interest in shares of stock
The stockholder-grantor shall have the right to
attend and vote at meetings of stockholders,
unless the secured creditor is expressly given by
the stockholder-grantor such right in writing
which is recorded in the appropriate corporate
books. (Sec. 54, RCC)
Revocation of Proxy
As a general rule, one who has given a proxy the
right to vote may revoke the same at any time,
unless said proxy is coupled with interest, even
though it may appear by its terms to be
irrevocable. It may be revoked in writing, orally,
or by conduct. (Aquino & Aquino, Commentaries and
Jurisprudence on the Revised Corporation Code of the
Philippines, 2020, p. 586, citing SEC Opinion dated
October 28, 1991)
(1) VOTING TRUST
It is an agreement whereby one or more
stockholders of a stock corporation may create a
voting trust for the purpose of conferring upon a
trustee or trustees the right to vote and other
rights pertaining to the shares for a period not
exceeding five (5) years at any one time. (Sec. 58,
RCC)
It is a trust created by an agreement between a
group of the stockholders of a corporation and
the trustee or by a group of identical agreements
between individual stockholders and a common
trustee, whereby it is provided that for a term of
years, or for a period contingent upon a certain
event, or until the agreement is terminated,
control over the stock owned by such
stockholders, either for certain purposes or for all
purposes, is to be lodged in the trustee, either
with or without a reservation to the owners, or
persons designated by them, of the power to
direct how such control shall be used. (Lee vs.
Court of Appeals, G.R. No. 93695 February 4, 1992)
Period
General Any Voting Trust shall not exceed 5
Rule years at a time.
Exception In case of a voting trust specifically
required as a condition in a load
agreement, said voting trust may be
for a period exceeding five (5) but
shall automatically expire upon full
payment of the load. (Sec. 58, RCC)
Purpose of Voting Trust
Voting trust is a control device by which a group
may gain or retain control over the management
of the corporation. This control device is allowed
as long as it is not entered into for purposes of
circumventing the laws against anti-competitive
agreements, abuse of dominant position, anti-
competitive mergers and acquisitions, violations
of nationality and capital requirements, or for the
perpetration of fraud. (Divina, Questions and
Answers on the Revised Corporation Code, 2020, p.
371)
Parties in Voting Trust Agreement
A Voting a Trust Agreement is entered only
between the trustee and certain stockholders.
The corporation itself is not a party or signatory
99
thereto. Thus, a corporation cannot enforce the
voting trust agreement executed by the
stockholder and trustees. Voting is personal in
nature for those who are qualified and willing to
vote. The voting trust is personal to the
stockholder and trustees. (NDC. vs. Aquino, G.R.
No. L-34192 and G.R. No. L-34213, June 30, 1988)
Effect of Voting Trust Agreement
The most immediate effect of a voting trust
agreement on the status of a stockholder who is
a party to its execution — from legal titleholder
or owner of the shares subject of the voting trust
agreement, he becomes the equitable or
beneficial owner. On the other hand, the trustee
becomes the titleholder or legal owner of the
shares subject of the voting trust agreement. (Lee
vs. Court of Appeals, G.R. No. 93695 February 4, 1992)
In any event, a voting trust transfers only voting
or other rights pertaining to the shares subject of
the agreement or control over the stock. It does
not transfer the corporation’s assets. (NDC. vs.
Aquino, G.R. No. L-34192 and G.R. No. L-34213, June
30, 1988)
Powers or Rights of Voting Trustees:
(1) Shall possess the right to vote and other
rights pertaining to the shares so transferred
and registered to the shares in his or their
names subject to the terms and conditions of
and for the period specified in the
agreement;
(2) May vote in person or by proxy unless the
agreement provides otherwise;
(3) The trustee may exercise the rights of
inspection of all corporate books and records;
(4) The trustee is the legal title holder or owner
of the shares so transferred under the
agreement. He is, therefore, qualified to be a
director (Sundiang & Aquino, Reviewer on
Commercial Law, 2019, p.302)
However, the trustee is not entitled to proprietary
rights, like dividends and the assets of the
corporation under dissolution and liquidation.
(Divina, Questions and Answers on the Revised
Corporation Code, 2020, p. 370)
Limitations on the Voting Trust Agreement
(1) It should not exceed five years at any time,
provided, that in case of a voting trust
specifically required as a condition in a loan
agreement, said voting trust may be for a
period exceeding five (5) years but shall
automatically expire upon full payment of the
loan;
(2) A voting trust agreement must be in writing
and notarized and specify the terms and
conditions thereof;
(3) A certified copy of such agreement shall be
filed with the corporation and with the SEC;
otherwise, the agreement is ineffective and
unenforceable;
(4) The certificate or certificates of stock covered
by the voting trust agreement shall be
canceled and new ones shall be issued in the
name of the trustee or trustees, stating that
they are issued pursuant to said agreement.
The books of the corporation shall state that
the transfer in the name of the trustee or
trustees is made pursuant to the voting trust
agreement;
(5) The trustee or trustees shall execute and
deliver to the transferor, voting trust
certificates, which shall be transferable in the
same manner and with the same effect as
certificates of stocks;
(6) The voting trust agreement filed with the
corporation shall be subject to examination
by any stockholder of the corporation in the
same manner as any other corporate book or
record; provided that both the trustor and the
trustee or trustees may exercise the right of
inspection of all corporate books and records
in accordance with the provisions of the RCC.
(7) No voting trust agreement shall be entered
into for purposes of circumventing the laws
against anti-competitive agreements, abuse
of dominant position, anti-competitive
mergers and acquisitions, violation of
nationality and capital requirements, or for
the perpetuation of fraud;
(8) Unless expressly renewed, all rights granted
in a voting trust agreement shall
automatically expire at the end of the agreed
period. The voting trust certificates, as well
as the certificates of stock in the name of the
100
 trustee or trustees, shall thereby be deemed
canceled and new certificates of stock shall
be reissued in the name of the trustors;
(9) The voting trustee or trustees may vote by
proxy or in any manner authorized under the
bylaws unless the agreement provides
otherwise. (Divina, Questions and Answers on
the Revised Corporation Code, 2020, p. 372)
Voting Trust Agreement and Proxy Compared
Voting Trust
Irrevocable
Legal title to the share is transferred to the trustee
The certificate of stock shall be cancelled and a new one
issued in the trustee’s name
It must be notarized
The trustor-shareholder cannot vote
It cannot be for a specific meeting
The trustee can vote by proxy
The trustee votes in his/her own right as holder of legal
title
The trustee can be elected as a director (Aquino &
Aquino, Commentaries and Jurisprudence on the Revised
Corporation Code of the Philippines, 2020, p. 595)
A trustee can vote and exercise all the rights of a
stockholder (Divina, Questions and Answers on the
Revised Corporation Code, 2020, p. 372)
Test to distinguish a Voting Trust
Agreement from Proxies
In order to distinguish a voting trust agreement
from proxies and other voting pools and
agreements, it must pass three criteria or tests,
namely:
(1) that the voting rights of the stock are
separated from the other attributes of
ownership;
(2) that the voting rights granted are intended to
be irrevocable for a definite period of time;
and
(3) that the principal purpose of the grant of
voting rights is to acquire voting control of
the corporation (Lee vs. Court of Appeals, G.R.
No. 93695 February 4, 1992)
Note: A corporation cannot enforce the voting
trust agreement executed by the stockholder and
trustees. Voting is personal in nature for those
who are qualified and willing to vote. The voting
trust is personal to the stockholder and trustees.
(NDC. vs. Aquino, G.R. No. L-34192 and G.R. No. L-
34213, June 30, 1988)
Proxy
Generally revocable
No transfer of title
No cancellation of the certificate shall be made
Need not be notarized
The shareholder retains his right to vote
It can be for a specific meeting
The proxy cannot further delegate his/her authority to
vote and must therefore vote in person
The proxy is the agent of the shareholder
The proxy, as such, cannot be elected as a director
(Aquino & Aquino, Commentaries and Jurisprudence on
the Revised Corporation Code of the Philippines, 2020,
p. 595)
A proxy cannot be voted and cannot qualify as a director
of a corporation unless he is a stockholder in his own
right
No right to inspect is granted unless separately
authorized for that purpose (Divina, Questions and
Answers on the Revised Corporation Code, 2020, p. 372)
(2) CASES WHEN STOCKHOLDERS’ ACTION
IS REQUIRED
i. BY A MAJORITY VOTE
(1) Retention of existing corporate term (Sec. 11,
RCC)
(2) Election of directors/trustees (Sec. 23, RCC)
(3) Grant of compensation to directors other
than per diems (Sec. 29, RCC)
(4) Entering into a Management Contract, except
those instances subject to 2/3 votes of the
outstanding capital stock (Sec. 43, RCC)
(5) Adoption of by-laws (Sec. 45, RCC)
(6) Amendment or repeal of by-laws (Sec. 45,
RCC)
101
(7) Revocation of the power to amend, repeal or
adopt by-laws which were delegated to the
Board (Sec. 47, RCC)
(8) Fixing the issued price of no-par value shares,
if the Board of Directors is not authorized by
the Articles of Incorporation (Sec. 61, RCC)
(9) Voluntary Dissolution where no creditors are
affected (Sec. 134, RCC)
ii. BY A TWO-THIRDS VOTE
(1) Amendment of Articles of Incorporation
(Sec. 15; Sec. 102, RCC)
(2) Removal of directors/trustees (Sec. 27,
RCC)
(3) Ratification of a contract of self-dealing
directors (Sec. 31, RCC)
(4) Ratification of an act of a disloyal
director (Sec. 33, RCC)
(5) Extension or shortening of corporate
term (Sec. 36, RCC)
(6) Increase or decrease capital stock (Sec.
37, RCC)
(7) Incur, create, or increase bonded
indebtedness (Sec. 37, RCC)
(8) Denial of pre-emptive right (Sec. 38,
RCC)
(9) Sale, lease, exchange, mortgage,
pledge, or disposal of all or substantially
all of corporate asset (Sec. 39, RCC)
(10) Investment of corporate funds in
another corporation or business or for
any other purpose other than the
primary purpose (Sec. 41, RCC)
(11) Issuance of stock dividend (Sec. 42, RCC)
(12) Entering into a management contract if
(a) A stockholder or stockholders
representing the same interest of both
the managing and the managed
corporation own or control more than
1/3 of the total outstanding capital
entitled to vote of the managing
corporation; or
(b) A majority of the members of the
board or director of the managing
corporation also constitute a majority
of the members of the board of
directors of the managed corporation
(Sec. 43, RCC)
(13) Delegation of the power to amend, repeal
or adopt new by-laws to the Board of
Directors (Sec. 47, RCC)
(14) Merger or consolidation (Sec. 76, RCC)
(15) Amendment to the plan of merger or
consolidation (Sec.76, RCC)
(16) Adoption of plan or distribution of assets of
non-stock corporation (Sec. 94, RCC)
(17) Incorporation of a religious society (Sec.
114, RCC)
(18) Voluntary dissolution where creditors are
affected (Sec. 135, RCC)
iii. BY CUMULATIVE VOTING
It is the right of a stockholder to give a candidate
as many votes as the number of directors to be
elected multiplied by the number of his shares.
In stock corporations, it is a matter of right while
in non-stock corporations, it can only be allowed
if it is provided in the Articles of Incorporation or
by-laws.
Cumulative voting gives the stockholder entitled
to vote the right to give a candidate as many
votes as the number of directors to be elected
multiplied by the number of his shares shall equal
or he may distribute them among the candidates
as he may see fit.
This is granted by law to each stockholder with
voting rights. However, in non-stock
corporations, cumulative voting is generally not
allowed, UNLESS allowed by the AOI or by-laws.
In the election of Directors, a stockholder may
cast as many votes as there are number of
directors to be elected multiplied by the number
of the shares owned and either:
a. Give all the votes to one (1) candidate; or
b. Distribute them among as many candidates
as he may see fit (Sec. 23, RCC)
Note: No delinquent stock shall be voted for.
Members of nonstock corporations may cast as
many votes as there are trustees to be elected
but may not cast more than one (1) vote for one
102
(1) candidate, unless otherwise provided in the
articles of corporation. (Sec. 23, RCC)
Nominees for directors or trustees receiving the
highest number of votes shall be declared
elected.
Manner of Voting; Voting Trust
Stockholders or members may vote in all
meetings of stockholders or members:
1. In person
2. By proxy
3. Through remote communication
4. In absentia (Sec. 57, RCC)
Note: Voting through remote communication or
in absentia shall be allowed only when so
authorized in the by-laws or by majority of the
Board of Director or Trustees, except in
corporations vested with public interest where
voting through remote communication or in
absentia is available despite absence of provision
in the by-laws allowing the same. (Sec. 58, in
relation to Sec. 49, RCC)
iv. WITHOUT BOARD RESOLUTION
(1) 2/3 of outstanding capital stock – delegate to
the board the power to amend the by-laws;
(2) Majority of the outstanding capital stock –
revoke the power of the board to amend the
by- laws which was previously delegated.
(3) Removal of directors by a vote of the
stockholders representing at least 2/3 of the
outstanding capital stock.
The term “outstanding capital stock (OCS),”
means the total shares of stock issued under
binding subscription contracts to subscribers or
stockholders, whether fully or partially paid,
except treasury shares (Sec. 173, RCC).
(3) MANNER OF VOTING
c) PROPRIETARY RIGHTS
These rights pertain to certain economic benefits
that accrue to his shares, such as:
(1) Right to Dividends
(2) Right of Appraisal
(3) Right to Inspect
(4) Pre-emptive Right
(5) Right to Vote
(6) Right of First Refusal (Divina, Questions and
Answers on the Revised Corporation Code, 2020
edition, p. 374)
(1) RIGHTS TO DIVIDENDS
The right of the stockholder to demand payment
of dividends after board declaration.
Stockholders are entitled to dividends pro rata
based on the total number of shares that they
own and not on the amount paid for the shares.
General Stock corporations are prohibited from
Rule retaining surplus profits in excess of
100% of their paid-in capital stock
Exception (1) When justified by definite
corporate expansion projects or
programs approved by the board
of directors; or
(2) When the corporation is prohibited
under any loan agreement with
any financial institution or creditor,
whether local or foreign, from
declaring dividends without its/his
consent, and such consent has not
yet been secured; or
(3) When it can be clearly shown that
such retention is necessary under
special circumstances obtaining in
the corporation, such as when
there is need for special reserve
for probable contingencies (Sec.
43, RCC)
Period when the right to dividends accrues
General The right of the stockholders to be
Rule paid dividends vest as soon as they
have been lawfully and finally
declared by the board of Directors.
From that time, the corporation
becomes indebted to each
stockholder who may recover the
debt, as an ordinary unsecured
creditor may do, against the
corporation.
In case of transfer of shares,
dividends declared before the
transfer shall belong to the transferor
while those declared after the
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 transfer shall belong to the
transferee. (Ladia and Reyes, The
Revised Corporation Code of the
Philippines, Annotated, 2021, p. 291)
Exception (1) It is only the stockholders of
record as of the date of the
declaration of dividends or
holders of record on a certain
future date, as the case may be,
who are entitled to receive
dividends unless the parties have
agreed otherwise. (SEC Opinion,
Nov. 12, 1986; Cojuangco vs.
Sandiganbayan, 586 SCRA 790,
April 24, 2009).
Right to Dividends in relation to specific kind of
shares of stock
Share of Right to Dividends
stock
Common Holder of common stock is entitled to
shares an equal pro-rata division of profits or
dividends but without any preference
or advantage over any stockholder or
class of stockholders (Ladia and
Reyes, The Revised Corporation Code
of the Philippines, Annotated, 2021, p.
52)
Preferred Holder of preferred shares of stock
shares of may be given preference in the
stock distribution of dividends (Sec. 6, RCC)
Unpaid Holders of subscribed shares which
shares of are not fully paid, which are not
stock but delinquent, shall have all the rights of
not a stockholder. Thus, he is entitled to
delinquent receive dividends (Sec. 71, RCC)
Delinquent If cash dividends – any cash dividends
shares of due on delinquent stock shall be first
stock be applied to the unpaid balance on
the subscription plus costs and
expenses (Sec. 42, RCC)
If stock dividends – withheld until their
unpaid subscription is fully paid (Ibid.)
Treasury treasury shares do not have the status
shares of of outstanding shares. Consequently,
stock it participates neither in dividends,
because dividends cannot be declared
by the corporation to itself
(Commissioner vs. Manning, G.R. No.
L-28398 August 6, 1975)
Persons entitled to receive dividends
Dividends are payable to the stockholders of
record as of the date of the declaration of
dividends or holders of record. Dividends
declared before the transfer of shares belong to
the transferor and those declared after the
transfer belongs to the transferee, unless the
parties have agreed otherwise. (SEC Opinion, Nov.
12, 1986; Cojuangco vs. Sandiganbayan, 586 SCRA
790, April 24, 2009).
(2) APPRAISAL RIGHT
It is the right of a stockholder who dissents from
certain corporate actions to demand payment of
the fair value of his or her shares. (Turner vs.
Lorenzo Shipping Corporation, G.R. No. 157478,
November 24, 2010)
Purpose
The purpose of the right of appraisal is to protect
the property rights of dissenting stockholders
from actions by the majority shareholders which
alters the nature and character of their
investments. (Ladia and Reyes, The Revised
Corporation Code of the Philippines, Annotated, 2021,
p. 435)
When available
Instances when the right of appraisal may be
exercised
(1) In case an amendment to the articles of
incorporation has the effect of changing or
restricting the rights of any stockholder or
class of shares, or of authorizing preferences
in any respect superior to those of
outstanding shares of any class, or of
extending or shortening the term of
corporate existence;
(2) In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all
or substantially all of the corporate property
and assets as provided in the Code;
(3) In case of merger or consolidation; and
104
(4) In case of investment of corporate funds for
any purpose other than the primary purpose
of the corporation. (Sec. 80, RCC)
(5) In a close corporation, stockholder may, for
any reason, compel the corporation to
purchase shares held at fair value, which
shall not be less than the par or issued value,
when the corporation has sufficient assets in
its books to cover its debts and liabilities
exclusive of capital stock. (Sec. 104, RCC)
Requisites
(1) Any Ground for appraisal must be present.
(2) A written demand on the corporation must be
made within 30 days after the date when the
vote was taken
(3) The dissenting stockholders attend the
meeting of the stockholders and voted
against the proposed action.
(4) The price of the Fair Market Value of the
shares on the day before the date of voting.
In case of disagreement, the value will be
determined by appraisal of 3 disinterested
persons (Sec 82, RCC)
(5) The corporation has sufficient unrestricted
retained earnings to pay (Turner vs. Lorenzo
Shipping Corporation, G.R. No. 157478, November
24, 2010)
Effect of the exercise of right of appraisal
All rights accruing to the dissenting stockholder’s
shares, including voting and dividend rights, shall
be suspended, except the right of such
stockholder to receive payment of the fair value
thereof. (Sec. 82, RCC)
Limitations on the exercise of appraisal
right
(1) Any of the instances provided by law for the
exercise of the right by a dissenting
stockholder must be present.
(2) The dissenting stockholder must have voted
against the proposed corporate action. The
right is not available to a stockholder who
was either absent at the meeting where the
corporate action was approved, or was
present at such meeting but abstained from
casting his vote.
(3) A written demand on the corporation for
payment of his shares must be made by him
within 30 days after the date the vote was
taken. Failure to make the demand within
such period shall be deemed a waiver of the
appraisal right.
(4) The price must be based on the fair value of
the shares as of the day prior to the date on
which the vote was taken. If the proposed
corporate action is implemented or effected,
the payment shall be made upon surrender
of the certificates of stock representing his
shares.
(5) Such fair value must be determined as
provided in Sec. 82. The fair value shall
exclude any appreciation or depreciation in
anticipation of such corporate action.
(6) Payment of the shares must be made only
out of the unrestricted earnings of the
corporation. No payment shall be made to
any dissenting stockholder unless the
corporation has unrestricted retained
earnings in its books to cover the payment.
The trust fund doctrine backstops the
requirement of unrestricted retained earnings
to fund the payment of the shares of stocks
of the withdrawing stockholders (Philip Turner,
et al., v. Lorenzo Shipping Corp., G.R. No. 157479,
November 24, 2010)
(7) Upon such payment, the stockholder must
transfer his shares to the corporation
(Sections 81 and 42, RCC)
Disagreement as to the fair value of shares
If within a period of 60 days from the date the
corporate action was approved by the
stockholders, the withdrawing stockholder and
the corporation cannot agree on the fair value of
the shares, it shall be determined and appraised
by three (3) disinterested persons, one of whom
shall be named by the stockholder, another by
the corporation, and the third by the two thus
chosen.
The findings of the majority of the appraisers
shall be final, and their award shall be paid by the
105
corporation within 30 days after such award is
made. (Sec. 82, RCC)
Cost of Appraisal
To be paid:
(1) By the corporation
(a) Where the price which the corporation
offered to pay the dissenting stockholder is
lower than the fair value as determined by
the appraisers named by them;
(b) Where an action is filed by the dissenting
stockholder to recover such fair value and
the refusal of the stockholder to receive
payment is found by the court to be
justified.
(2) By the dissenting stockholder
(a) Where the price offered by the
corporation is approximately the same as
the fair value ascertained by the
appraisers;
(b) Where the same action is filed by the
dissenting stockholder and his refusal to
accept payment is found by the court to
be unjustified (Sec. 84, RCC)
Cases when payment should not be made
(1) Where the demand for payment is withdrawn
with the consent of the corporation;
(2) If the proposed corporate action is
abandoned or rescinded by the corporation;
(3) If the proposed corporate action is
disapproved by the Securities and Exchange
Commission where approval is necessary;
and
(4) If the Securities and Exchange Commission
determines that such stockholder is not
entitled to the appraisal right;
(5) Failure to make a demand with the 30-day
period provided for in Section 81 of the RCC;
(6) The shares are transferred by the dissenting
shareholder; and
(7) The dissenting shareholder failed to submit
the stock certificate/s within 10 days from his
written demand for payment of the value of
his shares. (Aquino & Aquino, Commentaries and
Jurisprudence on the Revised Corporation Code of
the Philippines, 2020 edition, p. 726-727)
The stockholder is not allowed by law to
unilaterally withdraw his demand for payment.
Consent of the corporation is indispensable. (Sec.
83, RCC)
When the right of the dissenting stockholder to
be paid the fair value of his shares ceases in the
cases enumerated above, his status as a
stockholder shall thereupon be restored, and all
dividend distributions which would have accrued
on his shares shall be paid to him. (Sec. 83, RCC)
Effect of transfer of shares by a dissenting
stockholder
If certificates bearing such notation are
transferred, and the certificate consequently
cancelled, the rights of a transferor as a
dissenting stockholder shall cease, the transferee
shall have all the rights of a regular stockholder,
and all dividend distributions which would have
accrued on such shares shall be paid to the
transferee. (Sec. 85, RCC)
(3) RIGHT TO INSPECT
Persons who may exercise the right to
inspect and period to inspect
Corporate records, regardless of the form in
which they are stored, shall be open to
inspection: by any director, trustee, stockholder
or member of the corporation in person or by a
representative at reasonable hours on business
days, and a demand in writing may be made by
such director, trustee or stockholder at their
expense, for copies of such records or excerpts
from said records. (Sec. 73, RCC)
Basis of right of inspection
The stockholder's right of inspection of the
corporation's books and records is based upon
their ownership of the assets and property of the
corporation. It is, therefore, an incident of
ownership of the corporate property. This right is
predicated upon the necessity of self-protection.
It is given to him as such and must be exercised
by him with respect to his interest as a
stockholder and for some purpose germane
106
thereto or in the interest of the corporation. The
inspection has to be germane to his interest as a
stockholder, and has to be proper and lawful in
character and not inimical to the interest of the
corporation. Thus, the right of inspection must be
exercised in good faith, for specific and honest
purpose, and not to gratify curiosity, or for
speculative or vexatious purposes. (Gokongwei vs.
SEC, G.R. No. L-45911 April 11, 1979)
Rule on Inspection
General Stockholders are entitled to full
Rule information as to the management
of the corporation and the manner
of expenditure of its funds, and to
inspection to obtain such
information, especially where it
appears that the company is being
mismanaged or that it is being
managed for the personal benefit of
officers or directors or certain of the
stockholders to the exclusion of
others.
Exception The one requesting it must not have
been guilty of using improperly any
information through a prior
examination, and that the person
asking for such examination must
be "acting in good faith and for a
legitimate purpose in making his
demand."
(Gonzales vs. PNB, G.R. No. L-33320 May 30, 1983)
Right of Inspection over wholly-owned
subsidiary corporation
Stockholders of parent corporation’s right
extends to a wholly owned subsidiary which is
completely under the control and management of
the parent company where he is such a
stockholder.
When the parent and subsidiary are legally being
operated as separate and distinct entities, there
is no such right of inspection on the part of the
stockholder of the parent company (Gokongwei vs.
SEC, G.R. No. L-45911 April 11, 1979)
Rule on denial of right of inspection
Neither the executive officers nor the board of
directors have the power to deprive a stockholder
of the right altogether. A by-law unduly restricting
the right of inspection is undoubtedly invalid.
(Pardo vs. Hercules Lumber, G.R. No. L-22442, August
1, 1924)
Remedy in case of denial of the right to
inspect
(a) If the corporation denies or does not act on
a demand for inspection and/or reproduction,
the aggrieved party may report such to SEC.
Within 5 days from receipt of such report,
SEC shall conduct a summary investigation
and issue an order directing the inspection or
reproduction of the requested records.
(b) Mandamus – in such event, the corporate
secretary shall be included as a party
respondent since he is customarily charged
with the custody of all documents or records
of the corporation and against whom
personal order of the court would be made.
(c) Damages either against the corporation or
the responsible officer who refused the
inspection (Sec. 73, RCC)
(d) Criminal complaint under Sec. 161 of the RCC
(Sec. 73, RCC)
(Ladia and Reyes, The Revised Corporation Code of the
Philippines, Annotated, 2021, p. 414-415)
Defenses available to the corporation
It shall be a defense to any action under Section
73 that the person demanding to examine and
copy excerpts from the corporation’s records and
minutes:
(a) has improperly used any information secured
through any prior examination of the records
or minutes of such corporation or of any
other corporation; or
(b) was not acting in good faith or for a
legitimate purpose in making the demand to
examine or reproduce corporate records; or
107
(c) is a competitor, director, officer, controlling
stockholder or otherwise represents the
interests of a competitor.
(4) PREEMPTIVE RIGHT
It is the preferential right granted to all
stockholders of a corporation to subscribe to all
issues or disposition of shares of any class, in
proportion to their respective shareholdings. (Sec.
38, RCC)
The right may be restricted or denied by the
articles of incorporation, and subject to certain
exceptions and limitations. The stockholder must
be given a reasonable time within which to
exercise their preemptive rights. Upon the
expiration of said period, any stockholder who
has not exercised such right will be deemed to
have waived it.
Purpose
To enable the shareholder to retain his
proportionate control in the corporation (non-
dilution) and to retain his equity in the surplus
When not available
a. Denied by the articles of incorporation or an
amendment thereto; or
b. To shares issued in compliance with laws
requiring stock offerings or minimum stock
ownership by the public; or
c. To shares issued in good faith with the
approval of the stockholders representing 2/3
of the outstanding capital stock, in exchange
for property needed for corporate purposes
or in payment of a previously contracted
debt; or
d. Waiver of such right by the stockholder,
whether express or implied.
The stockholder must be given reasonable time
within which to exercise their preemptive rights.
Upon the expiration of said period, any
stockholder who has not exercised such right is
deemed to have waived it. (Majority Stockholders of
Ruby Industrial Corp. v. Lim, G.R. Nos. 165887 &
165929, June 6, 2011)
The validity of issuance of additional shares may
be questioned if done in breach of trust by the
controlling stockholders. Thus, even if the pre-
emptive right does not exist, either because the
issue comes within the exceptions in Section 38
or because it is denied or limited in the articles of
incorporation, an issue of shares may still be
objectionable if the directors acted in breach of
trust and their primary purpose is to perpetuate
or shift control of the corporation, or to "freeze
out" the minority interest. (Majority Stockholders vs.
Lim G.R. No. 165887, June 6, 2011)
Preemptive Right in Close Corporation
The preemptive right of stockholders in close
corporations shall extend to all stock to be issued,
including reissuance of treasury shares, whether
for money, property or personal services, or in
payment of corporate debts, unless the articles of
incorporation provide otherwise. (Sec. 101, RCC)
Any shareholder of a close corporation, may for
any reason, compel the close corporation to buy
shares which shall not be less than the par or
issued value, provided that the close corporation
has the sufficient funds exclusive of outstanding
capital stock.
Preemptive rights of stockholders in ordinary
stock corporations may be denied if the shares
are to be issued:
(a) in compliance with laws requiring stock
offering or minimum stock ownership by the
public
(b) in exchange for property needed for
corporate purposes
(c) in payment of previously contracted debts
(Sec. 38, RCC)
Sec. 38 vs. Sec. 101
Sec. 38. The shareholders of an ordinary stock
corporation cannot exercise their preemptive
right in case the shares are to be issued in
compliance with the laws requiring minimum
stock ownership or shares issued in good faith
with approval of ⅔ OCS for payment to the debts
or properties needed to be paid by the
corporation. The treasury shares are included
(Note Sec. 38 uses the word “any”).
108
Sec. 101. In case of close corporation, if not
denied by the provision of AOI can exercise its
preemptive right even for money, payment of
indebtedness or property. Exceptions will not
apply to close corporation, unless provided in the
AOI.
Any shareholder of a close corporation, may for
any reason, compel the close corporation to buy
shares which shall not be less than the par or
issued value, provided that the close corporation
has the sufficient funds exclusive of outstanding
capital stock.
Exercise of pre-emptive right
Pre-emptive right must be exercised in
accordance with the AOI or the By-Laws. When
the AOI and the By-Laws are silent, the Board
may fix a reasonable time within which the
stockholders may exercise the right.
Stock Transactions covered includes:
(a) The re-issuance of treasury shares which
would cover the increase in the authorized
capital stock;
(b) Opening for subscription the unissued portion
of existing capital stock; and
(c) Disposition of treasury shares.
Re-issuance of treasury shares
When a corporation reacquires its own shares
which thereby become treasury shares, all
shareholders are entitled to pre-emptive right
when the corporation reissues or sells these
treasury shares. The re-issuance of treasury
shares is not among the exception provided by
Sec. 39 when pre-emptive right does not exist.
Transferability
Pre-emptive right is transferable unless there is
an express restriction in the Articles of
Incorporation.
Waiver
The stockholder may waive his pre-emptive right
either expressly or impliedly as when the
stockholder fails to exercise his pre-emptive right
after being notified and given an opportunity to
avail of such right.
Denial
The corporation can deny pre-emptive right if the
articles of incorporation or amendment thereto
denies such right. The stockholder must be given
a reasonable time within which to exercise their
preemptive rights. Upon the expiration of said
period, any stockholder who has not exercised
such right is deemed to have waived it. (Majority
Stockholders of Ruby Industrial Corp. vs. Lim and the
Minority Stockholders of Ruby Industrial Corp., G.R.
Nos. 165887 & 165929, June 6, 2011)
(5) RIGHT TO VOTE
No share may be deprived of voting rights except
those classified and issued as "preferred" or
"redeemable" shares (Sec. 6, RCC)
The right to vote is a right that is inherent in and
incidental to the ownership of corporate stock,
and as such, it is a property right. The right is
generally vested with legal owner of the shares.
Whoever owns the shares as appearing in the
books of the corporation exercises, therefore, the
right to vote. (Ladia, The Corporation Code of the
Philippines, Annotated, 2007, p. 326)
The stockholders can exercise their right to vote
through the election, replacement and removal of
Board of Directors or Trustees and on other
corporate acts which require stockholders’
approval.
One of the rights of a stockholder is the right to
participate in the control and management of the
corporation that is exercised through his vote.
The right to vote is a right inherent in and
incidental to the ownership of corporate stock,
and such is a property right. (Castillo v.
Balinghasay, 440 SCRA 442, 2004)
109
Conditions for issuance of non-voting
shares
(1) Only preferred or redeemable shares may be
made non-voting shares;
(2) There must remain other shares with full
voting rights; and
(3) The non-voting shares may still vote in a
number of matters, as enumerated below.
(Aquino & Aquino, Commentaries and
Jurisprudence on the Revised Corporation Code of
the Philippines, 2020 edition, p. 165)
Shareholders who hold non-voting shares retain
some measure of effective control. Thus, holders
of non-voting shares may still vote on the
following matters:
(1) Amendment of the articles of incorporation;
(2) Adoption and amendment of by-laws;
(3) Sale, lease, exchange, mortgage, pledge or
other disposition of all or substantially all of
the corporate property;
(4) Incurring, creating or increasing bonded
indebtedness;
(5) Increase or decrease of capital stock;
(6) Merger or consolidation of the corporation
with another corporation or other
corporations;
(7) Investment of corporate funds in another
corporation or business in accordance with
the corporation code; and
(8) Dissolution of the corporation (Philippine
Coconut Producers Federation, Inc. et.al. vs.
Republic of the Philippines, G.R. Nos. 1177857-58.
September 17, 2009)
Limitations on the Right to Vote:
(1) Where the Articles of Incorporation provides
for classification of shares pursuant to Sec. 6,
non-voting shares are not entitled to vote
except as provided under the same section;
(2) Preferred or redeemable shares may be
deprived of the right to vote unless otherwise
provided in the RCC;
(3) Fractional shares of stock cannot be voted
unless they constitute at least one full share;
(4) Treasury shares have no voting rights as long
as they remain in the treasury;
(5) Holders of stock declared delinquent by the
board of directors for unpaid subscription are
not entitled to vote or a representation at any
stockholder’s meeting;
(6) A transferee of stock cannot vote if his
transfer is not registered in the stock and
transfer book; and
(7) A stockholder is still entitled to vote even if
the shares are mortgaged or pledged unless
he authorizes the creditor in writing to vote.
(Sundiang & Aquino, Reviewer on Commercial
Law, 2017, p. 249)
(6) RIGHT OF FIRST REFUSAL
It is the right granted to stockholders of existing
corporations to buy the shares of stock of another
stockholder at a fixed price and only valid if made
on reasonable terms and consideration. (Fletcher,
Vol. 5, p.6266)
A right of first refusal is a contractual grant, not
of the sale of a property, but of the first priority
to buy the property in the event the owner sells
the same. As distinguished from an option
contract, in a right of first refusal, while the object
might be made determinate, the exercise of the
right of first refusal would be dependent not only
on the owner’s eventual intention to enter into a
binding juridical relation with another but also on
terms, including the price, that are yet to be
firmed up. (Polytechnic University of the Philippines
vs. Golden Horizon Realty Corporation, G.R. No.
183612, March 15, 2010)
Note: the right of first refusal, if not provided for
by law or by articles of incorporation, does not
exist at all (SEC Opinion No. 19-51, 11 October 2019)
When a stockholder transfers his shares, he must
offer them first, in the following order;
(1) Existing stockholders
(2) Corporation itself
(3) Any other persons
Ratio: If there is no provision in the AOI for the
classification of directors, then Class A
stockholders, by cumulating their votes will have
5,000 votes and can elect 3 members to the
board by dividing 5,000 votes to the candidates,
110
or at least 1,666 votes for each of the candidates.
Class B shares, having 2,500 votes can vote 2
members at 1,250 votes each while Class C
shares, having only 1,000 votes cannot be
guaranteed to any seat in the board.
Right to Financial Statements
A corporation shall furnish a stockholder or
member, within ten (10) days from receipt of
their written request, its most recent financial
statement, in the form and substance of the
financial reporting required by the SEC. (Sec. 74,
RCC)
d) REMEDIAL RIGHTS
These refer to remedies the stockholder may
pursue depending on the issues involved, such
as:
(1) INDIVIDUAL SUIT
Individual suits are filed when the cause of action
belongs to the individual stockholder personally,
and not to the stockholders as a group or to the
corporation, e.g., denial of right to inspection and
denial of dividends to a stockholder. If the cause
of action belongs to a group of stockholders, such
as when the rights violated belong to preferred
stockholders, a class or representative suit may
be filed to protect the stockholders in the group.
(Florete v. Florete, GR. No. 174909, January 20, 2016)
A suit instituted by a shareholder individually for
his own behalf against the corporation for injury
to his or her interest as a shareholder. The right
of action and recovery belongs to the
shareholders (direct action). (Cua, Jr. vs. Tan, G.R.
No. 181455-56, December 4, 2009)
(2) REPRESENTATIVE SUIT
A suit filed by a shareholder in his behalf and in
behalf likewise of other stockholders similarly
situated and with a common cause against the
corporation. (Republic Bank vs. Cuaderno, G.R. No.
L-22399, March 30, 1967)
Where the wrong is done to a group of
stockholders, as where preferred stockholders’
rights are violated, a class or representative suit
will be proper for the protection of all
stockholders belonging to the same group. (Ching
vs. Subic Bay Golf and Country Club, G.R. No. 174353,
September 10, 2014)
(3) DERIVATIVE SUIT
An action brought by one or more stockholders or
members in the name and on behalf of the
corporation to redress wrongs committed against
it or to protect or vindicate corporate rights,
whenever the officials of the corporation refuse
to sue or are the ones to be sued or hold control
of the corporation. (Ching vs. Subic Bay Golf &
Country Club, Inc., GR No. 174353, September 10,
2014) (Divina, Questions and Answers on the Revised
Corporation Code, 2020 edition, p. 374)
A stockholder filing a derivative suit is not suing
in his own behalf but in behalf of the corporation,
the fact that his shareholding is significant does
not preclude him from filing the suit. It is also not
necessary that a stockholder be a director to be
entitled to file a derivative suit. (San Miguel Corp.
vs. Khan, G.R. No. 85339, August 11, 1989)
A derivative suit is an action filed by stockholders
to enforce a corporate action. It is an exception
to the general rule that the corporation’s power
to sue is exercised only by the board of directors
or trustees. (Villamor Jr vs Umale, G.R. No. 172843,
September 24, 2014)
When minority stockholder may bring
derivative suits
As an exception to the foregoing rule,
jurisprudence has recognized certain instances
when minority stockholders may bring suits on
behalf of corporations." Where the board of
directors itself is a party to the wrong, either
because it is the author thereof or because it
refuses to take remedial action, equity permits
individual stockholders to seek redress. These
actions have come to be known as derivative
suits. (Ago Realty & Development corporation vs Ago
G.R. No. 210906, January 6, 2020)
A derivative action is a suit by a shareholder to
enforce a corporate cause of action. The
corporation is a necessary party to the suit. And
111
the relief which is granted is a judgment against
a third person in favor of the corporation.
Similarly, if a corporation has a defense to an
action against it and is not asserting it, a
stockholder may intervene and defend on behalf
of the corporation. (Chua vs. Court of Appeals, Hao,
G.R. No. 150793, November 19, 2004)
Derivative suit has been proven to be an effective
remedy of the minority against the abuses of
management. Thus, an individual stockholder is
permitted to institute a derivative suit on behalf
of the corporation wherein he holds stock in order
to protect or vindicate corporate rights, whenever
officials of the corporation refuse to sue or are
the ones to be sued or hold the control of the
corporation. In such actions, the suing
stockholder is regarded as the nominal party,
with the corporation as the party in interest. (Cua,
Jr. vs. Tan, G.R. No. 181455-56, December 4, 2009)
Requisites of derivative suits:
Section 1, Rule 8 of the Interim Rules of
Procedure Governing Intra-corporate
Controversies imposes the following
requirements for derivative suits:
(a) He was a stockholder or member at the time
the acts or transactions subject of the action
occurred and at the time the action was filed;
(b) He exerted all reasonable efforts, and alleges
the same with particularity in the complaint,
to exhaust all remedies available under the
articles of incorporation, by-laws, laws or
rules governing the corporation or
partnership to obtain the relief he desires
(exhaustion of all intra-corporate remedies);
The exhaustion of intra-corporate remedies
cannot be dispensed even if the company is
a family corporation (Ang v. Sps. Ang, G.R. No.
201675, June 19, 2013)
(c) No appraisal rights are available for the act
or acts complained of;
(d) The suit is not a nuisance or harassment suit.
(Ching vs. Subic Bay Golf and Country Club, Inc.,
et al. G.R. No. 174353, September 10, 2014)
(e) The action brought by the stockholder or
member must be "in the name of the
corporation or association. (Florete vs. Florete,
G.R. No. 174909 and 177275, January 20, 2016)
(f) The corporation be made a party to the case.
(Florete vs. Florete, G.R. No. 174909 and 177275,
January 20, 2016)
As a general rule, corporate litigation must be
commenced by the corporation itself, with the
imprimatur of the board of directors, which,
pursuant to the law, wields the power to sue.
Therefore, since the derivative suit is a remedy of
last resort, it must be shown that the board, to
the detriment of the corporation and without a
valid business consideration, refuses to remedy a
corporate wrong. A derivative suit may only be
instituted after such an omission. Simply put,
derivative suits take a back seat to board-
sanctioned litigation whenever the corporation is
willing and able to sue in its own name. (Ago
Realty & Dev. Corp. v. Ago, G.R. Nos. 210906 &
211203, October 16, 2019)
Before instituting a derivative suit, the relator-
stockholder must exert all reasonable efforts to
exhaust all remedies available under the articles
of incorporation, the by-laws, and the laws or
rules governing the corporation or partnership to
obtain the relief he or she desires. Such fact must
then be alleged with particularity in the
complaint." “The obvious intent behind the rule is
to make the derivative suit the final recourse of
the stockholder, after all other remedies to obtain
the relief sought had failed." (Ago Realty &
Development Corporation vs Ago G.R. No. 210906,
January 6, 2020)
112
 Individual or personal suit Representative or class suit Derivative Suit
Who initiates the action and parties-in-interest
Brought by a shareholder for direct Brought by a shareholder in his Brought by a stockholder for the benefit of
injury to his rights such as denial behalf and in behalf likewise of the corporation
to inspect corporate books and other stockholders similarly
records or pre-emptive rights situated and with a common The corporation itself is joined as a
(Florete vs. Florete, G.R. No. cause against the corporation. necessary party and recovery is in favor of
174909 and 177275, January 20, (Republic Bank vs. Cuaderno, and for the corporation. It is a suit granted
2016) G.R. No. L-22399, March 30, to any stockholder to institute a case to
1967) remedy a wrong done directly to the
corporation and indirectly to the
stockholders.

The real party in interest is the corporation,

Cause of action belongs to the
individual stockholder personally
(Villamor vs. Umale, G.R. Nos.
172843, 172881, September 24,
2014)
The wrong is done to him
personally and not to the other
stockholders or the
corporation. (Ching vs. Subic Bay
Golf and Country Club, G.R. No.
174353, Septembe 10, 2014)
Cause of action
Cause of action belongs to a
group of stockholders filed to
protect the stockholders similarly
situated (Cua Jr. vs. Tan, G.R.
No. 181455-56, December 4,
2009)
not the stockholders filing the suit. The
stockholders are technically nominal
parties but are nonetheless the active
persons who pursue the action for and on
behalf of the corporation. (Florente vs.
Florente, G.R. No. 174909, January 20,
2016)
Cause of action is based on injury or
wrong done wrong done directly to the
corporation and indirectly to the
stockholders.
If the gravamen of the complaint is injury
to the corporation, or to the whole body
of its stock and property without any
severance or distribution among individual
holders, or it seeks to recover assets for
the corporation or to prevent the
dissipation of its assets. (Florete vs.
Florete, G.R. No. 174909 and 177275,
January 20, 2016)

Note: The avenues for relief are mutually e) OBLIGATIONS OF A STOCKHOLDER

exclusive. The determination of the appropriate
remedy hinges on the object of the wrong done.
When the object is a specific stockholder or a
definite class of stockholders, an individual suit or
class/representative suit must be resorted to.
When the object of the wrong done is the
corporation itself or "the whole body of its stock
and property without any severance or
distribution among individual holders," it is a
derivative suit that a stockholder must resort to.
(Cua vs. Tan, G.R. No. 181455-56, December 4, 2009)
(1) Liability to the corporation for unpaid
subscriptions (Secs. 66 - 69, RCC);
(2) Liability to the corporation for the interest of
unpaid subscription if so required by the by-
laws (Secs. 65 and 66, RCC);
(3) Liability for watered stocks (Sec 64, RCC);
(4) Liability for dividends unlawfully paid (Sec. 42,
RCC);
(5) Administrative, civil, and criminal liability of a
stockholder responsible for a violation of the
Revised Corporation Code or for acts
indispensable to the violation of the Revised
Corporation Code (Sec. 171, RCC); and

113
(6) Liability to the creditors of the corporation for
unpaid subscription subject to the Limited Kinds of Meetings
Liability Rule. 1. Special stockholders/members meeting
2. Regular stockholders/members meeting
f) MEETINGS

Stockholders or Members Meeting

When Regular: fixed in the bylaws, or if not so fixed in the bylaws, or if not so fixed, on any date After
April 15 of every year as determined by the board of directors or trustee

Special: shall be held at any time deemed necessary or as provided in the bylaws (Sec. 49, RCC)
Notice There must be written notice of regular meetings sent to all stockholders or members of record
either through email or other manner as the SEC shall allow. (Sec. 49, RCC)

Failure to give notice would render the resolution made in such meeting voidable at the option of
the stockholder or member who was not notified

Regular: Must be sent at least 21 days prior to the scheduled meeting, unless a longer time is
provided in the by-laws (SEC MC no. 6 (2020

Special: Must be sent at least one (1) week prior to the scheduled meeting (Sec. 50, RCC)
Waiver of Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member.
notice
General waivers of notice in the articles of incorporation or the bylaws shall not be allowed

The attendance at a meeting shall constitute a waiver of notice of such meeting, except when the
person attends a meeting for the express purpose of objecting to the transaction of any business
because the meeting is not lawfully called or convened.

Closing of Regular: 20 days before the scheduled date of the meeting, unless the bylaws provide for a
books longer period

Special: 7 days before the scheduled date of the meeting, unless the bylaws provide for a longer
period
Venue Principal office of the corporation as set forth in the articles of incorporation

If not practicable, in the city or municipality where the principal office of the corporation is located.

Any city of municipality in Metro Manila, Metro Cebu, Metro Davao, and other Metropolitan areas
shall, for purposes of this section, be considered a city or municipality. (Sec. 50, RCC)

In non-stock, if provided in the by-laws, it may conduct meeting anywhere within the Philippines
(Sec. 92, RCC)
Quorum quorum shall consist of the stockholders representing a majority of the outstanding capital stock
pr a majority of the members in the case of nonstock corporations.

The by-laws may provide for a greater majority. (Sec. 51, RCC)
Subject Regular: the board of directors or trustees shall endeavor to present to stockholders or
members the following:
(a) The minutes of the most recent regular meeting
(b) A members' list for nonstock corporations and, for stock corporations, material information
on the current stockholders, and their voting rights;

114
 (c) A detailed, descriptive, balanced and comprehensible assessment of the corporation's
performance
(d) A financial report for the preceding year
(e) An explanation of the dividend policy and the fact of payment of dividends or the reasons
for nonpayment thereof;
(f) Director or trustee profiles
(g) A director or trustee attendance report
(h) Appraisals and performance reports for the board and the criteria and procedure for
assessment;
(i) A director or trustee compensation report
(j) Director disclosures on self-dealings and related party transactions; and/or
(k) The profiles of directors nominated or seeking election or reelection.

A director, trustee, stockholder, or member may propose any other matter for inclusion in the
agenda at may regular meeting of stockholders or members.

Special: A stockholder or member may propose the holding of a special meeting and items to
be included in the agenda. (Sec. 49, RCC) Matters wherein the law requires to be taken up at a
general/special meeting “duly called for the purpose”, such as:
(a) Removal of directors/trustees
(b) Filling up of vacancies in BOD/BOT
(c) Ratification of contract of the corporation with any of its directors/trustees
(d) Extension or shortening of corporate term
(e) Increase/decrease of capital stock or incurring, creating or increasing bonded indebtedness
(f) Sale or other disposition of all or substantially all of the assets of the corporation
(g) Investment of corporate funds in another corporation or business other than its primary
purpose
(h) Declaration of stock dividends
(i) Entering into a management contract with another corporation
(j) Amendment or repeal of the by-laws or adoption of a new one
(k) Fixing the issue price of no-par value shares by the stockholders
(l) Merger or consolidation
(m) Dissolution of corporation

Meetings of the Board of Directors/Trustees vs. Stockholders/Members

Occurrence
Regular Stockholder or member Once a year
Special Board or trustee Once a month unless the By-laws provide otherwise
Notice
Regular Stockholder or member At least 21 days prior written notice unless the Bylaws
otherwise provide
Board or trustee At least 2 days notice unless the By laws otherwise provide
Special Stockholder or member At least 1 week notice unless the By laws otherwise provide
Board or trustee least 2 days notice unless the By laws otherwise provide
Quorum
Regular Stockholder or member At least majority of the outstanding capital stock or majority of
the members unless the RCC or Bylaws provide otherwise

Bylaws may provide for a less or greater than majority in

determining quorum
Special Board or trustee At least majority of the board as fixed in the Articles of
Incorporation or Bylaws

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Stockholder or member
Board or trustee
Mode of Presence
Stockholder or member
Directors/Trustee
Bylaws may provide for a greater than but not lesser than
majority in determining quorum
Venue
Principal office
If not practicable, city or municipality where principal office
located
Anywhere unless otherwise provided in the Bylaws
In person or by proxy or through remote communication or in
absentia when allowed by Bylaws
Proxy voting is not allowed.

If directors/trustees are voting in their capacity as

stockholders/members, they may vote by proxy.
(Divina, Questions & Answers on the Revised Corporation Code, 2020 ed., pp. 364-365)

a) REPOSITORY OF CORPORATE POWERS

When stockholders or member may call a
meeting Classification of powers

(a) When there is no person authorized to call a
meeting; or
(b) The person authorized UNJUSTLY refuses to
call a meeting
Procedure:
(a) A stockholder/member may file a petition
before the SEC
(b) The stockholder/member shall show a good
cause for such petition
(c) SEC may issue an order directing the
petitioning stockholder/member to call a
meeting of the corporation and by giving
proper notice
(d) The petitioning stockholder/members shall
preside said meeting, until at least a majority
of the stockholders or members present have
chosen from among themselves, a presiding
officer (Sec. 49, RCC)
A corporation exercises its corporate powers
through its board of directors. This power may be
validly delegated to its officers, committees, or
agencies. "The authority of such individuals to
bind the corporation is generally derived from
law, corporate bylaws or authorization from the
board, either expressly or impliedly by habit,
custom or acquiescence in the general course of
business." (TERP Construction Corporation vs Banco
Filipino Savings and Mortgage Bank, G.R. No. 221771,
18 September 2019)
It is declared under Sec. 22 that corporate
powers shall be exercised, and all corporate
business conducted by the board of directors, and
this principle is recognized in the by-laws of the
corporation in question which contain a provision
declaring that the power to make contracts shall
be vested in the board of directors.

9. BOARD OR DIRECTORS AND TRUSTEES
The board of directors or trustees shall exercise
the corporate powers, conduct all business, and
control all properties of the corporation. (Sec. 22,
RCC)
The fact that the power to make corporate
contracts is thus vested in the board of directors
does not signify that a formal vote of the board
must always be taken before contractual liability
can be fixed upon a corporation; for a board can
create liability, like an individual, by other means
than by a formal expression of its will.

It is settled that contract between a corporation

and third person must be made by the director

116
and not by the stockholders. The corporation, in
such matters, is represented by the former and
not by the latter. It results that where a meeting
of the stockholders is called for the purpose of
passing on the propriety of making a corporate
contract, its resolutions are at most advisory and
not in any wise binding on the board. (Ramirez vs.
Orientalist Co. and Fernandez, G.R. No. 11897,
September 24, 1918)
The law is settled that contracts between a
corporation and third person must be made by or
under the authority of its board of directors and
not by its stockholders. Hence, the action of the
stockholders in such matters is only advisory and
not in any wise binding on the corporation.
(Barretto vs. La Previsora Filipina, G.R. No. 34719,
December 8, 1932)
Doctrine of Centralized Management
Unless otherwise provided in the Code, the board
of directors or trustees shall exercise the
corporate powers, conduct all business, and
control all properties of the corporation. (Sec. 22,
RCC)
Under the doctrine or principle of centralized
management, all corporate powers, all corporate
properties, and all corporate businesses of the
corporation are vested with its board of directors
or trustees, except for cases that require
shareholders’ or members’ approval. (Ladia and
Reyes, The Revised Corporation Code of the
Philippines, Annotated, 2021, p. 154)
It means that corporate powers are vested in a
body, called board of directors for a stock
corporation and board of trustees for a non-stock
corporation. Except in those instances where
stockholders' or members' approval is required
for certain acts under the RCC or the
corporation's bylaws, it is the board which
exercises corporate powers. The stockholders or
members, regardless of number, will have to
delegate the power to manage the corporation to
the board. (Divina, Question & Answer on the Revised
Corporation Code, 2020, p. 153)
The vesting of powers of management and
appointing officers and agents in the board of
directors gives to a corporation the benefits of
centralized administration which is a practical
business necessity in any large organization.
(Divina, Divina on commercial law: A comprehensive
Guide Vol. 1, pg. 572)
The concentration in the board of the powers of
control of the corporate business and
appointment of corporate officers and managers
is necessary for efficiency in any large
organization. Stockholders are too numerous,
scattered and unfamiliar with the business of a
corporation to conduct its business directly. And
so the plan of corporate organization is for the
stockholders to choose the directors who shall
control and supervise the conduct of corporate
business. (Filipinas Port Services vs. Victoria Go, et.al,
G.R. No. 161886, March 6,2007)
Delegation of Corporate Powers;
Agents/Officers
A corporation exercises its corporate powers
through its board of directors. This power may be
validly delegated to its officers, committees, or
agencies. "The authority of such individuals to
bind the corporation is generally derived from
law, corporate bylaws or authorization from the
board, either expressly or impliedly by habit,
custom or acquiescence in the general course of
business."
The authority of the board of directors to
delegate its corporate powers may either be: (1)
actual; or (2) apparent. Actual authority may be
express or implied. Express actual authority
refers to the corporate powers expressly
delegated by the board of directors. Implied
actual authority, on the other hand, "can be
measured by his or her prior acts which have
been ratified by the corporation or whose benefits
have been accepted by the corporation." (TERP
Construction Corporation vs Banco Filipino Savings and
Mortgage Bank, GR No. 221771, 18 September 2019)
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Doctrine of Apparent Authority
The authority of a corporate officer or agent in
dealing with third persons may be actual or
apparent. The apparent authority to act for and
to bind a corporation may be presumed from acts
of recognition in other instances, wherein the
power was exercised without any objection from
its board or shareholders.
The doctrine of "apparent authority," with special
reference to banks, has long been recognized in
this jurisdiction. Apparent authority is derived not
merely from practice. (Allied Banking Corp. v.
Spouses Macam, G.R. No. 200635, February 1, 2021,
J. Hernando)
If a corporation knowingly permits one of its
officers, or any other agent, to act within the
scope of an apparent authority, it holds him out
to the public possessing the power to so do those
acts; and thus, the corporation will, as, against
anyone who has in good faith dealt with it
through such agent, be estopped from denying
the agent's authority. (Francisco vs. GSIS, G.R. No.
L-18155 March 30, 1963)
The doctrine of apparent authority provides that
even if no actual authority has been conferred on
an agent, his or her acts, as long as they are
within his or her apparent scope of authority, bind
the principal. However, the principal's liability is
limited to third persons who are reasonably led to
believe that the agent was authorized to act for
the principal due to the principal's conduct.
(Calubad vs Ricarcen Development Corporation, GR
No. 202364, 30 August 2017)
Apparent authority is ascertained through:
(1) the general manner by which the corporation
holds out an officer or agent as having power
to act or, in other words, the apparent
authority with which it clothes him to act in
general, or
(2) the acquiescence in his acts of a particular
nature, with actual or constructive knowledge
thereof, whether within or without the scope
of his ordinary powers. (TERP Construction
Corporation vs Banco Filipino Savings and
Mortgage Bank, GR No. 221771, 18 September
2019; Allied Banking Corp. v. Spouses Macam,
G.R. No. 200635, February 1, 2021, J. Hernando)
The doctrine of apparent authority will not apply
if the transaction is not part of the function of the
officer within the corporation and/or the
transaction is not related to the purposes of the
corporation. As a simple example, the officer of
the corporation in charge of the administration of
facilities can never bind the corporation for
contracts relating to an investment in securities
as the latter transaction is not related to the
function of the officer in the corporation. (Divina,
Questions and Answers on the Revised Corporation
Code, 2020 ed., p.186)
b) TENURE, QUALIFICATIONS, AND
DISQUALIFICATIONS OF DIRECTORS
Tenure
General Rule:
In stock corporations, Directors shall be elected
for a term of one (1) year, while in non-stock
corporation, Trustees shall be elected for a term
not exceeding three (3) years.
Directors Trustees
Term of 1 year from Term not exceeding 3
among the holders years from among
of stocks registered the members of
in the corporation’s the corporation
books (Sec. 22, (Sec. 22, RCC)
RCC)
Exception:
If no election is held, the directors and officers
shall hold position under a hold‐over capacity
until their successors are elected and qualified.
(SEC Opinion, Dec. 15, 1989)
Hold-over situation arises only when no
successors are elected due to valid and justifiable
reasons (SEC-OGC Opinion No. 07-08, April 2007)
In Close corporations, as they may do away with
the BOD, management of corporate affairs may
be vested directly to the stockholders themselves
in which case the stockholders are to be
considered as the directors; there is no specific
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number of years for the term of the director. (Sec. Term vs. Tenure
96, RCC)
Term Tenure
Holdover Principle As to Time Covered
the time during which represents the term
Director serves for a term of one (1) year and the officer may claim to during which the
until their successors are elected and qualified. hold the office as of right incumbent
This means that if no election is conducted or no and fixes the interval actually holds office
after which the several
qualified candidate is elected, the incumbent
incumbents shall
director shall continue to act as such in a hold- succeed one another
over capacity until an election is held and As to applicability of Holdover Principle
qualified candidate is so elected. (Detective and not affected by the includes holdover
Protective Bureau vs. Cloribel, G.R. No. L-23428, holdover
November 29, 1968) As to Duration
Fixed by statute and it May be shorter (or, in
The holdover period does not change simply case of holdover, longer)
(1) It is that time from the lapse of one year from because the office may than the term for
a member’s election to the Board and until have become vacant, nor reasons within or beyond
his successor’s election and qualification. because the incumbent the power of the
(2) It is not part of the director’s original term of holds over in office incumbent
beyond the end of the
office, nor is it a new term; the holdover
term due to the fact that
period, however, constitutes part of his a successor has not been
tenure. elected and has failed to
(3) Corollary, when an incumbent member of the qualify.
board of directors continues to serve in a (Valle Verde Country Club v. Africa, G.R. No. 151969,
holdover capacity, it implies that the office September 4, 2009)
has a fixed term, which has expired, and the
incumbent is holding the succeeding term. For Non-stock educational corporations, trustees
(Valle Verde Country Club v. Africa, G.R. No. thereafter elected to fill vacancies, occurring
151969, September 4, 2009) before the expiration of a particular term, shall
hold office only for the unexpired period. Trustees
The hold-over principle does not diminish the elected thereafter to fill vacancies caused by
exercise of discretion and authority of the expiration of term shall hold office for five (5)
incumbent Board of Directors except as provided years. (Sec. 106, RCC)
by law. The principle still ensures that pending
the selection of a new set of directors, the Qualifications of a Director or Trustee:
incumbent directors will temporarily carry out the
regular business and protect the interest of the (1) Must own at least 1 share of the capital stock
corporation and its members. Thus, the authority in his own name, or if the corporation is a
of the incumbent Board of Directors is not limited non-stock corporation, he must be a member
to handling the corporation's daily operations but thereof; (Sec. 23, RCC)
may also exercise all powers and duties granted
by the RCC, the Condominium Act, and Bylaws.  A director who ceases to own at least one
(SEC-OGC Opinion No. 1219, March 19, 2019) (1) share of stock or a trustee who
ceases to be a member of the corporation
shall cease to be such. (Sec. 22, RCC)

 It is sufficient that the legal title as it

appears in the books is in the director
since the legal title is what counts. What

119
 is material is the legal title, not beneficial
ownership of the stock as appearing on
the books of the corporation. (Lee vs.
Court of Appeals, G.R. No. 93695, February
4,1992)
(2) Must be a natural person, of legal age,
possess full legal capacity.
(3) Must not be convicted by final judgment of
an offense punishable by imprisonment for a
period exceeding 6 years (Sec. 26, RCC)
(4) Other qualifications as may be prescribed in
the by-laws of the corporation. (Sec. 46, RCC)
 The by-laws, under Sec. 46, may also
provide for additional qualifications and
disqualifications for membership in the
Board. Although, it may not go away with
the minimum qualifications and
disqualifications as provided for under
Sec. 22 and 26.
The Code only requires that he must be a
stockholder of at least one share of stock. Aliens
may qualify as such as long as it holds at least
one share as appearing in the books of
corporation. However, aliens, whether resident or
non-resident, may not be elected as such in any
activity or undertaking exclusively to Filipino
citizens.
In the absence of a provision in the bylaws, a
corporation cannot require additional
qualifications for directors other than the
mandatory requirement under the RCC. (SEC-OGC
Opinion 51-19, October 11, 2019)
Grounds for Disqualification of a Director,
Trustee, or Officer:
(1) When a director ceases to own at least 1
share of stock or when a trustee ceases to be
a member;
(2) If within 5 years prior to the election or
appointment, the person was:
(a) Convicted by final judgment of
offense punishable by imprisonment
a period exceeding 6 years, or
violation the RCC, or for violating the
No. 8799, otherwise known as “The
Securities Regulation Code”;
(b) Found administratively liable for any
offense involving fraudulent acts; and
(c) By a foreign court or equivalent foreign
regulatory authority for acts, violations or
misconduct similar to (a) and (b); or
(3) Such other disqualifications which the SEC or
Philippine Competition Commission may
impose. (Sec. 26, RCC)
With the omission of the phrase "in his own right"
the election of trustees and other persons who in
fact are not beneficial owners of the shares
registered in their names on the books of the
corporation becomes formally legalized. Hence,
this is a clear indication that in order to be eligible
as a director, what is material is the legal title to,
not beneficial ownership of, the stock as
appearing on the books of the corporation. (Lee
vs. Court of Appeals, G.R. No. 93695, February 4,1992)
An amendment to the corporation’s by-laws
which renders a stockholder ineligible to be a
director, if he be also a director in a corporation
whose business is in competition with that of the
other corporation, has been sustained as valid.
This is based upon the principle that where the
director is so employed in the service of a rival
company, he cannot serve both, but must betray
one or the other. Such an amendment "advances
the benefit of the corporation and is good."
(Gokongwei, Jr. vs. Securities and Exchange
Commission, G.R. No. L-45911, April 11, 1979)
A provision in the bylaws which allots a
permanent seat in the board to a non-member of
the association is contrary to law. Similarly, the
fact that said permanent seat was held for fifteen
(15) years cannot give rise to a vested right and
estoppel cannot forestall a challenge against an
act that it is contrary to law. (Grace Christian High
School vs. Court of Appeals, et al, G.R. No,108905,
October 23,1997)
an
for
for
RA
120
c) REQUIREMENT OF INDEPENDENT Manner of election
DIRECTORS
At all elections of directors or trustees, there must
Independent Directors be present, either in person or through a
representative authorized to act by written proxy,
An independent director is a person who, apart the owners of majority of the outstanding capital
from shareholdings and fees received from the stock, or if there be no capital stock, a majority
corporation, is independent of management and of the members entitled to vote. (Sec. 23, RCC)
free from any business or other relationship
which could, or could reasonably be perceived to Note: When so authorized in the bylaws or by a
materially interfere with the exercise of majority of the board of directors, the
independent judgment in carrying out the stockholders or members may also vote through
responsibilities as a director. (Sec. 22, RCC) remote communication or in absentia. The right
to vote through such modes may be exercised in
Corporations required to have Independent corporations vested with public interest,
Directors notwithstanding the absence of a provision in the
by-laws of such corporations. (Sec. 23, RCC)
Corporations vested with public interest are now
required to have independent directors Manner of election and Method of Election
constituting at least twenty percent (20%) of the
board: (Sec. 22, RCC) Manner of Election Method of Election
Answers the question: Answers the question:
(1) Corporations covered by “The Securities What? How?
Regulations Code”, such as Corporation: (1) Viva Voce Stock Corporations
 whose securities are registered with SEC; (2) Show of hands (1) Straight
(3) Ballot (must be (2) Cumulative
 listed with an exchange; or
specifically  1 candidate
 with assets of at least P50 Million and requested) (Sec.  By distribution
having 200 or more holders of shares, 23, RCC) (Sec. 23, RCC)
each holding at least 100 shares of a
class of equity shares; Non-stock Corporations
(1) 1 vote for 1
(2) Banks and quasi-banks, NSSLAs, pawnshops, candidate
corporations engaged in money service (2) 5 votes for 1
business, pre-need, trust and insurance candidate
(3) Cumulative
companies, and other financial
 1 candidate
intermediaries; and  By distribution
provided in the AOI or
(3) Other corporations vested with public interest By-laws (Sec.88, RCC)
as may be determined by the SEC.
Election of Independent Directors
d) ELECTIONS
Independent directors must be elected by:
Except when the exclusive right is reserved for (a) the shareholders present or
holders of founders’ shares under Section 7 of (b) entitled to vote in absentia during the
this Code, each stockholder or member shall have election of directors. (Sec. 22, RCC)
the right to nominate any director or trustee who
possesses all of the qualifications and none of the Independent directors shall be subject to rules
disqualifications set forth in this Code. (Sec. 23, and regulations governing their qualifications,
RCC) disqualifications, voting requirements, duration of

121
term and term limit, maximum number of board
memberships; and other requirements that the
Commission will prescribe to strengthen their
independence and align with international best
practices. (ibid.)
Time to Determine Voting Right
(a) At the time fixed in by-laws
(b) If by-laws are silent, at time of election (Sec.
23, RCC)
Quorum requirement
At all elections of directors or trustees, there must
be present, either in person or through a
representative authorized to act by written proxy:
(a) In a stock corporation, the owners of majority
of the outstanding capital stock, excluding
the non-voting shares;
(b) In a non-stock corporation, a majority of the
members entitled to vote. (Sec. 51, RCC)
Note: Non-voting shares are not included
because it is not one of the instances when non-
voting shares are entitled to vote. (Sec. 6, RCC)
It is necessary that there be a quorum. An
election without quorum is invalid.
Note: If the owners of majority of the
outstanding capital stock or majority of the
members entitled to vote are not present in
person, by proxy, or through remote
communication, or not voting in absentia at the
meeting, such meeting may be adjourned. (Sec.
23, RCC)
Cumulative voting
A matter of right granted to stockholders to
multiply their number of shares by the number of
the directors to be elected, sum of which is his
total number of votes, which he may cast in favor
of only one candidate or distribute them to many
candidates as he may deem fit as long as it will
not exceed his total number of votes. (Sec. 23,
RCC)
In stock corporations, it is a matter of right.
In non-stock corporations, it can only be allowed
if it is provided in the Articles of Incorporation or
By-laws. (Sec. 88, RCC)
(a) Straight Voting
Every stockholder may vote such number of
shares for as many persons as there are directors
to be elected. (Sec. 23, RCC)
Illustration:
Mr. A (Stockholder)
Number of Mr. A’s Shares = 100 shares
Number of Directors to be elected = 5 Directors
100 shares multiplied by 5 directors = 500 votes
Mr. A can give 100 votes to each of the directors
(b) Cumulative voting for one candidate
A stockholder is allowed to concentrate his votes
and give one candidate as many votes as the
number of directors to be elected multiplied by
the number of his shares shall equal. (Sec. 23,
RCC)
Illustration:
Mr. A and Mr. B (Majority Stockholders)
Number of shares of Mr. A and B = 400 shares
Mr. C, Mr. D, Mr. E, Mr. F (Minority Stockholders)
Number of shares of Mr. C, D, E, and F = 100
shares
Number of Directors to be elected = 5 Directors
Mr. A and B’s shares (400 shares) multiplied by 5
directors = 2000 votes
Mr. C, D, E, and F’s shares (100 shares) multiplied
by 5 directors = 500 votes
If Mr. C, D, E, and F vote individually, there is no
assurance that the voted candidate shall win.
However, they may cumulate their votes (500
votes) to a single candidate
(c) Cumulative Voting by Distribution
A stockholder may cumulate his shares by
multiplying the number of his shares by the
number of directors to be elected and distribute
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the same among as many candidates as he shall
see fit. (Sec. 23, RCC)
Illustration:
Mr. A (Stockholder)
Number of Mr. A’s Shares = 100 shares
Number of Directors to be elected = 5 Directors
100 shares multiplied by 5 directors = 500 votes
Mr. A may cast his votes in any combination
desired by him provided that the total number of
votes cast by him does not exceed 500
(SEC-OGC Opinion No. 10-14, June 2, 2014)
Rationale of Cumulative Voting
Through cumulative voting, the minority
stockholders are given an opportunity to
cumulate their shares to improve the chance of
getting a seat in the board of directors.
Note: Cumulative voting in case of non‐stock
corporations may only be done if it is provided in
the Articles of Incorporation. Nominees for
directors or trustees receiving the highest
number of votes shall be declared elected. (Sec.
23, RCC)
Rules Governing all Methods of Voting
(a) The total number of votes cast shall not
exceed the number of shares owned by the
stockholders as shown in the books of the
corporation multiplied by the whole number
of directors to be elected
(b) No delinquent stock shall be voted. (Sec. 23,
RCC)
Election of Corporate Officers
Immediately after their election, the directors of
a corporation must formally organize and elect:
(a) The president who must be a director;
(b) The treasurer who may or may not be a
director;
(c) The secretary who should be a resident and
a citizen of the Philippines; and
(d) Such other officers as may be provided for in
the by-laws.
(e) Compliance officer – if the corporation is
vested with public interest. (Sec. 24, RCC)
General a person may hold two (2) or more
Rule positions concurrently
Exception  a president CANNOT serve as a
secretary or
 a president CANNOT serve treasurer
at the same time
Exception the president may serve as the
to the secretary or treasurer at the same time
exception if the RCC allows the same
(Sec. 24, RCC)
Note: The chairman of the board is not prohibited
from being elected as treasurer or secretary (Sec.
24, RCC).
Other Rules on Election of Corporate
Officers
In a non-stock corporation, other corporate
officers may be elected, unless the articles and
by-laws provide otherwise, directly by the
members. (Sec. 91, RCC)
In a close corporation, they are to be elected by
the stockholders, unless otherwise provided in
the articles or by-laws. (Sec. 96, RCC)
In case of a One Person Corporation (OPC), the
single stockholder may be self-appointed as
treasurer but not as corporate secretary. (Sec.
122, RCC)
Election Reportorial Requirements
When an election was duly held
Within thirty (30) days after the election of the
directors, trustees and officers of the corporation,
the secretary, or any other officer of the
corporation, shall submit to the Commission, the
names, nationalities, shareholdings, and
residence addresses of the directors, trustees,
and officers elected. (Sec. 25, RCC)
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For Non-holding of Election
The non-holding of elections and the reasons
shall be reported to the SEC:
 Within thirty (30) days from the date of the
scheduled election.
 The report shall specify a new date for the
election, which shall not be later than sixty
(60) days from the scheduled date.
Summary Order by the SEC
If no new date has been designated, or if the
rescheduled election is likewise not held, the SEC
may, upon the application of a stockholder,
member, director or trustee, and after verification
of the unjustified non-holding of the election,
summarily order that an election be held.
e) REMOVAL
Power to Remove Directors or Trustees
General Any Director or Trustee of a
Rule corporation may be removed from
office, with or without cause.
Exception If the director was elected by the
minority, there must be cause for
removal because the minority may
not be deprived of the right to
representation to which they may be
entitled to under Sec. 23 of the Code.
(Sec. 27, RCC)
Note: The right to representation refers to the
right to cumulative voting for one candidate.
Power to Remove Directors or Trustees
The power to remove directors or trustees is
lodge to the following:
(a) Stockholders; and
(b) SEC - shall, motu proprio or upon verified
complaint, and after due notice and hearing,
order the removal of a director or trustee
elected despite the disqualification, or whose
disqualification arose or is discovered
subsequent to an election. (Sec. 27, RCC)
Requisites of Removal from the Board
(a) It must take place either at a regular meeting
or special meeting of the stockholders or
members called for the purpose;
(b) There must be previous notice to the
stockholders or members of the intention to
remove;
(c) The removal must be by a vote of the
stockholders representing 2/3 of the
outstanding capital stock or 2/3 of the
members, as the case may be;
(d) The director may be removed with or without
cause unless he was elected by the minority,
in which case, it is required that there is
cause for removal. (Sec. 27, RCC)
If the vacancy in the board of directors or trustees
occur by virtue of removal, Section 28 authorizes
the filling of the vacancy by the election of a
replacement at the same meeting without further
notice or any subsequent general or special
meeting after proper notice.
Cause of removal
General Removal may be with or without
Rule cause.
Exception If the director to be removed was
elected by the minority, there must
be cause for removal because the
minority may not be deprived of the
right to representation to which they
may be entitled under Sec. 23 of the
Code.
(Sec. 27, RCC)
New Power of the SEC under the Revised
Corporation Code
The Commission shall, motu proprio or upon
verified complaint, and after due notice and
hearing, order the removal of a director or trustee
elected despite the disqualification, or whose
disqualification arose or is discovered subsequent
to an election. (Sec. 27, RCC)
The removal of a disqualified director shall be
without prejudice to other sanctions that the
Commission may impose on the board of
124
directors or trustees who, with knowledge of the (b) If not, said vacancies must be filled by the
disqualification, failed to remove such director or stockholders or members in a regular or
trustee. (Sec. 27, RCC) special meeting called for that purpose.

f) FILLING OF VACANCIES Filling by vote of remaining directors, when

allowed:
Stockholders or members may fill the
vacancy, if it is due to: (1) If the ground for vacancy is other than
removal, term expiration or increase in the
(1) If the vacancy may be filled by the remaining number of directors or trustees, the vacancy
directors or trustees but the board refers the may be filled up by the vote of at least a
matter to stockholders or members; majority of the remaining directors or
(2) Expiration of term trustees, if they still constitute a quorum.
(3) Removal
(4) Increase in the number of directors (2) When the vacancy prevents the remaining
(5) Grounds other than removal or expiration of directors from constituting a quorum and
term, e.g. death, resignation, abandonment, emergency action is required to prevent
or disqualification where the remaining grave, substantial, and irreparable loss or
directors do not constitute a quorum for the damage, the vacancy may be temporarily
purpose of filling the vacancy. (Sec. 28, RCC) filled up from among the officers of the
corporation by unanimous vote of the
The phrase “may be filled” in Section 28 shows remaining directors. (Sec. 28, RCC)
that the filling of vacancies in the board by the
remaining directors or trustees constituting a When the vacancy may be filled out due to
quorum is merely permissive, not mandatory. removal by member of the board
Corporations, therefore, may choose how
vacancies in their respective boards may be filled Cause of When Election of
up—either by the remaining directors constituting Vacancy Replacement should be
a quorum, or by the stockholders or members in Held
a regular or special meeting called for the Term Expiration No later than the day of such
expiration at a meeting called
purpose. (Tan v. Sycip, G.R. No. 153468, August 17,
for that purpose
2006)
Removal by the May be held on the same day
stockholders or of the meeting authorizing the
Effect of vacancy members removal, provided that the
agenda and notice of the
The board may continue to function even if there meeting provide for such
is a vacancy so long as there is a quorum. Any election of a replacement
act, transaction, or resolution of the board shall director or trustee.
be considered as valid even if there is a vacancy Increase in the At a regular or special meeting
so long as there is a quorum to do business. number of of stockholders or members
(Aquino, 2011, p. 281) directors or duly called for the purpose, or
trustees in the same meeting
authorizing the increase in the
Vacancy NOT by removal or expiration of
number of directors or
term trustees if so stated in the
notice of the meeting.
May be filled by: All other grounds No later than 45 days from the
time the vacancy arose
(a) The vote of at least a majority of the (Aquino & Aquino, Commentaries and Jurisprudence
remaining directors or trustees, if still on the Revised Corporation Code of the Philippines,
constituting a quorum; 2020 edition, p. 379)

125
Designation of director or trustee
A vacancy may be temporarily filled from among
the officers of the corporation by unanimous vote
of the remaining directors or trustees when:
(a) The vacancy prevents the remaining
directors from constituting a quorum; and
(b) Emergency action is required to prevent
grave, substantial, and irreparable loss or
damage to the corporation.
The action by the designated director or trustee
shall be limited to the emergency action
necessary. (Sec. 28, RCC)
Term of designated director or trustee
The term of the designated director or trustee
shall cease:
(1) Within a reasonable time from the
termination of the emergency; or
(2) Upon election of the replacement director or
trustee, whichever comes earlier. (Sec. 28,
RCC)
g) COMPENSATION
Compensation of Directors
General directors or trustees are not entitled
Rule to compensation in their capacity as
such, because they are supposed to
render their services to the
corporation gratuitously, and the
return upon their shares adequately
furnishes the motives for service,
without compensation. (Western
Institute of Technology, Inc., et al. vs
Salas, et al., G.R. No. 113032, August
21,1997)
Exception (1) Reasonable per diems
(2) As provided in the by-laws or
upon a majority vote of the
stockholders at a regular or
special meeting; and
(3) If they are performing functions
other than that of a director.
However, in no case shall the total
yearly compensation of directors, as
such directors, exceed 10% percent
of the net income before income tax
of the corporation during the
preceding year.
h) DISLOYALTY
Directors shall not acquire any personal or
pecuniary interest in conflict with their duty as
such directors or trustees. (Strategic Alliance
Development Corporation vs. Radstock, G.R. No.
178158, December 4, 2009)
General Where a director, by virtue of such
Rule office, acquires a business
opportunity which should belong to
the corporation, thereby obtaining
profits to the prejudice of such
corporation, the director must
account for and refund to the latter all
such profits.
Exception Unless the act has been ratified by a
vote of the stockholders owning or
representing at least two-thirds (2/3)
of the outstanding capital stock. (Sec.
33, RCC)
Forbidden Profits Rule
Directors and officers are fiduciary
representatives of the corporation and as such,
they are not allowed to obtain any personal profit,
commission, bonus or gain for their official
actions. (Sec. 33, RCC)
Doctrine of Corporate Opportunity
If there is presented to a corporate officer or
director a business opportunity, which the
corporation has an interest or a reasonable
expectancy, the self-interest of the officer or
director will be brought into conflict with that of
his corporation. The law does not permit him to
seize the opportunity even if he will use his own
funds in the venture. If he seizes the opportunity
thereby obtaining profits to the expense of the
corporation, he must account all the profits by
refunding the same to the corporation. (Sec. 33,
RCC)
Under such doctrine, a director of a corporation
is prohibited from competing with the business in
which his corporation is engaged in as otherwise
126
he would be guilty of disloyalty where profits that
he may realize will have to go to the corporate
funds except if the disloyal act is ratified. (Ient vs.
Tullett Prebon (Philippines), Inc., G.R. No. 189158.
January 11, 2017)
Requisites of Doctrine of Corporate
Opportunity:
Ratification
The corporation may choose to ratify the acts of
the director. However, this requires a vote of two-
thirds (2/3) of the outstanding capital stock.
Otherwise, he must account all the profits by
refunding the same to the corporation. (Aquino,
2011, p. 310)

Unless his act is ratified, a director shall refund to Distinction between Sections 30 and 33 of
the corporation all the profits he realizes on a the Code regarding ratification
business opportunity which:
Section 30 Section 33
(a) The Corporation is financially able to (Forbidden profits) (Corporate
undertake the business opportunity. Opportunity)
(b) From the nature of the business opportunity, CANNOT BE CAN BE RATIFIED
it is in line with the corporation’s business and RATIFIED
is of practical advantage to the corporation.
The second paragraph In Section 33, if a
(c) The corporation has an interest or a of Section 30 which director acquires for
reasonable expectancy, by embracing the makes a director liable himself a business
opportunity. to account for profits if opportunity which should
he attempts to acquire belong to the
A director, trustee, or officer shall be liable as a or acquires interests corporation, he is bound
trustee for the corporation and must account for adverse to the to account for such
the profits which otherwise would have accrued corporation in respect profits unless his act is
to the corporation if: to any matter reposed ratified by the
in him in confidence as stockholders
to which equity imposes representing 2/3 of the
(a) He attempts to acquire, or acquire any a disability upon him to outstanding capital
interest adverse to the corporation in respect deal in his own behalf is stock. Thus, if a violation
of any matter which has been reposed in not subject to of loyalty consists of a
them in confidence; and ratification by the matter which has been
(b) Upon which, equity imposes a disability upon stockholders. reposed in him in
themselves to deal in their own behalf. (Sec. confidence, the same is
30, RCC) not subject to
ratification. If the
The rule shall be applied notwithstanding the fact acquisition is merely that
of a business opportunity
that the director risked his own funds in the
which has not been
venture. (Sec. 33, RCC) reposed in him in
confidence, the same
Note: The prohibition no longer applies if the may be subject to
action was made after the resignation of the ratification by the
director. stockholders.
(Ladia and Reyes, The Revised Corporation Code of the
Burden of Proof Philippines, Annotated, 2021, pp. 206-207)

The burden of proof on the questions of good

faith, fair dealing, and loyalty of the officer to the
corporation should rest upon the officer who
appropriated the business opportunity for his own
advantage. (Aquino, 2011, p. 309)

127
i) BUSINESS JUDGMENT RULE
b. BUSINESS JUDGMENT RULE
The Business Judgment Rule provides that the
board of directors (or trustees, in case of non-
stock corporations) has the sole authority to
determine policies, enter into contracts, and
conduct the ordinary business of the corporation
within the scope of its charter. (Filipinas Port
Services vs. Go G.R. No. 161886, March 16, 2007)
General Questions of policy or management
Rule are left solely to the honest decision
of officers and directors of a
corporation and the courts are
without authority to substitute their
judgment for the judgment of the
board of directors.
The board is the business manager
of the corporation and so long as it
acts in good faith, its orders are not
reviewable by the courts or the SEC.
(Cua, Jr. vs. Tan, G.R. Nos. 181455-
56 & 182008, December 4, 2009,
Phil. Stock Exchange, Inc. vs. CA,
G.R. No. 125469, October 27, 1997)
Courts are barred from intruding into
the business judgments of the
corporation when the same are
made in good faith. (Balinghasay vs.
Castillo, G.R. No. 185664, April 8,
2015)
Exceptions (a) If the contracts are so
unconscionable and oppressive
as to amount to a wanton
destruction of the rights of the
minority (Ingersoll vs. Malabon
Sugar, G.R. No. L27770,
December 31, 1927);
(b) If they violate their duties under
Sec. 30 (director willfully and
knowingly assents to patently
unlawful acts of the corporation,
or are guilty of gross negligence
or bad faith); and
(c) If they violate Sec. 33 (disloyalty
of a director who acquires for
himself a business opportunity
that should have belonged to
the corporation, unless his act is
ratified by a 2/3 vote of
stockholders)
Consequences of the Business Judgment
Rule
(1) The resolution, contracts and transactions of
the board cannot be reversed or set aside by
the Courts even on the behest of
stockholders or members, under the principle
that the business of the corporation has been
left to the hands of the board.
(2) Directors and duly authorized officers cannot
be held personally liable for acts or contracts
done with the exercise of their business
judgment.
A board resolution authorizing a corporate officer
to obtain a loan includes the authority to assign
the receivables to secure the loan if the resolution
also empowers the officer to agree to the terms
and conditions of the loan and sign the
implementing documents. The officer who signed
the deed of assignment is however, not
personally liable if he indicated in the deed that
he was signing in behalf of the corporation.
(Divina, 2010, p. 79)
Doctrine of Apparent Authority
General Rule: Acts of an officer that are not
authorized by the Board of Directors do not bind
the corporation
Exception: Unless the corporation ratifies the
acts or holds the officer out as a person with
authority to transact on its behalf. (University of
Mindanao vs Bangko Sentral G.R. No. 194964-65,
January 11, 2016)
Provides that even if no actual authority has been
conferred on an agent, his or her acts, as long as
they are within his or her apparent scope of
authority, bind the principal. However, the
principal’s liability is limited to third persons who
are reasonably led to believe that the agent was
authorized to act for the principal due to the
principal’s conduct. (Calubad vs Ricarcen
Development Corp, G.R. No. 202364, August 30, 2017)
128

j) SOLIDARY LIABILITIES FOR
DAMAGES
Solidary liability cannot be lightly inferred. "There
is solidary liability when the obligation expressly
so states, when the law so provides, or when the
nature of the obligation so requires. Settled is the
rule that a director or officer shall only be
personally liable for the obligations of the
corporation, if the following conditions concur:
(1) the complainant alleged in the complaint that
the director or officer assented to patently
unlawful acts of the corporation, or that the
officer was guilty of gross negligence or bad
faith; and
(2) the complainant clearly and convincingly
proved such unlawful acts, negligence or bad
faith. (Atienza v. Golden Ram Engineering Supplies &
Equipment Corp., G.R. No. 205405, June 28, 2021, J.
Hernando)
Solidary Liabilities for Damages; Directors
or trustees who willfully and knowingly:
(a) Willfully and knowingly voting for and
assenting to patently unlawful acts of the
corporation; (Sec. 30, RCC)
(b) Gross negligence or bad faith in directing the
affairs of the corporation; (Sec. 30, RCC)
(c) Acquiring any personal or pecuniary interest
in conflict of duty; (Sec. 30, RCC)
(d) Consenting to the issuance of watered
stocks, or, having knowledge thereof, failing
to file objections with secretary; (Sec. 64, RCC)
(e) Agreeing or stipulating in a contract to hold
himself liable with the corporation; or
(f) By virtue of a specific provision of law
In labor cases, particularly, corporate directors
and officers are solidarily liable with the
corporation for the termination of employment of
corporate employees done with malice or in bad
faith. (Uichico vs. National Labor Relations
Commission, G.R. No. 121434, June 2, 1997)
k) PERSONAL LIABILITIES
General Members of the Board, who purport
rule to act in good faith for and on behalf
of the corporation within the lawful
scope of their authority, are not
liable for the consequences of their
acts. When the acts are of such
nature and done under those
circumstances, they are attributed to
the corporation alone and no
personal liability is incurred.
Exception When sufficient proof exists on
record that the officers acted
fraudulently, beyond his authority or
when the officer agrees to be
personally liable on behalf of the
corporation
(Price v. Innodata Phils., Inc., G.R. No. 178505,
September 30, 2008)
Note: The provisions on seizing corporate
opportunity and disloyalty (Secs. 30 and 33, RCC)
shall also apply to corporate officers. (ibid.)
To hold a director or officer personally liable for
corporate obligations, two requisites must
concur:
a. it must be alleged in the complaint that the
director or officer assented to patently unlawful
acts of the corporation or that the officer was
guilty of gross negligence or bad faith; and
b. there must be proof that the officer acted in bad
faith. (Freyssinet Filipinas Corp. v. Lapuz, G.R. No.
226722, March 18 2019)
Instances when personal liability may so
validly attach
Personal liability of a corporate director, trustee
or officer along (although not necessarily) with
the corporation may so validly attach, as a rule,
only when:
(1) He assents
(a) to a patently unlawful act of the
corporation, or
(b) for bad faith, or gross negligence in
directing its affairs, or
129
 (c) for conflict of interest, resulting in
damages to the corporation, its
stockholders or other persons;
(2) He consents to the issuance of watered
stocks or who, having knowledge thereof,
does not forthwith file with the corporate
secretary his written objection thereto;
(3) He agrees to hold himself personally and
solidarily liable with the corporation;
(4) He is made, by a specific provision of law, to
personally answer for his corporate action.
(Tramat Mercantile, Inc. vs. Court of Appeals, G.R.
No. 111008, November 7, 1994)
An individual cannot exercise any corporate
power pertaining to a corporation without
authority from its board of directors. Physical acts
of the corporation, like the signing of documents,
can be performed only by natural persons duly
authorized for the purpose. Consequently,
verifications and certifications against forum
shopping purportedly signed in behalf of the
corporation but without the requisite board
resolution authorizing the same are defective.
(Philippine Heart Center vs LGU of Quezon City, GR No.
225409, March 11, 2020)
Strains in Labor Law
The Supreme Court appears to have different
views regarding the personal liability of officers
when it comes to labor law violations:
a. Absent proof that the manager exceeded his
authority in dealing as regards the employee,
he cannot be held personally liable for the
said employee’s monetary compensation.
(Nicario v. NLRC, GR No. 125340, September 17,
1998)
b. Officers can be held personally liable for 13th
month pay of employees after the
corporation has ceased to exist. This is
because the officers are deemed to have
acted on behalf of the corporation.
(Restaurante Las Conchas vs. Llego, G.R. No.
119085, September 9, 1999)
Director or officer, when criminally liable
A director or officer may be held criminally liable
when he was directly required by law to do an act
in a given manner, and the same law makes the
person who fails to perform the act in the
prescribed manner expressly liable criminally.
Where a law requires a corporation to do a
particular act, failure of which on the part of the
responsible officer to do so constitutes the
offense, the responsible officer is criminally liable
therefore. (People vs. Tan Boon Kong, GR No. L-
35262, March 15, 1930)
Corporate Entity Theory
Basic is the principle that a corporation is vested
by law with a personality separate and distinct
from that of each person composing or
representing it. Equally fundamental is the
general rule that corporate officers cannot be
held personally liable for the consequences of
their acts, for as long as these are for and in
behalf of the corporation, within the scope of
their authority and in good faith. The separate
corporate personality is a shield against the
personal liability of corporate officers, whose acts
are properly attributed to the corporation. (Atienza
v. Golden Ram Engineering Supplies & Equipment
Corp., G.R. No. 205405, June 28, 2021, J. Hernando)
By specific provision of law
Under BP 22, where the check is drawn by a
corporation, company or entity, the person or
persons who actually signed the check in behalf
of such drawer shall be liable under this Act.
Hence the corporate entity theory cannot apply
and the director will be held personally liable for
drawing a bouncing check. (Llamado vs. CA, G.R.
No. 99032 March 26, 1997)
l) RESPONSIBILITY FOR CRIMES
Director or officer, when criminally liable
A director or officer may be held criminally liable
when he was directly required by law to do an act
in a given manner, and the same law makes the
130
person who fails to perform the act in the
prescribed manner expressly liable criminally.
Where a law requires a corporation to do a
particular act, failure of which on the part of the
responsible officer to do so constitutes the
offense, the responsible officer is criminally liable
therefore. (People vs. Tan Boon Kong, GR No. L-
35262, March 15, 1930)
If the offender is a corporation
If the offender is a corporation, the liability for
the criminal violation may at the discretion of the
court be imposed upon the corporation and/or
upon its directors, trustees, stockholders,
members, officer, employees responsible for the
violation or indispensable to its commission. (Sec.
171, RCC)
Third persons aiding or abetting in
violations
Third persons who aid, abet, counsel, command,
induce, or cause any violation of the Code, any
rule, or order of the SEC shall be punished with
fine not exceeding that imposed on the principal
offenders. (Sec. 172, RCC)
Criminal Liability of Corporate Agents
Criminal action is limited to the corporate agents
guilty of an act amounting to a crime and never
against the corporation itself.
Since the BOD is the repository of corporate
powers and acts as the agent of the corporation,
the directors may be held criminally liable. (Time
Inc. vs. Reyes, G.R. No. L-28882, May 31, 1971)
Corporations, partnerships, associations and
other juridical entities cannot be put to jail.
Hence, the criminal liability falls on the human
agent responsible for the violation of the Trust
Receipts Law. (Ong vs. Court of Appeals, G.R. No.
119858, April 29, 2003; see also Sec. 13, P.D. 115)
Criminal Sanctions imposed by the Court:
(a) Unauthorized use of corporate name (Sec.
159, RCC)
(b) Violation of disqualification provision (Sec.
160, RCC)
(c) Violation of duty to maintain records, to allow
inspection or reproduction (Sec. 161, RCC)
(d) Willful certification of incomplete, inaccurate,
false, or misleading statements or reports
(Sec. 162, RCC)
(e) Collusion by independent auditor (Sec. 163,
RCC)
(f) Obtaining corporate registration thru fraud
(Sec. 164, RCC)
(g) Fraudulent conduct of business (Sec. 165,
RCC)
(h) Corporation acting as intermediary for graft
and corrupt practices (Sec. 166, RCC)
(i) Corporation engaging intermediaries for graft
and corrupt practices (Sec. 167, RCC)
(j) Director, officer, trustee tolerating graft and
corrupt practices (Sec. 168, RCC)
(k) Retaliation against whistleblowers (Sec. 169,
RCC)
(l) Other violations of the Code not specifically
penalized – (Sec. 170, RCC)
m) SPECIAL FACT DOCTRINE
Special Fact Doctrine
General Rule: Majority view: Directors only owe
their duty to the corporation. They owe no
fiduciary duty to stockholders, but they may deal
with each other at fair and reasonable terms, as
if they were unrelated. No duty to disclose facts
known to the director or officer. (Taylor vs. Wright,
53 N.Y.S. 423 May 29, 1945)
Note: Minority View (Realistic View) recognizes
the directors’ obligation to the stockholders
individually as well as collectively, and refuses to
permit him to profit at the latter’s expense by the
use of information obtained as a result of official
position and duties.
Exception: Conceding the absence of a fiduciary
relationship in the ordinary case, where special
circumstances or facts are present which make it
inequitable for the director to withhold
information from the stockholder – courts
nevertheless hold that the duty to disclose arises
and concealment is fraud. Such as, concealment
131
of the defendant purchaser's identity (the
corporate officer had used an agent go between
to avoid detection of his actions by the seller
here); or failure to disclose significant facts that
materially affected the price of the stock. (Strong
v. Repide, 213 U.S. 419, May 3, 1909)
Application of Special Fact Doctrine
In U.S. jurisprudence, the special fact doctrine
was applied in the following:
(a) Where a director actively participates in the
negotiations for a transfer of the corporate
property (Ibid.).
(b) Where a director personally seeks a
stockholder for the purpose of buying his
shares without making disclosure of material
facts within his peculiar knowledge and not
within reach of the stockholders, the
transaction will be closely scrutinized, and
relief may be granted in appropriate
instances (Ibid.)
n) INSIDE INFORMATION
Material information acquired by an “insider”
about the issuer or the security that is not
generally available to the public. (Sec. 3.8, R.A.
8799)
Issuer
 The originator, maker, obligor or creator of
security (Sec. 3.2, R.A. 8799)
 Any entity authorized by the Commission to
offer to sell, sell or promote the sale to the
public of its equity, bonds, instruments of
indebtedness and other forms of securities.
(Sec. 3.1.11, Implementing Rules and
Regulations of R.A. 8799)
Insider
An insider could be any of the following:
(1) An issuer;
(2) A director or officer of the issuer (or any
person performing similar functions) or a
person controlling the issuer;
(3) A person who has a relationship or former
relationship with the issuer and the latter is
giving him or gave him access to material
information that is not generally available to
the public;
(4) A government employee, director, or officer
of an exchange, clearing agency and/or self-
regulatory organization who has access to
material information about an issuer or a
security that is not generally available to the
public;
(5) A person who learns such information by a
communication from any of the foregoing
insiders. (Sec. 3.8, R.A. 8799)
Unlawful Acts of Insider
It shall be unlawful for an insider to sell or to buy
a security of an issuer, while in the possession of
material information with respect to the issuer or
the security that is not generally available to the
public unless:
(1) The insider proves that the info was not
gained from such relationship
(2) That the other party selling to or buying from
the insider is identified the insider proves
(a) That he disclosed the information
(b) That he had reason to believe that the
other party otherwise is also in
possession of the information (Sec. 27,
Republic Act No. 8799 also known as the
Securities Regulation Code)
Validity and Binding Effects of Actions of
Corporate Officers
A corporate officer or agent may represent and
bind the corporation in transactions with third
person to the extent that authority has been
conferred upon him, and this includes powers
which have been:
(1) intentionally conferred, and
(2) also such powers as, in the usual course of
business, are incidental thereto, or may be
implied therefrom,
(3) powers added by custom and usage, as
usually pertaining to the particular officer or
agent, and
(4) such apparent powers as the corporation has
caused persons dealing with the officer or
agent to believe that it has conferred. (Yao Ka
132
 Sin Trading vs. Court of Appeals, G.R, No.
53820. June 15, 1992)
It is well-settled that If a private corporation
intentionally or negligently clothes its officers or
agents with apparent power to perform acts for
it, the corporation will be estopped to deny that
such apparent authority is real, as to innocent
third persons dealing in good faith with such
officers or agents. (Francisco vs. GSIS, G.R. No. L-
18155 March 30, 1963)
Where a stockholder claims, or services rendered,
a certain percentage of the profits of the
corporation under an agreement entered into by
and between him and the corporation, payment
cannot be refused by the corporation on the
ground that since the profits form part of its
assets, payment thereof requires a declaration of
dividends and/or resolution of the Board of
Directors. (Buenaseda vs. Bowen & Co., G.R. No. L-
14985, December 29, 1960)
o) CONTRACTS
(1) BY SELF-DEALING DIRECTORS
WITH THE CORPORATION
Self-Dealing Directors
A self-dealing director is one who deals or
transacts business with his own corporation.
General rule: A contract of the corporation with
one (1) or more of its directors, trustees, officers
or their spouses and relatives within the fourth
civil degree of consanguinity or affinity is
voidable, at the option of such corporation
Exception: when ALL the conditions laid down
in Sec. 31 are met.
(a) The presence of such director or trustee in
the board meeting in which the contract was
approved was not necessary to constitute a
quorum for such meeting;
(b) The vote of such director or trustee was not
necessary for the approval of the contract;
(c) The contract is fair and reasonable under the
circumstances
(d) In case of corporations vested with public
interest, material contracts are approved by
at least two-thirds (2/3) of the entire
membership of the board, with at least a
majority of the independent directors voting
to approve the material contract; and
(e) In the case of an officer, the contract has
been previously authorized by the board of
directors.
Where any of the first three (3) conditions set
forth in the preceding paragraph is absent, in the
case of a contract with a director or trustee, such
contract may be ratified by
(1) the vote of the stockholders representing at
least two-thirds (2/3) of the outstanding
capital stock or of at least two-thirds (2/3) of
the members in a meeting called for the
purpose: an
(2) full disclosure of the adverse interest of the
directors or trustees involved is made at
such meeting and the contract is fair and
reasonable under the circumstances. (Sec.
31, RCC)
In the case of Prime White Cement Corporation
vs. IAC, the Supreme Court held that the
transaction is covered by the self-dealing
provision under the Corporation Code. It is not
valid because the contract is not fair and
reasonable under the circumstances. There is no
hard and fast rule in determining whether the
contract is fair and reasonable under the
circumstances, hence the clause "under the
circumstances." In this case, the Supreme Court
held that it is not fair and reasonable because one
cannot fix the price of cement for a period of five
(5) years, considering the fluctuation of market
prices and nature of the commodity. (G.R. No. L-
68555, March 19, 1993)
(2) BETWEEN CORPORATIONS WITH
INTERLOCKING DIRECTORS
Interlocking Directors
An interlocking director is a director in one
corporation who deals or transacts with another
corporation of which he is also a director (or also
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known as arms-length transaction). In such case,
there may effectively be a dual agency, a divided
allegiance where allegiance in one corporation
may subordinated to the other.
The prevailing view is that these contracts
entered into where there is an interlocking
director is not voidable merely by reason of
conflicting duties or interest as to corporations
represented, even when a majority or all of the
directors are common to both corporations. It is
recognized that such will be upheld if there is no
bad faith or unfairness or collusion.
(1) The contract between corporations with
interlocking director is valid absent fraud and
provided it is reasonable under the
circumstances;
(2) If the interest of the interlocking director in
one corporation exceeds 20% and in the
other merely nominal, the contract becomes
voidable at the latter corporation’s option. In
effect, the director would be treated as a
self-dealing director under Sec. 31;
(3) If the interest in both companies is either
both substantial or both nominal, Sec. 32 will
apply.
While ownership by one corporation of all or a
great majority of stocks of another corporation
and their interlocking directorates may serve as
indicia of control, by themselves and without
more, however, these circumstances are
insufficient to establish an alter ego relationship
or connection between the two corporations,
thereby affirming that there is nothing irregular
or invalid per se in having corporations with
common directors. (Philippine National Bank vs.
Hydro Resources Contractors Corporation, G.R. Nos.
167530, 167561 &167603, March 13, 2013)
Third parties may not assail the contract if the
only ground is interlocking directorship. Only the
corporations which are parties to the contract
may file. (Development Bank of the Philippines vs.
Court of Appeals, G.R. No. 126200, August 16, 2001)
Executive Committee, Management
Committee, and other Committees
Executive Committee
It is a committee that the board creates pursuant
to an authority granted under the corporation's
bylaws, composed of at least three members of
the Board, that can act on matters falling within
the board's competence. (Divina, Questions and
Answers on the Revised Corporation Code, 2020 ed.,
p.40)
Said committee may act, by majority vote of all
its members, on such specific matters within the
competence of the board, as may be delegated
to it in the bylaws or by majority vote of the
board, except with respect to the:
(a) approval of any action for which shareholders’
approval is also required;
(b) filling of vacancies in the board;
(c) amendment or repeal of bylaws or the
adoption of new bylaws;
(d) amendment or repeal of any resolution of the
board which by its express terms is not
amendable or repealable; and
(e) distribution of cash dividends to the
shareholders. (Sec. 34, RCC)
What should be emphasized is that the executive
committee is as powerful as the board, as it
actually performs certain duties of the board,
and, in effect, it is acting for the board itself. And
so, because of the nature of the functions of the
executive committee, the authority to appoint
such body should be expressly provided in the
bylaws (De Leon, The Corporation Code of the
Philippines, p. 305). The executive committee
should however be distinguished from other
committees, which may be appropriately referred
to as “management” committees, which are also
within the competence of the board to create at
any time and whose actions require confirmation
by the board itself.
It should also be clarified that the executive
committee is not performing management
functions and that its members should not be
classified as officers of the corporation. The
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executive committee is a creation and an
extension of the board, performing functions
which the board is authorized to perform. In that
sense, the executive committee is also
performing board, and not management,
functions. In the same vein, foreigners who may
not be allowed to hold officer positions in some
nationalized enterprises, but who are allowed to
sit in the board of directors in proportion to their
stockholdings, are not prohibited from being
appointed as members of the executive
committee. As discussed above, what the
executive committee performs are board
functions (De Leon, The Corporation Code of the
Philippines, p. 308).
10. CAPITAL AFFAIRS
a) CERTIFICATE OF STOCK
It is a written instrument signed by the proper
officer of a corporation stating or acknowledging
that the person named in the document is the
owner of a designated number of shares of its
stock. (Teng vs. SEC and Ting Ping Lay, G.R. No.
184332, February 17, 2016)
(1) NATURE OF THE CERTIFICATE
A piece of paper or document which evidences
the ownership of shares and a convenient of
instrument for the transfer of title. (Ladia and
Reyes, The Revised Corporation Code of the
Philippines, Annotated, 2021, p. 356)
It expresses the contract between the
corporation and the stockholder, but is not
essential to the existence of a share of stock or
the nature of the relation of stockholder to the
Corporation. (Makati Sports Club Inc. vs. Cheng, G.R.
No, 178523 June 16, 2010)
It is a prima facie proof of:
(1) the holder's interest in the corporation,
(2) his ownership of the share represented
thereby and
(3) that the stock described therein is valid and
genuine in the absence of an evidence to the
contrary. (Sundiang & Aquino, Reviewer on
Commercial Law, 2019, p. 290)
(4) UNCERTIFICATED SHARES
The Commission may require corporations whose
securities are traded in trading markets and
which can reasonably demonstrate their
capability to do so to issue their securities or
shares of stocks in uncertificated or scripless form
in accordance with the rules of the Commission.
(Sec. 62, RCC)
(5) NEGOTIABILITY; REQUIREMENTS FOR
VALID TRANSFER OF STOCKS
Quasi Negotiable
Stock certificates are non-negotiable instruments
under the Negotiable Instruments Law.
Stock certificates are quasi-negotiable because
they can be transferred by indorsement coupled
with delivery. (De Los Santos, et al. vs. MacGrath, et.
al. G.R. No. L-4818, February 28, 1955)
They are quasi-negotiable instruments in the
sense that they may be transferred by
endorsement made by the owner or his atty-in-
fact and delivery thereof to the transferor. But
they are non-negotiable instruments in the sense
that they are subject to all the rights and
defenses which the true or lawful owner may
have as may be obtained under a particular set
of facts or circumstances. (Embassy Farms, Inc.
vs. Court of Appeals, G.R. No. 80682, August 13,
1990)
Nonetheless, the transferee of the stock
certificate takes it subject to such rights or
defenses as the registered owner or transferor’s
creditors may have under the law except insofar
as such rights or defense are subject to
limitations imposed by the principles governing
estoppel. (Tan vs. SEC, SEC Opinion No. 05-02,
January 31, 2005)
Non-Negotiable
Although a stock certificate is sometimes
regarded as quasi-negotiable, in the sense that it
may be transferred by delivery, it is well-settled
that the instrument is non-negotiable, because
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the holder thereof takes it without prejudice to
such rights or defenses as the registered owner
or creditor may have under the law, except
insofar as such rights or defenses are subject to
the limitations imposed by the principles
governing estoppel. (Republic vs. Sandiganbayan,
G.R. No. 107789 and 147214, April 30, 2003)
Requirements for Valid Transfer of Stocks
(1) Delivery of stock certificate to the transferee;
(2) The Certificate must be endorsed by the:
(a) owner or
(b) owner’s attorney-in-fact or
(c) other persons legally authorized to make the
transfer; and
(3) To be valid against third parties, the transfer
must be recorded in the books of the
corporation (Rural Bank of Lipa City Inc vs. Court,
of Appeals, G.R. No 124535, September 28 2001).
Delivery
The delivery contemplated in Section 63 [now
Section 62], pertains to the delivery of the
certificate of shares by the transferor to the
transferee, that is, from the original stockholder
named in the certificate to the person or entity
the stockholder was transferring the shares to,
whether by sale or some other valid form of
absolute conveyance of ownership. (Teng vs. SEC
and Ting Ping Lay, G.R. No. 184332, February 17,
2016)
Duty to Register Transfer of Stocks
In transferring stock, the secretary of a
corporation acts in purely ministerial capacity and
does not try to decide the question of ownership.
If a corporation refuses to make such transfer
without good cause, it may, in fact, even be
compelled to do so by mandamus. (Ibid.)
Effects of Non-Recording
The transfer is valid only between the contracting
parties but not effective and binding as against
the corporation and third parties. The right of the
transferee, as a stockholder, accrues only upon
entry of his name in the books of the corporation.
(Divina, Questions and Answers on the Revised
Corporation Code, 2020 edition, p. 408)
Consequently, the transferee cannot:
(a) enjoy the status of a stockholder,
(b) vote nor be voted for and
(c) will not be entitled to dividends insofar as the
assigned shares are concerned. (Rural Bank of
Lipa City, Inc., vs. Court of Appeals, G.R. No.
124535, September 28, 2001)
(6) ISSUANCE
The stock certificate itself, once issued, is a
continuing affirmation or representation that the
stock described therein is valid and genuine and
is at least prima facie evidence that it was legally
issued in the absence of evidence to the contrary.
(Alfonso S. Tan vs. Securities and Exchange
Commission, GR No. 95696, March 3, 1992)
Doctrine of Indivisibility of Subscription
Contracts
No certificate of stock shall be issued to a
subscriber until the full amount of the
subscription together with interest and expenses
(in case of delinquent shares), if any is due, has
been paid. (Sec. 63, RCC)
The SEC has consistently opined that subscription
is one, entire and indivisible contract. This
indivisibility of subscription is absolute as Section
63 speaks no exception. The purpose of the
doctrine is to prevent the partial disposition of a
subscription, which is not fully paid, because it is
permitted and the stockholder subsequently
becomes delinquent in the payment of his
subscription, the corporation may not be able to
sell as many of his subscribed shares as would be
necessary to cover the total amount from him
pursuant to Section 67 of the RCC. (Divina,
Questions and Answers on the Revised Corporation
Code, 2020 edition, p. 418)
Illustration: A subscribes to 100 shares for 100
pesos for each share, thus he owes the
corporation 10,000 pesos.
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If A manages to pay only 5,000 pesos, will he be
entitled to 50 shares there being he has already
paid 5,000 pesos?
No. Applying the doctrine of individsibility of
shares, A is not entitled to any stock for A has
only paid 50%. In principle, A only paid 50 pesos
per share.
Stock Certificate
A written instrument signed by the proper officer
of a corporation stating or acknowledging that
the person named in the document is the owner
of a designated number of shares of its stock.
(Teng vs. Securities and Exchange Commission, G.R.
No. 184332, February 17, 2016)
A certificate of stock is the evidence of a holder’s
interest and status in a corporation. It is prima
facie evidence that the holder is a shareholder of
a corporation. (Lao vs. Lao, G.R. No. 170585, October
6, 2008) However, evidence can be presented to
determine the real power of the shares. (Bitong
vs. Court of Appeals, G.R. No. 123553, July 13, 1998)
It should also be noted that the possession of the
stock certificate is not the sole determining factor
of one’s stock ownership. (Borgoña vs. Abra
Colleges, Inc. G.R. No. 204089, July 29, 2015)
Other competent means of establishing
shareholdings
(a) Articles of Incorporation
(b) Stock and Transfer Book. (Donnina C. Halley vs.
Printwell, Inc., G.R. No. 157549, May 30, 2011)
(c) Official receipts for the payment of
subscription
(d) Proof of issuance of part of the authorized
and unissued capital stock in favor of the
person who claims to be a shareholder
(e) Secretary’s Certificate
(f) General Information Sheet
(g) Minutes of the Meeting
(h) Other documents (Borgoña vs. Abra Colleges,
Inc. G.R. No. 204089, July 29, 2015)
(i) The shareholder named therein have fully
paid the subscription price considering that
the certificate will not be issued until the
same price is fully paid. (Donnina C. Halley vs.
Printwell, Inc., G.R. No. 157549, May 30, 2011)
Requirements for Issuance
A formal certificate of stock can be issued only
upon compliance with certain requisites:
(1) The certificates must be signed by the
president or vice-president, countersigned by
the secretary or assistant secretary, and
sealed with the seal of the corporation.
A mere typewritten statement advising a
stockholder of the extent of his ownership in a
corporation without qualification and/or
authentication cannot be considered as a
formal certificate of stock.
(2) The delivery of the certificate is an essential
element of its issuance.
Hence, there is no issuance of a stock
certificate where it is never detached from
the stock books although blanks therein are
properly filled up if the person whose name
is inserted therein has no control over the
books of the company.
(3) The par value, as to par value shares, or the
full subscription as to no par value shares,
must first be fully paid.
(4) The original certificate must be surrendered
where the person requesting the issuance of
a certificate is a transferee from a
stockholder. (Bitong vs. Court of Appeals, G.R.
No. 123553, July 13, 1998)
Payment of Taxes
Taxes due on the transaction, if any, must be
paid, to obtain from the Bureau of Internal
Revenue a certificate authorizing registration
("CAR"). The transferee should present the CAR
and the document evidencing the conveyance,
and surrender the duly endorsed stock certificate
to the secretary of the corporation who shall then
cancel the stock certificate of the transferor and
issue a new stock certificate to the transferee.
(Divina, Questions and Answers on the Revised
Corporation Code, 2020 edition, p. 406)
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Authority to Issue
The foregoing considerations are founded on the
basic principle that stock issued without authority
and in violation of law is void and confers no
rights on the person to whom it is issued and
subjects him to no liabilities. Where there is an
inherent lack of power in the corporation to issue
the stock, neither the corporation nor the person
to whom the stock is issued is estopped to
question its validity since an estopped cannot
operate to create stock which under the law
cannot have existence. (Bitong vs. Court of Appeals,
G.R. No. 123553, July 13, 1998)
Stockholder’s Right to Stock Certificate
Every stockholder has a right to have a proper
certificate issued to him by a corporation, upon
demand as soon as he has complied with the
conditions which entitle him to said certificate.
(SEC Opinion dated January 5, 1999) The corporation
is duty bound to issue stock certificates to their
stockholders as soon as their subscription prices
are fully paid. (Sec. 63, RCC)
Remedies for Non-Issuance
If the corporation wrongfully refuses to issue a
certificate of stock, the following are the remedies
available to an assignee or transferee of shares
of stock:
(1) File a suit for specific performance of an
express or implied contract;
(2) File for an alternative relief by way of
damages where specific performance cannot
be granted;
(3) File a petition for mandamus to compel
issuance of a certificate; and (SEC Opinion No.
06-21 dated March 23, 2006)
(4) Rescission of the subscription agreement
with the consequent mutual restitution (SEC
Opinion dated October 9, 1992)
Lost or Destroyed Certificates
No action may be brought against any
corporation which shall have issued a certificate
of stock in lieu of that which is lost, stolen or
destroyed pursuant to the procedure provided by
law, except in cases of fraud, bad faith, or
negligence on the part of the corporation and its
officers. (Sec. 72, RCC)
When Applicable
If the certificates are:
(1) Lost
(2) Stolen, or
(3) Destroyed
When Not Applicable
(1) Available but just worn out (SEC Opinion dated
July 13, 1993, Aquino page 671)
(2) Certificate was never issued to the
shareholder because it was not delivered by
the corporation
(3) Corporation itself lost the certificates before
delivery (SEC Opinion dated December 4, 1986
Aquino page 671)
Procedure
(1) Affidavit
Registered owner shall execute and file
affidavit providing details about the shares
represented by the lost certificate and the
circumstances regarding its loss/destruction
(Sec. 72(1), RCC)
(2) Verification
Corporation shall verify the affidavit and
other information and evidence with the
books of the corporation (Sec. 72(2), RCC)
(3) Publication
Corporation shall publish a notice in a
newspaper of general circulation in the place
where the corporation has its principal office,
once a week for three consecutive weeks at
the expense of the registered owner of the
certificate of stock that has been lost, stolen
or destroyed
(4) One-Year Waiting Period
There shall be a waiting period of one year
from the date of the last publication during
which a contest can be interposed
(5) Contest
If a contest has been presented to the
corporation or if an action is pending in court
regarding the ownership of the certificate of
stock which has been lost, stolen, or
destroyed, the issuance of the new certificate
138
 of stock in lieu thereof shall be suspended
until the final decision by the court regarding
the ownership of said certificate of stock
(6) Replacement
If there is no contest within the one-year
period, the corporation shall then replace the
certificate. The replacement of the certificate
can only be made before the expiration of the
one-year period if a bond is posted.
In case the registered owner files a bond or
other security in lieu thereof as may be
required, effective for a period of one year, for
such amount and in such form and with such
sureties as may be satisfactory to the Board of
Directors, a new certificate in lieu of one lost,
stolen, or destroyed may be issued even
before the expiration of the one-year period.
(Aquino & Aquino, Commentaries and
Jurisprudence on the Revised Corporation Code of
the Philippines, 2020, pp. 671-672)
Contents of Notice
(1) Name of the corporation
(2) Name of the registered owner of the
certificate
(3) Serial number of the certificate
(4) Number of shares represented by the
certificate
(5) After the expiration of one year from the date
of the last publication, if no contest has been
presented to the corporation regarding the
certificate of stock, the right to make such
contest shall be barred and the corporation
shall cancel in its books the certificate of
stock which has been lost, stolen, or
destroyed and issue in lieu thereof a new
certificate of stock (Aquino, Commentaries and
Jurisprudence on the Revised Corporation Code of
the Philippines, 2020 edition, p. 672)
Enforcement and Payment of Unpaid
Subscriptions
When insolvency supervenes, all unpaid
subscriptions become at once due and
enforceable. No demand is necessary. The
corporation has two remedies against the
subscriber to the corporate shares, namely
(a) to sell the stock for the account of the
delinquent subscriber, and
(b) to bring a legal action against him for the
amount due (Velasco vs. Poizat, G.R. No. L-11528.
March 15, 1918)
It is settled that a stockholder is personally liable
for the financial obligations of a corporation to the
extent of his unpaid subscription. (Edward Keller
vs. COB Group, G.R. No. L-68097 January 16, 1986)
(7) STOCK AND TRANSFER BOOK
Contents
Stock corporations must also keep a stock and
transfer book, which shall contain a record of the
following:
(1) All stocks in the names of the stockholders
alphabetically arranged;
(2) The installments paid and unpaid on all stock
for which subscription has been made, and
the date of payment of any installment;
(3) A statement of every alienation, sale or
transfer of stock made; and
(4) Such other entries as the by-laws may
prescribe. (Sec. 73, RCC)
The stock and transfer book shall be kept in the
principal office of the corporation or in the office
of its stock transfer agent and shall be open for
inspection by any director or stockholder of the
corporation at reasonable hours on business
days.
Stock and Transfer Book as Evidence
Books and records of a corporation (including the
stock and transfer book) are admissible in
evidence in favor of or against the corporation
and its members to prove the corporate acts, its
financial status and other matters (like the status
of the stockholders) and are ordinarily the best
evidence of corporate acts and proceedings.
Specifically, a stock and transfer book is
necessary as a measure of precaution,
expediency, and convenience because it provides
the only certain and accurate method of
establishing the various corporate acts and
transactions and of showing the ownership of
139
stock and like matters. (Halley vs. Printwell, Inc.,
G.R. No. 157549, May 30, 2011)
Stock Transfer Agents
One engaged principally in the business of
registering transfers of stocks on behalf of a stock
corporation (Sec. 73, RCC).
A stock transfer agent shall be allowed to operate
in the Philippines upon compliance with the
following:
(a) securing a license from the SEC (renewable
annually); and
(b) payment of a fee fixed by the SEC.
(8) SITUS OF THE SHARES OF STOCK
General The situs of shares of stock is the
Rule domicile of the corporation (Tayag vs.
Benguet Consolidated Inc., G.R. No.
L-23145, November 29, 1968)
It is not the domicile of the owner of
a certificate but the domicile of the
corporation which is decisive (Chua
Guan vs. Samahang Magsasaka, Inc.,
G.R. No. L-42091, Nov. 2, 1935)
The residence of the corporation is
the place where the principal office of
the corporation is located as stated in
its AOI, even though the corporation
has closed its office therein and
relocated to another place (Hyatt
Elevators and Escalators Corp. vs.
Goldstar Elevator Phils., Inc., G.R. No.
161026, Oct. 24, 2005)
Exception In property taxation – the situs of
intangible property, such as shares of
stocks, is at the domicile or residence
of the owner. (Wells Fargo Banc et al.
vs. Internal Revenue, G.R. No. 46720,
June 28, 1940)
Exception (a) When a nonresident alien has
to the shares of stock in a domestic
Exception corporation, then the situs will be
in the Philippines; and
(b) For purposes of the estate tax,
the gross estate of a resident
decedent, whether citizen or
alien, or a citizen decedent,
whether resident or nonresident,
includes his intangible personal
property wherever situated. (De
Leon, Corporation Code of the
Philipines)
b) WATERED STOCKS
(1) DEFINITION
Stocks issued for a consideration:
(a) less than its par or issued value or
(b) for a consideration in any form other than
cash, valued in excess of its fair value . (Sec.
64, RCC)
Diluted Stock - Stocks issued for a
consideration less than the par or issued price
thereof. (Sec. 61, RCC)
“Water” in the stock represents the difference
between the fair market value at the time of the
issuance of the stock and the par or issued value
of said stock. Both par and no-par stock can thus
be watered stock.
Note: No-par shares can be watered stock; when
they are issued for less than their issued value as
fixed by the corporation in accordance with law.
Rationale: The prohibition against watered
stocks is consistent with the general rule that an
agreement between the corporation and a
particular subscriber by which the subscription is
not to be payable or is to be payable in part only
cannot be either enforced by the subscriber or
interposed as defense in action on the
subscription. (National Exchange Company vs.
Dexter, G.R. No. L-27872, February 25, 1928)
Watered Stocks vs. Bonus Stocks
Watered Stocks Bonus Stocks
Stocks that are issued Stocks issued without
for a consideration less any valuable
than the par or issued consideration (Sec. 61,
price thereof (Sec. 65, RCC)
RCC)
140
Ways of Issuing Watered Stock
Watered stock may be issued in either of the
following ways:
(1) For a monetary consideration less than its
par or issued value;
(2) For a consideration in property, tangible or
intangible, valued in excess of its fair market
value;
(3) Gratuitously or under an agreement that
nothing shall be paid at all; or
(4) In the guise of stock dividends when there
are no surplus profits of the corporation.
(Ladia and Reyes, The Revised Corporation Code
of the Philippines, Annotated, 2021, p. 392)
Effects of Watered Stocks
Upon the issuance of watered stocks, the
corporation would have assumed an ostensible
capitalization in excess of its real assets. In other
words, the books of the corporation show that it
has more capital property than it has in fact which
misleads creditors and investors of the
corporation. (C. D. RHODE, Respondent, v. DOCK-
HOP Company, 184 Cal. 367, 1920)
Stock watering is proscribed in view of its evil
effects:
(1) The corporation is deprived of its capital
thereby hurting its business prospects,
financial capability and responsibility.
(2) Stockholders who paid their subscriptions in
full, or promised to pay the same, are injured
and prejudiced by the reduction of their
proportionate interest in the corporation; and
(3) Creditors are deprived of the corporate assets
for the protection of their interest under the
Trust Fund Doctrine. (Ladia and Reyes, The
Revised Corporation Code of the Philippines,
Annotated, 2021, p. 392)
Stock of a corporation issued for:
1. Less than their par or issued value in cash; or
2. Non-cash considerations which is valued in
excess of its fair value (Sec. 64, RCC)
(2) LIABILITY OF DIRECTORS FOR
WATERED STOCKS
Liability of Directors for Issuance of
Watered Stock
Any director or officer of a corporation shall be
solidarily liable with the stockholder concerned to
the corporation and its creditors for the difference
in value for:
(1) Consenting to the issuance of watered
stocks or;
(2) Failing express his objection in writing and
file the same with the corporate secretary
despite having knowledge thereof of such
issuance (Sec. 64, RCC)
When it comes to the watered no-par value
shares, the stockholder to whom the no-par
value shares are issued is not solidarily liable.
According to Sec. 6, non-par value shares are
deemed fully paid and non-assessable, so the
corporation or creditors cannot render the
stockholder to whom they are issued liable
solidarily to the directors or officer because it
cannot be assessed against him.
Note: Directors and officers who consented to the
issuance of watered stocks are solidarily liable
with the holder of such stocks to the corporation
and its creditors for the difference between the
fair value received at the time of the issuance and
the par or issued value of the share.
The liability will be to all creditors, whether they
became such prior or subsequent to the issuance
of the watered stock. Reliance by the creditors on
the alleged valuation of corporate capital is
immaterial and fraud is not made an element of
liability.
(3) TRUST FUND DOCTRINE FOR LIABILITY
FOR WATERED STOCKS
Applying the Trust Fund Doctrine, the aggregated
par value of the shares subscribed, regardless, if
the consideration is less than its par or issued
value, is treated as equity in trust of the
corporation's creditors. As such, the subscription
141
for less than the par or issued value of the shares
is violative of the trust fund doctrine. (Divina,
Questions and Answers on the Revised Corporation
Code, 2020 edition, p.420)
The Trust Fund Doctrine, treating the capital
stock of a corporation, inclusive of the unpaid
portion of subscriptions to said capital, as a “trust
fund” which the creditors have a right to look up
to for the satisfaction of their claims, is the basis
for the prohibition on issuing watered stock.
Stockholders, therefore, are by this doctrine
required and mandated to pay the full value of
their shares. (Ladia and Reyes, The Revised
Corporation Code of the Philippines Annotated, 2021
Edition, p. 392)
c) PAYMENT OF BALANCE OF
SUBSCRIPTION
Balance of Subscription shall be paid:
(a) On the date specified in the subscription
contract.
(b) In the absence of due date, the board of
directors may, at any time, declare due and
payable to the corporation unpaid
subscriptions and may collect the same or
such percentage thereof, in either case, with
accrued interest, if any, as it may deem
necessary (Sec. 66, RCC)
(1) CALL BY BOARD OF DIRECTORS
The board of directors may by resolution, order
the sale of delinquent stock and shall specifically
state the amount due on each subscription plus
all accrued interest, and the date, time and place
of the sale which shall not be less than thirty (30)
days nor more than sixty (60) days from the date
the stocks become delinquent (Sec. 67, RCC).
(2) NOTICE REQUIREMENT
Notice of the sale, with a copy of the resolution,
shall be sent to every delinquent stockholder
either personally, by registered mail, or through
other means provided in the bylaws. (Sec. 67,
RCC).
Publication
The same shall be published once a week for two
(2) consecutive weeks in a newspaper of general
circulation in the province or city where the
principal office of the corporation is located. (Sec.
67, RCC).
d) SALE OF DELINQUENT SHARES
Procedure for Sale of Delinquent Shares
Section 67 prescribes a mandatory procedure for
delinquency sale. The steps must be strictly
complied as follows:
(1) Resolution – the board shall issue resolution
ordering the sale of delinquent stock.
(2) Notice – notice of said sale, with a copy of
the resolution, shall be sent to every
delinquent stockholder either personally or
by registered mail or other means provided in
the By-Laws
(3) Publication – publication of the notice once
a week for two consecutive weeks in a
newspaper of general circulation in the
province or city where the principal office of
the corporation is located.
(4) Sale – the delinquent stock shall be sold at
the public auction to be held not less than 30
days nor more than 60 days from the date
stocks become delinquent.
(5) Transfer – the stock so purchased shall be
transferred to such purchaser in the books of
the corporation and a certificate for such
stock shall be issued in his favor.
(6) Credit Remainder – the remaining shares,
if any, shall be credited in favor of the
delinquent stockholder who shall likewise be
entitled to the issuance of a certificate of
stock covering the same (Aquino & Aquino,
Commentaries and Jurisprudence on the Revised
Corporation Code of the Philippines, 2020 edition,
p. 652-653)
142
Call by the Board in Sec. 66 and Sec. 67
Sec. 66 Sec. 67
As to Subject Matter
To declare unpaid To order the sale of
subscriptions as due delinquent stock
and demandable
As to Mandatory Character
Not mandatory Mandatory
A call is not necessary Strict compliance with the
when the date of formalities of sale under
payment is specified in Section 68 [now Section
the subscription 67], is necessary, the
agreement and the power to make the sale
corporation becomes being merely granted by
insolvent (Velasco v. law and an extraordinary
Poizat, G.R. No. L- one. Unless the
11528. March 15, delinquent shares are sold
1918). in accordance with the
said Section, the
ownership remains with
the stockholder. (SEC-
OGC Opinion No. 16-05,
March 31, 2016)
(1) EFFECT OF DELINQUENCY
General Rule Exception
No delinquent stock Except the right to dividends
(1) shall be voted in accordance with the
for, provisions of this Code
(2) be entitled to
vote, or (1) Provided, that any cash
(3) be represented dividends due on
at any delinquent stock shall
stockholder’s first be applied to the
meeting, unpaid balance on the
(4) nor shall the subscription plus costs
holder thereof and expenses,
be entitled to (2) while stock dividends
any of the rights shall be withheld from
of a stockholder the delinquent
(Sec. 70, RCC) stockholders until their
unpaid subscription is
fully paid (Sec. 70, RCC,
in relation Sec. 42, RCC)
(2) CALL BY RESOLUTION OF THE BOARD
OF DIRECTORS
The board of directors may by resolution, order
the sale of delinquent stock and shall specifically
state the amount due on each subscription plus
all accrued interest, and the date, time and place
of the sale which shall not be less than thirty (30)
days nor more than sixty (60) days from the date
the stocks become delinquent (Sec. 67, RCC).
e) ALIENATION OF SHARES
A person may become a stockholder in a
corporation by voluntarily acquiring a share.
Voluntary onerous acquisition of shares can be by
(1) purchase or (2) through subscription.
Purchase may be from the corporation itself or
from other shareholders. (Aquino, Commentaries
and Jurisprudence on the Revised Corporation Code of
the Philippines, 2020 edition, p. 697)
Registration of transfer
No transfer, however, shall be valid, except
between the parties until the transfer is recorded
in the books of the corporation showing the
names of the parties to the transaction, the date
of the transfer, the number of the certificate or
certificates and the number of shares transferred.
(Sec. 62, RCC)
Recording of alienation of shares
1. To enable the corporation to know at all times
their actual stock holders;
2. To afford the corporation the opportunity to
object or refuse its consent to the transfer in
case it has any claim against the stock; and
3. To avoid fictitious and fraudulent transfer
Sale of partially paid shares
No shares of stock against which the corporation
holds any unpaid claim shall be transferrable in
the books of the corporation. (Sec. 62, RCC)
Because partially paid shares are not covered yet
by a stock certificate, and as such, there is no
certificate which can be endorsed and delivered
143
to the transferee as required by Section 62 of the
RCC, the subscriber, as the owner of the shares,
may assign his right to the contract of
subscription in favor of the assignee. (Divina,
Question and Answers on the Revised Corporation
Code, 2020 edition, p. 409)
A corporation may refuse to acknowledge and
register a sale or assignment of shares which are
not fully paid, and may continue to hold the
original subscriber liable on the payment of the
subscription. However, the above principle in
Section 62 cannot be utilized by the corporation
to refuse to recognize ownership over pledged
shares purchased at public auction. The term
“unpaid claims” refers to “any unpaid claims
arising from unpaid subscription, and not to any
indebtedness which a subscriber or stockholder
may owe the corporation arising from any other
transactions. (China Banking Corp. vs. Court of
Appeals, G.R. No. 117604, March 26, 1997)
Sale of a portion of shares not fully paid;
prohibition
Under the doctrine of invisibility of subscription
contract, a stockholder who has not paid the full
amount of his subscription cannot transfer part of
his subscription in view of the indivisible nature
of a subscription contract. The reason behind the
principle of disallowing transfer of not fully paid
subscription to several transferee is that it would
be difficult to determine whether or not the
partial payments made should be applied as full
payment for the corresponding number of shares
which can only be covered by such payment or as
proportional payment to each and all of the entire
number of subscribed shares, and it would be
difficult to determine the unpaid balance to be
assumed by each transferee. (SEC-OGC Opinion No.
16-05, March 31, 2016)
Shares of stock against which the corporation
holds any unpaid claim shall not be transferable
in the books of the corporation. Hence, a
transferee of the partially paid shares cannot
compel the corporation to record the transfer of
shares in its books, even though he has no
knowledge that they are not fully paid. (Sec. 62,
RCC)
Sale of all of shares not fully paid
The entire subscription, although not yet fully
paid, may be transferred to a single transferee,
who as a result of the transfer must assume the
unpaid balance. It is necessary, however, to
secure of the consent of the corporation since the
transfer of subscription rights and obligations
contemplates a novation of contract which under
Article 1293 of the Civil Code cannot be made
without the consent be made without the consent
of the creditor. (SEC-OGC Opinion No. 16-05, March
31, 2016)
The incomplete payment of the subscription does
not preclude the subscriber from alienating his
shares of stock. However, the transfer shall be
valid only between the parties. The corporation
has the right to refuse from recording the sale in
its books.
Sale of fully paid shares
Shares of stock so issued are personal property
and may be transferred by the delivery of the
stock certificate or certificates, indorsed by
(1) The owner; or
(2) The owner’s attorney-in-fact; or
(3) Other person legally authorized to make the
transfer. (Sec. 62, RCC)
Shares of stock so issued with a certificate of
stock are personal property and may be
transferred by delivery of the certificate or
certificates indorsed by the owner of his attorney-
in-fact or other person legally authorized to make
the transfer. The transfer, however, must be
recorded in the books of the corporation to be
valid against the corporation. (Sec. 62, RCC)
Sale of fully paid shares is allowed even without
the consent of the corporation as long as the
requisites for the valid transfer of shares are
complied.
(1) ALLOWABLE RESTRICTIONS ON
THE SALE OF SHARES
The authority granted to a corporation to regulate
the transfer of its stock does not empower the
144
corporation to restrict the right of a stockholder
to transfer his shares, but merely authorizes the
adoption of regulations as to the formalities and
procedure to be followed in effecting transfer
(Thomson vs. Court of Appeals, G.R. No. 116631,
October 28, 1998).
The corporation may then impose restrictions on
the transfer of shares but subject to the following
requisites:
(1) Restrictions on the right to transfer shares
must appear in the articles of incorporation,
in the by-laws, as well as in the certificate of
stock; otherwise, the same shall not be
binding on any purchaser in good faith
(2) Restrictions shall not be more onerous than
granting the existing stockholders or the
corporation the option to purchase the shares
to the transferring stockholder with such
reasonable terms, conditions, or period
stated
(3) Upon the expiration of the said period, the
existing stockholders of the corporation fails
to exercise the option to purchase, the
transferring stockholder may sell their shares
to any third person. (Sec. 97, RCC)
Note that third persons being transferees of
shares are not bound by the articles of
incorporation and by-laws of a corporation. As
such, they can only be bound by the right of first
refusal if incorporated in the stock certificate.
While these restrictions appear in the chapter on
close corporations, there is no reason to apply the
same to open or regular corporation. (Divina,
Question and Answers on the Revised Corporation
Code, 2020 edition, p. 414)
(2) REQUISITES OF A VALID TRANSFER
(1) There must be a delivery of the stock
certificate;
(2) The certificate must be endorsed by the
owner or his attorney-in-fact or other persons
legally authorized to make the transfer; and
(Divina, Question and Answers on the Revised
Corporation Code, 2020 edition, p. 402)
(3) No transfer shall be valid, except as between
the parties, until the transfer is recorded in
the books of the corporation showing:
i. The names of the parties to the
transaction
ii. The date of the transfer,
iii. The number of the certificate or
certificates and
iv. The number of shares transferred (Teng
vs. Securities and Exchange Commission, G.R.
No. 184332, February 17, 2016)
The above enumerated requisites do not apply to
subscription contracts entered into between the
corporation and the subscriber. The subscriber
becomes a shareholder even if the corporation
has not yet issued the stock certificate. Full
payment is not even required under Section 71 of
the RCC before a shareholder can exercise the
rights of a stockholder. (Aquino, Commentaries and
Jurisprudence on the Revised Corporation Code of the
Philippines, 2020 edition, p. 623)
f) CORPORATE BOOKS AND RECORDS
(1) RIGHT TO INSPECT CORPORATE
RECORDS
The stockholder’s right of inspection of the
corporation’s book and records is based upon his
ownership of shares in the corporation and the
necessity for self-protection. (Puno v. Puno
Enterprises, Inc., G.R. No, 177066, September 11,
2009)
Corporate records, regardless of the form in
which they are stored, shall be open to
inspection: by any director, trustee, stockholder,
or member of the corporation in person or by a
representative at reasonable hours on business
days, and a demand in writing may be made by
such director, trustee, or stockholder at their
expense, for copies of such records or excerpts
from said records. (Sec. 73, RCC)
Other related laws on matters of inspecting
corporate books
The inspecting or reproducing party shall remain
bound by confidentiality rules under prevailing
145
laws, such as the rules on trade secrets or
processes under the following:
(a) RA No. 8293, otherwise known as the
“Intellectual Property Code of the
Philippines”, as amended,
(b) RA No. 10173, otherwise known as the “Data
Privacy Act of 2012”
(c) RA No. 8799, otherwise known as “The
Securities Regulation Code”, and
(d) Rules of Court. (Ibid.)
Who are prohibited to exercise the right to
inspect
A requesting party who is:
(1) NOT a stockholder or member of record, or
(2) is a competitor, director, officer, controlling
stockholder or otherwise represents the
interests of a competitor shall have no right
to inspect or demand reproduction of
corporate records. (Ibid.)
Requirements for the exercise of the right
of inspection
(1) Records are open to inspection only by any
director, trustee, stockholder, or member of
the corporation:
(a) in person or
(b) by a representative
(2) Done at reasonable hours on business days.
(3) A demand in writing may be made by the
director, trustee, or stockholder at their
expense, for such records or excerpts from
the records.
(4) The inspecting or reproducing party shall
remain bound by confidentiality rules under
prevailing laws such as the:
(a) Intellectual Property Code
(b) Data Privacy Act
(c) Securities Regulation Code
(d) Rules of Court. (Ibid.)
Note: The right to inspect extends to the books
and records of the wholly-owned subsidiary of the
corporation. It would be more in accord with
equity, good faith and fair dealing to construe the
statutory right of the stockholder to inspect the
books and records of the corporation as
extending to books and records of its wholly-
owned subsidiary which are in the corporation’s
possession and control. (Gokongwei v. SEC, et al.,
G.R. No. L-45911, 11 Apr. 1979)
(2) EFFECT OF REFUSAL TO INSPECT
CORPORATE RECORDS
Any officer or agent of the corporation who shall
refuse to allow the inspection and/or
reproduction of records in accordance with the
provisions of RCC shall be liable to such director,
trustee, stockholder or member for damages, and
in addition, shall be guilty of an offense which
shall be punishable under Section 161 of RCC.
Penalties under Sec. 161
Fine of The unjustified failure or refusal by
P10,000.00 the corporation, or by those
to responsible for keeping and
P200,000.00 maintaining corporate records, to
comply with Sections 45, 73, 92,
128, 177 and other pertinent rules
and provisions of this Code on
inspection and reproduction of
records at the discretion of the
court, taking into consideration the
seriousness of the violation and its
implications
Fine of P When the violation of this
20,000.00 to provision is injurious or
P400,000.00 detrimental to the public
Other notes
The penalties imposed shall be without prejudice
to SEC’s exercise of its contempt powers under
Section 157 hereof. (Sec. 161, RCC)
If such refusal is made pursuant to a resolution
or order of the BOD/BOT, the liability for such
action shall be imposed upon the directors or
trustees who voted for such refusal. (Sec. 73, RCC)
It shall be a defense to any action under Section
73 that the person demanding to examine and
copy excerpts from the corporation’s records and
minutes:
(a) has improperly used any information secured
through any prior examination of the records
146
 or minutes of such corporation or of any
other corporation, or
(b) was not acting in good faith or for a
legitimate purpose in making the demand to
examine or reproduce corporate records, or
(c) is a competitor, director, officer, controlling
stockholder or otherwise represents the
interests of a competitor. (Ibid.)
Reporting to the SEC
If the corporation denies or does not act on a
demand for inspection and/or reproduction, the
aggrieved party may report such to SEC. Within 5
days from receipt of such report, SEC shall
conduct a summary investigation and issue an
order directing the inspection or reproduction of
the requested records.
11. DISSOLUTION AND LIQUIDATION
Dissolution of a corporation is:
(1) the extinguishment or cancellation of the
corporate franchise and
(2) the termination of its corporate existence for
business purposes. (Divina, Questions and
Answers on the Revised Corporation Code, 2020
edition, p. 531)
a) MODES OF DISSOLUTION
I. Voluntary Dissolution
Grounds:
(a) Where no creditors are affected
(b) Where creditors are affected
(c) Shortening of corporate term
II. Involuntary Dissolution
Grounds:
(a) Non-use of corporate charter as provided
under Section 21 of the RCC;
(b) Continuous inoperation of a corporation as
provided under Section 21 of the RCC;
(c) Upon receipt of a lawful court order
dissolving the corporation;
(d) Upon finding by final judgment that the
corporation procured its incorporation
through fraud;
(e) Upon finding by final judgment that the
corporation:
(1) Was created for the purpose of
committing, concealing or aiding the SEC
of securities violations, smuggling, tax
evasion, money laundering, or graft and
corrupt practices;
(2) Committed or aided in the SEC of
securities violations, smuggling, tax
evasion, money laundering, or graft and
corrupt practices, and its stockholders
knew of the same; and
(3) Repeatedly and knowingly tolerated the
SEC of graft and corrupt practices or
other fraudulent or illegal acts by its
directors, trustees, officers, or
employees.
Note: Methods effecting dissolution as prescribed
by statute are exclusive, and a corporation cannot
be dissolved except in the manner prescribed by
law. (De Leon, 2010)
(1) VOLUNTARY DISSOLUTION
Grounds:
(a) Where no creditors are affected
(b) Where creditors are affected
(c) Shortening of corporate term
(a) Where no creditors are affected (Sec.
134, RCC)
This covers a situation where the corporation has
no creditors, or with creditors but without
conflicting claims and the corporate assets are
enough to satisfy the claims. (Divina, Divina on
Commercial Law, 2021, p. 646)
Procedure
Procedure where no creditors are affected by the
dissolution of the corporation:
(1) A meeting must be held on the call of
directors or trustees;
147
(2) At least 20 days prior to the meeting, notice
shall be given to each shareholder or member
of record personally, by registered mail, or by
any means authorized under its bylaws
whether or not entitled to vote at the
meeting, in the manner provided in Section
50 of the RCC and shall state that the purpose
of the meeting is to vote on the dissolution of
the corporation.
(3) The notice of meeting should also be
published once prior to the meeting:
(a) Notice shall contain the time, place and
object of the meeting
(b) in a newspaper published in the place
where the principal office of said
corporation is located, or if no newspaper
is published in such place, then in a
newspaper of general circulation in the
Philippines.
(4) The resolution to dissolve must be approved
by the majority of the board of directors or
trustees, and approved by at least majority of
the outstanding capital stock or majority of
the members.
Note: In the old Corporation Code, a vote of
majority of the board of directors or trustees
and at least 2/3 of the outstanding capital
stock /members was required.
(5) The corporation must submit the following to
the SEC:
(a) A verified request for dissolution stating
the following:
i. the reason for the dissolution
ii. the form, manner, and time when the
notices were given
iii. names of the stockholders and
directors or members and trustees
who approved of the dissolution
iv. the date, place and time of the
meeting in which the vote was made
v. details of publication
(b) A copy of the resolution authorizing the
dissolution, certified by the majority of
the BOD/T and countersigned by the
secretary.
(c) Proof of publication
(d) Favorable recommendation from the
appropriate regulatory agency, when
necessary
(6) The SEC shall, within 15 days from the receipt
of the verified request for dissolution, and in
the absence of any withdrawal within said
period, approve the request and issue the
certificate of dissolution, upon which the
dissolution will take effect.
(b) Where creditors are affected (Sec. 135,
RCC)
Procedure where the dissolution of the
corporation may prejudice the rights of any
creditor:
(1) A verified petition for dissolution shall be filed
with the SEC.
(2) The petition shall be:
(a) signed by a majority of the corporation’s
board of directors or trustees
(b) verified by its president or secretary or
one of its directors or trustees
(c) set forth all claims and demands against
it,
(d) set forth that the dissolution was
resolved upon by the affirmative vote of
the stockholders representing at least
two-thirds (2/3) of the outstanding
capital stock or at least two-thirds (2/3)
of the members at a meeting of its
stockholders or members called for that
purpose.
(3) The petition shall likewise state:
(a) the reason for the dissolution;
(b) the form, manner, and time when the
notices were given;
(c) the date, place, and time of the meeting
in which the vote was made.
(4) In addition to the verified petition, the
corporation shall submit to the SEC the
following:
(a) copy of the resolution authorizing the
dissolution, certified by a majority of the
148
 board of directors or trustees and
countersigned by the secretary of the
corporation; and
(b) list of all its creditors
(5) If the petition is sufficient in form and
substance, the SEC shall issue an order fixing
the deadline for filing objections to the
petition (shall not be less than thirty (30)
days nor more than sixty (60) days after the
entry of the order).
(6) Before such deadline, a copy of the order
shall be published at least once a week for
three (3) consecutive weeks in a newspaper
of general circulation published in the
municipality or city where the principal office
of the corporation is situated, otherwise, in a
newspaper of general circulation in the
Philippines. A similar copy shall be posted for
3 consecutive weeks in 3 public places in such
municipality or city.
(7) After the expiration of the time to file
objections, a hearing shall be conducted upon
prior five-day-notice to hear the objections
(8) If the objections are insufficient or the
material facts in the petition are true,
judgment shall be rendered dissolving the
corporation and directing the disposition of
assets. The judgment may include
appointment of a receiver.
(9) The dissolution shall take effect only upon
issuance by the SEC of a certificate of
dissolution.
(c) Shortening of corporate term (Sec. 136,
RCC)
A voluntary dissolution may be effected by
amending the articles of incorporation to shorten
the corporate term.
Procedure for dissolution by shortening of
corporate term:
(1) The articles of incorporation should be
amended to shorten the corporate term.
(2) The amendment should be approved by at
least the majority vote of the board of
directors or trustees, and ratified at a
meeting by the stockholders or members
representing at least two-thirds (2/3) of the
outstanding capital stock or of its members in
a meeting duly called for the purpose. (Sec.
36, RCC)
(3) A copy of the amended articles of
incorporation shall be submitted to the SEC.
(4) Upon the expiration of the shortened term,
as stated in the approved amended articles
of incorporation, the corporation shall be
deemed dissolved without any further
proceedings, subject to the provisions of the
RCC on liquidation.
In the case of expiration of corporate term,
dissolution shall automatically take effect on the
day following the last day of the corporate term
stated in the articles of incorporation, without the
need for the issuance by the Commission of a
certificate of dissolution. (Sec. 136, RCC)
Other Modes of Voluntary Dissolution
1. Dissolution by merger or consolidation (Sec.
79, RCC)
Upon issuance of SEC of a Certificate of Merger
or Consolidation, the corporate existence of the
absorbed corporation, and the constituent
corporations in case of consolidation, shall
automatically cease. No liquidation proceedings
will thereafter be conducted. Affidavit of
dissolution by a corporation sole
2. Affidavit of dissolution by a corporation sole
(Sec. 113, RCC)
A corporation sole may be dissolved and its affairs
settled voluntarily by submitting to the
Commission a verified declaration of dissolution,
setting forth:
(a) the name of the corporation;
(b) the reason for dissolution and winding up;
(c) the authorization for the dissolution of the
corporation by the particular religious’
denomination, sect or church; and
(d) the names and addresses of the persons who
are to supervise the winding up of the affairs
of the corporation
149
Upon approval of such declaration of dissolution
by the Commission, the corporation shall cease to
carry on its operations except for the purpose of
winding up its affairs.
Withdrawal of Dissolution (Sec. 137, RCC)
Procedure on Withdrawal of Request for
Dissolution:
(1) A withdrawal of the request for dissolution
shall be:
(a) Made in writing;
(b) Duly verified by any incorporator,
director, trustee, shareholder, or
member;
(c) Signed by the same number of
incorporators, directors, trustees,
shareholders, or members necessary to
request for dissolution as set forth in Sec.
133-136;
(d) Submitted no later than fifteen (15) days
from receipt by the Commission of the
request for dissolution.
(2) Upon receipt of a withdrawal of request for
dissolution, the SEC shall withhold action on
the request for dissolution and shall, after
investigation:
(a) Make a pronouncement that the request
for dissolution is deemed withdrawn;
(b) Direct a joint meeting of the board of
directors or trustees and the stockholders
or members for the purpose of
ascertaining whether to proceed with
dissolution; or
(c) Issue such other orders as it may deem
appropriate.
Procedure on Withdrawal of Petition for
Dissolution (where creditors are affected):
A withdrawal of the petition for dissolution shall
be in the form of a motion and similar in
substance to a withdrawal of request for
dissolution, but shall be verified and filed prior to
publication of the order setting the deadline for
filing objections to the petition.
(2) INVOLUNTARY DISSOLUTION
A corporation may be dissolved by the SEC:
(1) motu proprio or
(2) upon filing of a verified complaint by any
interested party.
Grounds for dissolution of the corporation:
(a) Non-use of corporate charter as provided
under Section 21 of the RCC;
(b) Continuous inoperation of a corporation as
provided under Section 21 of the RCC;
(c) Upon receipt of a lawful court order
dissolving the corporation;
(d) Upon finding by final judgment that the
corporation procured its incorporation
through fraud;
(e) Upon finding by final judgment that the
corporation:
1. Was created for the purpose of
committing, concealing or aiding the
commission of securities violations,
smuggling, tax evasion, money
laundering, or graft and corrupt
practices;
2. Committed or aided in the commission of
securities violations, smuggling, tax
evasion, money laundering, or graft and
corrupt practices, and its stockholders
knew of the same; and
3. Repeatedly and knowingly tolerated the
commission of graft and corrupt practices
or other fraudulent or illegal acts by its
directors, trustees, officers, or
employees.
The SEC shall give reasonable notice to, and
coordinate with, the appropriate regulatory
agency prior to the involuntary dissolution of
companies under their special regulatory
jurisdiction. (Sec. 138, RCC)
(a) Non-use of corporate charter
If a corporation does not formally organize and
commence its business within 5 years from the
date of incorporation, its certificate of
incorporation shall be deemed revoked as of the
150
day following the end of the five-year period.
(Sec. 21, RCC)
(b) Continuous inoperation
If a corporation has commenced its business but
subsequently becomes inoperative for a period of
at least five (5) consecutive years, the SEC may,
after due notice and hearing, place the
corporation under delinquent status.
A delinquent corporation shall have a period of
two (2) years to resume operations and comply
with all requirements that the SEC shall prescribe.
Upon compliance by the corporation, the SEC
shall issue an order lifting the delinquent status.
Failure to comply with the requirements and
resume operations within the period given by the
SEC shall cause the revocation of the
corporation’s certificate of incorporation. (Sec. 21,
RCC)
(c) Upon receipt of a lawful court order
dissolving the corporation
This may involve or arise from a quo warranto
proceeding involving a de facto corporation (Sec
19, RCC), or a liquidation proceeding involving an
insolvent debtor under R.A. No. 10142 (the
Financial Rehabilitation and Insolvency Act
[FRIA]). The dissolution of the corporation is one
of the effects of a liquidation order under FRIA.
(Divina, Divina on Commercial Law, 2021, p. 653)
(d) Upon finding by final judgment that the
corporation procured its incorporation
through fraud
This may happen when the corporation
misrepresented the purpose of incorporation, or
when the incorporators used fictitious names.
(ibid.)
(e) Upon finding by final judgment that the
corporation was created for an unlawful
purpose
If the corporation is ordered dissolved by final
judgment pursuant to the grounds set forth in
subparagraph (e) of Sec. 138, its assets, after
payment of its liabilities, shall, upon petition of
the SEC with the appropriate court, be forfeited
in favor of the national government. Such
forfeiture shall be without prejudice to the rights
of innocent stockholders and employees for
services rendered, and to the application of other
penalty or sanction under this Code or other laws.
(Sec. 138, RCC)
Other grounds to dissolve the corporation
upon order of the SEC:
Dissolution by the SEC on grounds under
Section 6(i) of P.D. No. 902-A:
(1) Fraud in procuring its certificate of
registration;
(2) Serious misrepresentation as to what the
corporation can do or is doing to the great
prejudice of or damage to the general public;
(3) Refusal to comply or defiance of any lawful
order of the Commission restraining
commission of acts which would amount to a
grave violation of its franchise;
(4) Continuous inoperation for a period of at
least five (5) years;
(5) Failure to file by-laws within the required
period;
(6) Failure to file required reports in appropriate
forms as determined by the Commission
within the prescribed period.
Dissolution by the SEC on other grounds
provided for in the RCC
(1) Violation of any of the provisions of the RCC
committed by the corporation (Sec. 158, RCC)
(2) Deadlock in a close corporation (Sec. 103,
RCC)
(3) In a close corporation, any act of directors,
officers or those in control of the corporation
which is illegal or fraudulent or dishonest or
oppressive or unfairly prejudicial to the
corporation or any stockholder or whenever
corporate assets are being misapplied or
wasted (Sec. 104, RCC)
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Consequence of dissolution
A corporation that has already been dissolved, be
it voluntarily or involuntarily, retains no juridical
personality to conduct its business save for those
directed towards corporate liquidation. In other
words, the corporation ceases to be a body
corporate for the purpose of continuing the
business for which it was organized. But it shall,
nevertheless, be continued as a body corporate
for three (3) years after the time when it would
have been so dissolved, for the purpose of
prosecuting and defending suits by or against it
and of enabling it gradually to settle and close its
affairs, to dispose of and convey its property and
to divide its assets. (PNB vs. Court of First Instance
of Rizal, et.al., G.R. No. 63201, May 27, 1992)
Effects of Dissolution
A corporation-grantee of a certificate of public
convenience to operate ice plant cannot lawfully
continue to sell ice after the expiration of its
corporate life. Neither can it apply for a new
certificate for it is incapable of receiving a grant.
It can only continue to exist for three years for
the purpose of winding up its affairs. (Buenaflor vs.
Camarines Sur Industry Corp., G.R. Nos. L-14991-
94. May 30, 1960)
A lease to a corporation may, by its terms,
terminate where the corporation ceases to exist.
But unless the lease so provides, the rights and
obligations thereunder are not extinguished by
the corporation’s dissolution since leases affect
property rights and survives the death of the
parties. The stockholders succeed to the rights
and liabilities of the dissolved corporation in an
unexpired leasehold state, which may have been
enforced by or against the receiver or liquidating
trustee.
Upon the expiration of the 3-year period to wind-
up its affairs, the juridical personality of the
corporation ceases for all intent and purpose, and
as a general rule, can no longer sue or be sued.
(Gonzales vs. Sugar Regulatory Administration, G.R.
No. 84606, June 28, 1989)
b) METHODS OF LIQUIDATION
Liquidation
The process of settling the affairs of the
corporation after its dissolution. This consists of:
(a) collection of all that is due the corporation
(b) the settlement and adjustment of claims
against it
(c) the payment of its debts, and
(d) the distribution of the remaining assets, if
any, among the stockholders thereof in
accordance with their contracts, or if there be
no special contract, on the basis of their
respective interests (Yu vs. Yukayguan, et al.,
G.R. No. 177549, June 18, 2009)
In other words, liquidation or winding up of
corporate affairs means the collection of the
corporate assets, the payments of all its debts
and settlement of its obligations, and the ultimate
distribution of the corporate assets, if any of it
remains, to all stockholders in accordance with
their proportionate stockholdings in the
corporation or in accordance with their respective
contract of subscription.
Methods
(1) By the corporation itself through its board of
directors/trustees
(2) By conveyance to a trustee within a three-
year period
(3) By management committee or rehabilitation
receiver
(4) By liquidation after three years (Ladia, The
Corporation Code of the Philippines, Annotated,
2015, p. 513)
(1) BY THE CORPORATION ITSELF (Sec. 139
(1), RCC)
The power of the board to manage corporate
affairs covers the situation where corporate
affairs are to be liquidated. If this method is
resorted to, the board will only have a period of
three (3) years to finish its task of liquidation.
Claims for or against the corporation not filed
within the period become unenforceable as there
exists no corporate entity against which they can
be enforced. Actions pending for or against the
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corporation when the three-year period expires
are abated since after that period, the corporation
ceases for all intents and purposes and is no
longer capable of suing or being sued. (Ladia, The
Revised Corporation Code of the Philippines,
Annotated, 2021, p. 521)
The continued existence for three (3) years shall
not be for the purpose of continuing the
business, but only for the purpose of:
(a) Prosecuting and defending suits by or against
it;
(b) Enabling it to settle and close its affairs;
(c) Permitting it to dispose of and convey its
property; and
(d) Allowing it to distribute its assets. (Sec. 139,
RCC)
(2) CONVEYANCE TO A TRUSTEE WITHIN A
THREE-YEAR PERIOD (Sec. 139 (2), RCC)
At any time during the three-year period, the
corporation may opt to convey all its corporate
assets to a trustee who will take charge of
liquidation, to prosecute and defend suits by or
against the corporation begun before the
expiration of said period.
If this method is used, the three-year period
limitation imposed will not apply provided the
designation of the trustee is made within that
period.
During the period of liquidation, but before
completion thereof, a dissolved corporation, as
represented by its trustee, can sue and be sued
even beyond the three-year period fixed by law.
(Ladia, The Revised Corporation Code of the
Philippines, Annotated, 2021, p. 521)
Unless the trusteeship is limited in its duration by
the deed of trust, there is no time limit within
which the trustee must finish liquidation (Board of
Liquidators vs. Kalaw, G.R. No. L-18805, August 14,
1967).
What is important is the completion of the
liquidation process so that creditors will be paid
and the residual assets are distributed to the
stockholders. (Divina, Divina on Commercial Law,
2021, p. 657)
(3) BY MANAGEMENT COMMITTEE OR
REHABILITATION RECEIVER
(For further discussion refer to FRIA)
By the receiver appointed by the SEC
Where a corporation is dissolved by judgement of
the SEC on a petition filed under Section 135 of
the RCC, the SEC may, in its discretion, appoint a
receiver to collect such assets and pay the debts
of the corporation. (Sec. 135, RCC)
In the exercise of its jurisdiction, the SEC
possesses the following powers:
(1) To appoint one or more receivers of the
property, real and personal, which is the
subject of the action pending before the
Commission in such other cases whenever
necessary in order to preserve the rights of
the parties-litigants and/or protect the
interest of the investing public and creditors;
(2) To create and appoint a management
committee, board, or body upon petition or
motu propio to undertake the management
of corporations, partnerships or other
associations not supervised or regulated by
other government agencies in appropriate
cases. (Sec. 6, PD 902-A, as amended by PD
1799)
The appointment of a receiver is, however,
permissive rather than mandatory and the law
tends to recognize that in cases of voluntary
dissolution, there is no occasion for the
appointment of a receiver, except under special
circumstances and upon proper showing (China
Banking Corp vs. Michelin, G.R. No. 36930, June 30,
1933)
By the rehabilitation receiver
The receiver who may be appointed by the SEC
is different from the rehabilitation receiver that
the competent Regional Trial Court may appoint
in cases involving the rehabilitation of an
insolvent debtor under FRIA.
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In cases falling under FRIA, the liquidation of the
debtor will be carried out by the rehabilitation
receiver or the liquidator appointed by the court.
Under Section 25 of the FRIA, the rehabilitation
court may convert a petition for rehabilitation to
liquidation if there is no showing that the debtor
may be rehabilitated. In which case, the
rehabilitation receiver may perform the functions
of the liquidator. (Divina, Divina on Commercial Law,
2021, p. 658)
Three-year period does not apply
When the liquidation of a dissolved corporation
has been placed in the hands of a receiver, the
three-year period fixed by law within which to
complete the task of liquidation will not apply,
and the receiver may institute all actions leading
to the liquidation of the corporation even after the
expiration of 3 years. (Sumera vs. Valencia, G.R.
45485, May 3, 1939)
Note however, that a receiver may be appointed
by the court even while the corporation is a going
concern and does not always imply dissolution of
a corporation. (Ladia, The Revised Corporation Code
of the Philippines, Annotated, 2007, p. 522)
(4) LIQUIDATION AFTER THREE YEARS
Under Sec. 139 of the RCC, after the expiration
of the three-year winding-up period, pending
actions by or against the corporation are abated.
It should not, however, be construed as to
prevent a corporation from pursuing activities
which would complete the final liquidation of a
dissolved corporation. Accordingly, it should be
allowed to continue liquidating its remaining
assets in order to complete the process of
dissolving the corporation.
Likewise, it should be allowed to distribute the
proceeds from said disposition to its stockholders
or creditors if any. A contrary interpretation
would have unjust and absurd results. (SEC-OGC
Opinion No. 15-07, July 21, 2015)
Three-year period
A dissolved corporation continues to be a body
corporate for three (3) years from the time it is
dissolved for the purpose of liquidation or winding
up of its affairs. (Ladia, The Revised Corporation
Code of the Philippines, Annotated, 2021, p. 513)
Generally, during said three-year period, the
board is not permitted to undertake any activity
outside of the usual liquidation of the corporation.
There is, however, nothing to prevent the
stockholders from conveying their respective
shareholdings toward the creation of a new
corporation to continue the business of the old.
This is because winding up is the sole activity of
a dissolved corporation that does not intend to
incorporate a new. If it does, however, it is not
unlawful for the old board to incorporate and
transfer the assets of a dissolved corporation to
the new corporation intended to be created as
long as the stockholders have given their consent
(Chung Ka Bio vs. IAC, G.R. No. 71837, July 26, 1988)
Directors as Trustees
The word “trustee” as used in the corporation
statute must be understood in its general
concept. It has been held that a counsel who
prosecuted and defended the interest of a
corporation, and who in fact appeared in behalf
of the corporation before and after its
incorporation may be considered a trustee of the
corporation, at least with respect to the matter in
litigation only. The purpose in the transfer of the
assets of the corporation to a trustee upon its
dissolution is more for the protection of its
creditors and stockholders. The appointment of
said counsel can be considered a substantial
compliance. (Gelano vs. CA, G.R. No L-39050,
February 24, 1981)
If the three-year extended life has expired
without a trustee or receiver having been
expressly designated by the corporation within
that period, the board of directors (or trustees)
itself, following the ruling in Gelano vs. CA, may
be permitted to continue as “trustees” by legal
implication to complete the corporate liquidation.
Still in the absence of board of directors or
trustees, those having pecuniary interest in the
154
assets, including not only the shareholders but
likewise the creditors of the corporation, acting Close Corporation Ordinary Corporation
for and in its behalf, might make proper There is a limitation on There is no limit as to
representation with SEC. (Clemente vs. Court of the number of the number of
Appeals, G.R. No. 82407, March 27, 1995) stockholders to twenty shareholders
(20)
Where person entitled to payment from There must be a A restriction on the
restriction on transfer of transfer of shares need
corporate assets cannot be found
shares. not be provided for
Specific qualifications Qualifications of
Except as otherwise provided for in Sections 93 to be eligible as stockholders are not
and 94 of the RCC, upon the winding up of stockholder are usually normally prescribed.
corporate affairs, any asset distributable to any provided for
creditor or stockholder or member who is Public offering of Public offering of shares
unknown or cannot be found shall be escheated shares is prohibited is not prohibited.
in favor of the national government. May be managed Managed by the Board
directly by the of Directors and not by
12. OTHER CORPORATIONS stockholders, as the the stockholders
Articles of
Incorporation may
a) CLOSE CORPORATIONS provide
There are rules on There are no rules on
Those whose shares of stock are held by a limited deadlock deadlock; the powers
number of persons like the family or other are given to SEC in case
closely-knit group. There are no public investors of deadlock in case of
and the shareholders are active in the conduct of close corporations are
the corporate affairs. not available
A shareholder may Generally, a shareholder
Definition and Requisites withdraw and ask the cannot withdraw and
corporation to purchase compel the corporation
his shares to purchase his shares
A close corporation is one whose articles of (Aquino, Commentaries and Jurisprudence on the
incorporation provides that: Revised Corporation Code of the Philippines, pp.762-
763)
(a) All the corporation’s issued stock of all
classes, exclusive of treasury shares shall be Applicability of RCC Provisions
held of record by not more than a specified
number of persons not exceeding twenty The Provisions of Title XII (Close Corporations)
(20) primarily govern close corporation, while other
(b) All the issued stock of all classes shall be Titles of the RCC apply suppletorily, except as
subject to one (1) or more specified otherwise provided under Title XII. (Sec. 95, RCC)
restrictions restriction on transfer permitted
by this Title; Companies That Cannot Be Close
(c) The corporation shall not list in any stock Corporations (Sec. 95, RCC)
exchange or make any public offering of its
stocks of any class; and (a) Mining Companies
(d) At least 2/3 of its voting stock or voting rights (b) Insurance Companies
must not be owned or controlled by another (c) Public Utilities
corporation which is not a close corporation. (d) Educational Institutions
(Sec. 95, RCC) (e) Stock Exchanges
(f) Banks
Close Corporations vs. Ordinary (g) Oil Companies
Corporations

155
(h) Other corporations declared to be vested
with public interest
NOTE:
(a) A corporation shall not be deemed a close
corporation when at least two-thirds (⅔) of
its voting stock or voting rights is owned or
controlled by another corporation which is
not a close corporation (Sec. 95, RCC);
(b) Restrictions on the transfer of shares must
not be more onerous than granting the
existing shareholders or the corporation the
option to purchase the shares of the
transferring shareholder under reasonable
terms, conditions, and period stated (Sec. 97,
RCC);
(c) The corporation is not a close corporation
even if the shares belong to less than twenty
(20) if not all the requisites are present (San
Juan Structural and Steel Fabricators, Inc. vs CA,
G.R. No. 129459, September 29, 1998). The three
(3) requisites must concur (Bustos vs Millians Shoe
Inc., G.R. No. 185024, April 24, 2017)
(1) CHARACTERISTICS
Characteristics of a Close Corporation
(1) The number of stockholders cannot exceed
twenty (20); (Sec. 95, RCC)
(2) To the extent that all stockholders can be
deemed directors, the number of directors
can effectively be more than fifteen (15);
(Sec. 13 [f], RCC)
(3) Shares of stock are subject to specified
restrictions; (Sec. 95, RCC)
(4) Shares of stock are prohibited from being
listed in the stock exchange or offered for
sale to the public; (Ibid)
(5) Stockholders may take an active part in
corporate management by vesting
management to them rather than a Board of
Director; (Sec. 96, RCC)
Stockholders who are actively involved in the
management of the corporation are liable in the
same manner as directors are liable. They are
personally liable for corporate torts unless the
corporation has obtained reasonably adequate
liability insurance. An example of corporate tort is
the non-payment of separation benefits of
employees who were terminated due to
authorized cause. (Naguiat Enterprises vs. NLRC,
G.R. No. 116123, March 13, 1997)
(6) Those active in management are personally
liable for corporate torts unless the
corporation has obtained an adequate liability
insurance; (Sec. 99, RCC)
(7) Directors may validly act even without a
meeting; (Sec. 100, RCC)
(8) Agreements between stockholders regarding
the operations of the business can validly be
made; (Sec. 99, RCC)
(9) To the extent that directors may be classified
into one or more classes and to be voted
solely by a particular class of stock,
cumulative voting may, in effect, be
restricted; (Sec. 96, RCC)
(10) The articles of incorporation may provide that
all officers shall be elected or appointed by
the stockholders; (Ibid)
(11) It may provide for greater quorum and voting
requirements in meetings of stockholders and
directors; (Ibid)
(12) Restriction on transfer of shares should be
indicated in the articles of incorporation, by-
laws and stock certificates; (Sec. 97, RCC)
(13) Pre-emptive rights of stockholders is broader
as it include all issues without exception;
(Sec. 101, RCC)
(14) A stockholder may withdraw and compel the
corporation to purchase his shares for any
reason with the limitation only that the
corporation has sufficient assets to cover its
liabilities exclusive of capital stock; (Sec. 104,
RCC)
(15) The proper forum may interfere in the
management of a close corporation in case of
deadlocks under Section 103, even of the
directors/stockholders are acting in good
faith; and (Sec. 103, RCC)
Any stockholder may petition the SEC for
corporate dissolution on grounds among
others, provided for in section 104. (Sec. 104,
RCC)
156
(16) A board resolution authorizing the sale or
mortgage of the corporate property is not
necessary to bind the corporation for the
action of its president. (Dulay Enterprises vs.
CA, G.R. No. 91889, August 27, 1993)
It is mandatory under Section 95 of the RCC for
the Articles of Incorporation of a close
corporation to provide that all of the issued stocks
of all classes shall be subject to one or more
restrictions.

Permissive Provisions of a Closed Under Section 97, the restrictions shall not be
Corporation: Stockholders Functioning as more onerous than granting the existing
Directors stockholders or the corporation the option to
purchase the shares of the transferring
1. The articles of 2. The articles of stockholder with such reasonable terms,
incorporation of a close incorporation may conditions or period stated in the Articles, by-
corporation may provide likewise provide laws, and the stock certificate. (Aquino,
that the business of the that all officers or Commentaries and Jurisprudence on the Revised
corporation shall be employees or that Corporation Code of the Philippines, pp.769)
managed by the specified officers or
stockholders of the employees shall
corporation rather be elected or Issuance or Transfer of Stock in Breach of
than by a board of appointed by the Qualifying Conditions
directors. stockholders,
instead of by the (1) If a stock is issued or transferred to a person
So long as this provision board of who is not eligible to be a holder of record
continues in effect, no directors. thereof, and if the certificate for such stock
meeting of stockholders clearly shows the qualifications of persons
need be called to elect entitled to be holders of record thereof, such
directors:
person is conclusively presumed to have
Provided, That the notice of the fact of his ineligibility to be a
stockholders of the stockholder.
corporation shall be (2) If the articles of incorporation states the
deemed to be directors for number of persons, not exceeding twenty,
the purpose of applying the who are entitled to be holders of record of
provisions of this Code, stocks, and if the certificate for such stock
unless the context clearly clearly states such number, and the issuance
requires otherwise: or transfer would cause the stock to be held
Provided, further, That the
by more than such number in persons, the
stockholders of the
corporation shall be person to whom the stock is issued or
subject to all liabilities of transferred is conclusively presumed to have
directors. notice of such fact.
(Sec. 96, RCC) (3) If a stock certificate conspicuously shows a
restriction on transfer of stock and the
(2) VALIDITY OF RESTRICTIONS ON transferee acquires the stock in violation of
TRANSFER OF SHARES such restriction, the transferee is conclusively
presumed to have notice of the fact that he
Restrictions on the right to transfer shares has acquired stock in violation of the
must appear in the: restriction, if such acquisition violates the
(1) Articles of incorporation; restriction.
(2) By-laws; and (4) Whenever any person to whom stock of a
(3) Certificate of stock close corporation has been issued or
Otherwise, the same shall not be binding on any transferred has, or is conclusively presumed
purchaser thereof in good faith (Sec. 97, RCC). to have, notice either (1) that he is a person
not eligible to be a holder of stock of the

157
 corporation, or (2) that transfer of stock (3) PREEMPTIVE RIGHT
would cause the stock of the corporation to
be held by more than the number of persons Preemptive Right
permitted by its articles of incorporation to
hold stock of the corporation, or (3) that the Preemptive rights of stockholders in close
transfer of stock is in violation of a restriction corporations shall extend to all stock to be issued,
on transfer of stock, the corporation may, at including reissuance of treasury shares, whether
its option, refuse to register the transfer of for money, property or personal services, or in
stock in the name of the transferee. payment of corporate debts, unless otherwise
(5) The provisions of subsection (4) shall not provided in the Articles of Incorporation. (Sec.
applicable if the transfer of stock, though 101, RCC)
contrary to subsections (1), (2) of (3), has
been consented to by all the stockholders of Preemptive Rights in Ordinary vs. Close
the close corporation, or if the close Corporation
corporation has amended its articles of
incorporation. Ordinary Corporation Close
(6) The term "transfer", as used in this section, Corporation
is not limited to a transfer for value. Does not extend to Extend to all stock to be
issuance of shares in issued, including
(7) The provisions of this section shall not impair
exchange for property reissuance of treasury
any right which the transferee may have to given for a corporate shares, whether for
rescind the transfer or to recover under any purpose or in payment money, property or
applicable warranty, express or implied. (Sec. of debt made in good personal services, or in
98, RCC) faith, if approved by the payment of corporate
stockholders debts, unless the articles
Board Meetings NOT Necessary representing at least 2/3 of incorporation provide
of the outstanding otherwise.
Unless the bylaws provide otherwise, any action capital stock.
taken by the directors of a close corporation (Divina, Questions and Answers on the Revised
without a meeting called properly and with due Corporation Code, 2020 edition, p. 506)
notice shall nevertheless be deemed valid if:
(4) AMENDMENT OF ARTICLES OF
(a) Before or after such action is taken, a written INCORPORATION
consent thereto is signed by all the directors;
(b) All the stockholders have actual or implied Any amendment to the articles of incorporation
knowledge of the action and make no prompt which seeks to delete or remove any provision
objection or in writing; or required by this Title or to reduce a quorum or
(c) The directors are accustomed to take informal voting requirement stated in said articles of
action with the express or implied incorporation shall require the affirmative vote of:
acquiescence of all stockholders; (1) At least two-thirds (2/3) of the outstanding
(d) All the directors have express or implied
capital stock, whether with or without voting
knowledge of the action in question and none rights, or
of them makes a prompt objection in writing. (2) A greater proportion of shares as may be
(Sec. 100, RCC) specifically provided in the articles of
incorporation for amending, deleting or
The director who failed to attend the meeting due removing any of the aforesaid provisions, at
to lack of proper call or notice may file his written a meeting duly called for the purpose. (Sec.
objection with the secretary of the corporation 102, RCC)
over the action taken therein after having
knowledge thereof, otherwise it is deemed
ratified. (Ibid.)

158
Kinds of amendments
Any amendment to the articles of incorporation
which:
(1) Seeks to delete or remove any provision
required by Title XII; or
(2) Seeks to reduce a quorum or voting
requirement stated in the articles of
incorporation. (Sec. 102, RCC)
Deadlocks
There is a deadlock when the directors or
stockholders are so divided respecting the
management of the corporation’s business and
affairs that the votes required for any corporate
action cannot be obtained with the consequence
that the business and affairs of the corporation
can no longer be conducted to the advantage of
the stockholders generally.
Upon written petition by any stockholder, the SEC
shall have the power to arbitrate and perform the
following powers:
(1) Canceling or altering any provision contained
in the Articles of Incorporation
(2) Canceling, altering or enjoining any
resolution or acts of the corporation or its
Board of Directors, stockholders, or officers
(3) Directing or prohibiting any act of the
corporation or its board of directors,
stockholders, or officers, or other persons
party to the action
(4) Requiring the purchase at their fair value of
shares of any stockholder, either by the
corporation regardless of the availability of
unrestricted retained earnings in its books or
by the other stockholders
(5) Appointing a provisional director
(6) Dissolving the corporation
(7) Granting such other relief as the
circumstances may warrant (Aquino,
Commentaries and Jurisprudence on the Revised
Corporation Code of the Philippines, pp.776-777)
Provisional director
A provisional director shall be an impartial person
who is neither a stockholder nor a creditor of the
corporation or any of its subsidiaries or affiliates,
and whose further qualifications, if any, may be
determined by the SEC. He is not a receiver of
the corporation but shall have all the rights and
powers of a duly elected director until removed
by the order of SEC or by all the stockholders.
(Sec. 103, RCC)
Withdrawal of Stockholders / Dissolution
As to the dissolution of the closed corporation,
the grounds are more extensive than in ordinary
Stock Corporation, any act prejudicial to any
stockholder wastage, its application of facts, and
even mere dishonesty are grounds to the
dissolution of a close corporation. And it may be
dissolved on petition of anyone single
stockholder.
Any stockholder of a close corporation may, for
any reason, compel the corporation to purchase
shares held at fair value, which shall not be less
than the par or issued value, when the
corporation has sufficient assets in its books to
cover its debts and liabilities exclusive of capital
stock.
Provided, that any stockholder of a close
corporation may, by written petition to the
Commission, compel the dissolution of such
corporation whenever any acts of the directors,
officers or those in control whenever any acts of
the directors, officers, or those in control of the
corporation are illegal, fraudulent, dishonest,
oppressive or unfairly prejudicial to the
corporation or any stockholder, or whenever
corporate assets are being misapplied or wasted.
(Sec. 104, RCC)
b) NON-STOCK CORPORATIONS
(1) DEFINITION
Non-Stock Corporation is one where no part of its
income is distributable as dividends to its
members (Section 86, RCC)
Even if there is a statement of capital stock, the
corporation is still a non-stock corporation if
dividends are not supposed to be declared, that
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is, there is no distribution of retained earnings.
(CIR vs. Club Filipino de Cebu, G.R. No. L-12719, May
31, 1962)
Requisites:
(1) It does not have a capital stock divided in to
shares.
(2) No part of its income is distributable as
dividends to its members
(3) Non-stock corporations must be formed or
organized for charitable, religious,
educational, professional, cultural, fraternal,
literary, scientific, social, civic service or
similar purposes, like trade, industry,
agricultural and like chambers or any
combination thereof. (Section 87, RCC)
Purposes:
(a) Charitable
(b) Religious
(c) Educational
(d) Professional
(e) Cultural
(f) Fraternal
(g) Literary
(h) Scientific
(i) Social
(j) Civic service
(k) Similar purposes, like trade, industry,
agricultural and like chambers; or
(l) Any combination thereof. (Sec. 87, RCC)
(2) TREATMENT OF PROFITS
Profits
Any profit which a non-stock may obtain
incidental to its operations, shall, whenever
necessary or proper be used for the furtherance
of the purpose or purposes for which the
corporation was organized subject to the
provisions of this Title. (Sec. 86, RCC)
The actual purpose is not controlled by the
corporate form or by the commercial aspect of
the business prosecuted, but may be shown by
extrinsic evidence, including the by-laws and the
method of operation. The essence of a non-stock
non-profit corporation is not the non-existence of
shares of stock to cover its capital but that:
(1) Its primary purpose should be any of those
under Sec. 87 of the Revised Corporation
Code, and
(2) There is a prohibition in the articles of
incorporation and by-laws that no part of the
income or any form of dividend is
distributable to the members, trustees, and
officers of the corporation (Collector of Internal
Revenue vs. Club Filipino, Inc. de Cebu, G.R. No.
L-12719, 1962)
A non-stock corporation cannot, generally,
engage in any business undertaking or
activity for profit as it would run counter to
its very nature as a non-profit entity.
However, as may be allowed and specified in
its articles of incorporation or as incidental to
the objects and purposes indicated therein, it
may engage in certain money-making
ventures or economic activities provided that
any profits derived therefrom shall be used
for the furtherance of the purpose for which
the corporation was organized or to defray
the operating expenses of the entity. (Ladia &
Reyes, The Revised Corporation Code (annotated)
2021 Edition, pp. 440-441)
Earning Profits Merely Incidental
By way of exception, the corporation may, as
incident to its purpose(s), engage in business
activities which are reasonably necessary to carry
out the purpose(s) for which the corporation was
organized. Any such power which is reasonably
necessary to enable a corporation to carry out
express powers granted and the purposes of its
creation is to be deemed implied or incidental
purpose. However, activities merely convenient
or useful are not implied if they are not essential,
having in view the nature and object of the
corporation.
Thus, while non-stock corporations are not
empowered to venture on profitable business
activities, they may, as incident to their purposes,
engage in such business activities that are
reasonably necessary or essential to carry out the
purposes for which they were organized,
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provided that any profit that may be derived
therefrom are not distributable to the members
but are used for the furtherance of corporate
purposes. (SEC Opinion dated 19 September 1995
addressed to Nestor Gonzales)
Members
Right to Vote
The right of any class or classes to vote may be
limited, broadened, or denied to the extent
specified in the articles of incorporation or by
laws. Without any limiting provision, the rule is
one member, one vote. (Section 88, RCC)
Unless otherwise provided in the articles of
incorporation or the bylaws, a member may vote
by proxy, in accordance with the provisions of this
Code. The Bylaws shall likewise authorize voting
through remote communication and/or in
absentia. (Sec. 88, RCC)
They may provide for a classification of members
with voting or non-voting rights. Proxy voting
may be denied in non-stock corporations while
this cannot be denied in stock corporations,
likewise, a right granted by law to all
stockholders. In the absence of a provision in
articles of incorporation or by-laws however,
members are entitled to vote by proxy as
mandated of the second paragraph of Section 88
of the Code. (Ladia & Reyes, The Revised
Corporation Code of the Philippines (annotated), 2021
edition, p. 442)
Membership
General Membership in a Non-Stock
Rule Corporation and all rights arising
therefrom is non transferrable.
(Section 89, RCC)
Exception Articles of Incorporation or by laws
may provide for rules of prescribing
transfer of membership
Trustees and Officers
The number of trustees shall be fixed in the
articles of incorporation or bylaws. It may or may
not be more than fifteen (15). (Sec. 91, RCC)
Distribution of Assets
Distribution of assets is allowed if expressly
provided in the Articles of Incorporation or
bylaws. In the absence of any provision, the
assets may be distributed in accordance with the
plan of distribution to persons, societies,
organizations, or corporations, whether or not
organized for profit as specified in the plan.
Distribution of assets to the members shall not
include assets that are included or will answer for
the following:
(1) All liabilities and obligations of the
corporation shall be paid, satisfied and
discharged, or adequate provision shall be
made therefor;
(2) Assets held by the corporation upon a
condition requiring return, transfer or
conveyance, and which condition occurs by
reason of the dissolution, shall be returned,
transferred or conveyed in accordance with
such requirements;
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(3) Assets received and held by the corporation
subject to limitations permitting their use
only for charitable, religious, benevolent,
educational or similar purposes, but not held
upon a condition requiring return, transfer or
conveyance by reason of the dissolution,
shall be transferred or conveyed to one (1) or
more corporations, societies or organizations
engaged in activities in the Philippines
substantially similar to those of the dissolving
corporation according to a plan of distribution
adopted pursuant to this Chapter;

(4) Assets other than those mentioned in the

preceding paragraphs, if any, shall be
distributed in accordance with the provisions
of the articles of incorporation or the bylaws,
to the extent that the articles of incorporation
or the bylaws determine the distributive
rights of members, or any class or classes of
members, or provide for distribution; and

(5) In any other case, assets may be distributed

to such persons, societies, organizations or
corporations, whether or not organized for
profit, as may be specified in a plan of
distribution adopted pursuant to this Chapter.
(Section 93, RCC)

162
Non-Stock vs. Stock Corporation

Non-Stock Stock
(1) Components Members Shareholders
(2) Board Members Trustees Directors
(3) As to existence No capital stock divided in to shares There is capital stock divided in to shares
of shares
(4) Dividends No dividends declared Dividends are declared
(5) Purpose Non-Profit – limited to Sec. 88 of RCC Primarily business
(6) Business It can conduct business but only if Business purpose is the primary purpose
activities incidental to its purpose
(7) Voting Rights Voting rights can be limited, broadened or One share-one vote
widened
(8) Transferability Membership is generally non transferrable Shares are transferrable
of Interest
(9) Termination Membership can be terminated Ownership of shareholder cannot be
terminated until the transfer of the shares
upon liquidation
(10) Effect of death Death of a member terminates Shares transferred through succession
membership
(11) Dues Payment of dues may be required No dues are paid
(12) Board There can be more than 15 Not more than 15 board
members/trustees members/directors
(13) Term of Board 3 years 1 year
Members
(14) Voting Cumulative voting is not allowed unless Cumulative voting is expressly allowed
provided for in the AOI or by-laws
(15) Liquidation Members will not get share in the assets Shareholders will get their share in the net
unless provided for in the AOI or by laws assets known as liquidated dividends
(16) Election of The member may directly elect the officers Officers are elected by the Board of
Officers of the non-stock corporations unless Directors
otherwise provided in the AOI or by-laws

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c) EDUCATIONAL CORPORATIONS (Ladia and Reyes, The Revised Corporation Code
(annotated), 2021 edition, p. 471)
Educational corporations – organized for
educational purposes, particularly the d) RELIGIOUS CORPORATIONS
establishment and maintenance of a school,
college or university. (Divina, Questions and Religious corporations may be incorporated by
Answers on the Revised Corporation Code, 2020 one or more persons. Such corporations may be
edition, p. 511) classified into:
a) Corporation sole; and
Non-stock educational corporation – b) Religious societies (Sec. 107, RCC).
trustees of educational institutions organized as
nonstock corporations shall not be less than five (1) CORPORATION SOLE
nor more than fifteen, provided that the number
of trustees shall be in multiples of five (Sec. 106, Formed for the purpose of administering and
RCC) managing, as trustee, the affairs, property and
temporalities of any religious denomination, sect,
Stock educational corporation – for or church, by the chief archbishop, bishop, priest,
institutions organized as stock corporations, the rabbi, or other presiding elder of such religious
number and term of directors shall be governed denomination, sect or church. (Sec. 108, RCC)
by the provisions on stock corporations (Sec. 106,
RCC) A corporation sole is one formed by the chief
archbishop, bishop, priest, minister, rabbi, or
Prohibition in establishment of educational other presiding elder of such religious
corporation: denomination, sect, or church (Sec. 108, RCC)
Exclusively for aliens and no group of aliens shall
comprise more than one-third of the enrollment Purpose
in any school. A corporation sole is incorporated for the purpose
of administering and managing, as trustee, the
Exception: Shall not apply to schools affairs, property and temporalities of any religious
established for foreign diplomatic personnel and denomination, sect or church (Ibid.)
their dependents and, unless otherwise provided
by law, for other foreign temporary residents. Contents of the AOI
(par. 2, Sec 4, Article XIV of the 1987 Constitution) The AOI of the corporation sole must set forth
that:
Public Schools Private Schools
(1) The applicant chief archbishop, bishop,
Created by the Managed by private
government individuals.
priest, minister, rabbi, or presiding elder
Subject to the law of Subject to the represents the religious denomination, sect,
their creation Corporation code or church who desires to become a
corporation sole;
Note: The provisions of Note: The institutions of
any special law or the learning once (2) The rules, regulations and discipline of the
Corporation Code may recognized by the religious denomination, sect or church are
be applied to as government as such are consistent with becoming a corporation sole
supplements to the law mandated by law within and do not forbid it;
of their creation. ninety days under the
provisions of the
Corporation Code and (3) Such chief archbishop, bishop, priest,
must perforce comply minister, rabbi, or presiding elder is charged
with the requirements with:
and procedure laid (a) The administration of the temporalities
down thereunder. and

164
 (b) The management of the affairs, estate
and properties of the religious
denomination, sect, or church within the
territorial jurisdiction, so described
succinctly in the AOI;
(4) The manner by which any vacancy occurring
in the office of chief archbishop, bishop,
priest, minister, rabbi, or presiding elder is
required to be filled, according to the rules,
regulations or discipline of the religious
denomination, sect, or church; and
(5) The place where the principal office of the
corporation sole is to be established and
located, which place must be within the
territory of the Philippines (Sec. 109, RCC)
Submission of the AOI
The chief archbishop, bishop, priest, minister,
rabbi or presiding elder of any religious
denomination, sect or church must file the AOI
with the Commission (Sec. 109, RCC)
The articles of incorporation must be:
(1) Verified, by affidavit or affirmation of the
chief archbishop, bishop, priest, minister,
rabbi, or presiding elder, as the case may be;
and
(2) Accompanied by a copy of the commission,
certificate of election or letter of appointment
of such chief archbishop, bishop, priest,
minister, rabbi, or presiding elder, duly
certified to be correct by any notary public
(Sec. 110, RCC)
Filing of Vacancies
The successors in office of any chief archbishop,
bishop, priest, minister, rabbi, or presiding elder
in a corporation sole:
(1) Shall become the corporation sole on their
accession to office; and
(2) Shall be permitted to transact business as
such upon filing a copy of their commission,
certificate of election, or letters of
appointment, duly certified by any notary
public with the Commission (Sec. 112, RCC).
Exercise of Power during Vacancies
During any vacancy in the office, all the powers
and authority of the corporation sole shall be
exercised by the person or persons authorized by
the rules, regulations or discipline of the religious
denomination, sect, or church represented by the
corporation sole to:
(a) Administer the temporalities and
(b) Manage the affairs, estate, and properties of
the corporation sole (Sec. 112, RCC).
Acquisition of Property
A corporation sole may:
(a) Purchase and hold real estate and personal
property for its church, charitable,
benevolent, or educational purposes; and
(b) Receive bequests or gifts for such purposes
(Sec. 111, RCC).

Commencement as a Corporation Sole Alienation of Property

From and after filing with the SEC of the said AOI: A corporation sole may purchase and hold
(1) Such chief archbishop, bishop, priest, real estate and personal property for its
minister, rabbi, or presiding elder shall church, charitable, benevolent, or educational
become a corporation sole; and purposes, and may receive bequests or gifts for
such purposes.
(2) All temporalities, estate and properties of the
religious denomination, sect or church General Rule Exception
theretofore administered or managed as such Such corporation may Provided, That in cases
chief archbishop, bishop, priest, minister, sell or mortgage real where the rules,
rabbi, or presiding elder shall be personally property held by it by regulations, and
obtaining an order discipline of the religious
held in trust as a corporation sole. (Ibid.)
for that purpose from denomination, sect or
the Regional Trial church, religious society,

165
 Court of the province
where the property is
situated upon proof
that the notice of the
application for leave to
sell or mortgage has
been made through
publication or as
directed by the Court,
and that it is in the
interest of the
corporation that leave to
sell or mortgage be
granted.
The application for leave
to sell or mortgage
must be made by
petition, duly
verified, by the chief
archbishop, bishop,
priest, minister, rabbi, or
presiding elder acting as
corporation sole, and
may be opposed by any
member of the religious
denomination, sect or
church represented by
the corporation sole:
(Sec. 111, RCC).
or order concerned (2) RELIGIOUS SOCIETIES
represented by such
corporation sole A religious corporation incorporated by any
regulate the method religious society, religious order, diocese, synod,
of acquiring, holding,
or district organization of any religious
selling, and
mortgaging real denomination, sect or church. (Sec. 114, RCC)
estate and personal
property, such rules, General Rule: Any religious society, religious
regulations and order, diocese, synod, or district organization of
discipline shall any religious denomination, sect, or church, may
govern, and the incorporate for the administration of its
intervention of the temporalities or for the management of its affairs,
courts shall not be properties, and estate. (Sec. 114, RCC)
necessary.
Procedure:
(1) Upon written consent of at least two- thirds
(2/3) of its membership; and/or
(2) By an affirmative vote at a meeting called for
the purpose of at least two- thirds (2/3) of its
membership (Ibid.)
Exception: Religious society will not be
incorporated when forbidden by competent
authority, the Constitution, pertinent rules,
regulations, or discipline of the religious
denomination, sect, or church of which it is a part
(Ibid.)

Voluntary Dissolution Filing and Contents of the AOI

A corporation sole may be dissolved, and its
affairs settled voluntarily by submitting to the
Commission a verified declaration of dissolution,
setting forth:
(a) The name of the corporation;
(b) The reason for dissolution and winding up;
(c) The authorization for the dissolution of
the corporation by the particular religious
denomination, sect or church;
(d) The names and addresses of the persons who
are to supervise the winding up of the affairs
of the corporation (Sec. 113, RCC).
Upon approval of such declaration of dissolution
by the Commission, the corporation shall cease to
carry on its operations except for the purpose of
winding up its affairs (Ibid.).
The AOI must be:
(1) Verified by the affidavit of the presiding elder,
secretary, or clerk or other member of such
religious society or religious order, or
diocese, synod, or district organization of the
religious denomination, sect, or church; and
(2) Filed with the SEC (Ibid.)
The AOI must set forth that:
(1) The religious society or religious order, or
diocese, synod, or district organization is a
religious organization of a religious
denomination, sect or church;
(2) At least two-thirds (2/3) of its membership
has given written consent or has voted to
incorporate, at a duly convened meeting of
the body;

166
(3) The incorporation of the religious society or
religious order, diocese, synod, or district
organization is not forbidden by competent
authority or by the Constitution, rules,
regulations or discipline of the religious
denomination, sect, or church of which it
forms part;
(4) The religious society or religious order,
diocese, synod, or district organization
desires to incorporate for the administration
of its affairs, properties and estate;
(5) The place within the Philippines where the
principal office of the corporation is to be
established and located; and
(6) The names, nationalities, and residence
addresses of the trustees, not less than five
(5) nor more than fifteen (15)
Elected by the religious society or religious
order, or the diocese, synod, or district
organization to serve for the first year, or
such other period as may be prescribed by
the laws of the religious society or religious
order, or of the diocese, synod, or district
organization (Ibid.)
e) ONE PERSON CORPORATIONS
A One Person Corporation (OPC) is a corporation
with a single stockholder: Provided, that only a
natural person, trust, or an estate may form the
same.
(1) EXCEPTED CORPORATIONS
Who cannot form an OPC
The following are prohibited from incorporating
as OPC:
(a) Banks and quasi banks
(b) Pre need
(c) Trust
(d) Insurance
(e) Public and publicly-listed companies
(f) Non-chartered government-owned and
controlled corporation
(g) Natural person who is licensed to exercise a
profession for the purpose of exercising
such profession, except as otherwise
provided under special laws (Sec. 116, RCC)
(2) CAPITAL STOCK REQUIREMENT
A One Person Corporation shall not be required
to have a minimum authorized capital stock
except as otherwise provided by special law. (Sec.
117, RCC)
No portion of the authorized capital is required to
be paid-up at the time of incorporation, unless
otherwise required by applicable laws or
regulations. (SEC Memorandum Circular No.7 dated
April 25, 2019)
(3) ARTICLES OF INCORPORATION AND
BY-LAWS
A One Person Corporation shall file articles of
incorporation in accordance with the
requirements under Section 14 of this Code. It
shall likewise substantially contain the following:
(1) If the single stockholder is a trust or estate,
the name, nationality, and residence of the
trustee, administrator, executor, guardian,
conservator, custodian, or other person
exercising fiduciary duties together with the
proof of such authority to act on behalf of the
trust or estate; and
(2) Name, nationality, residence of the nominee
and alternative nominee, and the extent,
coverage, and limitation of the authority. (Sec.
118, RCC)
Incorporators
The incorporator of an OPC being a natural
person must be of legal age.
The trust used by the law does not refer to a trust
entity, but the subject being managed (SEC
Memorandum Circular No.7, dated April 25, 2019)
By-Laws
The OPC is not required to submit and file
corporate by-laws. (Sec. 119, RCC)
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(4) CORPORATE NAME
An OPC shall indicate the letters “OPC” either
below or at the end of its corporate name. (Sec.
120, RCC)
Subject to renewal every two (2) years or as may
be required, upon review of the annual
submission of the Audited Financial Statements/
Financial Statements certified under oath by the
company’s President and Treasurer.

(5) CORPORATE STRUCTURE AND The bond is a continuing requirement for so long
OFFICERS as the single stockholder is the self-appointed
Treasurer of the OPC.
Officers
The bond may be cancelled upon proof of
(1) President appointment of another person as the Treasurer
and Filing of Amended Form for Appointment of
The single stockholder shall be the sole director Officers. (Sec. 10, SEC Memorandum Circular No. 7,
and president of the OPC. (Sec. 121, RCC) series of 2019)

Within fifteen (15) days form the issuance of the
certificate of incorporation, the OPC shall appoint
the following:
(2) Treasurer
(3) Corporate Secretary
Note: The single stockholder may not be
appointed as the corporate secretary. (Sec. 122,
RCC)

Note: A single stockholder who is likewise the
self-appointed treasurer of the corporation shall
give a bond to the Commission in such a sum as
may be required: Provided, that the said
stockholder/treasure shall undertake in writing to
faithfully administer the OPC’s funds to be
received as treasurer, and to disburse and invest
the same according to the articles of
incorporation as approved by the Commission.
The bond shall be renewed every two (2) years
or as often as may be required. (Sec. 122, RCC)
In addition to the functions designated by the
OPC, the Corporate Secretary shall:
(a) Be responsible for maintaining the minutes
book and/or records of the corporation;
(b) Notify the nominee or alternate nominee of
the death or incapacity of the single
stockholder, which notice shall be given no
later than five (5) days from such
occurrence;

ACS Surety Bond Coverage (c) Notify the Commission of the death of the
1.00 to 1,000,000.00 1,000,000.00 single stockholder within five (5) days from
such occurrence and stating in such notice
the names, residence addresses, and
1,000,001.00 to 2,000,000.00 contact details of all known legal heirs; and
2,000,000.00
2,000,001.00 to 3,000,000.00 (d) Call the nominee or alternate nominee and
3,000,000.00
the known legal heirs to a meeting and
3,000,001.00 to 4,000,000.00
advise the legal heirs with regard to, among
4,000,000.00
4,000,001.00 to 5,000,000.00 others, the election of a new director,
5,000,000.00 amendment of the articles of incorporation,
P5,000,001.00 and above = Amount of surety and other ancillary and/or consequential
bond coverage shall be equal to the OPC’s ACS matters. (Sec. 123, RCC)
(Sec. 10, SEC Memorandum Circular No. 7, series of
2019)

168
(4) Other officers as it may deem necessary
Appointment
Within fifteen (15) days form the issuance of the
certificate of incorporation, the OPC shall appoint
the treasurer, corporate secretary, and other
officers as it may deem necessary.
The OPC shall notify the Commission thereof
within five (5) days from appointment. (Sec. 122,
RCC)
(6) NOMINEE
Nominee and Alternate Nominee
The single stockholder shall designate a nominee
and an alternate nominee who shall, in the event
of the single stockholder’s death or incapacity:
(1) Take the place of the single stockholder as
director; and
(2) Shall manage the corporation’s affairs (Sec.
124, RCC)
The articles of incorporation shall state the
following details of the nominee and alternate
nominee:
(1) Names;
(2) Residence addresses;
(3) Contact details; and
(4) Extent and limitations of their authority in
managing the affairs of the OPC (Sec. 124,
RCC)
Consent required
The written consent of the nominee and alternate
nominee shall be attached to the application for
incorporation. Such consent may be withdrawn in
writing any time before the death or incapacity of
the single stockholder. (Sec. 124, RCC)
Term of Nominee and Alternate Nominee
(a) Temporary incapacity of the single
stockholder – the nominee shall sit as director
and manage the affairs of the OPC until the
stockholder, by self-determination, regains
the capacity to assume such duties.
(b) Death or Permanent Incapacity of the single
stockholder – the nominee shall sit as director
and manage the affairs of the OPC until the
legal heirs of the single stockholder have
been lawfully determined, and the heirs have
designated one of them or have agreed that
the estate shall be the single stockholder of
the OCP.
Role of the Alternate Nominee
The alternate nominee shall sit as director and
manage the OPC in case of the nominee’s
inability, incapacity, death, or refusal to discharge
the functions as director and manager of the
corporation, and only for the same term and
under the same conditions applicable to the
nominee. (Sec. 125, RCC)
Change of Nominee or Alternate Nominee
The single stockholder may, at any time, change
its nominee and alternate nominee by:
(1) Submitting to the Commission the names of
the new nominees; and
(2) Their corresponding written consent.
Note: For this purpose, the articles of
incorporation need not be amended. (Sec. 126,
RCC)
(7) LIABILITY
Liability of Single Shareholder
A sole shareholder claiming limited liability has
the burden of affirmatively showing that the
corporation was adequately financed.
Where the single stockholder cannot prove that
the property of the OPC is independent of the
stockholder’s personal property, the stockholder
shall be jointly and severally liable for the debts
and other liabilities of the OPC.
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The principles of piercing the corporate veil
applies with equal force to OPC as with other
corporations. (Sec. 130, RCC)
(8) CONVERSION OF CORPORATION TO
ONE PERSON CORPORATIONS AND
VICE-VERSA
Conversion from an Ordinary Stock
Corporation to a One Person Corporation
When a single stockholder acquires all the stocks
of an ordinary stock corporation, the latter may
apply for conversion into a One Person
Corporation, subject to the submission of such
documents as the Commission may require. (Sec.
131, RCC)
Approval of Conversion
If the application for conversion is approved:
(1) The Commission shall issue a certificate of
filing of amended articles of incorporation
reflecting the conversion.
(2) The OPC converted from an ordinary stock
corporation shall succeed the latter and be
legally responsible for all the latter’s
outstanding liabilities as of the date of
conversion. (Sec. 131, RCC)
Conversion from a One Person Corporation
to an Ordinary Stock Corporation
An OPC may be converted into an ordinary stock
corporation:
(1) After due notice to the Commission of such
fact and of the circumstances leading to the
conversion; and
Note: Such notice shall be filed with the
Commission within sixty (60) days from the
occurrence of the circumstances leading to the
conversion into an ordinary stock corporation.
(2) After compliance with all other requirements
for stock corporations under this Code and
applicable rules
Note: If all requirements have been complied
with, the Commission shall issue a certificate
of filing of amended articles of incorporation
reflecting the conversion. (Sec. 132, RCC)
In case of death of the single stockholder, the
nominee or alternate nominee shall:
(1) Transfer the shares to the duly designated
legal heir or estate within seven (7) days
from receipt of either an affidavit of heirship
or self-adjudication executed by a sole heir,
or any other legal document declaring the
legal heirs of the single stockholder; and
(2) Notify the Commission of the transfer.
Within sixty (60) days from the transfer of the
shares, the legal heirs shall notify the Commission
of their decision to either:
(a) Wind up and dissolve the OPC; or
(b) Convert it into an ordinary stock corporation.
(Sec. 132, RCC)
The ordinary stock corporation converted from an
OPC shall succeed the latter and be legally
responsible for all the latter’s outstanding
liabilities as of the date of conversion. (Sec. 132,
RCC)
Where the single stockholder cannot prove that
the property of the OPC is independent of the
stockholder’s personal property, the stockholder
shall be jointly and severally liable for the debts
and other liabilities of the OPC.
170
Conversion

Ordinary Stock Corporation to a One One Person Corporation to an Ordinary

Person Corporation Stock Corporation
Effects Upon issuance by the SEC of the Certificate of Upon issuance by the SEC of the Certificate of
Filing of amended Articles of Incorporation by Filing of amended Articles of Incorporation and
the SEC reflecting the conversion to OPC, the of By-Laws reflecting the conversion to an OSC,
Articles of Incorporation and the By-Laws shall the Articles of Incorporation the OPC shall be
be deemed superseded. (Sec. 2, SEC deemed superseded. (Sec. 11, SEC
Memorandum Circular No. 27, Series of 2020) Memorandum Circular No. 27, Series of 2020)

The Certificate of Filing Amended Articles of
Incorporation shall bear and retain the
corporation’s original SEC Registration Number.
Meanwhile, the name of the corporation shall
have an “OPC” suffix in order to reflect its
nature as an OPC. (Sec. 3, SEC Memorandum
Circular No. 27, Series of 2020)
The OPC converted from an Ordinary Stock
Corporation shall succeed the latter and be
legally responsible for the latter’s outstanding
liabilities as of the date of approval of the
conversion. (Sec. 4, SEC Memorandum Circular
No. 27, Series of 2020)
OPC provisions in the RCC shall apply
suppletorily. (Sec. 5, SEC Memorandum
Circular No. 27, Series of 2020)
Optional / Optional
Mandatory
Conversion
The date of the issuance of the Certificate of
Filing of Amended Articles of Incorporation and
of By-Laws shall be deemed as the date of
approval of the conversion. (Sec. 11, SEC
Memorandum Circular No. 27, Series of 2020)
The Certificate of Filing Amended Articles of
Incorporation shall bear and retain the
corporation’s original SEC Registration Number.
The OSC shall not have the “OPC” suffix as part
of its corporate name. (Sec. 12, SEC
Memorandum Circular No. 27, Series of 2020)
The OSC shall converted from an OPC shall
succeed the latter and be legally responsible for
all the latter’s outstanding liabilities as of the
date of conversion. (Sec. 13, SEC Memorandum
Circular No. 27, Series of 2020)
Mandatory, unless when winding-up and
dissolution is appropriate

(9) OTHERS Minutes Book

Term of Existence An OPC shall maintain a minutes book which shall

contain all actions, decisions, and resolutions
Incorporator Term
taken by the OCP. (Sec. 127, RCC)
Natural Person Perpetual
Trust Co-terminus with the trust. The
Records in Lieu of Meetings
OPC under the name of the trustee
may be dissolved upon proof of When action is needed on any matter, it shall be
termination of the trust. sufficient to prepare a written resolution:
Estate Co-terminus with the estate. The
OPC under the name of the estate (1) Signed and dated by the single stockholder;
may be dissolved upon proof of and
partition, such as a court-issued (2) Recorded in the minutes book of OPC.
order of partition or an
extrajudicial settlement. Note: The date of recording in the minutes book
(Sec. 10, SEC Memorandum Circular No. 7, series of shall be deemed to be the date of the meeting for
2019)
all purposes under this Code. (Sec. 128, RCC)

171
Reportorial Requirements
The One Person Corporation shall submit the
following within such period as the Commission
may prescribe:
(1) Annual financial statements audited by an
independent certified public accountant;
Note: If the total assets or total liabilities of
the corporation are less than Six Hundred
Thousand Pesos (P600,000.00), the financial
statements shall be certified under oath by the
corporation’s treasurer and president.
(2) A report containing explanations or
comments by the president on every
qualification, reservation, or adverse remark
or disclaimer made by the auditor in the
latter’s report;
(3) A disclosure of all self-dealings and related
party transactions entered into between the
One Person Corporation and the single
stockholder; and
(4) Other reports as the Commission may
require.
For purposes of this provision, the fiscal year of a
OPC shall be that set forth in its articles of
incorporation or, in the absence thereof, the
calendar year. (Sec. 129, RCC)
Placing under Delinquent Status
The Commission may place the corporation under
delinquent status should the corporation fail to
submit the reportorial requirements three (3)
times, consecutively or intermittently, within a
period of five (5) years. (Sec. 129, RCC)
f) FOREIGN CORPORATIONS
A foreign corporation is one formed, organized or
existing under laws other than those of the
Philippines and whose laws allow Filipino citizens
and corporations to do business in its own
country or State. (Sec. 140, RCC)
A foreign corporation lawfully doing business in
the Philippines shall be bound by all laws, rules
and regulations applicable to domestic
corporations of the same class, except those
which provide for the creation, formation,
organization or dissolution of corporations or
those which fix the relations, liabilities,
responsibilities, or duties of stockholders,
members, or officers of corporations to each
other or to the corporation. (Sec. 146, RCC)
(1) BASES OF AUTHORITY OVER FOREIGN
CORPORATIONS
Bases of authority over foreign corporations
(a) Consent
(b) Doctrine of “doing business” (related to the
definition under R.A. No. 7042, The Foreign
Investments Act, as amended by RA 8179)
(a) CONSENT
A corporation may give actual consent to judicial
jurisdiction manifested normally by compliance
with the State’s foreign corporation qualification
requirements such as licensing requirements and
other requirements to lawfully transact business
in the Philippines. (Sec. 142, RCC)
Such foreign corporation shall have the right to
transact business in the Philippines after
obtaining a license for that purpose in accordance
with this Code and a certificate of authority from
the appropriate government agency. (Sec. 140,
RCC)
(b) DOCTRINE OF “DOING BUSINESS”
WHAT CONSTITUTES “DOING BUSINESS”
A foreign corporation shall have the right to
transact business in the Philippines after
obtaining a license for that purpose in accordance
with this Code and a certificate of authority from
the appropriate government agency. (Sec. 140,
RCC)
Twin-Characterization Test
(1) Substance Test – the foreign corporation is
continuing the body or substance of the
172
 business or enterprise for which it was
organized or whether it has retired from it or
turned it over to another; and
(2) Continuity Test – the doing business implies
a continuity of commercial dealings and
arrangements and contemplates to that
extent the performance of acts or works or
the exercise of some of the functions
normally incident to, and in progressive
prosecution of, the purpose and object of its
organization. (The Mentholatum Co., Inc., Et Al.
vs. Anacleto Mangaliman, Et Al. G.R. No. L-47701,
June 27, 1941)
Isolated Transaction Test
What is determinative of "doing business" is not
really the number or the quantity of the
transactions, but more importantly, the intention
of an entity to continue the body of its business
in the country. The number and quantity are
merely evidence of such intention. The phrase
"isolated transaction" has a definite and fixed
meaning. i.e., a transaction or series of
transactions set apart from the common business
of a foreign enterprise in the sense that there is
no intention to engage in a progressive pursuit of
the purpose and object of the business
organization. Whether a foreign corporation is
"doing business" does not necessarily depend
upon the frequency of its transactions, but more
upon the nature and character of the
transactions. (Eriks PTE. LTD. vs. CA, G.R. No.
118843. February 6, 1997)
Actual Transaction of Business Required
To be doing or “transacting business in the
Philippines,” the foreign corporation must actually
transact business in the Philippines, that is,
perform specific business transactions within the
Philippine territory on a continuing basis in its
own name and for its own account. (Aquino,
Commentaries and Jurisprudence on the Revised
Corporation Code of the Philippines, 2020 edition, p.
872)
Actual transaction of business within the
Philippine territory is an essential requisite for the
Philippines to acquire jurisdiction over a foreign
corporation and this require the foreign
corporation to secure a Philippine business
license. If a foreign corporation does not transact
such kind of business in the Philippines, even if it
exports its products to the Philippines, the
Philippines has no jurisdiction to require such
foreign corporations to secure a Philippine
business license. (B. Van Zuiden Bros., Ltd. vs. Gtvl
Manufacturing Industries, Inc. G.R. No. 147905, May
28, 2007)
Modes of Doing Business
(1) Subsidiary
A corporation that will be organized in the
Philippines through the SEC. it is a corporation
more than 50% of the voting stock of which is
owned or controlled directly or indirectly
through one or more intermediates by another
corporation, which, thereby becomes a parent
company. (Sec. 1, Rule 2, Rules of Procedure on
Corporate Rehabilitation, 2008)
(2) Branch Office
Instead of incorporating a subsidiary, a foreign
corporation may create a “branch in the
Philippines, which would not be a legally
independent unit, and simply obtain a license
to do business in the Philippines.” A branch of
a foreign corporation is without legal
personality that is separate from the parent
company. (Philippine Deposit Insurance
Corporation vs. Citibank, G.R. No. 170290, April 11,
2012)
A branch office of a foreign corporation is
required to deposit securities with the SEC,
which securities will be returned upon
withdrawal of the foreign corporation from the
Philippines. (Sec. 126, RCC) The requirement
is meant to provide reasonable assurance that
the branch shall be able to settle its obligations
to the Philippine government and residents.
(SEC Opinion No. 11-14 dated March 9, 2011)
173
(3) Representative/Liaison Office
Deals directly with the clients of the parent-
foreign company but does not derive income
from the hose country and is fully subsidized
by its head office. It undertakes activities such
as, but not limited to, information
dissemination and promotion of the company’s
products as well as quality control of products.
(Sec. 1, Rule 2, Rules of Procedure on Corporate
Rehabilitation)
(4) Regional Headquarters / Regional
Operating Headquarters
A regional or area headquarters of
multinational companies may be organized
under Presidential Decree No. 218. A
multinational company is a foreign firm or
entity engaged in international trade with
affiliates, subsidiaries, or branches in the
Asia-Pacific Region. (Sec. 1, Rules and
Regulations to Implement P.D. No. 218)
“Doing business” shall include:
(1) Soliciting orders, service contracts, opening
offices, whether called "liaison" offices or
branches;
(2) Appointing representatives or distributors
domiciled in the Philippines or who in any
calendar year stay in the country for a period
or periods totaling one hundred eighty (180)
days or more Participating in the
management, supervision and control of any
domestic business;
(3) Participating in the management, supervision
or control of any domestic business, firm,
entity or corporation in the Philippines;
(4) Any other act or acts that imply a continuity
of commercial dealings or arrangements, and
contemplate to that extent the performance
of acts or works, or the exercise of some of
the functions normally incident to, and in
progressive prosecution of, commercial gain
or of the purpose and object of the business
organization. (Sec. 3[d], Foreign Investments
Act of 1991)
Doing business shall NOT include:
(1) Mere investment as a shareholder by a
foreign entity in domestic corporations duly
registered to do business, and/or the exercise
of rights as such investor;
(2) Having a nominee director or officer to
represent its interest in such corporation;
(3) Appointing a representative or distributor
domiciled in the Philippines which transacts
business in the representative's or
distributor's own name and account;
(4) The publication of a general advertisement
through any print or broadcast media;
(5) Maintaining a stock of goods in the
Philippines solely for the purpose of having
the same processed by another entity in the
Philippines;
(6) Consignment by a foreign entity of
equipment with a local company to be used
in the processing of products for export;
(7) Collecting information in the Philippines; and
(8) Performing services auxiliary to an existing
isolated contract of sale which are not on a
continuing basis, such as installing in the
Philippines machinery it has manufactured or
exported to the Philippines, servicing the
same, training domestic workers to operate
it, and similar incidental services. (Steelcase,
Inc. vs. Design International Selections, Inc., G.R.
No. 171995, April 18, 2012)
(9) Isolated transaction, even if it is in pursuant
of the usual business, does not constitute
doing business the doing of which would not
bar a foreign corporation from access to
Philippine Courts. (Bulakhidas vs. Navarro, G.R.
No. L-49695, April 7, 1986)
(2) NECESSITY OF A LICENSE TO DO
BUSINESS
For lawful transaction of business
Before a foreign corporation can transact
business in the Philippines it must secure proper
authorizations under existing laws. (Avon
Insurance PLC vs. Court of Appeals, G.R. No. 97645,
August 29, 1997)
174
The foreign corporation shall have the right to
transact business in the Philippines only after
obtaining a license for that purpose in accordance
with the RCC and certificate of authority from the
appropriate government agency. (Sec. 140, RCC)
Upon issuance of the license, such foreign
corporation may commence to transact business
in the Philippines and continue to do so for as
long as it retains authority to act as a corporation
under the laws of the country or State of its
incorporation, unless such license is sooner
surrendered, revoked suspended, or annulled in
accordance with this Code or other special laws.
(Sec. 143, RCC)
Requirements for foreign corporation to have the
right to transact business in the Philippines:
(1) License;
(2) Certificate of authority from the appropriate
government agency;
(3) Resident agent. (Secs. 140 and 142, RCC)
To acquire jurisdiction
The license requirement was imposed to subject
the foreign corporation doing business in the
Philippines to the jurisdiction of its courts. It was
never intended to favor domestic corporations
who enter into solitary transactions with unwary
foreign firms and then repudiate their obligations
simply because the latter are not licensed to do
business in this country. (National Trading
Corporation vs. CA, G.R. No. 110910, 17 July 1995)
The object of requiring a license is not to prevent
the foreign corporation from performing single
acts, but to prevent it from acquiring domicile for
the purpose of business without taking the steps
necessary to render it amenable to suits in the
local courts. (European Resources and Technologies
vs. Birkhahn, G.R. No. 159586, July 26, 2004)
To place foreign corporation in the same
footing as domestic corporations
The doctrine of lack of capacity to sue based on
failure to first acquire a local license is based on
considerations of sound public policy. It intended
to favor domestic corporations who enter was
never into solitary transactions with unwary
foreign firms and then repudiate their obligations
simply because the latter are not licensed to do
business in this country. (Antam Consolidated vs.
CA, G.R. No. L-61523; July 31, 1986)
For public protection
the foreign corporation is merely prevented from
being in a position where it takes the good
without accepting the bad. (European Resources
and Technologies vs. Birkhahn, G.R. No. 159586, July
26, 2004)
Effect of Doing Business Without a License
A foreign corporation transacting business in the
Philippines without a license, or its successors or
assigns, shall:
(1) Not be permitted to maintain or intervene in
any action, suit or proceeding in any court or
administrative agency of the Philippines;
(2) But such corporation may be sued or
proceeded against before Philippine courts or
administrative tribunals on any valid cause of
action recognized under Philippine laws. (Sec.
150, RCC)
Note: The Home Insurance Company case stating
that the violation of the prohibition against doing
business without first securing a license is subject
to penal sanctions is a mere obiter dictum and
without force (James Ient v. Tullett Prebon, Inc., G.R.
No. 189158, January 11, 2017). There is no provision
in the RCC which expressly provides for a penal
sanction for doing business without a license.
The object of the statute was not to prevent the
foreign corporation from performing single acts,
but to prevent it from acquiring a domicile for the
purpose of business without taking the steps
necessary to render it amenable to suit in the
local courts. (Marshall-Wells vs. Elser, G.R. No.
22015, September 1, 1924)
For banking institutions, a certificate of authority
from the Board of Investment is no longer
required under Foreign Investments Act of 1991
175
(R.A. 7042). Said certificate of authority is
necessary only for the purpose of availing of the
incentives granted and allowed under the
Omnibus Investment Code. (Ladia, The Corporation
Code of the Philippines, Annotated, 2007, p. 529)
Requisites for the Issuance of a License
(1) An application for license under oath;
(2) A foreign corporation applying for a license to
transact business in the Philippines shall
submit to the Commission a copy of its
articles of incorporation and bylaws, certified
in accordance with law, and their translation
to an official language of the Philippines, if
necessary;
(3) Attached to the application for license shall
be a certificate under oath duly executed by
the authorized official or officials of the
jurisdiction of its incorporation, attesting to
the fact that the laws of the country or State
of the applicant allow Filipino citizens and
corporations to do business therein;
(4) The application for a license to transact
business in the Philippines shall likewise be
accompanied by a statement under oath of
the president or any other person authorized
by the corporation, showing to the
satisfaction of the Commission and when
appropriate, other governmental agencies
that the applicant is solvent and in sound
financial condition, setting forth the assets
and liabilities of the corporation as of the date
not exceeding one (1) year immediately prior
to the filing of the application;
(5) Foreign banking, financial, and insurance
corporations shall, in addition to the above
requirements, comply with the provisions of
existing laws applicable to them. In the case
of all other foreign corporations, no
application for license to transact business in
the Philippines shall be accepted by the
Commission without previous authority from
the appropriate government agency,
whenever required by law (Sec. 142, RCC); and
(6) Appointment of a Resident Agent (Sec. 145,
RCC)
Valid Registration
Since the SEC will grant a license only when the
foreign corporation has complied with all the
requirements of law, it follows that when it
decides to issue such license, it is satisfied that
the applicant's by-laws, among the other
documents, meet the legal requirements. This, in
effect, is an approval of the foreign corporation’s
by-laws. (Citibank v. Chua, G.R. no. 102300, March
17, 1993)
(a) RESIDENT AGENT
Requisites
(1) A resident agent may be either an individual
residing in the Philippines or a domestic
corporation lawfully transacting business in
the Philippines:
(2) An individual resident agent must be of good
moral character and of sound financial
standing.
In case of a domestic corporation who will act as
a resident agent, it must likewise be of sound
financial standing and must show proof that it is
in good standing as certified by the Commission.
(Sec. 144, RCC)
Purpose of Appointing a Resident Agent
The power of the resident agent is limited to the
authority to receive, for and in behalf of the
corporation, services and other legal processes in
all actions and other legal proceedings against
the foreign corporation. (Aquino, Commentaries and
Jurisprudence on the Revised Corporation Code of the
Philippines, p. 881)
Effect of Service of Summons and Notices
to the Resident
When the defendant is a foreign private juridical
entity which has transacted or is doing business
in the Philippines, service may be made on its
resident agent designated in accordance with law
for that purpose, or it there be no such agent, on
the government official designated by law to that
effect, or on any of its officers or agents, directors
or trustees within the Philippines. (Sec. 14, Rule 14,
176
1997 Rules of Civil Procedure as amended by SC A.M.
No. 19-10-20-SC)
Service upon any agent of a foreign corporation,
whether or not engaged in business in the
Philippines, constitutes personal service upon the
corporation. (Sec. 145, RCC; Facilities Management
Corp. vs. De La Rosa, G.R. No. L-38649, March 26,
1979)
As a condition to the issuance of the license for a
foreign corporation to transact business in the
Philippines, such corporation shall file with the
Commission a written power of attorney
designating a person who must be a resident of
the Philippines, on whom summons and other
legal processes may be served in all actions or
other legal proceedings against such corporation,
and consenting that service upon such resident
agent shall be admitted and held as valid as if
served upon the duly authorized officers of the
foreign corporation at its home office. (Sec. 145,
RCC)
When service of summons or other legal
processes made upon the SEC instead of a
resident agent
(1) Foreign corporation, previously granted a
license, ceases to transact business in the
Philippines.
(2) A foreign corporation without any resident
agent in the Philippines on whom any
summons or other legal processes may be
served. (Sec. 128, RCC)
Such service made upon the SEC shall have the
same force and effect as if made upon the duly
authorized officers of the corporation at its home
office. (Sec. 128, RCC)
Whenever such service shall be made upon the
SEC, it must, within 10 days thereafter, transmit
by mail a copy of such summons or other legal
process to the corporation at its home or principal
office. The sending of such copy by the
Commission shall be a necessary part of and shall
complete such service.
Resident Agent not authorized to sign
certificate of non-forum shopping
While a resident agent may be aware of the
actions filed against the principal, he may not be
aware of the actions initiated by the principal,
therefore he cannot sign the certificate of non-
forum shopping that is a requirement for filing of
an initiatory pleading in court. (Expert Travel &
Tours Inc. v. CA, G.R. No. 152392, May 26, 2005)
Replacement of Resident Agent
SEC requires the submission of:
(1) A duly authenticated copy of board
resolution or a certification from the
authorized officer of the company formally
revoking his appointment as a resident agent
of the corporation; and
(2) Accompanied by a duly authenticated
written power of attorney designating the
substitute or the new resident agent.
The appointment of a resident agent of a foreign
corporation is revocable at any time at the
instance of the corporation. (SEC Opinion, Sept. 4,
1990)
(3) PERSONALITY TO SUE
Personality
(1) A foreign corporation transacting or doing
business in the Philippines with a license can
sue before Philippine courts.
(2) Subject to certain exceptions, a foreign
corporation doing business in the country
without a license cannot sue in Philippine
courts.
(3) If it is not transacting business in the
Philippines, even without a license, it can sue
before Philippine courts. (Ladia and Reyes, The
Revised Corporation Code of the Philippines,
Annotated, 2021, p. 543)
177
(4) SUABILITY OF FOREIGN (5) INSTANCES WHEN UNLICENSED
CORPORATIONS FOREIGN CORPORATIONS MAY BE
ALLOWED TO SUE (ISOLATED
Suability TRANSACTIONS)
Foreign corporation not licensed to do business
1. A foreign corporation transacting business in not absolutely incapacitated to sue:
the Philippines with the requisite license can
be sued in Philippine courts. Only when that foreign corporation is
"transacting" or "doing business" in the country
2. A foreign corporation transacting business in will a license be necessary before it can institute
the Philippines without a license can be sued suits. It may, however, bring suits on isolated
in Philippine courts. business transactions, which is not prohibited
under Philippine law. It is the act of engaging in
3. If it is not doing business in the Philippines, it business without the prescribed license, and not
cannot be sued in Philippine courts for lack of the lack of license per se, which bars a foreign
jurisdiction. (Ladia and Reyes, The Revised corporation from access to our courts. (Aboitiz
Corporation Code of the Philippines, Annotated, Shipping Corp. vs. Insurance Co. of NA, G.R. No.
2021, p. 543-544) 168402, August 6, 2008)

License Suability When unlicensed foreign corporations may be

Foreign Without a Cannot sue before allowed to sue:
Corporation license Philippine Courts; a
Doing Philippine national (1) To seek redress for an isolated business
Business in who has contracted
transaction
the said corporation
Philippines might be estopped
from challenging If the act or transaction involved is an isolated
the foreign transaction or the corporation is not seeking to
corporation’s enforce any legal or contractual rights arising
personality in a suit from, or growing out of, any business which it has
before Philippine transacted in the Philippines; (Western Supply vs.
Courts Reyes, G.R. No. L-27897, December 2, 1927)
Foreign Without a Can sue before
Corporation license/No Philippine courts on Doctrine of Isolated Transactions
Not Doing need for an isolated The doctrine of isolated transactions states that
Business in license transaction or on a
foreign corporations, even unlicensed ones, can
the cause of action
Philippines entirely sue or be sued on a transaction or series of
independent of any transactions set apart from their common
business business in the sense that there is no intention to
transaction engage in a progressive pursuit of the purpose
Foreign With required Can sue before and object of business transaction (Eriks PTE. LTD.,
Corporation license Philippine courts on v. CA, G.R. No. 118843, February 6, 1997).
Doing any transaction
Business in In the case at bar, the transactions entered into
the
by the respondent with the petitioners are not a
Philippines
series of commercial dealings which signify an
(Agilent Technologies Singapore Ltd., vs. Integrated
Silicon Technology Philippines Incorporated, G.R. No. intent on the part of the respondent to do
154618, April 14, 2004) business in the Philippines but constitute an
isolated one which does not fall under the
category of "doing business." The records show
that the only reason why the respondent entered

178
into the second and third transactions with the
petitioners was because it wanted to recover the
loss it sustained from the failure of the petitioners
to deliver the crude coconut oil under the first
transaction and in order to give the latter a
chance to make good on their obligation. (Antam
Consolidated vs. CA, G.R. No. L-61523; July 31, 1986)
Note: A single act does not necessarily mean an
isolated act. If the single act of transaction is not
merely incidental or casual, but is of such
character as distinctly to indicate a purpose on
the part of the foreign corporation to do other
business in the state, and to make the state a
basis of operations for the conduct of a part of
corporation's ordinary business, then it
constitutes doing business, and if the foreign
corporation is unlicensed, it cannot sue before the
court. (Far Eastern International Import vs. Nankai,
G.R. No. L-13525; November 30, 1962)
(2) To protect its corporate reputation,
name, and goodwill (Sec. 160, R.A. No.
8293)
If the purpose of the suit is to protect its
trademark, trade name, corporate name,
reputation or goodwill; (Fredco Manufacturing vs.
Harvard, G.R. No. 185917, June 1, 2011)
The Intellectual Property Code provides that any
foreign corporation not engaged in business in
the Philippines and a national of a country which
is a party to any convention, treaty or agreement
relating to intellectual property rights or the
repression of unfair competition, to which the
Philippines is also a party or extends reciprocal
rights, may sue in trademark or service mark
enforcement action (Sehwani Inc v. In-n-Out Burger,
G.R. No. 171053, 2007).
(3) To enforce a right not arising out of a
business transaction, e.g. tort that
occurred in the Philippines;
(4) When the parties have contractually
stipulated that Philippines is the venue
of actions;
(5) Where it is based on violation of the Revised
Penal Code; (Time, Inc. vs. Reyes, G.R. No. L-
28882, May 31, 1971)
The information shall be in the name of the
People of the Philippines and no longer the
foreign corporation which is only an aggrieved
party since a criminal offense is essentially an act
against the State. It is the latter which is
principally the injured party although there is a
private right violated. The foreign corporation’s
capacity to sue would become, therefore, of not
much significance in the main case. (Lacoste vs.
Fernandez, G.R. No. L-63796-97; May 2, 1984)
(6) If it is merely defending a suit filed against it;
(Time, Inc. vs. Reyes, G.R. No. L-28882, May 31,
1971)
(7) When the party sued is barred by the
principle of estoppel and/or principle of
unjust enrichment from questioning the
capacity of the foreign corporation;
Where the party is estopped to challenge the
personality of the corporation by entering into a
contract with it. (Rimbunan Hijau vs. Oriental Wood,
G.R. No. 152228, September 23, 2005)
A party is estopped to challenge the personality
of a corporation after having acknowledged the
same by entering into a contract with it. And the
doctrine of estoppel to deny corporate existence
applies to a foreign as well as to domestic
corporations. One who has dealt with a
corporation of foreign origin as a corporate entity
is estopped to deny its corporate existence and
capacity. (Communication Materials and Design vs.
CA, G.R. No. 102223; August 22, 1996)
(8) Recovery of misdelivered property
Lack of capacity to sue of a foreign corporation
without license to engage in business in the
Philippines is not applicable to a foreign
corporation performing single acts or "isolated
transactions." There is nothing in the record to
show that the petitioner has been in the
Philippines engaged in continuing business or
enterprise for which it was organized, when the
179
sixteen bundles were erroneously discharged in
Manila, for it to be considered as transacting
business in the Philippines. The fact is that the
bundles, the value of which is sought to be
recovered, were landed not as a result of a
business transaction, "isolated" or otherwise, but
due to a mistaken belief that they were part of
the shipment of forty similar bundles consigned
to persons or entities in the Philippines. (Swedish
East Asia vs. Manila Port Service, G.R. No. L-26332;
October 26, 1968)
No Legal Capacity to Sue
The Court resolves that ANDERSEN has no legal
capacity to sue for doing business in the
Philippines without procuring the necessary
license. It is not suing on an isolated transaction
on the basis of the contract it entered into with
MAGNA. However, MAGNA is already estopped
from challenging ANDERSEN's legal capacity
when it entered into a contract with it.
Section 133 of the Corporation Code of the
Philippines (1980)62 provides:
Section 133. Doing Business without License. —
No foreign corporation transacting business in the
Philippines without a license, or its successors or
assigns, shall be permitted to maintain or
intervene in any action, suit or proceeding in any
court or administrative agency of the Philippines;
but such corporation may be sued or proceeded
against before Philippine courts or administrative
tribunals on any valid cause of action recognized
under Philippine laws.
Thus, a foreign corporation that conducts
business in the Philippines must first secure a
license for it to be allowed to initiate or intervene
in any action in any court or administrative
agency in the Philippines. A corporation has legal
status only in the state that granted it personality.
63 Hence, a foreign corporation has no
personality in the Philippines, much less legal
capacity to file a case, unless it procures a license
as provided by law.
The number of the transactions entered into is
not determinative whether a foreign corporation
is doing business in the Philippines; the intention
to continue the body of its business prevails. 68
The number or quantity is merely an evidence of
such intention. A single act or transaction may
then be considered as doing business when a
corporation performs acts for which it was
created or exercises some of the functions for
which it was organized.
As an exception, a foreign corporation may sue
without a license on the basis of an isolated
transaction. (Magna Ready Mix Concrete Corp. v.
Andersen Bjornstad Kane Jacobs, Inc., G.R. No.
196158, January 20, 2021, J. Hernando)
Isolated Transactions
A single act may be considered as either doing
business or an isolated transaction depending on
its nature. It may be considered as doing business
if it implies a continuity of commercial dealings
and contemplates the performance of acts or the
exercise of functions normally incidental to and in
the progressive pursuit of its purpose. Contrarily,
it may be considered as an isolated transaction if
it is different from or not related to the common
business of the foreign corporation in the sense
that there is no objective to increasingly pursue
its purpose or object. And as stated, a license is
not required if the foreign corporation is suing on
an isolated transaction.
Though it was a single transaction, ANDERSEN's
act of entering into a contract with MAGNA
constitutes doing business in the Philippines. It
cannot be considered as an isolated transaction
because the act is related to ANDERSEN's specific
business purpose. Thus, in doing business
without a license, ANDERSEN had no legal
capacity to sue in the Philippines. (Magna Ready
Mix Concrete Corp. v. Andersen Bjornstad Kane Jacobs,
Inc., G.R. No. 196158, January 20, 2021, J.
Hernando)
Estoppel in Suits
However, the Court agrees that MAGNA is already
estopped from challenging ANDERSEN's legal
capacity to sue. The doctrine of estoppel states
that the other contracting party may no longer
challenge the foreign corporation's personality
180
after acknowledging the same by entering into a
contract with it. This principle is applied in order
to "prevent a person (or another corporation)
contracting with a foreign corporation from later
taking advantage of its noncompliance with the
statutes, chiefly in cases where such person has
received the benefits of the contract." (Magna
Ready Mix Concrete Corp. v. Andersen Bjornstad Kane
Jacobs, Inc., G.R. No. 196158, January 20, 2021, J.
Hernando)
(6) GROUNDS FOR REVOCATION OF
LICENSE
Without prejudice to other grounds provided
under special laws, the license of a foreign
corporation to transact business in the Philippines
may be revoked or suspended by the Commission
upon any of the following grounds:
(1) Failure to file its annual report or pay any fees
as required by the Code;
(2) Failure to appoint and maintain a resident
agent in the Philippines;
(3) Failure, after change of its resident agent or
of his address, to submit to the Securities and
Exchange Commission a statement of such
change;
(4) Failure to submit to the SEC an authenticated
copy of any amendment to its articles of
incorporation or by-laws or of any articles of
merger or consolidation within the time
prescribed by this Title;
(5) A misrepresentation of any material matter in
any application, report, affidavit or other
document submitted by such corporation
pursuant to this Title;
(6) Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due
to the Philippine Government or any of its
agencies or political subdivisions;
(7) Transacting business in the Philippines
outside of the purpose or purposes for which
such corporation is authorized under its
license;
(8) Transacting business in the Philippines as
agent of or acting for and in behalf of any
foreign corporation or entity not duly licensed
to do business in the Philippines; or
(9) Any other ground as would render it unfit to
transact business in the Philippines;
(10) Other grounds that may be provided by
special laws. (Sec. 151, RCC)
13. MERGER AND CONSOLIDATION
a) CONCEPT
Two or more corporations may merge into a
single corporation which shall be one of the
constituent corporations or may consolidate into
a new single corporation which shall be the
consolidated corporation. (Sec. 75, RCC)
Merger
Merger when two or more corporations may
merge into a single corporation which shall be
one of the constituent corporations. (Sec. 76, RCC)
In a merger, a corporation absorbs another
corporation and remains in existence while the
other is dissolved. It signifies the absorption of
one corporation by another which retains its
name and corporate identity with the added
capital, franchises and powers of a merged
corporation (Aquino, The Philippine Corporate Law
Compendium, 2014 Edition).
On the other hand, consolidation is when two or
more corporations may consolidate into a new
single corporation which shall be the consolidated
corporation. (Sec. 76, RCC)
In consolidation, a new corporation is created,
and the consolidating corporations are
extinguished. (Aquino, The Philippine Corporate Law
Compendium, 2014 Edition)
MERGER CONSOLIDATION
Uniting of two or more Uniting or amalgamation
corporations by the of two or more existing
transfer of property to corporations to form a
one of them which new corporation.
continue in existence,
the other or the others
being dissolved and
merged therein.
There is no new A single new corporation
corporation created. is created.

181
 The other constituent All corporations are
corporations are dissolved, but a new one
dissolved except the is created.
surviving corporation.
The surviving All assets, liabilities, and
corporation acquires all capital stock of all
the assets, liabilities, consolidated corporation
and capital stock of all are transferred to the
constituent new corporation
corporations.
b) CONSTITUENT CORPORATION VS.
CONSOLIDATED CORPORATION
In both merger and consolidation, the parties are
called the constituent corporations.
In case of merger, the constituent corporations,
except the surviving or absorbing corporation, are
the only ones dissolved.
In case of consolidation, all constituent
corporations are dissolved. The constituent
corporations form a union which creates a new
corporation called the consolidated corporation.
(Ladia, Reyes, The Revised Corporation Code of the
Philippines, Annotated, 2021, p. 428-429)
c) PLAN OF MERGER OR CONSOLIDATION
Plan of Merger or Consolidation
Two (2) or more corporations may merge into a
single corporation which shall be one of the
constituent corporations or may consolidate into
a new single corporation which shall be the
consolidated corporation. (Sec. 75, RCC)
Contents of Plan of Merger or Consolidation
The board of directors or trustees of each
corporation, party to the merger or consolidation,
shall approve a plan of merger or consolidation
setting forth the following:
(1) The names of the corporations proposing to
merge or consolidate, hereinafter referred to
as the constituent corporations;
(2) The terms of the merger or consolidation and
the mode of carrying the same into effect;
(3) A statement of the changes, if any, in the
articles of incorporation of the surviving
corporation in case of merger; and, in case
of consolidation, all the statements required
to be set forth in the articles of incorporation
for corporations organized under this Code;
and
(4) Such other provisions with respect to the
proposed merger or consolidation as are
deemed necessary or desirable. (Sec. 75,
RCC)
d) ARTICLES OF MERGER OR
CONSOLIDATION
After the approval by the stockholders or
members as required by the preceding section,
articles of merger or articles of consolidation shall
be executed by each of the constituent
corporations, to be signed by the president or vice
president and certified by the secretary or
assistant secretary of each corporation setting
forth:
(1) The plan of the merger or the plan of
consolidation;
(2) As to stock corporations, the number of
shares outstanding, or in the case of
nonstock corporations, the number of
members;
(3) As to each corporation, the number of shares
or members voting for or against such plan,
respectively;
(4) The carrying amounts and fair values of the
assets and liabilities of the respective
companies as of the agreed cut-off date;
(5) The method to be used in the merger or
consolidation of accounts of the companies;
(6) The provisional or pro forma values, as
merged or consolidated, using the accounting
method; and
(7) Such other information as may be prescribed
by the Commission. (Sec. 77, RCC)
Procedure
(1) Approval of merger or consolidation plan by
Board of Directors/Trustees of each
constituent corporations, setting forth the
matters required in Sec. 75.
(2) Approval of the plan by stockholders
representing 2/3 of the outstanding capital
182
 stock, or 2/3 of the members in non-stock
corporations, of each of such corporations at
separate corporate meetings called for the
purpose.
(3) Prior notice of such meeting, with a copy or
summary of the plan of merger or
consolidation, shall be given to all
stockholders or members at least twenty-one
(21) days prior to the scheduled meeting,
either personally of by registered mail,
stating the purpose thereof.
(4) Execution of the articles of merger or
consolidation by each constituent corporation
to be signed by the president or vice-
president and certified by the corporate
secretary or assistant secretary, setting forth
the matters required in Sec. 77.
(5) Submission of the articles of merger or
consolidation to the SEC, subject to the
requirement of Sec. 78, that if it involves
corporations under the direct supervision of
any other government agency or governed by
special laws, the favorable recommendation
of the government agency concerned shall
first be secured.
(6) Issuance of the certificate of merger or
consolidation by the SEC at which time the
merger or consolidation shall be effective.
(Secs. 76-79, RCC)
Effectivity of merger or consolidation
The merger or consolidation shall take effect
upon issuance by the SEC of the certificate
approving the articles and plan of merger or of
consolidation.
In the case of merger or consolidation of banks
or banking institutions, building and loan
associations, trust companies, insurance
companies, public utilities, educational
institutions and other special corporations
governed by special laws, the favorable
recommendation of the appropriate government
agency shall first be obtained. (Sec. 78, RCC)
The merger shall only be effective upon the
issuance of a certificate of merger by the SEC,
subject to its prior determination that the merger
is not inconsistent with the Corporation Code or
existing laws. The same rule applies to
consolidation which becomes effective not upon
the mere agreement of the members but only
upon issuance of the certificate of consolidation
by the SEC. (Mindanao Savings and Loan Assoc vs.
Wilkom, G.R. No. 178618, October 11, 2010)
e) EFFECTS (Sec. 80, CCP)
Effects of Merger or Consolidation
(a) The constituent corporations shall become a
single corporation.
i. In case of merger, shall be the surviving
corporation designated in the plan of
merger.
ii. In case of consolidation, shall be the
consolidated corporation designated in
the plan of consolidation.
(b) The separate existence of the constituents
shall cease except that of the surviving
corporation (in merger) or the consolidated
corporation (in consolidation).
(c) The surviving or the consolidated corporation
shall possess all the rights, privileges,
immunities and powers and shall be subject
to all duties and liabilities of a corporation.
(d) The surviving or the consolidated corporation
shall possess
i. All the rights, privileges, immunities and
franchises of each constituent
corporation
ii. All properties shall be deemed
transferred to the surviving consolidated
corporation.
(e) The surviving or the consolidated corporation
shall possess:
i. All the rights, privileges, immunities and
franchises of each constituent
corporation; and
ii. All real or personal property, all
receivables due on whatever account,
including subscriptions to shares and
other choses in action, and every other
interest of, belonging to, or due to each
183
 constituent corporation, shall be deemed
transferred to and vested in such
surviving or consolidated corporation
without further act or deed;
(f) The surviving or consolidated corporation
shall be responsible for:
i. All the liabilities and obligations of each
constituent corporation as though such
surviving or consolidated corporation had
itself incurred such liabilities or obligations;
and
ii. Any pending claim, action or proceeding
brought by or against any constituent
corporation may be prosecuted by or
against the surviving or consolidated
corporation.
iii. The rights of creditors or liens upon the
property of such constituent corporations
shall not be impaired by the merger or
consolidation. (Sec. 79, RCC)
(g) Employees of an absorbed corporation are
neither assets nor liabilities that are deemed
absorbed by the surviving corporation. The
Corporation Code does not mandate the
absorption of the employees of the non-
surviving corporation. The absorption of the
employees may, however, be provided for in
Merger Plan. In the absence of stipulation,
the surviving corporation may not be
judicially compelled to absorb the employees
of the non-surviving corporation. (BPI vs. BPI
Employees Union, G.R. No. 164301, August 10,
2010)
(h) For purposes of applying the Union Shop
Clause in the Collective Bargaining
Agreement between the surviving
corporation and the certified union therein,
the absorbed employees of the surviving
corporation. Hence, the Union Shop
Agreement applies to the absorbed
employees. (Sundiang and Aquino, Reviewer on
Commercial Law, 2017, p. 259)
Although in a merger, there is dissolution of the
absorbed corporations, there is no winding up of
their affairs, because the surviving corporation
automatically acquires all their rights, privileges,
powers, and liabilities. Same goes for the
consolidated corporation. (Associated Bank v. CA,
291 SCRA 51, G.R. No. 107382/G.R. No. 107612,
January 31, 1996)
Nell Doctrine
The Nell Doctrine states the general rule that the
transfer of all the assets of a corporation to
another shall not render the latter liable to the
liabilities of the transferor. If any of the above-
cited exceptions are present, then the transferee
corporation shall assume the liabilities of the
transferor.
However, the second exception under the
doctrine, if the transfer of assets of one
corporation to another amounts to a merger or
consolidation, then the transferee corporation
must take over the liabilities of the transferor. (Y-
I Leisure Philippines, Inc. v. Yu, G.R. No. 207161,
September 18, 2015)
Business-Enterprise Transfer
The transferee corporation’s interest goes beyond
the assets of the transferor’s assets and its
desires to acquire the latter’s business enterprise,
including its goodwill.
Section 40 suitably reflects the business-
enterprise transfer under the exception of the Nell
Doctrine because the purchasing or transferee
corporation necessarily continued the business of
the selling or transferor corporation. Given that
the transferee corporation acquired not only the
assets but also the business of the transferor
corporation, then the liabilities of the latter are
inevitably assigned to the former. Section 40
refers to the sale, lease, exchange or disposition
of all or substantially all of the corporation's
assets, including its goodwill. The sale under this
provision does not contemplate an ordinary sale
of all corporate assets; the transfer must be of
such degree that the transferor corporation is
rendered incapable of continuing its business or
its corporate purpose.
The purpose of the business-enterprise transfer
is to protect the creditors of the business by
allowing them a remedy against the new owner
184
of the assets and business enterprise. Otherwise,
creditors would be left “holding the bag,” because
they may not be able to recover from the
transferor who has “disappeared with the loot,”
or against the transferee who can claim that he is
a purchaser in good faith and for value. Based on
the foregoing, as the exception of the Nell
doctrine relates to the protection of the creditors
of the transferor corporation, and does not
depend on any deceit committed by the
transferee corporation, then fraud is certainly not
an element of the business enterprise doctrine.
Indeed, the transferee corporation may inherit
the liabilities of the transferor despite the lack of
fraud due to the continuity of the latter’s
business. (Y-I Leisure Philippines, Inc. v. Yu, G.R. No.
207161, September 18, 2015)
Exceptions
(1) Purchaser expressly or impliedly agrees to
assume such debts;
(2) Fraudulent transaction to escape liability for
debts;
(3) Transaction amounts to a consolidation or
merger of the corporations; and
(4) Purchasing corporation is merely a
continuation of the selling corporation
(Edward J. Nell Company vs. Pacific Farms Inc.,
G.R. No. L-20850, November 1965)
Limitations of Merger or Consolidation
(1) It should not result to an illegal combination
as proscribed in Act No. 3518;
(2) It should not substantially lessen the
competition between the corporations;
(3) It should not restrain commerce in any
section of the community; and
(4) It should not create a monopoly of any line of
commerce. (Ladia, The Corporation Code of the
Philippines, Annotated, 2007)
II. BANKING LAWS
A. NEW CENTRAL BANK ACT
(R.A. NO. 7653, AS AMENDED BY
R.A.NO. 11211)
1. STATE POLICIES
The State shall maintain a central monetary
authority that shall function and operate as an
independent and accountable body corporate in
the discharge of its mandated responsibilities
concerning money, banking and credit. In line
with this policy, and considering its unique
functions and responsibilities, the central
monetary authority established under this Act,
while being a government-owned corporation,
shall enjoy fiscal and administrative autonomy.
(Sec. 1, R.A. No. 7653, as amended by R.A. No. 11211)
2. MONETARY BOARD AND ITS POWERS
AND FUNCTIONS
The Monetary Board
The Monetary Board exercises the powers and
functions of the Bangko Sentral ng Pilipinas
(BSP), such as the conduct of monetary policy
and supervision of the financial system. (Sec. 6,
R.A. No. 7653)
Governance of the Bank
Composition of the Monetary Board
Composed of seven (7) members, appointed by
the President of the Philippines for a term of six
(6) years:
(a) One (1) BSP Governor
o Chairman of the Monetary Board;
o Head of a department;
o Required to direct and supervise the
operations and internal administration of
the BSP;
o Appointment shall be subject to
confirmation by the Commission on
Appointments (COA).
Note read: Tarrosa v. Singson case
below.
o If Governor is unable to attend a
Board meeting, he shall designate a
Deputy Governor to act as his
alternate:
185
  Provided, that in such event, the
Monetary Board shall designate one of
its members as ACTING
CHAIRMAN; (Sec. 6[a], R.A. No. 7653)
Deputy Governor shall be vested with
authority to participate and exercise the
right to vote in such meetings. (Sec. 21, R.A.
No. 7653 as amended by R.A. No. 11211)
(b) One (1) Cabinet Member
o Designated by the President of the
Philippines;
o If the Cabinet Member is unable to attend
a Board, he shall designate an
Undersecretary in his Department to
attend as his alternate; (Sec. 6[b], R.A. No.
7653)
(c) Five (5) Deputy Governors
o All shall serve full-time;
o Provided:
- Three (3) shall have a term of six (6) years;
and
- Other two (2), shall have a term of three
(3) years. (Sec. 6[c], R.A. No. 7653)
No Reappointment
No member of the Monetary Board may be
reappointed more than once. (Sec. 6, Art. 2, R.A.
No. 7653)
Appointment of BSP Governor
While Sec. 6(a) of the NCBA requires that the
Governor be subject to confirmation by the COA,
Congress cannot by law expand the confirmation
powers of the Commission on Appointments and
require confirmation of appointment of other
government officials not expressly mentioned in
the first sentence of Section 16 of Article VII of
the Constitution (Tarrosa v. Singson. G.R. No.
111243, May 25, 1994)
Vacancies in the Monetary Board
Any vacancy in the Monetary Board created by
the death, resignation, or removal of any member
shall be filled by the appointment of a new
member to complete the unexpired period of the
term of the member concerned. (Sec. 7, Art. 2, R.A.
No. 7653)
Qualifications of Monetary Board Member
(a) Natural-born Filipino citizen;
(b) Governor must be at least 40 y.o.;
(c) Other members, at least 35 y.o.;
(d) Good moral character;
(e) Unquestionable integrity;
(f) Known probity;
(g) Patriotic;
(h) With recognized competence in social and
economic disciplines (Sec. 8, Art. 2, R.A. No.
7653)
Monetary Board Member Disqualifications
(a) Disqualified from being a director, officer,
employee, consultant, lawyer, agent or
stockholder of any bank, quasi-bank or any
other institution which is subject to
supervision or examination by the BSP;
(b) Private sector members shall not hold any
other public office or public employment
during their tenure;
(c) Cannot be connected directly with any
multilateral banking or financial institution or
has a substantial interest in any private bank
in the Philippines, within 1 year prior to his
appointment;
(d) No member shall be employed in any such
institution within 2 years after the expiration
of his term except when he serves as an
official representative of the Philippine
Government to such institution;
(e) Governor and full-time Members shall limit
their professional activities to those
pertaining directly to their position with BSP,
and may not accept any other employment,
whether public or private, remunerated or ad
honorem; except in eleemosynary, civic,
cultural or religious organizations; or when
tasked by the President to represent the
interest of the Government; and
(f) When any member with personal or
pecuniary interest and shall retire from the
meeting when the matter is taken up. (Sec. 9,
Art. 2, R.A. No. 7653; Villanueva-Villanueva,
Commercial Law Review, 2018 Edition, pp. 737-
738)
186

Scope of Authority of the Monetary Board
(a) issue rules and regulations it considers
necessary for the effective discharge of the
responsibilities and exercise of the powers
vested upon the Monetary Board and the
Bangko Sentral. The rules and regulations
issued shall be reported to the President and
the Congress within fifteen (15) days from
the date of their issuance; (Sec. 15[a], Art. 2,
R.A. No. 7653)
(b) direct the management, operations, and
administration of the Bangko Sentral,
reorganize its personnel, and issue such rules
and regulations as it may deem necessary or
convenient for this purpose. The legal units
of the Bangko Sentral shall be under the
exclusive supervision and control of the
Monetary Board; (Sec. 15[b], Art. 2, R.A. No.
7653)
(c) establish a human resource management
system which shall govern the selection,
hiring, appointment, transfer, promotion, or
dismissal of all personnel. Such system shall
aim to establish professionalism and
excellence at all levels of the Bangko Sentral
in accordance with sound principles of
management. (Sec. 15[c], Art. 2, R.A. No. 7653)
(d) adopt an annual budget for and authorize
such expenditures by the Bangko Sentral as
are in the interest of the effective
administration and operations of the Bangko
Sentral in accordance with applicable laws
and regulations; (Sec. 15[d], Art. 2, R.A. No.
7653) and
(e) indemnify its members and other officials of
the Bangko Sentral, including personnel of
the departments performing supervision and
examination functions against all costs and
expenses reasonably incurred by such
persons in connection with any civil or
criminal action, suit or proceedings to which
he may be, or is, made a party by reason of
the performance of his functions or duties,
unless he is finally adjudged in such action or
proceeding to be liable for willful violation of
this Act, performed in evident bad faith or
with gross negligence. (Sec. 15[e], Art. 2, R.A.
No. 7653, as amended by R.A. No. 11211)
In the event of a settlement or compromise,
indemnification shall be provided only in
connection with such matters covered by the
settlement as to which the Bangko Sentral is
advised by external counsel that the person to be
indemnified did not commit willful violation of this
Act, performed in evident bad faith or with gross
negligence. (ibid.)
The costs and expenses incurred in defending the
aforementioned action, suit or proceeding may be
paid by the Bangko Sentral in advance of the final
disposition of such action, suit or proceeding
upon receipt of an undertaking by or on behalf of
the member, officer, or employee to repay the
amount advanced should it ultimately be
determined by the Monetary Board that he is not
entitled to be indemnified as provided in this
subsection. (ibid.)
(f) Authorize entities or persons to engage in
money service business. (Sec. 3, Art. 1, R.A. No.
7653)
(g) Assess price developments and outlook and
use its policy instruments to attain and
maintain price stability; (Sec. 3, Art. 1, R.A. No.
7653)
(h) Issue subpoena, to sue for contempt those
refusing to obey the subpoena without
justifiable reason, to administer oaths and
compelpresentation of books, recordsand ot
hers, needed in its examination, to impose
fines and other sanctions and to issue cease
and desist order, in the exercise of its quasi-
judicial functions (Banco Filipino Savings and
Mortgage Bank v. Bangko Sentral ng Pilipinas, G.R.
No. 200678, June 4, 2018; Colmenares v. Duterte,
G.R. Nos. 245981 & 246594, August 9, 2022)
Diligence required of Member of the
Monetary Board; Extraordinary Diligence
Members of the Monetary Board, officials,
examiners, and employees of the Bangko Sentral
who willfully violate this Act or who are guilty of
negligence, abuses or acts of malfeasance or
misfeasance or fail to exercise extraordinary
diligence in the performance of his duties shall be
held liable for any loss or injury suffered by the
Bangko Sentral or other banking institutions as a
187
result of such violation, negligence, abuse,
malfeasance, misfeasance or failure to exercise
extraordinary diligence. (Sec. 16, Art. 2, R.A. No.
7653)
Responsibilities of the Monetary Board
Members
(Sec. 16, Art. 2, R.A. 7653, as amended by Sec.
5[1][2][3], R.A. No. 11211, unless otherwise stated)
General Actions or omissions of the BSP, MB
Rule members and its other personnel are
held free and harmless to the fullest
extent permitted by law from any
liability. They shall be indemnified
for any and all liabilities, losses,
claims, demands, damages,
deficiencies, costs and expenses of
whatsoever kind and nature that
may arise in connection with the
exercise of their powers and
performance of their duties and
functions.
Exceptions They are liable if finally adjudged to
be in willful violation of this Act,
performed duties and functions in
evident bad faith or with gross
negligence.
When Members of the Monetary Board
Liable
The following are liable for any loss or injury
suffered by the BSP or other banking institutions
as a result of such violation, negligence, abuse,
malfeasance, misfeasance or failure to exercise
extraordinary diligence.
Who are liable Violations
Monetary Board: o Willful violation of this Act;
 members
o Guilty of:
Bangko Sentral  Negligence
ng Pilipinas  Abuses
 officials  Malfeasance
 examiners  Misfeasance
 employees  Fails to exercise
extraordinary diligence in
the performance of his
duties.
Who may be Violations
liable
General Rule: Disclosure of:
Monetary Board:  Confidential information
 members  Discussions or resolutions
of the MB;
Bangko Sentral  Operations of the MB;
ng Pilipinas
 officials Exceptions:
 examiners  Disclosure related to
 employees performance of official
functions with the BSP.
 With prior authorization of
the:
 MB or
 Governor.
Use of such information for:
 Personal gain;
 Detriment of:
 Gov’t
 BSP
 3rd parties
Note: Not considered
confidential
Any data or information
required to be submitted to
the:
 President and/or
 Congress, or
 Published under the
provisions of this Act shall
not be considered
confidential.
Diligence and good faith
The subject reports are only between the
Monetary Board and the BSP officials who
prepared and endorsed them and may be
rejected, modified or accepted by the Monetary
Board. The legal obligations of diligence and good
faith that BSP officials owe to the public under
Section 16 of the New Central Act start with the
official acts of the Monetary Board which, rightly
or wrong, are the cause of loss or injury to third
parties, not any preparatory report or
recommendation. (Borlongan vs. Reyes, G.R. No.
161276, January 31, 2005)
Removal of Members of the Monetary
Board
The President may remove any member of the
Monetary Board for any of the following reasons:
188
 Subsequently If the member is subsequently
Disqualified disqualified under the provisions of
Section 8 of this Act; or
Physically or If he is physically or mentally
mentally incapacitated that he cannot
incapacitated properly discharge his duties and
responsibilities and such incapacity
has lasted for more than six (6)
months; or
Fraudulent or If the member is guilty of acts or
Illegalities operations which are of fraudulent
or illegal character or which are
manifestly opposed to the aims and
interests of the Bangko Sentral; or
No longer If the member no longer possesses
possess the the qualifications specified in
qualification Section 8 of this Act
(Sec. 10, Art. 2, R.A. No. 7653)
Meetings
Meeting The Monetary Board shall meet at
Cadence least once a week.
Who may call  BSP Governor; or
 Two (2) other MB members
What The presence of four (4) members
constitute shall constitute a quorum:
quorum
Provided, That in all cases the
Governor or his duly designated
alternate shall be among the four
(4).
Required Unless otherwise provided in this
Concurrence Act, all decisions of the Monetary
Board shall require the
concurrence of at least four (4)
members.
Maintenance The BSP shall maintain and
of Records preserve a complete record of the
proceedings and deliberations of
the Monetary Board, including the
tapes and transcripts of the
stenographic notes, either in their
original form or in microfilm.
Modes of The meetings of the Monetary
meeting Board may be conducted through
modern technologies such as, but
not limited to, teleconferencing
and videoconferencing.
(Sec. 11, Art. 2, R.A. 7653, as amended by R.A. No.
11211)
Power of the Monetary Board
Power and Duties of the Governor
The Governor shall be the chief executive officer
of the Bangko Sentral. His powers and duties shall
be to:
(a) Prepare the agenda for the meetings of the
Monetary Board and to submit for the
consideration of the Board the policies and
measures which he believes to be necessary
to carry out the purposes and provisions of
this Act; (Sec. 17[a], Art. 3, R.A. No. 7653)
(b) Execute and administer the policies and
measures approved by the Monetary Board;
(Sec. 17[b], Art. 3, R.A. No. 7653)
(c) Direct and supervise the operations and
internal administration of the Bangko Sentral.
The Governor may delegate certain of his
administrative responsibilities to other
officers or may assign specific tasks or
responsibilities to any full-time member of
the Monetary Board without additional
remuneration or allowance whenever he may
deem fit or subject to such rules and
regulations as the Monetary Board may
prescribe. (Sec. 17[c], Art. 3, R.A. No. 7653)
(d) Appoint and fix the remunerations and other
emoluments of personnel below the rank of a
department head in accordance with the
position and compensation plans approved by
the Monetary Board, as well as to impose
disciplinary measures upon personnel of the
Bangko Sentral, subject to the provisions of
Section 15(c) of this Act: Provided, That
removal of personnel shall be with the
approval of the Monetary Board; (Sec. 17[d],
Art. 3, R.A. No. 7653)
(e) Render opinions, decisions, or rulings, which
shall be final and executory until reversed or
modified by the Monetary Board, on matters
regarding application or enforcement of laws
pertaining to institutions supervised by the
Bangko Sentral and laws pertaining to quasi-
banks, as well as regulations, policies or
instructions issued by the Monetary Board,
and the implementation thereof; (Sec. 17[e],
Art. 3, R.A. No. 7653) and
189
(f) Exercise such other powers as may be Authority of the Governor in case of
vested in him by the Monetary Board. (Sec. Emergencies
17[f], Art. 3, R.A. No. 7653)
In case of emergencies where time is insufficient
Power and Duties of the Representative to call a meeting of the Monetary Board, the
Governor of the Bangko Sentral, with the
The Governor of the Bangko Sentral shall be the concurrence of two (2) other members of
principal representative of the Monetary Board the Monetary Board, may decide any matter or
and of the Bangko Sentral and, in such capacity take any action within the authority of the Board.
and in accordance with the instructions of the
Monetary Board, he shall be empowered to: The Governor shall submit a report to the
(a) represent the Monetary Board and the President and Congress within seventy-two (72)
Bangko Sentral in all dealings with other hours after the action has been taken.
offices, agencies and instrumentalities of the
Government and all other persons or entities, At the soonest possible time, the Governor shall
public or private, whether domestic, foreign call a meeting of the Monetary Board to submit
or international; (Sec. 18[a], Art. 3, R.A. No. his action for ratification. (Sec. 19, Art. 3, R.A. No.
7653) 7653)
(b) sign contracts entered into by the Bangko
Sentral, notes and securities issued by the Limitations on the Outside Interest of the
Bangko Sentral, all reports, balance sheets, Governor and the Full-time Members of the
profit and loss statements, correspondence Board
and other documents of the Bangko Sentral.
The signature of the Governor may be in General Rule Exception
facsimile whenever appropriate; (Sec. 18[b], (1) They shall limit their They may accept
Art. 3, R.A. No. 7653) professional positions in
(c) represent the Bangko Sentral, either activities to those eleemosynary, civic,
personally or through counsel, including pertaining directly to cultural or religious
private counsel, as may be authorized by the their positions with organizations or
the Bangko Sentral; whenever, by
Monetary Board, in any legal proceedings,
designation of the
action or specialized legal studies; (Sec. 18[c], (2) They may not accept President, the Governor
Art. 3, R.A. No. 7653) and any other or the full-time member
(d) delegate his power to represent the Bangko employment, is tasked to represent
Sentral, as provided in subsections (a), (b) whether public or the interest of the
and (c) of this section, to other officers upon private, Government or other
his own responsibility: Provided, however, remunerated or ad government agencies in
That in order to preserve the integrity and the honorem matters connected with
prestige of his office, the Governor of the or affecting the
economy or the financial
Bangko Sentral may choose not to participate
system of the country.
in preliminary discussions with any
(Sec. 20, Art. 3, R.A. No. 7653)
multilateral banking or financial institution on
any negotiations for the Government within
Number and Functions of Deputy
or outside the Philippines. During the
Governors
negotiations, he may instead be represented
by a permanent negotiator. (Sec. 18[d], Art. 3,
Not more than five (5) deputies
R.A. No. 7653)
The BSP Governor, with the approval of the
Monetary Board, shall appoint not more than five
(5) Deputy Governors who shall perform duties as
may be assigned to them by the Governor and

190
the Monetary Board. (Sec. 21[1], Art. 3, R.A. No.
7653, as amended by R.A. No. 11211)
Function of Deputies
In the absence of the Governor, a Deputy
Governor designated by the Governor shall act as
chief executive of the BSP and shall exercise the
powers and perform the duties of the Governor.
Whenever the Governor is unable to attend
meetings of government boards or councils in
which he is an ex officio member pursuant to
provisions of special laws, a Deputy Governor as
may be designated by the Governor shall be
vested with authority to participate and exercise
the right to vote in such meetings. (Sec. 21[2], Art.
3, R.A. No. 7653, as amended by R.A. No. 11211)
3. THE BANGKO SENTRAL NG PILIPINAS
AND BANKS IN DISTRESS
THE BANGKO SENTRAL NG PILIPINAS
Creation of the Bangko Sentral ng Pilipinas
The Bangko Sentral ng Pilipinas is established an
independent central monetary authority, which
shall be a body corporate known as the Bangko
Sentral ng Pilipinas (BSP). (Sec. 2, Art. 1, R.A. No.
7653)
Bangko Sentral ng Pilipinas (Bangko Sentral) is
the central monetary authority of the Republic of
the Philippines pursuant to Republic Act No.
7653, New Central Bank Act. It supervises the
operations of banks and exercises regulatory
powers over non-bank financial institutions with
quasi-banking functions. It also exercises its
powers through respondent Monetary Board.
These include the power to place banks under
receivership under certain conditions and impose
administrative sanctions on banks and their
directors and/or officers upon violation
of banking laws and regulations and orders
issued by the Monetary Board, commission of
irregularities, conducting business in an unsafe or
unsound manner as may be determined by the
Monetary Board, among others. (Banco Filipino
Savings and Mortgage Bank v. Bangko Sentral ng
Pilipinas, G.R. No. 200642, April 26, 2021,
HERNANDO, J.)
Constitutionally made
The Constitution expressly grants the BSP, as the
country’s central monetary authority, the power
of supervision over the operation of banks, while
leaving with Congress the authority to define the
BSP’s regulatory powers over the operations of
finance companies and other institutions
performing similar functions. (Bank of Commerce v.
Planters Development Bank. G.R. Nos. 154470-71,
September 24, 2012)
The Central Bank of the Philippines (now Bangko
Sentral ng Pilipinas), through the Monetary
Board, is the government agency charged with
the responsibility of administering the monetary,
banking and credit system of the country and is
granted the power of supervision and
examination over banks and non-bank financial
institutions performing quasi-banking functions of
which savings and loan associations. (Busuego v.
Court of Appeals, G.R. No. 95326, March 11, 1999)
Fiscal and administrative autonomy; Government
-Owned and Controlled Corporation
In line with this policy, and considering its unique
functions and responsibilities, the central
monetary authority established under this Act,
while being a government-owned corporation,
shall enjoy fiscal and administrative autonomy.
(Sec. 1, Art. 1, R.A. No. 7653)
Purely governmental function
Undoubtedly, the function of the Central Bank of
the Philippines (CBP) as the central monetary
authority is a purely governmental function. Prior
to its creation, the supervision of
banks, banking and currency, and the
administration of laws relating to coinage and
currency of the Philippines was lodged with the
Bureau of Treasury under the immediate
supervision of the Executive Bureau (EB). (Bank of
the Philippine Islands v. Central Bank of the Philippines,
G.R. No. 197593, October 12, 2020, HERNANDO, J.)
Administrative Agency NOT simply a Corporate
Entity
The BSP is not simply a corporate entity but
qualifies as an administrative agency created,
pursuant to constitutional mandate, (Sec. 20, Art.
12, 1987 Constitution) to carry out a particular
191
governmental function. To be able to perform its
role as central monetary authority, the
Constitution granted it fiscal and administrative
autonomy. In general, administrative agencies
exercise powers and/or functions which may be
characterized as administrative, investigatory,
regulatory, quasi-legislative, or quasi-judicial, or
a mix of these five, as may be conferred by the
Constitution or by statute. (Soriano v. Laguardia.
G.R. Nos. 164785 and 165636, April 29, 2009;
Colmenares v. Duterte, G.R. Nos. 245981 & 246594,
August 9, 2022)
Corporate body performing governmental
functions
Central Bank of the Philippines is a corporate
body performing governmental functions.
Operating a clearing house facility for regional
checks is within CBP's governmental functions
and duties as the central monetary authority.
(Bank of the Philippine Islands v. Central Bank of the
Philippines, G.R. No. 197593, October 12, 2020,
HERNANDO, J.)
In the case of government agencies, the question
of its suability depends on whether it is
incorporated or unincorporated. An incorporated
agency has a Charter of its own with a separate
juridical personality while an unincorporated
agency has none. In addition, the Charter of an
incorporated agency shall explicitly provide that it
has waived its immunity from suit by granting it
with the authority to sue and be sued. This
applies regardless of whether its functions are
governmental or proprietary in nature. (ibid.)
Indubitably, the CBP, which was created under
RA 265 as amended by Presidential Decree No.
72 is a government corporation with separate
juridical personality and not a mere agency of the
government. Specifically, Sections 1 and 4 of RA
265, as amended, provided for the creation of the
CBP, a corporate body with certain corporate
powers which include the authority to sue and be
sued. Its main function is to administer the
monetary, banking and credit system of the
Philippines which is primarily governmental in
nature. (ibid.)
It has the following duties:
(a) To primarily maintain internal and external
monetary stability in the Philippines, and to
preserve the international value of the peso
and the convertibility of the peso into other
freely convertible currencies; and
(b) To foster monetary, credit and exchange
conditions conducive to a balanced and
sustainable growth of the economy. (ibid.)
CBP is not immune to suit although it performed
governmental functions.
Nonetheless, while the CBP performed a
governmental function in providing clearing
house facilities, it is not immune from suit as its
Charter, by express provision, waived its
immunity from suit. However, although the CBP
allowed itself to be sued, it did not necessarily
mean that it conceded its liability. Petitioner BPI
had been given the right to bring suit against
CBP, such as in this case, to obtain compensation
in damages arising from torts, subject, however,
to the right of CBP to interpose any lawful
defense. (Bank of the Philippine Islands v. Central
Bank of the Philippines, G.R. No. 197593, October 12,
2020, HERNANDO, J.)
Policy directions in the areas of money, banking
and credit
Under the New Central Bank, the BSP is given the
responsibility of providing policy directions in the
areas of money, banking and credit; it is given,
too, the primary objective of maintaining price
stability, conducive to a balanced and sustainable
growth of the economy, and of promoting and
maintaining monetary stability and convertibility
of the peso. (Bank of Commerce v. Planters
Development Bank, G.R. Nos. 154470-71 & 154589-90,
September 24, 2012)
Quasi-Judicail Powers
Pursuant to Art. XII, Sec. 20 of the Constitution,
Congress constituted Bangko Sentral as an
independent central monetary authority. As an
administrative agency, it is vested with quasi-
judicial powers, which it exercises through the
Monetary Board. (Banco Filipino Savings and
Mortgage Bank vs. Bangko Sentral ng Pilipinas and the
Monetary Board, G.R. No. 200678, June 04, 2018)
192
Capital of 200 Billion Pesos; Where
deposited
(1) The capital of BSP shall be Two hundred
billion pesos (P200,000,000,000);
(2) To be fully subscribed by the Government of
the Republic of the Philippines;
Provided, increase in capitalization shall be
funded solely from the declared dividends of the
BSP in favor of the National Government. (Sec.
2[2], Art. 1, R.A. 7653, as amended by R.A. No. 11211)
For this purpose, any and all declared dividends
of the Bangko Sentral in favor of the National
Government shall be deposited in a special
account in the General Fund, and earmarked
for the payment of BSP’s increase in
capitalization. Such payment shall be released
and disbursed immediately and shall continue
until the increase in capitalization has been fully
paid. (ibid.)
Primary Objective of the Bangko Sentral ng
Pilipinas
(1) Maintain price stability conducive to a
balanced and sustainable growth of the
economy and employment; and
(2) Promote and maintain monetary stability
and the convertibility of the peso. (Sec. 2,
Art. 1, R.A. 7653, as amended by R.A. No.
11211)
Basic Functions of the Bangko Sentral ng
Pilipinas
(1) It provides policy directions in the areas of
money, credit and banking (Sec. 3, R.A.
7653, as amended by R.A. No. 11211);
(2) It shall have supervision over the
operations of barks (Ibid.);
(3) It shall exercise regulatory powers over the
operations of finance companies, and non-
bank financial institutions (Ibid.);
(4) It shall exercise regulatory and examination
power over money service businesses,
credit granting businesses, and payment
system operators (Ibid.).
(5) It is, through the Monetary Board,
empowered to authorize entities or persons
engaged in money service businesses
(Ibid.).
(6) To oversee the payment and settlement
systems including critical financial market
infrastructures (Ibid.).
(7) It shall have the sole power and authority
to issue currency within the territory of the
Republic of the Philippines;
(8) The power to issue regulations to prevent
the circulation of foreign currencies, or
currency substitutes as well as the
reproduction of facsimiles of BSP notes;
(9) It has the power to investigate, make
arrests, conduct searches and seizure for
the purpose of maintaining the integrity of
the currency;
(10) To engage in foreign exchange
transactions in order to maintain price
stability;
(11) To make rediscounts, discounts, loans and
advances to banking and other financial
institutions to influence the volume of
credit consistent with the objectives of
price stability;
(12) To engage in open market operations—
purchase and sale of securities—exclusively
in accordance with its objective of
achieving price stability;
(13) To act as the banker of the government;
(14) To engage in marketing and stabilization of
securities for the account of the
government; and
(15) To act as the financial advisor of the
government.
(16) To require from any person or entity,
including GOCCs, any data for statistical
and policy development purposes (Sec. 23,
R.A. 7653, as amended by R.A. No. 11211).
(17) To approve the transfer of at least 10% of
the voting shares in banks and quasi-
banks; no transfer shall take effect or shall
be recognized without BSP approval (Sec.
25-A, R.A. 7653, as amended by R.A. No.
11211)
(18) Impose administrative sanctions on the
entities supervised by the BSP (Sec. 37, R.A.
7653, as amended by R.A. No. 11211)
193
(Aquino & Sundiang Sr., Reviewer on Commercial
Law, 2022 Edition, pp. 513-515)
Corporate Powers of the Bangko Sentral ng
Pilipinas
(1) To adopt, alter, and use a corporate seal
which shall be judicially noticed;
(2) To enter into contracts;
(3) To lease or own real and personal property,
and to sell or otherwise dispose of the same;
(4) To sue and be sued; and
(5) To do and perform any and all things that
may be necessary or proper to carry out the
purposes of this Act.
(6) Acquire and hold such assets and incur such
liabilities in connection with its operations
authorized by the provisions of this Act, or as
are essential to the proper conduct of such
operations.
(7) Compromise, condone or release, in whole or
in part, any claim of or settled liability to the
Bangko Sentral, regardless of the amount
involved, under such terms and conditions as
may be prescribed by the Monetary Board to
protect the interests of the Bangko Sentral.
(Sec. 5, Art. 1, R.A. No. 7653)
Powers of the Bangko Sentral ng Pilipinas
when Estopped
The Central Bank, by promising to rehabilitate the
bank, is estopped from closing it down. The
conduct of the Central Bank reveals a calculated
attempt to evade rehabilitating OBM despite its
promises. Hence, respondent Central Bank of the
Philippines is directed to comply with it
obligations under the voting trust agreement, and
to desist from taking action in violation thereof.
(Ramos v. Central Bank of the Philippines. G.R. No. L-
29352, October 4, 1971)
The Central Bank of the Philippines is duly
committed to maintain the stability of the
country's foreign exchange reserve position.
Underlying this commitment, however, is the
government's strict and faithful adherence to
basic principles of fairness and decency under the
Bill of Rights. Hence, CB circulars/memoranda
must be implemented in a manner that would not
only safeguard or harmonize them with
government programs designed to uplift or
promote the country's level of production and
employment, but at the same time avoid
irreparable or grave prejudice to participants of
said program. (Central Bank of the Philippines v. Hon.
Intermediate Appellate Court, etc. G.R. No. L-69078.
December 4, 1989)
And in case the banks faithfully complied with
BSP’s directives, the latter is estopped from
enforcing the disputed circulars that would deny
banks their right to purchase foreign exchange at
the preferred rate. (ibid.)
Operations of the Bangko Sentral ng
Pilipinas
(a) Research and Statistics
The BSP shall prepare data and conduct economic
research for the guidance of the Monetary Board
in the formulation and implementation of its
policies. Such data shall include, among others,
forecasts of the balance of payments of the
Philippines, statistics on the monthly movement
of the monetary aggregates and of prices and
other statistical series and economic studies
useful for the formulation and analysis of
monetary, banking, credit and exchange policies.
(Sec. 22, Art. 4, R.A. No. 7653)
(b) Obtain Data and Information
The BSP shall have the authority to require from
any person or entity, including government
offices and instrumentalities, or government-
owned or controlled corporations, any data, for
statistical and policy development purposes in
relation to the proper discharge of its functions
and responsibilities: Provided, That
disaggregated data gathered are subject to
prevailing confidentiality laws. (Sec. 23[1], Art. 4,
R.A. No. 7653, as amended by R.A. No. 11211)
Issue Subpoena Refuse the Subpoena
The BSP through the Those who refuse the
Governor or in his subpoena without
absence, a duly justifiable cause, or who
authorized refuse to supply the
representative shall Bangko Sentral with
194
 have the power to issue data required, shall be
a subpoena for the subject to punishment
production of the books for contempt in
and records for the accordance with the
aforesaid purpose. provisions of the Rules
of Court.
(ibid.)
The authority of the Bangko Sentral to require
data from banks shall continue to be exercised
pursuant to its supervisory powers set forth in this
Act and other applicable laws. (Sec. 23[2], Art. 4,
R.A. 7653, as amended by R.A. No. 11211)
Data on individuals and firms, other than banks,
gathered by the Bangko Sentral shall not be made
available to any person or entity outside of the
Bangko Sentral whether public or private except
under order of the court or under such conditions
as may be prescribed by the Monetary
Board: Provided, however, That the collective
data on firms may be released to interested
persons or entities: Provided, finally, That in the
case of data on banks, the provisions of Section
27 of this Act shall apply. (Sec. 23[3], Art. 4, R.A.
7653, as amended by R.A. No. 11211)
Training of technical personnel in the field
of money and banking
Promote and sponsor the training of technical
personnel in the field of money and banking.
Authorized to defray the costs of study, at home
or abroad, of qualified employees of the Bangko
Sentral, of promising university graduates or of
any other qualified persons who shall be
determined by proper competitive examinations.
The MB shall prescribe rules and regulations to
govern the training program of the Bangko
Sentral. (Sec. 24, Art. 4, R.A. 7653)
Supervision and Examination
(1) The Bangko Sentral shall have supervision
over, and conduct regular or special
examinations of: banking institutions;
(a) quasi-banks;
(b) subsidiaries of banlcs and quasi-banks
engaged in allied activities – a
subsidiary means a corporation more
than fifty percent (50%) of the voting
stock of which is directly or indirectly
owned, controlled or held with power to
vote by a bank or quasi-bank
(c) an affiliate means a corporation the
voting stock of which, to the extent of
fifty percent (50%) or less, is owned by
a bank or quasi-bank or which is related
or linked directly or indirectly to such
institution or intermediary through
common stockholders or such other
factors as may be determined by the
Monetary Board. (Sec. 25, R.A. No. 7653
as amended by R.A. No. 11211)
(2) The Bangko Sentral shall have regulatory
authority over, and conduct regular or
special examinations of, entities which under
this Act or by special laws are subject to its
jurisdiction.
(3) The BSP Sentral shall establish a mechanism
for issues arising from bank examinations. It
shall be independent and reports directly to
the Monetary Board, without prejudice to the
authority of the Bangko Sentral and its
Monetary Board to take enforcement and
supervisory actions against supervised
entities.
(4) The department heads and the examiners of
the supervising and/or examining
departments are hereby authorized to
administer oaths to any director, officer, or
employee of any institution under their
respective supervision or subject to their
examination.
(5) Compel the presentation of all books,
documents, papers or records necessary in
their judgment to ascertain the facts relative
to the true condition of any institution as well
as the books and records of persons and
entities relative to or in connection with the
operations, activities or transactions of the
institution under examination, subject to the
provision of existing laws protecting or
safeguarding the secrecy or confidentiality of
bank deposits as well as investments of
195
 private persons, natural or juridical, in debt
instruments issued by the Government.
No restraining order or injunction
General No restraining order or injunction
Rule shall be issued by the court enjoining
the BSP from examining any
institution subject to supervision or
examination by the BSP
Exceptions (1) If there is convincing proof that
the action of the Bangko Sentral
is plainly arbitrary and made in
bad faith; and
(2) if the petitioner or plaintiff files
with the clerk or judge of the
court in which the action is
pending a bond executed in favor
of the Bangko Sentral, in an
amount to be fixed by the court.
(Sec. 25, R.A. No. 7653 as amended by R.A. No.
11211)
Authority to Approve Transfer of Shares
Voting Transfers or acquisitions, or a series
Shares thereof, of at least ten percent
(10%) of the voting shares in banks
or quasi-banks shall require the prior
approval of the Bangko Sentral.
Approval of The selling or conveying stockholder
Transfer shall submit such transfer or
acquisition for approval by the
Bangko Sentral within such period as
may be prescribed by the Monetary
Board.
Fitness of In approving such transfers or
the acquisitions, regard shall be given by
incoming the Bangko Sentral to the fitness of
stockholders the incoming stockholders as may be
indicated in their integrity,
reputation and financial capacity.
Legal Effect Without Bangko Sentral approval, no
such transfer or acquisition shah
have legal effect nor shall the same
be recognized in the books of the
institution or by any government
agency, and the transferor-
stockholders shall remain
accountable and responsible
therefor.
Liability Transfer of actual control or
management of the institution to the
new stockholders or their
representatives prior to Bangko
Sentral approval shall make the
transferor, the transferee and any
person responsible therefor liable
under Sections 36 and 37 of this Act.
Sharing of Notwithstanding any provision of law
information to the contrary, the Bangko Sentral
with PDIC may share with the Philippine
Deposit Insurance Corporation any
information that the Bangko Sentral
may obtain pertaining to transfer or
acquisition of shares or series of
transfers or acquisition of shares in
banks and quasi-banks.
(Sec. 25-A, R.A. No. 7653 as amended by R.A. No.
11211)
Bank Deposits and Investments
When secrecy of deposits is waived
Any director, officer or stockholder who, together
with his related interest, contracts a loan or any
form of financial accommodation from:
(1) his bank; or
(2) from a bank
(a) which is a subsidiary of a bank holding
company of which both his bank and the
lending bank are subsidiaries; or
(b) in which a controlling proportion of the
shares is owned by the same interest that
owns a controlling proportion of the
shares of his bank, in excess of five
percent (5%) of the capital and surplus
of the bank, or in the maximum amount
permitted by law, whichever is lower.
(Sec. 26, R.A. No. 7653)
Confidentiality
Any information obtained from an examination of
his deposits shall be held strictly confidential and
may be used by the examiners only in connection
with their supervisory and examination
responsibility or by the Bangko Sentral in an
appropriate legal action it has initiated involving
the deposit account shall be required by the
lending bank to waive the secrecy of his deposits
of whatever nature in all banks in the Philippines.
(ibid.)
196
Prohibitions iii. indicating to receive such information.
In addition to the prohibitions found in R.A. No. (ibid.)
3019 and 6713, personnel of the Bangko Sentral
are hereby prohibited from: (4) Borrowing

(1) Connection to an institution. General Rule Exception

Prohibited from Unless said borrowing is
General Rule Exception borrowing from any transacted on:
Being an officer, (a) Except non- institution subject to (a) an arm's length
director, lawyer or stock savings and loan supervision or basis;
agent, employee, associations and examination by the BSP. (b) fully disclosed to
consultant or provident funds the MB; and
stockholder, directly or organized exclusively for (c) shall be subject to
indirectly, of any employees of the BSP such rules and
institution subject to and regulations as the
supervision or (b) If otherwise MB may prescribe.
examination by the BSP. provided in this Act; (ibid.)
(Sec. 27, R.A. No. 7653)
Examination and Fees
(2) Receiving gifts
Who shall (a) Supervising and examining
personally department head, personally; or
Directly or indirectly requesting or
supervise (b) Deputy
receiving any gift, present or pecuniary or and examine
material benefit for himself or another, Who are The operations of:
from any institution subject to supervision under (1) Every bank;
or examination by the Bangko Sentral; supervision (2) Every quasi-bank;
(ibid.) and (3) Including their:
examination (a) Subsidiaries
(3) Revealing information (b) Affiliates engaged in allied
activities, and
General Rule Exception (4) Other entities which under this
Revealing in any manner (a) orders of the court; Act or special laws are subject
information relating to (b) orders of the to BSP supervision, in
the condition or Congress; accordance with the guidelines
business of any such (c) any government set by the MB taking into
institution office; consideration sound and
(d) any authorized prudent practices
government agency; Interval That there shall be an interval of at
(e) under such least twelve (12) months between
conditions as may be regular examinations.
prescribed by the Provided, That the Monetary Board,
Monetary Board. by an affirmative vote of at least
five (5) members, may authorize a
special examination if the
This prohibition shall not be held to apply to the circumstances warrant.
giving of information to the: Conduct of The institution concerned shall
(a) Monetary Board; examination afford to the head of the
(b) BSP Governor; appropriate supervising and
(c) any person that is: examining departments and to his
i. authorized by either of them; authorized deputies full opportunity
ii. in writing; to examine its:
(1) books and records;
(2) cash and assets;

197
 (3) general condition;
(4) review its systems and
procedures at any time during
business hours when
requested to do so by the
Bangko Sentral.
Inspection General Rule: None of the reports
not open to and other papers relative to such
Public examinations shall be open to
inspection by the public.
Exception:
(1) insofar as such publicity is
incidental to the proceedings
hereinafter authorized or
(2) if it is necessary for the
prosecution of violations in
connection with the business
of such institutions.
Fee Supervised institutions shall pay to
the Bangko Sentral, no later than
May 31 of each year, an annual
supervision fee as may be
prescribed by the Monetary Board.
In determining the amount of the
annual supervision fee, the
Monetary Board shall consider the
costs of supervision.
(Sec. 28, R.A. No. 7653)
BANKS IN DISTRESS
Whenever a bank is in distress, the Bangko
Sentral ng Pilipinas may help banks by any of the
following:
(1) Granting emergency loans in an amount not
exceeding 50% of its total deposits and
deposit substitutes;
(2) Appointing a conservator;
(3) Appointing a receiver and order liquidation of
the bank. (Aquino and Aquino, Fundamentals of
Banking Law, 2019 Edition, p. 411)
Loans to Banks
(1) Loans without collateral. The Bangko Sentral
may extend loans and advances to banking
institutions for a period of not more than
seven (7) days without any collateral for the
purpose of providing liquidity to the banking
system in times of need. (Sec. 83, R.A. No.
7653)
(2) Emergency Loan and Advances. In periods of
national and/or local emergency or of
imminent financial panic which directly
threaten monetary and banking stability, the
Monetary Board may, by a vote of at least five
(5) of its members, authorize the Bangko
Sentral to grant extraordinary loans or
advances to banking institutions secured by
assets as defined hereunder: Provided, That
while such loans or advances are
outstanding, the debtor institution shall not,
except upon prior authorization by the
Monetary Board, expand the total volume of
its loans or investments. (Sec. 84, R.A. No.
7653)
a) CONSERVATORSHIP
Grounds and procedures for placing a bank
under Conservatorship; Governing law
The grounds and procedures for placing a bank
under conservatorship, as well as, the powers
and duties of the conservator appointed for the
bank shall be governed by the provisions of
Section 29 and the last two paragraphs of Section
30 of he New Central Bank Act. Also the same
rule shall apply to conservatorship proceedings of
quasi-banks. (Sec. 67, R.A. No. 8791)
Appointment of a Conservator
The Monetary Board may appoint a conservator:
(a) On the basis of a report submitted by the
appropriate supervising or examining
department;
(b) When MB deemed it adequate to protect the
interest of depositors and creditors when a
bank or a quasi-bank is in a state of
continuing inability or unwillingness to
maintain a condition of liquidity. (Sec. 29[1],
Art. 4, R.A. 7653)
Tasks of Conservator
The Monetary Board may appoint a conservator
with such powers as the Monetary Board shall
deem necessary to take charge of the:
(1) assets
(2) liabilities
(3) management thereof
198
(4) reorganize the management
(5) collect all monies and debts due said
institution
(6) exercise all powers necessary to restore its
viability
(7) conservator shall report to the MB
(8) conservator shall be responsible to the MB
(9) shall have the power to:
(a) overrule
(b) revoke the actions of the previous
management and board of directors of
the bank or quasi-bank. (Sec. 29[1], Art. 4,
R.A. 7653)
Qualifications of Conservator
The conservator must be:
(1) competent and
(2) knowledgeable in bank operations and
management (Sec. 29[2], Art. 4, R.A. 7653)
Duration of Conservatorship
The conservatorship shall not exceed one (1)
year. (Sec. 29[2], Art. 4, R.A. 7653)
Remuneration of Conservator
Regular General Rule: The conservator
Remuneration shall receive remuneration to be
fixed by the Monetary Board, in
an amount not to exceed two-
thirds (2/3) of the salary of the
president of the institution in one
(1) year, payable in twelve (12)
equal monthly payments.
Exception: A conservator
connected with the BSP, in which
case said conservator shall not be
entitled to receive any
remuneration or emolument.
If terminated If at any time within the one-year
on the ground period, the conservatorship is
that the terminated on the ground that
institution can the institution can operate on its
operate on its own, the conservator shall
own receive the balance of the
remuneration which he would
have received up to the end of
the year.
If terminated  The MB may appoint a
on the other conservator connected with
grounds the BSP, in which case he shall
not be entitled to receive any
remuneration or emoluments
from the BSP during the
conservatorship.
 The expenses attendant to
the conservatorship shall be
borne by the bank or quasi-
bank concerned.
(Sec. 29[3], Art. 4, R.A. 7653)
Effects of Conservatorship
(a) Designation of conservator is not a
precondition to the designation or receiver.
(Sec. 31, R.A. No. 7653)
(b) Merely takes over the management of the
bank and assumes exclusive powers to
oversee every aspect of the bank's operations
and affairs, thus the bank or the quasi-bank
retains juridical personality; (Central Bank
ofthe Philippines v. Court of Appeals, G.R.
No.88353, May 8, 1992) and
(c) Perfected transactions cannot be repudiated
(First Philippine International Bank v. CA, G.R. No.
115849 January 24, 1996)
Termination of Conservatorship
The Monetary Board shall terminate the
conservatorship when:
(a) Expiry of the 1-year term
(b) When the Monetary Board is satisfied that the
institution can continue to operate on its own
and the conservatorship is no longer
necessary.
(c) When the Monetary Board, on the basis of the
report of the conservator or of its own
findings, determine that the continuance in
business of the institution would involve
probable loss to its depositors or creditors, in
which case receivership and liquidation shall
pursued. (Sec. 29[4], Art. 4, R.A. 7653)
b) CLOSURE
The Monetary Board may summarily and without
need for prior hearing forbid the institution from
doing business in the Philippines and designate
the Philippine Deposit Insurance Corporation as
receiver of the banking institution. (Sec. 30[d], Art.
4, R.A. 7653; Hermosa Savings and Loan Bank, Inc. v.
Development Bank of the Philippines, G.R. No. 222972,
February 10, 2021)
199
Grounds for closure of a bank or a quasi
bank
(1) Cash Flow test – Inability to pay liabilities as
they become due in the ordinary course of
business (Sec. 30[a], Art. 4, R.A. 7653; Hermosa
Savings and Loan Bank, Inc. v. Development Bank
of the Philippines, G.R. No. 222972, February 10,
2021)
(2) Balance sheet test – Insufficiency of
realizable assets to meet its liabilities (Sec.
30[b], Art. 4, R.A. 7653; Hermosa Savings and
Loan Bank, Inc. v. Development Bank of the
Philippines, G.R. No. 222972, February 10, 2021)
(3) Inability to continue business without
involving probable losses to its depositors
and creditors (Sec. 30[c], Art. 4, R.A. 7653;
Hermosa Savings and Loan Bank, Inc. v.
Development Bank of the Philippines, G.R. No.
222972, February 10, 2021)
(4) Willful violation of a cease and desist order
under Section 37 that has become final,
involving acts or transactions which amount
to fraud or a dissipation of the assets (Sec.
30[d], Art. 4, R.A. 7653; Hermosa Savings and
Loan Bank, Inc. v. Development Bank of the
Philippines, G.R. No. 222972, February 10, 2021)
(5) Notification to the BSP or public
announcement of a bank holiday (Sec. 53, R.A.
No. 8791)
(6) Suspension of payment of its deposit
liabilities continuously for more than 30 days
(Sec. 53, R.A. No. 8791)
(7) Persisting in conducting its business in an
unsafe or unsound manner (Sec. 56, R.A. No.
8791)
“Close Now, Hear Later” Scheme
Sec. 29 does not contemplate prior notice and
hearing before a bank may be directed to stop
operations and placed under receivership. When
the law provides for the filing of a case within ten
(10) days alter the receiver takes charge of the
assets of the bank, it is unmistakable that the
assailed actions should precede the filing of the
case. (Central Bank of the Philippines v. Court of
Appeals, G.R. No. 76118, March 30, 1993)
The "close now, hear later" doctrine has already
been justified as a measure for the protection of
the public interest. Swift action is called for on the
part of the BSP when it finds that a bank is in dire
straits. Unless adequate and determined efforts
are taken by the government against distressed
and mismanaged banks, public faith in the
banking system is certain to deteriorate to the
prejudice of the national economy itself, not to
mention the losses suffered by the bank
depositors, creditors, and stockholders, who all
deserve the protection of the government. (Vivas
v. Monetary Board of the Bangko Sentral ng Pilipinas,
G.R. No. 191424, August 7, 2013, citing Bangko Sentral
ng Pilipinas Monetary Board v. Antonio-Valenzuela,
G.R. No. 184778, October 2, 2009)
The "close now and hear later" scheme is
grounded on practical and legal considerations to
prevent unwarranted dissipation of the bank's
assets and as a valid exercise of police power to
protect the depositors, creditors, stockholders,
and the general public. (Venus Commercial Co., Inc.
v. Department of Health, G.R. No. 240764, November
18, 2021)
Current and complete examination is NOT
necessary
It is clear that RA 7653 no longer requires that an
examination be made before the MB can issue a
closure order. (Philippine Deposit Insurance Corp. v.
Dumayas, A.M. No. RTJ-21-015 & OCA IPI No. 15-
4381-RTJ, November 17, 2020 citing Rural Bank of San
Miguel, Inc. v. Monetary Board, G.R. No. 150886,
February 16, 2007)
Legal Standing to Assail Closure Order
The closure and liquidation of a bank, which is
considered an exercise of police power may be
the subject of judicial inquiry. The order of
closure may be assailed:
(a) by the stockholders representing at least
majority of the outstanding capital stock;
(b) within ten days from receipt by the board of
directors of the order;
(c) thru a petition for certiorari on the ground
that the action taken by the BSP was in
excess of jurisdiction or with grave abuse of
discretion as to amount to lack of jurisdiction.
(Sec. 30, Art. 4, R.A. 7653)
200
c) RECEIVERSHIP
PDIC as a Statutory Receiver of Banks
Receivership refers to the stage within which the
Philippine Deposit Insurance Corporation
manages the affairs of the closed bank and
preserves its assets for the benefit of creditors.
(Sec. 10, R.A. No. 3591, as amended by R.A. No.
10846)
Whenever a bank is ordered closed by the
Monetary Board, the PDIC shall be designated as
receiver, and it shall proceed with the takeover
and liquidation of the closed bank. For this
purpose, banks closed by the Monetary Board
shall no longer be rehabilitated. (Sec. 12[a], R.A.
No. 3591, as amended by R.A. No. 10846)
The mandatory inclusion of the PDIC as a
representative party is grounded on its statutory
role as the fiduciary of the closed bank which,
under the New Central Bank Act, is authorized to
conserve the latter's property for the benefit of its
creditors. (Banco Filipino Savings and Mortgage Bank
v. Bangko Sentral ng Pilipinas, G.R. No. 200642, April
26, 2021, HERNANDO, J.)
The appointment of a receiver operates to
suspend the authority of the bank and its
directors and officers over its property and
effects, such authority being reposed in the
receivership and in this respect, the receivership
is equivalent to an injunction to restrain the
bank officers from intermeddling with the
property of the bank in anyway. (Cu v. Small
Business Guarantee and Finance Corp., G.R. No.
211222, August 7, 2017)
Grounds for Receivership
Whenever the MB finds that a bank or quasi-
bank:
(1) Has notified the BSP or publicly announced a
unilateral closure, or has been dormant for at
least 60 days or in any manner has
suspended the payment of its deposit/deposit
substitute liabilities, or is unable to pay its
liabilities as they become due in the ordinary
course of business. This shall not include
inability to pay caused by extraordinary
demands induced by financial panic in the
banking community;
(2) Has insufficient realizable assets, as
determined by the BSP, to meet its liabilities;
(3) Cannot continue in business without involving
probable losses to its depositors or creditors;
or
(4) Has willfully violated a cease-and-desist order
under Sec. 37 that has become final,
involving acts or transactions which amount
to fraud or a dissipation of the assets of the
institution. (Sec. 30, Art. 4, R.A. 7653)
When the Monetary Board finds a bank insolvent,
it may "summarily and without need for prior
hearing forbid the institution from doing business
in the Philippines and designate the Philippine
Deposit Insurance Corporation as receiver of the
banking institution. As fiduciary of the insolvent
bank, Philippine Deposit Insurance Corporation
conserves and manages the assets of the bank to
prevent the assets' dissipation. (Sec. 30, Art. 4, R.A.
7653; Banco Filipino Savings and Mortgage Bank v.
Bangko Sentral ng Pilipinas, G.R. No. 200678, June 4,
2018)
Effects of Receivership
(1) The business operations are suspended;
(2) Assets shall be deemed in custodia legis in
the hands of the receiver and shall be exempt
from garnishment, levy, attachment or
execution.
(3) The bank is not liable to pay interest on
deposits during the period of suspension or
operation (Fidelity Savings and Mortgage Bank v.
Cenzon, G.R. No. L-46208, April 5. 1990)
(4) Banks under liquidation retain their legal
personality;
(5) There will be no preference even if the
claimant-depositor obtained a writ of
preliminary attachment. (Villanueva-Castro,
2020 Commercial Law Recap, 2020 edition, p.
236)
Upon the designation of the Corporation as
receiver of a closed bank, it shall serve a notice
of closure to the highest-ranking officer of the
bank present in the bank premises, or in the
absence of such officer, post the notice of closure
in the bank premises or on its main entrance. The
201
closure of the bank shall be deemed effective A bank under receivership can only sue or
upon the service of the notice of closure. be sued through its receiver, the PDIC.
Thereafter, the receiver shall takeover the bank Thus, a petition filed on behalf of a bank
and exercise the powers of the receiver as under receivership that is neither filed
provided in this Act. (Sec. 27 R.A. No. 10846, through nor authorized by the PDIC must
creating new sections, Sec. 14[a], R.A. No. 10846) be dismissed for want of jurisdiction.
When a bank is ordered closed and placed under
The receiver shall have authority to use the receivership of PDIC by the Monetary Board,
reasonable force, including the authority to force PDIC is mandated to proceed with the takeover
open the premises of the bank, and exercise such and liquidation of the closed bank. PDIC shall
acts necessary to take actual physical possession immediately gather and take charge of all the
and custody of the bank and all its assets, assets and liabilities of the bank, administer the
records, documents, and take charge of its affairs same for the benefit of its creditors, and exercise
upon the service of the notice of closure. (Sec. 27 the general powers of a receiver under
R.A. No. 10846, creating new sections, Sec. 14[b], R.A. the Revised Rules of Court. (Banco Filipino Savings
No. 10846) and Mortgage Bank v. Bangko Sentral ng Pilipinas, G.R.
No. 200642, April 26, 2021, HERNANDO, J.)
The receiver of the bank is obliged to collect pre-
existing debts due to the bank, and in connection Distinguish conservator from receiver
therewith, to foreclose mortgages securing such Conservator Receiver
debts. (Larrobis, J.R. v. Philippine Veteran’s Bank, G.R. conservator is a receiver is generally
135706, October 1, 2004) appointed if the bank is appointed if the bank is
in a continuing state of insolvent
Duties of Receiver lack of liquidity
(1) The receiver shall immediately gather and; adequate to protect the
take charge of all the assets and liabilities of interest of the bank's
creditors and depositors
the institution, and administer the same for
takes charge of the receiver shall
the benefit of its creditors;
assets, liabilities and immediately gather and
(2) The receiver shall exercise the general management of the take charge of all the
powers of a receiver under the Revised Rules bank in distress assets and liabilities of
of Court; the institution,
(3) The receiver may deposit or place the funds administer the same for
of the institution in non-speculative the benefit of its
investments; creditors, and exercise
(4) The receiver shall not, with the exception of the general powers of
administrative expenditures, pay or commit the receiver under the
Rules of Court.
any act that will involve the transfer or
bank is allowed to do bank cannot do
disposition of any asset of the business business
institution.(Aquino & Sundiang Sr., Reviewer on has one (1) year from upon its appointment
Commercial Law, 2022 Edition, p.506) appointment to restore based on any of the
the bank's financial statutory grounds, must
Fiduciary Relationship of Closed Bank and viability proceed with the
PDIC liquidation of the closed
Considering that the receiver has the power to bank
take charge of all the assets of the closed bank (Divina, Divina on Commercial Law, A Comprehensive
and to institute for or defend any action against Guide, Vol. II, 2021 Edition, p. 95)
it, only the receiver, in its fiduciary capacity, may
sue and be sued on behalf of the closed
bank. (Banco Filipino Savings and Mortgage Bank v.
Bangko Sentral ng Pilipinas, G.R. No. 200678, June 4,
2018)

202
d) LIQUIDATION Difference between the Liquidation of
Banking Corporation and Ordinary
The recovery and conversion of assets into cash Corporations
for distribution to all creditors in accordance with
the rules on concurrence and preference of Banking Ordinary
credits. PDIC is the receiver and liquidator (Sec. Corporation Corporation
1[m], Rule 2, AM No. 19-12-02-SC). As to The New Central Corporation Code
Governing Bank Act (R.A. No. (R.A. No. 11232)
Note: With the removal of the 90-day receivership law 11211)
to determine if the bank can still be rehabilitated,
PDIC Act (R.A. No.
a bank placed under receivership is considered 3591 as amended
also as under liquidation. by
R.A. No. 10846)
Types of Liquidation As to By closure order By dissolution
Closure of the Monetary order of the
Voluntary Involuntary Board, summarily Securities and
Liquidation Liquidation and without need Exchange
In case of the voluntary The grounds and for prior hearing. Commission after
liquidation of any bank procedures for placing a (Sec. 30[4], R.A. the filing of a
organized under the bank under receivership No. 11211) verified complaint
laws of the Philippines, or liquidation, as well as and proper notice
or of any branch or the powers and duties of and hearing. (Sec.
office in the Philippines the receiver or liquidator 134, 135, and
of a foreign bank, appointed for the bank 138, R.A. No.
written notice of such shall be governed by the 11232)
liquidation shall be sent provisions of Sections As to Tax PDIC shall gather SEC shall issue
to the Monetary Board 30, 31, 32, and 33 of the Clearance and take charge of final order of
before such liquidation is New Central Bank Act: Require- all its assets and dissolution only
undertaken, and the Provided, That the ment liabilities upon after submission
Monetary Board shall petitioner or plaintiff issuance of order of the tax
have the right to files with the clerk or of closure. (Sec. clearance. (Sec.
intervene and take such judge of the court in 30[3], R.A. No. 52[c], NIRC)
steps as may be which the action is 11211)
necessary to protect the pending a bond, As to Voluntary At any time within
interests of creditors. executed in favor of the Authority liquidation of three (3) years
(Sec. 68, R.A. 8791) Bangko Sentral, in an to pursue banks is available after its
amount to be fixed by liquidation as a consequence dissolution, the
the court. This Section of voluntary corporation is
shall also apply to the dissolution allowed to
extent possible to the provided that no undertake its own
receivership and voluntary liquidation or
liquidation proceedings dissolution shall convey its
of quasi-banks. (Sec. 69, be undertaken by remaining assets
R.A. 8791) a bank without to one or more
prior approval of trustees. (Sec.
the Monetary 139, R.A. No.
Board. (Sec. 191, 11232)
Manual of
Regulations for
Banks 2018)
(In Re: Petition for the Assistance in the Liquidation of
Rural Bank of Bokod Benguet, Inc., PDIC v. BIR, G.R.
No. 158261, December 18, 2006)

203
Grounds for Liquidation The assets gathered by The receiver shall have
See Grounds for Receivership above (Sec. 30, the receiver shall be the authority to facilitate
Art. 4, R.A. 7653) evaluated and verified and implement the
as to their existence, purchase of the assets
ownership, condition, of the closed bank and
and other factors to the assumption of its
General Procedure in Proceeding For
determine their liabilities by another
Judicial Assistance in the Liquidation realizable value. In the insured bank, without
(1) The petition shall be filed ex parte within a management, need for approval of the
reasonable period from receipt of the preservation and liquidation court. The
Monetary Board Resolution placing the bank disposition of assets, the exercise of this authority
under liquidation. receiver shall be guided shall be in accordance
(2) All persons or entities with claims against the by cost-benefit with the Rules on
assets of the closed bank shall file their claims considerations, Concurrence and
with the receiver within sixty (60) days from resources of the closed Preference of Credits
bank, and potential under the Civil Code or
the date of publication of the notice of
asset recovery (Sec. other laws, subject to
closure. Claims filed outside the foregoing 16[a], R.A. No. 10846) such terms and
prescribed period shall be disallowed. conditions as the
Claims denied by the receiver shall be filed Corporation may
with the liquidation court within sixty (60) prescribe. The
days from receipt of the final notice of denial disposition of the branch
of claim. licenses and other bank
A claim whose validity has not yet been licenses of the closed
determined with finality at the time of the bank shall be subject to
the approval of the
submission of the final asset distribution plan,
Bangko Sentral ng
either by reason of a pending suit or for Pilipinas. (Sec. 15[a],
whatever reason, shall be considered as R.A. No. 10846)
contingent claim and shall not be paid under
the proposed final asset distribution plan. Effect of Receivership and Liquidation
(3) Upon finality of the order approving the final (Aquino & Sundiang Sr., Reviewer on Commercial Law,
asset distribution plan, the petition for 2022 Edition, pp. 507-510)
assistance in the liquidation of a closed bank
shall henceforth be, for all intents and (c) No rehabilitation. Section 12(a) of the PDIC
purposes, considered closed and terminated law provides that, "whenever a bank is
and the receiver, its officers, employees or ordered closed by the Monetary Board, the
agents, are forever discharged from any and Corporation shall be designated as receiver
all claims and/or liability arising from or in and it shall proceed with the takeover and
connection with the liquidation of the closed liquidation of the closed bank in accordance
bank. with" the PDIC law. Banks closed by the
(4) The receiver shall submit a final report on the Monetary Board shall no longer be
implementation of the approved final asset rehabilitated (Sec. 1214, R.A. No. 3591 as
distribution plan to the Monetary Board and amended);
the SEC after the expiration of the winding-
up period. (Sec. 16[k] to Sec. 16[p], R.A. No. (d) There will be no preference even if the
3591, as amended by R.A. No. 10846) claimant-depositor obtained a writ of
preliminary attachment. After the declaration
Modes of Liquidation of insolvency, the remedy of the depositors is
to intervene in the liquidation proceedings
Conventional Purchase of Assets (Provident Savings Bank v. CA, G.R. No. 97218,
Liquidation and/or Assumption May 17, 1993).
of Liabilities

204
(e) On the corporate franchise or existence.
Upon placement by the Monetary Board of a
bank under liquidation, it shall continue as a
body corporate until the termination of the
winding-up period.
(1) Such continuation as a body corporate
shall only be for the purpose of
liquidating, settling and closing its affairs
and for the disposal, conveyance or
distribution of its assets.
(2) The receiver shall represent the closed
bank in all cases by or against the closed
bank and prosecute and defend suits by
or against it. In no case shall the bank be
reopened and permitted to resume
banking business after being placed
under liquidation (Sec. 1314, R.A. No. 3591
as amended).
(f) On the powers and functions of its directors,
officers, and stockholder. The powers, voting
rights, functions and duties, as well as the
allowances, remuneration and perquisites of
the directors, officers, and stockholders of
such bank are terminated upon its dosure.
Accordingly, the directors, officers, and
stockholders shall be barred from interfering
in any way with the assets, records, and
affairs of the bank (Ibid.).
(g) On the assets. Upon service of notice of
closure, all the assets of the closed bank shall
he deemed in custodia legis in the hands of
the receiver, and as such, these assets may
not be subject to attachment, garnishment,
execution, levy or any other court processes.
A judge, officer of the court or any person
who shall issue, order, process or cause the
issuance or implementation of the
garnishment order, levy, attachment or
execution, shall be liable under Section 27 of
the PDIC Law. Collaterals securing the loans
and advances granted by the Bangko Sentral
ng Filipinas shall not be induded in the assets
of the dosed bank for distribution to other
creditors. The proceeds in excess of the
amount secured shall be returned by the
Bangko Sentral ng Pilipinas to the receiver
(Ibid.).
(h) On labor relations. Notwithstanding the
provisions of the Labor Code, the employer-
employee relationship between the closed
bank and its employees shall be deemed
terminated upon service of the notice of
closure of the bank in accordance with this
Act. Payment of separation pay or benefits
provided for by law shall be made from
available assets of the bank in accordance
with the Rules on Concurrence and
Preference of Credits under the Civil Code or
other laws (Ibid.).
(i) Contractual obligations. The receiver may
cancel, terminate, rescind, or repudiate any
contract of the dosed bank that is not
necessary for the orderly liquidation of the
bank, or is grossly disadvantageous to the
closed bank, or for any ground provided by
law (Ibid.).
(j) On interest payments. The liability of a bank
to pay interest on deposits and all other
obligations as of closure shall cease upon its
closure by the Monetary Board without
prejudice to the first paragraph of Section 85
of R.A. No. 7653 (the New Central Bank Act).
The receiver shall have the authority, without
need for approval of the liquidation court, to
assign, as payment to secured creditors, the
bank assets serving as collaterals to their
respective loans up to the extent of the
outstanding obligations, including interest as
of date of closure of the bank, as validated by
the receiver. The valuation of the asset shall
be based on the prevailing market value of
the collaterals as appraised by an
independent appraiser on an 'as is where is'
basis (Ibid.).
(k) Liability for penalties and surcharges for late
payment and nonpayment of taxes. From the
time of closure, the closed bank shall not be
liable for the payment of penalties and
surcharges arising from the late payment or
nonpayment of real property tax, capital
gains tax, transfer tax, and similar charges
(Ibid.).
(l) Bank charges and fees on services. The
receiver may impose on behalf of the closed
bank, charges and fees for services rendered
after bank closure, such as, but not limited
to, the execution of pertinent deeds and
certifications (Ibid.).
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(m) Actions pending for or against the closed
bank Except for actions pending before the
Supreme Court, actions pending for or
against the closed bank in any court or quasi-
judicial body shall, upon motion of the
receiver, be suspended for a period not
exceeding 180 days and referred to
mandatory mediation. Upon termination of
the mediation, the case shall be referred back
to the court or quasi-judicial body for further
proceedings.
(n) Final decisions against the dosed bank. The
execution and enforcement of a final decision
of a court other than the liquidation court
against the assets of a closed bank shall be
stayed. The prevailing party shall file the final
decision as a claim with the liquidation court
and settled in accordance with the Rules on
Concurrence and Preference of Credits under
the Civil Code or other laws (Ibid.).
(o) Docket and other court fees. Payment of
docket and other court fees relating to all
cases or actions filed by the receiver with any
judicial or quasi- judicial bodies shall be
deferred until the action is terminated with
finality. Any such fees shall constitute as a
first lien on any judgment in favor of the
closed bank or in case of unfavorable
judgment, such fees shall be paid as
liquidation costs and expenses during the
distribution of the assets of the closed bank
(Ibid.).
B. GENERAL BANKING LAW OF 2000
(R.A. NO. 8791)
Declaration of Policy
The State recognizes the
(a) vital role of banks in providing an
environment conducive to the sustained
development of the national economy; and
(b) the fiduciary nature of banking that requires
high standards of integrity and performance.
Judicial Review
General The actions of the Monetary Board
Rule shall be final and executory, and may
not be restrained or set aside by the
court
Exception on petition for certiorari on the ground
that the action taken was in excess of
jurisdiction or with such grave abuse
of discretion as to amount to lack or
excess of jurisdiction. The petition for
certiorari may only be filed by the
stockholders of record representing
the majority of the capital stock within
ten (10) days from receipt by the
board of directors of the institution of
the order directing receivership,
liquidation or conservatorship.
(Sec. 30, Art. 4, R.A. 7653; Ekistics Philippines, Inc. v.
Bangko Sentral ng Pilipinas, G.R. No. 250440, May 12,
2021)
Ground; Grave abuse of discretion
The power and authority of the Monetary Board
to close banks and liquidate them thereafter
when public interest so requires is an exercise of
police power of the State. Police power, however,
may not be exercised arbitrarily or unreasonably
and could be set aside if it is either capricious,
discriminatory, whimsical, arbitrary, unjust, or is
tantamount to a denial of due process and equal
protection clauses of the Constitution. (Apex
Bancrights Holdings, Inc. v. Bangko Sentral ng
Pilipinas, G.R. No. 214866, October 2, 2017)
In furtherance thereof, the State shall promote
and maintain a stable and efficient banking and
financial system that is globally competitive,
dynamic and responsive to the demands of a
developing economy. (Sec. 2, R.A. No. 8791)
General Concepts
Laws and regulations concerning banks serve a
two-fold purpose:
(1) To protect the public that bank serve; and
(2) To attain and preserve a dependable and
sound banking system, therby promoting a
stable and robust economy (Aquino and
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 Aquino, Fundamentals of Banking Law, 2019
Edition, p. 16)
1. DEFINITION AND CLASSIFICATION OF
BANKS
Banks
“Banks” shall refer to entities engaged in the
lending of funds obtained in the form of deposits.
(Sec. 3[1], R.A. No. 8791)
The concept of “bank” was explained in the case
of Republic of the Philippines v. Security Credit
and Acceptance Corp., G.R. No. L-20583, “a bank
has been defined as "a moneyed institute
founded to facilitate the borrowing, lending, and
safe-keeping of money and to deal in notes, bills
of exchange, and credits." (Republic of the
Philippines v. Security Credit and Acceptance Corp.,
G.R. No. L-20583, January 23, 1967; Banks & Banking,
by Zellmann, Vol. 1, p. 46.)
It has three elements:
(a) it is engaged in the lending of funds;
(b) the funds are obtained from the public, which
means, 20 or more lenders; and
(c) the funds are obtained from the public in the
form of deposits.
Note that unlike the old law, these activities need
not be performed with habituality. (Sec. 3[1],
R.A. No. 8791; Divina, Divina on Commercial Law,
A Comprehensive Guide, Vol. II, 2021 Edition, pp.
126-127)
Banks borrow the public's excess money (i.e.
deposits) and lend out the same. (United Coconut
Planters Bank, Inc. v. E. Ganzon, Inc., G.R. No.
244247, November 10, 2021)
Banks therefore redistribute wealth in the
economy by channeling idle savings to profitable
Universal banks; It is otherwise known as an expanded commercial bank. (Divina on Commercial Law, A
(Sec. 3[2][a], R.A. No. Comprehensive Guide, Vol. II, 2021 Edition, p. 131)
8791)
Powers
investments. Banks operate (and earn income) by
extending credit facilities financed primarily
by deposits from the public. They plough back
the bulk of said deposits into the economy in the
form of loans. Since banks deal with the public's
money, their viability depends largely on their
ability to return those deposits on demand.
For this reason, banking is undeniably
imbued with public interest. Consequently,
much importance is
given to sound lending practices and good
corporate governance. (ibid.)
Classification of Banks
Banks shall be classified into:
(a) Universal banks; (Sec. 3[2][a], R.A. No. 8791)
(b) Commercial banks; (Sec. 3[2][b], R.A. No.
8791)
(c) Thrift banks, composed of:
(i) Savings and mortgage banks,
(ii) Stock savings and loan associations, and
(iii) Private development banks, as defined in
the Republic Act No. 7906 (hereafter the
"Thrift Banks Act");(Sec. 3[2][c], R.A. No.
8791)
(d) Rural banks, as defined in Republic Act No.
73S3 (hereafter the "Rural Banks Act"); (Sec.
3[2][d], R.A. No. 8791)
(e) Cooperative banks, as defined in Republic Act
No 6938 (hereafter the "Cooperative
Code"); (Sec. 3[2][e], R.A. No. 8791)
(f) Islamic banks as defined in Republic Act No.
6848, otherwise known as the "Charter of Al
Amanah Islamic Investment Bank of the
Philippines"; (Sec. 3[2][f], R.A. No. 8791) and
(g) Other classifications of banks as determined
by the Monetary Board of the Bangko Sentral
ng Pilipinas. (Sec. 3[2][g], R.A. No. 8791) (6-
Aa)
207
 (a) Authority to exercise, in addition to the powers authorized for a commercial bank
in Sec. 29.
(b) Powers of an investment house as provided in existing laws.
(c) Power to invest in a non-allied enterprises as provided in this Act. (Sec. 23, R.A.
No. 8791)

NOTE: An entity authorized by the Bangko Sentral to perforin universal or commercial

banking functions shall likewise have the authority to engage in quasi-banking
functions. (Sec. 6, R.A. No. 8791)
Commercial banks; Powers
(Sec. 3[2][b], R.A. No. (a) General powers incident to corporations.
8791) (b) Accept drafts and issuing letters of credit;
(c) Discount and negotiate promissory notes, drafts, bills of exchange, and other
evidences of debt;
(d) Accept or creating demand deposits;
(e) Receive other types of deposits and deposit substitutes;
(f) Buy and sell foreign exchange and gold or silver bullion;
(g) Acquire marketable bonds and other debt securities;
(h) Extend credit, subject to such rules as the Monetary Board may promulgate. (Sec.
29, R.A. No. 8791)

NOTE: An entity authorized by the Bangko Sentral to perform universal or commercial

banking functions shall likewise have the authority to engage in quasi-banking
functions. (Sec. 6, R.A. No. 8791)

Section 20 of the GBL allows universal or commercial banks, upon prior approval of the
Bangko Sentral ng Pilipinas, to open branches or offices within or outside the
Philippines. It further provides that "a bank authorized to establish branches or other
offices shall be responsible for all business conducted in such branches and offices to
the same extent and in the same manner as though such business had all been
conducted in the head office. A bank and its branches and offices shall be treated as
one unit. (Allied Banking Corporation v. Spouses Macam, Spouses Caña, G.R. No.
200635, February 1, 2021, HERNANDO, J.)
Thrift banks, A thrift bank is one established as:
(Sec. 3[2][c], R.A. No. (a) savings banks
8791) (b) mortgage banks
(c) private development banks
(d) stock savings and
(e) loans associations organized under existing laws, and any banking corporation.
(Sec. 3[a], R.A. No. 7906)

For the purpose of:

(1) Accumulating the savings of depositors and investing them together with capital
loans secured by bonds, mortgages in real estate and insured improvements
thereon, chattel mortgage, bonds and other forms of security, or in loans for
personal or household finance, whether secured or unsecured, or in financing for
homebuilding and home development, in readily marketable and debt securities,
in commercial papers and account receivables, drafts, bill of exchange,
acceptance or notes, arising out of commercial transactions or in outlets
determined by the Monetary Board as necessary in the furtherance of national
economic objectives;
(2) Providing short-term working capital, medium and long-term financing, to
business engaged in agriculture, services, industry and housing; and

208
 (3) Providing diversified financial and allied services for its chosen market and
constituencies especially for small and medium enterprises and individuals. (Sec.
3, R.A. No. 7906)
Rural banks Is one established to provide credit facilities in order to make needed credit available
(Sec. 3[2][d], R.A. and readily accessible in the rural areas on reasonable term (Sec. 2, R.A. No. 7353)
No. 8791)
Cooperative banks Is one organized by the majority shares of which is owned and controlled by
(Sec. 3[2][e], R.A. No. cooperatives primarily to provide financial and credit services to cooperatives (Sec. 100,
8791) R.A. No. 6938)

A cooperative bank may perform the following functions:

(1) To carry on banking and credit services for the cooperatives;
(2) To receive financial aid or loans from the Government and the Central Bank of
the Philippines for and in behalf of the cooperative banks and primary
cooperatives and their federations engaged in business and to supervise the
lending and collection of loans;
(3) To mobilize savings of its members for the benefit of the cooperative
movement;
(4) To act as a balancing medium for the surplus funds of cooperatives and their
federations;
(5) To discount bills and promissory notes issued and drawn by cooperatives;
(6) To issue negotiable instruments to facilitate the activities of cooperatives;
(7) To issue debentures subject to the approval of and under conditions and
guarantees to be prescribed by the Government;
(8) To borrow money from banks and other financial institutions within the limit to
be prescribed by the Central Bank; and
(9) To carry out all other functions as may be prescribed by the Authority: Provided,
That the performance of any banking function shall be subject to prior approval
by the Central Bank of the Philippines.
Islamic banks Al-Amanah Islamic Investment Bank of the Philippines
(Sec. 3[2][f], R.A. No. The primary purpose of the Islamic Bank shall be to promote and accelerate the socio-
8791) and economic development of the Autonomous Region by performing banking, financing
and investment operations and to establish and participate in agricultural, commercial
and industrial ventures based on the Islamic concept of banking.

All business dealings and activities of the Islamic Bank shall be subject to the basic
principles and rulings of Islamic Shari'a within the purview of the aforementioned
declared policy. Any zakat or "ithe" paid by the Islamic Bank on behalf of its
shareholders and depositors shall be its obligation to appropriate said zakat fund and
to disburse it in legitimate channels to be ascertained first by the Shari'a Advisory
Council. (Sec. 3, R.A. No. 6848)
Other classifications Does not fall under any of the classifications of banks under Sec. 3.2, R.A. No. 8791:
of banks as
determined by the (1) Philippine Veterans Bank
Monetary Board of the Created as a private commercial bank owned by Filipino World War II Veterans.
Bangko Sentral ng (R.A. No. 3581, as amended by R.A. No. 7169)
Pilipinas. (Sec.
3[2][g], R.A. No. (2) Land Bank of the Philippines
8791) (6-Aa) Created to finance the acquisition and distribution of agricultural estates for
division and resale to small landlords as well as the purchase of the landholding
by the agricultural lessee. (Sec. 74, R.A. No. 3844)

(3) Development Bank of the Philippines

209
 To private banking services principally to cater to the medium and long-term
needs of agricultural and industrial enterprises with emphasis on small and
medium-scale enterprises. (Sec. 2, R.A. 8523)

(4) Offshore Banks

A branch, subsidiary or affiliate of a foreign banking corporation which is duly
authorized by the Central Bank of the Philippines to transact offshore banking
business in the Philippines. (Sec. 1[b], P.D. 1034)
Foreign Banks A foreign bank is a banking corporation formed, organized or existing under any law
(Sec. 140, RA 11232 – other than those of the Republic of the Philippines.
Revised Corporation
Code) Foreign banks are allowed to enter the Philippine banking system under any of the
following modes:
(a) Acquiring, purchasing, or owning up to 100% of the voting stock of an existing
bank;
(b) Investing in up to 100% of the voting stock of a new banking subsidiary
incorporated under the laws of the Philippines; or
(c) Establishing branches with full banking authority. (Sec. 2, RA 10641)

Difference Between Ordinary Corporation and Banking Corporation

BANKING CORPORATION ORDINARY CORPORATION

Generally, a stock corporation. (Sec. 8.1, R.A. No. 8791)
A Certificate of Authority must first be secured from the
Monetary Board before it can register with the SEC. (Sec.
14, R.A. No. 8791)
The provisions of the Corporation Code tot eh contrary
notwithstanding, at least five and a maximum of 15, two
of whom shall be independent directors. (Sec. 15, R.A.
No. 8791)
May be a stock or a non-stock corporation. (Sec. 3, R.A.
No. 11232)
Registered with the Securities and Exchange Commission
(SEC) without any certificate of authority issued by a
government agency. (Sec. 18, R.A. No. 11232)
The number of directors shall not exceed more than
fifteen (15). (Sec. 14, R.A. No. 11232)

In case of a merger or a consolidation, the number of

directors shall not exceed 21. (Sec. 17, R.A. No. 8791)
Not permitted to issue non-par value shares. (Sec. 9,
R.A. No. 8791)
May not purchase or acquire its own shares or accept
them as a security for loan. (Sec. 10, R.A. No. 8791)
EXCEPTION: When it is authorized by the Monetary
Board, and the bank must sell or dispose of said shares
within 6 months from the time of acquisition at a public
or a private sale. (Id.)
May declare dividends, in the absence of the conditions
set forth under Section 57, R.A. No. 8791.
Does not require a certificate of tax clearance before the
Bangko Sentral ng Pilipinas can approve its dissolution.
In Spec. Proc. No. 91-SP-0060 pending before the RTC,
the concerned bank was placed under receivership and
ordered liquidated by the BSP, not the SEC; and the SEC
is not even a party in the said case, although the BIR is.
(In Re: Petition for Assistance in the Liquidation of the
May issue par value or non-par value shares. (Sec. 6,
R.A. No. 11232)
May purchase or acquire its own shares for a legitimate
corporate purpose; provided that it has unrestricted
retained earnings in its books to cover the shares to be
purchased or acquired. (Sec. 40, R.A. No. 11232)
May declare dividends provided that it has unrestricted
retained earnings. (Sec. 42, R.A. No. 11232)
Requires a certificate of tax clearance as prior
requirement for the approval of the dissolution by the
SEC. (Sec. 52[c], National Internal Revenue Code of
1997, as amended by R.A. No. 10963)

210
 Rural Bank of Bokod (Benguet), Inc. v. Bueau of Internal
Revenue, G.R. No. 158261, December 18, 2006)

Distinguish universal bank from commercial bank

Universal Bank Commercial Bank

The minimum capital requirement for a universal bank is The minimum capital requirement for a commercial
as follows: bank is as follows:
Head Office only P 3 billion Head Office only P 2 billion
Up to 10 branches P 6 billion Up to 10 branches P 4 billion
11 to 100 branches P 15 billion 11 to 100 branches P 10 billion
More than 100 branches P 20 billion More than 100 branches P 15 billion
may perform the functions of an investment house may NOT perform the functions of an investment house
may invest in the equity of allied and non-allied may only invest in the equity of allied enterprises
enterprises

2. DISTINCTION OF BANKS FROM QUASI-BANKS AND TRUST ENTITIES

Banks Banks shall refer to entities engaged in the lending of funds obtained in the form of deposits.
(Sec. 3[1], R.A. No. 8791)
Quasi-Banks Quasi-banks shall refer to entities engaged in the borrowing of funds through the issuance,
endorsement or assignment with recourse or acceptance of deposit substitutes as defined in
Section 95 of Republic Act No. 7653 (hereafter the "New Central Bank Act") for purposes of re-
lending or purchasing of receivables and other obligations. (Sec. 4.6[3], R.A. No. 8791)

Note: Unlike banks, quasi-banks do not accept deposits but take deposit substitutes which are
not insured with the PDIC.

Essential Elements of Quasi-Banking

(1) Borrowing of funds for the borrower’s own account

(2) Twenty or more lenders at any one time;
(3) The methods of borowing are:
(a) Issuance
(b) Endorsement; or
(c) Acceptance of debt insrument of any kind other than deposits such as acceptances,
promissory notes, participations, certificates of assignments or similar instruments with
recourse, trust certificates, repurchase agreements;
(d) and such other instruments as the Monetary Board may determine
(4) The purpose of which is:
(a) Relending; or
(b) Purchasing receivables or other obligations (Sec. 241, Manual of Regulations of Bank,
December 2018)
Trust Entities Trust is a relationship or an arrangement whereby a person called a trustee is appointed by a
person called a trustor to administer, hold and manage funds and/or property of the trust or for
the benefit of a beneficiary. (Circular No. 403 [e], Manual of Regulations for Banks, s. 2018)

Trust Entity
A bank or non-bank financial institution, through specifically designated business unit to perform
trust functions and trust corporation, authorized by the BSP to engage in trust or other fiduciary
business. (Circular 767, Bangko Sentral ng Pilipinas, Series of 2012)

211
 A Trust Entity shall refer to:
(1) Bank or an NBFI, through its specifically designated business unit to perform trust functions;
or (Circular No. 403 [a], Manual of Regulations for Banks, s. 2018)
(2) trust corporation, authorized by the Bangko Sentral to engage in trust and other fiduciary
business under Section 79 of R.A. No. 8791 (Section 53, R.A. No. 8791)

Trust business shall refer to any activity resulting from a trustor-trustee relationship
(trusteeship) involving the appointment of a trustee by a trustor for the administration, holding,
management of funds and/or properties of the trustor by the trustee for the use, benefit or
advantage of the trustor or of others called beneficiaries. (Circular No. 403 [b], Manual of
Regulations for Banks, s. 2018)

Persons or entities found to be performing Nature and Concepts of Banking Business

banking or quasi-banking functions without
authority from the Bangko Sentral shall be
subject to appropriate sanctions under the New
Central Bank Act and other applicable laws. (Sec.
6, R.A. No. 8791)
Note, however, that a bank may obtain a trust
license and once it is issued, the bank may act as
trustee with power to administer and manage
assets for the trustor. The trust department of the
bank, while it is organizationally and operationally
distinct from the regular bank, has no separate
legal personality from the bank. (Divina, Divina on
Commercial Law, A Comprehensive Guide, Vol. II, 2021
Edition, p. 134)
3. NATURE OF BANK FUNDS AND BANK
DEPOSITS
Bank Funds and Bank Deposits
Bank funds
The bank can make use of the value of the
money deposited. (Subido Pagente Certeza Mendoza
and Binay Law Offices v. Court of Appeals, G.R. No.
216914, December 6, 2016)
Bank deposits
Bank deposits are in the nature of irregular
deposits. The funds obtained by a bank from the
public which are relent by such bank to its own
borrowers. They are governed by the law on
loans. They give rise to creditor-debtor
relationship between the bank as debtor, and the
depositors as creditors. (Sec. 95, R.A. 7653)
(a) Subject to the Supervision of the Bangko
Sentral ng Pilipinas – The operations and
activities of banks shall be subject to
supervision of the Bangko Sentral. (Sec. 4[1],
R.A. No. 8791)
(b) Deposit Function – It is the function of a bank
that allows it to receive money from the
public with the obligation of safely keeping it,
and returning the same. Fixed, savings, and
current deposits of money in banks and
similar institutions shall be governed by the
provisions concerning simple loan. (Art. 1980,
NCC; Villanueva-Castro, Commercial Law Review
Recap, 2020 Edition, p. 200)
(c) Bank are Entities Engaged in the Lending of
Funds Obtained through Deposits from the
Public – They borrow the public's excess
money (i.e., deposits) and lend out the same.
Banks therefore redistribute wealth in the
economy by channeling idle savings to
profitable investments. Banks operate (and
earn income) by extending credit facilities
financed primarily by deposits from the
public. They plough back the bulk of said
deposits into the economy in the form of
loans. Since banks deal with the public's
money, their viability depends largely on their
ability to return those deposits on demand.
For this reason, banking is undeniably
imbued with public interest. Consequently,
much importance is given to sound lending
practices and good corporate governance.
(Banco De Oro-EPCI, Inc. v. JAPRL Development
Corporation, G.R. No. 179901, April 14, 2008)
(d) Debtor and Creditor relationship – Bank
deposits are governed by the law on loans. A

212
 creditor and debtor relationship is created presented by the investigate. The
between the Bank and its depositors. The mortgagor and an business of a bank is
fiduciary nature of a bank-depositor innocent mortgagee is one affected with public
relationship does not convert the contract not expected to conduct interest, for which
an exhaustive reason for the bank
between the bank and its depositors from a
investigation on the should guard against
loan to trust agreement. Failure by the bank history of the loss due to negligence
to pay the depositor is failure to pay a simple mortgagor’s title. (Heirs or bad faith. (Spouses
loan and not a breach of trust. (Consolidated of Eduardo Manlapat v. Omengan vs. Philippine
Bank and Trust Corporation vs. CA, G.R. No. CA, G.R. No. 125585, National Bank, G.R. No.
138569, September 11, 2003) June 8, 2005) 161319, January 23,
2007)
There is a debtor-creditor relationship
between the bank and its depositor. The bank (g) Imbued with public interest – The business
is the debtor and the depositor is the creditor. of banking is one imbued with public interest.
The depositor lends the bank money and the As such, banking institutions are obliged to
bank agrees to pay the depositor on demand. exercise the highest degree of diligence as
The savings deposit agreement between the well as high standards of integrity and
bank and the depositor is the contract that performance in all its transactions.
determines the rights and obligations of the The law expressly imposes upon the banks a
parties. (Philippine National Bank v. Mañalac, fiduciary duty towards its clients and to treat
G.R. No. 194984 (Notice), August 8, 2016) in this regard the accounts of its depositors
with meticulous care." (East West Banking Corp.
(e) An indispensable institution – The banking v. Cruz, G.R. No. 221641, July 12, 2021,
system is an indispensable institution in the HERNANDO, J.)
modern world and plays a vital role in the (h) Exercised Utmost Diligence – In every case,
economic life of every civilized nation. the depositor expects the bank to treat his
Whether as mere passive entities for the account with the utmost fidelity, whether
safekeeping and saving of money or as active such account consists only of a few hundred
instruments of business and commerce, pesos or of millions. The bank must record
banks have become an ubiquitous presence every single transaction accurately, down to
among the people, who have come to regard the last centavo, and as promptly as possible.
them with respect and even gratitude and, This has to be done if the account is to reflect
most of all, confidence. (Bank of Commerce v. at any given time the amount of money the
Heirs of Cinco, G.R. No. 226350 (Notice), October depositor can dispose of as he sees fit,
16, 2019) confident that the bank will deliver it as and
(f) Deals with Registered Lands – Banks, indeed, to whomever he directs. (Gumabon v. Philippine
should exercise more care and prudence in National Bank, G.R. No. 202514, July 25, 2016)
dealing even with registered lands, than
private individuals, as their business is one Banks handle transactions involving millions
affected with public interest. Banks keep in of pesos and properties worth considerable
trust money belonging to their depositors, sums of money. The banking business will
which they should guard against loss by not thrive only as long as it maintains the trust
committing any act of negligence that and confidence of its customers/clients.
amounts to lack of good faith. (Heirs of Indeed, the very nature of their work, the
Eduardo Manlapat v. CA, G.R. No. 125585, June 8, degree of responsibility, care and
2005) trustworthiness expected of officials and
employees of the bank is far greater than
General Rule Exception those of ordinary officers and employees in
A mortgagee can rely on Mere reliance on the
the other business firms. (United Coconut
what appears on the title is not enough as
certificate of title they need to

213
 Planters Bank v. Basco, G.R. No. 142668, August
31, 2004)
(i) Fiduciary – The fiduciary nature of banking
does not convert a simple loan into a trust
agreement because banks do not accept
deposits to enrich depositors but to earn
money for themselves. The law allows banks
to offer the lowest possible interest rate to
depositors while charging the highest
possible interest rate on their own borrowers.
The interest spread or differential belongs to
the bank and not to the depositors who are
not cestui que trust of banks. (Consolidated
Bank and Trust Corp. v. Court of Appeals, G.R. No.
138569, September 11, 2003)
This fiduciary relationship means that the
bank’s obligation to observe "high standards
of integrity and performance" is deemed
written into every deposit agreement
between a bank and its depositor. (Land Bank
of the Philippines v. Catadman, G.R. No. 200407,
June 17, 2020)
Banks are not required to exert more than the
diligence of a good father of a family in
regard to the sale and issuance of the subject
foreign exchange demand draft. The case at
bar does not involve the handling of
petitioners' deposit, if any, with the
respondent bank. (Reyes v. CA, G.R. No.
118492, August 15, 2001)
(j) Exclude certain individuals from its premises
– Bank has the right to exclude certain
individuals from its premises or to limit their
access thereto as to time, to protect, not only
its premises and records, but also the persons
of its personnel and its customers/clients
while in the premises. After all, by its very
nature, the business of the petitioner bank is
so impressed with public trust; banks are
mandated to exercise a higher degree of
diligence in the handling of its affairs than
that expected of an ordinary business
enterprise. (United Coconut Planters Bank v.
Basco, G.R. No. 142668, August 31, 2004)
Deposit Substitute
Deposit substitutes are alternative forms of
obtaining funds from the public, other than
deposits, through the issuance, endorsement, or
acceptance of debt instruments for the own
account of the borrower, for the purpose of
relending or purchasing of receivables and other
obligations. These instruments may include, but
need not be limited to, bankers’ acceptances,
promissory notes, participations, certificates of
assignment and similar instruments with
recourse, and repurchase agreements. (Sec. 95,
R.A. 7653)
The definition of deposit substitutes in the
banking laws was brought about by an
observation that banks and non-bank financial
intermediaries have increasingly resorted to
issuing a variety of debt instruments, other than
bank deposits, to obtain funds from the public.
The definition also laid down the groundwork for
the supervision by the Central Bank of quasi-
banking functions. (Banco De Oro v. Rizal
Commercial Banking Corporation, G.R. No. 198756,
August 16, 2016)
Note: Any deposit substitute transaction by a
bank performing quasi-banking functions shall be
limited to its own promissory notes, repurchase
agreements, and certificates of
assignment/participation with recourse. (Sec. 242,
Manual of Regulations of Bank, December 2018)
Financial Intermediaries
Persons or entities whose principal functions
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. (First
Planters Pawnshop, Inc. v. Commissioner of Internal
Revenue, G.R. No. 174134, July 30, 2008)
Non-stock Savings and Loan Associations
Non-stock savings and loan association shall
mean a non-stock, non-profit corporation
engaged in the business of accumulating the
savings of its members and using such
accumulations for loans to members to service
214
the needs of households by providing long term
financing for home building and development and
for personal finance. (Sec. 3[a], R.A. No. 8367)
Deposit Function of Banks
The deposit function of banks refers to those
functions which allow a bank to receive money
from the public with the obligation of returning an
equal amount of the same kind and quality.
(Villanueva-Castro, Commercial Law Recap, 2020
Edition, p. 160)
Characteristics of Bank Deposits
Bank deposits are in the nature of irregular
deposits. They are really loans because they earn
interest. All kinds of bank deposits, whether
fixed, savings, or current are to be treated as
loans and are to be covered by the law on loans
(Lucman v. Malawi, G.R. No. 159794, December 19,
2006)
Relationship Between Bank and Its Deposit; Legal
Implications
Deposits of money in banks and similar
institutions are considered simple loans.
Hence, the relationship between a depositor and
a bank is that of creditor and debtor. The
ownership of the amount deposited
is transmitted to the bank upon the perfection of
the contract and it can make use of the amount
deposited for its own transactions and other
banking operations. Although the bank has the
obligation to return the amount deposited it has
no obligation to return or deliver the same
money that was deposited.(Banco De Oro v.
Republic, G.R. No. 198756 (Resolution), August 16,
2016)
All kinds of bank deposits, whether fixed, savings,
or current are to be treated as loans and are to
be covered by the law on loans. (Art. 1980, Civil
Code of the Philippines; Guingona vs. City Fiscal of
Manila, G.R. No. L-60033, April 4, 1984; Gullas v. PNB,
G.R. No. L-43191, November 13, 1935, Malcolm, J.)
A contract for the use of safety deposit box is a
special kind of deposit. The relationship between
a commercial bank and its safety deposit box
client is that of a bailee and bailor, the bailment
being for hire and mutual benefit. As such, the
bank has the obligation to exercise the diligence
of a good father of a family as such depositary.
The bank was held liable for the loss of the
certificates of title in the safety deposit box since
the deposit box is located in the bank premises
and is under the absolute control of the bank. (Sia
vs. Court of Appeals, G.R.No. 102970, May 13, 1993)
Current and Savings Deposits are loans to a bank
because it can use the same
The petitioner here in making time deposits that
earn interest with respondent Overseas Bank of
Manila was in realty a creditor of the respondent
bank and not a depositor. The respondent bank
was in turn a debtor of petitioner. (Lucman v.
Malawi, G.R. No. 159794, December 19, 2006)
Title to Money deposited is transferred to the
bank
Failure of the Bank to return the amount
deposited will not constitute estafa through
misappropriation punishable under Article 315,
par. l(b) of the Revised Penal Code, but it will only
give rise to civil liability. (Guingona vs. City Fiscal of
Manila, G.R. No. L-60033, April 4, 1984)
Certificate of deposit
A certificate of deposit is defined as a written
acknowledgment by a bank or banker of the
receipt of a sum of money on deposit which the
bank or banker promises to pay to the depositor,
to the order of the depositor, or to some other
person or his order, whereby the relation of
debtor and creditor between the bank and the
depositor is created." It is presumed that the
money deposited in a bank account belongs to
the person in whose name the deposit account is
opened. (Allied Banking Corporation v. Spouses
Macam, Spouses Caña, G.R. No. 200635, February 1,
2021, HERNANDO, J.)
215
Types of Deposits
Savings The most common type of deposit
Deposits and is usually evidenced by a
passbook. (Villanueva-Castro,
Commercial Law Recap, 2020 Edition,
p. 201)
Trust shall refer to an account where
Account transactions arising from a
trusteeship are kept and recorded
(Sec. 403[p], Manual of Regulations
of Bank, December 2018)
Time One the payment of which cannot
Deposits legally be required within such a
specified number of days.
(Villanueva-Castro, Commercial Law
Recap, 2020 Edition, p. 202)
Time deposits shall be issued for a
specific period of term. (Sec. 216,
Manual of Regulations of Bank,
December 2018)
Demand Demand deposits are "all those
Deposits liabilities of the Bangko Sentral and of
or other banks which are denominated
Current in Philippine currency and are subject
Deposiys to payment in legal tender upon
demand by the presentation of
(depositor’s) checks. Central Bank
regulations prohibit demand deposit
from earning interest is bereft of
merit. Under Central Bank Circular
No. 22, Series of 1994, "demand
deposits shall not be subject to
any interest rate ceiling." This, in
effect, is an open authority to pay
interest on demand deposits, such
interest not being subject to any rate
ceiling. (BPI Family Savings Bank,
Inc. v. First Metro Investment
Corporation, G.R. No. 132390, May
21, 2004)
Foreign Authority to deposit foreign
Currency currencies. Any person, natural or
Deposit juridical, may, in accordance with the
provisions of this Act, deposit with
such Philippine banks in good
standing, as may, upon application,
be designated by the Central Bank for
the purpose, foreign currencies which
are acceptable as part of the
international reserve, except those
which are required by the Central
Bank to be surrendered in accordance
with the provisions of Republic Act
Numbered two hundred sixty-five
(Now Rep. Act No. 7653). (Sec. 2,
R.A. No. 6426)
Survivorship Agreement
A survivorship agreement is an agreement
whereby the co-depositors agree to permit either
of them to withdraw the whole deposit during
their lifetime and transferring the balance to the
survivor upon the death of one of them.
(Villanuava-Castro, Commercial Law Review Recap,
2020 Edition, p. 202)
In said agreement, the co-depositors agree that
upon the death of either of them, the share
pertaining to the deceased shall accrue to the
surviving co-depositor or he can withdraw the
entire deposit. (Rodriguez v. Rodriguez, G.R. No.
230404, January 31, 2018)
Survivorship Agreement Between Spouses on
their Bank Account upheld by the Court
Neither is the survivorship agreement a
donation inter vivos, for obvious reasons,
because it was to take effect after the death of
one party. Secondly, it is not a donation between
the spouses because it involved no conveyance of
a spouse's own properties to the other. (Vitug v.
CA, G.R. No. 82027, March 29, 1990)
Loan Function of Banks
Authority to Lend Money
A bank shall grant loans and other credit
accommodations only in amounts and for the
periods of time essential for the effective
completion of the operations to be financed. (Sec.
1, Circular No. 622, Bangko Sentral ng Pilipinas, s.
2008) Such grant of loans and other credit
accommodations shall be consistent with safe and
sound banking practices. (Sec. 39[1], R.A. 8791)
No jurisdiction, control, or relation to the sugar
restitution fund.
Petitioner Philippine National Bank's role was
merely that of a lending bank. Under Republic Act
No. 7202 and its Implementing Rules and
Regulations, lending banks are not obligated to
216
compensate sugar producers for their losses.
Restitution falls under the Bangko Sentral ng
Pilipinas, upon the establishment of a sugar
restitution fund. Petitioner Philippine National
Bank has not violated any of its obligations
toward respondents since it was never tasked by
the law to refund the claim for excess payments.
As a private banking institution and as a publicly
listed company, it has no jurisdiction, control, or
relation to the sugar restitution fund. (BSP and PNB
v. Spouses Ledesma, G.R No. 211176, February 6,
2019)
Types of Loans and Credits
Salary- Refer to unsecured loans for a
Based broad range of consumption
General purposes, granted to individuals
Purpose mainly on the basis of regular
Consump- salary, pension or other fixed
tion Loans compensation, where repayment
would come from such future cash
flows, either through salary
deductions, debits from the
borrower’s deposit account, mobile
payments, pay- through
collections, over-the-counter
payments or other type of payment
arrangement agreed upon by the
borrower and lender. (Sec. 311,
Manual of Regulations of Bank,
December 2018)
Policy statement. The Bangko
Sentral recognizes the helpful role
of salary-based, consumer lending
schemes in allowing an individual
borrower to manage his/her cash
flows provided these are granted
under sound credit standards and
fair consumer practices. The
Bangko Sentral likewise
encourages competition and
transparency to promote efficient
and innovative delivery of financial
services and fair dealing with
customers. (Ibid.)
Credit Card The Bangko Sentral shall foster the
Operations development of the credit card
industry to make consumer credit
readily available under conditions
of fair and sound business
practices aligned with global best
practices. The Bangko Sentral
likewise envisions effective and
efficient delivery of credit card
services that encourages
transparency and competition.
Credit Card – refers to any card or
other credit device, including its
virtual representation, intended for
the purpose of obtaining money,
property, goods or services on
credit. (Sec. 312, Manual of
Regulations of Bank, December
2018)
Agricultural (a) Agriculture and Fisheries
Loans Projects with Long Gestation
Period – Pursuant to Section 24 of
R.A. No. 8435 (Agriculture and
Fisheries Modernization Act of
1997), agriculture and fisheries
projects with long gestation
periods shall be entitled to longer
grace periods in repaying the loan
based on the economic life of the
project. For purposes of this
Section, the following definitions
and guidelines shall govern the
grant of loans for long-gestating
agriculture and fisheries projects.
(Sec. 313, Manual of Regulations of
Bank, December 2018)
(b) Agricultural Value Chain
Financing Framework –
Value chain refers to a set of
actors/ players, e.g., producers
(farmers/ fisherfolks), traders,
suppliers, processors, aggregators,
who conduct linked sequence of
value- adding activities involved in
bringing a product from its raw
material stage to the final
consumers; (ibid.)
While value chain finance refers to
the financial flows to those
actors/players from both within the
value chain and financial flows to
those actors/players from the
outside as a result of their being
linked within a value chain; (ibid.)
The Bangko Sentral supports the
promotion of agricultural value
chain financing as an effective and
organized approach to channel
217
 financing to the agriculture and
fisheries sectors and promote
financial inclusion. By encouraging
the linking of various actors/
players in an agricultural value
chain, credit risk of participating
smallholder farmers/ fisherfolks
can be reduced. As a result, this
type of financing would facilitate
and allow small farmers/ fisherfolks
to have, if not more, access to
credit. This is expected to further
improve productivity in the
agriculture and fisheries sectors
and at the same time uplift the
lives of these marginalized
farmers/fisherfolks. (ibid.)
Micro- Microfinance is the provision of a
finance broad range of financial services,
Loans such as deposits, loans, payment
services, money transfers and
insurance products to the poor and
low-income households, generally
for their microenterprises and
small businesses, to enable them
to raise their income levels and
improve their living standards.
Core principles for microfinance:
(a) The poor needs access to
variety of appropriate financial
services that are convenient,
flexible and reasonably priced.
(b) The poor has the capability to
repay loans, pay the real cost
of loans, generate savings and
avail complementary financial
services.
(c) Microfinance institutions must
subscribe to performance
standards and best practices to
ensure greater outreach and
sustainability.
(d) In line with the Philippine
National Strategy for
Microfinance, the
government’s role is an
enabler (establishing the
market-oriented policy and
regulatory environment) and
not as a direct provider of
financial services.
(e) Microfinance should become
an integral part of the financial
sector in order to achieve its
full potential of reaching a
large number of the poor.
(f) Microfinance is an effective
tool for poverty alleviation and
is a clear testament that
market-based solutions are
feasible to expand access to
financial services toward
building a truly inclusive
financial system.
Micro-credit loans are small loans
granted to the basic sectors, on the
basis of the borrower’s cash flow
and other loans granted to the
poor and low-income households
to enable them to raise their
income levels and improve their
living standards. These loans are
typically unsecured but may also
be secured in some cases. (Sec.
314, Manual of Regulations of
Bank, December 2018)
Interbank Interbank loan transactions shall
Loans include, among other things:
(a) interbank call loan (IBCL)
transactions;
(b) interbank term loan
transactions;
(c) borrowings evidenced by
deposit substitute instruments;
and
(d) purchases of receivables with
recourse: Provided, however, That
only IBCL transactions which are
settled through the banks’
respective DDAs with the Bangko
Sentral via PhilPaSS shall be
subject to the reserve requirement
prescribed for IBCL in Sec. 251
(Required reserves against deposit
and deposit substitute
liabilities): Provided, further, that
funds borrowed by banks from
trust departments of banks or IHs
shall be excluded from the herein
definition of interbank loan
transactions. (Sec. 315, Manual of
Regulations of Bank, December
2018)
218
Bank Loans Domestic borrowings by local
to government units (LGUs) pursuant
Government to Section 123 of R.A. No.
7653. The domestic borrowings of
LGUs within the Philippines, the
procedures to be observed as well
as the documentary requirements
to be submitted, relative to the
requests for Monetary Board
opinion on the probable effects of
the proposed credit operation on
monetary aggregates, the price
level and the balance of payments
(BOP), pursuant to Section 123 of
Republic Act No. 7653, as well as
other pertinent laws and
regulations shall be governed by
the guidelines as contained
in Appendix 53.
Debt service limit on local
government borrowings. To
ensure the effective
implementation of the debt service
limit on local government
borrowings as stipulated in Section
324 (b) of the Local Government
Code of 1991, all banks shall
require each borrowing LGU to
present a certificate of its debt
service and borrowing capacity,
duly certified by the Bureau of
Local Government Finance –
Department of Finance (BLGF
DOF).
Domestic borrowings by
Government-Owned and/or – specify the nature of papers
Controlled Corporations (GOCCs),
Local Water Districts (LWDs) and
State Universities and Colleges
(SUCs) pursuant to Section 123 of
R.A. No. 7653. The domestic
borrowings of GOCCs, LWDs, and
SUCs within the Philippines, the
procedures to be observed as well
as the documentary requirements
to be submitted, relative to the
requests for Monetary Board
opinion on the probable effects of
the proposed credit operation on
monetary aggregates, the price
level and the BOP, pursuant to
Section 123 of R.A. No. 7653, as
well as other pertinent laws and
regulations shall be governed by
the guidelines as contained
in Appendix 54.
Enforcement actions. Any violation
of this Section shall be subject to
appropriate
enforcement/supervisory action/s
provided under Sec. 002 and
Sections 36 and 37 of R.A. No.
7653, as well as those contained in
other applicable regulations of the
Bangko Sentral. Imposition of
applicable enforcement action shall
be on a per loan/borrowing
account, regardless of the number
of tranches or releases from the
same loan/borrowing.
(Sec. 316, Manual of Regulations of
Bank, December 2018)
Other Loans Loans under Section 12 of R.A. No.
and Redis- 7353, Section 10 of R.A. No. 7906
counting to and Article 102, R.A. No. 6038, as
Thrift / amended by RA. No. 9520. Banks
Rural / may rediscount papers of
Cooperative TBs/RBs/Coop Banks. Banks shall
specify the nature of papers
acceptable for rediscounting as
well as the rediscount rate.
Loans under Section 12 of R.A. No.
7353, Section 10 of R.A. No. 7906
and Article 102, R.A. No. 6038, as
amended by RA. No. 9520. Banks
may rediscount papers of
TBs/RBs/Coop Banks. Banks shall
acceptable for rediscounting as
well as the rediscount rate.
Loans under Section 14 of R.A. No.
7353. The following are the
guidelines in the grant by the LBP,
DBP or any government-owned or
controlled bank or FI of a loan to
an RB under Section 14 of R.A. No.
7353
(Sec. 317, Manual of Regulations of
Bank, December 2018)
219
Loan Grants and Its Requirements
Issuance of certification.
Subject to the qualifications of the Rural Banks
(RB) prescribed in Item “b” hereof, the Monetary
Board shall issue the certification required under
Section 14 of R.A. No. 7353,which shall be final,
after the Monetary Board has determined that:
(1) The resources of the Rural Banks are
inadequate to meet the legitimate credit
needs of the locality wherein the Rural Bank
is established;
(2) There is dearth of private capital in said
locality; and
(3) It is not possible for the stockholders of the
Rural Bank to increase the paid-up capital
thereof.
The appropriate supervising department of the
Bangko Sentral may prescribe and require the
submission by the Rural Bank of papers and
documents necessary for such determination.
Qualifications for loan.
In order to qualify for the financial assistance
under said provision of law, the Rural Bank shall
first meet the following requirements:
(1) Its capital-to-risk assets ratio during the last
six (6) months immediately preceding the
loan application should be at least ten
percent (10%);
(2) Its past due loans are not more than twenty-
five percent (25%);
(3) It has no deficiency in allowance for probable
losses on loans and other risk assets;
(4) It must not have incurred deficiency in its
reserves against deposit liabilities for the last
six (6) months preceding the filing of the
application;
(5) It must have been operating profitably for the
last three (3) years;
(6) Its arrearages with the Bangko Sentral or
other government FIs, if any, are being
liquidated through an approved plan of
payment, the conditions of which are being
complied with; and
(7) It is operating substantially in accordance
with applicable laws and Bangko Sentral rules
and regulations.
Extension of loan; The Landbank of the
Philippines.
The DBP or any government-owned or controlled
bank or FI shall, within sixty (60) days from
issuance by the Monetary Board of the
certification, and subject to their loan and
investment policies, extend to an RB a loan or
loans from time to time, repayable in ten (10)
years, with concessional rates of interest, against
security/ies which the stockholder or stockholders
of the RB may offer.
Conditions for the Grant of Loans by Bank
and Security Requirements
(1) A bank shall grant loans and other credit
accommodations only in amounts and for the
periods of time essential for the effective
completion of the operations to be financed.
(Sec. 39, R.A. 8791)
(2) Such grant of loans and other credit
accommodations shall be consistent with safe
and sound banking practices. (Ibid.)
(3) Before granting a loan or other credit
accommodation, a bank must ascertain that
the debtor is capable of fulfilling his
commitments to the bank. (Sec. 40, R.A. 8791)
(4) A bank may demand from its credit applicants
a statement of their assets and liabilities and
of their income and expenditures and such
information as may be prescribed by law or
by rules and regulations of Monetary Board
to enable the bank to properly evaluate the
credit application. (Ibid.)
(5) Should such statements prove to be false or
incorrect in any material detail, the bank may
terminate any loan or other credit
accommodation granted on the basis of said
statements and shall have the right to
demand immediate repayment or liquidation
of the obligation. (Ibid.)
(6) The amortization schedule of bank loans and
other credit accommodations shall be
adapted to the nature of the operations to be
financed. (Sec. 44, R.A. 8791)
(7) In case of loans and other credit
accommodations with maturities of more
than five (5) years, provisions must be made
for periodic amortization payments, but such
220
 payments must be made at least annually.
(Ibid.)
Requirements for Grant of Loans or Other
Credit Accommodations
(1) Before granting a loan or other credit
accommodation, a bank must ascertain that
the debtor is capable of fulfilling his
commitments to the bank;
(2) A bank may demand from its credit applicants
a statement of their assets and liabilities and
of their income and expenditures;
(3) Other information as may be prescribed by
law or by rules and regulations of Monetary
Board to enable the bank to properly evaluate
the credit application which includes the
corresponding financial statements submitted
for taxation purposes to the Bureau of
Internal Revenue. (Sec. 40, R.A. 8791)
Ratio of Net Worth to Total Risk Assets
The minimum ration which the net worth of a
bank must bear to its total risk assets which
may include contingent accounts, i.e., net
worth: total risk assets. (Sec. 34, R.A. 8791)
Net Worth
The total of the unimpaired paid-in capital
including pain-in surplus, unretained earnings,
and undivided profit, net of valuation reserves
and other adjustments as may be required by the
Bangko Sentral ng Pilipinas. (Sec. 24, R.A. 8791)
Effect of Non-Compliance with the
Prescribed Minimum Ratio of Capital Risk
The Monetary Board may:
(1) In case a bank does not comply with the
prescribed minimum ratio, the Monetary
Board may limit or prohibit the distribution of
net profits by such bank and may require that
part or all of the net profits be used to
increase the capital accounts of the bank until
the minimum requirement has been met;
(2) The Monetary Board may, furthermore,
restrict or prohibit the acquisition of major
assets and the making of new investments by
the bank, with the exception of purchases of
readily marketable evidences of indebtedness
of the Republic of the Philippines and of the
Bangko Sentral and any other evidences of
indebtedness or obligations the servicing and
repayment of which are fully guaranteed by
the Republic of the Philippines, until the
minimum required capital ratio has been
restored;
(3) In case of a bank merger or consolidation, or
when a bank is under rehabilitation under a
program approved by the Bangko Sentral, the
Monetary Board may temporarily relieve the
surviving bank, consolidated bank, or
constituent bank or corporations under
rehabilitation from full compliance with the
required capital ratio under such conditions
as it may prescribe. (Sec. 34, R.A. 8791)
Limitations on the Power of the Bank to
Grant Loans, Credit Accommodations, and
Guarantees
(a) Single borrower’s limit – Except as the
Monetary Board may otherwise prescribe for
reasons of national interest, the total amount
of loans, credit accommodations and
guarantees as may be defined by the
Monetary Board that may be extended by a
bank to any person, partnership, association,
corporation or other entity shall at no time
exceed 25% of the net worth of such bank.
This rule is known as the single borrower’s
limit. Note that while the law sets the SBL to
20% of the bank’s net worth, the Monetary
Board has increased the threshold limit to
25%. (Sec. 35, R.A. No. 7653; Divina, Divina on
Commercial Law, A Comprehensive Guide, Vol. II,
2021 Edition, p. 142)
(b) Loans granted to directors, officers,
stockholders and their related interests must
conform to certain procedural and
substantive requirements, otherwise, criminal
sanctions may be imposed. These
requirements are known as Directors,
Officers, Stockholders, and Related Interests
Accounts (DOSRI) rules and regulations. (Sec.
36, R.A. No. 7653; Divina, Divina on Commercial
Law, A Comprehensive Guide, Vol. II, 2021
Edition, p. 142)
(c) Except as the Monetary Board may otherwise
prescribe, loans and other credit
accommodations against real estate shall not
221
 exceed 75% of the appraised value of the
respective real estate security, plus 60% of
the appraised value of the insured
improvements, and such loans may be made
to the owner of the real estate or to his
assignees 223 whereas, loans and other
credit accommodations on security of chattels
and intangible properties such as, but not
limited to, patents, trademarks, trade names,
and copyrights shall not exceed 75% of the
appraised value of the security, and such
loans and other credit accommodation may
be made to the title-holder of the chattels and
intangible properties or his assignees. (Sec.
38, R.A. No. 7653; Divina, Divina on Commercial
Law, A Comprehensive Guide, Vol. II, 2021
Edition, pp. 142-143)
(d) A bank shall grant loans and other credit
accommodations only in amounts and for the
periods of time essential for the effective
completion of the operations to be financed.
Such grant of loans and other credit
accommodations shall be consistent with safe
and sound banking practices. (Sec. 39, R.A. No.
7653; Divina, Divina on Commercial Law, A
Comprehensive Guide, Vol. II, 2021 Edition, p.
143)
(e) The amortization schedule of bank loans and
other credit accommodations shall be
adapted to the nature of the operations to be
financed. (Sec. 44, R.A. No. 7653; Divina, Divina
on Commercial Law, A Comprehensive Guide, Vol.
II, 2021 Edition, p. 143)
(f) Joint and Solidary Signature Practice (Security
Bank and trust Company, Inc. v. Cuenca, G.R. No.
138544, October 3, 2000)
In case of loans and other credit accommodations
with maturities of more than five (5) years,
provisions must be made for periodic
amortization payments, but such payments must
be made at least annually: Provided, however,
that when the borrowed funds are to be used for
purposes which do not initially produce revenues
adequate for regular amortization payments
therefrom, the bank may permit the initial
amortization payment to be deferred until such
time as said revenues are sufficient for such
purpose, but in no case shall the initial
amortization date be later than five (5) years from
the date on which the loan or other credit
accommodation is granted. (Sec. 44, R.A. No. 7653)
Single Borrower’s Limit
The Single Borrower’s Limit aims to prevent the
bank from making excessive loans and other
credit accommodations to a single borrower or
related borrowers, including guarantees for the
account of such borrower or group, thereby
safeguarding the bank against exposure to a
single client. Also, the SBL allocates the resources
of the bank to various segments of the economy.
(Villanueva-Castro, Commercial Law Recap, 2020
Edition, p. 217)
Single Borrower’s Limit Threshold
Except as the Monetary Board may otherwise
prescribe for reasons of national interest, the
total amount of loans, credit accommodations
and guarantees as may be defined by the
Monetary Board that may be extended by a bank
to any person, partnership, association,
corporation or other entity shall at no time
exceed twenty percent (20%) of the net
worth of such bank. The basis for determining
compliance with single-borrower limit is the total
credit commitment of the bank to the borrower.
(Sec. 35.1, R.A. 8791)
Unless the Monetary Board prescribes otherwise,
the total amount of loans, credit accommodations
and guarantees prescribed in the preceding
paragraph may be increased by an additional ten
percent (10%) of the net worth of such bank
provided the additional liabilities of any borrower
are adequately secured by trust receipts, shipping
documents, warehouse receipts or other similar
documents transferring or securing title covering
readily marketable, non-perishable goods which
must be fully covered by insurance. (Sec. 35.2, R.A.
8791
Inclusions The above prescribed ceilings shall
to Single include:
Borrower’s (1) the direct liability of the maker
Limit or acceptor of paper discounted with
or sold to such bank and the liability
of a general endorser, drawer or
guarantor who obtains a loan or other
credit accommodation from or
222
 discounts paper with or sells papers
to such bank;
(2) in the case of an individual who
owns or controls a majority interest in
a corporation, partnership,
association or any other entity, the
liabilities of said entities to such bank;
(3) in the case of a corporation, all
liabilities to such bank of all
subsidiaries in which such corporation
owns or controls a majority interest;
and
(4) in the case of a partnership,
association or other entity, the
liabilities of the members thereof to
such bank. (No. X303 (c), Manual of
Regulations for Banks, s. 2014)
Exclusions For purposes of this Section, loans,
to Single other credit accommodations and
Borrower’s guarantees shall exclude:
Limit (1) loans and other credit
accommodations secured by
obligations of the Bangko Sentral or
of the Philippine Government;
(2) loans and other credit
accommodations fully guaranteed by
the government as to the payment of
principal and interest;
(3) loans and other credit
accommodations secured by U.S.
Treasury Notes and other securities
issued by central governments and
central banks of foreign countries
with the highest credit quality given
by any two (2) internationally
accepted rating agencies;
(4) loans and other credit
accommodations to the extent
covered. (No. X303 (E), Manual of
Regulations for Banks, s. 2014)
4. DILIGENCE REQUIRED OF BANKS
Highest Degree of Diligence is required
more than that of a Good Father of a Family
It is well-settled that the diligence required of
banks is more than that of a good father of a
family. Banks are required to exercise the highest
degree of diligence in its banking transactions.
(Bank of the Philippine Islands v. Spouses Quiaoit, G.R.
No. 199562, January 16, 2019)
Business Banking is Imbued with Public
Interest
With banks, the degree of diligence required is
more than that of a good father of a family
considering that the business of banking is
imbued with public interest due to the nature of
their functions. The stability of banks largely
depends on the confidence of the people in the
honesty and efficiency of banks. (Philippine
National Bank v. Mañalac, G.R. No. 194984 (Notice),
August 8, 2016)
Diligence required of banks in view of the
fiduciary nature of banking
The State recognizes the vital role of banks in
providing an environment conducive to the
sustained development of the national economy
and the fiduciary nature of banking that requires
high standards of integrity and performance. (Sec.
2, R.A. No. 8791)
In view of the fiduciary nature of banking. Sec. 2
of ("RA 8791"), which declares that the State
recognizes the "fiduciary nature of banking that
requires high standards of integrity and
performance.” This way provision in the general
banking law, introduced in 2000, is a statutory
affirmation of Supreme Court decisions, starting
with the 1990 case of Simex International vs.
Court of Appeals, holding that "the bank is
under obligation to treat the accounts of its dep
ositors with meticulous care, always having in mi
nd the fiduciary nature of their relationship. This
fiduciary relationship means that the bank’s
obligation to observe "high standards of integrity
and performance" is deemed written into every
deposit agreement between a bank and its
depositor. The fiduciary of banking requires
banks to assume a degree of diligence higher
than that of a good father of a family. Article
1172 of the Civil Code states that the degree of
diligence required of an obligor is that prescribed
by law or contract, and absent such stipulation
then the diligence of a good father of a family.
Section 2 of RA 8791 prescribes the statutory
diligence required from banks that banks must
observe “high standards of integrity and
performance” in servicing their depositors (Poole-
223
Blunden v. Union Bank of the Philippines, G.R. No.
205838, November 29, 2017)
The fiduciary nature of banking does NOT
convert a simple loan into a trust
agreement
However, the fiduciary nature of a bank-depositor
relationship does not convert the contract
between the bank and its depositors from a
simple loan to a trust agreement, whether
express or implied. Failure by the bank to pay the
depositor is failure to pay a simple loan, and not
a breach of trust. (Land Bank of the Philippines v.
Catadman, G.R. No. 200407, June 17, 2020)
Fiduciary Business
Other fiduciary business shall refer to any activity
of a trust-licensed bank resulting from a contract
or agreement whereby the bank binds itself to
render services or to act in a representative
capacity such as in an agency, guardianship,
administratorship of wills, properties and estates,
executorship, receivership, and other similar
services which do not create or result in a
trusteeship. It shall exclude collecting or paying
agency arrangements and similar fiduciary
services which are inherent in the use of the
facilities of the other operating departments of
said bank. Investment management activities,
which are considered as among other fiduciary
business, shall be separately defined in the
succeeding item to highlight its being a major
source of fiduciary business. (Circular No. 403 [c],
Manual of Regulations for Banks, s. 2018)
High Standard of Conduct; Bank is
expected to be an expert
The collecting bank, being primarily engaged in
banking, holds itself out to the public as the
expert on this field, and the law thus holds it to a
high standard of conduct." A bank is expected to
be an expert in banking procedures and it has the
necessary means to ascertain whether a check,
local or foreign, is sufficiently funded. (Philippine
National Bank v. Spouses Cheah, G.R. No. 170865,
April 25, 2012)
Cases where banks exercised utmost
diligence
(1) RCBC sufficiently demonstrated extra-
ordinary diligence in purchasing part of the
acquired lands from LIPCO. Before it acquired
these lands, RCBC reviewed and inspected
LIPCO's certificates of title and other relevant
documents to trace the origin of LIPCO's titles
to ascertain the nature of the property. It
likewise conducted ocular inspections on the
property, and confirmed that the property
was not only in LIPCO's possession; more
than this, nobody was occupying the
property. As with LIPCO, the fact that the
property had already been converted by the
DAR assured RCBC that the property it was
purchasing was no longer agricultural land
and was, therefore, outside CARP coverage.
(Hacienda Luisita, Inc. v. Presidential Agrarian
Reform Council, G.R. No. 171101, July 5, 2011)
(2) PNB acted in good faith when it approved the
loan application of the Galicias. PNB was
diligent in processing the loan application of
the Galicias and that respondents failed to
dispute that prior to the signing of the Real
Estate Mortgage Agreement, it conducted a
credit investigation on the Galicias as well as
the parcels of land being offered as
collaterals. PNB also conducted its credit
investigation prior to the issuance of TCT No.
195378 in the name of the Galicias should not
be taken against it. What was material to the
grant of the loan was that the Galicias were
able to secure a copy of the TCT issued to
them and without a copy of the said TCT, the
loan application would not have been
granted. Furthermore, as a gesture of utmost
precaution, PNB even waited for the title in
favor of the Galicias to be issued before it
executed and signed the Contract of Real
Estate Mortgage. For this reason, PNB cannot
be considered a mortgagee in bad faith.
(Philippine National Bank v. Sia, G.R. No. 165836,
February 18, 2009)
(3) The bank has the right to exclude certain
individuals from its premises or to limit their
access thereto as to time, to protect, not only
224
 its premises and records, but also the persons
of its personnel and its customers/ clients
while in the premises. After all, by its very
nature, the business of the petitioner bank is
so impressed with public trust; banks are
mandated to exercise a higher degree of
diligence in the handling of its affairs than
that expected of an ordinary business
enterprise. Banks handle transactions
involving millions of pesos and properties
worth considerable sums of money. The
banking business will thrive only as long as it
maintains the trust and confidence of its
customers/clients. Indeed, the very nature of
their work, the degree of responsibility, care
and trustworthiness expected of officials and
employees of the bank is far greater than
those of ordinary officers and employees in
the other business firms. Hence, no effort
must be spared by banks and their officers
and employees to ensure and preserve the
trust and confidence of the general public and
its customers/clients, as well as the integrity
of its records and the safety and well being
of its customers/clients while in its premises.
For the said purpose, banks may impose
reasonable conditions or limitations to access
by non-employees to its premises and
records, such as the exclusion of non-
employees from the working areas for
employees, even absent any imminent or
actual unlawful aggression on or an invasion
of its properties or usurpation thereof,
provided that such limitations are not
contrary to the law. (United Coconut Planters
Bank v. Basco, G.R. No. 142668, August 31, 2004)
Cases where bank failed to exercise utmost
diligence
(5) Allied Bank is liable for unilaterally debiting
and closing the deposit account of the
Spouses Mario Macam. Allied Bank is
expected to act with extraordinary diligence
required of banks. The Court cannot
overemphasize that the highest degree of
diligence required of banks likewise
contemplates such diligence in the selection
and supervision of its employees. The very
nature of their work which involves handling
millions of pesos in daily transactions requires
a degree of responsibility, care and
trustworthiness that is far greater than those
expected from ordinary clerks and
employees. The bank must not only exercise
"high standards of integrity and
performance," it must also insure that its
employees do likewise because this is the
only way to insure that the bank will comply
with its fiduciary duty. We thus agree with the
trial court's holding that Allied Bank clothed
Caña with sufficient authority to effect the
ostensible crediting of Helen's account and
approve the subsequent fund transfers to five
different accounts in the total amount of P46
Million. The trial court found that in previous
instances, Caña had extended Helen the
same credit arrangement via a temporary
overdraft line. (Allied Banking Corporation v.
Spouses Macam, Spouses Caña, G.R. No. 200635,
February 1, 2021, HERNANDO, J.)
(6) Real Bank's own negligence contributed to
the improper payment when it failed to detect
the impostor in opening the account. The CA
is correct in pointing out that
the banking industry is imbued with public
interest; banks are thus expected to always
observe the highest degree of care and
diligence in their transactions. Real Bank
should have detected the irregularities in the
documents of the impostor and prevented
the unauthorized payment had it exercised
extraordinary diligence. (The Real Bank (A
Thrift Bank), Inc. v. Maningas, G.R. No. 211837,
March 16, 2022, HERNANDO, J.)
(7) The Bank's failure to observe the degree of
diligence expected of it clearly constitutes
negligence. The Bank's lapses in
ascertaining the identity of the petitioner as
one of the signatories in the document as
well as the genuineness of her signature
confirm that the Bank fell short in
exercising the degree of diligence
demanded of it in the conduct of its affairs.
As the Bank is not a mortgagee in good
faith, it should be held jointly and severally
liable with Antonio in the payment of moral
damages, exemplary damages, and
attorney's fees in favor of the petitioner.
225
 (Banta v. Equitable Bank, Inc. (Now BDO
UNIBANK, Inc.), February 10, 2021, G.R. No.
223694)
(8) Metrobank is Liable to JMC. The drawee
bank, or the bank on which a check is
drawn, is bound by its contractual
obligation to its client, the drawer, to pay
the check only to the payee or to the
payee's order. The drawee bank is duty-
bound to follow strictly the instructions of
its client, which is reflected on the face of,
and by the terms of, the check. When the
drawee bank pays a person other than the
named payee on the check, the drawee
bank violates its contractual obligation to
its client. Thus, it shall be held liable for the
amount charged to the drawer's account.
(Metropolitan Bank and Trust Company v.
Junnel’s Marketing Corporation, Co., G.R. No.
232044, August 27, 2020)
(9) In releasing the dollar bills without listing
down their serial numbers, BPI failed to
exercise the highest degree of care and
diligence required of it. BPI exposed not
only its client but also itself to the situation
that led to this case. Had BPI listed down
the serial numbers, BPI's presentation of a
copy of such listed serial numbers would
establish whether the returned 44 dollar
bills came from BPI or not. (Bank of the
Philippine Islands v. Quiaoit, G.R. No. 199562,
January 16, 2019)
(10) The drawee, Citibank was remiss of its
contractual duty to pay the proceeds of the
crossed checks only to its designated
payee, this Court ruled that Citibank should
also bear liability for the loss incurred by
Ford. Citibank should have scrutinized
Citibank Check Numbers SN 10597 and
16508 before paying the amount of the
proceeds thereof to the collecting bank of
the BIR. For this reason, Citibank had
indeed failed to perform what was
incumbent upon it, which is to ensure that
the amount of the checks should be paid
only to its designated payee. The fact that
the drawee bank did not discover the
irregularity seasonably, in our view,
constitutes negligence in carrying out the
bank's duty to its depositors. The point is
that as a business affected with public
interest and because of the nature of its
functions, the bank is under obligation to
treat the accounts of its depositors with
meticulous care, always having in mind the
fiduciary nature of their relationship. (City
State Savings Bank v. Tobias, G.R. No. 227990,
March 7, 2018)
(11) When the purchaser or the mortgagee is a
bank, the rule on innocent purchasers or
mortgagees for value is applied more
strictly. Being in the business of extending
loans secured by real estate mortgage,
banks are presumed to be familiar with the
rules on land registration. Since the
banking business is impressed with public
interest, they are expected to be more
cautious, to exercise a higher degree of
diligence, care and prudence, than private
individuals in their dealings, even those
involving registered lands. Banks may not
simply rely on the face of the certificate of
title. Hence, they cannot assume that,
simply because the title offered as security
is on its face free of any encumbrances or
lien, they are relieved of the responsibility
of taking further steps to verify the title and
inspect the properties to be mortgaged. As
expected, the ascertainment of the status
or condition of a properly offered to it as
security for a loan must be a standard and
indispensable part of a bank's operations.
(Land Bank of the Philippines v. Belle
Corporation, G.R. No. 205271, September 2,
2015)
(12) The respondent bank was negligent in
permitting the deposit and encashment of
the crossed checks without the proper
indorsement. An indorsement is necessary
for the proper negotiation of checks
specially if the payee named therein or
holder thereof is not the one depositing or
encashing it. Knowing fully well that the
subject checks were crossed, that the
payee was not the holder and that the
checks contained no indorsement,
respondent bank should have taken
reasonable steps in order to determine the
validity of the representations made by
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 Chua. Respondent bank was amiss in its
duty as an agent of the payee. Prudence
dictates that respondent bank should not
have merely relied on the assurances given
by Chua. (Go v. Metropolitan Bank and Trust,
Co., G.R. No. 168842, August 11, 2010)
5. PROHIBITED TRANSACTIONS BY BANK
DIRECTORS AND OFFICERS
Under the general banking law, no director,
officer, employee, or agent of any bank shall -
(a) Make false entries in any bank report or
statement or participate in any fraudulent
transaction, thereby affecting the financial
interest of, or causing damage to, the bank
or any person;
(b) Without order of a court of competent
jurisdiction, disclose to any unauthorized
person any information relative to the funds
or properties in the custody of the bank
belonging to private individuals, corporations,
or any other entity: Provided, That with
respect to bank deposits, the provisions of
existing laws shall prevail;
(c) Accept gifts, fees, or commissions or any
other form of remuneration in connection
with the approval of a loan or other credit
accommodation from said bank;
(d) Overvalue or aid in overvaluing any security
for the purpose of influencing in any way the
actions of the bank or any bank; or
(e) Outsource inherent banking functions. (Sec.
55.1, R.A. No. 8791)
Restrictions on bank exposure to Directors,
Officers, Stockholders, and their Related
Interests (DOSRI)
Purpose
The prohibition is intended to protect the public,
especially the depositors, from the over
borrowing of bank funds by bank officers,
directors, stockholders and related interests, as
such overborrowing may lead to bank failures.It
has been said that "banking institutions are not
created for the benefit of the directors or officers.
While directors have great powers as directors,
they have no special privileges as individuals.
They cannot use the assets of the bank for their
own benefit except as permitted by law. Stringent
restrictions are placed about them so that when
acting both for the bank and for one of
themselves at the same time, they must keep
within certain prescribed lines regarded by the
legislature as essential to safety in the banking
business. (Soriano v. People, G.R. No. 240458,
January 8, 2020)
When DOSRI’s interest does NOT appear to be
beneficial
A bank officer violates the DOSRI law when he
acquires bank funds for his personal benefit, even
if such acquisition was facilitated by a fraudulent
loan application. Directors, officers, stockholders,
and their related interests cannot be allowed to
interpose the fraudulent nature of the loan as a
defense to escape culpability for their
circumvention of Section 83 of Republic Act (RA)
No. 337. (Soriano v. People, G.R. No. 162336,
February 1, 2010)
DOSRI Restrictions
No director or officer of any bank shall, directly or
indirectly, for himself or as the representative or
agent of others, borrow from such bank nor shall
he become a guarantor, indorser or surety for
loans from such bank to others, or in any manner
be an obligor or incur any contractual liability to
the bank except with the written approval of the
majority of all the directors of the bank, excluding
the director concerned: Provided, That such
written approval shall not be required for loans,
other credit accommodations and advances
granted to officers under a fringe benefit plan
approved by the Bangko Sentral. The required
approval shall be entered upon the records of the
bank and a copy of such entry shall be
transmitted forthwith to the appropriate
supervising and examining department of the
Bangko Sentral. (Sec. 36[1], R.A. 8791)
Arm Length Rule
Dealings of a bank with any of its directors,
officers or stockholders and their related interests
shall be upon terms not less favorable to the bank
than those offered to others examining
department of the Bangko Sentral. (Sec. 36[2],
R.A. 8791)
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Effect upon Director/Officer
After due notice to the board of directors of the
bank, the office of any bank director or officer
who violates the provisions of this Section may be
declared vacant and the director or officer shall
be subject to the penal provisions of the New
Central Bank Act. (Par. 3, Sec. 36, R.A. 8791)
Amount of Loan which a Bank can extend to
DOSRI
The Monetary Board may regulate the amount of
loans, credit accommodations and guarantees
that may be extended, directly or indirectly, by a
bank to its directors, officers, stockholders and
their related interests, as well as investments of
such bank in enterprises owned or controlled by
said directors, officers, stockholders and their
related interests. However, the outstanding
loans, credit accommodations and guarantees
which a bank may extend to each of its
stockholders, directors, or officers and their
related interests, shall be limited to an amount
equivalent to their respective unencumbered
deposits and book value of their paid-in capital
contribution in the bank: Provided, however, That
loans, credit accommodations and guarantees
secured by assets considered as non-risk by the
Monetary Board shall be excluded from such limit:
Provided, further, That loans, credit
accommodations and advances to officers in the
form of fringe benefits granted in accordance
with rules as may be prescribed by the Monetary
Board shall not be subject to the individual limit.
(Par. 4, Sec. 36, R.A. 8791)
Requirements for DOSRI
(1) The borrower is a director, officer or any
stockholder of a bank;
(2) He contracts a loan or any form of financial
accommodation;
(3) The loan or financial accommodation is from:
(a) his bank;
(b) a bank that is a subsidiary of a bank
holding company of which both his bank
and lending bank are subsidiaries; or
(c) a bank in which a controlling proportion
of the shares is owned by the same
interest that owns a controlling
proportions of the shares of his bank; and
(4) The loan or financial accommodation of the
director, officer or stockholder, singly or with
that of his related interest, is in excess of 5%
of the capital and surplus of the lending bank
or in the maximum amount permitted by law,
whichever is lower. (Circular No. 170, Bangko
Sentral ng Pilipinas; Sec. 26, R.A. No. 7653;
Villanueva-Castro, Commercial Law Recap, 2020
Edition, pp. 222-223)
Ceiling Requirement
Under the second paragraph of Section 83
regulates the amount of credit accommodations
that banks may extend to their directors or
officers by limiting these to an amount equivalent
to the respective outstanding deposits and book
value of the paid-in capital contribution in the
bank. (Go v. Bangko Sentral ng Pilipinas, G.R. No.
178429, October 23, 2009)
Commission of estafa NOT compatible with the
violations of DOSRI Law
The bank money (amounting to ₱8 million) which
came to the possession of petitioner was money
held in trust or administration by him for the
bank, in his fiduciary capacity as the President of
said bank. It is not accurate to say that petitioner
became the owner of the ₱8 million because it
was the proceeds of a loan. That would have
been correct if the bank knowingly extended the
loan to petitioner himself. But that is not the case
here. According to the information for estafa, the
loan was supposed to be for another person, a
certain "Enrico Carlos"; petitioner, through
falsification, made it appear that said "Enrico
Carlos" applied for the loan when in fact he
("Enrico Carlos") did not. Through such
fraudulent device, petitioner obtained the loan
proceeds and converted the same. Under these
circumstances, it cannot be said that petitioner
became the legal owner of the ₱8 million. Thus,
petitioner remained the bank’s fiduciary with
respect to that money, which makes it capable of
misappropriation or conversion in his hands.
(Soriano v. People, G.R. No. 162336, February 1, 2010)
Restrictions extended to indirect borrowings
The prohibition in Section 83 is broad enough to
cover various modes of borrowing. It covers loans
228
by a bank director or officer (like herein
petitioner) which are made either:
(a) directly,
(b) indirectly,
(c) for himself,
(d) or as the representative or agent of others.
It applies even if the director or officer is a mere
guarantor, indorser or surety for someone else's
loan or is in any manner an obligor for money
borrowed from the bank or loaned by it. (ibid.)
6. STIPULATION ON INTERESTS
Courts must apply stipulated interest
In a loan or forbearance of money, the interest
due should be that stipulated in writing, and in
the absence thereof, the rate shall be 12% per
annum. Hence, only in the absence of a
stipulation can the court impose the 12% rate of
interest. (Security Bank and Trust Company vs. RTC
of Makati, G.R. No. 113926, October 23, 1996)
Floating Interest Rates
A stipulation for a floating rate of interest in a
letter of credit in which there is no reference rate
set either by it or by the Central Bank, leaving the
determination thereof to the sole will and control
of the lender bank is invalid; While it may be
acceptable, for practical reasons given the
fluctuating economic conditions, for banks to
stipulate that interest rates on a loan not be fixed
and instead be made dependent upon prevailing
market conditions, there should always be a
reference rate upon which to peg such variable
interest rates. (Consolidated Bank & Trust Corp. v.
Court of Appeals, G.R. No. 114286, April 19, 2001)
There may be instances where
an interest rate scheme which does not
specifically indicate a particular interest rate may
be validly imposed. Such interest rate scheme
refers to what is typically called
a floating interest rate system. (Goldwell
Properties Tagaytay, Inc. v. Metropolitan Bank and
Trust Co., G.R. No. 209837, May 12, 2021,
HERNANDO J.)
Citing the Manual of Regulations for Banks of the
Bangko Sentral ng Pilipinas (BSP), the Court
discussed how the BSP allows banks and
borrowers to agree on a floating rate of interest,
provided that it must be based on market-based
reference rates: 305.3 Floating rates of interest.
– The rate of interest on a floating rate loan
during each interest period shall be stated on the
basis of Manila Reference Rates (MRRs), T-Bill
Rates or other market based reference rates plus
a margin as may be agreed upon by the parties.
The Court states that "this BSP requirement is
consistent with the principle that the
determination of interest rates cannot be left
solely to the will of one party. It further
emphasizes that the reference rate must be
stated in writing, and must be agreed upon by the
parties." In order for the concept of
a floating rate of interest to apply, it presupposes
that a market-based reference rate is indicated in
writing and agreed upon by the parties. (ibid.)
Floating rates of interest refer to the variable
interest rates stated on a market-based
reference rate agreed upon by the parties.
Stipulations on floating rate of interest differ from
escalation clauses. A floating rate of interest
pertains to the interest rate itself that is not fixed
as it is dependent on a market-based reference
that was agreed upon by the parties. (ibid.)
Escalation clauses
The agreement between the parties on the
imposition of increasing interest rates on the loan
is commonly known as the escalation clause.
Generally, the escalation clause refers to the
stipulation allowing increases in the interest rates
agreed upon by the contracting parties. There is
nothing inherently wrong with the escalation
clause because it is validly stipulated in
commercial contracts as one of the means
adopted to maintain fiscal stability and to retain
the value of money in long term contracts. In
short, the escalation clause is not void per
se. (Villa Crista Monte Realty & Development Corp. v.
Equitable PCI Bank, G.R. No. 208336, November 21,
2018)
Unilateral escalation clauses void
Nevertheless, an escalation clause "which grants
the creditor an unbridled right to adjust the
interest independently and upwardly, completely
229
depriving the debtor of the right to assent to an
important modification in the agreement" is void.
A stipulation of such nature violates the principle
of mutuality of contracts. Thus, this Court has
previously nullified the unilateral determination
and imposition by creditor banks of increases in
the rate of interest provided in loan contracts.
(Spouses Juico v. China Banking Corp., G.R. No.
187678, April 10, 2013)
Escalation clause; when allowable.
Parties to an agreement pertaining to a loan or
forbearance of money, goods or credits may
stipulate that the rate of interest agreed upon
may be increased in the event that the applicable
maximum rate of interest is increased by the
Monetary Board: Provided, That such stipulation
shall be valid only if there is also a stipulation in
the agreement that the rate of interest agreed
upon shall be reduced in the event that the
applicable maximum rate of interest is reduced by
law or by the Monetary Board: Provided, further,
That the adjustment in the rate of interest agreed
upon shall take effect on or after the effectivity of
the increase or decrease in the maximum rate of
interest. (No. X305[3], Manual of Regulations for
Banks, s. 2017)
Interest on microfinance loans.
Global experience has demonstrated that a
market-based interest rate regime permits the
institution providing microfinance services
become sustainable and able to cover
administrative costs, provisions for loan losses
and intermediation/funding costs. Global
experience continues to validate the proposition
that what matters most to the poor and
underserved segments is access to financial
services rather than their interest-rate cost –
most especially because microenterprise and
small business borrowers will take a microfinance
loan whose repayment periods match the
additional cash flows they hope to generate.
Therefore, interest on such microfinance loans
shall be reasonable but shall not be lower than
the prevailing market rates. This is to enable the
lending institution not only to recover the
financial and operational costs incidental to this
type of microfinance lending but also to realize
some bottom line gains. (Sec. 314, Manual of
Regulations of Bank, December 2018)
C. SECRECY OF BANK DEPOSITS
(R.A. NO. 1405, AS AMENDED AND
R.A. NO. 6426, AS AMENDED)
Governing Laws
1. R.A. No. 1405, as amended “An Act
Prohibiting Disclosure of or Inquiry into,
Deposits with any Banking Institution and
Providing Penalty Therefor”
2. R.A. No. 6246, as amended “An Act
Instituting A Foreign Currency Deposit
System in the Philippines, and for Other
Purposes”
Terminologies
Deposits refers to money or funds placed with a
bank that can be withdrawn on the depositor’s
order or demand, such as deposit accounts in the
form of savings, current and time deposits. (Sec.
2, R.A., 1405; Official Gazette website, “BIR:
Investments are not subject to the bank secrecy law,
only bank deposits and government securities” dated
August 12, 2014)
Deposits are characterized as being in the nature
of a simple loan. The placing of deposits in a bank
creates a creditor-debtor relationship between
the depositor and the bank. As such, the bank,
being the debtor, has the obligation to pay a
certain sum of money to the depositor, being the
creditor.
Depositor - A depositor, in cases of bank
deposits, is one who pays money into the bank in
the usual course of business, to be placed to his
credit and subject to his check or the beneficiary
of the funds held by the bank as trustee. (Wright
v. Holmes, 62 A. 507, 508, 100 Me. 508, 3 L.R. A., N.S.,
769, 4 Ann. Cas. 583. Words and Phrases, Permanent
Edition, Vol. 12, p. 262)
Government bonds are debt securities which
are unconditional obligations of the State, and
backed by its full taxing power. Government
bonds include treasury bills, treasury notes, retail
treasury bonds, dollar linked peso notes and
other risk free bonds. (Sec. 2, R.A., 1405; Official
230
Gazette website, “BIR: Investments are not subject to
the bank secrecy law, only bank deposits and
government securities” dated August 12, 2014)
1. PURPOSE
Two Allied Purposes
(1) Encourage the people to deposit their money
in banking institutions, so that it may be
utilized by way of authorized loans and
thereby assist in economic development.
(2) Discourage private hoarding. (Sec. 1, R.A. No.
1405)
R.A. No. 1405 has two allied purposes. It hopes
to discourage private hoarding and at the same
time encourage the people to deposit their money
in banking institutions, so that it may be utilized
by way of authorized loans and thereby assist in
economic development. Owing to this piece of
legislation, the confidentiality of bank deposits
remains to be a basic state policy in the
Philippines. (BSP Group, Inc. v. Go, G.R. No. 168644,
February 16, 2010)
It is enacted to help encourage the public to
deposit their money in banking institutions so that
it may be used on loans and eventually assist in
the economic development of the country. The
law protects deposits of whatever nature from
examination and inquiry, subject to certain
exceptions:
Section 2. All deposits of whatever nature
with banks or banking institutions in the
Philippines including investments in bonds
issued by the Government of the Philippines,
its political subdivisions and its
instrumentalities, are hereby considered
as of an absolutely confidential nature and
may not be examined, inquired or looked into
by any person, government official, bureau or
office, except upon written permission of the
depositor, or in cases ofimpeachment, or
upon order of a competent court in
cases of bribery or
dereliction of duty of public officials, or in
cases where the money deposited or invested
is the subject matter of the litigation.
(The Real Bank (A Thrift Bank), Inc. v. Maningas,
G.R. No. 211837, March 16, 2022)
State Policy
The confidentiality of bank deposits remains to be
a basic state policy in the Philippines. Section 2 of
the law institutionalized this policy by
characterizing as absolutely confidential in
general all deposits of whatever nature with
banks and other financial institutions in the
country. (Sec. 2, R.A. No. 1405)
Rationale
The law was passed to encourage the infusion of
adequate capital to propel more speedily the
country's economic development. The author of
the law believed that the approval of the law "will
inject into the bloodstream of our anemic
economy the capital which we need for greater
agricultural and industrial production. (Explanatory
Notes to House Bill No. 3977 by Rep. Jose P. Laurel, Jr.
of Batangas, cited in Lim, Bank Secrecy Law, A
Historical and Economic Analysis, Philippine Law
Journal, Vol. 77, p. 210)
Coverage; General Banking Rule of Secrecy
All deposits of whatever nature with banks or
banking institutions in the Philippines including
investments in bonds issued by the Government
of the Philippines, its political subdivisions and its
instrumentalities, are hereby considered as of an
absolutely confidential nature and may not be
examined, inquired or looked into by any person,
government official, bureau or office, except
upon written permission of the depositor, or in
cases of impeachment, or upon order of a
competent court in cases of bribery or dereliction
of duty of public officials, or in cases where the
money deposited or invested is the subject matter
of the litigation. (Sec. 16 par. 2, Art. 2, R.A. No. 7653,
amending Sec. 2 and 3, R.A. No. 1405, which were
both amended by P.D. No. 1792 now expressly
repealed by R.A. No. 7653)
Under Republic Act No. 1405, or the Bank Secrecy
Law, bank accounts and deposits of whatever
nature with banks or banking institutions in the
Philippines are "considered as of an absolutely
confidential nature"; they "may not be examined,
inquired or looked into by any person”. Any bank
official or employee who discloses any
information concerning deposits may be
231
prosecuted and penalized. (Republic v. Ongpin, G.R.
No. 207078, June 20, 2022)
Wherein deposits refer to money or funds placed
with a bank that can be withdrawn on the
depositor’s order or demand, such as deposit
accounts in the form of savings, current and time
deposits. Deposits are characterized as being in
the nature of a simple loan. The placing of
deposits in a bank creates a creditor-debtor
relationship between the depositor and the bank.
As such, the bank, being the debtor, has the
obligation to pay a certain sum of money to the
depositor, being the creditor. (Philippine Veterans
Bank v. Commissioner on Internal Revenue. G.R. No.
205261. April 26, 2021)
Deposits are thus no longer limited to those
governed by the law on loans giving rise to
creditor-debtor relationship. (Ejercito v.
Sandiganbayan (Special Division) and People of the
Philippines, G.R. Nos. 157294-95. November
30, 2006)
While the phrase "of whatever nature"
proscribes any restrictive interpretation of
"deposits." Moreover, it is clear from the
immediately quoted provision that, generally, the
law applies not only to money which is deposited
but also to those which are invested. This further
shows that the law was not intended to apply only
to "deposits" in the strict sense of the word.
Otherwise, there would have been no need to add
the phrase "or invested." (Ejercito v. Sandiganbayan
(Special Division) and People of the Philippines, G.R.
Nos. 157294-95, November 30, 2006)
Absolute Confidentiality; Protection from
Unwarranted Inquiry
The absolute confidentiality rule in R.A. No. 1405
actually aims at protection from unwarranted
inquiry or investigation if the purpose of such
inquiry or investigation is merely to determine the
existence and nature, as well as the amount of
the deposit in any given bank account. (BSB
Group, Inc. v. Go, G.R. No. 168644, February 16, 2010)
Construction of Confidentiality
By force of statute, all bank deposits are
absolutely confidential, and that nature is
unaltered even by the legislated exceptions.
There is disfavor towards construing these
exceptions in such a manner that would authorize
unlimited discretion on the part of the
government or of any party seeking to enforce
those exceptions and inquire into bank deposits.
If there are doubts in upholding the absolutely
confidential nature of bank deposits against
affirming the authority to inquire into such
accounts, then such doubts must be resolved in
favor of confidentiality. (Republic v. Eugenio. G.R.
No. 174629, February 14, 2008)
Zones of Privacy
Under the R.A. No. 1405, bank deposits are
statutorily protected or recognized zones of
privacy. (Ejercito v. Sandiganbayan (Special Division)
and People of the Philippines. G.R. Nos. 157294-95,
November 30, 2006; Marquez v. Desierto, G.R. No.
135882, June 27; and Opl v. Torres. G.R. No. 127685.
July 23, 1998)
While the fundamental law has not bothered with
the triviality of specifically addressing privacy
rights relative to banking accounts, there,
nevertheless, exists in our jurisdiction a legitimate
expectation of privacy governing such accounts.
The source of this right of expectation is
statutory, and it is found in R.A. No. 1405,
otherwise known as the Bank Secrecy Act of
1955. .(BSB Group, Inc. v. Go, G.R. No. 168644,
February 16, 2010)
2. PROHIBITED ACTS
The following cannot be done in connection with
bank deposits:
Peso Deposits
Prohibited Acts Persons Liable
Examine, Inquiry, (a) Any person;
Looking into: (b) Any government
(a) bank deposit; official; or
232
 (b) government bond (c) Any government violation of any Any person.
investment in any bureau or office. provision of this law as
of the instances (Sec. 2, R.A. No. 1405) well as regulation of the
not allowed by Monetary Board
law. pursuant to this law
(Sec. 2, R.A. No. (R.A. No. 6426, Sec. 8)
1405)
Disclosure concerning (a) Any official or
bank deposits to (b) Any employee of 3. DEPOSITS COVERED
another in any instance banking
not allowed by law. institution.
Deposits (1) All Peso deposits of
(Sec. 3, R.A. No. 1405) (Sec. 3, R.A. No. 1405)
Generally whatever nature with banks
Violation of any Any person.
Covered or banking institutions in the
provisions of the law. (Sec. 5, R.A. No. 1405)
Philippines are considered
(Sec. 5, R.A. No. 1405)
as of an absolutely
confidential nature. (Sec. 2,
Examples: R.A. No. 1405)
(1) In camera Inspection NOT Allowed – In (2) Investments in bonds
camera inspection of the bank deposit issued by the Government
records is also not allowed and is also in the of the Philippines, its
nature of any information concerning the said political subdivisions and its
deposits. (Marquez v. Disierto. G.R. No. 135882. instrumentalities, whether
June 27, 2001. Pardo, J.) denominated in pesos or
foreign currency. Note that
(2) A news reporter that reported what he
investments in bonds in
overheard from the conversation of two bank foreign currency are still
employees about a bouncing check of a covered by RA 1405. The
depositor is not violating the law (Aquino & Foreign Currency Deposit
Sundiang Sr., Reviewer in Commercial Law, 2022 Act does not cover those
Edition, p. 474) investments. (ibid)
(3) Trust Accounts. R.A. No.
Foreign Currency Deposits 1405 is broad enough to
Prohibited Acts Persons Liable cover Trust Accounts
examines, inquires, or (a) Any person; (particularly, Trust Account
looks into foreign (b) Any government No. 858 in this case).
currency deposits official; or (Ejercito v. Sandiganbayan
without written (c) Any government (Special Division) and
permission of the bureau or office People of the Philippines,
depositor whether judicial or G.R. Nos. 157294-95,
administrative or November 30, 2006)
legislative, Deposits and (4) Foreign currency deposits.
(d) or any other private Funds (R.A. No. 6426)
or public entity. Covered by (5) Funds placed in a bank not
attach, garnish, or anyone Other Laws on in the nature of a deposit by
subject the foreign Confidentiality private individuals or
currency deposit to any entities. These may also not
other order or process be disclosed. (Sec. 55.1,
of any court, legislative R.A. No. 8791)
body, or other (6) Deposits in offshore
administrative body banking units (Sec. 8, PD
makes a disclosure (a) any official No. 1246)
concerning bank (b) or employee of the
deposits to another in banking institution
any instance not
allowed by law

233
Investment in Government Bonds
Refer to investments in bonds issued by the
Government of the Philippines, its political
subdivisions and its instrumentalities.
Government bonds are debt securities which are
unconditional obligations of the State, and
backed by its full taxing power. Government
bonds include treasury bills, treasury notes, retail
treasury bonds, dollar linked peso notes, and
other risk-free bonds. (Sec. 2, R.A. No. 1405)
4. EXCEPTIONS FROM COVERAGE
A bank deposit may be inquired into in the
following cases:
Exceptions under the Law on Secrecy of Bank
Deposits
(1) Written permission or consent in writing by
the depositor; (Sec. 2, R.A. No. 1405)
(2) Impeachment of the President, Vice
President, members of the Supreme Court,
members of the Constitutional Commission;
(Sec. 2, R.A. No. 1405)
(3) Upon order of a competent court in cases of:
(a) Bribery or dereliction of duty of public
officials; (Sec. 2, R.A. No. 1405)
(b) Where the money deposited or invested
is the subject of litigation. The money
deposited should be the very thing in
dispute; (Sec. 2, R.A. No. 1405; Mellon Bank,
N.A. v. Magsino. G.R. No. 71479, October 18,
1990)
Exceptions under Other Laws
(4) Anti-graft and Corrupt Practices Act.
Prosecution for violation of an anti-graft and
corrupt practices act; (R.A. No. 3019)
A person charged with unlawfully acquiring
wealth under RA 1379 cannot oppose the
issuance of a subpoena duces tecum for the
records of his bank account for this is among
the instances excepted from the coverage of
the Secrecy of Bank Deposits Act are Anti-
graft cases. (Sec. 8, R.A. 3019)
(5) Unclaimed Balance Law. Disclosure by the
bank to the National Treasurer of information
concerning dormant deposits under the
Unclaimed Balances law (Act. No. 3936, as
amended);
(6) Philippine Deposit Insurance Commission.
Examination and inquiry into deposit records
by PDIC when there is failure of promt
corrective action as declared by the Monetary
Board duue to capital deficiency; (Sec. 11[c],
PDIC LA)
(7) Bangko Sentral ng Pilipinas. BSP is authorized
to:
(a) inquire into or examine bank deposits or
investments in the course of a periodic or
special examination to ensure
compliance with The Anti-Money
Laundering Law, in accordance with the
rule of examination of the Bangko
Sentral; (Sec. 11, R.A. No. 9160, as
amended) and
(b) conduct annual testing which is limited to
the determination of the existence and
true identity of the owners of numbered
accounts; (Sec. 11, R.A. No. 9160, as
amended)
(c) DOSRI Loans: Loans with their Banks of
Bank Directors, Officers, Stockholders
and related interests. Loans in excess of
5% of the Bank's Capital and Surplus.
The Borrower waived his right as regards
the Secrecy of Bank Deposits. (No. 347
Waiver of Secrecy of Deposit, Bangko Sentral
ng Pilipinas.)
(8) New Central Bank Act. Directors, officers,
stockholders and related interests who
contract a loan or any form of financial
accommodation with their bank or related
bank are required to execute a written waiver
of secrecy of deposits pursuant to The New
Central Bank Act; (Sec. 26, Rep. Act No. 7653)
(9) Human Security Act. After determining
existence of probable cause, the Court of
Appeals may authorize examination of and
gathering of information on deposits,
placements, trust accounts, assets, and
records in a bank or financial institution; of
the following:
(a) A person charged with or suspected of
the crime of terrorism or conspiracy to
commit terrorism;
234
 (b) Any judicially declared and outlawed
terrorist organizations, associations, or
group of persons; or
(c) Any member of such organization,
association, or group of persons in a bank
or financial institution and the gathering
of any relevant information about the
same from said bank or financial
institution. (Secs. 27 and 28, RA 9372)
(10) The Anti-Money Laundering Act. The
AMLC may be authorized to examine and
inquire into bank deposits or investments
with banks or non-bank financial
institutions:
(a) with court order, when there is
probable cause that the deposits or
investments are related to an unlawful
activity or a money laundering offense;
(Secs. 3[i] and 4 of R.A. No. 9160
(b) Court order shall not be necessary in
the following cases:
i. Kidnapping for ransom under Article
267 of Act No. 3815 (RPC);
ii. Violations of Sections 4, 5, 6, 8, 9,
10, 12, 13, 14, 15, and 16 of R.A.
No. 9165 (Comprehensive
Dangerous Drugs Act of 2002);
iii. Hijacking and other violations under
R.A. No. 6235; destructive arson and
murder, as defined under the RPC,
as amended, including those
perpetrated by terrorists against
non-combatant persons and similar
targets;
iv. Felonies and offenses similar to the
foregoing which are punishable
under the penal laws of other
countries;
v. Terrorism and conspiracy to commit
terrorism as defined under R.A. No.
9372, as amended (Rule 11, R.A. No.
9610, as amended).
(c) Violation of the Anti-Money Laundering
Act; (R.A. No. 9610, as amended)
(11) Presidential Commission on Good
Government. The PCGG in the conduct of
its investigations to recover ill-gotten
wealth accumulated by former President
Ferdinand E. Marcos, his immediate family,
relatives, subordinates and close
associates, may issue subpoenas requiring
the attendance and testimony of witnesses
and/or the production of books, papers,
contracts, records, statement of accounts
and other documents. (Sec. 3 [e], E.O. No. 1,
s. 1986)
(12) Commission Commission of Internal
Revenue is authorized to inquire into bank
deposit accounts in relation to:
(a) an application for compromise of tax
liability under Sec. 204 (A) (2) of the
Tax Code by readon of financial
incapacity to pay his tax liability; or a
determination of a decedent’s gross
estate under The National Internal
Revenue Code; (Sec. 6 (f) (1-2), NIRC, as
amended; R.A. No. 8424, as amended by R.
A. No. 10021) and
(b) a request for tax information of specific
taxpayers made by a foreign tax
authority pursuant to a tax treaty under
The Exchange of Information on Tax
Matters Act of 2009. (R.A. No. 8424, as
amended by R.A. No. 10021).
(13) Commission on Audit. The COA is
authorized to examine and audit
government deposits pertaining to the
revenue and receipts of, and expenditures
or uses of funds and properties, owned or
held in trust by, or pertaining to, the
Government or any of its subdivisions,
agencies or instrumentalities, including
government-owned and controlled
corporations with original charters; (Art. IX-
D, 1987 Philippine Constitution and P.D. No.
1445)
(14) Ombudsman. The Ombudsman has the
power to issue subpoena and subpoena
duces tecum, take testimony in any
investigation or inquiry, as well as examine
and access bank accounts and records. The
power of the Ombudsman to subpoena
deposit information of a government official
may be exercised when the following
conditions concur:
235
 (a) there must be a case pending before a
court of competent jurisdiction;
(b) the account must be clearly identified;
(c) the inspection must be limited to then
subject matter of the pending case; and
(d) the bank personnel and the account holder
must be notified to be present during the
inspection; (Marquez v. Desierto. G.R. No.
135882, June 27, 2001)
(15) Court of Appeals. The CA designated as a
special court, may issue an order
authorizing law enforcement officers to
examine and gather information on the
deposits, placements, trust accounts,
assets and records in a bank or financial
institution in connection with anti-terrorism
case; (R.A. No. 9372)
(16) Coup D’Etat Law. (R.A No. 6968)
(17) Police Power. When the State
exercises/invokes its Police Power. The
lawful exercise of police power in
constitutionally protected zones of privacy
is illustrated by the enactment of the
Human Security Act of 2007, Anti-Money
Laundering Act of 2001, and the Terrorism
Financing Prevention and Suppression Act
of 2012. Compliance with Article III,
Section 2 and 3 of the Constitution.67 The
authority to inquire into or examine the
main account and the related accounts
shall comply with the requirements of
Article III, Sections 2 and 3 of the 1987
Constitution. (Secs. 2 and 3, Art. III, The
1987 Constitution)
Police power is based upon the concept of
necessity of the State and its corresponding right
to protect itself and its people. (JMM Promotion and
Management Inc. v. Court of Appeals, G.R. No.
120095, August 5, 1996, citing Rubi v. Provincial Board
of Mindoro)
Jurisprudence Interpreting Exceptions
(18) Garnishment of bank deposits;
(19) In case of amendment or repeal of the law.
(Doña Adela Export International, Inc. v,
Trade and Investment Development
Corporation (TIDCORP) and Bank of the
Philippines Islands (BPI), G.R. No. 201931,
February 11, 2015)
(20) Plunder and Unexplained Wealth.
Prosecution for unexplained wealth such as
“Plunder” case; (PNB v. Gancayco. G.R. No. L-
18343, September 30, 1965; Marquez v.
Desierto, G.R. No. 135882, June 27, 2001; and
Opl v. Torres, G.R. No. 127685, July 23, 1998)
Cases of unexplained wealth are similar to cases
of bribery or dereliction of duty and no reason is
seen why these two classes of cases cannot be
excepted from the rule making bank deposits
confidential. (PNB v. Gancayco. G.R. No. L-18343.
September 30, 1965)
Plunder is analogous to bribery. The exception in
the law that is applicable in bribery also applies
to plunder. The overt or criminal acts as described
in Sec. 1 (d) of R.A. 7080 would make the
similarity between plunder and bribery even more
pronounced since bribery is essentially included
among these criminal acts. (Ejercito v.
Sandiganbayan (Special Division) and People of the
Philippines, G.R. Nos. 157294-95, November 30, 2006)
(21) Equity. Court-ordered examination of
deposits on grounds of equity. (Salvacion
v. Central Bank, G.R. No. 94723, August 21,
1997)
(22) Foreign Currency Deposit. Examination of
Foreign Currency Deposit upon written
permission of depositor himself. (Intengan
vs. CA, G.R. No. 128996, February 15, 2002)
Authorized Disclosures
Disclosures by authorized and responsible bank
officials are allowed in the following instances:
i. reporting of unclaimed balances to the
Treasurer of the Philippines; (Secs. 1 and 2, Act
No. 3936)
236
ii. turn-over to the Commissioner of Internal
Revenue of the amount in bank accounts as
may be sufficient to satisfy the writ of
garnishment issued to collect delinquent
taxes; (Secs. 205 and 208, R.A. No. 8424)
iii. submission of report, and turn-over to, the
court officer or executing sheriff of garnished
amounts pursuant to a writ of garnishment in
satisfaction of a judgment (Sec. 9 [c], Rule 39,
Rules of Court; China Banking Corporation vs.
Ortega, G.R. No. L-34964, January 31, 1973)
iv. disclosure by a bank officer or employee upon
order of the court in connection with a deposit
in a closed bank that was used in the
perpetration of anomalies. (Soriano vs.
Manuzon, C.A. G.R.S.P No. 87634)
5. GARNISHMENT OF DEPOSITS,
INCLUDING FOREIGN DEPOSITS
General Bank accounts may be garnished by
Rule the creditors of the depositor There
is no violation of the Law on Secrecy
of Bank Deposits if the accounts are
garnished (China Bank v. Ortega,
G.R. No. L-34964, January 31, 1973)
The amount of deposit is actually not
disclosed and the intent of the
legislature does not cover
garnishment (Philippine Commercial
and Industrial Bank, et al. v. The
Hon. CA, et al., G.R. No. 84526,
January 28, 1991; Aquino &
Sundiang Sr., Reviewer in
Commercial Law, 2022 Edition, p.
479)
Exception (1) Foreign currency deposits. The
foreign currency deposits shall
be exempt from attachment,
garnishment, or any other order
or process of any court,
legislative body, government
agency or any administrative
body whatsoever. (Sec. 8, R.A.
No. 6427)
(2) Those exempt under the Rules
of Civil Procedure like provision
for the family for four months
(Rule 39, ROC).
Exception (1) Salvacion Case (Equity)
to the Account of non-resident alien
Exception found guilty of raping a minor
Filipino was allowed on the
basis of equity. (Salvacion v.
Central Bank. G.R. No. 94723,
August 21, 1997)
(2) Gotianuy Case (Co-Payee)
Being a co-payee thereof, then
he or his estate can be
considered as a co-depositor of
said checks. No written consent
of the other co-payee is
necessitated in an inquiry of the
deposits by the said co-
depositor. (China Banking
Corporation vs. CA, G.R. No.
140687, December 18, 2006)
Salvacion Case
Far-reaching implications on the right of a
national to obtain redress for a wrong committed
by an alien who takes refuge under a law and
regulation promulgated for a purpose which does
not contemplate the application thereof
envisaged by the alien. If we rule that the
questioned Sec. 113 of Central Bank Circular No.
960 which exempts from attachment,
garnishment, or any other order or process of any
court, legislative body, government agency or
any administrative body whatsoever, is applicable
to a foreign transient, injustice would result
especially to a citizen aggrieved by a foreign
guest like accused Greg Bartelli. This would
negate Arti. 10 of the New Civil Code which
provides that "in case of doubt in the
interpretation or application of laws, it is
presumed that the lawmaking body intended
right and justice to prevail. It would be
unthinkable, that the questioned Sec. 113 of
Central Bank No. 960 would be used as a device
by accused Greg Bartelli for wrongdoing, and in
so doing, acquitting the guilty at the expense of
the innocent. This situation calls for fairness
against legal tyranny. (Salvacion v. Central Bank.
G.R. No. 94723, August 21, 1997)
237
Gotianuy Case
The monies subject of said checks originally came
from the Gotianuy, the owner of the account.
Citibank checks evidenced that the Gotianuy is
one of the payees of said checks. Being a co-
payee thereof, then he or his estate can be
considered as a co-depositor of said checks.
Since Gotianuy is a co-depositor of the CBC
account, then his request for the assailed
subpoena is tantamount to an express permission
of a depositor for the disclosure of the name of
the account holder. It must also be remembered
that in the complaint of Jose Gotianuy, he alleged
that his US dollar deposits with Citibank were
illegally taken from him. China Bank employee
Cristuta Labios testified that Mary Margaret Dee
came to China Bank and deposited the money of
Gotianuy in Citibank US dollar checks to the dollar
account of her sister Adrienne Chu. This fortifies
our conclusion that an inquiry into the said
deposit at China Bank is justified. At the very
least, Gotianuy as the owner of these funds is
entitled to a hearing on the whereabouts of these
funds. It was not the intent of the legislature
when it enacted the law on secrecy on foreign
currency deposits to perpetuate injustice. This
Court is of the view that the allowance of the
inquiry would be in accord with the rudiments of
fair play, the upholding of fairness in our judicial
system and would be an avoidance of delay and
time-wasteful and circuitous way of administering
justice. (China Banking Corporation vs. CA, G.R. No.
140687, December 18, 2006)
D. ANTI-MONEY LAUNDERING ACT
(R.A. NO. 9160, AS AMENDED BY R.A.
NO. 9194, 10167, 10365, 10927, AND
11521)
[hereinafter referred as AMLA]
1. POLICY
State Policy
(1) To protect and preserve the integrity and
confidentiality of bank accounts;
(2) To ensure that the Philippines shall not be
used as a money laundering site for the
proceeds of any unlawful activity;
(3) To extend cooperation in transnational
investigations and prosecutions of persons
involved in money laundering activities
wherever committed, as well as in the
implementation of targeted financial
sanctions related to the financing of the
proliferation of weapons of mass destruction,
terrorism, and financing of terrorism,
pursuant to the resolution of the United
Nations Security Council. (Sec. 2, R.A. No.
9160, as amended by R.A. No. 11521)
Deterrence Function
The Anti-Money Laundering Act is meant to stop
not only the practice of money laundering in all
its stages but more importantly the crimes that
generated the proceeds that are being laundered.
The process of money laundering is normally
divided into three stages, namely:
(1) Placement stage - The proceeds of the
crime often cash, are deposited in a financial
institution.
(2) Layering stage - The proceeds are moved,
usually through a series of transactions,
which may involve different entities, different
assets and different jurisdictions, so as to
sever any audit trail to make the tracing of
the source harder.
(3) Integration stage - The criminal resumes
control of the proceeds, free from any link to
the criminal source.
(a) Anti-money laundering laws are designed to
facilitate early detection, especially at the
"Placement stage," so that it may lead to the
identification and prosecution not only of the
perpetrators of the crime of money
laundering but also the perpetrators of the
predicate offence. Locating the proceeds of
the crime leads to the detection of the crime
generating the proceeds and hence to the
apprehension of the perpetrator.
(b) The fight against anti-money laundering has
pragmatic economic justification. "Depriving
potential money launderers of access to
financial markets helps those markets
238
 maintain a reputation for integrity which Certeza Mendoza and Binay Law Offices v. CA. G.R. No.
enhances their stability and hence 216914, December 6. 2016)
attractiveness. And legitimate businesses are
spared the distortions in competition caused 2. COVERED INSTITUTIONS AND THEIR
by unlawfully financed enterprises for which OBLIGATIONS
money laundering and not commercial profit
is the prime objective. (E.P. Ellinger, Eva COVERED INSTITUTIONS
Lomnicka, and R.J.A. Hooley, Ellinger's Modern
Banking Law, 4th Ed., 2006, p. 94, hereinafter Covered “Institutions” was changed to Covered
referred to as Ellinger's Modern Banking Law) “Persons” under Sec. 3[a], R.A. No. 9160, as
amended.
Jurisdiction
COVERED PERSONS. The "covered persons"
Section 5 of AMLA vests jurisdiction over all cases under AMLA may be natural or juridical persons.
on money laundering with the Regional Trial An important component of the scheme to
Courts. Those committed by public officers and prevent money-laundering is the registration of
private persons who are in conspiracy with such these persons with AMLC and the submission of
public officers shall be under the jurisdiction of reports by these covered persons. The
the Sandiganbayan. This is further clarified in registration of Covered Persons becomes even
Rule 5 of the 2016 RIRR, which provides: more important for non-bank entities which are
subject to less stringent regulator or there is no
Rule 5. Jurisdiction over Money Laundering specialized agency that monitors them. Under
Cases. Section 3[a] of AMLA, as amended by R.A. No.
10365 and R.A. No. 10927, "Covered Persons"
(a) Regional Trial Court. The regional trial refers to the following:
courts shall have jurisdiction to try money
laundering cases committed by private (1) Supervised or regulated by the Bangko
individuals, and public officers not covered by Sentral ng Pilipinas (BSP):
the jurisdiction of the Sandiganbayan. (a) banks,
(b) Sandiganbayan. The Sandiganbayan shall (b) non-banks,
have jurisdiction to try money laundering (c) quasi-banks,
cases committed by public officers under its (d) trust entities,
jurisdiction, and private persons who are in (e) foreign exchange dealers,
conspiracy with such public officers. (Rule 5, (f) pawnshops,
2016 RIRR of R.A. No. 9160, as amended) (g) money changers,
(h) remittance and transfer companies and other
Investigatory Body similar entities and
(i) all other persons and their subsidiaries and
The AMLC does not exercise quasi-judicial powers affiliates
and is simply an investigatory body. The AMLC's
investigatory powers does not seep into and (2) Supervised or regulated by the
approximates a quasi-judicial agency's Insurance Commission (IC):
inquisitorial powers. The AMLC's investigation of (a) Insurance companies,
money laundering offenses and its determination (b) pre-need companies and
of possible money laundering offenses, (c) all other persons
specifically its inquiry into certain bank accounts
allowed by court order, does not transform it into
an investigative body exercising quasi-judicial
powers. (Shu v. Dee, as cited in Subido Pagente

239
(3) Supervised or regulated by the
Securities and Exchange Commission:
a. Securities dealers, brokers, salesmen,
investment houses and other similar
persons managing securities or rendering
services as investment agent, advisor, or
consultant,
b. Mutual funds, closed-end investment
companies, common trust funds, and
other similar persons, and
c. Other entities administering or otherwise
dealing in currency, commodities or
financial derivatives based thereon,
valuable objects, cash substitutes and
other similar monetary instruments or
property;
(4) Designated Non-Financial Businesses
and Professions (DNFBPs). While not
regulated by either BSP, IC, or SEC, these
DNFBPs, which are non-financial in nature,
are covered persons by reason of their being
designated by law as such. These include the
following:
(a) Jewelry dealers
i. in precious metals, who, as a
business, trade in precious metals,
for transactions in excess of One
million pesos (P1,000,000.00);
ii. in precious stones, who, as a
business, trade in precious stones,
for transactions in excess of One
million pesos (P1,000,000.00);
(b) Company service providers which, as
a business, provide any of the following
services to third parties:
i. Acting as a formation agent of
juridical persons;
ii. Acting as (or arranging for another
person to act as) a director or
corporate secretary of a company, a
partner of a partnership, or a similar
position in relation to other juridical
persons;
iii. Providing a registered office,
business address or accommodation,
correspondence or administrative
address for a company, a partnership
or any other legal person or
arrangement; and
iv. Acting as (or arranging for another
person to act as) a nominee
shareholder for another person; and
(c) Persons, including lawyers, accountant
Persons who provide any of the
following services (Sec. 1, Rule 4, 2018
Implementing Rules and Regulations of R.A.
No. 9160, as amended):
i. Managing of client money, securities,
or other assets;
ii. Management of bank, savings, or
securities account;
iii. Organization or contribution for the
creation, operation, or management
of companies; and
iv. Creation, operation or management
of juridical persons or arrangements,
and buying and selling business
entities. (Sec. 3[a], R.A. No. 9160, as
amended by R.A. No. 10365)
Lawyers and accountants are not
considered as covered persons if they
render services under item 6 provided
the following requisites are present.
i. They are acting as independent
legal professionals
ii. Authorized to practice in the
Philippines; and
iii. They are subject to the provisions
of their respective codes of
conduct and/or professional
responsibility or any of its
amendments. (Sec. 3[a], R.A. No.
9160, as amended by R.A. No. 10365)
They shall be excluded from the coverage of the
Anti-Money Laundering Act in relation to
information concerning their clients or where
the disclosure of information would compromise
client confidences or the attorney-client
relationship.
(5) Casinos, including internet and ship-
based casinos, with respect to their casino
cash transactions related to the gaming
operations; (Sec. 3[a], R.A. No. 9160, as
amended by R.A. No. 10927)
240
 i. Internet-based casinos
Refer to casinos in which persons
participate by the use of remote cone,
television, radio or any other kind of
electronic or other technology for
facilitating communication. (ibid.)
ii. Ship-based casino
Refer to casinos, the operation of which is
undertaken on board a vessel, ship, boat,
or any other water-based craft wholly or
partly intended for gambling. (ibid.)
(6) Real estate developers and brokers;
(Sec. 3[a], R.A. No. 9160, as amended by R.A.
No. 11521)
Primary Duties of Covered Persons
(1) Covered persons shall comply with all the
requirements under the AMLA, its IRR and
other AMLC issuances. They shall have the
duty to cooperate with the AMLC in the
discharge of the latter’s mandate and
execution of its lawful orders and issuances
to protect their business or professions from
being used in money-laundering activities.
(2) The covered persons’ board of directors,
partners or sole proprietors shall be
ultimately responsible for the covered
person’s compliance with the AMLA, its IRR,
and other AMLC issuances (Rule 4, 2018 IRR of
R.A. No. 9160, as amended)

i. Real Estate Developers Professionals Excluded from “Covered

Refers to any natural or juridical person Persons”
engaged in the business of developing
real estate development project for the Notwithstanding the foregoing, the term ‘covered
account of the developer and offering persons’ shall exclude lawyers and accountants
them for sale or lease. (ibid.) acting as independent legal professionals
ii. Real Estate Brokers in relation to information concerning their
Refers to any natural or juridical person clients or where disclosure of information would
engaged in the business of developing compromise client confidences or the attorney-
real estate development project for the client relationship: Provided, That these lawyers
account of the developer and offering and accountants are authorized to practice in the
them for sale or lease. (ibid.) Philippines and shall continue to be subject to the
provisions of their respective codes of conduct
(7) Offshore gaming operators, as well as their and/or professional responsibility or any of its
service providers, supervised, accredited or amendments. (Sec. 3[a], R.A. No. 9160)
regulated by the Philippine Amusement and
Gaming Corporation (PAGCOR) or any General Rule Exception
government agency. (Sec. 2 of RA 11521 Lawyers and If they act as an
amending Sec. 3(a), RA 9160) accountants are “Independent
considered as Legal/Accounting
i. Offshore Gaming Operator Covered Persons Professional”. An
under the definition “Independent Legal or
in the AMLA. (Sec. 1, Accounting Professional”
Refers to an entity engaged in offering
Rule 4, 2018 IRR of refers to lawyers/accountants
online games of chance or sporting R.A. No. 9160, as working in a private firm or
events via the internet using a network amended) as a sole practitioner who,
and software program, by themselves or by way of business or
through local service providers. (ibid.) occupation, provides
purely legal or accounting
ii. Service Providers services to their clients.
(Sec. 1, Rule 2, 2018 IRR of
Refers to duly constituted business R.A. No. 9160, as amended)
corporations who provide components of
offshore gaming operations to offshore
gaming operators. (ibid.)

241
 OBLIGATIONS OF COVERED
INSTITUTIONS
(1) Customer identification - (“Know Your
Client” KYC)
Covered institutions shall establish and
record the true identity of its clients based on
official documents. They shall maintain a
system of verifying the true identity of their
clients and, in case of corporate clients,
require a system of verifying their legal
existence and organizational structure, as
well as the authority and identification of all
persons purporting to act on their behalf.
The provisions of existing laws to the contrary
notwithstanding, anonymous accounts,
accounts under fictitious names, and all other
similar accounts shall be absolutely
prohibited. Peso and foreign currency non-
checking numbered accounts shall be
allowed. (Sec. 9 [a], R.A. No. 9160)
(2) Record keeping
All records of all transactions of covered
institutions shall be maintained and safely
stored for five (5) years from the date of
transactions. With respect to closed
accounts, the records on customer
identification, account files and business
correspondence, shall be preserved and
safely stored for at least five (5) years from
the dates when they were closed. (Sec. 9 [b],
R.A. No. 9160)
Exception: If a case has been filed in court
involving the account, records must be
retained and safely kept beyond the five (5)-
year period, until it is officially confirmed by
the AMLC Secretariat that the case has been
resolved, decided or terminated with finality.
(Sec. 3, Rule 20, 2018 Implementing Rules and
Regulations of R.A. No. 9160, as amended)
The record keeping provisions under the
AMLA pertains to the obligation of covered
institutions to maintain and safely store all
records of transactions for five years for
purposes of determining possible violations of
the AMLA. A bank cannot use this provision
to escape proper accounting of client’s
deposits on the pretext that all documents
pertaining to closed accounts and settled
loans have already been disposed. Ultimately,
as between its five-year holding policy versus
its legal and jurisprudential fiduciary duty to
exercise the highest degree of care in
conducting its affairs, the latter consideration
certainly prevails. (Metrobank vs. Cruz, G.R. No.
221220, January 19, 2021)
(3) Reporting of covered and suspicious
transactions
General Rule: Exception:
Covered persons shall The AMLC prescribes
report to the AMLC all a different period not
covered transactions exceeding fifteen (15)
and suspicious working days.
transactions within
five (5) working days
from occurrence
thereof.
(Sec. 9, R.A. No. 9160, as amended by R.A. No.
10365)
Note: Should a transaction be determined to
be both a covered transaction and a
suspicious transaction, the covered person
shall be required to report the same as a
suspicious transaction. (ibid.)
According to the wording of R.A. No. 9160, the
AMLC “is not one of the covered institutions
prohibited from disclosing information on covered
and suspicious transactions,” and that the
rationale for the prohibition does not extend to
the AMLC. Unlike covered institutions, the AMLC
is mandated to investigate and file a case against
violators based on the information it obtains.
Furthermore, the prohibition and confidentiality
cannot apply to the AMLC; otherwise, it would
contravene its direct mandate under Sec. 7, R.A.
No. 9160.
AMLC is not merely a repository of reports and
information on covered and suspicious
transactions. It is created precisely to investigate
and institute charges against the offenders. Sec.
7 clearly states that it is tasked to institute civil
242
forfeiture proceedings and other remedial
proceedings, and to file complaints with the
Department of Justice or the Office of the
Ombudsman for anti-money laundering offenses.
The criminal prosecution of such offenses would
be unduly hampered if it were to be prohibited
from disclosing such information. For the AMLC to
refuse disclosing the information required of it
would be to go against its own functions under
the law. (Republic of the Philippines, Represented by
the AMLC v. Sandiganbayan. G.R. Nos. 232724-27,
Feb. 12, 2021)
Prohibited Communications
When reporting covered or suspicious
transactions to the AMLC, covered persons and
their officers and employees are prohibited from:
(1) Communicating, directly or indirectly, in any
manner or by any means, to any person, the
fact that a covered or suspicious transaction
report was made, the contents thereof, or
any other information in relation thereto.
NOTE: If the reporting is done by any person
in the regular performance of his duties in
good faith, no administrative, criminal, or civil
proceedings shall lie against said person,
whether or not such reporting results in any
criminal prosecution under this Act of any
other law (Safe Harbor Provision).
(2) Communicating, directly or indirectly, in any
manner or by any means, to any person or
entity, the media, the fact that a covered or
suspicious transaction has been reported or
is about to be reported, the contents of the
report, or any other information in relation
thereto.
(3) Publishing or airing such reporting in any
manner or form by the mass media,
electronic mail, or other similar devices.
In case of violation of these prohibitions, the
concerned officer and employee of the covered
person and media shall be held criminally liable
(Sec. 9, R.A. No. 9160)
3. COVERED TRANSACTIONS
Refers to any act establishing any right or
obligation or giving rise to any contractual or legal
relationship between the parties thereto. It also
includes any movement of funds by any means
with a covered institution. (Sec. 3[h], R.A. No.
9160)
COVERED TRANSACTIONS
It is a transaction in cash or other equivalent
monetary instrument involving a total amount in
excess of P500,000.00 within one banking day.
(Sec. 3[b], R.A. No. 9160, as amended by R.A. No.
10927)
Exceptions:
(1) For casinos
a single casino transaction involving an
amount in excess of P5 Million or its
equivalent in any other currency (Sec. 3[a][8],
R.A. No. 9160, as amended by R.A. No. 10927);
(2) For real estate developers and brokers
a single cash transaction involving an amount
in excess of Seven million five hundred
thousand pesos (P7,500,000.00) or its is
equivalent in any other currency (Sec. 3[b],
R.A. No. 9160, as amended by R.A No. 11521).
4. SUSPICIOUS TRANSACTIONS
SUSPICIOUS TRANSACTIONS
“Suspicious transactions” are transactions with
covered institutions, regardless of the amounts
involved, where any of the following
circumstances exist:
(1) There is no underlying legal or trade
obligation, purpose or economic justification;
(2) The client is not properly identified;
(3) The amount involved is not commensurate
with the business or financial capacity of the
client;
(4) Taking into account all known circumstances,
it may be perceived that the client’s
transaction is structured in order to avoid
being the subject of reporting requirements
under Act;
243
(5) Any circumstance relating to the transaction
which is observed to deviate from the profile
of the client and/or the client’s past
transactions with the covered institution.
(6) The transactions is in anyway related to an
unlawful activity or offense under this Act
that is about to be, is being or has been
committed; or
(7) Any transaction that is similar or analogous to
any of the foregoing. (Sec. 3[b-1], R.A. No.
9160, as amended by R.A No. 11521).
Distinction between a "covered transaction
report and a "suspicious transaction report
A covered transaction report involves
transaction/s in cash or other equivalent
monetary instrument involving generally a total
amount in excess of P500,000.00 within one (1)
banking day, while suspicion transaction report
involves transactions with cover institutions
regardless of the amounts involved made under
any the suspicious circumstances enumerated by
law. (Bar 2015; Divina, Divina on Commercial Law a
Comprehensive Guide Vol. II, 2021, p. 168)
Prohibited Acts During Reporting of
Covered or Suspicious Transactions
When reporting covered or suspicious
transactions, covered institution and its officers
and employees are prohibited from:
(1) Communicating to any person or media of
such fact
(2) Publish or air such report by the mass media,
e-mail, or other device (Sec. 9[c], R.A. No.
9160).
5. SAFE HARBOR PROVISION
When reporting covered or suspicious
transactions to the AMLC, covered institutions
and their officers and employees, shall not be
deemed to have violated the secrecy of bank
deposits law and similar laws. (Rule 9.3.c., RIRR)
In fact, no administrative, criminal or civil
proceedings shall lie against any person for
having made a covered or suspicious transaction
report in the regular performance of his duties
and in good faith, whether or not such reporting
results in any criminal prosecution under this Act
or any other Philippine law (Rule 9.3.e, RIRR, in
relation to Sec. 7, AMLC Regulatory Issuance A, B, and
C No. 1 Series of 2021)
Immunity from Other Laws
When reporting covered or suspicious
transactions, the covered institution is deemed
not to have violated:
(1) The Law on Secrecy of Bank Deposits of R.A.
No. 1405, as amended;
(2) Foreign Currency Deposit Act of the
Philippines or R.A. No. 6426, as amended;
(3) General Banking Law of 2000 or R.A. No.
8791; and
(4) Other similar laws. (Sec. 9[c], R.A. No. 9160, as
amended by R.A. No. 9194)
6. MONEY LAUNDERING
(HOW COMMITTED; UNLAWFUL
ACTIVITIES OR PREDICATE CRIMES)
Money Laundering
A crime whereby the proceeds of an unlawful
activity are transacted, thereby making them
appear to have originated from legitimate
sources. (Sec. 4, R.A. No. 9160)
Laundering: The term used to describe
investment or other transfer of money flowing
from racketeering, drug transactions, and other
illegal sources into legitimate channels so that its
original source cannot be traced. (Black’s Law
Dictionary, 6th ed.)
HOW COMMITTED
Money Laundering is also committed by any
covered person who, knowing that a covered or
suspicious transaction is required under this Act
to be reported to the AMLC, fails to do so.
Elements:
(1) The monetary instrument or property
represents, involves or relates to the
proceeds of any unlawful activity;
244
(2) Knowledge of the offender that the monetary
instrument or property represents, involves
or relates to the
(3) proceeds of the unlawful activity;
(4) The offender commits any of the following:
(a) Transacts said monetary instrument or
property;
(b) Converts, transfers, disposes of, moves,
acquires, possesses or uses said
monetary instrument or property;
(c) Conceals or disguises the true nature,
source, location, disposition, movement
or ownership of or rights with respect to
said monetary instrument or property;
(d) Attempts or conspires to commit money
laundering offenses referred to in
paragraphs (1), (2) or (3);
(e) Aids, abets, assists in or counsels the
commission of the money laundering
offenses referred to in paragraphs (1),
(2) or (3) above; and
(f) Performs or fails to perform any act as a
result of which he facilitates the offense
of money laundering referred to in
paragraphs (1), (2) or (3) above. (Sec. 4,
R.A. No. 10365, amending Sec. 4, R.A. No.
9160)
Failure to file a report as a money
laundering offense
Any covered institution or person who, knowing
that a covered or suspicious transaction is
required under the Anti-Money Laundering Act to
be reported to the Anti-Money Laundering
Council, fails to do so. (Sec. 4, R.A. No. 9160, as
amended by R.A. No. 9194 and R.A. No. 10365)
“Monetary Instrument” refers to proceeds of, or
instruments related to an unlawful activity. This
may refer to any of the following:
(1) Coins or currency of legal tender of the
Philippines, or of any other country;
(2) Drafts, checks, and notes;
(3) Securities or negotiable instruments, bonds,
commercial papers, deposit certificates,
trust certificates, custodial receipts, or
deposit substitute instruments, trading
orders, transaction tickets and confirmations
of sale or investments and money market
instruments; and
(4) Other similar instruments where title thereto
passes to another by endorsement,
assignment, or delivery. (Sec. 3[c], R.A. No.
9160)
Three Basic Steps in Money Laundering
(1) Placement
At this stage, the launderer inserts the dirty
money into a legitimate financial institution
usually in the form of cash bank deposits.
(2) Layering
Involves sending money through various
financial transactions to change its form and
make it more difficult to follow. It may consist
of bank-to-bank transfers, changing
currency, or purchasing high value items.
(3) Integration
The money re-enters mainstream economy in
legitimate-looking form, appearing to have
come from some legitimate transaction.
UNLAWFUL ACTIVITIES OR PREDICATE
CRIMES
“Unlawful activity” refers to any act or omission
or series or combination thereof involving or
having direct relation to the following:
(1) Kidnapping for ransom under Article 267 of
Act No. 3815, otherwise known as the
Revised Penal Code, as amended;
(2) Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15
and 16 of Republic Act No. 9165, otherwise
known as the Comprehensive Dangerous
Drugs Act of 2002;
(3) Section 3 paragraphs B, C, E, G, H and I of
Republic Act No. 3019, as amended,
otherwise known as the Anti-Graft and
Corrupt Practices Act;
(4) Plunder under Republic Act No. 7080, as
amended;
(5) Robbery and extortion under Articles 294,
295, 296, 299, 300, 301 and 302 of the
Revised Penal Code, as amended;
(6) Jueteng and Masiao punished as illegal
gambling under Presidential Decree No.
1602;
245
(7) Piracy on the high seas under the Revised
Penal Code, as amended and Presidential
Decree No. 532;
(8) Qualified theft under Article 310 of the
Revised Penal Code, as amended;
(9) Swindling under Article 315 and Other
Forms of Swindling under Article 316 of the
Revised Penal Code, as amended;
(10) Smuggling under Republic Act Nos. 455
and 1937;
(11) Violations of Republic Act No. 8792,
otherwise known as the Electronic
Commerce Act of 2000;
(12) Hijacking and other violations under
Republic Act No. 6235; destructive arson
and murder, as defined under the Revised
Penal Code, as amended;
(13) Terrorism and conspiracy to commit
terrorism as defined and penalized under
Sections 3 and 4 of Republic Act No. 9372;
(14) Financing of terrorism under Section 4 and
offenses punishable under Sections 5, 6, 7
and 8 of Republic Act No. 10168, otherwise
known as the Terrorism Financing
Prevention and Suppression Act of 2012:
(15) Bribery under Articles 210, 211 and 211-A
of the Revised Penal Code, as amended,
and Corruption of Public Officers under
Article 212 of the Revised Penal Code, as
amended;
(16) Frauds and Illegal Exactions and
Transactions under Articles 213, 214, 215
and 216 of the Revised Penal Code, as
amended;
(17) Malversation of Public Funds and Property
under Articles 217 and 222 of the Revised
Penal Code, as amended;
(18) Forgeries and Counterfeiting under Articles
163, 166, 167, 168, 169 and 176 of the
Revised Penal Code, as amended;
(19) Violations of Sections 4 to 6 of Republic Act
No. 9208, otherwise known as the Anti-
Trafficking in Persons Act of 2003;
(20) Violations of Sections 78 to 79 of Chapter
IV, of Presidential Decree No. 705,
otherwise known as the Revised Forestry
Code of the Philippines, as amended;
(21) Violations of Sections 86 to 106 of Chapter
VI, of Republic Act No. 8550, otherwise
known as the Philippine Fisheries Code of
1998;
(22) Violations of Sections 101 to 107, and 110
of Republic Act No. 7942, otherwise known
as the Philippine Mining Act of 1995;
(23) Violations of Section 27(c), (e), (f), (g) and
(i), of Republic Act No. 9147, otherwise
known as the Wildlife Resources
Conservation and Protection Act;
(24) Violation of Section 7(b) of Republic Act No.
9072, otherwise known as the National
Caves and Cave Resources Management
Protection Act;
(25) Violation of Republic Act No. 6539,
otherwise known as the Anti-Carnapping
Act of 2002, as amended;
(26) Violations of Sections 1, 3 and 5 of
Presidential Decree No. 1866, as amended,
otherwise known as the decree Codifying
the Laws on Illegal/Unlawful Possession,
Manufacture, Dealing In, Acquisition or
Disposition of Firearms, Ammunition or
Explosives;
(27) Violation of Presidential Decree No. 1612,
otherwise known as the Anti-Fencing Law;
(28) Violation of Section 6 of Republic Act No.
8042, otherwise known as the Migrant
Workers and Overseas Filipinos Act of
1995, as amended by Republic Act No.
10022;
(29) Violation of Republic Act No. 8293,
otherwise known as the Intellectual
Property Code of the Philippines;
(30) Violation of Section 4 of Republic Act No.
9995, otherwise known as the Anti-Photo
and Video Voyeurism Act of 2009;
(31) Violation of Section 4 of Republic Act No.
9775, otherwise known as the Anti-Child
Pornography Act of 2009;
(32) Violations of Sections 5, 7, 8, 9, 10(c), (d)
and (e), 11, 12 and 14 of Republic Act No.
7610, otherwise known as the Special
Protection of Children Against Abuse,
Exploitation and Discrimination;
(33) Fraudulent practices and other violations
under Republic Act No. 8799, otherwise
known as the Securities Regulation Code of
2000 (Sec. 3[i], R.A. No. 9160 as amended
by R.A. No. 10365, amending)
246
 The following are the amendments
introduced under RA 11521
(34) Violation of Section 19 (a)(3) of Republic
Act No. 10697, otherwise known as the
‘Strategic Trade Management Act’, in
relation to the proliferation of weapons of
mass destruction and its financing
pursuant to United Nations Security
Council Resolution Numbers 1718 of 2006
and 2231 of 2015;
(35) Violations of Section 254 of Chapter II,
Title X of the National Internal Revenue
Code of 1997, as amended, where the
deficiency basic tax due in the final
assessment is in excess of Twenty-five
million pesos (PhP 25,000,000.00) per
taxable year, for each tax type covered and
there has been a finding of probable cause
by the competent authority; Provided,
further, That there must be a finding of
fraud, willful misrepresentation or
malicious intent on the part of the
taxpayer: Provided, finally, That in no case
shall the AMLC institute forfeiture
proceedings to recover monetary
instruments, property, or proceeds
representing, involving, or relating to a tax
crime, if the same has already been
recovered or collected by the Bureau of
Internal Revenue (BIR) in a separate
proceeding; and
(36) Felonies and offenses of a similar nature
that are punishable under the penal laws
of other countries. (Sec. 3[i], R.A. No. 9160
as amended by R.A. No. 11521)
Finding of Probable Cause
The Court finds probable cause to charge for
money laundering as defined in Section 4(a) of
RA 9160 when:
(1) There was only one beneficial owner of the
471 bank accounts with the Legacy Banks of
the 86 individual depositor’s respondent
Manu Gidwani;
(2) when 142 of these 471 accounts, with the
total amount of P20,966,439.09, were in the
names of helpers and rank-and-file
employees of the Gidwani spouses who do
not have the financial capacity to deposit the
amounts recorded under their names;
(3) when the helpers and rank-and-file
employees who reside and are employed in
Bacolod City maintained bank accounts in
Legacy Banks located in different parts of the
country.
(4) That these individuals reported either
respondent Manu's office or business address
as their own further arouses serious suspicion
on the true ownership of the funds deposited.
It gives the impression that the helpers and the
rank-and-file employees had been used by
respondent as dummies, and their purported
ownership mere subterfuge, in order to increase
the amount of his protected deposit. (PDIC v.
Gidwani, G.R. 234616, June 20, 2018)
7. ANTI-MONEY LAUNDERING COUNCIL
AND ITS FUNCTIONS
Creation of Anti-Money Laundering Council
(AMLC).
The Anti-Money Laundering Act created the entity
known as the Anti-Money Laundering Council
(AMLC).
The AMLC is composed of:
(1) Governor of Bangko Sentral ng Pilipinas as its
Chairman;
(2) The Commissioner of the Insurance
Commission as a member;
(3) The Chairman of the Securities and Exchange
Commission as a member. (Sec. 7, R.A. No.
9160, as amended by R.A. No. 9194 and R.A. No.
10365)
The AMLC shall act unanimously in the discharge
of its functions.
Functions of the Anti-Money Laundering
Council
The AMLC has the following functions:
(1) Require and receive covered or suspicious
transaction reports from covered institutions
and persons (Sec. 7, R.A. No. 9160, as
amended by R.A. No. 9194);
247
(2) Issue orders addressed to the appropriate
Supervising Authority or the covered
institution to determine the true identity of
the owner of any monetary instrument or
property subject to a covered transaction
or suspicious transaction report or request
for assistance from a foreign State, or
believed by the AMLC, on the basis of
substantial evidence, to be, in whole or in
part, wherever located, representing,
involving, or related to, directly or
indirectly, in any manner or by any means,
the proceeds from an unlawful activity R.A.
No. 9160, Sec. 7, as amended by R.A. No.
9194;
(3) Institute civil forfeiture proceedings and all
other remedial proceedings through the
Office of the Solicitor General (Sec. 7, R.A.
No. 9160);
(4) Cause the filing of complaints with the
Department of Justice or the Ombudsman
for the prosecution of money laundering
offenses;
(5) Investigate suspicious transactions and
covered transactions deemed suspicious
after an investigation by the AMLC, money
laundering activities, and other violations
of the AMLA (Sec. 7, R.A. No. 9160 as
amended by R.A. No. 9194);
(6) Apply before the Court of Appeals, ex parte
for the freezing of any monetary
instrument or property alleged to be
laundered, proceeds from, or
instrumentalities used or intended to be
used in any unlawful activity (R.A. No.
9160 as amended by R.A. No. 10365);
(7) Implement such measures as may be
necessary and justified under the AMLA to
counteract money laundering (Sec 7, R.A.
No. 9160);
(8) Receive and take action in respect of, any
request from foreign states for assistance
in their own anti-money laundering
operations (Sec 7, R.A. No. 9160);
(9) Develop educational programs on the
pernicious effects of money laundering, the
methods and techniques used in money
laundering, the viable means of preventing
money laundering and the effective ways
of prosecuting and punishing offenders
(Sec. 7, R.A. No. 9160);
(10) Enlist the assistance of any branch,
department, bureau, office, agency, or
instrumentality of the government,
including government-owned and
controlled corporations, in undertaking any
and all anti- money laundering operations,
which may include the use of its personnel,
facilities and resources for the more
resolute prevention, detection, and
investigation of money laundering offenses
and prosecution of offenders (Sec. 7, R.A.
No. 9160);
(11) Impose administrative sanctions for the
violation of laws, rules, regulations and
orders, and resolutions issued pursuant
thereto (Sec. 7, R.A. No. 9160, as amended
by R.A. No. 9194);
(12) Require the Land Registration Authority
and all its Registries of Deeds to submit to
the AMLC reports on all real estate
transactions involving an amount in excess
of Five Hundred Thousand Pesos
(P500,000.00) within fifteen (15) days
from the date of the registration of the
transaction, in a form to be prescribed by
the AMLC. The AMLC may also require the
Land Registration Authority and all its
Registries of Deeds to submit copies of
relevant documents of all real estate
transactions. (Sec. 7, R.A. No. 9160, as
amended by R.A. No. 10365)
Additional functions of AMLC under Sec. 3, R.A.
10365, 2021, amending Sec. 7, R.A. No. 9160.
(13) in the conduct of its investigation, the
AMLC shall apply for the issuance of a
search and seizure order with any
competent court;
(14) in the conduct of its investigation, the
AMLC shall apply for the issuance
of subpoena ad
testificandum and/or subpoena duces
tecum with any competent court;
(15) to implement targeted financial sanctions
in relation to proliferation of weapons of
mass destruction and its financing,
including ex parte freeze, without delay,
248
 against all funds and other assets that are
owned and controlled, directly or indirectly,
including funds and assets derived or
generated therefrom, by individuals or
entities designated and listed under United
Nations Security Council Resolution
Numbers 1718 of 2006 and 2231 of 2015
and their successor resolutions as well as
any binding resolution of the Security
Council; and
(16) to preserve, manage or dispose assets
pursuant to a freeze order, asset
preservation order, or judgment of
forfeiture: Provided, however, that
pending their turnover to the national
government, all expenses incurred in
relation to the duties herein mentioned
shall be deducted from the amount to be
turned over to the national government.
(Sec. 3, R.A. 10365)
The Anti-Money Laundering Council is not merely
a repository of reports and information on
covered and suspicious transactions. It was
created precisely to investigate and institute
charges against those suspected to commit
money laundering activities.
The criminal prosecution of such offenses would
be unduly hampered if it were to be prohibited
from disclosing such information. For the Anti-
Money Laundering Council to refuse disclosing
the information required of it would be to go
against its own functions under the law. (Republic
v. Sandiganbayan, G.R. Nos. 232724-27, February 15,
2021)
Function of the AMLC and its Secretariat:
Information Security and Confidentiality.
The AMLC and its Secretariat shall securely
protect information received or processed and
shall not reveal, in any manner, any information
known to them by reason of their office. This
prohibition shall apply even after their separation
from the AMLC. (Sec. 4, R.A. No. 11521, a new Sec.
8-A was after Section 8 (Creation of a Secretariat) of
R.A. No. 9160)
Executive Director
To support the AMLC, a secretariat is established
headed by an Executive Director who shall be
appointed by the Council for a term of five (5)
years. He must be a member of the Philippine
Bar, at least thirty-five (35) years of age and of
good moral character, unquestionable integrity
and known probity. All members of the
Secretariat must have served for at least five (5)
years either in the BSP, IC, or SEC, and shall hold
full-time permanent positions within the BSP.
(Rule 8 [A], 2016 RIRR of R.A. No. 9160, as amended)
8. AUTHORITY TO INQUIRE INTO BANK
DEPOSITS
Extraordinary Power - Authority to Inquire
into Bank Deposits.
The AMLC may inquire into or examine any
particular deposit or investment with any banking
institution or non-bank financial institution. This
can be either upon order of the court or even
without court order in certain exceptional cases.
(Sec 11, RA 9160)
A court order ex parte must first be obtained
before the AMLC can inquire into Related
Accounts. (Sec 1[1.2], Rule 11, 2018 IRR, RA 9160)
AMLC may inquire into or examine any particular
deposit or investment, including related accounts,
with any banking institution or non-bank financial
institution upon order of any competent court
based on an ex parte application in cases of
violations of this Act, when it has been
established that there is probable cause that
the deposits or investments, including related
accounts involved, are related to an unlawful
activity as defined in Section 3(i) (unlawful
activities) hereof or a money laundering offense
under Section 4. (Sec. 11, R.A. No. 9160 as amended
by R.A. No. 10167)
SEC. 11. Authority to Inquire into Bank
Deposits.
Elements of Sec. 11 of the AMLA as
amended
(1) Ex-parte application by the AMLC;
249
(2) Determination of probable cause by the CA;
and
(3) In case of exception from court order in cases
involving unlawful activities defined in Secs.
3(i)(1), (2), and (12). (Subido Pagente Certeza
Mendoza and Binay Law Offices vs. CA., G.R. No.
216914, December 6, 2016)
First Element: Court Order Ex Parte must
first be obtained before the AMLC can inquire into
these related Accounts: Provided, That the
procedure for the ex parte application of the ex
parte court order for the principal account shall
be the same with that of the related accounts.
Court of Appeals action on application
within 24 Hours
Court of Appeals shall act on the application to
inquire into or examine any deposit or investment
with any banking institution or non-bank financial
institution within twenty-four (24) hours from
filing of the application.
Authority of BSP to check compliance
Bangko Sentral ng Pilipinas may, in the course of
a periodic or special examination, check the
compliance of a Covered institution with the
requirements of the AMLA and its implementing
rules and regulations.
Definition of Related Accounts
Related Accounts shall refer to accounts, the
funds and sources of which originated from
and/or are materially linked to the monetary
instrument(s) or property(ies) subject of the
freeze order(s).
Second Element: Probable Cause.
In the context of bank inquiry, probable cause
refers to such facts and circumstances which
would lead a reasonably discreet, prudent, or
cautious man to believe that any monetary
instrument or property sought to be inquired into
is in any way related to any unlawful activity
and/or money laundering offense. Otherwise
stated, it is necessary to show specific facts and
circumstances that provide a link between an
unlawful activity or a money laundering offense,
on the one hand, and the account or monetary
instrument or property sought to be examined on
the other hand. (Republic v. Bolante. G.R. No.
186717, April 17, 2017)
Bank Inquiry is not a search warrant or
warrant of arrest. A bank inquiry order does
not necessitate a finding of probable cause similar
to that in search warrant or warrant of arrest. The
Constitution and the Rules of Court prescribe
particular requirements attaching to search
warrants that are not imposed by the AMLA with
respect to bank inquiry orders. A constitutional
warrant requires that the judge personally
examine under oath or affirmation the
complainant and the witnesses he may produce,
such examination being in the form of searching
questions and answers. Those are impositions
which the legislative did not specifically prescribe
as to the bank inquiry order under the AMLA.
Simply put, a bank inquiry order is not a search
warrant or warrant of arrest as it contemplates a
direct object but not the seizure of persons or
property. (Republic vs. Eugenio. G.R. No. 174629,
February 14, 2008)
Third Element (optional): Without Court
Order
Except that no court order shall be required in
cases involving activities defined below:
(1) Sec. 3(i)(1) or Kidnapping for ransom under
Art. 267 of Act No. 3815, otherwise known as
the Revised Penal Code, as amended;
(2) Sec. 3(i)(2) or Sections 3, 4, 5, 7, 8 and 9 of
Article 2, R.A. No. 6425, as amended,
otherwise known as the Dangerous Drugs Act
of 1972;
(3) Sec. 3(i)(12) or Hijacking and other violations
under R.A. No. 6235; destructive arson and
murder, as defined under the Revised Penal
Code, as amended, including those
perpetrated by terrorists against non-
combatant persons and similar targets;
(4) Felonies or offenses of a nature similar to
those mentioned in Section 3(i)(1), (2), and
(12), which are Punishable under the penal
laws of other countries, and terrorism and
conspiracy to commit terrorism as defined
and penalized under R.A. No. 9372. (Sec. 11,
R.A. No. 9160 as amended by R.A. No. 10167)
250
Constitutional Requirement
The authority to inquire into or examine the main
account and the related accounts shall comply
with the requirements of Article III, Sections
2 and 3 of the 1987 Constitution, which are
hereby incorporated by reference.
No Condition Precedent
No prior criminal charge, pendency of a case, or
conviction for an unlawful activity or money
laundering offense is necessary for the filing or
the resolution of an application for issuance of
bank inquiry order. If the contrary position is
adopted, then the bank inquiry order would be
limited in purpose as a tool in aid of litigation of
live cases, and wholly inutile as a means for the
government to ascertain whether there is
sufficient evidence to sustain an intended
prosecution of the account holder for violation of
the AMLA. Should that be the situation, in all
likelihood, the AMLC would be virtually deprived
of its character as a discovery tool, and thus
would become less circumspect in filing
complaints against suspect account holders. After
all, under such set-up the preferred strategy
would be to allow or even encourage the
indiscriminate filing of complaints under the AMLA
with the hope or expectation that the evidence of
money laundering would somehow surface during
the trial. Since the AMLC could not make use of
the bank inquiry order to determine whether
there is evidentiary basis to prosecute the
suspected malefactors, not filing any case at all
would not be an alternative. (Republic vs. Eugenio.
G.R. No. 174629, February 14, 2008)
Section 11 of R.A. No. 9160 does not violate
procedural due process
AMLC, in investigating probable money
laundering activities, does not exercise quasi-
judicial powers, but merely acts as an
investigatory body with the sole power of
investigation similar to the functions of the
National Bureau of Investigation (NBI). Hence,
the ex parte application for the bank inquiry order
cannot be said to violate any person's
constitutional right to procedural due process.
(Estrada v. Sandiganbayan, AMLC, and People of the
Philippines, G.R. 217682, July 17, 2018)
As the AMLC does not exercise quasi-judicial
functions, its inquiry by court order into bank
deposits or investments cannot be said to violate
any person's constitutional right to procedural
due process. (Anti-Money Laundering Council v.
Bolante et. al, G.R. 186717, April 17, 2017)
There is no violation of substantive due process,
because the physical seizure of the targeted
corporeal property is not contemplated in any
form by the law. The AMLC may indeed be
authorized to apply ex parte for an inquiry into
bank accounts, but only in pursuance of its
investigative functions akin to those of the
National Bureau of Investigation. (Anti-Money
Laundering Council v. Bolante et. al, G.R. 186717, April
17, 2017)
Section 11 of R.A. No. 9160 does not violate
right to privacy
The source of the right to privacy respecting bank
deposits is statutory, not constitutional; hence,
the Congress may validly carve out exceptions to
the rule on the secrecy of bank deposits, as
illustrated in Section 11 of R.A. No. 9160. (Estrada
v. Sandiganbayan, AMLC, and People of the
Philippines, G.R. 217682, July 17, 2018)
Section 11 of R.A. 9160 does not violate the
proscription against ex post facto laws
The amendment introduced by R.A. No. 10167
does away with the notice to the account holder
at the time when the bank inquiry order is applied
for. The elimination of the requirement of notice,
by itself, is not a removal of any lawful protection
to the account holder because the AMLC is only
exercising its investigative powers at this stage.
Indeed, R.A. No. 10167, in recognition of the ex
post facto clause of the Constitution, explicitly
provides that "the penal provisions shall not apply
to acts done prior to the effectivity of the AMLA
on October 17, 2001.
Furthermore, the AMLC's inquiry and examination
into bank accounts are not undertaken
whimsically based on its investigative discretion.
251
The AMLC and the CA are respectively required to
ascertain the existence of probable cause before
any bank inquiry order is issued. Section 11 of
R.A. 9160, even with the allowance of an ex parte
application therefor, cannot be categorized as
authorizing the issuance of a general warrant.
This is because a search warrant or warrant of
arrest contemplates a direct object but the bank
inquiry order does not involve the seizure of
persons or property.
Lastly, the holder of a bank account subject of a
bank inquiry order issued ex parte is not without
recourse. He has the opportunity to question the
issuance of the bank inquiry order after a freeze
order is issued against the account. He can then
assail not only the finding of probable cause for
the issuance of the freeze order, but also the
finding of probable cause for the issuance of the
bank inquiry order. (Estrada v. Sandiganbayan,
AMLC, and People of the Philippines, G.R. 217682, July
17, 2018)
The Court clarified that the AMLC, in investigating
probable money laundering activities, does not
exercise quasi-judicial powers, but merely acts as
an investigatory body with the sole power of
investigation similar to the functions of the
National Bureau of Investigation (NBI). Hence,
the ex parte application for the bank inquiry order
cannot be said to violate any person's
constitutional right to procedural due
process. Also, the source of the right to privacy
respecting bank deposits is statutory, not
constitutional; hence, the Congress may validly
carve out exceptions to the rule on the secrecy of
bank deposits, as illustrated in Section 11 of R.A.
No. 9160. (ibid.)
Related Accounts
Related accounts shall refer to accounts, funds
and sources of which originated from and/or are
materially linked to the monetary instruments or
properties subject of the freeze order(s) or an
order of inquiry, regardless of the layer of
accounts that the funds had passed through or
transactions that they had undergone. (Sec. 1,
Rule 2, 2018 IRR, R.A. No.9160)
Note: The Court of Appeals must act on the
application within 24 hours from the filing
thereof.
The power to determine the existence of
probable cause is lodged in the trial court
In the issuance of a bank inquiry order, the power
to determine the existence of probable cause is
lodged in the trial court. The court receiving the
application for inquiry order cannot simply take
the AMLC's word that probable cause exists that
the deposits or investments are related to an
unlawful activity. It will have to exercise its own
determinative function to be convinced of such
fact.
Requisites in Issuance of a Bank Inquiry
Order
For the trial court to issue a bank inquiry order, it
is necessary for the AMLC to be able to show:
(1) Specific facts and circumstances that provide
a link between an unlawful activity or a
money laundering offense, and
(2) The account or monetary instrument or
property sought to be examined. (Anti-Money
Laundering Council v. Bolante et. al, G.R. 186717,
April 17, 2017)
Court Order as a requisite to inquiry
Examination In cases of violations of AMLA,
by AMLA when it has been established
where the upon ex parte application that
Court Order there is probable cause that the
required deposits or investments including
related accounts involved are
related to.
(1) An Unlawful Activity; or
(2) A Money laundering offense
(Sec. 11, R.A. No. 9160)
Note: On the issue of
constitutionality of Sec. 11 of
AMLA, the Supreme Court held
that the Sec. 11 providing for ex-
parte application and inquiry by
the AMLC into certain bank
deposits and investments does
not violate substantive due
252
 process, there being no physical
seizure of property involved at
that stage. A bank inquiry order
under Sec. 11 does not
necessitate any form of physical
seizure of property of the account
holder. What the bank inquiry
order authorizes is the
examination of the particular
deposits or investments in
banking institutions or non-bank
financial institutions.
The monetary instruments or
property deposited with such
banks or financial institutions are
not seized in a physical sense, but
are examined on particular
details such as the account
holder's record of deposits and
transactions. (Subido vs. CA, G.R.
No. 216914, December 06, 2016)
Examination (1) Kidnapping for ransom
by AMLA under Article 267 of Act No.
where the 3815, otherwise known as
Court Order is the Revised Penal Code, as
not required amended;
(2) Sections 4, 5, 6, 8, 9, 10, 11,
12, 13, 14, 15 and 16 of
Republic Act No. 9165,
otherwise known as the
Comprehensive Dangerous
Drugs Act of 2002;
(3) Hijacking and other
violations under Republic
Act No. 6235; destructive
arson and murder, as
defined under the Revised
Penal Code, as amended;
(4) Felonies or offenses of a
nature similar to those
mentioned in Section 3(i)
(1), (2), and (12) which are
punishable under the penal
laws of other countries;
Terrorism and conspiracy to
commit terrorism as defined
and penalized under
Republic Act No. 9372; and
(Sec. 11, AMLA)
(5) Financing of terrorism under
Section 4 and offenses
punishable under Sections
5, 6, 7 and 8 of the
Terrorism Financing
Prevention and Suppression
Act (TFPSA). (Sec. 2.1, 2018
RIRR of AMLA)
AMLC may inquire into the bank deposits
even without court order
AMLC may inquire into the bank deposits even
without court orderbut only in exceptional cases.
Section 11, AMLA, as amended by R.A. No.
10167, provides that the “AMLC may inquire into
or examine any particular deposit or investment,
including related accounts, with any banking
institution or non-bank financial institution. This
can be either upon order of the court or even
without court order in certain exceptional cases.”
Section 11 allows the AMLC to inquire into bank
accounts without having to obtain a judicial order
in cases where there is probable cause that the
deposits or investments are related to kidnapping
for ransom, certain violations of the
Comprehensive Dangerous Drugs Act of 2002,
hijacking and other violations under R.A. No.
6235, destructive arson and murder. Absent any
of the mentioned predicate crimes, a court order
is necessary to inquire into bank deposits.
(Republic vs. Eugenio, G.R. No. 174629, February 14,
2008)
Note: By virtue of R.A. No. 10168, Anti-Financing
of Terrorism is now included as one of the
predicate crimes where a court order is not
necessary to examine or inquire into bank
deposits.
Examination by AMLA should comply with
the requirement of the Constitution
The authority of AMLC to inquire into or examine
the main account and the related accounts shall
comply with the requirements of Article III,
Sections 2 and 3 of the 1987 Constitution.
Inquiry into deposit does not require pre-
existing criminal case
Inquiry into deposits under Section 11 does not
require a pre-existing criminal case. (Republic vs.
Eugenio, G.R. No. 174629, February 14, 2008)
253
The holder of the bank account can
question the issuance of bank inquiry order
The holder of a bank account that is the subject
of a bank inquiry order issued ex parte has the
opportunity to question the issuance of such an
order after a freeze order has been issued against
the account.
The account holder can then question
(1) The finding of probable cause for the
issuance of the freeze order, and;
(2) The finding of probable cause for the
issuance of the bank inquiry order. (Anti-
Money Laundering Council v. Bolante et. al, G.R.
186717, April 17, 2017)
9. FREEZING OF MONETARY
INSTRUMENT OR PROPERTY
A Freeze Order is an order issued by the Court of
Appeals that blocks or restrains monetary
instruments or properties in any way related to
an unlawful activity from being transacted,
withdrawn, deposited, transferred, removed,
converted, concealed, or otherwise moved or
disposed without affecting the ownership. This is
in line with the state policy of our Anti-Money
Laundering laws to protect and preserve the
integrity of the Philippine financial system.
A freeze order is a provisional remedy aimed at
blocking or restraining monetary instruments or
properties in any way related to an unlawful
activity from being transacted, converted,
concealed, moved, or disposed without affecting
the ownership thereof. It is an extraordinary and
interim relief to prevent the dissipation, removal,
or disposal of properties that are suspected to be
the proceeds of, or related to, unlawful activities.
The relief is pre-emptive in character, meant to
prevent the owner from disposing his property
and thwarting the State’s effort in building its
case and eventually filing civil forfeiture
proceedings and/or prosecuting the owner. (Ligot
v. Republic, G.R. No. 176944, March 6, 2013)
A provisional asset preservation aimed at
preserving monetary instruments or properties in
any way related to an unlawful activity or money
laundering offense for a period of twenty (20)
days during which time the court shall determine
whether the same should be modified or lifted or
an asset preservation order should issue and act
accordingly. The provisional asset preservation
order shall be issued ex parte and if probable
cause is established. (Republic of the Philippines,
Represented by the AMLC vs. Ng and Metropolitan
Bank and Trust Company, G.R. No. 239047, June 16,
2021)
Nature of Freeze Order
A Freeze Order is temporary in nature. However,
the period of six months may be extended in
certain cases. (Ibid.)
A freeze order is merely an interim relief and pre-
emptive in character, such that the monetary
instruments or property that are in any way
related to an unlawful activity or money
laundering are temporarily preserved by
preventing the owner from utilizing them during
the duration of the freeze order. Moreover,
Section 10 of R.A. 9160, as amended, provides
clearly that the freeze order shall be ipso
facto lifted if there is no case filed against a
person whose account was frozen within the
period determined by the CA, but not exceeding
6 months. In other words, the freeze order is not
permanent and it is time-bound. (Beacon Currency
Exchange, Inc. v. Republic, G.R. No. 255099 (Notice),
March 18, 2021)
The relief is pre-emptive in character, meant to
prevent the owner from disposing his property
and thwarting the State's effort in building its
case and eventually filing civil forfeiture
proceedings and/or prosecuting the
owner. (Yambao v. Republic, G.R. No. 171054,
January 26, 2021)
Section 10. Freezing Monetary Instrument
or Property
Issuing Upon a verified ex parte petition by
Court and the AMLC and after determination
Period of that probable cause exists that any
monetary instrument or property is
effectivity of
in any way related to an unlawful
254
the Freeze activity as defined in Section 3(i)
Order hereof, the Court of Appeals may
issue a freeze order which shall be
effective immediately, for a period
of twenty (20) days.
Summary Within the twenty (20) day period,
Hearing to the Court of Appeals shall conduct
Determine a summary hearing, with notice to
the parties, to determine whether
Modification
or not to modify or lift the freeze
of Freeze
order, or extend its effectivity.
Order;
Period; The total period of the freeze order
Total Period issued by the Court of Appeals
of Freeze under this provision shall not
Order exceed six (6) months.
A freeze order may only be
effective for a maximum period of
six months; hence, even assuming
that the Urgent Motion for
Additional Period of Freeze Order
should have been granted, the six-
month maximum period has
elapsed. (Republic v. Bloomberry
Resorts and Hotels, Inc., G.R. No.
224112, September 2, 2020)
Freeze This is without prejudice to an asset
order in preservation order that the
relation to Regional Trial Court having
jurisdiction over the appropriate
Asset
anti-money laundering case or civil
preservation
forfeiture case may issue on the
order of the
same account depending on the
RTC
circumstances of the case, where
the Court of Appeals will remand
the case and its records.
Automatic Provided, That if there is no case
Lifting filed against a person whose
account has been frozen within the
period determined by the Court of
Appeals, not exceeding six (6)
months, the freeze order shall be
deemed ipso facto lifted.
Provided, further, That this new
rule shall not apply to pending
cases in the courts.
Period In any case, the court should act on
the petition to freeze within twenty-
within which
Petition to four (24) hours from filing of the
petition.
Freeze must
be acted
If the application is filed a day
before a nonworking day, the
upon by the computation of the twenty-four
CA (24) hour period shall exclude the
nonworking days.
(Sec. 10[a][1], R.A. No. 9160 as amended by R.A. No.
11521)
A freeze order may only be effective for a
maximum period of six months. It shall be
deemed ipso facto lifted upon the expiration of
the six-month period, unless a petition for civil
forfeiture against the frozen monetary
instrument or property has been filed. In which
case, the freeze order shall remain effective
until an asset preservation order is issued.
Thus, a freeze order is merely an interim relief
intended to temporarily preserve monetary
instruments. It is pre-emptive in character,
meant to prevent the owner from disposing the
property and thwarting the State's effort in
building its case and eventually filing civil
forfeiture proceedings and/or prosecuting the
owner. (Hawkson's Truck and Parts Center Corp. v.
Honorable Court of Appeals, G.R. No. 250078
(Notice), June 15, 2022)
Clearly, a Freeze Order may not be issued
indefinitely, lest the same be characterized as a
violation of the person's right to due process and
to be presumed innocent of a charge. (Republic v.
Bloomberry Resorts and Hotels, Inc., G.R. No. 224112,
September 2, 2020)
Scope of Freeze Order
The freeze order or asset preservation order
issued under this Act shall be limited only to the
amount of cash or monetary instrument or value
of property that court finds there is probable
cause to be considered as proceeds of a predicate
offense, and the freeze order or asset
preservation order shall not apply tyo amounts in
the same account in excess of the amount or
value of the proceeds of the predicate offense.
(Sec. 10[a][2], R.A. No. 9160 as amended by R.A. No.
11521)
Motion to Lift the Freeze Order
A person whose account has been frozen may file
a motion to lift the freeze order and the court
must resolve this motion before the expiration of
255
the freeze order. (Sec. 10[a][3], R.A. No. 9160 as
amended by R.A. No. 11521)
Prohibition on courts against injunction of
freeze order
General Rule Exception
No court shall issue a except the Supreme
temporary restraining Court
order or a writ of
injunction against any
freeze order
(Sec. 10[a][4], R.A. No. 9160 as amended by R.A. No.
11521)
Rules on targeted financial sanctions in
relation to proliferation of weapons of mass
destruction and their financing
For purposes of implementing targeted financial
sanctions in relation to proliferation of weapons
of mass destruction and its financing, as provided
under Section 3(15), the AMLC shall have the
power to issue, ex porte, an order to freeze
without delay.
The freeze order shall be effective until the basis
for its issuance shall have been lifted. During the
effectivity of the freeze order, the aggrieved party
may, within twenty (20) days from issuance, file
with the Court of Appeals a petition to determine
the basis of the freeze order according to the
principle of effective judicial protection: Provided,
That the person whose property or funds have
been frozen may withdraw such sums as the
AMLC determines to be reasonably needed for
monthly family needs and sustenance including
the services of counsel and the family medical
needs of such person.
The AMLC, if circumstance warrant, may initiate
civil forfeiture proceedings to preserve the assets
and to protect it from dissipation. No court shall
issue a temporary restraining order or a writ of
injunction against the freeze order, except the
Court of Appeals or the Supreme Court.” (Sec.
10[b], R.A. No. 9160 as amended by R.A. No. 11521)
Power to Freeze Accounts
The power of the AMLC to freeze accounts has
been deleted under RA 9194.
However, the CA may issue a freeze order under
the following conditions:
(1) There must be a verified Ex parte petition by
the AMLC
(2) CA must determine that Probable Cause
exists that any monetary instrument of
property is in any way related to any unlawful
activity as defined in the AMLA
(3) The freeze order shall be effective
immediately
(4) The freeze order shall be for a period not
exceeding 6 months (Sec. 10, R.A. No. 9160)
Similarly, the bank does not have the unilateral
right to freeze the accounts of its clients on mere
suspicion that the depositor does not have a right
over them. (Philippine Commercial Bank v.
Balmaceda, G.R. No. 158143, September 2, 2011)
However, a bank has the authority to temporarily
freeze the bank account of a deceased depositor
under Sec. 97, R.A. No. 8424 or the Tax Reform
Act.
Probable cause for the issuance of a freeze
order against an account or any monetary
instrument or property subject thereof
Probable cause as "such facts and circumstances
which would lead a reasonably discreet, prudent
or cautious man to believe that an unlawful
activity and/or a money laundering offense is
about to be, is being or has been committed and
that the account or any monetary instrument or
property subject thereof sought to be frozen is in
any way related to said unlawful activity and/or
money laundering offense. (Rule 10.2 of the
Revised Rules and Regulations Implementing Republic
Act No. 9160, as Amended by Republic Act No. 9194,
defined)
The Court of Appeals’ finding that probable cause
exists was sustained by the Supreme Court when
based on the AMLC’s ex parte application and the
256
Ombudsman’s complaint, it is established that a
military officer admitted that his income came
from his salary as an officer of the Armed Forces;
yet, the Ombudsman’s investigation revealed that
the bank accounts, investments and properties in
the name of military officer and his family amount
to more than Fifty-Four Million Pesos
(P54,000,000.00). Since these assets are grossly
disproportionate to the military officer’s income,
as well as the lack of any evidence that the
military officer and his family have other sources
of income, the Court of Appeals properly found
that probable cause exists that these funds have
been illegally acquired or are related or product
of an unlawful activity. (Ligot v. Republic, March.
G.R. No. 176944. March 6, 2013. Brion, J.)
As the Court observed in Subido, this definition
refers to probable cause for the issuance of a
freeze order against an account or any monetary
instrument or property subject thereof.
Nevertheless, the Court shall likewise be guided
by the pronouncement in Ligot v. Republic that
"probable cause refers to the sufficiency of the
relation between an unlawful activity and the
property or monetary instrument." (Anti-Money
Laundering Council v. Bolante et. al, G.R. 186717, April
17, 2017)
In resolving the issue of whether probable cause
exists, the CA's statutorily-guided determination's
focus is not on the probable commission of an
unlawful activity (or money laundering) that the
OMB has already determined to exist, but on
whether the bank accounts, assets, or other
monetary instruments sought to be frozen are in
any way related to any of the illegal activities
enumerated under R.A. No. 9160, as amended.
Otherwise stated, probable cause refers to the
sufficiency of the relation between an unlawful
activity and the property or monetary instrument
which is the focal point of Section 10 of R.A. No.
9160, as amended. (Yambao v. Republic, G.R. No.
171054, January 26, 2021)
FORFIETURE PROVISIONS
Section 12. Forfeiture Provisions
Civil Upon determination by the AMLC that
Forfeiture probable cause exists that any
monetary instrument or property is in
any way related to an unlawful
activity as defined in Section 3(i) or a
money laundering offense under
Section 4 hereof, the AMLC shall file
with the appropriate court through
the Office of the Solicitor General, a
verified ex parte petition for
forfeiture, and the Rules of Court on
Civil Forfeiture shall apply.
The forfeiture shall include those
other monetary instrument or
property having an equivalent value
to that of the monetary instrument or
property found to be related in any
way to an unlawful activity or a
money laundering offense, when with
due diligence, the former cannot be
located, or it has been substantially
altered, destroyed, diminished in
value or otherwise rendered
worthless by any act or omission, or
it has been concealed, removed,
converted, or otherwise transferred,
or it is located outside the Philippines
or has been placed or brought outside
the jurisdiction of the court, or it has
been commingled with other
monetary instrument or property
belonging to either the offender
himself or a third person or entity,
thereby rendering the same difficult
to identify or be segregated for
purposes of forfeiture
Probable In the context of civil forfeiture,
cause probable cause refers to such facts
and circumstances which would lead
a reasonably discreet, prudent, or
cautious man to believe that any
monetary instrument or property
sought to be preserved is in any way
related to any unlawful activity and/or
money laundering offense. (Republic
of the Philippines, Represented by the
AMLC vs. Ng and Metropolitan Bank
and Trust Company, G.R. No. 239047,
June 16, 2021)
257
Claim on Where the court has issued an order
Forfeited of forfeiture of the monetary
Assets instrument or property in a criminal
prosecution for any money laundering
offense defined under Section 4 of
this Act, the offender or any other
person claiming an interest therein
may apply, by verified petition, for a
declaration that the same legitimately
belongs to him and for segregation or
exclusion of the monetary instrument
or property corresponding thereto.
The verified petition shall be filed with
the court which rendered the
judgment of forfeiture, within fifteen
(15) days from the date of the finality
of the order of forfeiture, in default of
which the said order shall become
final and executor. This provision
shall apply in both civil and criminal
forfeiture.
Payment in Where the court has issued an order
Lieu of of forfeiture of the monetary
Forfeiture instrument or property subject of a
money laundering offense defined
under Section 4, and said order
cannot be enforced because any
particular monetary instrument or
property cannot, with due diligence,
be located, or it has been
substantially altered, destroyed,
diminished in value or otherwise
rendered worthless by any act or
omission, directly or indirectly,
attributable to the offender, or it has
been concealed, removed, converted,
or otherwise transferred to prevent
the same from being found or to
avoid forfeiture thereof, or it is
located outside the Philippines or has
been placed or brought outside the
jurisdiction of the court, or it has been
commingled with other monetary
instruments or property belonging to
either the offender himself or a third
person or entity, thereby rendering
the same difficult to identify or be
segregated for purposes of forfeiture,
the court may, instead of enforcing
the order of forfeiture of the
monetary instrument or property or
part thereof or interest therein,
accordingly order the convicted
offender to pay an amount equal to
the value of said monetary instrument
or property. This provision shall apply
in both civil and criminal forfeiture
(Sec. 12, R.A. No. 9160 as amended by R.A. No.
10365)
Section 12 is hereby amended by inserting a new
paragraph to read as follows:
No court shall issue a temporary restraining order
(TRO) or a writ of injunction (WOI) against any
provisional asset preservation order or asset
preservation order, except the Court of Appeals
or the Supreme Court. (Sec. 3[a] R.A. No. 9160, as
amended by R.A. No. 11521)
Civil Forfeiture
Civil Forfeiture refers to the non-conviction-based
proceedings aimed at forfeiting, in favor of the
government, monetary instruments or properties
related to an unlawful activity or money
laundering offense defined herein. (Sec. 1[r], Rule
2, 2018 RIRR of AMLA)
Who The AMLC shall institute civil
initiates forfeiture proceedings and all other
remedial proceedings, through the
Office of the Solicitor General, to
confiscate all monetary instruments
or properties related to ML/TF or
associated unlawful activity, in
accordance with Rule 12 hereof. (Sec.
1.11, Rule 6[D)], 2018 RIRR, R.A. No.
9160)
When and Upon determination that probable
Where to cause exists that any monetary
file instrument or property is in any way
related to an unlawful activity or ML
offense, the AMLC shall file with the
regional trial court, through the Office
of the Solicitor General, a verified
petition for civil forfeiture.
The petition for civil forfeiture shall
include other monetary instrument or
property of equal value in cases
where the monetary instrument or
property that should be subject of
forfeiture:
(a) Cannot be located despite due
diligence;
258
 (b) Has been substantially altered, therein may apply, by verified petition, for a
destroyed, diminished in value or declaration that the same legitimately belongs to
otherwise rendered worthless by him and for segregation or exclusion of the
any act or omission; monetary instrument or property corresponding
(c) Has been concealed, removed,
thereto.
converted, or otherwise
transferred;
(d) Is located outside the Philippines Sec. 9. The respondent shall file a
or has been placed or brought Comment or verified comment or opposition,
outside the jurisdiction of the opposition. not a motion to dismiss the
court; or petition, within fifteen days from
(e) Has been commingled with other service of notice or within thirty
monetary instrument or property days from the publication in case
belonging to either the offender service of notice was by
himself or a third person or entity, publication.
thereby rendering the same The comment or opposition shall
difficult to identify or be (a) state whether respondent
segregated for purposes of admits the allegations of the
forfeiture. (Sections 1.1 and 1.2, petition; (b) specify such
Rule 12, 2018 RIRR of RA 9160, inaccuracies or falsities in
in relation to Section 12[a] of the petitioner’s statement of facts;
said Act) – Equal Asset Value and (c) state clearly and concisely
the respondent’s defense in law
and the specific and pertinent
Asset of equivalent value. The forfeiture shall provisions of the law and their
include those other monetary instrument or applicability to respondent.
property having an equivalent value to that of the Sec. 10. Effect If no comment or opposition is
monetary instrument or property found to be of failure to file filed within the reglementary
related in any way to an unlawful activity or a comment or period, the court shall hear the
money laundering offense, when with due opposition. case ex parte and render such
diligence, the former cannot be located, or it has judgment as may be warranted by
been substantially altered, destroyed, diminished the facts alleged in the petition
and its supporting evidence.
in value or otherwise rendered worthless by any
Sec. 35. Notice Where the court has issued an
act or omission, or it has been concealed,
to file claims order of forfeiture of the
removed, converted, or otherwise transferred, or monetary instrument or property
it is located outside the Philippines or has been in a civil forfeiture petition for any
placed or brought outside the jurisdiction of the money laundering offense defined
court, or it has been commingled with other under Section 4 of Republic Act
monetary instrument or property belonging to No. 9160, as amended, any
either the offender himself or a third person or person who has not been
entity, thereby rendering the same difficult to impleaded nor intervened
identify or be segregated for purposes of claiming an interest therein may
apply, by verified petition, for a
forfeiture. (Sec. 2, R.A. No. 9160, as amended by R.A.
declaration that the same
No. 10365)
legitimately belongs to him and
for segregation or exclusion of the
Pertinent provisions of the Rules of monetary instrument or property
Procedure in Civil Forfeiture as regards to corresponding thereto. The
Claim on Forfeited Assets verified petition shall be filed with
the court which rendered the
Where the court has issued an order of forfeiture order of forfeiture within fifteen
of the monetary instrument or property in a days from the date of finality of
criminal prosecution for any ML offense, the the order of forfeiture, in default
of which the said order shall be
offender or any other person claiming an interest

259
 executory and bar all other
claims.
Sec. 36. How In his petition, the claimant must
to file a claim; state the complete facts, attach
contents the affidavits of his witnesses,
supporting documents and other
evidence, and personally verify
the claim. The claimant shall file
the petition with the clerk of
court, pay the docket and other
lawful fees and submit proof of
service of a copy of the claim
upon the petitioner.
Sec. 37. The court may dismiss the claim
Effect of non- outright if it is not sufficient in
compliance form and substance and is
with manifestly filed for delay.
requirements. Otherwise, it shall issue a notice
to the petitioner to file its
comment on the claim.
Sec. 39. The court may, without hearing,
Disposition of issue an appropriate order
admitted or approving any claim admitted or
uncontested not contested by the petitioner.
claim.
(A.M. No. 21-03- 13-SC, or the Rule on Asset
Preservation, Seizure, and Forfeiture in Criminal Cases
Under Republic Act No. 9160 as Amended, 2021)
The rules clearly require that a comment to the
petition must (a) state whether respondent
admits the allegations of the petition; (b) specify
such inaccuracies or falsities in petitioner's
statement of facts; and (c) state clearly and
concisely the respondent's defense in law and the
specific and pertinent provisions of the law and
their applicability to respondent. Otherwise, the
allegations in the petition are deemed
admitted. (Republic v. Manalo, G.R. No. 220072
(Notice), March 23, 2022)
Payment in lieu of forfeiture
Where the court has issued an order of forfeiture
of the monetary instrument or property subject of
an ML offense, and said order cannot be enforced
because:
(1) Any particular monetary instrument or
property cannot, with due diligence, be
located;
(2) It has been substantially altered, destroyed,
diminished in value or otherwise rendered
worthless by any act or omission, directly or
indirectly, attributable to the offender;
(3) It has been concealed, removed, converted,
or otherwise transferred to prevent the same
from being found or to avoid forfeiture
thereof;
(4) It is located outside the Philippines or has
been placed or brought outside the
jurisdiction of the court; or
(5) It has been commingled with other
monetary instruments or property belonging
to either the offender himself or a third
person or entity, thereby rendering the same
difficult to identify or be segregated for
purposes of forfeiture, the court may,
instead of enforcing the order of forfeiture of
the monetary instrument or property or part
thereof or interest therein, accordingly order
the convicted offender to pay an amount
equal to the value of said monetary
instrument or property. (Sec. 12[c], R.A. No.
9160)
This provision shall apply in both civil and criminal
forfeiture.
MUTUAL ASSISTANCE AMONG STATES
Mutual Legal Assistance (MLA) refers to the
formal method of cooperation between two
jurisdictions for purposes of seeking assistance in
the production of documents, asset freezing and
forfeiture, extradition, enforcement of foreign
judgment, and other kinds of legal assistance in
criminal matters. (Sec. 1[jjj], Rule 2, 2018 RIRR, R.A.
No. 9160)
General Where a foreign State makes an MLA
Rule request in the investigation or
prosecution of a ML/Terrorism
Financing (TF) offense, the AMLC may
execute the request or refuse to
execute the same and inform the
foreign State of any valid reason for
not executing the request or for
delaying the execution thereof.
Exception The AMLC may refuse to comply with
any MLA request where the action
sought in the request:
260
 (1) Contravenes any provision of
the Constitution; or
(2) The execution of the request is
likely to prejudice the national
interest of the Philippines.
Exception There is a treaty between the
to the Philippines and the requesting State
exception relating to the provision of assistance
in relation to ML/TF or associated
unlawful activity.
(Sec. 1, Rule 29, 2018 RIRR, R.A. No. 9160)
Basis for Making and Acting on Mutual
Legal Assistance Request
A foreign State may make, and the Philippines
may execute, an MLA request pursuant to
conventions, treaties and international
agreements over which the Philippines is a party.
The principles of mutuality and reciprocity shall,
at all times, be recognized. (Sec. 2, Rule 29, 2018
IRR of AMLA)
Requirements for Mutual Legal Assistance
from Foreign States
All MLA requests from a foreign State must:
(1) Confirm that an investigation or prosecution
is being conducted in respect of a money
launderer or terrorism financer named
therein, or that he has been convicted of any
ML/TF offense or associated unlawful
activity;
(2) State the grounds on which any person is
being investigated or prosecuted for ML/TF or
associated unlawful activity or the details of
his conviction;
(3) Give sufficient particulars as to the identity of
said person, including specific monetary
instrument or property;
(4) Give particulars sufficient to identify any
covered person believed to have any
information, document, material or object
which may be of assistance to the
investigation or prosecution;
(5) Specify the concerned covered person from
which any information, document, material or
object that may be of assistance to the
investigation or prosecution may be
gathered;
(6) Specify the manner in which and to whom
said information, document, material or
object obtained pursuant to said request, is
to be produced;
(7) Give all the particulars necessary for the
issuance by the court in the requested State
of the writs, orders or processes needed by
the requesting State; and
(8) Contain such other information as may assist
in the execution of the request, including the
statement of the specific legal provision of
the penal law on ML/TF or associated
unlawful that was violated in the requested
State. Provided, that the felonies or offenses
punishable under the penal laws of the
requesting State are of a nature similar to the
unlawful activities as herein defined. (Sec. 3,
Rule 29, 2018 RIRR, R.A. No. 9160)
Procedure for Mutual Legal Assistance
Requests from Foreign States (Sec. 4, Rule
29, 2018 IRRA of AMLA)
Receipt of MLA Request
MLA requests shall be received by the following
government agencies:
(1) All MLA requests from foreign States shall be
filed with the DOJ, as the central authority on
all MLA matters; or
(2) The AMLC may directly receive and act on
MLA requests made on the basis of
reciprocity; Provided, that all actions taken on
such requests shall be transmitted to the DOJ
for formal response to the requesting State.
(Sec. 4[4.1], Rule 29, 2018 IRR, R.A. No. 9160)
Powers of the AMLC to Act on Mutual Legal
Assistance Requests
The AMLC may execute an MLA request from a
foreign State by:
(1) Tracking down, freezing, restraining and
seizing assets alleged to be proceeds of or
related to any unlawful activity under the
procedures laid down in the AMLA and
TFPSA, their respective IRR, and other AMLC
issuances
(2) Giving information or documents needed by
the foreign State, for evidentiary purposes,
261
 within the procedures laid down in the AMLA
and TFPSA, their respective IRR, and other
AMLC issuances; and
(3) Applying for an order of forfeiture of any
monetary instrument or property with the
court: Provided, that the court shall not issue
such an order unless the application is
accompanied by an authenticated copy of the
order of a court in the requesting State
ordering the forfeiture of said monetary
instrument or property of a person who has
been convicted of a ML/TF offense or an
unlawful activity in the requesting State, and
a certification or an affidavit of a competent
officer of the requesting State stating that the
conviction and the order of forfeiture are final
and that no further appeal lies in respect of
either. (Sec. 4[4.2], Rule 29, 2018 IRR, R.A. No.
9160)
Investigation, Freeze Order, Bank Inquiry
and Civil Forfeiture
(1) The provisions on AMLC investigation, and
freeze order, bank inquiry and civil forfeiture,
shall apply to MLA requests when necessary
to affect the assistance to be extended.
(2) The AMLC shall adopt a flexible mechanism
for:
(a) coordinating with other States regarding
requests for freezing and forfeiture of
assets; and
(b) managing, including disposal, of frozen,
preserved and forfeited assets.
(3) The AMLC shall coordinate, if necessary, with
the requesting State on the, procedure for,
and mode of, turnover of the portion of the
forfeited assets that belongs to the relevant
persons in the requesting State. (Sec. 4[4.3],
Rule 29, 2018 IRR, R.A. No. 9160)
Suppletory Application of the Rules of
Court
For attachment of Philippine properties in the
name of persons convicted of any unlawful
activity, execution and satisfaction of final
judgments of forfeiture, application for
examination of witnesses, procuring search
warrants, production of bank documents and
other materials, and all other actions not specified
in the AMLA and TFPSA, their respective IRR, and
other AMLC issuances, and assistance for any of
the aforementioned actions, which is subject of a
request by a foreign State, resort may be had to
the proceedings pertinent thereto under the
Rules of Court. (Sec. 4[4.4], Rule 29, 2018 IRR, R.A.
No. 9160)
Results of AMLC Action
The results of the actions taken by the AMLC shall
be transmitted to the DOJ for formal response to
the requesting State. (Sec. 4[4.5], Rule 29, 2018
IRR, R.A. No. 9160)
III. INSURANCE LAW
(P.D. No. 162, as amended by R.A.
No. 10607, Insurance Code [ICP])
A. BASIC CONCEPTS
Insurance Contract
Section 2 (1) of P.D. 612, otherwise known as
the Insurance Code, defines a contract of
insurance as an agreement where the insurer
undertakes for a consideration (the premium) to
indemnify the insured against loss, damage, or
liability arising from an unknown or contingent
event. (Chartis Philippines Insurance, Inc. v. Cyber
City Teleservices, Ltd., G.R. No. 234299, March 3,
2021)
Contract of Suretyship
A contract of suretyship is an agreement whereby
a party, called the surety, guarantees the
performance by another party, called the
principal or obligor, of an obligation or
undertaking in favor of another party, called the
obligee. (Sec. 177, IPC; Spouses Papasin v. Westmont
Bank, G.R. No. 232065 (Notice), June 22, 2022) . It
shall be deemed to be an insurance contract,
within the meaning of this Code, only if made by
a surety who or which, as such, is doing an
insurance business as hereinafter provided. (Sec.
2 par. 3, ICP)
262
Doing or Transacting an Insurance
Business
(1) Making or proposing to make, as insurer, any
insurance contract;
(2) Making or proposing to make, as surety, any
contract of suretyship as a vocation and not
as merely incidental to any other legitimate
business or activity of the surety;
(3) Doing any kind of business, including a
reinsurance business, specifically recognized
as constituting the doing of an insurance
business within the meaning of this Code;
(4) Doing or proposing to do any business in
substance equivalent to any of the foregoing
in a manner designed to evade the provisions
of this Code.
In the application of the provisions of this Code,
the fact that no profit is derived from the making
of insurance contracts, agreements or
transactions or that no separate or direct
consideration is received therefor, shall not be
deemed conclusive to show that the making
thereof does not constitute the doing or
transacting of an insurance business. (Sec. 2[b],
ICP)
(a) Mutual Insurance Companies
A protection and indemnity club is a mutual
insurance association, a cooperative
enterprise where the members are both the
insurer and insured. In it, the members all
contribute, by a system of premiums or
assessments, to the creation of a fund from
which all losses and liabilities are paid, and
where the profits are divided among
themselves, in proportion to their interest.
Additionally mutual insurance associations, or
clubs, provide three types of coverage,
namely, protection and indemnity, war risks,
and defense costs. (Steamship Mutual
Underwriting Association (Bermuda) Limited v.
Sulpicio Lines, Inc., G.R. Nos. 196072 & 208603,
September 20, 2017)
(b) Bancassurance
The presentation and sale to bank customers
by an insurance company of its insurance
products within the premises of the head
office of such bank duly licensed by the BSP
or any of its branches (Sec.375, ICP). The bank
itself will not engage in insurance business
because it is prohibited under the General
Banking Law to engage in insurance
business. (Aquino-Sundiang, Sr., Reviewer on
Commercial Law, 2022 Edition, p. 17)
Interpretation of Insurance Contracts
When the terms are ambiguous, uncertain or
doubtful, the terms should be interpreted strictly
against the insurer and liberally in favor of the
insured because an insurance contract is a
contract of adhesion. If there is no doubt, the
provisions must be construed in their plain,
ordinary and popular sense. (Rizal Surety and
Insurance Co. vs. CA, G.R. No. 112360, July 18, 2000)
Interpretation of Period in an Insurance
Contracts
In insurance contract the 12-month period should
mean 360 days. The court held that the 12-month
period in Condition No. 27 of the parties' fire
insurance policies should refer to the period of
one (1) year, or 365 days, in line with Section 63
of the Insurance Code and prevailing
jurisprudence. This is also consistent with Article
13 of the Civil Code which provides that when the
law speaks of a year, it is understood to be
equivalent to 365 days. (Alpha Plus International
Enterprises Corp. v. Philippine Charter Insurance Corp.,
G.R. No. 203756, February 10, 2021, HERNANDO, J.)
1. ELEMENTS OF AN INSURANCE
CONTRACT
Cause
1) Existence of Insurable interest - the insured
must possess an interest of some kind
susceptible of pecuniary estimation; (Sec. 10-
25, ICP)
2) Risk of Loss - the insured is subject to a risk
of loss through the destruction or impairment
of that interest by the happening of
designated perils; (Sec. 3 (1), Sec. 51 par 9, ICP)
Consent
3) Assumption of risk - the insurer assumes the
risk of loss; (Sec. 2, ICP)
263
4) Distribution of losses - such assumption is 167330, September 18, deemed as engaged
part of a general scheme to distribute actual 2009) in the business of
losses among a large group of persons 2. Health Management insurance (Philippine
bearing somewhat similar risks; Organization (HMO) Health Care
Contracts — a contract Providers, Inc. v.
whereby the HMO CIR, G.R. No.
Object / subject matter 167330, September
undertakes to provide
5) Premium - in consideration of the insurer’s or arrange for the 18, 2009);
promise, the insured makes a ratable provision of pre-agreed 2. Insurance may take
contribution to a general insurance fund. or designated health the form of a
(Sec. 77, ICP) care services of its provision in a
enrolled members for a Collective Bargaining
Test of Insurance fixed prepaid fee for a Agreement whereby
specified period of time the employer agreed
The test to determine if a contract is an insurance (Executive Order No. to assume under a
contract or not, depends on the nature of the 192, Series of 2015). self-insurance basis,
3. Extended warranty hospitalization fixed
promise, the act required to be performed, and
contracts offered by expenses for the
the exact nature of the agreement in the light of dependents of
manufacturer /sellers of
the occurrence, contingency, or circumstances products are not regular employees
under which the performance becomes requisite. insurance contracts. In (Mitsubishi Motors
It is not by what it is called. Basically, an an extended warranty, Philippines Salaried
insurance contract is a contract of indemnity. In the manufacturer Employees Union v.
it, one undertakes for a consideration to /seller has a Mitsubishi Motors
indemnify another against loss, damage or relationship to the Philippines Corp.,
liability arising from an unknown or contingent product or service, or G.R. No. 175773,
does some acts that June 17, 2013).
event. (White Gold Marine Services Inc. v. Pioneer
impart knowledge of
Insurance and Surety Corp., G.R. No.154514, July 28,
the product or service
2005)
to the extent of
minimizing if not
Principal Object and Purpose Test eliminating, the
If assumption risk and indemnification of loss are element of chance or
the principal objectives, the business is that of risk (I.C. Legal Opinion
insurance. But if they are merely incidental and No. 21-16 dated
service is the principal purpose, then the business December 22, 2021).
is not insurance. (Medicard Philippines, v. CIR, G.R. (Aquino-Sundiang, Sr., Reviewer on Commercial Law,
No. 222743, April 5, 2017 citing Philippine Health Care 2022 Edition, pp. 19-20)
Providers, Inc. v. Commissioner of Internal Revenue,
G.R. No. 167330 (Resolution), September 18, 2009) 2. CHARACTERISTICS/NATURE OF
INSURANCE CONTRACTS
Not Insurance Considered
Insurance Risk serves to distribute the risk of
1. Contracts of law firm 1. A contract by which a distributing economic loss among as many as
with clients whereby in corporation, in device possible to those who are subject
consideration of consideration of a to the same kind of risk. By paying
periodical payments, stipulated amount, a pre-determined amount into a
the law firm promises to agrees at its own general fund out of which
represent such clients expense to defend a payment will be made for an
in all suits for or against physician against all economic loss of a defined type,
them are not insurance suits for damages for each member contributes to a
contracts (Philippine malpractice is one of small degree toward
Health Care Providers, insurance, and the compensation for losses suffered
Inc. v. CIR, G.R. No. corporation will be by any member of the group. This
broad sharing of economic risk is

264
 the principle of risk-distribution
(Aquino-Sundiang, Sr., Reviewer
on Commercial Law, 2022 Edition,
p.17)
Contract of A contract of adhesion is one
adhesion - wherein a party prepares the
fine print stipulations in the contract, which
rule the other party merely affixes his
signature or his “adhesion”
thereto. This principle is the very
reason why in every doubt or
ambiguity in an insurance contract
is resolved in favor of the insured
and against the insurer. (Gulf
Resorts, Inc vs. Phil. Charter Ins.
Corp, G.R. No. 156167, May 16,
2005)
Aleatory The liability of the insurer depends
upon the happening of some
contingent event. An aleatory
contract is a contract where one or
both of the parties reciprocally
bind themselves to give or do
something upon the happening of
an event which is uncertain, or
which is to occur at an
indeterminate time. (Art. 2010,
Civil Code)
Contract of he insured is entitled to recover
indemnity only the amount of total loss
actually sustained.
General Rule: This rule applies
only to property insurance.
Exception: In life insurance, one
cannot assign a price tag on the
value of human life. The measure
of liability of the insurer is the face
value of the insurance policy.
Exception to the exception: By
way of exception, a creditor may
insure the life of a debtor but only
up to the amount of the debt,
which is the extent of the
creditor's insurable interest;
Insurance contracts are not
wagering contracts. (Sec. 4, ICP)
Uberrimae one of perfect good faith not for
fidae the insured alone, but equally so
contract for the insurer (Aquino-Sundiang,
Sr., Reviewer on Commercial Law,
2022 Edition, p.18)
Voluntary The parties may incorporate such
terms and conditions as they may
deem convenient: Provided they
do not contravene any provision of
law and are not opposed to public
policy, law, morals, good customs,
or public order. (De Leon, The
Insurance Code of the Philippines,
2010, p. 17)
General Rule: The taking out of
an insurance contract is not
compulsory.
Exception: Liability insurance
may be required by law in certain
instances (e.g. compulsory motor
vehicle liability insurance, or
employees under Labor Code, or
as a condition to granting a license
to conduct a business or calling
affecting the public safety or
welfare). (De Leon, The Insurance
Code of the Philippines, 2010, p.
18)
Personal The law presumes that theinsurer
considered the personal
qualifications and circumstances
of the insured in approving the
insurance application. (Aquino-
Sundiang, Sr., Reviewer on
Commercial Law, 2022 Edition,
p.19)
Consensual An insurance contract is a
consensual contract and is
therefore perfected the moment
there is a meeting of minds with
respect to the object and the
cause or consideration (Arts.
1315, 1318, and 1319, Civil Code)
What may be insured
General Rule: Exception:
Any contingent or No insurance can be
unknown event, taken for or against the
whether past or future, drawing of any lottery,
which may damnify a or for or against any
person having insurable chance or ticket in a
interest, or create a lottery drawing prize.
liability against him, may (Sec. 4, ICP)
be insured. (Sec. 3 (1),
ICP)
265
Notes:
(a) The risk must be:
i. A contingent or unknown event, whether
past or future
ii. It must damnify the insured or create
liability against him
(b) The risk “must be real and such that neither
the insured nor the insurance company may
hasten to prevent it
(c) A past event that may be insured against is
peculiar to Marine Insurance (Aquino,
Essentials of Insurance Law, 2018, p. 17-19).
Nature of Insurance Contract
Like any other contract, parties to a contract of
insurance could stipulate on terms and conditions
that would govern them as long as these
stipulations are not contrary to law. An insurance
contract is the law between the parties. Its terms
and conditions constitute the measure of the
insurer's liability and compliance therewith is a
condition precedent to the insured's right to
recovery from the insurer.
In the instant case, Condition No. 27 of the
parties' fire insurance policies to be considered as
an integral part of their agreement and
compliance therewith is a condition precedent to
petitioner's right to recover on the insurance
policy that it secured from the respondents.
(Alpha Plus International Enterprises Corp. v. Philippine
Charter Insurance Corp., G.R. No. 203756, February
10, 2021, HERNANDO, J.)
3. CLASSES OF INSURANCE
a. Marine - (Secs. 101-168, ICP)
It is an agreement to indemnify against risks
connected with navigation, to which a ship,
cargo, freightage, profits, or other insurable
interest.
However, the Insurance Code does not limit
marine insurance to risk of navigation. It may
also include movable property that may be
expose during a certain voyage or a fixed period
of time (Sec. 101, ICP)
Coverage of Marine Insurance:
Marine insurance includes Insurance against loss
of or damage to:
(1) Vessels, craft, aircraft, vehicles, goods,
freights, cargoes, merchandise, effects,
disbursements, profits, moneys, securities,
choses in action, instruments of debts,
valuable papers, bottomry, and respondentia
interests and all other kinds of property and
interests therein, in respect to, appertaining
to or in connection with any and all risks or
perils of navigation, transit or transportation,
or while being assembled, packed, crated,
baled, compressed or similarly prepared for
shipment or while awaiting shipment, or
during any delays, storage, transshipment, or
reshipment incident thereto, including war
risks, marine builder’s risks, and all personal
property floater risks;
(2) Person or property in connection with or
appertaining to a marine, inland marine,
transit or transportation insurance, including
liability for loss of or damage arising out of or
in connection with the construction, repair,
operation, maintenance or use of the subject
matter of such insurance (but not including
life insurance or surety bonds nor insurance
against loss by reason of bodily injury to any
person arising out of ownership,
maintenance, or use of automobiles);
(3) Precious stones, jewels, jewelry, precious
metals, whether in course of transportation
or otherwise; and
(4) Bridges, tunnels and other instrumentalities
of transportation and communication
(excluding buildings, their furniture and
furnishings, fixed contents and supplies held
in storage); piers, wharves, docks and slips,
and other aids to navigation and
transportation, including dry docks and
marine railways, dams and appurtenant
facilities for the control of waterways. (Secs.
101[a], ICP)
Marine Insurance also includes marine protection
and indemnity insurance, meaning insurance
against, or against legal liability of the insured for
loss, damage, or expense incident to ownership,
operation, chartering, maintenance, use, repair,
or construction of any vessel, craft or
266
instrumentality in use of ocean or inland Insurance, G.R. No.
waterways, including liability of the insured for 13983, September
personal injury, illness or death or for loss of or 1,1919)
damage to the property of another person. (Secs. Example: Example:
101[b], ICP) rusting of steel pipes in Sinking of the vessel due
the course of voyage a to improper loading of
"peril of the sea" in view the logs on one side so
Cargo can also be the subject of marine of the toll on the cargo that the barge was
insurance, and once it is entered into, the implied of wind, water, and salt tilting on one side and
warranty of seaworthiness immediately attaches conditions. (Cathay for that it did not
to whoever is insuring the cargo, whether he be Insurance Co. vs. Hon. navigate on even keel
the shipowner or not. Although he has no control Court of Appeals and and developed a leak.
over the vessel, the shipper has control in the Remington Industrial (Roque v. IAC, G.R. No.
choice of vessel (Roque v. IAC, G.R. No. L- Sales Corporation, G.R. L-66935. November 11,
66935. November 11, 1985). No. 76145, June 30, 1985).
1987)
Proximate cause of loss in Marine (Divina, Divina on Commercial Law A Comprehensive
Guide, Vol. I, 2021, p. 111).
Insurance
As a rule, only perils of the sea may be insured
Special Marine Insurance Contract and
against. To recover under a marine insurance
Clauses
policy, the proximate cause of the loss must be
perils of the sea. The insurer is not liable if the
(1) All Risks Policy
loss is due to ordinary, natural and inevitable
action of the sea, ordinary wear and tear and
An "all risks policy" should be read literally as
unseaworthiness. (Divina, Divina on Commercial Law
A Comprehensive Guide, Vol. I, 2021, p. 110). meaning all risks whatsoever and covering all
losses by an accidental cause of any kind. The
Perils of the Sea vs. Perils of the Ship terms have been taken to mean that which
Perils of the Sea Perils of the Ship happens by chance or fortuitously, without
Perils of the sea or perils Perils of the ship refer to intention and design, and which is unexpected,
of navigation include losses which in the unusual and unforeseen. A marine insurance
only those casualties ordinary course of policy providing that the insurance was to be
due to the unusual events result from the "against all risks" must be construed as creating
violence or ordinary, natural and a special insurance and extending to other risks
extraordinary causes inevitable action of the than are usually contemplated. The very nature
connected with sea, or from ordinary of the term "all risks" must be given a broad and
navigation. It has been wear and tear of the
comprehensive meaning as covering any loss
said to include only such ship, or from the
losses as are of negligent failure of the
other than a willful and fraudulent act of the
extraordinary nature or ship's owner to provide insured. (Divina, Divina on Commercial Law A
arise from some the vessel with the Comprehensive Guide, Vol. I, 2021, p. 112).
overwhelming power adequate crew
which cannot be complement and proper The insured has the initial burden of proving
guarded against by the equipment to convey the that the cargo was in good condition when the
ordinary exertion of cargo under ordinary policy attached and that the cargo was
human skill or prudence, conditions. damaged when unloaded from the vessel;
as distinguished from thereafter, the burden then shifts to the insurer
the ordinary wear and
to show the exception to the coverage. (Filipino
tear of the voyage and
Merchants Insurance Co. vs. CA, G.R. No. 85141,
from injuries suffered by
November 28, 1989)
the vessel in
consequence of her not
being unseaworthy.
(Razon v . Union

267
 (2) Barratry Clause  Transfer of the insured machineries and
equipment from one building to another
A clause which provides that there can be no that was not stipulated in the policy
recovery on the policy in case any willful without the consent of the insurer
misconduct on the part of the master or crew in because this changes the condition of the
the pursuance of some unlawful or fraudulent thing insured (Malayan Insurance Company,
purpose without consent of owners, and to the Inc. v. PAP Co. Ltd., [Phil. Branch], G.R. No.
prejudice of the owner’s interest. (Roque vs. IAC, 200784, August 7, 2013).
G.R. No. L-66935, November 11, 1985)
Friendly Fire vs. Hostile Fire
(3) Inchmaree Clause (negligence Friendly Fire Hostile Fire
clause) Insurer not liable Insurer is liable
fire that burns in a fire that escapes and
A clause which makes the insurer liable for loss place where it is bums in a place where it
supposed to burn is not supposed to be. It
or damage to the hull or machinery arising from
(e.g., gas may also refer to fire that
the: stove,fireplace, etc.). started out as a friendly
(a) Negligence of the captain, engineer, etc. fire, but escapes from its
(b) Explosions, breakage of shafts; and original place or it
(c) Latent defect of machinery or hull. (Thames becomes too strong as it
and Mersey Marine Insurance Co Ltd vs. Hamilton, becomes out of control.
Fraser and Co, ‘Inchmaree’ (1887) 12 AC 484, HL) (Aquino, Essentials of Insurance Law, 2018, p. 95).

(4) Sue and Labor Clause c. Casualty

A clause wherein the insurer may become liable
to pay the insured, in addition to the loss actually
suffered such expenses as the property against a
peril for which the insurer would have been liable.
(Aquino, Essentials of Insurance Law, 2018, p. 314)
b. Fire – (Secs. 169-175, ICP)
An insurance covering loss or liability arising
from accident or mishap, excluding certain
types of loss which by law or custom are
considered as falling exclusively within the
scope of other types of insurance (Sec. 176,
ICP)

It is an insurance against loss by fire, "Intentional" vs. "Accidental" as Used in

lightning, windstorm, tornado or earthquake Insurance
and other allied risks, when such risks are
covered by extension to fire insurance Intentional
policies or under separate policies. (Sec. 169, Intentional as used in
ICP) an accident policy
excepting intentional
Alteration injuries inflicted by the
An alteration in the use or condition of a insured or any other
person implies the
thing insured from that to which it is limited
exercise of the
by the policy made without the consent of reasoning faculties,
the insurer, by means within the control of consciousness and
the insured, and increasing the risks, entitles volition. Where a been taken to mean that
an insurer to rescind a contract of fire provision of the policy
insurance. (Sec. 170, ICP) exdudes intentional
injury, it is the
Example: intention of the person
 Converting an insured residential house inflicting the injury
that is controlling. If
to a factory; and
the injuries suffered
Accidental
The terms "accident" and
"accidental," as used in
insurance contracts, have
not acquired any
technical meaning. They
are construed by the
courts in the ordinary and
common acceptation.
Thus, the terms have
which happens by chance
or fortuitously, without
intention or design, which
is unexpected, unusual
and unforeseen. The
terms do not, without
qualification, exclude

268
 by the insured clearly events resulting in (a) Fidelity Bond — contract of insurance
resulted from the damage or loss due to against loss from misconduct.
intentional act of a fault, recklessness or (b) Fidelity Guaranty Insurance — a contract
third person, the negligence of third whereby one, for a consideration, agrees
insurer is relieved from parties. The concept is
to indemnify the assured against loss
liability as stipulated not necessarily
(Biagtan v. The Insular synonymous with "no arising from the want of integrity fidelity,
Life Assurance Co. fault." It may be utilized or honesty of employees or other persons
Ltd., G.R. No. L- simply to distinguish holding positions of trusts.
25579, March 29, intentional or malicious (c) Performance bond — bond that is issued
1972.) acts from negligent or to secure the performance of an
careless ads of man (Pan obligation. (Aquino-Sundiang, Sr., Reviewer
Malayan Insurance Corp. on Commercial Law, 2022 Edition, p. 104)
v. CA, G.R. No.
81026, April 3, 1990) e. Life – (Secs. 181-186, 233-237, ICP)
(1993 and 1996 Bar).
(Aquino, Essentials of Insurance Law, 2018, pp. 95-
96)
Life insurance is an insurance on human lives
and insurance appertaining thereto or
Third-Party Liability connected therewith. (Sec. 181, ICP)
In a third-party liability insurance contract, the
insurer assumes the obligation of paying the Annuity
injured third party to whom the insured is liable. Every contract or undertaking for the
The insurer becomes liable as soon as the liability payment of annuities including contracts for
of the insured to the injured third person the payment of lump sums under a
attaches. Prior payment by the insured to the retirement program where a life insurance
injured third person is not necessary in order that company manages or acts as a trustee for
the obligation of the insurer may arise. From the such retirement program shall be considered
moment that the insured became liable to the a life insurance contract. (ibid.)
third person, the insured acquired an interest in
the insurance contract, which interest may be i. Individual life
garnished like any other credit. (Perla Compania de It is the insurance on human lives and
Seguros v. Ramolete, G.R. No. L-60887, 1991) insurance appertaining thereto or
connected therewith. It may be made
d. Suretyship – (Secs. 177-180, ICP) payable on the death of the person, or on
his surviving a specified period, or
A contract of suretyship is an agreement otherwise contingently on the
whereby a party, called the surety, continuance or cessation of life. (Sec. 181-
guarantees the performance by another 182, ICP)
party, called the principal or obligor, of an
obligation or undertaking in favor of another ii. Group life
party, called the obligee. (Sec. 177, IPC; It is essentially a single insurance contract
Spouses Papasin v. Westmont Bank, G.R. No. that provides coverage for many
232065 (Notice), June 22, 2022). individuals. The coverage terms for group
insurance are usually stated in a master
It shall be deemed to be an insurance agreement or policy that is issued by the
contract, within the meaning of this Code, insurer to a representative of the group or
only if made by a surety who or which, as to an administrator of the insurance
such, is doing an insurance business as program, such as an employer. The
hereinafter provided. (Sec. 2 par. 3, ICP) employer acts as a functionary in the
collection and payment of premiums and
Suretyship is usually in the form of a bond.

269
 in performing related duties. (Pineda vs.
CA, G.R. No. 105562, September 27, 1993)
iii. Industrial life
It is that form of life insurance under
which the premiums are payable either
monthly or oftener, if the face amount of
insurance provided in any policy is not
more than five hundred times that of the
current statutory minimum daily wage in
the City of Manila, and if the
words industrial policy are printed upon
the policy as part of the descriptive
matter. (Sec. 235, ICP)
f. Microinsurance
It is a financial product or service that meets
the risk protection needs of the poor where:
The amount of contributions, premiums,
fees or charges, computed on a daily basis,
does not exceed seven and a half percent
(7.5%) of the current daily minimum wage
rate for nonagricultural workers in Metro
Manila; and
The maximum sum of guaranteed benefits is
not more than one thousand (1,000) times
of the current daily minimum wage rate for
nonagricultural workers in Metro Manila.
(Sec. 187, ICP)
g. Compulsory Motor Vehicle Liability
Insurance (CMVLI) – (Secs. 386-402, ICP)
It refers to a contract of insurance against
passenger and third-party liability for death
or bodily injuries and damage to property
arising from motor vehicle accidents.
The purpose of CMVLI is to provide
compensation for the death or bodily injuries
suffered by innocent third parties or
passengers as a result of the negligent
operation and use of motor vehicles. The
victims or their dependents are assured of
immediate financial assistance, regardless of
the financial capacity of motor vehicle
owners. (Malayan Insurance Co., Inc. v.
Stronghold Insurance Co., Inc., G.R. No. 203060,
June 28, 2021, HERNANDO, J.)
Mandatory Insurance
It shall be unlawful for any land
transportation operator or owner of a motor
vehicle to operate the same in the public
highways unless there is in force in relation
thereto a policy of insurance or guaranty in
cash or surety bond issued in accordance
with the provisions of this chapter to
indemnify the death, bodily injury, and/or
damage to property of a third-party or
passenger, as the case may be, arising from
the use thereof. (Sec. 387, ICP)
Insurance, a requirement for registration
Registration of any vehicle will not be made
or renewed without complying with the
requirement. (Sec. 389, ICP)
Claimants/ victims may be a “passenger” or
a “3rd party.” It applies to all vehicle whether
public or private vehicles. (Sec. 386, ICP)
Period to File Notice
The written notice of claim must be
presented within six months from the date
of the accident otherwise the claim is
deemed waived. (Sec. 397, ICP)
(a) If there is an agreement, the insurance
company concerned shall forthwith
ascertain the truth and extent of the
claim and make payment within five
working days after reaching an
agreement.
(b) If no agreement is reached, the
insurance company shall pay only the
“no-fault” indemnity without prejudice to
the claimant from pursuing his claim
further, in which case, he shall not be
required or compelled by the insurance
company to execute any quit claim or
document releasing it from liability under
the policy of insurance or surety bond
issued. (Sec. 398, ICP)
270
 Prescriptive Period
The action must be filed in court or the
Insurance Commission within one year from
denial of the claim. (Sec. 397, ICP)
It bears to stress that the rationale for the
necessity of bringing suits against the
insurer within one year from the rejection of
the claim has already been settled. As
already laid down in precedent, the condition
contained in an insurance policy that claims
must be presented within one year after
rejection is not merely a procedural
requirement but an important matter
essential to a prompt settlement of claims
against insurance companies as it demands
that insurance suits be brought by the
insured while the evidence as to the origin
and cause of destruction have not yet
disappeared. (Alpha Plus International
Enterprises Corp. v. Philippine Charter Insurance
Corp., G.R. No. 203756, February 10, 2021,
HERNANDO, J.)
Case law teaches that the prescriptive period
for the insured's action for indemnity should
be reckoned from the "final rejection" of the
claim. The "final rejection" simply means
denial by the insurer of the claims of the
insured and not the rejection or denial by the
insurer of the insured's motion or request for
reconsideration. The rejection referred to
should be construed as the rejection in the
first instance. (ibid.)
h. Compulsory Insurance Coverage for
Agency-Hired Workers – (Secs. 386-402,
ICP)
Each migrant worker deployed by a
recruitment/manning agency shall be
covered by a compulsory insurance policy
which shall be secured at no cost to the said
worker. Such insurance policy shall be
effective for the duration of the migrant
worker's employment (Sec.37-A, RA No. 8042
as amended by RA No.10022, otherwise known
as "Migrant Workers and Overseas Filipinos Act of
1995)
4. INSURABLE INTEREST
General Rule Exception
It is pecuniary in Life insurance, the expectation
nature of benefit from the continued
life of that person need not be
necessarily be of pecuniary
nature.
Insurable Interest is that interest which a person
is deemed to have in the subject matter insured,
where he has a relation or connection with or
concern in it, such that the person will derive
pecuniary benefit or advantage from the
preservation of the subject matter insured and
will suffer pecuniary loss or damage from its
destruction, termination, or injury by the
happening of the event insured against. (Lalican
vs. Insular Life Assurance Company, G.R. No. 183526,
August 25, 2009)
Stipulations Prohibited
Every stipulation in a policy of insurance for the
payment of loss whether the person insured has
or has not any interest in the property insured, or
that the policy shall be received as proof of such
interest, and every policy executed by way of
gaming or wagering, is void. (Sec. 25, ICP)
The policy of the State against wagering contracts
is apparent in Section 3 of the Insurance Code,
as amended, requiring the presence of insurable
interest for a contract of insurance to be valid.
This is meant to eliminate the temptation of
taking out a policy for speculative or evil
purposes. Insurance policies should be obtained
in good faith, and not for the purpose of
speculating upon the hazard of a life in which one
has no interest in. (Dela Fuente v. Fortune Life
Insurance Co., Inc., G.R. No. 224863, December 2,
2020)
Reasons for the requirement of an
insurable interest
As deterrence to the insured – The
requirement of an insurable interest to support a
contract of insurance is based upon
considerations of public policy which render
wager policies invalid. A wager policy is obviously
271
contrary to public interest. (De Leon, Insurance upper limit of his provable loss under the
Code, p.92) contract. (Ibid.)

As a measure of limit of recovery – If and to Subject matter of Insurable Interest

the extent that any particular insurance contract (1) The life or health of another
is a contract to pay indemnity, the insurable (2) A property interest whether real or personal
interest of the insured will be the measure of the

Insurable Interest in Property vs. Insurable Interest in Life

INSURABLE INTEREST IN LIFE INSURABLE INTEREST IN PROPERTY
(Sec. 10, ICP) (Sec. 13, ICP)
As to extent
Unlimited except if effected by a creditor on the life of Limited to the actual value of the interest in property.
the debtor. (save in life insurance effected by a creditor
on the life of the debtor)
As to time when insurable interest must exist
Must exist at the time the policy takes effect and need Must exist when the policy takes effect and when the
not exist at the time of the loss. loss occurs.
As to expectation of benefit to be derived
Expectation of the benefit to be derived need not have Expectation benefits must have a legal basis.
any legal basis.
As to the beneficiary’s interest
Beneficiary need not have insurable interest over the life Beneficiary must have insurable interest over the thing
of the insured if the insured himself secured the policy. insured in property insurance.
However, if the life insurance was obtained by the
beneficiary, the latter must have insurable interest over
the life of the insured.
As to assignment or transfer of the policy
Can be transferred even without the consent of or notice It is necessary that the transferee has insurable interest
to the insurer. By express provision of Section 184 of the over the thing insured (Aquino, Insurance Law, p. 111)
Insurance Code, it is not necessary that the transferee has
insurable interest (Aquino, Insurance Law, p. 110)
(Aquino-Sundiang, Sr., Reviewer on Commercial Law, 2022 Edition, pp. 43-44)

a) Insurable Interest in Life Insurance (b) TEST: Whether the person is interested
in the preservation of the insured’s life
Classes of Insurable Interest in Life despite the insurance.
Insurance: (Sec. 10, ICP) (c) It may be based on:

(1) Insurable interest in the insured’s own life Blood relationship

(2) Insurable interest in the life of another
person
(a) The owner of the policy is different from
the “subject” of the insurance (the
person whose life is insured)
Sec. 10 (a): Mere blood relationship is
sufficient.
Blood relationship is limited to insurable
interest over the life of a spouse or of one’s
children. (Aquino, Essentials of Insurance
Law, 2018, p. 80)

272
 Other relatives: Require pecuniary interest
(3) Education or Support
One has an insurable interest in the life of
any person whom he depends wholly or in
part for education or support. The law does
not require that the person on whom one
depends wholly or in part for education or
support is legally obligated to do so. (Aquino,
Essentials of Insurance Law, 2018, p. 81)
Support not be based on the legal obligation
to support. There is insurable interest even
if the person who supports the one taking
the insurance is a non-relative.
(Aquino-Sundiang, Sr., Reviewer on Commercial
Law, 2022 Edition, pp. 38-39)
(4) Pecuniary interest
There should be reasonable certainty that the
continuation of life will be a direct, material
advantage to the insured to satisfy the
requirement of insurable interest.
Examples:
 A company in the life of its officers
 A surety in the life of the principal
 A close corporation in the lives of its
stockholders
A corporate employer has an insurable
interest on its manager whose death will be
detrimental to the corporation’s operation. (El
Oriente Fabrica de Tabacos, Inc. v. Posadas, G.R.
No. 34774, September 21, 1931)
Debtor’s Life
A creditor shall have insurable interest over
the life of a debtor who may be obligated to
deliver money or property or to provide some
service. (Aquino, Essentials of Insurance Law,
2018, p. 83)
(5) One Whose Life Any Estate Depends
Any person upon whose life any estate or
interest vested in him depends
Examples:
 A person who will become the owner of
the property as soon as another attains a
certain age, may, by means of insurance,
assure an indemnity for loss to be
suffered by him in case that person dies
before attaining such age;
 X may insure the life of Y in order to
compensate himself for the loss which he
will suffer through the latter’s death.
Mortgage Redemption Insurance
A “mortgage redemption insurance” is a
device for the protection of both the mortgagee
(creditor) and the mortgagor (debtor). The
mortgagor may be insured into a “mortgage
redemption insurance.” (Great Pacific Life Assurance
Corp. vs. CA, G.R. No. 113899, October 13, 1999)
If a person procures life insurance on his
own life, who may be his beneficiary:
Beneficiary
Person who is named or designated in a contract
of life, health, or accident insurance as the one
who is to receive the benefits which become
payable, according to the terms of the contract,
upon the death of the insured. (De Leon, Insurance
Code, p. 96)
General When one insures his own life, he
rule: may designate any person as the
beneficiary, whether or not the
beneficiary has an insurable interest
in the life of the insured.
Exception: Those disqualified to receive
donation under Article 739 of the
Civil Code.
Article 739. The following donations
shall be void:
a. Those made between persons
who were guilty of adultery or
concubinage at the time of the
donation;
b. Those made between persons
found guilty of the same
criminal offense, in
consideration thereof;
273
 c. Those made to a public officer or
his wife, descendants and
ascendants, by reason of his
office.
In the case referred to in No. 1, the
action for declaration of nullity may
be brought by the spouse of the
donor or donee; and the guilt of the
donor and donee may be proved by
preponderance of evidence in the
same action. (Art. 739, New Civil
Code (NCC))
The beneficiary in this case can be
anyone, such as a distant relative or
friend, who need not have any
insurable interest in the life of the
insured.
In order for Article 739 to apply, it
is not required that there be a
previous conviction for adultery or
concubinage, due to the wording of
“preponderance of evidence”
(Insular Life v. Ebrado, G.R. No. L-
44059, 1977)
Important Update: Members of the lesbian,
gay, bisexual, transgender, and queer (LGBTQ+)
have the right to designate their domestic
partners as beneficiaries. An individual who has
secured a life insurance policy on his or her own
life may designate any person as beneficiary
provided that such designation does not fall
under the enumerations provided in Article 739 of
the Civil Code. (Insurance Commission, Legal Opinion
No. 2020-02, dated March 04, 2020)
Notes:
 Consent of the cestui que vie (life insured) in
a life insurance policy is not essential to the
validity of the policy. It is the insured who has
the legal insurable interest at the inception of
the policy, the insurance can be valid even
without such consent. (Sec. 10, ICP)
 With respect to spouses, the insurable
interest remains even if they are separated.
(Ibid.)
Insurable Interest of Beneficiary in Life
Insurance
Party Rule
Insured who takes out Can designate
an insurance in his own ANYBODY as
life. beneficiary whether or
not the beneficiary has
insurable interest over
his (Insured) life
Insured who takes out Insurable interest on the
an insurance on the life part of the INSURED is
of another person necessary.
designating himself as
beneficiary.
One who takes out an Insurable interest on the
insurance on the life of part of the
another and designates BENEFICIARY is
a third person as the required.
beneficiary.
Right of the insured to Change Beneficiary
in Life Insurance
General Rule Exception
The insured shall have If the insured has
the right to change the expressly waived this
beneficiary he right in said policy.
designated in the policy Notwithstanding the
foregoing, in the event
the insured does not
change the beneficiary
during his lifetime, the
designation shall be
deemed irrevocable
(Sec. 11, ICP)
Effects of the revocable/irrevocable
designation of the beneficiary
Revocable Irrevocable
The insured may change In case of irrevocable
the beneficiary during designation, the
his lifetime, add a beneficiary has acquired
beneficiary or exclude a a vested right on the life
beneficiary in case of insurance policy
joint designation of including its incident
beneficiaries. such as the policy loan
and cash surrender
The same rule applies in value. As such, any act
case the policy is silent on the part of the
on the nature of the insured which may
designation, for in such impair the interest of the
case, the designation is irrevocably designated
beneficiary is null and
274
 deemed to be revocable. void. Thus, the In case a beneficiary is the proceeds shall
(Sec. 11, ICP) beneficiary cannot be unlawfully payable to the
changed, no additional designated estate of the
beneficiary can be insured (not only to
designated and the the lawful spouse
insured cannot take a of the insured
cash surrender value on although she has a
the policy unless the share in the estate
beneficiary consents to of the insured). It
any of the foregoing is because the
acts. policy remains
(Divina, Divina on Commercial Law A Comprehensive valid. Only the
Guide, Vol. I, 2021, p. 17). designation is void.
In case of joint the share of the
Forfeiture by Beneficiary of Interest in designation of unlawfully
Insurance Policy beneficiaries designated
beneficiary shall
form additional part
The interest of a beneficiary in a life insurance
of the share of the
policy shall be forfeited when the beneficiary is lawfully designated
the principal, accomplice, or accessory in willfully beneficiary. Thus,
bringing about the death of the insured. In such the share of the
a case, the share forfeited shall pass on to the common law
following: spouse shall be
(a) To other beneficiaries, unless otherwise forfeited in favor of
disqualified. the designated
illegitimate
(b) In the absence of other beneficiaries, the
children. (Heirs of
proceeds shall be paid in accordance with the
Loreto C. Maramag
policy contract. vs. Maramag, G.R.
(c) If the policy contract is silent, the proceeds No. 181132, June
shall be paid to the estate of the insured. 5, 2009)
(Sec. 12, ICP) In case of joint proceeds shall be
designation of divided based on
Instances when the estate is entitled to the lawfully designated terms of policy. If
proceeds of the insurance beneficiaries the policy is silent,
the proceeds shall
The insurance policy proceeds shall redound to be divided equally
between or among
the benefit of the estate of the insured:
the beneficiaries.
(1) where the insured has not designated any In case a beneficiary is the proceeds are
beneficiary, or lawfully designated payable to the
(2) when the designated beneficiary is and the insured beneficiary unless
disqualified by law to receive the proceeds, dies ahead of the he is the principal,
that. (Heirs of Loreto C. Maramag vs. Maramag, beneficiary accessory or
G.R. No. 181132, June 5, 2009) accomplice in
willfully bringing
Summary of to whom will the proceeds of about the death of
the life insurance policy be payable the insured.
In such a case, interest the proceeds shall be
of the beneficiary paid in accordance
The proceeds of the life insurance policy are
shall be forfeited with the policy
payable as follows: and the share contract. If the
forfeited shall pass policy contract is
on to the other silent, the proceeds

275
 beneficiaries, shall be paid to the TEST:
unless otherwise estate of the
disqualified. In the insured. (Sec. 12, In general, a person has insurable interest in the
absence of other ICP) property, if he derives pecuniary benefit or
beneficiaries
advantage from its preservation or would suffer
Note that the insurer is pecuniary loss, damage or prejudice by its
still liable. (2008
destruction whether he has or he has no title in,
Bar)
or lien upon, or possession of the property.
In case the beneficiary If irrevocable, the
(Filipino Merchants Insurance Co., Inc. v. CA, G.R. No.
predeceases the proceeds shall inure to
85141, November 28, 1989)
insuted, make a the benefit of the legal
distinction between representatives of the
irrevocable and beneficiary. If Hence, PECUNIARY INTEREST over the property
revocable beneficiary. revocable, the proceeds is always necessary although the interest is not
shall inure to the estate limited to interest of an owner. (Aquino-Sundiang,
of the insured. If the Sr., Reviewer on Commercial Law, 2022 Edition, p. 40)
policy is silent as to
whether designation is Additional Rules:
irrevocable or
revocable, the proceeds (1) Estoppel cannot be invoked because the
shall inure to the estate
existence of insurable interest is a matter of
of the insured because
the designation is public policy. (ibid.)
revocable unless (2) A person having a mere right of possession
otherwise specified in of the property may insure its full value in his
the policy. own name. (ibid.)
The beneficiary's the proceeds are (3) A person has insurable interest if he has real
interest in a life payable to him right over the property or in any situation
insurance endowment where the person may be damnified by the
policy will only accrue if loss of the property because he will be
the insured dies before
deprived of possession of the property or of
the end of the
endowment period. If
a collateral, or he will be made responsible
the insured survives, for the loss. Thus, the owner, the mortgagee,
(Divina, Divina on Commercial Law A Comprehensive lessee, usufructuary, the depositary, the
Guide, Vol. I, 2021, pp. 19-20). carrier, or the gratuitous borrower in
commodatum has insurable interest over the
b) Insurable Interest in Non-Life Insurance property that is the subject of their contracts
or right (2016 Bar). (ibid.)
Insurable Interest in Property Insurance (4) An heir has no insurable interest over
Every interest in property, whether real or properties that he will inherit. (ibid.)
personal, or any relation thereto, or liability in (5) An owner whose property was levied upon by
respect thereof, of such nature that a a judgment creditor, and who lost the same
contemplated peril might directly damnify the in an execution sale retains insurable interest
insured, is an insurable interest in property. thereon during the redemption period. (ibid.)
(Sec. 13, ICP) (6) The carrier has insurable interest over the
goods that are being shipped and so does the
Basic Rule: No contract or policy of insurance consignee buyer. (Malayan Insurance Co. v.
on property shall be enforceable except for the Philippine First Ins. Co., G.R. No. 184300, July 11,
benefit of some person having an insurable 2012)
interest in the property insured. (Sec. 18, ICP) (7) The lessee in a financial lease has insurable
interest over the property that is the object
of the lease although title is retained by the

276
 financial lessor. (Vicente Ong Lim Sing, Jr. v. FEB
Leasing, G.R. No. 168115, June 8, 2007)
An insurable interest in property does not
necessarily imply a property interest in, or a lien
upon, or possession of, the subject matter of the
insurance, and neither the title nor a
beneficial interest is requisite to the existence of
such an interest. It is sufficient that the insured
is so situated with reference to the property that
he would be liable to loss should it be injured or
destroyed by the peril against which it is insured.
Anyone has an insurable interest in property
who derives a benefit from its existence or would
suffer loss from its destruction.
Insurable interest in property is not limited to
property ownership in the subject matter of the
insurance. Where the interest of the insured in,
or his relation to, the property is such that he will
be benefitted by its continued existence, or will
suffer a direct pecuniary loss by its destruction,
his contract of insurance will be upheld, although
he has no legal or equitable title. A husband
would thus have an insurable interest in the
paraphernal property of his wife since the fruits
thereof belong the conjugal partnership and may
be used for the support of the family. (UCPB
General Insurance Co., Inc. v. Asgard Corrugated Box
Manufacturing Corp., G.R. No. 244407, January 26,
2021)
Kinds of Insurable Interest in Property
Insurance
(1) Existing Interest
Examples:
 A carrier or depository of any kind has
insurable interest in a thing held by him
as such, to the extent of his liability but
not to exceed the value thereof.
 Both the mortgagor and mortgagee may
insure the mortgaged property against
fire. The mortgagor may insure it up to
the extent of the value while the
mortgagee up to the extent of mortgage
debt.
 A depositor may insure his deposits in
excess of PDIC insurance coverage
(Divina,Divina on Commercial Law A
Comprehensive Guide, Vol. I, 2021, pp. 20 -
21).
(2) Inchoate interest founded on an existing
interest
Examples:
 A stockholder may insure corporate
property to the extent of and in
proportion to the value of his shares in
the corporation. A stockholder has
inchoate right to the corporate assets
which will ripen into full ownership upon
dissolution and liquidation of the
corporation
 A property under contract to sell
 The judgment creditor after levy of the
judgment debtor’s property, may insure
it because the debtor may not exercise
his right of redemption (Ibid, p. 22).
(3) Expectancy, coupled with an existing interest
out of which the expectancy arises. e.g.
interest over the profits that are to be earned
in a business establishment
Examples:
 Growing crops.
 Expected freightage of the common
carrier.
 Profits of a partnership for a partner (Ibid,
p. 23).
Insurable Interest of Beneficiary in
Property Insurance
The beneficiary must have insurable interest in
the property that is the object of insurance.
The contract will be considered a wagering
contract if the beneficiary will be allowed to
recover even if he has no insurable interest on
the subject property. (Aquino, Essentials of
Insurance, 2018, pp. 109 - 110)
277
Effect of change of interest in the thing
insured
General A change in interest in the thing
rule: insured without a change in
insurance does not transfer the
policy but suspends it until the
interest in the thing and the interest
in the insurance are vested in the
same person. (Sec. 20, ICP)
Exceptions: a) Life, health, and accident
insurance. (Sec. 20, ICP)
b) A change of interest in the
thing insured after the
occurrence of an injury which
results in a loss. (Sec. 21, ICP)
c) A change of interest in one or
more of several things,
separately insured by one
policy. (Sec. 22, ICP)
d) A change of interest by will or
succession on the death of the
insured. (Sec. 23, ICP)
e) A transfer of interest by one of
several partners, joint owners,
or owners in common, who are
jointly insured, to the others.
(Sec. 24, ICP)
f) When a policy is so framed that
it will inure to the benefit of
whomsoever, during the
continuance of the risk, may
become the owner of the
interest insured. (Sec. 57, ICP)
When there is an express
prohibition against alienation in the
policy, in case of alienation, the
contract of insurance is not merely
suspended but is avoided. (Art.
1306, Civil Code)
Insurable Interest of Bailee
In a contract of carriage, both the carrier and the
depositary have insurable interest over the
property subject to the provision of Section 15 of
the Insurance Code of the Philippines which
provides: “A carrier or depository of any kind has
an insurable interest in a thing held by him as
such to the extent of his liability but not to exceed
the value thereof.” (Sec. 15, ICP)
In case of mortgaged property
Open mortgage or loss payable clause
Acts of the mortgagor affects the mortgagee
because the mortgagor does not cease to be a
party to the contract.
Unless the policy otherwise provides, where a
mortgagor of property effects insurance in his
own name providing that the loss shall be payable
to the mortgagee, or assigns a policy of insurance
to a mortgagee, the insurance is deemed to be
upon the interest of the mortgagor, who does not
cease to be a party to the original contract, and
any act of his, prior to the loss, which would
otherwise avoid the insurance, will have the same
effect, although the property is in the hands of
the mortgagee, but any act which, under the
contract of insurance, is to be performed by the
mortgagor, may be performed by the mortgagee
therein named, with the same effect as if it had
been performed by the mortgagor. (Sec.8, ICP)
Standard or union mortgage clause
The subsequent acts of the mortgagor cannot
affect the rights of mortgagee.
If an insurer assents to the transfer of an
insurance from a mortgagor to a mortgagee, and,
at the time of his assent, imposes further
obligations on the assignee, making a new
contract with him, the acts of the mortgagor
cannot affect the rights of said assignee. (Sec. 9,
ICP)
Insurable Interest of the Mortgagor and
Mortgagee
Both the mortgagor and a mortgagee have
separate and distinct insurable interests in the
same mortgaged property, such that each one of
them may insure the same property for his own
sole benefit; The intentions of the parties as
shown by their contemporaneous acts, must be
given due consideration in order to better serve
the interest of justice and equity. (Rizal Commercial
Banking Corporation vs. Court of Appeals, G.R. Nos.
128833, 128834, and 128866, April 20, 1998)
278
Both interests may be covered by one policy, or Effects if the mortgagee procures separate
each may take out a separate policy covering his insurance coverage without reference to
interest, either at the same or at separate times the right of the mortgagor

Mortgagor’s Mortgagee’s The effects are as follows:

insurable interest insurable interest (a) The mortgagee may collect from the insurer
General Rule: Covers The mortgagee's to the extent of his credit.
the full value of the insurable interest is to (b) The insurer, after payment to the mortgagee,
mortgaged property, the extent of the debt,
is subrogated to the rights of the latter
even though the since the property is
mortgage debt is relied upon as security
against the mortgagor and may collect the
equivalent to the full thereof, and in insuring debt of the latter to the extent of the amount
value of the property. he is not insuring the paid to the mortgagee. This principle applies
(Geagonia vs. Court of property but his interest only where the policy obtained by the
Appeals, G.R. No. or lien thereon. His mortgagee covers his interest alone.
114427, February 6, insurable interest (c) The mortgagee-insured can no longer collect
1995) is prima facie the value the mortgagor's indebtedness after receiving
mortgaged and extends full payment of the credit from the insurer
Exception: The only to the amount of
since the latter acquires the right to collect
insurable interest of the the debt, not exceeding
owner of the ship the value of the
from the mortgagor by virtue of the
hypothecated by mortgaged property. subrogation. However, if the mortgagee is
bottomry is only the (Geagonia vs. Court of not able to collect the whole amount of the
excess of its value over Appeals, G.R. No. credit, he may still collect the deficiency from
the amount secured by 114427, February 6, the mortgagor. (Divina, Divina on Commercial
bottomry. (Sec. 103, 1995) Law A Comprehensive Guide, Vol. I, 2021, p. 30).
ICP)
Insurable Interest in Marine Insurance
Ways Where Mortgagee May Be the
Beneficial Payee (1) The owner of the ship has in all cases
(2) The owner of the ship has insurable interest
(1) He may become the assignee of the policy in expected freightage which according to the
with the consent of the insurer (2012 Bar); ordinary and probable course of things he
(2) He may be the pledgee without the consent would have earned but for the intervention of
of the insurer; the peril insured against or other peril
(3) The original policy may contain a mortgage incident to the voyage (Sec. 105, ICP).
clause; (3) One who has an interest in the thing from
(4) A rider making the policy payable to the which profits are expected to proceed has an
mortgagee as his interest may appear may insurable interest in the profits (Sec. 107, ICP).
be attached (loss payable clause);
(5) A standard mortgage clause containing a Persons with Insurable Interest Over the
collateral independent contract between the Ship
mortgagor and the insurer may be attached;
(6) The policy, though by its terms payable is Shipowner (1) over the value of the vessel
absolutely payable to the mortgagor, may
have been procured by a mortgagor under a The owner of a ship has in all
contract duty to insure for the mortgagee’s cases an insurable interest in it
benefit, in which case the mortgagee even if chartered and the
charterer agreed to pay the
acquires an equitable lien upon the proceeds
shipowner the value of the
(Sundiang & Aquino, Reviewer on Commercial
vessel in case of loss. However,
Law, 2019, p. 116; Geagonia vs. Court of Appeals,
the shipowner can recover only
G.R. No. 114427, February 6, 1995).
the amount not recoverable

279
 from the charterer. (Sec. 102,
ICP)
If the ship is hypothecated by a
bottomry loan, the insurable
interest is only up to the excess
of the value of the vessel over
the loan. (Sec. 103, ICP)
(2) over expected freightage
(3) Freightage, in the sense of a
policy of marine insurance,
signifies all the benefits
derived by the owner, either
from the chartering of the ship
or its employment for the
carriage of his own goods or
those of others. (Sec. 104,
ICP)
Cargo Over the cargo and expected profit
owner/ (Sec. 107, ICP)
Shipper
Charterer (1) over the vessel up to the
extent of the amount he is
liable to the shipowner, if the
ship is lost or damaged during
the voyage (Sec. 108, ICP).
(2) over his expected profits or
freightage if he accepts
cargoes from other persons for
a fee.
(3) over his own cargo or his
client's cargo.
Lender on A lender in a loan on bottomry has
Bottomry insurable interest over the ship up
(Sec. 103, to the extent of the loan. (Aquino,
ICP) Essentials, 2018, p. 318)
A loan on bottomry
or respondentia shall be considered
that which the repayment of the
sum loaned and the premium
stipulated, under any condition
whatsoever, depends on the safe
arrival in port of the goods on which
it is made, or of their value in case
of accident. (Art. 719, Code of
Commerce).
It is a loan on bottomry when the
security is a vessel, and
respondentia when the security is
cargo.
Mortgagee The vessel may be mortgage by the
shipowner. (Aquino, Essentials,
2018, p. 318)
(Aquino-Sundiang, Sr., Reviewer on Commercial Law,
2022 Edition, pp. 84-85; Aquino, Essentials, 2018, p.
318)
5. DOUBLE INSURANCE AND
OVERINSURANCE
When does double insurance exist?
Double insurance exists when the same person is
insured by several insurers separately in respect
to the same subject and interest. (Sec. 95, ICP)
Requisites:
(1) The person insured is the same;
(2) There are two or more insurers insuring
separately;
(3) The subject matter is the same;
(4) The interest insured is also the same; and
(5) The risk or peril insured against is likewise the
same. (Aquino-Sundiang, Sr., Reviewer on
Commercial Law, 2022 Edition, pp. 71-72;
Malayan Insurance Co., Inc. v: Philippine First
Insurance Co., G.R. No. 184300, July 14, 2012).
Nature of the liability of the several
insurers in double insurance
In double insurance, the insurers are considered
as co-insurers. Each one is bound to contribute
ratably to the loss in proportion to the amount for
which he is liable under his contract. (Divina,
Divina on Commercial Law A Comprehensive Guide,
Vol. I, 2021, p. 39).
Double insurance in life insurance
There can be double insurance in life insurance
but there can never be over-insurance because of
the intrinsic value of life.
Double insurance prohibited
General rule: Exception:
The implication of the rules The total insurance
on double insurance (Sec. 93 is in excess of the
and 94) under the Insurance value of the
property insured.
280
 Code is that double insurance 6. Discovery of other insurance coverage in
is not prohibited. excess of the value of property is a ground
for rescission (Sec. 64[f], IPC)
Note: But it may be
contractually prohibited by a
Over-Insurance v. Double Insurance
provision in an insurance
policy.
OVER-INSURANCE DOUBLE INSURANCE
As to Number of Insurers
Over-insurance by Double Insurance
May be one or more Always more than one
insurers involved insurers involved
There is over-insurance if the insured takes out As to Amount of Insurance
an insurance over the property insured in an Amount of insurance is There may be no over-
amount which is in excess of the value of his beyond the value of insurance as when the
insurable interest (Aquino, Essentials of Insurance, insurable interest of the sum total of the
2018, p. 283 ). insured. amounts of the policies
issued does not exceed
Effects of Double Insurance and Over- the insurable interest of
Insurance (Sec. 96, ICP) the insured.

Where the insured in a policy other than life is Reinsurance

over insured by double insurance. A contract of reinsurance is defined as one by
which an insurer procures a third person
1. The insured, unless the policy otherwise (reinsurer) to insure him against loss or liability
provides, may claim payment from the by reason of such original insurance. 65 A
insurers in such order as he may select, up to separate and distinct arrangement from the
the amount for which the insurers are original contract of insurance, a reinsurance
severally liable under the respective agreement insures the contracted risk in the
contracts; original insurance contract. 66 The reinsurer's
2. Where the policy under which the the insured contractual relationship is with the direct insurer,
claims is a valued policy, any sum received by not the original insured, and the latter has no
him under any policy shall be deducted from interest in and is generally not privy to the
the value of the policy without regard to the contract of reinsurance. Plainly, reinsurance is the
actual value of the subject matter insured; "insurance of an insurance." (The Solid Guaranty,
3. Where the policy under which the insured Inc. v. FLT Prime Insurance Corp., G.R. No. 248094
(Notice), November 11, 2021)
claims is an unvalued policy, any sum
received by him under any policy shall be
deducted against the full insurable value, for General Rule Exception
any sum received by him under any policy; The original insured The original insured
4. Where the insured receives any sum in has no interest in a may be allowed to
excess of the valuation in the case of valued contract of directly sue the
policies, or of the insurable value in the case reinsurance (Sec. reinsurer if the
of unvalued policies, he must hold such sum 100, ICP). There is no reinsurance policy
in trust for the insurers, according to their privity between the contains a stipulation
right contribution among themselves; original insured and pour autrui in favor of
5. Principle of Contribution – Each insurer is the reinsurer. Thus, the original insured.
bound, as between himself and the other the original insured Under the same
insurers, to contribute ratably to the loss in cannot file an action general principle, the
proportion to the amount for which he is to recover from the reinsurer is not
liable under his contract. (Malayan Insurance reinsurer even if he required to comply
Co., Inc. v. Philippine First Insurance Co., has difficulty in with the requirements
Inc., G.R. No. 184300, July 11, 2012) recovering from the imposed under the

281
 original insurer. rules only to the Double Insurance vs. Co-insurance
Neither can the original insurer (the
reinsurer intervene in surety in this case) CO-INSURANCE DOUBLE INSURANCE
the case filed by the The insured undertakes The insurer partially
insured against the to assume the risk to insured the property
original insurer the extent that is not
covered by the
(ibid). insurance.
(ibid.)
Insurance Policy vs. Reinsurance
6. NO FAULT, SUICIDE, AND
INSURANCE POLICY REINSURANCE
INCONTESTABILITY CLAUSE
(Sec. 49, ICP) (Sec. 97, ICP)
As to definition
The written document Any contract by which NO FAULT CLAUSE
embodying the terms an insurer procures a
and stipulations of the third person to insure The injured third party or passenger is given the
contract of insurance him against loss or option to file a claim for death or injury without
between the insured liability by reason of the necessity of proving fault or negligence of any
and insurer. such original insurance. kind. (Sec. 391, ICP)
As to evidence
A formal written The original contract of From Whom Should the Injured Recover
instrument evidencing insurance and the
(a) In the case of an occupant, the claim under
the contract of contract of reinsurance
insurance is covered by separate
the “no-fault indemnity” provision lies against
policies. the insurer of the vehicle where the occupant
is riding and no other. The claimant is not
Double Insurance vs. Reinsurance free to choose from which insurer he will
claim the “no fault indemnity,” as the law, by
DOUBLE INSURANCE REINSURANCE using the word “shall,” makes it mandatory
(Sec. 95, ICP) (Sec. 97, ICP) that the claim be made against the insurer of
As to Interest the vehicle in which the occupant is riding,
Involves the same Insurance of different mounting or dismounting from. (Perla
interest interests Compania de Seguros, Inc. vs. Ancheta, G.R. No.
As to Insurer No. L-49699. August 8, 1988)
Insurer remains in such Insurer becomes an (b) If not an occupant, claim shall lie against the
capacity insured in relation to insurer of the directly offending vehicle.
reinsurer (c) In all cases, the right of the party paying the
As to Insured claim to recover against the owner of the
Insured in the first Original insured has no vehicle responsible for the accident shall be
contract is a party in interest in reinsurance
maintained. (Aquino-Sundiang, Sr., Reviewer on
interest in the second contract
Commercial Law, 2022 Edition, p. 99)
contract
As to Subject
Subject of insurance is Subject of insurance is
Conditions for application of no fault clause
property the original insurer’s risk
As to Consent 1) The claim must be for death or bodily injuries
Insured has to give his Consent of original only (property damage or liability not
consent insured, not necessary included).
(Aquino-Sundiang, Sr., Reviewer on Commercial Law,
2022 Edition, pp. 74) 2) The total indemnity in respect of any person
shall not exceed PHP 15,000 (Sec. 391, ICP,
Insurance Memo Circular 4-2006)

282
3) The following proof of loss, when submitted
under oath, shall be sufficient evidence to
substantiate the claim (1984 BAR)
a) Police report of accident; and
b) Death certificate and evidence sufficient
to establish the proper payee; or
c) Medical report and evidence of medical
or hospital disbursement in respect of
which refund is claimed. (Sec. 391, IPC)
4) No double recovery; claim may be made
against one motor vehicle only. (Sundiang &
Aquino, Reviewer on Commercial Law, 2019, p.
167)
Proper Insurer to Claim From
The claimant is not free to choose from which
insurer he will claim the “no fault indemnity,” as
the law, by using the word “shall,” makes it
mandatory that the claim be made against the
insurer of the vehicle in which the occupant is
riding, mounting or dismounting from. (Perla
Campania de Segtabs, Inc. V. Ancheta, GR. L- 49699,
August 8, 1988).
Limitations on no fault indemnity provision
a) A claim may be made against one motor
vehicle only.
b) If the victim is an occupant of a vehicle, the
claim shall lie against the insurer of the
vehicle in which he is riding, mounting or
dismounting from.
c) In any other case (i.e., if the victim is not an
occupant of a vehicle), the claim shall lie
against the insurer of the directly offending
vehicle.
d) In all cases, the right of the party paying the
claim to recover against the owner of the
vehicle responsible for the accident shall be
maintained.
e) The total indemnity in respect of any person
shall not exceed fifteen thousand pesos
(P15,000.00);
f) The following proofs of loss, when submitted
under oath, shall be sufficient evidence to
substantiate the claim:
i. Police report of accident, and
ii. Death certificate and evidence sufficient
to establish the proper payee, or
iii. Medical report and evidence of medical
or hospital disbursement in respect of
which refund is claimed. (Aquino,
Essentials of Insurance, 2018, p. 426).
Schedule and Coverage of Indemnities
The Commissioner may, if warranted, set forth
schedule of indemnities for the payment of claims
for death or bodily injuries with the coverages set
forth herein. (Sec. 390, ICP)
The Court ruled that the schedule does not
restrict the kinds of damages that petitioner may
be made to pay as long as liability is shown to
have arisen and the requisites for each kind of
damages are present.
The schedule is not an enumeration of the
specific kinds of damages that may be awarded.
Its purpose was to set limits to the amounts the
insurance company would be liable for in cases of
"claims for death, bodily injuries of, professional
services and hospital charges, for services
rendered to traffic accident victims"; it does not
limit or exclude claims for other kinds of
damages. The Court added that petitioner therein
should have used a more specific and precise
language to reflect its intentions as presented in
its arguments. (Malayan Insurance Co., Inc. v.
Stronghold Insurance Co., Inc., G.R. No. 203060, June
28, 2021, HERNANDO, J.)
Other Common Clauses in Compulsory
Motor Vehicle Liability Insurance (CMVLI)
i. Authorized Driver Clause – is a
stipulation in a motor vehicle insurance
policy which provides that the driver, other
than the insured owner, must be duly
licensed to drive the motor vehicle,
otherwise the insurer is excused from
liability (Villacorta vs. Insurance Commission,
G.R. No. 5417, October 28, 1980)
ii. Theft Clause - The risks insured against in
the policy may include theft. If there is such
a provision and the vehicle was unlawfully
taken, the insurer is liable under the theft
clause and the authorized driver clause
does not apply. The insured can recover
283
 even if the thief has no driver’s license.
(Perla Compania de Seguros v. CA, G.R. No.
96452, May, 07, 1992)
The taking of a vehicle by another person
without the permission or authority from
the owner thereof is sufficient to place it
within the ambit of the word theft as
contemplated in the policy, and is
therefore, compensable (Paramount
Insurance Corp. v. Remondeulaz, G.R. No
173773, November 28, 2012).
Theft Clause applies
There is theft as contemplated under the Theft
Clause if the vehicle is taken with intent to gain
without the consent of the insured-owner. Thus,
there is theft EVEN if:
(1) the vehicle was returned; or
(2) the vehicle was stolen by the driver of the
insured (Alpha Insurance and Surety Company v.
Castor, G.R. No. 198174, September 2, 2013); or
(3) the vehicle was taken to the owner of a repair
shop for the purpose of repair and in order to
attach accessories (Paramount Insurance v. Sps.
Remondeulaz, G.R. No. 173773, November 28,
2012).
SUICIDE CLAUSE
A policy provision that states the liability of
insurer in case of death by suicide.
Effect of death through suicide
The insurer in a life insurance contract shall be
liable in case of suicide if:
(1) Suicide was committed after the policy has
been in force for a period of two years from
the date of its issue or its last reinstatement,
unless the policy provides for a shorter
period;
Any stipulation extending the two-year period is
void.
(2) Suicide committed in a state of insanity; it
shall make the insurer liable regardless of the
date of the commission of the suicide (Sec.
183, ICP; (Aquino-Sundiang, Sr., Reviewer on
Commercial Law, 2022 Edition, p. 104)
Burden of Proof in Suicide Clauses
It is incumbent upon a party alleging suicide as a
defense, especially in actions involving insurance
policies to prove it by clear and convincing proof.
Killing of the Insured by the Beneficiary
General Rule: Exception:
The interest of a beneficiary (1) Accidental
in a life insurance policy shall killing;
be forfeited when the (2) Self-defense;
beneficiary is the principal, and
accomplice, or accessory in (3) Insanity of the
willfully bringing about the beneficiary at
death of the insured. In such the time he
a case, the share forfeited killed the
shall pass on to the other insured. (Sec.
beneficiaries, unless 183, ICP, De
otherwise disqualified. In the Leon, Insurance
absence of other Code, p. 113)
beneficiaries, the proceeds
shall be paid in accordance
with the policy contract. If
the policy contract is silent,
the proceeds shall be paid to
the estate of the insured.
(Sec. 12, ICP)
INCONTESTABILITY CLAUSES
An incontestable clause is an agreement by which
the insurance company limits the period of time
within which it will interpose objections to the
validity of the policy or set up any defense.
Rationale
The “Incontestability Clause” under Sec. 48 of the
Insurance Code regulates both the actions of the
insurers and prospective takers of life insurance.
It gives insurers enough time to inquire whether
the policy was obtained by fraud, concealment,
or misrepresentation; on the other hand, it
forewarns scheming individuals that their
attempts at insurance fraud would be timely
uncovered – thus deterring them from venturing
into such nefarious enterprise.
At the same time, legitimate policy holders are
absolutely protected from unwarranted denial of
their claims or delay in the collection of insurance
proceeds occasioned by allegations of fraud,
284
concealment, or misrepresentation by insurers, 29,2013; The Insular Life Assurance Co. Ltd. v.
claims which may no longer be set up after the Khu, April 18, 2016; Aquino-Sundiang, Sr.,
two-year period expires as ordained under the Reviewer on Commercial Law, 2022 Edition, p. 70)
law.
Defenses that are not barred by
Thus, the self-regulating feature of Section 48 lies incontestability clause:
in the fact that both the insurer and the insured
are given the assurance that any dishonest (a) That a person taking the insurance lacked
scheme to obtain life insurance would be insurable interest as required by law;
exposed, and attempts at unduly denying a claim (b) The cause of death of the insured is an
would be struck down. (Manila Bankers Life excepted risk;
Insurance Corporation v. Cresencia Aban, G.R. No. (c) That the premiums have not been paid;
175666, 29 July 2013) (d) That the conditions of the policy relating to
military or naval service have been violated;
Period of Incontestability (e) That fraud is of particularly vicious type;
(f) That the beneficiary failed to furnish proof of
Prevailing Doctrine Old Doctrine death or to comply with any condition
An insurer is given two After a policy of life imposed by the policy after the loss has
years — from the insurance made happened; or
effectivity of a life payable on the death (g) The action was not brought within the time
insurance contract and of the insured shall specified (Aquino-Sundiang, Sr., Reviewer on
while the insured is alive have been in force Commercial Law, 2022 Edition, p. 71)
— to discover or prove during the lifetime of
that the policy is void ab the insured for a period
initio or is rescindible by of two years from
B. PERFECTION OF THE INSURANCE
reason of the fraudulent the date of its issue CONTRACT
concealment or or of its last
misrepresentation of the reinstatement, the A contract of insurance, like other contracts, must
insured or his agent. insurer cannot prove be assented to by both parties either in person or
After the two-year that the policy is void by their agents. So long as an application for
period lapses, or when ab initio or is insurance has not been either accepted or
the insured dies within rescindible by reason rejected, it is merely an offer or proposal to make
the period, the insurer of the fraudulent
a contract. The contract, to be binding from the
must make good on concealment or
the policy, even misrepresentation of
date of application, must have been a completed
though the policy was the insured or his contract, one that leaves nothing to be done,
obtained by fraud, agent. (Manila Bankers nothing to be completed, nothing to be passed
concealment, or Life Insurance upon, or determined, before it shall take effect.
misrepresentation Corporation vs. Aban, There can be no contract of insurance unless the
(Sun Life of Canada G.R. No. 175666, July minds of the parties have met in agreement.
(Philippines), Inc. vs. 29, 2013 (Perez v. CA, G.R. No. 112329, 2000)
Sibya, 793 SCRA 45,
2016). The contract of insurance is perfected when the
assent or consent is manifested by the meeting
Requisites: of the offer and the acceptance upon the thing
(a) The insurance is a life insurance policy and the cause which are to constitute the
payable on the death of the insured. contract. Mere offer or proposal is not
(b) It has been in force during the lifetime of the contemplated (De Lim v. Sun Life Assurance Co., G.R.
insured for at least two years from its date of No. L-15774, November 29, 1920).
issue or of its last reinstatement (Sec. 48, ICP).
(c) The period of two years may be shortened
but it cannot be extended by stipulation
(Manila Bankers Life Ins. Corp. v. Aban, July

285
1. Offer and acceptance/ Consensual
Theory of Cognition (Civil Code): acceptance is
considered to effectively bond the offeror only
from the time it came to his knowledge.
In the case of Enriquez v. Sun Life Assurance Co.,
the Supreme Court applied the Cognition Theory
when it ruled that an acceptance made by letter
shall not bind the person making the offer except
from the time it came to his knowledge. The court
held that:
a) The submission of an application, even with
premium payment is a mere offer on the part
of the applicant, and does not bind the
insurer;
b) An insurance contract is also not perfected
where the applicant dies before the approval
of his application or it does not appear that
the acceptance of the application ever came
to the knowledge of the applicant;
c) An acceptance made by letter shall not bind
the person making the offer except from the
time it came to his knowledge. (GR. 15895,
Nov. 29, 1920)
Theory of Manifestation (Code of Commerce):
the contract is perfected at the moment when the
acceptance is declared or made by the offeree
(Divina, Divina on Commercial Law A Comprehensive
Guide, Vol. I, 2021, p. 41).
Contract of insurance, when perfected
Pursuant to the cognition theory, an insurance
contract is perfected when the applicant-insured
has knowledge of the acceptance and approval
by the insurer of his application. There is no valid
and perfected insurance contract without
payment of premium.
Generally, the insured is the one making the offer
by submitting an application to the insurer and
the latter accepts the offer by approving the
application. Thus, mere submission of the
application without the corresponding approval of
the policy does not result in the perfection of the
contract of insurance (Great Pacific Life Assurance
Corp. v. CA, No. L-31845. April 30, 1979; See
Exception: Eternal Gardens Memorial Park v. Philam
Life, G.R. No. 166245, April 9, 2008; Aquino-Sundiang,
Sr., Reviewer on Commercial Law, 2022 Edition, p. 22)
(2011 and 2016 Bar).
Cover notes are interim or preparatory
contracts of insurance. An interim coverage may
be necessary because the insurer may need more
time to process the insurance application. (Aquino,
Essentials of Insurance, 2018, p. 165)
Cover notes are issued to bind insurance
temporarily pending the issuance of the policy.
Within 60 days after issue of a cover note. A
policy shall be issued in lieu thereof, including
within its terms the identical insurance bound
under the cover note and the premium therefore.
(Divina, Divina on Commercial Law A Comprehensive
Guide, Vol. I, 2021, p. 53).
COVER NOTES BINDING RECEIPT
A temporary insurance A conditional insurance
coverage pending coverage but does not
issuance of the policy become effective unless
and the insurer is liable if eventually approved by
the loss occurred during the insurer.
such provisional period.
The Policy – Form of the Contract
No policy, certificate or contract of insurance shall
be issued or delivered within the Philippines
unless in the form previously approved by the
Commissioner;
The policy shall be in printed form which may
contain blank spaces; and any word, phrase,
clause, mark, sign, symbol, signature, number, or
word necessary to complete the contract of
insurance shall be written on the blank spaces
provided therein. (Sec. 50, ICP)
Delivery of Policy
Since the contract of insurance is consensual (and
not a formal or real contract), delivery of the
policy is not necessary for its perfection.
However, the insured has the right to demand
delivery of the policy. (Aquino-Sundiang, Sr.,
Reviewer on Commercial Law, 2022 Edition, p. 22)
286
Acceptance
Where the application for insurance constitutes
an offer by the insured, a policy issued strictly in
accordance with the offer is an acceptance of the
offer that perfects the contract. (De Leon, The
Insurance Code of the Philippines, 2010, p. 179)
Delay in Acceptance
Mere delay by the insurer, although unreasonable
in acting upon the application raises no
implication of acceptance nor does it estop the
insurer to deny the existence of the contract
(Perez V. CA, G.R. No. 412329, January 28, 2000).
Delay in Approval of Policy
Mere delay in acceptance of the insurance
application will not result in a binding contract.
Courts cannot impose upon the parties a contract
if they did not consent. However, in proper cases,
the insurer may be liable for tort.
Exceptional case of Eternal Gardens Memorial
Park Corp. v. Phil. American Life Ins. Corp.,
where there is a prior agreement fixing the date
of effectivity, that is, one year starting from the
party's purchase of a memorial lot on installment
from the memorial park. There was no approval
of the application but the policy was deemed
effective. It is believed, however, that this case is
an example of a policy where the insurer is the
one making the offer and the insured accepts the
offer (G.R. No. 166245, April 9, 2008; Aquino-
Sundiang, Sr., Reviewer on Commercial Law, 2022
Edition, p. 23)
Fine Print Rule
An insurance contract is a contract of adhesion
which must be construed liberally in favor of the
insured and strictly against the insurer in order to
safeguard the latter’s interest (The Insular Life
Assurance Company v. Paz Khu, G.R. No. 195176,
2016)
A contract of adhesion is one wherein a party,
usually a corporation, prepares the stipulations in
the contract, while the other party merely affixes
his signature or his “adhesion” thereto. Any
ambiguity therein is resolved against the insurer,
or construed liberally in favor of the insured. (Gulf
Resorts, Inc. vs. Philippine Charter Insurance
Corporation, G.R. No. 156167, May 16, 2005)
Limitations of liability on the part of the insurer or
health care provider must be construed in such a
way as to preclude it from evading its obligations.
Accordingly, they should be scrutinized by the
courts with extreme jealousy and care and with a
jaundiced eye. (Blue Cross Health Care v. Olivares,
G.R. No. 169737, 2008)
Papers attached to the policy
(a) Rider
Attachment to an insurance policy that
modifies the conditions of the policy by
expanding or restricting its benefits or
excluding certain conditions from the
coverage. (Black’s Law Dictionary, 5th Ed., p.
1189)
Riders, together with other attachments to
the policy like clause, warranty or
endorsements, are not binding on the insured
unless:
(a) The descriptive title or name thereof is
mentioned and written on the blank
spaces provided in the policy; and
(b) Countersigned by the insured or owner
unless he was the one who applied for
the rider, clause, warranty, etc. (Sec. 50,
ICP)
A rider containing an "automatic increase
clause"—one that increases the coverage
subject to the attainment of a certain age of
the insured—is not a separate contract. It is
part of the original policy which is in the
nature of a conditional obligation (Aquino-
Sundiang, Sr., Reviewer on Commercial Law,
2022 Edition, pp. 26-27 citing Commissioner of
Internal Revenue v. Lincoln Philippine Life
Insurance Company, G.R. No. 119176, March 19,
2002).
287
(b) Warranty Under present rules, policies are valid and binding
even if the premiums were paid on installments.
It is a statement or promise made by the (GSIS v. Prudential Guarantee and Assurance, Inc.,
insured set forth in the policy itself or G.R. No. 165585, November 20, 2013)
incorporated in it by proper reference, the
untruth or non-fulfillment of which in any Effect of Non-Payment of Premium
respect, and without reference to whether General Cash and Carry Rule. An
the insurer was in fact prejudiced by such Rule: insurance policy is generally not
binding unless the premium thereof
untruth or non-fulfillment renders the policy
has been paid. (Divina, Divina on
voidable by the insurer. (Dimaampao, Bar Commercial Law A Comprehensive
Essentials in Commercial Law, 2020 ed., p. 337) Guide, Vol. I, 2021, p. 44)
Exception: (1) Grace Period in life of industrial
(c) Clause life policy (Sec. 77, ICP)
(a) Individual Life or
An agreement between the insurer and the Endowment Insurance and
insured on certain matter relating to the Group Life Insurance –
liability of the insurer in case of loss. (De Leon, Grace period of either thirty
Insurance Code, p. 195) (30) days or one (1) month
within which the payment
of any premium after the
No application form shall be used with, and no
first may be made
rider, clause, warranty or endorsement shall be (b) Industrial Life Insurance
attached to, printed or stamped upon such policy, Grace period is four (4)
certificate or contract unless the form of such weeks, and where
application, rider, clause, warranty or premiums are payable
endorsement has been approved by the monthly, either thirty (30)
Commissioner. (Sec. 232, ICP) days or one (1) month.

2. Premium Payment (2) Credit extension (Sec. 77, ICP, as

amended)
Insurance Premium A 90-day credit extension may be
given whenever credit extension
It is the agreed price for assuming and carrying is given under the broker and
the risk. Like the consideration paid to an insurer agency agreements with duly
for undertaking to indemnify the insured against licensed intermediaries.
a specified peril. (De Leon, Insurance Code, p. 244)
(3) Acknowledgement of premium
Premium is the elixir vitae of the insurance payment (Sec. 79, ICP)
business because by law the insurer must
(4) Acceptance by the obligee of the
maintain a legal reserve fund to meet its bond issued by the surety (Sec.
contingent obligations to the public, hence, the 179, ICP)
imperative need for its prompt payment and full
satisfaction. All actuarial calculations and various (5) There is an agreement allowing
tabulations of probabilities of losses under the the insured to pay the premium
risks insured against are based on the sound in installments and partial
hypothesis of prompt payment of premiums. payment has been made at the
Upon this bedrock insurance firms are enabled to time of loss (Makati Tuscany
Condominium v. Court of
offer the assurance of security to the public at
Appeals, G.R. No. 95546, 1992)
favorable rates. (Tibay v. Court of Appeals, G.R. No.
119655, May 24, 1996) (6) Estoppel - (UCPB General
Insurance, Inc. v. Masagana

288
 Telemart, G.R. No. 137172,
1999)
(7) Issuance of cover notes (Sec.
52, ICP)
A notice of availability of a check by itself, does
not produce the effect of payment of a premium.
(Gaisano v. Development Insurance and Surety
Corporation, G.R. No. 190702, February 27, 2017)
Premium payment, insurer entitled to it
An insurer is entitled to payment of the premium
as soon as the thing insured is exposed to the
peril insured against. Notwithstanding any
agreement to the contrary, no policy or contract
of insurance issued by an insurance company is
valid and binding unless and until the premium
thereof has been paid, except in the case of a life
or an industrial life policy whenever the grace
period provision applies. (Sec. 77, ICP)
Non-payment of premiums
The general rules of law applicable to the
payment of money obligations are, of course,
applicable to the payment of insurance
premiums. As a general principle, the time
specified for the payment of premiums is of the
essence of the contract. The ability of the insurer
to meet its contingent obligations to the public
depends upon the prompt payment of all
premiums due it. (De Leon, The Insurance Code of
the Philippines, 2010, p. 247)
Effect of the payment of premium by post-
dated Checks
The payment of a premium by a post-dated check
at a stated maturity subsequent to the loss is
insufficient to put the insurance into effect if
there is no credit agreement (Gaisano v.
Development Insurance and Surety Corp., February
27, 2017).
However, even if there is no credit agreement,
payment by means of a check or a note, accepted
by the insurer, bearing a date prior to the loss,
assuming an availability of the funds thereof,
would be sufficient even if it remains unencashed
at the time of the loss. The subsequent effects of
encashment would retroact to the date of the
instrument and its acceptance by the creditor
(Vitug, Pandect of Commercial Law and Jurisprudence,
1st Ed., p. 68; Aquino-Sundiang, Sr., Reviewer on
Commercial Law, 2022 Edition, p.56)
Authority of Agent to Receive Premium
Any insurance company which delivers a policy or
contract of insurance to an insurance agent or
insurance broker shall be deemed to have
authorized such agent or broker to receive on its
behalf payment of any premium which is due on
such policy or contract of insurance at the time of
its issuance or delivery or which becomes due
thereon.
The insurer is also bound by its agent’s
acknowledgement of receipt of payment of
premium (American Home Assurance Co. v. Chua,
G.R. No. 130421, 1999).
3. Non-default options in life insurance
(a) Extended term insurance the policy’s
available cash value will be used as a single
premium to purchase a term insurance.
(b) Reduced paid up cash value will be used
to purchase a paid-up insurance providing a
coverage with term equivalent to the original
policy but lower amount.
(c) Cash Surrender value once policy is
surrendered it cannot be reinstated. (Divina,
Divina on Commercial Law A Comprehensive
Guide, Vol. I, 2021, p. 146).
4. Reinstatement of Lapsed Policy of Life
Insurance
To reinstate a policy means to restore the
same to premium-paying status after it has
been permitted to lapse Both the Policy
Contract and the Application for
Reinstatement provide for specific conditions
for the reinstatement of a lapsed policy.
(Lalican v. The Insular Life Assurance Company,
Limited, G.R. No. 183526, August 25, 2009)
The insurer has the right to deny the
reinstatement if it is not satisfied as to the
289
 insurability of the insured and if the latter does
not pay all the overdue premiums and all other
indebtedness to the company (Divina, Divina on
Commercial Law A Comprehensive Guide, Vol. I,
2021, p. 53).
5. Refund of Premium
Three instances when an insured is entitled
to a return of premium paid:
a. To the whole premium, if no part of his
interest in the thing insured be exposed to any
of the perils insured against.
b. Where the insurance is made for a definite
period of time and the insured surrenders his
policy, to such portion of the premium as
corresponds with the unexpired time at a pro
rata rate, unless a short period rate has been
agreed upon and appears on the face of the
policy, after deducting from the whole
premium any claim for loss or damage under
the policy which has previously accrued.
c. When the contract is voidable on account of
the fraud or misrepresentation of the insurer
or of his agent or on account of facts the
existence of which the insured was ignorant
without his fault; or when, by default of the
insured other than the actual fraud, the
insurer never incurred any liability under the
policy (Divina, Divina on Commercial Law A
Comprehensive Guide, Vol. I, 2021, p. 59).
A person insured is NOT entitled to a refund
premium if the policy is annulled, rescinded, or if
claim is denied by reason of fraud. (Sec. 82, ICP)
Premium Necessary for Suretyship
General rule: Exception:
Premium is also where the obligee has
necessary in order accepted the bond, it is
for the contract of binding even if the premium
suretyship or bond has not been paid subject to
to be binding. the right of the insurer to
recover the premium from its
principal
(Sec. 79, ICP; Philippine Pryce Assurance Corporation
v. CA, G.R. No. 107062, 1994).
C. RIGHTS AND OBLIGATIONS OF
PARTIES
The rights and obligations of the parties must be
determined by the terms of their contract.
Each party to a contract of insurance is bound to
know all the general causes which are open to his
inquiry, equally with that of the other, and which
may affect the political or material perils
contemplated; and all general usages of trade.
(Sec. 32, ICP)
(1) INSURER
Assumes the risk of loss and undertakes for a
consideration to indemnify the insured upon the
happening of a designated peril (Divina, Divina on
Commercial Law A Comprehensive Guide, Vol. I, 2021,
p. 4).
Right of Insurer
An insurer is entitled to payment of the premium
as soon as the thing insured is exposed to the
peril insured against.
Notwithstanding any agreement to the contrary,
no policy or contract of insurance issued by an
insurance company is valid and binding unless
and until the premium thereof has been paid,
except in the case of a life or an industrial life
policy whenever the grace period provision
applies, or whenever under the broker and
agency agreements with duly licensed
intermediaries, a ninety (90)-day credit extension
is given. No credit extension to a duly licensed
intermediary should exceed ninety (90) days from
date of issuance of the policy. (Sec. 77, ICP)
(2) INSURED
He is the person whose loss is the occasion for
the payment of the insurance proceeds by the
insurer (Divina, Divina on Commercial Law A
Comprehensive Guide, Vol. I, 2021, p. 4).
Rights of Insured
i. Right to financially sound and viable
insurance company.
ii. Right to access insurance companies’ official
financial information
290
 iii. Right to be informed of the license
status of insurance companies,
intermediaries and soliciting agents.
iv. Right to be offered a duly approved
insurance.
v. Right to be informed of the benefits,
exclusions and other provisions under
the policy.
vi. Right to receive the policy.
vii. Right to confidentiality of information.
viii. Right to efficient service from insurance
companies, intermediaries
soliciting agents.
ix. Right to prompt and fair settlement of
claims.
x. Right to seek assistance from the
Insurance Commission. (Aquino,
Essentials of Insurance, 2018, pp. 45 – 46)
Right of the Insured to Rescind Contract
Time to exercise:
(a) In a life insurance – Before the
incontestability clause sets in.
(b) In a non-life policy – Prior to the
commencement of an action on the contract.
Limitations on the Right of the Insured to
Rescind Contract:
(a) In a life insurance – defenses are available
only during the first two years of a life
insurance policy.
The injured party is entitled to rescind the
contract from the time when the representation
becomes false. (Sec. 45, ICP)
(b) In a non-life policy – such right must be
exercised prior to the commencement of an
action in the contract (Sec. 48, ICP).
Waiver of Right to Rescind
Acceptance of premium payments despite
knowledge of the ground for rescission (Sec. 45,
ICP)
Right of the insured to Change Beneficiary
in Life Insurance
General Rule Exception
The insured shall have If the insured has
the right to change the expressly waived this
beneficiary he right in said policy.
designated in the policy Notwithstanding the
foregoing, in the event
the insured does not
change the beneficiary
during his lifetime, the
and designation shall be
deemed irrevocable
(Sec. 11, ICP)
ASSURED. The insured is also the assured when
the proceeds are payable to him. In property
insurance, the assured must have insurable
interest over the property ang such insurable
interest is covered by the insurance policy. In life
insurance, the insured may insure someone else’s
life, and designate himself as beneficiary
provided that he has insurable interest over the
life of the person whom he insures (Divina, Divina
on Commercial Law A Comprehensive Guide, Vol. I,
2021, pp. 4-5).
(3) BENEFICIARY
He is the third person designated by the insured
to receive the proceeds. In case of failure to
designate a beneficiary in a life insurance or the
beneficiary designated is disqualified, the
proceeds should accrue to the estate of the
insured (Divina, Divina on Commercial Law A
Comprehensive Guide, Vol. I, 2021, p. 5).
General Any person may be designated as
rule: beneficiary in life insurance contract
even though he is a stranger and
has no insurable interest in the life
of the insured.
Exception: Those disqualified to receive
donation under Article 739 of the
Civil Code.
Article 739. The following donations
shall be void:
(1) Those made between persons
who were guilty of adultery or
291
 concubinage at the time of the general average loss assessed upon the thing
donation; insured. (Sec. 138, ICP)
(2) Those made between persons
found guilty of the same The insurer of the vessel or cargo that is
criminal offense, in saved is liable for general average
consideration thereof; contribution and not for particular average.
(3) Those made to a public officer Only the insurer of the damaged cargo or
or his wife, descendants and vessel is liable for particular average if
ascendants, by reason of his covered by the policy
office.
General Average Loss vs. Particular
In the case referred to in No. 1, the Average Loss
action for declaration of nullity may
be brought by the spouse of the General Average Loss Particular Average
donor or donee; and the guilt of the Loss
donor and donee may be proved by Includes damages and Includes all damages
preponderance of evidence in the expenses which are and expenses caused to
same action. (Art. 739, New Civil deliberately caused by the vessel or to her
Code (NCC)) the master of the vessel cargo which have not
or upon his authority, in inured to the common
The beneficiary in this case can be order to save the vessel, benefit and profit of all
anyone, such as a distant relative or her cargo, or both at the persons interested in the
friend, who need not have any same time from a real or vessel and her cargo. It
insurable interest in the life of the known risk. It must be refers to those losses
insured. borne equally by all of which occur under such
In order for Article 739 to apply, it the interests concerned circumstances as do not
is not required that there be a in the venture. Under entitle the unfortunate
previous conviction for adultery or this, the requisites to the owners to receive
concubinage, due to the wording of right to claim general contribution from other
“preponderance of evidence” average contribution owners concerned in the
(Insular Life v. Ebrado, G.R. No. L- are: venture as where a
44059, 1977) (a) There must be a vessel accidentally runs
common danger to aground and goes to
Rights of Beneficiary the vessel or pieces after the cargo is
cargo; saved (Sec. 138, ICP)
(b) Part of the vessel
The beneficiary has the right to receive the or cargo was
proceeds of the insurance on the occurrence of sacrificed
the event designated. deliberately;
(c) The sacrifice must
Rights and Liabilities In Relation to Marine be for the common
Insurance safety or for the
benefit of all;
a) Right of the Insured in General Average - (d) It must be made
by the master or
Where it has been agreed that an insurance
upon his authority;
upon a particular thing, or class of things, (e) It must be
shall be free from particular average, a successful, i.e.,
marine insurer is not liable for any particular resulted in the
average loss not depriving the insured of the saving of the
possession, at the port of destination, of the vessel or cargo;
whole of such thing, or class of things, even and
though it becomes entirely worthless; but (f) It must be
such insurer is liable for his proportion of all necessary

292
(Aquino-Sundiang, Sr., Reviewer on Commercial Law,
2022 Edition, p. 87)
b) New Jason Clause - The Jason clause derives
its name from The Jason 225 US 32 (1912)
decided by the US Supreme Court under the
Harter Act. By the Jason clause, a shipowner
(provided he had exercised due diligence to
make the ship seaworthy and properly
manned, equipped and supplied) could claim
a general average contribution from cargo,
even where the damage was caused by faulty
navigation of the vessel, provided that the bill
of lading excluded liability for such faults.
c) Rights of Insurer Who Pays Partial Loss as
Actual Total Loss - If a marine insurer pays
for a loss as if it were an actual total loss, he
is entitled to whatever may remain of the
thing insured, or its proceeds or salvage, as
if there had been a formal abandonment (Sec.
149, ICP)
Kinds of Loss in Marine Insurance
i. Total loss
a. Actual total loss
 Total destruction
 Loss by sinking
 Damage rendering the thing
valueless
 Total deprivation of owner of
possession of thing insured (Sec. 132,
ICP)
Note: Complete physical destruction is not
necessary to consider the loss as actual total loss
as for example where the cargo became totally
useless because of water damage. (1996 Bar)
b. Constructive total loss - (Sec. 133, in relation to
Sec. 141, ICP)
 Actual loss of more than three-fourths
(3/4) of the value of the object;
 Damage reducing value by more than
three-fourths (3/4) of the value of the
vessel and of cargo; and
 Expenses of shipment exceed three-
fourths (3/4) of value of cargo.
ii. Partial loss – every loss which is not
total is partial. (Sec. 130, ICP)
d) Insurer’s Liability for Refusal of Abandonment
- If an insurer refuses to accept a valid
abandonment, he is liable as upon an actual
total loss, deducting from the amount any
proceeds of the thing insured which may
have come to the hands of the insured. (Sec.
156, ICP)
Abandonment
It is the act of the insured by which, after a
constructive total loss, he declares the
relinquishment to the insurer of his interest in the
thing insured. (Sec. 140, ICP)
Requisites of valid abandonment
a. There must be an actual relinquishment by
the person insured of his interest in the thing
insured;
b. There must be a constructive total loss;
c. The abandonment be neither partial nor
conditional; (Sec. 142, ICP)
d. It must be made within a reasonable time
after the receipt of reliable information of the
loss; (Sec. 143, ICP)
e. It must be factual; (Sec. 144, ICP)
f. It must be made by giving notice thereof to
the insurer which may be done orally or in
writing (Sec. 143, ICP);
g. The notice of abandonment must be explicit
and must specify the particular cause of the
abandonment (Sec. 144, ICP).
e) “New for Old” Rule - In the case of a partial
loss of ship or its equipment, the old
materials are to be applied towards payment
for the new.
Unless otherwise stipulated in the policy, a
marine insurer is liable for only 2/3 of the
remaining cost of repairs after such
deduction, except that anchors must be paid
in full. (Sec. 168, ICP)
293
Liability of Surety
The extent of a surety’s liability is determined by
the language of the suretyship contract or bond
itself. It cannot be extended by implication,
beyond the terms of the contract. Thus, to
determine whether petitioner is liable to
respondent under the surety bond, it becomes
necessary to examine the terms of the contract
itself (First Lepanto-Taisho Insurance Corporation
(now known as FLT Prime Insurance Corporation) vs.
Chevron Philippines, Inc. (formerly known as Caltex
Philippines, Inc.), G.R. No. 177839, January 18, 2012).
Where a contract of surety is terminated under
its terms, the liability of the principal for
premiums after such termination ceases
notwithstanding the pendency of a lawsuit to
enforce a liability that accrued during its
stipulated lifetime (Capital Insurance & Surety Co v.
Ronquillo Trading, G.R. No. L-36488, July 25, 1983).
D. RESCISSION OF INSURANCE
CONTRACTS
Grounds for Rescission of an Insurance
Contract
(1) Non-payment of Premium; (Sec. 64, ICP)
(2) Conviction of a crime arising out of acts
increasing the hazard insured against; (Ibid.)
(3) Discovery of fraud or material
misrepresentation; (Ibid.)
(4) Discovery of willful or reckless acts or
omissions increasing the hazard insured
against; (Ibid.)
(5) Physical changes in the property insured
which result in the property becoming
uninsurable; (Ibid.)
(6) Discovery of other insurance coverage that
makes the total insurance in excess of the
property insured; (Ibid.)
(7) Determination by the Commissioner that the
continuation of the policy would violate or
would place the insurer in violation of this
Code; (Ibid.)
(8) Concealment; (Sec. 27, ICP); and
(9) Breach of Material Warranty (Sec. 74, ICP)
The law provides that Sec. 64 applies to “other
than life insurance”. In other words, Sec. 64
applies only to property insurance. Nevertheless,
it is still believed that some of the grounds may
also apply to life insurance. For example, a life
insurance may also be cancelled for non-payment
of premium, fraud or material misrepresentation.
(Aquino, Essentials of Insurance Law, 2018, p. 171)
Requisites of Cancellation
Cancellation of insurance policies requires the
concurrence of the following conditions:
(1) Prior notice of cancellation to insured;
(2) The notice of cancellation must be based on
the occurrence after effective date of the
policy of one or more of the grounds
mentioned in Section 64;
(3) The notice must be in writing, mailed or
delivered to the named insured at the
address shown in the policy or to his broker
is authorized in writing in the policy owner
to receive the notice of cancellation on his
behalf;
(4) The notice must state the grounds relied
upon provided in Section 64 of the Insurance
Code and upon request of insured, to furnish
facts on which cancellation is based.
(Philamcare Health Systems, Inc. vs. Court
of Appeals and Julita Trinos, G.R. No. 125678,
March 18, 2002; Malayan Insurance Co., Inc. v.
Gregoria Cruz Arnaldo, G.R. No. L-67835, October
12, 1987; Sec. 65, ICP)
Devices of Insurer in Ascertaining and
Controlling Risks
Four Primary Concerns of the Insurer
(1) Correct estimation of risk, which enables
insurer to determine if he will approve the
policy application, and if so, at what premium
rate;
(2) Delimitation of the risk;
(3) Control of risk to guard against increase of
risk; and
(4) Determine if loss occurs, and if so, the
amount thereof. (Aquino-Sundiang, Sr.,
Reviewer on Commercial Law, 2022 Edition,
p. 58)
294
Concealment A neglect to communicate describing the risks
that which a party knows assumed.
and ought to communicate.
(Sec. 26, ICP)
1. CONCEALMENT
Representations Representation is a
statement made by insured
at the time of, or prior to, Concealment is a neglect to communicate that
the issuance of the policy as which a party knows and ought to communicate;
to the existing or past fact or whether intentional or unintentional, it entitles
state of facts, or concerning the injured party to rescind a contract of
future happening, to give insurance. (Sec. 26-27, ICP)
information to the insurer
and otherwise induce him to Each party to a contract of insurance must
enter into the insurance communicate to the other, in good faith, all facts
contract. (De Leon, within his knowledge which are material to the
Insurance Code, p. 155)
contract and as to which he makes no warranty,
(1) An oral or written
statement (Sec. 36, and which the other has not the means of
ICP); ascertaining (Sec. 28, ICP)
(2) Made at the time of or
prior to the issuance of Concealment may be committed by either the
the policy (Sec. 37, insurer or the insured. (Qua Che Gan v. Law Union
ICP); & Rock Ins. Co. G.R. No. L-4611 (1955)
(3) Affirmative or
promissory (Sec. 39, Requisites:
ICP); and
(4) Related to the risk to
1) A party knows the fact which he neglects to
be insured (Sec. 45,
ICP). communicate or disclose to the other;
Warranties It is a statement or promise 2) Such party concealing is duty bound to
by the insured contained in disclose such fact to the other;
the policy itself or 3) Such party concealing makes no warranty of
incorporated in or attached the fact concealed; and
to it by proper reference, the 4) The other party has not the means of
falsity or non-fulfillment of ascertaining the fact concealed. (Florendo vs.
which and regardless of Philam Plans, Inc., G.R. No. 186983, February 22,
whether or not the insurer 2012)
has suffered loss or
prejudice as a result of the
Failure of the insured to disclose conditions
falsity or non-fulfillment,
renders the policy voidable affecting the risk of which he is aware, makes the
at the election of the insurer. contract voidable at the insurer’s option, the
(De Leon, Insurance Code, ration being that the contract of insurance is of
p. 166) good faith. But, Sec. 27 uses that phrase “injured
Conditions Collateral promises or party”, thus the insured may also rescind the
stipulations. contract.
Exceptions Stipulations which limit or
restrict the operation of The rule on concealment is a requirement of
the general provisions honesty, good faith and fair dealing. (Argente v.
and excluding certain West Coast Life Insurance Company, G.R. No. L-24899,
specified risks that March 19, 1928)
otherwise would be
included under the
general language

295
Proof of Fraud in Concealment The insured need not die of the disease he had
failed to disclose to the insurer. It is sufficient that
General rule: Exception: his non-disclosure misled the insurer in forming
Fraud need not be When the concealment his estimates of the risks of the proposed
proven in order to prove is made by the insured insurance policy or in making inquiries (Sunlife
concealment. (Saturnino in relation to the falsity Assurance - Company of Canada v. CA, G.R. No.
v. Phil. American Life of a warranty, the non- 105135, June 22, 1995).
Insurance, G.R. No. L- disclosure must be
16163, February 28, intentional and
Effect of Concealment
1963) fraudulent in order that
the contract may be
However, good faith is rescinded. (Sec. 2, ICP) General Concealment vitiates the contract
not a defense in rule: and entitles the insurer to rescind,
concealment. The The Insurance Code even if the death or loss is due to a
materiality of the facts dispenses with proof of cause not related to the concealed
concealed does not fraudulent intent in matter. (Sec. 27, ICP; Sunlife v. CA,
depend on the state of cases of rescission due G.R. No. 105135, 1995)
mind of the insured, but to concealment, but not Exceptions: i. Concealment after the contract
rather to the probable so in cases of rescission has become effective, because
and reasonable due to false concealment must take place at
influence of the facts representations. the time the contract is entered
upon the party to whom Concealment of material into in order that the policy may
communication should facts is fraudulent in and be avoided;
have been made. (Vda. of itself. (The Insular ii. Waiver or estoppel;
de Canilang vs. CA, G.R. Life Assurance Co., Ltd. iii. In marine insurance, where
No. 92492, June 17, v. Heirs of Alvarez, G.R. concealment of the following
1993; The Insular Life Nos. 207526 & 210156, matters does not vitiate the
Assurance Co., Ltd. v. October 03, 2018) entire contract but merely
Heirs of Alvarez, G.R. exonerates the insurer from a
Nos. 207526 & 210156, loss resulting from the risk
October 03, 2018) concealed:
(a) The national character of
the insured;
Burden of proof (b) The liability of the thing
The party claiming the existence of concealment insured to capture and
must prove that there was knowledge of the fact detention;
concealed on the part of the party charged with (c) The liability to seizure
concealment (Insurance Company v. Gridley, 100 from breach of foreign
U.S. 614, 1879) laws or trade;
(d) The want of necessary
Test of Materiality in Concealment documents; and
(e) The user of false and
simulated paper. (Sec.
Materiality is to be determined not by the event,
112, ICP)
but solely by the probable and reasonable iv. Incontestability clause (Sec.
influence of the facts upon the party to whom the 233(b) and Sec. 48, ICP)
communication is due, in forming his estimate of
the disadvantages of the proposed contract, or in Concealment in Marine Insurance
making his inquiries. (Sec. 31, ICP)
In marine insurance, a person is presumed to
The test is the effect which the knowledge of the have knowledge at the time of insuring, of a prior
fact in question would have on the contract. It is loss, if the information has reached him in the
sufficient if the knowledge of it would influence usual mode of transmission.
the party in making the contract. (Vance,
Handbook of the Law of Insurance, 2nd Ed., p. 347)

296
Each of the party in the marine insurance is
bound to disclose the following information:
(1) All information required in Sec. 28 (Sec. 109,
ICP);
(2) All the information which he possesses that is
material to the risk, except such as is
mentioned in Section 30 (ibid,);
(3) the exact and whole truth in relation to all
matters that he represents, or upon inquiry
discloses or assumes to disclose (ibid,); and
(4) Belief and expectation of a third person in
reference to a material fact is material and
must be disclosed in marine insurance (Sec.
109, ICP).
Effect of Concealment in Marine Insurance
Concealment of the matters specified in Sec.112
will not entirely avoid the contract but will merely
exonerate the insurer from losses resulting from
the risk concealed.
Concealment in Non-Medical Insurance
The waiver of medical examination in non-
medical insurance contract renders the
information required of the applicant concerning
the previous conditions of health and diseases
suffered more important. The cause of death is
not important because it is well settled that the
insured need not die of the disease he had failed
to disclose to the insurer. It is sufficient that the
nondisclosure misled the insurer in forming his
estimated of the risks of the proposed policy or in
making inquiries (Sunlife v. Sps. Bacani, G.R. No.
105135 (1995)
The Supreme Court ruled in Philamcare Health
Systems, Inc. v. Court of Appeals and Julita
Trinos, that answers of the applicant, who is not
a doctor, regarding the medical history of his wife
largely depends on opinion rather than fact.
Where matters of opinion or judgment are called
for, answers made in good faith and without
intent to deceive will not avoid the policy even
though they are untrue. (G.R. No. 125678, March
18, 200).
Disclosure of Information Upon Inquiry
Neither party to a contract of insurance is bound
to communicate information of the matters
following, except in answer to the inquiries of the
other:
(1) Those which the other knows;
(2) Those which, in the exercise of ordinary care,
the other ought to know, and of which the
former has no reason to suppose him
ignorant;
(3) Those of which the other waives
communication;
(4) Those which prove or tend to prove the
existence of a risk excluded by a warranty,
and which are not otherwise material; and
(5) Those which relate to a risk excepted from
the policy and which are not otherwise
material (Sec. 30, ICP)
Disclosure of Information Even in the
Absence of Inquiry
(1) Those which the other has no means of
ascertaining (Sec. 30, 32 and 33, ICP)
(2) Those material to the contract (Sec. 31, 34 and
35, ICP)
(3) Those as to which the party with a duty to
communicate makes no warranty (Sec. 67-76,
ICP)
2. MISREPRESENTATION OR OMISSIONS
Representations
It is a statement incidental to the contract of
insurance relative to some fact having reference
thereto and upon the faith of which the contract
is entered into. (Villanueva, Commercial Law Review,
2018 ed., p. 299)
A representation is to be deemed false when the
facts fail to correspond with its assertions or
stipulations. (Sec. 44, ICP)
The fraudulent intent on the part of the insured
must be established to entitle the insurer to
rescind the contract. Misrepresentation as a
defense of the insurer to avoid liability is an
297
affirmative defense and the duty to establish such
defense by satisfactory and convincing evidence
rests upon the insurer. (Manulife v. Ybanez, G.R. No.
204736, 2016)
Requisites of Misrepresentation:
(1) The insured stated a fact which is untrue;
(2) Such fact was stated with knowledge that it
is untrue and with intent to deceive or which
he states positively as true without knowing
it to be true and which has a tendency to
mislead; and
(3) Such fact in either case is material to the risk.
(43 Am. Jur. 2nd 1019)
Kind of Representations
Effects of Misrepresentation in Marine
Insurance
(1) If intentional, any misrepresentation of
material facts with fraudulent intent avoids
policy; and
(2) If not intentional but material to the risk, the
insurer may also rescind the contract from
the time the representation becomes false.
(De Leon, Insurance Code, p. 353)
Instances when injured party CAN rescind
contract on the ground of false
representation
(a) The representation fails to correspond with
the facts (Sec. 44, ICP); and
(b) It is false in a material point (Sec. 45, ICP)

(a) Oral or written (Sec. 36, ICP) The materiality of a representation is determined
(b) Affirmative – involves statements dealing by the same rules as the materiality of
with facts existing at the time the contract is concealment. (Sec. 46, IPC)
made. (Sec. 39, ICP; Aquino, Essentials of
Insurance, 2018, p. 154) Instances when injured party CANNOT
(c) Promissory representation – pertains to rescind contract on the ground of false
statements made by the insured concerning representation
what is to happen at the time the insurance
is already effective. (ibid.) (a) When there is waiver;
(b) When an action has already been
Test of Materiality commenced on the contract (Sec. 48, IPC);
(c) When the incontestable clause applies (Sec.
The materiality of a representation is determined 48, IPC). (Aquino, Essentials of Insurance, 2018,
by the same rules as the materiality of a p. 212)
concealment. (Sec. 46, ICP)
Concealment vs. Representation
Effects of Misrepresentation
Concealment Representation
The injured party is entitled to rescind from the
time when the representation becomes false (Sec. Who may commit
45, ICP).
May be committed by Committed only by
Misrepresentation in Marine Insurance the insured or the insured.
insurer.
Insured’s representation is intentionally false in
any material respect, or in respect of any fact on Acts involved
which the character and nature of the risk
Concealment cannot Representation can
depends, the insurer may rescind the entire
refer to future acts. pertain to future acts
contract. (Sec. 113, ICP) because it can be
promissory.

298
 Concealment Representation A statement in a policy, of a matter relating to the
person or thing insured, or to the risk, as fact, is
It involves an omission – Involves positive assertion an express warranty thereof. (Sec. 71, ICP).
non-disclosure or affirmation
Every express warranty, made at or before the
Materiality execution of a policy, must be contained in the
policy itself, or in another instrument signed by
Same test of materiality applies
the insured and referred to in the policy as
Effects – Who can rescind making a part of it. (Sec. 70, ICP).

Same effects on the part of the insured; insurer has (2) Implied warranty
right to rescind.
Is one that is deemed incorporated in the contract
(Aquino, Essentials of Insurance, 2018, pp. 207-208)
although not expressly mentioned therein. They
are found only in marine insurance; (Sec. 67, ICP)
3. BREACH OF WARRANTIES
(3) Affirmative warranty
Warranty
Asserts the existence of a fact or condition at the
It is a statement or promise made by the insured
time it is made; (Sec. 67, ICP)
set forth in the policy itself or incorporated in it
by proper reference, the untruth or non-
(4) Promissory warranty or Executory
fulfillment of which in any respect, and without
warranty
reference to whether the insurer was in fact
prejudiced by such untruth or non-fulfillment
The insured stipulates that certain facts or
renders the policy voidable by the insurer.
conditions pertaining to the risk shall exist or that
(Dimaampao, Bar Essentials in Commercial Law, 2020
ed., p. 337) certain things with reference thereto shall be
done or omitted. It is the nature of a condition
A warranty may relate to the past, the present, subsequent. (Sec. 72 and 73)
the future or to all of these. (Sec. 68, ICP)
Effect of Breach of Warranty
No particular form of words is necessary to create
a warranty. (Sec. 69, ICP) Material Warranty

General rule: Exceptions:

Breach of Warranty
material warranty - (1) Loss occurs before
The violation of a the time of
Violation of a warranty that there were no other material warranty, or performance of the
insurances on the property insured entitles the other material provision warranty (Sec. 76,
insurer to rescind. (General Insurance & Surety Corp. of the policy, on the part ICP)
v. Ng Hua, G.R. No. L-14373, January 30, 1960) of either the insured or (2) Performance
insurer, entitles the becomes unlawful
Kinds of Warranties (Sec. 67, ICP) other to rescind. (Sec. (ibid.)
74, ICP) (3) Performance
(1) Express Warranty becomes impossible
A breach of warranty (4) (Ibid.)
without fraud merely (5) Waiver or estoppel
Is the one that is stated in the policy or any of its
exonerates an insurer may also prevent the
attachment from the time that it insurer from being
occurs, or where it is discharged from
broken in its inception, liability (Pioneer v.
prevents the policy from

299
 attaching to the risk. Yap, G.R. No. L- Seaworthiness
(Sec. 76, ICP) 36232, 1974) A ship is seaworthy, when reasonably fit to
perform the service, and to encounter the
The breach referred to under Section 76 is one ordinary perils of the voyage, contemplated by
without fraud. Falsity, not fraud, is the basis of the parties to the policy (Sec. 116, ICP).
liability in a warranty.
(1) Without fraud, the policy is avoided only from For a vessel to be seaworthy it must be
the time of breach (Sec. 76, ICP) and the adequately equipped for the voyage and manned
insured is entitled (a) to return the premium with a sufficient number of competent officers
paid at a pro rata rate from the time of breach and crew. (Caltex (Philippines), Inc. vs. Sulpicio Lines,
(Sec. 79[b], ICP). If it occurs after the Inc, G.R. No. 131166, September 30, 1999)
inception of the contract; or (b) to all the
premiums if it is broken during the inception (2) That the ship will not deviate from agreed
of the contract. In the latter case, the voyage unless deviation is proper (Secs. 123-
contract is void ab initio and never becomes 126);
binding.
(2) With fraud, the policy is avoided ab initio, and Deviation
the insured is not entitled to the return of the Deviation is a departure from the course of the
premium paid. (De Leon, The Insurance Code of voyage insured, mentioned in the last two (2)
the Philippines, 2010, p. 234) sections, or an unreasonable delay in pursuing
the voyage or the commencement of an entirely
Insurer is barred by waiver or estoppel to claim different voyage. (Sec. 125, ICP)
violation of the so-called hydrants warranty
when, despite knowing fully that only 2 fire A deviation is proper:
hydrants existed (out of the 11 hydrants (a) When caused by circumstances over which
required), it still issued the insurance policies and neither the master nor the owner of the ship
received the premiums (Qua Chee Gan v. Law has any control;
Union, G.R. No. 4611, December 17, 1955). (b) When necessary to comply with a warranty,
or to avoid a peril, whether or not the peril is
Immaterial Warranty insured against;
(c) When made in good faith, and upon
General rule: Exceptions reasonable grounds of belief in its necessity
Not all breach of the The parties stipulate to avoid a peril; or
provisions in the policy that violation of
(d) When made in good faith, for the purpose of
may give the right to particular provision,
rescind the policy. though normally
saving human life or relieving another vessel
Immaterial provisions do immaterial, shall avoid in distress. (Sec. 126, ICP)
not avoid the policy. the policy. In effect, the
(Sec. 75, ICP). parties converted the (3) That the ship will not engage in an illegal
immaterial provision into venture;
material one. (4) Warranty of possession of documents o
(Aquino-Sundiang, Sr., Reviewer on Commercial Law, neutrality; that the ship will carry the
2022 Edition, p. 67) requisite documents of nationality or
neutrality of the ship or cargo where such
Implied Warranties in Marine Insurance nationality or neutrality is expressly
warranted (Sec. 122, ICP);
(1) That the ship is seaworthy at the inception of (5) Presence of insurable interest. (Aquino-
the insurance (Sec. 115); Sundiang, Sr., Reviewer on Commercial Law,
2022 Edition, p. 84)

300
Warranty vs. Representation In another variation of what is known as “Other
Insurance Clause”, it may be expressly provided
for as a condition that the insured must give
Warranty Representation
notice of the existence of another insurance
As to Nature coverage on the same property. Otherwise, the
policy is null and void. (New Life Enterprises v. Court
Part of the contract Mere collateral of Appeals, G.R. No. 94071, March 31, 1992)
inducement
A condition in the policy which requires insured
As to Form to disclose to the insurer of any insurance that, if
violated by the insured, would ipso facto avoid
Written on the policy or in a Need not be written on the contract. (Pioneer v. Yap, G.R. No. L-36232,
valid rider or attachment, the policy or may be oral December 19, 1974).
actually or by reference

As to Materiality EXCEPTION / EXCLUSION CLAUSE

Generally conclusively Should be established to Stipulations which limit or restrict the operation
presumed to be material be material of the general provisions and excluding certain
specified risks that otherwise would be included
As to Compliance under the general language describing the risks
assumed.
Must be strictly complied Requires only substantial
with truth and compliance
The terms and phraseology of the exception
clause be clearly expressed so as to be within the
As to Applicability of Incontestability Clause
easy grasp and understanding of the insured, for
Does not apply Applies if the terms are doubtful or obscure the same
must be of necessity be interpreted or resolved
(Aquino-Sundiang, Sr., Reviewer on Commercial Law, against the insured who caused the ambiguity.
2022 Edition, p. 67)
(Virginia Calanoc v. Court of Appeals, G.R.No.L-8151,
December 16,1955)
CONDITIONS
Exceptions are used for the purpose of making
Collateral promises or stipulations which includes: more definite and certain the general words used
to describe the risk the Insurer undertook to bear.
1) Promises or obligations regarding claims (De Leon, Insurance Code, p. 39)
procedure that are not fundamental to the
validity of the contract; and The obligation to prove that the loss is covered
2) Conditions conferring more rights to the by the exception rests with the insurer. (New
insurer enlarging or repeating the minimum World International Development (Phils.), Inc. vs. NYK-
rights provided by law. (Aquino, Essentials of Fil Japan Shipping Corp., G.R. No. 171468, August 24,
Insurance, 2018, p. 219) 2011)

In Perla Compania De Seguros, Inc. v. Court of IV. TRANSPORTATION LAW

Appeals, the Supreme Court considered as valid
the provision in an insurance against liability to
third persons, a provision that imposes the
condition that any settlement of claim by third
persons shall be subject to the approval of the
insurer. No compliance with the condition will bar
the insured from claim from the insurer. (G.R. No.
78860, May 28, 1990)
Contract of Transportation
There is a contract of transportation when a
person obligates himself to transport persons or
property from one place to another for a
consideration. The contract may involve carriage
of passengers or carriage of goods. The person
who obligates himself to transport the goods or

301
passengers maybe a common carrier or a private
carrier. (Aquino & Hernando, Essentials of
Transportation and Public Utilities Law, 2020, p. 3)
A contract of carriage is defined as one whereby
a certain person or association of persons
obligate themselves to transport persons, things,
or news from one place to another for a fixed
price. (KLM Royal Dutch Airlines vs. Tiongco, G.R. No.
212136, October 4, 2021, HERNANDO, J.)
Nature of Contract of Carriage
The nature of the business which involves the
transportation of persons or goods makes a
contract of carriage imbued with public interest.
It is therefore bound to observe not just the due
diligence of a good father of a family but that of
"extraordinary" care in the vigilance over the
goods as required under Article 1733 of the Civil
Code. The nature of a contract of carriage is
elucidated in Singson v. Court of Appeals in this
wise:
A contract of air carriage is a peculiar one.
Imbued with public interest, common carriers are
required by law to carry passengers safely as far
a human care and foresight can provide, using
the utmost diligence of a very cautious person,
with due regard for all the circumstances. A
contract to transport passengers is quite different
in kind and degree from any other contractual
relation. And this is because its business is mainly
with the traveling public. In invites people to avail
of the comforts and advantages it offers. The
contract of carriage, therefore, generates a
relation attended with a public duty. Failure of
the carrier to observe this high degree of care
and extraordinary diligence renders it liable for
any damage that may be sustained by its
passengers. (KLM Royal Dutch Airlines vs. Tiongco,
G.R. No. 212136, October 4, 2021, HERNANDO, J.)
A contract to transport passengers is quite
different in kind and degree from any other
contractual relation. And this, because of the
relation which an air carrier sustains with the
public. Its business is mainly with the travelling
public. It invites people to avail of the comforts
and advantages it offers. The contract of air
carriage, therefore, generates a relation attended
with a public duty. (Airfrance vs Carrascoso, G.R. No.
L-21438, September 28, 1966)
A public duty to provide public service and
convenience to its passengers which must be
paramount to self-interest or enrichment. (WG&A
Shipping Lines, Inc. v. Spouses Asuncion, G.R. No.
225975 (Notice), January 12, 2021)
A. COMMON CARRIERS
1. CONCEPT
Common carriers, defined:
Common carriers are persons, corporations, firms
or associations engaged in the business of
carrying or transporting passengers or goods or
both, by land, water, or air, for compensation,
offering their services to the public. (Art. 1732,
NCC)
Complementary to the codal definition is Section
13, paragraph (b), of the Public Service Act; it
defines “public service” to be - “x x x every person
that now or hereafter may own, operate,
manage, or control in the Philippines, for hire or
compensation, with general or limited clientele,
whether permanent, occasional or accidental,
and done for general business purposes, any
common carrier, railroad, street railway, subway
motor vehicle, either for freight or passenger, or
both, with or without fixed route and whatever
may be its classification, freight or carrier service
of any class, express service, steamboat, or
steamship, or steamship line, pontines, ferries
and water craft, engaged in the transportation of
passengers or freight or both, shipyard, marine
repair shop, wharf or dock, ice plant, ice
refrigeration plant, canal, irrigation system, gas,
electric light, heat and power, water supply and
power petroleum, sewerage system, wire or
wireless communication systems, wire or wireless
broadcasting stations and other similar public
services. (Philippine American General Insurance
Company v. PKS Shipping Company, G.R. No. 149038,
April 9, 2003)
Common carriers are holds itself out as ready to
engage in the transportation of goods for hire as
302
a public employment and not as a casual
occupation. (De Guzman v. CA, G.R. No. L-47822,
December 22, 1988)
Requisites:
(1) Must be a person, corporation, firm, or
association;
(2) Engaged in the business of carrying or
transporting passengers or goods or both;
(3) The carriage or transport must either be by
land, water, or air;
(4) The service is for a fee;
(5) The service is offered to the public. (Art. 1732,
New Civil Code, Aquino & Hernando, Essentials of
Transportation and Public Utilities Law, 2016, p.
22)
Parties to a Contract of Carriage
(1) Carrier
A carrier is a person or corporation who
undertakes to transport or convey goods or
persons from one place to another,
gratuitously or for hire. The carrier is
classified either as a private/special carrier or
as a common/public carrier. (Pereña vs. Zarate,
G.R. No. 157917. August 29, 2012)
(2) Passenger
One who travels in a public conveyance by
virtue of an express or implied contract with
the common carrier, paying fare or what is
the equivalent thereof (Jesusa Vda. de Nueca v.
Manila Railroad Company, G.R. No. 31731-R,
1968)
(3) Shipper
The shipper is the person who delivers the
goods to the carrier for transportation. The
shipper is the person who pays the
consideration on whose behalf payment is
made. (Aquino & Hernando, Essentials of
Transportation and Public Utilities Law, 2016, p.
4)
(4) Consignee
The consignee is the person to whom the
goods are to be delivered. The consignee
may be the shipper himself as in the case
where the goods will be delivered to one of
the branch offices of the shipper. However,
the consignee may be a third person who is
not actually a party to the contract of
carriage. (Aquino & Hernando, Essentials of
Transportation and Public Utilities Law, 2016, pp.
4-5)
Not a party to a Contract of Carriage
(1) The driver who is the employee of the
operator of the common carrier is not a party
to the contract. (Sanico v. Colipano, G.R. No.
209969, September 27, 2017)
(2) The parents of the passenger who is of legal
age are not real parties in interest. (Baliwag
Transit v. Court of Appeals, G.R. No. 80447,
January 31, 1989)
(3) The sub-contractor (the carrier of the carrier)
is also not a party. (Torres-Madrid Brokerage,
Inc. v. FEB Mitsui Marine Insurance, Co. Inc., G.R.
No. 194121, July 11, 2016)
Test for determining whether one is a
common carrier:
True-Prolonged Test
The true test for a common carrier is not the
quantity or extent of the business actually
transacted, or the number and character of the
conveyances used in the activity, but whether the
undertaking is a part of the activity engaged in by
the carrier that he has held out to the general
public as his business or occupation. The question
must be determined by the character of the
business actually carried on by the carrier, not by
any secret intention or mental reservation it may
entertain or assert when charged with the duties
and obligations that the law imposes. (Sps. Perena
vs. Sps. Zarate, G.R. No. 157917, August 29, 2012)
303
 Carriage of Passengers
Nature
It is an agreement to carry the passenger at some future
time and it is consensual and is necessarily perfected by
mere consent. (British Airways, Inc. v. CA, G.R. No. 92288,
February 9, 1993)
Parties
Carrier: Party who binds himself to transport persons, goods,
or both. It may be a common carrier or a private carrier.
Passenger: One who travels in a public conveyance by virtue
of an express or implied contract with the common carrier
paying fare or what is equivalent thereof. (Jesusa Vda. De
Nueca v. Manila Railroad Company, G.R. No. 31731-R, May
29, 1968) A passenger is still considered as a passenger
even if he is being carried gratuitously or under a reduced
fare.
Commencement
Commences from the moment the person who purchases
the ticket from the carrier presents himself at the proper
place and in a proper manner to be transported. (Jesusa
Vda. de Nueca, et al. vs. The Manila Railroad Company, CA,
G.R. No. 31731, Jan. 30, 1968)
Duration
Continues until the passenger has been landed at the port 1.
of destination and has left the vessel owner’s dock or
premises (Aboitiz Shipping Corporation vs. Court of Appeals,
November 06, 1989)
It is the duty of common carriers of passengers to stop their
conveyances a reasonable length of time in order to afford
passengers an opportunity to enter, and they are liable for
injuries suffered from the sudden starting up or jerking of
their conveyances while doing so. The duty which the carrier
2.
of passengers owes to its patrons extends to persons
boarding the cars as well as to those alighting therefrom
(Dangwa Transportation Co., Inc. vs. CA, G.R. No.
95582. October 7, 1991)
Carriage of Goods
A consensual contract to carry goods whereby the carrier
agrees to accept and transport goods at some future date.
Shipper: Person who delivers the goods to the carrier for
transportation and pays the consideration, or on whose
behalf the payment is made.
Consignee: is the person to whom the goods are to be
delivered. The consignee may be the shipper himself or
may be a third person who is not a party in a contract of
carriage.
Common carrier : when consignee is bound by contract
Commences from the time the goods are conditionally
placed in possession of and received by the carrier for
transportation (Art. 1736, NCC)
General Rule: Continues until the goods are delivered,
actually or constructively, by the carrier to the
consignee or to the person who has the right to receive
them, and even when they are temporarily unloaded
or stored in transit. (Art. 1736 and Art 1737, NCC)
Exception: The shipper or the owner had made use of
the right of stoppage in transit (Art. 1737, NCC)
Continues even during the time the goods are stored
in a warehouse of the carrier at the place of destination
until the consignee has been advised of the arrival of
the goods has been given a reasonable opportunity
thereafter to remove them or otherwise dispose of
them (Art. 1738, NCC)

Common carriers shall be governed by the following laws:

Contract Primary Law Suppletory Law

Land transportation
New Civil Code. (Art. 1732-
Common carrier Code of Commerce
1766)
Private carrier (object
Code of Commerce New Civil Code
commerce)
New Civil Code (deposit if
Object non-commerce
property / contract if passengers)
Air transportation

304
 Phil. as destination New Civil Code Code of Commerce
Warsaw Convention, Chicago
Phil. as one of the itineraries Convention, Intl. Agreement, New Civil Code
Montreal Convention
Water transportation
Coastwise (interisland) New Civil Code Code of Commerce
Foreign Port to Phil. Port New Civil Code Code of Commerce/ COGSA
Phil. Port to Foreign Port Law of country of destination
(DIVINA, Divina on Commercial Law, A Comprehensive Guide, Vol. 1, 2021 ed., p. 193)

Characteristics carriers to apply to them. (Fabre, Jr. vs. CA,

(1) Article 1732 makes no distinction between
one whose principal business activity is the
carrying of persons or goods or both and one
who does such carrying only as an ancillary
activity. (De Guzman vs. CA, G.R. No. L-4782,
December 22, 1988)
(2) Article 1732 also carefully avoids making any
distinction between a person or enterprise
offering transportation service on a regular or
scheduled basis and one offering such service
on an occasional, episodic or unscheduled
basis. (Ibid.)
(3) Article 1732 does not distinguish between a
carrier offering its services to the “general
public” and one who offers services or solicits
its business only from a narrow segment of
the general population. (Ibid.)
(4) A person or entity is a common carrier and
has the obligations of the common carrier
under the Civil Code even if he did not secure
a Certificate of Public Convenience. (Ibid.)
(5) The Civil Code makes no distinction as to the
means of transporting, as long as it is by land,
water or air. (First Philippine Industrial
Corporation vs. CA, G.R. No. 125948, December
29, 1998)
(6) The Civil Code does not provide that the
transportation should be by motor vehicle.
(Ibid.)
(7) A person or entity may be a common carrier
even if he has no fixed and publicly known
route, maintains no terminals, and issues no
tickets. (Asia Lighterage and Shipping, Inc. vs.
CA, G.R. No. 147246, August 19, 2003)
(8) A person or entity need not be engaged in
the business of public transportation for the
provisions of the Civil Code on common
G.R. No. 111127, July 26, 1996)
(9) The carrier can also be a common carrier
even if the operator does not own the
vehicle or vessel he or she operates or has
to actually hire one. (Westwind Shipping
Corporation v. UCPB General Insurance Co.,
Inc., G.R. No. 200289, November 25, 2013)
(10) The carrier can also be a common carrier
even if the operator sub-contracts the
carriage of goods to another entity. (Torres-
Madrid Brokerage, Inc. v. FEB Mitsui Marine
Insurance, Co., G.R. No. 194121, July 11, 2016)
(Aquino & Hernando, Essentials of
Transportation and Public Utilities Law, 2020,
pp. 16–17)
NOTE: A pipeline operator is considered a
common carrier. (First Phil. Industrial Corp. vs. CA,
G.R. No. 125948, December 29, 1998)
Common Carriers by Operation of Law
(1) A Pipeline Operator under the Petroleum
Act of the P oil pipeline operators are
considered on carriers (Art. 86, RA No. 387)
The definition of "common carriers" in the Civil
Code makes no distinction as to the means of
transporting, as long as it is by land water or air.
It does not provide that the transportation of the
passengers or goods should be by motor vehicle.
(First Phil. Industrial Corp. vs. CA, G.R. No. 125948,
December 29, 1998)

305
(2) Electricity Distributors
The distribution of electricity to end-users shall be
a regulated common carrier business requiring a
franchise (Sec. 22, RA Na 9136).
(3) Customs Broker
Customs brokers have been regarded as common
carrier because transportation of goods is an
integral part of their business. (Westwind Shipping
Corp. vs. UCPB General Insurance Co., Inc., G.R. Nos.
200289 and 200314, November 25, 2013)
A broker can be contracted to facilitate process,
and clear the shipments from the customs
authorities, withdraw them from the pier, then
transport and deliver them to the consignee.
(Torres-Madrid Brokerage, Inc. vs. FEB Mitsui Marine
Insurance Co., Inc., G.R. No. 194121, July 11, 2016)
Service Providers Not Considered As
Common Carrier
(1) A travel agency is not a common carrier.
The object of contractual relation of a person
who purchases a ticket through a travel
agency is only the agency's, service of
arranging and facilitating the booking,
ticketing and accommodation in a package
tour. It is not bound under the law to observe
extraordinary diligence in the performance of
its obligation. (Crisostomo vs. Court of Appeals,
G.R. No. 138334, August 25, 2003)
However, travel agency and the carrier may
be made jointly and severally liable. (Cathay
Pacific Airways vs. Reyes, G.R. No. 185891, June
26, 2013)
(2) Towage Operators
Towage refers to a service rendered to a
vessel by towing for the mere purpose of
expediting her voyage without reference to
any circumstances of danger. (Aquino &
Hernando, Essentials of Transportation and Public
Utilities Law, 2020, p. 39).
The party that provides the service in a
contract of towage is required to observe the
due diligence of a good father of the family.
Fault or negligence of the obligor consists in
his failure to exercise due care and prudence
in the performance of the obligation as the
nature of the obligation so demands. (Cargolift
Shipping, Inc. vs. L. Acuario Marketing Corp., G.R.
No. 146426. June 27, 2006)
(3) Stevedoring Service
Stevedoring refers to the handling of the
cargo in the holds of the vessel or between
the ship's tackle and the holds of the vessel.
The responsibility of the stevedore ends upon
the loading and stowing of the cargo in the
vessel.
The diligence required of a stevedore is the
diligence of a good father of a family.
(Mindanao Terminal and Brokerage Service, Inc. v.
Phoenix Assurance Company of New York/ Mcgee
& Co., Inc., G.R. No. 162467 - May 8, 2009).
(4) Arrastre Service
The arrastre operator is no different from that
of a depositary or warehouseman. The
functions of an arrastre operator have
nothing to do with the trade and business of
navigation, nor to the use or operation of
vessels. (Aquino & Hernando, Essentials of
Transportation and Public Utilities Law, 2020, p.
41).
An arrastre operator should observe the same
degree of diligence as that required of
common carrier and a warehouseman.
(Marina Port Services, Inc. v. American Home
Assurance Corp., G.R. No. 201822, August 12,
2015)
(5) Freight Forwarder
A freight forwarder is not a common carrier.
It merely chooses or selects the common
carrier. A freight forwarder's liability is limited
to damages arising from its own negligence
in choosing the carrier; however, where the
forwarder contracts to deliver goods
to their destination instead of merely
arranging for their transportation, it becomes
liable as a common carrier for loss or damage
to goods. A freight forwarder assumes the
responsibility of a carrier, which actually
executes the transport, even though the
forwarder does not carry the merchandise
itself. (Unsworth Transport International (Phils.),
306
 Inc. vs. Court of Appeals, G.R. No. 166250, July
As to state regulation
26, 2010)

Subject to regulation. Not subject to

Distinction between common carrier and regulation.
private carrier
As to stipulation on limiting liability
Common Carrier Private Carrier
Parties may not agree Parties may agree on
As to passengers
on limiting the carrier’s limiting the carrier’s
liability except when liability, provided it is
Offers its service to the Primarily because he
provided by law. not contrary to law,
public. only caters to some
morals or good
specific or privileged
customs.
individuals.
(Spouses Teodoro and
Presumption as to fault and negligence
Pereña v. Spouses
Teresita, G.R. No.
Presumption of fault or No fault or negligence is
157917
negligence applies. presumed.
August 29, 2012)
As to laws applicable on damages
As to required diligence

Law on common carriers Law on obligations and

Requires extraordinary Requires only ordinary
contracts
diligence. diligence.
(Divina, Divina on Commercial Law Vol. 1, 2021, pp.
As to what governs the parties’ rights and 194–195; Sundiang & Aquino, Reviewer on Commercial
obligations Law, 2022, p. 124)

Governed by law and Governed principally by A common carrier is defined under Article 1732
the terms of the their stipulations of the Civil Code as persons, corporations, firms
contract of carriage
or associations engaged in the business of
carrying or transporting passengers or goods or
As to whether it may refuse to enter into a
contract of carriage both, by land, water or air, for compensation,
offering their services to the public.
Bound to carry for all Not bound to carry for
who offer such goods as any reason unless It is obvious from the above definition that a
he is accustomed to bound by contract. travel agency is not an entity engaged in the
carry and tender business of transporting either passengers or
reasonable goods and is therefore, neither a private nor a
compensation for common carrier. It did not undertake to transport
carrying them
the passenger from one place to another since its
As to exemption for negligence of employees covenant with its customers is simply to make
travel arrangements in their behalf. Its services
as a travel agency include procuring tickets and
Cannot stipulate that it May validly enter into a facilitating travel permits or visas as well as
is exempt from liability stipulation exempting booking customers for tours.
on account of itself from liability
negligence of its because the public is
The object of the passenger‘s contractual relation
employees. Such not involved.
stipulation is void for with the travel agency is the latter‘s service of
being contrary to public arranging and facilitating petitioner‘s booking,
policy. ticketing and accommodation in the package
tour. In contrast, the object of a contract of
carriage is the transportation of passengers or

307
goods. It is in this sense that the contract
between the parties was an ordinary one for
services and not one of carriage. (Crisostomo vs.
CA, G.R. No. 138334, August 25, 2003)
A private carrier is defined as one who, without
making the activity a vocation, or without holding
himself or itself out to the public as ready to act
for all who may desire his or its, services,
undertakes, by special agreement in a particular
instance only, to transport goods or persons from
one place to another either gratuitously or for
hire. (Sps Perena vs. Sps. Nicolas, G.R. No. 157917,
August 29,2012)
A private carrier is one wherein the carriage is
generally undertaken by special agreement and it
does not hold itself out to carry goods for the
general public. (Malayan Insurance Co., Inc. vs.
Philippine Insurance Co., G.R No. 184300, July 11,
2012)
Conversion of a common carrier into a
private carrier
A charter party may transform a common carrier
into a private carrier. However, it must be a
bareboat or demise charter where the charterer
mans the vessel with his own people and
becomes, in effect, the owner for the voyage or
service stipulated. (Caltex Phil's, Inc. v. Sulpicio Lines
G.R. No 131166 September 30, 1999).
The common carrier is not transformed into a
private carrier if the charter party is a contract, of
affreightment like a voyage charter or a time
charter. (Aquino & Hernando, Essentials of
Transportation and Public Utilities Law, 2020, p. 28)
If is therefore imperative that a public carrier shall
remain as such, notwithstanding the charter of
the whole or portion of a vessel by one or more
persons, provided the charter is limited to the
Ship only as in the case of a time-charter or
voyage-charter. It is only when the charter
includes both the vessel and its crew, as in a
bareboat or demise that a common carrier
becomes private, at least insofar as the particular
voyage covering the charter-party is concerned
(Loadstar Shipping Co., Inc. v Pioneer Asia Insurance
Corp, G.R. No. 157481 January 24, 2006)
A common carrier become a private carrier when
it undertakes to carry a special cargo or chartered
to a special person special person only. (Malayan
Insurance Co., Inc. vs. Philippine First Insurance G.R
No. 184300, July 11, 2012)
CLASSIFICATION OF TRANSPORT
NETWORK VEHICLE SERVICES AND
TRANSPORT NETWORK COMPANIES
In recognition of technological innovations which
allowed for the proliferation of new ways of
delivering and offering public transportation, the
Department of Transportation and
Communications (DOTC) (now Department of
Transportation), through Department Order (DO)
Nos. 2015-11 dated May 8, 2015 and 2017-11
dated June 19, 2017, created two (2) new
classifications, namely:
1.Transport Network Companies (TNC); and
2.Transportation Network Vehicle Service
(TNVS). (The Land Transportation and
Regulatory Board (LTFRB) v. Valenzuela, G.R. No.
242860, March 11, 2019)
Transport Network Company, defined:
It refers to a person or entity that provides pre-
arranged transportation services for
compensation using an internet-based
technology application or digital platform
technology to connect passengers with drivers
using their personal vehicles. (Sec. 1, DOTr
Department Order No. 2018-013)
Transportation Network Vehicle Service,
defined:
It refers to a TNC-accredited private vehicle
owner, which is a common carrier, using the
internet-based technology application or digital
platform technology transporting passengers
from one point to another, for compensation.
(Sec. 2, DOTr Department Order No. 2018-013)
TNVS and TNC: Classified as Common
Carrier
Irrespective of the application's limited market
scope, i.e., Angkas users, it remains that, on the
one hand, these bikers offer transportation
services to wiling public consumers, and on the
other hand, these services may be readily
308
accessed by anyone who chooses to download
the Angkas app. While DBDOYC further claims
that another distinguishing factor of its business
is that "its drivers may refuse at any time any
legitimate demand for service by simply not going
online or not logging in to the online platform,"
still when they do so log-in, they make their
services publicly available. In other words, when
they put themselves online, their services are
bound for indiscriminate public consumption.
Again, as also mentioned above, Article 1732
defining a common carrier "carefully avoids
making any distinction between a person or
enterprise offering transportation service on a
regular or scheduled basis and one offering such
service on an occasional, episodic or unscheduled
basis. "This doctrinal statement seems to be the
apt response to DBDOYC's assertion.
As the Court observes, the genius behind the
Angkas app is that it removes the inconvenience
of having to physically hail for public
transportation by creating a virtual system
wherein practically the same activity may now be
done at the tip of one's fingers. As such, the fact
that its drivers are not physically hailed on the
street does not automatically render Angkas-
accredited drivers as private carriers. (LTFRB vs.
Valenzuela, G.R. No. 242860, March 11, 2019)
Due to the established roles of TNCs and TNVS in
providing transport services to the public, they
should be treated as engaged in the operation of
a public utility. TNCs and TNVS are considered as
engaged in the business of carrying or
transporting passengers for compensation and
offering their services to the public. As such, the
operation of TNCs and TNVS is imbued with public
interest and must submit to the full regulation by
the State. (DOTr Department Order No. 2018-013)
1. DILIGENCE REQUIRED OF COMMON
CARRIERS
STANDARD OF DILIGENCE
Common carriers, from the nature of their
business and for reasons of public policy, are
bound to observe extraordinary diligence on
the vigilance over goods and for the safety of the
passengers transported by them according to all
the circumstances of each case. (Art. 1733, NCC)
Extraordinary diligence, defined:
Common carriers, from the nature of their
business and for reasons of public policy, are
bound to observe extraordinary diligence and
vigilance with respect to the safety of the goods
and the passengers they transport. Thus,
common carriers are required to render service
with the greatest skill and foresight and to use all
reasonable means to ascertain the nature and
characteristics of the goods tendered for
shipment, and to exercise due care in the
handling and stowage, including such methods as
their nature requires. (Belgian Overseas Chartering
and Shipping N.V. vs. Philippine First Insurance Co.,
Inc., G.R. No. 143133, June 5, 2002)
The nature of the business which involves the
transportation of persons or goods makes a
contract of carriage imbued with public interest.
It is therefore bound to observe not just the
due diligence of a good father of a family but that
of "extraordinary" care in the vigilance over the
goods as required under Article 1733 of the Civil
Code. (KLM Royal Dutch Airlines v. Tiongco, G.R. No.
212136, October 4, 2021, HERNANDO, J.)
Article 1733 of the Civil Code states: ART. 1733.
Common carriers, from the nature of their
business and for reasons of public policy, are
bound to observe extraordinary diligence in the
vigilance over the goods and for the safety of the
passengers transported by them, according to all
the circumstances of each case. Such
extraordinary diligence in the vigilance over the
goods is further expressed in Articles 1734, 1735
and 1745, Nos. 5, 6, and 7, while the
extraordinary diligence for the safety of the
passengers is further set forth in Articles 1755
and 1756. This extraordinary diligence, following
Article 1755 of the Civil Code, means that
common carriers have the obligation to carry
passengers safely as far as human care and
foresight can provide, using the utmost diligence
of very cautious persons, with due regard for all
the circumstances. (Sanico vs. Colipano, G.R. No.
209969. September 27, 2017, J. Caguioa)
309
It is that extreme measure of care and caution
which persons of unusual prudence and
circumspection observe for securing and
preserving their own property or rights. (National
Trucking and Forwarding Corp., vs. Lorenzo Shipping
Corp., G.R. No. 153563, February 07, 2005)
Duration of duty to exercise utmost
diligence
By Duty to exercise utmost diligence begins
Land when a passenger has accepted the offer,
as when he is attempting to board the
conveyance.
The common carrier is duty bound to stop
their conveyances for reasonable length of
time in order to afford passengers an
opportunity to board and enter, and they
are liable for injuries suffered by boarding
passengers resulting from the sudden
starting up or jerking of their conveyances
while they do so. (Continuing Offer
Doctrine) (Aquino & Hernando, Essentials
of Transportation and Public Utilities Law,
2020, p. 11)
By Duty to exercise utmost diligence begins as
Sea soon as a person with bona fide intention
of taking passage places himself in the
employees and is accepted as a passenger.
(Aquino & Hernando, Essentials of
Transportation and Public Utilities Law,
2020, p. 90)
By Duty to exercise utmost diligence begins
Air upon the issuance of the contract of
carriage.
Ticketing, as the act of issuing the contract
of carriage, is necessarily included in the
exercise of extraordinary
diligence. (Manay, Jr. vs. Cebu Air, Inc.,
G.R. No. 210621, April 4, 2016)
EXTRAORDINARY DILIGENCE IN
CARRIAGE OF GOODS
Common carriers, from the nature of their
business and on public policy considerations, are
bound to observe extraordinary diligence in the
vigilance over the goods transported by them.
Subject to certain exceptions enumerated under
Article 1734 of the Civil Code, common carriers
are responsible for the loss, destruction, or
deterioration of the goods. The extraordinary
responsibility of the common carrier lasts from
time the goods are unconditionally placed in the
possession of, and received by the carrier for
transportation until the same are delivered,
actually or constructively, by the carrier to the
consignee, or to the person who has a right to
receive them. (Aleson Shipping Lines v. CGU
International Ins. Plc., G.R. No. 217311, July 15, 2020)
The extraordinary diligence over the goods
tendered for the shipment requires the common
carrier to know and follow the required
precaution for avoiding damage to, or destruction
of the goods entrusted to it for sale, carriage and
delivery. It requires common carriers to render
service with the greatest skill and foresight and
to use all reasonable means to ascertain the
nature and characteristic of goods tendered for
shipment, and to exercise due care in handling
the stowage, including such methods as their
nature requires. (Calvo vs. UPCB, G.R. No. 148496,
March 19, 2002)
EXTRAORDINARY DILIGENCE IN
CARRIAGE BY SEA
It includes:
1) The fitness of the vessel itself to withstand
the rigors or vicissitudes of the voyage;
2) The fitness of the vessel to store the cargoes
and accommodate passengers to be
transported; and
3) The vessel is adequately equipped and
properly manned with a sufficient number of
competent officers and crew. (Aquino &
Hernando, Essentials of Transportation and Public
Utilities Law, 2020, p. 139-147)
Petitioner was extremely remiss before and
during the time of the vessel’s sinking. Petitioner
did not endeavor to dispute the CA’s finding that
the vessel’s Captain erroneously navigated the
ship, and failed to reduce its speed considering
the ship’s size and the weather conditions. The
crew members were also negligent when they did
not make any stability calculations, and prepare a
detailed report of the vessel’s cargo stowage
plan. The radio officer failed to send an SOS
message in the internationally accepted
310
communication network but instead used the
Single Side Band informing the company about
the emergency situation. (Sulpicio Lines, Inc. (now
known as Philippine Span Asia Carrier Corporation) vs.
Karaan, G.R. No. 208590. October 3, 2018)
Seaworthiness
Ensuring the seaworthiness of the vessel is the
first step in exercising the required vigilance
(Cokaliong Shipping Lines v. WCPB, Gen. Insurance
Co., G.R. No. 146018, June 25, 2003).
However, presentation of certificates of
seaworthiness is not sufficient to overcome the
presumption of negligence (Delsan Transport Lines
v. CA, G.R. No. 127897, November 15, 2001).
Seaworthiness is that strength, durability and
engineering skill made a part of a ship's
construction and continued maintenance,
together with a competent and sufficient crew,
which would withstand the vicissitudes and
dangers of the elements which might reasonably
be expected or encountered during her voyage
without loss or damage to her particular cargo
(San Miguel Corp. v. Heirs of Inguito, G.R. Nos. 141716
& 142025, July 4, 2002)
For a vessel to be seaworthy, it must be
adequately equipped for the voyage and manned
with a sufficient number of competent officers
and crew. The failure of a common carrier to
maintain in seaworthy condition the vessel
involved in its contract of carriage is a clear
breach of its duty prescribed in Article 1755 of the
Civil Code. (Vector Shipping Corporation vs. Macasa,
G.R. No. 160219, July 21, 2008)
Implied Warranty of Seaworthiness of Ship
It is generally held that in every marine insurance
policy the assured impliedly warrants to the
assurer that the vessel is seaworthy and
such warranty is as much a term of the contract
as if expressly written on the face of the policy.
Thus Sec. 113 of the Insurance Code provides
that "(i)n every marine insurance upon a ship or
freight, or freightage, or upon anything which is
the subject of marine insurance, a warranty is
implied that the ship is seaworthy." Under Sec.
114, a ship is "seaworthy when reasonably fit to
perform the service, and to encounter the
ordinary perils of the voyage, contemplated by
the parties to the policy." Thus it becomes the
obligation of the cargo owner to look for a reliable
common carrier which keeps its vessels in
seaworthy condition. He may have no control
over the vessel but he has full control in the
selection of the common carrier that will
transport his goods. He also has full discretion in
the choice of assurer that will underwrite a
particular venture. (Phil-Am General Insurance Co.,
Inc. v. Court of Appeals, G.R. No. 116940, June 11,
1997)
A passenger or a shipper of goods is under no
obligation to conduct an inspection of the ship
and its crew. The carriers are deemed to warrant
impliedly the seaworthiness of the ship The
failure of a common carrier to maintain in
seaworthy condition the vessel involved in its
contract of carriage is a clear breach of its duty
prescribed in Art. 1755. (Caltex (Philippines), Inc. vs.
Sulpicio Lines, Inc., G.R. No. 131166. September 30,
1999)
Unseaworthiness
While seaworthiness is commonly equated with
the physical aspect and condition of the vessel for
voyage as its ability to withstand the rigors of the
sea, it must not be forgotten that a vessel should
be armed with the necessary documents required
by the maritime rules and regulations, both local
and international. It has been written that vessel
seaworthiness further extends to cover the
documents required to ensure that the vessel can
enter and leave ports without problems.
(APQ Shipmanagement Co., Ltd. v. Caseñas, G.R. No.
197303, June 4, 2014)
Presentation of certificates of seaworthiness is
not sufficient to overcome the presumption of
negligence (Delsan Transport Lines y Court of
Appeals, G.R. No 127897, November 15, 2001).
Cargoworthiness
A vessel is cargo worthy if it is sufficiently strong
and equipped to carry the particular kind of cargo
which she has contracted to carry, and her cargo
must be so loaded that it is safe for her to proceed
311
on her voyage. (Santiago Lighterage Corporation vs.
Court of Appeals, G.R. No. 139629, June 21, 2004)
No Overloading
Duty to exercise due diligence includes the duty
to take passengers or cargoes that are within the
carrying capacity of the vessel (Negros Navigation
v Court of Appeals, G.R. No. 110398 November 7,
1997)
Deviation
If there is an agreement between the shipper and
the carrier as to the road over which the
conveyance is to be made, the carrier may not
change the route, unless it be by reason of
force majeure; and should he do so without this
cause, he shall be liable for all the losses which
the goods he transports may suffer from any
other cause, beside paying the sum which may
have been stipulated for such case.
When on account of said cause of force majeure,
the carrier had to take another route which
produced an increase in transportation charges,
he shall be reimbursed for such increase upon
formal proof thereof. (Art. 359, Code of Commerce)
Transshipment
Transshipment is defined as the act of sending an
exported product through an intermediate
country before routing it to the country intended
to be its final destination. In maritime law, it is
the act of taking the cargo out of ship
and loading it in another. (Commissioner of
Customs v. Court of Tax Appeals, G.R. Nos. 171516-17
(Resolution), February 13, 2009)
It does not dependent upon the ownership of the
transporting ships or conveyances or in the
change of carriers
as the petitioner seems to suggest, but rather on
the fact of actual physical
transfer of cargo from one vessel to another
(Magellan Manufacturing Marketing Corp. v. Court of
Appeals, G.R. No. 95529, August 22, 1991)
EXTRAORDINARY DILIGENCE IN
CARRIAGE BY LAND
Roadworthiness
Common carriers that offer transportation by land
are required to make sure that the vehicles they
are using are in good order and condition.
Common carriers must also make sure that the
seats and other furniture to be used by the
passengers are in good order and condition.
(Aquino & Hernando, Essentials of Transportation and
Public Utilities Law, 2020, p. 162)
The duty to exercise extraordinary diligence also
requires the carrier to purchase and use vehicle
parts that are not defective. A common carrier
neglects its duty to transport its passengers safely
where one of its passengers died because the
floor of its bus gave way after a tire blow-out
caused by overcrowding, over speeding and
weak flooring. (M. Ruiz Highway Transit, Inc y Court
of Appeals, G.R. Na L-16086, May 29, 1964)
The driver was clearly negligent when he was
relatively driving fast on a narrow highway and
approaching a similarly narrow bridge. A bus is a
significantly large vehicle which would be difficult
to maneuver and stop if it were travelling at a
high speed. On top of this, the time of the
accident was on or about sunrise when visibility
on the road was compromised. The driver should
have been more prudent and careful in his driving
the bus especially considering that transportation
company is a common carrier (Cacho vs. Manahan,
G.R. No. 203081, January 17, 2018)
Violation of Traffic Rules
Unless there is proof to the contrary, it is
presumed that a person driving a motor vehicle
has been negligent if at the time of the mishap,
he was violating any traffic regulation. (Art. 2185,
NCC)
EXTRAORDINARY DILIGENCE IN
CARRIAGE BY AIR TRANSPORTATION
Due diligence in air transportation includes the
obligation to:
1) Make sure that the aircraft is Airworthy
312
2) That the vessel has a competent Captain and
crew; and
3) That the captain and his crew exercise
extraordinary diligence in operating the
aircraft (Aquino & Hernando, Essentials of
Transportation and Public Utilities Law, 2020, p.
397)
The contract of air carriage is a peculiar one.
Being imbued with public interest, the law
requires common carriers to carry the passengers
safely as far as human care and foresight can
provide, using the utmost diligence of a very
cautious person, with due regard for all
circumstances. If the cause of non-fulfillment of
the contract is due to a fortuitous event, it has to
be the sole and only cause. (PAL vs. CA, G.R. No. L-
82619, September 15, 1993)
The airline must exercise extraordinary
diligence in the fulfillment of the terms and
conditions of the contract of carriage.
The passenger, however, has the correlative
obligation to exercise ordinary diligence in the
conduct of his or her affairs. (Manay, Jr. v. Cebu Air,
Inc., G.R. No. 210621, April 4, 2016)
Airworthiness
The aircraft must be in such condition that it must
be able to withstand the rigors of the flight
Passengers Denied Boarding
The air carrier is duty bound to accept and board
a passenger with confirmed tickets if the
passenger, presents himself on time in the airline
counter in the airport. There would be breach of
contract on the part of the carrier if its employees
will refuse to accept the passenger with
confirmed tickets. (Philippine Airlines v. Court of
Appeals. GR No 123238, September 22, 2008)
EXTRAORDINARY DILIGENCE IN
CARRIAGE OF PASSENGER
A common carrier is bound to carry the passenger
as far as human care and foresight can provide,
using the utmost diligence of very cautious
persons, with a due regard for all circumstances.
(Art. 1755, NCC)
A common carrier has the duty to exercise the
utmost diligence in the carriage of
passengers. In case of death or injury, a carrier
is presumed to have been at fault or negligent.
The burden is then on the carrier to prove that
the injury or death was due to an unforeseen
event or to force majeure. (Philippine Rabbit Bus
Lines, Inc. v. Lim, G.R. No. 212252, February 28, 2018)
Due diligence in the selection and
supervision of employees:
In case of loss of effects of passengers or death
or injuries to passengers, the liability of the
common carrier does NOT cease upon proof that
they exercised all the diligence of a good father
of the family in the selection and supervision of
their employees. (Art. 1759, NCC)
2. LIABILITIES OF COMMON CARRIERS
Principles governing the liability of a common
carrier:
(1) The liability of a carrier is contractual and
arises upon breach of its obligation. There is
breach if it fails to exert extraordinary
diligence according to all circumstances of
each case;
(2) a carrier is obliged to carry its passenger with
the utmost diligence of a very cautious
person, having due regard for all the
circumstances;
(3) a carrier is presumed to be at fault or to have
acted negligently in case of death of, or injury
to, passengers, it being its duty to prove that
it exercised extraordinary diligence; and
(4) the carrier is not an insurer against all risks
of travel. (Isaac vs. A.L. Ammen Transportation,
G.R. No. L-9671, August 23, 1957)
In Regional Container Lines of Singapore v. The
Netherlands Insurance Co. (Philippines), the
Court summarized the rules on the liability of a
common carrier:
(5) Common carriers are bound to
observe extraordinary diligence over the
goods they transport, according to all the
circumstances of each case;
313
(6) In the event of loss, destruction, or
deterioration of the insured goods, common
carriers are responsible, unless they can
prove that such loss, destruction, or
deterioration was brought about by, among
others, "flood, storm, earthquake, lightning,
or other natural disaster or calamity"; and
(7) In all other cases not specified under Article
1734 of the Civil Code, common carriers are
presumed to have been at fault or to have
acted negligently, unless they
observed extraordinary diligence. (Aleson
Shipping Lines v. CGU International Ins. Plc., G.R.
No. 217311, July 15, 2020; G.R. No. 168151,
September 4, 2009 citing Central Shipping Co.,
Inc. v. Insurance Company of North America,
G.R. N. 150751, September 20, 2004)
The court need not make an express finding of
fault or negligence of common carriers, the law
imposes to common carriers strict liability, as long
as it is shown that there exists a contract between
the passenger (or the shipper of the goods to be
carried) and the common carrier and that the
loss, deterioration, injury, or death took place
during the existence of the contract (Arts. 1735
and 1756, NCC).
Liability for injuries even if they have
observed ordinary diligence and care
(a) The law imposed upon them to exercise
extraordinary diligence, thus, they are liable
even if they exercised ordinary diligence.
(b) Common carriers are bound to carry
passengers safely as far as human care and
foresight can provide, using the utmost
diligence of very cautious persons with a due
regard for all the circumstances.
Causes of Action from Negligent Act of
Common Carrier
(Villanueva, Commercial Law Review, 2018 ed., p.172-
173)
1. Culpa contractual – In the contract of
carriage of passengers, it is the obligation of
carrier to convey the passengers safely to the
point of destination. In case the passenger is not
brought safely thereto, there will be a breach of
contract.
A common carrier becomes liable under culpa
contractual for the death of, or injury to,
passengers when: (i) Through the negligence or
willful acts of its employees; or (ii) Willful acts or
negligence of other passengers or of strangers, if
common carrier's employees through the exercise
of due diligence could have prevented or stopped
the act. In the contract of carriage of passengers,
the law requires common carriers to carry
passengers safely using the utmost diligence of
very cautious persons with due regard for all
circumstances. Consequently, when a passenger
dies or is inured in the discharge of a contract of
carriage, it is presumed that the common carrier
is at fault. (Light Rail Transit Authority vs. Navidad,
G.R. No. 145804. February 6, 2003; Villanueva,
Commercial Law Review, 2018 ed., p.172).
2. Culpa aquiliana – Damage caused to another
due to negligence.
The contract of carriage is between the carrier
and the passenger, and in the event of
contractual liability, the carrier is exclusively
responsible [therefor] to the passenger, even if
such breach be due to the negligence of his
driver. The carrier can neither shift his liability on
the contract to his driver nor share it with him for
his driver’s negligence is his. (Estrada vs. Philippine
Rabbit Bus Lines, Inc., G.R. No. 203902, July 19, 2017)
3. Culpa criminal – The driver‘s act may amount
to a crime.
The essence of the quasi offense of criminal
negligence under Article 365 of the RPC lies in the
execution of an imprudent or negligent act that,
if intentionally done, would be punishable as a
felony. The law penalizes, thus, the negligent or
careless act, not the result thereof. The gravity of
the consequence is only taken into account to
determine the penalty; it does not qualify the
substance of the offense. (People vs. Go, G.R. No.
210816, December 10, 2018)
314
Distinguish negligence based on culpa on a breach of contract of carriage, the aggrieved
contractual and based on culpa aquiliana. party does not need to prove that the common
Culpa Contractual Culpa Aquiliana carrier was at fault or was negligent. He or she is
Source of Obligation
only required to prove the existence of the
contract and its non-performance by the carrier.
Breach of contract Negligent act or (KLM Royal Dutch Airlines vs. Tiongco, G.R. No.
omission 212136, October 4, 2021, HERNANDO, J.)
Employee’s Liability
Employee cannot be Solidarily liable with the
There is no dispute that KLM and Dr. Tiongco
made liable as he is not employer
a party to the contract of
entered into a contract of carriage. Dr. Tiongco
carriage. (Sanico vs. purchased tickets from the airline for his trip to
Colipano, G.R. No. Almaty, Kazakhstan. KLM, however, breached its
209969. September 27, contract with Dr. Tiangco when it failed to deliver
2017, J. Caguioa) his checked-in suitcase at the designated place
Employer’s Liability and time. The suitcase contained his clothing for
direct and immediate, direct, primary, and the conference where he was a guest speaker, a
not merely subsidiary or solidary (Estrada vs. copy of his speech, and his resource materials.
secondary (Estrada vs. Philippine Rabbit Bus Worse, Dr. Tiangco's suitcase was never returned
Philippine Rabbit Bus Lines, Inc., G.R. No. to him even after he arrived in Manila from
Lines, Inc., G.R. No. 203902, July 19, 2017) Almaty. Thus, KLM's liability for the lost suitcase
203902, July 19, 2017) was sufficiently established as it failed to
Availability of defense overcome the presumption of negligence. (ibid.)
Due diligence in the Due diligence in the
selection and selection and In case of loss of effects of passengers or death
supervision of the supervision of the
or injuries to passengers, the common carrier is
employee is not a employee is a defense
defense presumed to be at fault or have acted negligently
unless it had observed extraordinary diligence.
The court need not make an express finding of
Registered Owner Rule fault or negligence of common carriers, the law
General Rule: Under this rule, the person who is imposes to common carriers strict liability, as long
the registered owner of a vehicle is liable for any it is shown that: (1) there exists a contract
damage caused by the negligent operation of the between the passenger or the shipper of the
vehicle although the same was already sold or goods to be carried and the common carrier; and
conveyed to another person at the time of the (2) the loss, deterioration, injury or death took
accident. (Filcar Transport Services vs. Espinas, G.R. place during the existence of the contract. (Arts.
No. 174156, June 20, 2012) 1735 and 1756, NCC)

Exception: When the vehicle was stolen from a
garage without the owner‘s knowledge and
consent. (Duavit vs. Court of Appeals, GR 82318, May
18, 1989)
PRESUMPTION OF NEGLIGENCE
Considering that a contract of carriage is vested
with public interest, a common carrier is
presumed to have been at fault or to have acted
negligently in case of lost or damaged goods
unless they prove that they observed
extraordinary diligence. Hence, in an action based
Jurisprudence holds that a common carrier is
presumed to have been negligent if it fails to
prove that it exercised extraordinary vigilance
over the goods it transported. When the goods
shipped are either lost or arrived in damaged
condition, a presumption arises against the
carrier of its failure to observe that diligence, and
there need not be an express finding of
negligence to it liable. To overcome the
presumption of negligence, the common carrier
must establish by adequate proof that it exercised
extraordinary diligence over the goods. It must
do more than merely show that some other party

315
could be responsible for the damage.||| (Unitrans
International Forwarders, Inc. v. Insurance Company
of North America, G.R. No. 203865, March 13, 2019, J.
Caguioa)
Mere proof of delivery of the goods in good order
to a common carrier and of their arrival in bad
order at their destination (or failure to transport
the passenger safely) constitutes a prima facie
case of fault or negligence against the carrier. If
no adequate explanation is given as to how the
deterioration, the loss or the destruction of the
goods happened, the transporter shall be held
responsible. (Eastern Shipping Lines, Inc. vs. BPI/MS
Insurance Corp., G.R. No. 182864, January 12, 2015;
Belgian Overseas Chartering and Shipping, N.V. vs.
Phil. First Ins. co., G.R. No. 143133, June 5, 2002)
The presumption also makes the doctrine of
proximate cause inapplicable to contract of
carriage. The presumption arises upon the
happening of the accident. (Calalas vs. CA, G.R. No.
122039, May 31, 2000; Sundiang & Aquino, Reviewer
on Commercial Law, 2017, pp. 456 to 457)
The trial court is not required to make an express
finding of the common carrier’s fault or
negligence. Even the mere proof of injury relieves
the passengers from establishing the fault or
negligence of the carrier or its employees. The
presumption of negligence applies so long as
there is evidence showing that: (a) a contract
exists between the passenger and the common
carrier; and (b) the injury or death took place
during the existence of such contract. In such
event, the burden shifts to the common carrier to
prove its observance of extraordinary diligence,
and that an unforeseen event or force
majeure had caused the injury. (Sulpicio Lines, Inc.
vs. Sesant, G.R. No. 172682, July 27, 2016)
B. VIGILANCE OVER GOODS
Common carriers are responsible for the loss,
destruction or deterioration of the goods. (Art.
1734, NCC)
Basic obligations of the carrier
(1) To accept passengers and goods without
discrimination;
(2) To seasonably deliver the goods or bring the
passenger to the destination;
(3) To deliver the goods or bring the passenger
to the proper place or destination;
(4) To deliver the goods to the proper person;
and
(5) To exercise extraordinary diligence in the
performance of its duties. (Aquino & Hernando,
Essentials on Transportation and Public Utilities
Law, 2020, p. 70)
1. EXEMPTING CAUSES
Common carriers are responsible for the loss,
destruction, or deterioration of the goods, unless
the same is due to any of the following causes
only:
(1) Flood, storm, earthquake, lightning or other
natural disaster or calamity (Art. 1734, NCC);
(2) Act of public enemy in war, whether
international or civil (Ibid.);
(3) Act or omission of the shipper or the owner
of the goods (Ibid.);
(4) The character of the goods or defects in the
packing or in the containers;
(5) Order or act of competent authority; (Ibid.);
(6) Exercise of extraordinary diligence (Arts. 1735
and 1755, NCC)
Fortuitous Event
Except in cases expressly specified by the law, or
when it is otherwise declared by stipulation, or
when the nature of the obligation requires the
assumption of risk, no person shall be responsible
for those events which could not be foreseen, or
which, though foreseen, were inevitable. (Art.
1174, NCC)
As the peril of fire is not comprehended within the
exceptions in Article 1734 the common carrier
shall be presumed to have been at fault or to have
acted negligently, unless it proves that it has
observed the extraordinary diligence required by
316
law. Fire may not be considered a natural disaster
or calamity. This must be so as it arises almost
invariably from some act of man or by human
means. It does not fall within the category of an
act of God unless caused by lightning or by other
natural disaster or calamity. (Eastern Shipping
Lines, Inc. vs. Intermediate Appellate Court, G.R. No.
L-71478, May 29, 1987)
Requisites in raising the defense of
fortuitous event
(1) It must be independent of human will;
(2) It must be impossible to foresee the event
which constitutes the “caso fortuito”, or if it
can be foreseen, it must be impossible to
avoid;
(3) The occurrence must be such as to render it
impossible for the debtor (carrier) to fulfill his
obligations in a normal manner; and
(4) The obligor (carrier) must be free from any
participation in the aggravation of the injury
resulting to the creditor. (Mindex Resources
Development vs. Morillo, G.R. No. 138123, March
12, 2002)
Fortuitous event, to be a valid defense, must be
established to be the proximate cause of the loss
(Asia Lighterage and Shipping, Inc. vs. CA G.R. No.
147246, August 19, 2003).
The act of the train guard of the railroad company
in shooting the passenger because of a personal
grudge is unforeseeable by the company. The
latter had no means to ascertain or anticipate that
the two would meet, nor could it reasonably
foresee every personal rancor that might exist
between each one of its many employees and any
one of the thousands of eventual passengers
riding in its trains. The shooting in question was
therefore "caso fortuito" within the definition of
Art. 1105 of the old Civil Code (which is the law
applicable), being both unforeseeable and
inevitable under the given circumstances; and
pursuant to established doctrine, the resulting
breach of the company's contract of safe carriage
with the deceased was excused thereby. (Gillaco,
et al. vs. MRR Co., G.R. No. No. L-8034. November 18,
1955)
If the fortuitous event was accompanied by
neglect and malfeasance by the carrier's
employees, an action for damages against the
carrier is permissible. (Japan Airlines vs. Court of
Appeals, G.R. No. 118664. August 7, 1998)
For a common carrier to be absolved from liability
in case of force majeure, it is not enough that the
accident was caused by a fortuitous event. The
common carrier must still prove that it did not
contribute to the occurrence of the incident due
to its own or its employees’ negligence. (Bachelor
Express, Incorporated vs. Court of Appeals, G.R. No.
85691, July 31, 1990; Sulpicio Lines, Inc. (now known
as Philippine Span Asia Carrier Corporation) vs. Karaan,
G.R. No. 208590. October 3, 2018)
In one case, it was held that monsoons, during
which strong winds were not unusual, would not
be sufficient to categorize the weather condition
as a storm. When the loss of the vessel was
caused not only by the southwestern monsoon
but also by the shifting of the logs in the hold due
to improper stowage, the defense of force
majeure is unavailing. (Central Shipping Company,
Inc. vs. Insurance Company of North America, G.R. No.
150751, September 20, 2004; DIVINA, Divina on
Commercial Law, A Comprehensive Guide, Vol. 1, 2021
ed., p. 208)
Due to acts of public enemy
A public enemy is a citizen of another country
against which the Philippine government is at
war.
Note: The act of the public enemy must be the
proximate and only cause of the loss.
Requisites in raising the defense of natural
disaster and public enemy:
In order that the common carrier may be
exempted from responsibility, the natural disaster
must have been the proximate and only cause of
the loss. However, the common carrier must
exercise due diligence to prevent or minimize loss
before, during and after the occurrence of flood,
storm or other natural disaster in order that the
common carrier may be exempted from liability
317
for the loss, destruction, or deterioration of the
goods. The same duty is incumbent upon the
common carrier in case of an act of the public
enemy referred to in Article 1734, No. 2. (Art.
1739, NCC)
The hijacking of the goods is not considered a
fortuitous event or a force majeure.
Nevertheless, a common carrier may absolve
itself of liability for a resulting loss caused by
robbery or hijacked if it is proven that the robbery
or hijacking was attended by grave or irresistible
threat, violence or force. (Keihin-Everett Forwarding
Co., Inc. vs. Tokio Marine Malayan Insurance Co., Inc.,
G.R. No. 212107. January 28, 2019)
Due to acts or omission shipper
Requisites in raising the defense of
improper packing
(1) Even if the loss, destruction, or deterioration
of the goods should be caused by the
character of the goods, or the faulty nature
of the packing or of the containers, the
common carrier must exercise due diligence
to forestall or lessen the loss. (Art. 1742, NCC)
(2) Carrier must had not known the fact of
improper packing of goods upon ordinary
observation to be relieved of liability;
(3) If the defect is existing upon acceptance, the
carrier must receive the goods under protest
and must be duly noted in the bill of lading.
(A.F. Sanchez Brokerage vs. CA, G.R. No. 147079,
December 21, 2004)
If the improper packing is known to the carrier or
his employees or is apparent upon ordinary
observation, but he nevertheless accepts the
same without protest or exception
notwithstanding such condition, he is not relieved
of liability for the resulting damage. (Calvo vs.
UCPB, G.R. No. 148496, March 19, 2002)
Even if the fact of improper packing was known
to the carrier or its crew or was apparent upon
ordinary observation, it is not relieved of liability
for loss or injury resulting therefrom, once it
accepts the goods notwithstanding such
condition. (Belgian Overseas Chartering and Shipping
N.V. vs. Philippine First Insurance Co., Inc., G.R. No.
143133, June 05, 2002)
Order of competent public authority
Requisite in raising the defense of order by
public authority:
If through the order of public authority, the goods
are seized or destroyed, the common carrier is
not responsible, provided said public authority
had power to issue the order. (Art. 1743, NCC)
The intervention of the municipal officials was not
of a character that would render impossible the
fulfillment by the carrier of its obligation. The
petitioner was not duty bound to obey the illegal
order to dump into the sea the scrap iron.
Moreover, there is absence of sufficient proof that
the issuance of the same order was attended with
such force or intimidation as to completely
overpower the will of the petitioner’s employees.
The mere difficulty in the fulfillment of the
obligation is not considered force majeure.
(Ganzon vs. Court of Appeals, G.R. No. No. L-
48757. May 30, 1988)
2. CONTRIBUTORY NEGLIGENCE
Contributory negligence in relation to
goods
If the shipper or owner merely contributed to the
loss, destruction or deterioration of the goods,
the proximate cause thereof being the negligence
of the common carrier, the latter shall be liable in
damages, which however, shall be equitably
reduced. (Art. 1741, NCC)
Contrariwise, even if the loss, destruction, or
deterioration of the goods should be caused by
the character of the goods, or the faulty nature
of the packing or of the containers, the common
carrier must exercise due diligence to forestall or
lessen the loss. (Art. 1742, NCC)
However, the carrier may be allowed to prove
that the only cause of the loss of the goods is any
of the following acts of the shipper:
318
(1) Failure of the shipper to disclose the nature
of the goods;
(2) Improper marking or direction as to
destination;
(3) Improper loading when he assumed such
responsibility. (Aquino & Hernando, of
Transportation and Public Utilities Law, 2020, p.
268)
Contributory negligence in relation to
passengers
It cannot be doubted that the employees of the
railroad company were guilty of negligence in
piling these sacks on the platform in the manner
above stated; that their presence caused the
plaintiff to fall as he alighted from the train; and
that they therefore constituted an effective legal
cause of the injuries sustained by the plaintiff. It
necessarily follows that the defendant company
is liable for the damage thereby occasioned
unless recovery is barred by the plaintiff's own
contributory negligence. In resolving this problem
it is necessary that each of these conceptions of
liability, to-wit, the primary responsibility of the
defendant company and the contributory
negligence of the plaintiff should be separately
examined. (Cangco vs. Manila Railroad Co., G.R. No.
12191. October 14, 1918)
Contributory negligence on the part of the injured
party is NOT a defense that will excuse the carrier
from liability. It will only mitigate such liability.
(Del Prado vs. Manila Electric Co., G.R. No. L-29462,
March 07, 1929)
It is conduct on the part of the injured party,
contributing as a legal cause to the harm he has
suffered, which falls below the standard which he
is required to conform for his own protection. It
is an act or omission amounting to want of
ordinary care on the part of the person injured
which, concurring with the defendant’s
negligence, is the proximate cause of the injury.
(National Power Corp. vs. Heirs of Casionan, G.R. No.
165969, November 27, 2008)
Doctrine of last clear chance
Under the doctrine of last clear chance, when
both parties involved in the accident were both
negligent, the negligence of the party will not be
considered the proximate cause if the other party
has the last clear chance of avoiding the injury.
Thus, if the plaintiff has the last clear chance of
avoiding the injury, the defendant may no longer
be held liable.
The doctrine CANNOT be applied against a
passenger.
Doctrine of last clear chance applies in a suit
between the owners and drivers of two colliding
vehicles, not where the passenger demands
responsibility from the carrier to enforce
contractual obligations. For it would be
inequitable to exempt the negligent driver of the
jeepney and its owners on the ground that the
other driver was likewise guilty of negligence.
(Phil. Rabbit Lines, Inc. vs. Intermediate Appellate
Court, G.R. Nos. 66102-04. August 30, 1990; citing
Anuran, et al. v. Buño, et al., G.R. Nos. L-21353 and L-
21354, May 20, 1966)
The principle of last clear chance applies only in
a suit between the owners and drivers of two
colliding vehicles. It does not arise where a
passenger demands responsibility from the
carrier to enforce its contractual obligations, for it
would be inequitable to exempt the negligent
driver and its owner on the ground that the other
driver was likewise guilty of negligence. (Tiu vs.
Arriesgado, G.R. No. 138060, September 1, 2004)
When the doctrine of last clear chance does
not apply
As to the last clear chance, the applicable law in
resolving complaints for damages would depend
on the complainant's cause of action. If the action
is based on contract of carriage, the Civil Code
provisions on common carrier are applicable. On
the other hand, if the cause of action is based on
tort, the provisions of the Code of Commerce on
vessel collision would govern.
319
Under articles 827 and 828 of the Code of a. ACTUAL OR CONSTRUCTIVE LIABILITY
Commerce, in case of a collision between two
vessels at sea, both are solidarily liable for the DUTY TO ACCEPT GOODS FOR TRANSPORT
loss of cargo carried by either, not only in the
A common carrier that is granted a certificate of
case where both vessels may be shown to be
public convenience is duty bound to accept
actually blameworthy but also in the case where
passengers and cargo without any discrimination.
it is obvious that only one was at fault but the
(FC Fisher v. Yangco Steamship Company, et al., G.R.
proof does not show which. No. 8095, November 5, 1914)
(Government of the P. I. vs. Philippine Steamship Co.,
G.R. No. 18957, January 16, 1923)
Valid grounds for non-acceptance
3. DURATION OF LIABILITY OF COMMON 1) When goods sought to be transported are
CARRIER dangerous objects, or substances including
dynamites and other explosives;
2) The goods are unfit for transportation;
Duration of liability of common carrier over 3) Acceptance would result to overloading;
goods 4) The goods are considered contrabands or
(1) Upon delivery of goods to common carrier; illegal goods;
(2) During temporary unloading or storing in 5) Goods are injurious to health;
transit; 6) Goods will be exposed to untoward danger
like flood capture by enemies, and the like;
(3) Until delivery to the consignee or person who 7) Goods are livestock will exposed to diseases;
has the right to receive them. (Aquino & 8) Strike;
Hernando, Essentials of Transportation and Public
9) Failure to tender goods on time; and
Utilities Law, 2020, pp. 117–119)
10) The goods are not goods agreed upon or are
included in the excluded goods stipulated by
General Rule Exception the parties. (Aquino & Hernando, Essentials of
Continues until the The shipper or the Transportation and Public Utilities Law, 2020, p.
goods are delivered, owner had made use of 73-74)
actually or the right of stoppage in
constructively, by the transit (Art. 1737, NCC)
carrier to the consignee
Delivery of Goods to Common Carrier
or to the person who has Responsibility of common carrier upon delivery of
Continues even during
the right to receive goods:
the time the goods are
them, and even when
stored in a warehouse of
they are temporarily
the carrier at the place The extraordinary responsibility of the common
unloaded or stored in
of destination until the carrier lasts from the time the goods are
transit. (Art. 1736 and
consignee has been
Art 1737, NCC) unconditionally placed in the possession of, and
advised of the arrival of
the goods has been received by the carrier for transportation. (Art.
given a reasonable 1736, NCC)
opportunity thereafter
to remove them or There is delivery to the carrier when the goods
otherwise dispose of
are ready for and have been placed in the
them (Art. 1738, NCC)
exclusive possession, custody and control of the
carrier for the purpose of their immediate
transportation and the carrier has accepted them.
Where such a delivery has thus been accepted by
the carrier, the liability of the common carrier
commences eo instanti. (Saludo, Jr. vs. CA, G.R. No.
95536, March 23, 1992)

320

DUTY TO DELIVERY IN THE PLACE AGREED
UPON
Actual or Constructive Delivery
Responsibility of common carrier ends upon
actual or constructive delivery to consignee or
person who has the right to receive the goods.
Likewise, the obligation of a common carrier
ceases when the goods are turned over to the
customs authorities.
The extraordinary responsibility of the common
carrier lasts from the time the goods are
unconditionally placed in the possession of, and
received by the carrier for transportation until the
same are delivered, actually or constructively, by
the carrier to the consignee, or to the person who
has a right to receive them, without prejudice to
the provisions of Article 1738. (Art. 1736, NCC)
The Code of Commerce provides in this
connection:
1) The carrier must deliver to the consignee,
without any delay or obstruction, the goods
which he may have received, by the mere fact
of being named in the bill of lading to receive
them; and if he does not do so, he shall be
liable for the damages which may be caused
thereby. (Art. 368, Code of Commerce)
2) If the consignee cannot be found at the
residence indicated in the bill of lading, or if
he refuses to pay the transportation charges
and expenses, or if he refuses to receive the
goods, the municipal judge, where there is
none of the first instance, shall provide for
their deposit at the disposal of the shipper,
this deposit producing all the effects of
delivery without prejudice to third parties
with a better right. (Art. 369, Code of
Commerce)
Common carriers must ascertain the identity of
the recipient. Failing to deliver shipment to the
designated recipient amounts to a failure to
deliver. The shipment shall then be considered
lost, and liability for this loss ensues. (Federal
Express Corporation vs. Antonino, G.R. No. 199455,
June 27, 2018)
There is actual delivery in contracts for the
transport of goods when possession has been
turned over to the consignee or to his duly
authorized agent and a reasonable time is given
him to remove the goods. (Westwind Shipping Corp.
vs. UCPB General Insurance Co., Inc., G.R. Nos.
200289 and 200314, November 25, 2013)
Furthermore, when there is no dispute that the
custody of the goods was never turned over to
the consignee or his agents but was lost into the
hands of unauthorized persons who secured
possession thereof on the strength of falsified
documents, the common carrier is at fault or
negligent. (Nedlloyd Lijnen B.V. Rotterdam vs. Glow
Laks Enterprises, Ltd., G.R. No. 156330, November 19,
2014)
If the consignee refused to accept the goods, the
carrier must return the goods to the shipper. The
place where the goods should be returned may
be designated by the parties. (Tan vs. Great Harvest
Enterprises, Inc., G.R. No. 220400, March 20, 2019)
DUTY TO MAKE TIMELY DELIVERY OF THE
GOODS
The carrier is duty bound to deliver the goods
within the time agreed upon to the designated
consignee.
Absence of Delay
Common carriers are not obligated by law to carry
and to deliver merchandise, and persons are not
vested with the right to prompt delivery, unless
such common carriers previously assume the
obligation to deliver at a given date or time.
(Mendoza vs. Philippine Air Lines, Inc., G.R. No. L-
3678, February 29, 1952)
The oft-repeated rule regarding a carrier's liability
for delay is that in the absence of a special
contract, a carrier is not an insurer against delay
in transportation of goods. When a common
carrier undertakes to convey goods, the law
implies a contract that they shall be delivered at
destination within a reasonable time, in the
321
absence, of any agreement as to the time of b. TEMPORARY UNLOADING OR
delivery. But where a carrier has made an express STORAGE
contract to transport and deliver properly within Common carrier’s observance of extraordinary
a specified time, it is bound to fulfill its contract diligence during temporary unloading or storing
and is liable for any delay, no matter from what in transit, or storing in a warehouse:
cause it may have arisen. This result logically
follows from the well-settled rule that where the
law creates a duty or charge, and the party is General Rule Exception
disabled from performing it without any fault in The common carrier‘s The common carrier is
himself, and has no remedy over, then the law duty to observe not bound to exercise
will excuse him, but where the party by his own extraordinary diligence such diligence when the
in the vigilance over the shipper or owner has
contract creates a duty or charge upon himself,
goods remains in full made use of the right of
he is bound to make it good notwithstanding any force and effect even stoppage in transit. (Art.
accident or delay by inevitable necessity because when they are 1737, NCC)
he might have provided against it by contract. temporarily unloaded or
Whether or not there has been such an stored in transit, or
undertaking on the part of the carrier is to be when the goods are
determined from the circumstances surrounding stored in a warehouse of
the case and by application of the ordinary rules the carrier at the place
for the interpretation of contracts. (Saludo, Jr. vs. of destination. (Arts.
CA, G.R. No. 95536, March 23, 1992) 1737 – 1738, NCC)

A common carrier undertaking to transport
property has the implicit duty to carry and deliver
it within reasonable time, absent any particular
stipulation regarding time of delivery, and to
guard against delay. In case of any unreasonable
delay, the carrier shall be liable for damages
immediately and proximately resulting from such
neglect of duty. (Saludo, Jr. vs. CA, G.R. No. 95536,
March 23, 1992)
Consequences of a common carrier‘s delay
in the transportation of goods:
1. The carrier is still liable even if natural disaster
is caused the damage;
2. The stipulation limiting the liability of the
carrier is inoperative;
3. The carrier is liable for the damages caused
by the delay; and
4. The consignee may exercise his right to
abandon under Article 371 of the Code of
Commerce. (Aquino & Hernando, Essentials of
Transportation and Public Utilities Law, 2020, p.
80)
At the time customs broker turned over the
custody of the cargoes to a common carrier for
inland transportation, it is still required to observe
extraordinary diligence in the vigilance of the
goods. Failure to successfully establish this
carries with it the presumption of fault or
negligence, thus, rendering the customs broker
liable to the shipper it contracted with, subject to
the right of reimbursement against the carrier in
whose possession, the goods where hijacked.
(Keihin-Everett Forwarding Co., Inc. vs. Tokio Marine
Malayan Insurance Co., Inc., G.R. No. 212107.
January 28, 2019; DIVINA, Divina on Commercial Law,
A Comprehensive Guide, Vol. 1, 2021 ed., p. 203)
Right of stoppage in transit
The right of stoppage in transit is the right of an
unpaid seller to resume possession of the goods
at any time while they are in transit, and he will
then become entitled to the same rights in regard
to the goods as he would have had if he had
never parted with the possession. (Art. 1530, NCC)
Note: Such extraordinary liability continues until
the consignee has been advised of the arrival of
the goods and has had reasonable opportunity
thereafter to remove them or otherwise dispose
of them. (Nedlloyd Lijnen B.V. Rotterdam vs. Glow

322
Laks Enterprises, Ltd., G.R. No. 156330, November 19, Purpose of Limiting Stipulations
2014)
The purpose of the limiting stipulation in the Bill
of Lading is to protect the common carrier. Such
Note: A carrier is allowed by law to release goods stipulations obliges the shipper/consignee to
to the consignee even without the latter’s notify the common carrier of the amount that the
surrender of the bill of lading. The non-surrender latter may be liable for in case of loss of the
of the original bill of lading does not violate the goods. (Aquino & Hernando, Essentials of
carrier’s duty of extraordinary diligence over Transportation and Public Utilities Law, 2020, p. 328)
goods.(Aquino & Hernando, Essentials of
Transportation and Public Utilities Law, 2020, p. 87)
Note: The presence of a limiting stipulation does
not remove the duty to exercise extraordinary
4. STIPULATION FOR LIMITATION OF diligence in the transportation of goods. Under
LIABILITY the provisions of Article 1752, the presumption of
negligence still applies despite the presence of a
limiting stipulation. (Aquino & Hernando, Essentials
COMMON CARRIER PRIVATE CARRIER of Transportation and Public Utilities Law, 2020, p.
328)
Parties may not agree on Parties may agree on
limiting the carrier’s limiting the carrier’s
Requirements to be valid:
liability except when liability, provided not
provided by law. contrary to law, morals A stipulation between the common carrier and the
or good customs. shipper or owner limiting the liability of the
former for the loss, destruction, or deterioration
(Sundiang & Aquino, Reviewer on Commercial Law, of the goods to a degree less than extraordinary
2017, p. 453) diligence shall be valid, provided it be:
1. In writing, signed by the shipper or owner;
2. Supported by a valuable consideration other
Three Kinds of Limiting Stipulations:
than the service rendered by the common
1. Exculpatory contracts – those exempting the carrier; and
carrier from any and all liability for loss or
3. Reasonable, just and not contrary to public
damage occasioned by its own negligence.
policy. (Art. 1744, NCC)
2. Unqualified limitation – provides for
unqualified limitation of such liability to an
agreed valuation. a. VOID STIPULATIONS IN A
CONTRACT OF CARRIAGE OF
3. Limiting liability – limiting the liability of the
GOODS
carrier to an agreed valuation unless the
shipper declares a higher value and pays a
higher rate of freight. (Aquino & Hernando, Any of the following or similar stipulations shall
Essentials of Transportation and Public Utilities be considered unreasonable, unjust and contrary
Law, 2020, p. 326) to public policy:
1. That the goods are transported at the risk of
Note: The first and second kind of stipulations the owner or shipper;
are VOID for being contrary to public policy, the 2. That the common carrier will not be liable for
third one is VALID and enforceable. (H.E. Heacock any loss, destruction, or deterioration of the
Company vs. Macondray & Company, Inc., G.R. No. goods;
16598, October 3, 1921)
3. That the common carriers need not observe
any diligence in the custody of the goods;
4. That the common carrier shall exercise a
degree of diligence less than that of a good

323
 father of a family, or of a man of ordinary
prudence in the vigilance over the movables
transported;
5. That the common carrier shall not be
responsible for the acts or omission of his or
its employees;
6. That the common carrier's liability for acts
committed by thieves, or of robbers who do
not act with grave or irresistible threat,
violence or force, is dispensed with or
diminished;
7. That the common carrier is not responsible for
the loss, destruction, or deterioration of
goods on account of the defective condition
of the car, vehicle, ship, airplane or other
equipment used in the contract of carriage.
(Art. 1745, NCC)
b. LIMITATION OF LIABILITY OF
FIXED AMOUNT
A contract fixing the sum that may be recovered
by the owner or shipper for the loss, destruction,
or deterioration of the goods is valid, if it is
reasonable and just under the circumstances, and
has been fairly and freely agreed upon. (Art. 1750,
NCC)
c. LIMITATION OF LIABILITY IN
ABSENCE OF DECLARATION OF
GREATER VALUE
A stipulation that the common carrier's liability is
limited to the value of the goods appearing in the
bill of lading, unless the shipper or owner declares
a greater value, is binding. (Art. 1749, NCC)
Note: If the common carrier, without just cause,
delays the transportation of goods or changes the
stipulated route, the contract limiting the
common carrier‘s liability cannot be availed of in
case of the loss, destruction, or deterioration of
the goods. (Art. 1747, NCC)
Stipulation Reducing Diligence
Parties cannot stipulate so as to totally exempt
the carrier from exercising any degree of
diligence whatsoever; and the parties cannot
stipulate that the common carrier shall exercise
diligence less than the diligence of a good father
of a family. (Aquino & Hernando, Essentials of
Transportation and Public Utilities Law, 2020, p. 328)
Instances when Limiting Stipulations
CANNOT be Invoked:
1. Then the agreement limiting the common
carrier’s liability is annulled by the shipper or
owner IF the common carrier refused to carry
the goods unless the former agreed to such
stipulation. (Art. 1746, NCC)
2. If the carrier delays in the transportation of
the goods. (Art. 1747, NCC)
3. If the carrier changes the stipulated or usual
route. (Art. 1747, NCC.)
5. LIABILITY FOR BAGGAGE OF
PASSENGERS
Baggage
Articles a passenger usually takes with him for his
own personal use, comfort and convenience
according to the habits or wants of the particular
class to which he belongs, either with reference
to his immediate necessities or to the ultimate
purpose of his journey. (Timoteo B. Aquino,
Essentials of Transportation and Public Utilities Law,
2020, p. 200-201)
Checked-in Baggage
Baggage that is “checked in” or delivered to the
carrier are governed by the rules regarding the
carriage of goods. In other words, the rules that
are applicable to goods that are being shipped are
applicable to baggage delivered to the custody of
the carrier as an incident of a contract of carriage
of passenger. (Aquino & Hernando, Essentials of
Transportation and Public Utilities Law, 2020, p.
201)
Kinds of Baggage
1. Checked-in Baggage
This refers to baggage delivered to the
custody of the common carrier and received
by him, to be carried in the same manner as
other goods being transported by him. As the
common carrier has custody of such baggage
and are carried like any other goods, the
324
 provisions on carriage of goods shall apply
(extraordinary diligence in the vigilance over
the goods). (Art. 1735, NCC)
2. Hand-carried
Those that are in the custody of the
passenger
2) Passenger took the Precautions which the
common carrier advised relative to the care
and vigilance of their baggage (Art. 1998, NCC)
Note: The provisions of Articles 1733 to 1753
shall apply to the passenger's baggage which is
not in his personal custody or in that of his
employee. (Art. 1754, NCC)

Checked-in Baggage Hand-carried Extraordinary responsibility of common

Applicable Rule carrier on checked-in baggage:
Arts. 1998 and 2000 to Arts. 1733 to 1753 of the
2008 of the New Civil New Civil Code. From the very nature of their business and by
Code. reasons of public policy, common carriers are
Legal Nature of the Baggage bound to observe extraordinary diligence in the
Necessary deposit Considered as “goods” vigilance over the goods transported by them.
Diligence by the Common Carrier This extraordinary responsibility lasts from the
Diligence of a
time the goods are unconditionally placed in the
Extraordinary diligence
depositary (Ordinary possession of and received by the carrier until
diligence) they are delivered actually or constructively to the
consignee or person who has the right to receive
them. The only exceptions are those causes
Duty to take care of the passengers’ provided under Article 1734, Civil Code of the
baggage Philippines. (Sabena Belgian World Airlines vs. CA,
G.R. No. 104685, March 14, 1996)
General Rule Exception
Carrier may only inquire Airline companies are Article 1754 of the Civil Code does not exempt
on the nature of the required to inspect each the common carrier from liability in case of loss,
passenger's baggage and every cargo brought but only highlights the degree of care required of
but not search or inspect into the aircraft (Sec. 8, it depending on who has the custody of the
its contents (Nocum v. RA No 6235 also known
belongings. Hence, the law requires the common
Laguna Tayabas Bus as "An Act Prohibiting
Company G.R. Na L- Certain Acts Inimical to carrier to observe the same diligence as the hotel
23733, October 31, Civil Aviation, and For keepers in case the baggage remains with the
1969). Other Purpose") passenger; otherwise, extraordinary diligence
must be exercised. (Sulpicio Lines, Inc. vs. Sesant,
G.R. No. 172682. July 27, 2016)
Requisites for Common Carrier’s Liability
for Hand-Carried Baggage or Necessary
Deposit: Liability on hand-carried baggage
The baggage of passengers in their personal The rules on necessary deposit apply for hand-
custody or in that of their employees while being carried luggage. However, the fact that rules on
transported shall be regarded as necessary necessary deposit apply does not mean that the
deposits. The common carrier shall be carrier is relieved of its duties.
responsible for such baggage as depositaries,
provided that: Article 1754 of the Civil Code does not exempt the
1) Notice was given to the common carrier, or common carrier from liability in case of loss, but
to their employees, of the baggage brought only highlights the degree of care required of it
by the passengers; and depending on who has custody of the belongings.
Hence, the law requires common carriers to
observe the same diligence as the hotel keepers

325
in case the baggage remains with the passenger, C. SAFETY OF PASSENGERS
otherwise, extraordinary diligence must be
exercised. (Aquino & Hernando, Essentials of
A common carrier is bound to carry the
Transportation and Public Utilities Law, 2020, p. 203)
passengers safely as far as human care and
foresight can provide, using the utmost diligence
Liability Hotel Keepers of very cautious persons, with a due regard for all
General rule Exception the circumstances. (Art. 1755, NCC)
The hotel-keeper cannot 1. Those which may
free himself from proceed from any The extraordinary diligence required of common
responsibility by posting force majeure. (Art.
carriers is calculated to protect the passengers
notices to the effect that 2000, NCC)
he is not liable for the 2. The act of a thief or
from the tragic mishaps that frequently occur in
articles brought by the robber, who has connection with rapid modern transportation.
guest. Any stipulation entered the hotel is (Isaac vs. A.L. Ammen Transportation, G.R. No. L-
between the hotel- not deemed force 9671, August 23, 1957)
keeper and the guest majeure, unless it is
whereby the done with the use of
The high standard of care is imperatively
responsibility of the arms or through an
former as set forth in irresistible force.
demanded by the precariousness of human life
Articles 1998 to 2001 is (Art. 2001, NCC) and by the consideration that every person must
suppressed or 3. The hotel-keeper is in every way be safeguarded against all injuries.
diminished shall be void. not liable for (Ibid.)
(Art. 2003, NCC) compensation if the
loss is due to the
acts of the guest, his
Principles governing the liability of a
family, servants or common carrier
visitors, or if the loss (1) The liability of a carrier is contractual and
arises from the arises upon breach of its obligation;
character of the
things brought into
(2) A carrier is obliged to carry passengers with
the hotel. (Art. 2002, utmost diligence of a very cautious person;
NCC) (3) A carrier is presumed to be at fault or to have
acted negligently in case of death of, or injury
to, passengers; and
Liability of common carrier even when the
baggage is not declared and charges are (4) A carrier is NOT an insurer against all risks of
not paid: travel. (Isaac vs. A.L. Ammen Transportation,
G.R. No. L-9671, August 23, 1957)
A common carrier is liable for the loss of baggage
although not declared and the charges not paid,
if it accepted them for transportation. The contract of air carriage is a peculiar one.
Being imbued with public interest, the law
requires common carriers to carry the passengers
Where the common carrier accepted its
safely as far as human care and foresight can
passenger's baggage for transportation and even
provide, using the utmost diligence of a very
had it placed in the vehicle by its own employee,
cautious person, with due regard for all
its failure to collect the freight charge is the
circumstances.
common carrier's own lookout. It is responsible
for the consequent loss of the baggage. (Sarkies
Tours Philippines vs. CA, G.R. No. 108897 October 2, If the cause of non-fulfillment of the contract is
1997) due to a fortuitous event, it has to be the sole and
only cause. (PAL vs. CA, G.R. No. L-82619, September
15, 1993)

326
1. VOID STIPULATIONS
There can be no stipulation lessening the utmost
diligence that is owed to passengers. (Aquino &
Hernando, of Transportation and Public Utilities Law,
2020, p. 138)
The responsibility of a common carrier for the
safety of passengers as required in articles 1733
and 1755 cannot be dispensed with or lessened
by stipulation, by the posting of notices, by
statements on tickets, or otherwise. (Art. 1757,
NCC)
General The responsibility of a common
rule carrier for the safely of
passengers cannot be dispensed
with or lessened by stipulation by
the posting of notices, by
statements on tickets, or
otherwise (Art. 1757, Civil Code)
Exception When a passenger is carried
'gratuitously, a stipulation
limiting the common carrier's
liability for negligence is valid.
(Art. 1758, Civil Code).
Exception Even when a passenger is carried
to gratuitously, a stipulation limiting
exception the common carrier's liability for
willful acts or gross negligence is
invalid. (Art. 1758, Civil Code).
A stipulation limiting the liability
of the carrier for the death or
injuries to paying passengers is
void. (Art. 1760, Civil Code).
2. DURATION OF LIABILITY
The carrier is bound to exercise utmost diligence
with respect to passengers the moment the
person who purchases the ticket or a token from
the carrier presents himself at the proper place
and in a proper manner to be transported. Such
person must have a bona fide intention to use the
facilities of the carrier, possess sufficient fare with
which to pay for his passage, and present himself
to the carrier for transportation in the place and
manner provided. If he does not do so, he will not
be considered a passenger and the carrier does
not owe him extraordinary diligence. (Vda. de
Nueca, et al. vs. The Manila Railroad Company, CA-
G.R. No. 31731, January 30, 1968)
The mandate and duty of common carriers to
exercise extraordinary diligence in the
transportation of its passengers does not end
with the implementation of safety and security-
related preventive measures. This duty
continues for the whole voyage and
includes also reactive measures taken,
especially in cases involving passengers'
injury or death. In such cases, common carriers
are duty-bound to thoroughly investigate and
provide sufficient assistance to passengers and
other concerned parties to ensure that no further
harm or injury is caused. (WG&A Shipping Lines,
Inc. v. Spouses Asuncion, G.R. No. 225975 (Notice),
January 12, 2021)
DUTY TO TRANSPORT THE PASSENGER
SAFELY TO HIS DESTINATION
Doctrine of Continuing Offer
It is the duty of the carriers of passengers to stop
their conveyances for a reasonable length of time
in order to afford passengers an opportunity to
board and enter, and they are liable for injuries
suffered by boarding passengers resulting from
the sudden starting up or jerking of their
conveyances while they do so. (Dangwa
Transportation Co., Inc. vs CA, G.R. No. 95582,
October 7, 1991)
Duty to exercise utmost diligence in
carriage of passengers begin if by TRAIN:
When a person who wants to board a train in a
railway station:
(1) Purchases a ticket from the carrier;
(2) Presents himself at the proper place and in a
proper manner for transportation;
(3) Has bona fide intention to use the facilities of
the carrier;
(4) Possesses sufficient fare with which to pay for
his passage; and
327
 (5) Presents himself to the carrier for
transportation in the place and manner
provided. (Vda. De Nueca et al. vs. The Manila
Railroad Company, CA-G.R. No. 31731, January
30, 1968)
Such duty of a common carrier to provide safety
to its passengers so obligates it not only during
the course of the trip but for so long as the
passengers are within its premises and where
they ought to be in pursuance to the contract of
carriage. (LRTA vs. Navidad, G.R. No. 145804,
February 06, 2003)
Duty to exercise utmost diligence
carriage of passengers begin if by SEA:
The duty of the carrier commences as soon as a
person with bona fide intention of taking passage
places himself in the employees and is accepted
as a passenger. It also requires the duty to make
sure that the carrier’s employees treat the
passengers with kindness, respect, courtesy and
due consideration. (Aquino & Hernando, Essentials
of Transportation and Public Utilities Law, 2020, p. 90)
Duty to exercise utmost diligence in
carriage of passengers begin if by LAND:
The common carrier is duty bound to stop their
conveyances for reasonable length of time in
order to afford passengers and opportunity to
board and enter, and they are liable for injuries
suffered by boarding passengers resulting from
the sudden starting up or jerking of their
conveyances while they do so. (Continuing Offer
Doctrine) (Aquino & Hernando, Essentials of
Transportation and Public Utilities Law, 2020, p. 11)
Duty to exercise utmost diligence
carriage of passengers begin if by AIR:
The obligation of the airline to exercise
extraordinary diligence commences upon the
issuance of the contract of carriage. Ticketing, as
the act of issuing the contract of carriage, is
necessarily included in the exercise of
extraordinary diligence. (Manay, Jr. vs. Cebu Air,
Inc., G.R. No. 210621, April 4, 2016)
Arrival at Destination
As a rule, the relation of carrier and passenger
does not cease at the moment the passenger
alights from the carrier's vehicle at a place
selected by the carrier at the point of destination,
but continues until the passenger has had a
reasonable time or a reasonable opportunity to
leave the carrier's premises. And, what is a
reasonable time or a reasonable delay within this
rule is to be determined from all the
circumstances. Thus, a person who, after
alighting from a train, walks along the station
platform is considered still a passenger. (La
Mallorca vs. CA, G.R. No. L-20761, July 27, 1966)
in
Duty to make sure that the carrier’s
employees treat the passengers with
kindness, respect, courtesy and due
consideration. (Sps. Fernando vs. Northwest
Airlines, Inc., G.R. No. 212038, February 8, 2017)
DUTY TO TRANSPORT PASSENGER WITH
REASONABLE DISPATCH
The basic rule that applies to carriage of goods
shall also apply to carriage of passengers, that is,
the carrier must commence its trip within a
reasonable time. The carrier shall be made liable
when the vessel or vehicle is unreasonably
delayed. (Sps. Fernando vs. Northwest Airlines, Inc.,
G.R. No. 212038, February 8, 2017)
3. LIABILITY FOR ACTS OF OTHERS
a. EMPLOYEES
Common carriers are liable for the death of or
injuries to passengers through the negligence or
wilful acts of the former's employees, although
in
such employees may have acted beyond the
scope of their authority or in violation of the
orders of the common carriers.
This liability of the common carriers does not
cease upon proof that they exercised all the
diligence of a good father of a family in the
selection and supervision of their employees. (Art.
1759, NCC)
328
b. OTHER PASSENGERS AND STRANGERS
A common carrier is responsible for injuries
suffered by a passenger on account of the willful
acts or negligence of the passengers or of
strangers, if the common carrier‘s employees
through the exercise of diligence of a good father
of the family could have prevented or stopped the
act or omission. (Art. 1763, NCC)
Although the employer was not inside the vehicle
at the time of the collision, he is still solidarily
liable with the employee. (Sps. Hernandez vs. Sps.
Dolor, G.R. No. 160286, July 30, 2004)
It is the carrier’s strict obligation to select its
drivers and similar employees with due regard not
only to their technical competence and physical
ability, but also, no less important, to their total
personality, including their patterns of behavior,
moral fibers, and social attitude. (Maranan vs.
Perez, G.R. No. L-22272, June 26, 1967)
The rule of ordinary care and prudence is not so
exacting as to require one charged with its
exercise to take doubtful or unreasonable
precautions to guard against unlawful acts of
strangers. The carrier is not charged with the
duty of providing or maintaining vehicles as to
absolutely prevent any and all injuries to
passengers. Where the carrier uses cars of the
most approved type, in general use by others
engaged in the same occupation, and exercises a
high degree of care in maintaining them in
suitable condition, the carrier cannot be charged
with negligence in this respect. (Pilapil vs. CA, G.R.
No. 52159, December 22, 1989)
Liability for delay in commencement of
voyage
A delayed voyage refers to a voyage involving late
departure of the ship from its port of origin or late
arrival thereof to its port of destination for a
period of time not exceeding twenty-four (24)
hours from the Certificate of Public Convenience
(CPC) — authorized time of departure or arrival
of the ship.
MARINA Circular No. 2018-07 dated September
20, 2018 clearly orders to intensify and ensure
protection of the public against inefficient
shipping and/or transport services and in order to
clearly establish their rights against operators in
cases of canceled, delayed, or
unfinished/uncompleted voyages. It serves to
provide a clear outline of the rights of the
passengers and the obligation of the operators as
well as the remedies available to the former in
case of violations and/or non-compliance
therewith by the latter. Hence, in case of delayed
voyages, the operator/carrier shall become liable
to the passengers.
Liability for defects in equipment and
facilities
A common carrier is bound to carry the
passengers safely as far as human care and
foresight can provide, using utmost diligence of
very cautious persons, with a due regard for all
circumstances. It is clear that the carrier is not an
insurer of the passengers' safety. His liability rests
upon negligence, his failure to exercise the
"utmost" degree of diligence that the law
requires, and in case of a passenger's death or
injury the carrier bears the burden of satisfying
the court that he has duly discharged the duty of
prudence required. The rule on the liability of
carriers for defects of equipment is thus
expressed: “The preponderance of authority is in
favor of the doctrine that a passenger is entitled
to recover damages from a carrier for an injury
resulting from a defect in an appliance purchased
from a manufacturer, whenever it appears that
the defect would have been discovered by the
carrier if it had exercised the degree of care which
under the circumstances was incumbent upon it,
with regard to inspection and application of the
necessary tests. For the purposes of this doctrine,
the manufacturer is considered as being in law
the agent or servant of the carrier, as far as
regards the work of constructing the appliance.
According to this theory, the good repute of the
manufacturer will not relieve the carrier from
liability.” (Necesito, et al., vs. Paras, et al., G.R. Nos.
L-10605 and L-10606, June 30, 1958)
329
The rationale of the carrier's liability is the fact
that the passenger has neither choice nor control
over the carrier in the selection and use of the
equipment and appliances in use by the carrier.
Having no privity whatsoever with the
manufacturer or vendor of the defective
equipment, the passenger has no remedy against
him, while the carrier usually has. It is but logical,
therefore, that the carrier, while not an insurer of
the safety of his passengers, should nevertheless
be held to answer for the flaws of his equipment
if such flaws were at all discoverable. (Ibid.)
Due diligence in the selection and
supervision of employees
In case of loss of effects of passengers or death
or injuries to passengers, the liability of the
common carrier does NOT cease upon proof that
they exercised all the diligence of a good father
of the family in the selection and supervision of
their employees. (Art. 1759, NCC)
4. EXTENT OF LIABILITY FOR DAMAGES
Recoverable damages
Damages in cases comprised in this Section shall
be awarded in accordance with Title XVIII of this
Book, concerning Damages. Article 2206 shall
also apply to the death of a passenger caused by
the breach of contract by a common carrier. (Art.
1764, NCC)
Damages
Damages is the pecuniary compensation,
recompense, or satisfaction for an injury,
sustained, or as otherwise expressed, the
pecuniary consequences that the law imposes for
the breach of some duty or violation of some
rights. (Aquino & Hernando, Essentials of
Transportation and Public Utilities Law, 2020, p. 355)
Extent of Recovery
In contracts and quasi-contracts, the damages for
which the obligor who acted in good faith is liable
shall be those that are the natural and probable
consequences of the breach of the obligation, and
which the parties have foreseen or could have
reasonably foreseen at the time the obligation
was constituted.
In case of fraud, bad faith, malice or wanton
attitude, the obligor shall be responsible for all
damages which may be reasonably attributed to
the non-performance of the obligation. (Art. 2201,
NCC)
Proof of Damages
Damages cannot be presumed and courts in
giving an award, must point out specific facts that
could afford a basis for measuring whatever
compensatory or actual damages are borne.
Burden of proof rests on the plaintiff who is
claiming actual damages against the carrier.
(Aquino & Hernando, Essentials of Transportation and
Public Utilities Law, 2020, p. 357)
Kinds of damages:
L - Liquidated
A - Actual
M - Moral
E - Exemplary
N - Nominal
T - Temperate
1. Actual or Compensatory Damages (See Arts.
2199 to 2215, NCC)
These are those awarded in satisfaction of, or in
recompense for, loss or injury sustained. They
proceed from a sense of natural justice and are
designed to repair the wrong that has been done,
to compensate for the injury inflicted and
not to impose a penalty. In actions based on torts
or quasi-delicts, actual damages include all the
natural and probable consequences of the act or
omission complained of.
There are two kinds of actual or compensatory
damages: one is the loss of what a person already
possesses (daño emergente), and the other is the
failure to receive as a benefit that which would
have pertained to him (lucro cesante). (Marikina
330
Auto Line Transport Corp vs. People, G.R. No. 152040,
March 21, 2006)
2. Moral Damages (See Arts. 2217 to 2220, NCC)
The award of Moral Damages is designed to
compensate the claimants for actual injury and is
not meant to enrich the complainant at the
expense of the defendant. (Kierulf vs. CA, G.R. No.
99301, March 13, 1997)
Requisites awarding moral damages:
1. There must be an injury, whether physical,
mental, or psychological, clearly sustained by
the claimant;
2. There must be a culpable act or omission
factually established;
3. The wrongful act or omission of the
defendant is the proximate cause of the
injury sustained by the claimant; and
4. The award of damages is predicated on any
of the cases stated in Article 2219. (Expert
Travel & Tours, Inc. vs. The Hon. Court of Appeals
and Ricardo Lo, G.R. No. 170414, August 25,
2010)
General Rule: Moral damages are NOT
recoverable in culpa contractual.
Exceptions:
a. In case of death of a passenger as a result of
the contractual breach.
b. When there is fraud or bad faith in the breach
of contract even if no death occurs.
c. When passenger suffered social humiliation,
wounded feelings, serious anxiety etc., as a
result of lack of attention, discourtesy, want
of care, callous behavior or part of the
personnel of the carrier. (Trans World Airlines
vs. CA, G.R. No. 78656, August 30, 1988)
3. Exemplary or Compensatory damages (See
Arts. 2229 to 2235, NCC)
Requisites for the award of exemplary
damages:
1. They may be imposed by way of example in
addition to compensatory damages, and only
after the claimant’s right to them has been
established;
2. They cannot be recovered as a matter of
right, their determination depending upon
the amount of compensatory damages that
may be awarded to the claimant;
3. The act must be accompanied by bad faith or
done in wanton, fraudulent, oppressive or
malevolent manner. (Mendoza vs. Sps. Gomez,
G.R. No. 160110, June 18, 2014)
NOTE: Exemplary damages are not available if
there is no moral, temperate, or compensatory
damages. (Darines vs. Quiñones, G.R. No. 206468,
August 2, 2017)
4. Nominal, Temperate and Liquidated Damages
(Arts. 2221 to 2228, NCC)
Articles 2221 and 2222 of the Civil Code make it
clear that nominal damages are NOT intended
for indemnification of loss suffered but for the
vindication or recognition of a right violated or
invaded. They are recoverable where some injury
has been done but the amount of which the
evidence fails to show, the assessment of
damages being left to the discretion of the court
according to the circumstances of the case.
Under Article 2224 of the New Civil Code, when
pecuniary loss has been suffered but the amount
cannot, from the nature of the case, be proven
with certainty, temperate damages may be
recovered. Temperate damages may be
allowed in cases where from the nature of the
case, definite proof of pecuniary loss cannot be
adduced, although the court is convinced that the
aggrieved party suffered some pecuniary loss.
(Adriano vs. La Sala, G.R. No. 197842, October 9,
2013)
The liability for liquidated damages is
governed by Articles 2226–2228 of the New Civil
Code. They are those agreed upon by the parties
331
to a contract, to be paid in case of breach thereof.
The parties to a contract are allowed to stipulate
on liquidated damages to be paid in case of
breach. It is attached to an obligation in order to
ensure performance and has a double function:
(1) to provide for liquidated damages, and (2) to
strengthen the coercive force of the obligation by
the threat of greater responsibility in the event of
breach. (Atlantic Erectors, Inc., vs. CA, G.R. No.
170732, October 11, 2012)
5. Attorney’s Fees and Interests
Article 2208 of the New Civil Code of the
Philippines states the policy that should guide the
courts when awarding attorney’s fees to a litigant.
As a general rule, the parties may stipulate the
recovery of attorney’s fees. In the absence of
such stipulation, this article restrictively
enumerates the instances when these fees may
be recovered. (PNCC vs. APAC Marketing
Corporation, G.R. No. 190957, June 5, 2013)
Note: The attorney’s fees which may be awarded
under Article 2208 is defined as being in the
extraordinary concept as indemnity. (Philippine
National Construction Corporation vs. APAC Marketing
Corp., G.R. No. 190957, June 5, 2013)
In awarding attorney’s fees, the trial court must
state the factual, legal, or equitable
justification for awarding the same, bearing in
mind that the award of attorney’s fees is the
exception, not the general rule, and it is not
sound policy to place a penalty on the right to
litigate; nor should attorney’s fees be awarded
every time a party wins a suit. (Philippine Airlines,
Inc. vs. Court of Appeals, et al., G.R. No. 123238,
September 22, 2008)
Amount of damages for death by a crime or
quasi-delict; additional liability of
defendant (Art. 2206, NCC):
The amount of damages for death caused by a
crime or quasi-delict shall be at least three
thousand pesos, even though there may have
been mitigating circumstances. In addition:
a. The defendant shall be liable for the loss of
the earning capacity of the deceased, and the
indemnity shall be paid to the heirs of the
latter;
b. Such indemnity shall in every case be
assessed and awarded by the court, unless
the deceased on account of permanent
physical disability not caused by the
defendant, had no earning capacity at the
time of his death;
c. If the deceased was obliged to give support
according to the provisions of Article 291, the
recipient who is not an heir called to the
decedent's inheritance by the law of testate
or intestate succession, may demand support
from the person causing the death, for a
period not exceeding five years, the exact
duration to be fixed by the court;
d. The spouse, legitimate and illegitimate
descendants and ascendants of the deceased
may demand moral damages for mental
anguish by reason of the death of the
deceased.
D. THE MONTREAL CONVENTION OF 1999
The relevant convention that the country now
adheres to is the Convention for the
Unification of Certain Rules for
International Carriage by Air, Montreal, 28
May 1999, otherwise known as the Montreal
Convention or "MC99."
It is designed to be a single, universal treaty,
governing airline liability around the world
relative to carriage of passengers, baggage, and
cargo. It amended the now defunct Warsaw
Convention and its related protocols —which
compensation system, over time has become
outdated. MC99 espouses a more modern and fair
liability regime than its Warsaw counterpart.
MC99 was ratified by the Philippine Senate on 10
August 2015 and became effective on 12
December 2015. To date, 132 of the 191
contracting states of International Civil Aviation
Organization are parties to the MC99. (DIVINA,
Divina on Commercial Law, A Comprehensive Guide,
Vol. 1, 2021 Edition, p. 320)
332
1. APPLICABILITY the same State. (Art.
When applicable When inapplicable 1[3], MC)
This Convention applies to Except as provided in
all international carriage of paragraph 2 of this 2. EXTENT OF LIABILITY OF AIR CARRIER
persons, baggage or cargo Article, the provisions of
a. Death or injury of passenger
performed by aircraft for this Convention shall not
reward. It applies equally to apply to the carriage of The Montreal Convention established a two-tier
gratuitous carriage by postal items. (Art. 2[3], liability for death or bodily injury to a passenger.
aircraft performed by an air MC)
transport undertaking. (Art.
1[1], MC) First tier Second tier
It also applies to carriage as The first tier is on the Under the second tier of
set out in Chapter V, basis of a strict liability liability, or for all
subject to the terms where an airline carrier damages higher than
contained therein. (Art. shall be made liable for 113,100 SDRs (or
1[4], MC) damage sustained in approximately up to
case of death or bodily US$170,000 based on
injury of a passenger on current IMF valuation),
NOTE: In the carriage of postal items, the carrier the condition that the the carrier shall be
shall be liable only to the relevant postal accident which caused liable unless it can show
administration in accordance with the rules the death or injury took that the damage was
applicable to the relationship between the carriers place on board-the not due to its
aircraft or in the course negligence or wrongful
and the postal administrations. (Art. 2[2], MC)
of any of the operations act or omission, or that
of embarking or the damage was solely
International Not an international disembarking. (Art. 17, due to the negligence
carriage carriage Montreal Convention) or wrongful act or
Refers to any carriage Carriage between two Under this first tier of omission of a third
in which the place of points within the territory liability, the carrier party. (Art. 21, Montreal
departure and the of a single State Party cannot limit or exclude Convention) Otherwise
place of destination, without an agreed its liability provided the stated, for those claims
whether or not there stopping place within the damages sustained above 113,100 SDRs,
be a break in the territory of another State is does not exceed the carrier shall not be
carriage or a not international carriage. 113,100 Special liable under this tier
transhipment, are (Art. 1[2], MC) Drawing Rights only if it shall prove that
situated either: ("SDRs"). An SDR is a it was not negligent or
Carriage to be performed
type of foreign at fault. To emphasize,
(1) Within the by several successive
exchange reserve asset the burden of proof is
territories of two carriers is deemed to be
created by the on the carrier.
States Parties, or one undivided carriage if:
International Monetary
(2) Within the (1) It has been regarded Fund. Its value is based
territory of a by the parties as a on an artificial basket of
single State Party single operation, currencies consisting of
if there is an whether it had been the US dollar, the euro,
agreed stopping agreed upon under the the pound and the
place within the form of a single Japanese yen. The
territory of contract or of a series liability limits are
another State, of contracts; and reviewed every five (5)
even if that State (2) It does not lose its years.
is not a State international character In this regard, the
Party. merely because one carrier may be held
contract or a series of liable even if it is not
contracts is to be negligent or at fault.
performed entirely (Art. 21, Montreal
within the territory of Convention) The carrier

333
 is thus presumptively kg luggage. The passenger may only claim above
liable up to the amount the limit of 1,131 SDR if he has made a special
of 113,100 SDRs. The declaration of interest at the time of check-in and
carrier's liability may be has paid a supplementary sum if the case so
reduced or exonerated
requires. In such case, the carrier will be liable to
only in case where
damage was caused by pay a sum not exceeding the declared sum.
contributory or sole (DIVINA, Divina on Commercial Law, A Comprehensive
negligence of the Guide, Vol. 1, 2021 Edition, p. 327)
passenger or person
claiming compensation. The passenger recover an amount greater
(Art. 20, Montreal
than the amount set forth in the
Convention)
Convention
(DIVINA, Divina on Commercial Law, A Comprehensive
Guide, Vol. 1, 2021 Edition, pp. 326-327) The passenger may recover a greater amount in
the following cases:
1. If at the time the packages were handed over
This two-tier liability is a departure from the
to the carrier, the passenger made a special
liability regime under the Warsaw Convention
declaration of the value at delivery and has
(and its subsequent amendments) where the
paid a supplementary sum; and (Artic1e 22(1),
carrier's liability was limited to125,000.00 (or its Warsaw Convention)
equivalent) regardless of whether the airline was
2. When the air carrier failed to raise timely
at fault or not. Also, the full defense that the
carrier or its agents has taken all reasonable objections during the trial when questions
measures to avoid damage is not already availing and answers regarding the actual claims and
under the Montreal Convention. damages sustained liy the passenger were
asked. (British Airways v. Court of Appeals, G.R.
No. 121824, January 29, 1998)
b. Lost or Delayed Baggage (DIVINA, Divina on Commercial Law, A Comprehensive
GENERAL RULE EXCEPTION Guide, Vol. 1, 2021 Edition, p. 328)
The carrier is liable for The carrier is not
damage sustained in case of liable if and to the Damage to cargo
destruction or loss of, or of extent that the
damage to, checked baggage damage resulted GENERAL RULE EXCEPTION
upon condition only that the from the inherent The carrier is liable The carrier is not liable if and
event which caused the defect, quality or for damage to the extent it proves that
destruction, loss or damage vice of the baggage sustained in the the destruction, or loss of, or
took place on board the event of the damage to, the cargo
aircraft or during any period destruction or loss resulted from:
within which the checked of, or damage to, (a) Inherent defect, quality
baggage was in the charge of cargo upon or vice of that cargo;
the carrier. condition only that
(b) Defective packing of
NOTE: In the case of unchecked baggage, including the event which
that cargo performed by
personal items, the carrier is liable if the damage caused the damage
a person other than the
resulted from its fault or that of its servants or so sustained took
carrier or its servants or
agents. (Art. 17, Montreal Convention) place during the
agents;
carriage by air.
(c) An act of war or an
In those cases where the carrier is held liable, the armed conflict;
carrier's liability shall be up to 1,131 SDRs for (d) An act of public
each passenger, or approximately US$70 per kg authority carried out in
luggage (per current valuation). This is an connection with the
entry, exit or transit of
apparent increase from the previous limit under
the cargo.
the Warsaw Convention of only up to US$20 per

334
Delay
GENERAL RULE EXCEPTION
The carrier is liable The carrier shall not be liable
for damage for damage occasioned by
occasioned by delay delay if it proves that it and
in the carriage by air its servants and agents took
of passengers, all measures that could
baggage or cargo. reasonably be required to
avoid the damage or that it
was impossible for it or them
to take such measures. (Art.
19, Montreal Convention)
No liability
(1) If the carrier proves that the damage was
caused or contributed to by the negligence or
other wrongful act or omission of the person
claiming compensation, or the person from
whom he or she derives his or her rights, the
carrier shall be wholly or partly exonerated
from its liability to the claimant to the extent
that such negligence or wrongful act or
omission caused or contributed to the
damage.
(2) When by reason of death or injury of a
passenger compensation is claimed by a
person other than the passenger, the carrier
shall likewise be wholly or partly exonerated
from its liability to the extent that it proves
that the damage was caused or contributed
to by the negligence or other wrongful act or
omission of that passenger. (Art. 20, Montreal
Convention)
Effect of exculpating or mitigating liability
Any provision tending to relieve the carrier of
liability or to fix a lower limit than that which is
laid down in this Convention shall be null and
void, but the nullity of any such provision does
not involve the nullity of the whole contract,
which shall remain subject to the provisions of
this Convention. (Art. 26, Montreal Convention)
Extent of liability of air carrier
Compensation in case of death or injury of
passengers
For damages not exceeding 100,000 Special Drawing
Rights for each passenger, the carrier shall not be able
to exclude or limit its liability.
The carrier shall not be liable for damages to the extent
that they exceed for each passenger 100,000 Special
Drawing Rights if the carrier proves that:
(a) Such damage was not due to the negligence or
other wrongful act or omission of the carrier or its
servants or agents; or
(b) Such damage was solely due to the negligence or
other wrongful act or omission of a third party.
(Art. 21, Montreal Convention)
Limits of liability
(1) Liability to Passenger for Delay. 4 150 Special
Drawing Rights per passenger
(2) Liability for Baggage. 1,000 Special Drawing
Rights per passenger
Exception: In case of a special declaration of interest
in delivery at destination and payment of
supplementary sum by the passenger, the carrier is
liable to a sum not exceeding the declared sum, unless
it proves that the sum is greater than the actual
interest in delivery at destination.
Liability for Cargo – Sum of 17 Special Drawing
Rights per kilogram
Exception: In case of a special declaration of interest
in delivery at destination and payment of a
supplementary sum by the consignor, the carrier is
liable to a sum not exceeding the declared sum, unless
it proves that the sum is greater than the actual
interest in delivery at destination.
Liability for part of the Cargo and object
contained therein – Total weight of the
package or packages concerned
NOTE: When it affects the value of other
packages covered by the same air waybill, or the
same receipt or, if they were not issued, by the
same record preserved by the other means, the
total weight of such package or packages shall
also be taken into consideration in determining
the limit of liability.
When inapplicable
The foregoing provisions of paragraphs 1 and 2
of this Article shall not apply if it is proved that
the damage resulted from an act or omission of
335
the carrier, its servants or agents, done with
intent to cause damage or recklessly and with
knowledge that damage would probably result;
provided that, in the case of such act or omission
of a servant or agent, it is also proved that such
servant or agent was acting within the scope of
its employment. (Art. 22, Montreal Convention)
Carriage by air performed by a person other
than the contracting carrier
Contracting carrier and actual carrier
The provisions of this Chapter apply when a
person (“the contracting carrier”) as a principal
makes a contract of carriage governed by this
Convention with a passenger or consignor or with
a person acting on behalf of the passenger or
consignor, and another person (“the actual
carrier”) performs, by virtue of authority from the
contracting carrier, the whole or part of the
carriage, but is not with respect to such part a
successive carrier. (Art. 39, Montreal Convention)
Respective liability of contracting and
actual carriers
If an actual carrier performs the whole or part of
carriage which is governed by this Convention,
both the contracting carrier and the actual carrier
shall, except as otherwise provided in this
Chapter, be subject to the rules of this
Convention, the former for the whole of the
carriage contemplated in the contract, the latter
solely for the carriage which it performs. (Art. 40,
Montreal Convention)
Mutual liability
The acts and omissions of the actual carrier and
of its servants and agents acting within the scope
of their employment shall, in relation to the
carriage performed by the actual carrier, be
deemed to be also those of the contracting
carrier.
The acts and omissions of the contracting carrier
and of its servants and agents acting within the
scope of their employment shall, in relation to the
carriage performed by the actual carrier, be
deemed to be also those of the actual carrier. (Art.
41, Montreal Convention)
Effect of exculpating or mitigating liability
Any contractual provision tending to relieve the
contracting carrier or the actual carrier of liability
under this Chapter or to fix a lower limit than that
which is applicable according to this Chapter shall
be null and void, but the nullity of any such
provision does not involve the nullity of the whole
contract, which shall remain subject to the
provisions of this Chapter. (Art. 47, Montreal
Convention)
Jurisprudence where the Supreme Court
ruled that the Warsaw Convention does not
apply
The following principles enunciated in the
foregoing cases are still applicable under the
Montreal Convention. (DIVINA, Divina on
Commercial Law, A Comprehensive Guide, Vol. 1, 2021
Edition, p. 334)
Illustrative cases:
1. Article 30 of the Warsaw Convention on
International Air Transportation does not
apply to a case where an airline refuses to
transport a passenger with confirmed
reservation.—The applicability insisted upon
by the KLM of article 30 of the Warsaw
Convention cannot be sustained. That article
presupposes the occurrence of either an
accident or a delay, neither of which took
place at the Barcelona airport; what is here
manifest, instead, is that the Aer Lingus,
through its manager there, refused to
transport the respondents to their planned
and contracted destination. (KLM Royal Dutch
Airlines vs. Court of Appeals, G.R. No. L-31150, July
22, 1975)
2. The Warsaw Convention does not operate as
an absolute limit of the extent of an airline's
liability; it does not regulate or exclude liability
for other breaches of contract by the carrier,
or misconduct of its employees, or for some
particular or exceptional type of damage.—
The Convention does not thus operate as an
exclusive enumeration of the instances of an
airline's liability, or as an absolute limit of the
extent of that liability. Such a proposition is
not borne out by the language of the
Convention, as this Court has now, and at an
earlier time, pointed out. Moreover, slight
336
 reflection readily leads to the conclusion that
it should be deemed a limit of liability only in
those cases where the cause of the death or
injury to person, or destruction, loss or
damage to property or delay in its transport is
not attributable to or attended by any willful
misconduct, bad faith, recklessness, or
otherwise improper conduct on the part of any
official or employee for which the carrier is
responsible, and there is otherwise no special
or extraordinary form of resulting injury. The
Convention's provisions, in short, do not
"regulate or exclude liability for other
breaches of contract by the carrier" or
misconduct of its officers and employees, or
for some particular or exceptional type of
damage. Otherwise, "an air carrier would be
exempt from any liability for damages in the
event of its absolute refusal, in bad faith, to
comply with a contract of carriage, which is
absurd." Nor may it for a moment be
supposed that if a member of the aircraft
complement should inflict some physical injury
on a passenger, or maliciously destroy or
damage the latter's property, the Convention
might successfully be pleaded as the sole
gauge to determine the carrier's liability to the
passenger. Neither may the Convention be
invoked to justify the disregard of some
extraordinary sort of damage resulting to a
passenger and preclude recovery therefor
beyond the limits set by said Convention. It is
in this sense that the Convention has been
applied, or ignored, depending on the peculiar
facts presented by each case. (Alitalia vs.
Intermediate Appellate Court, G.R. No.
7192, December 04, 1990)
3. While the Warsaw Convention has the force
and effect of law in the Philippines, the same
does not operate as an exclusive enumeration
of the instances when a carrier shall be liable
for breach of contract or as an absolute limit
of the extent of liability, nor does it preclude
the operation of the Civil Code or other
pertinent laws.—The appellate court declared
correct the non-application by the trial court
of the limited liability of therein defendant-
appellant under the “Conditions of the
Contract” contained in the air waybill, based
on the ruling in Cathay Pacific Airways, Ltd. vs.
Court of Appeals, et al., which substantially
enunciates the rule that while the Warsaw
Convention has the force and effect of law in
the Philippines, being a treaty commitment by
the government and as a signatory thereto,
the same does not operate as an exclusive
enumeration of the instances when a carrier
shall be liable for breach of contract or as an
absolute limit of the extent of liability, nor
does it preclude the operation of the Civil Code
or other pertinent laws. (Philippine Airlines, Inc.
vs. Court of Appeals, G.R. No. 119706, March 14,
1996)
4. A claim covered by the Warsaw Convention
can no longer be recovered under local law, if
the statute of limitations of two years has
already lapsed. Article 19 of the Warsaw
Convention provides for liability on the part of
a carrier for “damages occasioned by delay in
the transportation by air of passengers,
baggage or goods.” Article 24 excludes other
remedies by further providing that “(1) in the
cases covered by articles 18 and 19, any
action for damages, however founded, can
only be brought subject to the conditions and
limits set out in this convention.” Therefore, a
claim covered by the Warsaw Convention can
no longer be recovered under local law, if the
statute of limitations of two years has already
lapsed. (Philippine Airlines, Inc. vs.
Savillo, 149547, July 04, 2008)
V. INTELLECTUAL PROPERTY CODE
(R.A. No. 8293) [Note: Exclude
Implementing Rules and Regulations]
The State shall protect and secure the exclusive
rights of scientists, inventors, artists, and other
gifted citizens to their intellectual property and
creations, particularly when beneficial to the
people, for such period as may be provided by
law. (Sec. 13, Art. XIV, 1987 Philippine Constitution)
The State recognizes that an effective
intellectual and industrial property system:
(1) Vital to the development of domestic and
creative activity;
(2) Facilitates transfer of technology;
(3) Attracts foreign investments; and
(4) Ensures market access for our products.
337
To this end, the State shall promote the diffusion
of knowledge and information for the promotion
of national development and progress and the
common good. (Sec. 2, Intellectual Property Code of
the Philippines (IPC)

Patents Trademark Copyright

A patent refers to any technical
solution of a problem in any field of
human activity which is new,
involves an inventive step, and is
industrially applicable. (Pearl & Dean
(Phil.), Incorporated vs. Shoemart,
Incorporated, G.R. No. 148222
August 15, 2003)
It is the right granted to an inventor
by the State, or by the regional office
acting for several States, which
allows the inventor to exclude
anyone else from commercially
exploiting his invention for a limited
period (WIPO, Understanding
Industrial Property, p. 5)
As to definition
A trademark is any visible sign
capable of distinguishing the goods
(trademark) or services (service
mark) of an enterprise and shall
include a stamped or marked
container of goods. In relation
thereto, a trade name means the
name or designation identifying or
distinguishing an enterprise. (Pearl &
Dean (Phil.), Incorporated vs.
Shoemart, Incorporated, G.R. No.
148222 August 15, 2003)
As to Rights Granted
Trademarks are acquired solely
through registration. (Zuneca
Pharmaceutical Natrapharm, Inc.,
G.R. No 211850, September 8, 2020)
A certificate of registration of a mark
shall be prima facie evidence of the
validity of the registration, the
registrant‘s ownership of the mark,
and of the registrant‘s exclusive right
to use the same in connection with
the goods or services and those that
are related thereto specified in the
certificate. (Sec 138, IPC).
A copyright is confined to literary and
artistic works which are original
intellectual creations in the literary
and artistic domain protected from
the moment of their creation. (Pearl
& Dean (Phil.), Incorporated vs.
Shoemart, Incorporated, G.R. No.
148222 August 15, 2003)
Copyright, in the strict sense of the
term, is purely a statutory right.
Being a mere statutory grant, the
rights are limited to what the statute
confers. It may be obtained and
enjoyed only with respect to the
subjects and by the persons, and on
terms and conditions specified in the
statute. Accordingly, it can cover
only the works falling within the
statutory enumeration or
description. (Pearl & Dean (Phil.),
Incorporated vs. Shoemart,
Incorporated, G.R. No. 148222
August 15, 2003)

338
 As to Purpose
(1) It seeks to foster and reward (1) to point out distinctly the origin (1) To promote creativity
invention; or ownership of the goods or (2) Encourage creation of works.
(2) It promotes disclosure of services to which it is affixed; (ABS-CBN Corp. v. Gozon, G.R.
inventions to stimulate further (2) to secure to him, who has been No. 195956, 2015)
innovation and to permit the instrumental in bringing into the
public to practice the invention market a superior article of
once the patent expires; and merchandise, the fruit of his
(3) To ensure that ideas in the public industry and skill;
domain remain there for the free (3) to assure the public that they are
use of the public and it is only procuring the genuine article; to
after an exhaustive examination prevent fraud and imposition;
by the patent office that patent and
is issued. (Pearl & Dean (Phil.), (4) to protect the manufacturer
Inc. vs. Shoemart, Inc., G.R. No. against substitution and sale of
148222, August 15, 2003) an inferior and different article as
his product.
In today's internet-wired market
where the online sale and purchase
of goods and services is
commonplace, domain names not
only serve to identify an address on
the internet which leads to a
website, but also perform the
function of trademarks in the
traditional modes of business. (Kolin
Electronics Co., Inc. v. Taiwan Kolin
Corp. Ltd., G.R. Nos. 221347 &
221360-61, December 1, 2021,
HERNANDO, J.)
As to Elements
(a) Novelty (a) The validity of the mark; (a) Literary or artistic work
(b) Inventive step; and (b) The plaintiff’s ownership of the (b) Originality - Independently
(c) Industrial applicability mark; and created
(c) The use of the mark or its (c) Expression
colorable imitation by the alleged
infringer results in “likelihood of
confusion.”
As to When Rights are Obtained
Upon issuance of letters of patent by Upon registration. (Sec 122, IPC) Upon creation but registration
IPO needed only to recover damages in
cases of infringement
As to Term of Protection
20 years from the of the application 10 years and may be renewed for Generally up to 50 years after death
(Sec. 54, IPC) periods of 10 years at its expiration of the author (Sec. 213, IPC)
upon payment of the prescribed fee
and upon filing of a request. (Sec.
145-146, IPC)

339
A. PATENTS
Patent is a set of exclusive rights granted by a
state to an inventor or his assignee for a fixed
period of time in exchange for a disclosure of an
invention. (Salao, Essential of Intellectual Property
Law, 2019, p. 63)
A patent is granted to provide rights and
protection to the inventor after an invention is
disclosed to the public. It also seeks to restrain
and prevent unauthorized persons from unjustly
profiting from a protected invention. (E.I. Dupont
de Nemours and Co. vs. Francisco, G.R. No. 174379.
August 31, 2016)
Objective of a patent system
The ultimate goal of a patent system is to bring
new designs and technologies into the public
through disclosure; hence, ideas, once disclosed
to the public without protection of a valid patent,
are subject to appropriation without significant
restraint. (Pearl & Dean (Phil.), Inc. vs. Shoemart,
Inc., G.R. No. 148222, August 15, 2003)
The function of a patent is to add to the sum of
useful knowledge and one of the purposes of the
patent system is to encourage dissemination of
information concerning discoveries and
inventions. (Manzano vs. Court of Appeals, G.R. No.
113388, September 5, 1997).
The three-fold purpose of patent law:
(a) It seeks to foster and reward invention;
(b) It promotes disclosure of inventions to
stimulate further innovation and to permit the
public to practice the invention once the
patent expires; and
(c) The stringent requirements for patent
protection seek to ensure that ideas in the
public domain remain there for the free use
of the public and it is only after an exhaustive
examination by the patent office that patent
is issued. (Pearl & Dean (Phil.), Inc. vs.
Shoemart, Inc., G.R. No. 148222, August 15,
2003)
1. PATENTABLE INVENTIONS
Patentable Invention
Any technical solution of a problem in any field of
human activity which is new, involves an
inventive step and is industrially applicable. (Sec.
21, IPC)
Statutory Classes of Patentable Inventions
It may be, or may relate to:
(1) A product, such as a machine, a device, an
article of manufacture, a composition of
matter, a microorganism;
(2) A process, such as a method of use, a method
of manufacturing, a non-biological process, a
microbiological process;
(3) Computer-related inventions; and
(4) An improvement of any of the foregoing
Elements of a Patentable Invention
a) Novelty
b) Inventive step; and
c) Industrial applicability
a) Novelty
An invention shall not be considered new if it
forms part of a prior art. (Sec. 23, IPC)
The element of novelty is an essential requisite of
the patentability of an invention or discovery. If a
device or process has been known or used by
others prior to its invention or discovery by the
applicant, an application for a patent therefor
should be denied; and if the application has been
granted, the court, in a judicial proceeding in
which the validity of the patent is drawn in
question, will hold it void and ineffective. It has
been repeatedly held that an invention must
possess the essential elements of novelty,
originality and precedence, and for the patentee
to be entitled to the protection the invention must
be new to the world. (Angelita Manzano vs. Court of
Appeals G.R. No. 113388, September 5, 1997)
340
General Rule: Prior Art
(1) Everything which has been made available to
the public anywhere in the world, before the
filing date or the priority date of the
application claiming the invention; and
(2) The whole contents of an application for a
patent, utility model, or industrial design
registration, published in accordance with
this Act, filed or effective in the Philippines,
with a filing or priority date that is earlier than
the filing or priority date of the application:
Provided, That the application which has
validly claimed the filing date of an earlier
application under Section 31 of this Act, shall
be prior art with effect as of the filing date of
such earlier application: Provided, further,
That the applicant or the inventor identified
in both applications are not one and the
same. (Sec. 24, IPC)
Illustrative case:
The IPO issued Decision No. 2013-244 dated
December 20, 2013 which cancelled the
registration of the respondents' industrial design,
"Slipper." It ruled that a trademark, which has
been made available to the public anywhere in
the world before the filing date or priority date of
the application for registration of industrial
design, may constitute as prior art which covers
"everything" without qualification that such prior
art should also be an industrial design, according
to Section 24.1 of the IPO Code.
Simply put, it held that the respondents' "Slipper"
design is practically identical to SPASA's
"Havaianas Greek Pattern Logo" trademark,
which was registered beforehand. Specifically,
SPASA applied for the registration of the
"Havaianas Greek Pattern Logo" on April 2, 2009
while the respondents filed an application for
industrial design of the "Slipper" design on
October 19, 2009. Additionally, SPASA's
"Havaianas Greek Pattern Logo" was disclosed to
the public long before the year 2009.
Similarly, the IPO issued Decision No. 2013-
243 dated December 20, 2013 which cancelled
the registration of the respondents' industrial
design entitled "Sole," using the
same ratio in Decision No. 2013-244 (for
"Slipper"). It noted that SPASA applied for the
registration of the "Havaianas Rice Pattern Logo"
on April 2, 2009, or earlier than the filing date of
the respondents' application for industrial design
registration of the "Sole" design on October 19,
2009. In addition, the "Havaianas Rice Pattern
Logo" was disclosed to the public before 2009, as
the said design appears prominently on SPASA's
products. Based on these findings, the IPO ruled
that SPASA established the existence of its prior
art. (Sao Paulo Alpargatas S.A. v. Kentex
Manufacturing Corp., G.R. No. 202900, February 17,
2021, HERNANDO, J.)
Prejudicial Disclosure. A patent is granted to
provide rights and protection to the inventor after
an invention is disclosed to the public. It also
seeks to restrain and prevent unauthorized
persons from unjustly profiting from a protected
invention. However, ideas not covered by
a patent are free for the public to use and
exploit. (E.I. Dupont De Nemours and Co. v.
Francisco, G.R. No. 174379, [August 31, 2016)
Exception: Prior Art
Non-Prejudicial Disclosure. The disclosure of
information contained in the application during
the 12 months preceding the filing date or the
priority date of application shall not prejudice the
applicant on the ground of lack of novelty, if such
disclosure was made by:
(a) The Inventor, including any person, who, at
the filing date of application, had the right to
the patent,
Note: "Inventor" also means any person
who, at the filing date of application, had the
right to the patent. (Sec. 25.2, IPC)
(b) Patent Office and the information was
contained in:
i) Another application filed by the inventor
and should not have been disclosed by the
officer, or
ii) An application filed without the knowledge
or consent of the inventor by a third party
which obtained the information directly or
indirectly from the inventor, or
341
 (c) A Third Party which obtained the
information directly or indirectly from the
inventor. (Sec. 25.1, IPC)
b) Inventive Step
(Principle of non-obviousness)
General Rule: An invention shall involve an
inventive step if, having regard to prior art, it is
not obvious to a person skilled in the art at the
time of the filing date or priority date of the
application claiming the invention. (Sec. 26.1, IPC,
as amended by R.A. 9502)
Exception: In the case of drugs and medicines,
there is no inventive step if the invention results
from:
(a) the mere discovery of a new form or new
(b) property of a known substance which does
not result in the enhancement of the known
efficacy of that substance,
(c) the mere discovery of any new property or
new use for a known substance, or
(d) the mere use of a known process unless such
known process results in a new product that
employs at least one new reactant. (Sec. 26.2,
IPC, as amended by R.A. 9502)
The inclusion of the requirement of inventive step
is based on the premise that "protection should
not be given to what is already known as part of
the prior art, or to anything that the person with
ordinary skill could deduce as an obvious
consequence thereof." (WIPO, Intellectual Property
Handbook, 2004 edition, p.20)
In assessing inventive step, generally an
examination can be done on three (3) aspects, to
wit:
(a) the problem to be solved;
(b) the solution to the problem; and
(c) the advantages of the claimed invention
(WIPO, Intellectual Property Handbook, 2004
edition, p.20)
Person Skilled in the Art
A person with ordinary skills in a certain field or
art who is aware of what is a common general
knowledge in the field at the time of the
application. He or she is also presumed to have:
(a) knowledge of all references that are
sufficiently related to one another and to the
pertinent art;
(b) knowledge of all arts reasonably pertinent to
the particular problems with which the
inventor was involved; and
(c) normal means and capacity for routine work
and experimentation at his or her disposal.
(Rule 207, Revised Implementing Rules and
Regulations for Patents, Utility Models, and
Industrial Designs, Office Order No. 067 s. 2011)
c) Industrial Applicability
An invention that can be produced and used in
any industry shall be industrially applicable. (Sec.
27, IPC)
An invention should not be purely theoretical. It
must be useful and applied for practical purposes.
If the invention is intended to be a product or part
of a product, it should be possible to make that
product. If the invention is intended to be a
process or part of a process, it should be possible
to carry that process out or "use" it in practice.
(WIPO, Intellectual Property Handbook, 2004 edition,
p.18)
2. NON-PATENTABLE INVENTIONS
(a) Discoveries, scientific theories and
mathematical methods, and in the case of
drugs and medicines, the mere discovery of a
new form or new property of a known
substance which does not result in the
enhancement of the known efficacy of that
substance, or the mere discovery of any new
property or new use for a known substance,
or the mere use of a known process unless
such known process results in a new product
that employs at least one new reactant.
For the purpose of this clause, salts, esters,
ethers, polymorphs, metabolites, pure form,
particle size, isomers, mixtures of isomers,
complexes, combinations, and other
derivatives of a known substance shall be
considered to be the same substance, unless
342
 they differ significantly in properties with (f) Anything which is contrary to public order or
regard to efficacy; morality. (Sec. 22, IPC, as amended by R.A.
9502)
Note: In the case of drugs and medicines,
there is no patentable invention in the 3. OWNERSHIP OF A PATENT
following instances:
i. the mere discovery of a new form or Term of Patent
new property of a known substance
which does not result in the The term of a patent shall be 20 years from the
enhancement of the known efficacy of filing date of the application. (Sec. 54, IPC)
that substance, or
ii. the mere discovery of any new property a) Right of a Patent
or new use for a known substance, or The right to a patent belongs to:
iii. the mere use of a known process unless (1) the inventor,
such known process results in a new (2) his heirs, or
product that employs at least one new (3) his assigns.
reactant. (Sec. 22.1, IPC, as amended by
R.A. 9502) When two (2) or more persons have jointly
made an invention, the right to a patent shall
(b) Schemes, rules and methods of performing belong to them jointly. (Sec. 28, IPC)
mental acts, playing games or doing
business, and programs for computers; STATUS PERSON/S ENTITLED
Inventor Inventor, his heirs, or assigns
Note: For programs for computers (Sec. 28, IPC)
General Rule: Computer programs are not Two or more He who first files (Sec. 29, IPC)
patentable but are copyrightable. persons invent
separately and
Exception: They can be patentable if they
independently
are part of a process Two or more Applicant who has the earliest
applications filed filing date or earliest priority date
(c) Methods for treatment of the human or for the same (Sec. 29, IPC)
animal body by surgery or therapy and invention
diagnostic methods practiced on the human Inventions created Person who commissioned the
or animal body. This provision shall not apply pursuant to a work, unless agreed otherwise
to products and composition for use in any of commission
these methods; Employee makes Employee: If the invention is
(d) Plant varieties or animal breeds or essentially the invention in NOT part of his regular duties
the course of even if he uses the time,
biological process for the production of plants
employment facilities, and materials of the
or animals. This provision shall not apply to employer
micro-organisms and non-biological and
microbiological processes. Employer: If the invention is the
Provisions under this subsection shall not result of the performance of the
preclude Congress to consider the enactment regularly assigned duties unless
of a law providing sui generis protection of agreed otherwise (Sec. 30, IPC)
plant varieties and animal breeds and a
system of community intellectual rights b) First-to-File Rule
protection: (1) If two (2) or more persons have made the
(e) Aesthetic creations; and invention separately and independently
of each other, the right to the patent shall
belong to the person who filed an
application for such invention;

343
 (2) where two or more applications are filed
for the same invention, to the applicant
who has the earliest filing date or, the
earliest priority date. (Sec. 29, IPC)
There must be at least two persons who have
made the invention separately and independent
of each other. Otherwise, joint ownership under
Sec 28 may exist or the situation may call for the
application of Sec. 67. (Salao, Essential of
Intellectual Property Law, 2019, p. 73)
c) Inventions Created Pursuant to a
Commission
The person who commissions the work shall be
the owner of the patent unless there was an
agreement to the contrary. (Sec. 30, IPC)
If an employee made the invention in the course
of his regular employment, the patent shall
belong to:
(1) The employee, the inventive activity is not
part of his regular duties, even if the
employee uses the time, facilities, and
materials of the employer;
(2) The employer, if the invention is the result
of the performance of the
regular duties unless there is an agreement
to the contrary.
d) Right of Priority
An application for patent filed by any person who
has previously applied for the same invention in
another country which by treaty, convention, or
law affords similar privileges to Filipino citizens,
shall be considered as filed as of the date of filing
the foreign application: Provided, That
(a) the local application expressly claims priority,
(b) it is filed within twelve (12) months from the
date the earliest foreign application was filed;
and
(c) a certified copy of the foreign application
together with the English tradition is filed
within six (6) months from the date of filing
in the Philippines. (Sec. 31, IPC)
The right of priority given to a patent applicant is
only relevant when there are two or more
conflicting patent applications on the same
invention. Because a right of priority does not
automatically grant letters patent to an applicant,
possession of a right of priority does not confer
any property rights on the applicant in the
absence of an actual patent. (E.I. Dupont de
Nemours and Co. vs. Francisco, G.R. No. 174379.
August 31, 2016)
4. GROUNDS FOR CANCELLATION OF A
PATENT
Grounds for cancellation of a patent
Any interested person may, upon payment of the
required fee, petition to cancel the patent or any
claim thereof, or parts of the claim, on any of the
following grounds:
(1) What is claimed as the invention is not new
or patentable;
(2) Patent does not disclose the invention in a
manner sufficiently clear and complete for it
to be carried out by any person skilled in the
art; or
(3) Patent is contrary to public order or morality.
(Sec. 61.1, IPC)
(4) Patent is found invalid in an action for
infringement (Sec. 82, IPC); or
(5) Patent includes matters outside the scope of
the disclosure contained in the application
(Sec 21, IPC; Sec. 1, Regulations on Inter Partes
Proceeding).
Partial Cancellation
Where the grounds for cancellation relate to
some of the claims or parts of the claim,
cancellation may be affected to such extent only.
(Sec. 61.2, IPC)
5. REMEDY OF THE TRUE AND ACTUAL
INVENTOR
If a person, who was deprived of the patent
without his consent or through fraud is declared
by final court order or decision to be the true and
actual inventor, the court shall:
(1) Order for his substitution as patentee, or
(2) At the option of the true inventor, cancel the
patent, and award actual and other damages
344
 in his favor if warranted by the
circumstances. (Sec. 68, IPC)
Publication of the Court Order
In both instances referred above, the court shall
furnish the Office a copy of the order or decision,
which shall be published in the IPO Gazette within
3 months from the date such order or decision
became final and executory, and shall be
recorded in the register of the Office. (Sec. 69, IPC)
Filing of Action in Court
Actions indicated in Section 67 and 68 shall be
filed within one year from the date of publication
made in accordance with Section 44 and 51. (Sec.
70, IPC).
6. RIGHTS CONFERRED BY A PATENT
Rights conferred by a patent
These rights are exclusive to the owner of the
patent. If the subject matter is a:
Product to restrain, prohibit and prevent any
unauthorized person or entity from
making, using, offering for sale,
selling or importing that product;
(Sec. 71.1 (a), IPC)
Process to restrain, prevent or prohibit any
unauthorized person or entity from
using the process, and from
manufacturing, dealing in, using,
selling or offering for sale, or
importing any product obtained
directly or indirectly from such
process. (Sec. 71.1 (b), IPC)
Other patent owners shall also have the
rights of right to assign, or transfer by
Patent succession the patent, and to
Owners conclude licensing contracts for the
same. (Sec. 71.2, IPC)
Patent is broader when its subject matter is a
process since the owner does not only control the
use of the process but also the product obtained
from such process, even those that are obtained
directly from the same process. (Salao, Essential of
Intellectual Property Law, 2019, p. 94)
The applicant shall have all the rights of a
patentee under Section 76 against any person
who, without his authorization, exercised any of
the rights conferred under Section 71 of this Act
in relation to the invention claimed in the
published patent application, as if a patent had
been granted for that invention.
However, such third person must:
(a) Have an actual knowledge that the invention
that he was using was the subject matter of
a published application; or
(b) Have received written notice that the
invention that he was using was the subject
matter of a published application being
identified in the said notice by its serial
number: Provided, That the action may not
be filed until after the grant of a patent on
the published application and within four (4)
years from the commission of the acts
complained of. (Sec .46, IPC)
7. LIMITATIONS OF PATENT RIGHTS
a) Those provided for under Sec. 72 as
amended by R.A. No. 9502; (Sec. 72, IPC)
b) Use by a prior user (Sec. 73, IPC);
c) Use by the government (Sec. 74, IPC).
a) Those provided for under Sec. 72 as
amended by R.A. No. 9502
The following acts are not prohibited:
(1) Owner’s Consent. Using a patented
product which has been put on the market
in the Philippines by the owner of the
product, or with his express consent, insofar
as such use is performed after that product
has been so put on the said market (Sec.
72.1, IPC);
(2) Parallel Importation. Importation of
drugs and medicines by a government
agency or by any private third party
(Intellectual Property Code, Secs. 72.1 and
72.5). Private parties must secure a license
to import from BFAD. However, parallel
importation for other patented products is
not allowed without the authority of the
owner and may constitute infringement
(Secs. 71.1 and 76.1, IPC);
345
(3) Non-Commercial. Where the act is done
privately and on a non-commercial scale or
for a non-commercial purpose: Provided,
that it does not significantly prejudice the
economic interests of the owner of the
patent (Sec.72.2, IPC);
(4) Experimental Use. Where the act consists
of making or using exclusively for
experimental
(5) use of the invention for scientific purposes or
educational purposes and such other
activities directly related to such scientific or
educational experimental use (Sec.72.3, IPC);
(6) Drugs and Medicines. In the case of drugs
and medicines, where the act includes
testing, using, making or selling the
invention including any data related thereto,
solely for purposes reasonably related to the
development and submission of information
and issuance of approvals by government
regulatory agencies required under any law
of the Philippines or of another country that
regulates the manufacture, construction, use
or sale of any product (Sec.72.4, IPC);
(7) Medicine Individual Preparation. Where
the act consists of the preparation for
individual cases, in a pharmacy or by a
medical professional, of a medicine in
accordance with a medical prescription after
a drug or medicine has been introduced in
the Philippines or anywhere else in the world
by the patent owner, or by any party
authorized to use the invention (Sec. 72.5,
IPC);
(8) Patent Exhaustion. The exclusive right of
the patent owner is exhausted after the first
authorized sale, meaning, the purchaser
may thereafter use, repair and resell the
product (Keeler vs Standard Folding-Bed
Co., 157 U.S. 659 [1895]. However, the
purchaser may not reconstruct the product
from the parts of products that were already
used.
b) Prior User
Any prior user, who, in good faith was using the
invention or has undertaken serious preparations
to use the invention in his enterprise or business,
before the filing date or priority date of the
application on which a patent is granted, shall
have the right to continue the use thereof as
envisaged in such preparations within the
territory where the patent produces its effect.
(Sec. 73.1, IPC)
Transfer of right of a prior user
The right of the prior user may only be
transferred or assigned together with his
enterprise or business, or with that part of his
enterprise or business in which the use or
preparations for use have been made. (Sec. 73.2,
IPC)
c) Use by Government
General Rule: The Government is bound to
respect the patent. Patent is a property in itself
and it is guaranteed in our Constitution (Salao,
Essentials of Intellectual Property Law, 2019, p. 104)
Exception: A Government agency or third person
authorized by the Government may exploit the
invention even without agreement of the patent
owner where:
(a) The public interest, in particular, national
security, nutrition, health or the development
of other sectors, as determined by the
appropriate agency of the government, so
requires; or
(b) A judicial or administrative body has
determined that the manner of exploitation,
by the owner of the patent or his licensee, is
anti-competitive. (Sec. 74.1, IPC)
Additional exceptions provided by Republic Act
9502 otherwise known as ―Universally Accessible
Cheaper and Quality Medicines act:
(a) In the case of drugs and medicines, there is
a national emergency or other circumstance
of extreme urgency requiring the use of
invention;
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(b) In the case of drugs and medicines, there is
public non-commercial use of patent by
patentee without satisfactory reason; or
(c) In the case of drugs and medicines, the
demand for the patented article in the
Philippines is not being met to an adequate
extent and on reasonable terms, as
determined by the Secretary of the
Department of Health.
The use by the Government, or third person
authorized by the Government, shall be subject,
where applicable, to the following provisions:
(a) In situations of national emergency or other
circumstances of extreme urgency, the right
holder shall be notified as soon as reasonably
practicable;
(b) In the case of public non-commercial use of
the patent by the patentee, without
satisfactory reason, the right holder shall be
informed promptly;
(c) If the demand for the patented article in the
Philippines is not being met to an adequate
extent and on reasonable terms as
determined by the Secretary of Health, the
right holder shall be informed promptly;
(d) The scope and duration of such use shall be
limited to the purpose for which it was
authorized;
(e) Such use shall be non-exclusive;
(f) The right holder shall be paid adequate
remuneration in the circumstances of each
case, taking into account the economic value
of the authorization; and
(g) The existence of national emergency or other
circumstances of extreme urgency, in the
case of drugs and medicines shall be subject
to the determination of the President of the
Philippines for the purpose of determining the
need for such use or other exploitation, which
shall be immediately executory. (Sec. 74.2,
IPC)
8. PATENT INFRINGEMENT
Patent Infringement
Infringement is the making, using, offering for
sale, selling, or importing a patented product or a
product obtained directly or indirectly from a
patented process, or the use of a patented
process without the authorization of the
patentee. (Sec. 76.1, IPC)
A patent may be infringed where the essential or
substantial features of the patented invention are
taken or appropriated, or the device, machine or
other subject matter alleged to infringe is
substantially identical with the patented
invention. In order to infringe a patent, a machine
or device must perform the same function, or
accomplish the same result by identical or
substantially identical means and the principle or
mode of operation must be substantially the
same. (Del Rosario vs. Court of Appeal G.R. No.
115106, March 15, 1996)
There can be no infringement of a patent until a
patent has been issued, since whatever right one
has to the invention covered by the patent arises
alone from the grant of patent. (Creser Precision
Systems, Inc. v. Court of Appeals, G.R. No. 118708,
Feb. 02, 1998)
To be able to effectively and legally preclude
others from copying and profiting from the
invention, a patent is a primordial requirement.
No patent, no protection. (Pearl & Dean (Phil.), Inc.
vs. Shoemart, Inc., G.R. No. 148222, August 15, 2003)
In case of infringement, the patentee shall have
the exclusive right to:
(1) Restrain the unauthorized entity from
making, using offering for sale, selling or
importing the product;
(2) To prevent or prohibit the use of the process
or the sale, offering for sale or importing of
the product obtained from the process (Sec.
71.1, IPL)
Note: The exclusive right of a patentee to
make, use and sell a patented product, article
or process exists only during the term of the
patent. (Phil Pharmawealth, Inc. v. Pfizer, Inc.,
G.R. No. 167715, Nov. 17, 2010)
(3) Recover damages in a civil action for
infringement which can be equivalent to the
royalty or an amount that does not exceed 3
times the amount of actual dameges (Sec.
76.3 and 76.4, IPL)
347
(4) To ask that the court order that the infringing and its file history, and convert the protection of
products or goods be destroyed. (Sec. 76.5, the claims of patent the patent grant into a
IPL) cannot be given a hollow and useless
construction broader thing. Such imitation
a) Tests in Patent Infringement than the teachings would leave room for
expressed in the indeed encourage the
(1) Literal Infringement
patent. unscrupulous copyist to
(2) Doctrine of Equivalents (Studiengesellschaft make unimportant and
Kohle mbH vs. Eastman insubstantial changes
Literal Infringement Doctrine of Kodak Company, 616 F. and substitutions in the
Equivalents 2d 1315, May 15, 1980) patent which, though
The extent of Account shall be taken of adding nothing, would
protection conferred by elements which are be enough to take the
the patent shall be equivalent to the copied matter outside
determined by the elements expressed in the claim, and hence
claims, which are to be the claims, so that a outside the reach of the
interpreted in the light claim shall be considered law. (Godines vs. Court
of description and to cover not only all the of Appeals, G.R. No.
drawings (Sec. 75.1, elements expressed 97343, September 13,
IPC). therein, but also 1993)
equivalents (Sec. 75.2,
IPC).
Remedies for Patent Infringement
There is an outright Recognizes that minor
(1) Administrative Actions (Sec. 10.2, IPC)
copying of the modifications in a
invention, or if ever patented invention are (2) Disposal or destruction of Infringing material.
there are variations or sufficient to put the item (Sec. 76.5, IPC)
modifications, the beyond the scope of (3) Civil action for damages plus attorney’s fees
same are very minor. literal infringement. and other expenses for litigation. (Sec. 76.2,
(WIPO, Intellectual (Godines vs. Court of IPC)
Property Handbook, Appeals, G.R. No. 97343, (4) Criminal Action for Repetition of Infringement
2004 edition, p.29) September 13, 1993) (Sec. 84, IPC)
To determine whether It takes place when a
the particular item falls device appropriates a Liability of a Person Who Induces Patent
within the literal prior invention by Infringement
meaning of the patent incorporating its
claims, the court must innovative concept and,
Anyone who actively induces the infringement of
juxtapose the claims of although with some
the patent and the modification and
a patent or provides the infringer with a
accused product within change, performs component of a patented product or of a product
the overall context of substantially the same produced because of a patented process knowing
the claims and function in substantially it to be especially adopted for infringing the
specifications, to the same way to achieve patented invention and not suitable for
determine whether substantially the same substantial non-infringing use shall be liable as a
there is exact identity result. (Smith Kline contributory infringer and shall be jointly and
of all material Corporation vs. Court of severally liable with the infringer. (Sec. 76.6,
elements. (Godines vs. Appeals, G. R. No. IPC)
Court of Appeals, G.R. 126627, August 14,
No. 97343, September 2003, citing Godines vs.
13, 1993) Court of Appeals, G.R.
Infringement Action by a Foreign Nation
No. 97343, September
13, 1993) Any foreign national or juridical entity who meets
The patent's claims To permit the imitation the requirements of Section 3 (International
must be read in of a patented invention Conventions and Reciprocity) and not engaged in
connection with which does not copy any business in the Philippines, to which a patent has
patent's specification literal detail would be to been granted or assigned under this Act, may

348
bring an action for infringement of patent,
whether or not it is licensed to do business in the
Philippines under existing law. (Sec. 77, IPC)
b) Defenses in Action for Infringement
Defenses in Action for Infringement
a. Invalidity of the patent. (Sec. 81, IPC);
b. Existence of grounds for the cancellation of a
patent. (Sec. 61, IPC);
c. Prescription
i. Criminal action. The criminal action herein
provided shall prescribe in three (3) years
from date of the commission of the crime.
(Sec. 84, IPC)
ii. Civil Action. No damages can be recovered
for acts of infringement committed more
than four (4) years before the institution
of the action for infringement. (Sec. 79,
IPC)
Doctrine of File Wrapper Estoppel
Patentee is precluded from claiming as part of
patented product that which he had to excise or
modify in order to avoid patent office rejection,
and he may omit any additions he was compelled
to add by patent office regulations. (Advance
Transformer Co. v. Levinson 837 F.2d 1081, 1988)
Notice requirement before damage can be
recovered
Damages cannot be recovered for acts of
infringement committed before the infringer had
known, or had reasonable grounds to know of the
patent. It is presumed that the infringer had
known of the patent if on the patented product,
or on the container or package in which the article
is supplied to the public, or on the advertising
material relating to the patented product or
process, are placed the words "Philippine Patent"
with the number of the patent. (Sec. 80, IPC)
Note: Unfair Competition in Patent
Infringement
There is no mention of any crime of unfair
competition involving design patents in the
controlling provisions of unfair competition under
the Intellectual Property Code. It is unclear
whether the crime exists, and if there is
ambiguity, the statue must be strictly construed
against the State and liberally in favor of the
accused. This is because penal statutes cannot be
enlarged or extended by intendment, implication
or any equitable consideration. (Savage, et. al. vs.
Judge Taypin, G.R. No. 134217, May 11, 2000)
9. LICENSING
a) Voluntary License and Technology
Transfer Agreement
A voluntary license is an authorization given by
the patent holder to another person allowing him
to produce the patented article. The license
usually fixes the amount of royalties, sets quality
requirements and defines the markets in which
the licensee can sell the product. (Manzano v. Court
of Appeals, G.R. No. 113388, September 5, 1997)
The licensee shall be entitled to exploit the
subject matter of the technology transfer
arrangement during the whole term of the
technology transfer arrangement (Sec. 91, IPC)
Voluntary License Contracts
To encourage the transfer and dissemination of
technology, prevent or control practices and
conditions that may in particular cases constitute
an abuse of intellectual property rights having an
adverse effect on competition and trade, all
technology transfer arrangements shall comply
with the provisions of voluntary licensing under
the IPC. (Sec. 85, IPC)
There are two objectives of the law, first is to
encourage transfer and dissemination of
technology and second is to prevent practices
that may have an adverse effect on competition
and trade. In order to achieve these objects, the
law imposes certain restrictions on contracts and
the stipulations thereto that will be entered into
by the licensor and the licensee. The State as we
should all know by now is empowered to impose
these restrictions without violating the non-
impairment of contract clause in the Constitution
because of its police power (Salao, Essential of
Intellectual Property Law, 2019, p. 111).
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Technology Transfer Arrangement
Technology Transfer Arrangement refers to
contracts or agreements involving the transfer of
systematic knowledge for the manufacture of a
product, the application of a process, or rendering
of a service including management contracts; and
the transfer, assignment or licensing of all forms
of intellectual property rights, including licensing
of computer software except computer software
developed for mass market. (Sec. 4.2, IPC).
It is a licensing contract, between an intellectual
property owner, as the licensor, and a second
party as the licensee who was granted the
authority to commercially exploit the same
intellectual property right under specified terms
and conditions (Salao, Essential of Intellectual
Property Law, 2019, p. 40).
Stipulations that are prohibited in
technology transfer agreements
Except in cases under Section 91, the following
provisions shall be deemed prima facie to have an
adverse effect on competition and trade:
1. Those which impose upon the licensee the
obligation to acquire from a specific source
capital goods, intermediate products, raw
materials, and other technologies, or of
permanently employing personnel indicated
by the licensor (Sec. 87.1, IPC);
2. Those pursuant to which the licensor reserves
the right to fix the sale or resale prices of the
products manufactured on the basis of the
license (Sec. 87.2, IPC);
3. Those that contain restrictions regarding the
volume and structure of production (Sec. 87.3,
IPC);
4. Those that prohibit the use of competitive
technologies in a non-exclusive technology
transfer agreement (Sec. 87.4, IPC);
5. Those that establish a full or partial purchase
option in favor of the licensor (Sec. 87.5, IPC);
6. Those that obligate the licensee to transfer for
free to the licensor the inventions or
improvements that may be obtained through
the use of the licensed technology (Sec. 87.6,
IPC);
7. Those that require payment of royalties
to the owners of patents for patents which
are not used (Sec. 87.1, IPC);
8. Those that prohibit the licensee to export
the licensed product unless justified for
the protection of the legitimate interest of
the licensor such as exports to countries
where exclusive licenses to manufacture
and/or distribute the licensed product(s)
have already been granted (Sec. 87.8, IPC);
9. Those which restrict the use of the
technology supplied after the expiration of
the technology transfer arrangement,
except in cases of early termination of the
technology transfer arrangement due to
reason(s) attributable to the licensee (Sec.
87.9, IPC);
10. Those which require payments for patents
and other industrial property rights after
their expiration, termination arrangement
(Sec. 87.10, IPC);
11. Those which require that the technology
recipient shall not contest the validity of
any of the patents of the technology
supplier (Sec. 87.11, IPC);
12. Those which restrict the research and
development activities of the licensee
designed to absorb and adapt the
transferred technology to local conditions
or to initiate research and development
programs in connection with new
products, processes or equipment (Sec.
87.12, IPC);
13. Those which prevent the licensee from
adapting the imported technology to local
conditions, or introducing innovation to it,
as long as it does not impair the quality
standards prescribed by the licensor (Sec.
87.13, IPC);
14. Those which exempt the licensor for
liability for non-fulfilment of his
responsibilities under the technology
transfer arrangement and/or liability
arising from third party suits brought
about by the use of the licensed product
or the licensed technology (Sec. 87.14,
IPC); and
15. Other clauses with equivalent effects (Sec.
87.15, IPC). (DIVINA, Divina on Commercial
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 Law, A Comprehensive Guide, Vol. II, 2021 Transfer Bureau after evaluation thereof on a
Edition, p. 241) case-by-case basis (Sec. 91, IPC).
Stipulations required in all technology
Rights of Licensor and Licensee
transfer agreements
Licensor Licensee
The following provisions shall be included in In the absence of any The licensee shall be
voluntary license contracts: provision to the contrary entitled to exploit the
(1) That the laws of the Philippines shall govern in the technology subject matter of the
the interpretation of the same and in the transfer arrangement, technology transfer
event of litigation, the venue shall be the the grant of a license arrangement during the
shall not prevent the whole term of the
proper court in the place where the licensee licensor from granting technology transfer
has its principal office (Sec. 88.1, IPC); further licenses to third arrangement (Sec. 90,
(2) Continued access to improvements in person nor from IPC).
exploiting the subject
techniques and processes related to the
matter of the technology
technology shall be made available during the transfer arrangement
period of the technology transfer himself (Sec. 89, IPC).
arrangement (Sec. 88.2, IPC);
(3) In the event the technology transfer b) Compulsory License
arrangement shall provide for arbitration, the
Compulsory License is a license issued by the
Procedure of Arbitration of the Arbitration
Director General of the Intellectual Property office
Law of the Philippines or the Arbitration Rules to exploit a patented invention without the
of the United Nations Commission on permission of the patent holder, either by
International Trade Law (UNCITRAL) or the manufacture or through parallel importation (Sec.
Rules of Conciliation and Arbitration of the 4, RA 9502)
International Chamber of Commerce (ICC)
Nature of Compulsory Licensing
shall apply and the venue of arbitration shall
This covers situations where licenses are awarded
be the Philippines or any neutral country (Sec. against the will of the patent owner. The basis for
88.3, IPC); and this compulsion is again related to the State
(4) The Philippine taxes on all payments relating policies on intellectual property rights. (Salao,
to the technology transfer arrangement shall Essential of Intellectual Property Law, 2019, p. 115)
be borne by the licensor (Sec. 88.4, IPC).
Grounds
The Director of Legal Affairs may grant a license
Exceptional Cases Where Provision on
to exploit a patented invention, even without the
Prohibited Clauses may be Dispensed With
agreement of the patent owner, in favor of any
(1) Where substantial benefits will accrue to the
person who has shown his capability to exploit
economy, such as high technology content, the invention, under any of the following
increase in foreign exchange earnings, circumstances:
employment generation, regional dispersal of (1) National emergency or other
industries ; and/or substitution with or use of circumstances of extreme urgency (Sec. 93.1,
local raw materials; or IPC, as amended);
(2) In the case of Board of Investments, (2) Where the public interest, in particular,
registered companies with pioneer status, national security, nutrition, health or the
exemption from any of the above development of other vital sectors of the
requirements may be allowed by the national economy as determined by the
Documentation, Information and Technology

351
 appropriate agency of the Government, so
requires (Sec. 93.2, IPC, as amended); or
(3) Where a judicial or administrative body has
determined that the manner of exploitation
by the owner of the patent or his licensee is
anti-competitive (Sec. 93.3, IPC, as amended);
or
(4) In case of public non-commercial use of
the patent by the patentee, without
satisfactory reason (Sec. 93.4, IPC, as
amended);
(5) If the patented invention is not being
worked in the Philippines on a
commercial scale, although capable of
being worked, without satisfactory reason:
Provided, That the importation of the
patented article shall constitute working or
using the patent (Sec. 93.5, IPC, as amended);
and
(6) Where the demand for patented drugs
and medicines is not being met to an
adequate extent and on reasonable terms,
as determined by the Secretary of the
Department of Health (Sec. 93.6, IPC, as
amended).
Period for Filing a Petition for a Compulsory
License
Can be Compulsory license may be applied for
applied at any time after the grant of the
patent in the following cases:
(1) Where the public interest, in
particular, national security,
nutrition, health or the
development of other vital sectors
of the national economy as
determined by the appropriate
agency of the Government, so
requires; or
(2) Where a judicial or administrative
body has determined that the
manner of exploitation by the
owner of the patent or his
licensee is anti-competitive; or
(3) In case of public non-commercial
use of the patent by the patentee,
without satisfactory reason; and,
(4) If the invention protected by a
patent, hereafter referred to as
the "second patent," within the
country cannot be worked
without infringing another patent,
hereafter referred to as the "first
patent," granted on a prior
application or benefiting from an
earlier priority, a compulsory
license may be granted to the
owner of the second patent to the
extent necessary for the working
of his invention.
Cannot A compulsory license may not be
be applied for on the ground stated in
applied Subsection 93.5 before the
expiration of a period of four (4)
years from the date of filing of the
application or three (3) years from
the date of the patent whichever
period expires last (Sec. 94.1, IPC)
Terms and Conditions of Compulsory
License
The basic terms and conditions including the rate
of royalties of a compulsory license shall be fixed
by the Director of Legal Affairs subject to the
following conditions:
(1) The scope and duration of such license shall
be limited to the purpose for which it was
authorized (Sec. 100.1, IPC);
(2) The license shall be non-exclusive (Sec. 100.2,
IPC);
(3) The license shall be non-assignable, except
with that part of the enterprise or business
with which the invention is being exploited
(Sec. 100.3, IPC);
(4) Use of the subject matter of the license shall
be devoted predominantly for the supply of
the Philippine market: Provided, That this
limitation shall not apply where the grant of
the license is based on the ground that the
patentee's manner of exploiting the patent is
determined by judicial or administrative
process, to be anti-competitive (Sec. 100.4,
IPC).
(5) The license may be terminated upon proper
showing that circumstances which led to its
352
 grant have ceased to exist and are unlikely to
recur: Provided, That adequate protection
shall be afforded to the legitimate interest of
the licensee (Sec. 100.5, IPC); and
(6) The patentee shall be paid adequate
remuneration taking into account the
economic value of the grant or authorization,
except that in cases where the license was
granted to remedy a practice which was
determined after judicial or administrative
process, to be anti-competitive, the need to
correct the anti-competitive practice may be
taken into account in fixing the amount of
remuneration (Sec. 100.6, IPC).
Grounds for Cancellation of Compulsory
License
Upon the request of the patentee, the said
Director may cancel the compulsory license:
(1) If the ground for the grant of the compulsory
license no longer exists and is unlikely to
recur;
(2) If the licensee has neither begun to supply
the domestic market nor made serious
preparation therefor;
(3) If the licensee has not complied with the
prescribed terms of the license (Sec. 101.2,
IPC).
Amendment of Compulsory License
Upon the request of the patentee or the licensee,
the Director of Legal Affairs may amend the
decision granting the compulsory license, upon
proper showing of new facts or circumstances
justifying such amendment (Sec. 101.1, IPC).
Surrender of Compulsory License
The licensee may surrender the license by a
written declaration submitted to the Office (Sec.
101.3, IPC).
Note: The said Director shall cause the
amendment, surrender, or cancellation in the
Register, notify the patentee, and/or the licensee,
and cause notice thereof to be published in the
IPO Gazette (Sec. 101.4, IPC).
Licensee's Exemption from Liability
Any person who works a patented product,
substance and/or process under a license granted
under this Chapter, shall be free from any liability
for infringement: Provided however, That in the
case of voluntary licensing, no collusion with the
licensor is proven. This is without prejudice to the
right of the rightful owner of the patent to recover
from the licensor whatever he may have received
as royalties under the license (Sec. 102, IPC).
10. ASSIGNMENT AND TRANSMISSION OF
RIGHTS
Patents or applications for patents and invention
to which they relate, shall be protected in the
same way as the rights of other property under
the Civil Code (Sec. 103.1, IPC).
Transmission of Rights
Inventions and any right, title or interest in and
to patents and inventions covered thereby, may
be assigned or transmitted by inheritance or
bequest or may be the subject of a license
contract (Sec. 103.2, IPC).
Assignment of Inventions
An assignment may be of the entire right, title or
interest in and to the patent and the invention
covered thereby, or of an undivided share of the
entire patent and invention, in which event the
parties become joint owners thereof. An
assignment may be limited to a specified territory
(Sec. 104, IPC).
Formalities prescribed by the IPC for the
assignment of rights over a patent
The law prescribes the following formalities for
the assignment of rights over a patent and the
invention to which the patent relates:
(1) The assignment must be in writing,
acknowledged before a notary public or other
officer authorized to administer oath or
perform notarial acts, and certified under the
hand and official seal of the notary or such
other officer. (Sec. 105, IPC).
(2) The IPO shall record assignments, licenses
and other instruments relating to the
transmission ofany right, title or interest in
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 and to inventions, and patents or application
for patents or inventions to which they relate.
(Sec. 106.1, IPC).
(3) Such instruments shall be void as against any
subsequent purchaser or mortgagee for
valuable consideration and without notice,
unless, it is so recorded in the Office, within
three (3) months from the date of said
instrument, or prior to the subsequent
purchase or mortgage. (Sec. 106.2, IPC).
Rights of Joint Owners
Each of the joint owners shall be entitled to
personally make, use, sell, or import the invention
for his own profit provided however that neither
of the joint owners shall be entitled to grant
licenses or to assign his right, title, or interest or
part thereof without the consent of the other
owner or owners, or without proportionally
dividing the proceeds with such other owner or
owners (Sec. 107, IPC).
B. TRADEMARKS
Trademarks
Any visible sign (word, group of words, symbol,
logo or combination thereof) capable of
distinguishing the goods (trademark) or
services (service mark) of an enterprise and
shall include a stamped or marked container of
goods (Sec. 121.1, IP Code).
A trademark is any distinctive word, name,
symbol, emblem, sign, or device, or any
combination thereof, adopted and used by a
manufacturer or merchant on his goods to
identify and distinguish them from those
manufactured, sold, or dealt by others. (Société
des Produits, Nestlé, S.A. vs. Puregold Price Club, Inc.,
G.R. No. 217194, September 6, 2017)
Functions and Purpose of a Trademark
The purpose of trademark:
(1) to protect the owner of his property and
(2) to protect the public from being deceived by
reason of a misleading claim.
(3) to point out distinctly the origin or ownership
of the goods or services to which it is affixed;
(4) to secure to him, who has been instrumental
in bringing into the market a superior article
of merchandise, the fruit of his industry and
skill;
(5) to assure the public that they are procuring
the genuine article; to prevent fraud and
imposition; and
(6) to protect the manufacturer against
substitution and sale of an inferior and
different article as his product.
In today's internet-wired market where the online
sale and purchase of goods and services is
commonplace, domain names not only serve to
identify an address on the internet which leads to
a website, but also perform the function of
trademarks in the traditional modes of business.
(Kolin Electronics Co., Inc. v. Taiwan Kolin Corp. Ltd.,
G.R. Nos. 221347 & 221360-61, December 1, 2021,
HERNANDO, J.)
Trademarks have several functions:
(1) they indicate the origin or ownership of the
articles or services in which they are used;
(2) they guarantee that the articles or services
come up to a certain standard of quality; and
(3) they advertise the articles and services they
symbolize (Zuneca Pharmaceutical Natrapharm,
Inc., G.R. No 211850, September 8, 2020)
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1. MARKS VS. COLLECTIVE MARKS VS. TRADE NAMES

Marks Collective Marks Trade Name (2011 Bar)

Any visible sign capable of Any visible sign The name or designation identifying or distinguishing an
distinguishing the goods designated as such enterprise (Sec. 121.3, IPC).
(trademark) or services in the application for 1. A trade name is any individual name or surname, firm
(service mark) of an enterprise registration and name, device or word used by manufacturers,
and shall include a stamped or capable of industrialists, merchants and others to identify their
marked container of goods. (Sec. distinguishing the businesses, vocations or occupations (Converse Rubber
121.1, IP Code) origin or any other Corp., v. Universal Rubber Products, Inc., G.R. No.
common 279076, January 8, 1987).
It is “intellectual property characteristic, 2. Trade name is any designation which:
deserving protection by law”, and including the quality a. is adopted and used by person to denominate goods
“susceptible to registration if it is of goods or services which he markets, or services which he renders, or
crafted fancifully or arbitrarily of different business which he conducts, or has come to be so used
and is capable of identifying and enterprises which by other, and
distinguishing the goods of one use the sign under b. through its association with such goods, services or
manufacturer or seller from the control of the business, has acquired a special significance as the
those of another.” (Dy vs. registered owner of name thereof, and,
Koninklijke Philips Electronics, the collective mark c. the use of which for the purpose stated in (a) is
N.V., G.R. No. 186088. March 22, (Sec. 121.2, IPC). prohibited neither by legislative enactment nor by
2017) otherwise defined public policy. (Juan vs. Juan, G.R.
No. 221732. August 23, 2017)

Distinctiveness of Trademarks:
A potential trademark may be classified from weakest to strongest: (Zantarain’s Inc. v. Old Grove Smokehouse,
698 F.2d 786, February 25, 1983)

Generic refers to a particular genus or class of which an individual article or service is a member.
(a) It can never attain trademark protection.
(b) If a registered trademark becomes generic as to a particular product or service, the mark’s
registration is subject to cancellation.
 Examples: Thermos for vacuum-insulated flask, Styrofoam a polystyrene foam
Descriptive identifies a characteristic or quality of an article or service such as its color, odor, function,
dimensions, or ingredient.

General Rule: It is not ordinarily protectable as a trademark because, like a generic term, it belongs
to the public domain. (Ong Ai Gui v. Director of Patents, G.R. No. L-6235, March 28, 1995)
 Examples: Fragrant for perfumes or cologne and American Airlines provides flight services in
America

Exception: When the doctrine of secondary meaning applies. (Sec. 123.2)

Doctrine of Secondary Meaning

This doctrine is to the effect that a word or phrase originally incapable of exclusive
appropriation with reference to an article on the market, because geographically or
otherwise descriptive, might nevertheless have been used so long and so exclusively by one
producer with reference to his article that, in that trade and to that branch of the purchasing
public, the word or phrase has come to mean that the article was his product (Ang vs.
Teodoro, G. R. No. 48226, December 14, 1942).
Secondary meaning is established when a descriptive mark no longer causes the public to associate
the goods with a particular place but to associate the goods with a particular source. (Shang
Properties Realty Corp. v. St. Francis Development Corp., G.R. No. 190706, 2014)

355
 Suggestive requires the consumer to exercise the imagination in order to draw a conclusion as to the nature of
the goods or services. (Zatarains, Inc. v. Oak Grove Smokehouse, Inc. - 698 F.2d 786, 5th Cir. 1983)

Those which are capable of shedding “some light” upon certain characteristics of the goods or
services in dispute, they nevertheless involve “an element of incongruity,” “figurativeness,” or
“imaginative effort on the part of the observer.” (Societe Des Produits Nestlé, S.A. vs. Court of
Appeals, G.R. No. 112012. April 4, 2001)
 Examples: Tough for shoes as it creates an impression that the pair of shoes is strong and
durable and AIRBUS for airplanes
Arbitrary those which bear no relationship to the products or services to which they are applied; protectable
without proof of secondary meaning.
 Examples: Big Mac - bears no logical relation to the actual characteristics of the product it
represents (McDonald’s Corporation v. L.C. Big Mak Burger, Inc., et al., G.R. No. 143993,
August 18, 2004). Also, Camel for cigarettes and Apple for computers
Fanciful those are coined words which are meaningless made up by the right holder. The word is generally
not found in the dictionary; thus, it will have a high degree of distinctiveness.
 Examples: Starbucks, Kodak, Xerox, and Pepsi.
(Gepty, Intellectual Property Law Compendium, 2019, pp. 33)

2. ACQUISITION OF OWNERSHIP OF First-to-File Rule

MARK
Acquisition of Ownership of Mark
The rights in a mark shall be acquired through
registration made validly in accordance with the
provisions of this law. (Sec. 122, IPC)
It is not the application or registration of a
trademark that vests ownership thereof, but it is
the ownership of a trademark that confers the
right to register the same. A trademark is an
industrial property over which its owner is entitled
to property rights which cannot be appropriated
by unscrupulous entities that, in one way or
another, happen to register such trademark
ahead of its true and lawful owner. The
presumption of ownership accorded to a
registrant must then necessarily yield to superior
evidence of actual and real ownership of a
trademark. (Birkenstock Orthopaedie GMBH and Co.
Kg vs. Philippine Shoe Expo Marketing Corporation.
G.R. No. 194307, November 20, 2013)
The legislative intent to abandon the rule that
ownership is acquired through use and to adopt
the rule that ownership is acquired through
registration is therefore crystal clear. (Zuneca
Pharmaceutical Natrapharm, Inc., G.R. No 211850,
September 8, 2020)
By ruling that trademark is acquired solely
through registration, the Supreme Court did not,
nevertheless, abandon the first the file rule. While
it is the fact of registration which confers
ownership of the mark and enables the owner
thereof to exercise the rights expressed in the IF
Code, the first to file rule nevertheless prioritizes
the first filer of the trademark application and
operates to prevent any subsequent applicant
from registering the mark. (Zuneca Pharmaceutical
Natrapharm, Inc., G.R. No 211850, September 8,
2020)
Concept of Actual Use
A trademark gives its owner particular rights but
to keep enjoying those rights, the trademark has
to keep being used in the Philippines. For the
purpose of maintaining the validity of the
registration, proof of actual use of the mark must
be subsequently shown. (Rule 204 of IPOPHL MC
No. 17-010)
Prior use of mark not required before
registration
Prior use in the Philippines is not required
before registration. What is necessary is that
there must be actual use after registration.
The registrant shall file a declaration of actual use
of the mark with evidence to that effect within 3
years from the filing date of application otherwise

356
`
it may be cancelled. (Sec. 142.2 and Sec. 151[c],
IPL)
The registrant is required to file a declaration of
actual use and evidence to that effect, or shall
show valid reasons for non-use within 1 year from
the fifth anniversary date of registration. (Sec.
145, IPL)
Declaration of Actual Use (DAU)
The applicant or the registrant is required to file
a Declaration of Actual Use of the mark after filing
and registration. Note: Failure to file declaration
of actual use automatically results in the denial of
the registration or the cancellation of the
registration by operation of law. (Secs. 124.2 &
145, IPC)
The Supreme Court, however, held that while the
registrant should declare actual use, this does not
imply that actual use is the recognized mode of
acquisition of ownership. Rather, it must be
understood as provision requiring actual use of
the mark in order for the registered owner of a
mark to maintain his ownership. (Zuneca
Pharmaceutical Natrapharm, Inc., G.R. No 211850,
September 8, 2020)
The IP Code and the Trademark Regulations have
not specifically defined “use.” However, it is
understood that the “use” which the law
requires to maintain the registration of a
mark must be genuine, and not merely token.
Based on foreign authorities,58 genuine use may
be characterized as a bona fide use which
results or tends to result, in one way or
another, into a commercial interaction or
transaction “in the ordinary course of
trade.” (W Land Holdings vs Starwood Hotels &
Resort Worldwide Inc., G.R. No. 222366, December 4,
2017)
The use of a registered mark representing the
owner's goods or services by means of an
interactive website may constitute proof of actual
use that is sufficient to maintain the registration
of the same. However, the mere exhibition of a
trademark in a website is not sufficient. There
must be an actual commercial transaction
through the website or at the very least, the
website must show that it intends to target local
consumers by containing specific details geared
towards a commercial activity or interaction.
(ibid.)
When to File Declaration of Actual Use
(DAU)
1. Within 3 years from the filing date of the
application (3rd Year DAU);
Note: In Mattel vs. Francisco, it was held that
an admission in a pleading that the party has
not filed declaration of actual use within three
(3) years from application may be construed
as an abandonment or withdrawal of any
right or interest in his trademark. (G.R. No.
166886, July 30, 2008)
2. Within 1 year from the 5th anniversary of the
registration of the mark (5th Year DAU);
3. Within 1 year from the date of renewal; and
4. Within 1 year from the 5th anniversary of
each renewal. (Sec. 145, IPL; Rule 204,
Trademark Regulations of 2017)
Declaration of Non-Use (DNU)
In lieu of a DAU, an applicant or registrant, when
warranted, shall file a Declaration of Non-Use
indicating the grounds or justification therefor.
Non-use of a mark may be excused in the
following cases:
(1) Where the applicant or registrant is
prohibited from using the mark in commerce
because of a requirement imposed by
another government agency prior to putting
the goods in the market or rendering of the
services; (Rule 211, Trademark Regulations of
2017)
(2) Where a restraining order or injunction was
issued by the Bureau of Legal Affairs, the
courts or quasi-judicial bodies prohibiting the
use of the mark; or (Rule 211, Trademark
Regulations of 2017)
(3) Where the mark is the subject of an
opposition or cancellation case. (Rule 211,
Trademark Regulations of 2017)
(4) If the same is caused by circumstances
arising independently of the will of the
trademark owner shall be excused. However,
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`
non-use due to lack of funds shall not excuse
non-use of a mark. (Sec. 152.1, IPC)
The ff. shall not be grounds for cancellation or
removal of a mark:
(1) Use which does not alter its distinctive
character though the use is different from the
form in which it is registered. (Sec. 152.2, IPC)
(2) Use of a mark in connection with one or more
of the goods/services belonging to the class
in which the mark is registered. (Sec. 152.3,
IPC)
(3) Use of the mark by a company related to the
applicant or registrant. (Sec. 152.4, IPC)
(4) Use of the mark by a person controlled by the
registrant. (Sec. 152.4, IPC)
The use of a mark by a company related with, or
controlled by the registrant or applicant shall
inure to the latter's benefit: Provided, that such
mark is not used in such manner as to deceive
the public. (Sec.152.4, IPC)
When to File Declaration of Non-Use (DNU)
(1) Within three (3) years from filing date of the
application;
(2) Within the prescribed periods mentioned in
Rule 204 when use of a registered mark or a
mark subject of an active application has
been interrupted or discontinued by a
pending litigation. (See Rule 212, Trademark
Regulations of 2017)
Actual Commercial Transaction
Based on the amended Trademark Regulations, it
is apparent that the IPO has now given due
regard to the advent of commerce on the
Internet. Specifically, it now recognizes, among
others, “downloaded pages from the website of
the applicant or registrant clearly showing that
the goods are being sold or the services are being
rendered in the Philippines,” as well as “for online
sale, receipts of sale of the goods or services
rendered or other similar evidence of use,
showing that the goods are placed on the market
or the services are available in the Philippines or
that the transaction took place in the Philippines,”
as acceptable proof of actual use. Truly, the Court
discerns that these amendments are but an
inevitable reflection of the realities of the times.
Thus, the use of a registered mark representing
the owner's goods or services by means of an
interactive website may constitute proof of actual
use that is sufficient to maintain the registration
of the same. However, the mere exhibition of a
trademark in a website is not sufficient. There
must be an actual commercial transaction
through the website or at the very least, the
website must show that it intends to target local
consumers by containing specific details geared
towards a commercial activity or interaction. (W
Land Holdings vs Starwood Hotels & Resort Worldwide
Inc., G.R. No. 222366, December 4, 2017)
Effect of Registration
A certificate of registration of a mark shall be
prima facie evidence of:
1. The validity of the registration,
2. The registrant's ownership of the mark, and
3. The registrant's exclusive right to use the
same in connection with the goods or
services and those that are related thereto
specified in the certificate. (Sec. 138, IPC)
The said presumption may be challenged and
rebutted when an adverse party, in the
appropriate action, can show that the certificate
of registration is not reflective of ownership of the
holder, such as when:
(1) The first registrant has acquired ownership of
the mark through registration but
subsequently lost the same due to non-use or
abandonment (e.g., failure to file the
Declaration of Actual Use);
(2) The registration was done in bad faith;
(3) The mark itself becomes generic;
(4) The mark was registered contrary to the IP
Code (e.g., when a generic mark was
successfully registered for some reason); or
(5) The registered mark is being used by, or with
the permission of, the registrant so as to
misrepresent the source of the goods or
services on or in connection with which the
mark is used. (Kolin Electronics Co., Inc. v.
Taiwan Kolin Corp. Ltd., G.R. Nos. 221347 &
221360-61, December 1, 2021, HERNANDO, J.)
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Which means that registrant’s right may be
questioned by a person who has a better right,
including a prior actual user. This also includes
persons with internationally known marks.
The right to register a trademark should be based
on ownership. When the applicant is not the
owner of the trademark being applied for, he has
no right to apply for the registration of the same.
Only the owner of the trademark, trade name or
service mark used to distinguish his goods,
business or service from the goods, business or
service of others is entitled to register the same.
An exclusive distributor does not acquire any
proprietary interest in the principal’s trademark
and cannot register it in his own name unless it is
has been validly assigned to him. (Superior
Commercial Enterprises, Inc. vs. Kunnan Enterprises
Ltd., G.R. No. 169974. April 20, 2010)
Under the IP Code, the ownership of a
trademark is acquired by its registration.
While subsequent use of the mark and proof
thereof are required to prevent the removal or
cancellation of a registered mark or the refusal of
a pending application under the IP Code, this
should not be taken to mean that actual use and
proof thereof are necessary before one can own
the mark or exercise the rights of a trademark
owner. (Zuneca Pharmaceutical Natrapharm, Inc.,
G.R. No 211850, September 8, 2020)
Certainly, while the IP Code and the Rules of the
IPO mandate that the applicant/registrant must
prove continued actual use of the mark, it is the
considered view of the Court that this does not
imply that actual use is still a recognized mode of
acquisition of ownership under the IP Code.
Rather, these must be understood as provisions
that require actual use of the mark in order for
the registered owner of a mark to maintain his
ownership. (ibid.)
Moreover, the prima facie nature of the
certificate of registration is not indicative of the
fact that prior use is still a recognized mode of
acquiring ownership under the IP Code. Rather, it
is meant to recognize the instances when the
certificate of registration is not reflective of
ownership of the holder thereof. (ibid.)
In the same vein, prior users in good faith are
also protected in the sense that they will not be
made liable for trademark infringement even if
they are using a mark that was subsequently
registered by another person. This is expressed
in Section 159.1 of the IP Code. (ibid.)
An exclusive distributor does not acquire any
proprietary interest in the principal's trademark
and cannot register it in his own name unless it
has been validly assigned to him. (Superior
Commercial Enterprises, Inc. vs. Kunnan Enterprises,
G.R. No. 169974, April 20, 2010)
Requirements for a mark to be registered:
(1) It is a visible sign (not sounds or scents)
(2) Capable of distinguishing one’s goods and
services from another. (Sec. 121.2, IPC).
Void Registration
There are cases when the first registrant will not
acquire a better right. Even if these marks are
subsequently became registered, the registration
do not confer upon their owners the right under
Sec. 147.1 of the IP Code because the marks
were registered contrary to the provisions of the
same law. The following registrations are
considered void:
(1) When the mark was registered in bad faith –
one can have a registration in bad faith only
if he applied for the registration of the mark
despite knowing that someone else has
created, used, or registered that mark.
(2) When an unregistrable mark which was
mistakenly allowed to be registered was
already inherently unregistrable even prior to
its registration
Use of trademark extends to domain name
as a necessary incidence of modern world,
extend to future products
In W Land Holding, Inc. v. Starwood Hotels and
Resorts Worldwide, Inc., the Court, cognizant of
the increasingly prominent role of the internet in
modern commerce, held that the use of a
registered mark representing the owners goods
or services by means of an interactive website
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may constitute proof of actual use that is
sufficient to maintain the registration of the same,
viz.:
Cognizant of this current state of affairs, the
Court therefore agrees with the IPO DG, as
affirmed by the CA, that the use of a registered
mark representing the owner's goods or services
by means of an interactive website may
constitute proof of actual use that is sufficient to
maintain the registration of the same. Since the
internet has turned the world into one vast
marketplace, the owner of a registered mark is
clearly entitled to generate and further
strengthen his commercial goodwill by actively
marketing and commercially transacting his
wares or services throughout multiple platforms
on the internet. The facilities and avenues
present in the internet are, in fact, more
prominent nowadays as they conveniently cater
to the modern-day consumer who desires to
procure goods or services at any place and at any
time, through the simple click of a mouse, or the
tap of a screen. Multitudinous commercial
transactions are accessed, brokered, and
consummated everyday over websites. These
websites carry the mark which represents the
goods or services sought to be transacted. For the
owner, he intentionally exhibits his mark to
attract the customers' interest in his goods or
services. The mark displayed over the website no
less serves its functions of indicating the goods or
services' origin and symbolizing the owner's
goodwill than a mark displayed in the physical
market. Therefore, there is no less premium to
recognize actual use of marks through websites
than their actual use through traditional means.
Indeed, as our world evolves, so too should our
appreciation of the law. Legal interpretation — as
it largely affects the lives of people in the here
and now — never happens in a vacuum. As such,
it should not be stagnant but dynamic; it should
not be ensnared in the obsolete but rather,
sensitive to surrounding social realities. (Kolin
Electronics Co., Inc. v. Taiwan Kolin Corp. Ltd., G.R.
Nos. 221347 & 221360-61, December 1, 2021,
HERNANDO, J., citing W Land Holdings vs Starwood
Hotels & Resort Worldwide Inc., G.R. No. 222366,
December 4, 2017)
In fine, the owner of a registered trademark,
absent any legal obstacle or compelling reason to
the contrary, should be allowed to register, in its
favor, a domain name containing its registered
trademark as a dominant feature. KECI's
application to register and use the mark
"www.kolin.ph," presumably as its domain name
and platform to sell its products in the internet, is
merely in exercise of and consistent with its
exclusive right to use "KOLIN" on the business of
manufacturing, importing, assembling or selling
electronic equipment or apparatus. KECI's
exclusive right to use the "KOLIN" mark for the
business of manufacturing, importing,
assembling, or selling electronic equipment or
apparatus is entitled to protection, whether such
use is exercised online or through a physical
market — and whether the mark is printed on
product packaging or included in the domain
name of its website. Indeed, to preclude KECI
from safeguarding its right to protect the name of
its domain name containing its registered mark
would unduly limit the scope of selling and
antiquate the concept in relation to the current
times. (Kolin Electronics Co., Inc. v. Taiwan Kolin
Corp. Ltd., G.R. Nos. 221347 & 221360-61, December
1, 2021, HERNANDO, J)
KECI's rights from its existing trademark
registrations for"KOLIN" do extend to product
and market areas that are the normal potential
expansion of its business, and goods and services
and those in respect of which the trademark is
registered where such use would result in a
likelihood of confusion. Section 147 of the IP
Code provides that the owner of a registered
mark shall have the exclusive right to prevent all
third parties not having the owner's consent from
using in the course of trade identical or similar
signs ilar to those in respect of which the
trademark is registered, where such would result
in a likelihood of confusion. (ibid.)
In Dermaline, the Court held that the registered
trademark owner also enjoys protection in
product and market areas that are the normal
potential expansion of his business. (Dermaline,
Inc. vs. Myra Pharmaceuticals, Inc., G.R. No. 190065,
August 16, 2010)
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In McDonald's Corporation v. L.C. Big Mak Burger,
Inc.108 (Big Mak), the court explained:
Modern law recognizes that the protection to
which the owner of a trademark is entitled is not
limited to guarding his goods or business from
actual market competition with identical or similar
products of the parties, but extends to all cases
in which the use by a junior appropriator of a
trademark or trade-name is likely to lead to a
confusion of source, as where prospective
purchasers would be misled into thinking that the
complaining party has extended his business into
the field. (McDonald’s Corporation vs. L.C. Big Mak
Burger, Inc., G.R. No. 143993 August 18, 2004)
3. ACQUISITION OF OWNERSHIP OF
TRADE NAME
Acquisition of Ownership of Trade Name
Ownership of a trade name may be acquired not
necessarily by registration but by adoption and
use in trade or commerce (Zuneca
Pharmaceutical v. Natraphann, Inc., G.R. No, 711850,
September 8, 2020)
Protection of Trade Names
A trade name need not be registered with
the IPO before an infringement suit may be filed
by its owner against the owner of an infringing
trademark. Trade names shall be protected, even
prior to or without registration, against any
unlawful act committed by third parties. (Section
165.2, IPC) All that is required is that the
trade name is previously used in trade or
commerce in the Philippines (Coffee Partners,
Inc. v. San Francisco Coffee and Roastery Inc., G.R.
No. 169594, March 3; 2010)
A name or designation may not be used as a trade
name if by its nature or the use to which such
name or designation may be put, it is contrary to
public order or morals and if, in particular, it is
liable to deceive trade circles or the public as to
the nature of the enterprise identified by that
name. (Section 165.1, IPC)
Notwithstanding any laws or regulations
providing for any obligation to register trade
names, such names shall be protected, even prior
to or without registration, against any unlawful
act committed by third parties. In particular, any
subsequent use of the trade name by a third
party, whether as a trade name or a mark or
collective mark, or any such use of a similar trade
name or mark, likely to mislead the public, shall
be deemed unlawful. (Section 165.2, IPC)
The remedies provided for infringement of
trademark in shall apply mutatis mutandis in case
of trade name infringement. (Section 165.3, IPC)
Doctrine of Secondary Meaning Applicable
to Trade Names
The doctrine’s application has been extended to
corporate names since the right to use a
corporate name to the exclusion of others is
based upon the same principle which underlies
the right to use a particular trademark or
tradename. (Lyceum of the Philippines, Inc. v. Court
of Appeals, G.R. No. 101897, 1993)
4. NON-REGISTRABLE MARKS
A mark cannot be registered if it:
(a) Consists of immoral, deceptive or scandalous
matter, or matter which may disparage or
falsely suggest a connection with persons,
living or dead, institutions, beliefs, or national
symbols, or bring them into contempt or
disrepute; (Section 123.1 (a), IPC)
Fredco's registration of the mark "Harvard"
should not have been allowed because the
law prohibits the registration of a mark
"which may disparage or falsely suggest a
connection with persons, living or dead,
institutions, beliefs. Fredco's use of the mark
"Harvard," coupled with its claimed origin in
Cambridge, Massachusetts, obviously
suggests a false connection with Harvard
University. On this ground alone, Fredco's
registration of the mark "Harvard" should
have been disallowed. (Fredco Manufacturing
Corporation v. President and Fellows of Harvard
College, G.R. No. 185917, June 1, 2011)
(b) Consists of the flag or coat of arms or other
insignia of the Philippines or any of its political
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subdivisions, or of any foreign nation, or any
simulation thereof; (Section 123.1 (b), IPC)
(c) Consists of a name, portrait or signature
identifying a particular living individual except
by his written consent, or the name,
signature, or portrait of a deceased President
of the Philippines, during the life of his
widow, if any, except by written consent of
the widow; (Section 123.1 (c), IP)
It has been held that a personal name or
surname may not be monopolized as a
trademark or tradename as against others of
the same name or surname. For in the
absence of contract, fraud, or estoppel, any
man may use his name or surname in all
legitimate ways. (Emerald Garment
Manufacturing Corp. vs CA, G.R. No. 100098,
December 29, 1995)
(d) Is identical with a registered mark belonging
to a different proprietor or a mark with an
earlier filing or priority date, in respect of:
i. The same goods or services, or
ii. Closely related goods or services, or
iii. If it nearly resembles such a mark as to
be likely to deceive or cause confusion;
(Section 123.1 (d), IPC)
A mark cannot be registered if it can be
regarded as likely to deceive or cause
confusion upon the purchasing public, a
prospective mark must be shown to meet
two (2) minimum conditions:
o The prospective mark must nearly
resemble or be similar to an earlier mark;
and
o The prospective mark must pertain to
goods or services that are either
identical, similar or related to the goods
or services represented by the earlier
mark. (Mang Inasal Philippines, Inc., vs. IFP
Manufacturing Corporation, G.R. No. 221717,
June 19, 2017)
(e) Is identical with, or confusingly similar to, or
constitutes a translation of a mark which is
considered by the competent authority of the
Philippines to be well-known internationally
and in the Philippines, whether or not it is
registered here, as being already the mark of
a person other than the applicant for
registration, and used for identical or similar
goods or services; (Section 123.1 (e), IPC)
(f) Is identical with, or confusingly similar to, or
constitutes a translation of a mark considered
well-known in accordance with the preceding
paragraph, which is registered in the
Philippines with respect to goods or services
which are not similar to those with respect to
which registration is applied for: Provided,
That use of the mark in relation to those
goods or services would indicate a connection
between those goods or services, and the
owner of the registered mark: Provided
further, That the interests of the owner of the
registered mark are likely to be damaged by
such use; (Section 123.1 (f), IPC)
(g) Is likely to mislead the public, particularly as
to the nature, quality, characteristics or
geographical origin of the goods or services;
(Section 123.1 (g), IPC)
(h) Consists exclusively of signs that are generic
for the goods or services that they seek to
identify; (Section 123.1 (h), IPC)
(i) Consists exclusively of signs or of indications
that have become customary or usual to
designate the goods or services in everyday
language or in bona fide and established
trade practice; (Section 123.1 (i), IPC)
(j) Consists exclusively of signs or of indications
that may serve in trade to designate the kind,
quality, quantity, intended purpose, value,
geographical origin, time or production of the
goods or rendering of the services, or other
characteristics of the goods or services;
(Section 123.1 (j), IPC)
(k) Consists of shapes that may be necessitated
by technical factors or by the nature of the
goods themselves or factors that affect their
intrinsic value; (Section 123.1 (k), IPC)
(l) Consists of color alone, unless defined by a
given form; (Section 123.1 (l), IPC) or
(m) Is contrary to public order or morality.
(Section 123.1 (m), IPC)
Exceptions to Non-Registrability of
Descriptive Marks, Geographical Origin,
Shapes, and Colors.
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The prohibition on the non-registrability of
descriptive marks, geographical origin, shapes
and colors is not absolute. Under Sec. 123.2, if
the element of distinctiveness can be proven and
the same has been used in connection with goods
for such period of time required by law then the
said marks can be registered.
The Intellectual Property Office "may accept as
prima facie evidence that the mark has become
distinctive, as used in connection with the
applicant's goods or services in commerce, proof
of substantially exclusive and continuous use
thereof by the applicant in commerce in the
Philippines for five (5) years before the date on
which the claim of distinctiveness is made."
(Section 123.2, IPC)
Requirements for a Geographically
descriptive Mark to Acquire Secondary
Meaning:
(1) The secondary meaning must have arisen as
a result of substantial commercial use of a
mark in the Philippines
(2) Such use must result in the distinctiveness of
the mark insofar as the goods are concerned,
and;
(3) Proof of substantially exclusive and
continuous commercial use in the Philippines
for five (5) years before the date on which
the claim of distinctiveness is made
perceptibly disqualified from trademark
registration (Shang Properties Realty Co. and
Shang Properties, Inc. v St. Francis Devt. C., GR
No. 190706, July 21, 2014)
NOTE: Proof of substantially exclusive and
continuous commercial use in the Philippines for
five (5) years before the date on which the claim
of distinctiveness is made is prima facie evidence
of distinctiveness. (Sec. 123.2, IP Code)
5. TEST TO DETERMINE CONFUSING
SIMILARITY BETWEEN MARKS
a) Dominancy Test
The Dominancy Test focuses on the similarity
of the prevalent features of the competing
trademarks which might cause confusion or
deception, and thus infringement. If the
competing trademark contains the main,
essential or dominant features of another, and
confusion or deception is likely to result,
infringement takes place. Duplication or
imitation is not necessary; nor is it necessary
that the infringing label should suggest an effort
to imitate.
The question is whether the use of the marks
involved is likely to cause confusion or mistake in
the mind of the public or deceive purchasers.
(Mang Inasal Philippines, Inc., vs. IFP Manufacturing
Corporation, G.R. No. 221717, June 19, 2017)
By focusing not simply on similarities in size, form
or color but on the main or essential features of
each mark taken together. Duplication is not
necessary, and similarity, while relevant, is not
conclusive. (Asia Brewery, Inc. vs. Court of Appeals,
G.R. No. 103543, July 5, 1993)
The test was similarity or "resemblance between
the two (trademarks) such as would be likely to
cause the one mark to be mistaken for the others.
But this is not such a similitude as would amount
to identity." (Asia Brewery, Inc. vs. Court of Appeals,
G.R. No. 103543, July 5, 1993, citing Forbes, Munn &
Co. Ltd vs. Ang San To, 40 Phil. 272)
"Nanny" is confusingly similar to "Nan", being the
prevalent feature. Both are classified under Class
6, both are milk products, and both are in powder
form. Also, NANNY and NAN are displayed in the
same section of stores the milk section (Societe
Des Produits Nestle, S.A. v. Dy, GR No. 172276,
August 8, 2010)
Focuses on the similarity of the prevalent features
of the competing trademarks that might cause
confusion and deception, thus constituting
infringement.
If the competing trademark contains the main,
essential, and dominant features of another, and
confusion or deception is likely to result,
infringement occurs.
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Exact duplication imitation is not required. The
question is whether the use of the marks involved
is likely to cause confusion or mistake in the mind
of the public or to deceive consumers. (Citigroup,
Inc. vs. Citystate Savings Bank, Inc. G.R. No. 205409,
June 13, 2018)
IMPORTANT UPDATE: Abandonment of
Holistic Test
The Supreme Court (SC) has abandoned the
“holistic test” in evaluating trademark
resemblance and emphasized the adoption of the
“dominancy test.”
The Dominancy Test focuses on the similarity of
the prevalent features of the competing marks.
Meanwhile, the Holistic Test requires that the
entirety of the marks in question be considered in
resolving confusing similarity. There was no hard
and fast rule in determining which test should be
applied. There are more Supreme Court decisions
that applied the Dominancy Test.
The SC noted that Section 155.1 of the
Intellectual Property Code explicitly incorporated
the “dominancy test,” by defining infringement as
the “colorable imitation of a registered mark… or
a dominant feature thereof.” (Kolin Electronics Co.
Inc. vs Kolin Phils. International Inc., G.R. No. 228165,
Feb. 9, 2021)
In light of the foregoing, it is submitted that the
Dominancy Test must be used in determining the
existence of confusing similarity between the
marks. Again, this test relies not only on the
visual but also on the aural and connotative
comparisons and overall impressions between the
two trademarks. (Levi Strauss & Co. v. Sevilla, G.R.
No. 219744, March 1, 2021)
Idem Sonans
Idem sonans is a Latin term meaning sounding
the same or similar; having the same sound. It is
a legal doctrine in which a person’s identity is
presumed known despite the misspelling of his or
her name.
The rule on idem sonans is also a test to resolve
the confusing similarity of trademarks.
As to the syllabication and sound of the two
trade-names “Sapolin” and “Lusolin” being used
for paints, it seems plain that whoever hears or
sees them cannot but think of paints of the same
kind and make. (Sapolin Co., Inc. v. Germann & Co.,
Ltd., G.R. No. 45502, May 2, 1939).
Two names are said to be idem sonans if the
attentive ear finds difficulty in distinguishing them
when pronounced. (Martin v. State, 541 S.W. 2d
605)
Two trademarks used on identical or related
goods may be confusingly similar if they have
similar sound or pronunciation. (Tajanlangit V
Cazenas, G.R. No. L-18894, June 30, 1962)
Likelihood of confusion or mistake is greater
when identical or closely similar marks are used
on non-competing but related and common
household items because they are purchased by
ordinary purchasers who usually know them by
their names or trademarks. (Mighty Corporation v.
ELL Gallo Winery, G.R. No. 154342, July 14, 2004)
Aural effects of the words and letters contained
in the marks should be considered in determining
the issue of confusing similarity (Prosource
International, Inc v. Horphag Research Management
SA, G.R. No. 180073, November 25, 2009)
The determining point in trademark infringement
is a likelihood of confusion. The fact that
CEEGEEFER is idem sonans for CHERIFER is
enough to violate respondent's right to protect its
trademark, CHERIFER. (Prosel v. Tynor, G.R. No.
248021, 2020)
6. WELL-KNOWN MARKS
In determining whether a mark is well-known,
account shall be taken of the knowledge of the
relevant sector of the public, rather than of the
public at large, including knowledge in the
Philippines which has been obtained as a result of
the promotion of the mark. (Sec. 123, IPC)
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The question of whether or not a trademark is
considered “well-known” is factual in nature,
involving as it does the appreciation of evidence
adduced before the BLA-IPO. (Sehwani, Inc. v. In-
N-Out Burger, Inc., G.R. No. 171053, October 15,
2007)
Internationally Well-Known Marks
There is also protection for internationally known
marks registered in the Philippines for goods that
are not similar with respect to which registration
is applied for.
It is not required that the well-known mark be
used in commerce in the Philippines but only that
it be well-known in the Philippines (Fredco
Manufacturing Corporation v. President and Fellows of
Harvard College, G.R. No. 185917, June 1, 2011).
Factors Which Shall Not Be Required in
Determining Whether a Mark is a Well-
known Mark
(1) That the mark has been used in, or that the
mark has been registered, or that an
application for registration of the mark has
been filed in or in respect of the Member
State
(2) That the mark is well known in, or that the
mark has been registered, or that an
application for registration of the mark has
been filed in or in respect of, any jurisdiction
other than the Member State;
(3) That the mark is well known by the public at
large in the Member State. (Sehwani, Inc. v. In-
N-Out Burger, Inc., G.R. No. 171053, October 15,
2007)
Criteria in determining whether a mark is
well known:
(1) Duration, extent and geographical area of
any use of the mark, in particular, the
duration, extent and geographical area of any
promotion of the mark, including advertising
or publicity and the presentation, at fairs or
exhibitions, of the goods and/or services to
which the mark applies;
(2) Market share, in the Philippines and in
other countries, of the goods and/or
services to which the mark applies;
(3) Degree of the inherent or acquired
distinction of the mark;
(4) Quality-image or reputation acquired by
the mark;
(5) Extent to which the mark has been
registered in the world;
(6) Exclusivity of registration attained by the
mark in the world;
(7) Extent to which the mark has been used in
the world;
(8) Exclusivity of use attained by the mark in
the world;
(9) Commercial value attributed to the mark in
the world;
(10) Record of successful protection of the
rights in the mark;
(11) Outcome of litigations dealing with the
issue of whether the mark is a well-known
mark; and
(12) Presence or absence of identical or similar
marks validly registered for or used on
identical or similar goods or services and
owned by persons other than the person
claiming that his mark is a well-known
mark. (Rule 102, Trademark Regulation 2017)
7. RIGHTS CONFERRED BY
REGISTRATION
(1) Right to the exclusive use of the mark for
one ‘s own goods or services.
A certificate of registration of a mark shall be
prima facie evidence of the validity of the
registration, the registrant‘s ownership of the
mark, and of the registrant‘s exclusive right
to use the same in connection with the goods
or services and those that are related thereto
specified in the certificate. (Sec 138, IPC)
The registered trademark owner may use its
mark on the same or similar products, in
different segments of the market, and at
different price levels depending on variations
of the products for specific segments of the
market. The Court is cognizant that the
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registered trademark owner enjoys
protection in product and market areas that
are the normal potential expansion of his
business. (Dermaline, Inc. vs. Myra
Pharmaceuticals, Inc., G.R. No. 190065. August
16, 2010)
(2) Exclusive right to prevent all third parties
from using identical or similar signs or
containers. (Sec 147.1, IPC)
(3) General Rule: There is an exclusive right to
prevent third persons from using identical or
similar signs or containers for identical or
similar goods or services where such use
would result in a likelihood of confusion
In case of the use of an identical sign for
identical goods or services, a likelihood of
confusion shall be presumed. (Gepty,
Intellectual Property Law Compendium, 2019, pp.
102)
Exception: In cases of importation of drugs
and medicines, provided that said drugs or
medicines bear the registered marks that
have not been tampered, unlawfully
modified, or infringed upon. (Secs. 72.1,
147.1, 155, IPC)
(4) Exclusive right to prevent all third persons
from using a mark indicating a connection
between those goods and services of third
persons and those of the owner of the
registered mark.
The exclusive right of the owner of a well-
known mark which is registered in the
Philippines, shall extend to goods and
services which are not similar to those in
respect of which the mark is registered,
provided:
(a) That the use of that mark in relation to
those goods or services would indicate a
connection between those goods or
services and the owner of the registered
mark; and
(b) That the interests of the owner of the
registered mark are likely to be damaged by
such use. (Sec. 147.2, IP Code)
Use of third parties of names, etc. similar to
registered trademark
Notwithstanding any laws or regulations
providing for any obligation to register trade
names, such names shall be protected, even prior
to or without registration, against any unlawful
act committed by third parties. In particular, any
subsequent use of the trade name by a third
party, whether as a trade name or a mark or
collective mark, or any such use of a similar trade
name or mark, likely to mislead the public, shall
be deemed unlawful. (Rule 104, 2nd par., IPOPHL
Memorandum Circular No. 17-010)
However, registration of the mark shall not confer
on the registered owner the right to preclude
third parties from using bona fide their names,
addresses, pseudonyms, a geographical name, or
exact indications concerning the kind, quality,
quantity, destination, value, place of origin, or
time of production or of supply, of their goods or
services: Provided, that such use:
(1) Is confined to the purposes of mere
identification or information, and
(2) Cannot mislead the public as to the source of
the goods or services. (Sec. 148, IP Code)
Limitations of Rights Conferred:
(1) Duration
Shall remain in force for ten (10) years:
provided that the registrant shall file a
declaration of actual use and evidence to that
effect, or shall show valid reasons based on
the existence of obstacles to such use, as
prescribed by the Regulations, within one (1)
year from the fifth anniversary of the date of
the registration of the mark. Otherwise, the
mark shall be removed from the Register by
the Office. (Sec. 145, IPC)
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(2) Territorial
As a general rule, the protection afforded to
trademark is territorial, that is, it is only
limited to the territory of the country that
recognizes the same. As a consequence, a
mark that is not registered in the Philippines
will not get protection under the legal mantle
of trademark.
Exception: A well-known mark is
protected for identical goods and services
even if the same is not registered in the
country where it seeks protection. (Gepty,
Intellectual Property Law Compendium, 2019, p.
39)
A trade name of a national of a State that is
a party to the Paris Convention, whether or
not the trade name forms part of a
trademark is protected without the
obligation of filing or registration (Fredco
Manufacturing Corp. vs. President and Fellows of
Harvard College, G.R. No. 185917, June 1, 2011)
(3) Fair Use
The registration of the mark shall not confer
on the registered owner the right to preclude
third parties from using bona fide their
names, addresses, pseudonyms, a (d) if the registered mark is being used by,
geographical name, or exact indications
concerning the kind, quality, quantity,
destination, value, place of origin, or time of
production or of supply, of their goods or
services. Provided That:
(a) Such use is confined to the purposes of
mere identification or information; and
(b) Such use cannot mislead the public as to
the source of the goods or services. (Sec.
148, IPC)
(4) Prior User
Notwithstanding the provisions of Section
155 hereof, a registered mark shall have no
effect against any person who, in good faith,
before the filing date or the priority date, was
using the mark for the purposes of his
business or enterprise: Provided, That his
right may only be transferred or assigned
together with his enterprise or business or
with that part of his enterprise or business in
which the mark is used. (Sec. 159.1, IPC)
(5) Non-Use
Failure to file declaration of actual use
automatically results in the denial of the
registration or the cancellation of the
registration by operation of law. (Sec. 124.2,
IPC)
8. CANCELLATION OF REGISTRATION
A petition to cancel a registration of a mark under
this Act may be filed with the Bureau of Legal
Affairs by any person who believes that he is or
will be damaged by the registration of a mark
under this Act as follows:
(1) Within five (5) years from the date of the
registration of the mark under this Act.
(2) At any time, if the registered mark:
(a) becomes the generic name for the goods
or services, or a portion thereof, for
which it is registered or,
(b) has been abandoned, or,
(c) its registration was obtained fraudulently
or contrary to the provisions of this Act,
or,
or with the permission of, the registrant
so as to misrepresent the source of the
goods or services on or in connection
with which the mark is used.
(e) If the registered mark becomes the
generic name for less than all of the
goods or services for which it is
registered, a petition to cancel the
registration for only those goods or
services may be filed
(f) A registered mark shall not be deemed to
be the generic name of goods or services
solely because such mark is also used as
a name of or to identify a unique product
or service. The primary significance of
the registered mark to the relevant public
rather than purchaser motivation shall be
the test for determining whether the
registered mark has become the generic
name of goods or services on or in
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connection with which it has been used.
(Sec. 151.1 IPC)
If in a petition for cancellation of a trademark, it
was established that the petitioner was not its
owner, prior registration can be cancelled without
need of filing a separate petition (E.Y. Industrial
Sales, Inc. v. Shen Dar Electricity and Machinery Co.
Ltd., G.R. No. 184850, October 20, 2010)
While registration vests ownership over a mark,
bad faith may still be a ground for the cancellation
of trademark registrations. Bad faith and fraud, in
relation to trademark registration, bad faith
means that the applicant or registrant has
knowledge of prior creation, use and/or
registration by another of an identical or similar
trademark. In other words, it is copying and using
somebody else's trademark. Fraud, on the other
hand, may be committed by making false claims
in connection with the trademark application and
registration, particularly, on the issues of origin,
ownership, and use of the trademark in question,
among other things. (Medina v. Global Quest
Ventures, Inc., G.R. No. 213815, February 8, 2021)
9. TRADEMARK INFRINGEMENT
Trademark infringement refers to unauthorized
use of a registered mark that causes confusion on
the part of the buying public.
Elements of Trademark Infringement
(1) The trademark being infringed is registered in
the Intellectual Property Office;
Trade names, unlike trademarks need not
be registered with the IPO before an
infringement suit may be filed by its owner
against the owner of an infringing trademark.
All that is required is that the trade name is
previously used in trade or commerce in the
Philippines (Prosource International Inc v
Horphag Research Management SA, an Na
180073, November 25, 2009).
(2) The trademark is reproduced, counterfeited,
copied, or colorably imitated by the infringer;
(3) The infringing mark is used in connection
with the sale, offering for sale, or advertising
of any goods, business or services; or the
infringing mark is applied to labels, signs,
prints, packages, wrappers, receptacles or
advertisements intended to be used upon or
in connection with such goods, business or
services
(4) The use or application of the infringing mark
is likely to cause confusion or mistake or to
deceive purchasers or others as to the goods
or services themselves or as to the source or
origin of such goods or services or the
identity of such business; and
(5) The use or application of the infringing mark
is without the consent of the trademark
owner or the assignee thereof. (Diaz vs. People
of the Philippines, G.R. No. 180677, February 18,
2013)
The essential element of infringement is that the
infringing mark is likely to cause confusion.
(Forietrans Manufacturing Corp. vs. Davidoff Et. Cie SA,
G.R. No. 197482. March 6, 2017)
Whether a trademark causes confusion and is
likely to deceive the public hinges on "colorable
imitation" which has been defined as "such
similarity in form, content, words, sound,
meaning, special arrangement or general
appearance of the trademark or trade name in
their overall presentation or in their essential and
substantive and distinctive parts as would likely
mislead or confuse persons in the ordinary course
of purchasing the genuine article." (Mighty
Corporation v. E. & J. Gallo Winery, G.R. No. 154342,
July 14, 2004)
The use of an identical or colorable imitation of a
registered trademark by a person for the same
goods or services or closely related goods or
services of another party constitutes
infringement. It is a form of unfair competition
because there is an attempt to get a free ride on
the reputation and selling power of another
manufacturer by passing of one’s goods as
identical or produced by the same manufacturer
as those carrying the other mark (brand).
(Commissioner of Internal Revenue v. San Miguel
Corp., G.R. Nos. 205045 & 205723, 2017)
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Persons liable for trademark infringement appearance of one mark either refer to confusion
with respect to another of goods or confusion of
A person shall be liable for trademark as would likely mislead business. In either of its
infringement if, without the consent of the owner an average buyer in the forms, confusion is only
ordinary course of possible when the goods
of the registered mark, he:
purchase. (Mang Inasal or services covered by
(1) Use in commerce any reproduction, Philippines, Inc. vs. IFP allegedly similar marks
counterfeit, copy or colorable imitation of a Manufacturing Corp., are identical, similar or
registered mark or the same container or a G.R. No. 221717, June related in some manner.
dominant feature thereof in connection with 19, 2017) (Mang Inasal
the: Philippines, Inc. vs. IFP
(a) Sale Manufacturing
(b) Offering for sale Corporation, supra.)
(c) Distribution
(d) Advertising of any goods or services Two types of confusion arise from the use
(e) Including other Preparatory steps of similar or colorable imitation marks,
necessary to carry out the sale of any namely:
goods or services on or in connection
with which such use is likely to cause (1) Confusion of goods (product confusion) and
confusion, or to cause mistake, or to (2) Confusion of business (source or origin
deceive; or confusion).
(2) Reproduces or color ably imitates a
registered mark or a dominant feature Confusion of Confusion of
thereof and applies such reproduction or Goods/Services Business/Origin
colorable imitation to signs, packages, or
advertisements intended to be used in Exists when the ordinary Exists when one party's
commerce upon or in connection with the prudent purchaser would product or service
sale, offering for sale, distribution, or be induced to purchase though different from
one product or service that of another, is such
advertising of goods or services which likely
because of the similarity as might reasonably be
to cause confusion, or to cause mistake,
of the marks or trade assumed to originate
or to deceive. names used on the same from the latter and the
kind of product or public would then be
The “likelihood of confusion” is the gravamen of service. deceived into the belief
trademark infringement. Hence, it is immaterial (Skechers, U.S.A, Inc. v. that there is some
that there was no actual sale of goods or services Inter Pacific Industrial connection between the
using the infringing material as long as the acts Trading Corp. et. al., GR parties which in fact is
mentioned were actually committed. (Sec. 155, IP No. 164321 March 23, absent.
Code) 2011) (Skechers, U.S.A., Inc. v.
Inter Pacific industrial
Trading Corp et. al, GR
Failure to present proof of actual confusion does No. 164321, March 23,
not negate the claim of trademark infringement. 2011)
While proof of actual confusion is the best
evidence of infringement, its absence is Exist when the products Exist when the products
inconsequential. (McDonald’s Corporation vs. L.C. Big are competing are non-competing but
Mak Burger, Inc., G.R. No. 143993 August 18, 2004) (McDonald’s Corporation related enough to
v. L.C. Big Mak Burger, produce confusion or
Colorable imitation Confusion Inc., et al., G.R. No. affiliation (McDonald’s
It denotes such likeness The concept of 143993, August 18, Corporation v. L.C. Big
in form, content, words, confusion, which is at 2004) Mak Burger, Inc., et al.,
sound, meaning, special the heart of the G.R. No. 143993, August
arrangement or general proscription, could 18, 2004)

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Test on confusion of Test on confusion of
goods or services: origin: Whether the non-
competing articles may
1. dominancy test; and be classified under two
2.holistic test different classes
(abandoned) because-they are
deemed not to possess
the same descriptive
properties (Ang v.
Teonoro, G.R. No. L-
48226, December 14,
1942).
Factors to consider in determining the
likelihood of confusion:
(1) The resemblance between the trademarks;
(2) The similarity of the goods to which the
trademarks are attached;
(3) The likely effect on the purchaser; and
(4) The registrant’s express or implied consent
and other fair and equitable considerations.
(Mighty Corporation v. E. & J. Gallo Winery, G.R.
No. 154342, July 14, 2004)
Remedies against trademark infringer:
(1) Damages. (Sec. 156.1, IPC)
Damages which can be recovered from
infringer:
The owner of a registered mark may recover
damages from any person who infringes his
rights, and the measure of the damages
suffered shall be either:
(a) The reasonable profit which the
complaining party would have made, had
the defendant not infringed his rights; or
(b) The profit which the defendant actually
made out of the infringement; or
(c) In the event such measure of damages
cannot be readily ascertained with
reasonable certainty, then the court may
award as damages:
i) A reasonable percentage based upon
the amount of gross sales of the
defendant; or
ii) The value of the services in
connection with which the mark or
trade name was used in the
infringement of the rights of the
complaining party. (Sec. 156.1, IPC)
(2) Double damages. (Sec. 156.3, IPC)
(3) Injunction. (Sec. 156.4, IPC)
(4) Impounding. (Sec. 156.2, IPC)
(5) Court order for the disposal or destruction of
the infringement material. (Sec. 157.1, IPC)
Notice requirement in recovering damages
for infringement
In any suit for infringement, the owner of the
registered mark shall not be entitled to recover
profits or damages unless the acts have been
committed with knowledge that such imitation is
likely to cause confusion, or to cause mistake, or
to deceive. Such knowledge is presumed if the
registrant gives notice that his mark is registered
by displaying with the mark the words
“Registered Mark” or the letter R within a circle or
if the defendant had otherwise actual notice of
the registration. (Sec. 158, IPC)
10. UNFAIR COMPETITION
A person who has identified in the mind of the
public the goods he manufactures or deals in, his
business or services from those of others,
whether or not a registered mark is employed,
has a property right in the goodwill of the said
goods, business or services so identified, which
will be protected in the same manner as other
property rights. (Sec. 168.1, IPC)
The following shall be guilty of unfair competition,
and shall be subject to an action therefor:
(1) Any person who shall employ deception or
any other means contrary to good faith, by
which he shall pass off the goods
manufactured by him or in which he deals, or
his business, or services for those of the one
having established such goodwill; or
(2) Any person who shall commit any acts
calculated to produce said result. (Sec. 168.2,
IPC)
Unfair competition has been defined as the
passing off (or palming off) or attempting to pass
off upon the public the goods or business of one
person as the goods or business of another with
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the end and probable effect of deceiving the
public. Under Section 168 of the IPC, deception,
passing off and fraud upon the public are still the
key elements that must be present for unfair
competition to exist. (Coca-Cola Bottlers, Phils., Inc.
[CCBPI] vs. Gomez, G.R. No. 154491 November 14,
2008)
Passing Off/Palming Off
Passing off (or palming off) takes place where the
defendant, by imitative devices on the general
appearance of the goods, misleads prospective
purchasers into buying his merchandise under the
impression that they are buying that of his
competitors. (McDonald’s Corporation vs. L.C. Big
Mak Burger, Inc., supra.)
Acts Constitutive of Unfair Competition
(1) Selling one’s goods and giving them the
general appearance of goods of another
manufacturer or dealer, either:
(a) As to the goods themselves or in the
wrapping of the packages in which they
are contained, or the devices or words
thereon; or
(b) In any other feature of their appearance,
which would be likely to influence
purchasers to believe that the goods
offered are those of a manufacturer or
dealer, other than the actual
manufacturer or dealer. (Sec. 168.3(a),
IPC)
(2) Clothing one’s goods with such appearance
as shall deceive the public and defraud
another of his legitimate trade, or any
subsequent vendor of such goods or any
agent of any vendor engaged in selling such
goods with a like purpose. (Sec. 168.3(a), IPC)
(3) Using any artifice, or device, or employing
any other means calculated to induce the
false belief that such person is offering the
services of another who has identified such
services in the mind of the public. (Sec.
168.3(b), IPC)
(4) Making any false statement in the course of
trade or committing any other act contrary to
good faith of a nature calculated to discredit
the goods, business or services of another.
(Sec. 168.3(c), IPC)
“Hoarding” of a competitor’s products does not
fall within the coverage of the IPC and of Section
168 in particular. It does not relate to any patent,
trademark, trade name or service mark that the
respondents have invaded, intruded into or used
without proper authority from the petitioner, nor
are the respondents alleged to have fraudulently
passed off their products or services as those of
the petitioner. (Coca-Cola Bottlers, Phils., Inc.
[CCBPI] vs. Gomez, G.R. No. 154491, November 14,
2008)
Elements of Unfair Competition:
(1) Confusing similarity in the general
appearance of the goods, and
(2) Intent to deceive the public and defraud a
competitor. (Superior Commercial Enterprises,
Inc. v. Kunnan Enterprises, G.R. No. 169974, April
20, 2010)
The confusing similarity may or may not result
from similarity in the marks, but may result from
other external factors in the packaging or
presentation of the goods. The intent to deceive
and defraud may be inferred from the similarity
in appearance of the goods as offered for sale to
the public. Actual fraudulent intent need not be
shown. (Kho vs. Summerville General Merchandising
& Co., Inc., G.R. No. 213400, August 4, 2021,
HERNANDO, J.)
Test of unfair competition
Jurisprudence also formulated the following "true
test" of unfair competition: whether the acts of
the defendant have the intent of deceiving or are
calculated to deceive the ordinary buyer making
his purchases under the ordinary conditions of
the particular trade to which the controversy
relates. One of the essential requisites in an
action to restrain unfair competition is proof of
fraud; the intent to deceive, actual or probable,
must be shown before the right to recover can
exist. (Coca-Cola Bottlers, Inc. vs. Quintin J. Gomez,
G.R. No. 154491, November 14, 2008)
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Who may file an action of Unfair
Competition?
A person who has identified in the mind of the
public the goods he manufactures or deals in, his
business or services from those of others,
whether or not a registered mark is employed.
Such person has a property right in the goodwill
of the said goods, business or services so
identified, and said right shall be protected in the
same manner as other property rights. (Sec.
168.1, IPC)
Trademark Infringement vs. Unfair
Competition
The law on unfair competition is broader and
more inclusive than the law on trademark
infringement. Trademark infringement is more
limited, but it recognizes a more exclusive right
derived from the trademark adoption and
registration by the person whose goods or
business is first associated with it. The law on
trademarks is a specialized subject distinct from
the law on unfair competition, although the two
subjects are entwined with each other and are
dealt with together in the IP Code.
Hence, even if one fails to establish his exclusive
property right to a trademark, he may still obtain
relief on the ground of his competitor's unfairness
or fraud. Conduct constitutes unfair competition
if the effect is to pass off on the public the goods
of one man as the goods of another. It is not
necessary that any particular means should be
used to this end. (Mighty Corp. v. E. & J. Gallo
Winery, G.R. No. 154342, July 14, 2004)
Trademark Unfair Competition
Infringement
As to Definition
Unauthorized use of a Passing off of one’s
trademark goods as those of
another
As to Scope
Limited but more Broader and more
exclusive scope inclusive scope
As to Requirement of Fraudulent Intent
Unnecessary Essential
As to Requirement for Prior Registration
Prerequisite to the Unnecessary
action
As to Goods or Services Involved
Same class Different classes
(Del Monte Corp. vs. CA, GR Nos. L-78325, January 25,
1990)
Trademark Infringement without Unfair
Competition
There can be trademark infringement without
unfair competition such as when the infringer
discloses on the labels containing the mark that
he manufactures the goods, preventing the public
from - being deceived that the goods originate
from the trademark owner. (Superior Commercial
Enterprises, Inc. v. Kunnan Enterprises, G.R. No.
169974, April 20, 2010)
Capacity of Foreign Corporation to Sue for
Unfair Competition
Any foreign national or juridical person who
meets the requirements of Section 3 of the
Intellectual Property Code and does not engage
in business in the Philippines may bring a civil or
administrative action for opposition, cancellation,
infringement, unfair competition, or false
designation of origin and false description,
whether or not it is licensed to do business in the
Philippines under existing laws. (Sec. 160, IPC)
A foreign corporation not engaged in and licensed
to do business in the Philippines may maintain
action for unfair competition. This is so because
the crime of unfair competition is punishable
under Article 189 of the Revised Penal Code,
hence, is a public crime. (Sasot v. People, G.R. No.
143193, June 29, 2005)
REGISTRATION OF MARKS UNDER THE
MADRID SYSTEM (MADRID PROTOCOL)
Coverage
These Regulations and the Common Regulations
shall apply to all international applications filed
under the Madrid Protocol where IPOPHL is the
Office of Origin, and international registrations
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where the Philippines is a Designated Contracting
Party. (Rule 3, IPOPHL Memorandum 17-011,
"Philippine Madrid Regulations")
Rights Conferred
(1) An international registration designating the
Philippines shall have the same effect, from
the date of the international registration, as
if an application for the registration of the
mark had been filed directly with the IPOPHL
under the IP Code and the TM Regulations.
(2) If no refusal is notified by the IPOPHL to the
International Bureau in accordance with the
Madrid Protocol and the Common
Regulations, or if a refusal has been so
notified but has been subsequently
withdrawn, or if a statement of grant of
protection is sent by the IPOPHL, the
protection of the mark in the Philippines shall
be the same as if the mark had been
registered directly by the IPOPHL on the date
of the international registration. (Rule 15,
IPOPHL Memorandum 17-011, "Philippine Madrid
Regulations")
Requirements for Registration:
The following minimum requirements shall be
contained in the application form:
(1) Name and address and contact details of the
applicant or the address and contact details
of his representative, if any;
(2) The Designated Contracting Parties;
(3) Reproduction of the mark, and;
(4) Indication of the goods and services for which
registration of the mark is sought. (Rule 5,
1. BASIC PRINCIPLES [SEC. 172.2, 175, AND 181 ONLY]
Section 172.2, IPC
Works are protected by the sole fact of their
creation, irrespective of their mode or form of
expression, as well as of their content, quality and
purpose. (Section 172.2, IPC);
Principle of Automatic Protection
IPOPHL Memorandum 17-011, "Philippine Madrid
Regulations")
Term of Protection
The term of protection under the Madrid Protocol
is valid for ten (10) years from the date of
registration. The registration is renewable at the
end of each 10-year period directly with the WIPO
with effect in the designated Contracting Parties
concerned. (Art. 6, Madrid Protocol)
C. COPYRIGHT
Copyright is not primarily about providing the
strongest possible protection for copyright
owners so that they have the highest possible
incentive to create more works. The control given
to copyright owners is only a means to an end:
the promotion of knowledge and learning. The
goal of copyright is to promote creativity and
encourage creation of works. (ABS-CBN Corp. v.
Gozon, G.R. No. 195956, 2015)
A copyright refers to “the right granted by a
statute to the proprietor of an intellectual
production to its exclusive use and enjoyment to
the extent specified in the statute.” (Olaño vs. Lim
Eng Co, G.R. No. 195835. March 14, 2016)
Copyright is the right of literary property as
recognized and sanctioned by positive law. An
intangible, incorporeal right granted by statute to
the author or originator of certain literary or
artistic productions, whereby he is invested, for a
limited period, with the sole and exclusive
privilege of multiplying copies of the same and
publishing and selling them. (Juan vs. Juan, G.R.
No. 221732. August 23, 2017)
Section 175, IPC Section 181, IPC
News of today, office The copyright is
text of legislative or distinct from the
administrative or legal property in the material
nature, not protected. object subject to it.
Consequently, the transfer
The facts that constitute or assignment of the
the news are unprotected, copyright shall not itself
but the copyright constitute a transfer of the
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Copyright is vested from the very moment of creation protection subsists in any material object. Nor shall a
irrespective of their mode or form of expression, as well work entailing intellectual transfer or assignment of
as of their content, quality and purpose. (Sec. 171.1- effort that may result in the sole copy or of one or
172.2, IPC) the creation of a news several copies of the work
report. (Section 175, IPC) imply transfer or
The issuance of the certificates of registration and assignment of the
deposit as provided by Sec. 2, Rule 7 of Copyright copyright. (Section 181,
Safeguards and Regulations, are purely for recording the IPC)
date of registration and deposit of the work, and are not
conclusive as to copyright ownership (nor does it
determine the time when copyright vests). (Manly
Sportwear v. Dadodette Enterprises, G.R. No. 165306
September 20, 2005)

The enjoyment and exercise of copyright, including

moral rights, shall not be the subject of any formality;
such enjoyment and such exercise shall be independent
of the existence of protection in the country of origin of
the work. (Article 5(2), Berne Convention for the
Protection of Literary and Artistic Works)

2. COPYRIGHTABLE WORKS Copyrightable works

The scope of copyright is confined to literary and
artistic works which are original intellectual
creations in the literary and artistic domain
protected from the moment of their creation (Kho
vs Court of Appeals, G.R. No. 115758, March 19, 2002)
Requisites for copyright ability
For a work to enjoy copyright protection, it must
be an original creation. It should be stressed,
however, that copyright is not concerned with the
originality of ideas, but with the expression
of thought. Thus, the originality which is
required relates to the expression of the thought.
(Gepty, Intellectual Property Law Compendium, 2019,
pp. 158-159)
A work is deemed by law an original if the author
created it by his own skill labor and judgment
(Habana vs. Robles, G.R. No. 131522,19 July 1999)
It is meant that the material was not copied, and
evidences of at least minimal creativity; that it
was independently created by the author; and
that it possesses at least same minimal degree of
creativity. (Ching vs. Salinas, G.R. No. 161295, 29
June 2005, citing Donald Bruce Company v. B.G. Multi-
Comm. Corporation, 964 F. Supp. 265 (1997))
(a) Original Literary or Artistic Works
(b) Derivative Works
a) Original Literary or Artistic Works
Literary and artistic works are original
intellectual creations in the literary and artistic
domain protected from the moment of their
creation and shall include:
(1) Books, pamphlets, articles and other
writings;
(2) Periodicals and newspapers;
News as expressed in a video footage is
entitled to copyright protection. Broadcasting
organizations have not only copyright on but
also neighboring rights over their broadcasts.
Copyrightability of a work is different from
fair use of a work for purpose of news
reporting. (ABS-CBN Corp. v. Gozon, G.R. No.
195956, 2015)
(3) Lectures, sermons, addresses, dissertations
prepared for oral delivery, whether or not
reduced in writing or other material form;
(4) Letters;
(5) Dramatic or dramatico-musical compositions;
choreographic works or entertainment in
dumb shows;

396
(6) Musical compositions, with or without
words; (FILSCAP vs. Tan, G.R. No. L-36402,
March 16, 1987; Juan vs. Juan, G.R. No.
221732, August 23, 2017)
(7) Works of drawing, painting, architecture,
sculpture, engraving, lithography or other
works of art; models or designs for works
of art;
(8) Original ornamental designs or models for
articles of manufacture, whether or not
registrable as an industrial design, and
other works of applied art;
A "work of applied art" is an artistic creation
with utilitarian functions or incorporated in
a useful article, whether made by hand or
produced on an industrial scale. (Sec. 171.1,
IPC)
Works for applied art include all original
pictorials, graphics, and sculptural works
that are intended to be or have been
embodied in useful articles regardless of
factors such as mass production,
commercial exploitation, and the potential
availability of design patent protection.
(Ching vs. Salinas, Sr., G.R. No. 161295, June
29, 2005)
(9) Illustrations, maps, plans, sketches, charts
and three-dimensional works relative to
geography, topography, architecture or
science;
Maps are not mere factual compilations but
classified as “pictorial, graphic, and
sculptural works.” Unlike telephone
directories and other factual compilations,
maps have an inherent pictorial or
photographic nature that merits copyright
protection. (Mason vs. Montgomery Data, Inc.,
967 F.2d 135 1992)
(10) Drawings or plastic works of a scientific or
technical character;
(11) Photographic works including works
produced by a process analogous to
photography; lantern slides; Audiovisual
works and cinematographic works and
works produced by a process analogous to
cinematography or any process for making
audio-visual recordings;
(12) An "audiovisual work or fixation" is a work
that consists of a series of related images
which impart the impression of motion,
with or without accompanying sounds,
susceptible of being made visible and,
where accompanied by sounds, susceptible
of being made audible. (Sec. 202.3, IPC)
(13) Pictorial illustrations and advertisements;
(14) Computer programs; and
A "computer" is an electronic or similar
device having information-processing
capabilities, and a "computer program" is a
set of instructions expressed in words,
codes, schemes or in any other form, which
is capable when incorporated in a medium
that the computer can read, or causing the
computer to perform or achieve a particular
task or result. (Sec. 171.4, IPC)
(15) Other literary, scholarly, scientific and
artistic works.
(Sec. 172.1, IPC)
These are protected by the sole fact of their
creation, irrespective of their mode or form of
expression, as well as of their content, quality and
purpose. (Sec. 172.2, IPC)
b) Derivative works
Derivative works, which are creations that are
based on an existing work, shall also be protected
by copyright.
(1) Dramatizations, translations, adaptations,
abridgments, arrangements, and other
alterations of literary or artistic works; and
(2) Collections of literary, scholarly or artistic
works, and compilations of data and other
materials which are original by reason of the
selection or coordination or arrangement of
their contents. (Sec. 173.10, IPC)
The above works shall be protected as a new
works: Provided however, that such new work
shall not affect the force of any subsisting
copyright upon the original works employed or
any part thereof, or be construed to imply any
right to such use of the original works, or to
secure or extend copyright in such original works.
(Sec. 173.2, IPC)
397
Publisher’s Right
In addition to the right to publish granted by the
author, his heirs or assigns, the publisher shall
have a copyright consisting merely of the right of
reproduction of the typographical arrangement of
the published edition of the work. (Sec. 174, IPC)
3. NON-COPYRIGHTABLE WORKS
(a) Unprotected subject matters
(b) Works of the government
(c) Collection of an author‘s works, said author
has exclusive right to it
(a) Unprotected subject matters
No protection shall extend, under the law, to:
(1) any idea, procedure, system, method or
operation, concept, principle, discovery or
mere data as such, even if they are
expressed, explained, illustrated or embodied
in a work;
(2) news of the day and other miscellaneous
facts having the character of mere items of
press information; or
(3) any official text of a legislative, administrative
or legal nature, as well as any official
translation thereof. (Sec. 175, IPC)
News footage are copyrightable
Television newscasts are subject to copyright.
Although news or the events themselves are not
copyrightable, expression of the news particularly
when it underwent a creative process is entitled
to copyright protection. (ABS-CBN Corp. vs. Gozon,
G.R. No. 195956, March 11, 2015)
Format or mechanics of a tv show are not
copyrightable
The format or mechanics of a TV show is not
copyrightable as copyright does not extend to
ideas, procedures, processes, systems, methods
of operation, concepts, principles or discoveries
regardless of the form in which they are
described, explained, illustrated or embodied.
(Joaquin Jr. et al vs. Drilon, et al, G.R. No. 108946,
January 28, 1999)
No one may claim originality as to facts as these
do not owe their origin to an act of authorship.
The first person to find and report a particular fact
has not created the same; he has merely
discovered its existence. (Feist Publication vs. Rural
Telephone Services, 499 U.S. 340 (1991))
Objects of utility are not copyrightable
Objects of utility (i.e., hatch doors) are not artistic
works within the meaning of copyright laws. A
copyrightable work refers to literary and artistic
works defined as original intellectual creations in
the literary and artistic domain. A hatch door is
not primarily an artistic creation but rather an
object of utility designed to have aesthetic
appeal. It is intrinsically a useful article, which, as
a whole, is not eligible for copyright.
The only instance when a useful article may be
the subject of copyright protection is when it
incorporates a design element that is physically
or conceptually separable from the underlying
product. This means that the utilitarian article can
function without the design element. In such an
instance, the design element is eligible for
copyright protection. (Olaño vs. Lim Eng Co, G.R. No.
195835, March 14, 2016)
(b) Works of the government
No copyright shall subsist in any work of the
Government of the Philippines. (Sec. 176.1, IPC)
A "work of the Government of the
Philippines" is a work created by an officer or
employee of the Philippine Government or any of
its subdivisions and instrumentalities, including
government-owned or controlled corporations as
part of his regularly prescribed official duties. (Sec
171.11, IPC)
Elements:
(1) the creator must be an officer or employee of
the government
(2) the work was done as part of his regularly
prescribed official duties
398
 General Rule Exception even prevent, other from using that knowledge."
Prior approval of the No prior approval or By eliminating fear of other's appropriation and
government agency conditions shall be required exploitation of an author's work, intellectual
or office wherein the for the use of any purpose of creation is incentivized. (Republic v. Heirs of Tupaz
work is created shall statutes, rules and IV, G.R. No. 197335, September 7, 2020)
be necessary for regulations, and speeches,
exploitation of such lectures, sermons,
(a) Economic rights
work for profit. Such addresses, and
agency or office dissertations, pronounced,
(b) Moral rights
may, among other read or rendered in courts of (c) Rights to proceeds in subsequent transfer
things, impose as a justice, before
condition the administrative agencies, in (a) Copyright or economic rights
payment of deliberative assemblies and
royalties. (Sec. in meetings of public These economic rights basically protect the
176.1, IPC) character. (Sec 176.1, IPC) economic value of the work and provide the
copyright owner ways and means to generate
Government and Copyright revenues from his work. (Gepty, Intellectual
Property Law Compendium, 2019, pp. 169-170)
Notwithstanding the foregoing provisions, the
Government is not precluded from receiving and It shall consist of the exclusive right to carry out,
holding copyrights transferred to it by authorize or prevent the following acts:
assignment, bequest or otherwise; nor shall
publication or republication by the government in (1) Reproduction of the work or substantial
a public document of any work in which copyright portion of the work;
is subsisting be taken to cause any abridgment or (2) Reproduction is defined as the making of one
annulment of the copyright or to authorize any or more copies, temporary or permanent, in
use or appropriation of such work without the whole or in part, of a work or a sound
consent of the copyright owner. (Section 176.3, recording in any manner or form without
IPC) prejudice to the application of Fair Use
Doctrine. (Section 171.9, IPC)
(c) Collection of an author’s work, author (3) Dramatization, translation, adaptation,
has exclusive right abridgment, arrangement or other
transformation of the work;
The author of speeches, lectures, sermons, (4) The first public distribution of the original and
addresses, and dissertations mentioned in the each copy of the work by sale or other forms
preceding paragraphs shall have the exclusive of transfer of ownership;
right of making a collection of his works. (Section
176.2, IPC) First Public Distribution of Work

4. RIGHTS CONFERRED BY A COPYRIGHT An exclusive right of first distribution of work

Copyright has two rationales: the economic
benefit and social benefit. The economic benefit
is reaped by the author from his work while the
social benefit manifests when it creates impetus
for individuals to be creative. Copyright, like other
intellectual property rights, grants legal
protection by prohibiting the unauthorized
reproduction of the author's work. It "create[s] a
temporary monopoly on varying types of
knowledge, allowing their owners to restrict and
includes all acts involving distribution, specifically
including the first importation of an original and
each copy of the work into the jurisdiction of the
Republic of the Philippines. (Rule 12, Copyright
Safeguards & Regulations)
(5) Rental of the original or a copy of:
i. an audiovisual or cinematographic work;
ii. a work embodied in a sound recording;
iii. a computer program;

399
 iv. a compilation of data and other materials
or a musical work in graphic form;
irrespective of the ownership of the
original or the copy which is the subject
of the rental; (n)
(6) Public display of the original or a copy of the
work;
(7) Public performance of the work; and
(8) Other communication to the public of the
work (Section 177, IPC)
The author of a literary composition has a right to
the first publication thereof and entitled to
payment for its use, but once published, it is
dedicated to the public, and the author loses the
exclusive right to control subsequent publication
by others, unless the work is placed under the
protection of the copyright law. (Santos vs.
McCullough Printing Company, G.R. No. L-
19439. October 31, 1964)
The playing of music and singing of the combo in
dine and dance establishment which was paid for
by the public in purchases of food and constitutes
“performance for profit” as contemplated by the
Copyright Law. Nevertheless, defendant cannot
be held to have violated the Copyright Law
because the composers of the contested musical
compositions are deemed to have waived their
rights in favor of the general public because they
have failed to comply with the regulation
requiring an intellectual creation to be
copyrighted within 30 days after publication.
(Filipino Society of Composers, Authors and Publishers,
Inc. vs. Tan, G.R. No. L-36402. March 16,1987)
(b) Moral rights
The term moral rights has its origins in the civil
law and is a translation of the French le droit
moral, which is meant to capture those rights of
a spiritual, non-economic and personal nature.
The rights spring from a belief that an artist in the
process of creation injects his spirit into the work
and that the artist’s personality, as well as the
integrity of the work, should therefore be
protected and preserved. Because they are
personal to the artist, moral rights exist
independently of an artist’s copyright in his or her
work. While the rubric of moral rights
encompasses many varieties of rights, two are
protected in nearly every jurisdiction recognizing
their existence: attribution and integrity.
The right of attribution generally consists of the
right of an artist to be recognized by name as the
author of his work or to publish
anonymously/pseudonymously, the right to
prevent the author’s work from being attributed
to someone else, and to prevent the use of the
author’s name on works created by others,
including distorted editions of the author’s
original work. The right of integrity allows the
author to prevent any deforming or mutilating
changes to his work, even after the title of the
work has been transferred. In some jurisdictions,
the integrity right also protects artwork from
destruction. Whether or not a work of art is
protected from destruction represents a
fundamentally different perception of the purpose
of moral rights. If integrity is meant to stress the
public interest in preserving a nation’s culture,
destruction is prohibited; if the right is meant to
emphasize the author’s personality, destruction is
seen as less harmful than the continued display
of deformed or mutilated work that misrepresents
the artist and destruction may proceed. (John
Carter, John Swing and John Veronis v. Helmsley-
Spear, Inc. and Associates, U.S. Court of Appeals for
2nd Circuit, 1 December 1995)
The author of a work shall, independently of the
economic rights in Section 177 or the grant of an
assignment or license with respect to such right,
have the right:
(1) Creator's right to be attributed or
credited whenever his work will be used
by another - to require that the authorship
of the works be attributed to him, in
particular, the right that his name, as far as
practicable, be indicated in a prominent way
on the copies, and in connection with the
public use of his work. (Section 193.1, IPC)
(2) To make any alterations of his work prior to,
or to withhold it from publication. (Section
193.2, IPC)
(3) Creator's right of integrity against
"derogatory treatment - to object to any
distortion, mutilation or other modification of,
400
 or other derogatory action in relation to, his
work which would be prejudicial to his honor
or reputation. (Section 193.3, IPC)
(4) Author's right against false attribution -
to restrain the use of his name with respect
to any work not of his own creation or in a
distorted version of his work. (Section 193.4,
IPC)
Right of Attribution in a Collective Work
A collective work is a work which has been
created by two or more natural persons at the
initiative and under the direction of another with
the understanding that it will be disclosed by the
latter under his own name and that contributing
natural persons will not be identified. (Section
171.2, IPC)
When an author contributes to a collective work,
his right to have his contribution attributed to him
is deemed waived unless he expressly reserves it.
(Section 196, IPC)
Editing, Arranging, and Adaptation of Work
In the absence of a contrary stipulation at the
same time an author licenses or permits another
to use his work, the necessary editing, arranging
or adaptation of such work, for publication,
broadcast, use in a motion picture, dramatization,
or mechanical or electrical reproduction in
accordance with the reasonable and customary
standards or requirements of the medium in
which the work is to be used, shall not be deemed
to contravene the author's rights secured by this
chapter. Nor shall complete destruction of a work
unconditionally transferred by the author be
deemed to violate such rights. (Section 197, IPC)
Waiver of moral rights
General Rule: An author may waive his
some but not all his moral rights by a written
instrument. (Sec. 195, IPC)
Exception: No such waiver shall be valid where
its effects are to permit another:
(1) To use the name of the author, or the title of
his work, or otherwise to make use of his
reputation with respect to any version or
adaptation of his work which, because of
alterations therein, would substantially tend
to injure the literary or artistic reputation of
another author. (Section 195.1, IPC)
(2) To use the name of the author with respect
to a work he did not create. (Section 195.2,
IPC)
Term of Moral Rights
The right of an author under Section 193.1 (right
to be attributed) shall last during the lifetime of
the author and in perpetuity after his death while
the rights under Sections 193.2 (right to make
alteration), Section 193.3 (right against
derogatory treatment), and Section 193.4 (right
against false attribution) shall be coterminous
with the economic rights, the moral rights shall
not be assignable or subject to license. The
person or persons to be charged with the
posthumous enforcement of these rights shall be
named in a written instrument, which shall be
filed with the National Library. In default of such
a person or persons, such enforcement shall
devolve upon either the author's heirs, and in
default of the heirs, the Director of the National
Library. (Section 198, IPC)
Person - for purposes of Section 198 of the IPC,
it shall mean any individual, partnership,
corporation, association, or society. The Director
of the National Library may prescribe reasonable
fees to be charged for his services in the
application of provisions of this Section. (Section
198.2, IPC)
Breach of Contract
An author cannot be compelled to perform his
contract to create a work or for the publication of
his work already in existence. However, he may
be held liable for damages for breach of such
contract. (Section 194, IPC)
Enforcement remedies for moral rights
Violation of any of moral rights shall entitle those
charged with their enforcement to the same
rights and remedies available to a copyright
401
owner. In addition, damages which may be
availed of under the Civil Code may also be
recovered. Any damage recovered after the
creator's death shall be held in trust for and
remitted to his heirs, and in default of the heirs,
shall belong to the government. (Section 199, IPC)
(c) Right to Proceeds in Subsequent
Transfers of Copyright (Droit De Suite
or Follow Up Rights)
In every sale or lease of an original work of
painting or sculpture or of the original manuscript
of a writer or composer, subsequent to the first
disposition thereof by the author, the author or
his heirs shall have an inalienable right to
participate in the gross proceeds of the sale or
lease to the extent of five percent (5%). This right
shall exist during the lifetime of the author and
for 50 years after his death. (Section 200, IPC)
Rights which are not covered under Droit
De Suite
(1) Prints
(2) Etchings
(3) Engravings
(4) Works of applied art, or
(5) Works of similar kind wherein the author
primarily derives gain from the proceeds of
reproductions. (Section 201, IPC)
5. OWNERSHIP OF A COPYRIGHT
Ownership of copyrighted material is
shown by proof of originality and
copyrightability. While it is true that where the
complainant presents a copyright certificate in
support of the claim of infringement, the validity
and ownership of the copyright is presumed. This
presumption, however, is rebuttable and it cannot
be sustained where other evidence in the record
casts doubt on the question of ownership, as in
the instant case. Moreover, the presumption of
validity to a certificate of copyright registration
merely orders the burden of proof. The applicant
should not ordinarily be forced, in the first
instance, to prove all the multiple facts that
underline the validity of the copyright unless the
respondent, effectively challenging them, shifts
the burden of doing so to the applicant. (Olaño vs.
Lim Eng Co, G.R. No. 195835. March 14, 2016)
Presumptions of Authorship
(1) The natural person whose name is indicated
on a work in the usual manner as the author
shall, in the absence of proof to the contrary,
be presumed to be the author of the work.
This is applicable even if the name is a
pseudonym, where the pseudonym leaves no
doubt as to the identity of the author. (Section
219.1, IPC)
(2) The person or body corporate whose name
appears on an audiovisual work in the usual
manner shall, in the absence of proof to the
contrary, be presumed to be the maker of
said work. (Section 219.2, IPC)
The copyright of a derivative work solely belongs
to the person who fixes an idea into a tangible
medium of expression. The law on copyright only
protects the expression of an idea, not the idea
itself. Thus, one who merely contributes concepts
or ideas is not deemed an author. (Republic v. Heirs
of Tupaz IV, G.R. No. 197335, September 7, 2020)
402
SUMMARY OF COPYRIGHT OWNERSHIP:
CREATION
Original literary and artistic
works of joint authorship
Work created by an author
during and in the course of
his employment
Commissioned Work (by a
person other than an
employer of the author
and who pays for it and
the work is made in
pursuance of the
commission)
Audiovisual work
Letters
Anonymous and
Pseudonymous Works
Audiovisual work
OWNER
Author of the work (Section 178.1, IPC)
General rule: Co-authors shall be the original owners of the copyright
in the absence of agreement, the co-authors’ rights shall be governed by the rules on
co-ownership
Exception: If the work consists of parts that can be used separately and the author of
each part can be identified, the author of each part, in the part that he has created.
(Section 178.2, IPC)
Employee: if the creation of the object of copyright is not a part of his regular duties
even if the employee uses the time, facilities and materials of the employer.
The employer, if the work is the result of the performance of his regularly-assigned
duties, unless there is an agreement, express or implied, to the contrary. (Section 178.3,
IPC)
As to ownership: to person who so commissioned the work
As to Copyright: Shall remain with the creator, unless there is a written stipulation to
the contrary (Section 178.4, IPC)
Producer, the author of the scenario, the composer of the music, the film director, and
the author of the work so adapted
However, subject to contrary or other stipulations among the creators, the producers
shall exercise the copyright to an extent required for the exhibition of the work in any
manner, except for the right to collect performing license fees for the performance of
musical compositions, with or without words, which are incorporated into the work.
(Section 178.5, IPC)
Writer but subject to the provisions of Article 723 of the Civil Code. (Sec. 178.6, IPC)
Letters and other private communications in writing are owned by the person to whom
they are addressed or delivered, but they cannot be published or disseminated without
the consent of the writer or his heirs (Art. 723, New Civil Code).
General Rule: Publishers shall be deemed to represent the authors of articles and other
writings published without the names of the authors or under pseudonyms.
Exception:
1. contrary appears
2. Pseudonyms or adopted name leaves no doubts as to the author’s identity,
3. if the author of the anonymous works discloses his identity. (Section 170, IPC)
Producer, the author of the scenario, the composer of the music, the film director, and
403
 the author of the work so adapted

However, subject to contrary or other stipulations among the creators, the producers
shall exercise the copyright to an extent required for the exhibition of the work in any
manner, except for the right to collect performing license fees for the performance of
musical compositions, with or without words, which are incorporated into the work.
(Section 178.5, IPC)

Letters Writer but subject to the provisions of Article 723 of the Civil Code. (Sec. 178.6, IPC)

Letters and other private communications in writing are owned by the person to whom
they are addressed or delivered, but they cannot be published or disseminated without
the consent of the writer or his heirs (Art. 723, New Civil Code).

Anonymous and General Rule: Publishers shall be deemed to represent the authors of articles and other
Pseudonymous Works writings published without the names of the authors or under pseudonyms.

Exception:
1. contrary appears
2. Pseudonyms or adopted name leaves no doubts as to the author’s identity,
3. if the author of the anonymous works discloses his identity. (Section 170, IPC)

DURATION OF COPYRIGHT

TYPE OF WORK DURATION (+ = AFTER DEATH)

Single creator / Newspaper article Life time and 50 years after death of creator. (Sec. 213.1, IPC)
of creator

Lifetime of last surviving co-creator and 50 years after death of last

Joint creator
surviving co-creator. (Sec. 213.2, IPC)

50 years from the date on which the work was first lawfully published
Published Anonymous or If the author’s identity is revealed or is no longer in doubt before the 50-
pseudonymous year period, the provisions on original and derivative works, as well as
work works of joint authorship, shall apply. (Sec. 213.3, IPC)

Unpublished Anonymous or 50 years counted from the making of the work (Sec. 213.3, IPC)
pseudonymous
work

Work of applied art 25 years from date of making or creation. (Sec. 213.4, IPC)

Published – 50 years from publication

Photographic work.
Unpublished – 50 years from from making. (Sec. 213.5, IPC)

Audio-visual Published – 50 years from publication

works including those produced by
process analogous to photography Unpublished – 50 years from from making. (Sec. 213.6, IPC)
or any process for making audio-

404
 visual recordings
The term of protection subsequent to the death of the author shall run from the date of his death or of
publication, but such terms shall always be deemed to begin on the first day of January of the year following
the event which gave rise to them. (Section 214, IPC)
6. LIMITATIONS ON COPYRIGHT
The following acts shall not constitute
infringement of copyright:
(a) The recitation or performance of a work, once
it has been lawfully made accessible to the
public, if done privately and free of charge or
if made strictly for a charitable or religious
institution or society. (Section 184.1[a], IPC)
(b) The making of quotations from a published
work if they are compatible with fair use and
only to the extent justified for the purpose,
including quotations from newspaper articles
and periodicals in the form of press
summaries, provided, that the source and the
name of the author, if appearing on the work,
are mentioned. (Section 184.1[b], IPC)
The private reproduction of a published
work in a single copy, where the
reproduction is made by a natural person
exclusively for research and private study,
shall be permitted, without the authorization of
the owner of copyright in the work. (Section 187.1,
IPC)
However, the permission granted under
Subsection 187.1 shall not extend to the
reproduction of:
i. A work of architecture in the form of building
or other construction;
ii. An entire book, or a substantial part thereof,
or of a musical work in graphic form by
reprographic means;
iii. A compilation of data and other materials;
iv. A computer program except as provided in
Section 189; and
v. Any work in cases where reproduction would
unreasonably conflict with a normal
exploitation of the work or would otherwise
unreasonably prejudice the legitimate
interests of the author. (n)
(c) The reproduction or communication to the
public by mass media of articles on current
political, social, economic, scientific or
religious topic, lectures, addresses, and other
works of the same nature, which are
delivered in public, if such use is for
information purposes and has not been
expressly reserved, provided that the source
is clearly indicated. (Section 184.1[c], IPC)
Reproduction is the making of one or more
copies, temporary or permanent, in whole or
in part, of a work or a sound recording in any
manner or form without prejudice to the
provisions of Section 185 of Republic Act No.
8293. (Sec. 171.9 as amended by Rep. Act No.
10372)
Under this provision, the 2016 Presidential
and Vice-Presidential debates fall under
“addresses and other works of the same
nature.” Thus, the copyright conditions for
the debates are: (1) the
reproduction/communication to the public by
mass media of the debates is for information
purposes; (2) the debates have not been
expressly reserved by the Lead Networks
(copyright holders); and (3) the source is
clearly indicated. (Rappler, Inc. vs. Bautista,
G.R. No. 222702. April 5, 2016)
(d) The reproduction and communication to the
public of literary, scientific or artistic works as
part of reports of current events by means of
photography, cinematography or
broadcasting to the extent necessary for the
purpose. (Section 184.1[d], IPC)
(e) The inclusion of a work in a publication,
broadcast, or other communication to the
public, sound recording or film, if such
405
 inclusion is made by way of illustration for
teaching purposes and is compatible with
fair use, provided that the source and of the
name of the author, if appearing in the work,
are mentioned. (Section 184.1[e], IPC)
(f) The recording made in schools, universities,
or educational institutions of a work included
in a broadcast for the use of such schools,
universities or educational institutions,
provided that such recording must be
deleted within a reasonable period after they
were first broadcast, provided, further, that
such recording may not be made from
audiovisual works which are part of the
general cinema repertoire of feature films
except for brief excerpts of the work. (Section
184.1[f], IPC)
(g) The making of ephemeral recordings by a
broadcasting organization by means of its
own facilities and for use in its own
broadcast. (Section 184.1[g], IPC)
(h) The use made of a work by or under the
direction or control of the government, by
the National Library or by educational,
scientific or professional institutions where
such use is in the public interest and is
compatible with fair use. (Section 184.1[h],
IPC)
This presupposes the government's use of a
work for public interest. Unlike in the
exercise of power of eminent domain, no
payment of just compensation is necessary
for such use.
(i) The public performance or the
communication to the public of a work, in a
place where no admission fee is charged in
(j) respect of such public performance or
communication, by a club or institution for
charitable or educational purpose only,
whose aim is not profit making, subject to
such other limitations as may be provided in
the Regulations. (Section 184.1[i], IPC)
Communication to the public means any
communication to the public, including
broadcasting, rebroadcasting, retransmitting by
cable, broadcasting and retransmitting by
satellite, and includes the making of a work
available to the public by wire or wireless means
in such a way that members of the public may
access these works from a place and time
individually chosen by them. (Section 171.3, IPC)
Public performance, in the case of a work
other than an audiovisual work, is the recitation,
playing, dancing, acting or otherwise performing
the work, either directly or by means of any
device or process; in the case of an audiovisual
work, the showing of its images in sequence and
the making of the sounds accompanying it
audible; and, in the case of a sound recording,
making the recorded sounds audible at a place or
at places where persons outside the normal circle
of a family and that family’s closest social
acquaintances are or can be present, irrespective
of whether they are or can be present at the same
place and at the same time, or at different places
and/or at different times, and where the
performance can be perceived without the need
for communication within the meaning of
Subsection 171.3. (Section 171.6, IPC)
(k) Public display of the original or a copy of the
work not made by means of a film, slide,
television image or otherwise on screen or
by means of any other device or process,
provided that either the work has been
published, or, that original or the copy
displayed has been sold, given away or
otherwise transferred to another person by
the author or his successor in title. (Section
184.1[j], IPC)
(l) Any use made of a work for the purpose of
any judicial proceedings or for the giving of
professional advice by a legal practitioner.
(Section 184.1[k], IPC)
(m) The reproduction or distribution of published
articles or materials in a specialized format
exclusively for the use of the blind, visually-
and reading-impaired persons: Provided,
That such copies and distribution shall be
made on a nonprofit basis and shall indicate
the copyright owner and the date of the
original publication. (Section 184.1[l], IPC)
(n) Any library or archive whose activities are not
for profit may, without the authorization of
the author or copyright owner, make a limited
406
 number of copies of the work, as may be
necessary for such institutions to fulfill their
mandate, by reprographic reproduction:
(1) Where the work by reason of its fragile
character or rarity cannot be lent to user in
its original form;
(2) Where the works are isolated articles
contained in composite works or brief
portions of other published works and the
reproduction is necessary to supply them;
when this is considered expedient, to persons
requesting their loan for purposes of research
or study instead of lending the volumes or
booklets which contain them; and
(3) Where the making of such limited copies is in
order to preserve and, if necessary in the
event that it is lost, destroyed or rendered
unusable, replace a copy, or to replace, in the
permanent collection of another similar
library or archive, a copy which has been lost,
destroyed or rendered unusable and copies
are not available with the publisher. (Section
188, IPC)
(o) The reproduction in one (1) back-up copy or
adaptation of a computer program shall be
permitted, without the authorization of the
author of, or other owner of copyright in, a
computer program, by the lawful owner of
That computer program: Provided, That the
copy or adaptation is necessary for:
(1) The use of the computer program in
conjunction with a computer for the
purpose, and to the extent, for which the
computer program has been obtained;
and
(2) Archival purposes, and, for the
replacement of the lawfully owned copy
of the computer program in the event
that the lawfully obtained copy of the
computer program is lost, destroyed or
rendered unusable. (Section 189.1, IPC)
(p) The provisions of this section shall be
interpreted in such a way as to allow the work
to be used in a manner which does not
conflict with the normal exploitation of the
work and does not unreasonably prejudice
the right holder's legitimate interests. (Section
184.2, IPC)
7. DOCTRINE OF FAIR USE
Fair use has been defined as a privilege to use
the copyrighted material in a reasonable manner
without the consent of the copyrighted owner or
as copying the theme or ideas rather than their
expression. xxx Commercial use of the
copyrighted work can be weighed against fair
use. (ABS-CBN Corp. vs. Gozon, G.R. No. 195956,
March 11, 2015)
The fair use of a copyrighted work for criticism,
comment, news reporting, teaching including
limited number of copies for classroom use,
scholarship, research, and similar purposes is not
an infringement of copyright. (Section 185.1, IPC)
Factors in determining if the use of a
copyrighted work is within the limits of the
doctrine of fair use:
In determining whether the use made of a work
in any particular case is fair use, the factors to be
considered shall include:
(1) The purpose and character of the use,
including whether such use is of a commercial
nature or is for non-profit educational
purposes;
(2) The nature of the copyrighted work;
(3) The amount and substantiality of the portion
used in relation to the copyrighted work as a
whole; and
(4) the effect of the use upon the potential
market for or value of the copyrighted work.
(Section 185.1, IPC)
The “Transformative Test” is generally used in
reviewing the purpose and character of the usage
of the copyrighted work.The court must look into
whether the copy of the work adds “new
expression, meaning or message” to transform it
into something else. (ABS-CBN Corporation vs.
Gozon, G.R. No. 195196, March 11, 2015)
“Meta-use” can also occur without necessarily
transforming the copyrighted work used. (ibid.)
407
Decompilation, which is the reproduction of the
code and translation of the forms of a computer
program to achieve the interoperability of an
independently created computer program with
other programs, may also constitute fair use
under the criteria established by this section, to
the extent that such decompilation is done for the
purpose of obtaining the information necessary to
achieve such interoperability. (Section 185.1, IPC)
Above factors also applicable to
unpublished work
The fact that a work is unpublished shall not by
itself bar a finding of fair use if such finding is
made upon consideration of all the above factors.
(Section 185.2, IPC)
Importation for personal purposes
The importation of a copy of a work by an
individual for his personal purposes shall be
permitted without the authorization of the author
of or other owner of copy right.
R.A. No. 10732 deleted the express provisions in
the IPC, specifically Secs. 190.1 and 190.2,
regarding personal importation but the opinion of
the IPO is that this has the effect only of removing
the limit to the number of legitimate copies that
can be imported for personal use. (Aquino and
Sundiang, Sr., Review on Commercial Law, 2022
Edition, pp. 654-655)
8. COPYRIGHT INFRINGEMENT
Infringement of a copyright is a trespass on a
private domain owned and occupied by the owner
and, therefore, protected by law.
How committed
Any person infringes a right protected when one:
(a) Directly commits an infringement;
(b) Benefits from the infringing activity of
another person who commits an infringement
if the person benefiting has been given notice
of the infringing activity and has the right and
ability to control the activities of the other
person;
(c) With knowledge of infringing activity,
induces, causes or materially contributes to
the infringing conduct of another. (Section
216, IPC)
It also includes the act of any person who at the
time when copyright subsists in a work has in his
possession an article which he known, or ought
to know, to be an infringing copy of the work for
the purpose of:
(a) Selling, letting for hire, or by way of trade
offering or exposing for sale, or hire, the
article
Note: The mere sale of the illicit copies of
the software programs was enough by itself
to show the existence of probable cause for
copyright infringement. There was no need
for the petitioner to still prove who copied,
replicated or reproduced the software
programs. (Microsoft Corporation vs.
Manansala, G.R. No. 166391, October 21, 2015)
(b) Distributing the article for purpose of trade,
or for any other purpose to an extent that will
prejudice the rights of the copyright owner in
the work; or
(c) Trade exhibit of the article in public. (Section
217.3, IPC)
Copyright infringement is committed by any
person who shall use original literary or artistic
works, or derivative works, without the copyright
owner’s consent in such a manner as to violate
the foregoing copy and economic rights. For a
claim of copyright infringement to prevail, the
evidence on record must demonstrate: (1)
ownership of a validly copyrighted material by the
complainant; and (2) infringement of the
copyright by the respondent. (Olaño vs. Lim Eng Co,
G.R. No. 195835. March 14, 2016)
What Constitutes Infringement
To constitute infringement, the usurper must
have copied or appropriated the original work of
an author or copyright proprietor, absent
copying, there can be no infringement of
copyright. Unlike a patent, a copyright gives no
408
exclusive right to the art disclosed; protection is
given only to the expression of the idea · not the
idea itself. (Olaño vs. Lim Eng Co, G.R. No. 195835.
March 14, 2016)
Infringement consists in the doing by any person,
without the consent of the owner of the
copyright, of anything the sole right to do which
is conferred by statute on the owner of the
copyright.
It can cover a whole range of acts from copying,
assembling, packaging to marketing, including
the mere offering for sale of counterfeit goods.
(Habana et al vs. Robles et al., G.R. No. 131522, July
19, 1999)
Copyright infringement is thus committed by any
person who shall use original literary or artistic
works, or derivative works, without the copyright
owner’s consent in such a manner as to violate
the foregoing copy and economic rights.
xxx
For a claim of copyright to prevail, the evidence
on record must demonstrate: (1) ownership of a
validly copyrighted material by the complainant;
and (2) infringement of the copyright by the
respondent.
xxx
What was copyrighted were their
sketches/drawings only, and not the actual hatch
doors themselves. To constitute infringement, the
usurper must have copied or appropriated the
original work of an author or copyright proprietor,
absent copying, there can be no infringement of
copyright. Absent originality and copyrightability
as elements of a valid copyright ownership, no
infringement can subsist. (Olaño vs. Lim Eng Co,
G.R. No. 195835. March 14, 2016)
Substantial Reproduction
It is not necessarily required that the entire
copyrighted work, or even a large portion of it, be
copied. If so much is taken that the value of the
original work is substantially diminished, there is
an infringement of copyright and to an injurious
extent, the work is appropriated. In cases of
infringement, copying alone is not what is
prohibited. The copying must produce an
“injurious effect.” (Habana et al vs. Robles et al., G.R.
No. 131522, July 19, 1999)
Knowledge not an Element of Infringement
Knowledge of infringement is material only when
a person is charged of aiding and abetting a
copyright infringement. The liability for copyright
infringement is in the nature of strict liability. It
does not require mens rea or culpa. (ABS-CBN
Corp. vs. Gozon, G.R. No. 195956, March 11, 2015)
Lack of intent to pirate is not a defense.
Remedies against Copyright Infringement
Any person infringing a right protected under this
law shall be liable:
(a) Injunctive relief. (Section 216.1 (a), IPC)
(b) Impoundment. (Section 216.1 (c), IPC)
(c) Destruction. (Section 216.1 (d), IPC)
(d) Search and Seizure. (Section 216.2, IPC)
(e) Damages. (Section 216.1 (b), Section 216.1 (e),
Section 199, Section 226, IPC)
(f) Other relief including moral and exemplary.
(Section 216.1 (e), IPC)
(g) Imprisonment. (Section 217.1, IPC)
Jurisdiction
Without prejudice to the provisions of Subsection
7.1(c), actions under this Act shall be cognizable
by the courts with appropriate jurisdiction under
existing law. (Section 225, IPC)
Prescription of Action for Damages
No damages may be recovered under this Act
after the lapse of four years from the time the
cause of action arose. (Section 226, IPC)
Affidavit Evidence
In an action under this law, an affidavit made
before a notary public by or on behalf of the
owner of the copyright in any work or other
subject matter and stating that:
(a) At the time specified therein, copyright
subsisted in the work or other subject matter;
409
(b) He or the person named therein is the owner
of the copyright; and
(c) The copy of the work or other subject matter
annexed thereto is a true copy thereof.
The affidavit shall be admitted in evidence in any
proceedings under this law and shall be prima
facie proof of the matters therein stated until the
contrary is proved, and the court before which
such affidavit is produced shall assume that the
affidavit was made by or on behalf of the owner
of the copyright. (Section 218.1, IPC)
Presumptions in an action against
copyright infringement
(a) Copyright shall be presumed to subsist in the
work or other subject matter to which the
action relates if the defendant does not put
in issue the question whether copyright
subsists in the work or other subject matter;
and
(b) Where the subsistence of the copyright is
established, the plaintiff shall be presumed to
be the owner of the copyright if he claims to
be the owner of the copyright and the
defendant does not put in issue the question
of his ownership.
(c) Where the defendant, without good faith,
puts in issue the questions of whether
copyright subsists in a work or other subject
matter to which the action relates, or the
ownership of copyright in such work or
VI. ELECTRONIC COMMERCE ACT
(R.A. No. 8792)
SALIENT FEATURES OF R.A. No. 8792
GENERAL PROVISIONS
Objective
The E-Commerce Act aims to facilitate domestic
and international dealings, transactions,
arrangements agreements, contracts and
exchanges and storage of information through
the utilization of electronic, optical and similar
medium, mode, instrumentality and technology
to recognize the authenticity and reliability of
electronic documents related to such activities
subject matter, thereby occasioning
unnecessary costs or delay in the
proceedings, the court may direct that any
costs to the defendant in respect of the action
shall not be allowed by him and that any
costs occasioned by the defendant to other
parties shall be paid by him to such other
parties. (Section 218.2, IPC)
International Registration of Works
A statement concerning a work, recorded in an
international register in accordance with an
international treaty to which the Philippines is or
may become a party, shall be construed as true
until the contrary is proved except:
(a) Where the statement cannot be valid under
this Act or any other law concerning
intellectual property. (Section 220.1, IPC)
(b) Where the statement is contradicted by
another statement recorded in the
international register. (Section 220.2, IPC)
Disclosure of Information
Where any article or its packaging or an
implement for making it is seized or detained
under a valid search and seizure is, or is
reasonably suspected to be, by an authorized
enforcement officer, in violation of this law, the
said officer shall, wherever reasonably
practicable, notify the owner of the copyright in
question or his authorized agent of the seizure or
detention, as the case may be. (Section 220A, IPC)
and to promote the universal use of electronic
transaction in the government and general public.
(Sec. 3, RA 8792)
Sphere of Application
The E-Commerce Act Act shall apply to any kind
of data message and electronic document used in
the context of commercial and non-commercial
activities to include domestic and international
dealings, transactions, arrangements,
agreements contracts and exchanges and storage
of information. (Sec. 4, RA 8792)
Definition of Terms
410
Information and Communications System
Refers to a system intended for and capable of
generating, sending, receiving, storing, or
otherwise processing electronic data messages or
electronic documents and includes the computer
system or other similar device by or in which data
is recorded or stored and any procedures related
to the recording or storage of electronic data
message or electronic document. (Sec. 5[d], RA
8792; Sec. 1[l], Rule 2, Rules on Electronic Evidence)
Electronic data message
Refers to information generated, sent, received
or stored by electronic, optical or similar means.
(Sec. 5[c], RA 8792; Sec. 1[g], Rule 2, Rules on
Electronic Evidence)
Text messages have been classified as
“ephemeral electronic communication. (Nuez vs.
Cruz-Apao, A.M. No. CA-05-18-P)
Electronic document
Refers to information or the representation of
information, data, figures, symbols or other
modes of written expression, described or
however represented, by which a right is
established or an obligation extinguished, or by
which a fact may be proved and affirmed, which
is received, recorded, transmitted, stored,
processed, retrieved or produced electronically.
(Sec. 5[f], RA 8792)
NOTE: It includes digitally signed documents
and any print-out or output, readable by sight
or other means, which accurately reflects the
electronic data message or electronic document.
For purposes of these Rules, the term “electronic
document” may be used interchangeably with
“electronic data message”. (Sec. 1[h], Rule 2, Rules
on Electronic Evidence)
The rules use the word “information” to define an
electronic document received, recorded,
transmitted, stored, processed, retrieved or
produced electronically. This would suggest that
an electronic document is relevant only in terms
of the information contained therein, similar to
any other document which is presented in
evidence as proof of its contents. (National Power
Corporation vs. Codilla, Jr., G.R. No. 170491, April 03,
2007)
Electronic signature
Refers to any distinctive mark, characteristic
and/or sound in electronic form, representing the
identity of a person and attached to or logically
associated with the electronic data message or
electronic document or any methodology or
procedures employed or adopted by a person and
executed or adopted by such person with the
intention of authenticating or approving an
electronic data message or electronic document.
(Sec. 5[e], RA 8792; Sec. 1[j], Rule 2, Rules on
Electronic Evidence)
As gleamed from the wording of the law, the
signature may be any distinctive mark or
characteristic that represents the identity of a
person. (Bagumbayan-VNP Movement, Inc. vs.
Commission on Elections, G.R. No. 206719, April 10,
2019)
An electronic signature may come in two forms:
(1) a distinctive mark, characteristic or sound
in electronic form; or
(2) a method or procedure employed by a
person with the intention of approving or
authenticatingan electronic document.
(Capalla v. Commission on Elections, G.R. Nos.
201112, 201121, 201127 & 201413, June 13,
2012)
Digital signature
Refers to an electronic signature consisting of a
transformation of an electronic document or an
electronic data message using an asymmetric or
public cryptosystem such that a person having
the initial untransformed electronic document
and the signer’s public key can accurately
determine:
(a) Whether the transformation was created
using the private key that corresponds to the
signer’s public key; and
(b) Whether the initial electronic document had
been altered after the transformation was
412
 made. (Sec. 1[e], Rule 2, Rules on Electronic
Evidence)
Digitally signed
Refers to an electronic document or electronic
data message bearing a digital signature verified
by the public key listed in a certificate. (Sec. 1[f],
Rule 2, Rules on Electronic Evidence)
Electronic key
Refers to a secret code which secures and
defends sensitive information that crosses over
public channels into a form decipherable only
with a matching electronic key. (Sec. 5[g], RA
8792; Sec. 1[i], Rule 2, Rules on Electronic Evidence)
Persons regulated under E-Commerce Act
The following are the persons regulated under
the E-Commerce Act:
(1) Addressee refers to a person who is
intended by the originator to receive the
electronic data message or electronic
document, but does not include a person
acting as an intermediary with respect to that
electronic data message or electronic data
document. (Sec. 5[a], RA 8782)
(2) Intermediary refers to a person who in
behalf of another person and with respect to
a particular electronic document sends,
receives and / or stores or provides other
services in respect of that electronic data
message or electronic document. (Sec. 5[h],
RA 8792)
(3) Originator refers to a person by whom, or
on whose behalf, the electronic document
purports to have been created, generated
and/or sent. The term does not include a
person acting as an intermediary with respect
to that electronic document. (Sec. 5[i], RA
8792)
(4) Service provider refers to a provider of:
(a) Online services or network access or the
operator of facilities therefor including
entities offering the transmission,
routing, or providing of connections for
online communications, digital or
otherwise, between or among points
specified by a user, of electronic
documents of the user's choosing; or
(b) The necessary technical means by which
electronic documents of an originator
may be stored and made accessible to
designated or undesignated third party.
Such service providers shall have no
authority to modify or alter the content
of the electronic document received or to
make any entry therein on behalf of the
originator, addressee or any third party
unless specifically authorized to do so,
and who shall retain the electronic
document in accordance with the specific
request or as necessary for the purpose
of performing the services it was
engaged to perform. (Sec. 5[j], RA 8792)
A. LEGAL RECOGNITION OF ELECTRONIC
DATA MESSAGES, DOCUMENTS, AND
SIGNATURES
LEGAL RECOGNITION OF ELECTRONIC
DATA MESSAGES
Information shall not be denied legal effect,
validity or enforceability solely on the grounds
that it is in the data message purporting to give
rise to such legal effect, or that it is merely
referred to in that electronic data message. (Sec.
6, RA 8792)
Attribution of Electronic Data Messages
(1) An electronic data message or electronic
document is that of the originator if it was
sent by the originator himself.
(2) As between the originator and the addressee,
an electronic data message or electronic
document is deemed to be that of the
originator if it was sent:
(a) by a person who had the authority to
act on behalf of the originator with
413
 respect to that electronic data message
or electronic document; or
(b) by an information system programmed
by, or on behalf of the originator to
operate automatically.
(3) As between the originator and the addressee,
an addressee is entitled to regard an
electronic data message or electronic
document as being that of the originator, and
to act on that assumption, if:
(a) in order to ascertain whether the
electronic data message or electronic
document was that of the originator, the
addressee properly applied a procedure
previously agreed to by the originator for
that purpose; or
(b) the electronic data message or electronic
document as received by the addressee
resulted from the actions of a person
whose relationship with the originator or
with any agent of the originator enabled
that person to gain access to a method
used by the originator to identify
electronic data messages as his own.
(4) Paragraph (3) does not apply:
(a) as of the time when the addressee has
both received notice from the originator
that the electronic data message or
electronic document is not that of the
originator, and has reasonable time to
act; accordingly, or
(b) in a case within paragraph (3) sub-
paragraph (b), at any time when the
addressee knew or should have known,
had it exercised reasonable care of used
any agreed procedure, that the electronic
data message or electronic document
was not that of the originator.
(5) Where an electronic data message or
electronic document is that of the originator
or is deemed to be that of the originator, or
the addressee is entitled to act on that
assumption, then, as between the originator
and the addressee, the addressee is entitled
to regard the electronic data message or
electronic document as received as being
what the originator intended to send, and to
act on that assumption. The addressee is not
so entitled when it knew or should have
known, had it exercised treasonable care or
used any agreed procedure, that the
transmission resulted in any error in the
electronic data message or electronic
document as received.
(6) The addressee is entitled to regard each
electronic data message or electronic
document received as a separate electronic
data message or electronic document and to
act on that assumption, except to the extent
that it duplicates another electronic data
message or electronic document and the
addressee knew or should have known, had
it exercised reasonable care or used any
agreed procedure, that the electronic data
message or electronic document was a
duplicate. (Sec. 18, RA 8792)
LEGAL RECOGNITION OF ELECTRONIC
DOCUMENTS
Equivalent compliance
Electronic documents shall have the legal effect,
validity or enforceability as any other document
or legal writing.
1. Agreement must be in writing. Where the
law requires a document to be in writing,
that requirement is met by an electronic
document if:
(a) It maintains its integrity and
reliability; and
(b) It can be authenticated so as to be
usable for subsequent reference, in that:
i. The electronic document has remained
complete and unaltered, apart from the
addition of any endorsement and any
authorized change, or any change
which arises in the normal course of
414
 communication, storage and display;
and
ii. The electronic document is reliable in
the light of the purpose for which it was
generated and in the light of all
relevant circumstances. (Sec. 7[a], RA
8792)
NOTE: Paragraph (a) applies whether
the requirement therein is in the form of
an obligation or whether the law simply
provides consequences for the document
not being presented or retained in its
original form. (Sec. 7[b], RA 8792)
2. Document must be in original form.
Where the law requires that a document be
presented or retained in its original
form, that requirement is met by an
electronic document if:
(a) There exists a reliable assurance as to
the integrity of the document from
the time when it was first generated in its
final form; and
(b) That document is capable of being
displayed to the person to whom it
is to be presented: Provided, That no
provision of this Act shall apply to vary
any and all requirements of existing laws
on formalities required in the execution
of documents for their validity. (Sec. 7[c],
RA 8792)
Rule on Original Documents
(1) Where the law requires information to be
presented or retained in its original form, that
requirement is met by an electronic data
message or electronic document if;
(a) The integrity of the information from
the time when it was first generated in its
final form, as an electronic data message
or electronic document is shown by
evidence aliunde or otherwise; and
(b) Where it is required that information
be presented, that the information is
capable of being displayed to the
person to whom it is to be presented.
(2) Paragraph (1) applies whether the
requirement therein is in the form of an
obligation or whether the law simply provides
consequences for the information not being
presented or retained in its original form.
(3) For the purpose of subparagraph (a) of
paragraph (1):
(a) The criteria for assessing integrity
shall be whether the information has
remained complete and unaltered,
apart from the addition of any
endorsement and any change which
arises in the normal course of
communication, storage and display; and
(b) The standard of reliability required
shall be assessed in the light of
purpose for which the information
was generated and in the light of all
the relevant circumstances. (Sec. 10,
RA 8792)
Instances when copies of a document are
equally regarded as originals:
(1) When a document is in two or more copies
executed at or about the same time, with
identical contents, all such copies are equally
regarded as originals.
(2) When an entry is repeated in the regular
course of business, one being copied from
another at or near the time of the
transaction, all the entries are likewise
equally regarded as originals.
(3) When a document is in two or more copies
executed at or about the same time with
identical contents, or is a counterpart
produced by the same impression as the
original, or from the same matrix, or by
mechanical or electronic re-recording, or by
chemical reproduction, or by other equivalent
techniques which accurately reproduces the
415
 original, such copies or duplicates shall be
regarded as the equivalent of the original.
Apparently, "duplicate original copies" or
"multiple original copies" wherein two or more
copies are executed at or about the same time
with identical contents are contemplated in 1 and
3 above. If the copy is generated after the
original is executed, it may be called a "print-out
or output" based on the definition of
an electronic document, or a "counterpart" based
on Section 2, Rule 4 of the Rules
on Electronic Evidence. (RCBC Bankard Services
Corp. v. Oracion, Jr., G.R. No. 223274, June 19, 2019)
Evidence
For evidentiary purposes, an electronic document
shall be the functional equivalent of a written
document under existing laws. (Sec. 7, RA 8792)
Transport Document
If a transport document has been issued in the
form of electronic document or data message and
paper document shall subsequently be issued to
modify the existing transportation agreement
either to grant, acquire, renounce, surrender,
transfer, or negotiate a right or to acquire or
transfer obligation, it is mandatory that: (i) the
electronic document or data message should be
first terminated, and (ii) the termination should
be stated in the paper document. (Sec. 26, RA
8792; Aquino and Sundiang, Sr., Reviewer on
Commercial Law, 2022 Edition, p. 10)
LEGAL RECOGNITION OF ELECTRONIC
SIGNATURES
(iii) Enables the identification of its originator and
Validity of electronic signatures
An electronic signature on the electronic
document shall be equivalent to the signature of
a person on a written document if that signature
is proved by showing that a prescribed
procedure, not alterable by the parties interested
in the electronic document, existed under which:
(a) A method is used to identify the party
sought to be bound and to indicate said
party's access to the electronic document
necessary for his consent or approval through
the electronic signature;
(b) Said method is reliable and appropriate
for the purpose for which the electronic
document was generated or communicated,
in the light of all circumstances, including any
relevant agreement;
(c) It is necessary for the party sought to
be bound, to proceed further with the
transaction, to have executed or provided
the electronic signature; and
(d) The other party is authorized and
enabled to verify the electronic
signature and to make the decision to
proceed with the transaction authenticated
by the same. (Sec. 8, RA 8792)
Retention of Electronic Data Message or
Electronic Document
The requirement in any provision of law that
certain documents be retained in their original
form is satisfied by retaining them in the form of
an electronic data message or electronic
document which:
(i) Remains accessible so as to be usable for
subsequent reference;
(ii) Is retained in the format in which it was
generated, sent or received, or in a format
which can be demonstrated to accurately
represent the electronic data message or
electronic document generated, sent or
received;
addressee, as well as the determination of
the date and the time it was sent or received.
The above requirement is satisfied by using the
services of a third party, provided that the
conditions set fourth in subparagraph s (i), (ii)
and (iii) are met. (Sec. 13, RA 8792)
416
Recognition by Parties of Electronic Data
Message or Electronic Document
As between the originator and the addressee of
an electronic data message or electronic
document, a declaration of will or other
statement shall not be denied legal effect, validity
or enforceability solely on the ground that it is in
the form of an electronic data message. (Sec. 17,
RA 8792)
B. PRESUMPTION RELATING TO
ELECTRONIC SIGNATURES
Presumption relating to electronic
signature
In any proceedings involving an electronic
signature, it shall be presumed that:
(a) The electronic signature is the signature of
the person to whom it correlates; (Sec. 9[a],
RA 8792)
(b) The electronic signature was affixed by that
person with the intention of signing or
approving the electronic document UNLESS
the person relying on the electronically
signed electronic document knows or has
noticed the defects in or unreliability of the
signature or reliance on the electronic
signature is not reasonable under the
circumstances; (Sec. 9[b], RA 8792)
(c) The electronic signature was affixed by that
person with the intention of authenticating or
approving the electronic document to which
it is related or to indicate such person’s
consent to the transaction embodied therein;
(Sec. 3[b], Rule 6, Rules on Electronic Evidence)
and
(d) The methods or processes utilized to affix or
verify the electronic signature operated
without error or fault. (Sec. 3[c], Rule 6, Rules
on Electronic Evidence)
Disputable presumptions relating to digital
signatures
Upon the authentication of a digital signature, it
shall be presumed, in addition to those
mentioned in the immediately preceding section,
that:
(a) The information contained in a certificate is
correct;
(b) The digital signature was created during the
operational period of a certificate;
(c) The message associated with a digital
signature has not been altered from the time
it was signed; and
(d) A certificate had been issued by the
certification authority indicated therein. (Sec.
4, Rule 6, Rules on Electronic Evidence)
C. ADMISSIBILITY AND EVIDENTIAL
WEIGHT OF ELECTRONIC DATA
MESSAGE OR ELECTRONIC DOCUMENT
Best Evidence Rule under the Rules on
Electronic Evidence (A.M. No. 01-7-01-SC.
Re: Rules on Electronic Evidence)
Original of an electronic document
An electronic document shall be regarded as the
equivalent of an original document under the Best
Evidence Rule if it is a printout or output readable
by sight or other means, shown to reflect the data
accurately. (Sec. 1, Rule 4, Rules on Electronic
Evidence)
Copy of the electronic document as
equivalent of the original
GENERAL An electronic document is
RULE: equivalent to an original in the
following instances:
(a) When a document is in two or
more copies executed at or
about the same time with
identical contents;
(b) It is a counterpart produced
by the same impression as
the original, or from the same
matrix, or by mechanical or
electronic re-recording, or by
chemical reproduction;
(c) By other equivalent
techniques which accurately
reproduce the original, such
copies or duplicates shall be
417
 regarded as the equivalent of of proving its authenticity. (Sec. 1, Rule 5, Rules on
the original. (Sec. 2, Rule 4, Electronic Evidence)
Rules on Electronic Evidence)
EXCEPTION: Notwithstanding the foregoing,
copies or duplicates shall not be
admissible to the same extent as
the original if:
(a) A genuine question is raised
as to the authenticity of the
original; or
(b) In the circumstances, it would
be unjust or inequitable to
admit a copy in lieu of the
original. (Sec. 2, Rule 4, Rules
on Electronic Evidence)

Rules for proving an electronic document

Affidavit of evidence

All matters relating to the admissibility and

evidentiary weight of an electronic document may
be established by an affidavit stating facts of
direct personal knowledge of the affiant or based
on authentic records. The affidavit must
affirmatively show the competence of the affiant
to testify on the matters contained therein. (Sec.
1, Rule 9, Rules on Electronic Evidence)

Cross-examination of deponent

The affiant shall be made to affirm the contents

of the affidavit in open court and may be cross-
examined as a matter of right by the adverse
party. (Sec. 2, Rule 9, Rules on Electronic Evidence)

In the absence of such authentication through

the affidavit of the custodian or other qualified
person, the said annexes or attachments cannot
be admitted and appreciated as business records
and excepted from the rule on hearsay evidence.
(RCBC Bankard Services Corporation vs. Oracion, Jr.,
G.R. No. 223274, June 19, 2019)

Burden of proving authenticity

The person seeking to introduce an electronic

document in any legal proceeding has the burden

418
 Electronic Documents
Admissibility An electronic document is admissible in
evidence if it complies with the rules
on admissibility prescribed by the
Rules of Court and related laws and is
authenticated in the manner
prescribed by these Rules. (Sec. 2,
Rule 3, Rules on Electronic Evidence)
Manner of Before any private electronic document
Authentication offered as authentic is received in
evidence, its authenticity must be proved
by any of the following means:
(a) by evidence that it had been
digitally signed by the person
purported to have signed the same;
(b) by evidence that other appropriate
security procedures or devices as
may be authorized by the Supreme
Court or by law for authentication of
electronic documents were applied
to the document; or
(c) by other evidence showing its
integrity and reliability to the
satisfaction of the judge. (Sec. 2,
Rule 5, Rules on Electronic
Evidence)
Electronic Signature
An electronic signature or a digital
signature authenticated in the manner
prescribed hereunder is admissible in
evidence as the functional equivalent
of the signature of a person on a
written document. (Sec. 1, Rule 6, Rules on
Electronic Evidence)
An electronic signature may be
authenticated in any of the following
manner:
(a) By evidence that a method or
process was utilized to establish a
digital signature and verify the same;
(b) By any other means provided by law;
or
(c) By any other means satisfactory to
the judge as establishing the
genuineness of the electronic
signature. (Sec. 2, Rule 6, Rules on
Electronic Evidence)
419
Evidential Weight

Electronic Commerce Act Rules on Electronic Evidence

Evidential weight Factors in determining evidential weight of an electronic

document
In assessing the evidential In assessing the evidentiary weight of an electronic document, the
weight of an electronic data following factors may be considered:
message or electronic (a) The reliability of the manner or method in which it was generated,
document, the following shall stored or communicated, including but not limited to input and
be given due regard: output procedures, controls, tests and checks for accuracy and
(a) The reliability of the reliability of the electronic data message or document, in the light
manner in which it was of all the circumstances as well as any relevant agreement;
generated, stored or (b) The reliability of the manner in which its originator was identified;
communicated; (c) The integrity of the information and communication system in
(b) The reliability of the which it is recorded or stored, including but not limited to the
manner in which its hardware and computer programs or software used as well as
originator was programming errors;
identified; and (d) The familiarity of the witness or the person who made the entry
(c) Other relevant factors. with the communication and information system;
(Sec. 12, RA 8792) (e) The nature and quality of the information which went into the
communication and information system upon which the electronic
data message or electronic document was based; or
(f) Other factors which the court may consider as affecting the
accuracy or integrity of the electronic document or electronic data
message. (Sec. 1, Rule 7, Rules on Electronic Evidence)
Integrity of an information and communication system
In any dispute involving the integrity of the information and
communication system in which an electronic document or electronic
data message is recorded or stored, the court may consider, among
others, the following factors:
(a) Whether the information and communication system or other
similar device was operated in a manner that did not affect the
integrity of the electronic document, and there are no other
reasonable grounds to doubt the integrity of the information and
communication system;
(b) Whether the electronic document was recorded or stored by a
party to the proceedings with interest adverse to that of the party
using it; or
(c) Whether the electronic document was recorded or stored in the
usual and ordinary course of business by a person who is not a
party to the proceedings and who did not act under the control
of the party using it. (Sec. 2, Rule 7, Rules on Electronic Evidence)

420
D. OBLIGATION OF CONFIDENTIALITY
GENERAL RULE: Any person who obtained
access to any electronic key, electronic data
message or electronic document, book, register,
correspondence, information, or other material
pursuant to any powers conferred under this Act,
shall not convey to or share the same with any
other person.
EXCEPTION: Except for the purposes authorized
under this Act. (Sec. 32, RA 8792)
VII. FOREIGN INVESTMENTS ACT (RA
7042, AS AMENDED BY RA 11647)
The applicable law is R.A. No. 7042, as amended
by R.A. No. 8179 and by R.A. No. 11647
otherwise known as “Foreign Investments Act of
1991”
The FIA shall not apply to banking and other
financial institutions which are governed and
regulated by the General Banking Act and other
laws under the supervision of the Central Bank
(Rule I, Sec. 4, Implementing Rules and Regulations of
R.A. No. 7042, as amended by RA 11647 or FIA-IRR,
March 2, 2022)
A. POLICY OF THE LAW [SEC. 1, RA 11647]
Rationale of FIA: (AEWA)
 To attract, promote and welcome productive
investments from foreign individuals,
partnerships, corporations, and
governments, including their political
subdivisions, in activities which significantly
contribute to sustainable, inclusive, resilient,
and innovative economic growth,
productivity, global competitiveness,
employment creation, technological
advancement, and countrywide development
to the extent that foreign investment is
allowed in such activity by the Constitution
and relevant laws, and consistent with the
protection of national security.
 To encouraged enterprises that significantly
expand livelihood and employment
opportunities for Filipinos;
 To enhance economic value of agricultural
products;
 To promote the welfare of Filipino
consumers; expand the scope, quality and
volume of exports and their access to foreign
markets; and/or transfer relevant
technologies in agriculture, industry and
support services.
Foreign investments shall be welcome as a
supplement to Filipino capital and technology in
those enterprises serving mainly the domestic
market.
The State shall promote accountability and
integrity in public office, as well as the promotion
and administration of efficient public service to
entice foreign investments.
Foreign investments shall be conducted based on
the principles of transparency, reciprocity, equity,
and economic cooperation. (Section 1, RA 11647;
Section 2 of RA 7042 (R.A. No. 7042), as amended by
Republic Act No. 8179, or FIA)
As a general rule, there are no restrictions on
extent of foreign ownership of export enterprises.
In domestic market enterprises, foreigners can
invest as much as one hundred percent (100%)
equity except in areas included in the negative
list. Foreign owned firms catering mainly to the
domestic market shall be encouraged to
undertake measures that will gradually increase
Filipino participation in their businesses by taking
in Filipino partners, electing Filipinos to the board
of directors, implementing transfer of technology
to Filipinos, generating more employment for the
economy and enhancing skills of Filipino workers.
(Sec. 2, FIA)
421
B. DEFINITION OF TERMS [SEC. 2, RA
11647]
1. Foreign Investment
Foreign investment is an equity investment
made by a non-Philippine national in the form of
foreign exchange and/or other assets actually
transferred to the Philippines and duly registered
with the Bangko Sentral ng Pilipinas. (Sec. 3(c),
FIA)
Provided; however, that for purposes of
determining foreign ownership, peso investments
made by non-Philippine nationals shall be
considered; for purposes of monitoring foreign
investments, the following shall be observed:
2. Doing Business
Includes:
1. Soliciting orders, service contracts, opening
offices, whether called "liaison" offices or
branches;
2. Appointing representatives or distributors
domiciled in the Philippines or who in any
calendar year stay in the country for a
period or periods totalling one hundred
eighty (180) days or more;
3. Participating in the management,
supervision or control of any domestic
business, firm, entity or corporation in the
Philippines; and
4. Any other act or acts that imply a continuity
of commercial dealings or arrangements,
and contemplate to that extent the
performance of acts or works, or the
exercise of some of the functions normally
incident to, and in progressive prosecution
of, commercial gain or of the purpose and
object of the business organization (Section
3(d), FIA)
i. For purposes of Section 8 of the Act, and
Section 36, Rule X of these Rules and
Regulations, existing foreign investment shall
mean an equity investment made by a non-
Philippine national and duly registered with
the SEC or the DTI in the form of foreign
exchange or other assets transferred to the
Philippines.
ii. Foreign direct investments (FDIs) flows
monitored and recorded by the BSP; and
iii. Actual foreign investments monitored and
recorded by investment promotion agencies
(IPAs). (Rule I, Sec. 1 (r), FIA-IR
Not be deemed to include
1. Mere investment as a shareholder by a foreign entity in domestic
corporations duly registered to do business, and/or the exercise of
rights as such investor; nor
2. Having a nominee director or officer to represent its interests in
such corporation; nor
3. Appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for its own
account;
(Section 3(d), FIA)
The IRR further does not include the following from the definition of
“doing business”:
1. The publication of a general advertisement through any print or
broadcast media
2. Maintaining a stock of goods in the Philippines solely for the
purpose of having the same processed by another entity in the
Philippines
3. Consignment by a foreign entity of equipment with a local company
to be used in the processing of products for export
4. Performing services auxiliary to an existing isolated contract of sale
which are not on a continuing basis, such as installing in the
Philippines machinery it has manufactured or exported to the
Philippines, servicing the same, training domestic workers to
operate it, and similar incidental services. (Rule I, Sec. 1(j), FIA-
IRR)
422
The determination of whether a foreign
corporation is doing business in the Philippines
must be based on the facts of each case. The
Court gives emphasis to the importance of the
element of continuity of commercial activities to
constitute doing business in the Philippines
(Cargill, Inc. vs. Intra Strata Assurance
Corporation, G.R. No. 168266, March 15, 2010)
A foreign company that merely imports goods
from a Philippines exporter, without opening an
office or appointing an agent in the Philippines is
not doing business in the Philippines. (Cargill, Inc.
vs. Intra Strata Assurance Corporation, G.R. No.
168266, March 15, 2010)

3. Export Enterprise
“Export enterprise” shall mean:
a. an enterprise wherein a manufacturer,
processor or service (including tourism)
enterprise exports sixty percent (60%); or
b. more of its output, or wherein a trader
purchases products domestically and
exports (60%) or more of such purchases.
(Sec. 3(e), RA 7042)

4. Domestic Market Enterprise

“Domestic market enterprise” shall mean:
a. an enterprise which produces goods for
sale, or renders services to the domestic
market entirely; or
b. if exporting a portion of its output fails to
consistently export at least sixty percent
(60%) thereof. (Sec. 3(f), RA 7042)

423
C. Registration of Investment of Non-Philippine Nationals [Sec. 6, RA 11647]
Philippine national vs Foreign Corporation
Philippine national Foreign corporation
The term Philippine national shall mean any of the following: One which is formed, organized, or existing under
laws other than those of the Philippines in
1. a citizen of the Philippines or
accordance with the R.A. No. 11232 or the Revised
2. a domestic partnership or association wholly owned by Corporation Code.
citizens of the Philippines;
Branch office of a foreign company carries out the
3. or a corporation organized under the laws of the business activities of the head office and derives
Philippines of which at least sixty percent (60%) of the income from the host country.
capital stock outstanding and entitled to vote is owned
Representative or liaison office deals directly with
and held by citizens of the Philippines;
the clients of the parent company but does not
4. or a corporation organized abroad and registered as derive income from the host country and is fully
doing business in the Philippines under the Revised subsidized by its head office. It undertakes activities
Corporation Code of which 100% of the capital stock such as but not limited to information dissemination
outstanding and entitled to vote is wholly owned by and promotion of the company's products as well as
Filipinos; quality control of products. (Rule I, Sec. 1 (q), FIA-
IRR)
5. or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a
Philippine national and at least sixty percent (60%) of
the fund will accrue to the benefits of Philippine
nationals;
Provided, That where a corporation and its non-Filipino
stockholders own stocks in a Securities and Exchange
Commission (SEC) registered enterprise, at least sixty
percent (60%) of the capital stock outstanding and entitled
to vote of each of both corporations must be owned and
held by citizens of the Philippines and at least sixty percent
(60%) of the members of the Board of Directors of each of
both corporations must be citizens of the Philippines, in
order that the corporation shall be considered a Philippine
national. The control test shall be applied for this purpose.
Compliance with the required Filipino ownership of a
corporation shall be determined on the basis of outstanding
capital stock whether fully paid or not, but only such stocks
which are generally entitled to vote are considered. (Rule I,
Sec. 1 (ii), FIA-IRR)
For stocks to be deemed owned and held by Philippine
citizens or Philippine nationals, mere legal title is not
enough to meet the required Filipino equity. Full beneficial
ownership of the stocks, coupled with appropriate voting
rights is essential. Thus, stocks, the voting rights of which
have been assigned or transferred to aliens cannot be
considered held by Philippine citizens or Philippine
nationals. (Roy III vs. Herbosa, G.R. No. 207246, April 18,
2017, citing FIA-IRR)
Note: Individuals or juridical entities not meeting the
aforementioned qualifications are considered as non-
Philippine nationals.

424
Registration of Non-Philippine Nationals which are in the FINL, subject to foreign
equity limitations defined therein.
GENERAL RULE: EXCEPTION: c. Existing enterprises, which are non-Philippine
A non-Philippine national Unless participation of
nationals at the time of effectivity of the Act
may do business in the non-Philippine nationals and which intend to increase the percentage
Philippines, as that term in the enterprise is of foreign equity participation under the Act,
is defined in Section prohibited or limited to a beyond that previously authorized under the
3(a), or invest in a smaller percentage by Act, shall be governed by the qualifications in
domestic enterprise up existing law and/or item (a) above. Thus, existing enterprises
to one hundred percent under the provisions of shall be allowed to increase the percentage
(100%) of its capital, this Act. share of foreign equity participation beyond
without need of prior
current equity holdings only if their existing
approval:
investment area is not in the FINL. Similarly,
1. upon registration existing enterprises engaged in more than
with the Securities one (1) investment area shall be allowed to
and Exchange increase percentage of foreign equity
Commission (SEC),
participation if none of the investment areas
or
2. the DTI in the case
they are engaged in is in the FINL.
of single d. Existing foreign corporations shall be allowed
proprietorships. to increase capital even if their existing
investment area is in the FINL.
(Sec. 6, FIA) e. Transfer of ownership from one foreign
company to another shall be allowed even if
Qualifications: the enterprise is engaged in an area in the
FINL as long as there is no increase in the
a. Any non-Philippine national may do business percentage share of foreign equity. (Rule VI,
or invest in a domestic enterprise up to one Sec. 18, FIA-IRR)
hundred percent (100%) of its capital
provided:
1. It is investing in a domestic market Limitations on Registration
enterprise in areas outside the FINL; or GENERAL RULE: EXCEPTION:
2. It is investing in an export enterprise
whose products and services do not fall The SEC or the DTI, as  That any enterprise
the case may be, shall seeking to avail of
within Lists A and B of the FINL, except
not impose any incentives under the
for defense-related activities, which may limitations on the Omnibus Investment
be approved pursuant to Section 8 (b) (1) extent of foreign Code of 1987 must
of the Act. ownership in an apply for registration
enterprise additional to with the BOI, which
Provided further that, as required by existing
those provided in this shall process such
laws, the country or state of the applicant Act application for
must also allow Filipino citizens and registration in
corporations to do business therein. accordance with the
criteria for evaluation
b. Non-Philippine national qualified to do
prescribed in said
business per paragraph (a) above, but who Code.
will engage in more than one investment  That a non-
area, one or more of which is in the FINL, Philippine national
may be registered under the Act. However, intending to engage in
said non-Philippine national will not be the same line of
allowed to engage in the investment areas, business as an existing
joint venture, in which
he or his majority

425
 shareholder is a i. All applications are considered officially
substantial partner,
must disclose the fact
and the names and
addresses of the
partners in the existing
joint venture in his
application for
registration with SEC.
(Sec. 6, FIA)
Transitory Period
During the transitory period as provided in
Section 15 hereof, SEC shall disallow registration
of the applying non-Philippine national if the
existing joint venture enterprise, particularly the
Filipino partners therein, can reasonably prove
the domestic market activities to be undertaken
by SEC shall effect registration of any enterprise
applying under this Act within fifteen (15) days
upon submission of completed requirements.
(Sec. 6, FIA)
Registration Process for Non-Philippine
Nationals
a. Filing of application.
i. In the case of foreign corporations and
domestic corporations or partnerships
(both domestic and foreign) applications
for registration shall be filed with the
SEC.
ii. In the case of sole proprietor,
applications for Metro Manila shall be
c.
filed with the DTI-National Capital
Region.
iii. In the provinces, applications may be
filed with the extension offices of the SEC
for corporations and partnerships and the
provincial offices of the DTI for sole
proprietors.
b. Pre-processing of documents and additional
requirements.
Pre-processing of documents shall be
undertaken to assist the investor in
determining the completeness of his
documents.
accepted only upon submission of
complete documents to either the SEC or
the DTI.
ii. As required by Section 8 of the Act, the
following shall also be submitted to the
SEC or the DTI:
 For enterprises wishing to engage in
defense-related activities, clearance
from the Department of National
Defense (DND) or the Philippine
National Police (PNP).
 For non-Philippine nationals engaged
in micro and small domestic market
enterprises with a paid-in equity
capital of at least US$100,000 but
not equal to or more than
US$200,000:
o A certificate from the DOST that
the investment involves
advanced technology; or
o A certificate from the DICT or
DTI or DOST endorsing startups
or startup enablers; or
o A certificate from the appropriate
DOLE Regional Office having
jurisdiction over the place of the
enterprise that the enterprise or
investor has executed a
notarized undertaking that the
majority of their direct
employees shall be Filipinos and
that in no case shall the number
of Filipino direct employees be
less than fifteen (15).
Approval.
The SEC or DTI, as applicable, shall decide
on the application within seven (7) working
days from official acceptance of an
application by domestic corporations,
partnerships, and sole proprietors.
In the case of foreign corporations, the SEC
shall decide on the same within twenty (20)
working days.
Otherwise, the application shall be
considered as automatically approved if it is
not acted upon within said period for a cause
426
 not attributable to the applicant. (Rule VI, Sec.
19, FIA-IRR)
D. FOREIGN INVESTMENTS IN EXPORT
ENTERPRISES [SEC. 7, RA 11647]
Foreign investment in export enterprise whose
products and services do not fall within Lists A
and B of the Foreign Investment Negative List
provided under Section 8 hereof is allowed up to
one hundred percent (100%) ownership.
Export enterprise which are non-Philippine
nationals shall register with BOI and submit the
reports that may be required to ensure continuing
compliance of the export enterprise with its
export requirement.
BOI shall advise SEC or STI, as the case may be,
of any export enterprise that fails to meet the
export ratio requirement. The SEC or DTI shall
thereupon order the non-complying export
enterprise to reduce its sales to the domestic
market to not more than forty percent (40%) of
its total production; failure to comply with such
SEC or DTI order, without justifiable reason, shall
subject the enterprise to cancellation of SEC or
DTI registration, and/or the penalties provided in
Section 14 hereof. (Sec. 7, FIA)
Export ratio shall refer to:
 The percentage share of the volume or peso
value of goods exported to the total volume
or value of goods sold in any taxable year if
the export enterprise is engaged in
manufacturing or processing;
 The percentage share of the peso value of
services sold to foreigners to total earnings
or receipts from the sale of its services from
all sources in any taxable year if the export
enterprise is service-oriented. Value of
services sold shall refer to the peso value of
all services rendered by an export enterprise
to foreigners that are paid for in foreign
currency or pesos funded from inwardly
remitted foreign currency as properly
documented by the export enterprise; or
 The percentage share of the volume or peso
value of goods exported to the total volume
or value of goods purchased domestically in
any taxable year if the export enterprise is
engaged in merchandise trading. (Rule I,
Sec. 1(o), FIA-IRR)
Registration for Foreign Investments in
Export Enterprises
Export enterprise shall register and comply with
the export requirements in accordance
with Title XIII of the National Internal Revenue
Code (NIRC), as amended, for purpose of availing
any tax incentive or benefit. (Sec. 7, FIA)
Within seven (7) working days from the issuance
of the certificate of registration, the SEC or DTI
shall transmit to BOI copies of the certificate of
registration together with the prescribed
application form duly accomplished by the export
enterprise. (Rule VIII, Sec. 26, FIA-IRR)
E. FOREIGN INVESTMENTS IN DOMESTIC
MARKET ENTERPRISES [SEC. 7, RA
7042]
Non-Philippine nationals may own up to one
hundred percent (100%) of domestic market
enterprises unless foreign ownership therein is
prohibited or limited by existing law or the
Foreign Investment Negative List under Section 8
hereof.
A domestic market enterprise may change its
status to export enterprise if over a three (3) year
period it consistently exports in each year thereof
sixty per cent (60%) or more of its output.
F. FOREIGN INVESTMENT NEGATIVE LIST
[SEC. 8, RA 11647]
Foreign Investments Negative List' or 'Negative
List' shall mean a list of areas of economic activity
whose foreign ownership is limited to a maximum
of 40% of the equity capital of the enterprises
engaged therein (Sec. 3[g], FIA).
a. List A shall enumerate the areas of activities
reserved to Philippine nationals by mandate
of the Constitution and specific laws.
b. List B shall contain the areas of activities and
enterprises pursuant to law:
427
 1. Defense-related activities, requiring prior Retail Trade
clearance and authorization from
Except as otherwise provided under Republic Act
Department of National Defense (DND)
No. 8762, otherwise known as the Retail Trade
to engage in such activity, such as the
Liberalization Act of 2000 and other relevant
manufacture, repair, storage and/or
laws, micro and small domestic market enterprise
distribution of firearms, ammunition,
with paid-in equity capital less than the
lethal weapons, military ordinance,
equivalent of Two hundred thousand US dollar
explosives, pyrotechnics and similar
(US$200,000.00) are reserved to Philippine
materials, unless such manufacturing or
nationals.
repair activity is specifically authorized by
the Secretary of National Defense; or Provided, That if:
2. Activities which have implications on
(1) they involve advanced technology as
public health and morals, such as the:
determined by the Department of Science
a. manufacture and distribution of
and Technology, or
dangerous drugs;
b. all forms of gambling; (2) they are endorsed as startup or startup
c. nightclubs, bars, beerhouses, dance enablers by the lead host agencies pursuant
halls; to Republic Act No. 11337, otherwise known
d. sauna and steam bath houses and as the Innovative Startup Act; or
massage clinics.
(3) a majority of their direct employees are
3. Small and medium-sized domestic
Filipinos, but in no case shall the number of
market enterprises with paid-in equity
Filipino employees be less than fifteen (15),
capital less than the equivalent of five
than a minimum paid-in capital of One
hundred thousand US dollars
hundred thousand US dollars
(US$500,000) are reserved to Philippine
(US$100,000.00) shall be allowed to non-
nationals, unless they involve advanced
Philippine nationals
technology as determined by the
Department of Science and Technology. Understudy Programs
Export enterprises which utilize raw
That registered foreign enterprises employing
materials from depleting natural
foreign nationals and enjoying fiscal incentive
resources, with paid-in equity capital of
shall implement an understudy or skills
less than the equivalent of five hundred
development program to ensure the transfer of
thousand US dollars (US$500,000) are
technology or skills to Filipinos. Compliance with
likewise reserved to Philippine nationals.
this requirement shall be regularly monitored by
c. Amendments to List B may be made upon
the DOLE.
recommendation of the Secretary of National
Defense, or the Secretary of Health, endorses Nothing in this Act shall operate as a cause for
by the NEDA, or upon recommendation motu termination of employees hired prior to the
propio, of NEDA, approved by the President, effectivity of this Act. In all cases, the provisions
and promulgated through the issuance of the of Presidential Decree No. 442, otherwise known
Foreign Investment Negative List by as the Labor Code of the Philippines" and other
Executive Order. applicable laws, rules and regulations issued by
DOLE shall prevail.
NOTE: Professional services listed in these
negative lists may validly form a corporation by Amendments
way of exception in the Revised Corporation
Amendments to List B may be made upon
Code.
recommendation of the Secretary of National
Defense, or the Secretary of Health, endorses by
the NEDA, or upon recommendation motu propio,
of NEDA, approved by the President, and

428
promulgated through the issuance of the Foreign
Investment Negative List by Executive Order.
ii. Submit to Congress an analysis of foreign
Amendments to the Foreign Investment Negative
List shall not be made more often than once every
two (2) years.
Provided, That the NEDA, in consultation and
cooperation with the BOI, DTI, SEC, DICT, IPAs
and other pertinent government agencies, shall,
every two (2) years:
i. Review the Foreign Investment Negative
List, and
investment performance economic activities
of the industries under the Foreign
Investment Negative List and the reasons for
the recommended amendments, if
any: Provided, further, That NEDA shall
recommend to Congress investment-related
matters requiring necessary legislation.

List A: Foreign Ownership is Limited by Mandate of the Constitution and Specific Laws
No Foreign a. Mass media, except recording (Article XVI, Section 11 of the 1987 Constitution; Presidential
Equity Memorandum dated May 5, 1994) and internet business. (DOJ Opinion No. 40, S. 1998)
b. Practice of professions (Article XII, Section 14 of the Constitution, Section 1 of R.A. No.
(100% Filipino
5181, Section 7[j] of R.A. No. 8981), including Radiologic and x-ray technology (R.A. No.
Ownership)
7431), Criminology (R.A. No. 6506), Law (Article VIII, Section 5 of the Constitution; Rule
138,
c. Retail trade enterprises with paid-up capital of less than US$2,500,000.00 (Section 5 of
R.A. No. 8762)
d. Cooperatives (Chapter III, Article 26 of R.A. No. 6938, as amended by Chapter II, Article
10 of R.A. No. 9520)
e. Organization and operation of private detective, watchmen or security guards agencies.
(Section 4 of R.A. No. 5487)
f. Small-scale mining. (Section 3 of R.A. No. 7076)
g. Utilization of marine resources in archipelagic waters, territorial sea and exclusive
economic zone as well as small-scale utilization of natural resources in rivers, lakes, bays,
and lagoons. (Article. XII, Section 2 of the Constitution)
h. Manufacture, repair, stockpiling and/or distribution of nuclear weapons
i. Manufacture of firecrackers and other pyrotechnic devices
Up to Twenty a. Private radio communications network
Percent (20%)
Foreign Equity
(80% Filipino
Ownership)
Up to Twenty- a. Private recruitment, whether for local or overseas employment (Article 27 of P.D. No.
Five Percent 442)
(25%) Foreign b. Contracts for the construction of defense-related structures (Section 1 of Commonwealth
Equity Act No. 541)
(75% Filipino c. Contracts for construction of defense-related structures
Ownership)
Up to Thirty a. Advertising (Article XVI, Section 11 of the Constitution)
Percent (30%)
Foreign Equity
(70% Filipino
Ownership)

429
Up to Forty a. Subject to applicable regulatory frameworks, contracts for the construction and repair of
Percent (40%) locally-funded public works (Section 1 of C.A. No. 541, Letter of Instruction No. 630), except:
Foreign Equity i. Infrastructure/development projects covered in R.A. No. 7718; and Projects which are
foreign-funded or assisted and required to undergo international competitive bidding ( Sec.
(60% Filipino
21[a] of R.A. No. 7718)
Ownership)
b. Exploration, development, and utilization of natural resources (Article XII, Section 2 of the
Constitution)
c. Ownership of private lands (Article XII, Section 7 of the Constitution; Section 22 of C.A. No.
141; Section 4 of R.A. No. 9182)
d. Operation of public utilities (Article XII, Section 11 of the Constitution; Section 16 of C.A.
No. 146; Section 2[a] of RA. No. 7718), except power generation and the supply of electricity
to the contestable market (Section 6 and Section 29, respectively, of R.A. No. 9136) and such
other like businesses or services not covered by the definition of public utilities.
d. Educational institutions other than those established by religious groups and mission boards,
for foreign diplomatic personnel and their dependents, and other foreign temporary residents
(Article XIV, Section 4 of the Constitution), or for short-term high-level skills development that
do not form part of the formal education system as defined in Section 20 of B.P. No. 232
(1982). f. Culture, production, milling, processing, trading except retailing, of rice and corn
and acquiring, by barter, purchase or otherwise, rice and corn and the by-products thereof.
(Section 5 of P.D. No. 194)
g. Contracts for the supply of materials, goods and commodities to government-owned or
controlled corporation, company, agency or municipal corporation. (Sec. 1 of RA No. 5183)
h. Operation of deep sea commercial fishing vessels. (Sec. 27 of RA No. 8550, as amended by
RA No. 10654)
i. Ownership of condominium units. (Sec. 5 of RA No. 4726)
j. Private radio communications network (Art. XII, Sec. 11 of the Constitution, NTC
Memorandum Circular No. 10- 8-91)
List B: Foreign Ownership is Limited by Reasons of Security Defense Risk to Health and Morals. and
Protection of Small and Medium Scale Enterprises
Up to Forty Percent (40%) Foreign Equity
a. Manufacture, repair, storage, and/or distribution of products and/or ingredients requiring Philippine National
Police (PNP) clearance:
i. Firearms (handguns to shotguns), parts of firearms and ammunition therefor, instruments or implements
used or intended to be used in the manufacture of firearms;
ii. Gunpowder;
iii. Dynamite;
iv. Blasting supplies;
v. Ingredients used in making explosives:
1. Chlorates of potassium and sodium;
2. Nitrates of ammonium, potassium, sodium barium, copper (11), lead (11), calcium, and cuprite;
3. Nitric acid;
4. Nitrocellulose;
5. Perchlorates of ammonium, potassium, and sodium;
6. Dinitrocellulose;
7. Glycerol;
8. Amorphous phosphorus;
9. Hydrogen peroxide;
10. Strontium nitrate powder;
11. Toluene; and

430
 vi. Telescopic sights, sniper scope, and other similar devices.
However, the manufacture or repair of these items may be authorized by the Chief of the PNP to non-Philippine
nationals; Provided that a substantial percentage of output, as determined by the said agency, is exported. Provided
further that the extent of foreign equity ownership allowed shall be specified in the said authority/clearance. (R.A.
No. 7042 as amended by R.A. No. 8179)
b. Manufacture, repair, storage, and/or distribution of products requiring Department of National Defense (DND)
clearance:
i. Guns and ammunition for warfare;
ii. Military ordinance and parts thereof (e.g., torpedoes, depth charges, bombs, grenades, missiles);
iii. Gunnery, bombing, and fire control systems and components;
iv. Guided missiles/missile systems and components; v. Tactical aircraft (fixed and rotary-winged), parts and
components thereof;
v. Space vehicles and component systems;
vi. Combat vessels (air, land, and naval) and auxiliaries;
vii. Weapons repair and maintenance equipment;
viii. Military communications equipment;
ix. Night vision equipment;
x. Stimulated coherent radiation devices, components, and accessories;
xi. Armament training devices
xii. Others as may be determined by the Secretary of the DND
However, the manufacture or repair of these items may be authorized by the Secretary of National Defense to non-
Philippine nationals; Provided, that a substantial percentage of output, as determined by the said agency, is
exported. Provided, further, that the extent of foreign equity ownership allowed shall be specified in the said
authority/clearance. (R.A. No. 7042 as amended by R.A. No. 8179)
c. Manufacture and distribution of dangerous drugs (R.A. No. 7042 as amended by R.A. No. 8179)
d. Sauna and steam bathhouses, massage clinics and other like activities regulated by law because of risks posed
to public health and morals, except wellness centers (R.A. No. 7042 as amended by R.A. No. 8179)
e. All forms of gambling (R.A. No. 7042 as amended by R.A. No. 8179) except those covered by investment
agreements with PAGCOR (R.A. No. 1869, as amended by R.A. No. 9487)
f. Domestic market enterprises with paid-in equity capital of less than the equivalent of US$200,000.00 (RA. No.
7042, as amended by R.A. No. 8179)
g. Domestic market enterprises which involve advanced technology or employ at least 50 direct employees with
paid-in equity capital of less than the equivalent of US$100,000.00. (R.A. No. 7042, as amended by R.A. No. 8179)

VIII. PUBLIC SERVICE ACT, AS (4) To prevent ruinous competition.

AMENDED
An Act Amending The first two are carried out by the appropriate
Commonwealth Act No. 146 government agencies in terms of fixing rates, like
(R.A. No. 11659) water rates and electricity rates. They are
regulated by the State.
Purposes for the enactment of the Public
Service Act The fourth is achieved, among others, by
(1) To secure adequate, sustained service for the determining who will be allowed to provide public
public at the least possible cost; service in a particular area. Thus, there is the first
(2) To protect the public against unreasonable operator rule which gives preferential right to the
charges and poor, inefficient service; first operator to perform service, and a second
(3) To protect and secure investments in public operator shall be allowed only if public interest
services; and will indeed be served. (DIVINA, Divina on

431
Commercial Law, A Comprehensive Guide, Vol. 1, 2021
Edition, p. 297, citing Luzon Stevedoring Co., Inc. vs.
Public Service Commission, G.R. No. L-5458,
September 16, 1953; Tan Sima v. Hacbang, G.R. No.
37321, March 3, 1933)
While the amendment of Public Service Act was
made pursuant to the State’s policy of
encouraging private enterprise and expanding
the base of investment in the country, with the
goal of providing efficient, reliable, and affordable
services to all.
These policies are fulfilled by:
(a) ensuring effective regulation of public
services;
(b) providing reasonable rate of return to public
services;
(c) rationalizing foreign equity restrictions by
clearly defining the term “public utilities”; and
(d) instituting processes for the protection of
national security. (Sec. 1, R.A. No. 11659)
Main Feature of the Amended Public
Service Act
With the enactment of RA 11659, the Philippines
now has a Public Services law that:
(1) clarifies the long-existing confusion behind
the terms “public service” and “public utility”,
and correspondingly, limits the definition of
“public utility” to stimulate foreign
investment in public service sectors;
(2) Removes foreign equity restrictions on most
public service companies, with the exception
of those considered as ‘public utility’ and
‘critical infrastructure’, thus it opens up
multiple key sectors of the Philippine public
service industry that were previously subject
to the constitutionally imposed 40% foreign
equity restriction on public utilities.
(3) limits the scope of ‘critical infrastructure’ to
public service companies that own, use or
operate systems and assets that are “vital to
the Republic of the Philippines that the
incapacity or destruction of such systems or
assets would have a detrimental impact on
national security, including
telecommunications and other such vital
services as may be declared by the President
of the Philippines.
Public Service Commission
The Commission shall have jurisdiction and
supervision over all public services, including
public utilities, and their franchises, equipment,
and other properties, and in the exercise of its
authority, it shall have the necessary powers and
the aid of public force: Provided, That public
services, including public utilities, owned or
operated by government entities shall be
regulated by the Commission in the same way as
privately-owned public services.
Note: Nothing in this Act shall be interpreted to
diminish, limit, or restrict the authority of
Congress from granting franchises to public
services, as may be provided by law. Any
franchise or certificate necessary for the
operation of a public service shall be granted by
Congress unless otherwise previously delegated
by law to the relevant Administrative Agencies.
(Sec. 13 (a), C.A. No. 146 as amended by Sec. 4, R.A.
No. 11659)
Government Agencies that Replaced the
Public Service Commission
All references to the Public Service Commission in
Commonwealth Act No. 146, as amended, shall
pertain to any Administrative Agency to which the
powers and duties of the Public Service
Commission were transferred by subsequent
laws, such as but not limited to:
(a) Civil Aeronautics Board (CAB);
(b) Civil Aviation Authority of the Philippines
(CAAP);
(c) Department of Energy (DOE);
(d) Department of Environment and Natural
Resources (DENR);
(e) DICT;
(f) Department of Transportation (DOTr);
(g) Energy Regulatory Commission (ERC);
(h) Land Transportation Franchising and
Regulatory Board (LTFRB);
(i) Land Transportation Office (LTO);
(j) Local Water Utilities Administration (LWUA);
(k) Maritime Industry Authority (MARINA);
432
(l) Metropolitan Waterworks and Sewerage
System (MWSS);
(m) National Telecommunication Commission
(NTC);
(n) National Water Resources Board (NWRB);
(o) Philippine National Railways (PNR);
(p) Philippine Ports Authority (PPA); and
(q) Toll Regulatory Board (TRB). (Sec. 3, R.A. No.
11659)
A. CRITICAL INFRASTRUCTURE
The PSA Amendment introduces the definition of
a critical infrastructure refers to any public service
which owns, uses, or operates systems and
assets, whether physical or virtual, so vital to the
Republic of the Philippines that the incapacity or
destruction of such systems or assets would have
a detrimental impact on national security,
including telecommunications and other such
vital services as may be declared by the President
of the Philippines. (Sec. 2[e], RA 11659)
Notably, the PSA Amendment specifically
identifies:
(a) telecommunications as a critical
infrastructure and
(b) allows the President to declare other vital
services as a critical infrastructure.
Telecommunications under the PSA Amendment
refers to any process which enables a
telecommunications entity to relay and receive
voice, data, electronic messages, written or
printed matter, fixed or moving pictures, words,
music or visible or audible signals or any control
signals of any design and for any purpose by wire,
radio or other electromagnetic, spectral, optical
or technological means, as defined by Section
3(a) of Republic Act No. 7925, otherwise known
as the "Public Telecommunications Policy Act of
the Philippines", as amended, except passive
telecommunications tower infrastructure and
components, such as, but not limited to, poles,
fiber ducts, dark fiber cables, and passive
telecommunications tower infrastructure, as
defined by the Department of Information and
Communications Technology (DICT), and value-
added services, as defined in Section 3(h) of
Republic Act No. 7925, as amended. (Sec. 2[m],
R.A. No. 11659).
Interruption of critical infrastructure
Obligations are imposed upon entities operating
critical infrastructures
In case the services of any entity engaged in the
operation and management of critical
infrastructure are interrupted: it shall act on
customer complaints within ten (10) days, or
provide an action plan to be accomplished within
a reasonable period, from the date the complaint,
written or otherwise, was received. For this
purpose, entities engaged in the operation and
management of critical infrastructure shall file a
monthly report to the appropriate regulatory
agency detailing the service interruptions that
occurred during the covered period, the
complaints lodged before it, and the actions taken
on each complaint. (Sec. 23, C.A. No. 146 as
amended by Sec. 12, R.A. No. 11659)
Persons and companies engaged in the
telecommunications business shall obtain and
maintain certifications from an accredited
certification body attesting to compliance with
relevant ISO standards on information security,
as prescribed by the DICT: Provided, That the
maintenance of these certifications shall be a
continuing qualification for retention of franchise
or other authority to operate: Provided, further,
That this section shall not apply to micro, small
and medium enterprises under Republic Act No.
6977, otherwise known as the "Magna Carta for
Micro, Small and Medium Enterprises (MSMEs)",
as amended. (Sec. 26, R.A. No. 11659)
Reciprocity clause in the operation and
management of critical infrastructure
The PSA Amendment also imposes a reciprocity
clause wherein foreign nationals shall not be
allowed to own more than fifty percent (50%) of
the capital of entities engaged in the operation
and management of critical infrastructure unless
the country of such foreign national accords
reciprocity to Philippine Nationals as may be
provided by foreign law, treaty or international
433
agreement. Reciprocity may be satisfied by
according rights of similar value in other
economic sectors. (Sec. 25, R.A. No. 11659)
B. FOREIGN STATE-OWNED
ENTERPRISES
Refers to an entity in which a foreign State:
(i) Directly or indirectly owns more than fifty-
percent (50%) of the capital taking into
account both the voting rights and beneficial
ownership;
(ii) Control, through ownership interests,
the exercise of more than fifty percent (50%)
of the voting rights; or
(iii) Holds the power to appoint a majority of
members of the board of directors or any
other equivalent management body. (Sec.
2[g], R.A. No. 11659)
Note: An entity controlled by or acting on behalf
of the foreign government or foreign state-owned
enterprises shall be prohibited from owning
capital in any public service classified as public
utility or critical infrastructure. (Sec. 24, R.A. No.
11659)
Foreign Equity in Public Utilities
Constitutional Limitations
The limitations imposed on public utilities under
Article XII of the Constitution are as follows:
(1) No franchise, certificate, or any other form of
authorization for the operation of a public
utility shall be granted except to citizens of
the Philippines or to corporations or
associations organized under the laws of the
Philippines at least 60% of whose capital is
owned by such citizens; (Section 11, Article XII,
1987 Constitution)
(2) No franchise, certificate, or authorization
shall be exclusive in character; (ibid.)
(3) Non-Exclusivity of Franchises: No franchise,
certificate, or authorization shall be for a
longer period than 50 years; nor shall any
such franchise or right shall be granted
except under the condition that it shall be
subject to amendment, alteration, or repeal
by the Congress when the common good so
requires; (ibid.)
(4) The State shall encourage equity
participation in public utilities by the general
public; (ibid.)
(5) Extent of Foreign Equity Participation: The
participation of foreign investors in the
governing body of any public utility enterprise
shall be limited to their proportionate share
in its capital, and all the executive and
managing officers of the public utility that is
a corporation or association must be citizens
of the Philippines; (ibid.)
(6) In times of national emergency, when the
public interest so requires, the State may,
during the emergency and under reasonable
terms prescribed by it, temporarily take over
or direct the operation of any privately-
owned public utility or business affected with
public interest; (Section 17, Article XII, 1987
Constitution)
(7) The State may, in the interest of national
welfare or defense, upon payment of just
compensation, transfer to public ownership
utilities and other private enterprises to be
operated by the Government; (Section 18,
Article XII, 1987 Constitution)
(8) The State shall regulate or prohibit
monopolies when the public interest so
requires; (Section 19, Article XII, 1987
Constitution) and
(9) Combinations in restraint of trade or unfair
competition are not allowed. (Section 19,
Article XII, 1987 Constitution)
It was clarified by the Supreme Court in the case
of Tatad vs. Garcia, that the limit imposed by the
Constitution on foreign equity applies only to the
operation of a public utility and not to ownership
of the facilities. The right to operate a public
utility may exist independently and separately
from the ownership of the facilities thereof. One
can own said facilities without operating them as
a public utility, or conversely, one may operate a
public utility without owning the facilities used to
serve the public. The exercise of the rights
encompassed in ownership is limited by law so
that a property cannot be operated and used to
serve the public as a public utility unless the
434
operator has a franchise. (G.R. No. 114222, April 6,
1995)
The control test must be used for purposes of
compliance with the provisions of the Constitution
and of other laws on nationality requirements.
(SEC-OGC Opinion No. 11-42 dated October 12, 2011)
Full beneficial ownership of 60% of the
outstanding capital stock, coupled with 60% of
the voting rights, is required. To construe the 60-
40% equity requirement is merely based on the
voting shares, disregarding the preferred non-
voting shares, not on the total outstanding
subscribed capital stock, would give rise to a
situation where the actual foreign interest would
not really be only 40% but may extend beyond
that because they could also own even the entire
preferred non-voting shares. (Gamboa v. Teves,
G.R. No. 176579, June 28, 2011 and October 9, 2012).
However, to comply with the Beneficial
Ownership Test, for the purposes of determining
compliance with the constitutional or statutory
ownership, the required percentage of Filipino
ownership shall be applied to BOTH
(a) the total number of outstanding shares of
stock entitled to vote in the election of
directors; AND
(b) the total number of outstanding shares of
stock, whether or not entitled to vote x x x.
(Roy III vs. Herbosa, G.R. No. 207246, November
22, 2016)
C. PUBLIC SERVICE AS PUBLIC UTILITY
Under the amended Public Service Act, public
utility is now clearly defined and distinguished
from public service. It is now clear that public
utility and public service do not refer to the same
thing. All public utilities are public services,
but not all public services are public
utilities.
PUBLIC SERVICE
Public service has retained its original definition
under the old PSA, Commonwealth Act No. 146,
as amended.
Includes every person that now or hereafter may
own, operate, manage, or control in the
Philippines, for hire or compensation, with
general or limited clientele, whether permanent,
occasional or accidental, and done for general
business purpose, any common carrier, railroad,
street railway, traction railway, subway motor
vehicle, either for freight or passenger, or both
with or without fixed route and whether may be
its classification, freight or carrier service of any
class, express service, steamboat or steamship
line, pontines, ferries, and watercraft, engaged in
the transportation of passengers or freight or
both, shipyard, marine railways, marine repair
shop, [warehouse] wharf or dock, ice plant, ice-
refrigeration plant, canal, irrigation system, gas,
electric light, heat and power water supply and
power, petroleum, sewerage system, wire or
wireless communications system, wire or wireless
broadcasting stations, and other similar public
services: Provided, however, That a person
engaged in agriculture, not otherwise a public
service, who owns a motor vehicle and uses it
personally and/or enters into a special contract
whereby said motor vehicle is offered for hire or
compensation to a third party or third parties
engaged in agriculture, not itself or themselves a
public service, for operation by the latter for a
limited time and for a specific purpose directly
connected with the cultivation of his or their farm,
the transportation, processing, and marketing of
agricultural products of such third party or third
parties shall not be considered as operating a
public service for the purposes of this Act. (Sec.
13[b], C.A. No. 146, as amended)
PUBLIC UTILITY
Prior to the amendments, the term “public utility”
was not defined under the 1987 Constitution, the
old Public Service Act, or any other law. Thus, we
rely to judicial interpretation laid down by the
Supreme Court that construed public utility to
mean public service.
In the case of JG Summit Holdings vs. Court of
Appeals, the court defines public utility as a
business or service engaged in regularly
supplying the public with some commodity or
service of public consequence such as electricity,
gas, water, transportation, telephone or
435
telegraph service.” As its name indicates, the high voltage backbone
term “public utility” implies public use and service system, as defined by
to the public. (G.R. No. 124293. September 24, 2003) Section 4(cc) of Republic
Act No. 9136, as
amended; (Sec. 2[n],
In the Amended Public Service Act, “public utility”
R.A. No. 11659)
is now clearly defined and distinguished from Petroleum and refer to the operation and
“public service”. petroleum maintenance of pipeline
Product transmission systems to
Under Section 4 of RA No. 11659, “public utility” Pipeline ensure an uninterrupted
refers to a public service that operates, manages Transmission and adequate supply
or controls for public use any of the following: Systems and transmission of
(1) distribution of electricity; petroleum and
(2) transmission of electricity; petroleum products to
the public; and excludes
(3) petroleum and petroleum products pipeline
petroleum pipeline
transmission systems, systems operated
(4) water pipelines distribution systems and exclusively for private or
wastewater pipeline systems, own use, or incidental to
(5) seaports, and the operations of a
(6) public utility vehicles. distinct business; (Sec.
2[i], R.A. No. 11659)
All concessionaires, joint ventures and other Water Pipeline refer to the operation and
similar entities that wholly operate, manage or Distribution maintenance of water
control for public use the sectors above are public Systems and pipeline distribution systems
Wastewater to ensure an uninterrupted
utilities. (Sec. 4, R.A. No. 11659)
Pipeline and adequate supply and
Systems distribution of potable water
The definition introduced by RA No. 11659 limits for domestic and other
the coverage of public utility to specific sectors purposes and the operation
that will remain subject to the forty percent and maintenance of
(40%) foreign equity ownership limit provided for wastewater pipeline systems,
by the 1987 Constitution. Therefore, there are except desludging companies
public services that are no longer subject to the and septic tanks, to ensure
60% Filipino ownership requirement. public health and safety, as
regulated by Republic Act No.
6234, entitled "An Act
Public Utilities Subject to the Requirement Creating the Metropolitan
that atleast 60%of their capital stock must Waterworks and Sewerage
be owned by Filipinos System and Dissolving the
National Waterworks and
Distribution of refers to the conveyance of Sewerage Authority; and for
electricity electric power by a Other Purposes", as
distribution utility amended, and Presidential
through its distribution Decree No. 198, otherwise
system as defined by known as the "Provincial
Section 4(n) of Republic Water Utilities Act of 1973",
Act No. 9136, otherwise as amended; (Sec. 2[o], R.A.
known as the "Electric No. 11659)
Power Industry Reform Seaport refers to a place where ships
Act of 2001", as may anchor or tie up for the
amended (Sec. 2[f], R.A. purpose of shelter, repair,
No. 11659) loading or discharge of
Transmission of refers to the conveyance of passengers or cargo, or for
Electricity electricity through the other such activities

436
 connected with water-borne
commerce, and including all
the land and water areas and
the structures, equipment
and facilities related to these
functions, as defined by the
charters of relevant
authorities or agencies, such
as the Philippine Ports
Authority, Subic Bay
Metropolitan Authority,
PHIVIDEC Industrial Estate
Authority, Cebu Port
Authority, local government
units, and other similar
agencies or government
bodies; (Sec. 2[l], R.A. No.
11659)
Public Utility refer to internal combustion
Vehicles (PUVs) engine vehicles that carry
passengers and/or domestic
cargo for a fee, offering
services to the public, namely
trucks-for-hire, UV express
service, public utility buses
(PUBs), public utility
jeepneys (PUJs), tricycles,
filcabs, and
taxis: Provided, That
transport vehicles accredited
with and operating through
transport network
corporations shall not be
considered as public utility
vehicles. (Sec. 2[k], R.A. No.
11659)
Congress has the power to classify a public
service as a public utility
Nothing in this Act shall be interpreted as a
requirement for legislative franchise where the
law does not require any. No other person shall
be deemed a public utility unless otherwise
subsequently provided by law. (Sec. 4, R.A. No.
11659)
The President may recommend to classify a
public service as a public utility.
The President, upon the recommendation of the
National Economic and Development Authority
(NEDA), may recommend to Congress the
classification of a public service as a public utility
on the basis of the following criteria:
(1) The person or juridical entity regularly
supplies and transmits and distributes
to the public through a network a
commodity or service of public
consequence;
(2) The commodity or service is a natural
monopoly that needs to be regulated
when the common good so requires. For this
purpose, natural monopoly exists when the
market demand for a commodity or service
can be supplied by a single entity at a lower
cost that by two or more entities;
(3) The commodity or service is necessary
for the maintenance of life and
occupation of the public; and
(4) The commodity or service is obligated to
provide adequate service to the public
on demand. (Sec. 4, R.A. No. 11659)
Administrative agencies are prohibited
from imposing nationality requirements on
public services not classified as public
utilities
All public services, including those classified as
public utilities under this Act, shall continue to be
regulated and supervised by the relevant
Administrative Agencies under existing laws. (Sec.
4, R.A. No. 11659)
Moreover, a public service which is not classified
as a public utility under this Act shall be
considered a business affected with public
interest for purposes of Sections 17 and 18 of
Article XII of the Constitution. (ibid.)
Notwithstanding any law to the contrary,
nationality requirements shall not be imposed by
the relevant administrative agencies on any
public service not classified as a public utility.
(ibid.)
437
PUBLIC SERVICES THAT ARE NOT PUBLIC
UTILITIES MUST STILL SECURE THE
CERTIFICATE OR FRANCHISE TO OPERATE
FROM THE COMMISSION.
Regulation of Public Utilities
Authority to Operate
No public service shall operate in the Philippines
without possessing a valid and subsisting
certificate from the Public Service Commission
known as "certificate of public convenience," or
"certificate of public convenience and necessity,"
as the case may be, to the effect that the
operation of said service and the authorization to
do business will promote the public interests in a
proper and suitable manner. (Sec. 15, C.A. No. 146)
Certificate of Public Certificate of Public
Convenience and Necessity (CPCN)
Certificate of Public Certificate of Public
Convenience and Convenience
Necessity
a written authority a written authority
issued by the issued by the
government to enable a government to enable a
person to engage in person to engage in
public service, for which public service
service a legislative
franchise is required,
e.g., air transportation,
shipping, railroad,
telecommunications,
subject to the existence
of a need
(DIVINA, Divina on Commercial Law, A Comprehensive
Guide, Vol. 1, 2021 Edition, pp. 299-300)
Priority Rule
If a public service has maintained an exemplary
record in the delivery of services, and has made
substantial investments on infrastructure,
technology or equipment for its operations, such
performance and size of investment shall be
taken into consideration, and the application for
renewal of the franchise, certificate, concession
or authorization of the public service shall be
given priority by the appropriate Administrative
Agencies.
Instances where a Certificate of Public
Convenience and/or Necessity may be
revoked or cancelled
(1) The facts and circumstances on the strength
of which said certificate was issued have
been misrepresented or materially changed.
(Sec. 16[m], C.A. No. 146)
(2) The holder thereof has violated or willfully
and contumaciously refused to comply with
any order, rule, or regulation of the
Commission or any provision of the (Sec.
16[n], C.A. No. 146)
(3) Where the holder is a mere dummy; (real
owner a foreigner) (Pecson vs. Pecson, G.R. No.
45516, July 30, 1938)
(4) Where the operator ceased operation and
placed his buses on storage; (Paredes vs.
Public Service Commission, G.R.No.L-7111, May
30, 1955) and
(5) Where the operator abandons, totally the
service.(Paez v. Marcelo, G.R. No. L-1530, March
30, 1962)
(DIVINA, Divina on Commercial Law, A Comprehensive
Guide, Vol. 1, 2021 Edition, pp. 302-303)
Notice and Hearing
(a) Required with respect to the following:
(1) Issuance of CPC or certificates authorizing
the operation of public service within the
Philippines (Sec. 16[a], C.A. No. 146 as amended
by R.A. No. 11659);
(2) Fixing and determination of fair and
reasonable individual or joint rates, tolls,
charges, classifications, tariffs or schedules
thereof (Sec. 16[b], C.A. No. 146 as amended by
R.A. No. 11659);
(3) Fixing of standards and qualifications (Sec.
16[d], C.A. No. 146);
(4) Fixing of standards for measuring quantity
(Sec. 16[e], C.A. No. 146);
(5) Establishment of rules to secure accuracy of
all meters and all measuring appliances (Sec.
16[f], C.A. No. 146);
(6) Order to compel operators to furnish proper,
safe, and adequate service (Sec. 16[g] C.A. No.
146);
(7) Allowing extension of facilities (Sec. 16[h], C.A.
No. 146);
438
(8) Fixing and determination of proper and
adequate rates of depreciation of the
property of any public service (Sec. 16[l], C.A.
No. 146 as amended by R.A. No. 11659); ; and
(9) Imposition of administrative fines for
violation of the conditions of the CPC under
Section 21 of the PSA; this is regulatory and
punitive in character (GMA Network, Inc. v.
NTC, G.R. No. 196112, February 26, 2014).
Note: The Public Service Act (PSA) provides for a
60-day prescriptive period under Section 28
thereof for criminal cases under Sections 23, 24,
25, and 26 of the PSA. However, this does not
apply to imposition of fines under Section 21
(ibid.).
(b) Prior Notice and Hearing is NOT
required with respect to the following
(Sec. 17, PSA as amended by R.A. No.
11659):
(1) To investigate, upon the Commission's
own initiative, or upon complaint in
writing, any matter concerning any
public service as regards matters under
its jurisdiction;
(2) To require any public service to furnish
safe, adequate, and proper service as
the public interest may require and
warrant;
(3) To enforce compliance with any
standard, rule, regulation, order or
other requirement of the Commission;
(4) To prohibit or prevent any public
service from operating without having
first secured a certificate (CPC) and
require existing public services to pay
the fees for the issuance of the
certificate;
(5) To require any public service to pay the
actual expenses incurred by the
Commission in any investigation if it
shall be found that any rate, toll,
charge, schedule, regulation, practice,
act or service thereof is in violation of
any provision of the Public Service Act
or any certificate, order, rule,
regulation or requirement issued or
established by the Commission.
(6) To require any public service to keep
its books, records, and accounts so as
to afford an intelligent understanding
of the conduct of its business and to
that end to require every such public
service of the same class to adopt a
uniform system of accounting.
(7) To appraise and value the properties of
the public service;
(8) To examine and test measuring
appliances of the public service;
(9) To grant special permits to make extra
or special trips in territories not
specified in the certificate (CPC);
(10) To investigate accidents that may
occur on the property of the public
service or directly or indirectly
connected with its maintenance and
operation; and
(11) To compel compliance with the laws
and regulations.
(Aquino-Sundiang, Reviewer on Commercial Law, 2022
Edition, pp. 199-201)
D. UNLAWFUL ACTS
It shall be unlawful for any public service:
(a) To provide or maintain any service that is
unsafe, improper, or inadequate or withhold
or refuse any service which can reasonably
be demanded and furnished, as found and
determined by the Commission in a final
order which shall be conclusive and shall take
effect in accordance with this Act, upon
appeal of otherwise. (Sec. 19[a], C.A. No. 146)
(b) To make or give, directly or indirectly, by
itself or through its agents, attorneys or
brokers, or any of them, discounts or rebates
on authorized rates, or grant credit for the
payment of freight charges, or any undue or
unreasonable preference or advantage to any
person of corporation or to any locality or to
any particular description of traffic or service,
or subject any particular person or
corporation or locality or any particular
description of traffic to any prejudice or
disadvantage in any respect whatsoever; to
adopt, maintain, or enforce any regulation,
practice or measurement which shall be
439
 found or determined by the Commission to
be unjust, unreasonable, unduly preferential
or unjustly discriminatory in a final order
which shall be conclusive and shall take effect
in accordance with the provisions of this Act,
upon repeal or otherwise. (Sec. 19[b], C.A. No.
146)
(c) To refuse or neglect, when requested by the
Postmaster General or his authorized
representative, to carry public mail on the
regular trips of any public land transportation
service maintained or operated by any such
public service, upon such terms and
conditions and for a consideration in such
amounts as may be agreed upon between the
Postmaster General and the public service
carrier or fixed by the Commission in the
absence of an agreement between the
Postmaster General and the carrier. In case
the Postmaster General and the public
service carrier are unable to agree on the
amount of the compensation to be paid for
the carriage of the mail, the Postmaster
General shall forthwith request the
Commission to fix a just and reasonable
compensation for such carriage and the same
shall be promptly fixed by the Commission in
accordance with section sixteen of this Act.
(Sec. 19[c], C.A. No. 146 as amended by R.A. No.
11659);
(d) To refuse or neglect, when requested by the
Administrative Agency to urgently use,
deliver or render the public service for the
purpose of avoiding further loss on human,
material, economic, or environment during a
state of calamity. (Sec. 9, R.A. No. 11659)
E. POWERS OF THE PRESIDENT TO
SUSPEND OR PROHIBIT TRANSACTION
OR INVESTMENT
In the interest of national security, the President,
after review, evaluation and recommendation of
the relevant government department or
Administrative Agency, may, within sixty (60)
days from the receipt of such recommendation,
suspend or prohibit any proposed merger
or acquisition transaction, or any
investment in a public service that
effectively results in the grant of control,
whether direct or indirect, to a foreigner or
a foreign corporation. (Sec. 23[1], RA 11659)
The Philippine Competition Commission (PCC)
may be consulted on all matters relating to
mergers and acquisitions. (ibid.)
The NEDA shall promulgate rules and regulations
to implement the provisions of this section. (ibid.)
F. INVESTMENTS BY AN ENTITY
CONTROLLED BY OR ACTING ON
BEHALF OF THE FOREIGN
GOVERNMENT, OR FOREIGN STATE-
OWNED ENTERPRISES
An entity controlled by or acting on behalf of the
foreign government or foreign state-owned
enterprises shall be prohibited from owning
capital in any public service classified as public
utility or critical infrastructure: Provided, That the
prohibition shall apply only to investments made
after the effectivity of this Act: Provided, further,
That foreign state-owned enterprises which own
capital prior to the effectivity of this law are
prohibited from investing in additional capital
upon the effectivity of this Act: Provided, finally,
That notwithstanding the immediately preceding
clause, the sovereign wealth funds and
independent pensions funds of each state may
collectively own up to thirty percent (30%) of the
capital of such public services.
In the interest of national security, an entity
controlled by or acting on behalf of the foreign
government or foreign-owned enterprises shall
not make any date or information disclosure, nor
extend assistance, support or cooperation to any
foreign government, instrumentalities or agents.
The NEDA shall promulgate rules and regulations
to implement the provisions of this section. (Sec.
24, RA 11659)
440
G. RECIPROCITY CLAUSE understudy/skills development program to
ensure the transfer of technology/skills to
Foreign ownership of capital of entities Filipinos, whether next-in-rank or otherwise, with
engaged in the operation and management the potential of succeeding the foreign national in
of critical infrastructure the same establishment or its subsidiary, within a
specific period as may be determined by the
GENERAL RULE: EXCEPTION: DOLE, upon consultation with relevant
Foreign nationals shall Unless the country of government agencies and industry experts. (Sec.
not be allowed to own such foreign national 25, R.A. No. 11659)
more than fifty percent accords reciprocity to
(50%) of the capital of Philippine Nationals as TAXATION LAW
entities engaged in the may be provided by
operation and foreign law, treaty or
management of critical international
I. GENERAL PRINCIPLES OF TAXATION
infrastructure. agreement.
A. POWER OF TAXATION AS
Reciprocity may be satisfied by according rights DISTINGUISHED FROM POLICE
of similar value in other economic sectors. The POWER AND EMINENT DOMAIN
NEDA shall promulgate rules and regulations for
this purpose. (Sec. 25, R.A. No. 11659) Taxation
It is the enforced proportional contributions
Employment of a foreign national by a exacted by the State from persons and properties
public service pursuant to its sovereignty in order to support the
government and to defray all the public needs.
GENERAL RULE: EXCEPTION: (Mandanas v. Purisima, G.R. No. 199802, July 03,
A public service shall Unless otherwise 2018)
employ a foreign provided by law, or by
national only AFTER the any international Taxation may be made the implement of the
determination of non- agreement. state's police power (Lutz v. Araneta, GR No. L-7859,
availability of a Dec 22, 1955)
Philippine National who
is competent, able, and Police Power
willing to perform the It is the inherent and plenary power of the state
services for which the
which enables it to prohibit all that is hurtful to
foreign national is
desired. the comfort, safety and welfare of society.
(Sec. 25, R.A. No. 11659) (Ermita-Malate Hotel and Motel Operators Association,
Inc. v. Mayor of Manila, G.R. No. L-24693, July 31,
1967)
Requirements
Eminent Domain
Any foreign national seeking admission to the
It is the ultimate right of the sovereign power to
Philippines for employment purposes and any
appropriate, not only the public but the private
public service which desires to engage a foreign
property of all citizens within the territorial
national for employment in the Philippines must
sovereignty, to public purpose. (Republic v. Heirs of
obtain an employment permit pursuant to the
Borbon, G.R. No. 165354, January 12, 2015)
Labor Code of the Philippines (PD 442). (Sec. 25,
RA 11659)

Public services employing foreign nationals issued

employment permits in industries to be
determined by the Department of Labor and
Employment (DOLE) shall implement an

441
TAXATION POLICE EMINENT Affects all Affects all Affects only a
POWER DOMAIN OR persons, persons, particular property.
EXPROPRIATION property and property,
Purpose excises. privileges,
Levied for Exercised to Taking of private and rights.
the purpose promote property for public Basis
of raising public use. Public Public Necessity of the
revenue. welfare necessity. necessity public for private
through and the right property.
regulations. of the State
Amount of Exaction and the
There is no Limited to No exaction; public to self-
limit. cover the compensation is paid protection
cost of by the government. and self-
regulation, preservation.
issuance of (Mamalateo, Reviewer on Taxation, 2019 Edition, pp.
the license or 18-19)
surveillance.
Benefits Received by the Taxpayer What is the determining factor in
No special or No direct Direct benefit results distinguishing Tax and Regulation as a
direct benefit benefits are in the form of just form of Police Power?
is received received but compensation.
other than a healthy In distinguishing tax and regulation as a form of
the economic
police power, the determining factor is the
government standard of
secures that society is purpose of the implemented measure. If the
general attained purpose is primarily to raise revenue, then it will
benefit known as be deemed a tax even though the measure
resulting “damnum results in some form of regulation. On the other
from the absque hand, if the purpose is primarily to regulate, then
protection of injuria”. it is deemed a regulation and an exercise of the
taxpayer’s police power of the state, even though
person and incidentally, revenue is generated. (Angeles
property and
University vs. City of Angeles, G.R. No. 189999, July
welfare of all
27, 2012)

B. INHERENT AND CONSTITUTIONAL

LIMITATIONS OF TAXATION
Non-Impairment of Contracts 1. Inherent Limitations
The non- Contracts Contracts may be
impairment may be impaired. The following are the inherent limitations of
rule impaired. taxation:(PITIE)
subsists.
Transfer of Property of Rights a) Public Purpose;
Taxes paid Allows only Property is taken b) Inherently Legislative;
become restraints by the c) Territorial;
part of on the government upon d) International Comity; and
public funds exercise of payment of just e) Exemption of Government Entities, Agencies,
property compensation. and Instrumentalities. (Ignatius Michael D.
rights exist. Ingles, Tax Made Less Taxing: A Reviewer with
Codals and Cases, 3rd Edition, 2021, pp. 8-11)
Scope

442
a) Public Purpose
A revenue measure must be laid for public
purpose. It is the legislature who determines
“public purpose”. (Dimaampao, Basic
Approach to Income Taxation, 2018 Edition,
p. 37)
It is a general rule that the legislature is
without power to appropriate public revenue
for anything but a public purpose. It is the
essential character of the direct object of
expenditure which must determine its validity
as justifying a tax, and not the magnitude of
the interest to be affected nor the degree to
which the general advantage of the
community, and thus the public welfare, may
be ultimately benefited by their promotion.
Incidental to the public or to the state, which
results from the promotion of private interest
and the prosperity of private enterprises or
business, does not justify their aid by the use
of public money. (Pascual vs Secretary of Public
Works and Communication, G.R. No. L-10405,
December 29, 1960)
Test in Determining Public Purpose in Tax
1. Duty Test – whether the thing to be
threatened by the appropriation of public
revenue is something which is the duty of the
State, as a government.
The term "public purpose" is not defined. It is an
elastic concept that can be hammered to fit
modern standards. Jurisprudence states that
"public purpose" should be given a broad
interpretation. It does not only pertain to those
purposes which are traditionally viewed as
essentially government functions, such as
building roads and delivery of basic services, but
also includes those purposes designed to
promote social justice. Thus, public money may
now be used for the relocation of illegal settlers,
low-cost housing and urban agrarian reform.
(Planters Products, Inc. vs. Fertiphil Corporation, G.R.
NO. 166006, March 14, 2008)
2. Promotion of General Welfare Test –
whether the law providing the tax directly
promotes the welfare of the community in
equal measure. When a tax law is only a
mask to exact funds from the public when its
true intent is to give undue benefit and
advantage to a private enterprise, that law
will not satisfy the requirement of "public
purpose." (Ibid.)
Public purpose is not destroyed by the fact that
the tax law may not be beneficial to one group.
The fact that one sector is benefited and in the
process another sector is being in a way
prejudiced would not diminish the public
character of the tax. (Tio vs. Videogram Regulatory
Board, G.R. No. 75697, June, 1987)
The fact that it was donated after, does not cure
the defect that the tax was not for a public
purpose at the time the tax law was passed. The
public purpose must exist at the time of the
enactment of the tax legislation. (Pascual vs. Sec
of Public Works, G.R. No. L-10405, December,29 1960)
b) Inherently Legislative
General Rule: Congress could not re-delegate
this delegated power, since the power of taxation
is a power that is exercised by the Congress as
delegates of the People.
Exceptions:
i. Delegation to Local Governments
The Constitution grants each LGU the power
to create its own sources of revenue and to
levy taxes, fees and charges which shall
accrue exclusively to the LGU. (Section 5,
Article X, 1987 Constitution)
ii. Delegation to the President
Delegation by Congress to the President to fix
tariff rates, import and export quotas,
tonnage and wharfage dues; and other
duties or imposts. (Section 28(2), Article VI,
1987 Constitution)
443
iii. Delegation of Emergency Powers to the
President
Delegation to the President to enter into
executive agreements, and to ratify treaties
which may contain tax exemption provisions
subject to the concurrence by the majority
members of the Congress in the ratification
made by the President. (Section 28(4), Article
VI, 1987 Constitution)
c) Territorial
The power to tax is limited to the territorial
jurisdiction of the State (Ignatius Michael D.
Ingles, Tax Made Less Taxing: A Reviewer with
Codals and Cases, 3rd Edition, 2021, p.10).
d) International Comity
A state must recognize the generally
accepted tenets of international law, among
which are the principles of sovereign equality
among the states and of their freedom from
suit without their consent, that limit the
authority of a government to effectively
impose taxes on a sovereign state or
instrumentalities, as well as on its property
held, and activities undertaken, in that
capacity. Even when one enters the territory
of another, there is an implied understanding
that the former does not thereby submit itself
to the authority and jurisdiction of the latter.
(Mamalateo, Reviewer on Taxation, 2019, pp. 56-
57)
e) Exemption of Government Entities,
Agencies, and Instrumentalities
General Rule: Agencies performing
governmental functions are tax-exempt.
Exemption:
1. Agencies performing proprietary
functions.
2. When expressly provided by law or their
charter subjects them to tax
Government-owned and controlled
corporations which perform proprietary
functions are subject to tax. However,
certain corporations have been granted
exemption under Section 27(c) of R.A.
8424 as amended by R.A. 9337 which
took effect on July 1, 2005 and R. A.
10026 which lapsed into law in March 11,
2010 due to absence of signature of the
President, to wit:
i. Government Service Insurance System
(GSIS)
ii. Social Security System (SSS)
ii. Philippine Health Insurance
Corporation (PHIC)
iv. Local water districts
v. Home Development Mutual Fund
(HDMF) – exempt under CREATE Law
However, pursuant to Section 7 of R.A. 10963,
otherwise known as Tax Reform for Acceleration
and Inclusion (TRAIN) Law, PCSO is no longer
exempted from tax. Also, PAGCOR is removed
from income tax exemption under Sec. 1 of R.A.
9337, amending the 1997 NIRC.
However, since PAGCOR is exempt from VAT
under RA 9337, the BIR exceeded its authority in
subjecting PAGCOR to VAT. (PAGCOR vs. BIR, G.R.
No. 172087, March 15, 2011)
The exemption of PAL was expressly removed
under R.A. No. 7716. (PAL vs. Secretary of Finance,
G.R. No. 115852, October 30, 1995).
Moreover, taxes are financial burdens imposed
for the purpose of raising revenues to defray the
cost of the operation of the Government, and a
tax on property of the Government, whether
national or local, would merely have the effect of
taking money from one pocket to put it in another
pocket. (Board of Assessment of Appeals of Laguna
vs. CTA, G.R. No. L-35683, May 7, 1987)
Notwithstanding the immunity of the government
from taxes, the principle is also well recognized
that the Government may tax itself. In one case,
the SC held that there is no constitutional
limitation on the power of the Congress to tax the
AFP if it wishes to do so. (Bisaya Land
444
 Transportation Co., Inc. vs. CIR, G.R. No. L-10114,
November 26, 1957).\
2. Constitutional Limitations
Provisions Directly Affecting Taxation:
These are (PUPTONTSV):
i. Prohibition Against Imprisonment for Non –
Payment of Poll Tax (Section 20, Article III,
1987 Constitution)
ii. Uniformity and Equality of Taxation (Section
28, Article VI, 1987 Constitution)
iii. Progressive System of Taxation (Section
28, Article VI, 1987 Constitution)
iv. Grant by Congress of Authority to the
President to Impose Tariff Rates (Section 28,
Article VI, 1987 Constitution)
v. Appropriation, revenue, tariff bill must
exclusively originate in the House of
Representatives (Section 24, Article VI, 1987
Constitution)
vi. Prohibition Against Taxation of Religious,
Charitable Entities, and Educational
Entities (Section 28, Article VI, 1987
Constitution)
vii. Prohibition Against Taxation of Non-Stock,
Non-Profit Institutions (Section 4, Article
IX, 1987 Constitution)
viii. Majority Vote of Congress for Grant of Tax
Exemption (Section 28, Article VI, 1987
Constitution)
ix. Prohibition on Use of Tax Levied for Special
Purpose (Section 29, Article VI, 1987
Constitution)
x. President’s Veto Power on Appropriation,
Revenue or Tariff Bills (Section 27, Article
VI, 1987 Constitution)
xi. Non-Impairment of Jurisdiction of the
Supreme Court (Section 30, Article VI, 1987
Constitution)
xii. Grant of Power to the Local Government
Units to Create its Own Sources of Revenue
(Section 5, Article IX, 1987 Constitution)
xiii. No Appropriation or Use of Public Money for
Religious Purposes (Section 28, Article VI,
1987 Constitution)
(i) Prohibition Against Imprisonment for
Non-Payment of Poll Tax
No person shall be imprisoned for debt or
non-payment of a poll tax.” (Section 20, Article
III, 1987 Constitution)
Poll Tax, defined
A tax of fixed amount on individuals residing
within a specified territory, whether citizens
or not, without regard to their property. One
cannot be imprisoned for non-payment of poll
tax because payment thereof is not
mandatory, it is merely permissive. (51 Am.
Jur. 660, cited in Villanueva v. City of Iloilo, G.R.
No. L-26521, December 28, 1968)
While a person may not be imprisoned for
non-payment of poll tax, he may be
imprisoned for non-payment of other kinds of
taxes where the law expressly so provides.
(Dimaampao, Tax Principles and Remedies, 2021
Edition, p. 118)
(ii) Uniformity and Equality of Taxation
“The rule of taxation shall be uniform and
equitable.” (Section 28(1), Article VI, 1987
Constitution)
Uniformity means that all taxable articles or
kinds of property of the same classes shall be
taxed at the same rate. (Mamalateo, Reviewer
in Taxation, 2014, p. 58) A tax is uniform when
it operates with the same force and effect in
every place where the subject of it is found.
A local tax on tenement houses does not
violate the rule of uniformity and equality of
taxation even if the tax in question is not also
levied on other classes of buildings in the
locality where such tax is imposed. (Villanueva
vs. City of Iloilo, G.R. No. L-26521, December 28,
1968)
Uniformity is not disregarded if a tax is levied
on admission to cinema, theaters, vaudeville
companies, theatrical shows and boxing
exhibitions but does not tax other places of
amusement such as race tracks, cockpits,
445
cabarets, concert halls, circuses and other
places of amusement. (Eastern Theatrical Co.
vs. Alfonso, G.R. No. L-1104, May 31, 1949)
It must be stressed that the rule of uniform
taxation does not deprive Congress of the
power to classify subjects of taxation, and
only demands uniformity within the particular
class. (Abakada Guro Party List vs. Ermita, G.R.
No. 168056, September 1, 2005)
Uniformity vs. Equitability vs. Equality
Uniformity – All taxable property shall be
alike to be subjected to tax.
Equitability – The burden of taxation falls
to those better able to pay.
Equality – When the burden of the tax falls
equally and impartially upon all persons and
property subject to it.
double taxa
The law is also equitable even if it is equipped
with a threshold margin. The VAT rate of 0%
or 10% (now 12%) does not apply to sales
of goods or services with gross annual sales
or receipts not exceeding P1,500,000.00
(now P3,000,000). Also, basic marine and
agricultural food products in their original
state are still not subject to tax, thus ensuring
that prices at the grassroots level will remain
accessible (Abakada Guro Party List vs. Ermita,
G.R. No. 168056, September 1, 2005)
Note: Inequalities resulting from singling out
of one particular class for taxation or
exemption infringe no constitutional
limitation. (Sison vs. Ancheta, G.R. No. L-59431,
July 25, 1984)
(iii) Progressive System of Taxation
“The Congress shall evolve a progressive
system of taxation.” (Section 28(1), Article VI,
1987 Constitution)
Progressivity – Tax rate increases as the
tax base increases.
Progressivity of taxation is also mandated by
the Constitution. Our income tax system is
one good example of such progressivity
because it is built on the principle of the
taxpayer’s ability to pay. Taxation is
progressive when its rate goes up depending
on the resources of the person affected
(Reyes vs. Almanzor, G.R. Nos. 49839-46, April 26,
1991).
The Constitution does not really prohibit the
imposition of indirect taxes which, like the
VAT, are regressive. What it simply provides
is that Congress shall "evolve a progressive
system of taxation." The constitutional
provision has been interpreted to mean
simply that "direct taxes are to be preferred
[and] as much as possible, indirect taxes
should be minimized.” (Tolentino vs. Secretary
of Finance, GR No. 115455, October 30, 1995;
Abakada Guro Partylist vs. Ermita GR No. 168056,
September 1, 2005)
(iv)Appropriation, Revenue, Tariff Bill Must
Exclusively Originate in the House of
Representatives
“All appropriation, revenue or tariff bills, bills
authorizing the increase of public debts, bills
of local application and private bills, shall
originate exclusively in the House of
Representatives, but the Senate may propose
or concur with amendments.” (Section 24,
Article VI, 1987 Constitution)
Indeed, what the Constitution simply means
is that the initiative for filing revenue, tariff or
tax bills, bills authorizing an increase of the
public debt, private bills and bills of local
application must come from the House of
Representatives on the theory that, elected
as they are from the districts, the members
of the House can be expected to be more
sensitive to the local needs and problems. On
the other hand, the senators, who are elected
at large, are expected to approach the same
problems from the national perspective. Both
views are thereby made to bear on the
446
 enactment of such laws (Abakada Guro Party
List vs. Ermita, G.R. No. 168056, September 1,
2005).
(v) Grant by Congress of Authority to the
President to Impose Tariff Rates
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 imports within the framework
of the national development program of the
government. (Section 28 par. 2, Article VI, 1987
Constitution)
Flexible Tariff Clause
Requisites of a valid imposition of tariff
rates by the President: (DCF)
1. Delegated by Congress through a law;
2. Subject to Congressional limits and
restrictions; and
3. Within the framework of the national
development program (Section 28, Article
VI, 1987 Constitution)
(vi)Prohibition Against Taxation of
Religious, Charitable Entities, and
Educational Entities
“Charitable institutions, churches and
parsonages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all
lands, buildings and improvements, actually,
directly and exclusively used for religious,
charitable, or educational purposes shall be
exempt from taxation.” (Section 28(3), Article
VI of the 1987 Constitution)
The tax exemption under this constitutional
provision covers REAL PROPERTY taxes only.
“Exclusive” is defined as possessed and enjoyed
to the exclusion of others; debarred from
participation or enjoyment; and “exclusively” is
defined, in a manner to exclude; as enjoying a
privilege exclusively. If real property is used for
one or more commercial purposes, it is not
exclusively used for the exempted purposes but
is subject to taxation. The words “dominant use”
or “principal use” cannot be substituted for the
words “used exclusively” without doing violence
to the Constitution and the law. (Lung Center of the
Phil. vs. Quezon City, G.R. No. 144104, June 29, 2004)
What is meant by actual, direct and exclusive use
of the property for charitable purposes is the
direct and immediate and actual application of
the property itself to the purposes for which the
charitable institution is organized. It is not the use
of the income from the real property that is
determinative of whether the property is used for
tax-exempt purposes. (Id.)
Actual use is necessary. To be exempt from
tax, the lands, buildings and improvements must
not only be exclusively but also actually and
directly used for religious and charitable
purposes. (Province of Abra vs. Hernando, G.R. No.
L-49336, August 31, 1981)
Note: USE overrides OWNERSHIP that if
property, although actually owned by a religious,
charitable or educational institution, is actually
used for a non-exempt purpose, the exemption
from tax of said property vanishes.
While the use of the second floor of the main
building for residential purposes of the Director
and his family may find justification under the
concept of incidental use, which is complimentary
to the main or primary purpose, i.e., educational,
the lease of the first floor to the Northern
Marketing Corporation cannot be considered
incidental to the purpose of education. Since only
a portion is used for the purpose of commerce, it
is only fair that half of the assessed tax be
returned to the school involved. (Abra Valley vs.
Aquino, G.R. No. L-39086, June 15, 1988)
Rule on Gifts in Favor of Charitable and
other Institutions
General Rule: The constitutional exemption
applies only to property tax. Gifts are subject to
donor’s tax. (Rev. Casimiro Lladoc vs. CIR, G.R. No.
L-19201, June 16, 1965)
447
Exemption: Gifts made in favor of charitable
and other institutions may also be exempt from
Donor’s tax, not under the Constitution, but
under the NIRC, provided certain conditions are
met. (Sections 101(A)(2) & 101(B)(2), NIRC as
amended by TRAIN Law)
(vii) Prohibition Against Taxation of Non-
Stock, Non-Profit Institutions
“All revenues and assets of non-stock, non-
profit educational institutions used actually,
directly and exclusively used for educational
purposes shall be exempt from taxes and
duties.” (Section 4(3), Article XIV, 1987
Constitution)
For a non-stock non-profit hospital to be
completely exempt from income tax, Sec.
30(E) and (G) of the Tax Code requires that
said institution should operate exclusively for
charitable or social welfare purposes. But in
case that non-stock non-profit hospital earns
income from its for-profit activities, the
subject hospital shall only be subject to
income tax insofar as the income derived
from its profit activities, but only at the
preferential income tax rate of 10% based on
its taxable income, regardless of the
disposition made of such income, pursuant to
Sec. 27(B), in relation to the last paragraph
of Sec. 30 of the Tax Code. (CIR vs. St. Luke’s
Medical Center, G.R. No. 20-3514, February. 13,
2017)
Revenues derived from assets used in
operations of cafeterias, canteens and
bookstores are also exempt if they are also
owned and operated by the educational
institution as ancillary activities and the same
are located in the school premises. (RMC 76-
2003)
The income derived by it for being a non-
stock non-profit educational institution,
regardless of the source, which were used
actually, directly and exclusively for
educational purposes shall be exempt from
income tax. However, the income derived by
it from unrelated trade, business or activities
which were not used actually, directly and
exclusively for educational purposes shall be
subject to the preferential income tax rate of
10% of its taxable income pursuant to Sec.
27(B) of the Tax Code. (CIR vs. DLSU, G.R. No.
196596, November 9, 2016)
The crucial point of inquiry then is on the use
of the assets or on the use of the revenues.
These are two things that must be viewed
and treated separately. But so long as the
assets or revenues are used actually, directly
and exclusively for educational purposes,
they are exempt from duties and taxes. (CIR
vs. DLSU, G.R. No. 196596, November 9, 2016)
That the Constitution treats non-stock, non-
profit educational institutions differently from
proprietary educational institutions cannot be
doubted. The privilege granted to the former
(non – stock, non – profit educational
institution) is conditioned only on the actual,
direct and exclusive use of their revenues and
assets for educational purposes. In clear
contrast, the tax privilege granted to the
latter may be subject to limitations imposed
by law. Thus, it is declared that the last
paragraph of Section 30 of the Tax Code
without force and effect for being contrary to
the Constitution insofar as it is subject to tax
the income and revenues of non-stock, non-
profit educational institutions used actually,
directly and exclusively for educational
purpose. (CIR vs. DLSU, G.R. No. 196596,
November 9, 2016)
The income tax exemption pertains only to
non-stock, non-profit educational institutions
and does not cover the other exempt
organizations under Section 30 of the Tax
Code. (CIR vs. DLSU, G.R. No. 196596, November
9, 2016)
Proprietary educational institutions, including
those cooperatively owned may likewise be
entitled to such exemptions, subject to the
limitations provided by law, xxx” (Section 4(3),
Article XIV, 1987 Constitution)
448
 Proprietary educational institutions are,
however, taxable under Section 27 (B) of the
Tax Code. -See in -depth discussion in
Income Tax on Corporation Chapter
By the Tax Code's clear terms, a proprietary
educational institution is entitled only to the
reduced rate of 10% corporate income tax.
The reduced rate is applicable only if: (1) the
proprietary educational institution is
nonprofit and (2) its gross income from
unrelated trade, business or activity does not
exceed 50% of its total gross income. (CIR vs.
DLSU, G.R. No. 196596, November 9, 2016)
(viii) Majority Vote of Congress for Grant of
Tax Exemption
“No law granting any tax exemption shall be
passed without the concurrence of a majority
of all the Members of the Congress.” (Section
28 (4), Article VI, 1987 Constitution)
Reason: To prevent indiscriminate grant of
tax exemptions.
In granting tax exemptions, an absolute
majority of the members of the Congress is
required, while in cases of withdrawal of such
tax exemption, a relative minority is
sufficient. (Dimaampao, Tax Principles and
Remedies, 2021 Edition)
(ix) Prohibition on Use of Tax Levied for
Special Purpose
“All money collected or any tax levied for
special purposes 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.” (Section
29(3), Article VI of the 1987 Constitution)
(x) President’s Veto Power on
Appropriation, Revenue or Tariff Bills
“The President shall have the power to veto
any particular item or items in an
appropriation, revenue or tariff bill but
the veto shall not affect the item or items
which he does not object.” (Section 27 (2),
Article VI, 1987 Constitution)
(xi) Non-Impairment of Jurisdiction of
the Supreme Court
“The Congress shall have the power to
define, prescribe, and apportion the
jurisdiction of the various courts but may not
deprive the Supreme Court of its jurisdiction
over cases enumerated in Section 5 hereof.”
(Section 2, Article VIII, 1987 Constitution)
The Supreme Court shall have, among
others, the following powers:
1. 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;
2. All cases involving the legality of any tax,
impost, assessment, or toll, or any
penalty imposed in relation thereto.”
(Section 5, Article VIII, 1987 Constitution)
Under the principle of judicial non –
interference, the courts cannot inquire into
the wisdom of the taxing act unless there is
a violation of the Constitutional limitations or
restrictions. (CIR v. Lingayen Gulf Electric Power
Co., Inc. GR L 237771, August 4, 1968)
(xii) Grant of Power to the Local
Government Units to Create its Own
Sources of Revenue
“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,
449
 fees, and charges shall accrue exclusively to to individuals, especially by providing
the local governments.” (Section 5, Article X, notice and opportunity for hearing.
1987 Constitution)
D. TAX AS DISTINTINGUISHED FROM
When local governments invoke the power to OTHER FORMS OF EXACTIONS
tax on national government instrumentalities,
the exercise of the power is construed strictly Tax vs. License Fee
against local governments. The rule is that a
tax is never presumed and there must be a Tax License Fee
clear language in the law imposing the tax. As to Basis
(MIAA v. CA, G.R. No. 155650, July 20, 2006) Power of Taxation Police power
As to Purpose
(xiii) No Appropriation or Use of Public To generate revenue Regulatory
Money for Religious Purposes As to Limitations
Generally, unlimited; Limited to costs of issuing
No public money or property shall be Subject to inherent the license;
and constitutional Necessary inspection or
appropriated applied, paid or employed,
limitations police surveillance
directly or indirectly, for the use, benefit or
Effect of Non-payment
support of any sect, church, denomination, Does not make the Makes the business illegal
sectarian institution or system of religion, or business illegal
of any priest, preacher, minister, other
religious teacher, or dignitary as such, except If the purpose is primarily revenue or if revenue
when such priest, preacher, minister, or is at least one of the real and substantial
dignitary is assigned to the armed forces, or purposes, then the exaction is a tax. Hence, the
to any penal institution, or government motor vehicle registration fees are taxes because
orphanage or leprosarium. (Section 29(2), the legislative intent is mainly to raise funds for
Article VI, 1987 Constitution) the construction and maintenance of highways
and, to a much a lesser degree, to pay for the
Exception to the limitation: Except if the expenses of the Land Transportation Office. (PAL
priest, preacher, minister or dignitary is v. Edu, et al. GR No. L-41383, August 15, 1988)
assigned to: (LAPG)
An ordinance imposing fees based on project cost
1. The Armed Forces whose purpose is to regulate certain construction
2. Any penal institution activities of the identified special projects, which
3. Government orphanage or includes "cell sites" or telecommunications
4. Leprosarium (Section 29 (2), Article VI, towers, is not a tax because the fees imposed in
1987 Constitution) the said ordinance are primarily regulatory in
nature, and not primarily revenue-raising. (Smart
C. REQUISITES OF A VALID TAX (PUWLO) vs. Municipality of Malvar, Batangas, GR No. 204429
dated February 18, 2014)
1. It must be for a public purpose;
2. It must be uniform; Tax vs. Toll
3. The party being taxed must be within
the jurisdiction of the taxing authority; Tax Toll
4. The tax must not impugn on the inherent As to Definition
and constitutional limitations on the Demand of sovereignty A demand of
power of taxation; and for raising revenue proprietorship. Amount
5. Assessment and collection of certain charged for the cost and
maintenance of
kinds of taxes guarantee against injustice
property used
As to Purpose

450
 For support of the As compensation for use Tax vs. Customs Duties
government of another’s property
As to Determination of Amount Tax Customs Duties
Determined by the
Determined by the cost As to Purpose
sovereign of the property, its Raising revenue Controlling the flow of the
improvement or goods of the country
maintenance As to Broadness
As to who may impose Broader term Tariff or tax on the
importation or exportation
Imposed by the State Imposed either by the
of goods
government or by
private individuals or
entities Tax vs. Debt

Tax vs. Penalty Tax Debt

As to Basis
Tax Penalty Law Contract / Judgment
As to Definition As to effect of failure to pay
Enforced proportional Sanction imposed for Civil and criminal Civil liability only
contributions from violation of laws liability
persons and property As to mode of payment
As to purpose Money Money, property, or
For revenue To regulate conduct service
As to Authority As to assignability
Imposed only by the Imposed either by the No Yes
government government or by As to subjectivity to Compensation / set-off
private individuals or No Yes
entities As to interest
Yes, if deficient or General rule: No, unless
Tax vs. Special Assessment delinquent expressly stipulated
As to authority
Public authority Private individuals
Tax Special Assessment
Prescription
As to Definition
Determined by the Determined by the Civil
Demand of sovereignty Special levy on lands
Tax Code Code
for raising revenue comprised within the
territorial jurisdiction of
a Province, City or
Municipality specially E. KINDS OF TAXES
benefitted by public
works, projects, As to Object
improvements funded
by the LGU concerned 1. Personal or poll tax - A fixed amount
As to subject imposed upon individuals, whether citizens or
Imposed on lands, Imposed on land only
not, residing within a specified territory
persons, property,
business, etc.
without regard to their property or
As to liability occupation. (DIMAAMPAO, Tax Principles and
Personal Non-personal Remedies, 2021, p.168)
As to basis 2. Property tax - Tax imposed on property,
Based on necessity (and Based solely on benefits real or personal, in proportion to its value.
partially on benefits) (Ibid.)
As to application 3. Privilege/ excise tax - A charge upon the
General Special to a particular performance of an act, the enjoyment of a
time and place privilege, or the engaging in an occupation.

451
 (51 Am. Jur. 61, cited in Villanueva v. City of Iloilo,
G.R. No. L-26521, December 28, 1968)
As to Burden or Incidence
1. Direct Taxes - Tax for which a taxpayer is
directly liable on the transaction or business
it engages in. (DIMAAMPAO, Tax Principles
and Remedies, 2021, p.163
2. Indirect Taxes - Tax primarily paid by
persons who can shift the burden upon
someone else. (DIMAAMPAO, Tax Principles and
Remedies, 2021, p.164)
As to Tax Rate
1. Specific tax – imposed and based on a
physical unit of measurement, as by head or
number, weight, or length or volume (e.g.
taxes on distilled spirits and wines). (Tan vs.
Mun. of Pagbilao, G.R. L-14264, April 30, 1963)
2. Ad Valorem Tax – is a tax, duty, or
imposition based on the specified value of the
goods. (CIR v. Pilipinas Shell Petroleum, G.R. No.
188497, February 19, 2014).
3. Mixed– partially specific and partly ad
valorem. An example would be the excise tax
on fermented liquors which has a separate
specific tax rate based on the selling price of
the article.
As to purposes
1. General/ fiscal or revenue - Tax imposed
solely to raise revenue for the government,
such as: income tax, donor’s tax. estate tax
and value-added tax. (DIMAAMPAO, Tax
Principles and Remedies, 2021, p.167)
2. Special/ regulatory or sumptuary - Tax
imposed and collected to achieve a particular
legitimate object of government. (Ibid.)
As to Scope of Authority
1. National Tax - Tax imposed by the National
Government (DIMAAMPAO, Tax Principles and
Remedies, 2021, p.168)
2. Local or Municipal - ax levied and collected
by a local government (Ibid.)
As to Graduation
1. Progressive - one whereby the rate
increases as the tax base (amount) increases.
(Ibid.)
2. Regressive - one whereby the tax rate
decreases as the tax base increases. (Ibid.)
3. Proportionate - Tax rate is based on a fixed
percentage of the amount of the property,
receipts or other bases to be taxed.
F. DOCTRINES IN TAXATION
1. Construction and Interpretation of Tax
Laws, Rules and Regulations
General Rule: If the tax law is clear and
unambiguous, apply the law strictly against
the taxpayer and in favor of the government.
(CIR v. CA, CTA and Ateneo de Manila, GR 115349,
April 18, 1997)
Exception: If the law is doubtful and
ambiguous, then the law must be construed
strictly against the Government and liberally
in favor of the taxpayer.
Burdens are not to be imposed nor presumed
to be imposed beyond the plain and express
terms of the law. "The general rule of
requiring adherence to the letter in
construing statutes applies with peculiar
strictness to tax laws and the provisions of a
taxing act are not to be extended by
implication. (CIR vs. San Miguel Corporation,
G.R. No. 205045, January 25, 2017)
2. Prospectivity of Tax Laws
General Rule:
Tax Laws are prospective in application.
Exceptions:
a. Where no vested right will be impaired;
b. Where the law allows retroactive
application; and
452
 c. If there is bad faith on the part of the
taxpayer (Sec.246, NIRC)
Note: Section 246 of the NIRC states that tax
rulings or any revocation, modification, or
reversal of any of the rules and regulations
promulgated by the Commissioner or any
rulings or circulars promulgated by him shall
not be given retroactive application if such
revocation, modifications, or reversal is
prejudicial to the taxpayers except:
1. When the taxpayer deliberately
misstated or omitted from his return
certain facts or documents required by
him by the BIR;
2. When the facts subsequently gathered
are different from the facts on which the
tax ruling was based; and
3. When the taxpayer is in bad faith.
3. Imprescriptibility of Taxes
General Rule: Taxes are imprescriptible.
Exceptions: When provided otherwise by
the tax law itself.
Example: NIRC provides for statutes of
limitation on the assessment and collection of
taxes therein imposed (i.e. 3-year period to
assess, and 5-year period under Sec. 222).
4. Double Taxation
It means taxing the same person for the
same tax period and the same activity twice,
by the same jurisdiction.
Kinds of Double Taxation
a) Double Taxation in Strict Sense – same
property is taxed twice when it should be
taxed only once; and that both taxes are
imposed on the same property or subject
matter for the same purpose, by the same
State, Government or taxing authority within
the same jurisdiction or taxing district during
the same taxing period and covering the
same kind of character of tax. It violates the
equal protection clause of the constitution.
(Villanueva vs. City of Iloilo, G.R. No. L-26521,
December 28, 1968)
Requisites:
1. Both taxes are imposed on the same
property or subject matter;
2. For the same purpose;
3. Imposed by the same taxing authority;
4. Within the same jurisdiction;
5. During the same taxing period;
6. Covering the same kind or character of
tax. (Soriano, Manuel and Laco, The Tax
Reviewer, 2021 Edition, p. 7)
b) Double Taxation in Broad Sense or
Indirect Double Taxation – is the opposite
of direct double taxation and is not legally
objectionable. The absence of one or more of
the foregoing requisites of obnoxious direct
tax makes it indirect. (Mamalateo, Reviewer on
Taxation, 2019, p. 25)
Constitutionality of Double Taxation
There is no constitutional prohibition against
double taxation in the Philippines. It is something
not favored, but is permissible, provided some
other constitutional requirement is not thereby
violated.(Villanueva vs. City of Iloilo, G.R. No. L-
26521, December 28, 1968)
Double taxation in its stricter sense is
unconstitutional, but that in the broader sense is
not necessarily so. (Mamalateo, Reviewer on
Taxation, 2019, p. 25)
General Rule: Our Constitution does not
prohibit double taxation, in a broad sense. Hence,
it may not be invoked as a defense against the
validity of tax laws. (Ibid.)
DIRECT DOUBLE INDIRECT DOUBLE
TAXATION TAXATION (Allowed)
(Prohibited)
1. Both taxes are Extends to all cases in
imposed on the which there are two or
same property or more pecuniary
subject matter; impositions but one or
more of the
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 2. For the same requisites of direct (i)Ways of Shifting Tax Burden
purpose; double taxation is
3. Imposed by the missing. 1. Forward shifting- transfer of the tax
same taxing i.e. VAT and LBT burden from a factor of production through
authority; imposed on same
the factors of distribution until finally rests on
4. Within the same revenue
the consumer.
jurisdiction;
5. During the same
2. Backward shifting- transfer of the tax
taxing period;
burden from the consumer through the
6. Covering the same
kind or character of
factors of distribution to the factor of
tax. production.
(Villanueva vs. City of Iloilo, G.R. No. L-26521,
December 28, 1968) 3. Onward shifting- transfer of the tax burden
two or more times either forward or
Exception: Double taxation will not be allowed backward (Valencia & Roxas, Income
if it results in a violation of the equal protection Taxation, 2016, p.34).
clause.
(ii) Taxes That Can Be Shifted - Indirect
There is no double taxation in the following taxes e.g., Value Added Tax
instances:
1. Tax imposed by the State and the local (iii) Meaning of Impact and Incidence of
government upon the same occupation, Taxation
calling or activity. (Villanueva vs. City of Iloilo,
G.R. No. L-26521 December 28, 1968) Impact of Taxation - The point on which a
2. Real estate tax and income tax collected on tax is originally imposed.
the same real property leased for earning
purposes. (Ibid.) Incidence of Taxation – the point on
3. Taxes are imposed on the taxpayer's final which a tax burden finally rest or settle down
product and the storage of raw materials
used in the production of the final product. Tax capitalization – it means the reduction in
(Procter and Gamble Philippines vs. Municipality the price of the taxed object equal to the
of Jagna, G.R. No. L-24265, December 8,1979) capitalized value of future taxes which the
purchaser expects to be called upon to pay.
5. Escape from Taxation A special form of backward shifting except that
while the latter involves the shifting back of a
Tax avoidance and tax evasion are the common single tax, the former involves the throwing back
devices wherein the taxpayer can escape the of a whole series of taxes and taxes place
effects of taxation. (Ignatius Michael D. Ingles, before any of them, with the exemption of the
Tax Made Less Taxing: A Reviewer with Codals first is paid. (Valencia & Roxas, Income Taxation,
and Cases, 3rd Edition, 2021, p.23). 2016, p.35)

a) Shifting of Tax Burden Transformation – it is the method whereby the

The transfer of the burden of tax by the original
payer or the one on whom the tax was assessed
or imposed to another.
manufacturer or producer upon whom the tax has
been imposed, fearing the loss of his market if he
should add the tax to the price, pays the tax and
endeavors to recoup himself by improving his
process of product at a lower cost. (Valencia &
Roxas, Income Taxation, p.35)

454
b) Tax Avoidance / Tax Minimization TAX AVOIDANCE / TAX EVASION /TAX
TAX MINIMIZATION DODGING
It is the use by the taxpayer of legally permissible The tax saving device A scheme used outside of
alternative tax rates or methods of assessing within the means those lawful means and
sanctioned by law. This when availed of, it usually
taxable property or income in order to avoid or
method should be used subjects the taxpayer to
reduce tax liability (e.g. termination of deposits by the taxpayer in good further or additional civil or
subject to 20% final tax and re-investing it in tax- faith and at arm’s criminal liabilities. Tax
exempt government bonds). It is a saving device length. evasion connotes
within the means sanctioned by law and should Legal Illegal
be used by the taxpayer in good faith and at (CIR vs. Estate of Toda, Jr., G.R. No. 147188,
arm's length. (CIR vs. Estate of Benigno Toda, GR September 14, 2004)
147188, September 14,2004)
6. Exemption From Taxation
c) Tax Evasion / Tax Dodging
A grant of immunity, express or implied, to
It is the use of taxpayers of illegal or fraudulent particular persons or corporations from the
means to evade or lessen the payment of a tax obligation to pay taxes. (Surigao Consolidated
(e.g. deliberate non-reporting or under-reporting Mining vs. CIR, G.R. No. L-14878, December 26, 1963)
of an income). (Id.)
Basis of the Grant of Exemption:
Indicia of Fraud in Tax Evasion
“No law granting any tax exemption should be
a) Failure to declare for taxation purposes true passed without the concurrence of a majority of
and actual income derived from business for all the members of Congress (Section 28(4), Article
2 consecutive years; or VI, 1987 Constitution).
b) Substantial under declaration of revenues in
the income tax returns of the taxpayer for 4 Nature of Tax Exemption
consecutive years coupled with intentional
overstatement of deductions. (see Sec. 248[B], 1. It is a personal privilege of the grantee.
NIRC) 2. It is generally revocable by the government
unless the exemption is founded on a
Connotes the Integration of 3 Factors: contract, which is protected from
(ESC) impairment, but the contract must contain
the other essential elements of contracts.
1. The end to be achieved, i.e. the payment of ▪ It implies a waiver on the part of the
less than that known by the taxpayer to be government to collect what otherwise
legally due; would be due, and in this sense is
2. An accompanying state of mind which is prejudicial thereto.
described as being “evil”, in “bad faith”, 3. It is not necessarily discriminatory so long as
“willful”, or “deliberate and not merely the exemption has a reasonable foundation
accidental”, and or rationale basis.
3. A course of action or failure of action which
is unlawful. (CIR vs.Estate of Benigno Toda, GR Basic Principles Regarding Tax Exemption
147188, September 14,2004)
🕮 Exemptions are highly disfavored by law and
Note: See also Section 248(B) of NIRC providing he who claims an exemption must be able to
for prima facie evidence of filing a false or justify his claim by the clearest grant of law.
fraudulent return. An exemption from the common burden
cannot be permitted to exist upon vague

455
 implication. (Asiatic Petroleum Co. vs. Llanes,
G.R. No. 25386, October 20, 1926)
🕮 He who claims exemption should prove his
factual and legal basis for exemption.
(Commissioner of Internal Revenue vs. Acesite
Philippines Hotel Corporation, G.R. No. 147295,
February 16, 2007)
 Tax exemptions are strictly construed against
the person claiming it. (Esso Standard Eastern,
Inc. vs. Acting Commissioner of Customs, GR No.
L-21841, October 28, 1966)
 Constitutional grant of exemptions is self-
executing.
 In the same way that taxes are personal, tax
exemptions are also personal.
 Deductions from income tax purposes
partake of the nature of tax exemptions,
therefore should also be construed strictly
against the taxpayer. (Commissioner of Internal
Revenue vs. General Foods Phil., Inc., GR No.
143672, April 24, 2003)
 The same is true with regards tax refunds.
(Commissioner of Internal Revenue vs. Eastern
Telecommunications Phil., Inc., G.R. No. 163835,
July 7, 2010)
a) Kinds of Tax Exemption
As to Form:
(i) Express - Expressly granted by the
Constitution, statutes, treaties, franchises or
similar legislative acts.
Implied - When particular persons,
properties, or exercise are deemed exempt as
they fall outside the scope of the taxing
provision itself.
(ii) Contractual - Are those agreed to by the
taxing authority in contract lawfully entered
into by them under enabling laws. (Casanovas
v. Hord, G.R. No. 3473, March 22, 1907)
As to Basis:
(i) Constitutional Exemptions – Immunities
from taxation which originate from the
Constitution.
(ii) Statutory Exemptions – those which
emanate from legislation.
As to Extent:
(i) Total Exemption – connotes absolute
immunity.
(ii) Partial Exemption – one where a collection
of a part of the tax is dispensed with.
b) Rationale/Grounds for Exemption
Being a waiver from its power to tax, the
government, in granting tax exemption,
should justify that the grant of such
exemption will benefit the body of people,
which is sufficient to offset the loss of
revenue occasioned thereby.
Grounds for Tax Exemption
(i) Contract – the grant of tax exemption is
usually contained in the charter of the
corporation to which the exemption is
granted.
(ii) Public policy -to encourage new and
necessary industries, or to foster charitable
institutions.
(iii) Reciprocity – to reduce the rigors of
international double or multiple taxation, tax
exemptions maybe granted in treaties. A tax
exemption is a personal privilege of the
grantee and therefore not assignable; it is
generally revocable by the government,
unless founded on contract and must not be
discriminatory.
c) Revocation of Tax Exemption
If the grant of an exemption does not
constitute a contract, but merely “a
spontaneous concession by the legislature,
not connected with any service or duty
imposed” it is REVOCABLE by the power
which made the grant.
456
 Thus, if the basis of the tax exemptions is by
virtue of a franchise granted by Congress, the
exemption may be revoked. However, if the
tax exemption constitutes a binding contract
and for a valuable consideration, the
government cannot unilaterally revoke the
tax exemption.
d) Exemption of Government from
Taxation
There is no point in national and local
government taxing each other, unless a
sound and compelling policy requires such
transfer of public funds from one government
pocket to another. However, while
government instrumentalities are exempt
from real property taxes, government
owned or controlled corporations are
not exempt from real property taxes.
(Manila International Airport Authority vs. City of
Paranaque, G.R. No. 15560, July 20, 2006)
Revocability of Tax Exemption
A law which changes the terms of the contract by
making new conditions, or changing those in the
contract, or dispenses with those expressed,
impairs the obligation. However, the non-
impairment rule does not apply to public utility
franchises since a franchise is subject to
amendment, alteration or repeal by the Congress
when the public interest so requires (Section 11,
Article XII, 1987 Constitution).
Contractual tax exemptions are those agreed
to by the taxing authority in contracts, such as
those contained in government bonds or
debentures, lawfully entered into by them under
enabling laws in which the government, acting in
its private capacity, sheds its cloak of authority
and waives its governmental immunity. Truly, tax
exemptions of this kind may not be revoked
without impairing the obligations of contracts.
These contractual tax exemptions, however, are
not to be confused with tax exemptions granted
under franchises. A franchise partakes the
nature of a grant which is beyond the purview of
the non-impairment clause of the Constitution.
Article XII, Section 11, of the 1987 Constitution is
explicit that no franchise for the operation of a
public utility shall be granted except under the
condition that such privilege shall be subject to
amendment, alteration or repeal by Congress as
and when the common good so requires. (Meralco
vs. Province of Laguna, G.R. No. 131359, May 5, 1999)
Rules:
a. When the exemption is unilaterally granted
by law and the same is withdrawn by virtue
of another law, there is no violation.
b. When the exemption is bilaterally agreed
upon between the government and the
taxpayer, it cannot be withdrawn without
impairing the contract.
c. When the exemption is granted under a
franchise, it may be revoked because a
franchise is subject to amendment,
alteration, or repeal by Congress. (Ibid.)
7. Equitable Recoupment
 Where the refund of a tax illegally or
erroneously collected or overpaid by a
taxpayer is barred by prescription, a tax
being assessed against a taxpayer may
be recouped or set-off against the tax
whose refund is now barred by
prescription. (Collector of Internal Revenue
vs. University of Santo Tomas and the Court
of Tax Appeals, G.R. No. L-11274, November
28, 1958)
Note: This is NOT followed in the Philippines.
(Id.)
8. Prohibition On Compensation and Set-
Off
General Rule:
There can be no off-setting of taxes against the
claims that the taxpayer may have against the
government. A person cannot refuse to pay a tax
on the ground that the government owes him an
amount equal to or greater than the tax being
collected. (Francia v. Intermediate Appellate
Court, G.R. No. L-67649, June 28, 1988)
457
Reasons:
1. Lifeblood Doctrine;
2. Taxes are not contractual obligation but arise
out of duty to the government;
3. The government and the taxpayer are not
mutually creditors and debtors of each other.
(Francia vs. IAC, G.R. No. L-67649, June 28, 1988)
Exception:
Where both claims already became overdue and
demandable as well as fully liquidated, or where
the government and the taxpayer are in their own
right reciprocally debtors and creditors of each
other, compensation takes place by operation of
law. (Domingo vs. Garlitos, G.R. No. L-18994, June 29,
1963)
 Thus, a tax presently being assessed against
a taxpayer may not be recouped or set-off
against an overpaid tax the refund of which
is already barred by prescription (Domondon,
11th ed, p. 46)
 A tax is not an obligation that is created by
contracts express or implied. It is an
obligation imposed by law. Inasmuch as
taxes are not debt, it follows that the two
obligations are not subject of set-off or
compensation under Art. 1279 of the New
Civil Code. (Domingo vs. Garlitos, G.R. No. L-
18994, June 29, 1963)
 Taxes could not be set-off against the
taxpayer’s claim of refund for reforestation
charges it initially shouldered which should
have been the obligation of the government.
(Republic vs. Mambulao Lumber, G.R. No. L-
17725, February 28, 1962)
 The obligation to pay real estate tax
delinquency could not be set-off by the
amount which the government is indebted to
the former by way of expropriation that was
effected by the national government.
(Francia vs. IAC, G.R. No. L-67649, June 28,
1988)
 There can be no offsetting of taxes against
the claims that a taxpayer may have against
the government, such as reimbursement
from the Oil Price Stabilization Fund (OPSF).
(Caltex Phils. vs. COA, G.R. No. 92585, May
8, 1992)
 Philex cannot refuse the payment of its tax
liabilities on the ground that it has pending
claims for VAT input credit/refund. A
taxpayer cannot refuse to pay his taxes when
they fall due simply because he has a claim
against the government or that the collection
of the tax is contingent on the result of the
lawsuit it filed against the government. (Philex
Mining vs. Commissioner, G.R. No. 125704,
August 28, 1998)
9. Compromise and Tax Amnesty
Compromise
A contract whereby the parties, by making
reciprocal concessions, avoid litigation or put an
end to one already commenced (Article 2028, New
Civil Code).
a) Requisites:
1. The taxpayer must have a tax liability.
2. There must be an offer (of the amount
to be paid by the taxpayer)
3. There must be an acceptance (by the
Commissioner or taxpayer as the case
maybe) of the offer in the settlement of
the original claim. (Ben L. Chuy, et al. v.
Collector of Internal Revenue, C.T.A. Case,
July 16, 1958)
b) Persons Allowed to Enter into
Compromise of Tax Obligations:
1. BIR Commissioner – as expressly
authorized by the NIRC subject to the
following conditions.
a) When a reasonable doubt as to
validity of the claim against the
taxpayer exist; OR
b) The financial position of the taxpayer
demonstrates a clear inability to pay
the assessed tax. (Sec. 204, NIRC)
2. Collector of Customs- with respect to
custom duties limited to cases where the
legitimate authority is specifically granted
such in remission of duties. (Sec. 709,
Tariffs and Customs Code)
458
 3. Customs Commissioner- subject to Distinguish from Tax Exemption
the approval of the Secretary of Finance,
in cases involving the imposition of fines, TAX AMNESTY TAX EXEMPTION
surcharges, and forfeitures. (Sec. 2316, Immunity from all Immunity from civil liability
Tariffs and Customs Code) criminal and civil only.
obligations from non-
Tax Amnesty payment of taxes.
It is a general pardon Immunity or privilege
Tax amnesty is a general pardon or intentional given to all taxpayers. granted to qualified
overlooking by the State of its authority to impose taxpayers from a charge or
penalties on persons otherwise guilty of evasion burden of which others are
subjected. (Florer vs.
or violation of a revenue or tax law. It partakes
Sheridan, 137 Ind. 28, 36
of an absolute forgiveness or waiver by the
NE 365)
government of its right to collect what is due it It applies only to past tax Applies prospectively after
and to give tax evaders who wish to relent a periods. (People vs. the grant of the exemption
chance to start with a clean slate. A tax amnesty, Castañeda, G.R. No. L- or from qualification
much like a tax exemption, is never favored nor 46881, September 15, therefrom.
presumed in law. The grant of a tax amnesty, 1988)
similar to a tax exemption, must be construed (Soriano, Manuel and Laco, The Tax Reviewer, 2021
strictly against the taxpayer and liberally in favor Edition, pp. 11-12)
of the taxing authority. (CIR vs. Philippine-Aluminum
Wheels, Inc., G.R. No. 216161, August 9, 2017) II. NATIONAL TAXATION

Effect of Submission of Documentary A. TAXING AUTHORITY

requirements for Availment of Tax Amnesty
1. JURISDICTION,
The Court explained that the documentary
requirements and payment of the amnesty tax
operate as a suspensive condition, such that
completion of these requirements entitles the
taxpayer-applicant to immediately enjoy the
immunities and privileges under Republic Act No.
9480.
However, the Court further stated that Section 6
of the law contains a resolutory condition.
Immunities and privileges will cease to apply to
taxpayers who, in their SALN, were proven to
have understated their net worth by 30% or
more.
Republic Act No. 9480 provides that the
proceeding to challenge the SALN must be
initiated within one year following the date of
filing of the Tax Amnesty documents. Respondent
asserts that it availed of the tax amnesty program
on January 25, 2008. Hence, petitioner's
challenge, made only in April 2009, was already
time-barred (CIR vs. Apo Cement Corp.,G.R. No.
193381, February 8, 2017)
POWER, AND
FUNCTIONS OF THE COMMISSIONER
OF INTERNAL REVENUE
a) Interpreting Tax Laws and Deciding
Cases
i. Powers and Duties of the Bureau of
Internal Revenue (E3A)
● The assessment and collection of all
internal revenue taxes, fees, and
charges;
● The enforcement of all forfeitures,
penalties, and fines connected therewith;
● The execution of judgments in all cases
in its favor by the CTA and ordinary
courts;
● Giving effect to and administering the
supervisory and police powers conferred
to it by the Tax Code or other laws.(Sec.
2, NIRC)
ii. Powers of the Commissioner of
Internal Revenue: IDIOM ASAP -D)

459
 iii. The penalties imposed in relation
1) Interpret tax laws (Sec. 4[1], NIRC). thereto, or
2) Decide Tax Cases(Sec. 4[2], NIRC) iv. Other matters arising under the Tax
3) Obtain information and to summon Code, other tax laws or portions
thereof administered by the BIR. (Sec.
examine and take testimony of persons
4, NIRC)
(Sec. 5, NIRC as amended by TRAIN)
4) Make assessments and prescribe In any case, even if this Court were to disregard
additional requirements for tax the Collection Letter as a final decision of the
administration and enforcement(Sec. Commissioner on Avon's protest, the Collection
6[A], NIRC, as amended by TRAIN)
Letter constitutes an act of the Commissioner on
5) Prescribe Real Property Values(Sec.
"other matters" arising under the National
6[E], NIRC, as amended by TRAIN)
Internal Revenue Code, which, pursuant to
6) Make arrest and seizures(Sec. 15, NIRC,)
Philippine Journalists, Inc. v. CIR, may be the
7) Delegate powers(Sec. 7, NIRC,)
subject of an appropriate appeal before the Court
8) Assign or reassign internal revenue
of Tax Appeals(CIR vs. Avon Products Manufacturing,
officers to establishments where articles
G.R. Nos. 201398-99, October 03, 2018).
subject to excise tax are produced or
kept(Secs.95 &97 , NIRC)
3) Power to Obtain Information, and to
9) Impose duties on certain officers
Summon, Examine, and Take Testimony
10) Suspend business operations(Sec. 115,
of Persons.
NIRC)
In ascertaining the correctness of any return,
1) Power to interpret tax laws
or inmaking a return when none has been
made, or in determining the liability of any
● The CIR shall have the exclusive and
person for any internal revenue tax, or in
original jurisdiction to interpret the
collecting any suchliability, or in evaluating
provisions of the Tax Code and other
tax compliance, the Commissioner is
special tax laws, subject for review by the
authorized: (E-COST)
Secretary of Finance.(Sec. 4, NIRC)
NOTE: A ruling by the CIR that interpret
(i) To examine any book, paper, record, or
provisions of the NIRC and other tax laws
other data which may be relevant or
shall be presumed valid unless modified,
material to such inquiry;
reversed or superseded by the Secretary of
Finance. A taxpayer who receives an adverse
(ii) To obtain on a regular basis from any
ruling from the CIR may, within thirty (30)
person other than the person whose
days from the date of receipt of such ruling,
internal revenue tax liability is subject to
seek its review by the Secretary of Finance.
audit or investigation, or from any office
The Secretary of Finance may also review the
or officer of the national and local
rulings motu proprio. (DOF Order 7-02)
governments, government agencies and
instrumentalities, including the Bangko
2) Power to decide tax cases
Sentral ng Pilipinas and government-
owned or -controlled corporations, any
● The CIR shall also have the power to
information such as, but not limited to,
decide the following tax cases but subject
costs and volume of production, receipts
to the exclusive appellate jurisdiction of
or sales and gross incomes of taxpayers,
the CTA (DROP):
and the names, addresses, and financial
i. Disputed assessments,
statements of corporations, mutual fund
ii. Refunds of internal revenue taxes,
companies, insurance companies,
fees or other charges,
regional operating headquarters of

460
 multinational companies, joint accounts,
associations, joint ventures of consortia
and registered partnerships, and their
members;
Provided, That the Cooperative
Development Authority shall submit to
the Bureau a tax incentive report, which
shall include information on the income
tax, value-added tax, and other tax
incentives availed of by cooperatives
registered and enjoying incentives under
Republic Act No. 6938, as amended:
Provided, further, That the information
submitted by the Cooperative
Development Authority to the Bureau
shall be submitted to the Department of
Finance and shall be included in the
database created under Republic Act No.
10708, otherwise known as ‘The Tax
Incentives Management and
Transparency Act (TIMTA)’.(Sec. 5(B) of
NIRC, amended by TRAIN Law)
(iii) To summon the person liable for tax or
required to file a return, or any officer or
employee of such person, or any person
having possession, custody, or care of
the books of accounts and other
accounting records containing entries
relating to the business of the person
liable for tax, or any other person, to
appear before the Commissioner or his
duly authorized representative at a time
and place specified in the summons and
to produce such books, papers, records,
or other data, and to give testimony;
(iv) To take such testimony of the person
concerned, under oath, as may be
relevant or material to such inquiry; and
(v) To cause revenue officers and employees
to make a canvass from time to time of
any revenue district or region and inquire
after and concerning all persons therein
who may be liable to pay any internal
revenue tax, and all persons owning or
having the care, management or
possession of any object with respect to
which a tax is imposed.
The provisions of the foregoing paragraphs
notwithstanding, nothing in this Section shall
be construed as granting the Commissioner
the authority to inquire into bank deposits
other than as provided for in Section 6(F) of
the NIRC. (Sec. 5, NIRC)
It is the power to hear and determine
questions of fact to which the legislative
policy is to apply and to decide in accordance
with the standards laid down by the law itself
in enforcing and administering the same law.
The administrative body exercises its quasi-
judicial power when it performs in a judicial
manner an act which is essentially of an
executive or administrative nature, where the
power to act in such manner is incidental to
or reasonably necessary for the performance
of the executive or administrative duty
entrusted to it(CIR vs. Avon Products
Manufacturing, G.R. Nos. 201398-99, October 03,
2018).
In carrying out these quasi-judicial functions,
the Commissioner is required to "investigate
facts or ascertain the existence of facts, hold
hearings, weigh evidence, and draw
conclusions from them as basis for their
official action and exercise of discretion in a
judicial nature." Tax investigation and
assessment necessarily demand the
observance of due process because they
affect the proprietary rights of specific
persons.
4) Power Make Assessments and Prescribe
Additional Requirements for Tax
Administration and Enforcement
(Sec.6, NIRC)
● BIR Commissioner Caesar Dulay in 2018
thru a Tax Advisory made use of this
section when he obligated the taxpayer
to pay monthly withholding taxes rather
than quarter as per TRAIN Law.
461
 (i) Examination of Returns and
Determination of Tax Due - After a return
has been filed as required under the
provisions of the NIRC, the Commissioner
or his duly authorized representative may
authorize the examination of any
taxpayer and the assessment of the
correct amount of tax, notwithstanding
any law requiring the prior authorization
of any government agency or
instrumentality: Provided, however, That
failure to file a return shall not prevent
the Commissioner from authorizing the
examination of any taxpayer. (Sec. 6(A) of
NIRC, as amended by TRAIN Law)
(ii) Failure to Submit Required Returns,
Statements, Reports and other
Documents. - When a report required by
law as a basis for the assessment of any
national internal revenue tax shall not be
forthcoming within the time fixed by laws
or rules and regulations or when there is
reason to believe that any such report is
false, incomplete or erroneous, the
Commissioner shall assess the proper tax
on the best evidence obtainable. (Best
Evidence Obtainable Rule)
The law is specific and clear. The rule on
the "best evidence obtainable" applies
when a tax report required by law for the
purpose of assessment is not available or
when the tax report is incomplete or
fraudulent(Bonifacio Sy Po vs CA, G.R. NO.
81446, August 18, 1988)
(iii) Authority to Conduct Inventory-taking,
Surveillance and to Prescribe
Presumptive Gross Sales and Receipts;
(iv) Authority to Terminate Taxable Period
(v) Authority to Accredit and Register Tax
Agents;
(vi) Authority of the Commissioner to
Prescribe Additional Procedural or
Documentary Requirements. (Sec. 6,
NIRC, as amended)
5) Power to Prescribe Real Property
Values
The Commissioner is hereby authorized to
divide the Philippines into different zones or
areas and shall, upon mandatory consultation
with competent appraisers both from the
private and public sectors, and with prior
notice to affected taxpayers, determine the
fair market value of real properties located in
each zone or area, subject to automatic
adjustment once every three (3) years
through rules and regulations issued by the
Secretary of Finance based on the current
Philippine valuation standards: Provided,
That no adjustment in zonal valuation shall
be valid unless published in a newspaper of
general circulation in the province, city or
municipality concerned, or in the absence
thereof, shall be posted in the provincial
capitol, city or municipal hall and in two (2)
other conspicuous public places therein:
Provided, further, That the basis of any
valuation, including the records of
consultations done, shall be public records
open to the inquiry of any taxpayer. (Sec. 6(E)
of NIRC, amended by TRAIN Law)
To summarize: (PNP-MZ)
1. Mandatory consultation with both
private and public competent appraisers
before division of the Philippines into
zones.
2. Prior Notice to affected taxpayers before
the determination of fair market values of
the of real properties.
3. Publication or posting of adjustments in
zonal value in newspaper of general
circulation in the province, city or
municipality concerned.
4. The basis of valuation and records of
consultation shall be public records
open to the inquiry of the taxpayer.
5. Zonal valuations shall be automatically
adjusted every three years.
462
For purposes of computing any internal
revenue tax, the value of the property shall
be, whichever is the higher of:
1. The fair market value as determined by the
Commissioner; or
2. The fair market value as shown in the
schedule of values of the Provincial and City
Assessors.
Authority of the Commissioner to Inquire
into Bank Deposit Accounts and Other
Related information held by Financial
Institutions. - Notwithstanding any contrary
provision of Republic Act No. 1405, Republic Act
No. 6426, otherwise known as the Foreign
Currency Deposit Act of the Philippines, and other
general or special laws, the Commissioner is
hereby authorized to inquire into the bank
deposits and other related information held by
financial institutions.
General Rule:
CIR may not acquire in bank deposits of
taxpayers, even if undergoing audit investigation.
Exceptions:
a) A decedent to determine his gross estate;
b) Any taxpayer who has filed an application for
compromise of his tax liability under Section
204(A)(2) of this Code by reason of financial
incapacity to pay his tax liability.
In case a taxpayer files an application to
compromise the payment of his tax liabilities
on his claim that his financial position
demonstrates a clear inability to pay the tax
assessed, his application shall not be
considered unless and until he waives in
writing his privilege under Republic Act No.
1405, Republic Act No. 6426, otherwise
known as the Foreign Currency Deposit Act
of the Philippines, or under other general or
special laws, and such waiver shall constitute
the authority of the Commissioner to inquire
into the bank deposits of the taxpayer; and
c) A specific taxpayer or taxpayers subject of a
request for the supply of tax information from
a foreign tax authority pursuant to an
international convention or agreement on tax
matters to which the Philippines is a signatory
or a party of: Provided, That the information
obtained from the banks and other financial
institutions may be used by the Bureau of
Internal Revenue for tax assessment,
verification, audit and enforcement purposes.
(Sec. 6[F], NIRC, as amended)
Contents of the Request
(1) The identity of the person under examination
or investigation;
(2) A statement of the information being sought,
including its nature and the form in which the
said foreign tax authority prefers to receive
the information from the Commissioner;
(3) The tax purpose for which the information is
being sought;
(4) Grounds for believing that the information
requested is held in the Philippines or is in the
possession or control of a person within the
jurisdiction of the Philippines;
(5) To the extent known, the name and address
of any person believed to be in possession of
the requested information;
(6) A statement that the request is in conformity
with the law and administrative practices of
the said foreign tax authority, such that if the
requested information was within the
jurisdiction of the said foreign tax authority
then it would be able to obtain the
information under its laws or in the normal
course of administrative practice and that it
is in conformity with a convention or
international agreement; and
(7) A statement that the requesting foreign tax
authority has exhausted all means available
in its own territory to obtain the information,
except those that would give rise to
disproportionate difficulties. (Sec. 7, RR 10-
2010)
The term "foreign tax authority," as used
herein, shall refer to the tax authority or tax
administration of the requesting State under
463
 the tax treaty or convention to which the
Philippines is a signatory or a party of. (Sec.
6, NIRC, as amended by R.A. 10021)
6) Authority of Internal Revenue Officers
to Make Arrests and Seizures.
The Commissioner, the Deputy
Commissioners, the Revenue Regional
Directors, the Revenue District Officers and
other internal revenue officers shall have
authority to make arrests and seizures for the
violation of any penal law, rule or regulation
administered by the Bureau of Internal
Revenue. Any person so arrested shall be
forthwith brought before a court, there to be
dealt with according to law.
Organizational Chart
7) Authority of the Commissioner to
Delegate Power.
recommendation of the Commissioner,
discovered by regional and district
officials, may be compromised by a
regional evaluation board which shall be
composed of the Regional Director as
Chairman, the Assistant Regional
Director, the heads of the Legal,
Assessment and Collection Divisions and
the Revenue District Officer having
jurisdiction over the taxpayer, as
members; and
(d) The power to assign or reassign
internal revenue officers to
establishments where articles subject to
excise tax are produced or kept. (Sec. 7,
NIRC)

The Commissioner may delegate the powers

vested in him under the pertinent provisions
of this Code to any or such subordinate
officials with the rank equivalent to a
division chief or higher, subject to such
limitations and restrictions as may be
imposed under rules and regulations to be
promulgated by the Secretary of Finance,
upon recommendation of the Commissioner.

However, the following powers of the

Commissioner shall not be delegated:

(a) The power to recommend the

promulgation of rules and regulations
by the Secretary of Finance;
(b) The power to issue rulings of first
impression or to reverse, revoke or
modify any existing ruling of the Bureau.
(c) The power to compromise or abate,
under Sec. 204 (A) and (B) of this Code,
any tax liability: Provided, however, That
assessments issued by the regional
offices involving basic deficiency taxes of
Five hundred thousand pesos (P500,000)
or less, and minor criminal violations, as
may be determined by rules and
regulations to be promulgated by the
Secretary of finance, upon

464
The act of issuance of the demand letter by the
Chief of the Accounts Receivable and Billing
Division does not fall under any of the exceptions
that have been mentioned as non-
delegable.(Section 7 of the NIRC; Oceanic Wireless
Network v. CIR, G.R.148380, December 9,2005)
8) The power to assign or reassign internal
revenue officers to establishments
where articles subject to excise tax are
produced or kept.(Sec. 16, NIRC)
9) Power to Impose Duties on Certain
Officers and Debtors.
Registers of Deeds shall not register in the
Registry of Property any document
transferring real property or real rights
therein or any chattel mortgage, by way of
gifts inter vivos or mortis causa, legacy or
inheritance, unless a certification from the
Commissioner that the tax fixed in this Title
and actually due thereon had been paid is
shown, and they shall immediately notify the
Commissioner, Regional Director, Revenue
District Officer, or Revenue Collection Officer
or Treasurer of the city or municipality where
their offices are located, of the nonpayment
of the tax discovered by them.
Any lawyer, notary public, or any government
officer who, by reason of his official duties,
intervenes in the preparation or
acknowledgment of documents regarding
partition or disposal of donation inter vivos or
mortis causa, legacy or inheritance, shall
have the duty of furnishing the
Commissioner, Regional Director, Revenue
District Officer or Revenue Collection Officer
of the place where he may have his principal
office, with copies of such documents and
any information whatsoever which may
facilitate the collection of the aforementioned
tax.
Neither shall a debtor of the deceased pay his
debts to the heirs, legatee, executor or
administrator of his creditor, unless the
certification of the Commissioner that the tax
fixed in this Chapter had been paid is shown;
but he may pay the executor or judicial
administrator without said certification if the
credit is included in the inventory of the
estate of the deceased.(Sec. 95, NIRC)
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 taxes fixed in this Title
and due thereon have been paid is shown. (Sec.
97, NIRC)
10) Power of the Commissioner to Suspend
the Business Operations of a Taxpayer.
The Commissioner or his authorized
representative is hereby empowered to
suspend the business operations and
temporarily close the business establishment
of any person for any of the following
violations:
(a) In the case of a VAT-registered Person. –
(1) Failure to issue receipts or invoices;
(2) Failure to file a value-added tax
return as required under Section
114; or
(3) Understatement of taxable sales or
receipts by thirty percent (30%) or
more of his correct taxable sales or
receipts for the taxable quarter.
(b) Failure of any Person to Register as
Required under Section 236.
The temporary closure of the establishment
shall be for the duration of not less than five
(5) days and shall be lifted only upon
compliance with whatever requirements
prescribed by the Commissioner in the
closure order. (Sec. 115, NIRC)
465
b) Non-Retroactivity of Rulings
General Rule:
Any revocation, modification or reversal of (1)
rules and regulations promulgated in accordance
with the NIRC, or (2) any rulings or circulars
promulgated by the CIR shall not be given
retroactive application if the revocation,
modification, or reversal is prejudicial to the
taxpayers. (NIRC, Sec. 246)
Exceptions:
(a) Where the taxpayer deliberately misstates or
omits material facts from his return or any
document required of him by the BIR;
(b) Where the facts subsequently gathered by
the BIR are materially different from the facts
on which the ruling is based; or
(c) Where the taxpayer acted in bad faith.
Rulings, circulars, rules and regulations
promulgated by the CIR should have no
retroactive application if applying them
would prejudice the taxpayers. (CIR v.
Court of Appeals, G.R. No. 117982, 1997)
However, when the ruling, circular, or rules and
regulations was nullified by a court (and not by
the CIR), then the non-retroactivity rule does not
apply. (Philippine Bank of Communications v.
CIR, G.R. No. 112024, 1999) A general
interpretative rule issued by the CIR may be
relied upon by taxpayers from the time the rule is
issued up to its reversal by the Commissioner or
this Court. (CIR v. San Roque, G.R. No. 187485, 2013)
2. Rule-making authority of the Secretary
of Finance
a. Authority of the Secretary of
Finance to Promulgate Rules and
Regulations
Upon recommendation of the CIR, the
Secretary of Finance shall promulgate all
needful rules and regulations for the effective
enforcement of the provisions of the NIRC.
(Sec. 244, NIRC, as amended)
Requisites of a valid revenue regulation
To be valid, a revenue regulation must be
within the scope of statutory authority or
standard granted by the legislature.
Specifically, the regulation must
(1) be germane to the object and purpose of
the law;
(2) not contradict, but conform to, the
standards the law prescribes; and
(3) be issued for the sole purpose of carrying
into effect the general provisions of our
tax laws. (La Suerte Cigarette Factory vs.
CIR, G.R. No. 125346, November 11, 2014)
Process of Contesting a ruling of the BIR
1.a. File a request for ruling review with the
Secretary of Finance (SOF) within thirty (30) days
from receipt of the CIR’s ruling. (DOF Department
Order No. 23-2001 dated October 25, 2001)
Sec. 4 of the NIRC provides that the power to
interpret the provisions of the NIRC and other tax
laws is under the exclusive and original
jurisdiction of the CIR, subject to review by the
SOF.
1.b. Appeal to the SOF is in compliance with
the rule on exhaustion of administrative
remedies. Thus, appeal to the SOF may be
dispensed with if any of the exceptions to the rule
on exhaustion of administrative remedies is
present. The exceptions, among others, are the
following:
1. exhaustion would be futile – The SOF
requesting a ruling from the CIR and later on
adopting the ruling as his own;
2. issue is purely legal – Tax implications of the
Poverty Eradication and Alleviation
Certificates (PEACe) Bonds; and;
3. when there are circumstances indicating the
urgency of judicial intervention – impending
maturity of the PEACe Bonds. (BDO vs.
Republic, GR No. 198756 dated January 13, 2015)
466
b. Specific Provisions to be Contained
in Rules and Regulations
It must contain provisions specifying,
prescribing, or defining:
1. The time and manner in which Revenue
Regional Director shall canvass their
respective Revenue Regions to discover
persons and property liable to national
internal revenue taxes, and the manner
their lists and records of taxable persons
and taxable objects shall be made and
kept.
2. The forms of labels, brands or marks to
be required on goods subject to excise
tax, and the manner how the labelling,
branding or marking shall be effected.
3. The condition under which and the
manner in which goods intended for
export, which if not exported would be
subject to an excise tax, shall be labelled,
branded or marked.
4. The conditions to be observed by
revenue officers respecting the
institutions and conduct of legal actions
and proceedings;
5. The conditions under which goods
intended for storage in bonded
warehouses shall be conveyed thither,
their manner of storage and method of
keeping entries and records, also the
books to be kept by Revenue Inspectors
and the reports to be made by them in
connection with their supervision of such
houses.
6. The conditions under which denatured
alcohol may be removed and dealt in, the
character and quantity of the denaturing
material to be used, the manner in which
the process of denaturing shall be
effected, so as to render the alcohol
suitably denatured and unfit for oral
intake, the bonds to be given, the books
and records to be kept, the entries to be
made therein, the reports to be made to
the CIR, and the signs to be displayed in
the business or by the person for whom
such denaturing is done or by whom,
such alcohol is dealt in.
7. The manner in which revenue shall be
collected and paid, the instrument,
document or object to which revenue
stamps shall be affixed, the mode of
cancellation, the manner in which the
proper books, records, invoices and other
papers shall be kept and entries therein
made by the person subject to the tax,
as well as the manner in which licenses
and stamps shall be gathered up and
returned after serving their purposes.
8. The conditions to be observed by
revenue officers respecting the
enforcement of Title III imposing a tax
on estate of a decedent, and other
transfers mortis causa, as well as on gifts
and such other rules and regulations
which the CIR may consider suitable for
the enforcement of the said Title III.
9. The manner in which tax returns,
information and reports shall be prepared
and reported and the tax collected and
paid, as well as the conditions under
which evidence of payment shall be
furnished the taxpayer, and the
preparation and publication of tax
statistics.
10. The manner in which internal revenue
taxes, such as income tax, including
withholding tax, estate and donor's
taxes, value-added tax, other percentage
taxes, excise taxes and documentary
stamp taxes shall be paid through the
collection officers of the BIR or through
duly authorized agent banks which are
hereby deputized to receive payments of
such taxes and the returns, papers and
statements that may be filed by the
taxpayers in connection with the
payment of the tax:
Provided, however, that notwithstanding
the other provisions of the NIRC
prescribing the place of filing of returns
and payment of taxes, the CIR may, by
rules and regulations require that the tax
returns, papers and statements and
taxes of large taxpayers be filed and
paid, respectively, through collection
467
 officers or through duly authorized agent
banks:
Provided, further, That the CIR can
exercise this power within 6 years from
the approval of RA 7646 or the
completion of its comprehensive
computerization program, whichever
comes earlier:
Provided, finally, that separate venues
for the Luzon, Visayas and Mindanao
areas may be designated for the filing of
tax returns and payment of taxes by said
large taxpayers.
Provided, however, That the Secretary of
Finance, upon recommendation of the
CIR, may modify or add to the above
criteria for determining a large taxpayer
after considering such factors as
inflation, volume of business, wage and
employment levels, and similar economic
factors.
The penalties prescribed under Section 248
shall be imposed on any violation of the rules
and regulations issued by the Secretary of
Finance, upon recommendation of the CIR,
prescribing the place of filing of returns and
payments of taxes by large taxpayers.
(Sec. 245, NIRC, as amended)
B. INCOME TAX
1. Definition, Nature and General
Principles
Definition
Income Tax is a tax on all yearly profits arising
from property, professions, trade or offices or as
a tax on person’s income, emolument, profits and
the like (Dimaampao, Basic Approach to Income
Taxation, 2018 Edition, p. 7).
Nature
Income tax is a kind of tax levied upon the
privilege of receiving income or profit. It is an
excise tax and not a property tax (Dimaampao,
Basic Approach to Income Taxation, 2018 Edition, p.
7)
General principles of income taxation
Except when otherwise provided in the NIRC, as
amended the following are the general principles
of income taxation in the Philippines:
▪ Citizen residing in the Philippines/ Resident
Citizens (RC) - Taxable on all income from
sources within and without the Philippines.
▪ Non-Resident Citizen (NRC) - Taxable only on
income derived from sources within the
Philippines.
▪ An individual citizen of the Philippines who is
working and deriving income from abroad as
an overseas contract worker or a seaman
who is a citizen of the Philippines and who
receives compensation for services rendered
abroad as a member of the complement of a
vessel engaged exclusively in international
trade shall be treated as an overseas contract
worker - Taxable only on income derived
from sources within the Philippines
▪ An alien individual, whether a resident or not
of the Philippines - Taxable only on income
derived from sources within the Philippines.
▪ Domestic Corporations - Taxable on all
income derived from sources within and
without the Philippines
▪ A foreign corporation, whether engaged or
not in trade or business in the Philippines -
Taxable only on income derived from sources
within the Philippines (Sec. 23, NIRC)
Taxable on income Taxable ONLY income
sourced within and sourced within and
without without
Citizens residing in the Non – Resident Citizens
Philippines or Resident
Citizens
Domestic Corporations Overseas Contract
Worker /Seamen aboard
468
 a vessel engaged
exclusively in
international Trade
Aliens, whether resident
or not
Foreign Corporations
(ibid)
a) Criteria in imposing Philippine Income
Taxation (CRS)
(i) Citizenship Principle
A citizen taxpayer is subject to income tax:
▪ On his worldwide income (income within
and without the Philippines); or
▪ Only on his income from sources within
the Philippines, if he qualifies as a non-
resident citizen. (Sec 23, NIRC)
(ii) Residence Principle
A resident alien is taxable only on his income
from sources within the Philippines but
exempt from tax on his income from sources
outside the Philippines. (Ibid.)
(iii) Source Principle
An alien individual, whether a resident or not
of the Philippines, is subject to Philippine
income tax on his income from sources within
the Philippines such as dividend, interest,
rent or royalty.(Ibid.)
b) Types of Philippine Income Taxes
x. Branch Profit Remittance Tax
c) Taxable Period
(i) Calendar period: Accounting period from
January 1 to December 31.
Taxable income is computed based on calendar
year if: (BONI)
▪ The taxpayer’s annual accounting period is
other than a fiscal year;
▪ Taxpayer has no annual accounting
period;
▪ Taxpayer does not keep books; or
▪ Taxpayer is an individual.
(ii) Fiscal period: Accounting period of 12
months ending on the last day of any month
other than December. Note: Allowed in a
corporation but not in an individual taxpayer.
(Sec. 52(b), NIRC)
(iii) Short period: A taxpayer may have a
taxable period of less than 12 months when:
(D2NA -T)
▪ Taxpayer dies
▪ Corporation is a newly organized
▪ Corporation changes its accounting
period
▪ Corporation is dissolved (Sec.47, NIRC)
Accounting Period
1. Individuals – the accounting period shall be
calendar year or that which is a 12-month
period that ends in December 31.

i. Income Tax 2. Corporations – the accounting period can

ii. Final Income Tax either be calendar or fiscal year, the latter
iii. Gross Income Tax being an accounting period of 12 months
iv. Improperly Accumulated Earnings Tax ending on the last day of the month other
(IAET) (repealed by Sec. 8 of the CREATE than December.
Law)
v. Minimum Corporate Income Tax (MCIT) Change of Accounting Period
vi. Optional Corporate Income Tax
vii. Fringe Benefits Tax (FBT) If a taxpayer, other than an individual, changes
viii. Special Income Tax on certain his accounting period from fiscal year to calendar
corporations year, from calendar year to fiscal year, or from
ix. Capital Gains Tax (CGT)

469
one fiscal year to another, the net income shall, d) Kinds of Taxpayers
with the approval of the Commissioner, be
computed on the basis of such new accounting SUMMARY
period, subject to the filing of a Final or Individuals Corporations Others
Adjustment Return for a Period of Less than 12 Resident Citizen Domestic Joint
Months. (Sec. 46, NIRC) (RC) corporation Venture and
(DC) Consortium
Nonresident Resident Partnership
Final or Adjustment Returns for a Period of
Citizen (NRC) foreign
Less than Twelve (12) Months. corporation
(RFC)
1. Returns for Short Period Resulting from Resident Alien Nonresident Estate
Change of Accounting Period. - If a taxpayer, (RA) foreign
other than an individual, with the approval of corporation
the Commissioner, changes the basis of (NRFC)
computing net income: Nonresident Trust
alien not
a) from fiscal year to calendar year, a engaged in
trade or
separate final or adjustment return shall
business (NRA-
be made for the period between the close NETB)
of the last fiscal year for which return was Nonresident
made and the following December 31. alien engaged in
trade or
b) from calendar year to fiscal year, a business (NRA-
separate final or adjustment return shall ETB)
be made for the period between the close Minimum wage
of the last calendar year for which return earners (MWE)
was made and the date designated as the Note: Detailed discussion on these can be found
under Income Tax on Individuals and Corporations
close of the fiscal year.
c) from one fiscal year to another fiscal
2. Income
year, a separate final or adjustment
return shall be made for the period
between the close of the former fiscal a) Definition and Nature
year and the date designated as the close
of the new fiscal year. An income is the return in money from one's
business, labor, or capital invested; gains,
2. Income Computed on Basis of Short Period. profit or private revenue. (Black’s Law
Dictionary)
Where a separate final or adjustment return
An income may be defined as the gain
is made on account of a change in the
derived from capital, from labor, or from both
accounting period, and in all other cases
combined, provided it be understood to
where a separate final or adjustment return
include profit gained through a sale or
is required or permitted by rules and
conversion of capital assets.(Eisner vs.
regulations prescribed by the Secretary of
Macomber, 252 U.S., 189)
Finance, upon recommendation of the
Commissioner, to be made for a fractional
Income is a flow of service rendered by
part of a year, then the income shall be
capital by the payment of money from it or
computed on the basis of the period for which
any other benefit rendered by the fund
separate final or adjustment return is made.
through a period of time. Income is the “fruit”
(Sec. 47, NIRC)
of the capital or labor severed from the
“tree”.(Madrigal vs. Rafferty, GR 12287, August 7,
1918)

470
b) When Income is Taxable
i. Existence of income
ii. Realization of income
iii. Recognition of income
i. Existence of Income
a. There must be gain or profit whether in
cash or equivalent. Income tax applies only
when there is income, gain or profit.
Case law provides that in order to constitute
"income," there must be realized "gain."
Clearly, because of the nature of membership
fees and assessment dues as funds
inherently dedicated for the maintenance,
preservation, and upkeep of the clubs'
general operations and facilities, nothing is to
be gained from their collection. (Association of
Non – Profit Clubs (ANPC) v.CIR, G.R. No. 228539,
June 26, 2019)
b. The gain must be realized or received
ii. Realization of Income
Under the realization principle, revenue is
generally recognized when both of the following
conditions are met:
1. The earning is complete or virtually complete;
and
2. An exchange has taken place. (Manila
Mandarin Hotels v. CIR, CTA Case. 5046, March 24
1997)
A taxpayer is deemed to have received items of
gross income which have been credited to or set
apart for him without restriction. On the other
hand, appreciation in value of property is not
even an accrual of income to a taxpayer prior to
the realization of such appreciation through sale
or conversion of the property. (Sec. 38, RR No. 2-
40, February 10, 1940)
iii. Recognition of Income
Receipt of income for purposes of taxation may
actual or constructive. (CIR vs. BPI, G.R. No.
147375, June 25, 2006)
Income is received not only when it is actually
handed to a person but also when it is merely
constructively received by him. (See discussion in
realization of income)
Requisites for an income to be taxable
1. There must be a gain or profit;
2. The gain must be realized or received
whether actually or constructively; or
3. It is not exempted by law or treaty for income
tax. (CIR vs. Philippine Daily Inquirer, Inc. G.R.
No. 213943, March 22,2017)
c) Tests in determining whether income is
earned for tax purposes:
(1) Realization Test:
Unless the income is deemed “realized,”
there is no taxable income.
This principle requires that revenue must be
earned before it is recorded. Thus, the
amounts received in advance are not treated
as revenue of the period in which they are
received but as revenue of the future period
or periods in which they are earned. These
amounts are carried as unearned revenue,
that is, liabilities to transfer goods or render
services in the future — until the earning
process is complete.
Under the realization principle, revenue is
generally recognized when both of the
following conditions are met:
1. The earning is complete or virtually
complete; and
2. An exchange has taken place. (Manila
Mandarin Hotels v. CIR, CTA Case. 5046,
March 24 1997)
Actual Vis-À-Vis Constructive Receipt
Actual receipt – is the actual and physical
receipt.
Constructive receipt – occurs when money or
its equivalent is placed at the control of the
person who rendered the service without
restriction by the payor
471
Examples:
▪ Deposits in the bank which are made
available by the seller of service without any
restrictions.
▪ Issuance by the payor of a notice to offset
any debt or obligation and acceptance
thereof by the seller as payment of services
rendered.
▪ Transfer of amounts retained by the payor for
the account of the seller (RR 16-2005, Sec.
4.108 -4)
▪ An item of income must be included in gross
income if it is credited to the account of or
set apart for the taxpayer, or otherwise made
available to the taxpayer, although not yet
physically received or placed to his actual
possession.
(2) Economic Benefit Test or Doctrine of
Proprietary Interest
The Economic Benefit Theory provides that
anything, which benefits a person materially
or economically in whatever way, is taxable
under the law. (BIR Ruling No. 123-97)
As a general rule, in this jurisdiction, mere
increase in the value of the property without
actual realization, either through sale or other
disposition, is not taxable, the only exception
being that even without a sale or other
disposition, if by reason of appraisal, the cost
basis of property is increased and the
resultant basis is used as the new tax base
for purposes of computing the allowable
depreciation expense, the net difference
between the original cost basis and new basis
due to appraisal is taxable under the
economic-benefit principle. (BIR Ruling No.
029-98)
(3) Severance Test
There is no taxable income until there is a
separation from capital of something of
exchangeable value, thereby supplying the
realization or transmutation which would
result in the receipt of income (Eisner vs.
Macomber, 252 U.S., 189).
d) Tax-Free Exchange
General Rule:
In a sale or exchange of property the entire
amount of gain or loss is recognized. (Sec.
40(c)(1), NIRC)
Exception:
Tax-free exchanges refer to those instances
enumerated in Section 40(C)(2) of the NIRC
which, as amended by CREATE law, are not
subject to Income Tax, Capital Gains Tax,
Documentary Stamp Tax and/or Value-added
Tax, as the case may be.
In general, there are two kinds of tax-free
exchange:
(1) transfer to a controlled corporation; and
(2) reorganizations
1. Transfer to a controlled corporation
No gain or loss will be recognized if:
a) The transferee is a corporation;
b) The transferee exchanges its shares of
stock for property of the transferor;
c) The transfer is made by a person, acting
alone or together with others, not
exceeding four persons; and
d) As a result of the exchange, the
transferor, alone or together with others,
not exceeding four persons, gains
control of the transferee. (Sec. 40(c),
NIRC)
Example:
A and B are partners in a retail business who
decided to incorporate their business. They
went to the SEC to establish A & B Co.
wherein the properties of their existing
business were transferred to the newly
established corporation.
2. Reorganizations include:
a. mergers or consolidations,
472
 b. acquisition of a controlled corporation,
c. acquisition of all or substantially all of
properties of another corporation,
d. recapitalization, and
e. reincorporation. (Sec. 40(c)(2), NIRC)
Merger or Consolidation
The term “merger” or “consolidation”, when
used in Sec. 40 of the NIRC, shall be understood
to mean:
(i) the ordinary merger or consolidation; or
(ii) the acquisition by one corporation of all or
substantially all the properties of another
corporation solely for stock:
For a transaction to be regarded as a merger or
consolidation within the purview of Section 40, it
must be undertaken for a bona fide business
purpose and not solely for the purpose of
escaping the burden of taxation:
In determining whether a bona fide business
purpose exists, each and every step of the
transaction shall be considered and the whole
transaction or series of transaction shall be
treated as a single unit: Provided, finally, that in
determining whether the property transferred
constitutes a substantial portion of the property
of the transferor, the term “property” shall be
taken to include the cash assets of the transferor.
Control defined: The term “control”, when used
in Section 40, shall mean ownership of stocks in
a corporation possessing at least fifty-one
percent (51%) of the total voting power of all
classes of stocks entitled to vote. (Section 40(C)(6),
NIRC)
Example:
Q: AAA Co., BBB Co., and CCC Co. agreed to
merge, with AAA Co. as the surviving corporation.
Pursuant to the Plan of Merger, BBB Co. and CCC
Co. shall transfer all their assets and liabilities to
AAA Co. as a consequence of the merger, for
which AAA Co., by way of original issue, shall
issue common shares of stocks to BBB Co. and
CCC Co.
Is the statutory merger among AAA Co., BBB Co.,
and CCC Co. a merger within the contemplation
of Section 40 (C) (2) (a) and (b) in relation to
Section 40 (C) (6) (b) of the Tax Code?
A: Yes. The merger of AAA Co., BBB Co., and CCC
Co. is a merger within the contemplation of
Section 40 (C)(2)(a) and (b) in relation to Section
40 (C)(6)(b) of the Tax Code, because AAA Co.
shall acquire and assume all the assets and
liabilities of BBB Co. and CCC Co. and the same is
advisable, expedient and in the best interest of
the merging corporations and their respective
stockholders. The merger, being undertaken for
a bona fide business purpose and not for the
purpose of escaping the burden of taxation,
qualifies for non-recognition of gain or loss for
income tax purposes in accordance with Section
40(C)(2) of the Tax Code, where no gain or loss
shall be recognized by BBB Co. and CCC Co. as
the transferors of all assets and liabilities to AAA
Co. pursuant to the Plan of Merger.
e) Situs of Income Taxation
Definition
It means the place of taxation. It is the state or
political unit which has jurisdiction to impose a
particular tax. (CIR vs. Marubeni, G.R. No.137377,
December 18,2001)
Factors that determine the situs of
taxation:
1. Nature of the tax;
2. Subject matter of the tax (person, property,
act or activity);
3. Place of excise, business or occupation being
taxed;
4. Citizenship of the taxpayer;
5. Residence of the taxpayer;
6. Source of income.
473
Kind of Tax
KIND OF TAX SITUS
Poll/Capitalization/ Residence of the
Community Tax taxpayer, regardless of
the source of income or
location of the property
of the taxpayer.
Excise Tax Place where the act is
performed, or occupation
engaged in.
Value Added Tax Place of consumption.
Subject Matter
SUBJECT SITUS
MATTER
Income Tax
▪ Resident citizen Sources of income
▪ Domestic derived from within and
corporation outside the Philippines
▪ Alien, resident or Sources of income
not derived from within the
Philippines
▪ Non-resident
foreign corporation
▪ Non-resident citizen
▪ Foreign
corporation,
resident or not
Estate and Donor’s Tax
Citizen, resident or non Properties wherever
Resident alien situated
Non-resident Alien Properties situated within
the Philippines
Property Tax
Real Property Place where the property
is situated (lex rei sitae)
Tangible Personal Place where the property
property is physically located
although the owner
resides in another
jurisdiction; or place of
sale or transaction
Intangible personal General Rule:
Property (e.g., credits, Domicile of the owner.
receivables, bank Mobilia sequuntur
deposits, bonds, personam (movables
promissory notes, follow the
mortgage loans, person)
judgments and
corporate stocks) Exceptions: When
property has acquired a
business situs in another
jurisdiction; or
When the law provides
for
the situs of the subject of
tax.
▪ Franchise,
patents,
copyrights,
trademarks –
situs is the place
of the country
where such
intangibles are
exercised
▪ Receivables –
Domicile or
residence of the
debtor
▪ Bank deposits –
Location of the
depository bank
Rules on sources of income (Section 42 A-
C, NIRC)
Income Test of Source
Interest Debtor’s Residence
Income from Place or performance of the
services services rendered. When
services are performed
partly within the Philippines
and partly without the
Philippines, the allocation
should be based on time
rendered within and without
the Philippines.
Service Place of performance
Rental and Royalties Location of the property or
place where the intangible
is used.
Gain on sale of real Location of Property
property
Gain on sale of Place of sale
personal property
(except sale of
shares of a domestic
corporation)
Gain from the sale of Treated as derived entirely
shares of stock in a from sources within the
domestic corporation Philippines, regardless of
where the shares are sold.
Dividends Residence of the
corporation declaring the
dividends
474

Income Partly within and without:
Income covered:
▪ Services rendered partly within and without
the Philippines
▪ Sale of personal property produced (wholly or
partly) within and sold without Philippines
▪ Sale of personal property produced (wholly or
partly) within and sold within Philippines
In CIR vs. Marubeni, (G.R. No.137377, December
18, 2001), involved were turnkey contracts. The
Supreme Court ruled that turnkey contracts were
actually divisible contracts which each had
different stages, with each stage having different
tax implication:
▪ For the stage involving design, engineering,
and procurement of equipment and supplies,
these were considered outside the hands
of the Philippine taxing authority as these
were all done in Japan
▪ For the stages involving the actual
installation and construction, these were
all considered within the jurisdiction
of the Philippine taxing authority as
the construction and installations were
all done in the Philippines (Ignatius
Michael D. Ingles, Tax Made Less Taxing: A
Reviewer with Codals and Cases, 3rd Edition,
2021, p.10).
3. Gross Income (CTIR2ADP3)
a) Definition:
All income derived from whatever source,
including (but not limited to) the following
items:
1. Compensation for services in whatever
form paid, including, but not limited to
fees, salaries, wages, commissions, and
similar items;
2. Gross income derived from the conduct
of trade of business or the exercise of
a profession;
3. Gains derived from dealings in
property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Pensions; and,
11. Partner’s distributive share from the net
income of the general professional
partnership. (Sec. 32[A] of the NIRC)
The definition of gross income is broad
enough to include passive income subject to
specific rates or final taxes. However, since
these passive incomes are already subjected
to different rates and taxed finally at source,
they are no longer included in the
computation of gross income which
determines taxable income. (CIR vs. Philippines
Airlines, Inc., G.R. No. 160628, October 9,2005)
b) Concept of Income from Whatever
Source Derived
Gross Income in its broad sense, means, all
income from whatever source, derived within
or without the Philippines, legal or illegal. The
NIRC doesn’t distinguish legal and illegal
income.
Hence, proceeds from embezzlement or
swindling, for instance, are income because
the income recipient has already complete
dominion over them an can use such for his
economic benefit. If a taxpayer receives
income, legally or illegally, without
consensual recognition of obligation to repay,
that income is taxable. (James vs US, 366 U.S.
213, 1961)
c) Gross Income vs. Net Income vs.
Taxable Income
Gross income – Gross Income is described
as income from whatever source, including
compensation for services; the conduct of
trade or business or the exercise of
profession; dealings in property; interests;
475
 rents; royalties; dividends; annuities; prizes
and winnings; pensions; and a partner's
distributive share in the net income of a
general professional partnership. It does not
include income excluded by law, or which
are exempt from income tax. (Sec. 32(A) (B),
NIRC)
Net income – Gross income less statutory
deductions (Sec. 26, R.R. 02-04, Sec. 36)
Taxable Income – Pertinent items of gross
income specified in this code (NIRC) less any
deductions, if any, authorized for such types
of income by this Code or another law (NIRC
as amended by TRAIN Law, Sec.31)
For Individuals:
Taxable Income is equal to net income. No more
deduction for exemptions (personal,
additional and premium for health insurance) as
it has been repealed by TRAIN Law.
For Corporations:
Taxable income is equal to net income.
Gross Sales/Revenue/Receipts Xxx
Add Other income Xxx
Less: Cost of Sales or Cost of Services Xxx
Total Gross Income Xxx
Less: Allowable Deductions (Itemized Xxx
or Optional Standard Deductions)
Taxable Income Xxx
d) Source of Income Subject to Tax
Sources of income subject to tax may come
from the following (CP3 -FB-DRA2)
(1) Compensation income
(2) Fringe benefit
(3) Professional income
(4) Income from business
(5) Income from dealings of property
(6) Passive investment income
(7) Annuities and proceeds from life
insurance or other types of insurance
(8) Prizes and awards
(9) Pension, retirement benefit or
separation pay
(10) Income from any source
(1) Compensation income
All renumerations for services performed by an
employee under an employer – employee
relationship, unless expressly excluded by NIRC
(Sec. 2, RR 8- 2018)
It includes salaries, wages, emoluments and
honoraria, allowances, commissions (e.g.,
transportation, representation, entertainment
and the like); fees including director's fees, if the
director is, at the same time, an employee of the
employer/corporation; taxable bonuses and
fringe benefits except those which are subject to
the fringe benefits tax under Sec. 33 of the NIRC;
taxable pensions and retirement pay; and other
income of a similar nature.
Note: See detailed discussion under Income Tax
on Individuals – Tax on Compensation Income
(2) Fringe Benefit
It means any good, service or or other benefit
furnished in cash or in kind by an employer
addition to basic salaries to individual employee
in (except rank and file employee). (Sec.33
(B)NIRC)
Note: See detailed discussion in Income Tax on
Individuals – Tax on Compensation Income
(3) Professional Income
Fees derived from engaging in an endeavor
requiring special training as professional as a
means of livelihood such as but limited to fees of
C.P.A.s, doctors, lawyers and engineers. (R.R. 2-
98)
Compensation Professional Income
Income
Fees or renumeration Fees or renumeration
under employer - without employer –
employee relationship employee relationship
476
(4) Income from business (7) Annuities proceeds from life insurance
It arises from habitual engagement in any or other types of insurance
commercial activity involving regular sales of
goods or services by an individual or a Annuity refers to the periodic installment
corporation. payments of income or pension by insurance
companies during the lifetime of a person or for
(5) Income on Dealings of Properties a guaranteed fixed period of time, whichever is
longer, in consideration of capital paid by him. It
Income on sale of properties whether ordinary or is paid annually, monthly or periodically,
capital asset. computed upon the amount paid yearly but
necessarily of life. (Peralta vs. Auditor General, G.R.
Personal Property Income No.. L-8480, March 29, 1957)
Manufacturing
Produced within and Income partly within Taxable Not Taxable
sold without and partly without Portion that represents Portion of the proceeds
Produced within and Income within interest or amounts in representing premium -
sold without excess of premiums paid return OF capital
Produced without and Income partly within -return ON capital
sold within and partly without
Trading (8) Prizes and Awards
Purchased without and Income within
sold within Definition:
Purchased within and Income without
sold without Prizes refer to those obtained as a result of effort
Purchased within and Income within while winnings are products of chance or luck. (De
sold without Leon, NIRC Annotated)

(6) Passive Investment Income
Passive income is income generated by the
taxpayer’s assets. These assets can be in the
form of real properties that return rental income,
shares of stock in a corporation that earn
dividends or interest income received from
savings. (Chamber of Real Estate vs. Romulo, G.R. No.
160756, March 9, 2010)
As a rule, passive income subjected to final tax
is no longer included in the computation of the
annual taxable income.
Passive income is derived from:
a. Interest
b. Dividends
c. Royalty income
d. Prizes; and
e. Other winnings
Refers to the amount of money in cash or in kind
received by chance or luck. Prizes and awards are
generally taxable except specifically mentioned
under the exclusions from the computation of
gross income under (Sec. 32[B] of the NIRC)
How Taxed: Please see table above
Change made by the TRAIN Law
Winnings from PCSO of above Php10,000 are
now subject to final tax of 20%
(9) Pension, Retirement Benefit or
Separation Pay
Pension in general – amount of money received
in lump sum or staggered basis in consideration
of service rendered given after an individual
reaches the age of retirement.(Peralta vs. Auditor,
G.R. No. L – 8480, March 29, 1957)

Pension, retirement benefits, gratuities are

generally taxable to the extent of the amount

477
 received, except if there is a BIR approved succeeding taxable year, he realizes taxable
pension plan and the requisites for exemption income and must be included in his income tax
have been met. (Sec. 32 (B)(6) of NIRC) return in the year of receipt.

Separation Pay may or may not be taxable This principle does not apply to tax credits or
depending on the voluntariness or refunds of:
involuntariness of the cause of separation (Sec. 1. Erroneously paid income tax,
32 (B)(6) of NIRC) 2. Estate tax,
3. Donor’s tax, and
(10) Income from any source 4. Special assessments since they are not
deductible form gross income.
i. Forgiveness/Condonation of 5. Final Taxes in the nature of income tax
Indebtedness
Income Tax imposed by authority of any foreign
Forgiveness or condonation of one’s countries (except when the taxpayer signifies his
indebtedness has the following effects: desire to avail of tax credit of foreign tax
(Sec.34[C], NIRC)
Consideration Tax Implication
Consideration of the e) Exclusions
services performed by the Taxable (Income)
debtor to the creditor Definition
Without any consideration Taxable (Gift)
Corporation forgives the Taxable
Income received or earned but is not taxable as
debt of its stockholder (Dividends)
income because it is exempted by law or treaty.
(De Leon, NIRC Annotated)
ii. Recovery of Accounts Previously Written
Off Rationale
The recovery of bad debts previously allowed as
▪ They represent return of capital or are not
deduction in the preceding year or years shall be
income, gain or profit. – (e.g. life insurance
included as part of the taxpayer’s gross income
proceeds paid to the heirs or beneficiaries
in the year of such recovery to the extent of the
upon death of insured)
income tax benefit of the said deduction, this is
▪ They are subject to another kind of
otherwise known as the Tax Benefit Rule
internal revenue tax (e.g. passive income
subject to final tax)
Bad Debts
▪ They are income, gain or profit that is
expressly exempt from income
Refer to those debts resulting to from
tax(MAMALATEO, Income Tax)
worthlessness or uncollectibility in whole or in
part, of amounts due to the taxpayer by others
(1) Taxpayer who may avail
arising from money lent or uncollectible accounts
of income from goods or services (R.R. 5 – 09,
Sec. 2 [a] )
Generally, all kinds of taxpayers may avail of
exclusions from gross income, unless
iii.Receipt of Tax Refunds or Credit expressly excluded by law.

If a taxpayer received a tax credit certificate or

refund for erroneously paid tax which was
claimed as deduction from his gross income that
resulted in a lower net taxable income or a higher
net operating loss that was carried over to the

478
(2) Distinguish from deductions and tax Types of deductions:
credits
1. Itemized deductions in Section 34(A) to
Exclusion vs. Deductions (J) and (M);
2. Optional Standard Deductions (40%)
Exclusion Deduction under Sec. 34(L);
3. Special deductions in Sections 37 and 38 of
Flow of wealth Amounts which the law the NIRC, and in special laws like the BOI law
(Income) to the allows to be subtracted
(E.O. 226).
taxpayer which is not from gross income in
treated as part of gross order to arrive at the net
income due to its income Who are NOT allowed to claim deductions
exemption by law or from gross income
does not come within
the definition of income 1. NRA-NETB and NRFC are subject to final tax
Pertains to the Pertains to the from their gross income from sources within
computation of GROSS computation of the Philippines.
INCOME TAXABLE INCOME 2. RC, RA and NRC earning purely
Something received or Something spent or compensation income
earned by the taxpayer paid in earning gross
but do not form part of income (i.e. expenses) a) Concepts as Return of capital
gross income
Income tax is levied by law only on income,
which maybe gross income or net income;
Exclusion vs. Tax Credits hence amount representing return of capital
should be deducted from the proceeds of
Exclusion Tax Credits sales of assets and should not be subject to
income tax. (Sec. 65 of R.R. No. 02-40)
Amount received as Amount representing
an income or gain but a tax previously paid Items that are closely related to the business
does not form part of which may be or profession that without which the sale
gross income deducted from a tax would have not occurred.
liability to arrive at
the tax still due These items are deducted from the gross
sales or receipts to arrive at the gross
4. Deductions From Gross Income income.

Deductions Gross Sales/Revenue/Receipts xxx

Less: Cost of Sales or Cost of xxx
Aside from exclusions which are not part of Services
income to be taxed, the Tax Code also allows the Gross income xxx
taxpayer certain amounts to be deducted from Add Other income xxx
the gross income in arriving at the net income Total Gross Income xxx
which will be the basis for the taxable income to
be taxed either at graduated tax table or b) Itemized Deductions vs. Optional
corporate income taxes. Standard Deduction

Deductions from gross income refer to items Itemized Deductions

which the law allows to be subtracted from
pertinent items of gross income to arrive at the The allowable itemized deductions from gross
taxable income. income are (BELT DID CPR):

479
1. Bad debts Basis for Optional Standard Deduction
2. Business Expenses
3. Losses Individual Corporation
4. Taxes Basis
5. Depreciation Gross Gross Sales/Receipts – Cost
6. Interest Sales/Receipts of Sales/Services + Other
7. Depletion of oil & gas wells & mines x40% = OSD Income not subject to VAT=
Total Gross income x40%=
8. Charitable & other contributions
OSD
9. Pension trusts How Applied
10. Research & development (Sec. 34A, NIRC) Gross Gross Sales/Receipts – Cost
Sales/Receipts – of Sales/Services + Other
Optional Standard Deduction (OSD) OSD = Net Income not Subject to Final
Income/Taxable Tax = Total Gross Income –
In lieu of the above enumerated allowable Income OSD = Net Income/Taxable
deductions (expenses discussed above). Section Income
34(L) of the Tax Code provides for an optional
standard deduction (OSD) which is: NOTES:

● For Individuals – 40% of Gross Sales/ gross
receipts
● For Corporations – 40% of Gross Income
It is a fixed percentage deduction without to
regard to any actual expenditure in lieu of
itemized deduction
● Individuals availing OSD are not allowed to
deduct Cost of Sales/Services as the basis of
OSD is gross sales/receipts
● While for Corporations, they are allowed to
deduct the cost of sales/services(Sec.34[L],
NIRC)
Who are allowed to deduct OSD?

Itemized Deduction OSD ● Individuals

Amount Allowable to be Deducted o Allowed to all kinds of individual except
Actual amount of 40% of Gross non – resident aliens
expenses incurred Sales/Gross Receipts o Those who are under the graduated tax
(For Individual) or 40% table of 0-35%
of Gross Income (For ● General professional Partnership or its
Corporation)
partners – however, they may avail of it only
Supporting Invoices/Receipts/Documents
once.
Yes. All expenses need No longer need to be
to be supported by supported by
● Domestic / Resident Corporations – only
invoices/receipt or other invoices/receipts corporations whose income in whole or in
competent supporting part is not exempt or preferential rate.
documents
Audited Financial Statements Rules on OSD
Individuals and No longer need to file
Corporations are Audited Financial ● Taxpayer wishing to be deducted using OSD
required to file audited Statements for BIR or shall signify its intention in its first quarter
financial statements Income Tax Return filing income tax return.
purposes
● Once exercise is irrevocable for the taxable
year the election was made

Rules on OSD on General Professional

Partnership

480
The distributable net income of the partnership for which an allowance has been made
may be determined by claiming either itemized (major repairs);
deductions or OSD. The share in the net income 4. Premiums paid on any life insurance
of the partnership, actually or constructively policy covering the life of any officer or
received, shall be reported as taxable income of employee, or any person financially
each partner. interested in any trade or business
The partners comprising the GPP can no longer carried on by the taxpayer, individual or
claim further deduction from their distributive corporate when the taxpayer is directly
share in the net income of the GPP and are not or indirectly a beneficiary under such
allowed to avail of the 8% income tax rate option policy; (Sec. 36[A] of NIRC)
since their distributive share from the GPP is 5. Interest expense, bad debts and losses
already net of cost and expenses. from sale of property between related
parties;(Sec. 36[B] of NIRC)
If Partnership chooses, Itemized Deduction, 6. Losses from sales or exchange of
Partners may claim Itemized Deductions property
ONLY 7. Non – deductible interest
8. Non – deductible taxes
If Partnership chooses, OSD, Partners may claim 9. Non – deductible losses and
Neither itemized or optional. 10. Losses from wash sales of sales of stock
or securities (Sec.38 of NIRC)
If the partner also derives other income from
trade, business or practice of profession apart 5. Income Tax on Individuals
and distinct from the share in the net income of
the GPP, the deduction that can be claimed from a) Resident Citizens, Non-resident
the other income would either be the itemized Citizens, and Resident Aliens
deductions or OSD.
The individual taxpayers can be classified as
Requirement for using OSD follows:
a) Citizens
Unless the taxpayer signifies in his return to elect 1. Resident Citizens (RC)
OSD, he is considered having availed of the 2. Non-Resident Citizens (NRC)
itemized deduction.
b) Aliens
Such election when made by the . Resident Alien (RA)
qualified taxpayer, is irrevocable for the year in . Non-Resident Alien
which the election was made; however, he can 1. Engaged in trade or business (NRA-
choose itemized deductions on the succeeding ETB)
years (R.R. 16-2008, Sec.7) 2. Not engaged in trade or business
(NRA-NETB)
c) Items Not Deductible (PN4R2LSW)
c) Special Class of Individual Employees
The following are not deductible in computing i. Aliens employed by regional
net income: headquarters, regional operating
headquarters, offshore banking units,
1. Personal, living or family expenses; and petroleum services contractors.
2. Amount paid out for new building of ii. Minimum wage earners
any property or estate (capital
expenditure);
3. Amount expended in restoring property
in making good the exhaustion thereof

481
a. Citizens
i. Resident Citizen (RC)
● Are those citizens who reside in the
Philippines.
● A citizen of the Philippines who
stayed in the Philippines or stay
outside for less than 183 days during
the taxable year (VALENCIA & ROXAS,
Income Taxation, p. 583)
Coverage:
Taxed on income sourced within and
without the Philippines and maybe taxed
at a rate of 0%-35% (effective 2018-
2022) or 8% tax rate on gross annual
sales or receipts (if applicable).
ii. Non-Resident Citizens (NRC) – resides in the Philippines
Filipino citizen who: ELWoP
a) Establishes to the satisfaction of the
Commissioner the fact of his physical
presence abroad with a definite
intention to reside therein.
b) Leaves the Philippines during the
taxable year to reside abroad, either
as an immigrant or for employment
on a permanent basis.
c) 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. “Most of
the time” meaning at least 183
days.
d) Has been Previously considered as
non-resident citizen and who arrives
in the Philippines at any time during
the taxable year to reside
permanently in the Philippines shall
likewise be treated as a non-resident
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
(Section 22[E], NIRC).
e) Taxpayer shall submit proof to the
Commissioner to show his intention
of leaving the Philippines to reside
permanently abroad or to return to
and reside in the Philippines as the
case may be.
Coverage:
Taxed on income sourced within maybe
taxed at a rate of 0%-35% of net taxable
income (effective 2018-2022) or 8% tax
rate on gross annual sales or receipts (if
applicable).
b. Aliens
i. Resident Aliens (RA)
Individual who is not a citizen but
An alien is considered as resident
if:
1. He is not a mere transient or
sojourner (R.R. No. 02-40, Sec. 5);
2. He has no definite intention as to his
stay in the Philippines; or
3. His purpose is of such nature that
an extended stay may be necessary
for its accomplishment and to that
end, the alien makes home
temporarily in the Philippines (BIR
DA -ITAD Ruling No. 153-06, December
12,2006)
When is residency lost?
A resident alien who has acquired residence in
the Philippines retains his status a resident alien
until he abandons the same and actually departs
the Philippines. Mere intention to change his
residence is not enough. (R.R. No. 02-40, Sec. 5)
Coverage:
Taxed on income sourced WITHIN the
Philippines. Based on the graduated rate of 0%-
35% of the NET taxable income.
482
 entertainment and the like); fees including
Income Taxation on Individuals director's fees, if the director is, at the same time,
Kinds of Taxable How taxed? an employee of the employer / corporation;
Individuals on taxable bonuses and fringe benefits, except those
income which are subject to the fringe benefits tax under
Resident Citizen Within Graduated tax Sec. 33 of the Code and the allowable "de
(RC) and table (0% -35%)
minimis" benefits; taxable pensions and
Without /8% Gross
(Global) Sales/Receipt (if retirement pa-v; and other income of a similar
applicable) nature constitute compensation income(Sec. 2(a),
Nonresident Within Graduated tax R.R. 8-2018)
Citizen (NRC) ONLY table(0%-35%)
/8% Gross Compensation for services in whatever from paid
Sales/Receipt (if including but not limited to:
applicable)
Resident Alien Within Graduated tax ● Fees
(RA) ONLY table (0%-35%) ● Salaries
/8% Gross ● Wages
Sales/Receipt (if
● Commission and
applicable)
Nonresident Within Graduated tax ● Similar items
alien engaged in ONLY table (0%-35%)
trade or /8% Gross o Fringe Benefit given to rank and file
business (NRA- Sales/Receipt (if employees in excess of Php 90,000 limit
ETB) applicable) o Taxable portion of De Minimis Benefits in
Nonresident Within 25% on Gross excess of Php 90,000 limit
alien not ONLY Income o A Taxable portion of 13th month pay and
engaged in other benefits in excess of Php 90,000
trade or
o Representation and Transportation
business (NRA-
NETB)
Allowance of employees of the private
sector (RATA)
o Taxable Pension, Retirement and
(1) Inclusion and Exclusions for Taxation
Separation Pay
on Compensation Income
o Voluntary contributions in excess of the
mandatory contributions to SSS, GSIS,
TAXABILITY: Taxed on individuals earning
PhilHealth and HDMF. (R.M.C. 27 -2011)
purely compensation income are taxed at
0%-35% graduated tax table on their net
Requisites for compensation to be taxable
taxable compensation income (Sec. 3 (b), R.R.
No. 8-2018) (APaR)

(a) Inclusions 1. There must be personal services actually

Compensation Income – all remuneration for
services performed by an employee for his
employer under an employee – employer
relationship, unless specifically excluded by
the Code.
The name by which the remuneration for services
is designated is immaterial. Thus, salaries,
wages, emoluments and honoraria, allowances,
commissions (e.g. transportation, representation,
rendered
2. There must be payment for such services
rendered
3. The payment made is reasonable
(The manner and procedure on how
compensation income is taxed shall be discussed
on the topic of Withholding Tax on
Compensation)

483
 (b) Exclusions
. Fringe Benefits subject to Fringe Benefits
Tax (FBT)
. 13th month pay and other benefits not
exceeding Php 90,000
. De Minimis Benefits within the limits
. Convenience of the Employer.
. Amount received through accident or
health insurance
. Separation Pay due to death sickness or
other disability or any other cause beyond
the control of the employee or the official
i. Fringe benefits subject to fringe benefit
tax
Fringe Benefits
Definition
Classification of employees for tax
purposes:
● Managerial employees – those who are
given the powers or prerogatives to lay down
and execute management policies and/or to
hire, transfer, suspend, lay-off, recall,
discharge, assign or discipline employees.
● Supervisory employees – are those who
recommend managerial actions if the
exercise of such authority is not merely
routinary or clerical in nature but requires the
use of independent judgment.
● Rank and file employees – are those
employees who are neither managerial nor
supervisory employees. Rank and file
employees are not subject to Fringe Benefit
Tax.

Any goods, services or benefits furnished or Fringe benefits subject to fringe benefit tax
granted in cash or in kind by an employer to an (FBT):
individual employee, in addition to basic salaries,
except a rank and file employee. (Sec 2.33 (B), RR (1) Housing;
(3.98)) (2) Expense account;
(3) Vehicle of any kind;
Fringe Benefit (4) Household personnel, such as maid, driver
Given to Rank and Given to Managerial and others;
File Employees and Supervisory (5) Interest on loan at less than market rate to
employees
the extent of the difference between the
Part of Compensation Income?
market rate and the actual rate granted;
Part of employee’s Not part of taxable
compensation income compensation income
(6) Membership fees, dues and other expenses
treated as other benefit. subject to graduated borne by the employer for the employee in
tax rates. social and athletic clubs or other similar
organizations;
Subject to What Tax? (7) Expense for foreign travel;
May be subject to regular Subject to Fringe (8) Holiday and vacation expenses;
income tax rates for Benefit Tax (9) Educational assistance to the employee or
individuals using the his dependents; and
graduated tax table if it’s (10) Life or health insurance and other non-life
13th Month and other
insurance premiums or similar amounts in
benefits has already
exceeded the Php 90,000 excess of what the law allows. (Sec. 33,
limit. NIRC)
Who pays for the tax?
The EMPLOYEE pays for EMPLOYER pays for
the tax which will be the tax
withheld from the
employee’s compensation

484
1. Housing When NOT subject to FBT:

When subject to FBT: i. Expenses incurred by the employee but

which are paid by his employer but is
i. Employer leases a residential property for duly receipted and is under the name of
use of the employee; the employer;
ii. Employer owns a residential ii. Expenses paid by the employee but
property and assigns the same for use by reimbursed by employer but is duly
the employee; receipted and is under the name of the
iii. Employer purchases a residential employer. (R.R. 3-98)
property on installment basis and allows
the use by employee;
iv. Employer purchases a residential Duly
property and transfers ownership to the receipted
Expense and under Subject
employee;
employer’s to FBT
v. Employer provides a monthly amount for name
the employee to pay his landlord.(R.R. 3- Expense of the
98) employee whether
paid or No Yes
When NOT subject to FBT: reimbursed by the
employer
i. Housing privileges of military officials of Expense of the
the AFP consisting officials of the employee whether
Philippine Army, Philippine Navy and paid or Yes No
Philippine Air Force; reimbursed by the
ii. Housing unit which is situated inside or employer
Personal expenses
adjacent (i.e. the unit is located within a Regardless Yes
by the employee
maximum of 50 meters from the
perimeter of the business premises) to
3. Vehicle of any kind.
the premises of a business or factory;
and
When subject to FBT:
iii. Temporary housing for an employee
who stays in a housing unit for three
i. Employer provides a car to the employee
months or less. (R.R. 3-98)
under his name either by:
a. purchasing in full payment or in
2. Expense account
installment, or
b. providing cash for the purchase
When subject to FBT:
vehicle in employee’s name or
c. shouldering a portion of the purchase
i. Expenses incurred by the employee but
price
which are paid by his employer;
ii. Employer either owns or leases a fleet of
ii. Expenses paid by the employee but
motor vehicle for use of the business and
reimbursed by employer; and
the employee
iii. Personal expenses of the employee paid
iii. Use of yacht whether owned and
for or reimbursed regardless the fact it
maintained or leased by the employer
is duly receipted and is under the name
(CASASOLA, NIRC (2013), p 267-269)
of the employer. (R.R. 3-98)
4. Household personnel (maid or driver)

485
When subject to FBT: ii. Inland travel expenses such as food,
beverages and local transportation.
i. Salaries of household help, personal iii. Lodging cost in a hotel or similar
drivers of the employee or establishment amounting to an average
ii. Other similar personal expenses like of $ 300 or less
payment of homeowner’s association iv. Cost of economy or business class
dues airplane tickets
v. 70% of the cost of the first class airplane
tickets

Travel Expense Subject to FBT

Inland Travel Expense No
Lodging cost in hotel or Yes, only if cost
5. Interest on loans similar establish exceeds $300
Travel expenses for Yes
family members
When subject to FBT:
Airline tickets:
Economy or business No
i. When the employer interest free interest class
loans or at less than market rate to the First class Yes up to 30% of the
extent of the difference between the cost of the ticket
market rate and the actual rate granted
8. Holiday and vacation expenses
6. Membership fees, dues and other expenses
borne by the employer for the employee in Note: The manner and procedure for the tax on
social and athletic clubs, and similar fringe benefits or Fringe Benefit Tax shall be
organizations discussed in Withholding Taxes

7. Expenses of Foreign travel 9. Educational assistance to the employee or

his dependents.
When subject to FBT:
When NOT subject to FBT:
i. When no documentary evidence is shown
that the employee’s travel was in connection Educational assistance to Educational
with business meetings or conventions employee assistance to
dependents
What amount is subject to FBT 1. Study is directly connected
with employer’s trade or
a. 30% of the cost of the first class airplane business and Assistance was
tickets 2. There is a written contract provided through
that the employee shall remain a competitive
b. Lodging cost in a hotel or similar
employed with the employer scheme
establishment in excess of $ 300 for a period mutually agreed
c. Travel expenses paid by the employer for the upon by the parties.
family members of the employee
(BANGAWAN, Income Taxation, p. 374) 10. Life or health insurance and other non-life
insurance premiums.
When NOT subject to FBT:
When NOT subject to FBT:
i. Foreign travel is in line with the trader or
business.

486
 i. Cost for the premiums borne by the
employer for group insurance of
employees.
ii. Cost of contributions of the employer for
the benefits of the employee to the SSS,
GSIS and similar contributions arising
from the provisions of law.
iii. Voluntary contributions in excess of the
mandatory are taxable. (R.M.C 27-2011)
ii. 13th month Pay and other benefits not
exceeding Php 90,000
a. Thirteenth month pay equivalent to the
mandatory one (1) month basic salary of
official and employees of the government
(whether national or local), including
government-owned or controlled
corporations, and/or private offices
received after the twelfth month pay;
and
b. Other benefits such as Christmas bonus,
productivity incentives, loyalty award,
gift in cash or in kind, and other benefits
of similar nature actually received by
officials and employees of both
government and private offices, including
the Additional Compensation Allowance
(ACA) granted and paid to all officials and
employees of the National Government
Agencies (NGAs) including State
Universities and Colleges (SUCs),
Government-Owned and/or Controlled
Corporations (GOCCs), Government
Financial Institutions (GFIs) and Local
Government Units (LGUs).
The above stated exclusions under (a) and (b)
shall cover benefits paid or accrued during the
year, provided that the total amount shall not
exceed ninety thousand pesos (₱ 90,000),
which may be increased through rules and
regulations issued by the Secretary of Finance,
upon recommendation of the Commissioner, after
considering among others, the effect on the same
of the inflation rate at the end of the taxable year.
(Sec. 6, R.R. No. 11-2018)
iii. De Minimis Benefits
These facilities or privileges furnished to
employees that are of relatively small value and
are offered or furnished merely as a means of
promoting heath, goodwill, contentment or
efficiency of employees. Applicable to all types
of employees, whether Supervisory, Managerial
or Rank and File.
The following are the de minimis benefits,
as amended by the TRAIN LAW (M 3R.
DALEGUC)
1. Monetized unused vacation and sick leave
credits paid to government officials and
employees;
● The number and nature (both vacation
and sick leave) of monetized unused
leaves is NOT subject to any limitations
for employees of the GOVERNMENT
officials and employee.
2. Monetized unused vacation leave credits of
private employees not exceeding 10 days
during the year;
● Only monetized unused VACATION
LEAVE credits not exceeding days are
non – taxable. Monetized unused SICK
LEAVE credits shall be taxable regardless
of days for employees of the PRIVATE
SECTOR.
Non-taxable unused
Employee monetized leave
Limit
of: Sick
Vacation
Leave
Government None on
Yes Yes
both
Private Up to 10
Sector Yes No days
only
3. Medical cash allowance to dependents of
employees, not exceeding P1,500 per
employee per semester or P250 per month;
4. Rice subsidy of P2,000 or one 50-kg sack of
rice per month worth not more than P2,000;
5. Uniforms and clothing allowance not
exceeding P6,000 per annum;
487
6. Actual medical assistance not exceeding De minimis
Fringe Benefits
P10,000 per annum; Benefits
7. Laundry allowance not exceeding P300 per Benefits given
month; Subject to
8. Employees’ achievement awards, which must limitations of No limitations as to
be in the form of tangible personal property amounts amount
other than cash or gift certificates, with an Exclusivity of the List
annual monetary value not exceeding List is exclusive Any benefits can be
P10,000 received by the employee under an treated as fringe
established written plan which does not
discriminate in favor of highly paid What happens when the given de minimis
employees; benefits exceeds the prescribed limit?
9. Gifts given during Christmas and major
anniversary celebrations not exceeding De minimis granted by an employer shall form
P5,000 per employee per annum; part of compensation income subject to
10. Daily meal allowance for overtime work and graduated rates but only to the amount in the
night/graveyard shift not exceeding 25% of excess of ceiling prescribed if given to rank and
the basic minimum wage; and file employee or if were given to managerial or
● If the grant of meal allowance was not supervisory employees, the excess will be subject
for overtime work or night/graveyard to fringe benefit tax. (R.M.C No. 5- 2011)
shift SHALL BE SUBJECT TO INCOME
TAX. (R.R.5-2011) Excess of De
● Meal allowance and lodging furnished for Minimis
the “advantage or convenience of the Tax Implication
Benefit given
employer” shall be exempt from tax. Meal to:
should be furnished within the premises Rank and file Excess will form part of 13th
of the employer. (TABAG, Income Taxation month pay and other
with Special Topics in Taxation, 2018, p.18)
benefit and any excess
11. Benefits received by an employee by virtue
from the Php 90,000 limit
of a Collective Bargaining Agreement (CBA)
shall be taxable under
and productivity incentive schemes,
regular income tax rates
provided the total annual monetary value
Managerial and Excess amount is subject
received from both CBA and productivity
Supervisory to Fringe Benefit Tax
incentive schemes combined do not exceed
P10,000 per employee per taxable year.
Illustration:
Mr. Juan, a rank and file employee, during 2019
The enumeration of De Minimis Benefits is
was given the following benefits:
exclusive. (Section 2, RR-2011, May 11, 2012)
Compensation Amount Classification
Changes Made in TRAIN Law:
13th Month Pay Php30,000 13th month
14th Month Pay 30,000 Other Benefit
● The medical cash allowance was Productivity 15,000 Other benefit
increased from P750 to P1,500 per Incentive Bonus
semester; Laundry 6,000 De minimis
● The rice subsidy was increased from allowance, Php benefit
P1,500 to P2,000 per month; and 500 per month for
● The clothing allowance was increased 12 months (limit is
from P4,000 to P6,000 per annum. only Php 300 per
month or Php
3,600 per year)

488
 Rice Allowance, 36,000 De minimis What is the tax implication on the excess?
Php 3,000 per benefit
month for 12 Mr. Juan being a rank and file employee, the
months (limit is excess shall form part of his taxable
only Php 2,000 or
compensation income subject to regular income
Php 24,000 per
year) tax rates together with all other taxable
Uniform allowance 10,000 De minimis compensation income.
(limit Php 6,000) benefits
Total Benefits Php Supposing, Mr. Juan is a manager, what
Given 112,000 will be the tax implication on the excess?

Compute for the taxable portion of the benefits Mr. Juan, being a managerial employee, such
givens, if any. excess shall be treated as fringe benefit subject
to fringe benefit tax.
Solution:
Benefit Amount Limit Amount iv. Convenience of the Employer Rule
of 13th
month Benefit given to the employee but proves to be
and more advantageous to the employer.
other
benefit
Such as a housing unit which is situated inside or
13th month Php
Pay 30,000 adjacent (i.e., the unit is located within a
14th month 30,000 maximum of 50 meters from the perimeter of the
pay business premises) to the premises of a business
Productivity 15,000 or factory;
Incentive
Bonus v. Amount Received Through Accident or
Laundry 6,000 3,600 2,400 Health Insurance Compensation for
allowance Injuries or Sickness:
Rice 36,000 24,000 12,000
allowance a. Any amount received by reason of
Uniform 10,000 6,000 4,000
compensation for personal injury or
allowance
sickness through Accident or Health
Total 13th 93,400
month and Insurance or under Workmen’s
other Compensation Acts.
benefits b. Plus the amount of any damages
Less: Non - (90,000) received, whether by suit or
Taxable 13th agreement, on account of such
month injuries or sickness.
and other c. The injury or sickness must arise from an
benefit employee – employer relationship.
Taxable 13th Php
month and 3,400
other benefit
Excluded Damages arising from personal
injuries and sickness:
● As can be seen in the above computation,
● Actual and compensatory damages
with regards to the de minimis benefits given
Moral, nominal, temperate or moderate,
only the excess of the limit was credited as
liquidated
part of 13th month pay and other benefit
which is reclassified as “other benefit.”

489
 Punitive damages or exemplary damages are Professional - a person formally certified by a
taxable within the broad concepts of gross professional body belonging to a specific
income (Glenshaw glass vs. CIR, 75 US 473) profession by, virtue of having completed a
required examination or course of studies and/or
Compensation for lost profits is taxable. practice, whose competence can usually be
(DOMOMDON) measured against an established set of
standards. It also refers to a person who engages
in some art or sport for money, as a means of
livelihood, rather than as a hobby. It includes but
Reason: Compensatory, not gain/profit. is not limited to doctors, lawyers, engineers,
architects, CPAs, professional entertainers,
vi. Separation Pay due to death sickness or artists, professional athletes, directors,
other disability or any other cause beyond producers, insurance agents, insurance
the control of the employee or the official adjusters, management and technical
consultants, bookkeeping agents, and other
When excluded: recipients of professional, promotional and talent
fees.
i. Amount is received by an official,
employee or by his heirs; a) Schedular
ii. Received from the employer;
iii. It was received as a consequence of the In general, the income tax on the individual's
separation of such official or employee taxable income shall be computed based on the
from the service of the employer by following schedules as provided under Sec.
reason of: 24(A)(2)(a) of the Tax.
a. Because of death, sickness and/or
other disability; or Tax Due: How Computed?
b. For any caused beyond the control of
such official or employee. (Sec. 32 Step 1: Determination of Taxable Income
[B][6][b] of NIRC)
Taxable Income - refers to the pertinent items
The phrase “any caused beyond the of gross income specified in the Code, less
control” connotes involuntariness on the deductions, if any, authorized for such types of
part of the official or employee. The income by the Code or other special laws.
separation from service of the official or
employee must not be asked or initiated If computed using itemized deductions:
by the employee (Sec. 2 [B], R.R. No. 12 -
1986) Gross or Net Sales /Gross Php 1,000,000
Receipts
(2) Taxation of Business Income/Income Less : Cost of Sales (350,000)
from Practice of Profession Gross Income 650,000
Less: Itemized Deductions (350,000)
Self-employed - a sole proprietor or an Taxable Income Php 300,000
independent contractor who reports income
earned from self-employment. S/he controls who If computed using OSD:
s/he works for, how the work is done and when
it is done. It includes those hired under a contract Gross or Net Sales / Gross Php 1,000,000
of service or job order, and professionals whose Receipts
income is derived purely from the practice of Less: Optional Standard (400,000)
profession and not under an employer - employee Deductions (40% of Gross
relationship. Sales or Gross Receipts

490
 Taxable Income Php 700,000 Effect of being taxed under schedular rates
(either opted to or failed to signify its
The TRAIN Law, repealed the following option to be taxed at 8%: or failed to
exemptions: qualify)
i. Personal Exemptions – Php 50,000
ii. Additional Exemptions – Php 25,000 per i. Individual allowed to deduct itemized
qualified dependents (maximum of 4 deduction or optional standard deduction
qualified dependents)
iii. Premium on Health Insurance – Php ii. Gross sales or gross receipts shall be subject
2,400 to business tax of:

Step 2: Determination of tax due by using a) If annual gross sales or gross receipt
the schedular/graduated tax rates: exceeds the VAT threshold or opted to be
a VAT payer – 12%
Effective 2018 -2022: b) If annual gross sales or gross receipt does
not exceed the VAT threshold AND
Range of does not opt or is not to be a VAT payer
Income Tax Due a+(b x c) – 3% or other applicable percentage tax
rates
Not Of Excess
Over Basic Additional
over over iii. Individual shall be required to submit a
financial statement attached to the annual
0 250k Exempt
income tax return if:
250k 400k 0 20% 250,000
400k 800k 30,000 25% 400,000
a) Individual who opts to use itemized
800k 2M 130,000 30% 800,000 deduction or failed to signify or elect the
2M 8M 490,000 32% 2,000,000 option to use the Optional Standard
8M - 2,410,000 35% 8,000,000 Deduction; or
K- hundred thousand; b) Individual exceeded the VAT threshold
M -million (Sec.3[C], NIRC)

Effective January 1,2023 and onwards: (b) 8% option

Range of Option is available to: (RSA -116)

Income Tax Due a+(b x c)

i. Individual is a resident citizen or resident

Not Of Excess
Over Basic Additional alien
over over
ii. Individual’s who earns
0 250k Exempt a. purely from self-employment or
250k 400k 0 15% 250,000 practice of profession and
400k 800k 22,500 20% 400,000 b. mixed income earner;
800k 2M 102,500 25% 800,000 iii. Individual’s annual gross sales or gross
receipts does not exceed the VAT threshold
2M 8M 402,500 30% 2,000,000
or is not a VAT registered taxpayer and
8M - 2,202,500 35% 8,000,000
iv. Individual’s gross sales or gross receipt is
K- hundred thousand;
under Section 116 of Title V of the Tax Code
M -million
as amended.

491
a. Self-Employed Individuals Earning ● NOT be allowed to deduct itemized or
Income Purely from Self-Employment optional deduction
or Practice of Profession. - Individuals ● NO longer be liable to the 3% percentage
earning income purely from self-employment tax on gross sales or receipts as the 8%
and/or practice of profession whose gross tax is already in lieu of percentage tax.
sales/receipts and other non-operating ● No longer required to attached financial
income does not exceed the value-added tax statements with the annual income tax
(VAT) threshold as provided under Section return
109 (BB) of the Tax Code, as amended, shall
have the option to avail of: Gross Annual Gross Annual Receipts
Receipts DOES NOT EXCEED Php
The graduated rates under Section 24(A)(2)(a) of EXCEEDS Php 3M 3M
the Tax Code, as amended; OR Taxed at 0%-35% Option 1 -Taxed at 0%-
graduated tax rates. 35% graduated tax rates.
Allowed to deduct Allowed to deduct itemized
An eight percent (8%) tax on gross sales or itemized or optional or optional standard
receipts and other non-operating income in standard deduction. deduction. Subject 3% tax
excess of two hundred fifty thousand pesos Subject to 12%
(P250,000.00) in lieu of the graduated income tax VAT Option 2- Taxed at 8% of
rates under Section 24(A) and the percentage gross sales /receipts
tax including non – operating
income in excess of Php
The options available to the taxpayer are as 250,000. CANNOT deduct
follows: itemized or optional
standard deduction. NOT
subject to 3% percentage
i. Option 1 -Taxed at Graduated Tax table tax.
of 0%-35%.
Purely Self Employed
Under this option, an individual will:
● be taxed on its taxable income using the Option 1 Option 2
graduated tax table (see letter a – Tax Base
schedular) Net Income (Sales – Gross Sales/receipts +
● be allowed to deduct itemized deductions COS –Deductions) other non – operating
or optional standard deduction income in excess of Php
● be liable to percentage tax of three 250,000
percent (3%) on gross sales/receipts Tax Rate
● Individual shall be required to submit a 0%-35% 8%
financial statement attached to the Subject to 3% Percentage Tax on Gross
annual income tax return if: Sales/receipts and other non – operating
income?
● Individual who opts to use itemized
Yes No
deduction or failed to signify or elect the
Allowed to deduct expenses and Cost of
option to use the Optional Standard Sales?
Deduction. Yes No

ii. Option 2 -Taxed at 8%. b. Individual Earning Income Both

Under this option, an individual will:
● be taxed at 8% on its gross sales or
receipts (including other non-operating
income) in excess of Php250,000
(business or practice of profession) -
For mixed income earners, the income
tax rates the applicable rates are
Mixed Income Earner - an individual earning
compensation income from employment, and

492
income from business, practice of profession ● NO longer be liable to the 3% percentage
and/or other sources aside from employment. tax on gross sales or receipts as the 8%
tax is already in lieu of percentage tax.
Taxability ● No longer required to attached financial
statements with the annual income tax
Taxpayers earning both compensation income return
and income from business or practice of ● Income earned from compensation will
profession shall be subject to the following taxes: be taxed at 0%-35% graduated tax
All Income from Compensation – The table.
Graduated Tax Rates of 0%-35%
Gross Annual Gross Annual Receipts
All Income from Business or Practice of Receipts DOES NOT EXCEED Php
Profession – EXCEEDS Php 3M 3M
Taxed at 0%-35% Option 1 -Taxed at 0%-
graduated tax rates. 35% graduated tax table.
Income earners who are mixed income earners
Allowed to deduct Allowed to deduct itemized
that have gross sales or receipts not itemized or optional or optional standard
exceeding the VAT threshold of Php 3M shall standard deduction. deduction. Subject 3% tax
have the following options: Subject to 12%
VAT Option 2- Taxed at 8% of
Option 1 -Taxed at Graduated Tax table of gross sales /receipts
0%-35% including non – operating
income. CANNOT deduct
Under this option, an individual will: itemized or optional
standard deduction. NOT
subject to 3% percentage
● be taxed on its taxable income using the
tax. However the tax on
graduated tax table both for compensation compensation income will
and income earned from business and/or be taxed at graduated tax
profession. (see letter a – schedular) table of 0%-35%
● be allowed to deduct itemized deductions or
optional standard deduction Mixed Income Earner
● be liable to percentage tax of three percent
(3%) on gross sales/receipts Option 1 Option 2
● Individual shall be required to submit a Tax Base
financial statement attached to the annual Compensation Gross Sales/receipts +
income tax return if: Income + Net Income other non – operating
● Individual who opts to use itemized from business (Sales income
deduction or failed to signify or elect the –COS –Deductions)
option to use the Optional Standard Tax Rate
0%-35% on 8% on Business income
Deduction.
Compensation and only
Net Income from
ii) Option 2 -Taxed at 8%. Business and/or 0%-35% - on
profession Compensation income
Under this option, an individual will: Subject to 3% Percentage Tax on Gross
Sales/receipts and other non – operating
● be taxed at 8% on its gross sales or income?
annual receipts (including non- operating Yes No
income) Allowed to deduct expenses and Cost of
● NOT be allowed to deduct itemized or Sales?
optional deduction Yes No

493
Purely Self-employed vs Mixed Income 8% Option not available to:
Earner
a. Pure compensation income earners;
Purely Self Mixed income earner b. VAT registered taxpayers;
employed c. Non-VAT taxpayers whose gross
No compensation Earns from business receipts/sales exceed P3,000,000.00;
income being earned income and compensation d. Taxpayers subject to other percentage taxes
Tax based on 8% option except Sec. 116;
Gross sales/receipts Gross sales/receipts +
e. Partners of General Professional
+ other non- other non-operating
operating income
Partnerships;
income less first Php f. Individuals enjoying income tax exemption
250,000 such as those registered with Barangay Micro
Taxability of Compensation Income Business Enterprise since taxpayers are not
No separate tax Has separate tax allowed to avail of double or multiple tax
computation for computation for exemptions under different tax laws unless
compensation compensation income specifically provided by law. (RR 8-2018 and
income which will be taxed at 0%- RMC 50-2018)
35% graduated income
tax. Summary of Important Rules:

How to avail of the option?
Individual taxpayers who are eligible and would
like to be taxed at 8% (Option 2) shall signify
its option on its 1st Quarter ITR and be
irrevocable and no amendment of option
shall be made for the taxable year. (Section
3I RR 8-2018, )
Failure to exercise or to signify its option shall
subject the income to the graduated tax rates of
0%- 35% (i.e. it is as if Option 1 was chosen).
What is the effect if the Php 3M gross
annual sales /receipts was breached within
the year?
A taxpayer shall automatically be subject to the
graduated rates under Section 24(A)(2)(a) of the
NIRC, as amended, even if the flat 8% income
tax rate option is initially selected, when
taxpayer’s gross sales/receipts and other non-
operating income exceeded the VAT threshold
during the taxable year.
In such case, his income tax shall be computed
under the graduated income tax rates and shall
be allowed a tax credit for the previous quarter/s
income tax payment/s under the 8% income tax
rate option.
The 8% income tax rate shall be based on the
gross sales/receipts and other non-operating
income, net of returns and cash discounts, in
excess of P250,000.00.
Taxpayer must signify his intention to avail of the
8% income tax rate in the 1st Quarter ITR /
Percentage Tax Return, or on the initial quarter
return of the taxable year after the
commencement of a new business/practice of
profession. Otherwise, taxpayer is considered to
have availed of the graduated rates.
Such election shall be irrevocable and no
amendment of option shall be made for the said
taxable year.
The option to be taxed at 8% gross income tax
rate is not available to a VAT-registered taxpayer,
regardless of the amount of gross sales/receipts,
and to a taxpayer who is subject to Other
Percentage Taxes under the Tax Code except
Sec. 116.
Partners of a General Professional Partnership
(GPP) by virtue of their distributive share from
GPP which is already net of cost and expenses
cannot avail of the 8% income tax rate option.
The Financial Statements is not required to be
attached in filing the final income tax return.

494
However, existing rules and regulations on form of real properties that return rental income,
bookkeeping and invoicing/receipting shall still shares of stock in a corporation that earn
apply. dividends or interest income received from
savings. (Chamber of Real Estate and Builders'
The P250,000.00 exemption for those subject to Associations, Inc. vs. Romulo, G.R. No. 160756,
the 8% tax is not applicable to mixed income March 9, 2010)
earners since it is already incorporated in the first
tier of the graduated income tax rates applicable Passive income is derived from: (RRD-I)
to compensation income. Under the said
graduated rates’ the excess of the P250,000.00 1. Interest
over the actual taxable compensation income is 2. Dividends
not deductible/creditable against the taxable 3. Royalty income
income from business/practice of profession 4. Rental Income
under the 8% income tax rate option.
1. Interest
8.a. A taxpayer shall automatically be subject to
the graduated rates under Section 24(A)(2)(a) of Conditions to be a passive income:
the Tax Code, as amended, even if the flat 8%
income tax rate option is initially selected, when 1. Derived from sources within the Philippines
taxpayer’s gross sales/receipts and other non- 2. Earned by:
operating income exceeded the VAT threshold a. Citizen
during the taxable year. In such case, his income b. Resident Alien
tax shall be computed under the graduated c. Non Resident Alien Engaged in Trade or
income tax rates and shall be allowed a tax credit Business
for the previous quarter/s income tax payment/s d. Domestic or Foreign Corporation
under the 8% income tax rate option. 3. Derived from:
a. Any currency bank deposit or
8.b. The taxpayer is required to update his/her b. Any other monetary benefit from deposit
registration immediately within the month substitutes and from trust funds and
following the month s/he exceeded the VAT similar arrangements.
threshold. S/he shall be liable to VAT
prospectively starting on the first day of the Interest income may be:
month following the month when the threshold is
breached. The taxpayer shall pay the required Subject to final Subject to Regular
percentage tax covering the sales/receipts and Tax Income Tax Rate
other non-operating income, from the beginning Interest income is Interest income is
of the taxable year or commencement of sourced within source without
business/practice of profession until the time the
taxpayer becomes liable for VAT, without Tax on Interest Income
imposition of penalty if timely paid on the
immediately succeeding month/quarter (Atty. a. From any currency bank deposit, yield, or
Bobby Lock, 2019 Taxation Updates and Critical any other monetary benefit from deposit
Areas,page 4) substitutes and from trust funds and
similar arrangements derived from sources
(3) Taxation of Passive Income within the Philippines:

Passive Investment Income Taxpayer Rate

Resident Citizen
Passive income is income generated by the 20% on
Non Resident Citizen
taxpayer’s assets. These assets can be in the interest income
Resident Alien

495
 Non Resident Alien Engaged depository bank from the proceeds of the long-
in Trade or Business term deposit or investment certificate based on
Domestic Corporation the remaining maturity thereof:
Resident Foreign
Corporation Pre -terminated Tax
Non Resident Alien Not 25% on Gross Implication
Engaged in Trade or Income On the 5th year or thereafter Exempt
Four (4) years to less than five 5%
Business
(5) years
Non Resident Foreign 25% on Gross Three (3) years to less than (4) 12%
Corporation Income years
(Secs.24[B],25[A][2],25[B],27[D][1],28[A][7],&28[B][ Less than three (3) years 20%
1] of NIRC) (Secs.24[B],25[A][2] of NIRC)
Deposit substitutes
Tax applicable to:
Under the 1997 National Internal Revenue Code,
● Resident Citizens
Congress specifically defined "public" to mean
● Resident Aliens
"twenty (20) or more individual or corporate
● Non – Resident Alien engaged in Trade or
lenders at any one time." Hence, the number of
Business
lenders is determinative of whether a debt
instrument should be considered a deposit
Conditions to be exempt from final tax:
substitute and consequently subject to the 20%
final withholding tax. (BDO vs. Republic of the
1. Depositor or investor is an individual citizen
Philippines, G.R. No. 198756, January 13, 2015)
(resident or not), resident alien and non –
Tax implication on the 20 – Lender rule resident alien engaged in trade or profession.
2. Long Term Deposits (LTD) or investment
Less than 20 lenders 20 or more certificates under the name of the individual;
lenders (Deposit 3. LTD or investment in the form of:
Substitute) a. Savings;
Interest income forms part Interest income is b. common or individual trust funds;
of gross income subject to subject to final tax of c. deposit substitutes;
regular income tax rates 20% d. investment management accounts; and
(Id.) e. and other investment evidenced
prescribed by BSP;
The provision for the 20% withholding only 4. Must be issued by banks only;
applies to interest on banks and does not cover 5. LTD or investment must have a maturity of
interest paid by cooperatives. (Castillo, Dumaguete five (5) years;
Cathedral Credit Cooperative vs.CIR, G.R. 187722, 6. Must be in denominations of Php 10,000 and
January 22, 2010) other denominations prescribed by BSP;
7. Only interest income from LTD or investment
b. From long-term deposit or investment in certificates are covered by the exemption;
the form of savings, common or individual 8. Does not cover other income; and
trust funds, deposit substitutes, 9. Must not be pre -terminated before the 5th
investment management accounts and year. (Revenue Memorandum Circular No. 7-
other investments evidenced by 2015)
certificates in such form prescribed by the
Bangko Sentral ng Pilipinas (BSP)

Final tax shall be imposed on the entire income

and shall be deducted and withheld by the

496
Interest in foreign currency depositary constructively received. (MAMALATEO, Philippine
units Income Tax, 2010, p.111)

Taxpayer Rate a. Dividends from Domestic Foreign

Resident Citizen Corporation /Including shares of an
15 % on
Resident Alien
interest* income
individual in the distributable net
Domestic corporation income after tax of a taxable
Resident foreign corporation 7.5% on interest partnership where the individual is a
income partner
Non Resident Alien Engaged in
Trade or Business
Taxpayer Rate
Non Resident Alien NOT
Resident Citizen
engaged in trade or business Exempt
Non – Resident Citizen 10%
Non Resident Citizen
Resident Alien
Non Resident foreign
Non Resident Alien Engaged in
corporation 20%
Trade or Business
Non Resident Foreign Corporation 30%*
Changes made by the TRAIN Law (Secs.24[B],25[A][2],25[B],&28[B][1] of NIRC)

Increase the final tax on interest in foreign *Subject to tax sparring rate of 15% or applicable
currency depositary units from 7.5% to 15% tax treaty rates.

2. Dividends Tax sparring rule

It refers to any distribution made by a corporation A final withholding tax at the rate of fifteen
to its shareholder out of its earnings or profits and percent (15%) is hereby imposed on the amount
payable to its shareholders, whether in money or of cash and/or property dividends received from
other property (Sec. 73[A] of NIRC) a domestic corporation, which shall be collected
and paid as provided in Section 57 (A) of this
Dividend income may be: Code, subject to the condition that the country in
which the nonresident foreign corporation is
Subject to final Tax Subject to Regular domiciled, shall allow a credit against the tax due
Income Tax Rate
from the nonresident foreign corporation taxes
Dividends came from
deemed to have been paid in the Philippines(Sec.
domestic corporation or
28(B)(5), NIRC; CIR vs. Procter and Gamble, G.R. No.
partnership where the
66838, December 2, 1991)
partner is an income
recipient.
Dividends from b. Dividends from foreign corporation
Dividend from foreign
foreign corporation
corporation which earns
more than 50% of Since it is sourced outside the Philippines it
its income in will be subject to regular income tax rates for
the Philippine for the past resident citizens and domestic corporations
three years only. (Sec. 23, NIRC)

When taxable When is dividend foreign corporation

Dividend income is taxable at the time of their
declaration by the corporation, and not on the
time of actual payment of dividends, since
dividend is taxable, whether actual or
considered source from within?
From a foreign corporation, unless less than
fifty percent (50%) of the gross income of
such foreign corporation for the three-year
period ending with the close of its taxable

497
 year preceding the declaration of such Liquidating dividend
dividends or for such part of such period as
the corporation has been in existence) was When a corporation distributes all of its assets in
derived from sources within the Philippines as complete liquidation or dissolution, the gain
determined under the provisions of this realized or loss sustained by the stockholder,
Section; but only in an amount which bears whether individual or corporation, is taxable
the same ratio to such dividends as the gross income or deductible loss, as the case may be
income of the corporation for such period .(Section 73[A], NIRC)
derived from sources within the Philippines
bears to its gross income from all A liquidating dividend is not a dividend
sources.(Sec. 42 (2) (b) of NIRC) income. The transaction is considered a
sale or exchange of property between the
Stock dividend corporation and the stockholder.(Sec. 256,
R.R. 2-1940)
General Rule
3. Royalty income
Not subject to tax because it does not constitute
income; it represents transfer of surplus to capital Definition
account. (Sec. 73[B] of the NIRC)
It is the payment for the use and exhaustion of
Exceptions: property such as earnings from copyrights,
patents, trademarks, formulas and natural
a) Under Sec. 73(B) when the following concur: resources under lease. (Sec.42[4],NIRC)
(RST)
How taxed:
a. There is redemption or cancellation
of shares of stock; Subject to final Tax Subject to Regular
Income Tax Rate
b. The transaction involves stock
Payment for use of When sale of royalty is
dividends; and intellectual property on a regular basis.
c. The “time and manner” of the (Passive income) (Active Income)
transaction makes it “essentially Royalty income sourced Royalty source without
equivalent to a distribution of taxable within
dividends”.(CIR vs. CA, CTA & ANSCOR, G.R.
No. 108576, January 30, 1999) Tax Rates:
2. The recipient is other than the shareholder
(Brachrach vs. Seifert, G.R. No. L-2659, October From literary works and musical
12, 1950).
compositions (Individuals Only )
3. Change in the stockholder’s equity results by
Taxpayer Rate
virtue of the stock dividend issuance. Resident Citizen
Non – Resident Citizen
Property dividend Resident Alien 10%
Non Resident Alien Engaged in
Dividends given other than cash shall be subject Trade or Business
to final tax similar to cash dividends, i.e., 10%. Non Resident Alien Not Engaged
25%
(Sec. 24 [B][2] of the NIRC) in Trade or Business

498
b. Royalties, in general (passive Tax rates:
income)
Taxpayer Rate a. On properties, in located in the
Resident Citizen Philippines:
Non – Resident Citizen
Resident Alien Taxpayer Rate
20%
Domestic Corporation Non Resident Alien Engaged in Trade or
Resident Foreign 25%
Business
Corporation Non Resident Foreign Corporation 30%
Non Resident Alien NOT
Engaged in Trade or 25% b. On specific properties rented owned by
Business
non -resident foreign corporation:
Non Resident Foreign
30%
Corporation
(Secs.24[B],25[A][2],25[B],27[D][1],28[A][7],&28[B][ Lease on Rate on Gross
1] of NIRC) income
Cinematographic Films 25%
Foreign vessels 4.5%
4. Rental Income
Aircraft machineries and
7.5%
equipment
Definition
Tax treatment on Leasehold Improvement
It refers to the amount or compensation paid for
the use or enjoyment of a thing or a right and .Leasehold Improvements by Lessee
implies a fixed sum or property amounting to be
paid at a stated time for the use of the Method of reporting the value of permanent
property.(MAMALATEO, Philippine Income Taxation, improvements introduced by the lessee:
2010, p.139)

How taxed: ● Outright method – recognized as income

to lessor at the time when such buildings
Location Subject to Subject to Regular improvements are completed at fair market
of the final Tax Income Tax Rate value.
Property ● Spread-out method – the lessor spread
over the life (or remaining period) of the
lease, the estimated depreciated value of
In the If owned by a If owned by a citizen,
Philippines non – resident alien, non –
such buildings or improvements at the
resident alien resident alien termination of the lease and report as an
not engaged engaged in trade or income for each year of the lease, an aliquot
in trade or business, domestic part thereof (Sec.49, R.R. 2-40)
non – corporation or
resident resident i. VAT Added to Rental/Paid by the
foreign foreign corporation Lessee
corporation
on
The amount of the VAT in a vatable lease
Outside If owned by resident which the lessor passed on to the lessee does
the citizen or domestic
not form part of the rental income of the
Philippines corporation
lessor, since such amount is to be paid by the
lessor as output VAT on the sale of leasing
services to the BIR.

499
ii. Advance Rental/Long Term Lease
General rule:
Accrual method will apply; thus, it is taxable
when earned and not when the payment is
received. (CASASOLA, NIRC, Annotated)
Exception:
When it is received under a claim of right and
without restriction as to its use
● Security deposit applied to the rental of the
terminal month or period of contract must be
recognized as income at the time it is applied
and not at the time paid.
● If security deposit is to ensure contract
compliance, it is not income to the lessor until
the lessee violates any provision of the
contract. (CASASOLA, NIRC, Annotated)
considered as ordinary
asset. (Sec.2(b) of RR No.
7-2003)
Note that in ordinary assets, the list is
EXCLUSIVE.
b. Types of Gains: Ordinary Income vis-a-
vis Capital Gain
Treatment of Ordinary Gains:
Those arising from the sale of ordinary assets
will form part of the taxable income subject
to the graduated/basic/regular income tax.
Likewise, losses arising from such sale may
be claimed as deductible expense, without
any limitation as to amount, unlike in capital
losses.
Treatment of Capital Gains:

(4) Taxation of Capital Gains
Income on sale of properties whether ordinary or
capital asset.
a. Kinds of Asset for Tax Purposes
Depending on the nature of the property, the
gains derived from sale or disposition of
capital assets may be subject to:
1. Capital gains tax; or
2. Ordinary income tax.

Assets could either be Ordinary or Capital asset: Capital Gains Tax (CGT) is applicable only
to:
Ordinary Asset Capital Asset
a. Stock in trade of the Includes all property 1. Sale of shares of stock of a domestic
taxpayer or other held by the taxpayer corporation NOT listed or traded
properties of a kind whether or not through a local stock exchange held as
which would properly connected in trade or capital assets; and
be included in the business not included 2. Sale of real property located in the
inventory of the in the definition of
Philippines held as a capital asset.
taxpayer; ordinary assets.
b. Property held by the
taxpayer primarily for All other capital gains are subjected to regular
sale to customers in income tax.
the ordinary course of
business; Net Capital Gain Net Capital Loss
c. Property used in trade Definition
or business and subject The excess of the gains The excess of the losses
to depreciation; and from sales/exchanges of from sales or exchanges
d. Real property used in capital assets over the of capital assets over
trade or business. losses from such the gains from such
sales/exchanges. sales or exchanges.
*Real properties acquired
by bank through Tax Treatment
foreclosure sales are

500
 All other capital assets Does not form part of Rules on Holding Period:
other than subject to allowable deductions –
percentage taxes and because loss can be ▪ Rules applies to whom: Individual
capital gains taxes deducted only to the Taxpayers only.
forms of part of the extent of capital gain
▪ To what kind of assets: Capital Assets
taxable income subject
to income tax except Sale of Real Property and Sale of
Shares of Tax Not Listed or Traded
Basis for Determining gain or loss in through local stock exchange (since
exchange of properties (determination of subject to Capital Gains Tax)
cost) as per Sec. 40B of NIRC:
Holding Period
If Capital asset was If Capital asset was
How the capital Cost Basis
held for more than 12 held for less than 12
asset was acquired
months (Long Term months (Short Term
By Purchase Cost of the property
Gain) Gain)
By Inheritance Fair market price or value
Percentage to be recognized
as of date of acquisition
The net capital gain or The net capital gain or
By Gift If the property was
loss is reported at 50% loss is reported at
acquired by gift, the basis
of the amount realized 100% of realized gain
shall be the same as if it
gain or loss or loss
would be in the hands of
the donor or the last
preceding owner by whom For corporations, the net capital gain or loss is
it was not acquired by gift, always reported at 100%, as the holding period
except that if such basis is does not apply. (Sec. 39[B],NIRC)
greater than the fair
market value of the Loss Limitation Rule
property at the time of the
gift then, for the purpose General Rule: Capital losses are allowed only to
of determining loss, the
the extent of capital gains;
basis shall be such fair
market value
For less than an The basis of such property Exception: If a domestic bank or trust company,
adequate is the amount paid by the a substantial part of whose business is the receipt
consideration in transferee for the property of deposits, sells any bond, debenture, note or
money or money’s certificate or other evidence of indebtedness
worth issued by any corporation (including one issued
by a government or political subdivision), any loss
c. Special rules pertaining to the income shall not be included in determining the
or loss from dealing in property held as applicability of the limitation. (Sec. 39 (C) of NIRC)
Capital Asset
Net Loss Carry Over
Capital assets not subject to CGT
This rule is applicable only to individual
Holding Period taxpayers. If an individual, sustains in any taxable
year a net capital loss, such loss (in an amount
Holding period is the length of time that the asset not in excess of the net income for such year)
has been held by the taxpayer. It covers the shall be treated in the succeeding taxable year as
period from date of acquisition to the date of sale a loss from the sale or exchange of a capital asset
of a particular asset. held for not more than 12 months.(Sec. 39 (D) of
NIRC)

501
Summary of applicable income taxes for The CGT of 6% of actual consideration (selling
Capital Gains and Ordinary Gains price) or the fair market of the value at the time
of sale of real property held as capital asset,
Type of Gain Applicable Tax whichever is higher. This is called presumed
Capital gain on sale of Subject to 15% CGT. gain. (SMI-ED PHILIPPINES TECHNOLOGY, INC., vs.
shares of domestic CIR, G.R. No. 175410; Nov. 12, 2014)
corporation not traded Applicable to all
or listed though local individuals and Sale of Real Property exempt from CGT
stock exchange corporations, domestic or
(direct sale) foreign, resident or not.
(As amended by the
Exemption of certain individuals from the CGT on
CREATE Law) the sale or disposition of a Principal Residence,
the proceeds of which is fully utilized in acquiring
or constructing a new principal residence..
Sale of real properties Subject to 6% on the
classified as capital presumed gain, based on Requirements: (ON -18 -30 -CPU)
assets in the the highest amount
Philippines among the selling price, 1. Sale or disposition of the old principal
fair market value and residence;
zonal value.
2. By natural persons – citizen or resident
All other types of Subject to basic income
capital gains other tax, subject to the rules
alien individual taxable under Sec. 24 of the
than those on net capital gains and Code (does not include an estate or a trust);
enumerated above losses. Included in the 3. The proceeds of which is fully utilized in (a)
Income Tax Return (ITR) acquiring or (b) constructing a new principal
Ordinary Gain Subject to basic tax. Part residence within eighteen (18) calendar
(Income) of taxpayer’s taxable months from date of sale or disposition;
income and ITR. 4. Notify the Commissioner within thirty (30)
days from the date of sale or disposition
Capital Gains Tax through a prescribed return of his intention
to avail the tax exemption;
Capital gains tax is a tax on passive income, it is 5. Can only be availed of only once every ten
the seller not the buyer, who generally shoulder (10) years;
the tax. (Republic vs. Soriano, G.R. No. 211366, Feb. 6. The historical cost or adjusted basis of his old
25,2015) principal residence sold, exchanged or
disposed shall be carried over to the cost
Actual Gain: basis of his new principal residence.
7. If there is no full utilization, the portion
The income tax law imposes on income when of the gains presumed to have been realized
there is actual gain or profit after deducting the shall be subject to CGT.
cost or adjusted basis of the property sold from 8. Certification the Revenue District Officer that
the amount realized this is called actual gain. the proceeds from sale have been utilized.
(Sec. 40 (A) of NIRC) (Sec. 24 (D) of NIRC)

Presumed Gain: Escrow Agreement:

Where an individual or corporation sold a real
property or land/ building held as capital asset,
the law presumes that there was a capital gain
realized. Hence, acquisition cost is not taken into
account.
The six percent (6%) CGT in relation to the
disposition of Principal Residence shall be
deposited in cash or manager's check in interest-
bearing account with an AAB under an Escrow
Agreement between the concerned RDO, the
Seller/Transferor and the AAB to the effect that

502
the amount so deposited, including its interest graduated tax
yield, shall only be released to such rates
Seller/Transferor upon certification by the said
RDO that the proceeds of sale or disposition Corporations
subject to
thereof has, in fact, been utilized in the
corporate
acquisition or construction of the income tax of
Seller/Transferor's new Principal Residence 25%
within 18 calendar months from date of the said Tax base Gross selling price Taxable income
sale or disposition. The date of sale or disposition Still
of a property refers to the date of notarization of subject
the document evidencing the transfer of said to No. Yes
property. income
tax
Sale of principal residence is subject to CGT, if
the sale is made not for the purpose of buying a Dealer in Securities
new principal residence.
Means a merchant of stocks or securities,
In case a real property is sold in installment whether an individual, partnership or corporation,
(initial payment not exceeding 25% of the with an established place of business, regularly
contract price) wherein the initial payment was engaged in the purchase of securities and the
paid in cash and the balance in the form of resale thereof to customers; that is, one who, as
interest bearing promissory notes and the seller a merchant, buys securities and re-sells them to
discounted the promissory notes in the year of customers with a view to the gains and profits
sale, the entire gain on the sale must be reported that may be derived therefrom. (Sec. 22(U) of
in the year of sale (Bañas vs. Court of Appeals, G.R. NIRC)
No. 102967, February 10, 2000).
Securities
The transfer of property through expropriation
proceedings is a sale or exchange within the Shares of stock in a corporation and rights to
meaning of Sections 24(D) and 56(A)(3) of the subscribe for or to receive such shares. The term
NIRC, and profit from the transaction constitutes includes bonds, debentures, notes or certificates,
capital gain. Since CGT is a tax on passive or other evidence or indebtedness, issued by any
income, it is the seller who are liable to shoulder corporation, including those issued by a
the tax. (Republic vs. Spouses Salvador, GR No. government or political subdivision thereof, with
205428 dated June 7, 2017) interest coupons or in registered form. (Sec. 22(T)
of NIRC)
Dealings in Shares of Stocks Listed and
Traded in the Local Stock Exchange Changes made in TRAIN Law and CREATE
Law
Sale made by a Sale made by a
person Other Dealer of ● Increase the rate of CGT on sale of stock
Than a Dealer of Securities transaction that is not listed/traded in the
Securities (Sec. (Sec. 24) local stock exchange from 5-10% graduated
127) rates to a flat rate of 15% with regards to
Stock Subject to individual taxpayers and corporations.
transactions tax regular While the tax rate for sale of stock
Tax ●
(See discussion income tax
effect transaction traded/listed in the local
under Percentage
Taxes) stock exchange is increased from ½ of 1%
Individual – to 6/10 of 1%.
Tax rate 6/10 of 1%
subject to

503
Tax on Capital Gains Tax Rate :6%

(See detailed discussion under B. 3. V. Income from Tax Base:

dealings in property)
Individual Corporation
To summarize: Sale, exchange, or other
a. Income from sale of shares of stocks of disposition of real
a Philippine Corporation -15% of net Sale, exchange or
property located in the
capital gain disposition of
Philippines, classified as
b. Income from sale of land and/or lands and/or
capital assets, including
buildings buildings only
pacto de retro sales and
6% of Gross Selling Price or Fair Market Value other forms of
(FMV) whichever is higher conditional sales.

c. Income from sale, exchange or other Actual Gain v. Capital Gain

disposition of other capital assets
Subject to RCIT/MCIT on income from sale of
capital asset NOT subject to capital gains tax
without the benefit of Holding Period and Net
Capital Loss Carry Over
Capital Gains Tax
General Rule:
The income tax law imposes on income when
there is actual gain or profit after deducting the
cost or adjusted basis of the property sold from
the amount realized this is called actual
gain.(Sec. 40 (A) of NIRC)

Capital gains tax is a tax on passive income, it is Exception:

the seller not the buyer, who generally shoulder
the tax. (Republic of the Philippines as represented by Where an individual or corporation sold a real
DPWH vs. Arlene Soriano, G.R. No. 211366, February
property or land/ building held as capital asset,
25,2015)
the law presumes that there was a capital gain
realized.
i. Sale of Real Property or Land and/or
Buildings
(5) Capital Asset vs. Ordinary Asset
Applicable to:
Kinds of Asset for Tax Purposes
● Individuals
● Resident Citizen
Assets could either be Ordinary or Capital asset:
● Resident Alien
● Non – Resident Citizen
Ordinary Asset Capital Asset
● Non – Resident Alien Engaged in Trade
Definition
or Business . Stock in trade Includes all property
● Non – Resident Alien Not Engaged in of the taxpayer or other held by the taxpayer
Trade or business properties of a kind whether or not
● Domestic corporation which would properly connected in trade or
be included in the business but not
inventory of the including those
taxpayer; enumerated as ordinary
. Property held assets
by the taxpayer
primarily for sale to
customers in the

504
 ordinary course of similar arrangements derived from sources
business; within the Philippines -20% Final Tax
. Property used
in trade or business b. From long-term deposit or investment in
and subject to
the form of savings, common or individual
depreciation; and
. Real property trust funds, deposit substitutes,
used in trade or investment management accounts and
business. other investments evidenced by
*Real properties certificates in such form prescribed by the
acquired by bank Bangko Sentral ng Pilipinas (BSP)
through foreclosure
sales areconsidered as Pre -terminated Tax
ordinary asset Implication
(Sec.2(b) of RR No. 7- On the 5th year or thereafter Exempt
2003) Four (4) years to less than five 5%
Gain derived (5) years
Ordinary gain Capital gain Three (3) years to less than (4) 12%
Determination of Income years
Actual Gain Presumed Gain Less than three (3) years 20%
Tax imposed
May be subject to ii. Dividends -20%
Capital Gains Tax or
Subject to graduated or may be subject to
corporate income tax graduated or corporate iii. Royalties -
income tax rates
a. In General – 20%
Applicability of Holding Period b. Literary and Music Compositions – 10%
Not applicable Applicable
Loss Limitation Rule b. Capital Gains
Not applicable Applicable
Net Capital Loss Carry over (See discussion under B. 3. v. Income from dealings in
Not Applicable Applicable property)

b) Income Tax on Non-Resident Engaged a. Income from sale of shares of stocks of a

in Trade or Business Philippine Corporation-15% of net capital gain

Non – Resident Aliens Engaged in Trade or Income from sale of real property situated
Business in the Philippines

Coverage: From all income sourced within
a. Passive investment income
(See detailed discussion under B. 3. vi. Income on
Passive investment income)
i. Interest
a. From any currency bank deposit, yield, or
any other monetary benefit from deposit
substitutes and from trust funds and
Final tax of 6% of Gross Selling Price or FMV
whichever is higher
Taxable income
Taxed on income sourced WITHIN the
Philippines. Based on the graduated rate of 0%-
35% of the NET taxable income.
(see discussion on Tax Taxation of business
income/income from practice of profession – (a)
Schedular)

505
c) Income Tax on Non-Resident Aliens Not
Engaged in Trade or Business
Non-Resident Alien NOT Engaged in Trade
or Business - Individual who is not a citizen,
with residence outside the Philippines and does
not perform any of the above-mentioned.
TAXABILITY:
i. Passive investment income
(See detailed discussion under B. 3. vi. Income
on Passive investment income)
i. Interest
a. From any currency bank deposit, yield, or
any other monetary benefit from deposit
substitutes and from trust funds and
similar arrangements derived from sources
within the Philippines -25% Final Tax
b. From long-term deposit or investment in
the form of savings, common or individual
trust funds, deposit substitutes,
investment management accounts and
other investments evidenced by
certificates in such form prescribed by the
Bangko Sentral ng Pilipinas (BSP)– 25%
ii. Dividends -25%
Taxed on income sourced WITHIN the
Philippines. Based on the fixed rate of 25% of the
GROSS income.
d) Individual Taxpayers Exempt from
Income Tax
Individual taxpayers exempt from income
Income of any kind [shall be exempted from
taxation], to the extent required by any treaty
obligation binding upon the Government of the
Philippines. (Sec. 32 [B][5] of NIRC)
(1) Senior Citizens
.Tax Deduction – a subtraction from gross
income in arriving at the taxable income:
● Section 4(a) of the Expanded Senior Citizens
Act of 2003, which provides that the 20%
discount given to senior citizens shall be
considered a tax deduction, rather than a tax
credit on the part of the establishment
granting the same, is not unconstitutional.
While the Constitution protects property
rights, the State, in the exercise of the police
power, can intervene in the operations of a
business which may result in an impairment
of property rights in the process.(Carlos
Super Drug Corp. vs. DSWD, G.R. No. 166494,
June 29, 2007)

iii. Royalties -25% Other VAT exempt transactions

(1) Sale of goods & (1) Sale of goods &
services to Senior services to Senior
b. Capital Gains
Citizens –VAT exempt Citizens;
(See discussion under B. 3. v. Income from but not found in the (2) Transfer of property
dealings in property) Tax Code; pursuant to Sec
40(C)(2);
a. Income from sale of shares of stocks of a (2) Association Dues, (3) Association Dues,
Philippine Corporation-15% of net capital gain membership fees, and membership fees, and
other assessments and other assessments and
charges collected by charges collected by
Income from sale of real property situated homeowners homeowners
associations and associations and
in the Philippines
condominium condominium
corporation; - VATable corporation;
Final tax of 6% of Gross Selling Price or FMV (4) Sale of Gold to BSP
whichever is higher (3)Sale of Gold to BSP (5) Sale of Drugs and
iii. Gross income other than (i) and (ii) – Zero Rated medicines prescribed
for: (a)diabetes, (b)

506
 high cholesterol
(c)hypertension
beginning Jan. 1, 2019
(6) Sale of goods or
services, leases which
gross annual sales or
receipts do not exceed
Php 3M
(2) Minimum Wage Earners
Minimum Wage Earner (MWE) - Worker in
the private sector paid the statutory minimum
wage (SMW) or an employee in the public sector
with compensation income of not more than the
statutory minimum wage in the non-agricultural
sector where he/she is assigned (Sec. 2 [i]R.R. No.
8 -2018)
TAXABILITY: MWEs shall be exempt from the
payment of income tax on their taxable income.
The holiday pay, overtime pay, night shift
differential pay and hazard pay received by such
minimum wage earners shall likewise be exempt
from income tax (Sec.3[A] R.R. 8-2018)
Rules with regard to MWEs receiving 13th
month pay and other benefits? *
a. Statutory Minimum Wage (SMW), Holiday
Pay, Overtime Pay, Night Differential Pay and
Hazard Pay are exempt from income and
withholding tax;
b. Additional compensation such as
commissions, honoraria, fringe benefits,
benefits in excess of the allowable statutory
amount of P90,000.00, taxable allowances,
and other taxable income given to MWE by
the same employer other than those which
are expressly exempt from income tax shall
be subject to income tax and withholding tax;
c. MWEs receiving other income from other
sources in addition to compensation income,
such as income from other concurrent
employers, from the conduct of trade,
business or practice of profession, except
income subject to final tax, are subject to
income tax only to the extent of income other
than SMW, holiday pay, overtime pay, night
shift differential pay, and hazard pay earned
during the taxable year; and
d. Any reduction or diminution of wages for
purposes of exemption from income tax
shall constitute misrepresentation and
therefore, shall result to the automatic
adisallowance of expense, i.e.
compensation and benefits account, on
the part of the employer. The offenders
may be criminally prosecuted under
existing laws. (RR 11-2018)
(3) Exemptions Granted Under
International Agreements
Exemptions under international
agreements
Income of any kind [shall be exempted from
taxation], to the extent required by any treaty
obligation binding upon the Government of the
Philippines. (Sec. 32 [B][5] of NIRC)
6. Income Tax on Corporation
a) Income Tax on Domestic Corporations
and Resident Foreign Corporation
Taxation in General Corporation (Sec.
22(B))
Includes:
Partnerships, no matter how created or
organized, joint-stock companies, joint accounts,
association, or insurance companies,
Does not include:
General professional partnerships and a joint
venture or consortium formed for the purpose of
undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium
agreement under a service contract with the
Government.
Domestic corporation
A corporation created or organized in the
Philippines under its law
507
 Sec. 27(C) and other special laws, with no
Optional Tax Scheme for Domestic other taxable income;
Corporations b. Those with income subject to
special/preferential tax rates; and
Domestic corporations may opt to be taxed at c. Those with income partially subject to income
either: tax rate under Secs. 27(A) and 28(A)(1) of
the NIRC and partially subject to
● Corporate gross income tax – The President,
special/preferential tax rates. (Rev. Regs. 02-
upon recommendation of the Secretary. of 14, Sec. 5)
Finance, may allow domestic corporations the
option to be taxed at 15% of gross income (ii) OSD
after conditions have been satisfied.
● Regular corporate income tax (RCIT) subject In lieu of the itemized deductions, a corporation
to minimum corporate income tax may elect to a OSD in an amount not exceeding
forty percent (40%) of gross income of
Corporate tax scheme on regular corporations.
corporations
A taxpayer who elected to avail of the OSD shall
Domestic Corporation Resident signify in his/its first quarter return such
Corporation intention. Otherwise, he/it shall be considered as
Gross income tax; OR RCIT subject to MCIT having availed himself of the itemized deductions.
RCIT subject to MCIT
Once the election to avail the OSD is signified in
(a) Regular Corporate Income Tax (RCIT) the return, it shall be irrevocable for the taxable
year for which the return is made.
RCIT applies to all corporations in general. It
covers all taxable income of corporations that are Who can claim OSD?
not subject to final tax or capital gains tax.
All corporations who are subject to tax on taxable
The regular domestic tax rates are: net income can claim except the following:
1. NRFC
YEAR APPLICABLE TAX RATE 2. Taxpayers mandated to use itemized
2009 onwards 30% deductions
2006-2008 35%
before 2006 32%
(b) Minimum Corporate Income Tax (MCIT)
Allowable deductions
The MCIT is applicable to every corporation
taxable to the 30% regular corporate income tax
(i) Itemized deductions
including non-profit, exempt, and special
corporations with respect to their taxable income
Pertains to the items in Sec. 34 of the NIRC as
subject to the regular corporate income tax, but
discussed under Deductions from Gross Income
not to the income subject to special tax rates.
(Banggawan)
When itemized deductions is mandatory
The following are corporations, partnerships and Imposition of MCIT
other non-individuals that are mandated to use
the itemized deductions: Computed as 2% of gross income subject to
regular income tax (GI)
a. Those exempt under the NIRC (i.e., exempt
corporations under Sec. 30 and GOCCs under

508
SEC. 27(E) (1) Imposition of Tax. - A
minimum corporate income tax of two percent
(2%) of the gross income as of the end of the
taxable year, as defined herein, is hereby
imposed on a corporation taxable under this Title,
beginning on the fourth taxable year immediately
following the year
The MCIT is not a tax on capital. It is imposed on
gross income which is arrived at by deducting the
capital spent by a corporation in the sale of its
goods, i.e., the cost of goods and other direct
expenses from gross sales. Clearly, the capital is
not being taxed. Thus, MCIT is constitutional.
(Chamber of Real Estate and Builders’ Associations,
Inc. v. Romulo, G.R. No. 160756, 2010)
When applicable:
Beginning on the 4th taxable year from the year
in which such corporation commenced its
business operation, i.e. the year when
corporation registers with the BIR, regardless of
whether the corporation is using calendar or fiscal
year. Thus, a corporation which started
operations on any day in 2012 will be covered by
the MCIT in 2016.
When imposed:
When the corporation has either (Rev. Regs. 12-
07):
1. Zero or negative taxable income or
2. when 2% of the corporation’s gross income
is greater than 30% of its taxable income
(MCIT > RCIT)
When computed/paid:
At the time of filing of quarterly corporate income
tax as prescribed under Secs. 75 and 77 of the
NIRC. (Rev. Regs. 12-07)
Rationale:
Designed to prevent corporations from escaping
tax by including frivolous expenses in their
statement of income (e.g., over-statement of
depreciation expense).
Concept of Gross income for MCIT purposes
For corporations involved in
a. sale of goods- Gross sales less sales returns,
discounts, allowances, and cost of goods sold
b. sale of service- Gross receipts less sales
returns, allowances, discounts, and cost of
services.
Cost of goods sold shall mean all business
expenses directly incurred to produce the
merchandise to bring them to their present
location and use.
Cost of services shall mean all direct costs and
expenses necessarily incurred to provide the
services required by the customers and clients.
Excess MCIT Carry-over
Excess of MCIT over the RCIT shall be carried
forward and
credited against RCIT tax due in the immediately
succeeding three (3) years.
Rules for MCIT carry-over
1. Excess MCIT can be used as tax credit
against RCIT if RCIT is greater than MCIT.
Excess MCIT cannot be deducted against
MCIT tax due.
2. Unused MCIT at the end of the 3-year period
shall expire and will no longer be used.
Relief from MCIT
Upon recommendation of the CIR, MCIT may be
suspended by the Sec. of Finance upon
submission of proof that the corporation
sustained losses on account of:
a. Prolonged labor dispute
b. Force majeure
c. Legitimate business reverses
509
Corporations Exempt from MCIT Interest income
10% 10% Exempt
earned from EFCDU
a. Resident foreign corporations engaged in Royalties of all types
business as international carriers within the 20% 20% 30%
Philippines
b. Resident foreign corporations engaged in
Royalties from
business as offshore banking units’ outside the 30% Exempt Exempt
c. Resident foreign corporations engaged in Philippines
business as regional operating headquarters 15% (IF
d. Firms that are taxed under a special income subject to
Dividend Income
tax
tax regime (like those under PEZA or other From:
Exempt Exempt sparring
economic zones) a. Domestic
rule;
e. Proprietary educational institutions corporation
otherwise
f. Non-profit hospitals 30%)
g. Depositary banks under the FCDU/EFCDU b. Foreign 30%
RCIT RCIT
h. Real Estate Investment Trusts (REITs) corporation Final Tax
i. Nonresident foreign corporations
(d) Taxation of Capital Gains
Applicability of the MCIT where a
TAX BASE DC RFC NRFC
corporation is governed both under the
regular tax system and a special income tax Capital Gains from sale, barter, exchange, or other
disposition of shares of stock
system
5% of net
5% of net
NOT traded capital
In the case of a domestic corporation whose capital gains
in the Stock 15% gains if
operations or activities are partly covered by the if not over
Exchange not over
regular income tax system and partly covered P100,000
P100,000
under a special income tax system, the MCIT shall 6/10 of
apply on operations covered by the regular 1% of
income tax system. For example, if a BOI the gross
Listed and
registered enterprise has a “registered” and an selling
traded 10% if in 10% if in
“unregistered” activity, the MCIT shall apply to price of
through the excess of excess of
gross
the unregistered activity. (Rev. Regs. 09-98) local stock P100,000 P100,000
value of
exchange
the
(c) Taxation of Passive Income shares of
stock
TAX BASE TAX RATES Capital gains
DC RFC NRFC on sale or
Interest from exchange of
Deposits and Yield lands and/or
or any other Buildings
located in the
Monetary Benefit 6% RCIT RCIT
Philippines
from Deposit 20% 20% 30%
Substitutes, Trust Selling Price
Funds and Similar or FMV
Arrangements and whichever is
Royalties HIGHER
Interest income
on foreign Q: The Bureau of Treasury (BoT) issued P35
15% 7.5% Exempt
currency deposit billion worth of 10-year zero-coupon treasury
system bonds (PEACe Bonds) to A Corp at P10.2 billion.

510
Then, A Corp (as underwriter) on behalf of B Corp
sold and distributed the PEACe Bonds to
undisclosed investors. The CIR issued a ruling
declaring that the PEACe bonds being deposit
substitutes are subject to the 20% final
withholding tax. Thus, the Bo withheld 20% final
tax from the face value of the PEACe Bonds.
Petitioners contend that there is only one lender
to whom the BTr issued the government bonds.
Respondents theorize that the word “any”
indicates that the period contemplated is the
entire term of the bond and not merely the point
of origination or issuance such that if the debt
instruments “were subsequently sold in
secondary markets and so on, in such a way that
20 or more buyers eventually own the
instruments, then it becomes indubitable that
funds would be obtained from the “public.” Are
PEACe Bonds considered as “deposit substitutes”
and thus subject to 20% final withholding tax?
Suggested Answer: No. Under the 1997
National Internal Revenue Code, a final
withholding tax at the rate of 20% is imposed on
interest on any currency bank deposit and yield
or any other monetary benefit from deposit
substitutes and from trust funds and similar
arrangements. Congress specifically defined
"public" to mean "twenty (20) or more individual
or corporate lenders at any one time." Hence, the
number of lenders is determinative of whether a
debt instrument should be considered a deposit
substitute and consequently subject to the 20%
final withholding tax. From the point of view of
the financial market, the phrase “at any one time”
for purposes of determining the “20 or more
lenders” would mean every transaction executed
in the primary OR secondary market in
connection with the purchase or sale of securities.
In this case, the BIR asserted that government
securities are always deposit substitutes
irrespective of the number of lenders, but the SC
ruled that government securities must comply
with the “20 or more” rule. Petitioners argued
that the “20 or more” rule is relevant only at the
point of origination (i.e., issuance), but the SC
said that the “20 or more” rule is relevant “at any
one time”. In the end, the SC held that the PEACe
Bonds are not subject to the 20% FWT, not
because they are not deposit substitutes, but
because at the moment it cannot be determined
as to how many investors the PEACe Bonds were
sold to by A Corp. (Banco De Oro v Republic, G.R.
No. 198756, 2015.)
Q: In 2001, A, with the assistance of its financial
advisors, B Bank et al, requested an approval for
the issuance of Bureau of Treasury of 10-yaer
zero-coupon Treasury Certificates (T-notes). The
T-notes would be purchased for a special purpose
on behalf of A, repackaged and sold at a premium
to investors as the PEACE Bonds and the net
proceeds from the sale of the bonds will be used
to endow a permanent fund (the Hanapbuhay
Fund) to finance activities of NGOs in the country.
Bureau of Treasury issued the Auction Guidelines
which provides that the Bonds to be auctioned
are not subject to 20% withholding tax as the
issue will be limited to a maximum of 19 lenders
in the primary market based on the 2001 BIR
Ruling. B Bank was appointed as the Issue
Manager and Lead Underwriter for the offering of
the PEACE Bonds. However, BIR issued 2
conflicting BIR Rulings in 2011, (1) declaring the
PEACe Bonds, being deposit substitutes, were
subject to 20% final withholding tax, and the
Bureau of Treasury shall withhold 20% final tax
from the face value of the PEACe Bonds, (2)
clarifying that the final withholding tax due on the
discount or interest earned on the PEACe Bonds
should “be imposed and withheld not only on the
primary holders (A and B Bank) but also on all
subsequent holders of the Bonds. What is the
proper interpretation of the 20-lender rule under
Section22 (Y) of NIRC, particularly in relation to
issuance of government debt instruments
Suggested Answer: The definition of deposit
substitutes in Section 22 (Y) specifically defined
"public" to mean "twenty (20) or more individual
or corporate lenders at any one time." The
qualifying phrase for public introduced by the
National Internal Revenue Code shows that a
change in the meaning of the provision was
intended, and this Court should construe the
provision as to give effect to the amendment.
Hence, in light of Section 22 (Y), the reckoning of
whether there are 20 or more individuals or
corporate lenders is crucial in determining the tax
treatment of the yield from the debt instrument.
511
In other words, if there are 20 or more lenders,
the debt instrument is considered a deposit
substitute and subject to 20% final withholding
tax. (Banco de Oro v. Republic, G.R. No. 198756,
2016)
(e) Improperly Accumulated Earnings Tax
(IAET)
IAET is a 10% penalty tax imposed on the
improper accumulation of corporate earnings
beyond the needs of
the business.
Scope: The IAET covers improperly accumulated
earnings or profits of domestic corporations only,
whether special or regular domestic corporations.
Tax base (Rev. Regs. 02-01, Sec. 5)
For corporations found subject to IAET, the
"Improperly Accumulated Taxable Income" for a
particular year is first determined by adding to
that year’s taxable income the
following:
a. income exempt from tax
b. income excluded from gross income
c. income subject to final tax and
d. the amount of net operating loss carry-over
(NOLCO) deducted and
Taxable income shall be reduced by
- income tax paid/payable for the taxable year
- dividends actually or constructively paid
- amount reserved for reasonable needs of the
business
Rationale:
If the earnings and profits were distributed, the
shareholders would then be liable for income tax.
If the distribution were not made to them, they
would incur no tax in respect of the undistributed
earnings and profits of the corporation. It is a tax
in the nature of a penalty to the corporation for
the improper accumulation of its earnings, and a
deterrent to the avoidance of tax upon
shareholders who are supposed to pay dividends
tax on the earnings distributed to them. (Rev.
Regs. 02-01, Sec. 2)
Exception:
The use of undistributed earnings and profits for
the reasonable needs of the business would not
generally make the accumulated or undistributed
earnings subject to the tax. What is meant by
“reasonable needs of the business” is determined
by the Immediacy Test.
Immediacy Test
It states that the “reasonable needs of the
business” are the immediate needs of the
business, including reasonably anticipated needs
(e.g., expansion).
Covered corporations: (Rev. Regs. 02-01,
Sec. 4)
1) Only closely-held domestic corporations are
liable for IAET.
2) Closely-held corporations are those:
● At least 50% in value of the outstanding
capital stock; or
● At least 50% of the total combined voting
power of all classes of stock entitled to
vote;
● is owned directly or indirectly by or for
not more than 20 individuals.
● Domestic corporations not falling under
the aforesaid definition are, therefore,
publicly-held corporations.
Exempt corporations
The IAET shall not apply to the following
corporations: (BIG-PEN-T)
1. Banks and other non-bank financial
intermediaries
2. Insurance companies;
3. Publicly-held corporations;
4. Taxable partnerships;
5. General professional partnerships;
6. Non- taxable joint ventures; and
7. Enterprises that are registered:
512
 a. with the Philippine Economic Zone
Authority (PEZA) under RA 7916;
b. pursuant to the Bases Conversion and
Development Act of 1992 under RA 7227;
and
c. under special economic zones declared
by law which enjoy payment of special
tax rate on their registered operations or
activities in lieu of other taxes, national
or local.
Period for payment of dividend or IAET:
(Rev. Regs. 02- 01, Sec. 6)
Predominance Test:
If the gross income from unrelated
trade/business/other activity exceeds 50% of the
total gross income from all sources, entire taxable
income shall be subject to RCIT of 30%
“Unrelated trade, business or other activity”
means any trade, business or other activity, the
conduct of which is not substantially related to
the exercise or performance by such educational
institution or hospital from its primary
purpose or function.

The dividends must be declared and paid or Tax Base Basis

issued not later than 1 year following the close of On related trade, business or
the taxable year. Otherwise, the IAET, if any, 10% on taxable
activity (except passive
should be paid within 15 days thereafter. income
income)
IF total gross income from
Determination of purpose to avoid income 30% of entire unrelated trade, business, or
tax (Rev. Regs. 02-01, Sec. 7) taxable income activity exceed 50% of total
income
The fact that a corporation is a mere holding
company or investment company shall be prima
Summary of Tax Rules
facie evidence of a purpose to avoid the tax upon
its shareholders or members.
OWNER EDUCATIONAL HOSPITAL
INSTITUTION
A “holding or investment company” is a
10% of the taxable 30% of the
corporation having practically no activities except Private
income taxable income
holding property, and collecting the income
10% of the
therefrom or investing the same, and where the Non-Profit Exempt
taxable income
earnings or profits of a corporation are permitted
Government Exempt Exempt
to accumulate beyond the reasonable needs of
the business.
iii. Government-owned or controlled
ii. Proprietary educational institutions and
corporations, agencies,
non-profit hospitals (Sec. 27(B))
instrumentalities (Sec. 27(C))
Proprietary Non-Profit Educational
TAX RATE BASIS
Institution – any non-profit private school
maintained & administered by private individuals Same tax rate upon their
or groups with an issued permit to operate from 30% (2009 onwards) taxable income in a similar
DepEd, CHED, or TESDA; “proprietary” and “non- business, industry, or activity
profit” must concur.

Taxable at 10% on taxable income, except on

certain passive income (which shall be subject to
final tax)

513
General Rule:
GOCCs, agencies, or instrumentalities owned or
controlled by the government are taxable and
shall pay the same rate upon their taxable income
upon corporations or associations engaged in
similar business, industry or activity. (Ignatius
Michael D. Ingles, Tax Made Less Taxing: A Reviewer
with Codals and Cases, 3rd Edition, 2021, pp. 91-92)
Exceptions:
(a) GSIS
(b) SSS
(c) PHIC
(d) PCSO
(e) the Local Water Districts
iv. Foreign currency deposit units
Foreign currency deposit units (FCDUs) and
Expanded FCDUs (EFCDUs) refer to a unit or
department of a local bank or a local branch of a
foreign bank authorized by the BSP to engage in
foreign currency denominated transactions
pursuant tot R.A. No. 6426, as amended
Distinction of FCDU, OBU, and EFCDU
(Banggawan)
FCDUs are limited to short-term foreign currency
transactions while EFCDUs are allowed both
short-term and longer-term foreign currency-
denominated transactions
An FCDU is a division of a domestic bank. An OBU
is a division of a foreign bank which is authorized
to conduct foreign currency denominated
transactions. An EFCDU may be a division of a
domestic bank or a resident foreign bank
authorized to conduct banking under the
expanded foreign currency deposit system.
Tax on EFCDUs and OBUs
The income of depositary banks under the
Expanded Foreign Currency Deposit System from
foreign currency transactions with
A. Non-residents- exempt from tax
B. Residents
a. Banks under the foreign currency deposit
system such as OBUs, local commercial
banks and branches of foreign banks
authorized by the BSP to transact business
with FCDUs – exempt from income tax
b. Other residents
i. Interest income- 10% final tax
ii. Other income, such as commissions
and gains, RCIT
Tax on income of depositors under the
EFCDs
Any income of nonresidents from transactions
with depositary banks under the expanded
system shall be exempt from income tax. Interest
income of resident from depositary bank under
FCDS/EFCDS is subject to 7.5% final tax.
Resident Foreign Corporation
Applies to a foreign corporation engaged in trade
or business within the Philippines. (Sec. 22(H))
“Doing business” shall include soliciting orders,
service contracts, opening offices, whether liaison
offices or branches; appointing representatives or
distributors, operating under full control of the
foreign corporation, domiciled in the Philippines
or who in any calendar year stay in the country
for a period or periods totaling one hundred
eighty (180) days or more; participating in the
management, supervision or control of any
domestic business, firm, entity or corporation in
the Philippines; and any other act or acts that
imply a continuity of commercial dealings or
arrangements, and contemplate to that extent
the performance of acts or works, or the exercise
of some of the functions normally incident to and
in progressive prosecution of commercial gain or
of the purpose and object of the business
organization (Sec. 1(f), Foreign Investment Act IRR).
General Rule: same rules as domestic
corporations for regular income.
Q: A is a “foreign corporation organized and
existing under the laws of Canada. On April 2000,
514
it was granted an authority to operate as an
offline carrier by Civil Aeronautics Board. As an
off-line carrier, A does not have flights originating
from or coming to the Philippines and does not
operate any airplane in the Philippines. A
engaged the services of B as its general sales
agent in PH. B sells A’s passage documents in the
Philippines. A, through B, filed quarterly and
annual income tax returns and paid the income
tax on Gross Philippine Billings. Subsequently, A
filed a written claim for refund of alleged
erroneous paid income taxes before the BIR. CTA
denied the refund since it found that A was
engaged in business in the Philippines through a
local agent that sells airline tickets on its behalf,
hence it should be taxes as a resident foreign
corporation. A contends that by the appointment
of B as its general sales agent, petitioner cannot
be considered to have a "permanent
establishment" in the Philippines. Is A a resident
foreign corporation?
Suggested Answer: Yes. A, an offline carrier,
is a resident foreign corporation for income tax
purposes. A falls within the definition of resident
foreign corporation. A is undoubtedly "doing
business" or "engaged in trade or business" in the
Philippines. IRR of Foreign Investments Act
clarifies that "doing business" includes
"appointing representatives or distributors,
operating under full control of the foreign
corporation, domiciled in the Philippines or who
in any calendar year stay in the country for a
period or periods totaling one hundred eighty
(180) days or more[.]" Here, B performs acts or
works or exercises functions that are incidental
and beneficial to the purpose of petitioner's
business. The activities of B bring direct receipts
or profits to petitioner. There is nothing on record
to show that B solicited orders alone and for its
own account and without interference from, let
alone direction of, petitioner. On the contrary, B
cannot "enter into any contract on behalf of A
without the express written consent of the latter,
and it must perform its functions according to the
standards required by petitioner. Through B, A is
able to engage in an economic activity in the
Philippines. Moreover, was issued by the Civil
Aeronautics Board an authority to operate as an
offline carrier in the Philippines for a period of five
years. A is, therefore, a resident foreign
corporation that is taxable on its income derived
from sources within the Philippines. Petitioner's
income from sale of airline tickets, through B, is
income realized from the pursuit of its business
activities in the Philippines. (Air Canada v. CIR,
GR No. 169507, 2016)
Q: What constitutes doing business in order to
classify a corporation as a resident foreign
corporation?
Suggested Answer: Doing business constitutes
any act that implies continuity of commercial
dealings or arrangements or the exercise of
functions normally incidental to and in the
progressive prosecution of commercial gain or for
the purpose of the business. (Sec. 3 (d), Foreign
Investment Act; Air Canada v. CIR, GR No. 169507,
2016)
(1) Branch Profits Remittance Tax (BPRT)
Any profit remitted by a branch to its head office
shall be subject to a tax of 15% which shall be
based on the total profits applied or earmarked
for remittance without any deductions for the tax
component (except those activities which are
registered with PEZA) (Sec. 28(A)(5)).
The 15% branch profit remittance tax is a final
tax which is required to be withheld at source by
the branch of a foreign corporation.
Interest, dividends, rents, royalties, remuneration
for technical services, salaries, wages, premiums,
annuities, emoluments or other fixed or
determinable annual, periodic 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.
(Sec. 28(A)(5))
The term “effectively connected with the conduct
of 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
515
sufficient that the income arises from the
business activity in which the corporation is
engaged. (RMC No. 55-80)
Scope
BPRT covers the remittance of all resident foreign
corporations including ROHQs of multinational
companies, FCDUs or OBUs of foreign banks, and
international carriers, except PEZA-registered
entities.
Remittance form prior year earnings is still
taxable
The NIRC used the phrase “any profit remitted”
without limiting the same to current year profit
remittance. The BPRT therefore is understood to
apply to remittance of prior year earnings.
(Banggawan)
(b) Itemized Deductions vs. Optional
Standard Deduction
Kinds of deductions:
1. Itemized deductions
2. Optional standard deduction (OSD)
3. Special deductions
Itemized Deductions (BELT DID CPR)
1. Bad debts
2. Business Expenses
3. Losses
4. Taxes
5. Depreciation
6. Interest
7. Depletion of oil & gas wells & mines
8. Charitable & other contributions
9. Pension trusts
10. Research & development
Bad Debts
Bad debts are debts due to the taxpayer actually
ascertained to be worthless and charged off
during the year may be claimed as a deduction.
Requisites for deductibility:
1. There must be an existing indebtedness due
to the taxpayer which must be valid and
legally demandable;
2. It must be connected with the taxpayer’s
trade, business or practice of profession;
3. It must not be sustained in a transaction
entered into between related parties;
4. It must actually be charged off in the books
of accounts of the taxpayer as of the end of
the taxable year;
5. It must actually be ascertained to be
worthless and uncollectible as of the end of
the taxable year (Rev. Regs. 05-99, as amended
by Rev. Regs. 25-02)
6. The bad debt must not be one contracted
with a related party
Bad debts arising from transactions between
related parties are NOT deductible.
a. Between members of a family (includes only
brothers & sisters, spouse, ancestors, & lineal
descendants)
b. Between an individual & a corporation, more
than 50% in value of outstanding stock is
owned by such individual (except in case of
distributions in liquidation)
c. Between 2 corporations more than 50% in
value of outstanding stock owned by same
individual, if either one is a personal holding
company or a foreign holding company
during the taxable year preceding the date of
sale/exchange
d. Between grantor & fiduciary of any trust
e. Between fiduciary of a trust & the fiduciary of
another if same person is a grantor to each
trust
f. Between fiduciary & a beneficiary of a trust
Effects of recovery of bad debts
Tax Benefit Rule - Recovery of bad debts
previously allowed as deduction in the preceding
years shall be included as part of gross income in
the year of recovery to the extent of the income
tax benefit of such deduction. (Rev. Regulations,
05-99, Sec. 4)
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Ascertainment of worthlessness
Taxpayer did in fact ascertain the debt to be
worthless in the year for which the deduction was
sought. Worthlessness is not determined by an
inflexible formula or slide rule calculation but
upon the exercise of sound business judgment.
The determination of worthlessness must depend
upon the particular facts and circumstances of
the case. It must be uncollectible even in the
future. That in so doing, he acted in good faith.
Good faith does not require that the taxpayer be
an incorrigible optimist but on the other hand, he
may not be unduly pessimistic. (Collector v.
Goodrich, G.R. No. L-22265, 1967)
Business Expenses
Requisites for deductibility
1. Must be ordinary and necessary.
2. Must have been paid or incurred during the
taxable year.
3. Must have been paid or incurred in carrying
on the trade or business of the taxpayer.
4. Must be supported by receipts, records or
other pertinent papers. (CIR v. General Foods
Phils. G.R. No. 143672, 2003)
Expenses to be deductible:
● Amount must be reasonable
● It must be substantiated
● It is not contrary to law, public policy or
morals
● Tax required to be withheld must have been
paid to the BIR
Substantiation requirements
Sufficient evidence (i.e. official receipts, financial
statements or other adequate records) to
substantiate:
● Amount of expense deducted; and
● Direct connection/relation of the expense to
the development, management operation
and/or conduct of the trade, business or
profession of the taxpayer.
Classification of Expenses:
a. Ordinary expense – normal or usual in
relation to the taxpayer’s business and the
surrounding circumstances.
b. Necessary expense – appropriate and helpful
in the development of taxpayer’s business
and is intended to minimize losses or to
increase profits; day-to-day expense.
Note: While illegal income will form part of
the income of the taxpayer, expenses which
constitute bribe, kickback, and other similar
payment, being against law and public policy
are not deductible from gross income.
c. Business expense – expenditure related to
the business that is deductible in the year
incurred.
d. Capital expense – expenditure that improves
or adds to the value of the taxpayer’s
property or equipment; not immediately
deductible, i.e., deductible over time, taking
into account depreciation.
e. Private educational institutions - in addition
to the expenses ordinarily allowed as
deductions, a private educational institution
has the option to either (Sec. 34 (A)(2)):
1. Deduct outright those otherwise
considered as capital outlays of
depreciable assets for the expansion of
school facilities; or
2. Capitalize asset & deduct allowance for
depreciation
Advertising expense
There is yet to be a clear-cut criterion or a fixed
test for determining the reasonableness of an
advertising expense. There being no hard and
fast rule, the right to a deduction depends on a
number of factors such as but not limited to: the
type and size of business in which the taxpayer is
engaged; the volume and amount of its net
earnings; the nature of the expenditure itself; the
intention of the taxpayer; and the general
economic conditions. (CIR v. General Foods Phils.
G.R. No. 143672, 2003)
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Salaries, wages & other forms of
compensation for personal services
actually rendered (including grossed-up
monetary value of fringe benefit); but the
final tax should have been paid
Must be reasonable. Must be for the personal
services actually rendered.
Travel expenses, here and abroad, in
pursuit of trade, business/profession
Travel expenses include transportation expenses,
meals and lodging incurred solely on business. If
undertaken for other than business purposes, not
deductible. (Rev. Regs. 02-40, Sec. 66)
Cost of materials
Taxpayers should include in expenses the
charges for materials and supplies only to the
amount that they are actually consumed and
used in operation during the year for which the
return is made, provided that the cost of such
materials and supplies has not been deducted in
determining the net income for any previous
year. (Rev. Regs. 02-40, Sec. 67)
If the materials or supplies are used directly or
indirectly in the production of the product, the
related cost shall form part of the cost of the
product and will be deductible as such when the
product is sold.
Rentals and/or other payments as lessee,
user or possessor
On accrual basis, rent is deductible as expense
when liability is incurred during the period of use.
On cash basis, rent is deductible when incurred
and paid.
An advance payment is not deductible expense
on the part of the lessee until the same is used
for the relevant period, although the lessor may
be required to report the amount when received.
Expenses under lease agreements
Lessor
All ordinary and necessary expenses paid or
incurred during the taxable year which are
attributable to earning the lease income are
deductible.
Lessee
All expenses which under the terms of the
agreement the lessee is required to pay to the
lessor are allowable
deductions.
If the payments are so arranged as to constitute
advance rentals, the same shall be duly
apportioned over the lease term. In computing
the term of the lease, all options to renew shall
be taken into consideration if there is a
reasonable expectation that such options will be
exercised. (Rev. Regs. 19-86, Sec. 3)
Repairs and maintenance
Incidental (minor) repairs are deductible from
gross income. They do not materially add to the
value of the property nor appreciably prolong its
life but keep it in an ordinarily efficient operating
condition.
Major repairs (replacement) are not deductible
from gross income. They prolong the life of the
asset and thus should be capitalized.
Expenses for professionals
Amounts expended for books, furniture, and
professional instruments and equipment, the
useful life of which is short, may be deducted.
However, amounts expended for books,
furniture, and professional instruments and
equipment of a permanent character are not
allowable as deductions.
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Entertainment, amusement & recreation
expenses directly connected to the
development, management & operation &
conduct of trade, business/ profession
Subject to a limit of:
a. For taxpayers engaged in sale of
goods/properties – one half of one percent
(0.50%) of net sales (gross sales less sales
returns/allowances/discounts.
b. For taxpayers engaged in sale of services,
exercise of profession – one percent (1%) of
net revenues (gross revenue less discounts)
c. Engaged in both sale of goods/properties and
services – determined based on
apportionment formula taking into
consideration net sales/revenue to total net
sales/revenue, in which case shall not exceed
maximum ceiling prescribed above. (Rev.
Regs. 10-02, Sec. 5)
Requisites for deductibility:
1. Must be paid or incurred during the taxable
year;
2. Must be directly connected to the
development, management and operation of
trade, or business, profession of the
taxpayer;
3. Not contrary to law, morals, good customs,
public policy or public order;
4. Must not have been paid, directly or
indirectly, to any person as a bribe, kickback
or other similar payment;
5. Must be duly substantiated by adequate
proof; and
6. Appropriate amount of withholding tax, if
applicable, should have been withheld and
paid to the BIR. (Rev. Regs. 10-02)
Political campaign expenses
As a rule, campaign contributions are not
included in the taxable income of the candidate
to whom they were given.
Unutilized campaign funds shall be subject to
income tax.
Any candidate (winner or loser) must file with the
COMELEC his/her statement of expenditures. If
not, he/she will be precluded from using such
expenditures as deductions from his/her
campaign contributions. As such, the entire
amount of such contributions will be directly
subject to income tax. (Rev. Regs. 07-11, Sec. 2)
Training expenses
Ordinary and necessary expenses for education
and training actually incurred by the taxpayer
during the taxable year may be deductible.
Incentive Scheme
An additional deduction from taxable income of
one-half of the value of labor training expenses
incurred for developing or upgrading the
productivity and efficiency of unskilled labor or for
management development programs shall be
granted to the taxpayer, provided:
● Such training program is approved by the
National Manpower and Youth Council; and
● Such deduction shall not exceed 10 percent
of direct labor wage (Sec. 10, IRR of the Labor
Code, Book II, Rule III)
Allowable training expenses
The training expenses shall be in the form of
personal services, travelling expenses,
equipment, training tools, training supplies and
materials, and a reasonable amount for
contingencies. (Sec. 8, IRR of the Labor Code, Book
II, Rule III)
Non-applicability of incentive scheme
Training programs undertaken by training
institutions and/or associations operating for
profit shall not qualify under this incentive
scheme. (Sec. 10, IRR of the Labor Code, Book II,
Rule III)
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Losses
i. Requisites for deductibility of ordinary
loss:
1. Must be of the taxpayer;
2. Actually sustained during the taxable year;
3. Not compensated for by insurance or other
forms of indemnity;
4. Incurred in trade, business or profession OR
property connected with trade, business or
profession lost through fires, storm,
shipwreck, other casualties, robbery, theft or
embezzlement;
5. Evidenced by a completed transaction;
6. Not claimed as a deduction for estate tax
purposes; and
7. Notice of loss must be filed with the BIR
within 30 days but not more than 45 days
from the date of discovery of the casualty or
robbery, theft or embezzlement
The taxpayer’s failure to record in his books the
alleged loss proves that the loss had not been
suffered, hence, not deductible. (City Lumber v.
Domingo, G.R. No. L-18611, 1964)
Note: A declaration of loss should be filed with
the BIR within 45 days after the occurrence of the
casualty, robbery, etc. Failure to submit the
declaration within the prescribed time will result
in the disallowance of the loss. However, the
mere filing of the declaration of loss does not
automatically entitle the taxpayer to deduct the
alleged loss from gross income. (Rev. Regs. 12-77,
as amended by Rev. Regs. 10-79)
The amount of loss deductible is limited to the
difference between the value of the property
immediately preceding the loss and its value
immediately thereafter but shall not exceed an
amount equal of the cost or other adjusted basis
of the property, or depreciated cost reduced by
any insurance or other compensation received.
Losses are deductible only by the person
sustaining them. They are purely personal and
cannot be used as deductions by another.
In Tambunting Pawnshop v. CIR, the Supreme
Court disallowed claims for deductions due to
losses for failure to substantiate the losses. As to
the auction sale, the taxpayer merely relied on
entries made in its books. As to the losses due to
fire, the taxpayer failed to submit a Sworn
Declaration of Loss, which is required 45 days
from the discovery of the loss.
Other types of losses
(a) Capital losses
Deductions allowed only to the extent of the gains
from pertinent sales or exchanges of capital
assets
● Losses from sale or exchange of capital
assets
● Losses resulting from securities becoming
worthless and which are capital assets
● Losses from short sales of property
● Losses due to failure to exercise privilege or
option to buy or sell property
(b) Securities becoming worthless
Loss resulting from securities becoming worthless
shall be considered loss from the sale or
exchange of capital asset.
Such loss shall be computed on the last day of
the taxable year.
Exemption:
Not deductible in case of banks or trust
companies incorporated under the laws of the
Philippines, a substantial part of whose business
is the receipt of deposits. (Rev. Regs. 05-99, Sec. 5)
Losses from wash sales of stock or
securities
Wash sale is a sale or other disposition of stock
or securities where substantially identical
securities are acquired or purchased within a 61-
day period, beginning 30 days before the sale and
ending 30 days after the sale.
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General rule:
Not deductible
Exception:
Unless claim is made by a dealer in
stock/securities and made in ordinary course of
business
Wagering losses
Allowed only to the extent of the gains from such
losses
Net operating loss carry-over (NOLCO)
Net operating loss refers to the excess of
allowable deductions over gross income of the
business for any taxable year, which has not been
previously offset as deduction from gross income.
The net operating loss of a business shall be
carried over as a deduction from gross income for
the next 3 consecutive taxable years immediately
following the year of such loss.
The 3-year period shall continue to run
notwithstanding that the corporation paid its
taxes under MCIT, or that the individual availed
of the Optional Standard Deduction.
For mines, other than oil & gas wells, if loss is
incurred in any of the first 10 years of operation,
it may be carried over for the next 5 years.
Requirements:
1. The taxpayer was not exempt from income
tax in the year of such net operating loss;
2. The loss was not incurred in a taxable year
during which the taxpayer was exempt from
income tax, and
3. There has been no substantial change in the
ownership of the business or enterprise.
A merged with B, with A as the surviving
corporation. A cannot claim B’s prior losses as
deductions (PICOP v. CA, G.R. Nos. 106949-50 &
106984-85, 1995).
There is no substantial change in the ownership
of the business when:
i. Not<75% in nominal value of outstanding
issued shares is held by same persons
ii. Not<75% of paid up capital of corp. is held
by same persons
Note: No actual change in ownership occurs:
1. in case the transfer involves change from
direct ownership to indirect ownership, or
2. merger of the subsidiary into the parent
company.
If several corporations enter an agreement to
integrate their respective businesses, can each of
the corporations continue to carry-over their
respective net operating losses?
IF the separate corporations are not dissolved but
are merely integrated for a legitimate business
purpose, then the NOLCO of each separate
corporation is preserved after the proposed share
swap. This is because there is no substantial
change in the ownership of the business. (BIR
Ruling No. 30-00).
Taxes
The term “taxes” refers to national and local taxes
Deductible Taxes
All taxes, national or local, paid or incurred during
the taxable year in connection with the taxpayer’s
profession, trade or business, are deductible from
gross income.
Requisites for deductibility:
1. It must be paid or incurred within the taxable
year;
2. It must be paid or incurred in connection with
the taxpayer’s trade, profession or business;
3. It must be imposed directly on the taxpayer;
and
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4. It must not be specifically excluded by law
from being deducted from the taxpayer’s
gross income.
Non-Deductible Taxes:
1. Philippine income tax
a. Final income tax
b. Capital gains tax
c. Regular income tax
2. Income taxes imposed by authority of any
foreign country except when the taxpayer
does not signify in his return his desire to
claim it as tax credit;
3. Estate and donor’s taxes
4. Special assessments, i.e., taxes assessed
against local benefits of a kind tending to
increase the value of the property assessed
5. VAT
Treatments of surcharges/ interests/ fines
for delinquency
Interest on taxes - incurred or paid by a
taxpayer on all unpaid business-related taxes;
fully deductible from gross income and shall not
be subject to the 33%-limitation on deduction of
interest expense. (Sec. 3, RA No. 9337)
Surcharges – non-deductible (Rev. Regs. 02-40,
Sec. 80)
Penalties or fines incident to delinquency –
non-deductible (Rev. Regs. 02-40, Sec. 80)
Treatment of Special Assessments
General rule:
Special assessments are not deductible, even
though an incidental benefit may inure to the
public welfare.
Exception:
When assessments are made for the purpose of
maintenance or repair of local benefits, the
taxpayer may deduct assessments paid as an
expense incurred in business, if the payment of
such assessments is necessary to the conduct of
his business. (Rev. Regs. 02-40, Section 83)
Tax Credit v. Deduction
Tax deduction is treated as a tax-deductible
expense that is subtracted from the gross income
and results in a lower taxable income. It is an
amount that is allowed by law to reduce the
income prior to the application of the tax rate to
compute the amount of tax which is due. Being a
tax deduction, the discount does not reduce taxes
owed on a peso for peso basis but merely offers
a fractional reductions in taxes owed. On the
other hand, a tax credit is a peso-for-peso
deduction from a taxpayer’s tax liability due to the
government. (Carlos Superdrug Corp. v. DSWD, GR
No. 166494, 2007)
Exception to the rule that only such
persons on whom the tax is imposed by law
can claim deduction thereof - Taxes of
shareholder upon his interest as such and paid by
the corporation without reimbursement from him
can be claimed by the corporation as deduction.
Exception to the exception - A corporation
paying the tax for the holder of its bonds or other
obligations containing a tax-free covenant clause
cannot claim deduction for such taxes paid by it
pursuant to such covenant.
Tax Sparing Rule – a right of an income
taxpayer to deduct from income tax payable the
foreign income tax he has paid to his foreign
country subject to certain limitations.
Who can claim taxes as allowable
deductions
1. Citizen
2. Domestic Corporation
3. Member of GPP
4. Beneficiary of an estate or trust.
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Who cannot claim taxes as allowable
deductions
1. Alien individual (except resident aliens
deriving income from within & without the
Philippines, if there is reciprocity)
2. Foreign corporation.
Substantiation Requirements for Tax Credit
The tax credit shall be allowed only if the
taxpayer establishes to the satisfaction of the CIR
the following:
1. The total amount of income derived from
sources without the Philippines;
2. The amount of income derived from each
country, the tax paid or incurred to which is
claimed as a credit under said paragraph,
such amount to be determined under rules
and regulations prescribed by the Secretary
of Finance; and
All other information necessary for the
verification and computation of such credits
Depreciation
Refers to the gradual diminution in the service or
useful value of tangible property due from
exhaustion, wear and tear and normal
obsolescence; also applies to amortization of
intangible assets, the use of which in trade or
business is of limited duration.
Requisites for deductibility:
1. The allowance for depreciation must be
reasonable;
2. It must be for property used for employment
in trade or business or out of its not being
used temporarily during the year;
3. The allowance must be charged off; and
4. Schedule on the allowance must be attached
to the return.
Interest
Requisites for deductibility: (PLITI -
CRWDIT)
1. There must be an Indebtedness;
2. There should be an interest expense paid or
Incurred upon such indebtedness;
3. Indebtedness must be that of the Taxpayer;
4. Indebtedness must be Connected with the
taxpayer’s trade, business or exercise of
profession;
5. Interest expense must have been paid or
Incurred during the taxable year;
6. Interest must have been stipulated in
Writing;
7. Interest must be legally Due;
8. Interest payment arrangement must not be
between Related taxpayers;
9. Interest must not be incurred to finance
Petroleum operations;
10. In case of interest incurred to acquire
property used in Trade, business or exercise
of profession, the same was NOT treated as
a capital expenditure; and
11. The interest is not expressly disallowed by
Law to be deducted from gross income of the
taxpayer (Rev. Regs. No. 13-00)
General Rule on Deduction of Interest
Expense
The amount of interest expense paid or incurred
within a taxable year of indebtedness in
connection with the taxpayer’s trade, business, or
exercise of profession shall be allowed as a
deduction from the taxpayer’s gross income.
Limitation on Deduction of Interest
Expense
A taxpayer’s otherwise allowable deduction for
interest expense shall be reduced by 33%
effective 1 January 2009 of the interest income
subjected to final tax. (Sec. 34 (B)(1))
Tax Arbitrage - a method of borrowing without
entering into a debtor/creditor relationship, often
523
to resolve financing and exchange control
problems; in tax cases, back-to-back loan is used
to take advantage of the lower rate of tax on
interest income and a higher rate of tax on
interest expense deduction.
Deductible Interest Expense
Interest on taxes (discussed in the succeeding
page), such as those paid for deficiency or
delinquency, since taxes are considered
indebtedness (provided that the tax is a
deductible tax); however, fines, penalties, and
surcharges on account of taxes are not
deductible; interest on unpaid business tax shall
not be subjected to the limitation on deduction of
33%.
Non-deductible interest expense
No deduction shall be allowed in respect to the ff:
a. If within the taxable year an individual
taxpayer reporting income on the cash basis
incurs an indebtedness on which an interest
is paid in advance through discount or
otherwise. Provided, that such interest shall
be allowed as a deduction in the year that the
indebtedness is paid. Provided, further, that
if the indebtedness is payable in periodic
amortizations, the amount of interest which
corresponds to the amount of the principal
amortized or paid during the year shall be
allowed as a deduction in such taxable year;
b. If both the taxpayer and the person to whom
the payment has been made or is to be made
are:
o Between members of a family (includes
only brothers & sisters, spouse,
ancestors, & lineal descendants);
o Between an individual & a corporation,
more than 50% in value of outstanding
stock is owned by such individual (except
in case of distributions in liquidation);
o Between 2 corporations more than 50%
in value of outstanding stock owned by
the same individual, if either one is a
personal holding company or a foreign
holding company during the taxable year
preceding the date of sale/exchange
(except in case of distributions in
liquidation);
o Between grantor & fiduciary of any trust;
o Between fiduciary of a trust & the
fiduciary of another if same person is a
grantor to each trust;
o Between fiduciary & a beneficiary of a
trust (Sec. 34(B)(2))
c. If the indebtedness is incurred to finance
petroleum exploration;
d. d. Interest on preferred stock which in reality
is dividend
e. Interest on unpaid salaries and bonuses
f. Interest calculated for cost keeping on
account of capital or surplus invested in
business which does not represent charges
arising under interest-bearing obligation
g. Interest paid when there is no stipulation for
the payment thereof
Interest subject to special rules ( Sec.
34(B))
a. Interest paid in advance
b. Interest periodically amortized
c. Interest incurred to acquire property used in
trade or business
d. Reduction of interest expense/interest
arbitrage
Optional Treatment of Interest Expense
At the option of the taxpayer, interest incurred to
acquire property used in trade or business or
exercise of profession may be allowed as (Sec. 34
(B)(3)):
a. Expense (outright deduction) or
b. Capital expenditure (subject to amortization)
Charitable & Other Contributions
Requisites for Deductibility (contributions
subject to limitations):
1. Contributions or gifts must be actually paid or
made within the taxable year;
524
2. To or for the use of the government or its
agencies or any political subdivision,
exclusively for public purpose; or
3. To accredited domestic corporations or
associations organized and operated
exclusively for:
• Religious
• Charitable
• Scientific
• Youth & sports development
• Cultural or educational purposes
• Rehabilitation of veterans
• Social welfare institutions
• NGOs
Pension Trusts (Past Service Cost)
Pension Trust Contributions – a deduction
applicable only to the employer on account of his
contributions to a private pension plan for the
benefit of his employees; purely business in
character.
Normal Cost – the contributions during the
taxable year to cover the pension liability accruing
during such taxable year; allowed as a deduction
under Sec. 34(A)(1) of the NIRC as “expenses in
general.”
Past Service Cost – amount in excess of the
above contribution (covering pension liability
pertaining to old employees which accrued during
the years previous to the establishment of the
pension trust); allowed as deduction only if all of
the requisites below concur.
Requisites for deductibility of past service cost:
1. The employer must have established a
pension or retirement plan to provide for the
payment of reasonable pensions to his
employees;
2. The pension plan is reasonable and
actuarially sound;
3. The pension plan must be funded by the
employer;
4. The amount contributed must no longer be
subject to the control and disposition of the
employer;
5. The payment has not yet been allowed as a
deduction; and
6. The deduction is apportioned in equal parts
over a period of 10 consecutive years
beginning with the year in which the transfer
of payment is made.
OSD
a. Individual other than a nonresident alien -
may elect a standard deduction of 40% of his
gross sales or gross receipts.
b. Corporation other than non-resident foreign
corporations- may elect a standard deduction
of 40% of its gross income as defined in
Section 32 of the NIRC.
c. General professional partnerships - GPP and
the partners comprising such partnership
may avail of the OSD only once, either by the
GPP or the partners comprising the
partnership.
Who can claim OSD?
All taxpayers who are subject to tax on taxable
net income (RC, NRC, RA, DC, RFC) can claim
except the following:
1. Those not subject to income tax in the
Philippines
a. NRA whether or not engaged in trade or
business in the Philippines
b. NRFC
2. Taxpayers mandated to use itemized
deductions under RR 2-2014, Sec.5:
a. Corporations, partnerships and other
non-individuals:
i. Those exempt under the Tax Code, as
amended [Section 30 and those
exempted under Section 27(C)] and
other special laws, with no other
taxable income;
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 ii. Those with income subject to ii. NRFC subject to preferential tax rates
special/preferential tax rates; and
iii. Those with income subject to income Nonresident Cinematographic Film Owner,
tax rate under Section 27(A) and Lessor or Distributor
28(A)(1) of the Tax Code, as amended, Twenty-five percent (25%) of its gross income
and also with income subject to from all sources within the Philippines.
special/preferential tax rates.
Nonresident Owner or Lessor of Vessels
Chartered by Philippine Nationals
b. Individual taxpayers who are not entitled
Four and one-half percent (4 1/2%) of gross
to avail of the OSD and thus use only the
rentals, lease or charter fees from leases or
itemized deduction method are as
charters to Filipino citizens or corporations, as
follows:
approved by the Maritime Industry Authority.
i. Those exempt under the Tax Code, as
amended, and other special laws with
Nonresident Owner or Lessor of Aircraft,
no other taxable income [e.g.
Machineries and Other Equipment
Barangay Micro Business Enterprise
Rentals, charters and other fees derived by a
(BMBE)];
non-resident lessor of aircraft, machineries and
ii. Those with income subject to
other equipment shall be subject to a tax of seven
special/preferential tax rates; and
and one-half percent (7 1/2%) of gross rentals or
iii. Those with income subject to income
fees
tax rate under Section 24 of the Tax
Code, as amended, and also with
Tax on Certain Incomes Received by a
income subject to special/preferential
NRFC
tax rates.
1. Interest on Foreign Loans
b) Income Tax on Non-Resident Foreign
Corporations (NRFC)
A final tax at the rate of 20% is imposed on the
amount of interest on foreign loans contracted on
i. Taxation of NRFC in general
or after August 1, 1986. However, said income
may be exempt from income tax or partially
Non-Resident Foreign Corporation refers to a
exempt pursuant to a treaty obligation to which
foreign corporation not engaged in trade or
the Philippine government is bound.
business within the Philippines. (Sec. 22(I))
2. Intercorporate Dividends
A foreign corporation not engaged in trade or
business in the Philippines shall pay a tax equal
A final tax at the rate of 15% is imposed on the
to 30% of the gross income received from all
amount of cash and/or property dividends
sources within the Philippines such as interests,
received from a domestic corporation, subject to
dividends, rents, royalties, salaries, premiums
the reciprocity rule.
(except reinsurance premiums), annuities,
emoluments or other fixed or determinable
Reciprocity Rule:
annual, periodic or casual gains, profits and
income, and capital gains, except capital gains
The country in which the non-resident foreign
from sale of shares of stock not traded in the
corporation is domiciled shall allow a credit
stock exchange.
against the tax due from the nonresident foreign
corporation taxes deemed to have been paid in
Note: Special corporations are subject to a
the Philippines equivalent to 15% of the
different tax rate
dividends.

526
3. Capital Gains from Sale of Shares of d) Exemptions from Tax on Corporations
Stock not Traded in the Stock Exchange
The following organizations shall not be taxed
A final tax at the rates prescribed below is hereby under this Title in respect to income received by
imposed upon the net capital gains realized them as such:
during the taxable year from the sale, barter,
exchange or other disposition of shares of stock 1. Labor, agricultural or horticultural
in a domestic corporation, except shares sold, or organization not organized principally for
disposed of through the stock exchange: profit;
2. Mutual savings bank not having a capital
Not over P 100,000: 5% stock represented by shares, and cooperative
On any amount in excess of P 100,000: 10% bank without capital stock organized and
operated for mutual purposes and without
c) Income Tax on Special Corporation profit;
3. A beneficiary society, order or association,
SPECIAL CORPORATIONS operating for the exclusive benefit of the
Tax members such as a fraternal organization
Tax Base
Rate operating under the lodge system, or mutual
Gross rentals, aid association or a nonstock corporation
lease and organized by employees providing for the
Nonresident owner of
4.5% charter fees
lessor of vessel payment of life, sickness, accident, or other
from the
Philippines benefits exclusively to the members of such
Nonresident society, order, or association, or nonstock
Gross income corporation or their dependents;
cinematographic film
25% from the 4. Cemetery company owned and operated
owner, lessor, or
Philippines
distributor exclusively for the benefit of its members;
Gross rentals, 5. Nonstock corporation or association
Nonresident lessor of charges and organized and operated exclusively for
aircraft, machinery 7.5% other fees from religious, charitable, scientific, athletic, or
and other equipment Philippines cultural purposes, or for the rehabilitation of
Sources
veterans, no part of its net income or asset
Proprietary
educational Taxable income shall belong to or inure to the benefit of any
10% member, organizer, officer or any specific
institution and non- from all sources
profit hospital person;
Resident Gross Philippine 6. Business league chamber of commerce, or
2.5%
international carrier Billings board of trade, not organized for profit and
Regional operating no part of the net income of which inures to
headquarters of Philippine the benefit of any private stock-holder, or
10%
multinational taxable income individual;
corporation 7. Civic league or organization not organized for
(Ignatius Michael D. Ingles, Tax Made Less Taxing: A profit but operated exclusively for the
Reviewer with Codals and Cases, 3rd Edition, 2021, p.
promotion of social welfare;
114)
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

527
 solely of assessments, dues, and fees
collected from members for the sole purpose
of meeting its expenses; and
11. Farmers', fruit growers', or like association
organized and operated as a sales agent for
the purpose of marketing the products of its
members and turning back to them the
proceeds of sales, less the necessary selling
expenses on the basis of the quantity of
produce finished by them.
Note: The income of whatever kind and
character of the foregoing organizations from any
of their properties, real or personal, or from any
of their activities conducted for profit regardless
of the disposition made of such income, shall be
subject to tax.
Requisites for example of non-stock, non-
profit corporations
1. It must be a non-stock corporation or
association organized and operated
exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for
rehabilitations of veterans.
2. It should meet the following tests:
a. Organizational test- its constitutive
documents exclusively limits its purpose
to one or more of the following: religious,
charitable, scientific, athletic, or cultural
purposes, or for rehabilitations of
veterans.
b. Operational test: The regular activities of
the corporation or association must be
exclusively devoted to the
accomplishment of the aforementioned
purposes. A corporation fails this test if a
substantial part of its operations is
considered “activities conducted for
profit”
3. All net income or assets of the corporation or
association must be devoted to its purpose
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.
Imposition of 10% income tax on proprietary,
non- profit hospitals did not remove exemption of
non-stock corporations organized and operated
exclusively for charitable or social welfare
purposes. Moreover, revenues from paying
patients are income received from es from paying
patients are income received- profit hospital. (CIR
v. St. Luke’s Medical Center G.R. No. 195509, 2012)
e) Period within which to File Income Tax
Return of Individuals and Corporations
What is an Income Tax Return?
Report made by the taxpayer to the BIR
composed of:
● all gross income received during the taxable
year;
● allowable deductions including exemptions;
● net taxable income;
● income tax rate, due, and withheld, if any;
and
● income tax still to be paid or refundable
INDIVIDUAL RETURN
Who are the individuals required to file an
income tax return?
1. Resident Citizens;
2. Non-resident Citizens, or Resident Aliens for
the income earned within the Philippines;
3. Non-resident alien, Resident alien, Non-
resident Citizen engaged in trade or business
within the Philippines
Exception:
a. Individual Taxpayer whose taxable income is
subject to Zero (0%) percent under the new
graduated tax table (i.e. does not exceed
250k), shall not be required to file an income
tax return
XPN to XPN: A citizen of the PH and any
alien individual engaged in business or
practice of profession within the PH.
b. Individual with respect to Pure compensation
income derived from source within the PH,
528
 the income tax to which has been correctly
withheld;
XPN to XPN: An individual deriving
compensation currently from two or more
employers at any time during the taxable year.
c. Individual whose sole incomes has been
subjected to Final Withholding Income Tax;
d. A minimum wage earner or an individual who
is exempt from income tax pursuant to the
provisions of this code, and other laws,
general or special (NIRC Sec. 51 (A));
e. Employees qualified under Substituted Filing
of Returns (RR 3-2002)
NOTE: A citizen of the Philippines and any alien
individual engaged in business or practice of
profession within the Philippines shall file an
income tax return, regardless of the amount of
gross income. (Sec. 51 (A) (2) (a))
Who are the individuals NOT required to file
an income tax return?
1. An individual whose taxable income does not
exceed two hundred fifty thousand pesos
(P250,000) under Section 24(A)(2)(a). (Sec.
51 (A) (2));
2. An individual whose income tax has been
correctly withheld by his employer, provided
that such individual has only one employer
for the taxable year.
Note: Certificate of Withholding led by the
respective employers, duly stamped
"Received" by the Bureau, shall be
tantamount to the substituted filing of
income tax returns by said employees; (Rev.
Regs. 8-2018);
3. An individual whose sole income has been
subjected to final withholding tax pursuant to
Section 57(A) of this Code. (Sec. 51 (A) (2));
4. An individual who is exempt from income tax
pursuant to the provisions of this Code and
other laws, general or special. (Sec. 51 (A)
(2));
5. A minimum wage earner as defined in
these regulations — The Certificate of
Withholding led by the respective
employers, duly stamped "Received" by
the Bureau, shall be tantamount to the
substituted ling of income tax returns by
said employees. (Rev. Regs. 08-18)
NOTE: In all cases, all individuals deriving
compensation income, regardless of the amount,
from 2 or more concurrent or successive
employers at any time during the taxable year are
not qualified for substituted filing. Thus, they are
still required to file a return (RR 8-2018, Sec. 9)
Contents of an Individual Tax Return (ITR)
The ITR shall consists of a maximum of four (4)
pages in paper or electronic form, and shall only
contain the following information:
1. as amended) Personal profile and
information;
2. Total gross sales, receipts or income from
compensation for services rendered, conduct
of trade or business or the exercise of
profession, except income subject to final tax
as provided under this Code;
3. Allowable deductions under this Code;
4. Taxable income as defined under Sec. 31 of
this Code; and
5. Income tax due and payable (NIRC, Sec. 51(A),
WHEN AND WHERE TO FILE
Where should an individual file his/her
Income Tax Return?
Except in cases where the Commissioner
otherwise permits, the return shall be filed with
an authorized agent bank, Revenue District
Officer, Collection Agent or duly authorized
Treasurer of the city or municipality in which such
person has his legal residence or principal place
of business in the Philippines, or if there be no
legal residence or place of business in the
Philippines, with the Office of the Commissioner.
(Sec. 51 (B))
529
When should an individual file his/her
Income Tax Return?
The return of any individual specified above shall
be filed on or before the fifteenth (15th) day
of April of each year covering income for the
preceding taxable year. (Sec. 51 (C)(1))
CORPORATE RETURN
Which corporations are required to file an
Income Tax Return?
Every corporation subject to the tax herein
imposed, except foreign corporations not
engaged in trade or business in the Philippines,
shall render, in duplicate, a true and accurate
quarterly income tax return and final or
adjustment return in accordance with the
provisions of Chapter XII of this Title. (Sec. 52 (A))
Who shall file for the corporation?
The income tax return shall consist of a maximum
of four (4) pages in paper form or electronic form,
be filed by the president, vice-president or other
principal officer, shall be sworn to by such officer
and by the treasurer or assistant treasurer. (Sec.
52 (A))
Contents of the Corporate Income Tax
Return
1. Corporate profile and information;
2. Gross sales, receipts or income from services
rendered, or conduct of trade or business,
except income subject to final tax as provided
under this Code;
3. Allowable deductions under this Code;
4. Taxable income as defined in Section 31 of
this Code; and
5. Income tax due and payable
Provided, That the foregoing provisions shall
not affect the implementation of Republic Act
No. 10708 or TIMTA.
Taxable Year of a Corporation
A corporation may employ either calendar year or
fiscal year as a basis for filing its annual income
tax return: Provided, That the corporation shall
not change the accounting period employed
without prior approval from the Commissioner in
accordance with the provisions of Section 47.
(Sec. 52 (B))
Fiscal Year – pertains to an accounting period
of twelve (12) months ending on the last day of
any month other than December. (NIRC, Sec. 22
par. (Q))
1. Quarterly Income Tax - Every corporation
shall file in duplicate a quarterly summary
declaration of its gross income and
deductions on a cumulative basis for the
preceding quarter or quarters upon which the
income tax, as provided in Title II of this
Code, shall be levied, collected and paid.
The tax so computed shall be decreased by
the amount of tax previously paid or assessed
during the preceding quarters and shall be
paid not later than sixty (60) days from the
close of each of the first three (3) quarters of
the taxable year, whether calendar or fiscal
year. (Sec. 75)
2. Final Adjustment Return
Every corporation liable to tax under Section
27 shall file a final adjustment return covering
the total taxable income for the preceding
calendar or fiscal year. If the sum of the
quarterly tax payments made during the said
taxable year is not equal to the total tax due
on the entire taxable income of that year, the
corporation shall either:
a. Pay the balance of tax still due;
b. Carry-over the excess credit; or
c. Be credited or refunded with the excess
amount paid, as the case may be.
In case the corporation is entitled to a tax credit
or refund of the excess estimated quarterly
income taxes paid, the excess amount shown on
530
its final adjustment return may be carried over Q: May the Commissioner grant an
and credited against the estimated quarterly extension of time for the Filing of Returns?
income tax liabilities for the taxable quarters of ANS: Yes. In meritorious cases, the
the succeeding taxable years. Commissioner may grant an extension of time for
filing of returns subject to the provisions of
Once the option to carryover and apply the Section 56 NIRC.
excess quarterly income tax against income tax
due for the taxable quarters of the succeeding Q: May an individual pay taxpayer pay
taxable years has been made, such option shall his/her income tax in installments?
be considered irrevocable for that taxable period ANS: Yes. When a tax due is in excess of two
and no application for cash refund or issuance of thousand pesos (P2,000.00), the taxpayer other
a tax credit certificate shall be allowed therefor. than the corporation, may elect to pay in two (2)
(Sec. 76) equal installments – first of which shall be paid
upon the filing of return, and the second
WHEN AND WHERE TO FILE installment on or before 15th of October following
the close of the calendar year.
Place of Filing - Except as the Commissioner
otherwise permits, the quarterly income tax If any installment is not paid on or before the date
declaration required in Section 75 and the final fixed for payment, the whole amount becomes
adjustment return required in Section 76 shall be due and payable, together with the delinquency
filed with the authorized agent banks or Revenue penalties.
District Officer or Collection Agent or duly
authorized Treasurer of the city or municipality Return of Corporations Contemplating
having jurisdiction over the location of the Dissolution or Reorganization - Every
principal office of the corporation filing the return corporation shall, within thirty (30) days after the
or place where its main books of accounts and adoption by the corporation of a resolution or
other data from which the return is prepared are plan for its dissolution, or for the liquidation of
kept. (Sec. 77 (A)) the whole or any part of its capital stock,
including a corporation which has been notified
Time of FILING Time of PAYMENT of possible involuntary dissolution by the
Securities and Exchange Commission, or for its
The corporate The income tax due on reorganization, render a correct return to the
quarterly both the corporate Commissioner, verified under oath, setting forth
declaration shall be quarterly returns and the
the terms of such resolution or plan and such
filed within sixty (60) final adjustment income
days following the tax returns computed in
other information as the Secretary of Finance,
close of each of the accordance with Sections upon recommendation of the Commissioner,
first three (3) quarters 75 and 76 shall be paid at shall, by rules and regulations, prescribe.
of the taxable year. the time the declaration
or return is filed in a The dissolving or reorganizing corporation shall,
The final adjustment manner prescribed by the prior to the issuance by the Securities and
return shall be filed on Commissioner. Exchange Commission of the Certificate of
or before the fifteenth Dissolution or Reorganization, as may be defined
(15th) day of April, or
by rules and regulations prescribed by the
on or before the
fifteenth (15th) day of
Secretary of Finance, upon recommendation of
the fourth (4th) month the Commissioner, secure a certificate of tax
following the close of clearance from the Bureau of Internal Revenue
the fiscal year, as the which certificate shall be submitted to the
case may be. (Sec. 77 Securities and Exchange Commission. (Sec. 52 (C))
(B))

531
Return on Capital Gains Realized from Sale tantamount to the substituted filing of income tax
of Shares of Stock and Real Estate - Every returns by said employees. (Sec. 51-A)
corporation deriving capital gains from the sale or
exchange of shares of stock not traded thru a Conditions for Substituted Filing (POES-FF)
local stock exchange as prescribed under
Sections 24(C), 25(A)(3), 27(E)(2), 28(A)(8)(c) Substituted tax filing only applies to employees
and 28(B)(5)(c) shall file a return within thirty who meet all the following conditions (RR No. 3-
(30) days after each transaction and a final 2002):
consolidated return of all transactions during the
taxable year on or before the fifteenth (15th) day 1. Employees who receiver Purely
of the fourth (4th) month following the close of compensation income;
the taxable year. (Sec. 52 (D)) 2. The employees receive the income only from
One employer in the Philippines during the
f) Substituted Filing taxable year;
3. The amount of tax due from the employee at
Mode of filing when an employer’s annual the end of the year Equals the amount of tax
information return of withholding tax on withheld by employer;
compensation may be considered as “substitute”
4. The employee’s Spouse also complies with
ITR of the employee inasmuch as the information
all the aforementioned conditions;
provided in his ITR (BIR Form 1700) would
5. The employer Files the annual information
exactly be the same information contained in the
employer’s annual information return (BIR Form return (BIR Form 1604-CF);
1604-CF) (RR No. 03-2002, Sec. 4; RMC No. 1-2003) 6. Employee has BIR Form 2316 or Certificate
of Final Tax Withheld at Source (BIR Form
SUBSTITUTED NON-FILING 2306) issued by its employer.
FILING
Who are NOT qualified for Substituted
An individual taxpayer, Applicable only to Filing?
although required certain types of
under the law to file his individual tax payers The following individuals, however, are not
income tax return, will who are not required qualified for substituted filing and therefore, still
no longer have to under the law to file required to file Income Tax Return in accordance
personally file his own an income tax with existing regulations:
income tax return but return.
instead the employer’s 1. Individuals deriving compensation from two
annual information or more employers concurrently or
return filed will be successively at any time during the taxable
considered as the year;
“substitute”. 2. Employees deriving compensation income,
regardless of the amount, whether from a
single or several employers during the
Individual taxpayers receiving purely calendar year, the income tax of which has
compensation income, regardless of amount, not been withheld correctly (i.e., tax due is
from only one employer in the Philippines for the
not equal to the tax withheld) resulting to
calendar year, the income tax of which has been
collectible or refundable return
withheld correctly by the said employer (tax due
equals tax withheld) shall not be required to file 3. Individuals deriving other non-business,
an annual income tax return. The certificate of nonprofessional-related income in addition to
withholding filed by the respective employers, compensation income not otherwise subject
duly stamped 'received' by the BIR, shall be to a final tax;

532
4. Individuals receiving purely compensation
income from a single employer, although the
income tax of which has been correctly
withheld, but whose spouse falls under
Section 2.83.4(A), 2.83.4(B) and 2.83.4(C) of
these regulations;
5. Non-resident aliens engaged in trade or
business in the Philippines deriving purely
compensation income, or compensation
income and other non-business,
nonprofessional-related income. (Rev. Regs.
11-18)
For Husband and Wife
Married individuals, whether citizens, resident or
nonresident aliens, who do not derive income
purely from compensation, shall file a return for
the taxable year to include the income of both
spouses, but where it is impracticable for the
spouses to file one return, each spouse may file
a separate return of income but the returns so
filed shall be consolidated by the Bureau for
purposes of verification for the taxable year. (Sec.
51 (D))
In the regulations, under Individuals Earning
Purely Compensation Income 76 husband and
wife shall compute their individual income tax
separately based on their respective taxable
income; if any income cannot be definitely
attributed to or identified as income exclusively
earned or realized by either of the spouses, the
same shall be divided equally between the
spouses for the purpose of determining their
respective taxable income. (Rev. Regs. 08-18)
For Income of Parents and Unmarried
Minors
The income of unmarried minors derived from
property received from a living parent shall be
included in the return of the parent, except (1)
when the donor's tax has been paid on such
property, or (2) when the transfer of such
property is exempt from donor's tax. (Sec. 51 (E))
g) Failure to File Returns
What is the effect of failure to file income
tax returns?
Failure to file and/or pay any internal revenue tax
at the time or times required by law or regulation
shall be punished by a fine of not less than
P10,000 and imprisonment of not less than one
(1) year but not more than 10 years (NIRC, Sec.
255)
Q: What if the taxpayer is unable to make
his or her own return, due to disability?
ANS: If the taxpayer is unable to make his own
return, the return may be made by his duly
authorized agent or representative or by the
guardian or person charged with the care of his
person or property, the principal and his
representative or guardian assuming the
responsibility of making the return and incurring
penalties provided for erroneous, false or
fraudulent returns. (Sec. 51(F))
7. Withholding Taxes
a) Concept
Also known as “Taxation at Source” refers to the
requirement that, taxes imposed or prescribed by
the NIRC are to be deducted and withheld by the
payor-corporations and/or persons from
payments made to payees-corporation and/or
persons, for the former to pay the same directly
to the BIR.
In the operation of the withholding tax system,
the payee is the taxpayer (the person on whom
the tax is imposed), while the payor, a separate
entity, acts no more than an agent of the
government for the collection of the tax in order
to ensure its payment. (Bank of America v.
Commissioner, G.R. No. 103092, 1994)
Nature: Withholding tax is not a tax. It is the
method of collecting income tax in advance from
the taxable income of the recipient of income.
533

Who are required to deduct and withhold
taxes?
The following persons are constituted as
withholding agents required to withhold income
tax payments:
1. Juridical Persons, w/n engaged in trade or
business;
2. Individuals with respect to payments made in
connection with his trade or business;
3. Individual buyers not engaged in trade or
business, insofar as taxable sale, exchange or
transfer of real property is concerned; and
4. All government offices, including GOCCs, as
well as provincial, city, and municipal
governments and barangays.
What are the duties of the withholding
agent?
1. Filing of quarterly withholding tax returns;
2. The submission to the payee, in respect of his
or its receipt during the calendar year, of a
written statement showing the income or
other payments made by the withholding
agent during the quarter or year, and the
amount of tax deducted and withheld
therefrom; and
3. Filing with the BIR of the Reconciliation
Statement of Quarterly Payment, and a list of
payees and income payments.
Q: What are the consequences of the failure
of the withholding agent to collect and
remit taxes?
Answer: Any person required to withhold,
account for, and remit any tax imposed by this
code or who willfully fails to withhold such tax, or
account for and remit such tax, or aids or abets
in any manner to evade such any tax or the
payment thereof, shall, in addition to other
penalties provided for under this chapter, be
liable upon conviction to a penalty equal to the
total amount of tax not withheld, or not
accounted for and remitted. (NIRC Sec. 251)
Q: What must be done to any income tax
withheld by the income payor/withholding
agent in excess of what is prescribed?
Answer: It shall be refunded to the payee by the
said payor/withholding agent. The income
payor/withholding agent shall reflect the amount
refunded as adjustment to the remittable
withholding tax due for the 1st quarter
withholding tax return. It shall also be reflected
in the Alphabetical List of Payees, to be attached
in the said 1st Qtr return.
Q: What are the consequences of the failure
of the withholding agent to refund excess
withholding tax?
Answer: Any employer/withholding agent who
fails or refuses to refund any excess withholding
tax shall, in addition to the penalties provided in
this title, be liable to a penalty equal to the total
amount of refunds which was not refunded to the
employee resulting from any excess of the
amount withheld over the tax actually due on
their return. (NIRC Sec. 252)
Who are exempted from withholding
taxes?
The withholding of tax shall not apply to income
payment made on the following:
1. National government and its
instrumentalities, including provincial, city,
and municipal governments and GOCCs;
2. Persons enjoying exemption from payment of
income taxes pursuant to the provisions of
any law, general or special, such as but not
limited to the following:
a. Sales of real property by a corporation
which is registered with and certified by
the Housing and Land Use Regulatory
Board (HLURB), or the Housing and
Urban Development Coordinating Council
(HUDCC), as engaged in socialized
housing project where the selling price of
the house & lot or only lot, does not
exceed the socialized housing price
534
 applicable to the area as prescribed and
certified by the said council/board;
b. Corporations which are exempt from the
income tax under Sec. 30 of the Tax
Code, as amended, and GOCCs exempt
from income tax under Sec. 27 (A)(C) of
the same code.
However, the income payments arising
from any activity which is conducted for
profit or income derived from real or
personal property shall be subject to
withholding tax as prescribed in these
regulations;
c. Joint ventures or consortium formed for
the purpose of undertaking construction
projects, or engaging in petroleum, coal,
geothermal, and other energy operations
pursuant to an Operating or Consortium
Agreement under a service contract with
the government;
d. Individuals who earn P250,000.00 and
below from a lone income payor upon
compliance with these conditions:
i. Individual has executed a payee’s
sworn declaration of gross receipts;
ii. Sworn declaration has been
submitted to the lone income
payor/withholding agent on or
before January 15 of each year, or
before the initial income payment,
whichever is applicable.
Timing of Withholding
Withholding tax shall be deducted and withheld
by the withholding agent when the income
payment is paid or payable or accrued or the
income payment is accrued or recorded as an
expense or asset, whichever is earlier.
Q: When does the obligation of the
employer to withhold accrued bonuses
arise?
Answer: If the taxpayer claims bonuses as a
deduction in its ITR, the withholding tax on the
same should be withheld and remitted to the BIR
in the year of accrual and not during the year of
payment.
It arises at the time the income was paid or
accrued, or recorded as an expense in the
payor’s/employer’s books, whichever comes first.
(ING Bank N.V. v CIR, GR No. 167679, July 22, 2015)
Expanded withholding tax
Expanded withholding tax will apply:
1. Expense is paid by the taxpayer, which is
income to the recipient thereof subject to
income tax;
2. Income is fixed or determinable at the time
of payment
3. Income is one of the income payments listen
in the regulations; and
4. Income recipient is a resident of the
Philippines liable to income tax.
a. If recipient is a non-resident taxpayer,
then the income payment is subject to
FWT, not creditable.
5. Payor-withholding agent is also a resident of
the Philippines (Ignatius Michael D. Ingles, Tax
Made Less Taxing: A Reviewer with Codals and
Cases, 3rd Edition, 2021, p. 242)
Withholding tax on compensation
The withholding of tax on compensation income
is a method of collecting the income tax at source
upon receipt of the income. It applies to all
employed individuals whether citizens or aliens,
deriving income from
b) Creditable vs. Withholding
FINAL WITHOLDING TAX
Withholding of final tax on certain incomes is a
kind of withholding tax which is prescribed on
certain income payments, and is not creditable
against the income tax due of the payee on other
income subject to regular rates of tax for the
taxable year.
535
The liability of payment of tax rates rests due on the income. Taxes withheld on income
primarily on the payor as the withholding agent. payments covered by the expanded withholding
Thus, in case of failure to withhold the tax or tax and compensation income are creditable in
under-withholding, the deficiency tax shall be nature.
collected from the payor/withholding agent.
A CWT is considered a prepayment or an advance
(Rev. Regs. 02-98, Sec. 2.57) payment of eventual income taxes due at the end
of the taxable year Taxes withheld on certain
The amount of income tax withheld by the income payments are intended to equal or at
withholding agent is constituted as a full and final least approximate the tax due of the payee on
payment of the income tax due from the payee said income.
on the said income. The liability for payment of
the tax rests primarily on the payor as a The payor endorses the pertinent Certificate of
withholding agent. Thus, in case of his failure to Creditable Tax Withheld at Source to the payee
withhold the tax or in case of under withholding, for use by the payee against his tax liability at the
the deficiency tax shall be collected from the end of a taxable year.
payor/withholding agent.
The following are creditable withholding
The payee is not required to file an income tax taxes:
return for the particular income. Note, however,
that individual and corporate taxpayers will now 1. Expanded Withholding Tax (EWT) on certain
be required to declare in the ITR items which income payments;
have been subjected to final tax. 2. Withholding Tax on Compensation;
The finality of the withholding tax is limited only 3. Withholding Tax on money payments to the
to the payee’s income tax liability on the government
particular income. It does not extend to the
payee's other tax liability on said income, e.g.,
FINAL
percentage tax. CREDITABLE
WITHHOLDING
WITHHOLDING TAX
TAX
Formula: Amount of Tax Collected
Final Tax = (Gross Income subject to Final Tax) Full and final payment Intended to equal, or at
(Final Tax Rate) of the income due least approximate the tax
from the payee on due, from the said payee
Note: Deductions and/or personal exemptions said income on said income
are not allowed. Primarily Liable
Withholding agent Taxpayer
CREDITABLE WITHOLDING TAX Need to File a Return
Income recipient is
REQUIRED to file ITR,
Withholding taxes on ordinary business income Payee NOT Required
and/or pay the difference
which is still subjected to income tax and to file
between tax withheld and
therefore, is deductible as tax credit. (Rev. tax due on income
Regs.02-98, Sec. 2.57) Coverage
Those income payments
Under the creditable withholding tax system, ALL income subject to covered by EWT (Rev.
taxes withheld on certain income payments are final taxes Regs. 02-98)
intended to equal or at least approximate the tax
due of the payee on said income. The income (e.g. Passive income, (e.g. Professional fees,
recipient is still required to file an income tax Gross income of NRA- talent fees, income
NETB) payment to partners in
return to report the income and/or pay the
GPP)
difference between the tax withheld and the tax

536
C. VALUE-ADDED TAX (VAT)
1. Concept and Elements of VATable
Transactions
The value-added tax is an indirect tax, and the
amount of tax may be shifted or passed on to the
buyer, transferee or lessee of the goods,
properties or services. This rule shall likewise
apply to existing contracts of sale or lease of
goods, properties or services at the time of the
effectivity of Republic Act No. 7716.
The phrase “in the course of trade or business”
means the regular conduct or pursuit of a
commercial or an economic activity, including
transactions incidental thereto, by any person
regardless of whether or not the person engaged
therein is a non-stock, nonprofit private
organization (irrespective of the disposition of its
net income and whether or not it sells exclusively
to members or their guests), or government
entity (Rule 105, NIRC)
Elements of VAT (OSaV-E): (Sec. 105, NIRC)
a. It must be done in the Ordinary course of
trade or business;
b. There must be a Sale, barter, exchange,
lease of good or properties, or rendering of
service in the Philippines; and
c. It is not VAT-exempt or VAT zero-rated
2. Impact and Incidence of Tax
VAT is an indirect tax. As such, the
amount of tax paid on the goods, properties
or services bought, transferred,
or leased may be shifted or passed on by the
seller, transferor, or lessor to the buyer,
transferee or lessee. Unlike a direct tax, such
as the income tax, which primarily taxes an
individual’s ability to pay based on his income
or net wealth, an indirect tax, such as the
VAT, is a tax on consumption of goods,
services, or certain transactions involving the
same.
Further, in indirect taxation, there is a need
to distinguish between the liability for
the tax (impact) and the burden of the
tax (incidence). In adding or including the
VAT due to the selling price, the seller
remains the person primarily and legally
liable for the payment of the tax. What is
shifted only to the intermediate buyer and
ultimately to the final purchaser is the
burden of the tax. Stated differently, a seller
who is directly Co. A, a VAT registered
corporation/individual, operating a small
grocery in Makati sold to B, consumer who
would use the items bought for personal
consumption.
From whose pocket will the payment of
output tax come from? Co. A, (the
business) or B, (the consumer)?
Since VAT is an indirect tax. Such liability can
be shifted to the consumer of the goods and
services. Hence, it is B as the consumer who
will shoulder or bear the tax. (Incidence)
Who will be liable to pay the Output VAT to
the BIR?
Co. A, as the seller of goods will be liable to pay
the Output VAT. (Impact)
Co. A will retain the amount of output tax
collected from B and shall remit to the BIR when
it falls due for payment.
3. Destination Principle and Cross-Border
Doctrine
Destination Principle
As a general rule, the VAT system uses the
Destination Principle as a basis for the
jurisdictional reach of the tax. Goods and
services are taxed only in the country
where they are consumed. Thus, exports are
zero-rated, while imports are taxed. (Domondon,
2014)
No VAT shall be imposed to form part of the
cost of goods destined for consumption
outside of the territorial border of the
taxing authority. Hence, actual export of goods
537
and services from the Philippines to a foreign
country must be free from VAT. Conversely, those
destined for use or consumption within the
Philippines shall be imposed with the 12% VAT.
The VAT system uses the destination principle as
a basis for the jurisdictional reach of the tax.
Exception to the Destination Principle
However, the law clearly provides for an
exception to the destination principle; that is, for
a zero percent VAT rate for services that are
performed in the Philippines, "paid for in
acceptable foreign currency and accounted for in
accordance with the rules and regulations of the
BSP." Thus, for the supply of service to be zero-
rated as an exception, the law merely requires
that first, the service be performed in the
Philippines; second, the service falls under any of
the categories in Section 102(b) of the Tax Code;
and, third, it be paid in acceptable foreign
currency accounted for in accordance with BSP
rules and regulations (CIR vs American Express, GR
No. 152609, June 29, 2005).
Cross-Border Doctrine
In connection with the Destination Principle, the
Philippine VAT system adheres to the Cross
Border Doctrine, according to which, no
VAT shall be imposed to form part of the
cost of goods destined for consumption
outside of the territorial border of the
taxing authority.
Technical Importation
An application of the cross border doctrine where
goods sold by a person located in a special
economic zone to a person out of the
customs territory or economic zone will be
treated as importation. In the same manner,
that a person selling to another inside the
customs territory or special economic zone such
shall be treated as exportation and subject to
zero –rating.
In relation the above, Section 8 of Rep. Act No.
7916, as amended, mandates that the Philippine
Economic Zone Authority (PEZA) shall manage
and operate the ECOZONES as a separate
customs territory; thus, creating the fiction that
the ECOZONE is a foreign territory. As a result,
sales made by a supplier in the Customs Territory
to a purchaser in the ECOZONE shall be treated
as an exportation from the Customs Territory.
Main business must be VATable to consider
transactions “incidental” thereto VATable
as well: otherwise, if the main line of business is
VAT-exempt, such as sale of copra, then
transactions incidental thereto are considered
VAT-exempt as well. e.g., sale of delivery truck
by the one who sells copra.
However, if the sale is VAT zero-rated, the
incidental transactions thereto, not considered
zero-rated, are treated as subject to 12% VAT.
This is because a zero-rated sale is actually
subject to VAT, although at 0% rate.
The requirement of “in the course of trade
or business” or “incidental thereto” is NOT
applicable to:
a. Importations – in fact, even if the importation
is personal and not for business purposes, the
same will be considered subject to VAT, unless
the importer is an exempt importer like the
BOI-registered enterprise or PEZA-registered
entities enjoying exemption from taxes on
their importations under their registration.
b. Sale of service by non-residents in the
Philippines – as long as the services are
rendered in the Philippines, the same will be
subject to withholding VAT. The last
paragraph of Sec. 105 provides that they
“shall be considered as being in the course of
trade or business.”
4. Imposition of VAT on Transfer of Goods
by Tax Exempt Persons
VAT is computed at the rate of 0% or 12% of the
gross selling price of goods or gross receipts
realized from the sale of service. The VAT system
of taxation is aimed at realizing the services,
simplifying tax administration and to make the
tax system more equitable and to enable the
538
country to attain economic recovery (Kapatiran
ng Naglilingkod sa Pamahalaan ng Pilipinas vs.
Tan etc., G.R. No. 81311, June 30, 1988)
The following are the three (3) categories of
transactions subject to a VAT rate of 12%, vis-à-
vis their tax bases (Sagap-GSP, Igo-TLC,
Serlop-GR), zero rated transactions are to be
discussed later on:
Nature of Transaction Tax Base
1. On sale of goods and Gross Selling Price
properties (Sagap) (GSP)
2. On importation of Total Landed Cost
goods (Igo) (TLC)
3 On sale of services and Gross receipts (GR)
use and lease of
properties (Serlop)
Determination of Tax
1. If the amount provided is exclusive of VAT, that
amount is simply multiplied by 12% to arrive at
the amount of VAT;
2. If the amount provided is inclusive of VAT, that
amount is divided by 112% and then multiplied
by 12% to arrive at the amount of VAT.
The amount indicated in the official receipt or the
invoice amount is presumably inclusive of VAT.
Thus, if the official receipt or invoice price states
P112,000 as the amount of sales, the VAT
amount is 12/112 of P112,000 which is P12,000.
5. Transactions Deemed Sale Subject to
VAT
This kind of sale entails no actual sale, but by
their nature, they are considered as “sales”
subject to VAT. It should be determined whether
the sales was done in the ordinary course of trade
or business or not before the transaction is
considered “deemed sale”.
Rationale
In these kinds of transactions, input VAT was
already used by the seller as a credit against
output VAT. To recoup from the input VAT
already claimed on such goods which are not
subsequently subjected to output VAT since they
are not sold, the Law considered them as sold
and an output VAT shall be computed therefrom.
Note that the input VAT on purchase of raw
materials can be claimed on the month of
purchase with the expectation that the goods will
relate to output VAT upon their sale; if the above
transactions do not result in a VATable
transaction, or if not deemed sale, then the
taxpayer would have benefited from the input
VAT without any corresponding output VAT
liability.
The following shall be considered transactions
deemed sale (TDCR):
1. Transfer, use or consumption not in the
course of business of goods or properties
originally intended for sale or for use in the
course of business.
This can take place when VAT-registered person
withdraws goods from his business for his
personal use. (Sec. 4.106-7[a][1] of RR No. 16-
05)
2. Distribution or transfer to:
a. Shareholders or investors as share in the
profits of the VAT-registered persons
Property dividends which constitute stocks in
trade or properties primarily held for sale or lease
declared out of retained earnings and distributed
by the company to its shareholders shall be
subject to VAT. (Sec. 4.106-1[a][2][i] of RR No.
16-05)
b. Creditors in payment of debt;
3. Consignment of goods if actual sale is not
made within sixty (60) days following the
date such goods were consigned
Consignment of goods in itself is not a VAT
taxable transaction. Only if actual sale is not
made within sixty (60) days following the date
such goods were consigned will it be treated as a
transaction deemed sale subject to VAT.
Consigned goods returned by the consignee
within the 60-day period are not deemed sold.
539
4. Retirement from or cessation of business,
with respect to inventories of taxable goods
existing as of such retirement or cessation.
(Sec. 106[B])
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.
6. Zero-Rated and Effectively Zero-Rated
Sales of Goods or Properties
VAT on importation of goods
Importation is the act of bringing goods and
merchandise into the Philippines from a foreign
country.
Importer refers to any person who brings goods
into the Philippines, whether or not made in the
course of trade or business. (Sec. 4.107-1(b), RR
No. 16-05)
Tax base:
Total value used by the Bureau of Customs (BOC)
or landed Cost
The total value used by the Bureau of
Customs (BOC) in determining tariff and
customs duties, plus customs duties, excise
taxes, if any, and other charges, such as postage,
commission, and similar charges, prior to the
release of the goods from customs custody.
Exception: In case the valuation used by the
BOC in computing customs duties is based on
volume or quantity, the landed cost shall be the
basis for computing VAT.
Landed cost consists of the invoice amount,
customs duties, freight, insurance and other
charges.
If the goods imported are subject to excise tax,
the excise tax shall form part of the tax base.
Note: Those amounts paid which are contrary to
law, morals or public policy shall not be included
in the VAT base and likewise are not deductible
for income tax purposes, such as facilitation fees
or bribe.
The same rule applies to technical importations.
(see zero-rated sales)
Sale of tax-free goods to non -exempt
persons
In the case of tax-free importation of goods into
the Philippines by persons, entities or agencies
exempt from tax where such goods are
subsequently sold, transferred or exchanged in
the Philippines to non-exempt persons or entities,
the purchasers, transferees or recipients shall be
considered the importers thereof, who shall be
liable for any internal revenue tax on such
importation. The tax due on such importation
shall constitute a lien on the goods superior to all
charges or liens on the goods, irrespective of the
possessor thereof. (Section 107(B) of NIRC)
Zero-Rates Sale of Goods or Properties (Ex-
SL-SCT/TEZ)
Under Section 106(A)(2) of the amended Tax
Code, the following sale of goods shall be subject
to zero percent (0%) VAT rate:
a. Export sales
b. Sales to persons or entities whose exemption
under special laws or international
agreements to which the Philippines is a
signatory effectively subjects such sales to
zero rate.(see discussion on effective zero-rating
under AUTOMATIC VS. EFFECTIVE ZERO-RATING
below)
The provision regarding Foreign Currency
Denominated Sale under the enumeration of
sales by VAT-registered persons which shall be
subject to zero percent (0%) rate has been
removed under the TRAIN. Accordingly, they are
now subject to VAT.
540
The phrase "foreign currency denominated sale"
means sale to a non-resident of goods, except
those mentioned in Sections 149 and 150,
assembled or manufactured in the Philippines for
delivery to a resident in the Philippines, paid for
in acceptable foreign currency and accounted for
in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP).
Export Sales
Under Section 106(A)(2)(a), the term "export
sales" means:
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 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 Bangko Sentral ng
Pilipinas (BSP);
2. Sale and delivery of goods to:
(i) Registered enterprises within a separate
customs territory as provided under
special laws; and
(ii) Registered enterprises within tourism
enterprise zones as declared by the
Tourism Infrastructure and Enterprise
Zone Authority (TIEZA) subject to the
provisions under Republic Act No. 9593 or
The Tourism Act of 2009.
Note:
Items (2[i] and [2ii]) above were vetoed by the
President and as per RR No. 13-18 were not
included among those considered subject to zero-
rating. In the veto message of the President, it is
opined that these are subject to VAT by virtue of
the veto. However, it must be noted that our VAT
system follows the cross-border doctrine, and
economic zones are managed as separate
customs territory under Section 8 of the Special
Economic Zone Act. Accordingly, sales from
domestic suppliers to PEZA-registered entities
inside the economic zone should remain to be
considered zero-rated despite the removal of the
above provisions.
3. Sale of raw materials or packaging
materials to anon-resident 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);(see
note after the enumeration)
4. Sale of raw materials or packaging
materials to export-oriented enterprise
whose export sales exceed seventy
percent (70%) of total annual
production;(see note after the enumeration)
5. Those considered export sales under
Executive Order No. 226, otherwise known as
the Omnibus Investment Code of 1987,
and other special laws.(see note after the
enumeration)
Export sales under the Omnibus Investment Code
of 1987 (E.O. No. 226) means export sales
provided under Sec. 106(A)(2)(a)(5) of the NIRC
“shall mean the Philippine port F.O.B. value of
export products exported directly by a registered
export producer, or the net selling price of export
products sold by a registered export producer to
another export producer, or to an export trader
that subsequently exports the same including
sales to export processing zones. (Sec. 4.106-5, RR
No. 16-05)
6. 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.
7. Sale of goods, supplies, equipment and fuel
to persons engaged in international shipping
541
 or international air transport operations.
However, under the TRAIN, it is required that
they shall be used exclusively for
international shipping or air transport
operations.
The sale of goods, supplies, equipment and fuel
to persons engaged in international shipping or
international air transport operations is limited to
goods, supplies, equipment and fuel that shall be
used in the transport of goods and passengers
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:
Provided, further, that if any portion of such fuel,
goods, supplies or equipment is used for
purposes other than that mentioned in this
paragraph, such portion of fuel, goods, supplies,
and equipment shall be subject to 12% VAT.
Note: Item Nos. 3, 4 and 5 are no longer subject
to zero-rating under the TRAIN upon satisfaction
of the following conditions:
a. The successful establishment and
implementation of an enhanced VAT refund
system that grants refunds of creditable input
tax within 90 days from the filing of the VAT
refund application with the Bureau: Provided,
that, to determine the effectivity of item no.
1, all applications filed from January 1, 2018
shall be processed and must be decided
within 90 days from the filing 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.
However, all claims for refund/tax credit
certificate filed prior to January 1, 2018 shall still
be governed by the one hundred twenty (120)-
day processing period.
b. All pending VAT refund claims as of
December 31, 2017 shall be fully paid in cash
by December 31, 2019.
Provided, that the DOF shall establish a VAT
refund center in the BIR and in the BOC that will
handle the processing and granting of cash
refunds of creditable input tax.
Q: Is the above proviso excluding sub–
paragraphs 3, 4 and 5 from zero-rating already
effective?
A: No, the proviso not yet effective because the
second condition is not yet fulfilled which states:
“All pending VAT refund claims as of
December 31, 2017 shall be fully paid in cash
by December 31,2019.”
The sale of gold to the Bangko Sentral ng
Pilipinas, which was zero-rated prior to TRAIN,
is now considered VAT-exempt under the
TRAIN. Accordingly, any input VAT attributable
thereto will no longer be allowed as input tax
credits but rather will be closed to expense for
income tax purposes.
Zero Rated Sales of Service
Under Section 108(B) of the Amended Tax Code,
the following services performed in the
Philippines by VAT- registered persons shall be
subject to zero percent (0%) VAT rate:
1. *Processing, manufacturing or repacking
goods for other persons doing business
outside the Philippines which goods are
subsequently exported, where the services
are paid for in acceptable foreign currency
and accounted for in accordance with the
rules and regulations of the Bangko Sentral
ng Pilipinas (BSP);(see note no. 2 after the
enumeration)
2. Services other than those mentioned in the
preceding paragraph, the consideration for
which is paid for in acceptable foreign
currency and accounted for in accordance
with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
542
c. 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; (see discussion on effective zero-
rating under AUTOMATIC VS. EFFECTIVE ZERO-
RATING below)
3. Services rendered to persons engaged in
international shipping or air transport
4. operations, including leases of property for
use thereof: Provided, that these services
shall be exclusively for international shipping
or air transport operations. Thus, the services
referred to herein shall not pertain to those
made to common carriers by air and sea
relative to their transport of passengers,
goods or cargoes from one place in the
Philippines to another place in the
Philippines, the same being subject to twelve
percent (12%) VAT under Sec. 108 of the Tax
Code;
5. Services performed by subcontractors and/or
contractors in processing, converting, of
manufacturing goods for an enterprise whose
export sales exceed seventy percent (70%)
of total annual production; (see note no. 2 after
the enumeration)
6. Transport of passengers and cargo by
domestic air or sea vessels from the
Philippines to a foreign country. Gross
receipts of international air or shipping
carriers doing business in the Philippines
derived from transport of passengers and
cargo from the Philippines to another country
shall be exempt from VAT; however, they are
still liable to a percentage tax of three percent
(3%) based on their gross receipts derived
from transport of cargo from the Philippines
to another country as provided for in Sec. 118
of the Tax Code; and
7. Sale of power or fuel generated through
renewable sources of energy such as, but not
limited to, biomass, solar, wind, hydropower,
geothermal and steam, ocean energy, and
other emerging sources using technologies
such as fuel cells and hydrogen fuels:
Provided, however, that zero-rating shall
apply strictly to the sale of power or fuel
generated through renewable sources of
energy, and shall not extend to the sale of
services related to the maintenance or
operation of plants generating said power.
8. Services rendered to:
(i) Registered enterprises within a separate
customs territory as provided under
special law; and
(ii) Registered enterprises within tourism
enterprise zones as declared by the
TIEZA subject to the provisions under
Republic Act No. 9593 or The Tourism Act
of 2009.(see note no. 1 after the
enumeration)
Note:
1. Items (8[i] and [2ii]) above were vetoed by
the President and as per RR No. 13-18 are
not included among those considered subject
to zero-rating. In the veto message of the
President, it is opined that these are subject
to VAT by virtue of the veto. However, it must
be noted that our VAT system follows the
cross-border doctrine; and economic zones
are managed as separate customs territory
under Section 8 of the Special Economic Zone
Act. Accordingly, sales from domestic
suppliers to PEZA-registered entities inside
the economic zone should remain to be
considered zero-rated despite the removal of
the above provisions.
2. Items No. 1 and 5 above shall be subject to
the 12% VAT and no longer subject to zero
percent under the following conditions:
a. The successful establishment and
implementation of an enhanced VAT
refund system that grants refunds of
creditable input tax within 90 days from
the filing of the VAT refund application
with the Bureau: Provided, that, to
determine the effectivity of item no. 1, all
applications filed from January 1, 2018
shall be processed and must be decided
within 90 days from the filing of the VAT
refund application;
The 90-day period to process and decide,
pending the establishment of the
enhanced VAT Refund System shall only
543
 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.
However, all claims for refund/tax credit
certificate filed prior to January 1, 2018
shall still be governed by the one hundred
twenty (120)-day processing period.
All pending VAT refund claims as of
December 31, 2017 shall be fully paid in
cash by December 31, 2019.
Provided, that the DOF shall establish a
VAT refund center in the BIR and in the
BOC that will handle the processing and
granting of cash refunds of creditable
input tax.
Facilitation of collection of receivables for
foreign counterpart - zero-rated under sec.
108(b)(2)
Services performed by VAT-registered persons in
the Philippines (other than the processing,
manufacturing or repacking of goods for persons
doing business outside the Philippines), when
paid in acceptable foreign currency and
accounted for in accordance with the rules and
regulations of the BSP, are zero-rated. The
taxpayer in this case is a VAT-registered person
that facilitates the collection and payment of
receivables belonging to its non-resident foreign
client, for which it gets paid in acceptable foreign
currency inwardly remitted and accounted for in
conformity with BSP rules and regulations.
Certainly, the service it renders in the Philippines
is not in the same category as "processing,
manufacturing or repacking of goods" and
should, therefore, be zero-rated. In reply to a
query of respondent, the BIR opined in VAT
Ruling No. 080-89 that the income respondent
earned from its parent company’s regional
operating centers (ROCs) was automatically zero-
rated effective January 1, 1988.(CIR vs. American
Express, GR No. 152609, June 29, 2005)
To be considered zero-rated under Sec.
108(b)(2), the recipient of the service must
be doing business outside the Philippines
The Tax Code not only requires that the services
be other than "processing, manufacturing or
repacking of goods" and that payment for such
services be in acceptable foreign currency
accounted for in accordance with BSP rules.
Another essential condition for qualification to
zero-rating under Section 108(b)(2) is that the
recipient of such services is doing business
outside the Philippines. While this requirement is
not expressly stated in the second paragraph of
Section 108(b), this is clearly provided in the first
paragraph of Section 108(b) where the listed
services must be "for other persons doing
business outside the Philippines." The phrase "for
other persons doing business outside the
Philippines" not only refers to the services
enumerated in the first paragraph of Section
102(b), but also pertains to the general term
"services" appearing in the second paragraph of
Section 102(b). In short, services other than
processing, manufacturing, or repacking of goods
must likewise be performed for persons doing
business outside the Philippines. (CIR vs.
Burmeister and Wain; GR No. 153205; Jan. 22, 2007)
Rationale for zero-rating of exports
Cross border doctrine: The Philippine VAT
system adheres to “cross border doctrine”,
according to which, no VAT shall be imposed to
form part of the cost of goods destined for
consumption outside of the territorial border of
the taxing authority. (CIR vs. Toshiba Information
Equipment Philippines, Inc., G.R. No. 150154, August
9, 2004)
Automatic vs. Effective Zero-Rating
An automatically zero-rated sale refers to a sale
of goods, properties and services to a Freeport
Zone-registered enterprise by a VAT-registered
seller/supplier that is regarded as either an export
sale or (a foreign currency denominated sale,
prior to TRAIN) under Section 106 of the Tax
Code of 1997.
544

An effectively zero-rated sale, on the other hand,
refers to the local sale of goods, properties and
services by a VAT-registered person to an entity
that was granted indirect tax exemption under
special laws or international agreements. Since
the buyer is exempt from indirect tax, the seller
cannot pass on the VAT and therefore, the
exemption enjoyed by the buyer shall extend to
the seller, making the sale effectively zero-rated.
(Q4, RMC No. 50-2007)
Automatically Zero Effectively Zero
Rated Rated
As to Rate
Both are Vatable transaction a VAT rate of 0%
As to Source/ Transactions Covered
Transactions arising Transaction arising from
from EXPORT sale of LOCAL sale of goods
goods and/or services and/or services to an
entity that was granted
indirect tax exemption
under special laws or
international
agreements.
Treatment of Input Taxes
Both are allowed to refund the input taxes
attributable to Zero/Effectively Zero Rated Sales
under Section 112.
No need for an approved application
Under RR No. 16-05, those considered effectively
zero-rated [i.e., zero-rated sale of goods under
Sec. 106(A)(2)(b) and sale of services under Sec.
108(B)(3)] shall require prior application with the
appropriate BIR office for effective zero-rating.
Without an approved application for effective
zero-rating, the transaction otherwise entitled to
zero-rating shall be considered exempt. However,
this paragraph was deleted under RR No. 4-
07.(Remember that under a VAT-exempt sale
transaction by a VAT-registered taxpayer, the taxpayer
cannot claim an input tax related to the sale)
However, such requirement of prior ruling has
been struck down in the case of CIR vs. Seagate
Technology (Philippines), wherein the Court held
that a VAT-registered status, as well as
compliance with the invoicing
requirements, is sufficient for the effective
zero rating of the transactions of a
taxpayer. Hence, transactions of a VAT-
registered taxpayer cannot be exempted by its
mere failure to apply for their effective zero
rating. Otherwise, their VAT exemption would be
determined, not by their nature, but by the
taxpayer’s negligence-a result not at all
contemplated. Administrative convenience
cannot thwart legislative mandate.
The BIR regulations additionally requiring an
approved prior application for effective zero
rating cannot prevail over the clear VAT nature of
a taxpayer’s transactions. The scope of such
regulations is not within the statutory authority x
xx granted by the legislature.
Other than the general registration of a taxpayer
the VAT status of which is aptly determined, no
provision under our VAT law requires an
additional application to be made for such
taxpayers’ transactions to be considered
effectively zero-rated. An effectively zero-rated
transaction does not and cannot become exempt
simply because an application therefor was not
made or, if made, was denied. To allow the
additional requirement is to give unfettered
discretion to those officials or agents who,
without fluid consideration, are bent on denying
a valid application. Moreover, the State can never
be estopped by the omissions, mistakes or errors
of its officials or agents. (CIR vs Seagate Technology
(Phils), GR. No. 153866, February 11, 2005)
Sale within the Freeport Zone (Q6, RMC No.
50-2007)
Such sale, exchange, barter or lease of goods,
properties and services within the Freeport Zones
shall be exempt from VAT. The following
transactions are covered under this exemption:
a. All transactions between and/or among two
registered Freeport Zone Enterprises or
Residents;
b. Consumer goods purchased and consumed
within the Freeport Zones;
c. Sale/supply of services, including power or
electricity, by a Freeport Zone-registered
enterprise or resident within the Freeport
Zone, regardless of whether or not the
545
 buyer or customer is a registered Freeport
Zone enterprise or Zone Resident, provided
that said power/electricity or services are
rendered, used or consumed within the
Freeport Zone; and
d. The lease of properties owned by Freeport
Zone-registered enterprises or Residents,
provided that such properties are located
within the subject Freeport Zones.
A freeport zone, or economic zone, is considered
as outside the customs territory of the Philippines
for VAT purposes, following the destination
principle, transactions within the same are
considered exempt from VAT, including those
made between PEZA-registered entities.
Summary of changes made in the TRAIN
LAW
1. Sale of Gold to BSP is NOT a zero-rated
transaction anymore but is already a VAT-
exempt transaction.
2. Transactions paid thru foreign currency
denominated sales are no longer considered
as zero rated.
3. A proviso for excluding some zero-rated
transactions upon establishment of
“Enhanced VAT refund system” has been
included.
When a person who was exempt from the VAT on
his importation subsequently sells (transfers or
exchanges) in the Philippines such imported
article to a non – exempt person or entity, the
purchaser (transferee or assignee) will be
required to pay the VAT
In fine, the above section applies when:
a. Tax-free importation of goods into the
Philippines by persons, entities or agencies
exempt from tax;
b. Where such goods are subsequently sold,
transferred or exchanged in the Philippines;
c. To non-exempt persons or entities;
d. The purchasers, transferees or recipients
shall be considered the importers thereof;
and
e. Who shall be liable for any internal revenue
tax on such importation.
Illustration:
Xavi Passing Academy, is a tax exempt entity who
imported high – end soccer balls. Xavi Passing
Academy, Inc. then sold it to Diego Dribblers, Inc.
a non –exempt entity. Diego has to pay for the
VAT. However, Diego having paid the VAT on his
purchase can claim the VAT paid as creditable
input taxes.
7. VAT-Exempt Transactions
a) VAT exempt transactions; in general;
enumeration
▪ These refer to the sale of goods or properties
and/or services and the use or lease of
properties that is not subject to VAT. The
person making the exempt sale of goods,
properties or services shall not bill or pass on
any output tax to his customers because the
said transaction is not subject to VAT.
However, the seller is not allowed to credit
the VAT (input tax) passed to him on his
purchases of taxable goods, properties or
services, because he has no output tax to
deduct it from.(Sec. 109, NIRC)
▪ In other words, since the seller is not subject
to output tax, it is likewise not allowed any
tax credit of input tax from purchases.
Difference between VAT zero-rated vs.
VAT-exempt sales
Basis Zero-rated Exempt
Nature of Taxable, but Not taxable, not
transaction does not result subject to output
in an output tax tax
VAT- Required Optional
registration
546
 Basis Zero-rated Exempt against
Input tax The input VAT The seller in an any output.
on the exempt VAT payable (120k) Since this
purchases of a transaction is not (Excess/refund) input arises
VAT-registered entitled to any from a zero
person with input tax on his –rated sale
zero-rated sales purchases this can be
may be allowed despite the refunded.
as tax credits or issuance of a VAT
refunded invoice or receipt A VAT-registered person is given the option under
Sec. 109 either to:
Tax credit Can claim or Cannot avail of
refund enjoy tax tax credit or
1) Be VAT-exempt under Sec. 109(1); or
credit/refund refund which may
2) Be subject to VAT. But such election shall be
result in
increased prices irrevocable for a period of three years from
the quarter the election was made.
Example: Company A sells and exports bags (zero
rated) made out of emptied tetra packs and Exempt person vs. Exempt transaction
exports them to Europe. In 2018, it made total
Exempt Person Exempt Transaction
sales of Php 2M. It also bought a delivery van
Transactions that are Exemption on the
costing Php 1M from a VAT registered supplier.
ordinarily subject to VAT transactions (not on the
Aside from exporting bags, the said company also were not subjected to person) which are
sells fashion magazines (VAT exempt 12% VAT because of the specifically exempt by
transaction). As part of its operations, it bought status of one of the law.
Php 500,000 worth of glossy papers. Company A parties.
was able to sell magazines amounting to Php Hence, a person even
2.5M. Exemption is on the registered as VAT can
parties either they are: still have VAT –exempt
Q: How much is the VAT payable (excess of input ● Exempted by a sales. That it would also
special law be possible that one
or refund)?
● Exempted by entity can have one
international transaction subject to
Transaction Sol. VAT Remarks agreement VAT and one that is not
subject to VAT as this is
Export Sale of Php 2M - Zero rated
specified by law.
bags x 0% Sales VAT
is 0%
Examples:
Sale of Php - VAT
Groceries selling can
magazines 2.5M x exempt
goods (subject to 12%)
0 transaction
and also selling raw
no Output
meat and vegetable
VAT
(VAT exempt)
Purchase of Php 1M 120k Input tax
Delivery Truck x12% can be Bookstores selling
credited school supplies (subject
since it is to 12%) which also sells
related to a of books, magazines
Zero Rated except classified ads
Sale (VAT exempt)
Purchase of Php 0 The VAT Hence it is not available Applicable to all
glossy papers 500k x passed on to all taxpayers taxpayers provided such
0 cannot be transaction fall within
credited (Sec.109)

547
▪ The object of exemption from the VAT may
either be the transaction itself or any of the
parties to the transaction.
▪ An exempt transaction, on the one hand,
involves goods or services which, by their
nature, are specifically listed in and expressly
exempted from the VAT under the Tax Code,
without regard to the tax status – VAT-
exempt or not – of the party to the
transaction. Indeed, such transaction is not
subject to VAT, but the seller is not allowed
any tax refund of or credit for any input taxes
paid.
▪ An exempt party, on the other hand, is a
person or entity granted VAT exemption
under the Tax Code, a special law or an
international agreement to which the
Philippine is a signatory, and by virtue of
which its taxable transactions become
exempt from the VAT. Such party is also not
subject to the VAT, but may be allowed a tax
refund of or credit for input taxes paid,
depending on its registration as a VAT or non-
VAT taxpayer. (CIR vs. Seagate Technology
(Phils), G.R. No. 153866, February 11, 2005)
Exempt transactions, enumerated
(Sec. 109 as implemented by Sec. 4.109-1 (B) of RR
16-05 as amended by TRAIN LAW – RA 10963, and as
implemented by RR 13-2018)
a. Sale or importation of agricultural and marine
food products in their original state, livestock
and poultry of a kind generally used as, or
yielding or producing foods for human
consumption; and breeding stock and genetic
materials therefor.
Products classified under this paragraph shall
be considered in their original state even if
they have undergone the simple process of
preparation or preservation for the market,
such as freezing, drying, salting, broiling,
roasting, smoking or stripping. Polished
and/or husked rice, corn grits, raw cane and
molasses, ordinary salt, and copra shall be
considered in their original state.
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 (except specialty feeds for race horses,
fighting cocks, aquarium fish, zoo considered
as pets);
c. Importation of personal and household
effects belonging to the residents of the
Philippines returning from abroad and non-
resident citizens corning to resettle in the
Philippines: Provided, that such 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
belonging to persons coming to settle in the
Philippines or Filipinos or their families and
descendants who are now residents or
citizens of other countries, such parties
hereinafter referred to as overseas Filipinos,
in quantities and of the class suitable to the
profession, rank or position of the persons
importing said items, for their own use and
not for barter or sale, accompanying such
persons, or arriving within a reasonable time;
Provided, that the Bureau of Customs may,
upon the production of satisfactory evidence
that such persons are actually coming to
settle in the Philippines and that the goods
are brought from their former place of abode;
Provided further, that vehicles, vessels,
aircrafts, machineries and other similar goods
for use in manufacture, shall not fall within
this classification and shall therefore be
subject to duties, taxes and other
charges.(Sec. 109(1)(D) of NIRC as amended by
RA 109163, RR 13-2018)
e. Services subject to percentage tax under Title
V;
548
 Note: Change in Threshold for Services
Subject to Percentage Tax under TRAIN Law:
Lease of goods or properties or the
performance of services of non-VAT-
registered persons, other than the
transactions mentioned in paragraph (A) to
(BB) of Sec. 109(1) of the Tax Code, the
gross annual sales and/or receipts of which
does not exceed the amount of
P3,000,000.00;
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 private
educational institutions, duly accredited by
the Department of Education (DEPED), the
Commission on Higher Education (CHED), the
Technical Education and Skills Development
Authority (TESDA) 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 under Presidential Decree
No. 529;
l. Sales by agricultural cooperatives duly
registered with the Cooperative Development
Authority to their members as well as sale of
their produce, whether in its original state or
processed form, to non-members; their
importation of direct farm inputs,
machineries /and equipment, including spare
parts thereof, to be used directly and
exclusively in the production and/or
processing of their produce;
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:
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;
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, or real
property utilized for low-cost and socialized
housing as defined by Republic Act No. 7279,
otherwise known as the Urban Development
and Housing Act of 1992, and other related
laws, residential lot valued at P1,919,500 and
below, house and lot, and other residential
dwellings valued at now P3,199,200and
below. (R.R. 16-2011, January 1, 2012)
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 by R.A.7279, sale of house and lot,
and other residential dwellings with selling
price of not more than P2,000,000.00;
Provided, further, that every 3 years
thereafter, the amount therein stated shall be
adjusted to its present value using Consumer
Price Index, as published by Philippine
Statistics Authority (TRAIN Law);
549

q. Lease of a residential unit with a monthly
rental not exceedingP15,000 (TRAIN Law);
r. Sale, importation, printing or publication of
books and any newspaper, magazine, review
or bulletin which appears at regular intervals
with fixed prices for subscription and sale and
which is not devoted principally to the
publication of paid advertisements;
s. Transport of passengers by international
carriers; (As amended by RA No. 10378)
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; Provided, that the
fuel, goods, and supplies shall be used for
international shipping or air transport
operations (TRAIN Law);
v. Services of bank, non-bank financial
intermediaries performing quasi-banking
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;(TRAIN Law)
x. Transfer of property pursuant to Section
40(C)(2) of the NIRC, as amended;(TRAIN
Law)
y. Association dues, membership fees, and
other assessments and charges collected by
homeowners associations and condominium
corporations;(TRAIN Law)
z. Sale of gold to the Bangko Sentral ng Pilipinas
(BSP);(TRAIN Law)
aa. Sale of drugs and medicines prescribed for
diabetes, high cholesterol, and hypertension
beginning January 1, 2019; and(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
gross annual sales and/or receipts do not
exceed the amount of Three million
pesos (P3,000,000).(TRAIN Law)
Note:
Self-employed individuals and professionals
availing of the 8% on gross sales and/or receipts
and other non-operating income, under Sections
24 (A)(2)(b) and 24 (A)(2)(c)(2) of the NIRC shall
also be exempt from the payment of twelve
(12%) VAT
Rule on exempt sale of real property used
in business – Sec. 14 of RR 4-07, which
amended RR 16-05
Even if real property is not primarily held for sale
to customers or held for lease in the ordinary
course of trade or business but the same is used
in the trade or business of the seller, the sale
thereof shall be subject to VAT being a
transaction incidental to the taxpayer’s main
business.
🕮 However, in the case of CIR vs. Magsaysay
Lines, the sale of real properties that
constitute an isolated transaction, such as
sale of real properties that are used by
entities but not held primarily for sale or
lease, are not subject to VAT. They were not
used either in the course of trade or business.
The transactions were not considered
incidental to seller’s main business. (CIR vs.
Magsaysay Lines, G.R. No. 146984, July 28, 2006)
550

8. Input and Output Tax
a) Definition
Output Tax
The value-added tax due on the sale or lease of
taxable goods or properties or services by any
person registered or required to register. (Sec. 110
(A)(3)(B), NIRC)
It is a liability to be paid by the seller of goods
and /or services to the BIR. In short, output tax
is derived only from sales or transaction deemed
sales which are vatable at 12%.
Input Tax
The value-added tax due from or paid by a VAT-
registered person in the course of his trade or
business on importation of goods or local
purchase of goods or services, including lease or
use of property, from a VAT-registered person. It
shall also include the transitional input tax. (Sec.
110 (A)(3)(B), NIRC)
b) Sources of Input Tax
Any input tax evidenced by a VAT invoice or
official receipt issued in accordance with Section
113 hereof on the following transactions shall be
creditable against the output tax (Sec. 110, NIRC)
(1) Purchase or Importation of Goods
(i) For sale; or
(ii) For conversion into or intended to form
part of a finished product for sale
including packaging materials; or
(iii) For use as supplies in the course of
business; or
(iv) For use as materials supplied in the sale
of service; or
(v) For use in trade or business for which
deduction for depreciation or
amortization is allowed under this Code.
(2) Purchase of real properties for which a
VAT has actually been paid
(3) Purchase of services in which VAT has
actually been paid
(4) Transactions deemed sale
(5) Presumptive Input
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, shall be
allowed a presumptive input tax, creditable
against the output tax, equivalent to four percent
(4%) of the gross value in money of their
purchases of primary agricultural products which
are used as inputs to their production.
‘Processing' shall mean 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.
(Sec. 111(B), NIRC)
(6) Transitional Input
A person who becomes liable to value-added tax
or any person who elects to be a VAT-registered
person shall, subject to the filing of an inventory,
be allowed input tax on his beginning inventory
of goods, materials and supplies equivalent to
two percent (2%) of the value of such
inventory or the actual value-added tax paid on
such goods, materials and supplies, whichever is
higher, which shall be creditable against the
output tax.
Prior payment of taxes is not necessary
before a taxpayer could avail of the transitional
input tax credit, all that is required from the
taxpayer is to file a beginning inventory with the
BIR.
The contention that the 8% transitional input tax
credit in Section 105 presumes that a previous tax
was paid, whether or not it was actually paid,
551
requires a transaction where a tax has been
imposed by law, is utterly without basis in law.
The rationale behind the provisions of Section
105 was aptly elucidated in the Decision sought
to be reconsidered, thus:
It is apparent that the transitional input tax credit
operates to benefit newly VAT-registered
persons, whether or not they previously paid
taxes in the acquisition of their beginning
inventory of goods, materials and supplies.
During that period of transition from non-VAT to
VAT status, the transitional input tax credit serves
to alleviate the impact of the VAT on the
taxpayer. At the very beginning, the VAT-
registered taxpayer is obliged to remit a
significant portion of the income it derived from
its sales as output VAT. The transitional input tax
credit mitigates this initial diminution of the
taxpayer’s income by affording the opportunity to
offset the losses incurred through the remittance
of the output VAT at a stage when the person is
yet unable to credit input VAT payments(Fort
Bonifacio Development Corporation vs. CIR,G.R. No.
158885, April 2,2009)
Claim for Input Tax on Capital Goods
Capital goods or properties – refers to goods
or properties with estimated useful life greater
than 1 year and treated as depreciable assets
used directly or indirectly in the production or sale
of taxable goods or service (Section 4.110-3, RR 16-
05 as amended by RR 13-2018)
(1) For capital goods where aggregate costs
exceed 1 Million regardless of the acquisition
cost of each capital good, the input VAT shall
be spread even evenly over a period of sixty
(60) months or useful life, whichever is lower,
and the claim for input tax credit will
commence in the calendar month when the
capital good is acquired;
(2) If aggregate acquisition cost does not exceed
1Million - the total input taxes will be
allowable as credit against output tax in the
month of acquisition.
Aggregate Useful life is Amortize?
Cost of CG> 5 years or
Php 1M (net more?
of VAT
Yes Yes Yes over 60
months
Yes No Yes over
equivalent no.
of months
No. Regardless No.
Provided, further, that the amortization of
the input VAT shall be only allowed until
December 31, 2021 after which taxpayers with
unutilized input VAT on capital goods purchased
or imported shall be allowed to apply the same as
scheduled until fully utilized. (Sec. 110, NIRC, as
amended by TRAIN Law)
If the depreciable capital good is sold/transferred
within a period of five (5) years or prior to the
exhaustion of the amortizable input tax thereon,
the entire unamortized input tax on the capital
goods sold/transferred can be claimed as input
tax credit during the month/quarter when the
sale or transfer was made.
c) Persons who can avail input tax credits
The input tax credit on importation of goods or
local purchases of goods, properties or services
by a VAT-registered person shall be creditable:
a. To the importer upon payment of VAT prior
to the release of goods from customs
custody;
b. To the purchaser of the domestic goods or
properties upon consummation of the sale; or
c. To the purchaser of services or the lessee or
licensee upon payment of the compensation,
rental, royalty or fee. (Sec. 4.110-2, RR 16-
2005)
Provided, that the invoicing requirements was
completely complied with. (Sec. 113)
Non - compliance shall disallow the input tax for
crediting regardless if it was purchased from a
VAT registered supplier.
552
d) Determination of output/input tax, VAT
payable, excess input tax credits
1. Determination of Output Tax (Section
4.110-6, RR 16-2005 )
a. Sale of goods - Computed by multiplying the
gross selling price by 12%; (regardless if
such amount is collected or not)
b. Sale of services – computed by multiplying the
gross receipts by 12%
c. Amount of VAT is erroneously billed in the
invoice - the total invoice amount shall be
presumed to be comprised of the gross selling
price/gross receipts plus the correct amount
of VAT.
2. Determination of Creditable Input Tax
(Section 4.110-5, RR 16-2005)
The amount of input taxes creditable during a
month or quarter shall be determined by adding
all creditable input taxes arising from transactions
(see 11(b) Sources of input tax) during the month
or quarter plus any amount of input tax carried-
over from the preceding month or quarter,
reduced by the amount of claim for VAT refund
or tax credit certificate (whether filed with the
BIR, DOF, Board of Investments or the BOC) and
other adjustments, such as purchases returns
and allowances, input tax attributable to exempt
sales and input tax to sales subject to final VAT
withholding.
Allocation of Input Tax on Mixed
Transactions (Section 4.110-4, RR 16-2005)
All the input taxes that can be directly attributed
to transactions subject to VAT may be recognized
for input tax credit. Input taxes that can be
directly attributable to VAT taxable sales of goods
and services to the Government shall not be
credited against output taxes arising from sales
to non-Government entities;
Amount of input tax that can
Transaction
be credited
VATable Sales Actual purchase of goods and
service paid x 12% + input tax on
importation (if any) + Transitional
Input Tax (if applicable)
+Presumptive Input Tax (if
applicable) + amortized portion of
input tax on CG
VAT exempt Not allowed to credit any input tax
sales
Zero rated Sale Same as VATable Sales but input
tax can be refunded under Sec. 112
Sales to Only up to 7% of amount of sales
Government to government (Standard Input
VAT)
(Section 4.110-5, RR 16-2005)
If any input tax cannot be directly attributed to
either a VAT taxable or VAT-exempt transaction,
the input tax shall be pro-rated to the VAT
taxable and VAT-exempt transactions and
only the ratable portion pertaining to
transactions subject to VAT may be
recognized for input tax credit.
The input tax attributable to VAT-exempt sales
shall not be allowed as credit against the output
tax but should be treated as part of cost or
expense.
VAT Payable (Excess Output) or Excess
Input Tax (Section 4.110-7, RR 16-2005)
a. Output tax exceeds the input tax - the
excess shall be paid by the VAT-registered
person.
b. Input tax inclusive of input tax carried
over from the previous quarter exceeds
the output tax - the input tax inclusive of
input tax carried to the succeeding quarter or
quarters.
⮚ Any input tax attributable to zero-rated sales
by a VAT-registered person may at his option
553
 be refunded or applied for a tax credit
certificate.
⮚ Unutilized creditable input taxes attributable
to zero-rated sales can only be recovered
through the application for refund or tax
credit. Hence, unapplied input taxes cannot
be treated outright as deductible expense for
income tax purposes. (RMC 57-2013 and BIR
Ruling No. 123-2013)
9. Tax Refund or Tax Credit
Grounds
In a nutshell, there are only two grounds when
taxpayer may claim for a VAT refund, to wit:
▪ Excess input VAT attributable to effectively
zero-rated sales (Sec. 112[a]), and
▪ Excess input VAT at the time of cancellation
of the VAT registration (Sec. 112[b]).
Excess input vs. Excessively collected tax
The distinction between "excess input tax" and
"excessively collected taxes" can be understood
further by examining the production process vis-
a-vis the VAT system. In Commissioner of
Internal Revenue v. San Roque:
The input VAT is not "excessively" collected as
understood under Section 229 because at the
time the input VAT is collected the amount paid
is correct and proper. The input VAT is a tax
liability of, and legally paid by, a VAT-registered
seller of goods, properties or services used as
input by another VAT-registered person in the
sale of his own goods, properties, or services.
This tax liability is true even if the seller passes
on the input VAT to the buyer as part of the
purchase price. The second VAT-registered
person, who is not legally liable for the input VAT,
is the one who applies the input VAT as credit for
his own output VAT (CE Luzon Geothermal Power
Co., Inc. v. Commissioner of Internal Revenue,G.R. No.
197526, July 26, 2017)
Requirements to be submitted for a claim
for VAT refund
1. The taxpayer is engaged in sales which are
zero-rated or effectively zero-rated;
2. The taxpayer is VAT-registered;
3. The claim must be filed within two years after
the close of the taxable quarter when such
sales were made;
4. The input taxes are incurred or paid;
5. The input taxes are not transitional input
taxes;
6. The input taxes have not been applied
against output taxes during and in the
succeeding quarters;
7. The input taxes claimed are attributable to
zero-rated or effectively zero-rated sales;
8. In certain types of zero-rated sales, the
acceptable foreign currency exchange
proceeds thereof had been duly accounted
for in accordance with BSP rules and
regulations;(Secs. 106[A][2][a][1] and [2]; Sec.
106[B]; Secs 108[B][1] and [2])
9. Where there are both zero-rated and
effectively zero-rated sales and taxable or
exempt sales, and the input taxes cannot be
directly and entirely attributable to any of
these sales, the input taxes shall be
proportionately allocated on the basis of sales
volume.(Intel Technology Philippines vs. CIR,
G.R. No. 166732, April 27, 2007)
Who may claim for refund?
The following can avail of refund or tax credit:
1. A VAT-registered person whose sales of
goods, properties or services are zero-rated
or effectively zero-rated (Sec. 4.112-1 [a], RR
16-05).
The input tax that may be subject of the claim
shall exclude the portion of input tax that has
been applied against the output tax. The
application should be filed within two (2) years
after the close of the taxable quarter when such
sales were made.
In case of zero-rated sales, the payments for the
sales must have been made in acceptable foreign
554
currency duly accounted for in accordance with
the BSP rules and regulations.
Where the taxpayer is engaged in both zero-rated
or effectively zero-rated sales and in
taxable(including sales subject to final
withholding VAT) or exempt sales of goods,
properties or services, and the amount of
creditable input tax due or paid cannot be directly
and entirely attributed to any one of the
transactions, only the proportionate share of
input taxes allocated to zero-rated or effectively
zero-rated sales can be claimed for refund or
issuance of a tax credit certificate.
2. VAT-registered person whose registration
has been cancelled due to retirement from or
cessation of business, or due to changes in or
cessation of status under Sec. 106 (C) of the
Tax Code, within two (2) years from the date
of cancellation (Sec. 4.112-1 [b] of RR 16-05).
 Since the seller is the one directly liable
for VAT, the Supreme Court held that the
Seller him/her/itself must claim for
refund, and thereafter return the same to
the buyer. (Contex vs. CIR G.R. No. 151135,
July 2, 2004)
 The taxpayer must prove the following
for a tax refund to prosper:
(1) That it is a VAT-registered entity and
(2) It must substantiate the input VAT
paid by purchase invoice or official
receipt (Team Energy Corporation vs.
CIR,G.R. No. 197663, March 14, 2018)
Enhanced VAT Refund system
The Commissioner shall grant a refund or issue
the tax certificate for creditable input taxes within
90 days from the date of submission of the official
receipts or invoices and other documents in
support of the application filed in accordance with
Section (A) and (B) hereof; Provided, That should
the Commissioner find that the grant is not
proper, the Commissioner must state in writing
the legal and factual basis for denial.
In case of full or partial denial of the claim for tax
refund, the taxpayer affected may, within 30 days
from the receipt of the decision denying the
claim, appeal the decision with the Court of Tax
Appeals: Provided, however, That failure on the
part of any official, agent, or employee of the BIR
to act on the application within 90-day period
shall be punishable under Section 269 of this
Code. (Sec. 112, NIRC, as amended)
Five percent of the total VAT collection of the BIR
and BOC from the immediately preceding year
shall be automatically appropriated annually and
shall be treated as a special account in the
General Fund or as trust receipts for the purpose
of funding claims for VAT refund.
Period to file claim for refund
1. An administrative claim must be filed
with the CIR within two years after the
close of the taxable quarter when the zero-
rated or effectively zero-rated sales were
made.
2. The CIR has 90 days (as amended) from
the date of submission of complete
documents in support of the administrative
claim within which to decide whether to grant
a refund or issue a tax credit certificate. The
90-day period may extend beyond the two-
year period from the filing of the
administrative claim if the claim is filed in the
later part of the two-year period. If the 90-
day period expires without any decision from
the CIR, then the administrative claim may be
considered to be denied by inaction.
RR 13-2018
The enhanced VAT refund system grants and
pays refunds of creditable input tax within ninety
(90) days from the filing of the VAT refund
application with the Bureau. All applications filed
from January 1, 2018 shall be processed and
decided within ninety (90) days from the filing of
the VAT refund application.
However, all claims for refund/tax credit
certificate filed prior to January 1, 2018 shall
still be governed by the one hundred
twenty (120)-day processing period.
555

All pending VAT refund claims as of December 31,
2017 shall be fully paid in cash by December 31,
2019.
Provided, That Department of Finance (DOF)
shall establish a VAT refund center in the BIR and
in the Bureau of Customs (BOC) that will handle
the processing and granting of cash refunds of
creditable input tax.
RR No. 26-2018
The 90-day period to process and decide shall
start from the filing of the application/claim for
refund up to the release of the payment of the
VAT refund. Provided, that the claim/application
is considered to have been filed only upon
submission of the official receipts or invoices and
other documents in support of the application as
prescribed under pertinent revenue issuance.
Provided further, in the event that the 90-day
period has lapsed without having the refund
released to the taxpayer-claimant, the VAT
refund claim may still continue to be processed
administratively. Provided, however, that the BIR
official, agent or employee who was found to
have deliberately caused the delay in the
processing of the VAT refund claim may be
subjected to penalties.
The enhanced VAT refund system also
implements a risk-based post-audit, as well as an
electronic invoicing and receipts system.
Other implications:
Upon the successful establishment and
implementation of an Enhanced VAT Refund
System, the following shall be subject to the
twelve percent (12%) VAT and no longer be
subject to zero percent (0%) VAT rate:
• Processing, manufacturing or repacking
goods for other persons doing business
outside the Philippines, which goods are
subsequently exported, where the services
are paid for in acceptable foreign currency
and accounted for in accordance with the
rules and regulations of the BSP;
• Services performed by subcontractors and/or
contractors in processing, converting, or
manufacturing goods for an enterprise whose
export sales exceed seventy percent (70%)
of the total annual production; (Sec.33, RA No.
10963 – TRAIN)
3. Failure to comply with the 90-day waiting
period violates a mandatory provision of law.
It violates the doctrine of exhaustion of
administrative remedies and renders the
petition premature and thus without a cause
of action, with the effect that the CTA does
not acquire jurisdiction over the taxpayer’s
petition. Philippine jurisprudence is replete
with cases upholding and reiterating these
doctrinal principles. (San Roque case, supra)
4. A judicial claim must be filed with the CTA
within 30 days from the receipt of the CIR’s
decision denying the administrative claim.
When a taxpayer prematurely files a judicial
claim for tax refund or credit with the CTA
without waiting for the decision of the
Commissioner, there is no "decision" of the
Commissioner to review and thus the CTA as
a court of special jurisdiction has no
jurisdiction over the appeal. (San Roque case,
supra)
Clearly, the thirty (30)-day statutory period
within which to file a petition for review is
jurisdictional. Non-compliance bars the Court
of Tax Appeals from taking cognizance of the
appeal and determining the veracity of the
tax refund or credit claim (CE Casecnan Water
and Energy Company, Inc. v. Commissioner of
Internal Revenue, G.R. No. 203928, July 22, 2015)
5. All taxpayers, however, can rely on BIR
Ruling No. DA-489-03 from the time of its
issuance on 10 December 2003 up to its
reversal by this Court in Aichi on 6 October
2010, as an exception to the mandatory and
jurisdictional 120+30 day periods. (Mindanao
ii Geothermal Partnership vs. CIR, G.R. No.
193301, March 11, 2013)
556
San Roque Doctrine Periods to file a VAT refund PRIOR to
TRAIN vs. VAT refund under TRAIN
In a claim for refund or credit of "excess" input (Enhance VAT Refund)
VAT under Sec. 110(B) (Tax Credits) and Sec.
112(A) (Refunds or Tax Credits of Input Tax), the Prior TRAIN TRAIN Law
input VAT is not "excessively" collected as
understood under Sec. 229. At the time of Period to file Admin Claim
payment of the input VAT the amount paid is the
Same, within 2 years from the close of sale of
correct and proper amount. Under the VAT the taxable quarter
Period to Decide on the Claim
System, there is no claim or issue that the input
VAT is "excessively" collected, that is, that the 120 days from date of 90 days from date
input VAT paid is more than what is legally due. receipt of the written of receipt of the
The person legally liable for the input VAT cannot claim for refund written claim for
claim that he overpaid the input VAT by the mere refund
Deemed Denial, applicable?
existence of an "excess" input VAT.
Yes, after the lapse of No, this has been
The term "excess" input VAT simply means that the 120 days to decide deleted by TRAIN
the input VAT available as credit exceeds the on the refund claim Law
output VAT, not that the input VAT is excessively taxpayer. Such inaction
collected because it is more than what is legally shall be considered as
due. Thus, the taxpayer who legally paid the “deemed denial”
input VAT cannot claim for refund or credit of the Action after lapse of the period to decide
input VAT as "excessively" collected under
The taxpayer may The taxpayer has
Section 229. (CIR v. San Roque Power Corporation, elevate the refund no recourse to
G.R. No. 187485, February 12, 2013) claim to the CTA within elevate, taxpayer
30 days after the lapse shall wait or compel
A claim for tax refund or credit, like a claim for of the 120 day period the BIR officer to
tax exemption, is construed strictly against the to decide decide on the claim.
taxpayer. One of the conditions for a judicial Should there be a denial by the BIR on
claim of refund or credit under the VAT System is the claim
compliance with the 120 (now 90)+30 day Same, taxpayer must elevate its claim to the
mandatory and jurisdictional periods. Thus, strict CTA within 30 days after the receipt of the
compliance with the 120+30 day period is denial.
necessary for such a claim to prosper, whether
before, during, or after the effectivity of the Atlas 10. Filing of Returns and Payment
doctrine, except for the period from the issuance
of BIR Ruling No. DA-489-03 on 10 December In general, every person liable to pay the VAT
2003 to 6 October 2010 when the Aichi doctrine imposed under this Title shall file a quarterly
was adopted, which again reinstated the 120+30 return of the amount of his gross sales or receipts
day period as mandatory and jurisdictional (CIR within 25 days following the close of the quarter.
vs. San Roque Power Corporation/Taganito Mining Provided however that VAT-registered persons
Corporation vs. Commissioner of Internal Revenue G.R. shall pay the VAT on a monthly basis: Provided
187485, October 8, 2013; Steag State Power vs. CIR, finally, that beginning January 1, 2023, the filing
G.R. No. 205282, January 14, 2019). and payment shall be done within 25 days after
the close of taxable quarter. (Sec.114, NIRC as
amended by Sec.37 of RA No. 10963 - TRAIN).

557
Monthly VAT Return filing and payment
● Manual Taxpayers - every 20th day following
the end of the month (filing and payment)
Quarterly VAT returns
Every 25th day following the end of the quarter.
(Both EFPS and manual taxpayers, filing and
payment).
Beginning January 1, 2023, the filing and
payment shall be done within 25 days after the
close of taxable quarter. (TRAIN Law)
The term "taxable quarter" shall mean the
quarter that is synchronized to the income tax
quarter of the taxpayer (i.e., the calendar quarter
or fiscal quarter).
Amounts reflected in the monthly VAT
declarations for the first two (2) months of the
quarter shall still be included in the quarterly VAT
return which reflects the cumulative figures for
the taxable quarter. Payments in the monthly VAT
declarations shall, however, be credited in the
quarterly VAT return to arrive at the net VAT
payable or excess input tax/over-payment as of
the end of a quarter. (Sec. 4.114-1, RR 16-2005)
Strict Compliance with substantiation
requirement
Strict compliance with substantiation and
invoicing requirements is necessary considering
VAT's nature and VAT system's tax credit method,
where tax payments are based on output and
input taxes and where the seller's output tax
becomes the buyer's input tax that is available as
tax credit or refund in the same transaction. It
ensures the proper collection of taxes at all stages
of distribution, facilitates computation of tax
credits, and provides accurate audit trail or
evidence for BIR monitoring purposes (Team
Energy Corporation vs. CIR,G.R. No. 197663, March
14, 2018)
Where to file and pay
a. Manual Filing - AAB under the jurisdiction
of the Revenue District/BIR Office where the
taxpayer (head office of the business
establishment) is required to be registered.
For NIL returns, BIR mandates the use of the
electronic BIR (eBIR) forms by non-EFPS.(RR
6-2014)
b. EFPS - shall comply with the provisions of
the EFPS Regulations (Filing and payment is
thru EFPS to avoid wrong venue filing and
payment)
Attachments to VAT Declarations/Returns
Under Revenue Regulation 1-2012, effective
January 1, 2012, ALL VAT-registered taxpayers or
persons liable to VAT such as manufacturers,
wholesalers, service providers, among others,
regardless of the amount of the transaction, must
submit the following:
i. Summary list of sales (SLS)
ii. Summary list of purchases
(SLP)Summary list of Importations
(SLI)
Non-submission covers late submission and
submission of erroneous, incomplete,
falsified information in a SLS/SLP - P1,000 for
each failure but aggregate should not exceed
P25,000.
Non-submission of both the SLS and SLP is
considered two separate violations.(RMC 51-
09, September 15, 2009)
d. Final Withholding VAT on Sales to
Government
The Government or any of its political
subdivisions, instrumentalities or agencies,
including government-owned or -controlled
corporations (GOCCs) shall, before making
payment on account of each purchase of goods
and services which are f are subject to the value-
added tax imposed in Sections 106 and 108 of
558
this Code, deduct and withhold the value-added D. TAX REMEDIES UNDER THE NATIONAL
tax imposed in Sections 106 and 108 of this Code, INTERNAL REVENUE CODE OF 1997, AS
deduct and withhold a final value-added tax AMENDED
at the rate of five percent (5%) of the gross
payment thereof: Provided, That the payment Notes to Bar Examinees:
for lease or use of properties or property rights to
nonresident owners shall be subject to ten 1. Assessment of Internal Revenue Taxes
percent (10%) withholding tax at the time of a) Procedural Due Process in Tax
payment. For purposes of this Section, the payor Assessments
or person in control of the payment shall be b) Requisites of a Valid Assessment
considered as the withholding agent. c) Tax Delinquency and Tax Deficiency
d) Prescriptive Period for Assessment
The value-added tax withheld under this Section (1) False Returns vs. Fraudulent
shall be remitted within ten (10) days following Returns, vs. Non-Filing of Returns
the end of the month the withholding was (2) Suspension of Statute of Limitations
made.(Sec.114, NIRC)
2. Taxpayer’s Remedies
e. Administrative and Penal Sanctions a) Protesting an Assessment
(1) Period to File Protest
Power of the Commissioner to Suspend the (2) Submission of Supporting
Business Operations of a Taxpayer. - The Documents
Commissioner or his authorized representative is (3) Effect of Failure to File Protest
hereby empowered to suspend the business (4) Action of the Commissioner on the
operations and temporarily close the business Protest Filed
establishment of any person for any of the b) Compromise and Abatement of
following violations: Taxes
c) Recovery of Erroneously or Illegally
(a) In the case of a VAT-registered Person. - Collected

(1) Failure to issue receipts or invoices; 3. Government Remedies for Collection of

(2) Failure to file a value-added tax return as Delinquent Taxes
required under Section 114; or a) Requisites
Understatement of taxable sales or receipts by b) Prescriptive Periods
thirty percent (30%) or more of his correct
taxable sales or receipts for the taxable quarter. 4. Civil Penalties
a) Delinquency Interest and Deficiency
(b) Failure of any Person to Register as Required Interest
under Section 236. b) Surcharge
The temporary closure of the establishment shall c) Compromise Penalties
be for the duration of not less than five (5) days
and shall be lifted only upon compliance with As the above foregoing topics listed in the bar
whatever requirements prescribed by the syllabus are closely intertwined, the Committee
Commissioner in the closure order(Sec. 105,NIRC) has decided to merge and rearrange the topics in
the usual order as per actual practice to provide
for a clearer and holistic understanding of the
topics. Overview was provided, but the same is
discussed in the order of the syllabus.

559
1. Assessment of Internal Revenue Taxes
Tax Remedies
It refers to procedural steps that may be
undertaken by the government or a taxpayer for
the resolution of disputes concerning the levy or
imposition, assessment, collection, and refund of
taxes. (DOMONDON, Taxation, Tax Remedies
2014)
Basis
Power of the Commissioner to Make
Assessments and Prescribe Additional
Requirements for Tax Administration and
Enforcement (Section 6 of the NIRC)
1. Examination of return and determination of
tax due;
2. Use of the best evidence available;
3. Authority to conduct inventory taking,
surveillance and prescribe gross sales and
receipts if there is reason to believe that the
taxpayer is not declaring his correct income,
sales or receipts for internal revenue
purposes;
An assessment refers to the determination of
amounts due from a person obligated to make
payments. In the context of national internal
revenue collection, it refers to the determination
of the taxes due from a taxpayer under the
National Internal Revenue Code of 1997.
The assessment process starts with the filing of
tax return and payment of tax by the taxpayer.
The initial assessment evidenced by the tax
return is a self-assessment of the taxpayer. The
tax is primarily computed and voluntarily paid by
the taxpayer without need of any demand from
government. If tax obligations are properly paid,
the Bureau of Internal Revenue (BIR) may
dispense with its own assessment.
Tax collection must be preceded by a valid
assessment to allow the taxpayer to protest the
assessment, present their case and adduce
supporting evidence. Without complying with the
unequivocal mandate of first informing the
taxpayer of the government's claim, there can be
no deprivation of property, because no effective
protest can be made. (CIR vs. Unioil Corporation,
G.R. No. 204405, August 04, 2021, J. Hernando)
After filing a return, the Commissioner or his or
her representative may allow the examination of
any taxpayer for assessment of proper tax
liability. (CIR vs. Izone Technologies Philippines, CTA
EB Case No. 2295, May 05, 2022, citing Commissioner
vs. Fitness by Design, G.R. No. 215957, November 09,
2016).
An assessment, however, is not altogether
inconsequential; it is relevant in the proper
pursuit of judicial and extra judicial remedies to
enforce taxpayer liabilities and certain matters
that to enforce taxpayer liabilities and certain
matters that relate to it, such as the imposition of
surcharges and interest, and in the application of
statutes of limitations and establishment of tax
liens. (Tupaz v. Ulep, G.R. 127777, October 1, 1999)
NOTE: Concept of assessments: As the above
jurisprudence mentions, the filing of tax returns
is voluntary and self – assessing, meaning it is up
to the taxpayer whether to file their own taxes
and what amount will be reported in the tax
returns. The Bureau of Internal Revenue (BIR) in
turn, has the vital role of checking whether the
amounts reported by the taxpayer is correct
through an audit which is initiated through a BIR
document called Letter of Authority (LOA).
Any findings made shall be communicated to the
taxpayer by way of an Assessment. The
taxpayer in turn by way of due process responds
through filing of protest. (Id.)
a) Procedural Due Process in Tax
Assessment
1. Issuance of a Letter of Authority (LOA);
2. Tax Audit or Investigation;
3. Issuance of Notice of Informal Conference
(NIC) (RR 7-2018) / Notice of Discrepancy (NOD)
(RR No. 22-2020)
4. Issuance of Preliminary Assessment Notice
(PAN);
5. Issuance of Final Assessment Notice (FAN) or
Formal Letter of Demand (FLD); and
6. Administrative action / Inaction on Disputed
560
1. Issuance of a LOA
A LOA refers to a letter informing a taxpayer that
a certain revenue officer is authorized to examine
the books of accounts and other accounting
records of said taxpayer for the purpose of
verifying his tax liabilities during a taxable year.
There must be a grant of authority before any
revenue officer (RO) can conduct an examination
or issue an assessment... In the absence of such
an authority, the assessment or examination is a
nullity. Thus, the BIR cannot extend its
examination or assessment beyond the period
covered by the LOA. The LOA should cover a
taxable period not exceeding one taxable
year. The practice of issuing an LOA covering
audit of “unverified prior years” is prohibited. (CIR
vs. Sony Philippines, Inc. G.R. No. 178797, 17
November 2010)
The LOA must be served or presented to the
taxpayer within 30 days from its date of
issue; otherwise, it is null and void. (RAMO 1-
2000) (Dakay Construction & Development
Corporation vs. CIR, CTA EB Case No. 1294, 03 April
2017)
Under the Tax Code, the powers and duties of the
BIR include the assessment and collection of all
national internal revenue taxes, fees, and
charges. Thus, after a tax return has been filed,
the BIR is authorized to examine the taxpayer
and assess the correct amount of tax. However,
the failure of the taxpayer to file a return
shall not prevent the BIR from examining
the taxpayer. (Sec. 6(A) (as amended by RA 10963)
and Sec. 13 of the NIRC)
An LOA is premised on the fact that the
examination of a taxpayer who has already
filed his tax returns is a power that
statutorily belongs only to the CIR himself or
his duly authorized representatives. (Yan AN Cargo
Corp. vs. CIR, CTA Case No. 9865, June 01, 2021,
citing Medicard Philippines, Inc. v. CIR, G.R. No.
222743, April 5, 2017)
Apart from being a statutory requirement, an LOA
is equally needed even under the BIR's RELIEF
System because the rationale of requirement is
the same whether or not the CIR conducts a
physical examination of the taxpayer's records: to
prevent undue harassment of a taxpayer
and level the playing field between the
government' s vast resources for tax
assessment, collection and enforcement,
on one hand, and the solitary taxpayer's
dual need to prosecute its business while at
the same time responding to the BIR
exercise of its statutory powers. The balance
between these is achieved by ensuring that any
examination of the taxpayer by the BIR' s revenue
officers is properly authorized in the first place by
those to whom the discretion to exercise the
power of examination is given by the statute.
(Medicard Philippines, Inc. v. CIR, GR No. 222743, 5
April 2017)
Number of times a taxpayer may be
audited: Examination of books only once a
year
General rule: The books of account shall be
subject to examination and inspection only once
every taxable year. (Sec. 235, NIRC)
Exceptions:
1. Fraud, irregularity or mistakes, as determined
by the Commissioner;
2. The taxpayer requests for reinvestigation;
3. Verification of compliance with withholding tax
laws and regulations;
4. Verification of capital gains tax liabilities; and
5. In the exercise of the Commissioner’s power
under Section 5(B) to obtain information from
6. other persons in which case, another or
separate examination and inspection may be
made.
Mandatory Letter of Authority
RMC 75-2018 provides that prior approval and
authorization of the CIR or his duly authorized
representatives are needed, otherwise:
a. No Tax Assessments
b. No Assessment Functions or Proceedings
561
Any tax assessment without an LOA violates the
taxpayer’s right to due process and is, therefore,
“inescapably void”.
Requisites of a VALID LOA (PETTA) (RMO 44-
2010 and RMC 82-2022)
1. It must be issued by the proper approving
official
a. Regional Director (RD) – in cases of LOA
made by Regional District Offices (RDO)
b. Assistant Commissioner – Large
Taxpayer Services (ACIR – LTS) and its
divisions
c. Deputy Commissioner Legal and
Inspection Group – Enforcement Services
and
d. CIR or any authorized official – Task
Force and Special Teams
Example:
Ithiel Corp. was assessed for various deficiency
taxes for taxable year 2006. The tax audit was
conducted based on an undated LOA, which it
received on 10 Aug 2007.
PAN → FAN → Reinvestigation → Reassigned to
another RO → RO issued FDDA based on the
reinvestigation.
The CIR cannot dispense with the issuance of a
new LOA in case of reassignment of tax audit to
a new examiner. An assessment is void when the
officer who conducts the examination or
assessment has no authority to do so. (CIR v. Ithiel
Corp. CTA EB Case No. 1551 November 17, 2017)
2. It must not contain any manually – written
character, notation or erasure;
3. Must cover only one (1) taxable year,
except in tax fraud cases authorized by the
CIR or Deputy Commissioner and excise
taxes;
● A LOA should cover a taxable period not
exceeding one taxable year. The practice
of issuing LOA covering audit of
unverified prior years is hereby
prohibited. If the audit of a taxpayer shall
include more than one taxable period,
the other periods or years shall be
specifically indicated in the LOA. The
requirement to specify the taxable period
covered by the LOA is simply to inform
the taxpayer of the extent of the audit
and the scope of the revenue officer's
authority. Without this rule, a revenue
officer can unduly burden the taxpayer
by demanding random accounting
records from random unverified years,
which may include documents from as far
back as ten years in cases of fraud audit
(CIR vs. CSPCC, CTA EB Case No. 1668, July
16, 2018, citing CIR vs. De La Salle University,
Inc., G.R. No. 196596, November 9,2016).
Effect of issuing a LOA with Unverified Prior
Years
In the present case, the LOA issued to DLSU is
for Fiscal Year Ending 2003 and Unverified Prior
Years. The LOA does not strictly comply with RMO
43-90 because it includes unverified prior years.
This does not mean, however, that the entire LOA
is void. As the CTA correctly held, the assessment
for taxable year 2003 is valid because this taxable
period is specified in the LOA. DLSU was fully
apprised that it was being audited for taxable
year 2003. Corollarily, the assessments for
taxable years 2001 and 2002 are void for having
been unspecified on separate LOAs as required
under RMO No. 43-90. (Id.)
4. Must indicate the taxes covered by the
LOA;
5. Must indicate the names of authorized BIR
officers to audit said entity;
● In case officers are replaced, a new LOA
should be issued indicating the new
names of the officers handling said case.
(Nikken Philippines v. CIR, CTA EB No. 1569,
June 7, 2018)
562
Issuance of the LOA within 30 days is no
longer required A revalidation of an expired LOA shall require the
issuance of a new LOA, with the corresponding
The BIR issued Revenue Memorandum Circular notation thereto, including the previous LOA
(RMC) No. 82-2022, effectively removing the number and date of issue of said LOAs. (Dakay
requirement for the BIR to serve the LoA to the Construction & Development Corporation v. CIR, CTA
taxpayer within 30 days from issuance. However, EB No. 1294, 20 September 2016)
it must be emphasized that the LOA should be
served to the taxpayer immediately upon the Reassignment of the LOA
issuance or assignment thereof. The deletion of
this requirement shall not be an excuse for the This is the practice of reassigning or transferring
concerned RO to delay its service nor for a revenue officers, who are the original authorized
taxpayer to refuse its service or to question its officers named in the LOA, and subsequently
validity, in case the same is served beyond the substituting or replacing them with new revenue
30-day period. What is crucial is that the entire officers who do not have a new or amended LOA
audit process shall be completed within a period issued in their name.
of 180 days for RDO cases and 24O days for LT
cases from the date of issuance of the LOA. However, the Court, in the case of CIR vs.
McDonald’s Philippines, has already held that the
Reassignment or Transfer of a Revenue Officer
RMC 82-2022 RAMO No. l-2000
requires the issuance of a new or amended LOA
for the substitute or replacement Revenue Officer
A taxpayer can no It must be served to the
longer refuse the taxpayer within 30 days to continue the audit or investigation (CIR v.
service of an LoA or from its date of issuance; McDonald’s Philippines Realty Corporation, G.R No.
question its validity, in otherwise, it shall 242670, May 10, 2021)
case it is served beyond become null and void.
30 days. The taxpayer shall then The absence of a LOA is a violation of the
An LoA that remains have the right to refuse right to due process
unserved, or has been the service of this LOA,
served beyond 30 days unless the LOA is In the absence of such an authority, the
from the date of revalidated. assessment or examination is a nullity.
issuance, remains valid (Medicard v. CIR, G.R. No. 222743, April 5, 2017)
and enforceable,
provided that the
Cases which need not be covered by a valid
prescribed period to
complete the audit LOA:
process has not yet
expired. 1. Cases involving civil or criminal tax fraud
which fall under the jurisdiction of the tax
fraud division of the Enforcement Services;
Revalidation of the LOA and
2. Policy cases under audit by the Special Teams
Revalidation is done by issuing a new Letter of in the National Office. (RMO 36-99)
Authority or by just simply stamping the words
"Revalidated on ________________" on the face Due process in Issuance of LOA
of the copy of the Letter of Authority issued.
The CIR found discrepancies between Medicard’s
The LOA can be revalidated through the issuance Income Tax return and VAT Returns for 2006,
of a new LOA – once, if issued by the Regional informed Medicard and issued a Letter Notice.
Director; twice, if issued by the CIR. The Subsequently, the CIR issued a PAN and FAN
suspended LOA must be attached to the new against Medicard for deficiency VAT. After denial
issued LOA. (RMO 38-88)

563
of its protest, Medicard filed a Petition for Review
before the CTA which sustained the CIR’s
position. The CTA ruled that the determination of
deficiency VAT is not limited on the basis of the
issuance of a LOA alone as the CIR is granted vast
powers to perform examination and assessment
function. In lieu of the LOA, an LN was issued
informing Medicard of the discrepancies, a
procedure authorized under existing rules.
The absence of an LOA violated Medicard’s right
to due process. A FAN issued not on the basis of
an LOA is void. (Medicard Philippines, Inc. vs. CIR,
G.R. No. 222743, April 5, 2017)
Cases need not be covered by a valid LOA:
1. Cases involving civil or criminal tax fraud
which fall under the jurisdiction of the tax
fraud division of the Enforcement Services;
2. Policy cases under audit by the Special Teams
in the National Office.(RMO 36-99)
Effect of Issuance of the LOA:
Once a LOA has been issued to a taxpayer, the
taxpayer will be precluded to amend its
return.
 Letter Notices are NOT LOAs
examination of the
taxpayer
Definition
The Letter Notices (LN) are served by the
Bureau upon taxpayers found to have
underdeclared their sales or over claimed their
purchases and expenses, as part of the Bureau’s
enforcement efforts through the “no-contact-
audit approach”. These are considered notice of
audit or investigation in so far as the amendment
of any return is concerned which is the subject of
such LN. A taxpayer is therefore disqualified from
amending his return once an LN is served upon
him. (RMO No. 42-2003)
“No-contact-audit approach”
This is the process of computerized matching of
sales and purchases data contained in the BIR’s
RELIEF System, and other information filed by the
taxpayers. Even without conducting a detailed
examination of taxpayer’s books and records, the
computerized/manual matching of sales and
purchases/expenses will reveal discrepancies
which shall be communicated to the concerned
taxpayer through the issuance of Letter Notice
(LN) by the Commissioner. (Id.)

Letter Notice LOA Scope

(1) Only for the (1) Addressed to a
purpose of notifying revenue officer is Letter Notices (LNs) under the Relief System shall
the taxpayer that specifically required cover only the tax indicated therein on a given
discrepancy is found under the NIRC particular period or quarter. (Id.)
based on the BIR's before an
RELIEF examination of a Effects of issuance:
taxpayer may be had
(2) No such limitation (2) LOA is valid only ● this will not preclude the Commissioner from
as to validity until the period being issuing a Letter of Authority covering the
audited is prescribed. comprehensive audit of a taxpayer’s tax liability
(3 years) and have to ● this is not a waiver of the Commissioner’s right
be issued within 30 to look into the reasonableness of taxpayer’s
days to the TP to be operating and administrative expenses (Id.)
valid. ● the taxpayer to whom an LN was issued may
(3) Does not have a (3) LOA gives the voluntarily pay the deficiency income and VAT
period of examination revenue officer only a resulting from the findings of discrepancy in the
period of 10days from LN and shall be entitled to the abatement of
receipt of LOA to interests and penalties provided he pays the
conduct his deficiency taxes within 60 days from the receipt

564
 of the LN. Any payment of tax liabilities beyond
the 60-day period shall be assessed the
corresponding interests and penalties. (RMO No.
32-2005)
Effect of taxpayer’s refutation to the LN
● the concerned taxpayer will be given an
opportunity to reconcile its records with those
of the BIR within 120 days from the date of
issuance of the LN
● this will not entitle the taxpayer to abatement
of interest and penalties after the lapse of the
60-day period from LN issuance. If it remains
unsolved, the investigating officer shall
recommend the issuance of LOA to replace the
LN. (Id.)
Effect of failure to respond by the taxpayer
LNs served on taxpayers for which no response
was received or remained unserved due to failure
to locate the taxpayer shall be converted to LOAs
after the lapse of the 60-day period from LN
issuance. (Id.)
LN is not equivalent to an LOA
An LN is entirely different and serves a different
purpose than a LOA. Nor the Court may convert
the LN into the LOA required under the law even
if the same was issued by the CIR himself.
Upon receipt of the LN, a taxpayer may avail of
the BIR's Voluntary Assessment and Abatement
Program. If a taxpayer fails or refuses to avail of
the said program, the BIR may avail of
administrative and criminal remedies, particularly
closure, criminal action, or audit and
investigation. Since the law specifically requires
an LOA and RMO No. 32-2005 requires the
conversion of the previously issued LN to an LOA,
the absence thereof cannot be simply swept
under the rug, as the CIR would have it. (CIR vs,
MSEI Corporation, CTA EB Case No. 2044, October 29,
2020, citing Medicard v. CIR, G.R. No. 222743, April 5,
2017)
2. Tax Audit or Investigation
A Revenue Officer (RO) is allowed only 120 days
to conduct the audit and submit the required
report of investigation from the date of receipt of
an LOA by the taxpayer. If the RO is unable to
submit his final report of investigation within the
120-day period, he must then submit a Progress
Report to his Head of Office, and surrender the
LOA for revalidation.
BIR Audit Program
The report of investigation/verification of cases
covered by electronic letter of authority (eLA)
pursuant to this Order shall be submitted by the
RO within the following prescribed number of
calendar days:
Cases covered by eLA:
180 days for Regional cases and 240 days for LT
cases, from the date of issuance of eLA (Par.
25(II), RMO 19-2015 dated September 15, 2015)
In RAMO 1-2020, the 30-day period to serve the
eLA has been deleted, instead the following
guidelines was provided:
● On the first opportunity of the revenue officer
to have a personal contact with the taxpayer,
he should present the eLA together with the
checklist of requirements. The eLA should
only be served by the RO assigned to the
case.
● An eLA authorizes or empowers a designated
RO to examine, verify and scrutinize a
taxpayer’s books and records in relation to his
internal revenue tax liabilities for a particular
period.
If eLA was left unserved beyond 30-day period
from date of issuance, the eLA shall still be valid
and enforceable provided that the 180/240 days
to complete the audit has not yet expired. (RMC
No. 82-2022 dated June 28, 2022)
565
VAT Audit:
Within 60 to 90 days from the date of issuance of
eLA covering 1 or 2 quarters, respectively.
Effect of failure to complete audit within
120 days
Beginning June 1, 2010, there is no need for
revalidation of the LOA if the prescribed period to
audit has been exceeded. However, failure of the
Revenue Officer to complete audit shall be
subject to the applicable administrative sanction.
Number of times a taxpayer may be audited
General rule:
A taxpayer can be subjected to examination and
inspection for the same taxable year ONLY ONCE.
Exceptions:
1. When the CIR determines that fraud,
irregularities, or mistakes were committed by
the taxpayer;
2. When the taxpayer himself requests for the
re-investigation or re-examination of his
books of accounts and it was granted by the
Commissioner;
3. When there is a need to verify the taxpayer’s
compliance with regard to withholding and
other internal revenue taxes as prescribed in
a Revenue Memorandum Orders issued by
the Commissioner;
4. When the taxpayer’s capital gains tax
liabilities must be verified; and
5. When the commissioner chooses to exercise
his power to obtain information relative to the
examination of other taxpayers (Secs. 5 and
235, NIRC)
BIR’s request for documents
In requesting documents to be presented during
tax investigation, the RO shall comply with RMO
No. 53-98, as amended by RMO Nos. 16-2007
and 22-2007, and other applicable revenue
issuances. The RO shall mark in the Checklist of
Requirements only the documents/records which
are applicable and relevant in the audit and
should not require the taxpayer to submit tax
returns and other information which can be
retrieved within the Bureau.
Powers that can be used by the BIR during
a BIR audit
The failure of a taxpayer to file his or her return
will not hinder the Commissioner from permitting
the taxpayer's examination. The Commissioner
can examine records or other data relevant to his
or her inquiry in order to verify the correctness of
any return, or to make a return in case of
noncompliance, as well as to determine and
collect tax liability. (CIR vs. Izone Technologies
Philippines, CTA EB Case No. 2295, May 05, 2022,
citing Commissioner vs. Fitness by Design, G.R. No.
215957, November 09, 2016)
Power of the Commissioner to Obtain
Information, and to Summon/Examine,
and Take Testimony of Persons (Sec 5, NIRC)
In ascertaining the correctness of any return, or
in making a return when none has been made, or
in collecting any such liability, or in evaluating tax
compliance, the Commissioner is authorized:
a. To examine any book, paper, record, or other
date which may be relevant or material to
such inquiry;
b. To obtain on a regular basis from any person
other than the person whose internal revenue
tax liability is subject to audit or investigation,
or from any office or officer of the national
and local governments, government agencies
and instrumentalities, including the BSP and
GOCC, any information such as, but not
limited to, costs and volume of production,
receipts or sales and gross incomes of
taxpayers, and the names, addresses, and
financial statements of corporations, mutual
fund companies, insurance companies,
regional operating headquarters of
multinational companies, joint accounts,
associations, joint ventures or consortia and
registered partnerships, and their members;
566
 The TRAIN Law further requires the
submission to BIR of “Tax Incentive Report”
by Cooperative Development Authority
(CDA), which shall include information on the
income tax, VAT, and other tax incentives
availed of by cooperatives registered and
enjoying incentives under RA 6938, as
amended. Provided, further, that the
information submitted by the CDA to the BIR
shall be submitted to the Dept. of Finance
and shall be included in the database created
under RA No. 10708, otherwise known as the
“Tax Incentives Management and
Transparency Act (TIMTA)”
Note: Sec. 5(B) is also known as the Third-
Party Information Rule.
Sec. 5 of NIRC allows the BIR access to all
relevant or material records and data in the
person of the taxpayer, and the BIR can
accept documents which cannot be admitted
in a judicial proceeding where the Rules of
Court are strictly observed. The consent of
the taxpayer is NOT necessary for the
procurement of the books of accounts
needed for it to be given an assessment. To
require the consent of the taxpayer would
defeat the intent of the law to help the BIR
assess and collect the correct amount of
taxes (Fitness By Design, Inc. vs. CIR, G.R. No.
177982).
The above notwithstanding, nothing in Sec. 5
shall be construed as granting the
Commissioner the authority to inquire into
bank deposits other than that provided for in
Section 6(F) of the NIRC, as earlier
enumerated.
c. To summon the person liable for tax or
required to file a return, or any officer or
employee of such person, or any person
having possession, custody, or care of the
books of accounts and other accounting
records containing entries relating to the
business of the person liable for tax, or any
other person, to appear before the
Commissioner or his duly authorized
representative at a time and place specified
in the summons and to produce such books,
papers, records, or other data, and to give
testimony;
Subpoena Duces Tecum (SDT):
After 10 days from receipt of the Second and
Final Notice and the taxpayer still did not
comply, the authorized BIR officer shall
request for the issuance of a subpoena.
The request for the issuance of SDT shall be
through a Memorandum Report, stating
therein the relevant facts, specifying the
particular documents or records not made
available to him and the taxpayer liable or the
third party/office concerned, in accordance
with RMO 10-2013 under BIR Form No. 0713.
In case there is no submission or incomplete
presentation of the required books of
accounts and other accounting records, the
action lawyer assigned to the case shall
request the concerned revenue officers for a
conference. This shall be scheduled on the
fifth (5th) working day from the date set for
compliance with the SDT
Non-compliance with the SDT may eventually
lead to criminal prosecution for contempt.
Within seven (7) working days from
conference, the action lawyer shall prepare a
Letter-Complaint addressed to the Office of
the Prosecutor, recommending the criminal
prosecution of the individual taxpayer or third
party, or the responsible officer/s or
partner/s, who disobeyed the SDT for
violation of Section 266 (“Failure to Obey
Summons”) of the NIRC, as amended,
together with the Complaint-Affidavit and its
supporting evidentiary documents
The person summoned shall be accorded full
notice and opportunity to comply with the
SDT as detailed herein. Once the Complaint-
Affidavit has been filed for violation of Section
266 of the NIRC, as amended, no prosecuting
officer of the Bureau shall cause the
withdrawal or dismissal of the case,
567
 notwithstanding the subsequent submission
of documents indicated in the SDT.
Payment of the administrative penalty shall
not excuse the taxpayer/person summoned
from complying with the SDT.
d. To take such testimony of the person
concerned, under oath, as may be relevant or
material to such inquiry; and
e. To cause revenue officers and employees to
make a canvass from time to time of any
revenue district or region and inquire after
and concerning all persons therein who may
be liable to pay any internal revenue tax, and
all persons owning or having the care,
management or possession of any object
with respect to which a tax is imposed.
Prescriptive Period for Assessment
General Rule: Taxes shall be assessed within
three (3) years after either:
(a) The last day prescribed by law for the
filing of the return;
(b) The actual filing of the return, whichever
is later (Sec. 203, NIRC).
Note: Prescriptive Period for Assessment
will be discussed in detailed on part D.1.d of this
Notes
FAN must be issued before the expiration of
the prescriptive period
CIR’s contention that the assessment required to
be issued within the three (3)-year or extended
period provided in Sections 203 and 222 of the
National Internal Revenue Code refers to the PAN
is untenable.
Considering the functions and effects of a PAN vis
a vis a FAN, it is clear that the assessment
contemplated in Sections 203 and 222 of
the National Internal Revenue Code refers
to the service of the FAN upon the
taxpayer. (CIR vs. Transition Optical Philippines,
G.R. No. 227544, November 22, 2017)
Waiver of Prescription
Compromise/Waiver (waiver through
agreement). If before the expiration of the time
prescribed in Section 203 for the assessment of
the tax [3 years], both the Commissioner and
taxpayer have agreed in writing to its assessment
after such time, the tax may be assessed within
the period agreed upon, extendible by
subsequent agreements (Sec. 222(b), NIRC).
A waiver of statute of limitations, to a certain
extent, is a derogation of the taxpayer’s right to
security against prolonged and unscrupulous
investigations and must therefore be carefully
and strictly construed. The waiver of statute of
limitations is not a waiver of a right to invoke the
defense of prescription. It is an agreement
between the taxpayer and the BIR that the period
to issue an assessment and collect the taxes due
is extended to a date certain. The waiver does
not mean that the taxpayer relinquishes the right
to invoke prescription unequally particular where
the language of the document is equivocal. For
the purpose of safeguarding taxpayers from an
unreasonable examination, investigation or
assessment, our tax law provides a statute of
limitations in the collection of taxes. The law of
prescription being a remedial measure should be
liberally construed in order to afford such
protection. The exception to the law on
prescription should perforce be strictly construed.
(Philippine Journalists, Inc. vs. CIR, G.R. No. 162852,
December 16, 2004)
Does not include taxes which has already
prescribed
The waiver of the statute of limitations executed
by the taxpayer cannot be deemed to include
taxes already prescribed. (Republic v. Lim De Yu,
G.R. No. L-17438, April 30, 1964)
568
Waiver should include a valid effectivity the waivers were not in accordance with the 2004
date Rules on Notarial Practice; (2) it failed to indicate
the date of the BIR’s acceptance (3) it was not
The indefinite extension of the period for signed by the proper revenue officer (4) it failed
assessment is unreasonable because it deprives to specify the type of tax and the amount of tax
the said taxpayer of the assurance that he will no due, since these defects were not solely
longer be subjected to further investigation for attributable to the BIR. While the Revenue
taxes after the expiration of a reasonable period Delegation Authority Order No. 01-05 stated that
of time. (Philippine Journalists, Inc. vs. CIR, G.R. No. the waiver should not be accepted by the
162852, December 16, 2004) concerned BIR office or official unless duly
notarized, a careful reading of RDAO No. 01-05
Next Mobile Case – Bad Faith indicates that the proper preparation of the
waiver was primarily the responsibility of the
In the case of CIR vs. Next Mobile, Inc. (G.R. No. taxpayer or its authorized representative signing
212825, December 7, 2015), the Supreme Court the waiver. (ATC vs. CIR, G.R. No.230861, February
(SC) held that a taxpayer who is in bad faith 14, 2022).
cannot impugn the validity of the waiver. While
the SC reiterated that a waiver must strictly Revised policies on the execution of waiver
comply with the requirements prescribed by the pursuant to Revenue Memorandum Order
regulations, it qualified and held that a taxpayer No. (RMO) 14-2016 dated April 4, 2016
cannot impugn the validity of the waiver on the repeal the very strict requirements for a valid
basis of the defects he himself has caused after waiver prescribed in RMO No. 20-1990, RDAO No.
benefiting from it, as he will be deemed estopped 05-2001 and RMC No. 06-2005.
by his bad faith. Despite the waiver’s non-
compliance with the requirements in the RMO 20 -1990 RMO 14 -2016
regulations, the SC ruled in favor of the BIR and Form
treated the waiver as valid and binding upon the Must STRICTLY conform May or may not conform
taxpayer since the defect was attributable to the with the requirements with the requirements
latter’s deliberate acts. set in RMO 20-90 set out in RMO 20-90
Taxes covered?
Must clearly indicate Can simply state “all
Next Mobile Case Not Applicable
what taxes are included internal revenue taxes”
in the waiver
In CIR v. Next Mobile, Inc. (formerly Nextel When executed?
Communications Phils., lnc.), this Court Must be EXECUTED BEFORE the expiration of the 3-
recognized the doctrine of estoppel and upheld year prescriptive period to audit or lapse of the
the waivers when both the taxpayer and the previously agreed upon date (in cases where there
Bureau of Internal Revenue were in part de lie to. was a previous issuance of audit)
The taxpayer's act of impugning its waivers after Signed by the taxpayer Signed by the taxpayer
benefitting from them was considered an act of or duly authorized or duly authorized
bad faith. But even as respondent is estopped representative. For representative. For
from questioning the validity of the Waivers, the corporations by any of corporations by any of its
its responsible officials responsible officials.
assessment is nonetheless void because it was
served beyond the supposedly extended period Taxpayer CANNOT now
(CIR vs. Transition Optical Philippines, G.R. No. impugn the validity of
227544, November 22, 2017). the waiver as to the
signatory of the waiver.
Defects not solely attributable to the BIR. Material Dates
1. Date of execution 1. Date of Execution
The waiver was still considered valid despite it 2.Expiration of the 2. Expiration of issued
has the following defects: (1) the notarization of waiver waiver
3. Notarization

569
 4. Acceptance by the 10. The taxpayer is charged with the burden of
BIR ensuring that his Waiver is validly executed
BIR officials authorized to accept when submitted to the BIR. Thus, the
The CIR or authorized Can be accepted by the taxpayer must ensure that his Waiver:
revenue official shall group supervisors a. Is executed before the expiration of the
sign the waiver, designated in the LOA,
period to assess or to collect taxes.
indicating the who indicate their
agreement to the acceptance by signing b. Indicates the expiry date of the extended
waiver the waiver. period
Number of copies and duly accepted copy of c. Indicates the type of tax (for waiver of
waiver prescriptive period to collect)
Executed in 3 copies Taxpayer shall have the d. Is signed by his authorized
and taxpayer must duty to retain a copy of representative.
have a receiving copy the waiver 11. There is no strict format of the waiver
of the waiver duly
signed by the BIR Waiver is a bilateral agreement
Notarization
Required Not required

RMC No. 141-2019 - Reiterating the salient

points arising from RMO No. 14-16 on the
proper execution of waivers of the defense
of prescription:

1. The Waiver is a unilateral and voluntary

undertaking which shall take legal effect and
be binding on the taxpayer immediately upon
his execution thereof.
2. The Waiver need not specify the type of taxes
to be assessed nor the amount thereof. Waiver of the Defense of Prescription is a bilateral
3. It is no longer required that the delegation of agreement between a taxpayer and the Bureau
authority to a representative be in writing and of Internal Revenue to extend the period of
notarized. assessment and collection to a certain date. "The
4. The taxpayer cannot seek to invalidate his requirement to furnish the taxpayer with a copy
Waiver by contesting the authority of his own of the waiver is not only to give notice of the
representative. existence of the document but of the acceptance
5. It is the duty of the taxpayer to submit his by the BIR and the perfection of the agreement.
Waiver to the officials listed in the said RMO (CIR vs. Avon Products Manufacturing, G.R. Nos.
201398-99, October 03, 2018)
prior to the expiration of the period to assess
or to collect as the case maybe.
A waiver of the statute of limitations under the
6. In addition, previously authorized officials,
NIRC, is an agreement between the taxpayer and
the RDO or Group Supervisor as designated
the BIR that the period to issue an assessment
in the LOA or MOA can accept the waiver
and collect the taxes due is extended to a date
7. The date of acceptance by the BIR Officer is
certain. xxx The waiver is not a unilateral act by
no longer required to be indicated for the
the taxpayer or the BIR, but is a bilateral
Waiver’s validity.
agreement between two parties to extend the
8. The taxpayer shall have the duty to retain a
period to a date certain. xxx The requirement to
copy of the submitted Waiver
furnish the taxpayer with a copy of the waiver is
9. Notarization of the Waiver is not a
not only to give notice of the existence of the
requirement for its validity
document but of the acceptance by the BIR and
the perfection of the agreement. (Philippine

570
Journalists Inc., vs. CIR, G.R. No. 162852, December
16, 2004)
Invalidity of the Waiver cannot be raised if
the taxpayer partially paid the assessment:
Had petitioner truly believed that the waiver was
invalid and that the assessments were issued
beyond the prescriptive period, then it should not
have paid the reduced amount of taxes in the
revised assessment. RCBC’s subsequent
action effectively belies its insistence that the
waiver is invalid. The records show that on
December 6, 2000, upon receipt of the revised
assessment, RCBC immediately made payment
on the uncontested taxes. Thus, RCBC is
estopped from questioning the validity of the
waivers.
To hold otherwise and allow a party to gainsay its
own act or deny rights which it had previously
recognized would run counter to the principle of
equity which this institution holds dear. (RCBC vs.
CIR, GR No. 170257, September 7, 2011)
BIR Assessment Procedures and
Reglementary Procedure incorporated with
Tax payer’s Remedies (Applications of RR 12-99,
as amended by RR 18-13, RR 11-2014, RMO 26-2016,
and RR 7-2018)
Background of Related Issuances:
Assessment Related Issuance
Stage
NOD RR 7-2018, RR 22-2020
PAN RR 12-99, RR 18-2013, RMC
11-2014, RMO 26-2016
FAN / FLD RR 12-99, RR 18-2013, RMC
11-2014, RMO 26-2016
FDDA RR 12-99, RR 18-2013, RMC
11-2014, RMO 26-2016
● RR 12-99 was the first issuance which first
sets out the rule on BIR Assessment
Procedure (NIC, PAN, FAN/FLD, FDDA)
RR 18-2013 abolished the NIC as a stage in
● Notice of
the due process requirements (PAN, FAN/FLD,
FDDA)
● RR 11-2014 and RMO 26-2016 provides
further clarification to the due process
requirement.
● RR 7-2018 restored NIC as part of due
process requirements
● RR 22-2020 amended RR 7-2018 by
providing preparation of a Notice of
Discrepancy instead of a Notice of Informal
Conference
3. Issuance of NOD / NIC
In an informal conference, the taxpayer is given
an opportunity to present his side of the case.
The taxpayer may discuss with the BIR the merits
of the assessment and request that the
assessment be re-examined.
RR No. 7-2018 has now restored the requirement
of issuance of the NIC as a due process
requirement in the issuance of a deficiency tax
assessment. However, unlike the old provision of
RR No. 12-1999 which did not expressly provide
for the period within which the informal
conference may extend RR No. 7-2018 now
provides that the informal conference shall not
extend beyond thirty (30) days from the
taxpayer’s receipt of the Notice for Informal
Conference. Further, if the taxpayer is found to
still be liable for deficiency taxes after presenting
his side or if the taxpayer is not amenable, the
case will be endorsed to the Assessment Division
of the Revenue Regional Office or to the
Commissioner or his duly authorized
representative within seven (7) days from
conclusion of the informal conference for
issuance of a deficiency tax assessment. Finally,
failure of the revenue officers to comply with the
periods shall subject them to penalties as
provided under existing rules and regulations.
With the issuance of RR No. 22-2020, the
taxpayer must then be informed through an NOD
instead of an NIC.
✓ X
Notice for
Informal
Discrepancy
Conference
RO informs the taxpayer of its deficiency taxes
through the NOD. Discussion of Discrepancy
571
(shall in no case extend beyond 30 days from
receipt of NOD). Taxpayer presents an
explanation and submits all necessary documents
(within 30 days from receipt of NOD). Issuance
of a deficiency tax assessment in the form of a
PAN (within 10 days from the conclusion of the
discussion).
Taxpayer’s failure to appear on the scheduled
date, without prior notice to the BIR, will be
construed as a waiver of the taxpayer’s right to a
Discussion of Discrepancy. Consequently, the
taxpayer is deemed to have no objections to the
findings in the NoD. The failure of the taxpayer
to reconcile and present valid documentary
support against the noted discrepancies will
result in a Preliminary Assessment Notice (PAN)
Options given to Taxpayer after receipt of
NIC
1. Pays ALL the amount assessed – will
result to the termination of the assessment
process and close the taxable year for audit.
2. Does not pay all, or only some of the
amount assessed–The tax paid for will
be settled and terminated while for those
taxes not yet paid the TP will discuss with
the BIR examiner and submit supporting
documents and legal to reduce assessed
deficiency tax.
In this case the BIR can:
● Accept all supporting documents and
legal justifications presented and
agree that there is no tax deficiency
to be assessed which terminates the
assessment process.
● Accept some supporting documents
and legal justifications presented and
agree to reduce the amount
assessed with the remaining
amounts will be presented as
findings in the PAN.
● Not accept all justifications the TP
has presented and issues the PAN at
the original assessed amount
572
NOTICE OF DISCREPANCY FLOWCHART (Flowchart A)

573
4. Issuance of PAN
The PAN is a communication issued by the
Regional Assessment Division or any other
concerned BIR office, informing a taxpayer who
has been audited of the findings of the Revenue
Officer, following the review of these findings.
The requirements of a valid PAN:
1. In writing; and
2. Should inform the taxpayer of the law and the
facts on which the assessment is made. (Sec.
228, NIRC)
Under RR No. 12-99, as amended by RR No. 18-
13, the PAN shall show in detail the facts and the
law, rules and regulations, or jurisprudence on
which the proposed assessment is based. (Sec.
3.1.1)
Section 228 of the NIRC and its implementing rule
and regulation, Section 3 of RR No. 12-99,
mandate the contents for an assessment: "the
taxpayer shall be informed in writing of the law
and the facts on which the assessment is made;
otherwise, the assessment shall be void.". The
law imposes a substantive, not merely a formal,
requirement. In CIR vs. Reyes, the Court
emphasized that "failure to comply with Section
228 does not only render the assessment void,
but also finds no validation in any provision in the
Tax Code” (CIR vs. Unioil Corporation, G.R. No.
204405, August 04, 2021, J. Hernando)
Examination and review
It is determined that there exists
sufficient basis to assess the
taxpayer for any deficiency tax or
taxes.
Issuance of PAN
PAN shall show in detail the facts
and the law, rules and
regulations, or jurisprudence on
which the proposed
assessment is based.
Dispute the PAN by filing Protest
15 days from receipt of PAN
General rule:
The sending of the Preliminary Assessment
Notice (PAN) to a taxpayer is part of the due
process requirement in the issuance of a
deficiency tax assessment.
Exceptions to Issuance of PAN:
(METwEpCo)
(a) 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
(b) When the EXCISE TAX due on excisable
articles has not been paid; or
(c) When a discrepancy has been determined
between the TAX WITHHELD and the
amount ACTUALLY REMITTED by the
withholding agent; or
(d) 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 a non-exempt
person; or
(e) 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. (Sec. 228, NIRC)
NOTE: In the above-cited cases, a FLD/FAN shall
be issued outright. (RR No. 18-13)
Contents of the PAN
The PAN must show in detail the facts and the
law upon which the assessment is based.
Otherwise, it will not be valid and any resulting
assessment will be considered null and void.
Absence of the PAN
The issuance of the PAN is part of the due process
requirement under RR No. 18-13. Thus, if the BIR
did not issue a PAN or did not give the taxpayer
574
an opportunity to respond within 15 days, this will
be a violation of the due process right of a
taxpayer.
 The SC has already ruled that if a taxpayer is
not given an opportunity to respond to a PAN,
any resulting assessment will be considered
null and void. (Metro Star Superama, Inc. vs.
CIR, G.R. No. 185371, December 8, 2010)
Procedure
If after review and evaluation by the
Commissioner or his duly authorized
representative, as the case may be, 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 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.
If the taxpayer fails to respond (Reply to PAN)
within fifteen (15) days from date of receipt of
the PAN, he shall be considered in default, in
which case, a FLD/FAN shall be issued calling for
payment of the taxpayer's deficiency tax liability,
inclusive of the applicable penalties.
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. (RR 18-13)
In summary, the options given to the
taxpayer after receipt of PAN are:
1. Pay the whole amount assessed – the
audit is close is terminated upon payment of
the whole amount.
2. Does not pay all, or only some of the
amount assessed – The tax paid for will be
settled and terminated while for those taxes
not yet paid the TP will discuss with the BIR
examiner and submit supporting documents
and legal to reduce assessed deficiency tax.
A reply to the PAN shall be prepared and filed
with the BIR having jurisdiction over the audit
within 15 days AFTER the receipt of the
PAN.
In this case the BIR can:
● Accept all supporting documents and
legal justifications presented and agree
that there is no tax deficiency to be
assessed which terminates the
assessment process.
● Accept some supporting documents and
legal justifications presented and agree
to reduce the amount assessed with the
remaining amounts will be presented as
findings in the FLD/FAN.
● Not accept all justifications the TP has
presented and issues the FAN/FLD at the
original assessed amount.
The NOD/NIC and the PAN are a part of due
process. They give both the taxpayer and the
Commissioner the opportunity to settle the case
at the earliest possible time without the need for
the issuance of a FAN.
Indeed, Section 228 of the Tax Code clearly
requires that the taxpayer must first be informed
that he is liable for deficiency taxes through the
sending of a PAN. He must be informed of the
facts and the law upon which the assessment is
made. The law imposes a substantive, not merely
a formal, requirement. To proceed heedlessly
with tax collection without first establishing a
valid assessment is evidently violative of the
cardinal principle in administrative investigations
— that taxpayers should be able to present their
case and adduce supporting evidence. (CIR vs.
Avon Products Manufacturing, GR Nos. 201398-99,
October 03, 2018)
Issuance of PAN as a right to due process
The right to due process is violated when it
received both the PAN and the FAN on the same
day. The failure to give the taxpayer the
575
opportunity to respond to the PAN makes the
assessment void. CIR vs. Yumex Philippines
Corporation, CTA EB Case No. 1139, 11 August
2015)
The BIR is duty bound to wait for the expiration
of the 15 days from the date of the receipt of the
PAN before issuing the FAN. Section 228 of the
Tax Code gives the taxpayer 15 days from receipt
of the PAN to file a reply with the BIR. If during
the said period, no protest to the PAN is filed, it
is only then that the BIR can consider the
taxpayer in default and can issue the FAN. (Global
Fresh Products, Inc. vs CIR, CTA Case No. 9718, 30
June 2020)
FLOWCHART FOR ISSUANCE OF PRELIMINARY ASSESSMENT NOTICE (Flowchart B)
BIR Issues PAN
Agree, Pay
TP
agrees?
Disagrees
Submit
Reply?
No Yes, submit
BIR Issues FLD/FAN after 15 days
receipt of PAN
Reply to PAN not mandatory
No. A FLD/FAN shall be issued whether the PAN
is protested or not. (RMO 26-2016)
However, a reply to the PAN is still advisable to
reduce the assessment must be exhausted.
Effect of failure to file a protest on the 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 assessment notice shall be
caused to be issued by the said Office, calling for
the payment of the taxpayer’s deficiency tax
liability, inclusive of the applicable penalties.
B
END
Yes
Pay
all?
Pay some, refute
some
C
576
5. Issuance of FLD/FAN
Notice of Assessment (FAN/FLD)
After 15 days from the DATE OF RECEIPT OF
PAN, a FAN/FLD is issued.
If the taxpayer fails to respond within 15
days from receipt of the PAN
● Taxpayer shall be considered in default
● Issuance of FLD/FAN
Within 15 days from filing of the taxpayer’s
response or protest to the PAN
Issuance of FLD/FAN within 15 days from filing of
the response calling for the payment of the
deficiency taxes, inclusive of applicable penalties
FLD/FAN
A notice of assessment is a declaration of
deficiency taxes issued to a taxpayer who fails to
respond to a pre-assessment notice within the
prescribed period of time, or whose reply to the
PAN was found to be without merit. This is
commonly known as the FAN. An assessment
contains not only a computation of tax liabilities,
but also a demand for payment with a prescribed
period.
General rule: FAN may be issued only after PAN
has been served upon the taxpayer
Exceptions: METwEpCo
FLD/FAN will be issued by BIR regardless of
whether taxpayer protests the PAN.
FLD/FAN calling for payment of taxes must
include the facts, law, rules and regulations, and
jurisprudence upon which it is based. Otherwise,
it shall be void.
NOTE:
● FAN issued by the BIR even before the lapse
of 15-day period within which the taxpayer
could file a reply or protest to PAN is void.
(Missouri Square v. CIR, CTA Case No. 87070,
September 8, 2016)
● Non–service of PAN amounts to denial of due
process. Thus, the FAN/FLD were deemed
void. (Bloat & Ogle v. CIR, CTA Case No 8682,
Sep 2, 2016)
● BIR was found to violate the due process
requirement when it served both the PAN and
FAN/FLD on the same day. (CIR v. Yumex, CTA
EB No. 1139, September 7, 2011)
● A 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. (RR 12-99)
A FAN/FLD was considered void for not having an
assessment notice attached even though the FLD
stated the following:
● Computation or tabulation of the alleged
deficiency tax, together with interest and
penalties and their respective basis.
● A request to pay deficiency taxes thru an
authorized agent bank
● A note that the interest will be adjusted if the
total amount is paid beyond February 8.
The above statements did not amount to an
“assessment notice” – as there was no mention
of a definite time when payment was due and
demandable. (Derek Ramsay v. CIR, CTA Case 8456,
September 17, 2015)
Substantive Due Process
The concept of due process in assessment can be
summarized as follows:
1. Taxpayer should be notified that there is an
assessment.
2. In such notice he must be informed of the
legal and factual basis of assessment, for
both PAN and FAN (CIR vs. Metro Star
Superama, Inc, G.R. No. 185371, December 8,
2010).
577
FLD/FAN and WDL REINVESTIGATION will deem the request to
be only as RECONSIDERATION.
FLD/FAN may be the subject of WDL only if it is
unprotested, as it became final and executory. c. For protest for REINVESTIGATION – the
Thus, collection cannot be pursued just because TP requesting for reinvestigation MUST
the Commissioner or Regional Director has issued submit within sixty (60) days “relevant
an FLD/FAN. (RMO No. 35-2019) supporting documents”. Failure to do so shall
make the FAN/FLD final, executory, due and
When the warrant of distraint or levy is duly demandable.
served upon the Taxpayer and no property could
be located, the general rule is that the period of PAN FAN
assessment and collection is tolled. (Section 223, A PAN merely informs On the other hand, a
NIRC) the taxpayer of the FAN contains not only a
initial findings of the computation of tax
Requisites of a VALID Assessment Bureau of Internal liabilities but also a
Revenue. It contains the demand for payment
proposed assessment, within a prescribed
i. It must be in writing and signed by the BIR; and the facts, law, rules, period. As soon as it is
ii. It contains the law and the facts on which and regulations or served, an obligation
the assessment is based; jurisprudence on which arises on the part of the
iii. Contains a demand for payment within the the proposed taxpayer concerned to
prescribed period; assessment is based. It pay the amount
iv. Must be served on and received by the does not contain a assessed and
taxpayer. demand for payment but demanded. It also
usually requires the signals the time when
taxpayer to reply within penalties and interests
Note: Requisites of a VALID Assessment will
15 days from receipt. begin to accrue against
be discussed in detailed on part D.1.b of this Otherwise, the CIR will the taxpayer.
Notes finalize an assessment
and issue a FAN.
Taxpayer’s options upon receiving
FLD/FAN The PAN is a part of due
process. It gives both
a. Pay the amount assessed – terminates the taxpayer and the
and settle the audit for the taxable period. CIR the opportunity to
settle the case at the
earliest possible time
b. Pay some or Dispute some or all the without the need for the
findings - requires filing of a protest issuance of a FAN.
within 30 days from receipt of
FAN/FLD, asserting the TP’s factual and Contents
legal justification on why such finding has no Contains PROPOSED Computation of tax
basis should be dismissed. assessments liabilities
Does not contain a Contains demand for
Be reminded that EACH and EVERY finding demand for payment payment within a
must be protested, otherwise, such finding prescribed period
shall be deemed final and executory and due (CIR vs. Transition Optical Philippines, G.R. No.
227544, November 22, 2017).
for payment.

TP must indicate also if the item being

protested is for RECONSIDERATION or
REINVESTIGATION for each and every item
or findings. Failure to indicate

578
Note: Tax Delinquency vs. Tax Deficiency
will be discussed on part D.1.c of this Notes
6. Administrative action / Inaction on
Disputed
The taxpayer or its authorized representative or
tax agent may protest administratively against
the aforesaid FAN/FLD within thirty (30) days
from date of receipt thereof. The taxpayer
protesting an assessment may file a written
request for reconsideration or reinvestigation.
(Sec. 3.1.4, RR No. 12-99, amended by RR No.
18-13)
FLOWCHART FOR FINAL DECISION ON DISPUTED ASSESSMENT
(Flowchart C)
A protested assessment or a disputed assessment
is where the taxpayer questions an assessment
and asks the BIR to reconsider or cancel the same
because he believes he is not liable therefore. It
is the act by the taxpayer of questioning the
validity of the imposition of the corresponding
delinquency increments for internal revenue
taxes as shown in the notice of assessment and
letter of demand.
An assessment becomes a “disputed” assessment
when petitioner requests for the cancellation and
or withdrawal of the same.
Note: Protesting an Assessment will be
discussed on part D.2.a of this Notes
579
Final Decision on a Disputed Assessment
(FDDA) / Administrative Decision on
Disputed Assessment
This is issued if:
1. no protest is filed, or
2. a request for reinvestigation is filed but the
taxpayer failed to provide relevant supporting
documents within 60 days from its filing, or;
3. when the protest is expressly denied
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. (Sec. 3.1.5 of RR No.
12-99, as amended by RR No. 18-13)
It is true that the Commissioner is not obliged to
accept the taxpayer's explanations, as explained
by the Court of Tax Appeals. However, when he
or she rejects these explanations, he or she must
give some reason for doing so. He or she must
give the particular facts upon which his or her
conclusions are based, and those facts must
appear in the record.
Indeed, the Commissioner's inaction and
omission to give due consideration to the
arguments and evidence submitted before her by
Avon are deplorable transgressions of Avon's
right to due process. The right to be heard, which
includes the right to present evidence, is
meaningless if the Commissioner can simply
ignore the evidence without reason. (CIR vs. Avon
Products Manufacturing, G.R. Nos. 201398-99, October
03, 2018)
FDDA does not operate as a form of
collection of deficiency taxes.
The CIR’s collection efforts are initiated by
distraint, levy or court proceeding. The distraint
and levy proceedings are validly begun or
commenced from the issuance of a warrant of
distraint and levy and service against the
taxpayer or a proper judicial proceeding is
initiated. (CIR vs. CTA, G.R. No. 258947, March 29,
2022)
b) Requisites of a Valid Assessment
i. It must be in writing and signed by
the BIR; The signatory in the authorized
shall also be the one who signed the LOA
namely:
a. Regional Director (RD) – in cases of LOA
made by Regional District Offices (RDO);
b. Assistant Commissioner – Large Taxpayer
Services (ACIR – LTS) and its divisions;
c. Deputy Commissioner Legal and Inspection
Group – Enforcement Services; and
d. CIR or any authorized official – Task Force
and Special Teams.
ii. It contains the law and the facts on
which the assessment is based;
The formal letter of demand and assessment
notice shall state the facts,
jurisprudence, and law on which the
assessment was based; otherwise, these
shall be void. The word "shall" in Section
228 of the National Internal Revenue Code
and Revenue Regulations No. 12-99 means
the act of informing the taxpayer of both the
legal and factual bases of the assessment is
mandatory. The law requires that the bases
be reflected in the formal letter of demand
and assessment notice. This cannot be
presumed. Otherwise, the express mandate
of Section 228 and Revenue Regulations No.
12-99 would be nugatory. The requirement
enables the taxpayer to make an
effective protest or appeal of the
assessment or decision. (Commissioner vs.
Fitness by Design, G.R. No. 215957, November 09,
2016)
 The alleged “factual basis” in the advice,
preliminary letter and “audit working
papers” did not suffice. There was no
going around the mandate of the law that
the legal and factual bases of the
assessment be stated in writing in the
formal letter of demand accompanying
580
 the assessment notice. (CIR vs. Enron
Subic, G.R. No. 166387, January 19, 2009)
The old requirement of merely notifying
the taxpayer of the CIR’s findings was
changed in 1998 of informing the
taxpayer of not only the law, but also of
the facts on which an assessment would
be made, otherwise, the assessment
itself would be invalid. (CIR vs. Azucena
Reyes, G.R. No. 159694, January 27, 2006)
Just because the CIR issued an advice, a
preliminary letter during the pre-
assessment stage and a final notice, in
the order required by law, does not
necessarily mean that Enron was
informed of the law and facts on which
the deficiency tax assessment was made.
The law requires that the legal and
factual bases of the assessment be
stated in the formal letter of demand and
assessment notice. Thus, such cannot be
presumed. (CIR vs. Enron Subic Power
Corporation, GR No. 166387, January 19,
2009)
 The formality of a control number in the
assessment notice is not a requirement
for its validity but rather the contents
thereof should inform the taxpayer
of the declaration of deficiency tax
against the taxpayer. (CIR vs. Gonzales,
G.R. No. 177279, October 13, 2010)
iii. Contains a demand for payment within
the prescribed period;
A final assessment is a notice "to the effect
that the amount therein stated is due as
tax and a demand for payment thereof."
This demand for payment signals the time
"when penalties and interests begin to accrue
against the taxpayer and enabling the latter
to determine his remedies. Thus, it must be
"sent to and received by the taxpayer, and
must demand payment of the taxes described
therein within a specific period."[ The
disputed Final Assessment Notice is not a
valid assessment. First, it lacks the definite
amount of tax liability for which
respondent is accountable. It does not
purport to be a demand for payment of tax
due, which a final assessment notice should
supposedly be. Second, there are no due
dates in the Final Assessment Notice. This
negates petitioner's demand for payment.
(Commissioner vs. Fitness by Design, G.R. No.
215957, November 09, 2016)
Accordingly, an affidavit which was
executed by the revenue officer stating the
tax liabilities of a taxpayer and attached to a
criminal complaint for tax evasion cannot
be deemed an assessment that can be
questioned before the CTA. The fact that the
complaint itself was specifically directed and
sent to DOJ and not to Pascor shows that
the intent of the CIR was to file a criminal
complaint for tax evasion and not to issue an
assessment. (CIR vs. Pascor Realty and
Development Corporation, G.R. No. 128315, June
29, 1999)
iv. Must be served on and received by the
taxpayer.
Modes of Service of Assessments
1. Personal service;
The (assessment) notice shall be served
through personal service by delivering
personally a copy to the (taxpayer’s):
a. Registered address
b. Known address - a place other than
the registered address where
business activities of the party are
conducted or his place of residence.
(Section 3.1.6(i), Rev. Regs. No. 18-2013,
as amended by Par. II(1), RMO 40-2019)
c. Wherever he may be found. (Section
3.1.6(i), Rev. Regs. No. 18-2013, as
amended by Par. II(1), RMO 40-2019)
2. Registered mail; or
Service by mail is done by sending a copy
of the assessment notice through:
1. Registered Mail (with Return Card) with
instruction to the Postmaster to return
581
 the mail to the sender after ten (10)
days, if undelivered; or
2. Reputable Professional Courier
Service; or
3. Ordinary Mail. If no registry or
reputable professional courier service
is available in the locality of the
(taxpayer). (Section 3.1.6(ii), Rev. Regs.
No. 18-2013, as amended by Par. II (2),
RMO 40-2019)
An assessment is deemed made when the
demand letter or notice is released, mailed
or sent by the BIR to the taxpayer. The law
does not require that the taxpayer receive
the notice within the three-year or ten-year
period. (CIR vs. Bautista, G.R. No. L-2250, May
27, 1959)
NOTE: If the notice to the taxpayer is
served by registered mail, and no response
is received from the taxpayer within the
prescribed period from date of the posting
thereof in the mail, the same shall be
considered actually or constructively
received by the taxpayer. If the same is
personally served on the taxpayer or his
duly authorized representative who,
however, refused to acknowledge receipt
thereof, the same shall be constructively
served on the taxpayer (Sec. 3.1.7, RR 12-
99).
When a mail matter is sent by registered
mail, there exists a presumption set forth
under Sec. 3(v) Rule 131 of the Rules of
Court, that it was received in the regular
course of mail. The facts to be proved in
order to raise this presumption are: a) The
letter was properly addressed with postage
prepaid; and b) That it was mailed. While a
mailed letter is deemed received by the
addressee in the ordinary course of mail,
this is still merely a disputable presumption
subject to contravention, and a direct
denial of the receipt thereof shifts the
burden upon the party favored by the
presumption to prove that the mailed letter
was indeed received by the addressee
(BarcelonRoxas Securities v. CIR, G.R. No.
157064, August 7, 2006)
The presumption that a letter duly directed
and mailed was received in the regular
course of mail cannot apply where none of
the required facts to raise this presumption,
i.e., that the letter was properly addressed
with postage prepaid and that it was
mailed, has been shown. Mere notations on
the records of the tax collector of the
mailing of a notice of a deficiency tax
assessment to a taxpayer, made without
the supporting evidence, cannot suffice to
prove that such notice was sent and
received; otherwise, the taxpayer would be
at the mercy of the revenue officers,
without adequate protection or defense.
(Nava vs. CIR (G.R. No. L-19470, January 30,
1965)
3. Substituted delivery (RR 18- 2013)
Service of assessment notice on the trust
officer/agent of the decedent made after
the death is invalid since at that time the
legal relationship between the principal
and his agent had been automatically
severed by the death of the principal even
if the agent continued to act as such by
filing the decedent’s ITR (Estate of Late
Julian Diez V. CIR, G.R. No. 155541, January
27, 2004).
Sending of PAN and assessment notice to
the wrong address may only be seen as an
attempt to mislead or confuse ABC. In the
observance of procedural due process, the
SC is always mindful that a taxpayer being
made liable with his property be given an
opportunity to be heard which is one of its
essential elements. With the failure of CIR
to strictly comply with the procedure
prescribed by law, and failure of ABC to
receive a copy of the alleged assessment,
the latter was not afforded its right to be
heard for it was denied the opportunity to
protest or dispute the alleged assessment.
(A Brown Co., Inc. vs. CIR, CTA 6357, June 07,
2004)
4. Service to Tax Agent/Practitioner
appointed or authorized by the taxpayer in
582
 accordance with existing revenue
issuances (Section 3.1.6(I), Rev. Regs. No. 18-
2013, as amended by Par. II(11), RMO 40-
2019)
Written report on the Service
The server shall prepare written reports
(triplicate) on service, under oath before a Notary
Public or any person authorized to administer
oath under Section 14, NIRC, setting forth the
manner, place and date of service, the name of
the person or barangay official or professional
courier service company who received the same
and such other relevant information. (Par. II(6),
RMO 40-2019, in compliance with Section 3.1.6 (iii),
Rev. Regs. No. 18-2013)
with a copy of the pleading or any other court
submission. (Section 2, Rule 13, 1997 Rules of Civil
Procedures, as amended by A.M. No. 19-10-20-SC
2019) Thus, the filing of protest does not require
service to any other party.
c) Tax Delinquency vs. Tax Deficiency
Tax Deficiency - the amount still due and
collectible from a taxpayer upon audit or
investigation.
Tax Delinquency - the failure of the taxpayer to
pay the tax due on the date fixed by law or
indicated in the assessment notice or letter of
demand. (Takenaka Corporation Philippine Branch v.
CIR, CTA EB No. 745, Sept. 4, 2012)

Proof of Service (Par. II(7), RMO 40-2019) DELINQUENCY DEFICIENCY

Availability
a. Personal/Substituted Service = Duplicate Exists when: Exists when the amount
copy of assessment notice duly received. imposed by law (as
b. Service by Personal Mail = Registry receipt (1) the self-assessed determined by CIR or his
tax is not paid at all or authorized
issued by PhilPost.
was only partially paid representative) exceeds
c. Service by Professional Courier = Official on the prescribed amount shown as tax
receipt issued. date, or upon taxpayer’s return

When is Service deemed completed (Par. II (2) when the NOTE: An amount is
(10), RMO 40-2019) deficiency tax determined by the BIR as
assessed by the BIR a tax liability where there
a. Personal/Substituted Service = Actual has become final and is no amount stated in
delivery of assessment notice to the taxpayer executory the return
or representative. Collection Process
b. Service by Registered Mail = Upon actual Can be immediately To be collected, has to go
receipt by the taxpayer or after five (5) days collected through the assessment
process.
from the date of receipt of the first notice of
Remedy
the postmaster, whichever date is earlier.
Filing of a civil action Filing of a civil action
c. Service by Ordinary Mail = Upon expiration of
for the collection of during pendency of
ten (10) days after mailing. taxes is the proper protest is a ground for a
d. Service by Professional Courier Service = remedy motion to dismiss
upon actual receipt by the addressee, or after Penalties
at least two (2) attempts to deliver by the Is subject to Subject to 25%
courier service, or upon the expiration of five surcharges and surcharge, although
(5) calendar days after the first attempt to administrative subject to interest and
deliver, whichever is earlier. (A.M. No. 19-10- penalties. compromise penalty.
20-SC, 2019 Amendments to the 1997 Rules of
Civil Procedure)

NOTE: Filing is the act of submitting the pleading

or other paper to the court (or in this case to the
BIR), while service is the act of providing a party

583
d) Prescriptive Period for Assessment
Prescriptive Period for Assessment
1) General Rule: Taxes shall be assessed
within three (3) years after either:
(a) The last day prescribed by law for the
filing of the return;
(b) The actual filing of the return, whichever
is later (Sec. 203, NIRC).
Example: Co. A filed its 2014 Annual Income Tax
Return early on April 10, 2015. Regardless of the
early filing of Co. A, the prescriptive period will
only start on April 15, 2015, as the Tax Code
provides.
Example: Supposed Co. A belatedly filed its 2014
Income Tax Return where it was only filed on May
15, 2015. The prescriptive period will start to run
on May 15, 2015.
Section 222 (b) of the NIRC provides that any
internal revenue tax which has been assessed
within the period of limitation may be collected
by distraint or levy or by a proceeding in court
within five years from the assessment. The law is
clear that for a collection to be valid, the
assessment must be within the period of
limitation. Essentially, when the assessment is
issued beyond the prescriptive period, the
government's right to collect deficiency taxes also
prescribes. Hence, there is no more basis for its
collection save for certain exceptions. (La Flor Dela
Isabela, Inc. vs. CIR, G.R. No. 202105. April 28, 2021,
J. Hernando)
Effect of Amendment of Returns on
reckoning of the Prescriptive period
Taxpayers have the right to amend taxes as many
times so long as it is done within (3) years
from the date it was filed, provided no
notice for audit or investigation was
received from the BIR.
However, an amendment of a return may or may
not affect the running of the prescriptive period:
● If such amendment is considered a
“substantial amendment” – one that would
decrease or increase the tax payable. The
three-year prescriptive period will start to run
from the date when the amended return was
filed. (CIR vs. Phoenix Assurance Co., Ltd., G.R.
No. L-19727, May 20, 1965)
Example:
A filed its 2014 Income Tax Return on April 15,
2015. However, it was verified that such return
was not correct as A was not able to deduct an
expense (or was not able to report a material
amount of sales) which was material in amount.
A thus amended its return on January 10, 2016.
The running of the three (3) year prescriptive
period shall start on January 10, 2016 being that
such amendment can be considered as a
“substantial amendment” which will adjust the
running of the prescriptive period.
● Otherwise, if such amendment was just
superficial, then the prescriptive period for
assessment will start from the date when the
original return was filed.
Counting of periods
 A year is composed of 12 calendar months.
The Administrative Code of 1987, being the
more recent law than the New Civil Code,
governs the computation of legal periods (CIR
vs. Primetown. Property Group, G.R. No. 162155,
August 8, 2007)
 Where the government has not by express
statutory provision provided a limitation upon
its right to assess unpaid taxes, such right is
imprescriptible. Thus, there is no such time
limit on the right of the CIR to assess the
IAET under Section 29 of the Tax Code. (CIR
vs. Ayala Securities, G.R. No. L-29485, November
21, 1980)
 Where the last day of the period for doing an
act as provided by law falls on a Saturday, a
Sunday or a legal holiday in the place where
the court sits, the time should not run until
584
 the next working day. (CIR v. La Sallian Rationale for the 10-year prescriptive
Educational Innovators Foundation, Inc., CTA EB period on false or fraudulent return with
Case No. 703, 19 April 2012, citing Alarilla, Sr. v. intent to evade taxes and failure to file a
Ocampo, GR 144697, 10 December 2003) return:

2) Extra-ordinary prescription. The tax may
be assessed, or a proceeding in court for the
collection of such tax may be filed without
assessment, at any time within ten (10)
years after the discovery of either of the
following (Sec. 222(a), NIRC):
● False return, (regardless of intent to evade
tax);
● Fraudulent return with intent to evade tax;
or
● Failure to file a return, as in the case of:
a. A wrong return;
b. A grossly defective return
(1) False Returns vs. Fraudulent Return vs,
Non-filing of Returns
The ordinary period of prescription of 5 years
(now, three years) within which to assess tax
liabilities under Sec. 222 of NIRC should be
applicable to normal circumstances, but where
the government is placed at a disadvantage so as
to prevent its lawful agents from proper
assessment of tax liabilities due to false return,
fraudulent returns intended to evade payment of
tax or failure to file returns, the period of 10 years
provided in Sec. 222(a) of NIRC, from time of
discovery of the falsity, fraud or omission even if
it seems to be inadequate, should be the one
enforced.(CIR vs. Hoya Glass Disk Philippines, Inc.,
CTA EB Case No. 1524, August 16, 2017, citing Aznar
vs. CTA, & CIR, G.R. No. 20569, August 23, 1974)
Counting of the 10-year period:

False Returns Fraudulent Non-Filing The omission was discovered only in 1971. CIR
Returns of Returns has 10 years from 1971 or until 1981 within which
There is a Implies Failure or to assess. The assessment of deficiency income
deviation from intentional or Omission to tax was issued in 1973, which is well within the
the truth, deceitful entry file a return
period prescribed by law. (CIR vs. CTA, G.R. No.
whether with intent to
44007, March 20, 1991)
intentional or evade the taxes
not. It may be due
due to mistake, Date of Discovery
ignorance, or
carelessness The discovery happens only after the manner of
Does not make Filing a Mere commission and the nature and extent of the
the taxpayer fraudulent omission is fraud has been definitely ascertained. This occurs
criminally liable return will make already a when the Bureau of Internal Revenue renders a
you liable for violation final decision and requires the taxpayer to pay the
crimes involving regardless of deficiency taxes. (RMC No. 101-90, 26 November
moral turpitude the 1990)
as it entails fraudulent
willfulness and intent or
fraudulent willfulness of Filing of a False Return
intent on the the individual
part of the (CIR v. Bank When there is a showing that a taxpayer has
individual of substantially under-declared its sales, receipt or
(Republic v. commerce, income, there is a presumption that it has filed a
Marcos II, G.R. CTA EB No. false return. As such, the CIR need not
No. 130855, 654, immediately present evidence to support the
August 4, 2009) March 14, falsity of the return, unless the taxpayer fails to
2011)
overcome the presumption against it. (Far Eastern
University vs. City of Manila, CTA AC No. 223, October

585
14, 2020, citing Commissioner of Internal Revenue vs.
Asalus Corp., G.R. No. 221590, February 22, 2017)
While the filing of a fraudulent return necessarily
implies that the act of the taxpayer was
intentional and done with intent to evade the
taxes due, the filing of a false return can be
intentional or due to honest mistake.
(Commissioner of Internal Revenue vs. Philippine Daily
Inquirer, G.R. No. 213943, March 22, 2017)
A false return simply involves a "deviation from
the truth, whether intentional or not" while a
fraudulent return "implies intentional or deceitful
entry with intent to evade the taxes due." (CIR vs.
United Church of Christ, CTA EB Case No. 2346, March
15, 2022, citing Commissioner vs. Fitness by Design,
G.R. No. 215957, November 09, 2016)
Filing of a Fraudulent Return
Fraud is a question of fact that should be alleged
and duly proven. "The willful neglect to file the
required tax return or the fraudulent intent to
evade the payment of taxes, considering that the
same is accompanied by legal consequences,
cannot be presumed." Fraud entails
corresponding sanctions under the tax law.
Therefore, it is indispensable for the CIR to
include the basis for its allegations of fraud in the
asses notice. Here, he (the BIR investigating
officer) admitted that the gathered information
did not show that the respondent deliberately
failed to reflect its true income in 1995. (CIR vs.
Miffi Logisitcs Co., Inc., CTA EB Case No. 1979, January
23, 2020, citing Commissioner vs. Fitness by Design,
G.R. No. 215957, November 09, 2016)
For the ten-year period under Section 222(a) to
apply, it is not enough that fraud is alleged in the
complaint, it must be established by clear and
convincing evidence. The petitioner, having failed
to discharge the burden of proving fraud, cannot
invoke Section 222(a) (Republic v. GMCC United
Development Corp, G.R. No. 191856, December 7,
2016)
Note: Nothing in Sec. 222(A) shall be construed
to authorize the examination and investigation or
inquiry into any tax return filed in accordance
with the provisions of any tax amnesty law or
decree.
Fraud must be alleged and proved as a fact. It
must be the product of a deliberate intent to
evade taxes. It may be established by the
integration of three factors:
a. Intentional and substantial understatement
of tax liability by the taxpayer;
b. Intentional and substantial overstatement of
deductions of exemptions; and/or
c. Recurrence of the above circumstances. (CIR
vs. Estate of Benigno Toda Jr, G.R. No. 147188,
September 14, 2004)
Fraud-related decisions:
1. Fraud must be the product of a deliberate
intent to evade taxes; (Commissioner vs.
Fitness by Design, G.R. No. 215957, November 09,
2016)
2. Simple statement that the return filed was
not fraudulent does not disprove existence of
fraud; and
3. Presence of fictitious expenses, with no
evidence presented, proves existence of
fraud.
However, the courts did not consider the tax
returns filed as false or fraudulent with intent to
evade payment of tax in the following cases:
a. Mere understatement in the tax return will
not necessarily imply fraud;
b. Sale of a real property for a price less than its
fair market value is not necessarily a false
return;
c. Fraud is a question of fact and the
circumstances constituting fraud must be
alleged and proved in the trial court;
d. Fraud is never imputed and the courts never
sustain findings of fraud upon circumstances
that only create suspicion; and
e. Mistakes of revenue officers on three
different occasions remove element of fraud.
In determining whether the return filed is false or
fraudulent, jurisprudence has consistently held
586
that fraud is never imputed. The Court has
refrained from sustaining findings of fraud upon
circumstances which, at most, create only
suspicion. The mere understatement of a tax is
not itself proof of fraud for the purpose of tax
evasion. (CIR vs. Unioil Corporation, G.R. No. 204405,
August 04, 2021, J. Hernando)
Prima facie evidence of False or Fraudulent
Return.
The failure to report sales, receipts or income in
an amount exceeding 30% of that declared per
return, and a claim of deductions in an amount
exceeding 30% of actual deductions, shall render
the taxpayer liable for substantial under-
declaration of sales, receipts or income or for
overstatement of deductions, as mentioned
herein. (Section 248(B), NIRC)
Rule on wrong returns or amended returns:
 An income tax return cannot be considered
as a return for compensating tax for purposes
of computing the period of prescription under
Section 222 of the Tax Code, and that the
taxpayer must file a return for the particular
tax required by law in order to avail himself
of the benefits of Sec. 222 of the Tax Code;
otherwise, if he does not file a return, an
assessment may be made within the time
stated in Sec. 222(a) of the same Code
(Butuan Sawmill Inc. vs. CTA, G.R. No. L-20601,
February 28, 1966).
 The filing of a wrong return is equivalent to
no return at all – the third situation in
Sec. 229. Therefore, in this case, the 10-year
prescriptive period would apply.
No Prescription for assessing Improperly
Accumulated Earnings Tax
The SC is persuaded by the fundamental principle
invoked by CIR that limitations upon the right of
the government to assess and collect taxes will
not be presumed in the absence of clear
legislation to the contrary and that where the
government has not by express statutory
provision provided a limitation upon its right to
assess unpaid taxes, such right is imprescriptible.
The SC, therefore, reconsiders its ruling in its
decision under reconsideration that the right to
assess and collect the assessment in question had
prescribed after 5 years, and instead rules that
there is no such time limit on the right of the
CIR to assess the 25% (now 10%) tax on
unreasonably accumulated surplus
provided in Sec. 25 of NIRC, since there is
no express statutory provision limiting
such right or providing for its prescription.
The underlying purpose of the additional tax in
question on a corporation’s improperly
accumulated profits or surplus is as set forth in
the text of Sec. 25 of NIRC itself to avoid the
situation where a corporation unduly retains its
surplus instead of declaring and paving dividends
to its shareholders or members who would then
have to pay the income tax due on such dividends
received by them. The record amply shows that
Ayala Securities is a mere holding company of its
shareholders through its mother company, a
registered co-partnership then set up by the
individual shareholders belonging to the same
family and that the prima facie evidence and
presumption set up by the Tax Code, therefore
applied without having been adequately rebutted
by the Ayala Securities.(CIR vs. Ayala Securities Co.,
G.R. No. L-29485, November 21, 1980)
Effect of Extraordinary Prescription
Under Sec. 222 of the NIRC, in the case of false
or fraudulent return with intent to evade tax, or
of failure to file a return, either:
1. Assessment and Collection:
a. The tax may be assessed within 10 years
after discovery of the falsity, fraud or
omission (Sec. 222[a], NIRC), and
b. Collected within five (5) years following
the assessment of the tax (Sec. 222[c],
NIRC);
2. Collection only: A proceeding in court for
the collection of tax is filed within ten (10)
years after the discovery of the falsity, fraud
or omission. (Sec. 222(a), NIRC)
587
The Supreme Court held in previous cases that
for assessments that are issued within the 3-year
prescriptive period, the CIR has another three
years within which to collect taxes. The 5-year
period for collection of taxes only applies to
assessments issued within the extraordinary
period of 10 years in cases of false or fraudulent
return or failure to file a return. (CIR vs. CTA, G.R.
No. 258947, March 29, 2022)
Defective Return
A wrong return, however, is different from a
defective return. Defective returns may be
sufficient if there is a substantial compliance.
There is substantial compliance when:
1. The return is made in good faith and is not
false or fraudulent;
2. It covers the entire period involved; and
3. It contains information as to the various
items of income, deduction and credit with
such definiteness as to permit the
computation and assessment of the tax (CIR
vs. Lilia Gonzales, G.R. No. L-19495, April 2,
2019).
(2) Suspension of the Running of
Statute of Limitations
i. When taxpayer cannot be located in the
address given by him in the return, unless he
informs the CIR of any change in his address
thru a written notice to the BIR;
 The suspension of the three-year period
to assess applies only if the BIR
Commissioner is not aware of the
whereabouts of the taxpayer. Hence,
despite the absence of a formal written
notice of respondent's change of
address, the fact remains that petitioner
became aware of respondent's new
address as shown by documents replete
in its records. As a consequence, the
running of the three-year period to
assess respondent was not suspended
and has already prescribed. (CIR vs. BASF
Coating + Inks Phils., GR No. 198677,
November 26, 2014)
ii. When the taxpayer is out of the Philippines
(Sec. 223, NIRC);
iii. Where the CIR is prohibited from making the
assessment or beginning distraint or levy or
a proceeding in court for 60 days thereafter,
such as where there is a pending petition for
review in the CTA from the decision on the
protested assessment (Republic v. Ker & Co.,
GR L-21609, September 29, 1966);
iv. Where CIR and the taxpayer agreed in
writing for the extension of the assessment,
the tax may be assessed within the period so
agreed upon (Sec. 222 [b], NIRC);
v. When the taxpayer requests for
reinvestigation which is granted by the
Commissioner (Collector v. Suyoc Consolidated
Mining Co., GR L-11527, Nov. 25, 1958);
A request for reconsideration alone does not
suspend the period to assess/collect. The
request should first be granted, in order to
effect suspension. (Republic vs. Gancayco, G.R.
No. L-18307, 30 June 1964)
Granting the request for reconsideration
presupposes that an FLD/FAN was issued.
This means that the collection period starts
to run upon the issuance of the FLD/FAN.
Thus, the grant of request for
reconsideration tolls not only the period of
assessment but also that of the collection
period. (CIR v. BPI, G.R. No. 227049, September
16, 2020)
Request for reinvestigation refers to a plea
for re-evaluation of an assessment on the
basis of newly-discovered or additional
evidence that a taxpayer intends to present
in the reinvestigation. It may also involve a
question of fact or law or both. (Revenue
Regulations (RR) No. 12-85, 27 November 1985)
vi. When there is an answer filed by the BIR to
the petition for review in the CTA (Hermanos
v. CIR, GR. No. L-24972. Sept. 30, 1969) where
the court justified this by saying that in the
588
 answer filed by the BIR, it prayed for the 2. Request for reinvestigation
collection of taxes.
A claim for re-evaluation of the assessment
vii. When the Warrant of distraint and levy is duly based on newly-discovered or additional
served upon the taxpayer, his authorized evidence. It may also involve a question of
representative or a member of his household fact or law or both. It tolls the statute of
with sufficient discretion and no property is limitations.
located (proper only for suspension of the
period to collect). Under Sec. 223 of the NIRC, the running of the
prescriptive period can only be suspended by a
Under RMO No. 35-2019, a Warrant of request for reinvestigation, not a request for
Distraint or Levy may only be issued under reconsideration.
1. Unpaid Revenues. These are self-
assessed taxes arising from dishonored A mere request for "reinvestigation" without the
check, unpaid second installment of corresponding action on the part of the
income tax due of individual taxpayers Commissioner does not interrupt the running of
and duly validated unpaid tax due per the prescriptive period. The request should first
tax returns; and be granted in order to effect suspension. (Bravo
2. List of Unpaid Tax Assessments. (1) Alabang, Inc. vs. CIR, CTA Case No, 8199, November
Unprotested Final Assessment Notice; 29, 2012, reiterating Republic of the Philippines vs.
(2) Unappealed FDDA; (3) Unappealed Santiago Gancayco, G.R. No. L-18307, June 30, 1964)
Decision of the Commissioner; and (4)
Final and Executory Decision by the In a request for reinvestigation, the taxpayer is
Court—these are tax assessments given 60 days from the filing of the protest to
arising from investigation which have provide all relevant supporting documents.
become “final and executory.”
Reinvestigation Reconsideration
a plea of re-evaluation of refers to a plea of re-
2. Taxpayer’s Remedies an assessment on the evaluation of an
basis of newly discovered assessment on the
Tax Remedies or ADDITIONAL basis of existing
EVIDENCE that a records WITHOUT
It refers to procedural steps that may be taxpayer intends to need of additional
undertaken by the government or a taxpayer for present in the evidence. It may
the resolution of disputes concerning the levy or reinvestigation. It may involve both a question
imposition, assessment, collection, and refund of also involve a question of of fact or of law or
fact or of law or both. both.
taxes. (DOMONDON, Taxation, 2014)

a) Protesting an Assessment
Need to submit Relevant Supporting
Kinds of Protest Documents
Yes within 60 days FROM No need
1. Request for reconsideration date of filing of protest to
FAN/FLD
Effect of Non-Filing of Relevant Supporting
A claim for re-evaluation of the assessment
Documents
based on existing records without need of Failure to file within 60 Not Applicable
additional evidence. It may involve a question days of relevant
of fact or law or both. It does not toll the supporting documents
statute of limitations. renders the assessment
final, executory, due and
demandable

589
 Reckoning day of 180 days inaction by CIR or g. Itemized schedule of the adjustments to
its duly authorized representative which the taxpayer does not agree;
From the date of filing of From the date of filing h. Statements of facts or law in support of
the relevant supporting of the protest the protest; and
documents
i. Documentary evidence as it may deem
(Sec. 3.1.4., RR 18-2013)
necessary and relevant to support its
protest to be submitted 60 days from the
Content and Validity of Protest
filing thereof.
A protest is considered validly made if it satisfies
Note: RR 18-13 mandates that protests should
the following conditions:
include the facts, law, rules, regulations on
which the protest is based. Otherwise, the
1. In writing;
protest is void and of no effect. For items in
2. Addressed to the CIR;
the assessment not properly protested, these
3. Accompanied by a waiver of the Statute of
shall become final and demandable and a
Limitations in favor of the Government.
collection letter shall be issued immediately.
Without the waiver, the prescriptive period
will not be tolled; (BPI v. CIR, GR 139736,
Venue for Filing Protest to FLD/FAN
October 17, 2005)
4. State the facts, applicable law, rules and
The concerned office who signed the assessment
regulations or jurisprudence on which the
notice shall record and evaluate the
protest is based otherwise the protest would
protest/request for reinvestigation or
be void; and
reconsideration. If the procedure is not followed,
5. Must contain the following:
the Letter of Protest or Request shall be
a. Name of the taxpayer and address for the
considered void. (RMC 39-2013.)
immediate past 3 taxable years;
b. Nature of the request, specifying the
Modes of Filing a Protest
newly discovered evidence to be
presented;
Section 3.1.6(i), Rev. Regs. No. 18-2013, as
c. Taxable periods covered by the
amended by RMO 40-2019 only allow services of
assessment;
assessment notices by:
d. Amount and kind of tax involved and the
assessment notice number;
● Personal Service
e. Date of receipt of the assessment notice
● Substituted Service
or letter of demand;
● Service by Mail
f. Itemized statement of the finding to
a. Registered Mail with Return Card
which the taxpayer agrees (if any) as
b. Reputable Professional Courier Services
basis for the computation of the tax due,
c. Ordinary Mail
which must be paid upon filing of the
d. Service to Tax Agent/Practitioner
protest;

590
 FLOWCHART FOR ISSUANCE AND PROTEST OF FAN/FLD (Flowchart D)

(1) Period to File Protest Reply to PAN v. Protest to FAN

An assessment may be protested administratively Reply to PAN Protest to FAN/FLD

by filing a request for reconsideration or Number of Days to Respond
reinvestigation within thirty (30) days from 15 days AFTER receipt 30 days AFTER receipt of
receipt of the assessment. (Section 228, NIRC) of PAN FAN/FLD
Mandatory?
No. Merely directory. Yes.
Effect of Non – Filing
No effect. BIR will still Renders the assessment
proceed with the serving final, executory, due and
of FAN/FLD regardless if demandable and not
there is a response or subject to dispute.
not.
(see Sec. 3.1.4, RR No. 18-13)

591
(2) Submission of Supporting Documents
Submission of Documents Within 60 Days From
Filing of Protest (Allowed Only in Reinvestigation)
Within sixty (60) days from filing of the protest,
all relevant supporting documents must be
submitted, otherwise the assessment shall
become final. (Section 228 of the NIRC)
NOTE: RR 18-13 requires an identification of
the kind of protest filed – whether a
reconsideration or reinvestigation. The
submission of additional documents within 60
days from filing of protest is allowed only in the
case of reinvestigation. For motion for
reconsideration, the decision of the BIR will be
based only on documents already submitted to
the BIR prior to the issuance of FAN and no new
evidence will be accepted.
Relevant Supporting Documents:
The CIR cannot demand other supporting
documents, particularly if they do not exist and
eventually hold that failure to provide within the
60-day period makes the assessment final and
executory. “The term "relevant supporting
documents" should be understood as those
documents necessary to support the legal basis
in disputing a tax assessment as determined by
the taxpayer. The BIR can only inform the
taxpayer to submit additional documents. The
BIR cannot demand what type of supporting
documents should be submitted. Otherwise, a
taxpayer will be at the mercy of the BIR, which
may require the production of documents that a
taxpayer cannot submit.” (CIR vs. First Express
Pawnshop Company, Inc.; GR No. 172045-46; June 16,
2009)
(3) Effect of Failure to File Protest
When no protest is seasonably made by the
taxpayer, the assessment shall become final,
executory and demandable, and no request
for reconsideration or reinvestigation shall
be granted thereon. (Sec. 3.1.4 of RR No. 12-99,
as amended by RR No. 18-13)
In summary the FAN/FLD Procedure are as
follows:
1. Fifteen (15) days after the issuance of PAN
the BIR shall issue the FAN/FLD.
Be reminded that such FAN/FLD MUST be
issued BEFORE the prescriptive period
to ASSESS or the expiry of the WAIVER
if one has been issued.
2. The taxpayer has the following options in
dealing with the received FAN/FLD:
a. Pay the amount assessed –
terminates and settle the audit for the
taxable period.
b. Pay some or Dispute some or all the
findings - requires filing of a protest
within 30 days from receipt of
FAN/FLD, asserting the TP’s factual and
legal justification on why such finding has
no basis should be dismissed.
Be reminded that EACH and EVERY
finding must be protested, otherwise,
such finding shall be deemed final and
executory and due for payment.
TP must indicate also if the item being
protested is for RECONSIDERATION or
REINVESTIGATION for each and every
item or findings. Failure to indicate
REINVESTIGATION will deem the request
to be only as RECONSIDERATION.
c. For protest for REINVESTIGATION – the
TP requesting for reinvestigation MUST
submit within sixty (60) days “relevant
supporting documents”. Failure to do so
shall make the FAN/FLD final, executory,
due and demandable.
592
Reply to PAN v. Protest to FAN that the same is his final decision. (RR
12-99)
Reply to PAN Protest to FAN/FLD
Number of Days to Respond b. Indirect Denial of Protest:
15 days AFTER receipt 30 days AFTER receipt An indirect denial of protest results if the
of PAN of FAN/FLD CIR through its actions, in relation to a
Mandatory? pending protest, does either of the
No. Merely directory. Yes.
following:
Effect of Non – Filing
No effect. BIR will still Renders the assessment
proceed with the final, executory, due
1. Inaction by the CIR within the 180-day
serving of FAN/FLD and demandable and period (Sec. 228, last par., NIRC) provided to
regardless if there is a not subject to dispute. act upon a protest.
response or not.
(see Sec. 3.1.4, RR No. 18-13) Commissioner did not rule on the taxpayer’s
motion for reconsideration of the
(4) Action of the Commissioner on the assessment, the period to appeal will only
Protest Filed start when the respondent would receive the
summons for the civil action for collection of
Period to act upon or decide on protest filed deficiency tax. (BIR v. Union Shipping Corp.,
G.R. No. 66160, May 21, 1990)
The CIR has 180 days from the date of:
2. Filing of a collection case before the regular
1. Filing of the protest, in case of a request for courts for the collection of the tax. (Yabes vs.
reconsideration; or Flojo, G.R. No. L-46954, July 20, 1982)
2. Submission by the taxpayer of the required
documents within 60 days from filing of the Civil collection can also be considered as
protest, in case of a request for denial of protest of assessment (BIR v. Union
reinvestigation. Shipping Corp., G.R. No. 66160, May 21, 1990)

Decision on the Protest Filed by the CIR or 3. Issuance of a warrant of distraint or levy,
its duly authorized representative. except:

1. Approval of the Protest – Based on the a. When the protest was not taken into
justification provided by the taxpayer, the account before the warrant of distraint
BIR grants the protest and dismisses its claim and levy was issued
against the taxpayer terminating the audit b. When the taxpayer is left in the dark as
case against him/her. to which action of the Commissioner is
appealable
2. Denial of the Protest – this could either
be: Issuance of warrant of distraint and levy to
enforce collection of deficiency assessment is
a. Direct Denial of Protest– The protest outright denial of the request for
may be denied by an administrative reconsideration (Hilado v. CIR. CTA case 1256,
February 25, 1964)
decision on a disputed assessment,
stating the facts, applicable law, rules
4. Sending of a Final Notice before seizure,
and regulations or jurisprudence on
indicating that the CIR is giving the taxpayer
which such decision is based otherwise,
“the LAST OPPORTUNITY to settle the
the decision shall be void in which case
assessment”.
the same shall not be considered a
decision on a disputed assessment and

593
5. Sending of a Demand letter, containing a
text with the words “final decision” and
“appeal”, similar to the tenor of the following:
a. “This constitutes our final decision on the
matter. If you are not agreeable, you
may appeal to the CTA within 30 days
from receipt of this letter.”
b. “This is our final decision based on the
investigation. If you disagree, you may
appeal this final decision within 30 days
from receipt hereof, otherwise said
deficiency tax assessment shall become
final, executory and demandable.”
6. Referral by the Commissioner of the request
for reinvestigation to the Solicitor General
because this shows the insistence of the
Commissioner to collect tax.
 The filing of a criminal action against a
taxpayer after the filing of a protest is
deemed a denial of such protest. However,
the institution of a criminal action cannot in
itself be considered as an assessment. In the
first instance, there is already an assessment
made by the BIR, and the protest thereon is
denied through the criminal action. In the
latter, there is no assessment yet, and the
criminal charges filed, cannot be deemed an
assessment in itself. (see Pascor Realty case
under [E] Tax Remedies under the NIRC, [a]
Assessment)
7. Service of a Preliminary Collection Letter,
since it presupposes the existence of a valid
assessment notice.
Preliminary collection letter may serve as
assessment notice. (United International
Pictures v. CIR, G.R. No. 110318, August 28,
1996)
Collection Letter demonstrated a character of
finality such that there can be no doubt that
the Commissioner had already made a
conclusion to deny Avon's request and she
had the clear resolve to collect the subject
taxes. (CIR vs. Avon Products Manufacturing,
G.R. Nos. 201398-99, October 03, 2018)
In all these cases, the 30-day period is reckoned
from such implicit denial of protest.
Remedies of Taxpayer to Action by
Commissioner
(a) In Case of Denial of Protest
The remedy is to appeal such decision to the CTA
within 30 days from receipt of the decision.
Otherwise, the assessment will become final,
executory and demandable.
Note: If the taxpayer elevates his protest to the
CIR within 30 days from date of receipt of the
final decision of the CIR’s duly authorized
representative, such decision will not be final and
executory.
Two Kinds of Denial and How Appealed
1. Denial made by authorized
representative of the CIR – TP can
appeal within 30 days from receipt either
thru:
a) File an administrative appeal by elevating
the protest to the Commissioner of Internal
Revenue through a motion for
reconsideration or;
b) Appeal to the Court of Tax Appeals (CTA)
thru a Petition for Review
2. Denial made by the Commissioner of
Internal Revenue – only remedy is to file
an appeal with the CTA within 30 days
from receipt of FDDA
Proper venue for the filing of the request of
reconsideration – (Denial made by CIR’s
duly Authorized Representative)
Request for reconsideration to the Commissioner
within thirty (30) days from date of receipt of the
said decision. No request for reinvestigation shall
be allowed in administrative appeal and only
issues raised in the decision of the
Commissioner’s duly authorized representative
shall be entertained by the Commissioner.
594
The request for reconsideration should be filed to
the Office of the Commissioner and NOT with the
Office of the concerned Regional Director (RD),
Assistant Commissioner-Large Taxpayers Service
(ACIRLTS) and Assistant Commissioner-
Enforcement Service (ACIR-ES), who signed the
assessment notices. (RR No. 18-2013)
(b) In Case of Inaction by Commissioner
Within 180 Days From Submission of
Documents
The taxpayer has two alternative options:
1. File a petition for review with the CTA within
30 days after the expiration of the 180-day
period; or
2. Wait for the final decision of the CIR on the
disputed assessment and appeal the final
decision to the CTA within 30 days from the
receipt of the decision.
The above recourse for INACTION by the CIR or
its duly authorized representative is MUTUALLY
EXCLUSIVE and resort to one BARS the
application of the other.
There is no appeal to the CIR from the
failure of the CIR’s authorized
representative to act
This option is only available if the authorized
representative made a partial or whole denial of
the protest. (PAGCOR vs. BIR, GR No. 208731, Jan.
27, 2016)
 Jurisdiction of the CTA has been expanded to
include not only decisions or rulings, but also
inaction of the CIR. Decisions, rulings,
inaction of the CIR are necessary to vest the
CTA with jurisdiction to entertain appeal,
provided it is filed within 30 days after receipt
of decision or ruling or within 30 days after
expiration of the 180-day period fixed by law
for the CIR to act on a disputed assessment.
The 30-day period is jurisdictional and failure
to comply bars appeal and deprives the CTA
of jurisdiction. In case the CIR failed to act
on a disputed assessment within the 180-day
period, the taxpayer can either: (1) file
petition for review with CTA within 30 days,
or (2) await the final decision of the CIR on
disputed assessments and appeal such final
decision to CTA within 30 days after receipt
of the copy of the decision. These options are
mutually exclusive. (RCBC vs. CIR, G.R. No.
168498, June 16, 2006; CIR vs. Avon Products
Manufacturing, G.R. Nos. 201398-99, October 03,
2018
b) Compromise and Abatement of Taxes
The power of the Commissioner to compromise
or abate, under Sec. 204 (A) and (B) of this Code,
any tax liability: Provided, however, That
assessments issued by the regional offices
involving basic deficiency taxes of Five hundred
thousand pesos (P500,000) or less, and minor
criminal violations, as may be determined by rules
and regulations to be promulgated by the
Secretary of finance, upon recommendation of
the Commissioner, discovered by regional and
district officials, may be compromised by a
regional evaluation board which shall be
composed of the Regional Director as Chairman,
the Assistant Regional Director, the heads of the
Legal, Assessment and Collection Divisions and
the Revenue District Officer having jurisdiction
over the taxpayer, as members.
Tax Compromise
Involves the reduction of taxpayer’s liability.
(ABAN, Law of Basic Taxation, p.235)
Requisites for the compromise of taxes
1. Taxpayer has a liability
2. There must be an offer (by the taxpayer or
Commissioner)
3. A reasonable doubt as to validity of claim
against taxpayer exists or the financial
position of the taxpayer demonstrates a clear
inability to pay the assessed tax
4. There must be an acceptance (by the
taxpayer or Commissioner, as the case
maybe) of the offer in settlement of the
original claim
595
Cases which could be subject to
Compromise (RR 30-2002)
1. Delinquent accounts;
2. Cases under administrative protest after
issuance of the FAN to the taxpayer which are
still pending in the Regional Offices, Revenue
District Offices, Legal Service, Large
Taxpayer Service (LTS), Collection Service,
Enforcement Service and other offices in the
National Office;
3. Civil tax cases being disputed before the
courts;
4. Collection cases filed in courts;
5. Criminal violations, other than those already
filed in court or those involving criminal tax
fraud. (Sec. 204, NIRC)
Cases that can’t be subject for compromise
1. Withholding tax cases, unless the applicant-
taxpayer invokes provisions of law that cast
doubt on the taxpayer’s obligation to
withhold;
2. Criminal tax fraud cases confirmed as such by
the CIR or his duly authorized representative;
3. Criminal violations already filed in court;
4. Delinquent accounts with duly approved
schedule of installment payments;
5. Cases where final reports of reinvestigation
or reconsideration have been issued resulting
to reduction in the original assessment and
the taxpayer is agreeable to such decision by
signing the required agreement form for the
purpose. On the other hand, other protested
cases shall be handled by the Regional
Evaluation Board (REB) or the National
Evaluation Board (NEB) on a case to case
basis;
6. Cases which become final and executory
after final judgment of a court, where
compromise is requested on the ground of
doubtful validity of the assessment; and
7. Estate tax cases where compromise is
requested on the ground of financial
incapacity of the taxpayer.
Basis for Acceptance of Compromise
Settlement (RR No. 30-2002):
A. Doubtful validity of the assessment
The offer to compromise a delinquent account or
disputed assessment under these Regulations on
the ground of reasonable doubt as to the validity
of the assessment may be accepted when it is
shown that:
1. The delinquent account or disputed
assessment is one resulting from a jeopardy
assessment (For this purpose, “jeopardy
assessment” shall refer to a tax assessment
which was assessed without the benefit of
complete or partial audit by an authorized
revenue officer, who has reason to believe
that the assessment and collection of a
deficiency tax will be jeopardized by delay
because of the taxpayer’s failure to comply
with the audit and investigation requirements
to present his books of accounts and/or
pertinent records, or to substantiate all or any
of the deductions, exemptions, or credits
claimed in his return);
2. The assessment seems to be arbitrary in
nature, appearing to be based on
presumptions and there is reason to believe
that it is lacking in legal and/or factual basis;
3. The taxpayer failed to file an administrative
protest on account of the alleged failure to
receive notice of assessment and there is
reason to believe that the assessment is
lacking in legal and/or factual basis;
4. The taxpayer failed to file a request for
reinvestigation/reconsideration within 30
days from receipt of FAN and there is reason
to believe that the assessment is lacking in
legal and/or factual basis; or
5. The taxpayer failed to elevate to the CTA an
adverse decision of the Commissioner, or his
authorized representative, in some cases,
within 30 days from receipt thereof and there
is reason to believe that the assessment is
lacking in legal and/or factual basis;
6. The assessments were issued on or after
January 1, 1998, where the demand notice
allegedly failed to comply with the formalities
596
 prescribed under Sec. 228 of the National
Internal Revenue Code of 1997;
7. Assessments made based on the “Best
Evidence Obtainable Rule” and there is
reason to believe that the same can be
disputed by sufficient and competent
evidence; or,
8. The assessment was issued within the
prescriptive period for assessment as
extended by the taxpayer’s execution of
Waiver of the Statute of Limitations the
validity or authenticity of which is being
questioned or at issue and there is strong
reason to believe and evidence to prove that
it is not authentic.
B. Financial incapacity
The offer to compromise based on financial
incapacity may be accepted upon showing
that:
1. The corporation ceased operation or is
already dissolved. Provided, that tax
liabilities corresponding to the Subscription
Receivable or to the
Distributed/Distributable Assets to the
stockholders representing return of capital
at the time of cessation of operation or
dissolution of business shall not be
considered for compromise;
2. The taxpayer, as reflected in its latest
Balance Sheet supposed to be filed with
the Bureau of Internal Revenue, is
suffering from surplus or earnings
deficit resulting to impairment in the
original capital by at least 50%,
provided that amounts payable or due to
stockholders other than business-related
transactions which are properly included in
the regular “accounts payable” are by
fiction of law considered as part of capital
and not liability, and provided further that
the taxpayer has no sufficient liquid
asset to satisfy the tax liability;
3. The taxpayer is suffering from a net
worth deficit (total liabilities exceed total
assets) computed by deducting total
liabilities (net of deferred credits and
amounts payable to stockholders/owners
reflected as liabilities, except business
related transactions) from total assets (net
of prepaid expenses, deferred charges,
pre-operating expenses, as well as
appraisal increases in fixed assets), taken
from the latest audited financial
statements, provided that in the case of an
individual taxpayer, he has no other
leviable properties under the law other
than his family home;
4. The taxpayer is a compensation income
earner with no other source of
income and the family’s gross monthly
compensation income does not exceed the
levels of compensation income provided
for under Sec. 4.1.1 of these Regulations,
and it appears that the taxpayer possesses
no other leviable or distrainable assets,
other than his family home; or,
5. The taxpayer has been declared by any
competent tribunal/ authority/ body
/government agency as bankrupt or
insolvent.
Note: The Commissioner shall not consider any
offer for compromise settlement by reason of
financial incapacity unless and until the taxpayer
waives in writing his privilege of the secrecy of
bank deposits under R.A. No. 1405 or under other
general or special laws, and such waiver shall
constitute as the authority of the Commissioner
to inquire into the bank deposits of the taxpayer.
The compromise settlement is subject to the
following minimum amounts:
1. For cases of financial incapacity, a
minimum compromise rate of 10% of the
basic assessed tax;
2. For other cases, a minimum
compromise rate equivalent to 40% of the
basic tax assessed.
Where the basic tax involved exceeds
P1,000,000.00 or the settlement offered is less
that the prescribed minimum rates, the
compromise shall be subject to the approval of
the Evaluation Board composed of the
Commissioner and the four (4) Deputy
Commissioners.
597
Mandatory Payment of Compromise
Application
The compromise offer shall be paid by the
taxpayer upon filing of the application for
compromise settlement. No application for
compromise settlement shall be processed
without the full settlement of the offered amount.
In case of disapproval of the application for
compromise settlement, the amount paid upon
filing of the aforesaid application shall be
deducted from the total outstanding tax liabilities.
(RR 9-2013)
ABATEMENT
An abatement is a diminution or decrease in the
amount of tax imposed such that to abate is to
nullify or reduce in value or amount.
Grounds:
1. The tax or any portion thereof appears to
have been unjustly or excessively assessed;
or
2. The administration and collection costs
involved do not justify collection of the
amount due
Non-retroactivity of Rulings (Sec. 246,
NIRC, as amended)
General Rule: The rulings of the BIR are not
retroactive. Any revocation, modification or
reversal of any of the rules and regulations
promulgated or any of the rulings or circulars
promulgated by the CIR shall not be given
retroactive application if it will be prejudicial to
the taxpayers.
Exceptions:
1. Where the taxpayer deliberately misstates or
omits material facts from his return or any
document required of him by the BIR;
2. Where the facts subsequently gathered by
the BIR are materially different from the facts
on which the ruling is based; or
3. Where the taxpayer acted in bad faith. (Sec.
246, NIRC, as amended)
 Rulings, circulars, rules and regulations
promulgated by the CIR would have no
retroactive application if to so apply them
would be prejudicial to the taxpayers (CIR vs.
Locsin, CTA EB Case No. 2104, January 13, 2021,
citing CIR vs. CA, et al., G.R. No. 117982, 6
February 1997).
Cases Related to Non-retroactivity of
Rulings:
1. In order for Sec. 246 to apply, the ruling must
be issued to the taxpayer invoking the same.
(CIR vs. Filinvest Development Corporation, GR
No. 163653, July 19, 2011)
2. But, if the ruling issued is a general
interpretative rule, all taxpayers may rely on
the ruling and invoke Sec. 246 if proper. (CIR
vs. San Roque, GR No. 187485, February 12,
2013)
3. Section 246 is not limited to a reversal only
by the Commissioner because this Section
expressly states, "Any revocation,
modification or reversal" without specifying
who made the revocation, modification or
reversal. Hence, a reversal by the SC is
covered under Section 246. (San Miguel Paper
Packaging Corp. vs. CIR, CTA EB Case No. 2099,
October 7, 2020, citing CIR vs. San Roque, GR No.
187485, February 12, 2013)
c) Recovery of Tax Erroneously or Illegally
Collected
No suit or proceeding shall be maintained in any
court for the recovery of any national internal
revenue tax hereafter alleged to have been
erroneously or illegally assessed or collected, or
of any penalty claimed to have been collected
without authority, of any sum alleged to have
been excessively or in any manner wrongfully
collected without authority, or of any sum alleged
to have been excessively or in any manner
wrongfully collected, until a claim for refund or
credit has been duly filed with the Commissioner;
but such suit or proceeding may be maintained,
whether or not such tax, penalty, or sum has
been paid under protest or duress. (Sec.229, NIRC)
598

Grounds, Requisites, and Periods for Filing
a Claim for Refund or Issuance of a Tax
Credit Certificate
Grounds:
1. Tax is erroneously or illegally collected.
2. Sum collected is excessive or in any manner
wrongfully collected.
3. Penalty is collected without authority.
(Sec.229, NIRC)
Requisites of Tax Refund
1. There must be a written claim with the CIR,
as it would enable the CIR to correct the
errors of his subordinate and to notify the
government;
2. Must be a categorical claim for refund or
credit;
3. Must be filed within 2 years after the payment
of the tax or penalty otherwise no refund or
credit could be taken. No suit or proceeding
shall be instituted after the expiration of the
2-year period regardless of any supervening
cause that may arise after payment; and
4. Present proof of payment of the tax.
 It partakes of the nature of an exemption
and is strictly construed against the
claimant. The burden of proof is on the
taxpayer claiming the refund that he is
entitled to the same. (CIR vs. Tokyo
Shipping Co., Ltd., G.R. No. 68282, May 26,
1995)
To claim tax credit or refund of erroneously or
illegally collected taxes by the BIR, the claimant
must first file an administrative claim with the CIR
before filing its judicial claim with the courts of
law. Both claims must be filed within a two (2)-
year reglementary period. Timeliness of the filing
of the claim is mandatory and jurisdictional, and
thus the Court cannot take cognizance of a
judicial claim for refund filed either prematurely
or out of time. It is worthy to stress that as for
the judicial claim, tax law even explicitly provides
that it be filed within two (2) years from payment
of the tax "regardless of any supervening cause
that may arise after payment." (CIR vs. San Miguel
Corp., G.R. No. 180740, 180910, November 11, 2019,
J. Hernando)
Necessity of proof for claim or refund
Claim for refund partakes the nature of an
exemption, hence it is strictly construed against
the claimant and the failure to discharge said
burden is fatal to the claim. (CIR vs. S.C. Johnson
and Son, Inc., et al., G.R. No. 127105, June 25, 1999)
Section 112(A) of the NIRC, which enumerates
the requisites for a taxpayer to be entitled to a
tax refund or credit, does not require subsidiary
journals as part of the substantiation
requirement. The subsidiary journals are not
required, but they may be utilized by the CIR as
vital sources of information for other purposes
such as making assessments. (CIR vs. Philex Mining
Corporation, G.R. No. 226272, September 16, 2020, J.
Hernando)
Burden of Proof for Claim of Refund - Burden
of proof for claim of refund rests with the
claimant. Hence, it is strictly construed against
him
Prescriptive Period for Recovery of Tax
Erroneously or Illegally Collected
The filing of an administrative case for refund or
a case in court must be done within (2) years
from the date of payment of the tax or penalty
regardless of any supervening cause that may
arise after payment.
Provided, however, that the Commissioner may,
even without a written claim therefore, refund or
credit any tax, where on the face of the return
upon which payment was made, such payment
appears clearly to have been erroneously paid.
Commencement of the Two (2) Year Period
(Jurisprudence)
1. Tax sought to be refunded is illegally or
erroneously collected
599
  From the date the tax was paid.
(Commissioner vs. Victorias Milling, G.R. No.
L-24108, January 31, 1968)
2. Tax is paid only in installments or only
in part
 From the date the last or final installment
or payment because for tax purposes,
there is no payment until the whole or
entire tax liability is fully paid. (Collector
vs. Prieto, G.R. No. L-11976, August 29, 1961)
3. Taxpayer merely made a deposit
 Counted from the conversion of the
deposit to payment. (Union Garment vs.
Collector, CTA Case No. 416, November 17,
1958)
Note: Merely making a deposit is not
equivalent to payment until the amount is
actually applied to the specific purpose for
which it was deposited.
4. Tax has been withheld from source
(through the withholding tax system)
Counted from the date it falls due at the end
of the taxable year
 A taxpayer who contributes to the
withholding tax system does not really
deposit an amount to the government,
but in truth, performs and extinguishes
his tax obligation for the year concerned.
(Gibbs vs. Commissioner, G.R. No. L-17406,
November 29, 1965).
5. End of taxable year vs. date of the filing
of the final adjusted return
From the date when the final adjusted return
was filed.
 The rationale in computing this period is
the fact that it is only then the
corporation can ascertain whether it
made profits or incurred losses in its
business operations. (CIR vs. Gulf Air
Company, CTA EB Case No. 2439, April 12,
2022, citing ACCRA Investments vs. CA, G.R.
No. 96322, December 20, 1991)
6. Date when quarterly income tax was
paid vs. date when final adjusted return
was filed
From the date when final adjusted return was
filed
 The filing of the quarterly income tax
return (Sec. 68) and payment of
quarterly income tax should only be
considered mere installments of the
annual tax due. (Commissioner vs. TMX
Sales, G.R. No. 83736, January 15, 1992)
7. Date when the final adjustment return
was actually filed (e.g., Apr. 2) vs. Last
day when the adjustment return could
still be filed (e.g., April 15)
 From the date the final adjustment return
was actually filed. (Commissioner vs. CA,
G.R. No. 117254, January 21, 1999)
8. Tax was not erroneously or illegally
paid but the taxpayer became entitled
to refund because of supervening
circumstances
 From the date the taxpayer becomes
entitled to refund and not from the date
of payment. (Commissioner vs. Don Pedro
Central Azucarera, GR No. L-28467, February
28, 1973)
Other Consideration Affecting Tax Refunds
Refunds of Corporate Taxpayers
 The two-year prescriptive period within which
to claim a refund commences to run, at the
earliest, on the date of the filing of the
adjusted final tax return. (ACCRA Investments
Corp vs. CA, G.R. No. 96322, December 20, 1991)
There is a need to file a return first before a
claim for refund can prosper inasmuch as the
Commissioner by his own rules and
regulations mandates that the corporate
600
 taxpayer opting to ask for a refund must
show in its final adjustment return the
income it received from all sources and the
amount of withholding taxes remitted by its
withholding agents to the BIR. ACCRA filed its
final adjustment return for its 1981 taxable
year on April 15, 1982. The 2-year
prescriptive period within which to claim a
refund commences to run at the earliest, on
the date of the filing of the adjusted final tax
return. Hence, ACCRA had until April 15,
1984 within which to file its claim for refund.
(id.)
 The filing of quarterly ITRs required in Sec.
68 and implemented per BIR Form 1702-Q
and payment of quarterly income tax should
only be considered mere installments of the
annual tax due. These quarterly tax
payments which are computed based on the
cumulative figures of gross receipts and
deductions in order to arrive at a net taxable
income, should be treated as advances or
portions of the annual income tax due, to be
adjusted at the end of the calendar or fiscal
year. This is reinforced by Sec. 69 which
provides for the filing of adjustment returns
and final payment of income tax.
Consequently, the 2-year prescriptive period
provided in Sec. 230 of the Tax Code should
be computed from the time of filing of the
Adjustment Return or Annual ITR and final
payment of income tax. (CIR vs. TMX Sales Inc.,
& CTA, G.R. No. 83736, January 15, 1992)
 In exercising its option either to carry over
the excess credit or to claim for tax refund,
the corporation must signify in its annual
corporate adjustment return (by marking the
option box provided in the BIR Form) its
intention either to carry over the excess
credit or to claim a refund. (Systra Philippines,
Inc. vs. CIR, G.R. No. 176290, September 21,
2007).
Payment Under Protest is NOT Necessary
under NIRC
A suit or proceeding for tax refund may be
maintained “whether or not such tax, penalty or
sum has been paid under protest or duress.” (Sec.
229, NIRC)
The fact of withholding must be established by a
copy of a statement duly issued by the payor to
the payee showing the amount paid and the
amount of the tax withheld therefrom. (CIR vs.
Team [Philippines] Operations Corp. [formerly Mirant
(Phils.)], G.R. No. 179260, April 2, 2014)
Proper Party to Claim for Refund or Tax
Credit
A claim for tax refund or issuance may be filed
by:
1. Taxpayer
2. Statutory taxpayer
3. Withholding Agent
A “taxpayer” is any person subject to tax imposed
by the Tax Code.
Under Sec. 53(c), the withholding agent who is
required to deduct and withhold any tax is made
“personally liable for such tax” and is indemnified
against any claims and demands which the
stockholder might wish to make in questioning
the amount of payments effected by the
withholding agent in accordance with the
provisions of NIRC. The withholding agent, P&G-
Phil., is directly and independently liable for the
correct amount of the tax that should be withheld
from the dividend remittances. The withholding
agent is, moreover, subject to and liable for
deficiency assessments, surcharges and penalties
should the amount of the tax withheld be finally
found to be less than the amount that should
have been withheld under the law. A “person
liable for tax” has been held to be a “person
subject to tax” and “subject to tax” both connote
legal obligation or duty to pay a tax. By any
reasonable standard, such a person should be
regarded as a part-in-interest or as a person
having sufficient legal interest, to bring a suit for
refund of taxes he believes were illegally collected
from him. (Toledo Power Company vs. CIR, CTA Case
No. 9465, June 08, 2020, citing CIR vs. Procter &
Gamble Philippines Manufacturing Corporation & CTA,
G.R. No. 66838, December 2, 1991)
601
The proper party to question or seek a refund of
an indirect tax is the statutory taxpayer, the
person on whom the tax is imposed by law and
who paid the same even if he shifts the burden
thereof to another. Even if Petron Corporation
passed on to Silkair the burden of the tax, the
additional amount billed to Silkair for jet fuel is
not a tax but part of the price which Silkair had
to pay as purchaser. (Silkair vs. CIR, G.R. Nos.
171383 & 172379, November 14, 2008) A
withholding agent has a legal right to file a claim
for refund for two reasons: first, he is considered
a “taxpayer” under the NIRC as he is personally
liable for the withholding tax as well as for
deficiency assessments, surcharges and
penalties; and second, as an agent of the
taxpayer, his authority to file the necessary
income tax return and to remit the tax withheld
to the government impliedly includes the
authority to file a claim for refund and to bring an
action for recovery of such claim. (CIR vs. Smart
Communications, Inc., G.R. Nos. 179045-46, August
25, 2010)
Procedures and Time Periods Applicable in
the Case of Claiming Refund of Erroneously
or Illegally Paid Taxes or Penalties under
the Tax Code.
a. Administrative Claim
i. File with the CIR an administrative claim for
refund/TCC within two (2) years from the
date of payment of the tax or penalty;
ii. However, the CIR may, even without a
written claim therefor, refund or credit any
tax, where on the face of the return upon
which payment was made, such payment
appears clearly to have been erroneously
paid.
b. Judicial Claim
After filing an administrative claim, file a
judicial claim for refund with the CTA WITHIN
the same 2-year period from the date of
payment of the tax or penalty regardless of
any supervening cause that may arise after
payment. It is only important that the
administrative claim should be priorly filed;
But if the administrative claim is denied during
the 2-year period, the judicial claim should be
filed within 30 days from the receipt of the
CIR’s denial but within the 2-year period from
the date of payment. (Section 229, NIRC, CIR vs.
Goodyear Philippines, Inc, G.R. No. 216130, August
3, 2016)
3. Government Remedies for Collection of
Delinquent Taxes
The civil remedies for the collection of internal
revenue taxes, fees or charges and any increment
thereto resulting from delinquency shall be:
1. By distraint of personal property or levy upon
real property
2. By civil or criminal action
Either of these remedies or both simultaneously
may be pursued in the discretion of the
authorities charged with the collection of such
taxes. (NIRC, Sec. 205)
Period to Assess
Except as provided in Section 222, internal
revenue taxes shall be assessed within three (3)
years after the last day prescribed by law for the
filing of the return, and no proceeding in court
without assessment for the collection of such
taxes shall be begun after the expiration of
such period: Provided, That in a case where a
return is filed beyond the period prescribed by
law, the three (3)-year period shall be counted
from the day the return was filed. For purposes
of this Section, a return filed before the last day
prescribed by law for the filing thereof shall be
considered as filed on such last day. (Sec. 203,
NIRC)
In case of filing of a false or fraudulent return
with intent to evade tax or failure to file a return,
the tax may be assessed, or a proceeding in court
for the collection of such tax may be filed without
assessment, within ten (10) years after the
discovery of the falsity, fraud, or omission. (Sec.
222, NIRC)
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Generally, the government can only file a
proceeding in court to collect once the
assessment has become final and unappealable.
a) Requisites
Instances When an Assessment Becomes
FINAL, EXECUTORY AND DEMANDABLE
1. Failure of the taxpayer to file a VALID protest
within 30 days from receipt of the FAN/FD;
2. Failure of the taxpayer to submit all relevant
documents in support of his protest by way
of reconsideration within 60 days from the
date of filing of the protest;
3. Failure of the taxpayer to appeal to the CIR
or CTA within 30 days from date of receipt of
FDDA issued by the Commissioner’s duly
authorized representative;
4. Failure of taxpayer to appeal to CTA within
30 days from date of receipt of the FDDA
issued by the CIR;
5. Failure of taxpayer to timely file a motion of
reconsideration or new trial before the CTA
Division or failure to appeal to the CTA En
Banc and SC based on existing Rules of
Procedures; or
6. Failure of 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 BIR
registration or cancelling its BIR registration
as the case may be, through the
accomplishment and filing of BIR Form No.
1905 – Application for Registration
Information Updated, as prescribed by
pertinent issuance and/or amendments
thereto. (RMO 26-2016)
Collection
i. Tax lien
A tax lien is a charge on all leviable property of
the taxpayer to secure the proper payment of the
tax, surcharges, interests and costs.
It is a legal claim or charge on property, real or
personal, established by law as security in default
of the payment of tax. (HSBC vs. Rafferty, G.R. No.
L- 13188, November 15,1916)
The tax lien attaches not only from the service of
the warrant of distraint of personal property but
from the time the tax became due and payable.
(HSBC vs. Rafferty, G.R. No. L- 13188, November
15,1916)
For real properties – from the time of registration
with the Registered of Deeds. (CIR v. NLRC, G.R.
No. 74965, November 9,1994)
Notice required
The lien is not valid against any mortgagee,
purchaser, or judgment creditor until notice of
such lien shall have been filed in the proper
register of deeds of the province or city where the
property of the taxpayer is located. (Sec. 219,
NIRC)
Superiority of Tax Lien
It is settled that the claim of the government
predicated on a tax lien is superior to the claim of
a private litigant predicated on a judgment. (CIR
v. NLRC, G.R. No. 74965, November 9,1994)
Preference of credit
A tax (not due on specific property) due the
National Government come 9th, and taxes due
cities or municipalities come 10th in the order of
preference of credits on the other assets of the
debtor. (Art. 2244, Civil Code)
Distinguished from Distraint:
Distraint of the property seized must be that of
the taxpayer, although it need not be the
property in respect to which the tax is assessed;
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a tax lien, however, is directed to the property
subject to the tax regardless of its owner.
When applicable:
1. With respect to personal property– Tax lien
attaches when the taxpayer neglects or
refuses to pay tax after demand and not from
the time the warrant is served (Sec. 219, NIRC)
2. With respect to real property– from time of
registration with the register of deeds.
Tax lien is extinguished:
1. By payment or remission of the tax
2. By prescription of the right of government to
assess or collect
3. By failure to file notice of such tax lien in the
office of Register of Deeds
4. By destruction of property subject to tax lien
5. By replacing it with a bond
ii. Distraint and Levy Distraint
Seizure by the government of personal
properties, tangible or intangible, to enforce
payment of taxes, to be followed by a public sale,
if taxes are not voluntary paid. (DE LEON, NIRC
Annotated, p.475)
Garnishment
Taking of property usually cash or sum of money,
owned by the delinquency taxpayer which is in
the possession of a third party.
Two Kinds of Distraint
1. Actual Distraint – wherein ACTUAL
DELINQUENCY in tax payment is necessary
Procedure for Actual Distraint
1. Commencement of distraint
proceedings:
a. By the Commissioner or his duly
authorized representative where the
amount exceeds Php 1 million
b. By the Revenue District Officer where
amount is equal to or less than Php 1
million
Subjects of Distraint
Any goods, chattels or effects, and the personal
property, including stocks and other securities,
debts, credits, bank accounts, and interests in
and rights to personal property of such persons.
2. Warrant of distraint
a. How served:
i. To the owner or person from whose
possession such goods, chattels, or
effects or other personal property
were taken, or at the dwelling or
place of business of such person and
with someone of suitable age and
discretion.
ii. Stocks and other securities - upon
the taxpayer and upon the president,
manager, treasurer or other
responsible officer of the
corporation, company or association,
which issued the said stocks or
securities.
iii. Debts and credits - by leaving with
the person owing the debts or having
in his possession or under his control
such credits, or with his agent
iv. Bank accounts - upon the taxpayer
and upon the president, manager,
treasurer or other responsible officer
of the bank
3. Reporting
A report on the distraint shall, within ten
(10) days from receipt of the warrant,
be submitted by the distraining officer to the
Revenue District Officer, and to the Revenue
Regional Director
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4. Notice of sale of distrained properties
Posting of Notices
A notification to be exhibited in not less than
two (2) public places in the municipality or
city where the distraint is made, specifying;
the time and place of sale and the articles
distrained. One place for the posting of such
notice shall be at the Office of the Mayor of
the city or municipality in which the property
is distrained.
Date of Sale
The time of sale shall not be less than
twenty (20) days after notice to the
owner or possessor of the property as above
specified and the publication or posting of
such notice.
At the time and place fixed in such notice, the
said revenue officer shall sell the goods,
chattels, or effects, or other personal
property, including stocks and other
securities so distrained, at public auction, to
the highest bidder for cash, or with the
approval of the Commissioner, through duly
licensed commodity or stock exchanges.
In the case of stocks and other securities, the
officer making the sale shall execute a bill of
sale which he shall deliver to the buyer, and
a copy thereof furnished the corporation,
company or association which issued the
stocks or other securities. Upon receipt of the
copy of the bill of sale, the corporation,
company or association shall make the
corresponding entry in its books, transfer the
stocks or other securities sold in the name of
the buyer, and issue, if required to do so, the
corresponding certificates of stock or other
securities.
Excess
Any residue over and above what is
required to pay the entire claim, including
expenses, shall be returned to the owner of the
property sold. The expenses chargeable upon
each seizure and sale shall embrace only the
actual expenses of seizure and preservation of
the property pending the sale, and no charge
shall be imposed for the services of the local
internal revenue officer or his deputy. (Secs. 207-
209, NIRC)
Right of Preemption
If at any time prior to the consummation of the
sale all proper charges are paid to the officer
conducting the sale, the goods or effects
distrained shall be restored to the owner.
(Sec. 210, NIRC)
1. Report after the sale
Within two (2) days after the sale, the officer
making the same shall make a report of his
proceedings in writing to the Commissioner
and shall himself preserve a copy of such
report as an official record. (Sec. 211, NIRC)
Purchase and resale by the Government
When the amount bid for the property under
distraint is not equal to the amount of the tax or
is very much less than the actual market value of
the articles offered for sale, the Commissioner or
his deputy may purchase the same in behalf of
the national Government for the amount of taxes,
penalties and costs due thereon. (Sec. 212, NIRC)
Property so purchased may be resold by the
Commissioner or his deputy, subject to the rules
and regulations prescribed by the Secretary of
Finance, the net proceeds therefrom shall be
remitted to the National Treasury and accounted
for as internal revenue.
2. Constructive Distraint – wherein NO
ACTUAL DELINQUENCY is necessary
Applicable if taxpayer is: (HOLRR)
1. Retiring its business
2. Intending to leave the Philippines
3. Intending to remove his properties
therefrom
4. Intending to hide
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5. Intending to perform any act to obstruct the
proceedings for collecting the tax due or
which may due for him (Sec. 206, NIRC)
How effected:
Taxpayer will be required to sign a receipt
covering the property distrained and obligate
himself to:
1. Preserve it intact and unaltered; and
2. Not disposed of it any manner without
express authority of the CIR
If the taxpayer refuse, the officer will prepare a
list of the properties distrained and will leave a
copy thereof in the premises, in the presence of
two witnesses. (Sec.206,NIRC)
Levy (Sec. 207(B), NIRC)
Levy of real property refers to the same act of
seizure as in distraint, but in this case, of real
property, an interest in or rights to such property
in order to enforce the payment of taxes.
When made:
1. Before, simultaneously or after the distraint
of personal property belonging to the
delinquent;
2. In case the warrant of 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 tax delinquency,
the Commissioner or his duly authorized
representative shall, within thirty (30) days
after execution of the distraint, proceed with
the levy on the taxpayer's real property.
Procedure
1. Warrant of Levy
Duly authenticated certificate showing:
a. Name of the taxpayer
b. Amounts of the tax and penalty due
from him
c. Description of the property upon which
levy is made
2. Notice
Written notice of the levy shall be mailed to
or served upon:
1. Register of Deeds for the province or city
where the property is located; and,
2. Delinquent taxpayer, or if he be absent
from the Philippines, to his agent or the
manager of the business in respect to
which the liability arose, or if there be
none, to the occupant of the property in
question.
3. Report of receipt of warrant
Within ten (10) days after receipt of the
warrant, a report on any levy shall be
submitted by the levying officer to the
Commissioner or his duly authorized
representative: Provided, however, That a
consolidated report by the Revenue Regional
Director may be required by the
Commissioner as often as necessary:
Provided, further, That the Commissioner or
his duly authorized representative, subject to
rules and regulations promulgated by the
Secretary of Finance, upon recommendation
of the Commissioner, shall have the authority
to lift warrants of levy issued in accordance
with the provisions hereof.
4. Advertisement
Within twenty (20) days after levy, the
officer conducting the proceedings shall
proceed to advertise the property or a
usable portion thereof as may be necessary
to satisfy the claim and cost of sale
Duration of Posting
Such advertisement shall cover a period of at
least thirty (30) days
It will contain the following: (ANTS)
The advertisement shall contain:
1. Amount of taxes and penalties so due;
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2. Time and place of sale,
3. Name of the taxpayer against whom taxes
are levied; and
4. Short description of the property to be sold.
Place of Posting
By posting a notice at the:
1. Main entrance of the municipal building or
city hall and in public; and,
2. Conspicuous place in the barrio or district in
which the real estate lies.
Publication
Publication once a week for three (3) weeks
in a newspaper of general circulation in the
municipality or city where the property is located.
5. Sale
Venue
1. At the main entrance of the municipal
building or city hall; or
2. On the premises to be sold, as the officer
conducting the proceedings shall determine
and as the notice of sale shall specify.
Discontinuation of proceedings
At any time before the day fixed for the sale,
the taxpayer may discontinue all proceedings by
paying the taxes, penalties and interest.
Certificate of sale
Within five (5) days after the sale, a return
by the distraining or levying officer of the
proceedings shall be entered upon the records of
the Revenue Collection Officer, the Revenue
District Officer and the Revenue Regional
Director. The Revenue Collection Officer, in
consultation with the Revenue District Officer,
shall then make out and deliver to the
purchaser a certificate from his records,
showing the proceedings of the sale, describing
the property sold stating the name of the
purchaser and setting out the exact amount of all
taxes, penalties and interest: Provided, however,
That in case the proceeds of the sale exceeds the
claim and cost of sale, the excess shall be turned
over to the owner of the property.
The owner shall not, however, be deprived of the
possession of the said property and shall be
entitled to the rents and other income thereof
until the expiration of the time allowed for its
redemption.
Excess
That in case the proceeds of the sale exceeds the
claim and cost of sale, the excess shall be turned
over to the owner of the property.
Right of Redemption
Within one (1) year from the date of sale,
the delinquent taxpayer, or any one for him, shall
have the right of paying to the Revenue District
Officer the amount of the public taxes, penalties,
and interest thereon from the date of delinquency
to the date of sale, together with interest on said
purchase price at the rate of fifteen percent
(15%) per annum from the date of purchase
to the date of redemption, and such payment
shall entitle the person paying to the delivery of
the certificate issued to the purchaser and a
certificate from the said Revenue District Officer
that he has thus redeemed the property, and the
Revenue District Officer shall forthwith pay over
to the purchaser the amount by which such
property has thus been redeemed, and said
property thereafter shall be free from the lien of
such taxes and penalties.
6. Final Deed to Purchaser
In case the taxpayer shall not redeem the
property as herein provided, the Revenue
District Officer shall, as grantor, execute a
deed conveying to the purchaser so much of
the property as has been sold, free from all liens
of any kind whatsoever, and the deed shall
succinctly recite all the proceedings upon which
the validity of the sale depends. (Sec. 202, NIRC)
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Forfeiture to Government for Want of The real property under levy shall be sold in a
Bidder public sale, if the taxes involved are not
voluntarily paid following such levy.
In case there is no bidder for real property
exposed for sale as herein above provided or if Distraint vs. Levy
the highest bid is for an amount insufficient to
pay the taxes, penalties and costs, the Internal DISTRAINT LEVY
Revenue Officer conducting the sale shall declare Personal property only Real property only
the property forfeited to the Government in Pre-emption only (no Pre-emption and
satisfaction of the claim in question and within right of redemption) redemption (w/in 1 year
two (2) days thereafter, shall make a return of his from sale) available.
proceedings and the forfeiture which shall be No forfeiture in favor Sec. 215 provides that
of government in case forfeiture is available in
spread upon the records of his office. It shall be
there is no bidder/bid case there is no bidder/bid
the duty of the Register of Deeds concerned, is insufficient, but BIR is insufficient.
upon registration with his office of any such may purchase the
declaration of forfeiture, to transfer the title of property.
the property forfeited to the Government There is constructive There is NO constructive
WITHOUT the necessity of an order from a distraint levy
competent court.
Further distraint and levy
Redemption
The remedy by distraint of personal property and
Within one (1) year from the date of such levy on realty may be repeated if necessary, until
forfeiture, the taxpayer, or any one for him, may the full amount due including all expenses, is
redeem said property by paying to the collected. (Sec. 217, NIRC)
Commissioner or the latter's Revenue Collection
Officer the full amount of the taxes and penalties, iii. Suspension of business operation
together with interest thereon and the costs of
sale, but if the property be not thus redeemed, The Commissioner or his authorized
the forfeiture shall become absolute. representative is hereby empowered to suspend
the business operations and temporarily
Resale of Real Estate Taken for Taxes. close the business establishment of any
person:
The Commissioner shall have charge of any real
estate obtained by the Government of the 1. If, in the case of VAT-registered person,
Philippines in payment or satisfaction of taxes, there’s:
penalties or costs arising under this Code or in
compromise or adjustment of any claim a. Failure to issue receipts or invoices;
therefore; and said Commissioner may, upon the b. Failure to file a VAT return as required
giving of not less than twenty (20) days under Sec. 114; or,
notice, sell and dispose of the same of public c. Understatement of taxable sales or
auction or with prior approval of the Secretary of receipts by thirty percent (30%) or
Finance, dispose of the same at private sale. In more of his correct taxable sales or
either case, the proceeds of the sale shall be receipts for the taxable quarter; in case
deposited with the National Treasury, and an of failure of any person to register as
accounting of the same shall rendered to the required under Sec. 236, the
Chairman of the Commission on Audit. temporary closure of the
establishment shall be for the duration
of not less than five (5) days and shall be
lifted only upon compliance with

608
 whatever requirements prescribed by the Tax Base
Commissioner in the closure order. Basic tax Basic tax plus interest
and surcharges
2. Failure of any person to register as required Reckoning Point / Date
under Section 236. From the date From the due date
prescribed for its appearing in the notice
payment until the full and demand of the CIR
The temporary closure of the payment thereof, or until the amount is fully
establishment shall be for the duration of not upon issuance of a paid
less than five (5) days and shall be lifted notice and
only upon compliance with whatever demand by the CIR,
requirements prescribed by the whichever comes earlier
Commissioner in the closure order. (Sec. 115, Rate
NIRC) 2x the legal rate set by 2x the legal rate set by
the Bangko Sentral ng the Bangko Sentral ng
b) Prescriptive Period Pilipinas (BSP) Pilipinas (BSP)

Current legal rate: 6% Current legal rate: 6%

Any internal revenue tax which has been
assessed within the period of limitation as (BSP Circular No. 799 (BSP Circular No. 799
prescribed in paragraph (a) hereof may be dated June 21, 2013) dated June 21, 2013)
collected by distraint or levy or by a proceeding
in court within five (5) years following the Example: Imposition of Deficiency &
assessment of the tax. (Sec. 222[c], NIRC) Delinquency Interest BEFORE TRAIN LAW

Exceptions: (A) Taxpayer was audited by the BIR thru a LOA

issued in 2014 covering all taxes for 2013. BIR
a. False or fraudulent return with intent to issued an assessment for Income Tax (IT) during
evade taxes 2016 and which was timely protested but
b. Failure or omission to file a return however denied by the CIR thru an FDDA. By Jan
c. Waiver 2017 the taxpayer decided to pay the assessed
amount.
Either of these remedies or both (Administrative
and Judicial Remedies) simultaneously may be As can be observed from the above example (A),
pursued in the discretion of the authorities the DEFICIENCY INTEREST is to be computed
charged with the collection of such taxes. (Sec. from the date the tax was prescribed (supposed)
205, NIRC)
to be paid until its full payment in 2017. While the
DELINQUENCY INTEREST is to be paid from the
4. Civil Penalties
demand by the BIR which was the FAN/FLD until
its full payment.
a) Delinquency Interest and Deficiency
Interest
Effectively, before TRAIN LAW there was double
imposition of interest (interest on interest).
Deficiency Interest Delinquency Interest
Nature
Amount still due and Failure to pay the tax Upon Effectivity of TRAIN LAW – (New Rule
collectible from a due on the date fixed by on Deficiency and Delinquency Interest):
taxpayer law
upon audit or or indicated in the No imposition of Double Imposition of Interest.
investigation assessment notice or There shall be assessed and collected on any
letter of demand unpaid amount of tax, interest at the rate of
Shortage of taxes paid Delay in payment of double the legal interest rate for loans or
taxes forbearance of any money in the absence of an

609
express stipulation as set by the Bangko Sentral
ng Pilipinas from the date prescribed for payment
until the amount is fully paid; Provided, that in no
case shall the deficiency and the delinquency
interest prescribed … be imposed simultaneously.
(Sec. 249(A) of NIRC as amended by RA No. 10963 or
TRAIN Law)
Example: Imposition of Deficiency &
Delinquency Interest AFTER TRAIN LAW
(B) Taxpayer was audited by the BIR thru a LOA
issued in 2019 covering VAT from January –
December 2018. BIR issued an assessment for
VAT during 2019 and which was timely protested
but however denied by the CIR thru an FDDA. By
Jan 2020 the taxpayer decided to pay the
assessed amount.
Compared to the first example (Example A), here,
the DEFICIENCY INTEREST is to be imposed only
from the date the tax was supposed to be paid
until the issuance of the demand by the BIR
(FAN/FLD). While the DELINQUENCY INTEREST
is to be computed from the ISSUANCE OF
FAN/FLD until the payment thereof.
And, as could be observed the interest rate
effective TRAIN Law (January 1, 2018) is 20%.
If ASSESSED or ISSUED FAN/FLD prior to
the effectivity of TRAIN Law (Prior 2018)
but are to be paid during TRAIN Law’s
effectivity (2018 onwards)
Company A filed its 2015 Annual Income Tax
Return on April 14, 2016. On January 2, 2017, the
BIR issued a LOA covering all taxes for taxable
year 2015. By June 20, 2017, BIR issued the PAN
and issued the FAN 15 days after on July 5, 2017.
Company A filed its protest by way of
reinvestigation on August 4, 2017. Company A
was able to submit the supporting documents on
October 3,2017. BIR issued a Final Decision on
Disputed Assessment issued by the CIR on
December 31, 2017. On March 2018, Company A
decided to pay the assessed tax deficiency.
The provisions of TRAIN Law will apply on the
imposition of interest BUT insofar as that portion
of interest will run starting January 1, 2018. (Moog
Controls v. CIR, CTA Case 9077, February 22, 2018)
b) Surcharge
Surcharge is the civil penalty for the delay in the
payment of the taxes due.
25% of the amount due in the following cases:
1. Failure to file any return and pay the tax due
thereon as required by the Code or rules and
regulations on the date prescribed;
2. Unless otherwise authorized by the CIR, filing
of return is required with an internal revenue
officer other than those with whom the return
is required to be filed;
3. Failure to pay deficiency tax within the time
prescribed for its payment in the notice of
assessment;
610
 4. Failure to pay full or part of the amount of tax
shown on any return required to be filed
under the provisions of the NIRC or rules or
regulations or the full amount of tax due
thereon for which no return is required to be
filed, on or before the date prescribed for its
payment. (Sec. 248[a], NIRC)
50% of the tax or of the deficiency tax, in
case payment has been made on the basis of
such return before the discovery of falsity or
fraud:
1. In case of willful neglect to file return within
the period prescribed by the NIRC or by rules
and regulations;
2. In case fraudulent return is willfully made.
Provided, that substantial under-declaration of
sales or substantial overstatement of
deductions, as determined by CIR, shall
constitute prima facie evidence of a false or
fraudulent return. Provided, further, that
failure to report sales in an amount exceeding
30% of that declared per return, and a claim of
deductions in an amount exceeding 30% of
actual deductions, shall render the taxpayer
liable for substantial under-declaration of sales
or for overstatement of deductions. (Sec.
248[b], NIRC)
The payment of surcharge is mandatory and the
BIR is not vested with any authority to waive or
dispense with the collection thereof. (Philex vs.
CIR, G.R. No. 125704, August 28, 1998)
c) Compromise Penalty
Any person, who, under the NIRC or rules and
regulations promulgated thereunder, is:
or withhold or remit
taxes withheld,
or refund excess
taxes withheld on
compensation, at the
time
● failed to withhold or remit taxes withheld
● failed to refund excess taxes withheld on
compensation
● at the time or times required by law or rules
and regulations shall, in addition to other
penalties provided by law, upon conviction
thereof, be punished by a fine of not less than
Ten Thousand Pesos (P 10,000) and suffer
imprisonment of not less than one (1) year
but not more than ten (10) years. (Section
255, NIRC)
Any person who:
1. attempts to make it appear for any reason that
he or another has in fact filed a return or
statement, or
2. actually files a return or statement and
subsequently withdraws the same return or
statement after securing the official receiving
seal or stamp of receipt of internal revenue
office wherein the same was actually filed
shall, upon conviction therefore, be punished
by a fine of not less than Ten Thousand Pesos
(P10,000) but not more than Twenty
Thousand Pesos (P 20,000) and suffer
imprisonment of not less than one (1) year but
not more than three (3) years. (Ibid.)
III. LOCAL TAXATION
A. LOCAL GOVERNMENT TAXATION
Preliminaries

Required to: Who Willfully: Distinguish local taxation vs. national

Pay any tax Fails to pay such tax Taxation
Make a return Fails to make such
return
Keep any record Fails to keep any
record
Supply correct or Supply correct and
accurate information accurate information,
Local Taxation National Taxation
Scope of Taxation
Bound only up to the Covers the whole
territorial limits of the Philippine Island
implementing local
government unit
(province, city,

611
 municipality, or 3. The collection of local taxes, fees, charges
barangay) and other impositions shall in no case be let
Governing Laws to any private person;
Constitution, Constitution, 4. The revenue collected pursuant to the
Local Government Code National Internal provisions of the LGC shall inure solely to the
of 1991 Revenue Code as
benefit of, and be subject to the disposition
Ordinances amended by R.A.
Jurisprudence 10963 by, the local government unit levying
Revenue Issuances, the tax, fee, charge or other imposition
Jurisprudence unless otherwise specifically provided
Legislated by: herein; and
Respective sangguniang Congress 5. Each local government unit shall, as far as
panlungsod or practicable, evolve a progressive system
panlalawigan (thru the of taxation.
delegated power of the
congress)
Characteristics of the Taxing power of
Taxes Imposed
Local Government Units (LGUs)
Local Business Tax, Income Tax, Value
Real Property Tax Added Tax, Capital
Local Transfer Tax Gains Tax, a. Not inherent - May only be exercised if
Documentary Tax, delegated to them by law or Constitution;
Excise Tax b. Direct grant from the Constitution -
While a direct grant, the same is subject to
limitations as may be set by the Congress.
1. General Principles
Under the present constitutional rule,
Section 1, Article X, 1987 Constitution.
“where there is neither a grant nor a
prohibition by statute, the tax power must
“The territorial and political subdivisions of the
be deemed to exist although Congress may
Republic of the Philippines are the provinces,
provide statutory limitations and guidelines.
cities, municipalities, and barangays.”
(Manila Electric Co. vs. Province of Laguna, G.R.
No. 131359, October 4, 1999)
Section 130, LGC.
c. Not absolute - Subject to limitations and
Fundamental Principles. – The following guidelines provided for by law and
fundamental principles shall govern the exercise Constitution such as progressivity, etc.:
of the taxing and other revenue-raising powers of
local government units: (P3-C2LUE) ● The fundamental law did not intend the
delegation to be absolute and
1. Taxation shall be uniform in each local unconditional. The legislature must still
government unit; see to it that:
2. Taxes, fees, charges and other impositions
shall: 1. the taxpayer will not be over-
i. be equitable and based as far as burdened or saddled with multiple and
practicable on the taxpayer’s ability to unreasonable impositions;
pay; 2. each LGU will have its fair share of
ii. be levied and collected only for public available resources;
purposes; 3. the resources of the national
iii. not be unjust, excessive, oppressive, or government will not be unduly
confiscatory; disturbed; and
iv. not be contrary to law, public policy, 4. local taxation will be fair, uniform, and
national economic policy, or in restraint just.(Film Development Council of the
of trade;

612
 Philippines vs. Colon Heritage Realty
Corporation, G.R. No. 203754, June 16,
2015)
● There is no validity to the assertion that
the delegated authority can be declared
unconstitutional on the theory of double
taxation. It must be observed that the
delegating authority specifies the
limitations and enumerates the taxes over
which local taxation may not be exercised.
The reason is that the State has
exclusively reserved the same for its own
prerogative.(Pepsi Cola Bottling vs.
Municipality of Tanauan, G.R. No. L-31156,
February 27, 1976)
● Congress cannot abolish the local
government’s power to tax as it abrogate
what is expressly granted by the
fundamental law. The only authority
granted to Congress is to provide
guidelines and limitations on the local
government’s exercise of the power to
tax. (Dimaampao, Tax Principles and
Remedies, 2021 Edition, p. 132)
d. Exercised by the sangguinian of the LGU
concerned through an appropriate ordinance.
e. Its application is bounded by the
geographical limits of the LGU that
imposes the tax.
2. Nature and Source of Taxing Power
a) Grant of Local Taxing Power Under the
Local Government Code
Each local government until shall exercise its
power to create its own sources of revenue and
to levy taxes, fees, and charges subject to such
guidelines and limitations as the Congress may
provide, consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall
accrue exclusively to the local government
units.(Sec. 5, Art. X, 1987 Constitution and Sec. 129,
LGC)
It is settled that a municipal corporation unlike a
sovereign state is clothed with no inherent power
of taxation. The charter or statute must plainly
show an intent to confer that power or the
municipality, cannot assume it. And the power
when granted is to be construed in strictissimi
juris. Any doubt or ambiguity arising out of the
term used in granting that power must be
resolved against the municipality. Inferences,
implications, deductions – all these – have no
place in the interpretation of the taxing power of
a municipal corporation.
Therefore, the power of a province to tax is
limited to the extent that such power is delegated
to it either by the Constitution or by statute.
Section 5, Article X of the 1987 Constitution is
clear on this point. (Pelizloy Realty Corp. v. Province
of Benguet, G.R. No. 183137, April 10, 2013)
b) Authority to Prescribe Penalties for Tax
Violations and Limitations Thereon
Vested in the Sanggunian
General rule:
Limited as to the amount of imposable fine as well
as the length or period of imprisonment; The
Sanggunian is authorized to prescribe fines or
other penalties for violation of tax ordinances, but
in no case shall fines be less than (P1,000.00) nor
more than (P5,000.00) nor shall the
imprisonment be less than one (1) month nor
more than six (6) months; Such fine or other
penalty shall be imposed at the discretion of the
court.
Exception:
The Sangguniang Barangay may prescribe a fine
of not less than P100 nor more than P1,000.(Sec.
516, LGC)
● The power to tax is primarily vested in the
Congress; however, in our jurisdiction, it may
be exercised by local legislative bodies, no
longer merely by virtue of a valid delegation
as before, but pursuant to direct authority
conferred by Section 5, Article X of the
Constitution. Under the latter, the exercise of
the power may be subject to such guidelines
613
 and limitations as the Congress may provide
which, however, must be consistent with the
basic policy of local autonomy. (Mactan Cebu
International Authority vs. Ferdinand Marcos, G.R.
No. 120082, September 11,2006)
Principle of Exclusionary Doctrine
Preemption in the matter of taxation simply refers
to an 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. (Victoria’s Milling Co.,
Inc. vs. Municipality of Victorias, G.R. No. L -21183,
September 27, 1968)
When does the principle of exclusionary
doctrine apply?
1. Taxes levied under NIRC;
2. Taxes imposed under the Tariff and Customs
Code;
3. Taxes under special laws (DIZON, Taxation
(2006), p.130)
c) Authority to Grant Local Tax
Exemptions
Local government units may, through ordinances
duly approved, grant tax exemptions, incentives
or reliefs under such terms and conditions as they
may deem necessary. (Sec. 192, LGC)
Tax exemptions shall be conferred through the
issuance of a non-transferable Tax Exemption
Certificate. (IRR of LGC, Art. 282)
d) Withdrawal of Exemptions
General Rule:
Unless otherwise provided, tax exemptions or
incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, including
government-owned or –controlled corporations
are withdrawn upon the effectivity of the LGC.
Exceptions [CHEW-PIER]: (Exemptions not
withdrawn)
1. Local water districts;
2. Cooperatives duly registered under R.A. No.
6938; and
3. Non-stock and non-profit hospitals and
educational institutions. (Sec. 193, LGC)
4. Business enterprises certified by BOI as a
pioneer or non – pioneer for a period of 6 or
4 years, respectively, from date of
registration;
5. Business entity, association, or cooperatives
registered under R.A. 6810 or Countryside
and Barangay Business Enterprise; and
6. Printer and/or publisher of books or other
reading materials prescribed by the
Department of Education as school texts or
references insofar as receipts from printing
and/or publishing thereof are concerned. (Art.
283, IRR of LGC)
7. See all the RPT exemptions. (Sec. 234, LGC)
Unless otherwise repealed by law, business
and economic enterprises operating within
Export Processing Zone Authority shall
continue to enjoy exemption privileges and
tax incentive granted in P.D.66, as amended
(IRR of LGC, Art. 283)
● The withdrawal of tax exemptions or
incentives provided in R.A. 7160 can only
affect those franchises granted prior to the
effectivity of the law. (Smart Communications
vs. City of Davao, G.R. No. 155491, September 16,
2008)
● One of the most significant provisions of the
LGC is the removal of the blanket exclusion
of instrumentalities and agencies of the
National Government from the coverage of
local taxation.
Although as a general rule, LGUs cannot
impose taxes, fees, or charges of any kind on
the National Government, its agencies and
instrumentalities, this rule now admits an
exception, i.e. when specific provisions of the
LGC authorize the LGUs to impose taxes,
fees, or charges on the aforementioned
entities.
614
The legislative purpose to withdraw tax privileges
enjoyed under existing laws or charter is clearly
manifested by the language used on Sec. 137 and
193, categorically withdrawing such exemptions
subject only to the exceptions enumerated. Since
it would be tedious and impractical to attempt to
enumerate all the existing statutes providing for
special tax exemptions or privileges, the LGC
provided for an express, albeit general,
withdrawal of such exemptions or privileges. No
more unequivocal language could have been
used.(NPC vs. City of Cabanatuan, G.R. No. 149110,
April 9, 2003)
base or subject not otherwise specifically
enumerated herein or taxed under the
provisions of the National Internal Revenue
Code, as amended, or other applicable laws.
Residual Power of LGUs
The power to levy taxes, fees, or charges on any
base or subject, PROVIDED, the taxes are:
1. Not specifically enumerated;
2. Not taxed under the provisions of NIRC, as
amended; and
3. Not taxed under other applicable laws. (Sec.
186, LGC)

e) Authority to Adjust Local Tax Rates Requisites: (CUP-F)

Local government units shall have the authority
to adjust the tax rates as prescribed herein not
oftener than once every five (5) years, but in no
case shall such adjustment exceed ten percent
(10%) of the rates fixed under the LGC. (Sec.
191, LGC)
Tax rates be adjusted
Every 5 years.
Limitation to the adjustment
1. Not unjust, excessive, oppressive,
confiscatory, or contrary to declared national
policy;
2. Not against the fundamental principles of
local taxation;
3. Pursuant to an ordinance enacted with
public hearing conducted for the purpose
(Sec. 186, LGC); and
4. Subject to the limitations provided under not
one of the prohibited impositions under the
common limitations. (Sec. 186, LGC)

It should not exceed 10% of the rates fixed by

LGC.

f) Residual Taxing Power of Local

Governments
Local government units may exercise the
power to levy taxes, fees or charges on any

3. Scope of Taxing Power (with related LGC provision)

Taxing Power Prov. Mun. City Brgy

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

Tax on Business of Printing and Publication (136) (136)

Franchise Tax (137) (137)

Tax on sand, gravel and other quarry resources (138) (138)

Professional tax (139) (139)

615
 Amusement tax (140) (140)

Annual Fixed Tax for Every Delivery Truck or Van of (141) (141)
Manufacturers or Producers, Wholesalers, Dealers, Retailers

Tax on Business (143) (143)

Fees and charges on regulation/licensing of business and (147) (147)

occupation

Fees for Sealing and Licensing of Weights and Measures (148) (148)

Fishery Rentals, Fees and charges (149) (149)

Community Tax (156) (156)

Services Fees and Charges (153) (153) (153) (153)

Public Utility Charges (154) (154) (154) (154)

Toll Fees or Charges (155) (155) (155) (155)

Tax on Gross Sales or Receipts of Small-Scale (152a)

Stores/Retailers

Services Fees on the use of Barangay-owned properties (152b)

Barangay Clearance (152c)

Other Fees and Charges (on commercial breeding of fighting (152d)

cocks, cockfights, cockpits; places of recreation which charge
admission fees; outside ads)

Real Property Tax -do- -do- -do- -do-

May exceed the maximum rates allowed for the province or municipality (more than) or (equal to) 50%, except
rates of professional and amusement taxes (Sec. 151, LGC)

Quick Rules with regard to scope taxing
power
● Cities may tax all business and services that
a province and municipality can.
● A municipality cannot tax a business or
services that is already being taxed by the
province
A barangay may only exclusively tax these
following items: (BOTS)
a. Barangay Clearance
b. Other Fees and Charges (on commercial
breeding of fighting cocks, cockfights,
cockpits; places of recreation which charge
admission fees; outside ads)
c. Tax on Gross Sales or Receipts of Small-Scale
Stores/Retailers
d. Services Fees on the use of Barangay-owned
properties
Conversion from Municipality to Highly
Urbanized City
Section 13 particularly provides that
provinces may impose a franchise tax on
businesses granted with a franchise to
operate. Since provinces have been
vested with the power to levy a franchise
tax, it follows that municipalities,
pursuant to Sec. 142 of RA 7160, could
no longer levy it. Therefore, a franchise
tax ordinance which was enacted when a
political subdivision was still a

616
municipality, is ultra vires for being
violative of Sec. 142 of RA 7160. (Manila
Electric Company v. City of Muntinlupa, G.R.
No. 198529, February 09, 2021)

4. Specific Taxing Powers of Local Government Units

4.1 Taxing Powers of Provinces

Taxing Power Where Imposed Rate and Base Exemptions

Tax on Transfer of Real
Property (Sec. 135, Art.
I, Ch. II, LGC)
Tax on Business of
Printing and
Publication (Sec. 136,
Art. I, Ch. 2, LGC)
On sale, donation, barter, or
on any other mode of transfer
of ownership or title of real
property subject to certain
rate and base
On the business of persons
engaged in the printing and/or (1%)of the gross annual
publication of books, cards,
posters, leaflets, handbills,
certificates, receipts,
pamphlets, and others of Newly
similar nature
Not more than (50%) of Sale, transfer, or other
(1%) of the total disposition of real property
consideration involved or pursuant to R.A. 6657
of the fair market value if (Comprehensive Agrarian
monetary consideration Reform Law)
involved in the transfer is
not substantial, whichever
is higher
Not more than (50%) of Receipts from the printing
and/or publishing of books
receipts for the preceding or other reading materials
calendar year. prescribed by the
Department of Education,
started Culture and Sports as
business: school texts or references
Not exceeding (1/20) of
1% of the capital
investment.

In the succeeding calendar

Franchise Tax (Sec.
137, Art. I, Ch. II,
LGC)
Franchise – In its
specific sense, franchise
may refer to (1) a general
or primary franchise or
(2) to a special or
secondary franchise. The
former relates to the right
to exist as a corporation
by virtue of duly
approved Articles of
Incorporation, or a investment.
On businesses
enjoying a franchise
year, regardless of when
the business started to
operate, the tax shall be
based on the gross receipts
for the preceding calendar
year, or any fraction
thereof.
Not more than (50%) of
one percent (1%) of the
gross annual receipts for
the preceding calendar
year based on the
incoming receipt, or
realized, within its
territorial jurisdiction.
Newly started
business:
Not exceeding (1/20) of
(1%) of the capital
In the

617
charter pursuant a special succeeding calendar year,
law creating the regardless of when the
corporation. The right is business started to
vested with the operate, the tax shall be
individuals composing the based on the gross
corporation. On the other receipts for the preceding
hand, the latter refers to calendar year, or any
the right or privileges fraction thereon.
conferred upon existing
corporation such as the
right to use the streets of
a municipality to lay pipes
of tracks, erect poles or
string wires. This right is
vested with the
corporation itself.

Section 137 is categorical

in stating that franchise
tax can only be imposed
on businesses enjoying a
franchise. This goes
without saying that
without a franchise, a
local government unit
cannot impose franchise
tax. (National Power
Corporation vs. Provincial
Government of Bataan,
G.R. No. 180654, March
06, 2017)

Tax on Sand, Gravel
and Other Quarry
Resources (Sec. 138,
Art. I, Ch. II, LGC)
Professional Tax (Sec.
139, Art. I, Ch. II,
LGC)
To be paid to the province
where the profession is
practiced, or where a
principal office is
maintained.
On Ordinary stones, sand, Not more than (10%) of
gravel, earth, and other fair market value in the
quarry resources, as defined locality per cubic meter
under the National Internal
Revenue Code, as amended,
extracted from public lands
or from the beds of seas,
lakes, rivers, streams, creeks,
and other public waters
within its territorial
jurisdiction.
On each person engaged in At such amount and Professionals exclusively
the exercise of a profession reasonable classification employed by the
requiring government as the sangguniang government
examination. panlalawigan may
determine but shall in no
case exceed Three
hundred pesos (P300.00)

A person who pays for

professional tax may
practice his profession
anywhere in the country

618
without being subjected
to similar taxes.
Employers shall require
payment of professional
tax as a condition for
employment and annually
thereafter.
Payable annually, on or
before Jan 31. Any
person first beginning to
practice a profession after
January must pay the full
tax before engaging
therein.
Amusement tax (Sec.
140, Art. I, Ch. II,
LGC)
Shared equally by the
province and municipality
where amusement places
are located
Note: In case of
theaters or cinemas,
tax shall first be deducted
and withheld by their
proprietors, lessees or
operators
Annual Fixed Tax For
Every Delivery Truck
or Van of
Manufacturers, or
Producers,
Wholesalers of,
Dealers, or Retailers
in, Certain Products
The professionals subject to the professional tax are only those who have passed the
bar examinations, or any board or other examinations conducted by the Professional
Regulation Commission (PRC). For example, a lawyer who is also a Certified Public
Accountant (CPA) must pay the professional tax imposed on lawyers and that fixed for
CPAs, if he is to practice both professions (Sec. 228 (f), IRR of LGC).
Proprietors, lessees, or Not more than 10% of Holding of operas,
operators of theaters, Gross receipts from concerts, dramas,
cinemas, concert halls, admission fees (As recitals, painting and art
circuses, boxing stadia, amended by Section 1, R.A.
exhibitions, flower
and other places of 9640, 2009)
shows, musical
amusement
programs, literary and
oratorical presentations,
except pop, rock, or
similar concerts.
Professional basketball games do not fall under the same category as theaters,
cinematographs, concert halls and circuses as the latter basically belong to artistic forms
of entertainment while the former caters to sports and gaming.(PBA vs. CA, G.R. No.
119122, August 8, 2000)
Resorts, swimming pools, bath houses, hot springs and tourist spots cannot be
considered venues primarily “where one seeks admission to entertain oneself by seeing
or viewing the show or performances”. While it is true that they may be venues where
people are visually engaged, they are not primarily venues for their proprietors or
operators to actively display, stage or present shows and/or performances. Thus, they
do not belong to the same category or class as theaters, cinemas, concert halls,
circuses, and boxing stadia. It follows that they cannot be considered as among the
‘other places of amusement’ contemplated by Section 140 of the LGC and which may
properly be subject to amusement taxes (Pelizloy Realty Corp. vs. The Province of
Benguet, G.R. No. 183137, April 10, 2013).
Vehicles used for the Not exceeding Five
delivery of distilled spirits, hundred pesos (P500.00)
fermented liquors, soft on every truck, van or any
drinks, cigars and vehicle used by
cigarettes, and other manufactures, producers,
products as may be wholesalers, dealers or
determined by the retailers.
sanggunian, to sales
619
 (Sec. 141, Art. I, Ch. outlets, or consumers in
II, LGC) the province, whether
directly or indirectly
The manufacturers, producers, wholesalers, dealers and retailers shall be exempt from
the tax on peddlers prescribed elsewhere in the LGC.
Except as otherwise provided in this Code, the
province may levy only the taxes, fees, and
charges as provided in this Article, such as:
1. Tax on Transfer of Real Property Ownership
(Sec. 135, Art. I, Ch. II, LGC)
2. Tax on Business of Printing and Publication
(Sec. 136, Art. I, Ch. II, LGC)
3. Franchise Tax (Sec. 137, Art. I, Ch. II, LGC)
4. Tax on Sand, Gravel and Other Quarry
Resources (Sec. 138, Art. I, Ch. II, LGC)
5. Professional Tax (Sec. 139, Art. I, Ch. II, LGC)
6. Amusement Tax (Sec. 140, Art. I, Ch. II, LGC)
7. Annual Fixed Tax For Every Delivery Truck
or Van of Manufacturers or Producers,
Wholesalers of, Dealers, or Retailers in,
Certain Products (Sec. 141, Art. I, Ch. II, LGC)
4.2 Taxing Powers of Municipalities
● Manufacturers:
1. Manufacturing involves a physical or chemical
process that:
a. Alters the exterior texture or form, or
b. Alters the quality of any raw materials, or
c. Combines raw materials with other
materials to put to a special use to which
such raw material in their original
condition could not have been put
2. For the purpose of sale or distribution to
others and not for own use or consumption
3. Manufacturers who export all of its products
are only subject to tax on exporters. (DOF-
BLGF Opinion dated February 16, 1994)
● Wholesalers/Distributors:
Wholesale means 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.
Distributor is the middleman between the
manufacturer and retailer.
● Exporters:
Exporters shall refer to those who are principally
engaged in the business of exporting goods and
services, as well as manufacturers and producers
whose goods or services are both sold
domestically and abroad.
The 1991 LGC does not embody any provision or
classification for sale made by an “indirect
exporter”. Accordingly, a business engaged in the
sale of goods may only be classified as a (direct)
exporter, manufacturer, wholesaler/distributor,
dealer or retailer.
● Retailers:
Retail is the sale where the purchaser buys the
commodity for his own consumption, irrespective
of the quantity of the commodity sold.
Test to determine if company is wholesaler
or dealer:
● Wholesaler - invoices are issued to
companies or business establishments for re-
sale to end-users;
● Retailer – sales receipts are issued to
individual consumers or end-users.
● Contractors:
Include persons, natural or juridical, not subject
to professional tax whose activity consists
essentially of the sale of all kinds of service for a
fee, regardless of whether or not the
performance of a service calls for the exercise or
use of the physical or mental faculties of such
contractor or of his employees.
A company rendering management services is
subject to contractors’ tax. (DOF-BLGF Opinion
dated September 18, 2002)
620
● Banks and other financial institutions:
Include non-bank financial intermediaries,
lending investors, finance and investment
companies, pawnshops, money shops, insurance
companies, stock markets, stock brokers and
dealers in securities and foreign exchange.
● Peddlers:
Peddlers mean 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.
Note that the tax on Peddlers under Sec. 143(h)
does not apply to those already subject to Sec.
141.
● Others: Any other business not specified in
preceding clusters (1-7) which the
Sanggunian may tax.
Ceiling on Business Taxes Imposable by
LGU Within Metro Manila
The municipalities within the Metropolitan Manila
Area may levy taxes at rates which shall not
exceed by fifty percent (50%) the maximum
rates prescribed in the preceding section. (Sec.
144, LGC)
Tax on Different Periods of Business
Tax on New Businesses
● A newly-started business is already liable for
business taxes (i.e. license fees) at the start
of the quarter when it commences
operations. In computing the amount of tax
due for the first quarter of operations, the
business capital investment is used as
the bases. (Mobil Phils. vs. City Treasurer of
Makati, G.R. No. 15092, July 14, 2005).
● For the subsequent quarters of the first year,
the tax is based on the gross sales/receipts
for the previous quarter. (ibid.)
Tax on Renewal
● In the following year(s), the business then
taxed based on the gross sales or receipts of
the previous year. (Mobil Phils. vs. City
Treasurer of Makati, G.R. No. 15092, July 14,
2005).
Tax on Retirement of Business
A business subject to tax pursuant to the
preceding sections shall, upon termination
thereof:
● Submit a sworn statement of its gross sales
or receipts for the current year.
If the tax paid during the year be less than the
tax due on said gross sales or receipts of the
current year, the difference shall be paid before
the business is considered officially retired.
(Section 145, LGC)
Rules on Payment of Business Tax
i. The taxes imposed under Section 143 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 businesses
for which such tax has been paid. The tax on
a business must be paid by the person
conducting the same. (Section 146[a], LGC)
For example:
AAA Corp owns is a big convenience store chain
which operates branches in Quezon City, Manila,
Pasig and Cavite.
Section 143 of the LGC provides that:
● AAA pays for the business taxes for each
branch
● Payment of business tax in the City of Manila
does not exempt him from paying the other
local government units where the business
operates (Quezon City, Pasig and Cavite)
621
 ii. In cases where a person conducts or
operates two (2) or more of the
businesses mentioned in Section 143 of
the LGC which are subject to the same
rate of tax, the tax shall be computed
on the combined total gross sales or
receipts of the said two (2) or more
related businesses. (Section 146[b], LGC)
iii. In cases where a person conducts or
operates two (2) or more businesses
mentioned in Section 143 of the LGC
which are subject to 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. (Section 146[c],
LGC)
Fees and Charges for Regulation and
Licensing
The municipality may impose and collect such
reasonable fees and charges on business and
occupation and, except as reserved to the
province in Section 139 of the LGC, on the
practice of any profession or calling,
commensurate with the cost of regulation,
inspection and licensing before any person may
engage in such business or occupation, or
practice such profession or calling. (Section 147,
LGU).
Other Taxing Power of Municipalities:
a. Levy fees for the sealing and licensing of
weights and measures at such reasonable
rates as shall be prescribed by the
sangguniang bayan. (Sec. 148 (a), LGC )
b. Exclusive authority to grant fishery privileges
in the municipal waters and impose rentals,
fees or charges therefor in accordance with
the provisions of this Section. (Sec. 149 (a),
LGC)
Situs of Tax Collected
For purposes of collection of the taxes under
Section 143 of the LGC, manufacturers,
assemblers, repackers, brewers, distillers,
rectifiers and compounders of liquor, distilled
spirits and wines, millers, producers, exporters,
wholesalers, distributors, dealers, contractors,
banks and other businesses, maintaining or
operating branch or sales outlet elsewhere shall
record the sale in the branch or sales outlet
making the sale or transaction, and the tax
thereon shall accrue and shall be paid to the
municipality where such branch or sales outlet is
located.
In cases where there is no such branch or sales
outlet in the city or municipality where the sale or
transaction is made, the sale shall be duly
recorded in the principal office and the taxes
due shall accrue and shall be paid to such city or
municipality. (Sec. 150 [a], LGC)
1. Sales made by branches or sales outlets
● Sales shall be recorded in the branch or
sales outlet making the sale.
● Taxes accrue and shall be paid in the city
or municipality where the said branch or
sales outlet is located.
2. Sales made by head or principal office
● 30% - city or municipality where the
principal office is located
● 70% - city or municipality where the
factory, project office, plant or
plantation is located.
In case of a plantation located at a place other
than the place where the factory is located, the
70% shall be divided as follows:
● 60% - city or municipality where the factory
is located (if there are two or more factories,
60% is divided pro-rata based on volume of
production)
● 40% - city or municipality where the
plantation is located (if there are two or more
plantations, 40% is divided pro-rata based on
volume of production)
622
To summarize the above rule:
Sales of
Sales recorded in Principal Branches
Office or Sales
Outlets
70% - factory, project office, plant 100% -
or plantation place where
the branch
or sales
outlet is
located
60% - 40%- plant or
factory plantation
Where to pay business tax?
● It is the place of the consummation of the
sale, associated with the delivery of the
things which are the subject matter of the
contract that determines the situs of the
contract for purposes of taxation, and not
merely the place of the perfection of the
contract (Shell Co vs. Mun. of Sipocol, L-12680,
March 20, 1959).
● The city can validly tax the sales of matches
to customers outside of the city as long as the
orders were booked and paid for in the
company’s branch office in the city. (Phil.
Match vs. City of Cebu, G.R. No. L-30745, January
18, 1978).
● It is not the place where the contract was
perfected, but the place of delivery which
determines the taxable situs of the property
sought to be taxed. (Municipality of Jose
Panganiban vs. The Shell Company of the
Philippines, Ltd., G.R. No. L-18349, July 30, 1966)
Thus, it is all inconsequential where the
subject transactions were perfected and
consummated or paid.
4.3 Taxing Powers of Cities
Scope of the Taxing Power
The city may levy the taxes, fees, and charges
which the province or municipality may impose.
Provided, however, that the taxes, fees and
charges levied and collected by highly urbanized
and independent component cities shall accrue to
them and distributed in accordance with the
provisions of this Code.
The rates of taxes that the city may levy may
exceed the maximum rates allowed for the
province or municipality by not more than
fifty percent (50%) except the rates of
professional and amusement taxes. (Sec. 151,
LGC)
4.4 Taxing Powers of Barangays
The barangays may levy the following taxes, fees,
and charges which shall exclusively accrue to
them:
(a) Taxes – On stores or retailers with fixed
business establishments with gross sales of
receipts of the preceding calendar year of
Fifty thousand pesos (P50,000.00) or less, in
the case of cities and Thirty thousand pesos
(P30,000.00) or less;
(b) Service Fees of Charges. – Barangays may
collect reasonable fees or charges for
services rendered in connection with the
regulations or the use of barangay-owned
properties or service facilities such as palay,
copra, or tobacco dryers;
(c) Barangay Clearance. – No city or municipality
may issue any license or permit for any
business or activity unless a clearance is first
obtained from the barangay where such
business or activity is located or conducted.
For such clearance, the Sanggunian Barangay
may impose a reasonable fee. The application
for clearance shall be acted upon within
seven (7) working days from the filing
thereof. In the event that the clearance is not
issued within the said period, the city or
municipality may issue the said license or
permit;
(d) Other fees and Charges. – The barangay may
levy reasonable fees and charges:
623
 (1) On commercial breeding of fighting
cocks, cockfights and cockpits;
(2) On places of recreation which charge
admission fees; and
(3) On billboards, signboards, neon
signs, and outdoor advertisements.
(Sec. 152, LGC)
Discontinuance of Payment of Toll
When public safety and welfare so requires, the
Sanggunian concerned may discontinue the
collection of the tolls, and thereafter the said
facility shall be free and open for public use. (Sec.
155, LGC)

5. Common Revenue Raising Powers 6. Community tax

a) Service fees and charges
Local government units may impose and collect
such reasonable fees and charges for services
rendered. (Sec. 153, LGC)
b) Public utility charges
Local government units may fix the rates for the
operation of public utilities owned, operated
and maintained by them within their jurisdiction.
(Sec. 154, LGC)
Definition: A tax of a fixed amount upon all
persons, or upon all persons of a certain class,
resident within a specified territory, without
regard to their property or the occupations in
which they may be engaged(Eusebio Villanueva vs.
City of Iloilo, G.R. No. L-26521, December 28, 1968)
Who May Levy:
Cities and Municipalities (Sec.156, LGC)
Imposed upon:

c) Toll fees or charges 1. Individual (18-RIB -EI)

● The Sanggunian concerned may a. Every inhabitant of the Philippines

prescribe the terms and conditions and
fix the rates for the imposition of toll
fees or charges for the use of any
public road, pier, or wharf,
waterway, bridge, ferry or
telecommunication system funded
and constructed by the local government
unit concerned.
b. 18 years or over
c. Regularly employed for at least 30
consecutive days or
d. Engaged in business or occupation; or
e. Owns a real property with an aggregate
value of Php 1,000 or more; or
f. Required by law to file an income tax
return (Sec.157, LGC)

Exempt from toll charges: 2. Corporation

Provided, that no such toll fees or charges shall a. Domestic; or

be collected from:(P2AD) b. Resident Foreign engaged in or doing
business in the Philippines (Sec. 158, LGC)
● Officers and enlisted men of the Armed
Forces of the Philippines and Taxable Basic Additional Tax not to
● Members of the Philippine National Police on Persons Tax exceed
mission, Individual Php Php 1.00 Php 5,000
● Post office personnel delivering mail, 5.00 per Php
physically-handicapped, and 1,000 of
● Disabled citizens who are sixty-five (65) earning
years or older. Corporation Php Php 2.00 Php 10,000
500 per
Php5,000 of
earning

624
Those Exempted:
1. Diplomatic and consular representatives; and
2. Transient visitors when their stay in the
Philippines does not exceed 3 months. (Sec.
159, LGC)
When Paid:
Accrues on the 1st day of January of each year
and must be paid on or before the last day of
February of each year. (Sec. 161, LGC)
Printing of Community Tax Certificates
Who shall cause the printing of community
tax certificates?
The Bureau of Internal Revenue shall cause
the printing of community tax certificates. (Sec.
164, LGC)
To whom will the funds accrue?
The proceeds of the tax shall accrue to the
general funds of the:
1. Cities;
2. Municipalities; and
3. Barangays; except
A portion thereof which shall accrue to the
general fund of the national government to cover
the actual cost of printing and distribution of the
forms and other related expenses (Sec.164[a],
LGC)
Duty of the City/Municipal Treasurer
The city or municipal treasurer concerned shall
remit to the national treasurer the said share of x
within ten (10) days after the end of each
quarter. (Ibid.)
Deputized Barangay Treasurer
The city or municipal treasurer shall deputize the
barangay treasurer to collect the community tax
in their respective jurisdictions: Provided,
however, That said barangay treasurer shall be
bonded in accordance with existing laws.
(Sec.164[b], LGC)
Proceeds of the community tax collected through
the barangay treasurers shall be apportioned as
follows:
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.
(Sec.164[c], LGC)
7. Common Limitations on the Taxing
Power of LGU
Unless otherwise provided in the LGC, the
exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to
the levy of the following listed below, or in other
words, an LGU could not impose the following
taxes: (EDIT-MPEG-CBPM)
(a) Income tax, except when levied on banks
and other financial institutions;
(Correlate with Sec. 143 (f) On banks and
other financial institutions, at a rate not
exceeding fifty percent (50%) of one percent
(1%) on the gross receipts of the preceding
calendar year derived from interest,
commissions and discounts from lending
activities, income from financial leasing,
dividends, rentals on property and profit from
exchange or sale of property insurance
premium);
(b) Documentary stamp tax;
(c) Taxes on Estates, inheritance, gifts, legacies
and other acquisitions mortis causa,
except as otherwise provided herein;
(Correlate with Sec. 135. Transfer of Real
Property Ownership. – (a) The province
may impose a tax on the sale, donation,
barter, or on any other mode of transferring
ownership or title of real property at the rate
of not more than fifty percent (50%) of one
625
 percent (1%) of the total consideration
involved in the transfer is not substantial,
whichever is higher. The sale, transfer or
other disposition of real property pursuant to
R.A. No. 6657 shall be exempt from this tax);
(d) Customs duties, registration fees of vessel
and wharfage on wharves, tonnage dues, and
all other kinds of customs fees, charges and
dues except wharfage on wharves
constructed and maintained by the local
government unit concerned;
(e) Taxes, fees, and charges and other
impositions upon goods carried into or out of,
or passing through, the territorial jurisdictions
of local government units in the guise of
charges for wharfage, tolls for bridges or
otherwise, or other taxes, fees, or charges in
any form whatsoever upon such goods or
merchandise;
(Correlate with Sec. 155. 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 local government unit
concerned: Provided, That no such toll fees
or charges shall be collected from officers and
enlisted men of the Armed Forces of the
Philippines and members of the Philippine
National Police on mission, post office
personnel delivering mail, physically-
handicapped, and disabled citizens who are
sixty-five (65) years or older. When public
safety and welfare so requires, the
sanggunian concerned may discontinue the
collection of the tolls, and thereafter the said
facility shall be free and open for public use)
SC annulled an ordinance of Tacloban City
levying inspection fees, which were in reality,
taxes, upon animals exported or taken away
from the City. The inspection fee sought to
be collected – upon every head of specified
animals to be transported out of the City of
Tacloban (P2.00 per hog, P10.00 per cow and
P20.00 per carabao) – was in reality an
export tax specifically withheld from
municipal taxing power under Section 2287
of the Revised Administrative Code.
(Panaligan vs. City of Tacloban, G.R. No. L-9319,
September 27, 1957)
(f) Taxes, fees or charges on agricultural and
aquatic products when sold by Marginal
farmers or fishermen;
“Marginal Farmer or Fisherman” refers to an
individual engaged in subsistence farming or
fishing which shall be limited to the sale, barter
or exchange of agricultural or marine products
produced by himself and his immediate family
(Sec. 122, LGC).
(g) 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;
(h) Excise taxes on articles enumerated under
the National Internal Revenue Code, as
amended, and taxes, fees or charges on
petroleum products;
(i) Percentage or value-added tax (VAT) on
sales, barters or exchanges or similar
transactions on goods or services except as
otherwise provided herein;
Exception:
However, provinces are not barred from
levying amusement taxes even if amusement
taxes are a form of percentage taxes. Section
133 (i) of the LGC prohibits the levy of
percentage taxes "except as otherwise
provided" by the LGC. Evidently, Section 140
of the LGC carves a clear exception to the
general rule in Section 133 (i). Section 140
expressly allows for the imposition by
provinces of amusement taxes on "the
proprietors, lessees, or operators of theaters,
cinemas, concert halls, circuses, boxing
stadia, and other places of amusement
(Pelizloy Realty Corp. v. Province of Benguet,G.R.
No. 183137, April 10, 2013,)
626
 The limitation applies particularity to the
prohibition against municipalities and
municipal districts to impose “any percentage
tax or other taxes in any form based thereon
nor impose taxes on articles subject to
specific tax except gasoline, under the
provisions of the NIRC”. (Sec. 133, LGC)
(j) Taxes on the gross receipts of
transportation contractors and persons
engaged in the transportation of passengers
or freight by hire and common carriers by air,
land or water, except as provided in the LGC;
(k) Taxes on premiums paid by way of
reinsurance or retrocession;
(l) Taxes, fees or charges for the registration of
motor vehicles and for the issuance of all
kinds of licenses or permits for the driving
thereof, except tricycles;
Under Article 458 (a)[3-VI] of the Local
Government Code, the power of LGUs to
regulate the operation of tricycles and to
grant franchises for the operation thereof is
still subject to the guidelines prescribed by
the Department of Transportation and
Communications (DOTC). In compliance
therewith, the DOTC issued “Guidelines to
Implement the Devolution of LTFRBs
Franchising Authority over Tricycles-For-Hire
to Local Government units pursuant to the
Local Government Code.” The newly
delegated powers pertain to the franchising
and regulatory powers theretofore exercised
by the LTFRB and not to the functions of the
LTO relative to the registration of motor
vehicles and issuance of licenses for the
driving thereof. (LTO vs. City of Butuan, G.R. No.
131512, January 20, 2000).
(m) Taxes, fees, or other charges on Philippine
products actually exported, except as
otherwise provided herein;
(Correlate with Sec. 143 (c) On exporters,
and on manufacturers, millers,
producers, wholesalers, distributors,
dealers or retailers of essential
commodities enumerated hereunder at a
rate not exceeding one-half (1/2) of the rates
prescribed under subsections (a), (b) and (d)
of this Section)
(n) Taxes, fees, or charges, on Countryside and
Barangay Business Enterprises and
cooperatives duly registered under R.A. No.
6810 and R.A. No. 6938 otherwise known as
the “Cooperative Code of the Philippines”
respectively; and
(o) Taxes, fees or charges of any kind on the
National Government, its agencies and
instrumentalities, and local government
units.
The Authority should be classified as an
instrumentality of the national government
which is liable to pay taxes only with respect
to the portions of the property, the beneficial
use of which were vested in private entities.
When local governments invoke the power to
tax on national government instrumentalities,
such power is construed strictly against local
governments.
The rule is that a tax is never presumed and
there must be clear language in the law
imposing the tax. Any doubt whether a
person, article or activity is taxable is resolved
against taxation. This rule applies with grater
force when local governments seek to tax
national government instrumentalities.
(Philippine Fisheries Dev’t Authority vs. CA, G.R.
No. 169836, July 31, 2007)
 The exercise of the taxing power of local
government units is subject to the limitations
enumerated in Section 133 of the Local
Government Code. Under Section 133(o) of
the Local Government Code, local government
units have no power to tax instrumentalities of
the national government like the MIAA. (MIAA
vs. City of Pasay G.R. No. 163072, April 2, 2009)
627
Collection of Business Tax
a) Tax Period and Manner of Payment
Unless otherwise provided in the LGC, the tax
period of all local taxes, fees and charges shall be
the calendar year. Such taxes, fees and charges
may be paid in quarterly installments. (Sec.
165, LGC)
b) Accrual of Tax
Unless otherwise provided in the LGC, all local
taxes, fees, and charges shall accrue on the first
(1st) day of January of each year.
However, new taxes, fees or charges, or changes
in the rates thereof, shall accrue on the first (1st)
day of the quarter next following the effectivity of
the ordinance imposing such new levies or rates.
(Section 166, LGC)
c) Time of Payment
Unless otherwise provided in the LGC, all local
taxes, fees, and charges shall be paid within the
first twenty (20) days of January or of each
subsequent quarter, as the case may be. The
sanggunian concerned may, for a justifiable
reason or cause, extend the time for payment of
such taxes, fees, or charges without surcharges
or penalties, but only for a period not exceeding
six (6) months. (Sec. 167, LGC)
d) Penalties on Unpaid Taxes, Fees or
Charges
1. Surcharge - not exceeding twenty-five
(25%) of the amount of taxes, fees or
charges not paid on time; and
2. Interest - at the rate not exceeding two
percent (2%) per month of the unpaid
taxes, fees or charges including surcharges,
until such amount is fully paid but in no case
shall the total interest on the unpaid amount
or portion thereof exceed thirty-six (36)
months. (Sec. 168, LGC)
Respondent's computation of the surcharge, as
sustained by the trial court and the Court of
Appeals, varies the terms of the judgment sought
to be executed and contravenes Section 168 of
the Local Government Code. There is nothing in
the Court of Appeals' decision that would justify
the interpretation that the statutory penalty of
25% surcharge should be charged yearly
from due date until full payment. If that was the
intention of the Court of Appeals, it should have
so expressly stated in the dispositive portion of its
decision.
Distinguish from penalties imposed for non
– payment of national taxes
BIR Local Tax
12% per ANNUM 2% per MONTH
Maximum Period when Interest can be
imposed
No maximum Only up to 36th month
Imposition of Compromise Penalty
Non-payment shall also No imposition of
make the taxpayer liable compromise
for compromise
penalties
Surcharge Imposed
Same rate of 25% of tax to be paid
e) Authority of treasurer in collection and
inspection of books
Collection:
All local taxes, fees, and charges shall be
collected by the provincial, city, municipal, or
barangay treasurer, or their duly authorized
deputies. The provincial, city or municipal
treasurer may designate the barangay treasurer
as his deputy to collect local taxes, fees, or
charges. In case a bond is required for the
purpose, the provincial, city or municipal
government shall pay the premiums thereon in
addition to the premiums of bond that may be
required under the LGC. (Section 170, LGC)
Inspection of Books:
The provincial, city, municipal or barangay
treasurer may, by himself or through any of his
deputies duly authorized in writing, examine the
books, accounts, and other pertinent records of
any person, partnership, corporation, or
association subject to local taxes, fees and
628
charges in order to ascertain, assess, and collect
the correct amount of the tax, fee, or charge.
Such examination shall be made during regular
business hours, only once for every tax period,
and shall be certified to by the examining official.
Such certificate shall be made of record in the
books of accounts of the taxpayer examined.
In case the examination herein authorized is
made by a duly authorized deputy of the local
treasurer, the written authority of the deputy
concerned shall specifically state the name,
address, and business of the taxpayer whose
books, accounts, and pertinent records are to be
examination and the procedure to be followed in
conducting the same.
For this purpose, the records of the revenue
district office of the Bureau of Internal Revenue
shall be made available to the local treasurer, his
deputy or duly authorized representative. (Sec.
171, LGC)
The surcharge is a civil penalty imposed once for
late payment of a tax. Contrast this with the
succeeding provisions on interest, which was
imposable at the rate not exceeding 2% per
month of the unpaid taxes until fully paid. The
fact that the interest charge is made
proportionate to the period of delay, whereas the
surcharge is not, clearly reveals the legislative
intent for the different modes in their application
(National Power Corporation vs. City of Cabanatuan,
G.R. No. 177332, October 01, 2014,penned by J. Leon
8. Requisites of a Valid Tax Ordinance
Requisites for substantive validity of an
ordinance:(GOD-PC)
1. It must not contravene the Constitution or
any statute;
2. It must not be unfair or oppressive;
3. It must not be partial or discriminatory;
4. It must not prohibit but may regulate
trade;
5. It must be general and consistent with
public policy; and
6. It must not be unreasonable (Magtajas v.
Pryce Properties, G.R. No. 111097, July 20, 1994)
Incentive or relief granted by any local
government unit pursuant to the provisions of the
LGC shall be construed strictly against the person
claiming it. (Section 5(b), LGC)
Procedure for the approval and effectivity
of tax ordinances
1. Filing of proposal
2. Publication or posting
3. Notification
4. Mandatory public hearing
No tax or ordinance or revenue shall be enacted
or approved in the absence of a public hearing.
No public hearing shall be required before the
enactment of a local tax ordinance levying the
basic real property tax (Art. 324, IRR of LGC)
5. Approval of tax ordinance and revenue
measure
6. Publication of approved tax ordinance
a. If the tax ordinance or revenue measure
falls under Article 280 of this Rule, the
gist of such tax ordinance or revenue
measure shall be published in a
newspaper of general circulation within
the province where the Sanggunian
concerned belongs. In the absence of any
newspaper of general circulation within
the province, posting of such ordinance
or measure shall be made in accessible
and conspicuous public places in all
municipalities and cities of the province
to which the Sanggunian enacting the
ordinance or revenue measure belongs.
7. Furnishing of copies tax ordinance and
revenue to respective local treasurers
concerned for public dissemination. (Art. 276,
IRR of LGC)
629
9. Taxpayer’s Remedies
(60-60-30-15-15 Rule)
a) Protest
1. After receipt of the notice of assessment from
the treasurer, the taxpayer may file a written
protest within 60 days to contest the
assessment, otherwise the same will be final
and executory;
2. The local treasurer shall decide the protest
within 60 days from its filing;
● If protest is meritorious – treasurer shall
issue notice cancelling wholly or partially
the assessment.
● If not meritorious – treasurer shall deny
the protest with notice to the taxpayer.
● The protest may likewise be considered
denied if not acted upon within the 60-
day period.
3. The taxpayer shall have 30 days from the
receipt of denial or from the lapse of the 60-
day period to appeal with the court of
competent jurisdiction. Otherwise, the
assessment becomes conclusive and
unappealable. (Sec. 195, LGC)
Contents of Notice of the Assessment
The notice of assessment, which stands as the
first instance the taxpayer is officially made aware
of the pending tax liability, should be sufficiently
informative to apprise the taxpayer the legal basis
of the tax. Section 195 of the Local Government
Code does not go as far as to expressly require
that the notice of assessment specifically cite the
provision of the ordinance involved but it does
require that it state the nature of the tax, fee or
charge, the amount of deficiency, surcharges,
interests and penalties.
However in this case, the Revenue Code provides
multiple provisions on business taxes, and at
varying rates. Hence, we could appreciate the
Corporation's confusion, as expressed in its
protest, as to the exact legal basis for the tax.
Reference to the local tax ordinance is vital, for
the power of local government units to impose
local taxes is exercised through the appropriate
ordinance enacted by the sanggunian, and not by
the Local Government Code alone. What
determines tax liability is the tax ordinance, the
Local Government Code being the enabling law
for the local legislative body. (Luz R. Yamane vs. BA
Lepanto Condominium, G.R. 154993, October 25,
2005)
Payment under protest NOT required
Where an assessment is to be protested or
disputed, the taxpayer may proceed:
(a) without payment, or
(b) with payment.
(City of Manila vs. Cosmos Bottling Corporation, G.R.
No. 196681, June 27, 2018)
The law does not prescribe any formal
requirement to constitute a valid protest. To
constitute a valid protest, it is sufficient that it
contains the spontaneous declaration made to
acquire or keep some right or to prevent an
impending damage. Accordingly, a protest is valid
so long as it states the taxpayer’s objection to the
assessment and the reasons therefor. (China
Banking Corporation vs. City Treasurer of Manila, G.R.
No. 204117, July 1, 2015)
630
Protest in a BIR Protest in 2.File a Petition for
assessment assessment in a LGU Review to the CTA
for Local business tax
Governing Law b. Refund
National Internal Local Government Code
Revenue Code Claim for refund of tax credit for
Period to file protest erroneously or illegally collected tax, fee or
From date of receipt of From date of receipt of charge
FAN: 30 days to file Notice of Assessment:
60 days to file
Form of Protest
No case or proceeding shall be maintained in any
In a FAN: Taxpayer (TP) No form is required only court for the recovery of any tax, fee, or charge
MUST indicate if the a protest in written form erroneously or illegally collected until a written
protest is either for claim for refund or credit has been filed with the
REINVESTIGATION or local treasurer.
RECONSIDERATION
No case or proceeding shall be entertained in any
Also each finding must court after the expiration of two (2) years from
be protested otherwise
the date of the payment of such tax, fee, or
any finding not protest
charge, or from the date the taxpayer is entitled
will be deemed admitted
Period of filing of supplementary documents to a refund or credit. (Sec. 196, LGC)
to support protest
In case of a period of No requirement of filing What is required for a claim for an
REINVESTIGATION: A supplementary administrative refund:
TP shall submit documents
supplementary 1. Written Claim filed with;
documents within 60 2. Filed within 2 years from:
days from filing of a. Date of payment; or
protest
b. Date when taxpayer is entitled to a
Period to decide by the officer
refund or credit. (Ignatius Michael D. Ingles,
In a FAN: the BIR has The local treasurer has
Tax Made Less Taxing: A Reviewer with
180 days to decide on 60 days to decide
Codals and Cases, 3rd Edition, 2021, p. 582)
the protest
Recourse in case of denial of proper officer
TP shall either within 30 Within 30 days from
To be entitled to a refund under Section 196 of
days from receipt of receipt of denial TP shall the Local Government Code, the taxpayer must
denial: file an appeal with the comply with the following procedural
competent court of requirements:
1. File a motion for jurisdiction
reconsideration with the 1. File a written claim for refund or credit with
CIR* the local treasurer; and
2. File a judicial case for refund within two (2)
2.Elevate protest to the
years from the payment of the tax, fee, or
CTA thru a petition for
review charge, or from the date when the taxpayer
Recourse in case of inaction is entitled to a refund or credit (International
Upon the lapse of the Within 30 days from Container Services, Inc. vs. City of Manila, G.R. No.
180 day period to receipt of denial TP shall 185622, October 17, 2018)
decide, TP can either: file an appeal with the
competent court of Injunction available in LGU assessments
1. Wait for the decision jurisdiction
of the CIR or his Unlike the National Internal Revenue Code, the
representative; or Local Tax Code does not contain any specific

631
provision prohibiting courts from enjoining the
collection of local taxes. Such statutory lapse or
intent, however it may be viewed, may have
allowed preliminary injunction where local taxes
are involved but cannot negate the procedural
rules and requirements under Rule 58. (Angeles
City vs. Angeles Electric Corporation, G.R. No. 166134.
June 29, 2010)
● In the present case, the PEZA did not avail
itself of any of the remedies against a notice
of assessment. A petition for declaratory
relief is not the proper remedy once a notice
of assessment was already issued .Instead of
a petition for declaratory relief, the PEZA
should have directly resorted to a judicial
action. The PEZA should have filed a
complaint for injunction, the “appropriate
ordinary civil action” to enjoin the City from
enforcing its demand and collecting the
assessed taxes from the PEZA. After all, a
declaratory judgment as to the PEZA’s tax-
exempt status is useless unless the City is
enjoined from enforcing its demand.(City of
Lapu-Lapu v. Phil. Economic Zone Authority, G.R.
No. 184203,November 26,2014)
Distinguish the remedies provided in Sec.
195 vs. Sec. 196 as provided in LGC
Section 195 Section 196
Remedy covered
Protest of an Claim for refund of tax
assessment credit for erroneously
or illegally collected
tax, fee or charge
Precursory event
Receipt of an Erroneous payment or
assessment tax illegally collected
from taxpayer
Is assessment required
Yes Not required, only the
fact of payment
Period and reckoning point of filing
administrative claim
60 days from the date 2 years from date the
the assessment was tax was erroneously or
received
illegally collected.
Period to decide by Local Treasurer
60 days No deadline provided
by LGC
(International Container Services, Inc. vs. City of
Manila, G.R. No. 185622, October 17, 2018)
Can a taxpayer, in filing a protest assailing
the validity of the assessment, at the same
time pray for a refund in that same protest
letter?
Yes. Where payment was made, the taxpayer
may thereafter maintain an action in court
questioning the validity and correctness of the
assessment (Section 195, LGC) and at the same
time seeking a refund of the taxes. In truth,
it would be illogical for the taxpayer to only seek
a reversal of the assessment without praying for
the refund of taxes. Once the assessment is set
aside by the court, it follows as a matter of course
that all taxes paid under the erroneous or invalid
assessment are refunded to the taxpayer.
It must be understood, however, that in such
latter case, the suit for refund is conditioned
on the prior filing of a written claim for
refund or credit with the local treasurer. In
this instance, what may be considered as the
administrative claim for refund is the letter-
protest submitted to the treasurer. Where the
taxpayer had paid the assessment, it can be
expected that in the same letter-protest, he
would also pray that the taxes paid should be
refunded to him. As previously mentioned, there
is really no particular form or style
necessary for the protest of an assessment
or claim of refund of taxes. What is material
is the substance of the letter submitted to
the local treasurer.
Equally important is the institution of the
judicial action for refund within thirty (30)
days from the denial of or inaction on the
letter-protest or claim, not any time later,
even if within two (2) years from the date of
payment (as expressly stated in Section 196).
Notice that the filing of such judicial claim for
refund after questioning the assessment is within
the two-year prescriptive period specified in
Section 196. Note too that the filing date of such
judicial action necessarily falls on the beginning
portion of the two-year period from the date of
payment. Even though the suit is seemingly
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grounded on Section 196, the taxpayer
could not avail of the full extent of the two-
year period within which to initiate the
action in court.
Simply put, there are two conditions that must be
satisfied in order to successfully prosecute an
action for refund in case the taxpayer had
received an assessment.
One, pay the tax and administratively assail
within 60 days the assessment before the local
treasurer, whether in a letter-protest or in a claim
for refund. Two, bring an action in court within
thirty (30) days from decision or inaction by the
local treasurer, whether such action s
denominated as an appeal from assessment
and/or claim for refund of erroneously or illegally
collected tax.
To reiterate, Cosmos, after it had protested and
paid the assessed tax, is permitted by law to seek
a refund having fully satisfied the twin conditions
for prosecuting an action for refund before the
court. (City of Manila vs. Cosmos Bottling Corporation,
G.R. No. 196681, June 27, 2018)
While the non-filing of a written claim for refund
may not be a jurisdictional requirement, it results
to non-exhaustion of administrative remedies
which renders the action premature such that
“the claimed cause of action is not ripe for judicial
determination. (China Banking Corporation vs. The
Treasurer of the City of Manila, CTA EB No. 525,
February 21, 2011)
Effect of granting a claim for refund
The tax credit granted a taxpayer shall not be
refundable in cash but shall only be applied to
futuretax obligations of the same taxpayer for the
same business.
If a taxpayer has paid in full the tax duefor
the entire year and he shall have no other tax
obligation payable to the LGU concerned during
the year, his tax credits, if any, shall be applied
in full during the first quarter of the next
calendar year onthe tax due from him for the
same business of said calendar year.
Exception:
Any unapplied balance of the tax credit shall
be refunded in cash in the event that he
terminates operation of the business involved
within the locality. (Sec. 286, IRR of LGC)
Enforcement of the grant of refund
Instead of moving for the issuance of a writ of
execution relative to the aforesaid Decision,
petitioner should have merely requested for the
approval of the City of Manila in implementing the
tax refund or tax credit, whichever is appropriate.
In other words, no writ was necessary to
cause the execution thereof, since the
implementation of the tax refund will effectively
be a return of funds by the City of Manila in favor
of petitioner while a tax credit will merely serve
as a deduction of petitioner’s tax liabilities in the
future. (Coca – cola bottlers vs. City of Manila, G.R.
197561, April 7,2014)
c) Action before the Secretary of Justice
The law requires that the dissatisfied taxpayer
who questions the validity or legality of a tax
ordinance must file his appeal to the
Secretary of Justice, within 30 days from
effectivity thereof. In case the Secretary
decides the appeal, a period also of 30 days
is allowed for an aggrieved party to go to court.
But if the Secretary does not act thereon,
after the lapse of 60 days, a party could already
proceed to seek relief in court.
These three separate periods are clearly given for
compliance as a prerequisite before seeking
redress in a competent court. Such statutory
periods are set to prevent delays as well as
enhance the orderly and speedy discharge of
judicial functions. For this reason the courts
construe these provisions of statutes as
mandatory (Aala vs. Uy,G.R. No. 202781, January 10,
2017)
Procedure:
1. Appeal within 30 days from effectivity of the
ordinance to the Secretary of Justice
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2. Secretary must render a decision within 60
days from receipt of appeal
3. Within 30 days from the lapse of the 60
days without any action from the
Secretary of Justice, or within 30 days from
receipt of decision, the aggrieved taxpayer
may resort to court (Sec. 187,LGC)
RTC
Appeal within 30 days
from denial or after 60
days to decide has lapse
DOJ Secretary
(60 days to decide)
Appeal within 30 days
Date of Effectivity
On Disputing a Tax Ordinance
● When disputing an ordinance, the appeal to
the DOJ is MANDATORY, the RTC will
dismiss the case. (Jardine Davies Insurance
Brokers vs. Aliposa, G.R. 118900, February
27,2003)
Exception: In pure questions of law, the
appeal to the DOJ is NOT MANDATORY. It
can brought to straight to the RTC. (Alta Vista
Golf and Country Club vs. Cebu, G.R. No. 180235,
January 20,2016)
● A taxpayer may file a complaint assailing the
validity of the ordinance praying for a refund
of its perceived overpayments without first
filing a protest to the payment of taxed due
under the ordinance (Jardine Davies Insurance
Brokers vs. Aliposa, G.R. 118900, February
27,2003).
● Secretary of Justice can only review the
constitutionality or legality of the tax
ordinance, and, if warranted, to revoke it on
either or both of these grounds and there is
no need for a written protest when disputing
an ordinance (Ignatius Michael D. Ingles, Tax
Made Less Taxing: A Reviewer with Codals and
Cases, 3rd Edition, 2021 p. 577)
10. Assessment and Collection of Local
Taxes
a) Remedies of Local Government Unit
Chapter 4, Art. VI of LGC provides for the
remedies of LGUs for the collection of any
delinquent local tax, fee, charge, or other
revenue.
The following are the remedies of a local
government unit for the collection of delinquent
tax:
1. Local government’s lien for delinquent taxes,
fees or charges;
2. By administrative action
a. Distraint of personal property
b. Levy of real property
c. Compromise
3. By judicial action
Local government’s lien for delinquent
taxes, fees or charges
Local taxes, fees, charges and other revenues
constitute a lien, superior to all liens, charges or
encumbrances in favor of any person,
enforceable by appropriate administrative or
judicial action, 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.
Extinguishment of lien
The lien may only be extinguished upon full
payment of the delinquent local taxes, fees and
charges including related surcharges and interest.
(Sec. 173, LGC)
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(1) Civil remedies, in general (Sec. 174,
LGC)
The civil remedies for the collection of local taxes,
fees, or charges, and related surcharges and
interest resulting from delinquency shall be:
1. Administrative Action thru:
i. Distraint of Personal Property (Sec. 175,
LGC);
ii. Levy upon real property (Sec.176, LGC); and
iii. Compromise (Sec.148[b], LGC)
2. Judicial Action
1. Administrative action
i. Distraint of goods, chattels, or effects,
and other personal property of whatever
character, including stocks and other
securities, debts, credits, bank accounts,
and interest in and rights to personal
property, and
ii. By levy upon real property and interest in
or rights to real property;
Procedure for administrative action
(i) Distraint of personal property
What may be distrained:
1. Distraint of goods;
2. Chattels, or effects, and
3. Other personal property of whatever
character including:
a. stocks and other securities;
b. debts, credits, bank accounts; and
c. interest in and rights to personal
property(Sec.174[a],LGC)
How is distraint done?
1. Seizure (Sec.175[a], LGC)
When does the right of seizure accrue to
the Local Government?
Upon failure of the person owing any local tax,
fee, or charge to pay the same at the time
required.
Who should notify the taxpayer and how is
notice made?
The local treasurer or his deputy may notify the
taxpayer upon written notice.
What may be seized?
Seize or confiscate any:
a. Personal property belonging to that person;
or
b. Any personal property subject to the lien in
sufficient quantity
What needs to be satisfied?
To satisfy the tax, fee, or charge in question,
together with any increment thereto incident to
delinquency and the expenses of seizure.
What will the local treasurer or his deputy?
In such case, the local treasurer or his deputy
shall issue: a duly authenticated certificate
based upon the records of his office
What will the authenticated certificate
contain?
Showing the fact of:
1. delinquency and
2. the amounts of the tax, fee, or charge and
penalty due.
What is the purpose of the certificate?
Such certificate shall serve as sufficient
warrant for the distraint of personal property
aforementioned, subject to the taxpayer’s right to
claim exemption under the provisions of existing
laws.
What will be done to the distrained
properties?
Distrained personal property shall be sold at
public auction in the manner herein provided
for.
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2. Accounting of distrained goods.
(Sec.175[b], LGC)
What will the officer executing the distraint
do?
The officer executing the distraint shall make or
cause to be made an account of the goods,
chattels or effects distrained.
How many copies and for whom will it be?
A copy of which signed by himself shall be left
either with the:
(a) Owner or
(b) Person from whose possession the goods,
chattels or effects are taken, or
(c) At the dwelling or place of business of that
person and with someone of suitable age
and discretion
What will it contain?
A statement of the sum demanded and a note of
the time and place of sale.
3. Publication (Sec.175[c], LGC)
How will the auction be publicized?
The officer shall forthwith cause a notification
to be exhibited in :
Where will the notice be posted?
(a) Not less than three (3) public and
conspicuous places in the territory of the local
government unit where the distraint is made,
specifying the time and place of sale, and the
articles distrained.
(b) One place for the posting of the notice shall
be at the office of the chief executive of the
local government unit in which the property
is distrained.
Date of auction
a. The time of sale shall not be less than
twenty (20) days after notice to the
owner or possessor of the property as above
specified; and
b. the publication or posting of the notice.
4. Sale at Public Auction(Sec.175[d][e],
LGC)
What will be the effect of the payment
of the delinquent if made before the
sale?
If at any time prior to the consummation of
the sale, all the proper charges are paid to
the officer conducting the sale, the goods or
effects distrained shall be restored to the
owner.
What happens if the property is not sold
within 120 days?
Should the property distrained be not
disposed of within one hundred and twenty
(120) days from the date of distraint,
the same shall be considered as sold to
the local government unit concerned for
the amount of the assessment made thereon
by the Committee on Appraisal and to the
extent of the same amount, the tax
delinquencies shall be cancelled.
5. Report to Local Chief Executive
(Sec.175[d], LGC)
To whom shall the report be made?
Within five (5) days after the sale, the local
treasurer shall make a report of the
proceedings in writing to the local chief
executive concerned.
6. Disposition of proceeds (Sec.175[f],
LGC)
How will the proceeds be applied?
The proceeds of the sale shall be applied to
satisfy the tax, including the surcharges,
interest, and other penalties incident to
delinquency, and the expenses of the
distraint and sale.
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 What happens if there was a balance
after settling all dues?
The balance over and above what is required
to pay the entire claim shall be returned to
the owner of the property sold.
What are the expenses that could be
charged?
The expenses chargeable upon the seizure
and sale shall embrace only the actual
expenses of seizure and preservation of
the property pending the sale, and no
charge shall be imposed for the services of
the local officer or his deputy.
What if the proceeds are insufficient to
satisfy the claim of the local
government?
Where the proceeds of the sale are
insufficient to satisfy the claim, other
property may, in like manner, be
distrained until the full amount due,
including all expenses, is collected.
(ii) Levy of real property, procedure
1. Levy (Sec. 176, LGC)
When may levy of real property take place?
After the expiration of the time required to pay
the delinquent tax, fee, or charge,
Is it required that a distrained be made first
before levying the real property?
No. Real property may be levied on before,
simultaneously, or after the distraint of personal
property belonging to the delinquent taxpayer.
What will be issued by the provincial, city
or municipal treasurer?
The provincial, city or municipal treasurer, as the
case may be, shall prepare a duly authenticated
certificate showing
What will the authenticated certificate
contain?
A duly authenticated certificate showing:
(a) the name of the taxpayer
(b) and the amount of the tax, fee, or charge,
and penalty due from him.
Said certificate shall operate with the force of a
legal execution throughout the Philippines.
Levy shall be effected by writing upon said
certificate the description of the property
upon which levy is made.
Who shall be notified?
At property the same time, written notice of the
levy shall be mailed to or served upon the
a. assessor and the Register of the Deeds
of the province or city where the property is
located who shall annotate the levy:
i. On the tax declaration; and
ii. Certificate of title of the property,
respectively, and
b. the delinquent taxpayer or, if he be
absent from the Philippines:
i. To his agent or the manager of the
business in respect to which the liability
arose; or
ii. If there be none, to the occupant of
the property in question.
Prior Distraint of Real Property insufficient
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 thirty
(30) days after execution of the distraint, proceed
with the levy on the taxpayer’s real property.
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Report to Sanggunian
A report on any levy shall, within ten (10) days
after receipt of the warrant, be submitted by the
levying officer to the sanggunian concerned.
2. Advertisement (Sec.178,LGC)
Periods to consider in advertising the
auction of real property ?
Within thirty (30) days after the levy, the local
treasurer shall proceed to publicly advertise for
sale or auction the property or a usable portion
thereof as may be necessary to satisfy the claim
and cost of sale;
How long would be the advertisement
cover?
Advertisement shall cover a period of at least
thirty (30) days.
Where will the notice be posted?
It shall be effected by posting a notice:
a. At the main entrance of the municipal
building or city hall; and
b. In a public and conspicuous place in the
barangay where the real property is located.
Publication
By publication once a week for three (3)
weeks in a newspaper of general circulation in
the province, city or municipality where the
property is located.
What will the advertisement contain?
The advertisement shall contain:
a. the amount of taxes, fees or charges, and
penalties due thereon, and
b. the time and place of sale,
c. the name of the taxpayer against whom the
taxes, fees, or charges are levied, and
d. a short description of the property to be
sold.
3. Public Sale
Stay of proceedings of the sale
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.
Auction proper
If he fails to settle thetaxes, fees, charges,
penalties and interests before the sale , the sale
shall proceed.
Where will it be held?
Shall be held either:
a. At the main entrance of the provincial, city or
municipal building; or
b. On the property to be sold; or
c. At any other place as determined by the local
treasurer conducting the sale and specified in
the notice of sale.(Sec.178, LGC)
How made?
Upon payment to the local treasurer of the total
amount of taxes, fees, or charges, and related
surcharges, interests or penalties from the date
of delinquency to the date of sale, plus interest of
not more than two percent (2%) per month on
the purchase price from the date of purchase to
the date of redemption.(Sec.179, LGC)
4. Report to Sanggunian
To whom shall be the report be made?
Within thirty (30) days after the sale, the local
treasurer or his deputy shall make a report of
the sale to the sanggunian concerned, and
which shall form part of his records. (Sec.178 par.2,
LGC)
5. Delivery of the Certificate of Sale
After consultation with the sanggunian, the local
treasurer shall make and deliver to the purchaser
a certificate of sale, showing the proceedings
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of the sale, describing the property sold, stating
the name of the purchaser and setting out the
exact amount of all taxes, fees, charges, and
related surcharges, interests, or penalties. (Ibid.)
Owner not deprived
The owner shall not, however, be deprived of
the possession of said property and shall be
entitled to the rentals and other income
thereof until the expiration of the time allowed for
its redemption.(Sec.179, LGC)
Period of Redemption by owner/delinquent
taxpayer
Within one (1) year from the date of sale, the
delinquent taxpayer or his representative shall
have the right to redeem the property upon
payment to the local treasurer of the total amount
of taxes, fees, or charges, and related
surcharges, interests or penalties from the date
of delinquency to the date of sale, plus interest of
not more than two percent (2%) per month on
the purchase price from the date of purchase to
the date of redemption. (Ibid.)
Surrender of certificate of sale in case of
redemption
The provincial, city or municipal treasurer or his
deputy, upon surrender by the purchaser of
the certificate of sale previously issued to him,
shall forthwith return to the latter the entire
purchase price paid by him plus the interest
of not more than two percent (2%) per
month herein provided for, the portion of the
cost of sale and other legitimate expenses
incurred by him, and said property thereafter
shall be free from the lien of such taxes, fees, or
charges, related surcharges, interests, and
penalties. (Ibid.)
Effect of redemption
Such payment shall invalidate the certificate
of sale issued to the purchaser and the owner
shall be entitled to a certificate of
redemption from the provincial, city or
municipal treasurer or his deputy. (Ibid.)
6. Disposition of the Proceeds
Any excess in the proceeds of the sale over the
claim and cost of sales shall be turned over to the
owner of the property.(Sec.178,LGC)
7. Final Deed of Purchase
In case the taxpayer fails to redeem the property
as provided herein, the local treasurer shall
execute a deed conveying to the purchaser
so much of the property as has been sold, free
from liens of any taxes, fees, charges, related
surcharges, interests, and penalties. The deed
shall succinctly recite all the proceedings upon
which the validity of the sale
depends.(Sec.179,LGC)
Purchase of Property By the Local
Government Units for Want of Bidder
In case there is no bidder for the real property
advertised for sale as provided herein, or if the
highest bid is for an amount insufficient to
pay the taxes, fees, or charges, related
surcharges, interests, penalties and costs, the
local treasurer conducting the sale shall
purchase the property in behalf of the local
government unit concerned to satisfy the claim
and within two (2) days thereafter shall make a
report of his proceedings which shall be reflected
upon the records of his office. (Sec. 181, LGC)
Duty of Registrar of Deeds if LGU bought
the levied property
It shall be the duty of the Registrar of Deeds
concerned upon registration with his office of any
such declaration of forfeiture to transfer the
title of the forfeited property to the local
government unit concerned WITHOUT the
necessity of an order from a competent
court. (Ibid.)
Resale of Real Estate Taken for Taxes, Fees,
or Charges. –
The sanggunian concerned may, by ordinance
duly approved, and upon notice of not less than
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twenty (20) days, sell and dispose of the real
property acquired under the preceding section at
public auction.
The proceeds of the sale shall accrue to the
general fund of the local government unit
concerned. (Sec. 264, LGC)
Further distraint or levy
The remedies by distraint and levy may be
repeated if necessary until the full amount due,
including all expenses, is collected. (Sec. 184, LGC)
Exemption of personal property from
distraint or levy
The following property shall be exempt from
distraint and levy, attachment or execution
thereof for delinquency in the payment of any
local tax, fee or charge, including the related
surcharge and interest:
1. Tools and implements necessarily used by
the delinquent taxpayer in his trade or
employment;
2. One horse, cow, carabao, or other breast 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 Ten
thousand pesos (P10,000.00);
5. Provisions, including crops, actually provided
for individual or family use sufficient for four
(4) months;
6. The professional libraries of doctors,
engineers, lawyers and judges;
7. One fishing boat and net, not exceeding the
total value of Ten thousand pesos
(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.
(Sec. 185, LGC)
Distinguish Distraint and Levy:
Distraint Levy
Property being seized/levied
Personal Real
Reporting of sale: To whom made
Local Chief Executive Sanggunian
Right of Redemption
No right of redemption With right to redeem
within 1 year from the
date of sale
Notice made to
Owner/Delinquent tax Assessor
payer or possessor of Owner of the property or
personal property in absence in the
Philippines:
1. His agent
2.Occupant of the
property
Penalty on local treasurer for failure to
issue and execute warrant of distraint or
levy
Without prejudice to criminal prosecution under
the Revised Penal Code and other applicable
laws, any local treasurer who fails to issue or
execute the warrant of distraint or levy after the
expiration of the time prescribed, or who is found
guilty of abusing the exercise thereof by
complement authority shall be automatically
dismissed from the service after due notice and
hearing.(Sec. 177, LGC)
(iii) Compromise
The sanggunian concerned shall, by appropriate
ordinance, penalize fraudulent practices and
unlawful possession or use of instruments of
weights and measures and prescribe the criminal
penalty therefor in accordance with the provisions
of this Code. Provided, however, That the
sanggunian concerned may authorize the
municipal treasurer to settle an offense not
involving the commission of fraud before a case
therefor is filed in court, upon payment of a
compromise penalty of not less than Two
hundred pesos (P200.00). (Sec. 148([b], LGC)
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(2) Judicial action Distinguish with period of assessment of
national taxes:
Procedure for judicial action
NIRC LGC
The local government unit concerned may Period to assess (Ordinary)
enforce the collection of delinquent taxes, fees, 3 years from the date of 5 years from the date
charges or other revenues by civil action in any filing they become due
court of competent jurisdiction. The civil action Waiver of Prescription
Allowed Not allowed
shall be filed by the local treasurer within the
period prescribed in Section 194 of the LGC. (Sec.
183, LGC) As compared to periods to assess national taxes,
the period is only 3 years but can be extended
Where will the judicial action be filed? virtue of a written waiver executed by the
taxpayer.(Sec.222[b], NIRC)
Principal amount of taxes,
fees, exclusive of charges and Court The LGC did not provide for such equivalent
penalties provision as can be seen in Section 195 of the
Less than 300,000 if outside manila LGC.
or less than 400,000 if within Metro MTC
Manila Period of Collection:
More than 300,000 if outside
manila or more than 400,000 if RTC
5 years from date of assessment by
within Metro Manila
administrative or judicial action.
Above Php 1M CTA Division

Suspension of Periods:(PRO)
Can the local government simultaneously
avail of the administrative and judicial
The running of the periods of prescription
remedies?
provided in the preceding paragraphs shall be
suspended for the time during which:
Yes. Either of these remedies or all may be
pursued concurrently or simultaneously at the
1. The treasurer is legally prevented from
discretion of the local government unit
making the assessment of collection;
concerned. (Sec.174, LGC)
2. The taxpayer requests for a reinvestigation
and executes a waiver in writing before
b) Prescriptive Period
expiration of the period within which to
assess or collect; and
Local taxes, fees or charges shall be assessed
3. The taxpayer is out of the country or
within 5 years from the date they become due.
otherwise cannot be located. (Sec. 194[d],
No action for the collection of such shall be
LGC)
instituted after the expiration of such period.
B. REAL PROPERTY TAXATION
Except: In case of fraud or intent to evade
payment of taxes, fees or charges, the same may
Preliminaries
be assessed within 10 years. (Sec. 194[a] and [b])
The Real Property Tax Code does not carry a
definition of "real property" and simply says that
the realty tax is imposed on "real property, such
as lands, buildings, machinery and other
improvements affixed or attached to real
property." In the absence of such a definition, we

641
apply Article 415 of the Civil Code (Benguet
Corporation vs. Central board of assessments appeals
G.R. No. 106041, January 29, 1993)
Distinguish Local Taxation against
Real Property Taxation
Local Tax Real property Tax
Subject being Taxed
Tax on Businesses or Tax on Real Property
occupation
1. Fundamental Principles (C-BLUE)
a) All real property, whether taxable or
exempt, shall be appraised at the
CURRENT AND FAIR MARKET VALUE
prevailing in the locality where the
property is situated. (Sec. 201, LGC)
b) Real property shall be classified, valued
and assessed on the basis of its actual
use regardless of where located,
whoever owns it, and whoever uses it.
(Sec. 212 and 217, LGC)
● Actual use – refers to the purpose for
which the property is principally or
predominantly utilized by the person
in possession thereof. (Sec. 199(b),
LGC)
● “Usage” means direct, immediate
and actual application of the property
(MCLAA vs. Marcos G.R. No. 120082,
September 11, 1996)
c) The appraisal, assessment, levy and
collection of real property tax shall not be let
to any private person
d) Uniform classification within each local
government unit shall be observed
e) Equitable appraisal and assessment are
required. (Sec. 197, LGC)
Valuation of Real Property
● Fair market value is the amount which a
purchaser willing but not compelled to buy
would pay an owner of the property, and the
latter willing but not compelled to sell would
accept as the consideration or price therefor.
(Sec. 199 (L), LGC)
● Appraisal and Assessment of Real
Property Tax
Section 5 of PD 464 provides unequivocally
that "all real property, whether taxable or
exempt, shall be appraised at the current and
fair market value prevailing in the locality
where the property is situated." Contrary to
petitioner's contention, acquisition cost
cannot be and is not the sole basis of the
current and fair market value of a property.
The current value of like properties and their
actual or potential uses, among others, are
also considered (Sesbreño vs. CBAA, G.R. No.
106588, March 24, 1997)
Declaration of real property
The duty of the owner, persons administering real
property including improvements therein or their
duly authorized representative are required to
prepare and file with the provincial, city or
municipal assessor:
(i) a sworn statement declaring the true value of
their property, whether previously declared
or undeclared, taxable or exempt,
(ii) which shall be the current and fair market
value of the property, as determined by the
declarant.
(iii) Such declaration shall contain a description of
the property sufficient in detail to enable the
assessor or his deputy to identify the same
for assessment purposes.
(iv) The sworn declaration of real property herein
referred to shall be filed with the assessor
concerned once every three (3) years during
the period from January 1 to June 30 (Sec.
202, LGC)
Listing of real property in assessment rolls
a. In every province and city, including the
municipalities within the Metropolitan Manila
Area, there shall be prepared and maintained
by the provincial, city or municipal assessor
an assessment roll wherein shall be listed all
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 real property, whether taxable or exempt,
located within the territorial jurisdiction of the
local government unit concerned. Real
property shall be listed, valued and assessed
in the name of the owner or administrator, or
anyone having legal interest in the property.
b. The undivided real property of a deceased
person may be listed, valued and assessed in
the name of the estate or of the heirs and
devisees without designating them
individually; and undivided real property
other than that owned by a deceased may be
listed, valued and assessed in the name of
one or more co-owners: Provided, however,
that such heir, devisee, or co-owner shall be
liable severally and proportionately for all
obligations imposed by this Title and the
payment of the real property tax with respect
to the undivided property.
c. The real property of a corporation,
partnership, or association shall be listed,
valued and assessed in the same manner as
that of an individual.
d. Real property owned by the Republic of the
Philippines, its instrumentalities and political
subdivisions, the beneficial use of which has
been granted, for consideration or otherwise,
to a taxable person, shall be listed, valued
and assessed in the name of the possessor,
grantee or of the public entity if such property
has been acquired or held for resale or lease.
(Sec. 205, LGC)
2. Nature
The LGC does not carry a definition of real
property. The Supreme Court however in several
decisions suggested that in understanding what
“real property” is refence may be made to Art.
415 of the Civil Code. (ABAN, Law of Basic
Taxation in the Philippines, Revised 2011 edition,
pp.444-445.)
Moreover, Article 415 (9) of the New Civil Code
provides that "[d]ocks and structures which,
though floating, are intended by their nature and
object to remain at a fixed place on a river, lake,
or coast" are considered immovable property.
Thus, power barges are categorized as immovable
property by destination, being in the nature of
machinery and other implements intended by the
owner for an industry or work which may be
carried on in a building or on a piece of land and
which tend directly to meet the needs of said
industry or work. (FELS, Energy Inc., vs. Province of
Batangas and Office of the Provincial Assessor of
Batangas, G.R. No. 168557, February 16, 2007)
What is real property tax?
Real property taxes are annual taxes levied on
real property such as lands, buildings, machinery,
and other improvements not otherwise
specifically exempted under the Local
Government Code. Real property taxes are ad
valorem, with the amount charged based on a
fixed proportion of the value of the property.(City
of Lapu-Lapu vs. Phil. Economic Zone Authority,
G.R. No. 184203, November 26, 2014)
Characteristics of Real Property Tax
(PASED2)
1. Direct tax on the ownership or use of real
property
2. Ad valorem tax. The value is based on the
tax base.
3. Proportionate – the tax is calculated on the
basis of a certain percentage of the value
assessed
4. It creates a single, indivisible obligation
5. It attaches on the property (i.e. lien) and is
enforceable against it.
6. With respect to LGUs, it is levied thru a
delegated power (ABAN, Law of Basic Taxation
in the Philippines, 1994)
Who should be liable to the real property
tax?
a. Owner
The liability for taxes generally rests on the
owner of the real property at the time the tax
accrues. This is a necessary consequence
that proceeds from the fact of ownership.
b. Person who has the beneficial use.
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 The entity with the beneficial use of the real
property, such as the tax on property owned
by the government but leased to private
persons or entities, or when the tax
assessment is made on the basis of the actual
use of the property. In either case, the
unpaid realty tax attaches to the property but
is directly chargeable against the taxable
person who has actual and beneficial use and
possession of the property regardless of
whether or not that person is the owner.
(National Power Corporation vs. Province of
Quezon and Municipality of Pagbilao, G.R. No.
171586, July 15, 2009)
If the owner and the possessor of the real
property are two different persons, who
will pay the real property tax?
● Unpaid realty taxes attach to the property
and are chargeable against the person who
had actual or beneficial use and possession
of it regardless of whether or not he is the
owner.
To impose the real property tax on the
subsequent owner which was neither the
owner nor the beneficial user of the property
during the designated periods would not only
be contrary to law but also unjust.(Estate of
Lim vs. City of Manila, G.R. No. 90639, February
21, 1990)
c. Vendee
In Baguio case, the assumption by the
vendee of the liability for real estate taxes
prospectively due was in harmony with the
tax policy that the user of the property bears
the tax. (City of Baguio vs. Busuego, G.R. No. L-
29772, September 18, 1980)
In Estate of Lim case, the interpretation that
the [vendee] assumed the liability for
overdue real estate taxes for the periods prior
to the contract of sale is incongruent with the
said policy because there was no immediate
transfer of possession of the properties
previous to full payment of the
repurchase.(Estate of Lim vs. City of Manila, G.R.
No. 90639, February 21, 1990)
Assumption of liability without any transfer
of title nor beneficial use of the property
In the Baguio and Lim cases, the vendors still
retained ownership, and the effectiveness of the
tax liabilities assumed by the vendees turned on
the possession and use of the property subject to
tax. In other words, the contractual assumption
of liability was supplemented by an interest that
the party assuming liability had on the property
taxed. In the present case, NPC is neither the
owner nor the possessor or user of the property
taxed. No interest on its part thus justifies any tax
liability on its part other than its voluntary
contractual undertaking. Only Mirant as the
contractual obligor, not the local government
unit, can enforce the tax liability that NPC
contractually assumed (National Power Corporation
vs. Province of Quezon and Municipality of Pagbilao,
G.R. No. 171586, July 15, 2009).
3. Imposition
a) Power to levy
Who may levy?
The following may levy real property tax:
(1) a province or
(2) city or
(3) a municipality within the Metropolitan
Manila Area. (Sec. 232, LGC)
What are the properties covered by real
property tax?
The following shall be the coverage of imposition
by a province, or a city or municipality within
Metro Manila:(LBM -O)
(1) Land;
(2) Building;
(3) Machinery; and
(4) Other improvements not specifically
exempted (Sec. 232, LGC)
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Rates of imposition
The rates shall be as follows:
1. Province: not exceeding one percent (1%)
of the assessed value of real property; and
2. City or municipality within Metro
Manila: not exceeding two percent (2%) of
the assessed value of real property. (Sec. 233,
LGC)
Personal Properties taxed as real property
It is undeniable that the parties to a contract may
by agreement treat as personal property that
which by nature would be real property; and it is
a familiar phenomenon to see things classed as
real property for purposes of taxation. (Standard Oil
Co. of New York v. Joaquin Jaramillo,G.R. No. L-20329,
March 16, 1923)
Real Property Tax on Machineries
Machinery Defined
It embraces machines, equipment, mechanical
contrivances, instruments, appliances or
apparatus which may or may not be attached,
permanently or temporarily, to the real property.
It includes the physical facilities for production,
the installations and appurtenant service
facilities, those which are mobile, self-powered or
self-propelled, and those not permanently
attached to the real property which are actually,
directly, and exclusively used to meet the needs
of the particular industry, business or activity and
which by their very nature and purpose are
designed for, or necessary to its manufacturing,
mining, logging, commercial, industrial or
agricultural purposes (Section 199[o], LGC)
The Court reiterates that the machinery subject
to real property tax under the Local Government
Code “may or may not be attached,
permanently or temporarily to the real
property” and the physical facilities for
production, installations, and appurtenant service
facilities, those which are mobile, self- powered
or self-propelled, or are not permanently
attached must:
(a) be actually, directly and exclusively used to
meet the needs of the particular industry,
business, or activity; and
(b) by their very nature and purpose, be designed
for, or necessary for manufacturing, mining,
logging, commercial, industrial, or
agricultural purposes. (Manila Electric Company
vs. The City Assessor and City Treasurer of Lucena
City, G.R. No. 166102, August 5, 2015)
The underground tanks although installed by
the lessee, Shell and Caltex, are taxable as
necessary fixtures of the gasoline station
without which the gasoline station would not
be operational.(Caltex Phils. Inc. vs. CBAA, G.R.
No. L-50466, May 31, 1982)
While the two storage tanks are not
embedded in the land, they may,
nevertheless, be considered as
improvements on the land, enhancing its
utility and rendering it useful to the oil
industry. It is undeniable that the two tanks
have been installed with some degree of
permanence as receptacles for considerable
quantities of oil needed by MERALCO for its
operations. (MERALCO v. Central Board of
Assessment Appeals, G.R. No. L-47943, May 31,
1982)
Instances when machineries are not subject
to RPT
● Where the business is one of transportation,
which is carried on without a repair or service
shop, and its rolling equipment is repaired or
serviced in a shop belonging to another, the
tools and equipment in its repair shop which
appear movable are merely incidentals and
may not be considered immovables, and,
hence, not subject to assessment as real
estate for purposes of the real estate
tax.(Mindanao Bus Co. vs. City Assessor and
Treasurer, G.R. No. L-17870, September 29, 1962)
● MERALCO’s steel towers were held not to be
subject to realty tax, is not in point because
in that case the steel towers were regarded
as poles and under its franchise MERALCO’s
poles are exempt from taxation. Moreover,
645
 steel towers were not attached to any land or
building. They were removable from their
metal frames. (Manila Electric Company vs.
CBAA, G.R. No. L-47943, May 31, 1982)
Rule on RPT on Machineries
● Machinery is permanently attached - subject
to RPT
● Machinery is not permanently attached
● Essential and necessary to the business –
subject to RPT (See Manila Electric 2015 Case
and Caltex Case)
Special Levy on Properties
The following are special levies on real property
a. Special Levy on idle lands
b. Special Levy on public works
c. Special Education Fund (SEF)
Special Levy on Idle Lands
A province, or city or municipality within Metro
Manila may levy an annual tax on idle lands at the
rate not exceeding five percent (5%) of the
assessed value of the property in addition to the
basic tax. The lands covered are the following:
1. Agricultural lands
● More than 1 hectare in area if more than
½ of which remain uncultivated or
unimproved by the owner of the property
or person having interest therein
Exceptions
● 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. (Sec. 237,[a] LGC)
2. Other than agricultural lands
● Lands, other than agricultural, located in
a city or municipality, more than one
thousand (1,000) square meters in area
one-half ½ of which remain unutilized or
unimproved by the owner of the property
or person having legal interest
therein.(Sec. 237,[b] LGC)
3. Residential Lots in Subdivision. (Sec. 237,
par. 3 LGC)
Exemptions: (FAN-C)
Lands are exempted from special levy by reason
of:
1. Force majeure
2. Civil disturbance
3. Natural calamity or
4. Any cause or circumstance which physically
or legally prevents improving, utilizing or
cultivating the same. (Sec. 238, LGC)
Special Levy for Public Works
A province, city or municipality may impose a
special levy on the lands comprised within its
territorial jurisdiction specially benefited by public
works projects or improvements funded by the
local government unit concerned
Requisite for a valid special levy for public
works:
1. A tax ordinance shall describe with
reasonable accuracy the nature, extent and
location of the public works to be undertaken,
the estimated cost, the metes and bounds by
monuments and lines;(Sec. 241, LGC)
2. State the number of annual installments
which should not be less than 5 nor more
than 10 years (Sec. 241, LGC); and
3. Notice to the owners and public hearing. (Sec.
242, LGC)
The Sanggunian may fix different rates for
different parts or sections thereof, depending on
whether such land is more or less benefited by
the proposed work. (Sec. 241, LGC)
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Limit on the Special levy
Special levy shall not exceed sixty percent (60%)
of the actual cost of such projects and
improvements, including the costs of acquiring
land and such other real property in connection
therewith.
Exemption:
That the special levy 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 local government unit
concerned for the construction of such projects or
improvements(Sec.240,LGC)
Special Education Fund (SEF)
A province, or city or municipality within Metro
Manila may levy and collect an annual tax of one
percent (1%) on the assessed value of real
property which shall be in addition to the basic
real property tax
The proceeds thereof shall exclusively accrue to
the Special Education Fund (SEF)(Sec. 235, LGC).
Date of effectivity of assessment or
reassessment
All assessments or reassessments made after the
first (1st) day of January of any year shall take
effect on the first (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 ninety (90) days from the date any such
cause or causes occurred, and shall take effect at
the beginning of the quarter next following the
reassessment. (Sec. 221, LGC)
b) Exemption to Real Property Tax
The exemptions are based on the ownership,
character, and use of the property:
(a) Ownership. Exemptions from real property
taxes on the basis of ownership are real
properties owned by:
(i) 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;,
(ii) a province,
(iii) a city,
(iv) a municipality,
(v) a Barangay, and
(vi) registered cooperatives.
● To be exempted, the government agencies
should not have separate and distinct
personalities, meaning unincorporated
agencies.(NDC vs. Cebu City, G.R. No.
51593,November 5, 1992)
● GOCCs are not covered by the exemption
since the exemption only refers to
instrumentalities without personalities
distinct from the government. (Philippine
Ports Authority vs. City of Iloilo G.R. No.
109791,July 14, 2003)
Beneficial Use Doctrine
● In sum, the Court finds that GSIS enjoys
under its charter full tax exemption.
Moreover, as an instrumentality of the
national government, it is itself not liable to
pay real estate taxes assessed by the City of
Manila against its Katigbak and Concepcion-
Arroceros properties. Following the
"beneficial use" rule, however, accrued real
property taxes are due from the Katigbak
property, leased as it is to a taxable entity.
But the corresponding liability for the
payment thereof devolves on the
taxable beneficial user. This means that
the City of Manila has to satisfy its tax claim
by serving the accrued realty tax assessment
on MHC, as the taxable beneficial user of
the Katigbak property and, in case of
nonpayment, through means other than the
sale at public auction of the leased property
647
 (GSIS vs. City of Manila, G.R. No. 186242,
December 23, 2009)
Metropolitan Waterworks and Sewerage
System is not subject to RPT
● The Executive and Legislative Branches have
already categorized petitioner, not as a
government-owned and controlled
corporation, but as a Government
Instrumentality with Corporate
Powers/Government Corporate Entity
like the Manila International Airport Authority
and the Philippine Fisheries Development
Authority. Privileges enjoyed by these
Government Instrumentalities with Corporate
Powers/Government Corporate Entities
should necessarily also extend to petitioner.
Hence, petitioner's real property tax
exemption under Republic Act No. 6234 is still
valid as the proviso of Section 234 of the
Local Government Code is only applicable to
government-owned and -controlled
corporations.
Thus, petitioner is not liable to the Local
Government of Quezon City for real property
taxes, except if the beneficial use of its
properties has been extended to a taxable
person. (Metropolitan Waterworks and
Sewerage System vs. Local Government of
Quezon City, G.R. No. 194388,November 7,
2018)
Philippine Economic Zone Authority (PEZA)
is an instrumentality of the Government
hence exempt from tax
All told, the PEZA is an instrumentality of the
national government. Furthermore, the lands
owned by the PEZA are real properties owned by
the Republic of the Philippines. The City of Lapu-
Lapu and the Province of Bataan cannot collect
real property taxes from the PEZA.(City of Lapu-
Lapu v. Phil. Economic Zone Authority, G.R. No.
184203, November 26,2014)
(b) Character. Exempted from real property
taxes on the basis of their character are:
(i) charitable institutions,
(ii) houses and temples of prayer like
churches, parsonages or convents
appurtenant thereto, mosques, and
(ii) nonprofit or religious cemeteries.
● Under the 1987 Constitution and R.A. No.
7160 in order to be entitled to the exemption,
the petitioner is burdened to prove, by clear
and unequivocal proof, that (a) it is a
charitable institution; and (b) its real
properties are ACTUALLY, DIRECTLY and
EXCLUSIVELY used for charitable purposes.
If real property is used for one or more
commercial purpose, it is not exclusively used
for the exempted purposes but is subject to
taxation. The words “dominant use” or
“principal use” cannot be substituted for the
words “used exclusively” without doing
violence to the Constitution and the
law.(Lung Center of the Philippines vs.
Quezon City and Rosas, G.R. No. 144104,
June 29, 2004)
(c) Usage. Exempted from real property taxes
on the basis of the actual, direct and
exclusive use to which they are devoted are:
(i) all lands buildings and improvements
which are actually, directed and
exclusively used for religious, charitable
or educational purpose; (Sec. 28(c), Art.
VI, 1987 Constitution)
(ii) all machineries and equipment actually,
directly and exclusively used or by local
water districts or by government-owned
or controlled corporations engaged in the
supply and distribution of water and/or
generation and transmission of electric
power; (Sec.234, LGC) and
(iii) all machinery and equipment used for
pollution control and environmental
protection. (Sec. 206, LGC)
"Pollution control and infrastructure devices"
refers to infrastructure, machinery, equipment
and/or improvements used for impounding,
treating or neutralizing, precipitating, filtering,
conveying and cleansing mine industrial waste
648
and tailings as well as eliminating or reducing restrictions on dividends and provisions for
hazardous effects of solid particles, chemicals, reinvestment. (Sec. 4(3),Art. XIV, 1987
liquids or other harmful byproducts and gases Constitution)
emitted from any facility utilized in mining
operations for their disposal (Sec.3[am], R.A. 7942 ● The mere undertaking of petitioner NPC, a
- AN ACT INSTITUTING A NEW SYSTEM OF MINERAL government-owned and controlled
RESOURCES EXPLORATION, DEVELOPMENT, corporation engaged in the supply,
UTILIZATION AND CONSERVATION - as mentioned in generation, and transmission of electric
Provincial Assessor of Marinduque v. CA, G.R. No. power, under Section 10.1 of the Agreement,
170532, April 30, 2009) that it shall be responsible forthe payment of
all real estate taxes and assessments, does
Real Property Taxes for PEZA - Registered not justify the exemption. The privilege
Entities (R.A. 7916, as amended by R.A. 8748, granted to petitioner NPC cannot be
“THE SPECIAL ECONOMIC ZONE ACT OF 1995”) extended to FELS. The covenant is between
FELS and NPC and does not bind a third
Real Under Income Under 5%
person not privy thereto, in this case, the
Property Tax Holiday Gross
Tax on Income Tax Province of Batangas. (FELS Energy, Inc., vs.
On buildings Subject to RPT Exempt
Province of Batangas, G.R. No. 168557, February
(if owned)
16, 2007)
and leased
improvements Claim for Exemption:
On machinery Exempt only for Exempt
and the 1st three Every person who claims exemption from real
equipment years of property tax shall file with the assessor:
operation
What will be filed?
Land owned by ECOZONE Developer is subject to
RPT Documentary evidence in support of such claim
including: (BATA-C2AM)
Except as provided under Sec. 234 of the LGC,
any exemption from payment of real property tax 1. Corporate charters;
previously granted to, or presently enjoyed by, all 2. Title of ownership;
persons, whether natural or judicial, including all 3. Articles of incorporation;
government-owned or –controlled corporations 4. By-laws;
are hereby withdrawn upon the effectivity of the 5. Contracts;
LGC. (Sec. 234, LGC) 6. Affidavits certifications; and
7. Mortgage deeds, and similar documents.
● All revenues and assets of non-stock, non-
profit educational institutions used actually, When should it be filed?
directly, and exclusively for educational
purposes shall be exempt from taxes and Within 30 days from the date of declaration of
duties. Upon the dissolution or cessation of real property sufficient
the corporate existence of such institutions,
their assets shall be disposed of in the Effect of non – filing
manner provided by law.(Sec. 4(3),Art. XIV,
1987 Constitution) If the required evidence is not submitted within
the period prescribed, the property shall be
● Proprietary educational institutions, including listed as taxable in the assessment roll.
those cooperatively owned, may likewise be
entitled to such exemptions, subject to the
limitations provided by law, including

649
However, if the property shall be proven to be tax
exempt, the same shall be dropped from the
assessment roll of taxable properties. (Sec. 206,
LGC)
4. Appraisal and assessment
a) Classes of real property
For purposes of assessment, real property shall
be classified as: (RACIST -M)
1. Residential,
2. Agricultural,
3. Commercial,
4. Industrial,
5. Special,
6. Timberland or
7. Mineral.
(Sec.215, LGC)
Who has the power of classifying lands?
The city or municipal within the Metropolitan
Manila Area, through their respective
Sanggunian, shall have the power to classify
lands as residential, agricultural, commercial,
industrial, mineral, timberland with their zoning
ordinances. (Sec. 215, LGC)
What are the activities or entities
considered special for RPT purposes?
All lands, buildings, and other improvements
thereon actually, directly and exclusively
used for:(HOGS -CWE)
1. Hospitals;
2. Cultural; or
3. Scientific purposes;
4. Owned and used by local water districts;
5. Government-owned or controlled
corporations rendering essential public
services in the supply and distribution of
water and/or generation and transmission of
electric power. (Section 216, LGC)
b) Assessment based on actual use
Real property shall be classified, valued and
assessed on the basis of its actual use regardless
of where located, whoever owns it, and whoever
uses it. (Sec. 217, LGC)
“Actual Use” refers to the purpose for which the
property is principally or predominantly utilized by
the person in possession thereof.
● The present law on real property taxation
adopts actual use of real property as basis of
assessment. (Sec. 199(b), LGC)
● When Presidential Decree 464 was issued it
changed the basis of real property taxation.
It adopted the policy of taxing real property
on the basis of actual use, even if the user is
not the owner.(Province of Nueva Ecija vs.
Imperial Mining Inc., G.R. No. L-59463,November
19, 1982)
● Appraisal and assessment are based on
actual use irrespective of any previous
assessment or taxpayer’s valuation thereon
which is based on the taxpayer’s valuation
thereon which is based on the taxpayer’s
declaration. (Patalinghug vs. CA, G.R. No.
104789, January 27, 1994)
“Appraisal” is the act or process of determining
the value of property as of a specified date for a
specific purpose. (Sec. 199(e), LGC)
"Assessment" is 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.
(Sec. 199(f), LGC)
General revisions of assessments and
proper classification
The provincial, city or municipal assessor shall
undertake a general revision of real property
assessments within two (2) years after the
effectivity of the LGC and every three (3) years
thereafter. (Sec. 219, LGC)
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Date of effectivity of assessment or
reassessment
Generally, all assessments or reassessments
made after the first (1st) day of January of any
year shall take effect on the first (1st) day of
January of the succeeding year.
Exceptions: Reassessments due to:
1. Partial or total destruction
2. Major change in actual use;
3. Great and sudden inflation or deflation of real
property values;
4. Gross illegality of the assessment made; or
5. Any other abnormal cause.
The reassessment of real property shall be made
within ninety (90) days from the date any cause
or causes occurred, and shall take effect at the
beginning of the quarter next following the
reassessment. (Sec. 221, LGC)
Assessment of property subject to back
taxes
Property declared for the first time: assessed for
taxes for the period during which it would have
been liable but in no case for more than ten (10)
years prior to the date of initial assessment (Sec.
222, LGC)
Notification of new or revised assessment
When real property is assessed for the first time
or when an existing assessment is increased or
decreased, the local assessor shall within thirty
(30) days give written notice of the new or
revised assessment to the person in whose name
the property is being declared.
Notice may be given personally or by registered
mail or through the assistance of the punong
barangay to the last known address of the person
to be served. (Sec. 223, LGC)
5. Collection
a) Date of accrual of real property tax
Date of Accrual of Tax
The real property tax for any year shall accrue on
the first (1st) day of January and from that
date it shall be superior to any other lien,
mortgage, or encumbrance of any kind
whatsoever, and shall be extinguished only upon
the payment of the delinquent tax. (Sec. 246, LGC)
Accrual of Special Levy
The special levy shall accrue on the first day of
the quarter next following the effectivity of the
ordinance imposing such levy(Sec. 245, LGC)
Collecting authority
It shall be the responsibility of the city or
municipal treasurer concerned. The city or
municipal treasurer may deputize the
barangay treasurer to collect all taxes on real
property located in the barangay. Provided, that
the barangay treasurer is properly bonded for the
purpose.
Provided, further, that the premium on the bond
shall be paid by the city or municipal government
concerned. (Sec. 247, LGC)
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 local government unit, on or before the thirty-
first (31st) day of December each year, an
assessment roll containing a list of all persons
whose real property have been newly assessed or
reassessed and the values of such properties.
(Sec. 248, LGC)
b) Periods to Collect
Basic real property tax and any other tax levied
under the title on Real Property Taxation – Five
(5) years from the date they became due. (Sec.
270, LGC)
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When there is fraud or intent to evade the
payment – Ten (10) years. (Ibid.)
The period of prescription within which to collect
shall be SUSPENDED for the time during which:
1. The local treasurer is legally prevented
from collecting the tax;
2. The owner of the property or the person
having legal interest therein requests for
reinvestigation and executes a waiver in
writing before the expiration of the period
within which to collect; and
3. The owner of the property or the person
having legal interest therein is out of the
country or otherwise cannot be located.
(Ibid.)
Special Rules on Payment
a) Payment of real property tax in
installment
Payment of real property taxes and the additional
tax for the Special Education Fund, without
interest, may be made in four (4) equal
instalments:
● 1st instalment – March 31st;
● 2nd instalment – June 30th;
● 3rd instalment – September 30th;
● 4th instalment – December 31st.
This shall not apply to special levies which shall
be governed by ordinance of the sanggunian
concerned (Sec. 250, LGC).
Application of Payment:
Payments of real property taxes shall first be
applied to prior year’s delinquencies, interests
and penalties, if any, and only after the
delinquencies are settled the tax payments be
credited for the current period. (ibid.)
Discount:
The Sanggunian concerned may grant a
discount:
a.) Not exceeding 20% of annual tax due -
when paid in advance the basic RPT and
additional tax accruing to the Special
Education Fund (Section 251, LGC)
b.) 10% - in case of prompt payment (Section
342, IRR of LGC)
b) Interest on unpaid real property tax
In case of failure to pay the basic real property
tax or any other tax levied under the Title of
Collection of Real Property Tax upon the
expiration of the periods as provided in Section
250, or when due, as the case may be, shall
subject the taxpayer to the payment of interest
at the rate of 2% per month on the unpaid
amount or a fraction thereof, until the delinquent
tax shall have been fully paid:
Provided, however, that in no case shall the total
interest on the unpaid tax or portion thereof
exceeds thirty-six (36) months. (Sec. 255, LGC)
Note: Non-payment of RPT, unlike any other
taxes, does not result in the imposition of a
surcharge, only interests.
Distinguish from penalties imposed for non
– payment of national taxes
BIR Real Property
Interest Rate imposed
12% per ANNUM 2% per MONTH
Maximum Period when Interest can be
imposed
No maximum Only up to 36th month
Imposition of Compromise Penalty
Non-payment shall also No imposition of
make the taxpayer compromise
liable for compromise
penalties
Surcharge Imposed
25% imposed on basic No imposition of
tax surcharge
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c) Condonation of real property tax
- By SANGGUNIAN: in case of a
(i) general failure of crops or
(ii) substantial decrease in the price of
agricultural or agri-based products, or
(iii) calamity in any province, city or
municipality; (Sec. 276, LGC)
- By the President of the Philippines: when
public interest so requires. (Sec. 277, LGC)
c) Remedies of LGUs for collection of real
property tax
Remedies in general
The treasurer concerned may avail of:
1. Administrative action by levy on real property
2. Judicial action. (Sec. 256, LGC)
Distinguished from the remedies of local
government for non – payment of local
business taxes
As compared to the remedies by the remedies of
local government for non – payment of local
business taxes, remedies for real property
DOES NOT HAVE DISTRAINT ON PERSONAL
PROPERTIES.
Local government’s lien
The basic real property tax and any other tax
levied under this Title constitute a lien on the
property subject to tax, superior to all liens,
charges or encumbrances in favor of any person,
irrespective of the owner or possessor thereof,
enforceable by administrative or judicial
action, and may only be extinguished upon
payment of the tax and the related interests and
expenses (Sec. 257, LGC).
Administrative action by levy on property
(Sec. 258, LGC)
After the expiration of the time required to pay
the basic real property tax or any other tax levied
under this Title, real property subject to such tax
may be levied upon through:
Procedures of how a real property may be
levied
1. The issuance of a warrant on or before, or
simultaneously with,
2. The institution of the civil action for the
collection of the delinquent tax. (Ibid.)
Warrant of Levy
The provincial or city treasurer, or a treasurer of
a municipality within the Metropolitan Manila
Area, as the case may be, when issuing a warrant
of levy shall prepare a duly authenticated
certificate showing: (DAN)
1. Name of the delinquent owner of the
property or person having legal interest
therein,
2. Description of the property,
3. Amount of the tax due and the interest
thereon. (Ibid.)
Effect of warrant
The warrant shall operate with the force of a legal
execution throughout the province, city or a
municipality within the Metropolitan Manila Area.
(Ibid.)
Mailing of Warrant
The warrant shall be mailed to or served upon
the:
1. Delinquent owner of the real property; or
2. Person having legal interest therein; or
3. In case he is out of the country or cannot be
located;
4. The administrator or occupant of the
property.
At the same time, written notice of the levy with
the attached warrant shall be mailed to or served
upon the assessor and the Registrar of Deeds
of the province, city or municipality within the
Metropolitan Manila Area where the property is
located, who shall annotate the levy on the tax
declaration and certificate of title of the property,
respectively. (Ibid.)
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Reporting to Sanggunian
The levying officer shall submit a report on the
levy to the sanggunian concerned within ten
(10) days after receipt of the warrant by the
owner of the property or person having legal
interest therein. (Ibid.)
Advertisement and Sale (Sec. 260, LGC)
Periods to consider in advertising the
auction of real property
Within thirty (30) days after service of the
warrant of levy, the local treasurer shall proceed
to publicly advertise for sale or auction the
property or a usable portion thereof as may be
necessary to satisfy the tax delinquency and
expenses of sale.
Place where the notice will be posted
The advertisement shall be effected by posting a
notice at:
1. The main entrance of the provincial, city or
municipal building,
2. and in a publicly accessible and conspicuous
place in the barangay where the real property
is located, and
Publication
By publication once a week for two (2) weeks
in a newspaper of general circulation in the
province, city or municipality where the property
is located
Distinguished with publication requirement
of levy on real properties as provided in
Section 178 of LGC
Section 178 (Local Section 260 (Real
Business Tax) Property Taxation)
Once a week for three Once a week for two
(3) weeks (2) weeks
Stay of Proceedings
At any time before the date fixed for the sale, the
owner of the real property or person having legal
interest therein may stay the proceedings by
paying the delinquent tax, the interest due
thereon and the expenses of sale.
Auction Proper
The sale shall be held either at the
1. Main entrance of the provincial, city or
municipal building, or
2. On the property to be sold, or
3. At any other place as specified in the notice
of the sale.
Report to Sanggunian
Within thirty (30) days after the sale, the local
treasurer or his deputy shall make a report of the
sale to the sanggunian concerned, and which
shall form part of his records.
Delivery of Certificate of sale
The local treasurer shall likewise prepare and
deliver to the purchaser a certificate of sale
which shall contain the name of the purchaser, a
description of the property sold, the amount of
the delinquent tax, the interest due thereon, the
expenses of sale and a brief description of the
proceedings:
Provided, however, that proceeds of the sale in
excess of the delinquent tax, the interest due
thereon, and the expenses of sale shall be
remitted to the owner of the real property
or person having legal interest therein.
Owner not deprived
From the date of sale until the expiration of the
period of redemption, the delinquent real
property shall remain in the possession of
the owner or person having legal interest therein
who shall be entitled to the income and other
fruits thereof.
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Period of Redemption
Within one (1) year from the date of sale,
the owner of the delinquent real property or
person having legal interest therein, or his
representative, shall have the right to redeem the
property upon payment to the local treasurer of
the amount of the delinquent tax, including the
interest due thereon, and the expenses of sale
from the date of delinquency to the date of sale.
(Sec. 261, LGC)
Interest on delinquency sale
Interest of not more than two percent (2%)
per month on the purchase price from the date
of sale to the date of redemption. (Ibid.)
Surrender of certificate of sale in case of
redemption
The local treasurer or his deputy, upon receipt
from the purchaser of the certificate of
sale, shall forthwith return to the latter the
entire amount paid by him plus interest of
not more than two percent (2%) per
month. Thereafter, the property shall be free
from the lien of such delinquent tax, interest due
thereon and expenses of sale. (Ibid.)
Effect of redemption
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. (Ibid.)
Final deed to purchaser
In case the owner or person having legal interest
therein fails to redeem the delinquent property as
provided herein, the local 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. The
deed shall briefly state the proceedings upon
which the validity of the sale rests. (Sec. 262, LGC)
Purchase of Real Property by LGU for want
of bidder
In case there is no bidder for the real property
advertised for sale as provided herein, or if the
highest bid is for an amount insufficient to
pay the taxes, fees, or charges, related
surcharges, interests, penalties and costs, the
local treasurer conducting the sale shall
purchase the property in behalf of the local
government unit concerned to satisfy the claim
and within two (2) days thereafter shall make a
report of his proceedings which shall be reflected
upon the records of his office. (Sec. 263, LGC)
Duty of Registrar of Deeds if LGU bought
the levied property
It shall be the duty of the Registrar of Deeds
concerned upon registration with his office of any
such declaration of forfeiture to transfer the
title of the forfeited property to the local
government unit concerned WITHOUT the
necessity of an order from a competent
court. (Id.)
Period of Redemption still applies.
Within one (1) year from the date of such
forfeiture, the taxpayer or any of his
representatives, may redeem the property by
paying to the local treasurer the full amount of
the taxes, fees, charges, and related surcharges,
interests, or penalties, and the costs of sale.
If the property is not redeemed as provided
herein, the ownership thereof shall be fully
vested on the local government unit
concerned. (Sec. 181, LGC)
Resale
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 in a public auction under
Sec. 260.
655
The proceeds of the sale shall accrue to the
general fund of the local government unit
concerned. (Sec. 182, LGC)
Further levy until full payment of amount
due
The remedies by distraint and levy may be
repeated, if necessary, until the full amount due,
including all expenses, is collected. (Sec. 184, LGC)
6. Taxpayer’s Remedies
a) Contesting an assessment
(1) Payment under protest; Exceptions
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”. (Sec.252, LGC)
▪ The tax or a portion thereof paid under
protest shall be held in trust by the treasurer
concerned.
● The requirement of "payment under protest"
is a condition sine qua non before a protest
or an appeal questioning the
correctness of an assessment of real
property tax may be entertained. (Camp John
Hay vs. CBAA, G.R. No. 169234, October 2, 2013)
 Should the taxpayers question the
excessiveness of the amount of tax, he must
first pay the amount due, in accordance with
Section 252 of R.A. 7160. Then, he must
request the annotation of the phrase “paid
under protest” and accordingly appeal to the
Board of Assessment Appeals by filing a
petition under oath together with copies of
the tax declarations and affidavits or
documents to support his appeal. (Lopez vs.
City of Manila, G.R. No. 127139, February 19,
1999)
The payment under protest is not always
required when assailing validity of
assessment.
In City of Lapu Lapu v. PEZA, it emphasized the
need to distinguish between an erroneous
assessment and illegal assessment.
Erroneous
Illegal Assessment
Assessment
What is in dispute?
The correctness of the The authority of the
amount assessed assessment
Initial Remedy
Administrative Remedy Judicial Remedy
Payment under protest required
Yes Not required
Procedure
Payment under protest, File for an injunction
Protest, if denied appeal before the RTC to enjoin
to LBAA, appeal if the LGU from collecting
denied appeal to CBAA real property taxes
(City of Lapu-Lapu vs. PEZA, GR No. 184203,
November 26, 2014)
File protest with treasurer
▪ The protest in writing must be filed within
thirty (30) days from payment of the tax to
the provincial, city treasurer or municipal
treasurer, in the case of a municipality within
Metropolitan Manila Area, who shall decide
the protest within sixty (60) days from
receipt. (Sec. 195, LGC)
Appeal to Local Board of Assessment
Appeals (LBAA)
In case of denial or lapse of the 60-day period for
the Local Treasurer, the taxpayer may appeal to
the LBAA within 60 days from receipt. The LBAA
will then have 120 days to decide. (Sec. 226, LGC)
Appeal to Central Board of Assessment
Appeals (CBAA)
If the taxpayer is unsatisfied with the decision of
the LBAA, the taxpayer may appeal to the CBAA
within 30 days from receipt of decision. (Sec. 228-
c, LGC )
656
Appeal to the Court of Tax Appeals (CTA) En within 30 days from receipt of decision (Sec.
Banc 229(c), LGC)

If CBAA rejects protest, owner may appeal to CTA 5. Appeal to the Court of Tax Appeals (CTA)
En Banc within 30 days from receipt of decision. En Banc
(Sec. 7(a), R.A. 9284)
If CBAA rejects protest, owner may appeal to CTA
Appeal to the Supreme Court (SC) En Banc within 30 days from receipt of decision.
(Sec. 7(a), R.A. 9284)
Any adverse decision by the CTA En Banc may be
appealed to the Supreme Court within 15 days 6. Appeal to the Supreme Court (SC)
from receipt of decision.(Rule 45, ROC)
Any adverse decision by the CTA En Banc may be
In case the protest is granted: appealed to the Supreme Court within 15 days
from receipt of decision (Rule 45, ROC)
In the event that the protest is finally decided in
favor of the taxpayer, the amount or portion of b) Contesting a valuation of real property
the tax protested shall be (1) refunded to the
protestant, or (2) applied as tax credit against
his existing or future tax liability. (Sec. 252, LGC)

Refunds or credits of real property taxes

Procedure

1. File with the Local Treasurer

Written Claim to the provincial or city treasurer –
within 2 years from date the taxpayer is entitled
to such reduction or adjustment (Sec. 253, LGC)

2. Approval / Denial of Protest

The provincial or city treasurer shall decide the

claim for tax refund or credit within sixty (60)
days from receipt thereof. (Ibid.)

3. Appeal to Local Board of Assessment When availed:

Appeals (LBAA)
In case of denial or lapse of the 60-day period for
the Local Treasurer, the taxpayer may appeal to
the LBAA within 60 days from receipt. The LBAA
will then have 120 days to decide (Sec. 226 and
Sec. 229(a), LGC)
4. Appeal to Central Board of Assessment
Appeals (CBAA)
To question an act of the assessor
Who may avail:
Any owner or person having legal interest in the
property who is not satisfied with the action of
the provincial, city or municipal assessor in the
assessment of his property may (Sec. 226, LGC)

If the taxpayer is unsatisfied with the decision of

the LBAA, the taxpayer may appeal to the CBAA

657
(1) Appeal to the Local Board of
Assessment Appeals (LBAA)
Within sixty (60) days from the date of receipt
of the written notice of assessment, appeal to the
Board of Assessment Appeals of the province 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.
(Sec. 226, LGC)
The LBAA shall decide the appeal within 120 days
(2) Appeal to the Central Board of
Assessment Appeals (CBAA)
If unsatisfied with the decision of the LBAA, the
owner or person having legal interest may appeal
to the Central Board of Assessment Appeals
(CBAA) within 30 days from receipt of such
decision. The decision of the CBAA shall be final
and executory. (Sec. 229, LGC)
Appeal to the CTA
The CTA shall exercise exclusive appellate
jurisdiction to review by appeal the decisions of
the Central Board of Assessment Appeals 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; (Sec (2)(e), Rule
4, RRCTA)
Appeal to the SC
Petitions for certiorari, prohibition or mandamus
against CBAA and CTA. (Sec. 1, Rule 65, Rules of
Court)
(3) Effect of payment of tax
Appeal on assessments of real property made
under the provisions of the LGC 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. (Sec. 231, LGC)
C. Compromising real property tax
assessments
The city resolution allowing for the petitioner to
compromise its real property taxes is valid. Art.
1306 of the Civil Code of the Philippines provides
that contracting parties may establish such
conditions, as they may deem convenient,
provided they are not contrary to law, morals,
customs, public order, or public policy. According
to the Court, the said resolution was validly
executed and not contrary to law, morals, good
customs, public order, or public policy. (California
Manufacturing vs Las Pinas, G.R. No. 178461, June 22,
2009)
IV. JUDICIAL REMEDIES
A. COURT OF TAX APPEALS
1. Exclusive original and appellate
jurisdiction over CIVIL CASES
1.1 CTA en banc
1.1.1 Exclusive Original Jurisdiction
(a) The Court shall sit en banc in the exercise of
its administrative, ceremonial and non-
adjudicative functions. (Sec. 2 Rule 2, Revised
Rules of the Court of Tax Appeals [A.M. No. 05-
11-07-CTA])
1.1.2 Exclusive Appellate Jurisdiction
(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 – Bureau of Internal Revenue,
Bureau of Customs, Department of
Finance, Department of Trade and
Industry, Department of Agriculture;
ii. Local tax cases decided by the Regional
Trial Courts in the exercise of their
original jurisdiction; and
658
 iii. Tax collection cases decided by the
Regional Trial Courts 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 one million pesos;
(b) Decisions, resolutions or orders of the
Regional Trial Courts in local tax cases
decided or resolved by them in the exercise
of their appellate jurisdiction;
(c) Decisions, resolutions or orders of the
Regional Trial Courts in tax collection
cases decided or resolved by them in the
exercise of their appellate jurisdiction;
(d) 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;
(e) 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. (Sec. 2, Rule 4, RRCTA)
1.2 CTA division
1.2.1 Exclusive Original Jurisdiction
(a) 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. (Sec. 3(c)(1), Rule 4, RRCTA)
1.2.2 Exclusive Appellate Jurisdiction
(a) Decisions of the Commissioner of
Internal Revenue in cases involving
disputed assessments, refunds of internal
revenue taxes, fees or other charges,
penalties in relation thereto, or other matters
arising under the National Internal Revenue
Code or other laws administered by the
Bureau of Internal Revenue;
(b) Inaction by the Commissioner of
Internal Revenue in cases involving
disputed assessments, refunds of internal
revenue taxes, fees or other charges,
penalties in relation thereto, or other matters
arising under the NIRC or other laws
administered by the BIR, where the NIRC or
other applicable law provides a specific period
for action, in which case the inaction shall be
deemed a denial. (Sec. 3, Rule 4, RRCTA)
 Section 36 of R.A. No. 10963 (TRAIN
Law) deleted the inaction of the CIR to
act on the application for the VAT refund.
Thus, this item has lost its efficiency.
(Boado, 2018 Compact Reviewer in Taxation,
p. 394)
Under Section 112(C) of the NIRC, as amended,
the CIR has 120 days from the date of submission
of complete documents to rule on an
administrative claim of a taxpayer. In case of
denial of the claim for tax refund or tax credit,
either in whole or in part, or if the CIR failed to
act on an application within the prescribed period,
the taxpayer shall file a judicial claim by filing an
appeal before the CTA within 30 days from the
receipt of the decision denying the claim or after
the expiration the 120-day period. The non-
observance of the period would warrant the
dismissal of a petition filed before the CTA as it
would not acquire jurisdiction over the claim.
As a general rule, the 120-day period is
mandatory and jurisdictional. However, there are
two recognized exceptions to the mandatory and
jurisdictional nature of the period. First, if the
CIR, through a specific ruling, misleads a
particular taxpayer to prematurely file a judicial
claim with the CTA. Such specific ruling is
applicable only to the particular taxpayer.
Second, if the CIR issued a general interpretative
ruling in accordance with Section 425 of the Tax
Code which misleads all the taxpayers into
prematurely filing judicial claims with the CTA.
(Hedcor Sibulan, Inc. vs. CIR, G.R. No. 202093,
September 15, 2021, J. Hernando)
659

(c) Decisions, resolutions or orders of the
Regional Trial Courts in local tax cases
decided or resolved by them in the exercise
of their original jurisdiction;
(d) Decisions of the Commissioner of
Customs in cases involving liability for
customs duties, fees or other money charges,
seizure, detention or release of property
affected, fines, forfeitures of other penalties
in relation thereto, or other matters arising
under the Customs Law or other laws
administered by the Bureau of Customs;
(e) Decisions of the Secretary of Finance on
customs cases elevated to him
automatically for review from decisions of
the Commissioner of Customs adverse to the
Government under Section 2315 of the Tariff
and Customs Code; and
(f) Decisions of the Secretary of Trade and
Industry, in the case of nonagricultural
product, commodity or article, and the
Secretary of Agriculture, in the case of
agricultural product, commodity or article,
involving dumping and countervailing duties
under Section 301 and 302, respectively, of
the Tariff and Customs Code, and safeguard
measures under Republic Act No. 8800,
where either party may appeal the decision
to impose or not to impose said duties (Sec. 2
Rule 4, RRCTA)
Republic Act No. 9282 provides an exception to
the original jurisdiction of the Regional Trial
Courts over actions questioning the
constitutionality or validity of tax laws or
regulations. Except for local tax cases, actions
directly challenging the constitutionality or
validity of a tax law or regulation or administrative
issuance may be filed directly before the Court of
Tax Appeals.
Furthermore, with respect to administrative
issuances (revenue orders, revenue
memorandum circulars, or rulings), these are
issued by the Commissioner under its power to
make rulings or opinions in connection with the
implementation of the provisions of internal
revenue laws.
Tax rulings, on the other hand, are official
positions of the Bureau on inquiries of taxpayers
who request clarification on certain provisions of
the NIRC, other tax laws, or their implementing
regulations. Hence, the determination of the
validity of these issuances clearly falls within the
exclusive appellate jurisdiction of the Court of Tax
Appeals under Section 7(1) of Republic Act No.
1125, as amended, subject to prior review by the
Secretary of Finance, as required under Republic
Act No. 8424. (Banco De Oro vs. Rizal Banking
Corporation, G.R. No. 198756, August 16,2016; Steel
Corporation of the Philippines vs. Bureau of Customs,
G.R. No. 220502, February 12, 2018)
2. Exclusive original and appellate
jurisdiction over CRIMINAL CASES
2.1 CTA en banc
2.1.1 Exclusive Appellate Jurisdiction of CTA
en banc
Over cases involving criminal offenses
arising from violations of the National
Internal Revenue Code (NIRC) or the Tariff
and Customs Code and other laws
administered by the Bureau of Internal
Revenue (BIR) or Bureau of Customs
(BOC), CTA en banc have exclusive
appellate jurisdiction on the following:
(a) Decisions, resolutions or orders on motions for
reconsideration or new trial of the Court in
Division in the exercise of its exclusive
original jurisdiction;
(b) Decisions, resolutions or orders on motions for
reconsideration or new trial of the Court in
Division in the exercise of its exclusive
appellate jurisdiction; and
(c) Decisions, resolutions or orders of the
Regional Trial Courts in the exercise of their
appellate jurisdiction. (Sec. 2 (f)(g)(h), Rule
4, RRCTA)
660
2.2 CTA Division
2.2.1 Exclusive Original Jurisdiction
(a) over all criminal offenses arising from
violations of the NIRC or Tariff and
Customs Code 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.
Exception: That offenses or felonies where the
principal amount of taxes and fees, exclusive of
charges and penalties, claimed is less than One
million pesos (P1,000,000.00) or where there is
no specified amount claimed shall be tried by the
appropriate MTC or RTC depending on their
respective jurisdiction. (Sec. 3(b)(1), Rule 4, RRCTA)
2.2.2 Exclusive Appellate Jurisdiction:
(a) Over appeals from the judgments,
resolutions or orders of the Regional
Trial Courts in tax cases originally
decided by them, in their respected
territorial jurisdiction.
(b) Over petitions for review of the
judgments, resolutions or orders of
the Regional Trial Courts in the
exercise of their appellate jurisdiction
over tax cases originally decided by
the Metropolitan Trial Courts,
Municipal Trail Courts and Municipal
Circuit Trial Courts in their respective
jurisdiction. (Sec. 7 b., R.A. No. 1125)
 The authority of the CTA to take
cognizance of petitions for certiorari
questioning interlocutory orders
issued by the RTC in a local tax case
is included in the powers granted by
the Constitution as well as inherent
in the exercise of its appellate
jurisdiction. (City Government of Makati
vs. RTC, Makati, CTA EB Case No. 1465,
February 14, 2018, citing City of Manila
v. Grecia-Cuerdo, G.R. No. 175723,
February 4, 2014)
The CTA's appellate jurisdiction is not limited to
cases involving decisions of the CIR on matters
relating to assessments or refunds. Section 7 (a)
(2) of RA 9282 also covers "other matter arising
under the NIRC or other laws administered by the
BIR." Clearly, the CTA has jurisdiction to
determine whether the warrant of distraint
and/or levy (WDL) issued by the BIR is valid and
rule on the validity of the waivers of the statute
of limitations and taxpayers’ application for tax
amnesty under RA 9480. (La Flor Dela Isabela, Inc.
vs. CIR, G.R. No. 202105. April 28, 2021, J. Hernando)
Cases Appealable Straight to CTA En Banc
1. Realty property taxes decided by the CBAA;
2. Decision of the RTC in its appellate jurisdiction
over the following:
a. Local taxes cases
b. Tax collection cases
c. Criminal offenses (Sec. 2, Rule 4, RRCTA])
The power of the Court of Tax Appeals to exercise
its appellate jurisdiction does not preclude it
from considering evidence that was not
presented in the administrative claim in the
Bureau of Internal Revenue. Republic Act No.
1125 states that the Court of Tax Appeals is a
court of record. (Philippine Airlines, Inc. (PAL) v.
Commissioner of Internal Revenue, G.R. Nos. 206079-
80 and 206309, January 17, 2018)
The Court of Tax Appeals (CTA) was created to
be of the same level as the Court of Appeals.
(Sec. 1, R.A. No. 1125, as amended by R.A. 9282, and
further amended by R.A. 9503)
Structure of CTA
It consists of Nine (9) justices:
1. A presiding Justice and
2. Eight (8) Associate Justices (Sec. 1, R.A. 1125,
as amended by R.A. 9282, and further amended
by R.A. 9503)
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Quorum; Promulgation of resolution; time on appeal before SC. The question was
Reversal of decision neither raised on administrative level nor on
CTA level. (CIR vs. Procter & Gamble Phil Mfg.
As to: En banc Division Corp, G.R. No. L-66838, December 2, 1991)
Quorum At least Five At least Two
(5) Justices (2) Justices  Right to opportunity to present taxpayer’s
Promulgati Majority of Two (2) case should not be curtailed. But this right
on of the Justices members should not be abused. In this case, the
Resolution present different petitions for reconsideration have
Reversal of Affirmative N/a been on the same ground. CTA gave ample
decision of votes of Five opportunities for reconsideration. (Marquez
Division (5) members Lim vs. Collector of Internal Revenue and CTA,
G.R. No. 12157, May 30, 1959)
The attendance of five (5) justices of the Court
 Jurisdiction over subject matter is
shall constitute a quorum for its sessions en banc.
fundamental for a court to act on given
The affirmative vote of five (5) justices of the
controversy. It’s conferred by law, not by
Court en banc shall be necessary to reverse a
consent of parties. It can be challenged at
decision of a Division but a simple majority of the
any stage of proceedings and for lack of it,
Justices present is necessary to promulgate a
court can dismiss a case ex meromotu. To
resolution or decision in all other cases. (Sec. 2,
inquire into existence of jurisdiction over
R.A. 1125, as amended by R.A. 9503)
subject matter is the primary concern of a
Interlocutory orders or resolutions shall be acted court, for thereon would depend the ability of
upon by majority vote of the justices present its proceedings. (CIR vs. Leonardo S. Villa, G.R.
No. L-23988, January 2, 1968)
constituting a quorum. Where the necessary
majority vote cannot be had, the petition shall be
 The 30-day period fixed by law within which
dismissed; in appealed cases, the judgment or
taxpayer may question any ruling of CIR
order appealed from shall stand affirmed; and on
before Tax Appeal Court is jurisdictional. (CIR
all incidental matters, the petition or motion shall
vs. Lazarus Joseph, G.R. No. L-14034, August 30,
be denied (Sec. 3, Rule 2, RRCTA) 1962)

The attendance of at least two (2) justices of the B. PROCEDURES

Division Court shall be necessary to constitute a
quorum for its sessions in Divisions. The presence
at the deliberation and the affirmative vote of at
least two justices shall be required for the
pronouncement of a judgment or final resolution
of the Court in Divisions. (Sec. 2, R.A. 1125, as
amended by R.A. 9503)
Limitations
General Rule: New issues cannot be raised for
the first time on appeal.
Exceptions:
 The BIR should not be allowed to defeat an
otherwise valid claim for refund by raising
question of alleged incapacity for the first
1. Filling of a Judicial Action for Collection
of Taxes
a) Internal revenue taxes
Civil Action
a. By filing a CIVIL CASE for collection of
sums of money with proper regular court;
and
b. By filing an ANSWER to the petition for
review filed by the Taxpayer to the CTA.
Criminal Action
a. Attempt to Evade or Defeat Tax (Sec. 254,
NIRC)
b. Failure to file return, supply correct and
accurate information, pay tax, withhold

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 and remit tax and refund excess taxes
withheld on compensation. (Sec. 255,
NIRC)
b) Local Taxes
Same rules as in internal revenue taxes
b.1 Prescriptive period
Within 5 years from the date taxes, fees, or
charges become due. (Sec. 194, LGC)
2. Civil Cases
a) Who May Appeal, Mode of Appeal, and
Effect of Appeal
a.1 Who may appeal
● Any party adversely affected by a decision or
ruling or inaction of:
i. The Commissioner of Internal Revenue;
ii. The Commissioner of Customs;
iii. The Secretary of Finance;
iv. The Secretary of Trade and Industry;
v. The Secretary of Agriculture;
vi. The Central Board of Assessment Appeal;
or
vii. The Regional Trial Courts (Sec. 3 Rule 8,
RRCTA);
● Stockholders of a dissolved corporation; and
● Government.
a.2 Modes of Appeal
1. By filing a petition for review under Rule 42
of the 1997 Rules of Court, with respect to a
decision, ruling, or inaction of the:
i. Commissioner of Internal Revenue;
ii. Commissioner of Customs;
iii. The Secretary of Finance;
iv. The Secretary of Trade and Industry;
v. The Secretary of Agriculture; or
vi. The Regional Trial Courts
▪ This appeal shall be heard by a Division
of the CTA
2. By filing a petition for review as provided
under Rule 43 of the 1997 Rules of Court with
respect to a decision or resolution of the
Court in Division on a motion for
reconsideration or new trial shall the Court en
banc shall act on the appeal.
3. By filing a petition for review under a Rule 43
of 1997 ROC with respect to the decisions of
rulings of:
i. The Central Board of Assessment
Appeals; and
ii. Regional Trial Courts in the exercise of its
appellate jurisdiction
▪ This appeal shall be heard by the CTA en
banc (Sec. 4, Rule 8, RRCTA)
b) Suspension of Collection of Taxes
General Rule:
An appeal to the CTA from the decision of the CIR
will not 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. (Sec. 1, Rule 10, RRCTA)
Exception
When, in the view of the CTA the collection may
jeopardize the interest of the Government and/or
the taxpayer, it may suspend the said collection
and require the taxpayer either to (i) deposit the
amount claimed or (ii) to file a surety bond. (Steel
corporation vs. BOC, G.R. No. 220502, February 12,
2018, Spouses Emmanuel Pacquiao and Jinkee
Pacquiao v. CTA, G.R. No. 213394, April 6, 2016)
Requisites:
1) That the collection of tax may jeopardize the
interest of the government and/or the
taxpayer.
2) That the taxpayer is willing to deposit the
amount equal to the taxes assessed or
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 willing to file a bond amounting to not more
than twice the value of the tax being
assessed.
3) That the CTA may issue injunction order
only in the exercise of its appellate
jurisdiction
4) That the appeal is not frivolous/dilatory
(ibid.)
c) Injunction Not Available to Restrain
Collection
The NO INJUNCTION RULE does not apply to
the Court of Tax Appeals. Sec. 11 or RA 1125
gives the Tax Court authority to order the
suspension of tax collection when in its view, such
collection would work to the serious prejudice of
either the government or the taxpayer.
 The ancillary remedy is available only when
there is pending appeal over which the Court
of Tax Appeals has jurisdiction. (Commissioner
of Customs vs. Alikapata, G.R. No. L-32542,
November 26, 1970).
 In case the CTA finds that the petitioners
should provide the necessary security under
Section 11 of R.A. 1125, a recomputation of
the amount thereof is in order. If there would
be a need for a bond or to reduce the same,
the CTA should take note that the Court, in
A.M. No. 15-92-01-CTA, resolved to approve
the CTA En Banc Resolution No. 02-2015,
where the phrase “amount claimed” stated in
Section 11 of R.A. No. 1125 was construed to
refer to the principal amount of the
deficiency taxes, excluding penalties,
interests and surcharges. (Spouses
Emmanuel Pacquiao and Jinkee Pacquiao v. CTA,
G.R. No. 213394, April 6, 2016)
Taking of Evidence
The Court may receive evidence in the following
cases:
a. In all cases failing within the original
jurisdiction of the Court in Division pursuant
to Section 3, Rule 4 of the RCTA; and
b. In appeals in both civil and criminal cases
where the Court grants a new trial shall
suspend the running of the period within
which an appeal may be perfected (RCTA, Rule
13, Sec. 4[a]).
Taking of Evidence By:
▪ Justice
▪ Court Official
Motion for Reconsideration or New Trial
Any aggrieved party may seek a reconsideration
or new trial of any decision, resolution or order of
the Court. He shall file a motion for
reconsideration or new trial within fifteen days
form the date he received notice of the decision,
resolution or order of the Court in question (Sec.
1, Rule 15, RRCTA).
The motion shall be in writing stating its grounds,
in a written notice of which shall be served by
movant on the adverse party.
The filing of a motion for reconsideration or new
trial shall suspend the running of the period
within which an appeal may be perfected (Sec. 4,
Rule 15, RRCTA).
 A motion for new trial may be based on
one or more of the following grounds:
1. Fraud, accident, mistake or excusable
negligence which ordinary prudence could
not have guarded against and by reason of
which such aggrieved party has probably
been impaired in his rights; or
2. Newly discovered evidence, which he could
not, with reasonable diligence have
discovered and produced at the trial and,
which, if presented would probably alter the
result. (Sec. 5, Rule 15, RRCTA)
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3. Criminal Cases
a) Institution and Prosecution of Criminal
Actions
a.1. Institution of Criminal Actions
 All criminal actions before the Court in
Division in the exercise of its original
jurisdiction shall be instituted by the
filing of an information in the name of
the People of the Philippines. In criminal
actions involving violations of the NIRC
and other laws enforced by the BIR, the
CIR must approve their filing.
 In criminal actions involving violations of
tariff and Customs Code and other laws
enforced by BOC, the Commissioner of
Customs must approve their filing
 The institution of the criminal action
shall interrupt the running of the period
of prescription. (Sec. 2 Rule 9, RRCTA)
a.2. Prosecution of Criminal Actions
 All criminal actions shall be conducted
and prosecuted under the direction and
control of the public prosecutor.
 In criminal actions involving violation of
the National Internal Revenue Code or
other laws enforced by the Bureau of
Internal Revenue, and violations of the
Tariff and Customs Code or other laws
enforced by the Bureau of Customs, the
prosecution may be conducted by their
respective duly deputized legal officers.
(Sec. 3 Rule 9, RRCTA)
b) Institution of Civil Action in Criminal
Action
 In cases within the jurisdiction of the
Court, the criminal action and to the
corresponding civil action for the
recovery of civil liability for taxes and
penalties shall be deemed jointly
instituted in the same proceeding.
 The filing of the criminal action shall
necessarily carry with it the filing of the
civil action. No right to reserve the filing
of such civil action separately from the
criminal action shall be allowed or
recognized (Sec. 1 (a), Rule 111, Rules of
Court)
c) Period to Appeal
1. Notice of appeal within 15 days – appeal from
criminal cases decided by a RTC in the
exercise of its original jurisdiction. The Court
in Division shall act on the appeal. (Sec. 9(a),
Rule 9, RRCTA)
2. Petition for review under Rule 43 of the 1997
ROC within 15 days
▪ Appeal from criminal cases decided by
the Court in Division.
▪ Appeal from criminal cases decided by
the RTC in the exercise of their appellate
jurisdiction. The Court en banc shall act
on the appeal.
Role of Solicitor General
The Solicitor General shall represent the
People of the Philippines and government officials
sued in their official capacity in all cases brought
to the Court in the exercise of its appellate
jurisdiction. (Sec. 10, Rule 9, RRCTA)
4. Appeal to the CTA, En Banc
If the taxpayer is not satisfied with the CTA
Division’s ruling:
 FIRST, he may file a motion for
reconsideration before the same Division of
the CTA within fifteen (15) days from notice
thereof (Sec. 11, R.A. No. 1125 as amended by
R.A. No. 9282).
 THEN, a party adversely affected by a
resolution of a Division of the CTA on a motion
for reconsideration may file a petition for
review with the CTA en banc (Sec. 18, R.A. No.
1125 as amended by R.A. No. 9282).
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 A Motion for Reconsideration or Motion for
New Trial from the decision of the CTA division
is mandatory, because Rule 8, Sec. 1 (Review
of cases in Court en banc) of CTA rules uses
the word, “must”. Meanwhile, the same is
optional with CTA En Banc as Rule 16, Sec. 1
(Appeal to the Supreme Court by petition for review
on Certiorari) of CTA rules uses the word “may”.

5. Petition for Review on Certiorari to the

Supreme Court

By filing a petition for review on certiorari under

Rule 45 of the Rules of Court with respect to a
decision or ruling of the CTA en banc. The
Supreme Court shall act on the appeal.

Effect of appeal

 The motion for reconsideration or for new

trial filed before the Court shall be deemed
abandoned if, during its pendency, the
movant shall appeal to the Supreme Court
pursuant to Section 1 of this Rule. [2002
Internal Rules of the Court of Appeals, Rule VI,
sec. 15a] (Sec. 2, Rule 16, RRCTA)

 A party adversely affected by a decision or

ruling of the Court en banc may appeal
therefrom by filing with the SC a verified
petition for review on certiorari within 15
days from receipt of a copy of the decision or
resolution, as provided in Rule 45 of the ROC.
If such party filed a motion for
reconsideration or for new trial, the period
herein fixed shall run from the party’s receipt
of a copy of the resolution denying the
motion for reconsideration or for new trial.

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